33453125 Up Commercial Law Reviewer 2008

UNIVERSITY OF THE PHILIPPINESCOLLEGE OF LAW

Bar Operations 2008

COMMERCIAL LAW

Bar Operations Head │ Arianne Reyes

Academics Head │ Henry AgudaRyan Balisacan

Subject Head │ Henry AgudaTere Licaros

Subject Committee │ Lynn Ramos * Johaira WahabRuby Alberto * Dianne Capco

Information Management │

Committee

Chino Baybay [Head] * Simoun Salinas [Deputy] * Rania Joya[Design & Lay-out] * Ludee Pulido [Documentations] * LinusMadamba * Des Mayoralgo * Jillian De Dumo * MikeOcampo * Abel Maglanque * Edan Marri R. Cañete * CarmieRome Cargo

1 0 0 % U P L A W U P B A R O P S 2 0 0 8 Page 2 of 351

TABLE OF CONTENTS COMMERCIAL LAW

Commercial Law

TABLE OF CONTENTS

I. Corporation Law 3

II. Negotiable Instruments Law 88

III. Insurance Code 125

IV. Transportation Law 203

V. Code of Commerce 255

VI. Banking Law 275

VII. Intellectual Property Law 327


CORPORATION LAW COMMERCIAL LAW

CORPORATION LAW

a.

THE CORPORATION CODE OF THEPHILIPPINES

(BATAS PAMBANSA BLG. 68)

Chapter I

INTRODUCTION

1. The Corporation as a LegalConcept

1.1 Corporation Defined

A Corporation is an artificial being created byoperation of law, having the right of succession andthe powers, attributes, and properties expresslyauthorized by law or incident to its existence. (§2)

A corporation is a creature of:

A general enabling statute (requirements ofthe law must be complied with); and

The agreement of individuals who seek toincorporate (internal contractualarrangements: articles of incorporation andby-laws).

1.2 Four attributes of a corporation

An artificial being:

1. a juridical person capable of having rightsand obligations, w/ a personality separateand distinct from its members orstockholders

2. hence, stockholders are not personallyliable for corp. obligations and cannot beheld liable to third persons who have claimsagainst the corp. beyond their agreedcontribution to the corporate capital (paid-up capital and unpaid subscriptions) This isknown as the doctrine of limited liability.

Created by operation of law:

1. mere consent of the parties to form a corp.is not sufficient: the State must give itsconsent either through a special law (in thecase of a gov’t corp.) or a general law (fora private corp.)

2. the general law under w/c a private corp.may be formed or organized is theCorporation Code

Has the right of succession:

1. its continued existence during the termstated in its articles of incorp. cannot beaffected by any change in the members orstockholders

2. nor is it affected by the transfer of sharesby a stockholder to a 3rd person

Has the powers, attributes and properties expresslyauthorized by law or incident to its existence: as it

is a mere creature of the law, it can exercise onlysuch powers as the law may choose to grant it,either expressly or impliedly

1.3..Advantages of the CorporateOrganizations

1) Separate juridical personality – personalityseparate and distinct from individualstockholders and members

2) Limited liability to investors – stockholders areliable only to the extent of their contribution General rule: Where a corporation buys all

the shares of another corporation, this willnot operate to dissolve the othercorporation and as the two corporationsstill maintain their separate corporateentities, one will not answer for the debtsof the other. [Nell v Pacific Farms (15 SCRA415), Nov. 23, 1965]

Exceptions:o If there is an express assumption of

liabilities;o There is a consolidation or merger;o If the purchase was in fraud of

creditors;o If the purchaser becomes a

continuation of the seller;o If there are unpaid subscriptions

(stockholder is liable for the unpaidbalance).

3) Free transferability of units of ownership –stockholders hold their shares as personalproperty with rights to dispose, assign orencumber them as they may desire (§63)

4) Centralized Management – all corporate powersare exercised by the board of directors (§23)

1.4 Partnership vs. Corporation

1. Extent of Liability—partners are personallyliable for the debts of the partnership;stockholders cannot be made to personallyanswer to corporate creditors

2. Creation—mere agreement of the parties,w/c can be composed of just 2 persons,gives rise to the juridical personality of thepartnership, whether or not registered w/the SEC (Art. 1768, NCC); a corp., w/ aminimum of 5 incorporators, derives itsjuridical personality from the certificateissued by the SEC (§19)

3. Management—In most cases, all theowners in a partnership actively participatein management, w/ capacity to bind it byany usual contract (Art. 1818, NCC); in acorp., management is centralized in theboard of directors w/c has exclusive powerto bind the corp. (§23)

4. Nature of Relationship—partnership isbased on mutual trust and confidence(delectus personae) so that its existence isprecarious because of the facility w/ whichit can be dissolved (i.e. through the deathor unilateral act of a partner); a corp. hasmore stability as it enjoys the right ofsuccession and is not affected by the deathor insolvency of a stockholder; also,dissolution before a corp.’s term requires a



2/3rds vote of the stock (Secs. 118 and119, Corp. Code), always subject to SECintervention

5. Powers—a corporation has only suchpowers as are expressly granted to it andsuch as are necessary to the exercise of thepowers so granted or fro theaccomplishment of its purpose(sec.2, 36(11), and 45); In a partnership, as long asthe parties have agreed to it, thepartnership can perform any act as long asit does not violate any law or right ofothers.

1.5 Government Regulation of Corporations

By the Legislature

Basis: police power of the state (Northern Ry Co. v.State of Washington, 300 U.S. 154) and the factthat corporations owe their existence to the state

Manner: by amending or repealing the Corp. Codeor any part thereof

NDC v Phil Veterans Bank (1990)

PD 1717 ordered the rehabilitation of the AgrixGroup of Companies to be administered by NDC.Sec 4(1) provides that all mortgages and lienspresently attached be extinguished, and that allaccrued obligations shall not bear interest. Amongthose ordered extinguished was a lien in favor ofPhil Veterans Bank over prop in LB. NDC filed toforeclose the mortgage.

HELD: New Agrix was created by special decreeeven if 1973 Consti mandates that BatasangPambansa, cannot, except by general law, providefor formation, organization and regulation ofprivate corps, unless for GOCCs.

NDC was only mandated to extend loan and tomanage company. New Agrix was entirely privateand should have been organized under Corp Law.

By the SEC

Basis: Sec. 3, PD 902-A and Sec 5.1(a), RA8799.The Commission shall have absolute jurisdiction,supervision and control over all corporations,partnerships or associations, who are the granteesof primary franchises and/or licenses or permitsgranted by the government, to operate in thePhilippines; xxx

Note: Under Sec. 5.2 of RA8799, SEC’s jurisdictionover all cases enumerated under Sec. 5, PD 902-Awas transferred to the Regional Trial Court whichhas jurisdiction over the principal office of thecorporation, partnership or association concerned.

According to the Interim Rules of Procedure forIntra-Corporate Controversies (A.M. No. 01-2-04-SC), which took effect on April 1, 2001, theRegional Trial Court has jurisdiction over casesinvolving the following:

1. Devices or schemes employed by, or anyact of, the BOD, business associates,officers or partners, amounting to fraud ormisrepresentation which may be

detrimental to the interest of the publicand/or of the stockholders, partners ormembers of any corporation, partnership,or association;

2. Controversies arising out of intra-corporate, partnership, or associationrelations, between and amongstockholders, members or associates; andbetween, any or all of them and thecorporation, partnership, or association ofwhich they are stockholders, members orassociates, respectively;

3. Controversies in the election orappointment of directors, trustees,officers, or managers of corporations,partnerships, or associations;

4. Derivative suits; and5. Inspection of corporate books.

Morato v CA (2004)

Petitioners, stockholders of TF Ventures, Inc., fileda petition with the SEC against private respondentsfor the declaration of nullity of stockholders’ anddirectors’ meetings and damages. They assail thevalidity of the notice and stockholders’ meeting ofTF Ventures, Inc. and the organizational meeting ofthe members of the BOD. The petition was referredto the Securities Investigation and ClearingDepartment (SICD) of the SEC for investigationand resolution.Meanwhile, one of the private respondents(Matsura, Chairman of the BOD), wrote a letter tothe Examiners and Appraisers Dept of the SEC,requesting for an examination of the basis for thecapital increase of T.F. Ventures, Inc. fromP10,000,000 to P100,000,000, alleging thecommission of devices, schemes and criminal acts.The letter was forwarded by the SEC to theProsecution and Enforcement Dept (PED).Petitioners contended that with the filing of theletter-petition with the PED, Matsura resorted toforum shopping.

HELD: Matsura is not guilty of forum shopping.There is no identity of causes of action or identityof rights asserted by the parties in both cases. Inthis case, SEC Case is pending before the SICD,which has exclusive jurisdiction to investigate andresolve intra-corporate disputes. The respondent’sletter-petition, on the other hand, was referred bythe SEC to the PED and is pending before theProsecution and Enforcement Department of theSEC.

Section 8 of P.D. No. 902-A, as amended,provides:

SECTION 8. The Prosecution andEnforcement Department shall have,subject to the Commission’s control andsupervision, the exclusive authority toinvestigate, on complaint or motu propio,any act or omission of the Board ofDirectors/Trustees of corporations, or ofpartnerships, or other associations, or oftheir stockholders, officers or partners,including any fraudulent devices, schemesor representations, in violation of any lawor rules and regulations administered andenforced by the Commission; to file andprosecute in accordance with law andrules and regulations issued by theCommission and in appropriate cases, the



corresponding criminal or civil case beforethe Commission or the proper court orbody upon prima facie finding of violationof any laws or rules and regulationsadministered and enforced by theCommission; and to perform such otherpowers and functions as may be providedby law or duly delegated to it by theCommission.

Prosecution under this Decree or anyAct, Law, Rules and Regulations enforcedand administered by the Commission shallbe without prejudice to any liability forviolation of any provision of the RevisedPenal Code.

Under the said provision, the SEC, through thePED, is vested with authority to investigate, eithermotu proprio or upon complaint, any act oromission, fraudulent schemes, devices ormisrepresentations in violation of any law, rules orregulations, administered and enforced by the SEC,and to file and prosecute appropriate civil orcriminal cases upon a prima facie finding ofviolation of such laws, rules or regulations. Thepetitioners, in the SEC case, sought the nullificationof the Notice for the Annual Stockholders’ Meeting,the stockholders’ meeting and organizationalmeeting held on September 22, 1997, on theirclaim that the holding of the same was in violationof the Corporation Code and the By-Laws of thepetitioner corporation. In his answer to thepetition, the respondent asserted the validity of thesaid meeting and prayed, by way of counterclaim,for the nullification of the October 20, 1997meeting of the petitioners, and for damages. Incontrast, the respondent alleged in his letter-petition in the PED case that the petitioners wereengaged in fraudulent schemes, devices ormisrepresentations in violation of the law, and SECrules and regulations. The complainant Matsuuraasked the PED to investigate the complaint and filethe corresponding administrative, civil or criminalcases before the SEC, the proper court or body, forviolation of the laws, rules or regulationsadministered and enforced by the SEC. The factthat the SICD has not yet resolved the SEC casedoes not constitute a bar to the resolution of thePED case. The proceedings in the said cases areindependent and separate of each other and maythus proceed separately.

Note that while this case was pending in the SC, RA8799, Securities Regulation Code, took effect onAugust 8, 2000. Section 5.2 of the law providesthat SEC’s jurisdiction over all cases under Sec 5 ofPD 902-A is transferred to the RTCs.

Among the powers and functions of the SEC whichwere transferred to the RTC include the following:(a) jurisdiction and supervision over allcorporations, partnerships or associations who arethe grantees of primary franchises and/or a licenseor permit issued by the Government; (b) theapproval, rejection, suspension, revocation orrequirement for registration statements, andregistration and licensing applications; (c) theregulation, investigation or supervision of theactivities of persons to ensure compliance; (d) thesupervision, monitoring, suspension or take overthe activities of exchanges, clearing agencies andother SROs; (e) the imposition of sanctions for theviolation of laws and the rules, regulations andorders issued pursuant thereto; (f) the issuance of

cease-and-desist orders to prevent fraud or injuryto the investing public; (g) the compulsion of theofficers of any registered corporation or associationto call meetings of stockholders or membersthereof under its supervision; and, (h) the exerciseof such other powers as may be provided by law aswell as those which may be implied from, or whichare necessary or incidental to the carrying out of,the express powers granted the Commission toachieve the objectives and purposes of these laws.

However, Section 8 of P.D. No. 902-A, asamended, has already been repealed, as providedfor in Section 76 of RA 8799.

Thus, under the new law, the PED ceased to exist.However, the SEC retains jurisdiction to continuewith its investigation of the letter-petition ofrespondent Matsuura.

When RA 8799 took effect, the SEC case had notyet been submitted for decision by the SEC.Hence, the said case should be transferred to theRTC of Makati City, to be raffled to the appropriatebranch thereof assigned to try such cases. Despitethe repeal of Section 8 of P.D. No. 902-A and theabolition of the PED, the SEC may continue with itsinvestigation of the letter-petition of respondentMatsuura.

The Sandiganbayan has jurisdiction over

presidents, directors or trustees, or managersof government-owned or controlledcorporations organized and incorporated underthe Corporation Code for purposes of theprovisions of RA 3019, otherwise known as theAnti-Graft and Corrupt Practices Act. Basis: Sec4, RA 8249 (People v Sandiganbayan, 2005)

Union Bank v. Danilo ConcepcionGR No. 160727 June 26, 2007EYCO Group of Companies filed a petition forsuspension of payment, appointment ofreceiver/committee and approval ofrehabilitation plan with alternative prayer forliquidation and dissolution of corporations.Suspension was granted by the SEC HearingPanel. Union Bank became part of theManCom which represented the creditorbanks but later on broke away withoutnotifying the group. It filed a slew of caseswith the Makati RTC and applied forpreliminary attachment. Union Bank filed amotion to dismiss the case pending with theSEC, and when the SEC issued an orderappointing regular members of the ManCom,Union Bank filed a petition for certiorari withthe CA seeking the nullification of the SECOrder and again assailing the jurisdiction ofthe SEC. It alleged that the jurisdiction over abasic petition for suspension of payments waswith the RTC under Act No. 1956 (InsolvencyLaw). The CA and later on the SC ruled thatthe jurisdiction is with the SEC pursuant to PD902-A. The proceeding in the RTC was thussuspended. Concepcion was later appointed asliquidator by the SEC en banc and he filed amotion to intervene and set aside order ofattachment in the said RTC case. The SEC enbanc approved of the liquidation plan thatConcepcion submitted but his motion tointervene with the RTC was denied for lack ofstanding. The RTC also declared EYCO indefault in the said case, proceeded to receive



evidence ex parte and later rendered partialjudgment ordering EYCO to pay P400M toUnion Bank. Concepcion appealed the decisionand was sustained by the CA, which modifiedthe partial judgment of the RTC. Union Banknow comes to the SC assailing the CA’s order.

HELD: Denied. CA Order AFFIRMED. What isbeing assailed is the validity of theappointment of Concepcion as liquidator andhis standing to intervene in the RTC case.Albeit jurisdiction over a petition to declare acorporation in a state of insolvency strictly lieswith regular courts, the SEC possessed,during the period material, ample powerunder P.D. No. 902-A as amended, to declarea corporation insolvent as an incident of andin continuation of its already acquiredjurisdiction over the petition to be declared inthe state of suspension of payments in thetwo instances provided in Section 5(d)thereof.Said Section 5(d) vests the SEC with exclusiveand original jurisdiction over petitions forsuspension of payments which may either be:(a) a simple petition for suspension ofpayments based on the provisions of theInsolvency Law, i.e., the petitioningcorporation has sufficient assets to cover allits debts, but foresees the impossibility ofmeeting the obligations as they fall due, or (b)a similar petition filed by an insolventcorporation accompanied by a prayer for thecreation of a management committee and/orrehabilitation receiver based on the provisionsof P.D. No. 902-A, as amended by P.D. No.1758. The petition of EYCO in this case was amix of both situations. EYCO’s petition forsuspension for payment was, for all intentsand purposes, still pending with the SEC as ofJune 30, 2000. Accordingly, the SEC’sjurisdiction thereon, by the express terms ofR.A. No. 8999, still subsists “until [thesuspension of payment case and its incidentsare] finally disposed.”

Viva Footwear v. SECGR No. 163235 April 27, 2007Petitioner Viva Footwear ManufacturingCorporation is a domestic corporation engagedin the manufacture of rubber footwear.Respondents Philippine National Bank (PNB)and Philippine Bank of Communications(PBCom) are two of petitioner’s creditors. TheSEC, upon petition by Viva, declared the latterto be in a state of suspension of payments.The petition for rehabilitation was eventuallydismissed because it was not viable to do soas it was not financially sound. Viva nowclaims that its right to due process wasviolated when the SEC referred therehabilitation plan to the Financial Analysisand Audit Division without notice to petitioner.

HELD: NO MERIT. DISMISSED. Inadministrative proceedings, due processsimply means an opportunity to seek areconsideration of the order complained of; itcannot be fully equated to due process in itsstrict jurisprudential sense. It is theadministrative order, not the preliminaryreport, which is the basis of any furtherremedies the losing party in an administrative

case may pursue. Thus, petitioner has no rightto be notified of the preliminary report by theFinancial Analysis and Audit Division of theSEC.

Petitioner’s claim that the SEC’s referral of thepetition for rehabilitation to the said divisionviolated its right to due process deserves noconsideration. Petitioner’s right toadministrative due process only entitles it toan opportunity to be heard and to a decisionbased on substantial evidence. No more, noless.

Chapter II

CLASSIFICATION OF PRIVATECORPORATIONS

1. General Classification under §3:

1.1 Stock corporation

One which has a capital stock divided intoshares and is authorized to distribute to theholders of such shares dividends orallotments of the surplus profits (i.e.,retained earnings on the basis of the sharesheld (§3)

It is organized for profit. The governing body of a stock corporation

is usually the Board of Directors (Except incertain instances for close corporations)

1.2 Non-stock corporation

All other corporations are non-stockcorporations (§3)

One where no part of the income isdistributable as dividends to its members,trustees, or officers, subject to theprovisions of the Code on dissolution.Provided that any profit which a non-stockcorporation may obtain as an incident to itsoperation shall whenever necessary orproper be used for the furtherance of thepurpose or purposes for which thecorporation was organized. (§87)

Not organized for profit. Its governing body is usually the Board of

Trustees.

CIR vs. Club Filipino, Inc de Cebu (1962)

Club Filipino is a civic corporation organized todevelop and cultivate sport of all class anddenomination for the healthful recreation andentertainment of its SH and members. Its AOI andby-laws are silent as to dividends and theirdistribution but it was provided that upon itsdissolution, the Club’s remaining assets afterpaying debts shall be donated to a charitable Phil.Institution.

HELD: Club Filipino is a non-stock corporation.According to Section 3 of the Corporation Code,there are two elements for a stock corporation toexist: 1) capital stock divided into shares, and 2)an authority to distribute to the holders of such



shares, dividends or allotments of the surplusprofits on the basis of shares held. Nowhere inClub Filipino’s AOI or BL could be found anauthority for the distribution of its dividends orsurplus profits.

2. Other kinds of corporations

1. Public corporation - One formed or organizedfor the government or a particular state. Itspurpose is for the general good and welfare.

2. Private corporation - One formed for someprivate purpose, benefit, aim or end

3. Close corporation (§96) – One whose Articlesof Incorporation provide that:a) all of the corporation’s issued stock of all

classes, exclusive of treasury shares, shallbe held of record by not more that aspecified number of persons, not exceeding20

b) all of the issued stock of all classes shall besubject to one or more specified restrictionson transfer permitted by the Code

c) the corporation shall not list in any stockexchange or make any public offering ofany of its stock of any class

d) at least 2/3 of its voting stock must not beowned or controlled by another corporationwhich is not a close

e) must not be a mining or oil company, stockexchange, bank, insurance company, publicutility, educational institution or corporationvested with public interest

4. Educational corporation (§106) - Thosecorporations which are organized foreducational purposes. This type of corporationis governed by Section 106 of the CorporationCode

5. Religious sole and aggregate (§110, 111 (2),123) A corporation sole is one formed for the

purpose of administering and managing, astrustee, the affairs, property andtemporalities of any religious denomination,sect, or church, by the chief archbishop,bishop, priest, rabbi, or other presiding elderof such religious denomination, sect orchurch. (§110)

The corporation sole is an exception to thegeneral rule that at least five (5) membersare required for a corporation to exist.Here, there is only one (1) incorporator.This is applicable to religious communitiesthe regulations of which provide that thecommunity’s properties are to be placed inthe name of the head and administered byhim. (§111(2))

A corporation aggregate is a religiouscorporation incorporated by more than oneperson.

6. Eleemosynary corporation – One organized fora charitable purpose

7. Domestic corporation – A domestic corporationis one formed, organized, or existing under thelaws of the Philippines

8. Foreign corporation – One formed, organized orexisting under any laws other than those of thePhilippines and whose law allows Filipinocitizens and corporations to do business in itsown country and state. (§123)

9. Corporation created by special laws or charter(§4) Corporations which are governed primarily

by the provisions of the special law orcharter creating them (§4)

Corporation Code is suppletory in so far asthey are applicable (Ibid)

10. Subsidiary corporation – one in which control,usually in the form of ownership of majority ofits shares, is in another corporation (the parentcorporation)

11. Parent corporation – its control lies in its powerto elect the subsidiary’s directors thuscontrolling its management policies

Chapter III

FORMATION AND ORGANIZATION OFCORPORATION

1. Who May Form a Corporation

1.1 Incorporators

Any number of natural persons not less than five(5) but not more than fifteen (15), all of legal ageand a majority of whom are residents of thePhilippines, may form a private corporation for anylawful purpose or purposes. Each of theincorporators of a stock corporation must own orbe a subscriber to at least one (1) share of capitalstock of the corporation. (§10)

1) Natural persons Corporations and partnerships cannot be

incorporators, but may be stockholders.This prevents “layering” which may harbourcriminals and will make the corporation atool for defrauding the public.

Incorporators are those stockholders ormembers mentioned in the articles asoriginally forming and composing thecorporation and who are signatoriesthereof.

Corporators are stockholders or memberswho join the corporation after itsincorporation.

Original subscribers are persons whosenames are mentioned in the Articles, butnot as incorporators. They do not sign theArticles.

2) At least five incorporators but not more thanfifteen They must sign the articles of

incorporation. GENUINE INTEREST: Each incorporator

must own or subscribe to at least oneshare of stock of the corporation.

3) Majority of the incorporators must be residentsof the Philippines



General rule: need not be a citizen Exceptions: public utilities (Art XII, Sec 11.

Consti), schools (Art XIV, Sec 4(2), Consti),banks (General Banking Act), retail trade(RA 1180), savings and loan associations(RA 3799), investment houses (Sec 5, PD129), and other areas of investment ascongress may by law provide (Art XII, Sec.10, Consti).

Even though there are no legal restrictionsas to alien ownership, where > 40% of theoutstanding capital stock will be owned andcontrolled by aliens, must get writtenauthorization from BOI before it canregister with SEC. (purpose is to enableBOI to determine whether such corporationwherein aliens own a substantial number ofshares would contribute to the sound andbalanced development of the nationaleconomy)

4) Incorporators must be of legal age

2. Conditions Precedent for Incorporation

2.1 Consent or agreement of at least 5 naturalpersons with respect to:

1. Compliance with the Corp Code;2. Contribution/pooling of resources –

delivered to and held in trust by adesignated trustee;

3. Governance of: Contributions; Distribution of contributions; Division of profits/sharing of

losses; Pursuit of purpose/objectives; Corporate combination; and Transactions with third parties;

and4. Continuity or termination of existence.

2.2 Mandatory Requirements of the Code:

1. Execution of constitutive documents(AOI, By-laws);

2. Payment/delivery of contributions –delivered to and held in trust by adesignated trustee;

3. Submission of constitutive documentsto SEC for review or evaluation; and

4. SEC action – issuance of certificate ofregistration.

Note that once contributions are made beforeincorporation, such subscriptions are irrevocable fora period of 6 months (general rule). Exceptions:

1. When all of the other subscribers consentto the revocation; or

2. When the incorporation fails to materialize(Sec. 61)

3. Steps in the formation of acorporation

3.1. PROMOTION

The “promoter” brings together personsinterested in the business enterprise andsets in motion the machinery that leads tothe formation of the corporation.

“Promoter” is a person who, acting alone orwith others, takes initiative in founding andorganizing the business or enterprise of theissuer and receives consideration therefor.1

3.2. DRAFTING OF ARTICLES OFINCORPORATION

These constitute the charter of the corporation

1. CORPORATE NAME No corporate name may be allowed by

the SEC if the proposed name isidentical or deceptively or confusinglysimilar to that of any existingcorporation or to any other namealready protected by law or is patentlydeceptive, confusing or contrary toexisting laws. (§18)

A corporate name is essential to thecorporation’s acquisition of juridicalpersonality

Change of corporate name shall requirethe approval of the SEC. SEC will issueamended certificate of incorporationunder the amended name (Ibid)

A change in corporate name involvesan amendment of the Articles, whichrequires a majority vote of the boardand the vote or written assent ofstockholders holding 2/3 of theoutstanding capital stock (§16) Note:Does not include the non-voting stock.

It is the sole means of identifying thecorporation from its members orstockholders, and from other entitiesand corporations

Amendment in a corp’s AOI changingits corporate name does not extinguishthe personality of the originalcorporation. The corp upon suchchange of its name, is in no sense anew entity, nor the successor of theoriginal corp. it is the same corp with adifferent name, and its character is notchanged. Consequently, the “new”corp is still liable for the debts andobligations of the “old” corp (RepublicPlanters Bank v CA, 1992)

This is essential because through it,corporation can sue and be sued

SEC may allow incorporators to reservethe name for a particular period

To distinguish from partnerships andother business orgs, the law requirescorporations to append the word“Corporation” or “Inc” to its chosenname

A corporation should transact businessonly through its chosen name

Philips Export BV (PEBV) v CA (1992)

PEBV is a foreign corp under the law ofNetherlands, although not engaged in business inthe Phils. It is the registered owner of the Philipstrademark, and owns two local companies with thename Philips also.

PEBV asked the cancellation of the word Philipsfrom Standard Philips, a local manufacturer,

1 Sec. 3.10, The Securities Regulation Code (RA 8799)



alleging infringement of its exclusive right to usethe same. SEC and CA ruled for Std Philips, sayingthere was no confusion (unlike in Converse case).

Held:

Corp’s right to use its corp and trade name is aproperty right, a right in rem.

General Rule: Corp must have a name by which itis to sue and be sued and do all legal acts.

Accdg to Corp Code, no corp name may be allowed

1) if complainant corp acquired a prior rightover name and

2) proposed name isa) identical orb) deceptively or confusingly similar orc) patently deceptive, confusing or

contrary to existing lawPEBV’s local companies were incorporated 26 yrsbefore Std Philips.

TEST OF CONFUSING SIMILARITY IN CORP NAMES:Whether similarity is such as to mislead a personusing ordinary care and discrimination

Philips is the dominant word. No need to prove thatthere was actual confusion, as long as probable orlikely to occur. Std Philips’ purpose, as per itsarticles of incorp also includes sale andmanufacture of electrical products, which is PEBV’sline of business. Even if SEC guidelines mandatethat a corp could add 2 other words to proposedname, only one word “Std” was added. “Corp” notcounted.

Note: A prior user can consent to the use of itsname

2. PURPOSE CLAUSE Where a corporation has more than 1

purpose, the AOI shall state which isthe primary purpose and which issecondary (§14(2))

A non-stock corporation may notinclude those which contradict orchange its nature (Ibid)

SEC can reject or disapprove the AOI ifthe stated purpose is patentlyunconstitutional, illegal, immoral,contrary to government rules andregulations.(§17 (2))

Purpose clause confers as well as limitsthe powers which a corporation mayexercise

A corporation only has such powers asare expressly granted to it by law andby its AOI, those which may beincidental to such conferred powers(§45), those reasonably necessary toaccomplish its purposes (Section 36(11), and those which may be incidentto its existence (§2).

Reasons for purpose clause:o so that a stockholder contemplating

an investment will know what linesof business his money is to berisked

o so that management will knowwhat lines of business it isauthorized to act

o so that anyone who transacts withthe corporation may ascertainwhether a transaction he is

entering is one with the generalauthority of the management

Under Sec 14(2) a corporation canhave as many purposes as it wantsprovided:o AOI specify the corporation’s

primary and secondary purposeswhich need not be related to eachother

o Corporation for which specialprovisions are made can only havethe purpose peculiar to them

o Purposes must be lawful If purpose is lawful, SEC is not

authorized to inquire whethercorporation has hidden motives andmandamus will lie to compel it to issuecertificate

PD 902-A, Sec 6(h) gives SEC, afterconsultation with BOI, NEDA, or otherappropriate government agency, thepower to refuse or deny the applicationfor registration of any corporation if itsestablishment, organization, operationwill not be consistent with the declarednational economic policies

A corporation may not be formed forthe purpose of practicing a profession

3. PRINCIPAL OFFICE Must be within the Philippines (§14 (3)) AOI must specify both province or city

or town where it is located Important in (1) determining venue in

an action by or against the corporation(2) determining the province where achattel mortgage of shares should beregistered (Chua Gan v SamahangMagsasaka)

The statement of the principal officeestablishes the residence of thecorporation

4. TERM OF EXISTENCE When a corporation is organized, the

maximum life that can be stipulated inthe AOI is 50 years. But during the lifeof the corporation, the life or term canbe extended to another 50 years at anyone instance (§11)

But such extension of the life acorporation cannot be made earlierthan 5 years before the end of itsoriginal term. Exception: where thereare justifiable reasons for an earlierextension as may be determined by theSEC. (Ibid)

Exception: Condominium corporationscan be organized for a period of 200years

Extension involves an amendment ofthe AOI. Thus, the requisites under§16 must be complied with. Anydissenting stockholder may exercise hisappraisal right (§37).

5. INCORPORATORS AND DIRECTORS;NUMBER AND QUALIFICATIONS “Directors” is used for stock

corporations, while “trustees” is usedfor stock corporations.

GENERAL RULE: not less than 5 butnot more than 15EXCEPTIONS:



i) Non-stock corporations – articles orby-laws may provide for more than15 trustees (§92). Exception: Educational non-

stock corporations – trusteesmay not exceed 15. However,the number of trustees shall bein multiples of 5 (§108)

ii) Merger of banks – new board isallowed to have such number ofdirectors as is equivalent to thetotal number of directors of themerging banks, though it mayexceed fifteen (General BankingAct, as amended).

Incorporators and directors of a stockcorporation must own at least oneshare of stock of the corporation. In anon-stock corporation, a trustee mustbe a member thereof.

In nationalized industries, aliens maybe directors of a corporation only insuch number as may be proportional totheir allowable ownership of shares,2

e.g. if the articles provide for 10directors, and alien ownership is limitedto 40% of the capital, then aliens mayoccupy a maximum of 4 board seats.

6. CAPITAL STOCK; SUBSCRIPTION;PAYMENT

Capital stocko Capital stock is the amount fixed in the

AOI, to be subscribed and paid in orsecured to be paid in by theshareholders of a corporation, either inmoney or property, labor or services, atthe organization of the corporation orafterwards and upon which is toconduct its operation. (Fletcher)

o The capital stock limits the maximumamount or number of shares that maybe issued by the corporation withoutformal amendment of the AOI. Itremains the same even though theactual value of the shares asdetermined by the assets of thecorporation is diminished or increased.

Authorized capital stocko ACS is synonymous with capital stock

where the shares of the corporationhave par value. If the shares of stockhave no par value, the corporation hasno ACS, but it has capital stock theamount of which is not specified in theAOI as it cannot be determined until allthe shares have been issued. In thiscase, the two terms are notsynonymous (De Leon)

o State the authorized capital stock inlawful money of the Philippines, thenumber of shares into which the ACS isdivided, and the par value of each parvalue shares (§14(8), §15(7))

o Stock corporations are not required tohave any minimum authorized capitalstock except when special laws provideotherwise (§12)

Subscribed capital stock

2 Sec. 2-A, CA 108 (Anti-Dummy Law) as amended by PD 716.

o It is the amount of the capital stocksubscribed whether fully paid or not. Itconnotes an original subscriptioncontract for the acquisition by asubscriber of unissued shares in acorporation (§60,61)

o At least 25% of authorized capital stockmust be subscribed (§13)

o Subscription – mutual agreement of thesubscribers to take and pay for thestock of a corporation

o Pre-incorporation subscription –amount which each incorporator orstockholder agrees to contribute to aproposed corporation

Outstanding capital stocko It is the portion of the capital stock

which is issued and held by personsother than the corporation itself. Under§137, it is the total shares of stockissued under the binding subscriptionagreements to subscribers orstockholders, whether or not fully orpartially paid, except treasury shares.It is thus broader than “subscribed”capital stock

o The terms “subscribed capital stock”and “issued” or “outstanding” capitalstock are used synonymously sincesubscribed capital stock, asdistinguished from the certificate ofstock, can be issued even if not fullypaid. But while every subscribed share(assuming there is a bindingsubscription agreement) is“outstanding,” an issued share may nothave the status of outstanding share(as in the case of treasury shares)

Paid-up capitalo 25% of subscribed capital stock must

be paid-up for the purpose ofincorporation, but in no case shall beless than P 5000 (§13)

o Portion of the authorized capital stockwhich has been subscribed and paid.Not all funds or assets received by thecorporation can be considered paid-upcapital, for this term has a technicalsignification in corporation law. Suchmust from part of the authorizedcapital stock of the corporation,subscribed and then actually paid-up.[MSCI-NACUSIP Local Chapter v.National Wages and ProductivityCommission]

o Must be in the form of (a) cashdeposited in a bank or (b) propertywhich may be used or actually neededby the corporation in its operations

o Capital can’t consist or be invested inmoney market placement

o Corporations with more stringentcapital requirements: Insurance corporations – must

have paid-up capital stock of atleast P 5 M (Insurance Code, Sec188)

Banks – monetary board fixesminimum paid-up capitalrequirements for the differentclasses of banks (Central Bank Actand General Banking Act).



Unissued capital stocko It is that portion of the capital stock

that is not issued or subscribed. Itdoes not vote and draws no dividends

Legal capitalo It is the amount equal to the aggregate

par vale and/or issued value of theoutstanding capital stock. When parvalue shares are issued above par, thepremium or excess is not to beconsidered as part of the legal capital(Cf§43). In the case of no par valueshares, the entire considerationreceived forms part of legal capital andshall not be available for distribution ofdividends (§6, par 3)

Capitalo It is used broadly to indicate the entire

property or assets of the corporation.It includes the amount invested by thestockholders plus the undistributedearnings less losses and expenses.

o In the strict sense, it refers to thatportion of the net assets paid by thestockholders as consideration for theshares issued to them, which is utilizedfor the prosecution of the business ofthe corporation (De Leon)

7. TREASURER-IN TRUSTThe person elected by the subscribers asTreasurer of the corporation at the time ofthe incorporation, who is named as such inthe AOI and who has been authorized toreceive for and in the name and for thebenefit of the corporation, all subscriptions,fees, contributions or donations paid orgiven by the subscribers or members

8. TREASURER’S AFFIDAVITThe sworn statement of the Treasurerelected by the subscribers stating at least25% of the authorized capital stock of thecorporation has been subscribed and thatat least 25% of the total subscription hasbeen fully paid to him in actual cash and/orproperty, the fair valuation of which isequal to at least 25% of the saidsubscription, such paid-up capital being notless than 5,000.00 (§14)

9. OTHER MATTERS Classes of shares, as well as the

preferences or restrictions on any suchclass (§6)

Denial or restriction of pre-emptiveright (§39)

Prohibition against transfer of stockwhich would reduce stock ownership toless than the required minimum in thecase of a nationalized business oractivity (§15(11))

3.3. FILING OF ARTICLES AND PAYMENT OFFEES

Corporations governed by special laws haveto submit a recommendation from theappropriate government agency to theeffect that such articles are in accordancewith law.

a) banks, banking and quasi-bankinginstitutions,

b) building and loan associations,c) trust companies and other financial

intermediaries,d) insurance companies,e) public utilities,f) educational institutions, andg) other corporations governed by special

laws (§17) Non-stock corporations that intend to solicit

gifts, donations, and contributions from thepublic at large for the benefit of anindefinite number of persons must secure aCertificate of Registration from theInsurance Commissioner.

Failure to file AOI will prevent dueincorporation of the proposed corporationand will not give rise to its juridicalpersonality (§19). It will not even be a defacto corporation (§20)

1. Unless the certificate ofincorporation has been issued,there can be no de factocorporation (Hall vs. Piccio, 1950)

2. Campos—this statement should notbe taken as an absolute principle,but in the light of thecircumstances before the court.

3.4 EXAMINATION OF ARTICLES BY SEC;APPROVAL OR REJECTION

The SEC may reject any AOI thereto if thesame is not in compliance with therequirements of this Code (§17)

The SEC shall give the incorporators areasonable time within which to correct ormodify the objectionable portions of thearticles or amendment. (§ 17)

4. Grounds for disapproving articles ofincorporation (§17)

a) AOI does not substantially the formprescribed

b) Purpose is patently unconstitutional, illegal,immoral, contrary to government rules andregulations

c) Treasurer’s Affidavit concerning the amountof capital subscribed and or paid is false

d) Percentage requirement of ownership ofFilipino citizens as required by theConstitution not complied with.

After consulting with BOI, NEDA,appropriate government agency, SEC maydeny registration of any corporation if itsestablishment will not be consistent withdeclared national policies

Certificate of authority required of thefollowing:

a) Insurance Companies- InsuranceCommission

b) Banks, Building and LoanAssociations, Finance Companies-Monetary Board

c) Educational Institutions- Secretaryof Education

d) Public Utilities- Board of Power,Board of Transportation, National



Telecommunication Commission,etc..

Remedy in case of rejection of AOI: bypetition for review in accordance with theRules of Court (§6, last par., PD 902-A)

ISSUANCE OF CERTIFICATE OF INCORPORATION

A private corporation formed or organizedunder this Code commences to havecorporate existence and juridicalpersonality and is deemed incorporatedfrom the date the Securities and ExchangeCommission issues a certificate ofincorporation under its official seal (§19)

Thereupon the incorporators,stockholders/members and their successorsshall constitute a body politic and corporateunder the name stated in the articles ofincorporation for the period of timementioned therein, unless said period isextended or the corporation is soonerdissolved in accordance with law. (Ibid)

If incorporators are found guilty of fraud inprocuring Certificate of Incorporation, SECmay revoke the same after proper noticeand hearing (§6(I), PD 902-A)

5. Defective Attempts to Incorporate

5.1 DE FACTO CORPORATIONS – a corporationwhere there exists a flaw in its incorporation

Requisites of a de facto corporation(Ballantine as cited in Campos)

a) Valid statute – there is an apparently validstatue under which the corporation with itspurposes may be formed. There can be node facto corporation under a statuesubsequently declared unconstitutional

Municipality of Malabang vs. Benito (1969)

The municipality of Balabagan was created by EO386 of President Garcia out of barrios and sitios ofMalabang. The petitioners seek to nullify the EO.They rely on the Pelaez ruling that the President’spower to create municipalities under Sec. 68 of theAdministrative Code is unconstitutional.Respondents argue that the Pelaez ruling isinapplicable because Balabagan is a de factocorporation.

HELD: The Municipality of Balabagan was not a defacto corporation. The color of authority requisiteto a de facto municipal corporation may be anunconstitutional law, valid on its face, which haseither:

a. Been upheld for a time by the courts;or

b. Not yet been declared void; providedthat a warrant for its creation can befound in some other valid law or in therecognition of its potential existence inthe general constitution of the state.

The mere fact that Balabagan was organized beforethe statute was invalidated cannot make it a defacto corporation because, independently of theAdministrative Code, there is no other valid statuteto give color of authority to its creation. Thisdoesn’t mean that the acts done by Balabagan in

the exercise of its corporate powers are a nullity.The existence of EO 386 is an “operative fact whichcannot be justly ignored.”

b) User of corporate powers – there has beensome user of corporate powers, thetransaction of business in some way as if itwere a corporation not necessary that dealings between

the parties should have been on acorporate basis

election of directors and officers wouldnot be user of corporate powers sincethese acts are just indicative of a mereassociation

taking subscriptions to and issuingshares of stock, buying lot,constructing, and leasing a building onit will constitute sufficient user ofcorporate powers to constitute a defacto corporation

c) Substantial or Colorable compliance - therehas been colorable compliance with legalrequirements in GOOD FAITH while the corporation is still in the

process of incorporation, it is quiteclear that there can be no substantialor colorable compliance and therefore itcannot be at such a stage a de factocorporation

A corporation which has not yet beenissued a certificate of incorporationcannot claim “in good faith” to be acorporation. Thus, it cannot be a defacto corporation [Hall v. Piccio 86 Phil603]

Compliance with the Compliance with the above conditions

would make the corporation de facto whoseincorporation cannot be attackedcollaterally. It may only be attackeddirectly by the State in a quo warrantoproceeding (§20)

De facto doctrine grew out of the necessityto promote the security of businesstransactions and to eliminate quibbling overirregularities

The de facto doctrine is the exception tothe general rule that when there is no corpentity to talk about, it is the naturalpersons who are liable

Where corporations are neither de jure orde facto, associates may be held liable aspartners unless estoppel applies (§ 21)

No articles and no by-laws: no de factocorp. There’s no colorable compliance at all

De facto corp is like a de jure corp, has allthe powers and liabilities of de facto corp

THE ONLY DIFF: its incorporation can beattacked by State in quo warranto action

Ratio: Only State can give it legalexistence, so only the State is wronged

5.2 CORPORATION BY ESTOPPEL

It is a status acquired by persons whoassume to act as a corporation knowing itto be without authority. Such persons shallbe liable as general partners for all debts,liabilities and damages incurred or arisingas a result thereof. (§21)



When such ostensible corporation is suedon any transaction entered by it as acorporation or any tort committed by it assuch, it shall not be allowed to use as adefense as lack of corporate personality(§21)

One who assumes an obligation to anostensible corporation as such, cannotresist performance thereof on the groundthat there was in fact no corporation (§21)

Note that an unincorporated corporation isnot barred from transacting business beforethe commencement of corporate existence.Limit: personal liability. Complication: whenthe corporation did not come about

Against whom will estoppel lie? Whocommitted the active misrepresentation?

Where a person convinces other parties toinvest money for the formation of acorporation, but which has never dulyincorporated, there can be no resultingpartnership among them, and the merepassive investors cannot be held liable toshare in the losses suffered by the businessenterprise (Pioneer Surety v CA, 1989)

When applicable:1. Persons assuming to act as corp are

liable as gen partners;

2. 3rd party who had dealt with anunincorporated association as a corpmay be precluded from denying itscorporate existence on a suit broughtby the alleged corp – person deemed tohave admitted the existence of the corp

3. alleged corp that has entered into acontract by virtue of which it hasreceived advantages and benefits

However, if business associatesfraudulently misrepresent the existence ofa corp, 3rd party can sue them as genpartners. 3rd party is not estopped fromasserting their liability because he hadrecognized the corporation’s existence.Ratio: They cannot profit by their ownmisrepresentation.

Hence, if associates did not know of theedefective incorp, they can’t be personallyheld liable by innocent 3rd party (CfSalvaierra v Garlitos, 1958)

But if 3rd party knew of defects of incorp,he is estopped from recovering fromindividual associates, but must recover onlyfrom corp assets

Lozano vs. delos Santos (1997)

This case involved two incorporated drivers’associations that decided to unite and elect one setof officers to be given authority to collect the dailydues of the drivers who are members of theconsolidated association.HELD: Doctrine of estoppel applies when personsassume to form a corporation and exercisecorporate functions and enter into businessrelations with third persons. Where there are nothird persons involved and the conflict arises onlyamong those assuming to form a corporation, whotherefore know that it has not been registered,there is no corporation by estoppel.

International Express Travel v. CA (2000)

The doctrine of corporation by estoppel may apply

to:o a third party - a 3rd party who had dealt with

an unincorporated association as acorporation may be precluded from denyingits corporate existence on a suit brought bythe alleged corporation on the contract even ifhe did not know of the defectiveincorporation. 3rd party is considered to haveadmitted the existence of a corporation by thefact that he dealt with it as a corporation

o the alleged corporation - when a third personhas entered into a contract with anassociation which represented itself to be acorporation, the association is estopped fromdenying its corporate capacity in a suit againstit by such 3rd person. It cannot allege lack ofpersonality to be sued to evade responsibilityon a contract it has entered into and by virtueof which it has received advantages andbenefits

o associates as partners - when businessassociates fraudulently misrepresents theexistence of a corporation and the 3rd partycontacts with the association as a corporationwithout knowing the serious defects in itsincorporation, such 3rd party may sueassociates as general partners. Where boththe associates and the 3rd party were ignorantof the defective incoroporation, 3rd party canthold the associates liable since they were ingood faith. If 3rd party knew of defects inincorporation and still dealt with thecorporation, he must be deemed to havechosen to deal with the corporation as suchand should be limited in his recovery to thecorporate assets.

6. Internal Organization of theCorporation

6.1 APPROVAL OF BY-LAWS

1. Definition of by-laws These are regulations, ordinances, rules

or laws adopted by an association orcorporation or the like for its internalgovernance. By- laws define the rightsand obligations of various officers,persons or groups within the corporatestructure and provide rules for routinematters such as calling meetings.

Every corporation under this code shallhave the power and capacity: to adoptby-laws not contrary to law, morals, orpublic policy, and to amend or repealthe same in accordance with this code(§36 (5))

These are subordinate to the AOI, CorpCode, and other statutes. (Fleischer vs.Nolasco(1925))

2. When to adopt by-laws (§46) Every corporation formed under this

code must within 1 month after receiptof official notice of the issuance of itscertificate of incorporation by the SECadopt a code of by-laws for itsgovernment not inconsistent with thiscode.

May be adopted and filed prior toincorporation, in such case, shall beapproved and signed by all



incorporators submitted to SECtogether with AOI

Failure to file By-laws on time:

Loyola Grand Villas Homeowners Assn v. CA(1997)

The Supreme Court held that although theCorporation Code requires the filing of by-lawswithin one month after the issuance of theCertificate of Incorporation, it does not expresslyprovide for the consequences of non-filing withinthe said period. Failure to file the by-laws withinthat period does not imply the "demise" of thecorporation. By-laws may be required by law for anorderly governance and management ofcorporations but they are not essential to corporatebirth. Therefore, failure to file them within theperiod required by law by no means tolls theautomatic dissolution of a corporation.

3. How filed (§46) Must be approved by the affirmative

vote of the stockholders representingthe majority of the outstanding capitalstock or majority of members (if filedprior to incorporation, must beapproved and signed by allincorporators)

Must be signed by the stockholders ormembers voting for it

Must be filed with the SEC certified bythe majority of directors/trustees andcountersigned by the secretary of thecorporation which shall be attached tooriginal AOI

4. Where kept (§46) Must be kept in the principal office of

the corporation; subject to inspectionof stockholder or member during officehours (Cf §74)

5. Effectivity of by-laws In all cases, the by-laws shall be

effective only from the issuance of SECof certification that bylaws are notinconsistent with the Code

Cannot bind stockholders or corporationpending approval

By-laws or any amendment thereto ofany bank, banking institution, buildingand loan association, trust company,insurance company, public utility,educational institution or other specialcorporations governed by special lawsmust be accompanied by a certificate ofthe appropriate gov’t agency to theeffect that such by-laws are inaccordance with law

By-laws, like AOI are contracts ofadhesion. They will bind thecorporation and stockholders includingthose who vote against as well as thosewho became members after approval

Contracts entered into without strictcompliance with by-laws may bebinding on the corporation due to longacquiescence and usage (Board ofLiquidators vs. Kalaw (1967))

By-laws are mere internal rules amongstockholders and cannot affect orprejudice 3rd persons who deal with thecorporation unless they haveknowledge of the same (China BankingCorp v CA, 1997)

6. Contents (§47) Subject to the provisions of the

Constitution, this Code, other speciallaws, and the articles of incorporation,a private corporation may provide in itsby-laws for:a) The time, place and manner of

calling and conducting regular orspecial meetings of the directors ortrustees;

b) The time and manner of calling andconducting regular or specialmeetings of the stockholders ormembers;

c) The required quorum in meetings ofstockholders or members and themanner of voting therein;

d) The form for proxies ofstockholders and members and themanner of voting them; By lawsmay not prohibit the use of proxies-Peoples’ Home Savings Bank vs.Superior Court, cited in Campos

e) The qualifications, duties andcompensation of directors ortrustees, officers and employees;

f) The time for holding the annualelection of directors of trustees andthe mode or manner of givingnotice thereof;

g) The manner of election orappointment and the term of officeof all officers other than directorsor trustees;

h) The penalties for violation of theby-laws;

i) In the case of stock corporations,the manner of issuing stockcertificates; and

j) Such other matters as may benecessary for the proper orconvenient transaction of itscorporate business and affairs.

The contents may be subdivided intotwo major headings:a) Management and control of the

corporate entity; andb) Rights and obligations of

stockholders

7. Amendment or repeal (§48) Majority vote of the members of the

Board and majority vote of theoutstanding capital stock or majority ofmembers, in a meeting duly called forthe purpose; or

2/3 of the outstanding capital stock ormembers may delegate to the BOD thepower to amend or repeal any by-lawsor adopt new by-laws (such power maybe revoked by majority vote only)

In all other respects, the procedure foradopting the original by-laws shall bethe same in amending or repealing by-laws or adoption of a new set of by-laws



6.2 ELECTION OF DIRECTORS – discussed inChapter VII

6.3 COMMENCEMENT OF BUSINESS

7. Effects of non-use ofcharter/continuous inoperation (§ 22)

1. Non-user for 2 years (non-use of charter)-when the corporation does not formallyorganize and commence the transaction ofits business or the construction of its workswithin 2 years from the date of itsincorporation, its corporate powers ceaseand the corporation shall be deemeddissolved (automatic) Formal organization – may consist in

the election of new board of directorsor trustees and corporate officer

Commencement of business – maytake the form of contracting for leaseor sale of properties to be used asbusiness site of the corporation andother preparatory acts geared towardsfulfillment of the purpose for which thecorporation was established

2. Non-user for 5 years (continuousinoperation)- when the corporation hascommenced the transaction of its businessbut subsequently becomes continuouslyinoperative for a period of at least 5 years.The same shall be a ground for thesuspension or revocation of its corporatefranchise or Certificate of Incorporation(not automatic). Notice and hearing beforeSEC is required.

3. Exception: cause or non-use or operationwas due to causes beyond the control ofthe corporation as determined by SEC (ex.Mineral lands to be developed by thecorporation as per its purpose are theobject of court litigation and a courtinjunction against the corporate activitieshas been issued)

ANNUAL FINANCIAL STATEMENTS – filed with SECannually (SEC Rule, Nov. 20, 1980)

Chapter IV

THE CORPORATE ENTITY

1. Doctrine of separate juridicalpersonality

A corporation has a personality separate anddistinct from that of its stockholders andmembers and is not affected by the personalrights, obligations, and transactions of thelatter. Since corporate property is owned bythe corporation as a juridical person, thestockholders have no claim on it as owners, buthave merely an expectancy or inchoate right tothe same should any of it remain upondissolution of the corporation after all corporatecreditors have been paid. Such right is limitedonly to their equity interest (doctrine of limitedliability).

Although stockholder’s interest in the corp maybe attached by his personal creditor, corpproperty cannot be used to satisfy his claim(Wise & Co. vs. Man Sun Lung, 1940)

General Rule: Separate personality is vested toa corporate entity when it is issued thecertificate of incorporation by the SEC. Theexceptions are:a. de facto corporationb. corporation by estoppel

As a separate juridical personality, acorporation can be held liable for tortscommitted by its officers for corporate purpose(PNB v CA, 1978)

It can’t be held criminally liable for a crimecommitted by its officers (People v Tan BoonKong, 1930)

Corporate entities are entitled to the followingconstitutional rights: due process, equalprotection, and protection against unreasonablesearches and seizures. However, a corp is notentitled to the privilege against self-incrimination (Bataan Shipyard & Eng’g Co. vPCGG, 1987)

A corporation is not entitled to moral damages(LBC Express, Inc v CA)

Juridical personality of the corporation endswhen liquidation ends (payment of debts anddistribution of assets) and inchoate rights orexpectancies of stockholders are realized. Untilsuch conveyance is made, title over the assetsremains with the corporation.

2. Piercing the veil of corporatefiction

2.1 Nature of the piercing doctrine

Piercing the veil of corporate entity requiresthe court to see through the protectiveshroud which exempts its stockholdersfrom liabilities that ordinarily they could besubject to, or distinguishes one corporationfrom a seemingly separate one, were it notfor the existing corporate fiction [Lim v. CA,2000]. But to do this, the court must besure that the corporate fiction wasmisused, to such an extent that injustice,fraud or crime was committed uponanother, disregarding, their, his, her or its



rights. It is the protection of the interestsof innocent third persons dealing with thecorporate entity which the law seeks toprotect by this doctrine. [Traders RoyalBank v. CA, 1997]

Whether the existence of the corporationshould be pierced depends on questions offacts, appropriately pleaded. Mereallegation that a corporation is the alterego of the individual stockholders isinsufficient. The presumption is that thestockholders or officers are distinct entities.The burden of proving otherwise is on theparty seeking to have the court pierce theveil of corporate entity. [Ramoso v. VA,2000]

Piercing the veil of corporate entity ismerely an equitable remedy, and may beawarded only in cases when the corporatefiction is used to defeat public convenience,justify wrong, protect fraud or defend crimeor where the corporation is a mere alterego or business conduit of a person.

When it comes to applying the doctrine, thefirst point to consider is the liability ofobligation of the individual (the one who isbeing sought to be liable). Without suchliability, everything would have been incompliance with statutes (U.S vs.Milwaukee, 1905; Umali vs. CA, 1990).

In case of wholly-owned corporations,corporations with common stockholders, orcorporations having a parent-subsidiaryrelationship, the following are the“inevitable consequences”:

a) Control and management of thecorporation;

b) Interlocking directors;c) Common access to the use of resources,

services, and 3rd-party providers; andd) Intra-corporate dealings.In the above consequences, there is nonecessity for applying the doctrine of piercingthe corporate veil unless there is a particularact by the corporation, stockholder, or BODthat gives rise to a liability. If there’s a liabilityto speak of, such consequences may beconsidered as a means of evading such thusthe need for the piercing.

In applying the doctrine, determine:1. the rights and obligations of the

parties.2. the possibility of non-enforcement

of such rights and obligationsbecause of the shield or veil.

3. look into the circumstances andunderlying purpose of putting upthe corporation

2.2 Extent of the legal effects of piercing

The application of the piercing doctrine to aparticular case does not deny thecorporation of legal personality for any andall purposes, but only for the particulartransaction or instance for which thedoctrine was applied. [Koppel Phil. Inc. v.Yatco] (1946)

Piercing is not allowed unless the remedysought is to make the officer or anothercorporation pecuniarily liable for corporatedebts

2.3 Illustrative Cases where piercing the veilis allowed

If done to defraud the government of taxesdue it

If done to evade payment of civil liability If done by a corporation which is merely a

conduit or alter ego of another corporation If done to evade compliance with

contractual obligations If done to evade financial obligation to its

employees

2.4 Parent-subsidiary relationship

The mere fact that a corporation owns allor substantially all of the stocks of anothercorporation is not sufficient to justify theirbeing treated as one entity. If used toperform legitimate functions, thesubsidiary’s separate existence may berespected. However, to prevent abuses ofthe separate entity privilege, the court willpierce the veil of corporate entity andregard the two corporations as one.

Circumstances which if present in theproper combination renders the subsidiaryan instrumentality:a) The parent corporation owns all or

most of the subsidiary’s capital stockb) The parent and subsidiary corporations

have common directors or officersc) The parent corporation finances the

subsidiaryd) The parent corporation subscribes to all

the capital stock of the subsidiary orotherwise causes its incorporation

e) The subsidiary has grossly inadequatecapital

f) The parent corporation pays thesalaries and other expenses or losses ofthe subsidiary

g) The subsidiary has substantially nobusiness except with parent corporationor no assets except those conveyed toor by the parent corporation

h) In the papers of the parent corporationor in the statements of its officers, thesubsidiary is described as a departmentor division of the parent corporation orits business or financial responsibility isreferred to as the parent corporation’sown

i) The parent corporation uses theproperty of the subsidiary as its own

j) The directors or executives of thesubsidiary do not act independently inthe interest of the subsidiary but taketheir orders from the parentcorporation in the latter’s interest

k) The formal ledger requirements of thesubsidiary are not observed (PNB vRitratto Group, 2001).

The subsidiary cannot be considered amere instrumentality of the parentcorporation just by the combination of the11 signs listed above. For the veil ofcorporate entity of the subsidiary to bepierced so that it is considered just aninstrumentality, the act questioned musthave an illegal or unfair purpose which



results to prejudice to third persons whomay seek redress from the corporate entity

De Leon vs. NLRC (2001)

FACTS: FISI contracted with FTC for securityservices. Subsequently, the stockholders of FISIsold all their participation in the corporation to anew set of stockholders which renamed thecorporation MISI. Afterwards, FTC preterminatedits contract of security services with MISI causingpetitioner security guards to lose their employmentand file ULP case against FTC, FISI and MISI.HELD: There was ER-EE relationship between FTCand petitioners. It was shown that FISI was amere adjunct of FTC. Records show that FISI andFTC have the same owners and business address,and FISI provided security services only to FTC.The purported sale of the shares of the formerstockholders to a new set of stockholders whochanged the name of the corporation to MISIappears to be part of a scheme to terminate theservices of FISI's security guards posted at thepremises of FTC and bust their newly-organizedunion which was then beginning to become activein demanding the company's compliance with LaborStandards laws. Under these circumstances, theCourt cannot allow FTC to use its separatecorporate personality to shield itself from liabilityfor illegal acts committed against its employees.

Francisco vs. Mejia (2001)

With specific regard to corporate officers, thegeneral rule is that the officer cannot be heldpersonally liable with the corporation, whethercivilly or otherwise, for the consequences of hisacts, if he acted for and in behalf of thecorporation, within the scope of his authority and ingood faith. In such cases, the officer's acts areproperly attributed to the corporation. However, ifit is proven that the officer has used the corporatefiction to defraud a third party, or that he has actednegligently, maliciously or in bad faith, then thecorporate veil shall be lifted and he shall be heldpersonally liable for the particular corporateobligation involved.

3. Nationality of the Corporation

3.1 The place of incorporation test. The corporation is a national of the country

under whose laws it is organized orincorporated(§123):Domestic corporations – organized andgoverned under and by Philippine laws

Foreign corporations – organized underlaws other than those of the Philippines ancan operate only in the territory of thestate under whose laws it was formed.However, they may be licensed to dobusiness here.

3.2 Nationality of the Corporation asdetermined by the “Control Test”

Exploitation of Natural Resources - Section2, Art. XII CONST. “only Filipino Citizens orCorporations whose capital stock are atleast 60% owed by Filipinos can qualify toexploit natural resources.”

Public Utilities - Sec. 11, Art XII, CONST.“xxx no franchise, certificate or any otherform of authorization for the operation of apublic utility shall be granted except tocitizens of the Philippines or to corporationsor associations organized under the laws ofthe Philippines at least 60% of whosecapital is owned by such citizens. “

War-time Test - If the controllingstockholders are enemies, then thenationality of the corporation will be baseon the citizenship of the majoritystockholders in times of war (FilipinasCompania de Seguros v Christian Huenfeld,1951) .

Investment Test - Sec. 3(a) and (b),Foreign Investments Act of 1991 (RA7042).It considers for purpose of investment a“Philippine National” as a corporationorganized under the laws of the Philippinesof which at least 60% of the capital stockoutstanding and entitled to vote is ownedand held by citizens of the Philippines, or atrustee of the funds for pension or otheremployee retirement or separationbenefits, where the trustee is a Philippinenational and at least 60% of the fund willaccrue to the benefit of Philippine nationals.

3.3 Grandfather ruleUsed to determine the nationality of acorporation by which the percentage of Filipinoequity in corporations engaged in nationalizedand/or partly nationalized areas of activities,provided for under the constitution and othernationalization laws, is computed, in caseswhere corporate shareholders are present inthe situation, by attributing the nationality ofthe second or even subsequent tier ofownership to determine the nationality of thecorporate stockholder. (Villanueva, 2003)

SEC formula: SEC Letter Opinion“Shares belonging to corporations orpartnerships at least 60% of the capital ofwhich is owned by Filipino citizens shall beconsidered as of Philippine nationality, butif the percentage of Filipino ownership inthe corporation or partnership is less than60% only the number of sharescorresponding to such percentage shall beconsidered as of Philippine nationality.”



Chapter V

PROMOTERS’ CONTRACTS PRIOR TOINCORPORATION

1. Functions of Promoters

Organize and establish corporation Solicit or pool capital contributions Exercise/identify/consummate opportunities Make available capital

contributions/investments (underwrite) Manage/control Note: may be done prior or after incorporation.

Complications arise if performed prior toincorporation. For whom was the promoteracting in behalf of? (no juridical entity yet)

2.What are Promoter’s Contracts?

Contracts prior to existence of corporation thusthe corporation could not have been a party toit.

However, the corporation may make thecontracts its own and may become bound onsuch contracts if after incorporation, it adoptsor ratifies the same, or accepts its benefits withknowledge of the terms thereof.

Adoption or ratification need not be by expressresolution of the board and may be impliedfrom the acts of responsible officers of thecorporation.

3. Liability of Corporation forPromoter’s Contracts

Rules on the liability of the corp. on promoters’contracts:

3.1 General RuleCorp. is not bound by the contract – Since the

corp. did not yet exist at the time of the contract, itcould not have had an agent who could legally bindit.

3.2 Exception:

Corp. may be bound by the contract if it makes thecontract its own: How?

a. Adoption or ratification By express resolution Implied from the acts of responsible

officers of the corp.* The corp. cannot adopt only the part of the

contract which may be beneficial to it &then discard the part that is burdensome.

* The contract to be capable of adoption orratification, must be one within the powersof the corp. to enter.

b. Acceptance of benefits under the contractwith knowledge of the terms thereof

4. Personal Liability of Promoter onPre-Incorporation Contracts

There are three possible situations intended by thepromoter and the other party in pre-incorp.contracts:

1. Promoter takes a continuing OFFER on behalf ofthe corp, which if accepted by the corp.becomes a contract Promoter does notassume any personal liability, whether or notthe offer is accepted by the corp.

2. Promoter makes a contract at the time bindinghimself with the UNDERSTANDING that if thecorp., once formed, accepts or adopts thecontract, the promoter will be relieved of allresponsibilities

3. Promoter binds himself PERSONALLY &assumes the responsibility of looking to theproposed corp. for reimbursement

In the absence of any express or impliedagreement to the contrary, the 3rd situation will bepresumed and the promoter will be consideredpersonally liable for the contracts. Thus, the corp.’sadoption or ratification of the contract will notrelease the promoter from personal liability unlessa novation was intended. (Wells vs. Fay & EganCo., 143 Ga. 732, 87 S.E 873, 1915) Exception:Quaker v Hill case. In this case, Quaker looked tothe uincorporated entity when making the contract.Thus, the promoter was not liable.(Quaker Hill Inc.vs. Parr, 148 Colo. 45, 364 P. 2d 1056, 1961)

5. Compensation of Promoters

Gen rule – the corporation is not liable to paycompensation because this would be an impositionon innocent investors. (Ballantine)

Exceptions: if after it is formed, corporation expressly

promises to do so (Ballantine; Indianapolis BluePrint & Manufacturing Co. v. Kennedy et. al.,215 Ind. 409, 19 N.E 2d 554, 1939)

Services done partly before and partly afterincorporation and the corporation takes thebenefits thereof

The Corp. Code does not contain any provision asto the compensation of promoters. But theSecurities Act authorizes a promotion fee IF it isprovided for in the registration statement of thesecurities involved.

6. Fiduciary Relationship betweenCorporation & Promoter

The promoters, being responsible for the financing& organization of the corp., are under duty toexercise good faith & fairness in all their acts &transactions.

Example: Promoters often have to take options ortitle to property in their name but for the benefit ofthe corp. In such cases, they should not makesecret profits in passing title to the corp. If they do,they would have to account for all such profits tothe corp. when formed. (Old Dominion Mining andSmelting Corp., 203 Mass. 159, 89 N.E 193, 1909)



Chapter VI

CORPORATE POWERS

1. General powers of corporations(§36)

a. To sue and be sued in its corporate name;b. Succession by its corporate name for the period

of time stated in the articles of incorporationand the certificate of incorporation;

c. To adopt and use a corporate seal;d. To amend its articles of incorporation in

accordance with the provisions of this Code;e. To adopt by-laws, not contrary to law, morals,

or public policy, and to amend or repeal thesame in accordance with this Code;

f. In case of stock corporations, to issue or sellstocks to subscribers and to sell stocks tosubscribers and to sell treasury stocks inaccordance with the provisions of this Code;and to admit members to the corporation if itbe a non-stock corporation;

g. To purchase, receive, take or grant, hold,convey, sell, lease, pledge, mortgage andotherwise deal with such real and personalproperty, including securities and bonds ofother corporations, as the transaction of thelawful business of the corporation mayreasonably and necessarily require, subject tothe limitations prescribed by law and theConstitution;

h. To enter into merger or consolidation withother corporations as provided in this Code;

i. To make reasonable donations, including thosefor the public welfare or for hospital, charitable,cultural, scientific, civic, or similar purposes:Provided, That no corporation, domestic orforeign, shall give donations in aid of anypolitical party or candidate or for purposes ofpartisan political activity;

j. To establish pension, retirement, and otherplans for the benefit of its directors, trustees,officers and employees; and

k. To exercise such other powers as may beessential or necessary to carry out its purposeor purposes as stated in the articles ofincorporation. (in the purpose clause)

Sources of express power (Villanueva)o Section 36 (Corp Code and other applicable

statutes)o Purpose clause (AOI, supplemented by by-

laws) Sec 38 par 11 grants such power as are

essential or necessary to carry out its purposeor purposes as stated in the AOI. A corporationis presumed to act within its powers and whena contract is not on its face necessarily beyondits authority, it will, in the absence of proof tothe contrary, presumed valid

The general powers are to be exercised by theBOD. However, the power to amend AOI is tobe exercised by the stockholders or members

2 general restrictions on the power of thecorporation to acquire and hold properties:o that the property must be reasonably and

necessarily required by the transactions ofits lawful business

o that the power shall be subject to thelimitations prescribed by other special lawsand the constitution (corporation may notacquire more than 30% of voting stocks of

a bank; corporations are restricted fromacquiring public lands except by lease ofnot more than 1000 hectares)

2. Specific Powers - TCB PDA IDM(DIP CAB MDT)

Extend or shorten the corporate Term (§ 37) Increase or decrease Capital stock (§ 38) Incur, create or increase Bonded indebtedness

(§ 38) Deny Preemptive right (§ 39) Sell or otherwise Dispose of substantially all its

assets Acquire its own shares (§ 41) Invest in another corporation or business (§

42) Declare dividends (§ 43) Enter into Management contracts (§ 44)

3. Implied Powers

These implied powers are deemed to exist becauseof the following provisions:1. except such as are necessary or incidental to

the exercise of the powers so conferred (§36)2. such powers as are essential or necessary to

carry out its purpose or purposes as stated inthe AOI – catch-all phrase (§45)

Remember: (Coleman vs. Hotel de France Co., 29Phil. 323, 1915)1. A corporation is presumed to act within its

powers.2. When a contract, entered into by the

corporation, is not on its face necessarilybeyond its authority, it will be presumed valid.

4. The Ultra ViresDoctrine (§45)

Definition – These are acts which a corporation isnot empowered to do or perform because they arenot based on the powers conferred by its AOI orby the Corporation Code on corporations ingeneral, or because they are not necessary orincidental to the exercise of the powers soconferred.

Rule – No Corporation under this Code shallpossess or exercise any corporate powers exceptthose conferred by this Code or by its articles ofincorporation and except such as are necessary orincidental to the exercise of the powers soconferred.

An ultra vires act, if not illegal, can be remedied(by ratification)

Atrium v. CA (2001)

Atrium Management Corporation filed withRTC an action for collection of the 4postdated checks issued by the Hi-cementCorporation, though its signatories de Leon,treasurer, and delas Alas, chairman of thecorporation to a certain ET Henry, and Co,which the latter endorsed to Atrium for



rediscounting.

HELD: The act of issuing was well within theambit of a valid corporate act, for it wasfor securing a loan to finance theactivities of the corporation, hence, notan ultra vires act. An ultra vires act isdistinguished from illegal act, the formerbeing voidable which may be enforced byperformance, ratification, or estoppel,while the latter is void and cannot bevalidated. SC however, held de Leonnegligent.

NAPOCOR v Vera (1989)

NAPOCOR has a pier at its coal plant inBatangas. It did not renew its stevedoringcontract at the plant, but instead, took overthe services itself. RTC Judge issuedpreliminary injunction against NAPOCOR,saying that it was not empowered by itsCharter to engage in stevedoring and arrastreservices.

Held:

Under its Charter, NAPOCOR can exercisepowers as may be reasonably necessary tocarry out its business of constructing,operating and maintaining power plants, orwhich, from time to time, may be declared bythe Board to be necessary, useful, incidentalor auxiliary to accomplish said purpose.

If act is lawful, and not prohibited, and for thepurpose of serving corporate ends, andreasonably contributes to the promotion ofthose ends in a substantial sense, it may beconsidered within the corporation’s charterpowers.

Stevedoring services are incidental andindispensable to unload the coal shipments.

Republic of the Philippines vs. AcojeMining Co. (1963)

Acoje Mining requested the Director of Poststo open a post office in its mining camp forthe benefit of its employee and their families.In a resolution, Acoje agreed to be directlyresponsible for the “dishonesty, carelessness,or negligence of the employee it assigns”.Acoje’s employee, Sanchez, was designatedas the postmaster but he later disappearedwith 13K of post office funds. Acoje deniedliability on the ground that the resolution wasultra vires-BOD had no authority to act on thematter.

HELD: The company is estopped fromdenying liability on the ground that the boardresolution is ultra vires. Assuming arguendothat the resolution is an ultra vires act, thesame is not void for it was approved not incontravention of law, customs, public orderand public policy. The term ultra vires shouldbe distinguished from an illegal act for theformer is merely voidable which may beenforced while the latter is void and cannotbe validated.

Pirovano v De la Rama Steamship (1954)

Stocks are owned by Don de la Rama, his 2daughters, and their EEs with nominal shares.One of the daughters was married to thecompany president, Enrico Pirovano. Whilethe business grew, the father distributed hisstocks among his 5 daughters and his wife.NDC was also represented in the BoD becausethe corp had a debt to it. To secure the debt,all assets were mortgaged to NDC. Debt waslater converted to stock, such that NDC nowheld 4 of 9 seats in BoD. Such conversionreleased the mortgaged assets.

Enrico Pirovano died, so the BOD passed aresolution converting insurance proceeds onhis life to stocks for each of his minorchildren. Approved by SHs.

However, the other SHs realized that theywould actually be donating 1.44 M. instead ofthe 400K they intended (since the value ofthe stocks increased), and that Mrs. Pirovanowould now have 2x voting power as hersisters.

BOD later changed donation into cash, butwould be retained by the company as a loan,and the interest payable to the children, bothamounts to be paid to the children after debtto NDC paid, and later, when company is inposition to meet obligations. Mrs. Pirovanoformally accepted the donation. BOD laterapproved release of some funds held in trustfor Mrs. Pirovano to buy house in NY. SHsformally ratified the donation.

SEC later gave opinion that donation was voidbec it was beyond the scope of the corp’spowers. SHs later voted to revoke thedonation to the Pirovano children.

Held:

1) Donation was remunerative- for servicesrendered by Enrico Pirovano.

2) Donation was already perfected. Ratifiedby SHs, and agreed to by NDC, the onlycreditor.

3) Donation is within scope of the AOI. It isprovided that corp can invest and dealwith moneys not immediately required, insuch manner as from time to time may bedetermined, and that corp can aid in anyother manner any person of which anyobligation or in which any interest is heldby this corp, or in the affairs of prosperityof which this corp has a lawful interest.Corp has given donations to EEs in thepast, and to political campaigns.

Assuming donation was ultra vires,donation was ratified, making the actvalid and enforceable.

Ultra vires act: outside scope of powersgranted to it by its articles of incorp. Notnecessarily illegal, because ultra viresacts can become valid by ratification andestoppel.

General consequences of ultra vires acts1. On corporation itself-Corporation

May be dissolved under a quo warranto proceedingbut in most cases, the court merely enjoins the



corporation from commission of the ultra vires acts(Campos)-Certificate of Registration may be suspended orrevoked by SEC

2. On immediate parties- Parties to the ultravires contract, if executory on both sides,neither party can ask for specificperformance. Will be left as they are if thecontract has been fully executed on bothsides. If one party has performed his part,the contract will be enforced provided it isnot illegal

- Contract proceeding from an ultravires act is voidable (Republic v. Acoje MiningCo., GR L-18062, Feb. 28, 1963; 7 SCRA 361))

3. On the rights of stockholders- Any stockholdermay bring either an individual or derivative suitto enjoin a threatened ultra vires act orcontract. If act or contract has already beenperformed, a derivative suit for damages maybe filed against the directors, but their liabilitywill depend on whether they acted in good faithand with reasonable diligence in entering intocontracts. When based on tort, cannot set-upthe defense of ultra vires against injured partywho had no knowledge that such was ultravires

May become binding by the ratification of allstockholders unless third parties are prejudicedthereby or unless the acts are illegal (Pirovano v.de la Rama Steamship Co. 96 Phil. 335; 1954)

Chapter VIICONTROL AND MANAGEMENT OF

CORPORATIONS

1. Allocation of power and control(Campos)

3 levels of control in the corporate hierarchy:

1. the Board of Directors or Trustees- responsible for corporate policies and the

general management of the business andaffairs of the corporation

2. the Officers- in theory, execute the policies laid down by

the board- in practice, often have wide latitude in

determining the course of businessoperations

3. The stockholders or members- have residual power of fundamental

corporate changes

NOTE: BOD can delegate its function to the officersand also to committees appointed by it (ExecutiveCommittee, § 35)

2. Who Exercises Corporate Powers

2.1 BOARD OF DIRECTORS

1) Authority; repository of corporate powers The board of directors or trustees are

responsible for corporate policies and

general management of the businessaffairs of the corporation

Directors have a fiduciary duty to thecorp and to the SHs

General Rule: once elected, SHs haveno right to interfere with the BOD.Exceptions: removal of director (§28),amendments of AOI (§16),fundamental changes (§6), declarationof stock dividends (§43), entering intomanagement contracts (§44), fixing ofconsideration of no-par shares (§62),and fixing of compensation of directors(§30)

Unless otherwise provided in the CorpCode, the Board of Directors controland exercise:o the corporate powers of corporationo all business conducted,o all property of such corporation

(§23) The board exercises almost all

corporate powers, lays down allbusiness policies and is responsible forthe efficiency of management. Thestockholders have no right to interferewith the board’s exercise of its powersand functions except where the lawexpressly gives them the final say, likein cases of removal of a director,amendment of articles of incorporation,and other major changes (Cf §6, 42,43).

Limitations on the BOD’s authority orpowers:1. Action by SHs in order to elect a

BOD2. Certain act of the corp that require

joint action of the SHs and BOD Their resolutions on matters other than

the exceptions are legally not effectivenor binding and may be treated asmerely advisory or may be totallydisregarded. (Ramirez v. Orientalist Co.et. al., 38 Phil. 634; 1918); Wolfson v.Manila Stock Exchange, 72 Phil. 492;1941)

“Unless Otherwise Provided” – maypertain to instances where amanagement contract is entered hencecorporate powers are exercised by themanaging company and not the board

Authority of BOD can be delegated toagents/ officers/ committees (AOI,statutes, by-laws, resolutions) (YUChuck v Kong Li Po, 46 Phil 608).Delegation may be explicit, implicit, orbased on exigencies of the business (cf.Board of Liquidators v Kalaw)

The BOD may delegate its corporatepowers to either an executivecommittee or officials or contractedmanagers. The delegation, except forthe executive committee, must be forspecific purposes. The delegationmakes the officers agents of thecorporation. For such officers to bedeemed fully clothed by the corporationto exercise a power of the BOD, thelatter must specially authorize them todo so. (ABS-CBN Broadcasting Corp vCA, 1999)

The directors or trustees shall not actindividually nor separately but as a



body in a lawful meeting. Contractsentered into without a formal boardresolution does not bind thecorporation except when majority ofthe board has knowledge of thecontract and the contract benefited thecorporation. (ratification)

Directors owe their duties tocorporation as a whole rather than toindividual shareholders of classes ofshareholders

Business Judgment Rule- Sec 23 embodies the essence of the“business judgment rule,” that unlessotherwise provided in the Code, all corppowers and prerogatives are vesteddirectly in the BOD. Consequently, therule has two consequences: The resolution, contracts and

transactions of the BOD, cannot beoverturned or set aside by the SHsor members and not even by thecourts under the principle that thebusiness of the corp has been leftto the hands of the BOD; and

Directors and duly authorizedofficers cannot be held personallyliable for acts or contracts donewith the exercise of their businessjudgment.Exceptions:o When the Corp Code expressly

provides otherwise;o When the directors or officers

acted with fraud, grossnegligence or in bad faith; and

o When directors or officers actagainst the corp in conflict-of-interest situation

1) Requirements Qualifying share (§23)- Every director

must own at least one (1) share of thecapital stock of the corporation of whichhe is a director, which share shall standin his name on the books of thecorporation. Any director who ceases tobe the owner of at least one (1) shareof the capital stock of the corporationof which he is a director shall therebycease to be a director.

Lee vs. CA (1992)

Summons was served upon Lee and Lacdao,president and vice president of ALFA. The two,however contended that they are no longercorporate officers of the corporation because of thevoting trust agreement executed to DBP, hence,not authorized to receive summons. Summonsmust be served upon DBP

HELD:Execution of a voting trust creates a dichotomybetween equitable or beneficial ownership of thecorporate shares of a stockholder and legal titlethereto. The change from the old code to the newcode with respect to qualifying shares of directorsis the omission of the phrase “in his own right”pertaining to beneficial ownership of shares. In thenew corpo code, persons may be directors if theyare stockholders although not “in their own right”hence includes trustees. There is clear indication

that to be a director, what is material is legal titleand not beneficial ownership. With the execution ofthe voting trust agreement, Lee and Lacdao weredivested of their legal title to their shares hencecan no longer be directors and are no longercorporate officers. Because of this, they are notauthorized to receive summons

Requirements/Disqualifications:o Residence (§23) - a majority of the

directors or trustees of allcorporations organized under thisCode must be residents of thePhilippines

o Nationality – no requirement forcitizenship of a director or trusteeso even an alien may be elected assuch excepts in business activitiestotally closed to aliens

o Disqualification of directors,trustees or officers (§27): Convicted by final judgment of

an offense punishable byimprisonment for a periodexceeding six (6) years, or

Violation of this Codecommitted within five (5) yearsprior to the date of his electionor appointment

By-laws may provide foradditionalqualifications/disqualificationsas long as such additionalqualifications/disqualificationsshall not modify requirementsas prescribed in the corporationcode or be in conflict with suchprescribed requirements(§47(5))

o Note: To sit on the BOD is not avested right. Ownership of sharesdoes not automatically equate to aseat in the BOD

o In widely-held corporations, SECmandates the presence of at least 2or 20% of its board size, whicheveris lesser, independent directors(Securities Regulation Code, §38and Guidelines on the Nominationand Election of IndependentDirectors, Memo Circ No. 16, 2002)

Term: Directors shall hold office for 1year. However, incumbent directorsshall continue to be directors/trusteesuntil their successors have been electedand qualified (§23)

2) How elected (§24) Manner of election:

o There must be present in person orby representative majority of theoutstanding capital stock / member

o In any form; or must be by ballotwhen requested by any votingstock holder or member

o Voting may be in person or byproxy

At all elections of directors or trustees,there must be present owners of amajority of the outstanding capitalstock, or if there be no capital stock, a



majority of the members entitled tovote.

Every stockholder entitled to vote shallhave the right to vote the number ofshares of stock outstanding, at the timefixed in the by-laws, in his own nameon the stock books of the corporation,or where the by-laws are silent, at thetime of the election

Time to determine voting righto As per share standing in one’s

name at the time fixed by the By-Laws

o Where By-laws silent, at time ofelection

Cumulative voting – A system of votingdesigned to increase the voting powerof minority stockholders in the electionof corporate directors when more thanone director is to be elected.o A stockholder shall have as many

votes as he has number of sharestimes the number of directors upfor election

o Cumulative voting is allowed forelection of members of the Board ina stock corporation. Members ofthe Board in a Non-stockCorporation shall not be votedcumulatively unless specificallyprovided for in the By-laws.

o The total number of votes cast by astockholder shall not exceed thenumber of shares owned by him asshown in the books of thecorporation multiplied by the wholenumber of directors to be elected

o Gives the minority an opportunityto elect a representative to theBOD. Cannot itself give theminority control of corporate affairsbut may affect and limit the extentof majority’s control

o Theoretically, this allows theminority block to dominate theelection of BOD. However, theminority still needs the majority inorder to constitute a quorum.

o By-laws cannot provide againstcumulative voting since this right ismandated in §24 (mandatory in astock corporation – statutory rightof SHs)

o In determining how many sharesare needed to vote for the desired# of directors (necessary when onecampaigns for proxies), thefollowing formula may be followed:[ (outstanding shares) x (desired #of directors) + 1 ] / [ (total # ofdirectors) + 1 ]

o Unless otherwise provided in theAOI or in the by-laws, members ofcorporations which have no capitalstock may cast as many votes asthere are trustees to be elected butmay not cast more than one votefor one candidate.

Candidates receiving the highestnumber of votes shall be declaredelected.

Any meeting of the stockholders ormembers called for an election mayadjourn from day to day or from time

to time but not sine die or indefinitelyif:o For any reason, no election is held,

oro If there are SHs not present or

represented by proxy at themeeting, the owners of a majorityof the outstanding capital stock, orif there be no capital stock, amajority of the member entitled tovote.

Since the provision requires presence,meeting of stockholders is required

3) How Removed (§28) Any director or trustee of a corporation

may be removed from office by a voteof the stockholders holding orrepresenting 2/3 of the outstandingcapital stock, or if the corporation be aNon-stock Corporation, by a vote of 2/3of the members entitled to vote (withor without cause).

Note: Such removal shall take placeeither at a regular meeting or at aspecial meeting called for the purposeof removal of Directors or Trustees,with previous notice of the time andplace of such meeting, as well as theintention to propose such removal. Ifthe officers refuse to call a meeting toconsider the removal of the Director, itmay be called at the instance of anystockholder or member, but with duenotice.

Removal without cause may not beused to deprive minority stockholdersor members of the right ofrepresentation to which they may beentitled to under Section 24

The board cannot remove a director ortrustee as member of the board

Roxas v Dela Rosa (1926)

Binalbagan Estate Inc is engaged in the mfg of rawsugar from canes. Possessors of majority of sharesformed a voting trust composed of 3 trustees.Trustees now controlled 3,000 out of 5,500 shares.

Voting trust was able to vote BOD, withoutopposition from minority.

Trustees soon wanted to remove the directors theyhad elected, even if their terms had not yetexpired. Voting trust caused SEC to issue notice fora special gen mtg to elect a new BOD.

Held: Under the law, directors can only be removedby vote of SHs representing at least 2/3 of thesubscribed capital stock entitled to vote. When thepurpose is to remove directors, it must be stated incall for meeting. But vacancies in BOD can be filledby mere majority vote.

Trust does not have clear 2/3 majority. Voting trustshould have stated in notice that purpose was toremove present BOD. Meeting called by trusteesenjoined.

In this case, removal was sought to be done byreplacing directors

BUT can’t remove thru election of new officers becdirectors have fixed term of office



Note: §28 need not be resorted to in all instances.If removal is for cause (mismanagement or abuseof powers, the remedy of SHs shall be:

a) Receivership;b) Injunction if the act has not yet been

done;c) Dissolution if abuse amounts to a groundfor quo warranto but Sol Gen refuses toact;d) Derivative suit or complaint filed with

the RTC;e) Criminal action

4) Vacancies (§29)Vacancies in the Board of Directors orTrustees MAY be filled by a vote of at leasta majority of the remaining directors ortrustees; if still constituting a quorum

In the following cases, the stockholders ormembers shall fill the vacancy (REAQ):a. When the remaining directors or

trustees do not constitute a quorum;b. If the vacancy is caused by the removal

of a director or trusteec. If the vacancy is caused by the

expiration of term; andd. In case of increase in the number of

directors or trustees as a result of anamendment of the articles authorizingsuch increase

5) Compensation (§30) In the absence of any provision in the

By-laws fixing their compensation, thedirectors shall not receive anycompensation, except for reasonableper diems.

Any such compensation (other than perdiems) may be granted to the directorsby the vote of the stockholdersrepresenting at least a majority of theoutstanding capital stock at a regular orspecial stockholder’s meeting.

Limit: In no case shall the total yearlycompensation of directors, as suchdirectors, exceed 10% of the netincome before income tax of thecorporation during the preceding year.

Western Institute of Technology v Salas(1997)

In a meeting of the Board of Trustees of WesternInstitute of Technology, a resolution was passedgranting monthly compensation to officersrespondents who are members of the Board. Theresolution is valid. The prohibition with respect togranting compensation to corporatedirectors/trustees under Section 30 of theCorporation Code is not violated since thecompensation is being given to private respondentsin their capacity as officers of WIT and not as boardmembers.

6) How corporate powers exercised – Boardmust act as a body in a meeting

Requisites of board meetings Meeting of the Board duly assembled Existence of quorum

Decision of the majority of the quorumduly assembled (EXCEPTION: Electionof directors – requires a vote ofmajority of all the members of theboard)

WHEN? (§53) Regular meetings of directors or

trustees shall be held monthly, unlessthe by-laws provide otherwise.

Special meetings of the board ofdirectors or trustees may be held atany time upon the call of the presidentor as provided in the by-laws.

WHERE? (§53)Meetings of directors or trustees ofcorporations may be held anywhere in oroutside of the Philippines, unless the by-laws provide otherwise.

WHO MAY ATTEND?The members of the Board themselves;directors in Board meetings cannot berepresented or voted by proxies.

WHO PRESIDES? (§54)The president shall preside at all meetingsof the directors or trustee, unless the by-laws provide otherwise.

NOTICE REQUIREMENTS (§53) Notice of regular or special meetings

stating the date, time and place of themeeting must be sent to every directoror trustee at least one (1) day prior tothe scheduled meeting, unlessotherwise provided by the by-laws.

A director or trustee may waive thisrequirement, either expressly orimpliedly

QUORUM REQUIREMENTS (§25)Unless the articles of incorporation or theby-laws provide for a greater majority, amajority of the number of directors ortrustees as fixed in the articles ofincorporation shall constitute a quorum forthe transaction of corporate business, andevery decision of at least a majority of thedirectors or trustees present at a meetingat which there is a quorum shall be valid asa corporate act, except for the election ofofficers which shall require the vote of amajority of all the members of the board.

Filipinas Port Services Inc., represented bystockholders, Eliodoro C. Cruz v. Victoriano S. Go,et al.GR No. 161886March 16, 2007Cruz, a stockholder of the corporation, filed aderivative suit against the members of the boardquestioning the creation of certain positions. Cruzthus prayed that the respondent members of theboard of directors be made to pay Filport, jointlyand severally, the sums of money variedlyrepresenting the damages incurred as a result ofthe creation of the offices/positions complained ofand the aggregate amount of the questionedincreased salaries.



HELD: The board’s creation of the positions ofAssistant Vice Presidents for Corporate Planning,Operations, Finance and Administration, and thoseof the Special Assistants to the President and theBoard Chairman, was in accordance with the regularbusiness operations of Filport as it is authorized todo so by the corporation’s by-laws, pursuant to theCorporation Code. Besides, the determination ofthe necessity for additional offices and/or positionsin a corporation is a management prerogativewhich courts are not wont to review in the absenceof any proof that such prerogative was exercised inbad faith or with malice.

2.2 CORPORATE OFFICERS ANDAGENTS

1. Minimum set of officers and Qualification(§25) Immediately after their election, the

directors of a corporation must formallyorganize the election of:a. A president, who shall be a directorb. A treasurer who may or may not be

a director (SEC opinion that thetreasurer must be a resident andcitizen of the Phil.)

c. A secretary who shall be a residentand citizen of the Philippines, and

d. Such other officers as may beprovided for in the By-laws

Any two (2) or more positions may beheld concurrently by the same person,except that no one shall act aspresident and secretary or as presidentand treasurer at the same time.

Additional qualifications of officers maybe provided for in the by-laws (§47(5))

Ongkingco v. NLRC (1997)

Where the By-laws of the condominium corporationspecifically includes the position of“Superintendent/Administrator” in a roster ofcorporate officers, then such position is clearly acorporate officer position and issues ofreinstatement would be within the jurisdiction ofthe SEC and not the NLRC.

Tabaug v. NLRC (1997)

When the By-laws of the corporation provide thatone of the powers of the Board of Trustees is “toappoint a Medical Director,Comptroller/Administration, Chief of Services, andsuch other officers as it may deem necessary andprescribe their powers and duties” then suchspecifically designated positions should beconsidered “corporate officers” positions….

2. Disqualifications (§27)No person convicted by final judgment ofan offense punishable by imprisonment fora period exceeding six (6) years, or aviolation of this Code committed within five(5) years prior to the date of his election orappointment, shall qualify as a director,trustee or officer of any corporation.

3. Authority of corporate officers The authority of corporate officers to

bind the corporation is usually not

considered inherent in their office but isderived from law, the corporate by-laws or by delegation from the BODeither expressly or impliedly by habit,custom, or acquiescence in the generalcourse of business

Gen rule: A person dealing with acorporate officer is put on inquiry as tothe scope of the latter’s authority butan innocent person cannot beprejudiced if he had the right topresume under the circumstances theauthority of the acting officers.

People’s Aircargo vs. CA (1998)

Corporate President Punsalan solicited a proposalfrom respondent Sano for the preparation of afeasibility study. Sano prepared feasibility studyand was paid for it. Another proposal for thepreparation of operations manual was solicitedfrom Sano and was accepted by Punsalan. Manualwas prepared and approved by Commissioner ofBureau of Customs, seminar-workshops conductedbut payment was not made

HELD: Corporation is liable to Sano for servicesrendered. General rule is that absent the authorityfrom the Board of Directors, no person, not even itsofficers, can bind the corporation. However, acts ofperson in behalf of the corporation may be ratified.When corporation previously allowed First Contract,it gave president apparent authority to execute inits behalf the other contract, and is estopped fromdenying such authority. Corporation acceptedoperations manual and the seminars and havealready benefited from the contract. This ratifiesthe act of the president and makes it binding uponthe corporation. President is presumed to haveauthority to act within the domain of the generalobjectives of the corporation

Rural Bank of Milaor vs. Ocfemia (2000)

When a bank, by its acts and failure to act, hasclearly clothed its manager with apparent authorityto sell an acquired asset in the normal course ofbusiness, it is legally obliged to confirm thetransaction by issuing a board resolution to enablethe buyers to register the property in their names.It has a duty to perform necessary and lawful actsto enable the other parties to enjoy all benefits ofthe contract which it had authorized.

2.3 BOARD COMMITTEES

(SEC opinion-requirin all members must bemembers of the board)

The by-laws of a corporation may create anexecutive committee, composed of not lessthan three members of the board, to beappointed by the board. (§35)

Said committee may act, by majority voteof all its members, on such specific matterswithin the competence of the board, asmay be delegated to it in the by-laws or ona majority vote of the board, except withrespect to:o Approval of any action for which

shareholders' approval is also required;o The filling of vacancies in the board;



o The amendment or repeal of by-laws orthe adoption of new by-laws;

o The amendment or repeal of anyresolution of the board which by itsexpress terms is not so amendable orrepealable; and

o A distribution of cash dividends to theshareholders.

Cannot go as far as to render the BODpowerless and free from all responsibilitiesimposed on it by law (Campos)

Must be provided in the by-laws and mustbe composed of not less than 3 members ofthe board

Essential the executive committee acts bymajority vote of all the members

2.4 STOCKHOLDERS OR MEMBERS

Stockholders action is needed in majorchanges(§6) in the corporation which wouldaffect their contract with the corporation andalthough such action is usually initiated by theboard, it is not sufficient to give them effect.Stockholders or members approval expressedin a meeting duly called and held for thepurpose is still necessary. Exception: Corporations may be bound by unanimous

agreement of its stockholders althoughexpressed elsewhere than at a meeting

7) Requirements of stockholders’ ormembers meeting (notice and quorum)

WHEN? (§50)Regular meetings of stockholders ormembers shall be held annually on a datefixed in the by-laws, or if not so fixed, onany date in April of every year asdetermined by the board of directors ortrustees.

WHERE? Stockholder's or member's meetings,

whether regular or special, shall beheld in the city or municipality wherethe principal office of the corporation islocated, and if practicable in theprincipal office of the corporation:Provided, That Metro Manila shall, forpurposes of this section, be considereda city or municipality. (§51)

Members of non-stock corporationsmay provide in by-laws that meetingsmay be held any place even outside theplace where the principal office islocated provided proper notice is sentand that it is within the Philippines(§93)

WHO MAY ATTEND AND VOTE?Stockholders may attend and vote inperson, or by proxy.a. Pledgors, mortagors, executors,

receivers and administrators (§55) In case of pledged or mortgaged

shares in stock corporations, thepledgor or mortgagor shall have theright to attend and vote atmeetings of stockholders

o UNLESS, the pledgee or mortgagee isexpressly given by the pledgor ormortgagor such right in writing

which is recorded on theappropriate corporate books.

Executors, administrators,receivers, and other legalrepresentatives duly appointed bythe court may attend and vote inbehalf of the stockholders ormembers without need of anywritten proxy.

b. Joint owner of stocks (§56)The consent of all the co-owners shallbe necessary in order to vote, UNLESS

there is a written proxy, signed by allthe co-owners, authorizing one or someof them or any other person to votesuch share or shares PROVIDED, Thatwhen the shares are owned in an"and/or" capacity by the holdersthereof, any one of the joint ownerscan vote said shares or appoint a proxytherefor.

c. Treasury shares (Cf §41, 57. 68) Definition (§9): These are shares

of stock which have been issuedand fully paid for but subsequentlyre-acquired by the issuingcorporation by purchase,redemption, donation or throughsome other lawful means. Suchshares may again be disposed offor a reasonable price fixed by theBOD.

Treasury shares shall have novoting rights as long as such sharesremain in the Treasury. (§57)

WHO PRESIDES? The president shall preside at all

meetings of of the stockholders ormembers, unless the by-laws provideotherwise. (§ 54)

When there is no person authorized tocall a meeting, the SEC, upon petitionof a stockholder or member on ashowing of good cause therefor, mayissue an order to the petitioningstockholder or member directing him tocall a meeting of the corporation bygiving proper notice required by thisCode or by the by-laws. (§ 50)

The petitioning stockholder or membershall preside thereat until at least amajority of the stockholders ormembers present have been chosenone of their number as presidingofficer. (§50)

NOTICE REQUIREMENTS (§50) Written notice of regular meetings shall

be sent to all stockholders or membersof record at least two (2) weeks prior tothe meeting, unless a different period isrequired by the by-laws

Written notice of special meetings shallbe sent at least one (1) week prior tothe meeting, unless otherwise providedin the by-laws.

Notice of any meeting may be waived,expressly or impliedly, by anystockholder or member

Failure to give notice would render ameeting voidable at the instance of anabsent stockholder, who was not



notified of the meeting (Board v. Tan,105 Phil. 426(1959).

Attendance to a meeting despite wantof notice will be deemed impliedwaiver. (Campos)

All proceedings had and any businesstransacted at any meeting of thestockholders or members, if within thepowers or authority of the corporation,shall be valid even if the meeting beimproperly held or called, provided allthe stockholders or members of thecorporation are present or dulyrepresented at the meeting. (§51)

QUORUM REQUIREMENTS (§52) Unless otherwise provided for in the

Code or in the by-laws, a quorum shallconsist of the stockholders representinga majority of the outstanding capitalstock or a majority of the members inthe case of non-stock corporations.

By-laws may provide for a greater orlesser quorum (§47(3))

Where quorum is present at the start ofa lawful meeting, stockholders presentcannot without justifiable cause breakthe quorum by walking out from saidmeeting so as to defeat the validity ofany act proposed and approved by themajority (Johnston v Johnston, 1965CA decision)

WHY ATTEND MEETINGS? To make substantial changes To exercise control To be apprised of events To elect BOD To confirm actions requiring

confirmation

8) Corporate Acts Requiring Approval ofALL Stockholders (including non-votingshares)

a. AMENDMENT OF ARTICLES OFINCORPORATION – discussed in ChapterXIV

b. EXTEND OR SHORTEN CORPORATETERM – discussed in Chapter XIV

c. INCREASE OR DECREASE OF CAPITALSTOCK – discussed in Chapter XIV

d. INCURRING, CREATING OR INCREASINGBONDED INDEBTEDNESS – discussed inChapter XI

e. SALE, LEASE, MORTGAGE OR OTHERDISPOSITION OF SUBSTANTIALLY ALLCORPORATE ASSETS – discussed inChapter XVII

f. INVESTMENT OF FUNDS IN ANOTHERCORPORATION OR BUSINESS (§42)

A private corporation may invest itsfunds in any other corporation orbusiness or for any purpose otherthan the primary purpose for whichit was organized

Approval, voting and noticerequirement

1) Majority of the board ofdirectors or trustees and

2) Ratified by the stockholdersrepresenting at least two-thirds(2/3) of the outstanding capitalstock, or by at least two thirds(2/3) of the members in thecase of non-stock corporations,at a stockholder's or member'smeeting duly called for thepurpose.

3) Written notice of the proposedinvestment and the time andplace of the meeting shall beaddressed to each stockholderor member at his place ofresidence as shown on thebooks of the corporation anddeposited to the addressee inthe post office with postageprepaid, or served personally

Appraisal right - any dissentingstockholder shall have appraisalright

When SH approval not necessary-where the investment by thecorporation is reasonably necessaryto accomplish its primary purposeas stated in the AOI. Rules in casea corporation will invest its funds inanother corporationo If it is the same purpose or

incidental or related to itsprimary purpose, the board caninvest the corporate fundwithout the consent of thestockholders. What is requiredis only the vote of the majorityof the BOD. No appraisal right

o If the investment is in anothercorporation of differentbusiness or purpose, theaffirmative vote of majority ofthe board consented by 2/3 OScapital stock is required

o Apparent conflict: §36(7) limitscorp powers to thosereasonably and necessarilyrequired. But §42 implies thatcan invest in another businessas long as there’s 2/3 vote.Campos says that §42 shouldbe subject to §36.

o Accdg to Campos, if articles ofincorp provide that can investin another business, only 2/3vote needed. Otherwise, shouldamend articles first.

2. ADOPTION, AMENDMENT AND REPEALOF BY-LAWS (§48) Voting Requirement: BOD or BOT

by a majority vote and the ownersof at least a majority of theoutstanding capital stock, ormajority of the members of a non-stock corporation, at a regular orspecial meeting duly called for thepurpose, may amend or repeal anyby-laws or adopt new by-laws

Delegation of power to amend theBOD: The owners of two-thirds(2/3) of the outstanding capitalstock or two-thirds (2/3) of the



members in a non-stockcorporation may delegate to theboard of directors or trustees thepower to amend or repeal any by-laws or adopt new by-laws

Revocation of the delegation ofpower to amend: Any powerdelegated to the board of directorsor trustees to amend or repeal anyby-laws or adopt new by-laws shallbe considered as revoked wheneverstockholders owning orrepresenting a majority of theoutstanding capital stock or amajority of the members in non-stock corporations, shall so vote ata regular or special meeting

Whenever any amendment or newby-laws are adopted, suchamendment or new by-laws shallbe attached to the original by-lawsin the office of the corporation, anda copy thereof, duly certified underoath by the corporate secretary anda majority of the directors ortrustees, shall be filed with the SECthe same to be attached to theoriginal articles of incorporation andoriginal by-laws.

The amended or new by-laws shallonly be effective upon the issuanceby the Securities and ExchangeCommission of a certification thatthe same are not inconsistent withthis Code.

3. MERGER AND CONSOLIDATION –discussed in Chapter XVII

4. DISSOLUTION OF THE CORPORATION –discussed in Chapter XVI

5. Other instances requiringstockholders’ action (voting shares only)

a. DECLARATION OF STOCK DIVIDENDS –discussed in Chapter XIII

b. MANAGEMENT CONTRACTS (§44) – anycontract whereby a corporationundertakes to manage or operate all orsubstantially all of the business ofanother corporation, whether suchcontracts are called service contracts,operating agreements or otherwise

Approval and Voting Requirement:(§44) Approval by the board of directors,

and Approval by stockholders owning at

least the majority of theoutstanding capital stock, or by atleast a majority of the members ofboth the managing and themanaged corporation (at meetingduly called)

2/3 vote required of the managedcorporation when:o Where a stockholder or

stockholders representing thesame interest of both themanaging and the managedcorporations own or control

more than one-third (1/3) ofthe total outstanding capitalstock entitled to vote of themanaging corporation; or

o Where a majority of themembers of the BOD of themanaging corporation alsoconstitute a majority of themembers of the BOD of themanaged corporation

Term of management contract: notlonger than five years

c. FIXING CONSIDERATION OF NO-PARSHARES (§62) – The issued price of no-par value shares may be fixed in theAOI or by the BOD pursuant toauthority conferred upon it by the AOIor the by-laws, or in the absencethereof, by the stockholders at ameeting duly called for the purposerepresenting at least a majority of theoutstanding capital stock.

d. FIXING COMPENSATION OFDIRECTORS (§30) – Any suchcompensation (other than per diems)may be granted to the directors by thevote of the stockholders representing atleast a majority of the outstandingcapital stock at a regular or specialstockholder’s meeting.

6. Appraisal rightOne of the ways to get out of the corporation.It is an exception to the trust fund doctrine.The other way is to sell the shares of stock.

a. Definition (§81)This is a remedy available to astockholder who dissented and votedagainst certain extraordinary matters towithdraw or get out of the corporationby demanding payment of the value ofhis shares, as provided in the code.

b. Instances of appraisal right (§81)a) In case any amendment to the

articles of incorporation which hasthe effect of (cf §16):- changing or restricting therights of any stockholder orclass of shares, or- authorizing preferences inany respect superior tothose of outstanding sharesof any class, or- extending or shorteningthe term of corporateexistence (cf §37)

b) In case of sale, lease,exchange, transfer, mortgage, pledgeor other disposition of all orsubstantially all of the corporateproperty and assets as provided in theCode (cf §40); andc) In case of merger or consolidationd) In case of investment of corporate

funds in another corporation orbusiness or for any other purpose(§42)



c. What are the requirements for thesuccessful exercise of appraisal right?(Section 82 and 86) By making a written demand on the

corporation within thirty (30) daysafter the date on which the votewas taken for payment of the fairvalue of his shareso Failure to make the demand

within such period shall bedeemed a waiver of theappraisal right.

By surrendering the certificate orcertificates of stock, the corporationshall pay the fair value thereof asof the day prior to the date onwhich the vote was taken,excluding any appreciation ordepreciation in anticipation of suchcorporate action (provided that theproposed corp action isimplemented or affected).

If within a period of sixty (60) daysfrom the date the corporate actionwas approved by the stockholders,the withdrawing stockholder andthe corporation cannot agree on thefair value of the shares, it shall bedetermined and appraised by three(3) disinterested personso One of whom shall be named

by the stockholder, another bythe corporation, and the thirdby the two thus chosen

The findings of the majority of theappraisers shall be final

The award shall be paid by thecorporation within thirty (30) daysafter such award is made

No payment shall be made to anydissenting stockholder unless thecorporation has unrestrictedretained earnings in its books tocover such payment (Cf §41).Ratio: to protect the creditors andthe remaining SHs

Upon payment by the corporationof the agreed or awarded price, thestockholder shall forthwith transferhis shares to the corporation.

d. Effect of demand and termination ofright (§83)From the time of demand for paymentof the fair value of a stockholder'sshares until either (1) theabandonment of the corporate actioninvolved or (2) the purchase of the saidshares by the corporation, all rightsaccruing to such shares, includingvoting and dividend rights, shall besuspended,

EXCEPT the right of suchstockholder to receive payment of thefair value thereof, PROVIDED, if thedissenting stockholder is not paid thevalue of his shares within 30 days afterthe award, his voting and dividendrights shall immediately be restored.

e. When right to payment of fair value ofthe shares ceases (§84)

No demand for payment may bewithdrawn unless the corporationconsents thereto.

Instances when right to paymentceases:1) If such demand for payment is

withdrawn with the consent ofthe corporation

2) If the proposed corporateaction is abandoned orrescinded by the corporation

3) If the proposed corporateaction disapproved by the SECwhere such approval isnecessary,

4) If the SEC determines that suchstockholder is not entitled tothe appraisal right

In such instances, his status as astockholder shall be restored, andall dividend distributions whichwould have accrued on his sharesshall be paid to him.

f. Who bears costs of appraisal (§85) Generally, it shall be borne by the

corporation Exception: by the SH, when the fair

value ascertained by the appraisersis approximately the same as theprice which the corporation mayhave offered to pay the SH,

In the case of an action to recoversuch fair value, all costs andexpenses shall be assessed againstthe corporation, unless the refusalof the SH to receive payment wasunjustified.

g. Notation on certificates; rights oftransferee (§86) Within ten (10) days after

demanding payment for his shares,a dissenting SH shall submit thecertificates of stock representinghis shares to the corporation fornotation thereon that such sharesare dissenting shares.

His failure to do so shall, at theoption of the corporation, terminatehis rights.

Effect of transfer of certificatesbearing notation:1) The rights of the transferor as a

dissenting stockholder shallcease;

2) The transferee shall have allthe rights of a regularstockholder; and

3) All dividend distributions whichwould have accrued on suchshares shall be paid to thetransferee.

Note: right to vote is lost only if stock becomesdelinquent (§71)

3. Devices Affecting Control

General Rule: Extent of control is proportional tothe number of shares owned by the SHExceptions: proxy device, voting trust agreements,pooling and voting agreements, cumulative voting,



classification of shares, restriction on transfer ofshares, additional qualifications for directors,founder’s shares, management contracts, andunusual quorum and voting requirements

3.1 PROXY (§58, cf §20, Sec Regulation Code) Stockholders and members may vote in

person or by proxy in all meetings ofstockholders or members.

Requirements of proxies:a. In writing (oral proxies are not valid)b. Signed by the stockholder or memberc. Filed before the scheduled meeting with

the corporate secretary By-laws can also impose additional

requirements (ex. Must be notarized) Unless otherwise provided in the proxy, it

shall be valid only for the meeting for whichit is intended. No proxy shall be valid andeffective for a period longer than five (5)years at any one time (continuing proxy).

Right of proxy can be waived only for closecorporations (§89)

Senses of proxy:a. Person duly authorized by stockholder

or member to vote in his behalf in aSHs’ or members’ meeting. Proxy is anagent for a special purpose thus thegeneral rules of agency would normallyapply to the relationship created byproxy

b. Formal authority given by the holder ofthe stock who has the right to vote it toanother to exercise the voting rights ofthe former.Instrument or document whichevidences the authority of the agent.

Failure to comply with requirements willrender proxy void and ineffective.

To what extent does the proxy holderexercise his discretion? Extent of authoritygiven by the SH

Proxy is revocable even when it isexpressly provided to be irrevocable unlessit is coupled with an interest. The SupremeCourt has held that a proxy in favor of thepledge of the shares subject of the proxyas sufficient interest to render such proxyirrevocable. (Alejandrino vs. De Leon,1943)

Revocation may be made orally, in writingor implied:a. Appearance of the stockholder at the

meeting will terminate the proxyb. Death of the stockholder will also

terminate the proxy

3.2 VOTING TRUST AGREEMENT(§59) Definition: An arrangement created by one

or more stockholders for the purpose ofconferring upon a trustee or trustees theright to vote and other rights pertaining tothe shares for a period not exceeding five(5) years at any time (Villanueva). Thearrangement is embodied in a documentcalled a voting trust agreement (VTA)

A voting trust, which is specifically requiredas a condition in a loan agreement, may befor a period exceeding five (5) years butshall automatically expire upon fullpayment of the loan

Essence: separation of real ownership andvoting rights

Requirements of a VTA:

a. In writingb. Notarizedc. Shall specify the terms and conditions

thereofd. Certified copy of such agreement shall

be filed with the corporation and withthe SECo OTHERWISE, said agreement is

ineffective and unenforceable Procedure:

a. The certificate or certificates of stockcovered by the voting trust agreementshall be cancelled and new ones shallbe issued in the name of the trustee ortrustees stating that they are issuedpursuant to said agreement.

b. In the books of the corporation, it shallbe noted that the transfer in the nameof the trustee or trustees is madepursuant to said voting trustagreement.

c. The trustee or trustees shall executeand deliver to the transferors votingtrust certificates, which shall betransferable in the same manner andwith the same effect as certificates ofstock.

Right to inspect VTA: The voting trustagreement filed with the corporation shallbe subject to examination by anystockholder in the same manner as anyother corporate book or record. Thetransferor and the trustee or trustees mayexercise the right of inspection of allcorporate books and records in accordancewith the provisions of this Code.

Any other stockholder may transfer hisshares to the same trustee or trusteesupon the terms and conditions stated in thevoting trust agreement, and thereuponshall be bound by all the provisions of saidagreement.

Restriction: No VTA shall be entered intofor the purpose of circumventing the lawagainst monopolies and illegalcombinations in restraint of trade or usedfor purposes of fraud.

Automatic expiration of rights under theVTA: Unless expressly renewed, all rightsgranted in a voting trust agreement shallautomatically expire at the end of theagreed period. The voting trust certificatesas well as the certificates of stock in thename of the trustee or trustees shallthereby be deemed cancelled and newcertificates of stock shall be reissued in thename of the transferors.

The voting trustee or trustees may vote byproxy unless the agreement providesotherwise.

Purpose – to make possible a unifiedcontrol of the affairs of the corporation andconsistent policy; to make possible for amajority group of shareholders to disposeof a beneficial interest in a large proportionof their shares and still retain control of thecorporation through the voting trustee

Under the prevailing view, a voting trustshould have a legitimate business purposeto promote the best interests of thecorporation, or even to protect thelegitimate interests of others in thecorporation (Ballantine, cited in Campos)

No principal-agent relationship



The trustee has unlimited authority. Theonly limitation is that he should act for thebenefit of the SH (fiduciary obligation)

Voting trust certificates – issued by thetrustees (not the corp). These certificatesconfirm (1) that a trustee has beenconstituted, (2) the extent of shares, and(3) the participation of the SH in the VTA

The trustee can’t dispose of the block ofshares/ receive dividends. Can only vote

The SH can revoke the VTA on the groundof breach of fiduciary obligations

Status of transferee and transferor:a. Voting trustee is only a share owner

vested with apparent legal title for thesole purpose of voting upon stocks thathe does not own

b. Transferring stockholder retains theright of inspection of corporate bookswhich he can exercise concurrently withthe voting trustee

Powers and rights of voting trustees:a. Right to vote and other rights

pertaining to the shares in their namessubject to terms and conditions of andfor the period specified in theagreement

b. Vote in person or by proxy unlessagreement provides otherwise

c. Rights of inspection of corporate booksand records

d. Legal title holder – qualified to be adirector

The clear intent is that in order tobe eligible as director, what ismaterial is the legal title to, not thebeneficial ownership of, the stockas a[appearing on the books of acorporation. Therefore, a directorwho executes a voting trustagreement over all his shares,remains only a beneficial owner,and therefore is automaticallydisqualified from his directorship.(Lee v. CA, 1992)

Limitations on voting trust agreements:a. should not exceed 5 years except if a

condition in a loan agreement, shallautomatically expire upon full paymentof the loan

b. must not be for purposes ofcircumventing the law againstmonopolies and illegal combinations inrestraint of trade

c. must not be used for purposes of fraudd. must be in writing, notarized, specify

the terms and conditions thereofe. certified copy must be filed with

corporation and SEC otherwiseunenforceable

f. agreement is subject to examination bystockholder

g. shall automatically expire at the end ofthe agreed period

h. vote in person or by proxy unlessagreement provides otherwise

i. rights of inspection of corporate booksand records

Distinction between proxy and voting trust

Proxy VTALegal title No legal title Acquires legal title

Proxy VTARevocability Revocable unless

coupled withinterest

Irrevocable ifvalidly executedBUT SH canrevoke if there’s abreach of fiduciaryobligation

Extent ofpower

Can only act at aspecifiedstockholder’s ormember’smeeting

Not limited to anyparticular meeting

When tovote

Absence of theowner

Even when owneris present

Capacity tobe adirector

Can’t be voted asa director, unlesshe is also a SH ofrecord (ownsother shares)

Can be voted as adirector.Considered as theSH of record inthe books of thecorp

SubjectMatter

Voting rights Shares + votingrights

Duration Usually shorterbut can’t exceed 5years

Usually longer butcan’t exceed 5years except inloan agreements

Natl Investment & Dev’t Corp v Aquino (1988)

Batjak, a Fil-Am corp, owed money to PNB. Its oilmills were also mortgaged to other banks. Theyfurther borrowed money from NIDC, a whollyowned subsidiary of PNB, to pay off the mortgages.In return, NIDC got preferred shares, convertibleinto common shares. Batjak executed a 1st

mortgage on all its properties to PNB in exchangefor a credit facility etc.Next, a Voting Trust Agreement was executed infavor of NIDC by SHs representing 60% of Batjak.Period of 5 years, irrevocable. During this time, alldividends to be paid to SHs. When Batjak becameinsolvent, PNB foreclosed the mortgagedproperties. When Batjak failed to redeem, ittransferred ownership to NIDC.Batjak later sued NIDC, asking for the turn-over ofall the assets and in the alternative, asked forreceivership.Held:*Receiver is appointed if applicant has interest inproperty. But title of properties is now with NIDC.*Batjak did not impugn validity of the foreclosuresales. Also, no evidence that prop is in danger ofloss, removal or material injury if receiver notappointed.What was assigned to NIDC was only power to voteshares of stock of Batjak. Such power includesauthority to execute any agreement or docnecessary to express consent or assent to anymatter by SHs.Voting trust did not provide for transfer of assets.What was stipulated to be returned were onlycertifs of stock. Voting trust transfers only voting orother rights pertaining to shares or control over thestock.

3.3 POOLING AND VOTING AGREEEMENTS Agreement between 2 or more stockholders

to vote their shares in the same way There must be a valuable consideration for

each party Usually relate to election of directors Parties often provide for arbitration in case

of disagreement. Note: arbitrator is not



like a trustee. The former has no votingrights

Valid as long as they do not limit thediscretion of the BOD in the managementof corporate affairs or work any fraudagainst stockholders not party to thecontract. Thus, it is void if it provides thatdirectors, once elected, should vote forcertain persons as officers. (McQuade v.Stoneham, 263 NY 323 (1934)) EXCEPTION:Close corps may provide that a VTA caninterfere with discretion of the BOD

Does not involve a transfer of stocks but ismerely a private agreement

No transfer of ownership and voting rights Agreements by stockholders in close

corporations (§100):o Agreements by and among

stockholders executed before theformation and organization of a closecorporation, signed by all stockholders,shall survive the incorporation of suchcorporation and shall continue to bevalid and binding between and amongsuch stockholders, if such be theirintent, to the extent that suchagreements are not inconsistent withthe articles of incorporation,irrespective of where the provisions ofsuch agreements are contained, exceptthose required by this Title to beembodied in said articles ofincorporation.

o An agreement between two or morestockholders, if in writing and signed bythe parties thereto, may provide that inexercising any voting rights, the sharesheld by them shall be voted as thereinprovided, or as they may agree, or asdetermined in accordance with aprocedure agreed upon by them.

o No provision in any written agreementsigned by the stockholders, relating toany phase of the corporate affairs, shallbe invalidated as between the partieson the ground that its effect is to makethem partners among themselves.

o A written agreement among some or allof the stockholders in a closecorporation shall not be invalidated onthe ground that it so relates to theconduct of the business and affairs ofthe corporation as to restrict orinterfere with the discretion or powersof the board of directors: Provided,That such agreement shall impose onthe stockholders who are partiesthereto the liabilities for managerialacts imposed by this Code on directors.

o To the extent that the stockholders areactively engaged in the management oroperation of the business and affairs ofa close corporation, the stockholdersshall be held to strict fiduciary duties toeach other and among themselves.Said stockholders shall be personallyliable for corporate torts unless thecorporation has obtained reasonablyadequate liability insurance.

PROXY TRUSTEE POOLINGAND VOTINGAGREEMENTS

Principal –agent

Trustee-beneficiary

Consensual

Proxy can’texceeddelegatedauthority

The only limit tohis authority:must be forbenefit oftrustee(fiduciaryobligation)

Merely anagreement tovote in thesame way

Must be inwriting

Must be inwriting andnotarized

No formalitiesrequired

Copy mustbe filedwith corpsec

Copy must befiled with SEC

Merely acontractbetween SHs

Transfer of legaltitle to trustee

Regularvotingrights

Anotherpersonexercisesvotingrights onlyfor aspecific mtg(unlessotherwiseprovided)

Absolute votingrights, subjonly tofiduciary duty

Another personexercisesvoting rightscontinuously

Owner stillexercisesvoting rights

Proxycannot bedirector

Trustee can bedirector

Revocableat will, inany manner

EXC ifcoupledwith aninterest

Irrevocable, aslong as nomisconduct orfraud

Revocable byconsent ormutualtermination. Ifunilateraltermination,liable fordamages

Max of 5yrs at atime

Max of 5 yrs ata time (unlesscoterminus withloan)

SEC can pass on validity



Chapter VIIIDUTIES OF DIRECTORS AND

CONTROLLING STOCKHOLDERS

1. Duties and Liabilities of Directors

1.1 Duties In General

Duty Violation under §31

Obedience - Willfully and knowinglyvote for or assent topatently unlawful acts of thecorporation

Diligence - Guilty of gross negligenceor bad faith in directing theaffairs of the corporation

Loyalty - Acquire any personal orpecuniary interest in conflictwith their duty as suchdirectors or trustees

Extent of liability: Directors or trusteesshall be liable jointly and severally for alldamages resulting therefrom suffered bythe corporation, its stockholders, ormembers and other persons

Directors act as a body in formulating corppolicies and exercise all powers ofmanagement. Hence, they are fiduciariesof the corp. It does not matter who electedthem. Once elected, they must representthe interests of all SHs and of the corp as awhole.

Directors must act only within the corppowers. If not, they will be liable fordamages, unless they acted in GF and withdue diligence

1.2 Duty of diligence What are required and expected of

directors:o To possess at least ordinary knowledge

and skill to enable them to make soundbusiness decision

o To attend directors meetings withreasonable regularity

o To exercise reasonable care in themanagement of the corporation

o To keep themselves sufficientlyinformed about the general condition ofthe business

The degree of care and diligence required isusually that which men prompted by self-interest, generally exercise in their ownaffairs. In determining whether reasonablediligence has been exercised, the particularcircumstances of each case must beconsidered. The nature of the business isan important factor.

Business judgment ruleGEN RULE: Directors cannot be held liable formistakes or errors in the exercise of theirbusiness judgment if they acted in good faith,with due care & prudence. Contracts intra viresentered into by the board of directors arebinding upon the corp. & courts will notinterfere.

EXCEPTION: If the contracts are sounconscionable & oppressive as to amount to awanton destruction of the rights of theminority.

Board of Directors has authority to modify theproposed terms of the contracts of thecorporation for the purpose of making theterms more acceptable to the other contractingparties…The test to be applied is whether theact in question is the direct and immediatefurtherance of the corporation’s business, fairlyincidental to the express powers andreasonably necessary to their exercise. If so,the corporation has the power to do it;otherwise not. [Montelibano v. Bacolod MurciaMilling Co. (1962)]

Steinberg vs. Velasco

Steinberg is the receiver of Sibugay Trading.Velasco (Pres) and other directors, approvedand authorized unlawful purchases ofcompany’s stock from Ganzon et al. Accdg toSteinberg, this diverted funds supposed to bepaid to creditors.

Ganzon et al resigned as directors before theBoD approved the purchase of stocks fromthem, worth 3,300. At that time, corp owed13K. The corp also declared dividends in favorof SHs, to be paid in installments so as “not toaffect financial condition of the corp.” A/R’swhich appeared on books were worthless,because receiver could not collect them.

HELD: If directors dispose of corp prop or payaway its money without authority, they will berequired to make good the loss out of theirprivate estates.

Directors are not liable for loss to corp fromwant of knowledge, or for mistakes ofjudgment, provided they were honest and fairlywithin the scope of the powers and discretionconfided to mgt.

But acceptance of office of director implies acompetent knowledge of the duties assumed,and directors cannot excuse imprudence bec oftheir ignorance or inexperience. If they commiterror of judgment through mere recklessness orwant of ordinary prudence or skill, they may beheld liable for consequences.

Creditors of corp have right to assume that solong as there are outstanding debts andliabilities, BoD will not use assets of corp topurchase its own stock, and that it will notdeclare dividends to SHs when corp is insolvent.

Directors held liable.

Stock purchases and dividends werefunded out of remaining assets. Butassets < liabilities.

Ganzon et al were favored bec theywere able to get money ahead ofcreditors

Recipients of dividends can be heldliable by receiver. Ratio: SHs areaccessories. Remember, they werethe ones who chose directors.



1.3 Duty of loyalty

The determination as to whether, in a givencase, the duty of loyalty has been violated hasultimately to be decided by the court on thecase’s own merits. The ff. are more commonsituations involving such conflict of interests:

a. Self-dealing director (§32) A contract of the corporation with one

or more of its directors or trustees isvoidable, at the option of suchcorporation, unless all the followingconditions are present:o That the presence of such director

or trustee in the board meeting inwhich the contract was approvedwas not necessary to constitute aquorum for such meeting;

o That the vote of such director ortrustee was not necessary for theapproval of the contract;

o That the contract is fair andreasonable under thecircumstances; and

o That in case of an officer, thecontract has been previouslyauthorized by the board ofdirectors.

Where any of the first two conditionsset forth in the preceding paragraph isabsent, in the case of a contract with adirector or trustee, such contract maybe ratified by the vote of thestockholders representing at least two-thirds (2/3) of the outstanding capitalstock or of at least two-thirds (2/3) ofthe members in a meeting called forthe purpose

Full disclosure of the adverse interest ofthe directors or trustees involved mustbe made at such meeting provided,however, that the contract is fair andreasonable under the circumstances

The contract is voidable whether thecorporation suffered damages or not

The burden of proving fairness is on thedirector

b. Fixing compensation of directors andofficers (§30) General rule: Directors are only

entitled to per diems, which arereasonable

Exception: When AOI, by-laws, or anadvance contract provides forcompensation

Assuming compensation is intended,only SHs can fix the amount. In fact,the SHs should approve the granting ofcompensation because this entails areduction of the amount that could bedistributed to them as dividends

SH’s resolution to grant compensation can onlyrefer to future services (Barreto v La PrevisoraFilipina (1932))

Western Institute of Technology v. Salas(1997)

The position of being chairman and Vice-Chairman,like that of treasurer and secretary, are notconsidered directorship positions but officershippositions that would entitle the occupants tocompensation. Likewise, the limitation placed underSect. 30 of the Corporation Code that directorscannot receive compensation exceeding 10% of thenet income of the corporation would not apply tothe compensation given to such positions since it isbeing given in their capacity as officers of thecorporation and not a board members.

Barreto v La Previsora Filipina (1932)

Barreto, et al. are directors of La Previsora Filipina,a mutual building and loan assoc. By-laws providecompensation of 1% of profits to each director.Compensation to apply retroactively.

Held: By-laws do not create a legal obl to pay lifegratuity or pension out of its net profits => beyondpowers of mutual bldg and loan assoc.

Corp Law authorizes compensation only for futureservices, and cannot authorize continuouscompensation to particular directors after theiremployment has terminated for past servicesrendered gratuitously by them to the corp.

Building and loan associations are founded on strictmutuality and equality of benefits and obligations.Any contract or by-law in contravention of a statuteis ultra vires and void. There is an implied contractwith members that it shall not divert funds orpowers to purposes other than for which it wascreated. All members must participate equally inprofits and bear losses. Any diversion of funds tounauthorized purposes violates principle ofmutuality between members.

Also, there was no valid consideration bec the pastservices were rendered gratuitously.

c. Interlocking directors (§33) A contract between two or more

corporations having interlockingdirectors shall not be invalidated onthat ground alone, except cases offraud.

The contract is fair and reasonableunder the circumstances.

If the interest of the interlockingdirector in one corporation issubstantial and his interest in the othercorporation or corporations is merelynominal, he shall be subject to theprovisions of the preceding section(§32) insofar as the latter corporationor corporations are concerned.

Stockholdings exceeding twenty (20%)percent of the outstanding capital stockshall be considered substantial forpurposes of interlocking directors.

Requisites of a valid contract betweenthe corporation and one or more of itsdirectors, trustees or officers (§32):1. That the presence of such director

or trustee in the Board meeting inwhich the contract was approved



was not necessary to constitute aquorum for such meeting

2. That the vote of such director ortrustee was not necessary for theapproval of the contract

3. That the contract is fair andreasonable under thecircumstances

4. That in case of an officer, thecontract with the officer has beenpreviously authorized by the Boardof Directors

d. Seizing corporate opportunity; Disloyalty(§34) Where a director, by virtue of his office,

acquires for himself a businessopportunity which should belong to thecorporation, thereby obtaining profitsto the prejudice of such corporation, hemust account to the latter for all suchprofits by refunding the same (§34)UNLESS his act has been ratified by avote of the stockholders owning orrepresenting at least two-thirds (2/3)of the outstanding capital stock.o Hence, a majority SH can actually

compete with the corporation if heowns 2/3 of the OCS

o This provision shall be applicable,notwithstanding the fact that thedirector risked his own funds in theventure.

o Requires prejudice. If there’s noprejudice to the corporation, thedirector or officer can still be heldliable under §31.

o §34 covers only directors.However, according to Campos,officers can be held liable under§31 (2nd par.).—“When a director,trustee or officer attempts toacquire or acquires, in violation ofhis duty, any interest adverse tothe corporation in respect of anymatter which has been reposed inhim in confidence, as to whichequity imposes a liability upon himto deal in his own behalf, he shallbe liable as a trustee for thecorporation and must account forthe profits which otherwise wouldhave accrued to the corporation.”

The last paragraph of Section 31 andSection 34 contain the doctrine ofcorporate opportunity. In case of suchconflict of interests, and the directoracts against the good of thecorporation, he shall be accountable forthe profits he obtained, even if he hadrisked his own funds.

Corporate right , opportunity orexpectancy arises only when: (a)directors were negotiating on behalf ofthe corporation; (b) the corporationwas in need of the particular businessopportunity to the knowledge of thedirectors, or (c) the businessopportunity was seized and developedat the expense and with the facilities ofthe corporation. (Litwin v Allen)

e. Using inside information (Cf §3.8, 23.2, 27,61, 71.2, Securities Regulation Code)

The fiduciary position of insiders3,directors, and officers prohibits themfrom using confidential informationrelating to the business of thecorporation to benefit themselves orany competitor corporation in whichthey may have a mere substantialinterest.

The liability of a director or officerguilty of using inside information is tothe corporation and not to anyindividual stockholder

Since loss and prejudice to thecorporation is not a requirement forliability, the corporation has a cause ofaction as long as there is unfair use ofinside information

It is inside information if it is notgenerally available to others and isacquired because of the closerelationship of the director or officer ofthe corporation

General rule: (Majority view) Directorsowe no fiduciary duty to stockholdersbut they may deal with them at arm’slength. No duty to disclose facts knownto the director or officer

Special facts doctrine (Strong vRepide, 1909) – Conceding theabsence of a fiduciary relationship inthe ordinary case, courts neverthelesshold that where special circumstances ofacts are present which make itinequitable for the director to withholdinformation from the stockholder, theduty to disclose arises and concealmentis fraud.

2. Duties and Liabilities of Officers

The provisions on seizing corporate opportunity anddisloyalty (§31¶1 and §34) shall also apply tocorporate officers

Note: Members of the BOD who are also officersare held to a more stringent liability because theyare in-charge of day-to-day activities (Campos).

3. Duty of controlling interest A majority stockholder is subject to the duty of

good faith when he acts by voting at astockholders’ meeting with respect to a matterin which he has a personal interest

Controlling stockholders may dispose of theirshares at any time and at such price as theychoose provided they do not pervert theseprerogatives by transferring office to personswho are known as intending to raid thecorporate treasury or otherwise improperlybenefit themselves.

3“Insider” means: (a) the issuer; (b) a director or officer (or

person performing similar functions) of, or a personcontrolling the issuer; (c) a person whose relationship orformer relationship to the issuer gives or gave him accessto material information about the issuer or the security thatis not generally available to the public; (d) a governmentemployee, or director, or officer of an exchange, clearingagency and/or self-regulatory organization who has accessto material information about an issuer or a security that isnot generally available to the public; or (e) a person wholearns such information by a communication from any ofthe foregoing insiders (§3.8, Sec Regulations Code)



It is fraudulent for a stockholder to buy fromanother stockholder without disclosing hisidentity

Principal stockholders are likewise prohibitedfrom using inside information in the purchaseand sale of equity security

4. Remedies of stockholder in caseof mismanagement or abuse ofpowers

Receivership Injunction if the act has not been done Dissolution if the abuse amounts to a ground

for quo warranto but the Solicitr Generalrefuses to act

Derivative suit a complaint filed with the RTC

Uichico, et al. vs. NLRC (1997)

The petitioners, who are officers and directors ofCrispa, Inc., assailed the decision of the NLRCholding them solidarily liable with Crispa for thepayment of separation pay and backwages to theprivate respondents. It was the contention of thepetitioners that the award of separation pay andbackwages is a corporate obligation and musttherefore be assumed by Crispa alone.

HELD: While the general rule is that obligationsincurred by a corporation, acting through itsdirectors, officers and employees, are its soleliabilities, there are times when solidary liabilitiesmay be incurred such as in this case where it isundisputed that petitioners had a direct hand in theillegal dismissal of respondent employees. Theywere the ones, who as high-ranking officers anddirectors of Crispa, signed he Board resolutionretrenching the private respondents on the feignedground of serious business losses that had no basisapart from an unsigned and unaudited profit andloss statement which had no evidentiary valuewhatsoever. This is indicative of bad faith on thepart of petitioners for which they can be heldjointly and severally liable with Crispa for all themoney claims of the illegally terminated respondentemployees.

Tramat Mercantile, Inc. vs. CA (1994)

Personal liability of a corporate director, trustee orofficer along (although not necessarily) with thecorporation may so validly attach, as a rule, onlywhen:

o He assents (a) to a patently unlawful act ofthe corporation, or (b) for bad faith orgross negligence in directing its affairs, or(c) for conflict of interest, resulting indamages to the corporation, itsstockholders or other persons;

o He consents to the issuance of wateredstocks or who, having knowledge thereof,does not forthwith file with the corporatesecretary his written objection thereto;

o He agrees to hold himself personally andsoidarily liable with the corporation; or

o He is made, by a specific provision of law,to personally answer for his corporateaction

Reiterated in Atrium Management Corp. v. CA,2001

Chapter IXTHE RIGHT OF INSPECTION

1. Basis of right

Reason of the law for granting stockholders theright to inspect the records of the corporation: Asthe beneficial owners of the business, thestockholders have the right to know

1. The financial condition of the corporation;and

2. How the corporate affairs are being managedby their elected directors.

PURPOSE:

So that if they find the conditions unsatisfactory,they may be able to take necessary measures toprotect their investment.

The right of inspection is

1. Preventive – to a limited extent may serveas a deterrent to an ill-intentionedmanagement to know that its acts may bescrutinized

2. Remedial – a dissatisfied stockholder mayresort to the right of inspection as apreliminary step to seeking more directremedies against abuses committed bymanagement (removal of directors or aderivative suit).

The right of inspection goes hand-in-hand with theright to vote. Through the former, the SH cangather information on how to vote.

2. What records covered; recordsrequired to be kept by corporation(§74)

Books that record all business transactions ofthe corporation which shall include contract,memoranda, journals, ledgers, etc;

Minute book for meetings of the SHs/members; Minute book for meetings of the

board/trustees; Stock and transfer book.

Minutes of meetings without the signature of thecorporate secretary have no probative value (NATUv Sec of Labor, 1981)

What is a stock transfer agent?o A stock transfer agent is one engaged

principally in the business of registeringtransfers of stocks in behalf of a stockcorporation. No stock transfer agent shallbe allowed to operate in the Philippinesunless he secures a license from the SECand pays a fee as may be fixed by theCommission, which shall be renewableannually

o A stock corporation is not precluded fromperforming or making transfer of its ownstocks, in which case all the rules andregulations imposed on stock transferagents, except the payment of a license feeherein provided, shall be applicable.



Financial statements (§75)o Within ten (10) days from receipt of a

written request of any stockholder ormember, the corporation shall furnish tohim its most recent financial statement,which shall include a balance sheet as ofthe end of the last taxable year and a profitor loss statement for said taxable year,showing in reasonable detail its assets andliabilities and the result of its operations

o At the regular meeting of stockholders ormembers, the BOD or BOT shall present tosuch stockholders or members a financialreport of the operations of the corporationfor the preceding year, which shall includefinancial statements, duly signed andcertified by an independent certified publicaccountant.

o However, if the paid-up capital of thecorporation is less than P50,000.00, thefinancial statements may be certified underoath by the treasurer or any responsibleofficer of the corporation.

Torres et al v CA (1997)

It is the corporate secretary's duty and obligationto register valid transfers of stocks and if saidcorporate officer refuses to comply, the transferor-stockholder may rightfully bring suit to compelperformance.

3. Extent of and limitations on right

3.1 Limitations as to time and place

a. Only at reasonable hours on business days By-laws cannot limit inspection to

merely a few days during the yearchosen by the directors [Pardo vs.Hercules Lumberm, 1924]

By-laws cannot provide that theinspection shall only be upon authorityof the President of the corporationpreviously obtained in each case(Veraguth v. Isabela Sugar Co., 1932)

However, inspection should be made insuch a manner as not to impede theefficient operations of the corporation(Duff v. Mutual Brewing Co., NYLJ, Oct.3, 1892)

By-laws can adopt policies with respectto right to inspect (§47(10)-Such othermatters as may be necessary for theproper or convenient transaction of itscorporate business and affairs)

b. Inspection shall be done in the place wherethe corporation keep all its records, which,as enjoined by law, is in the principal office

Stockholder cannot demand that he beallowed to take the corporate booksouts of the corporation’s principal officefor the purpose of inspecting them(Veraguth, Supra)

3.2 Limitation as to purpose

Is the stockholder’s purpose material? – YES.There is however a presumption that hispurpose is a proper one and the corporationcannot refuse to grant him the right on itsmere belief that his motive is improper.

Otherwise, such refusal may open itsguilty officers or directors to liability fordamages, UNLESS they can successfullyprove in their defense:

o that the stockholder was notacting in good faith

o that he improperly used theinformation obtained in the past

o that he used the information foran illegitimate purpose

Gonzales v. PNB (1983)

Section 74 of the Corporation Code has beeninterpreted by the Supreme Court as no longerallowing the unqualified right of inspection ofstockholder of corporate records and that theperson making the demand has to show that heis acting in good faith and for a legitimatepurpose.

Burden of proving that the purpose isimproper or illegal is on corporation andits officers.

Good purposes: to investigate acts ofmanagement; to investigate financialconditions; fix value of shares; mailinglist for proxies; information for litigation

Not good and honest purposes: obtaincorporate secrets (e.g., formula);nuisance suit; to embarrass the company

TEST to determine whether the purpose asproved by the corporation or as admitted bythe stockholder is a legitimate one or not? – Alegitimate purpose is one which is germane tothe interests of the stockholder as such and notcontrary to the interests of the corporation(Gokongwei v. SEC, 1979).

4. Who may exercise right Director, trustee, stockholder, member,

personally or through an agento The right to inspect corporate books may

be done with the assistance of technicalmen (e.g., lawyers and accountants) andit may be delegated. The right includesthe right to copy or to take notes. (W.G.Philpotts v Phililppine Mfg Co., 1919)

The transferor of shares and the voting trustee,in accordance with Section 59

Stockholders of a parent corporation withrespect to subsidiary:o If two are legally separate and independent

entity, no right of inspection. However, theSH of the parent corp can look at the booksof the latter with respect to its investmentsto the subsidiary.

o If they are practically one and the same inso far as management and control isconcerned, and inspection is demandedbecause of gross mismanagement ofsubsidiary by the parent’s directors who are



also directors of subsidiary, who are alsodirectors of the subsidiary, then the latterwill be treated as a mere agent orinstrumentality of the respondent parentcorporation and the latter may becompelled to open the subsidiary’s books toits stockholders (Gokongwei v. SEC, Supra)

5. Remedies available if inspectionrefused Mandamus

o The writ should be directed againstthe corporation, but the secretarythereof may be joined as partydefendant since he is customarilycharged with the custody of allcorporate records and ispresumably the parson againstwhom the order of the court will bemade affective in case mandamusis granted.

o And even the president of the corp.may be made respondent ifnecessary to the effectuation of thecourt’s order (Philpotts v. Phil.Manufacturing Co., 1919)

Injunction Action for damages – any officer or agent of

the corporation who shall refuse to allow anydirector, trustees, stockholder or member ofthe corporation to examine and copy excerptsfrom its records or minutes, in accordance withthe provisions of this Code, shall be liable tosuch director, trustee, stockholder or memberfor damages

File an action to impose a penal offense by fineand/or imprisonmento Any officer or agent of the corporation who

shall refuse to allow any director, trustees,stockholder or member of the corporationto examine and copy excerpts from itsrecords or minutes, in accordance with theprovisions of this Code x x x and inaddition, shall be guilty of an offense whichshall be punishable under Section 144 ofthe Corporation Code

o If such refusal is made pursuant to aresolution or order of the board of directorsor trustees, the liability under this sectionfor such action shall be imposed upon thedirectors or trustees who voted for suchrefusal

o It shall be a defense to any action that theperson demanding to examine and copyhas improperly used any informationsecured through any prior examination ofthe records, or is not acting in good faith orfor a legitimate purpose in making hisdemand (§74, par 3)

o Other valid grounds for denying access tobooks or records: immediately prior to theannual SHs’ meeting; holder of books isunavailable; the books are being audited;on-going inventory count; computerization;moving out or change of business address

Chapter X

DERIVATIVE SUITS

1. Nature and Definition of aDerivative Suit

Definition

Derivative suit – suits of stockholders based onwrongful or fraudulent acts of directors or otherpersons

Nature and basis/distinguish from othersuits:

INDIVIDUAL suit if wrong done is personal toSH

CLASS suit if wrong done is to a group of SH DERIVATIVE suit if wrong done is to the

corporation itselfo In a derivative suit, the cause of action

belongs to the corporation and not thestockholders but since the directors whoare charged with mismanagement are theones who will be sued or may not be willingto sue, then the corporation is left withoutredress, hence, SH is given the right to sueon behalf of the corporation

2. Requirements relating toderivative suit

1. The stockholder or member bringing the suitmust have exhausted his remedies within thecorporation (Angeles v. Santos, 1937) (ex. Hehas made a demand on the directors ortrustees and they have failed or refused to acton such demand. Note: demand is notnecessary if it will be futile)

2. The stockholder or member must have beenone at the time the transaction or actcomplained of took place, or in the case of astockholder, the shares must have devolvedupon him since by operation of law, unlesssuch transaction or act continues and isinjurious to the stockholder (Pascual v. Orozco,1911)Bonafide ownership by stockholder of stock inhis own right suffices to invest him withstanding to bring a derivative action for thebenefit of the corporation. The number ofshares owned by the SH is immaterial since heis not suing in his own behalf or for theprotection or vindication of his own particularright or the redress of a wrong committedagainst him individually but in behalf and forthe benefit of the corp. (San Miguel Corp. v.Khan, 1989)Heirs of a SH can bring a derivative suitprovided that the transaction took place duringthe lifetime of the SH (Denison v. Berderger,1941)

3. Any benefit recovered by the stockholder ormember as a result of bringing the derivativesuit, whether by final judgment, by judicialcompromise or by extra-judicial settlement,must be accounted for to the corporation, whois the real party in interest

4. If the suit is successful, the plaintiff is entitledto reimbursement from the corporation for thereasonable expenses of litigation, includingattorney’s fees



Bitong v CA (1998)

In the absence of a special authority from theboard of directors to institute a derivative suit forand in its behalf, the managing officer isdisqualified by law to sue in her own name. Thepower to sue and be sued in any court by acorporation even as a stockholder is lodged in theBOD that exercises its corporate powers and not inthe president or officer thereof. But wherecorporate directors are guilty of a breach of trust,not of mere error of judgment or abuse ofdiscretion, and intra-corporate remedy is futile oruseless, a SH may institute a derivative suit inbehalf of himself and other SHs and for the benefitof the corporation, to bring about a redress of thewrong inflicted directly upon the corporation andindirectly upon the stockholders.

Lim vs. Lim-Yu (2001)The suit of respondent cannot be characterized asderivative, because she was complaining only ofthe violation of her preemptive right under Section39 of the Corporation Code. She was merelypraying that she be allowed to subscribe to theadditional issuances of stocks in proportion to hershareholdings to enable her to preserve herpercentage of ownership in the corporation. Shewas therefore not acting for the benefit of thecorporation. Quite the contrary, she was suing onher own behalf, out of a desire to protect andpreserve her preemptive rights

Filipinas Port Services Inc., representedby stockholders, Eliodoro C. Cruz v.Victoriano S. Go, et al.GR No. 161886March 16, 2007

Cruz, a stockholder of the corporation, filed aderivative suit against the members of theboard questioning the creation of certainpositions. Cruz thus prayed that therespondent members of the board ofdirectors be made to pay Filport, jointly andseverally, the sums of money variedlyrepresenting the damages incurred as a resultof the creation of the offices/positionscomplained of and the aggregate amount ofthe questioned increased salaries. The RTCfound in his favor initially but the CA laterdismissed the derivative suit.HELD: T his is a valid derivative suit institutedby Cruz. the action below is principally fordamages resulting from allegedmismanagement of the affairs of Filport by itsdirectors/officers, it being alleged that theacts of mismanagement are detrimental to theinterests of Filport. Thus, the injurycomplained of primarily pertains to thecorporation so that the suit for relief should beby the corporation. Besides, the requisitesbefore a derivative suit can be filed by astockholder are present in this case, to wit:

a) the party bringing suit should be ashareholder as of the time of the act ortransaction complained of, the numberof his shares not being material;

b) he has tried to exhaust intra-corporateremedies, i.e., has made a demand on

the board of directors for theappropriate relief but the latter hasfailed or refused to heed his plea; and

c) the cause of action actually devolves onthe corporation, the wrongdoing orharm having been, or being caused tothe corporation and not to theparticular stockholder bringing the suit.

3. Requirements under the Interim Rulesof Procedure for Intra-CorporateControversies (Rule 8)

1. He was a stockholder or member at the timethe acts or transactions subject of the actionoccurred and the time the action was filed;

2. He exerted all reasonable efforts, and allegesthe same with particularity in the complaint, toexhaust all remedies available under the AOI,by-laws, laws or rules governing thecorporation or partnership to obtain the reliefhe desires.

3. No appraisal rights are available for the act(s)complained of; and

4. The suit is not a nuisance or harassment suit.

Derivative suits are within the jurisdiction of theRTC (§5.2, Securities Regulation Code)

Chapter XI

FINANCING THE CORPORATION,

CAPITAL STRUCTURE

1. Sources of Financing

3 main sources:1. Contributions by stockholders (Equity)2. Loans or advances from creditors (Borrrowing)3. Profits that the business may earn

2. Classification of Shares (§6) Shares of stock of stock corporations may be

divided into classes or series of shares or both Each class or series of shares may have rights,

privileges, restrictions, stated in the AOI No share may be deprived of voting rights,

except:o Preferred oro Redeemable shares,o unless otherwise provided by the Code

There shall always be a class/series of shareswhich have a COMPLETE VOTING RIGHTS

EACH SHARE SHALL BE EQUAL IN ALLRESPECTS TO EVERY OTHER SHARE, except asotherwise provided in the AOI and as stated inthe certificate of stock

2.1 Common A stockholder, owner of at least one

common share, has the following rights:o right to vote at meetingso right to dividendso right to examine corporate books

Most commonly issued



Entitles owner to equal pro-rata division ofprofits after preference

2.2 Preferred Stocks which are given preference by the

issuing corporation in dividends and thedistribution of assets of the corporation incase of liquidation or such otherpreferences as may be stated in the AOIwhich are not violative of the CorporationCode. (§6)

Limitations on preferred shares:o Preferred shares can only be issued

with par valueo Preferred shares must be:

a. Stated in the Articles ofIncorporation and in the certificateof stock or

b. May be fixed by the BOD whereauthorized by the AOI, provided:such terms and conditions shall beeffective upon filing of a certificatethereof with the SEC.

Entitles holder to some preferences individends, distribution of assets uponliquidation or both:o preference as to dividends – dividends

are payable only when profits areearned and as a general rule, even ifthere are existing profits, BOD hasdiscretion to declare dividends or nota. Participating – after getting their

fixed dividend preference ahead ofCS, they share with the CS the restof the dividendsUNLESS expressly provided, they arenon-participating

b. Cumulative – dividends in arrearsaccrue, must be paid first beforecommon stock dividends are paid.

c. Non cumulative – contract makesdividends depend upon existence ofprofits for the year

o as to voting rights – usually does nothave voting rights; but unless clearlywithheld, PS would have right to voteNote: even if deprived of voting rights,PS holders are entitled to vote on thematters enumerated under §6

o preference upon liquidation – in theabsence of provision, participate prorata with common stock

o not a creditor; there’s no assurancethat you will get back investments butif the corporation profits, youparticipate in the profits

2.3 Par value These are shares with a stated value set

out in the AOI. This remains the sameregardless of the profitability of thecorporation. This gives rise to financialstability and is the reason why banks, trustcorporations, insurance companies andbuilding and loan associations must alwaysbe organized with par value shares.

One in the certificate of stock of whichappears an amount in pesos as the nominalvalue of the shares

Can’t be issued at less than par value.Otherwise, it would become a wateredstock (§65, discussed in Chapter XII)

Par value is minimum issue price of suchshare in the AOI which must be stated inthe certificate

2.4 No-par value These are shares without a stated value.

The Corporation upon their issuance will settheir value, which shall not be less than P5.

Shall be deemed fully paid and non-assessable and the holders of such sharesshall not be liable to the corporation or toits creditors in respect thereto (§6)

Entire consideration received by thecorporation for its no-par value shares shallbe treated as capital and shall not beavailable for distribution as dividends (Ibid)

Cannot be issued as Preferred Shares (Ibid) AOI must state the fact that corp issues no-

par shares and the number of shares Three ways of determining value of no par

value shares (§62):o By majority vote of the outstanding

shares (issued shares) in a meetingcalled for the purpose

o By BOD pursuant to authority conferredupon it by the AOI

o By amendment of the AOI Corporations which cannot issue no-par

value shares (§6):o Bankso Insurance Companieso Trust Companieso Building and Loan Associationso Public utilities

2.5 Founder‘s (§7) Those shares, classified as such in the AOI,

which are given certain rights andprivileges not enjoyed by the owners ofother stocks. (§7)

Where exclusive right to vote and be votedfor in the election of directors is granted,such right must be for a limited period notto exceed 5 years subject to approval bySEC. 5 year period shall commence fromdate of approval by SEC. (Ibid)

2.6 Redeemable Those shares, expressly so provided in the

AOI, which may be purchased or taken upby the corporation upon the expiration of afixed period regardless of the existence ofunrestricted retained earnings in the booksof the corporation and upon such terms andconditions stated in the AOI and in thecertificate of stock (§8)

Redemption is repurchase, a reacquisitionof stock by a corporation which issued thestock in exchange for property, whether ornot the acquired stock is cancelled, retiredor held in the treasury. Essentially, thecorporation gets back some of its stock,distributes cash or property to theshareholder in payment for the stock, andcontinues in business as before. Theredemption of stock dividends previouslyissued is used as a veil for the constructivedistribution of cash dividends. (CIR v CA,1999)

While redeemable shares may be redeemedregardless of the existence of unrestrictedretained earnings, this is subject to thecondition that the corporation has, aftersuch redemption, assets in its books to



cover debts and liabilities inclusive ofcapital stock. Redemption, therefore, maynot be made where the corporation isinsolvent or if such redemption will causeinsolvency or inability of the corporation tomeet its debts as they mature. (RepublicPlanters Bank v Agana, 1997)

2.7 Treasury These are shares of stock which have been

issued and fully paid for, but subsequentlyre-acquired by the issuing corporation bypurchase, redemption, donation or throughsome other lawful means. Such sharesmay again be disposed of for a reasonableprice fixed by the BOD. (§9)

Note: delinquent stocks, which are stocksthat have not been fully paid, may becometreasury stocks upon bid of the corporationin absence of other bidders (§68)

May be sold at less than par, regarded ascorporate property

In this manner, stocks can be retiredgradually, even those which aren’tredeemable

No limit as to how many shares can beretired

2.8 Convertible

A type of preferred stock that the holder canexchange for a predetermined number of thecorporation’s common shares at a specified time

2.9 Non-voting shares (§6)

Shares which have, generally, no votingrights; except in the followingcircumstances:o Amendment of the AOIo Adoption and amendment of by-lawso Sale, lease, exchange, other disposition

of all or substantially all of thecorporate property

o Incurring, creating or increasingbonded indebtedness

o Increase or decrease of capital stocko Merger and consolidationo Investment of corporate funds in

another corporation or businesso Dissolution of the corporation

CLASSES OF SHARES

A. Common

No-par Par

Multiple par value Single par value

B. Preferred

Liquidation Dividends

Cumulative/non-cumulative Participating/non-participating

C. Redeemable

With floating coupon rate With guaranteedcoupon rate

D. Convertibles

E. Combo of B+C+D

F. Founder’s shares

G. Treasury Shares

3. Nature of Subscription Contract

3.1 Subscription Contract

Any contract for the acquisition of unissuedstock in an existing or a corporation still tobe formed shall be deemed a subscriptioncontract, notwithstanding the fact that theparties may refer to it as a purchase orsome other contract. (§60)

Transfer for consideration of treasuryshares is a sale by the corporation (notsubscription). A transfer of fully paidshares by a stockholder to a third person isa sale. But it seems that assignment by asubscriber of his unpaid subscription wouldrequire that the requisites for valid releasefrom subscription must be complied with

Shareholders are not creditors of thecorporation with respect to theirshareholdings thereto and the principle ofcompensation or set-off has no application

Not necessarily required to be in writing Once subscription contract is perfected, SH

becomes the debtor of the corporation. Heis liable to pay any unpaid portion of thesubscription. He can also be madepersonally liable to the creditors of thecorporation to the extent of his unpaidsubscription

General Rule: SH is not liable to payinterest on his unpaid subscription.Exception: if required by the by-laws (§66)

3.2 Pre-incorporation subscription (§61) Pre-incorporation subscription is a

subscription for shares of stock of acorporation still to be formed.

It shall be irrevocable for a period of atleast six (6) months from the date ofsubscription.

It can only be revoked, when:o when all of the other subscribers

consent to the revocation, oro when the incorporation of the

corporation fails to materialize withinsix (6) months or within a longer periodas my be stipulated in the contract ofsubscription.

After the submission of the AOI to the SEC,no pre-incorporation subscription may berevoked.

4. Pre-emptive Right to Shares (Cf§39, 102)

4.1 Definition of pre-emptive rights – optionprivilege of an existing stockholder to subscribe toa proportionate part of shares subsequently issuedby the corp before the same can be disposed of in



favor of the others; includes all issues anddisposition of shares of any class

All stockholders of a stock corporation shallenjoy pre-emptive right to subscribe to allissues or disposition of shares of any class,in proportion to their respectiveshareholdings, unless such right is deniedby the AOI or an amendment thereto

This is to prevent dilution in shareholding Includes not only new shares in pursuance

of an increase of capital stock but wouldcover the issue of previously unissuedshares which form part of the existingcapital stock as well as treasury shares

Where the shares are issued in exchangefor property needed for corporate purposesor for debt previously granted, SH cannotdemand his pre-emptive right for right mayprejudice corporate interest (§39)

4.2 Limitation to exercise of pre-emptive right(§39):

a. Such pre-emptive right shall not extend toshares to be issued in compliance with lawsrequiring stock offerings or minimum stockownership by the public;

b. Not extend to shares to be issued in goodfaith with the approval of the stockholdersrepresenting two-thirds (2/3) of theoutstanding capital stock, in exchange forproperty needed for corporate purposes orin payment of a previously contracted debt

c. Shall not take effect if denied in the AOI oran amendment thereto.

4.3 Remedies in case of unwarranted denial:a. Injunctionb. Mandamus in any case, the suit should be individual

and not derivative because the wrong doneis to the stockholders individually

c. SEC can cancel shares if the third party isnot innocent

CAPITAL CONTRIBUTIONS

(Money + Proprietary rights)

+

LOAN ACCOMMODATIONS

CORPORATION

PROPERTY/ASSETS

LIABILITY:

Obligation to pay:

Principal + Interest Security Interest over Property and Assets Preferences vis-à-vis SH

EQUITY INTEREST

(Shares of Stock, Inchoate Rights)

Return of Equity Interest:

Dividends Proceeds realized from sale of shares Liquidity dividends

CONTROL ECON BENEFITS CLASSIFICATION OFSHARES

Chapter XII

CONSIDERATION FOR ISSUANCE OFSHARES

1. Form of consideration (§62)

Stocks shall not be issued for a considerationless than the par or issued price thereof.

Consideration for the issuance of stock may beany or a combination of any two or more of thefollowing:a) Actual cash paid to the corporation;b) Property, tangible or intangible, actually

received by the corporation and necessaryor convenient for its use and lawfulpurposes at a fair valuation equal to thepar or issued value of the stock issuedo Valuation of consideration other than

actual cash, or consists of intangibleproperty such as patents of copyrights– initially be determined by theincorporators or the board of directors,subject to approval by the SEC.

o Note: Property should not beencumbered. Otherwise, it wouldimpair the consideration

c) Labor performed for or services actuallyrendered to the corporation (must becapable of being valuated);

d) Previously incurred indebtedness of thecorporation;

e) Amounts transferred from unrestrictedretained earnings to stated capital(declaration of stock dividends); and

Aa

Aa



f) Outstanding shares exchanged for stocks inthe event of reclassification or conversion.

Prohibited consideration: Shares of stock shallnot be issued in exchange for promissory notesor future service (because realization isuncertain)

Future service may be used as considerationprovided that certificates of stock will be issuedonly after the performance of such services.

Same consideration applies for the issuance ofbonds by the corporation.

Fixing of issued price of no-par value shares:The issued price of no-par value shares may befixed:a) in the AOI orb) by the BOD pursuant to authority conferred

upon it by the AOI or the by-laws, orc) in the absence thereof, by the SHs

representing at least a majority of theoutstanding capital stock at a meeting dulycalled for the purpose.

The value of the consideration received mustbe equal to the issue price of the shares ofstocks which in no case shall be less than par

2. Liability on watered stocks

Watered stock – shares issued as fully paid-upwhen in fact the consideration agreed to andaccepted by the directors of the corporation wassomething known to be much less than the parvalue or issued value of the shares.

Water in stock refers to the difference between thefair market value at the time of the issuance andthe par or issued value of said stock. Subsequentincrease in the value of the property used in payingthe stock does not do away with the water in thestock. The existence of such water is determinedat the time of issuance of the stock.

Evils: deprives corp of needed capital; dilutesproportionate interest of existing and futureSH; injures present and future creditorsbecause it reduces value of corp assets

Any director or officer of a corporationconsenting to the issuance of stocks or who,having knowledge thereof, does not forthwithexpress his objection in writing and file thesame with the corporate secretary (§65)o for a consideration less than its par or

issued value oro for a consideration in any form other than

cash, valued in excess of its fair value, shall be solidarily liable with the stockholder

concerned to the corporation and its creditorsfor the difference between the fair valuereceived at the time of issuance of the stockand the par or issued value of the same.

3. How Payment of Shares Enforced

3.1 Delinquency sale

a. How do shares become delinquent (§67) Payment of any unpaid subscription or

any percentage thereof, together withthe interest accrued, if any, shall bemade on the date specified in thecontract of subscription or on the datestated in the call made by the board.

Failure to pay on such date shall renderthe entire balance due and payable andshall make the stockholder liable forinterest at the legal rate on suchbalance, unless a different rate ofinterest is provided in the by-laws,computed from such date until fullpayment.

If within thirty (30) days from the saiddate no payment is made, all stockscovered by said subscription shallthereupon become delinquent and shallbe subject to sale as hereinafterprovided, unless the BOD ordersotherwise.

Despite the fact that the subscription ispartially paid, the entire subscriptionbecomes delinquent

Subscriber is not barred from payingthe balance plus the expenses incurredby the corp before the date of thedelinquency sale (§68).

b. Procedure for delinquency sale (§68) The BOD must make a call by

resolution demanding the payment ofthe balance of the subscription ("noticeof call").

The notice of call shall be served oneach stockholder either personally orby registered mail. At this point, thereis no need for publication.

If the stockholder does not pay theamount on the date designated in thenotice, the Board shall issue, byresolution, a "notice of delinquency."

Notice of delinquency shall be servedon the non-paying subscriber eitherpersonally or by registered mail, PLUSpublication in a newspaper of generalcirculation in the province or city wherethe principal office of the corporation islocated, once a week for two (2)consecutive weeks. The notice shallstate the amount due on eachsubscription plus accrued interest, andthe date, time and place of the salewhich shall not be less than 30 daysnor more than 60 days from the datethe stocks become delinquent.

The amount due in the notice mustinclude all expenses: publication, legal,etc.o Note: the notices are jurisdictional.

In the public auction, the highestbidder is one who is willing to pay thebalance of the subscription for the leastnumber of shares. The corporation willgive the highest bidder the certificate ofstock in the number of his bid; theremaining number will be issued acertificate of stock in favor of thesubscriber as fully paid. If there are nobidders, the corporation must bid forthe whole number of shares regardlessof how much the SH has paid. Suchstocks will pertain to the corporation asfully paid treasury stocks.

c. When sale may be questioned (§69)

No action to recover delinquent stocksold can be sustained upon the groundof irregularity or defect in the notice of



sale, or in the sale itself of thedelinquent stock, unless the partyseeking to maintain such action firstpays or tenders to the party holding thestock the sum for which the same wassold, with interest from the date of saleat the legal rate; and

No such action shall be maintainedunless it is commenced by the filing ofa complaint within six (6) months fromthe date of sale.

Issuance of Certificate – Once full paymentfor the stocks have been tendered to thecorporation in any of the valid forms ofconsideration for the issuance of stocks,the purchaser or the subscribers entitled tobe issued the corresponding certificate ofstock which evidences their ownership ofshares in a particular corporation (§64)

Apocada v NLRC

Apocada was employed in Intans Phil wherein hesubscribed to 1500 shares. He subsequentlyresigned and instituted a complaint with NLRCagainst corporation for payment of unpaid wages,COLA, balance of gasoline and representationexpenses, bonus. Corporation applied what is dueto Apocada the balance of his unpaid subscription.HELD: Set-off is not proper. Unpaid subscriptionsare not yet due and payable. They become dueand payable when a call is made by thecorporation. There is no such call yet. Set-offagainst wages is not valid under labor code.

3.2 Court Action (§70)

Gen. Rule A valid call is a prerequisite toliability where court action is the remedychosen (Da Silva v. Aboitiz, 1923).

Exceptions:

1. the subscription contract specifies a date ofpayment

2. the corp. has become insolvent allunpaid subscriptions are immediatelyrecoverable in a court action by theassignee in insolvency [Velasco vs. Poizat,1918]

As a defense to a court action, the SH maycontend that the subscription was induced byfraudulent misrepresentation, provided he isnot barred by ratification, or guilty of laches.

Stockholders cannot escape liability on theirunpaid subscription on the ground that thesewere induced by an unfulfilled commitment ofthe President of the Phil. that the Phil.government would invest P9.00 for every pesosubscribed (PNB v. Bitulok Sawmill Inc., 1968)

4. Effect of Delinquency

a) Any cash dividends due on delinquent stockshall first be applied to the unpaid balance onthe subscription plus costs and expenses, whilestock dividends shall be withheld from thedelinquent stockholder until his unpaidsubscription is fully paid. (§43)

b) No delinquent stock shall be:o voted for or

o be entitled to vote or too representation at any stockholder's

meeting,o nor shall the holder thereof be entitled to

any of the rights of a stockholder (§71) Except the right to dividends in

accordance with the provisions of thisCode,

until and unless he pays the amountdue on his subscription with accruedinterest, and the costs and expenses ofadvertisement, if any.

Note that the provision on dividendspertain to delinquent stock hence a callmust have been made

Stock dividends on delinquent sharesare not applied but are included indelinquency sale wherein it is liquidated

5. Rights and Obligations of Holdersof Unpaid But Non-Delinquent Stock

Holders of subscribed shares not fully paidwhich are not delinquent shall have ALL therights of a stockholder. (§72)

Subscribers for stock shall pay to thecorporation INTEREST on all unpaidsubscriptions from the date of subscription, ifso required by, and at the rate of interest fixedin the by-laws. If no rate of interest is fixed inthe by-laws, such rate shall be deemed to bethe legal rate. (§66) General rule: unpaidsubscriptions can not be charged with interest.Exception: when required by the by-laws.

No certificate of stock shall be issued to asubscriber until the full amount of hissubscription, together with the interest andexpenses (in case of delinquent shares) if anyis due, has been paid. (§64)

No shares of stock against which thecorporation holds any unpaid claim shall betransferable in the books of the corporation(§63).

Attributes of a subscription contract:unconditional (obligation to pay must not besubject to any contingencies) and indivisible(as to the amount and transferability—Fua Cunv. Summers, 1923)

6. Issuance of Certificate

A certificate of stock is the best evidence of therights and status of a SH (although not a conditionprecedent to the acquisition of such rights), and isconvenient for the purposes of transfer (Campos).

Contents of a certificate:

- certifies that the person named is a holderor owner of a stated number of shares

- kind of shares issued- date of issuance- par value, if par value shares- signed by the proper officer of the corp.

(usually the pres., and the sec.)- bears the corporate seal

Over-issue of shares occurs when certificates areissued for more than the number of sharesauthorized by the articles. Any share certificate w/crepresents an over-issue would be void. No rightsor liabilities can arise therefrom in favor or against



the holders and bona fide purchasers would havethe right to damages for misrepresentation againstthe corp. but can’t acquire the rights ofstockholders.

General rule: entire subscription must be paid firstbefore the certificates of stock can be issued.Partial payments are to be applied pro rata to eachshare of stock subscribed. (Nava v Peers MktgCorp and Fua Cun v Summers).

Exception: in the Baltazar v Lingayen Gulf ElectricPower Co case, it was the practice of the corp toissue certificates of stock to its individual SHs forunpaid shares of stock and to give full voting powerto shares fully paid.

7. Lost or Destroyed Certificate (§73)

Procedure for re-issuance in case of loss, stolen ordestroyed certificates:

1. The registered owner of certificates of stock orhis legal representative shall file with thecorporation an affidvit setting forth as far aspossible:a) the circumstances as to how the certificates

were lost, stolen or destroyed;b) the number of shares represented by each

certificate, the serial numbers of thecertificates;

c) the name of the corp which issued the same;d) such other information and evidence which he

may deem necessary.2. The corp shall publish a notice in a newspaperof general circulation published in the place wherethe corp has its principal office, once a week for 3consecutive weeks at the expense of the owner ofthe certificate of stock, which has been lost, stolenor destroyed.3. After the expiration of one (1) year from thedate of the last publication and if no contest hasbeen presented, the corp shall cancel in its booksthe certificate of stock and issue in lieu thereof newcertificates of stock. The right to make such contestshall be barred after the expiration of the one-yearperiod.4. Even before the one year period expires, thenew certificates may be issued if the registeredowner files a bond or other security, running for aperiod of one (1) year for a sum and in such formand with such sureties as may be satisfactory tothe BOD. Provided, that if there is a pendingcontest regarding the ownership of said certificates,the issuance of new certificates shall be suspendeduntil the final decision of the court regarding theownership of the certificate of stock.

o Note: Except in cases of fraud, bad faith, ornegligence on the part of the corporation andits officers, no action may be brought againstthe corp which shall have issued certificates ofstock in lieu of those lost, stolen or destroyedpursuant to the above procedure.

Chapter XIIIDIVIDENDS AND PURCHASE OF

CORPORATION OF ITS OWN SHARES

1. Form of Dividends (§43)

1.1 CASH – most common form.

1.2 STOCK – a distribution to the stockholders ofthe company’s own stock. The corporate profits aretransferred to capital stock and shares of stockrepresenting the increase in capitalization aredistributed.

These do not represent income on the part ofthe SH. Investment and proportional interestin the corp remain the same

Lincoln Phil. Life v CA (1998)

Stock dividends are in the nature of shares ofstock, the consideration for which is theamount of unrestricted retained earningsconverted into equity in the corporation’sbooks. “A stock dividend of a corporation is adividend paid in shares of stock instead ofcash, and is properly only out of surplusprofits. So, a stock dividend is actually twothings: (1) a dividend: and (2) the enforceduse of the dividend money to purchaseadditional shares of stock at par.”

Limitation on the issue of stock dividends:o there must be unissued shares of the

corporation. If there are none, theremust be an increase in capital stockfirst, which requires an amendment ofthe AOI

o there must be unrestricted retainedearnings

o cannot be issued to non-stockholderseven for services rendered (Nielson v.Lepanto Consolidated Mines, 1968)

1.3 PROPERTY – Although the corp. may have abig amount of earnings available for dividends,they may not all be in cash.

2. Source of Dividends (§43)

“Unrestricted retained earnings” (URE) (definitionby the SEC) the undistributed earnings of the corp.w/c have not been allocated for any managerial,contractual or legal purposes and which are free fordistribution to the SHs as dividends. The only fund out of w/c dividends can be legallypaid. Should there be any capital deficit, subsequentprofits, if any, during succeeding periods must 1st

be applied to cover the deficit, and only the profitsremaining after eliminating the deficit, can beconsidered as URE.

Dividends can not be declared out of increase invaluation of existing assets. This is subject tofluctuation and is not yet realized.

3. Declaration of Dividends

3.1 How Dividends are declared

Approval & voting requirement:a) Approval of BODb) In case of stock dividend: must be approved by

SHs representing not less than two-thirds (2/3)of the outstanding capital stock at a regular orspecial meeting duly called for the purpose.

3.2 Dividend Declaration Discretionary withthe Board

Gen. Rule WON there should be a distribution ofdividends to the SHs in any given year & the form



of such dividends are matters addressed to thebusiness judgment of the BOD

Exceptions:1. When the decision is tainted w/ bad faith, fraud

or gross negligence2. If the court finds, upon complaint of a SH, that

a surplus was unreasonably accumulated(profits accumulated in excess of 100% of thecorp’s paid-in capital stock), it may order thecorp. to distribute dividendsExceptions to the exception (§43):a. when justified by definite corporate

expansion projects or programs approvedby the board of directors; or

b. when the corporation is prohibited underany loan agreement with any financialinstitution or creditor, whether local orforeign, from declaring dividends withoutits/his consent, and such consent has notyet been secured; or

c. when it can be clearly shown that suchretention is necessary under specialcircumstances obtaining in the corporation,such as when there is need for specialreserve for probable contingencies.

3.3 When Right to Dividends Vests

General rule: as soon as the same have beenlawfully declared by the BOD, becomes a debtowing to the SH. No revocation can be made

Exceptions:o not yet announced or communicated to the

public, revocable before announcement toSHs

o when stock dividends are declared sincethese are not distributions but merelyrepresent changes in the capital structure,may be revoked prior to actual issuance

Rights of transferee to dividends – Right todividends vests upon declaration so whoeverowns the stock at time or stockholders ofrecord also owns the dividend. Subsequenttransfer of stock would not carry with it right todividends UNLESS agreed upon by the parties

3.4 Liability for Illegal Dividends

Directors not personally liable if unintentionallydeclare illegal dividends, such as when thedirectors, in declaring dividends:

- rely on financial statements prepared by adishonest EE whom they had no reason tosuspect

- rely on advice of legal counsel that certainproceeds or profits are available fordividends

Directors liable under §31 if found negligent or inbad faith to the (1) corp; or (2) its creditors, ifinsolvent

4. Purchase by the Corporation of itsOwn Shares (§41)

A stock corporation shall have the power topurchase or acquire its own shares for alegitimate corporate purpose or purposes(treasury shares) provided, that thecorporation has unrestricted retained earnings

in its books to cover the shares to bepurchased or acquired

Treasury shares are shares of stocks whichhave been issued and fully paid for, butsubsequently reacquired by the issuingcorporation by purchase, redemption, donationor through some other lawful means (§9)

Treasury shares have no voting rights as longas such shares remain in the treasury (§57)

May be issued as property dividends providedthat the retained earnings has not beensubsequently impaired by losses

“Trust Fund doctrine” – the requirement ofunrestricted retained earnings is becausesubscription to the capital of a corporationconstitute a fund to which creditors have aright to look for the satisfaction of their claims(Phil. Trust Co. v. Rivera, 1923)

Legitimate purpose includes:a) To eliminate fractional shares arising out of

stock dividends;b) To collect or compromise an indebtedness

to the corporation, arising out of unpaidsubscription, in a delinquency sale, and topurchase delinquent shares sold during saidsale; and

c) To pay dissenting or withdrawingstockholders entitled to payment for theirshares under the provisions of this Code(appraisal right, Cf §81).

Improper purpose includes: raising of price ofstock by making it appear that it is beingactively traded (prohibited under Sec 24 of theSecurities Regulations Code) and preferringsome SHs to the prejudice of other SHs andcreditors (may be viewed as early liquidation ofthe investment of some of the SHs)

Remedies in case of improper purchase:a) Creditors prejudiced by the repurchase can

go after the selling SHs to recover whatwas paid to them

b) Directors who were negligent or in BF forapproving the repurchase can also be heldpersonally responsible

c) Prejudiced SH can also go after BOD whoapproved purchase (when their dividendsare reduced, remaining assets can’t coverdebts, etc)

A corporation must have unrestricted retainedearnings in acquiring own shares except:a) shares are acquired in the redemption of

redeemable shares (§8)b) shares are re-acquired to effect a decrease

in capital stock approved by the SEC (§38)shares are reacquired by a close corporationpursuant to the order of the SEC acting to arbitratea deadlock (§104)



Chapter XIVAMENDMENTS OF CHARTER

1. Amendment of the Articles ofIncorporation, Generally

1.1 Procedure for amendment of articles ofincorporation (§16)

a) The amendment must be for a legitimatepurpose; and must be approved by a majorityvote of the Board; and vote (in a meeting) ormere written assent (no meeting) of 2/3 of theoutstanding stock, or in case of a non-stockcorporation, by the members of thecorporation. Once the amendment is approved,

dissenting stockholders may exercise theirrights of appraisal if it involved diminishingof substantial rights previously granted orcreating a new set of shares with priorityrights.

b) The original and amended articles togethershall contain all provisions required by law tobe set out in the articles of incorporation. Sucharticles, as amended shall be indicated byunderscoring the change or changes made

c) A copy thereof duly certified under oath by thecorporate secretary and a majority of thedirectors or trustees stating the fact that saidamendment or amendments have been dulyapproved by the required vote of thestockholders or members, shall be submitted tothe Securities and Exchange Commission.

d) The amendment of the Articles of Incorporationwill be effective only upon approval of the SEC;but should no action be taken by the SECwithin 6 months from the date of filing, thenautomatically, the amendment is deemedeffective, provided that delay is not attributableto the corporation.

1.2 Grounds for disapproving amendment (§17)

The SEC may disapprove any amendmentthereto if the same is not in compliance withthe requirements of this Code

The SEC shall give the incorporators areasonable time within which to correct ormodify the objectionable portions of the articlesor amendment.

The following are grounds for such disapproval:a) Amendment is not substantially with the

form prescribedb) Purpose or purposes is/are patently

unconstitutional, illegal, immoral, contraryto government rules and regulations

c) Treasurer’s Affidavit concerning the amountof capital stock subscribed and/or paid isfalse

d) Percentage requirement of ownership byFilipino citizens as required by theConstitution not complied with

2. Special Amendments

2.1 Increase or decrease of capital stock(§38)

Approval and Voting Requirementa) Approved by a majority vote of the board

of directorsb) Two-thirds (2/3) of the outstanding capital

stock shall favor the increase or diminutionof the capital stock at a meeting duly calledfor the purpose

Certificate of Filing A certificate in duplicate must be signed by

a majority of the directors of thecorporation and countersigned by thechairman and the secretary of thestockholders' meeting, setting forth:a) That the requirements of voting and

notice have been complied with;b) The amount of the increase or

diminution of the capital stock;c) If an increase of the capital stock, the

amount of capital stock or number ofshares of no-par stock thereof actuallysubscribed, the names, nationalitiesand residences of the personssubscribing, the amount of capital stockor number of no-par stock subscribedby each, and the amount paid by eachon his subscription in cash or property,or the amount of capital stock ornumber of shares of no-par stockallotted to each stock-holder if suchincrease is for the purpose of makingeffective stock dividend thereforauthorized;

d) The amount of stock represented at themeeting; and

e) The vote authorizing the increase ordiminution of the capital stock

One of the duplicate certificates shall bekept on file in the office of the corporationand the other shall be filed with theSecurities and Exchange Commission andattached to the original articles ofincorporation.

Approval of SEC Any increase or decrease in the capital shall

require prior approval of the Securities andExchange Commission.

Decrease of capital stock: No decrease ofthe capital stock shall be approved by theCommission if its effect shall prejudice therights of corporate creditors

EffectivityFrom and after approval by the Securities andExchange Commission and the issuance by theCommission of its certificate of filing, thecapital stock shall stand increased or decreased

Treasurer’s Affidavit:The Securities and Exchange Commission shallnot accept for filing any certificate of increaseof capital stock unless accompanied by thesworn statement of the treasurer of thecorporation lawfully holding office at the time ofthe filing of the certificate, showing that atleast twenty-five (25%) percent of suchincreased capital stock (should be understoodas proposed increase-Campos) has beensubscribed and that at least twenty-five (25%)



percent of the amount subscribed has beenpaid either in actual cash to the corporation orthat there has been transferred to thecorporation property the valuation of which isequal to twenty-five (25%) percent of thesubscription

Appraisal right (§81¶1)Appraisal right may be exercised where theincrease in capital stock results in the creationof shares with preferences superior to those ofexisting ones.

Note: Proposing amendments is a way ofeasing out the minority stockholders because itcompels them to exercise their appraisal rights

2.2 Reduction of capit al stock

- Although the requirements in Section 38have been met, no reduction of capitalstock will be approved by the SEC if it willprejudice the rights of corporate creditors.

- There can be no reduction of capital stockwhich will in effect release the stockholdersfrom the payment of the balance of theirsubscription if it will adversely affect theright of he creditors in collecting theirclaims (Phil. Trust Co. vs. Rivera (1923)

- Appraisal Right—Although Section 38 doesnot grant the appraisal right in case ofreduction of capital stock, when it has theeffect of altering the rights of anystockholder or class of stockholders, theappraisal right may be exercised undersection 81 (1) (Campos)

- Except by decrease of capital stock and asotherwise allowed by this Coded, nocorporation shall distribute any of he assetsor property except upon lawful dissolutionand after payment of all its debts andliabilities. (§122)

o Campos—It seems that under theexception, a reduction surplus maybe distributed as dividends to thestockholders, as long as SECapproval has been obtained and therights of creditors is not prejudiced.

2.3 Change in corporate term (§37)

Approval and Voting Requirementa) Approved by a majority vote of the board

of directors or trustees andb) Ratified at a meeting by the stockholders

representing at least two-thirds (2/3) of theoutstanding capital stock or by at leasttwo-thirds (2/3) of the members in case ofnon-stock corporations.

Conflict in the availability of appraisal rightYES only for extension of corporate term(§37)YES for both shortening and extension (§81)

Chapter XVTRANSFER OF SHARES

1. Manner and Effectivity of Transfer

1.2 Indorsement and delivery Shares of stock may be transferred as

follows (§63):a) delivery of the certificate or certificates

andb) indorsed by the owner or his attorney-

in-fact or other person legallyauthorized to make the transfer

Rural Bank of Salinas v CA

Clemente, President of Rural Bank of Salinas andowner of shares in said corporation executed aSpecial Power of Attorney to his wife Melania givingher full power to sell or otherwise dispose of sharesof stock of the Bank. Before death of Clemente,Melania, pursuant to said SPA, executed deed ofAssignment of former’s shares. After death ofClemente, Melania presented to bank deed ofassignment for registration which the bank refused.Mandamus filed by Melania to compel bank toregister the transfer.

HELD: Transfer before death valid, stock not yetpart of estate. Shares of stock are personalproperty and may be transferred by delivery.Registration in corporate books is not necessary.The transfer effected in this case is valid. Thecorporation may not impose any restriction on suchtransfer. The right of transferee/assignee to havestocks transferred to his name is inherent right,duty of the corporation to register the transfer isministerial.

Rural Bank of Lipa v. CA (2001)

For the valid transfer of stocks, there must be strictcompliance with the mode of transfer prescribed bylaw, which are:a) there must be delivery of the stock certificate;b) the certificate must be endorsed by the owner orhis attorney-in-fact or other persons legallyauthorized to make the transfer; andc) to be valid against third parties, the transfermust be recorded in the books of the corporation.

Razon v IAC

Chudian was issued 1,500 shares at E Razon Incwith the corresponding stock certificate no 3. Saidstock certificates were delivered to Enrique Razonallegedly because it was the latter who paid for allthe subscription on the shares of stock in defendantcorporation with the understanding that has wasthe owner of said shares of stock and was to havepossession until such time as he was paid by othernominal incorporators/stockholders. Later on,parties delivered it for deposit with bank under thejoint custody of the parties. Administrator of theestate of Chudian filed a complaint against EnriqueRazon et al praying that the said stock certificatesbe delivered to estate of Chudian along with allcash and stock dividends and pre-emptive rightsaccruing thereto.

HELD: Chudian is still ownera) Shares of stock is transferred by delivery



and endorsement of the stock certificateb) Such mode of transfer is not complied with

in this casec) In the books of the corporation, Chudian is

still the owner of the stocks. He was evenelected member of the board which provesthat he is a stockholder

d) One who claims ownership should showthat the same was transferred to him inaccord with the valid mode of transfer.This petitioner failed to show

Endorsement is a mandatory requirement of law foran effective transfer

Tan v SEC (1992)

Alfonso Tan is owner of 400 shares in VisayanEducational Supply Corp evidenced by certificateNo. 2. Alfonso transferred 50 shares to Angel.Certificate No. 2 was cancelled and Certificate No.6 was issued to Angel and Certificate No. 8 wasissued to Alfonso. However, Alfonso did not makethe proper endorsement and did not make deliveryof certificate no. 2. Later on, Alfonso Tan electedto withdraw from the corporation. In exchange forhis shares, he received stocks in trade. CertificateNo. 8 was later on cancelled due to above. Afterseveral years, Alfonso Tan filed a case with CebuSEC questioning the cancellation of his stockcertificates despite non-endorsement and lack ofdelivery

HELD: Delivery and endorsement under Section 63of the corporation code is not mandatory becauseof the use of the word may. Delivery is notessential where it appears that the persons soughtto be held as stockholders are officers of thecorporation and have custody of the stock book asin this case. To hold that cancellation of certificateof stock of Alfonso is null and void because of lackof delivery and endorsement of mother certificateof stock no. 2 which was deliberately withheld is toprescribe restrictions on the transfer of stock inviolation of corporation law

1.2 Registration Purpose of registration

a) enable the transferee to exercise all therights of a stockholder

b) to inform the corporation of any changein share ownership so that it canascertain the persons (a) entitled to therights (b) subject to the liabilities of aSH

c) until registration is accomplished, thetransfer, though valid between theparties, cannot be effective against thecorporation

Effect of lack of registration:a) transferee cannot voteb) transferee cannot be voted forc) transferee cannot prevail over rights of

a subsequent attaching creditor (Usonv. Diosomito, 1935)

d) transferee not entitled to dividendse) stockholder on record has the right to

participate in meetings.

No registration of transfer of unpaid shares

If there is any unpaid balance on thestockholder’s subscription there can be nostock certificate on which indorsement can

be made. The shares are thus nottransferable on the corporate books. (§63)

However, the stockholder can still transferhis interest in the corporation by way of adeed of assignment.

Sunset View Condominium Corp v Campos

Sunset View Condominium corporation filed suitagainst Aguilar-Bernares Realty and Lim Siu Lengfor collection of assessments levied on theirrespective condominium units which they boughton installments and had not yet fully paid

HELD: Respondents not shareholders ofcondominium corporation because they are not yetfully paida) Sec 5 Condominium Act – shareholding in a

condominium corporation will be conveyed onlyin a proper case

b) Sec 4 of Condominium Act leaves to MasterDeed the determination of when shareholdingwill be transferred to purchaser of a unit

c) Master Deed provides that only owner of unit isa shareholder and that ownership of unit isacquired by purchaser subject to conditions andterms of the instrument conveying the unit tosuch purchaser.

d) Deed of Conveyance provide that ownership isconveyed only upon full payment of purchaseprice

e) Sec 10 Condominium Act – Membership inCondominium corporation shall not betransferable separately from condominium unitof which it is an appurtenance

Remedy if registration refused – Transfereemay petition the court for a writ of mandamusto compel the corporation to do so (Price v.Sulu Development Corp., 1933)

Rivera v Florendo (1986)

Rivera is the registered owner of 4899 shares ofstock of Fujiyama Hotel & Restaurant Inc. It isalleged that one Akasako is the real owner of the4899 shares under Rivera’s name, and as suchowner he sold 2550 shares to Milagros. Riverarefused to indorse the certificates to Milagrosdespite the assurance he gave to Milagros beforethe sale was consummated. The otherincorporators also sold their shares to Milagros andone Jureidini. As regards these transfers, thecertificates were properly indorsed by theirrespective owners. Milagros and Jureidiniattempted to have all the certificates registered intheir names but the corporation refused to do so.

HELD: Mandamus will not lie where the shares ofstock are not even indorsed by the registeredowner Rivera who is specifically resisting theregistration thereof in the books of the corp. Eventhe shares of stock sold by the other incorporatorscannot be also the subject of mandamus on thestrength of the mere indorsement of the supposedowners of said shares in the absence of expressinstructions from them. The right of the parties willhave to be threshed out in an ordinary action.

2. Restrictions on Transfer; Close



Corporations

2.1 General Rule: Free transferability ofshares

Shares are personal property – Shares of stockso issued are personal property and may betransferred (§63)

2.2 Exception: In close corporations

Considering the special circumstancesattending a close corporation (e.g. formed bypersons who know each other well, thus theywould want to choose the persons who will beallowed in their group), it is justifiable and evenimperative for its stockholders to protectthemselves from future conflicts by placingrestrictions on the right of each one of them totransfer his shares to an outsider (§97 & 98).

Validity of restrictions on transfer of shares(§98)

Restrictions on the right to transfer sharesmust appear in the articles of incorporationand in the by-laws as well as in thecertificate of stock; otherwise, the sameshall not be binding on any purchaserthereof in good faith.

Restrictions shall not be more onerous thangranting the existing stockholders or thecorporation the option to purchase theshares of the transferring stockholder withsuch reasonable terms, conditions or periodstated therein. If upon the expiration ofsaid period, the existing stockholders or thecorporation fails to exercise the option topurchase, the transferring stockholder maysell his shares to any third person.

Presumptions:a. If the stock certificate CONSPICUOUSLY

shows the restriction, the purchaser ortransferee is conclusively presumed tohave notice of the restriction, providedthis appears in the AOI. He cannotprove that he acted in good faith.Where a conclusive presumption ofnotice arises, the corporation may, atits option, refuse to register thetransfer, unless

(1) all the stockholders have consentedto the transfer, or

(2) the AOI have been properlyamended to remove the restriction.

b. If it appears in the certificate, but NOTCONSPICUOUSLY, then although hemay be presumed to have notice of therestriction, he can prove the contrary.

3. Unauthorized Transfers

3.1 certificates indorsed in blank – where thestockholder indorses his certificate in blank in sucha manner as to clothe whoever may be inpossession of it with apparent authority to dealwith the shares as the latter’s own, he will beestopped from claiming the shares as against abonafide purchaser. This is called the theory ofquasi-negotiability (Santamaria v. Hongkong &Shanghai Bank, 1951)

3.2 forged transfers – if the corporation shouldissue a new certificate pursuant to a forgedtransfer, it incurs no liability to the person in whosefavor it issued it and may demand its return forcancellation (Hodges v. Lezama, 1965). It is theduty of the purchaser to determine that theindorsement was genuine. But with respect to asubsequent purchaser in good faith and for value,the corporation is estopped from denying thevalidity of the newly issued certificate because byissuing such, it has represented that the personnamed therein is a stockholder of the corporation.Except where recognition of the original and newsubscriber will result to an overissue of shares.The new SH would now have right to damagesagainst the corporation and the latter against thosewho made false representation.

4. Collateral Transfers

Subject to collateral transfers: Shares ofstock being personal property, may be thesubject matter ofa. pledge orb. chattel mortgage.

Registration in corporate books notnecessary: Such collateral transfers are notcovered by Sec. 63 of the Code since suchprovision applies only to absolute transfer(Monserrat v. Ceron, 1933). Thus, theregistration in the corporate books ofpledges and chattel mortgages of sharesCANNOT have any legal effect.

Lim Tay v CA (1998)

Sy Guiok and Sy Lim pledged their shares in GoFay and Co to Lim Tay. They endorsed theirrespective share in blank and delivered the same toLim Tay. Sy Guiok and Sy Lim failed to pay henceLim Tay went to the corporate secretary to ask theregistration of the shares in his name. Corporatesecretary refused. Lim Tay instituted an action formandamus at SEC to compel corporate secretary toregister.

HELD: Corporate’s secretary cannot be compelledto record transfer. The duty of a corporatesecretary to record transfers of stocks isministerial. However, he cannot be compelled todo so when the transferees title to said shares hasno prima facie validity or is uncertain. Mandamuswill not issue to establish a right but only toenforce one already established. Lim Tay failed toestablish a legal right to have the shares registeredin his name. Lim Tay failed to establish a legalright. He is not owner of the shares withoutforeclosure and purchase at auction. He is merelya pledgee.

Attachment of shares

Garcia vs. Jomouad, (2000)

FACTS: Dico lost a collection case and theProprietary Ownership Certificate (POC) in the CebuCountry Club in his name was levied on andscheduled for public auction. Garcia claimedownership over the certificate and filed the actionfor injunction to enjoin the auction. Dico hadexecuted a Deed of Transfer in favor of petitionerwhich was furnished to The Club but the transfer



was not recorded in the books of the Club becausepetitioner failed to present proof of payment of therequisite capital gains tax.HELD: The transfer of the subject certificate madeby Dico to petitioner was not valid as to thejudgment creditors, as the same still stood in thename of Dico, the judgment debtor, at the time ofthe levy on execution. In addition, as correctlyruled by the CA, the entry in the minutes of themeeting of the Club's board of directors noting theresignation of Dico as proprietary member thereofdoes not constitute compliance with Section 63 ofthe Corporation Code. Said provision of law strictlyrequires the recording of the transfer in the booksof the corporation, and not elsewhere, to be validas against third parties.

Chapter XVIDISSOLUTION

1. Causes of Dissolution

1.1 Expiration of original, extended orshortened term

The term within which the corporationis to exist (which cannot be more than50 years) must be stated in its AOI.Once such period expires, thecorporation is automatically dissolvedwithout any other proceeding and itcannot thereafter be considered a defacto corporation.

A voluntary dissolution may be effectedby amending the articles ofincorporation to shorten the corporateterm pursuant to the provisions of theCode. Upon approval of the amendedarticles of incorporation or theexpiration of the shortened term, asthe case may be, the corporation shallbe deemed dissolved without anyfurther proceedings (§120)

1.2 Voluntary dissolution when nocreditors are affected (§118)

Dissolution may be effected by majorityvote of the board of directors ortrustees, and by a resolution dulyadopted by the affirmative vote of thestockholders owning at least two-thirds(2/3) of the outstanding capital stockor of at least two-thirds (2/3) of themembers.

Meeting to be held upon call of thedirectors or trustees after publication ofthe notice of time, place and object ofthe meeting for three (3) consecutiveweeks in a newspaper published in theplace where the principal office of saidcorporation is located; and if nonewspaper is published in such place,then in a newspaper of generalcirculation in the Philippines, aftersending such notice to each stockholderor member either by registered mail orby personal delivery at least thirty (30)days prior to said meeting.

A copy of the resolution authorizing thedissolution shall be certified by amajority of the board of directors ortrustees and countersigned by thesecretary of the corporation.

The Securities and ExchangeCommission shall thereupon issue thecertificate of dissolution. Thus, exceptfor the expiration of its term , nodissolution can be effective withoutsome act of the state (DaguhoyEnterprises v. Ponce, 1954)

1.3 Voluntary dissolution when creditorsare affected (§119)

Petition for dissolution shall be filedwith the Securities and ExchangeCommission.

The petition shall be signed by amajority of its board of directors ortrustees or other officers having themanagement of its affairs, verified byits president or secretary or one of itsdirectors or trustees, and shall set forthall claims and demands against it, andthat its dissolution was resolved uponby the affirmative vote of thestockholders representing at least two-thirds (2/3) of the outstanding capitalstock or by at least two-thirds (2/3) ofthe members at a meeting of itsstockholders or members called for thatpurpose.

If the petition is sufficient in form andsubstance, the Commission shall, by anorder reciting the purpose of thepetition, fix a date on or before whichobjections thereto may be filed by anyperson, which date shall not be lessthan thirty (30) days nor more thansixty (60) days after the entry of theorder. Before such date, a copy of theorder shall be published at least once aweek for three (3) consecutive weeksin a newspaper of general circulationpublished in the municipality or citywhere the principal office of thecorporation is situated, or if there be nosuch newspaper, then in a newspaperof general circulation in the Philippines,and a similar copy shall be posted forthree (3) consecutive weeks in three(3) public places in such municipality orcity.

Upon five (5) day's notice, given afterthe date on which the right to fileobjections as fixed in the order hasexpired, the Commission shall proceedto hear the petition and try any issuemade by the objections filed; and if nosuch objection is sufficient, and thematerial allegations of the petition aretrue, it shall render judgmentdissolving the corporation and directingsuch disposition of its assets as justicerequires, and may appoint a receiver tocollect such assets and pay the debts ofthe corporation

In this method of dissolution, SEC maydirect the manner in which theliquidation of the corporate assetsshould be made by assigning this taskto the corporation itself, or if it deemsproper, to a receiver appointed by it(Campos).

1.4 Dissolution by minority in closecorporations Voluntary dissolution whencreditors are affected (§105)



Any stockholder of a close corporation may,by written petition to the Securities andExchange Commissions, compel thedissolution of such corporation wheneverany of the acts of the directors, officers orthose in control of the corporation is illegal,or fraudulent, or dishonest, or oppressiveor unfairly prejudicial to the corporation orany stockholder or whenever corporateassets are being misapplied or wasted.

1.5 Failure to organize and commencebusiness; cessation of business for 5 years(§22)

Failure to formally organize andcommence the transaction of itsbusiness or construction of its workswithin two years its corporate powersshall cease and the corporation isdeemed dissolvedo Transacting business – implies a

continuity of acts or dealings in theaccomplishment of the purpose forwhich the corporation was formed(Mentholatum v. Mangaliman,1946)

o Formally organize includes not onlythe adoption of the by-laws butalso the establishment of the bodywhich will administer the affairs ofthe corporation and exercise itspowers

Commenced transaction of its businessbut subsequently becomes continuouslyinoperative for a period of at least fiveyears ground for suspension orrevocation of its corporate franchise orcertificate of incorporation

1.6 Involuntary dissolution

Revocation of certificate of registration bythe SEC (§121) A corporation may be dissolved by the

Securities and Exchange Commissionupon filing of a verified complaint andafter proper notice and hearing ongrounds provided by existing laws,rules and regulations

Grounds for revocation (Sec. 6, par i,PD 902-A)o Fraud in procuring its certificate of

registrationo Serious misrepresentation as to

what the corporation can or isdoing to the great prejudice of ordamage to the general public

o Refusal to comply or defiance ofany lawful order of the Commissionrestraining commission of actswhich would amount to a graveviolation of its franchise

o Continuous inoperation for a periodof at least five years

o Failure to file by-laws within therequired period

o Failure to file required reports inappropriate forms as determined bythe Commission within theprescribed period

Other groundso Sec. 144 BP 68 – Violation by the

corporation of any provision of theCorporation Code

o Sec. 104 BP 68 – In case of adeadlock in a close corporation, andthe SEC deems it proper to orderthe dissolution of the corporation asthe only practical solution to thedispute

Quo Warranto Proceedings (Sec. 2, Rule 66ROC) When it has offended against a

provision of an Act for its creation andrenewal

When it has forfeited its privileges andfranchises by nonuser

When it has committed or omitted anact which amounts to a surrender of itscorporate rights, privileges or franchise

When it has misused a right, privilege,or franchise conferred upon it by law orwhen it has exercised a right, privilegeor franchise in contravention of law

2. Effects of Dissolution; Winding-Upand Liquidation

2.1 Loss of juridical personality Corporation loses its juridical

personality and can no longer lawfullycontinue its business except for thepurpose of winding up. For thispurpose, it may sue and be sued,although upon the expiration of threeyears, all pending actions by or againstthe dissolved corporation abate(National Abaca Corp. vs. Pore, 1961)

cannot even be a de facto corporation,hence subject to collateral attack(Buenaflor vs. Camarines Sur IndustryCorp., 1960)

cannot enter into new contracts whichwould have the effect of continuing thebusiness (Cebu Port Labor Union vs.States Marine Co, 1957)

2.2 Executory contracts No right or remedy in favor of or

against any corporation, itsstockholders, members, directors,trustees, or officers, nor any liabilityincurred by any such corporation,stockholders, members, directors,trustees, or officers, shall be removedor impaired either by the subsequentdissolution of said corporation or byany subsequent amendment or repealof this Code or of any part thereof.(§145)

The prevailing view is that executorycontracts are not extinguished.However, some authorities make anexception of contracts for personalservices such as employment contractsof officers and employees where thedissolution is involuntary or the resultof merger or consolidation in whichcase the contracts are deemedterminated.

2.3 Winding-Up and Liquidation Definition: The winding up and turning

assets of corporation into cash fordistribution



A liquidation proceeding is a proceedingin rem so that all other interestedpersons whether known to the partiesor not may be bound by suchproceedings (Chua vs. NLRC, 1990)

For how long may the liquidation of acorporation be undertaken?o Every corporation whose charter

expires by its own limitation or isannulled by forfeiture or otherwise,or whose corporate existence forother purposes is terminated in anyother manner, shall nevertheless becontinued as a body corporate forthree (3) years after the time whenit would have been so dissolved

o However, in case the corporateassets are conveyed to a trustee ora receiver appointed by the SEC,the three year limitation will notapply (Sumera v. Valencia, 1939)

o Although the three year period mayhave expired, it does notnecessarily follow that a creditorwho was unable to collect his claimbefore three years would lose isrights. It is still possible for him tosue the trustee, if there be one, orif the circumstances so warrant, tofollow the assets in the hands ofthe stockholders who nay havereceived the same as liquidatingdividends (Tan Tiong Bio v. Comm.of Int. Rev., 1962)

Gelano v. CA (1981)

Even if no trustee is appointed or designatedduring the 3-year period of the liquidation ofthe corporation, a suit pending prior to theexpiration of the period may still beprosecuted with the counsel of record beingconsidered as the “trustee” required by law.Debtors of the corporation may not takeadvantage of the failure of the corporation totransfer its assets to a trustee; otherwise, itwould constitute undue enrichment to dismissthe case as against the defendant.

What could and should be done duringthe period of liquidation?o For the purpose of prosecuting and

defending suits by or against it andenabling it to settle and close itsaffairs, to dispose of and convey itsproperty and to distribute itsassets, but not for the purpose ofcontinuing the business for which itwas established.

o Except by decrease of capital stockand as otherwise allowed by thisCode, no corporation shalldistribute any of its assets orproperty except upon lawfuldissolution and after payment of allits debts and liabilities.

What happens if an asset cannot bedistributed to the person entitled to it?o Upon the winding up of the

corporate affairs, any assetdistributable to any creditor orstockholder or member who isunknown or cannot be found shallbe escheated to the city or

municipality where such assets arelocated.

Who may undertake the liquidation of acorporate (Methods of Liquidation)?o By the corporation itself through

the board of directors – the boardof directors serve as trustees

o Conveyance of all corporate assetsto trustees who will take charge ofthe liquidation. From and after anysuch conveyance by the corporationof its property in trust for thebenefit of its stockholders,members, creditors and others ininterest, all interest which thecorporation had in the propertyterminates, the legal interest vestsin the trustees, and the beneficialinterest in the stockholders,members, creditors or otherpersons in interest.

o Liquidation by a receiver who mayhave been appointed by the SECupon its decreeing the dissolutionof the corporation (§119). 3-yearperiod does not apply because thecorporation is substituted by thereceiver (Sumera v. Valencia,Supra). However, the mereappointment of a receiver, withoutanything more does not result inthe dissolution of the corporationnor bar it from the existence of itscorporate rights (Leyte Asphalt &Mineral Oil Co. Ltd., v. BlockJohnston & Breenbrawn, 1928)

A corporation cannot distribute any ofits assets or property except uponlawful dissolution and only afterpayment of all its debts and liabilities,after which the remaining assets mustbe distributed to the stockholders inproportion to their interest in thecorporation.

Exceptions: decrease in c/s resulting in a

surplus which can then bedistributed to stockholders providedno creditors are prejudiced

as otherwise allowed by the code:o Appraisal righto Deadlock in a close corporationo SH of a close corporation may

compel corporation to buy hisshares at fair value

o Corporation repurchases shares forany legitimate corporate purpose

o Corporation validly distributesdividend

CLEMENTE, ET. AL. v. CA (1995):

The termination of the life of a juridical entity doesnot by itself cause the extinction or diminution ofthe rights and liabilities of such entity, nor those ofits owners and creditors. If the three-yearextended life has expired without a trustee orreceiver having been expressly designated by thecorporation within that period, the board ofdirectors (or trustees) itself, may be permitted toso continue as "trustees" by legal implication to



complete the corporate liquidation. Still in theabsence of a board of directors or trustees, thosehaving any pecuniary interest in the assets,including not only the shareholders but likewise thecreditors of the corporation, acting for and in itsbehalf, might make proper representation with theSecurities and Exchange Commission, which hasprimary and sufficiently broad jurisdiction inmatters of this nature, for working out a finalsettlement of the corporate concerns.

Dissolved corporation’s capacity to sue:

Reburiano vs. CA, GR 102965, Jan 21, 1999

Corporation amended its AoI to shorten itscorporate existence while the case was pending incourt. SEC approved the amendment but the trialcourt was not notified. After the trial courtrendered judgment against corporation, it filedmotion to quash writ of execution because thecorporation lacked juridical personality to sue or besued.

SC held that it was erroneous to contend that adissolved and non-existing corporation could nolonger be represented by a lawyer andconcomitantly a lawyer could not appear as counselfor a non-existing judicial person. A corporationthat has a pending action and which cannot beterminated within the three-year period after itsdissolution is authorized under Sec. 78 [now §122]of the Corporation Law to convey all its property totrustees to enable it to prosecute and defend suitsby or against the corporation beyond the three-year period. Although private respondent did notappoint any trustee, yet the counsel whoprosecuted and defended the interest of thecorporation in the instant case and who in factappeared in behalf of the corporation may beconsidered a trustee of the corporation at least withrespect to the matter in litigation only.

Liquidation v. Rehabilitation

Phil. Veterans Bank v. Employees Union(2001)

Liquidation, in corporation law, connotes awinding up or setting with creditors anddebtors. It is the winding up of a corporationso that assets are distributed to those entitledto receive them. It is the process of reducingassets to cash, discharging liabilities anddividing surplus or loss.On the opposite end of the spectrum isrehabilitation which connotes a reopening orreorganization. Rehabilitation contemplates acontinuance of corporate life and activities inan effort to restore and reinstate thecorporation to its former position of successfuloperation and solvency.It is crystal clear that the concept ofliquidation is diametrically opposed orcontrary to the concept of rehabilitation, suchthat both cannot be undertaken at the sametime. To allow the liquidation proceedings tocontinue would seriously hinder therehabilitation of the subject bank.

Chapter XVIICORPORATE COMBINATION

1. Merger and Consolidation

1.1 What is a merger / consolidation?

Mergero One of the constituent corporations

remains as an existing juridicalperson, whereas the othercorporation shall cease to exist.Merger is the disappearance of oneof the corporations with the othercorporation acquiring all the assets,rights of action, and assuming allthe liabilities of the disappearingcorporation.

o Of course, there is an arrangementas to the shares of stocks that willbe issued to the formerstockholders of the two (2)corporations which were merged.Said stockholders are nowstockholders of the corporationwhich survives. The proportionbetween the two (2) corporationswill be the basis of the shares ofstocks that will be issued to thestockholders under the survivingcorporation.

Consolidationo If there is consolidation, there will

be disappearance of both theconstituent corporations with theemergence of a new corporateentity, called the consolidatedcorporation, which shall obtain allthe assets of the disappearingcorporations, and likewise shallassume all their liabilities.

o Also, the number of shares that willbe issued to each of thestockholders under the newcorporation is determined by theration between the assets of thetwo (2) corporations.

1.2 What is a “constituent corporation”? A“consolidated corporation”? (§76)

Two or more corporations may merge intoa single corporation which shall be one ofthe constituent corporations or mayconsolidate into a new single corporationwhich shall be the consolidated corporation.

1.3 What corporate approvals arerequired? (§77)

1. Approval by majority vote of each ofthe board of directors or trustees of theconstituent corporations of the plan ofmerger or consolidation.

2. Approval by the stockholders ormembers of each of such corporationsin separate meetings. The affirmativevote of stockholders representing atleast two-thirds (2/3) of theoutstanding capital stock of eachcorporation in the case of stockcorporations or at least two-thirds (2/3)of the members in the case of non-



stock corporations shall be necessaryfor the approval of such plan

3. Notice of such meetings shall be givento all stockholders or members of therespective corporations, at least two(2) weeks prior to the date of themeeting, either personally or byregistered mail. Said notice shall statethe purpose of the meeting and shallinclude a copy or a summary of theplan of merger or consolidation.

4. Any dissenting stockholder in stockcorporations may exercise his appraisalright in accordance with the Code.Provided, that if after the approval bythe stockholders of such plan, theboard of directors decides to abandonthe plan, the appraisal right shall beextinguished.

5. Amendment to the plan of merger orconsolidation may be made byapproved of the majority vote of therespective boards of directors ortrustees of all the constituentcorporations and ratified by theaffirmative vote of stockholdersrepresenting at least two-thirds (2/3)of the outstanding capital stock or oftwo-thirds (2/3) of the members ofeach of the constituent corporations.Such plan, together with anyamendment, shall be considered as theagreement of merger or consolidation.

1.4 What is a plan of merger orconsolidation? (§76)

The board of directors or trustees of eachcorporation, party to the merger orconsolidation, shall approve a plan ofmerger or consolidation setting forth thefollowing: The names of the corporations

proposing to merge or consolidate,hereinafter referred to as theconstituent corporations;

The terms of the merger orconsolidation and the mode of carryingthe same into effect;

A statement of the changes, if any, inthe articles of incorporation of thesurviving corporation in case ofmerger; and, with respect to theconsolidated corporation in case ofconsolidation, all the statementsrequired to be set forth in the articlesof incorporation for corporationsorganized under this Code; and

Such other provisions with respect tothe proposed merger or consolidationas are deemed necessary or desirable.

1.5 What are articles of merger orconsolidation? (§78)

After the approval by the stockholdersor members, articles of merger orarticles of consolidation shall beexecuted by each of the constituentcorporations:1) to be signed by the president or

vice-president and2) certified by the secretary or

assistant secretary of eachcorporation

The articles of merger or consolidationshall set forth:1) The plan of the merger or the plan

of consolidation;2) As to stock corporations, the

number of shares outstanding, or inthe case of non-stock corporations,the number of members; and

3) As to each corporation, the numberof shares or members voting forand against such plan, respectively.

1.6 When is the effectivity of merger orconsolidation? (§79)

Effectivity: Upon issuance by the SECof the certificate of merger andconsolidation

If the Commission is satisfied that themerger or consolidation of thecorporations concerned is notinconsistent with the provisions of thisCode and existing laws, it shall issue acertificate of merger or ofconsolidation, at which time the mergeror consolidation shall be effective.

The articles of merger or ofconsolidation shall be submitted to theSecurities and Exchange Commission inquadruplicate for its approval.

In the case of merger or consolidationof banks or banking institutions,building and loan associations, trustcompanies, insurance companies,public utilities, educational institutionsand other special corporationsgoverned by special laws, the favorablerecommendation of the appropriategovernment agency shall first beobtained.

If, upon investigation, the Securitiesand Exchange Commission has reasonto believe that the proposed merger orconsolidation is contrary to orinconsistent with the provisions of thisCode or existing laws, it shall set ahearing to give the corporationsconcerned the opportunity to be heard.Written notice of the date, time andplace of hearing shall be given to eachconstituent corporation at least two (2)weeks before said hearing. TheCommission shall thereafter proceed asprovided in this Code.

1.7 What are the effects of a merger orconsolidation? (§80)

1) The constituent corporations shallbecome a single corporation which: In case of merger, shall be the

surviving corporation designated inthe plan of merger; and

In case of consolidation, shall bethe consolidated corporationdesignated in the plan ofconsolidation;

2) The separate existence of theconstituent corporations shall cease,except that of the surviving or theconsolidated corporation;

3) The surviving or the consolidatedcorporation shall possess all the rights,privileges, immunities and powers andshall be subject to all the duties and



liabilities of a corporation organizedunder this Code;

4) The surviving or the consolidatedcorporation shall thereupon andthereafter possess: all the rights, privileges, immunities

and franchises of each of theconstituent corporations; and

all property, real or personal, andall receivables due on whateveraccount, including subscriptions toshares and other choses in action,and all and every other interest of,or belonging to, or due to eachconstituent corporation

these shall be deemed transferredto and vested in such surviving orconsolidated corporation withoutfurther act or deed; and

5) The surviving or consolidatedcorporation shall: be responsible and liable for all the

liabilities and obligations of each ofthe constituent corporations in thesame manner as if such survivingor consolidated corporation haditself incurred such liabilities orobligations; and

any pending claim, action orproceeding brought by or againstany of such constituentcorporations may be prosecuted byor against the surviving orconsolidated corporation.

The rights of creditors or liens uponthe property of any of suchconstituent corporations shall notbe impaired by such merger orconsolidation

Babst v. CA (2001)

It is settled that in the merger of two existingcorporations, one of the corporations survives andcontinues the business, while the other is dissolvedand all its rights, properties and liabilities areacquired by the surviving corporation.

ASSOCIATED BANK v. CA (1998)

Ordinarily, in the merger of two or more existingcorporations, one of the combining corporationssurvives and continues the combined business,while the rest are dissolved and all their rights,properties and liabilities are acquired by thesurviving corporation. Although there is dissolutionof the absorbed corporations, there is no windingup of their affairs or liquidation of their assets,because the surviving corporation automaticallyacquires all their rights, privileges and powers, aswell as their liabilities.

1.8 Procedure for Merger or Consolidation(Villanueva)

1) Board of each corporation shall draw upa plan of merger or consolidation,setting forth:

names of corporations involved(constituent corporations)

terms and mode of carrying it out statement of changes, if any, in the

present articles of survivingcorporation; or the articles of thenew corporation to be formed incase of consolidation.

2) Plan for merger or consolidation shallbe approved by majority vote of eachboard of the concerned corporations atseparate meetings.

3) The same shall be submitted forapproval by the stockholders ormembers of each such corporation atseparate corporate meetings duly calledfor the purpose. Notice should begiven to all stockholders or members atleast two (2) weeks prior to date ofmeeting, either personally or byregistered mail.

4) Affirmative vote of 2/3 of theoutstanding capital stock in case ofstock corporations, or 2/3 of themembers of a non-stock corporationshall be required.

5) Dissenting stockholders may exercisethe right of appraisal. But if Boardabandons the plan to merge orconsolidate, such right is extinguished.

6) Any amendment to the plan must beapproved by the same votes of theboard members of trustees andstockholders or members required forthe original plan.

7) After such approval, Articles of Mergeror Articles of Consolidation shall beexecuted by each of the constituentcorporations, signed by president or VPand certified by secretary or assistantsecretary, setting forth: plan of merger or consolidation in stock corporation, the number of

shares outstanding; in non-stock,the number of members

as to each corporation, number ofshares or members voting for andagainst such plan, respectively

8) Four copies of the Articles of Merger orConsolidation shall be submitted to theSEC for approval. Special corporationslike banks, insurance companies,building and loan associations, etc.,need the prior approval of therespective government agencyconcerned.

9) If SEC is satisfied that the merger orconsolidation is legal, it shall issue theCertificate of Merger or the Certificateof Incorporation, as the case may be.

10) If the SEC is not satisfied, it shall set ahearing, giving due notice to all thecorporations concerned. (§76-79)

1.9 Limitation on the right to merge /consolidate

1) Should not create monopolies2) Should not eliminate free and healhty

competition3) Act 3518 Sec 20 inhibits illegal

combinations



1.10 Appraisal right – any dissentingstockholder may exercise his appraisal rightunder the conditions provided in the Code

2. Sale of substantially all assets(§40)

2.1 Restrictions: Subject to the provisions ofexisting laws on illegal combinations andmonopolies

2.2 Scope of power: To sell, lease, exchange,mortgage, pledge or otherwise dispose of all orsubstantially all of its property and assets,including its goodwill, upon such terms andconditions and for such consideration, whichmay be money, stocks, bonds or otherinstruments for the payment of money or otherproperty or consideration, as its board ofdirectors or trustees may deem expedient

Meaning of disposition of substantiallyall of the corporate property andassets- if thereby the corporation wouldbe rendered incapable of continuing thebusiness or accomplishing the purposefor which it was incorporated.

2.3 Approval, voting and noticerequirement:

Majority vote of its board of directors ortrustees,

Authorized by the vote of thestockholders representing at least two-thirds (2/3) of the outstanding capitalstock, or in case of non-stockcorporation, by the vote of at least totwo-thirds (2/3) of the members, in astockholder's or member's meetingduly called for the purpose.

Written notice of the proposed actionand of the time and place of themeeting shall be addressed to eachstockholder or member at his place ofresidence as shown on the books of thecorporation and deposited to theaddressee in the post office withpostage prepaid, or served personallyo When SH approval not necessary -

If disposition is necessary in theusual and regular course ofbusiness of said corporation or ifthe proceeds of the sale or otherdisposition of such property andassets be appropriated for theconduct of its remaining business.

o In non-stock corporations wherethere are no members with votingrights - the vote of at least amajority of the trustees in officewill be sufficient authorization forthe corporation to enter into anytransaction authorized by thissection.

2.4 Appraisal right: any dissentingstockholder may exercise his appraisal rightunder the conditions provided in the Code

2.5 Abandonment of the sale, lease… -After such authorization or approval by thestockholders or members, the board ofdirectors or trustees may, nevertheless, in itsdiscretion, abandon such sale, lease, exchange,

mortgage, pledge or other disposition ofproperty and assets, subject to the rights ofthird parties under any contract relatingthereto, without further action or approval bythe stockholders or members.

2.6 Compared to merger and consolidation

Advantage of merger and consolidationover sale:- furnish a short cut to the

accomplishment of various transactions- may avoid the difficulty, delay and

expense which usually accompanydissolution, winding up and distributionof assets to its SH by a selling corp

- automatic assumption of liabilities ofthe absorbed corp (in sale, there mustbe sufficient funds reserved by theabsorbed corp to pay its liabilities,otherwise the sale may be attacked byCompared the creditors as a fraudulentconveyance)

- transfer or exchange of shares isexempt from registration underSecurities Act (in sale, registration withSEC required)

Advantage of sale of substantially allassets: Where the absorbing corp foreseesproblems in securing stockholders’ approvaland in granting the appraisal right ofdissenters, it may decide that its purchaseof the assets of the absorbed corp would bemore convenient and practical than merger



Chapter XVIIIFOREIGN CORPORATIONS

1. Definition (§123)

Foreign corporation is one formed, organized orexisting under any laws other than those of thePhilippines and whose laws allow Filipinocitizens and corporations to do business in itsown country or state.

2. “Doing business” (Sec. 3(d) RA7042, Foreign Investments Act of1991)

Soliciting orders Service contracts Appointing representatives or distributors

domiciled in the Philippines or who in anycalendar year stay in the country for aperiod or periods totaling 180 days or more

Opening offices, whether called liasonoffices or branches

Establishing a factory, workshop orprocessing plant

Undertaking building construction orerection projects

Opening a store, whether wholesale orretail without prejudice to the provisions ofthe Retail Trade Act

Maintaining or operating a warehouse forbusiness purposes including the storage,display or delivery of its own products

Participating in the management,supervision or control of any domesticbusiness, firm, entity or corporation in thePhilippines

Any other act or acts that imply acontinuity of commercial dealings orarrangements, and contemplate to thatextent, performance normally incident to ,and in progressive prosecution of,commercial gain or of the purpose andobject of the business organization

It shall not include: Mere investment as a shareholder by a

foreign entity in domestic corporationsduly registered to do business and/orthe exercise of such rights as suchinvestor

Having a nominee director or officer torepresent its interests in suchcorporations

Appointing a representative ordistributor domiciled in the Philippineswhich transacts business in its ownname and for its own account

The following acts by themselves shall notbe deemed doing business in the Phil: The publication of a general

advertisement through newspapers,brochures or other publication media orthrough radio or television

Maintaining the stock of goods in thePhil solely for the purpose of having thesame processed by another entity inthe Phil.

Collecting information in the Phil.

Performing services auxiliary to anexisting contract or sale, which are noton a continuing basis

Mentholatum Co., Inc., v. Mangaliman(1941)

No general rule or governing principle can belaid down as to what constitutes “doing” or“engaging” in or ‘transacting” business.Indeed, each case must be judged in the lightof its peculiar environmental circumstances.The true test, however, seems to be whetherthe foreign corporation is continuing the bodyor substance of the business or enterprise forwhich it was organized, or whether it hassubstantially retired from it and turned it overto another. The term implies a continuity ofcommercial dealings and arrangements, andcontemplates to that extent the performanceof acts or works or the exercise of thefunctions normally incident to and in theprogressive prosecution of the purpose andobject of its organization.

Necessity of obtaining a license to do business:

The reason for the license is to subject theforeign corporation doing business in thePhilippines to the jurisdiction of the courts,otherwise a foreign corporation illegally doingbusiness here may successfully though unfairlyplead such neglect or illegal act so as to avoidservice and thereby impugn the jurisdiction ofthe local courts.

B Van Zuiden Bros. Ltd. V. GTVL Manufacturing

GR No. 147905 May 28, 2007Zuiden, a foreign corporation not licensed to dobusiness in the Philippines, filed a complaint forsum of money with the RTC of Paranaque againstGTVL. The latter filed a motion to dismiss on theground that petitioner has no legal capacity to sueand this was granted. The CA sustained the RTCruling that the transactions were not isolated hencenot falling within the exception. It relied on EriksPte. Ltd. V. CA where it held that what is materialare the proponents to the transaction, as well asthe parties to be benefited and obligated by thetransaction.HELD: To be doing or “transacting business in thePhilippines” for purposes of Section 133 of theCorporation Code, the foreign corporation mustactually transact business in the Philippines, that is,perform specific business transactions within thePhilippine territory on a continuing basis in its ownname and for its own account. An essentialcondition to be considered as “doing business” inthe Philippines is the actual performance of specificcommercial acts within the territory of thePhilippines for the plain reason that the Philippineshas no jurisdiction over commercial acts performedin foreign territories. Here, there is no showing thatpetitioner performed within the Philippine territorythe specific acts of doing business mentioned inSection 3(d) of RA 7042. Petitioner did not alsoopen an office here in the Philippines, appoint arepresentative or distributor, or manage, superviseor control a local business. While petitioner and



respondent entered into a series of transactionsimplying a continuity of commercial dealings, theperfection and consummation of these transactionswere done outside the Philippines. The series oftransactions between petitioner and respondenttranspired and were consummated in Hong Kong.The SC found no single activity which petitionerperformed here in the Philippines pursuant to itspurpose and object as a business organization.Moreover, petitioner’s desire to do business withinthe Philippines is not discernible from theallegations of the complaint or from itsattachments.Therefore, there is no basis for ruling that petitioneris doing business in the Philippines. The SCcategorically stated its disagreement with the Courtof Appeals’ ruling that the proponents to thetransaction determine whether a foreigncorporation is doing business in the Philippines,regardless of the place of delivery or place wherethe transaction took place. To accede to suchtheory makes it possible to classify, for instance, aseries of transactions between a Filipino in theUnited States and an American company based inthe United States as “doing business in thePhilippines,” even when these transactions arenegotiated and consummated only within theUnited States

3. Requirements for the issuance of alicense

3.1. Documentary requirements (§125) A foreign corporation applying for a

license to transact business in thePhilippines shall submit to the SEC:o Copy of its articles of incorporation

and by-laws, certified in accordancewith law

o Their translation to an officiallanguage of the Philippines, ifnecessary.

The application shall be under oathand, unless already stated in its articlesof incorporation, shall specifically setforth the following:o The date and term of incorporation;o The address, including the street

number, of the principal office ofthe corporation in the country orstate of incorporation;

o The name and address of itsresident agent authorized to acceptsummons and process in all legalproceedings and, pending theestablishment of a local office, allnotices affecting the corporation;

o The place in the Philippines wherethe corporation intends to operate;

o The specific purpose or purposeswhich the corporation intends topursue in the transaction of itsbusiness in the Philippines:Provided, That said purpose orpurposes are those specificallystated in the certificate of authorityissued by the appropriategovernment agency;

o The names and addresses of thepresent directors and officers of thecorporation;

o A statement of its authorizedcapital stock and the aggregatenumber of shares which thecorporation has authority to issue,itemized by classes, par value ofshares, shares without par value,and series, if any;

o A statement of its outstandingcapital stock and the aggregatenumber of shares which thecorporation has issued, itemized byclasses, par value of shares, shareswithout par value, and series, ifany;

o A statement of the amount actuallypaid in; and

o Such additional information as maybe necessary or appropriate inorder to enable the Securities andExchange Commission to determinewhether such corporation is entitledto a license to transact business inthe Philippines, and to determineand assess the fees payable.

Attached to the application for licenseshall be a duly executed certificateunder oath by the authorized official orofficials of the jurisdiction of itsincorporation, attesting to the fact that:o The laws of the country or state of

the applicant allow Filipino citizensand corporations to do businesstherein

o The applicant is an existingcorporation in good standing.

If such certificate is in a foreignlanguage, a translation thereof inEnglish under oath of the translatorshall be attached thereto.

The application shall likewise beaccompanied by a statement underoath of the president or any otherperson authorized by the corporation,showing to the satisfaction of the SECand other governmental agency in theproper cases that the:o Applicant is solvent and in sound

financial condition, ando Setting forth the assets and

liabilities of the corporation as ofthe date not exceeding one (1)year immediately prior to the filingof the application.

Foreign banking, financial andinsurance corporations shall, in additionto the above requirements, comply withthe provisions of existing lawsapplicable to them.

In the case of all other foreigncorporations, no application for licenseto transact business in the Philippinesshall be accepted by the SEC withoutprevious authority from the appropriategovernment agency, whenever requiredby law.

3.2 Deposit requirements (§126) Upon issuance of the license, such

foreign corporation may commence totransact business in the Philippines andcontinue to do so for as long as it



retains its authority to act as acorporation under the laws of thecountry or state of its incorporation,unless such license is soonersurrendered, revoked, suspended orannulled in accordance with this Codeor other special laws.

Within sixty (60) days after theissuance of the license to transactbusiness in the Philippines, the license,except foreign banking or insurancecorporation, shall deposit with the SECfor the benefit of present and futurecreditors of the licensee in thePhilippines, securities satisfactory tothe SEC, consisting of :o Bonds or other evidence of

indebtedness of the Government ofthe Philippines, its politicalsubdivisions and instrumentalities,or of government-owned orcontrolled corporations and entities,

o Shares of stock in "registeredenterprises" as this term is definedin Republic Act No. 5186,

o Shares of stock in domesticcorporations registered in the stockexchange, or

o Shares of stock in domesticinsurance companies and banks, or

o Any combination of these kinds ofsecurities,

With an actual market value of at leastone hundred thousand (P100,000.)pesos;

Provided, however, That within six (6)months after each fiscal year of thelicensee, the SEC shall require thelicensee to deposit additional securitiesequivalent in actual market value totwo (2%) percent of the amount bywhich the licensee's gross income forthat fiscal year exceeds five million(P5,000,000.00) pesos.

The SEC shall also require deposit ofadditional securities if the actualmarket value of the securities ondeposit has decreased by at least ten(10%) percent of their actual marketvalue at the time they were deposited.

The SEC may at its discretion releasepart of the additional securitiesdeposited with it if the gross income ofthe licensee has decreased, or if theactual market value of the totalsecurities on deposit has increased, bymore than ten (10%) percent of theactual market value of the securities atthe time they were deposited.

The SEC may, from time to time, allowthe licensee to substitute othersecurities for those already on depositas long as the licensee is solvent. Suchlicensee shall be entitled to collect theinterest or dividends on the securitiesdeposited.

In the event the licensee ceases to dobusiness in the Philippines, thesecurities deposited as aforesaid shallbe returned, upon the licensee'sapplication therefor and upon proof tothe satisfaction of the SEC that thelicensee has no liability to Philippine

residents, including the Government ofthe Republic of the Philippines.

3.3 Appointment of resident agent (§128) A resident agent may be either an (§

127):o Individual residing in the Philippines

of good moral character and ofsound financial standing

o Domestic corporation lawfullytransacting business in thePhilippines:

The SEC shall require as a conditionprecedent to the issuance of the licenseto transact business in the Philippinesby any foreign corporation that suchcorporation file with the SEC a writtenpower of attorney:o Designating some person who must

be a resident of the Philippines, onwhom any summons and otherlegal processes may be served inall actions or other legalproceedings against suchcorporation, and

o Consenting that service upon suchresident agent shall be admittedand held as valid as if served uponthe duly authorized officers of theforeign corporation at its homeoffice.

Any such foreign corporation shalllikewise execute and file with the SECan agreement or stipulation, executedby the proper authorities of saidcorporation, in form and substance asfollows:o "The (name of foreign corporation)

does hereby stipulate and agree, inconsideration of its being grantedby the Securities and ExchangeCommission a license to transactbusiness in the Philippines, that ifat any time said corporation shallcease to transact business in thePhilippines, or shall be without anyresident agent in the Philippines onwhom any summons or other legalprocesses may be served, then inany action or proceeding arising outof any business or transactionwhich occurred in the Philippines,service of any summons or otherlegal process may be made uponthe SEC and that such service shallhave the same force and effect as ifmade upon the duly-authorizedofficers of the corporation at itshome office."

Whenever such service of summons orother process shall be made upon theSEC, the Commission shall, within ten(10) days thereafter, transmit by mail acopy of such summons or other legalprocess to the corporation at its homeor principal office.

The sending of such copy by theCommission shall be necessary part ofand shall complete such service. Allexpenses incurred by the Commissionfor such service shall be paid inadvance by the party at whose instancethe service is made.



In case of a change of address of theresident agent, it shall be his or its dutyto immediately notify in writing the SECof the new address.

3.4 Summary: Requisites for the Issuanceof License

The SEC will issue a license to theforeign corporation to do business inthe Philippines, provided the followingconditions are met:o Appointment of a Resident Agent:

Either a Filipino or domesticcorporation; and

Power of Attorney to SEC toreceive process

o Must prove that the foreigncorporation's country grantsreciprocal rights to Filipinos andPhilippine corporation.

o Establish an office in the Philippineso Bring in its assetso Undertaking that Filipino creditors

will be preferred in the event ofinsolvency

o Notice of six (6) months shouldthere be desire to terminateoperations

o Franchise and patents must remainin the Philippine, if this is possible

o Must file a bond of P100,000 whichmay be in the following form: surety bond government securities securities of political

subdivisions shares of stock of registered

enterprises with the SEC shares of stock of any

corporation being sold at thestock exchange

o Provided, that within six (6)months after each fiscal year, theSEC shall require the deposit ofadditional securities equivalent to2% of the amount in excess ofP500,000 of the gross income.[Sec. 125, 126, Corporation Code]

4. What laws are applicable toforeign corporations licensed totransact business in the Philippines?(§129)

Any foreign corporation lawfully doingbusiness in the Philippines shall be boundby all laws, rules and regulations applicableto domestic corporations of the same class,EXCEPT such only as provide for the:o Creation, formation, organization or

dissolution of corporations oro Those which fix the relations, liabilities,

responsibilities, or duties ofstockholders, members, or officers ofcorporations to each other or to thecorporation.

5. What are the consequence ofdoing business in the Philippineswithout a license? (§133)

No foreign corporation transacting businessin the Philippines without a license, or itssuccessors or assigns, shall be permitted tomaintain or intervene in any action, suit orproceeding in any court or administrativeagency of the Philippines;

Such corporation may be sued orproceeded against before Philippine courtsor administrative tribunals on any validcause of action recognized under Philippinelaws.

In addition, Sec. 134 makes it a ground forrevocation of license when a foreigncorporation transacts business in thePhilippines as agent of or acting for and inbehalf of any foreign corporation or entitynot duly licensed to do business in thePhilippines.

Status of Contracts entered into withoutthe requisite licenseo The failure to obtain a license by a

foreign corporation doing business inthe Philippines does not affect thevalidity of contracts entered into bysuch foreign corporation, but merelyremoves its legal standing to sue inlocal tribunals. However, the defectmay be cured by subsequentregistration by the foreign corporationto obtain the necessary license to dobusiness in the Philippines. [HomeInsurance Co. v. Eastern ShippingLines, 123 SCRA 424 (1983)]

o Although the law does not declare asvoid or invalid the contracts enteredinto by a foreign corporation with alocal corporation without the formerfirst securing a license or certificate todo business in the Philippines, theparties in this case cannot obtain reliefon the contracts entered into becausethey are charged with the knowledge ofthe existing law at the time theyentered into such contract and at thetime it is to be operative. [Top-WeldMfg. v. ECED, S.A., 138 SCRA 118(1985)]

o However, in the case of Merrill LynchFutures, Inc. v. CA, 211 SCRA 824(1992), the SC held that although theforeign corporation has engaged inbusiness in the Philippines without alicense, the dismissal of the suit wouldnot be proper on the ground that if thelocal investors knew that the foreigncorporation had no license to dobusiness, then they are estopped fromusing the lack of license to avoid theirobligations.

Legal standing of foreign corporations tosue on their corporate names, tradenames, and trademarkso A foreign corporation although not

doing business in the Philippines has apersonality to sue to oppose theregistration of a trademark when it isshown that its products using suchtrademark are being imported and soldin the Philippines, pursuant to theterms of RA 166. [General Garments v.Director of Patents, 41 SCRA 50(1971)]

o A foreign corporation has a right tomaintain an action in Philippine courts



even if it is not licensed to do businessand is not actually doing business on itsown therein to protect its corporate andtrade names, since it is a property rightin rem, which it may assert to protectagainst all the world, in any of thecourts of the world--even in jurisdictionwhere it does not transact business--just the same as it may protect itstangible property, against trespass orconversion. This is in consonance withthe Convention of the Union of Paris forthe Protection of Industrial Property towhich the Phils. is a party. Article 8thereof provides, "A trade name shallbe protected in all the countries of theUnion without the obligation of filing orregistration, whether or not it formspart of the trademark." The mandate iscontained in RA 166, or the TrademarkLaw. [Converse Rubber Corp. v.Universal Rubber Products, 147 SCRA154 (1987)]

6. Application to existing foreigncorporations (§148)

Every foreign corporation which on the dateof the effectivity of the Code is authorizedto do business in the Philippines under alicense issued to it, shall continue to havesuch authority under the terms andcondition of its license, subject to theprovisions of this Code and other speciallaws.

7. Amendments to articles ofincorporation or by-laws of foreigncorporations (§130)

Within sixty (60) days after theamendment becomes effective, file with theSEC, and in the proper cases with theappropriate government agency, a dulyauthenticated copy of the articles ofincorporation or by-laws, as amended,indicating clearly in capital letters or byunderscoring the change or changes made,duly certified by the authorized official orofficials of the country or state ofincorporation.

The filing thereof shall not of itself enlargeor alter the purpose or purposes for whichsuch corporation is authorized to transactbusiness in the Philippines.

8. Amended license (§131)

A foreign corporation authorized to transactbusiness in the Philippines shall obtain anamended license in the event it :o Changes its corporate name, oro Desires to pursue in the Philippines

other or additional purposes By submitting an application therefor to the

SEC, favorably endorsed by the appropriategovernment agency in the proper cases.

9. Merger or consolidation involvinga foreign corporation licensed in thePhilippines (§132)

One or more foreign corporationsauthorized to transact business in thePhilippines may merge or consolidate withany domestic corporation or corporations if:o Such is permitted under Philippine laws

and by the law of its incorporationo The requirements on merger or

consolidation as provided in this Codeare followed

Whenever a foreign corporation authorizedto transact business in the Philippines shallbe a party to a merger or consolidation inits home country or state as permitted bythe law of its incorporation, such foreigncorporation shall, within sixty (60) daysafter such merger or consolidation becomeseffective, file with the SEC, and ingovernment agency, a copy of the articlesof merger or consolidation dulyauthenticated by the proper official orofficials of the country or state under thelaws of which merger or consolidation waseffected

Provided, however, that if the absorbedcorporation is the foreign corporation doingbusiness in the Philippines, the latter shallat the same time file a petition forwithdrawal of its license.

10. Revocation of license (§134)

Without prejudice to other groundsprovided by special laws, the license of aforeign corporation to transact business inthe Philippines may be revoked orsuspended by the SEC upon any of thefollowing grounds:o Failure to file its annual report or pay

any fees as required by this Code;o Failure to appoint and maintain a

resident agent in the Philippines asrequired by this Title;

o Failure, after change of its residentagent or of his address, to submit tothe Securities and ExchangeCommission a statement of suchchange as required by this Title;

o Failure to submit to the Securities andExchange Commission an authenticatedcopy of any amendment to its articlesof incorporation or by-laws or of anyarticles of merger or consolidationwithin the time prescribed by this Title;

o A misrepresentation of any materialmatter in any application, report,affidavit or other document submittedby such corporation pursuant to thisTitle;

o Failure to pay any and all taxes,imposts, assessments or penalties, ifany, lawfully due to the PhilippineGovernment or any of its agencies orpolitical subdivisions;

o Transacting business in the Philippinesoutside of the purpose or purposes forwhich such corporation is authorizedunder its license;

o Transacting business in the Philippinesas agent of or acting for and in behalfof any foreign corporation or entity notduly licensed to do business in thePhilippines; or



o Any other ground as would render itunfit to transact business in thePhilippines. (n)

11. Issuance of certificate ofrevocation (§135)

Upon the revocation of any such license totransact business in the Philippines, theSecurities and Exchange Commission shallissue a corresponding certificate ofrevocation, furnishing a copy thereof to theappropriate government agency in theproper cases.

The Securities and Exchange Commissionshall also mail to the corporation at itsregistered office in the Philippines a noticeof such revocation accompanied by a copyof the certificate of revocation.

12. Withdrawal by a foreigncorporation (Section 136)

If a foreign corporation duly licensed to dobusiness desires to withdraw, it must file apetition for withdrawal, and must meet thefollowing requirements:o All claims accrued in the Philippines

must be settledo All taxes must be paido Petition must be published once a week

for three (3) consecutive weeks. (§136)

Doing business in the Philippines without a license:

Communications Materials vs. CA, (1996)

In determining whether a corporation doesbusiness in the Philippines or not, aside from theiractivities within the forum, reference may be madeto the contractual agreements entered into by itwith other entities in the country. A scrutiny of thedifferent contracts and agreements entered intowith various business contacts in the countryindicate convincingly a purpose to convey tocustomers and the general public that they aredealing directly with the foreign corporation, andthat foreign corporation is actively engaging inbusiness in the country. These agreements alsocontain provisions which are highly restrictive innature, reducing the local signatory to be a mereextension or instrument of the foreign corporation.Hence, the foreign corporation is deemed to bedoing business in the Philippines without a license.

Nonetheless, petitioner is estopped from raisingthis fact to bar the foreign corporation from suing.One who has dealt with a corporation of foreignorigin as a corporate entity is estopped to deny itscorporate existence and capacity. And the doctrineof estoppel to deny corporate existence applies to aforeign as well as to domestic corporations. Theprinciple will be applied to prevent a personcontracting with a foreign corporation from latertaking advantage of its noncompliance with thestatutes chiefly in cases where such person hasreceived the benefits of the contract.

MR Holdings, Ltd vs. Bajar,( 2002)

The question whether or not a foreigncorporation is doing business is dependentprincipally upon the facts and circumstances ofeach particular case, considered in the light of the

purposes and language of the pertinent statute orstatutes involved and of the general principlesgoverning the jurisdictional authority of the stateover such corporationsCAB, the CA categorized as “doing business”petitioner’s participation under the “AssignmentAgreement” and the “Deed of Assignment.” This issimply untenable. The expression “doing business”should not be given such a strict and literalconstruction as to make it apply to any corporatedealing. At this early stage and with petitioner’sacts or transactions limited to the assignmentcontracts, it cannot be said that it had performedacts intended to continue the business for which itwas organized. It may not be amiss to point outthat the purpose or business for whichpetitioner was organized is not discernible in therecords. No effort was exerted by the CA toestablish the nexus between petitioner’s businessand the acts supposed to constitute “doingbusiness.” Thus, whether the assignment contractswere incidental to petitioner’s business or werecontinuation thereof is beyond determination.

Chapter XIX

SPECIAL CORPORATIONS

1. Close Corporations

1.1 What is a close corporation? (§96)

A close corporation is one whosearticles of incorporation provide that:o All the corporation's issued stock of

all classes, exclusive of treasuryshares, shall be held of record bynot more than a specified numberof persons, not exceeding twenty(20);

o All the issued stock of all classesshall be subject to one or morespecified restrictions on transferpermitted by this Title; and

o The corporation shall not list in anystock exchange or make any publicoffering of any of its stock of anyclass.

A corporation shall not be deemed aclose corporation when at least two-thirds (2/3) of its voting stock or votingrights is owned or controlled by anothercorporation which is not a closecorporation.

1.2 What entities may not be organized asclosed corporations?

Any corporation may be incorporatedas a close corporation, except:o Miningo Oil companieso Stock exchangeso Bankso Insurance companieso Public utilities



o Educational institutionso Corporations declared to be vested

with public interest in accordancewith the provisions of this Code.

1.3 Validity of restrictions on transfer ofshares (§98)

Restrictions on the right to transfershares must appear in the:o Articles of incorporationo By-lawso Certificate of stock

OTHERWISE, the same shall not bebinding on any purchaser in good faith.

Said restrictions shall not be moreonerous than granting the existingstockholders or the corporation theoption to purchase the shares of thetransferring stockholder with suchreasonable terms, conditions or periodstated therein.

If upon the expiration of said period,the existing stockholders or thecorporation fails to exercise the optionto purchase, the transferringstockholder may sell his shares to anythird person.

1.4 Effects of issuance or transfer of stockin breach of qualifying conditions (§99)

A person is conclusively presumed tohave notice of the fact of ineligibility tobe a stockholder:o If stock of a close corporation is

issued or transferred to any personwho is not entitled under anyprovision of the articles ofincorporation to be a holder ofrecord of its stock, and

o If the certificate for such stockconspicuously shows thequalifications of the personsentitled to be holders of recordthereof

A person to whom stock is issued ortransferred is conclusively presumed tohave notice of these facts:o If the articles of incorporation of a

close corporation states the numberof persons, not exceeding twenty(20), who are entitled to be holdersof record of its stock, and

o If the certificate for such stockconspicuously states such number,and

o If the issuance or transfer of stockto any person would cause thestock to be held by more than suchnumber of persons.

If a stock certificate of any closecorporation conspicuously shows arestriction on transfer of stock of thecorporation, the transferee of the stockis conclusively presumed to have noticeof the fact that he has acquired stock inviolation of the restriction, if suchacquisition violates the restriction.

Whenever any person to whom stock ofa close corporation has been issued ortransferred has, or is conclusively

presumed under this section to have,notice eithero That he is a person not eligible to

be a holder of stock of thecorporation, or

o That transfer of stock to him wouldcause the stock of the corporationto be held by more than thenumber of persons permitted by itsarticles of incorporation to holdstock of the corporation, or

o That the transfer of stock is inviolation of a restriction on transferof stock, the corporation may, at itsoption, refuse to register thetransfer of stock in the name of thetransferee.

The provisions of subsection (4) shallnot be applicable if the transfer ofstock, though contrary to subsections(1), (2) or (3), has been consented toby all the stockholders of the closecorporation, or if the close corporationhas amended its articles ofincorporation in accordance with thisTitle.

The term "transfer", as used in thissection, is not limited to a transfer forvalue.

The provisions of this section shall notimpair any right which the transfereemay have to rescind the transfer or torecover under any applicable warranty,express or implied.

1.5 Agreements by stockholders (Section100)

1. Agreements by and amongstockholders: Executed before the formation and

organization of a close corporation, Signed by all stockholders Shall survive the incorporation of

such corporation and shall continueto be valid and binding betweenand among such stockholders, ifsuch be their intent,

To the extent that such agreementsare not inconsistent with thearticles of incorporation,irrespective of where the provisionsof such agreements are contained,except those required by this Titleto be embodied in said articles ofincorporation.

2. An agreement between two or morestockholders, if in writing and signed bythe parties thereto, may provide that inexercising any voting rights, the sharesheld by them shall be voted as thereinprovided, or as they may agree, or asdetermined in accordance with aprocedure agreed upon by them.

3. No provision in any written agreementsigned by the stockholders, relating toany phase of the corporate affairs, shallbe invalidated as between the partieson the ground that its effect is to makethem partners among themselves.

4. A written agreement among some or allof the stockholders in a closecorporation shall not be invalidated onthe ground that it so relates to the



conduct of the business and affairs ofthe corporation as to restrict orinterfere with the discretion or powersof the board of directors: Provided, That such agreement

shall impose on the stockholderswho are parties thereto theliabilities for managerial actsimposed by this Code on directors.

5. To the extent that the stockholders areactively engaged in the management oroperation of the business and affairs ofa close corporation, the stockholdersshall be held to strict fiduciary duties toeach other and among themselves.Said stockholders shall be personallyliable for corporate torts unless thecorporation has obtained reasonablyadequate liability insurance.

1.6 Amendment of articles ofincorporation (§103)

Any amendment to the articles ofincorporation which seeks to delete orremove any provision required by this Titleto be contained in the articles ofincorporation or to reduce a quorum orvoting requirement stated in said articles ofincorporation shall not be valid or effectiveunless approved by the affirmative vote ofat least two-thirds (2/3) of the outstandingcapital stock, whether with or withoutvoting rights, or of such greater proportionof shares as may be specifically provided inthe articles of incorporation for amending,deleting or removing any of the aforesaidprovisions, at a meeting duly called for thepurpose.

1.7 Deadlocks

1. Deadlocks, Defined:

Notwithstanding any contraryprovisions in the articles ofincorporation or by-laws oragreement of stockholders of aclose corporation

The directors or stockholders are sodivided respecting the managementof the corporation's business andaffairs

The votes required for anycorporate action cannot be obtained

The consequence is that thebusiness and affairs of thecorporation can no longer beconducted to the advantage of thestockholders generally

2. Resolution of deadlocks The SEC, upon written petition by

any stockholder, shall have thepower to arbitrate the dispute.

In the exercise of such power, theCommission shall have authority tomake such order as it deemsappropriate, including an order:o Cancelling or altering any

provision contained in thearticles of incorporation, by-

laws, or any stockholder'sagreement;

o Cancelling, altering or enjoiningany resolution or act of thecorporation or its board ofdirectors, stockholders, orofficers;

o Directing or prohibiting any actof the corporation or its boardof directors, stockholders,officers, or other persons partto the action;

o Requiring the purchase at theirfair value of shares of anystockholder, either by thecorporation regardless of theavailability of unrestrictedretained earnings in its books,or by the other stockholders;

o Appointing a provisionaldirector;

o Dissolving the corporation; oro Granting such other relief as

the circumstances maywarrant.

3. Provisional Director An impartial person who is neither

a stockholder nor a creditor of thecorporation or of any subsidiary oraffiliate of the corporation, andwhose further qualifications, if any,may be determined by theCommission.

A provisional director is not areceiver of the corporation anddoes not have the title and powersof a custodian or receiver.

A provisional director shall have allthe rights and powers of a dulyelected director of the corporation,including the right to notice of andto vote at meetings of directors,until such time as he shall beremoved by order of theCommission or by all thestockholders.

His compensation shall bedetermined by agreement betweenhim and the corporation subject toapproval of the Commission, whichmay fix his compensation in theabsence of agreement or in theevent of disagreement between theprovisional director and thecorporation.



San Juan Structural and Steel Fabricatiors vs.CA (1998)

Motorich entered into agreement with San Juan forthe transfer of a parcel of Land to latter. San Juanalready paid downpayment. When San Juan wasready to pay the balance, Motorich refused to sell.Motorich contend that Nenita Gruenberg’s,treasurer of Motorich, signature is not sufficient tobind Motorich, and that the signature of ReynaldoGruenberg, president of Motorich is required.Nenita Gruenberg is the spouse of ReynaldoGruenberg and both owns 99.866% of the sharesof stock of the corporation.HELD: Motorich is not a close corporation. Themere ownership by a single stockholder or byanother corporation of all or nearly all of the capitalstock of a corporation is not of itself sufficientground for disregarding their separatepersonalities. A narrow distribution of ownershipdoes not of itself make a close corporation. Thereare exceptional cases where an action by a directorwho is singly is the controlling stockholder may beconsidered as a binding corporate act and a boardaction is a mere formality. However, Nenita is notthe sole controlling stockholder.

CLOSE CORPORATIONS REGULAR CORPORATIONS

1. Management / Board Authority

There can be classification of directors into oneor more classes, each of whom may be votedfor and elected solely by a particular class ofstock; and

The articles of incorporation of a closecorporation may provide that the business ofthe corporation shall be managed by thestockholders of the corporation rather than by aboard of directors. So long as this provisioncontinues in effect:

1. No meeting of stockholders need be calledto elect directors

2. Unless the context clearly requiresotherwise, the stockholders of thecorporation shall be deemed to be directorsfor the purpose of applying the provisionsof this Code

3. The stockholders of the corporation shall besubject to all liabilities of directors.

The articles of incorporation may likewiseprovide that all officers or employees or thatspecified officers or employees shall be electedor appointed by the stockholders, instead of bythe board of directors.

There are no classification of board of directors

Corporate Powers devolved upon board ofdirectors whose powers are executed by officers.Cannot provide that it be managed bystockholders

Board of directors must be elected in astockholders meeting

Stockholders of a corporation are separate anddistinct from directors

Officers must be elected by the Board ofDirectors

2. Meetings

Unless the by-laws provide otherwise, anyaction by the directors of a close corporationwithout a meeting shall nevertheless bedeemed valid if:

1. Before or after such action is taken, writtenconsent thereto is signed by all thedirectors; or

The directors or trustees shall not actindividually nor separately but as a body in alawful meeting. They will act only afterdiscussion and deliberation of matters beforethem. Contracts entered into without a formalboard resolution does not bind the corporationexcept when ratified or when majority of theboard has knowledge of the contract and thecontract benefited the corporation.

Absence of a prompt objection in writing does




2. All the stockholders have actual or impliedknowledge of the action and make noprompt objection thereto in writing; or

3. The directors are accustomed to takeinformal action with the express or impliedacquiescence of all the stockholders; or

4. All the directors have express or impliedknowledge of the action in question andnone of them makes prompt objectionthereto in writing.

If a director's meeting is held without propercall or notice, an action taken therein within thecorporate powers is deemed ratified by adirector who failed to attend, unless hepromptly files his written objection with thesecretary of the corporation after havingknowledge thereof.

not ratify acts done by directors without a validmeeting. There must be express or impliedratification.

Express ratification may consist of a BoardResolution to that effect

Implied ratification may consist of acceptance ofbenefits from said unauthorized act while havingknowledge of said act

Failure to give notice would render a meetingvoidable.

Attendance to a meeting despite want of noticewill be deemed implied waiver

All proceedings had and any business transactedat any meeting of the stockholders or members,if within the powers or authority of thecorporation, shall be valid even if the meeting beimproperly held or called, provided all thestockholders or members of the corporation arepresent or duly represented at the meeting.(§51)

3. Voting / Quorum

The AOI may provide for a classification ofdirectors into one or more classes, each ofwhich may be voted for and elected solely by aparticular class of stock.

The AOI may provide for a greater quorum orvoting requirements in meetings ofstockholders or directors than those provided inthis Code.

No share may be deprived of voting rights,except Preferred or Redeemable shares, unlessotherwise provided by the Code

There shall always be a class/series of shareswhich have a COMPLETE VOTING RIGHTS

EACH SHARE SHALL BE EQUAL IN ALL RESPECTSTO EVERY OTHER SHARE, except as otherwiseprovided in the AOI

For Board of directors, the by-laws or AOI canprovide for a greater majority in quorum

For stockholders, the AOI can provide for adifferent percentage in quorum

4. Pre-emptive Right

The pre-emptive right of stockholders in closecorporations shall extend to all stock to beissued, including reissuance of treasury shares,whether for money, property or personalservices, or in payment of corporate debts,unless the articles of incorporation provideotherwise.

Limitations on the exercise of pre-emptive right:

a. Such pre-emptive right shall not extend toshares to be issued in compliance with lawsrequiring stock offerings or minimum stockownership by the public;

b. Not extend to shares to be issued in good faithwith the approval of the stockholdersrepresenting two-thirds (2/3) of the outstandingcapital stock, in exchange for property neededfor corporate purposes or in payment of apreviously contracted debt

c. Shall not take effect if denied in the Articles ofIncorporation or an amendment thereto.

5. Transferability

Restrictions on the right to transfer sharesmust appear in the AI and in the by-laws aswell as in the certificate of stock otherwise thesame shall not be binding on any purchaserthereof in good faith

Restrictions on the right to transfer not allowed

6. Withdrawal Right




Any stockholder of a close corporation may, forany reason, compel the said corporation topurchase his shares at their fair value, whichshall not be less than their par or issued value,when the corporation has sufficient assets in itsbooks to cover its debts and liabilities exclusiveof capital stock

Any stockholder of a close corporation may, bywritten petition to the SEC, compel thedissolution of such corporation whenever:Any of acts of the directors, officers or those in

control of the corporation is illegal, orfraudulent, or dishonest, or oppressive orunfairly prejudicial to the corporation orany stockholder, or

Corporate assets are being misapplied orwasted.

Stockholders may require the corporation tobuy-back their shares at fair value when theCorporation has unrestricted Retained Earnings:a. In case any amendment to the articles of

incorporation which has the effect of: changing or restricting the rights of

any stockholder or class of shares, or authorizing preferences in any respect

superior to those of outstanding sharesof any class, or

extending or shortening the term ofcorporate existence

b. In case of sale, lease, exchange, transfer,mortgage, pledge or other disposition of allor substantially all of the corporate propertyand assets as provided in the Code; and

c. In case of merger or consolidationd. Extension or shortening of the term of the

corporation (§37)e. Diversion of funds of corporation from

primary purpose to secondary purpose(§41)

The corporation may buy-back shares ofstockholders subject to the following limitations(Treasury shares):a. There must be unrestricted retained

earningsb. Must be for a legitimate purpose

2. Educational Corporations

2.1 Incorporation

a. Governing Laws: Special Laws and theCorporation Code (§106)

b. Pre-requisites to Incorporation: Except uponfavorable recommendation of the (Ministry ofEducation and Culture), the SEC shall not acceptor approve the articles of incorporation and by-laws of any educational institution (§107)

2.2 Board of Trustees (§108)

a. Non-stock

1. Composition—not less than 5 nor more than15 trustees, but always in multiples of five.Unless otherwise provided in the articles ofincorporation or the by-laws, the board ortrustees of incorporated schools, colleges, orother institutions of learning shall:

a. So classify themselves that the termof office of one-fifth (1/5) of theirnumbers shall expire every year.b. Trustees thereafter elected to fillvacancies, occurring before theexpiration of a particular term shall holdoffice only for the unexpired periodc. Trustees elected thereafter to fill

vacancies caused by expiration of term shallhold office for five (5) years

2. Quorum—Majority of the trusteesPowers and Authority of trustees shall be defined

in the by-laws

b. Stock—The number and erm of directors shallbe governed by the provisions on stockcorporations.

3. Religious Corporations

3.1 Classes of Religious Corporations (§ 109)

a. Corporation Sole

b. Religious Corporations—governed by theCorporation Code and the general provisions onnon-stock corporations insofar as thye may beapplicable.

3.2 Corporation Sole (§ 110)

a. Who may form—The chief archbishop, bishop,priest, minister, rabbi or other presiding elder ofsuch religious denomination, sect or church.(§110)

b. Filling of Vacancies (§114)

1. The successors in office concerned shallbecome the corporation sole on theiraccession to office and shall be permittedto transact business as such on the filingwith the Securities and ExchangeCommission of a copy of theircommission, certificate of election, orletters of appointment, duly certified byany notary public.

2. During any vacancy in the office, theperson or persons authorized andempowered by the rules, regulations or



discipline of the religious denomination,sect or church represented by thecorporation sole to administer thetemporalities and manage the affairs,estate and properties of the corporationsole during the vacancy shall exercise allthe powers and authority of thecorporation sole during such vacancy.

c. Purpose-- For the purpose of administeringand managing, as trustee, the affairs, propertyand temporalities of any religious denomination,sect or church. (§110)

d. The Articles of Incorporation must set forththat (§111):

1. The presiding elder of such religiousdenomination, sect or church is the chiefarchbishop, bishop, priest, minister,rabbi or presiding elder of his religiousdenomination, sect or church and thathe desires to become a corporation sole;

2. The rules, regulations and discipline ofhis religious denomination, sect orchurch are not inconsistent with hisbecoming a corporation sole and do notforbid it;

3. As such chief archbishop, bishop,priest, minister, rabbi or presiding elder,he is charged with the administration ofthe temporalities and the managementof the affairs, estate and properties ofhis religious denomination, sect orchurch within his territorial jurisdiction,describing such territorial jurisdiction;

4. The manner in which any vacancyoccurring in the office of chiefarchbishop, bishop, priest, minister,rabbi of presiding elder is required to befilled, according to the rules, regulationsor discipline of the religiousdenomination, sect or church to whichhe belongs; and

5. The place where the principal office ofthe corporation sole is to be establishedand located, which place must be withinthe Philippines.

The articles of incorporation may include anyother provision not contrary to law for theregulation of the affairs of the corporation.

e. Filing/submission of the Articles ofIncorporation (§112):

1. Verification before filing, by affidavitor affirmation of the chief archbishop,bishop, priest, minister, rabbi orpresiding elder, as the case may be,

2. Accompanied by a copy of thecommission, certificate of election orletter of appointment of such chiefarchbishop, bishop, priest, minister,rabbi or presiding elder, duly certified tobe correct by any notary public.

f. Effect of the Filing of the Articles (§112):

1. Such chief archbishop, bishop, priest,minister, rabbi or presiding elder shallbecome a corporation sole.

2. All temporalities, estate andproperties of the religiousdenomination, sect or churchtheretofore administered or managedby him as such chief archbishop,bishop, priest, minister, rabbi orpresiding elder shall be held in trustby him as a corporation sole, for theuse, purpose, behalf and sole benefitof his religious denomination, sect orchurch, including hospitals, schools,colleges, orphan asylums, parsonagesand cemeteries thereof.

g. Acquisition and Alienation of Property (§113):1. Purpose for holding and purchasing thereal and personal property, or receivinggifts and bequests—For its church,charitable, benevolent or educationalpurposes.

2. Conditions for sale or mortgage of realproperty held by it:

i. By obtaining an order for thatpurpose from the Court of FirstInstance of the province wherethe property is situated uponproof made to the satisfaction ofthe court that:

*notice of the applicationfor leave to sell ormortgage has been givenby publication orotherwise in such mannerand for such time as saidcourt may have directed,and *that it is to theinterest of the corporationthat leave to sell ormortgage should begranted.

ii. The application for leave to sellor mortgage must be made bypetition, duly verified, by the chiefarchbishop, bishop, priest,minister, rabbi or presiding elderacting as corporation sole, andmay be opposed by any memberof the religious denomination, sector church represented by thecorporation sole:

3. When the Intervention of the Courtsshall not be necessary—In cases wherethe rules, regulations and discipline of thereligious denomination, sect or church,religious society or order concernedrepresented by such corporation soleregulate the method of acquiring, holding,selling and mortgaging real estate andpersonal property, such rules, regulationsand discipline shall control.

h. Dissolution (§115):

1. A corporation sole may be dissolvedand its affairs settled voluntarily bysubmitting to the Securities and ExchangeCommission a verified declaration ofdissolution.



2. The declaration of dissolution shallset forth:

a. The name of the corporation;

b. The reason for dissolution andwinding up;

c. The authorization for thedissolution of the corporation bythe particular religiousdenomination, sect or church;

d. The names and addresses ofthe persons who are to supervisethe winding up of the affairs ofthe corporation.

3. Effect of approval of declaration ofdissolution by the Securities andExchange Commission—the corporationshall cease to carry on its operationsexcept for the purpose of winding up itsaffairs.

3.3 Religious Societies (§ 116)

a. Who may form a Religious Society:

Any religious society or religious order, or anydiocese, synod, or district organization of anyreligious denomination, sect or church, unlessforbidden by the constitution, rules, regulations,or discipline of the religious denomination, sector church of which it is a part, or by competentauthority.

b. Internal Requirement

Upon written consent and/or by an affirmativevote at a meeting called for the purpose of atleast two-thirds (2/3) of its membership,

c. SEC Requirement

1. Filing with the Securities andExchange Commission, articles ofincorporation verified by the affidavit ofthe presiding elder, secretary, or clerk orother member of such religious societyor religious order, or diocese, synod, ordistrict organization of the religiousdenomination, sect or church.

2. The Articles must set forth the ff:

a. That the religious society or religiousorder, or diocese, synod, or districtorganization is a religious organization ofa religious denomination, sect or church;

b. That at least two-thirds (2/3) of itsmembership have given their writtenconsent or have voted to incorporate, ata duly convened meeting of the body;

c. That the incorporation of the religioussociety or religious order, or diocese,synod, or district organization desiring to

incorporate is not forbidden by competentauthority or by the constitution, rules,regulations or discipline of the religiousdenomination, sect, or church of which itforms a part;

d. That the religious society or religiousorder, or diocese, synod, or districtorganization desires to incorporate for theadministration of its affairs, properties andestate;

e. The place where the principaloffice of the corporation is to beestablished and located, which place mustbe within the Philippines; and

f. The names, nationalities, andresidences of the trustees elected by thereligious society or religious order, or thediocese, synod, or district organization toserve for the first year or such otherperiod as may be prescribed by the lawsof the religious society or religious order,or of the diocese, synod, or districtorganization, the board of trustees to benot less than five (5) nor more thanfifteen (15).

d. Purpose of incorporation

For the administration of its temporalities or forthe management of its affairs, properties andestate.



b.

THE SECURITIESREGULATION CODE

(RA 8799)

Chapter IOVERVIEW:

THE FINANCIAL MARKETS

1. Capital Markets

The places to go if you want to raise newmoney

1.1 Equity Capital – for the investor, thestock market provides a variable return

a. Stock Market –Security – eg, shares of stock

1.2 Debt Capital – for the lender, themoney or bond market provides a fixedreturn

b. Money Market – for short termdebts, ie, those normally maturingwithin 1 year from date of issuance–

Security – commercial paper (anunsecured IOU of a company,issued on a discount basis,promising to pay the holder thefull face value thereof uponredemption)

c. Bond Market – for long term debts,ie, those normally maturing after ayear from date of issuance

Security – junk bonds (high yieldbonds having high interest ratesand are issued by lower creditrated companies or companieswith no credit rating)

2. Non-Capital Markets

The places to go if you want to hedge ormitigate the risks attached to holding capitalassets

2.1 Commodity Market – The instrumentstraded in this market are not present assetslike shares of stock, commercial papers orbonds but future contracts calling fordelivery of an asset ; for this reason, acommodity market is usually referred to as afutures market. (eg, agricultural products,metals and financial instruments)

Security – a futures contract (onewhich entitles the holder to buy orsell a specific amount of theunderlying commodity representedby the contract in a prearranged,

deliverable grade at a specific date inthe future at a specified price.

2.2 Foreign Exchange Market – Thismarket is an over-the-counter marketconducted by international banks and doesnot have a central location

Security – a forward exchangecontract

2.3 Options Market – It enables an investorto purchase an option giving him the right tobuy or sell a specific number of shares at afuture date, at a specific price. For this right,the investor either pays or receives money but(just like in a commodity market) the moneyinvolved is only a fraction of the market valueof the shares concerned.

Security – call or put options

Chapter IIOVERVIEW OF THE LAW

1. State Policy (Sec.2)

The State shall establish a socially conscious,free market that regulates itself, encouragesthe widest participation of ownership inenterprises, enhances the democratization ofwealth, promotes the development of thecapital market, protect investors, ensures fulland fair disclosure about securities, minimizesif not totally eliminates insider trading andother fraudulent or manipulative devices andpractices which create distortions in the freemarket.

PSE vs. Court of Appeals (1997)

The Securities Act is designed not only toprovide investors with adequate informationupon which to base their decision to buy andsell securities, but also to protect legitimatebusiness seeking o obtain capital throughhonest representation against competitionfrom crooked promoters and prevent fraud insale of securities.

The intended effects of the Securities Act arechiefly the following:

a. Prevention of excesses and fraudulenttransactions, merely by requirementthat their details be revealed;

b. Placing the market during the earlystages of the offering of security abody of information, which operatingindirectly through investment servicesand expert investors, will intend toproduce a more accurate appraisal ofa security.

The Code is self-executory, and failure of SEC toissue rules and regulations shall not in anymanner affect its self-executroy nature (Sec.72.1)

2. Powers and Functions of the SEC(Sec. 5)



1. Have jurisdiction and supervision over allcorporations, partnerships orassociations who are the grantees ofprimary franchises and/or a license orpermit issued by the Government;

2. Formulate policies andrecommendations on issues concerningthe securities market, advise Congressand other government agencies on allaspects of the securities market

3. Approve, reject, suspend, revoke orrequire amendments to registrationstatements, and registration andlicensing applications;

4. Regulate, investigate or supervise theactivities of persons to ensurecompliance;

5. Supervise, monitor, suspend or takeover the activities of exchanges, clearingagencies and other SROs;

6. Impose sanctions for the violation oflaws, rules, regulations and ordersissued pursuant thereto;

7. Prepare, approve, amend or repealrules, regulations and orders, and issueopinions and provide guidance on andsupervise compliance with such rules,regulations and orders;

8. Enlist the aid and support of and/ordeputize any and all enforcementagencies of the Government civil ormilitary as well as any privateinstitution, corporation, firm, associationor person;

9. Issue cease and desist orders to preventfraud or injury to the investing public;

10. Punish for contempt of the Commission,both direct and indirect;

11. Compel the officers of any registeredcorporation or association to callmeetings of stockholders or members;

12. Issue subpoena duces tecum andsummon witnesses to appear, order theexamination, search and seizure of alldocuments, papers, files and records,tax returns, and books of accounts ofany entity or person under investigation,subject to the provisions of existinglaws;

13. Suspend, or revoke after proper noticeand hearing, the franchise or certificateof registration of corporations,partnerships or associations, upon anyof the grounds provided by law;

14. Such other powers as may be providedby law as well as those which may beimplied from, or which are necessary orincidental to powers which are expresslygranted to the Commission.

The Commission’s jurisdiction over all casesenumerated under Sec 5 of PD 902-A ishereby transferred to the Courts of generaljurisdiction or the appropriate Regional TrialCourt.

The Commission shall retain jurisdiction overpending cases involving intra-corporatedisputes submitted for final resolution whichshould be resolved within 1 year from theenactment of this Code.

The Commission shall retain jurisdiction overpending suspension of

payments/rehabilitation cases filed as of 30June 2000 until finally disposed.

3. Definition of Terms

3.1 Securities - are shares, participation orinterests in a corporation or in a commercialenterprise or profit-making venture andevidenced by a certificate, contract,instrument, whether written or electronic incharacter. It includes:

(a) Shares of stock, bonds, debentures,notes, evidences of indebtedness,asset-backed securities;

(b) Investment contracts, certificates ofinterest or participation in a profitsharing agreement, certificates ofdeposit for a future subscription;

(c) Fractional undivided interests in oil,gas or other mineral rights;

(d) Derivatives like option and warrants;(e) Certificates of assignments,

certificates of participation, trustcertificates, voting trust certificates orsimilar instruments;

(f) Proprietary or non proprietarymembership certificatesincorporations; and

(g) Other instruments as may in thefuture be determined by theCommission.

3.2 Issuer - the originator, maker, obligor, orcreator of the security.

3.3 Broker - a person engaged in thebusiness of buying and selling securities forthe account of others.

3.4 Dealer - any person who buys and sellssecurities for his/her own account in theordinary course of business.

3.5 Associated person of a broker ordealer - an employee thereof who, directlyexercises control of supervisory authority, butdoes not include a salesman, or an agent or aperson whose functions are solely clerical orministerial.

3.6 Clearing Agency - any person who actsas intermediary in making deliveries uponpayment to effect settlement in securitiestransactions.

3.7 Exchange - an organized marketplace orfacility that brings together buyers and sellersand executes trades of securities and/orcommodities.

3.8 Insider –(a) the issuer;(b) a director or officer (or person

performing similar functions) of, or aperson controlling the issuer;

(c) a person whose relationship or formerrelationship to the issuer gives orgave him access to materialinformation about the issuer or thesecurity that is not generally availableto the public;

(d) a government employee, or director,or officer of an exchange, clearing



agency and/or self-regulatoryorganization who has access tomaterial information about an issueror a security that is not generallyavailable to the public; or

(e) a person who learns suchinformation by a communicationfrom any of the foregoing insiders.

3.9 Pre-need plans – are contracts whichprovide for the performance of futureservices or the payment of future monetaryconsideration at the time of actual need, forwhich planholders pay in cash or installmentat stated prices, with or without interest orinsurance coverage and includes life,pension, education, interment, and otherplans which the Commission may from timeto time approve.

3.10 Promoter - a person who, actingalone or with others, takes initiative infounding and organizing the business orenterprise of the issuer and receivesconsideration therefor.

3.11 Registration statement - is theapplication for the registration of securitiesrequired to be filed with the Commission.

3.12 Salesman - a natural person, employed assuch or as an agent, by a dealer, issuer orbroker to buy and sell securities.

3.13 Uncertified Security – a securityevidenced by electronic or similar records.

3.14 Underwriter - a person who guaranteeson a firm commitment and/or declared besteffort basis the distribution and sale of securitiesof any kind by another company.

4. Registration of Securities

Securities shall not be sold or offered forsale or distribution within the Philippines,without a registration statement duly filedwith and approved by the Commission. (Sec.8)


Under the policy of ”full material disclosure,”all companies, listed or applying for listing,are required to divulge truthfully andaccurately, all material information aboutthemselves, and the securities they sell, forthe protection of the investing public, andunder the pain of administrative, criminal andcivil sanctions. A fact is deemed material if ittends to induce or otherwise effect the sale orpurchase or its securities.

A reading of the grounds give for rejection orregistration reveals the intention of Congressto make the registration and issuance ofsecurities dependent, to a certain extent, onhe merits of the securities themselves, and ofthe issuer, to be determined by the SEC.Consequently, the absolute reliance on the fulldisclosure method is the registration ofsecurities is, therefore, untenable.

Procedure (Sec.12)

4.1 Filing of Registration Statement

All securities shall be registered throughthe filing by the issuer in the main officeof the Commission, of a sworn registrationstatement. The registration statementshall include any prospectus required orpermitted to be delivered.

The information required for registrationshall include, among others the effect ofthe securities issue on ownership, on themix of ownership, especially foreign andlocal ownership.

The registration statement shall be signedby

the issuer’s executive officer principal operating officer principal financial officer comptroller principal accounting officer corporate secretary or persons performing similar

functions

Accompanied By a duly verified resolutionof the board of directors of the issuercoporation.

The written consent of the expert namedas having certified any part of theregistration statement or any documentused in connection therewith shall also befiled.

Where the registration statement includesshares to be sold by selling shareholders,a written certification by such sellingshareholders as to the accuracy of anypart of the registration statementcontributed to by such sellingshareholders shall also be filed.

4.2 Payment of Fee

The issuer shall pay to the Commission afee of not more than 1/10 of 1% of themaximum aggregate price at which suchsecurities are proposed to be offered. TheCommission shall prescribe by rulediminishing fees in inverse proportion tothe value of the aggregate price of theoffering.

4.3 Notice of Filing

Notice of filing shall be immediatelypublished by the issuer in 2 newspapers ofgeneral circulation in the Philippines, oncea week for 2 consecutive weeks, or insuch other manner as the Commissionshall prescribe, reciting that:

a registration statement for the sale ofsuch security has been filed,

the registration statement, as well asthe papers attached thereto are opento inspection,

copies shall be furnished to interestedparties at such reasonable charge asthe Commission may prescribe.



4.4 Withdrawal of Registration Statement

A registration statement may bewithdrawn by the issuer only with theconsent of the Commission. (Sec. 13)

4.5 Amendments to Registration Statement(Sec. 13)

If a registration statement is on its faceincomplete or inaccurate in any materialrespect, the Commission shall issue anorder directing the amendment of theregistration statement. Upon compliancewith such order, the amendedregistration statement shall becomeeffective upon compliance with theprocedure in Section 12.6.

An amendment filed prior to theeffective date of the registrationstatement shall recommence the 45 dayperiod within which the Commissionshall act on a registration statement.

An amendment filed after the effectivedate of the registration statement shallbecome effective only upon such date asdetermined by the Commission.

If any change occurs in the facts setforth in a registration statement, theissuer shall file an amendment theretosetting forth the change.

4.6 Acceptance or Rejection by SEC

Within 45 days after the date of filing ofthe registration statement, or by suchlater date to which the issuer hasconsented, the Commission shall declarethe registration statement effective orrejected, unless the applicant is allowedto amend the registration statement.

a) Acceptance

The Commission shall declare theregistration statement to be effectiveif it finds that the registrationstatement together with all the otherpapers and documents attachedthereto, is on its face complete andthat the requirements have beencomplied with.

b) Rejection / Revocation (Sec. 13)

The Commission may reject aregistration statement and refuseregistration of the security, orrevoke the effectivity of aregistration statement and theregistration of the securitythereunder after due notice andhearing if it finds that:

The issuer:o Has been judicially declared

insolvent;o Has violated any of the

provisions of this Code, the rulespromulgated pursuant thereto,or any order of the Commissionin connection with the offering

for which a registration statementhas been filed;

o Has been or is engaged or is aboutto engage in fraudulenttransactions;

o Has made any false or misleadingrepresentation of material facts inany prospectus concerning theissuer or its securities;

o Has failed to comply with anyrequirement that the Commissionmay impose as a condition forregistration

The registration statement is on itsface incomplete or inaccurate in anymaterial respect or includes any untruestatement of a material fact or omits tostate a material fact required to bestated therein or necessary to makethe statements therein not misleading;or

The issuer, any officer, director orcontrolling person of the issuer, orperson performing similar functions, orany underwriter has been convicted, bya competent judicial or administrativebody, upon plea of guilty, or otherwise,of an offense involving moral turpitudeand/or fraud or is enjoined orrestrained by the Commission or othercompetent judicial or administrativebody for violations of securities,commodities, and other related laws.

If any issuer shall refuse to permit anexamination to be made by theCommission, its refusal shall be groundfor the refusal or revocation of theregistration of its securities.


The SEC has no power o overturn the decisionof the PSE Board to deny listing of securities.Questions of policy and management are leftto the honest decision of officers an directorsof a corporation, and courts are withoutauthority o substitute their judgment forjudgment of the Board of Directors. The Boadis the business manger of the corporation, andas long as it acts in good faith, its orders arenot reviewable by he courts. Also, as theprimary market for securities, the PSE hasestablished its name and goodwill, and it hasthe right to protect such goodwill bymaintaining a reasonable standard ofpropriety in the entities who choose totransact through its facilities. It wasreasonable for PSE, therefore, to exercise itsjudgment in the manner it deems appropriatefor its business identity, as long as no rightsare trampled upon and public welfare issafeguarded.

4.7 Oath of Issuer

Upon effectivity of the registrationstatement, the issuer shall state underoath in every prospectus that allregistration requirements have been metand that all information are true andcorrect as represented by the issuer or theone making the statement.



Any untrue statement of fact or omissionto state a material fact required to bestated or necessary to make thestatement therein not misleading shallconstitute fraud.

5. Suspension of Offer and Sale(Sec. 13)

If the Commission deems it necessary, itmay issue an order suspending the offerand sale of the securities pending anyinvestigation. The order shall state thegrounds for taking such actions, butsuch order of suspension althoughbinding upon persons notified thereof,shall be deemed confidential, and shallnot be published.

If, at any time, the Commission findsthat a registration statement containsany false statement or omits to stateany fact required to be stated therein ornecessary to make the statementstherein not misleading, the Commissionmay conduct an examination, and, afterdue notice and hearing, issue an Ordersuspending the effectivity of theregistration statement. (Sec. 14)

Failure of the issuer, underwriter, or anyother person to cooperate, or hisobstruction or refusal to undergo anexamination, shall be a ground for theissuance of a suspension order. (Sec.14)

If, at any time, the informationcontained in the registration statementfiled is or has become misleading,incorrect, inadequate or incomplete inany material respect, or the sale oroffering for sale of the securityregistered thereunder may work or tendto work a fraud, the Commission mayrequire from the issuer such furtherinformation necessary to enable theCommission to ascertain whether theregistration of such security should berevoked. The Commission may alsosuspend the right to sell and offer forsale such security pending furtherinvestigation. (Sec. 15)

The refusal to furnish informationrequired by the Commission may be aground for the issuance of an order ofsuspension. (Sec. 15)

The order shall be deemed confidential, andshall not be published.

Upon the issuance of the suspension order,no further offer or sale of such security shallbe made until the same is lifted or set asideby the Commission. Otherwise, such saleshall be void.

Notice of issuance of such order shall begiven to the issuer and every dealer andbroker who shall have notified theCommission of an intention to sell suchsecurity.

6. Securities and Transactions fromRegistration

6.1 Exempt Securities (Sec. 9)

(a) Any security issued or guaranteed bythe Government of the Philippines, orby any political subdivision or agencythereof, or by any person acting as aninstrumentality of said Government.

(b) Any security issued or guaranteed bythe government of any country withwhich the Philippines maintainsdiplomatic relations, or by any state,province or political subdivisionthereof on the basis of reciprocity.

(c) Certificates issued by a receiver or bya trustee in bankruptcy duly approvedby the proper adjudicatory body.

(d) Any security or its derivatives the saleor transfer of which is under thesupervision and regulation of theOffice of the Insurance Commission,Housing and Land Use RegulatoryBoard, or the Bureau of InternalRevenue.

(e) Any security issued by a bank exceptits own shares of stock.

Union Bank vs. SEC (2001)

Although the shares of stock of bankinginstitutions are exempt from registrationrequirements, a bank whose shares are listedin the stock market is covered by the RSA andthe implementing rule on the reportorialrequirements of listed companies. The RSAexempts from registration the securitiesissued by banking or financial institutions, butnowhere does its state or even imply thatbank as a listed corporation is exempt fromcomplying with reports required by the RSIRRs.

The Commission may, by rule or regulationafter public hearing, add to the foregoing anyclass of securities if it finds that the enforcementof this Code with respect to such securities is notnecessary in the public interest and for theprotection of investors.

6.2 Exempt Transactions (Sec. 10)

(a) At any judicial sale, or sale by anexecutor, administrator, guardian orreceiver or trustee in insolvency orbankruptcy.

(b) By or for the account of a pledgeholder, or mortgagee or similar lienholder selling or offering for sale ordelivery in the ordinary course ofbusiness and not for the purpose ofavoiding the provisions of this Code,to liquidate a bona fide debt, asecurity pledged in good faith assecurity for such debt.

(c) An isolated transaction in which anysecurity is sold, offered for sale,subscription or delivery is not beingmade in the course of repeated andsuccessive transactions by the owneror his representative and such owneror representative not being theunderwriter of such security.

(d) The distribution by a corporation to itsstockholders or other security holdersas a stock dividend or otherdistribution out of surplus.



(e) The sale of capital stock of acorporation to its own stockholdersexclusively, where no commission orother remuneration is paid or givendirectly or indirectly in connectionwith the ale of such capital stock.

(f) The issuance of bonds or notessecured by mortgage upon realestate or tangible personal property,where the entire mortgage togetherwith all the bonds or notes securedthereby are sold to a singlepurchaser at a single sale.

(g) The issue and delivery of anysecurity in exchange for any othersecurity of the same issuer pursuantto a right of conversion: Provided,That the security surrendered hasbeen registered under this Code orwas, when sold, exempt, and thatthe security delivered in exchange, ifsold at the conversion price, wouldat the time of such conversion fallwithin the class of securities entitledto registration under this Code.Upon such conversion the par valueof the security surrendered in suchexchange shall be deemed the priceat which the securities issued anddelivered in such exchange are sold.

(h) Broker’s transactions, executed uponcustomer’s orders, on any registeredExchange or other trading market.

(i) Subscriptions for shares of thecapital stock of a corporation prior toincorporation or in pursuance of anincrease in its authorized capitalstock, when no expense is incurred,or no commission, compensation orremuneration is paid or given, andonly when the purpose for soliciting,giving or taking of such subscriptionsis to comply with the requirementsof such law as to the percentage ofthe capital stock which should besubscribed before it can beregistered and duly incorporated, orits authorized capital increased.

Nestle Philippines vs. Court of Appeals(1991)

The language of the RSA exempting fromregistration “issuance o additional capitalstock,” must be interpreted to cover onlyissuance of shares of stock as part of and inthe course of increasing he authorized capitalstock of a corporation. It does not coverissuances of shares from already authorizedbut still unissued capital stock.

(j) The exchange of securities by theissuer with its existing securityholders exclusively, where nocommission or other remuneration ispaid.

(k) The sale of securities by an issuer tofewer than 20 persons in thePhilippines during any twelve-monthperiod.

(l) The sale of securities to any of thefollowing qualified buyers: Bank; Registered investment house; Insurance company;

Pension fund or retirement planmaintained by the Government orany political subdivision ormanaged by a bank or otherpersons authorized by the BangkoSentral to engage in trustfunctions;

Investment company; or Such other person as the

Commission determine asqualified buyers, on the basis ofsuch factors as financialsophistication, net worth,knowledge, and experience infinancial and business matters, oramount of assets undermanagement.

The Commission may exempt othertransactions, if it finds that therequirement of registration is notnecessary in the public interest or for theprotection of the investors such as byreason of the small amount involved orthe limited character of the publicoffering.

Any person applying for an exemption of atransaction shall file with theCommission a notice identifying theexemption relied upon on such form andat such time as the Commission by rulemay prescribe and with such notice shallpay to the Commission a fee equivalent to1/10 of 1% of the maximum aggregateprice or issued value of the securities.

7. Tender Offer and Proxy Solicitation

7.1 Tender Offers (Sec. 19)

Parties Required to make TenderOffer

(a) Any person or group of personsacting in concert who intends toacquire at least 15% of any classof any equity security of a listedcorporation or of any class of anyequity security of a corporationwith assets of at leastP50,000,000 and having 200 ormore stockholders with at least100 shares each or

(b) who intends to acquire at least30% of such equity over a periodof 12 months shall make a tenderoffer to stockholders by filing withthe Commission a declaration tothat effect; and furnish the issuera statement containing such of theinformation as the Commissionmay prescribe.

Withdrawal of tender Offer

Securities deposited pursuant to atender offer or request or invitationfor tenders may be withdrawn by oron behalf of the depositor at any timethroughout the period that the tenderoffer remains open and if thesecurities deposited have not beenpreviously accepted for payment, and



at any time after 60 days from thedate of the original tender offer orrequest or invitation, except as theCommission may otherwiseprescribe.

Securities offered exceedrequired quantity

Where the securities offered exceedthat which a person or group ofpersons is bound or willing to takeup and pay for, the securities thatare subject of the tender offer shallbe taken up as nearly as may be prorata, disregarding fractions,according to the number ofsecurities deposited by eachdepositor.

The provisions of this subsectionshall also apply to securitiesdeposited within 10 days after noticeof an increase in the considerationoffered to security holders is firstpublished or sent or given to securityholders.

Variations of Tender OfferWhere any person varies the termsof a tender offer or request orinvitation for tenders before theexpiration thereof by increasing theconsideration offered to holders ofsuch securities, such person shallpay the increased consideration toeach security holder whosesecurities are taken up and paid forwhether or not such securities havebeen taken up by such person beforethe variation of the tender offer orrequest or invitation.

7.2 Proxy Solicitations (Sec. 20)Proxies must be

in writing signed by the stockholder or his

duly authorized representativeand

filed before the scheduledmeeting with the corporatesecretary.

Period of Validity

Unless otherwise provided in the proxy,it shall be valid only for the meeting forwhich it is intended. No proxy shall bevalid and effective for a period longerthan 5 years at one time.

No broker or dealer shall give any proxy,consent or authorization to a personother than the customer, without theexpress written authorization of suchcustomer.

A broker or dealer who holds or acquiresthe proxy for at least 10% or suchpercentage as the Commission mayprescribe of the outstanding share of theissuer, shall submit a report identifyingthe beneficial owner within 10 days aftersuch acquisition, for its own account orcustomer, to the issuer of the security,

to the Exchange where the security istraded and to the Commission.

7.3 Fees for Tender Offers and CertainProxy Solicitations (Sec. 21)

At the time of filing with the Commissionof any statement required for any tenderoffer or for proxy or consent solicitation,the Commission may require that theperson making such filing pay a fee of notmore than 1/10 of 1% of: The proposed aggregate purchase

price in the case of a transactionunder Sections 20 or 72.2; or

The proposed payment in cash, andthe value of any securities or propertyto be transferred in the acquisition,merger or consolidation, or the cashand value of any securities proposedto be received upon the sale ordisposition of such assets in the caseof a solicitation under Section 20.

8. Regulation of Transactions ofDirectors / Officers / PrincipalStockholders (Sec. 23)

8.1 Filing of Statement Every person who is directly or indirectly

the beneficial owner of more than 10% ofany class of any equity security or

who is a director or an officer of theissuer of such security,

shall file, at the time either such requirementis first satisfied or within ten days after hebecomes such a beneficial owner, director, orofficer, a statement with the Commission and,if such security is listed for trading on anExchange, also with the Exchange, of theamount of all equity securities of such issuerof which he is the beneficial owner, and withinten (10) days after the close of each calendarmonth thereafter, if there has been a changein such ownership during such month, shallalso file a statement indicating his ownershipat the close of the calendar month and suchchanges as have occurred during suchcalendar month.

8.2 Recovery of Damages for Unfair Use ofInformation

a. For the purpose of preventing the unfair use ofinformation which may have been obtained bysuch beneficial owner, director, or officer byreason of his relationship to the issuer

any profit realized by him from anypurchase and sale, or any sale andpurchase, of any equity security ofsuch issuer within any period of lessthan six (6) months,o unless such security was acquired

in good faith in connection with adebt previously contracted,

shall inure to and be recoverable bythe issuer, irrespective of anyintention of holding the securitypurchased or of not repurchasing thesecurity sold for a period exceeding 6months.



b. Suit to recover such profit may be institutedbefore the RTC by the issuer, or by the owner ofany security of the issuer in the name and inbehalf of the issuer if the issuer shall fail orrefuse to bring such suit within 60 days afterrequest or shall fail diligently to prosecute thesame thereafter. But;

No such suit shall be brought more thant2 years after the date such profit wasrealized.

It shall be unlawful for any beneficial owner,director, or officer to sell any equity securityof such issuer if the person selling thesecurity or his principal:

(a) Does not own the security sold; or(b) If owning the security, does not

deliver it against such sale within 20days thereafter, or does not within 5days after such sale deposit it in themails or other usual channels oftransportation;

But no person shall be deemed to haveviolated this subsection if he proves thatnotwithstanding the exercise of good faithhe was unable to make such delivery ordeposit within such time, or that to do sowould cause undue inconvenience orexpense.

The provisions of Subsection 23. 2 shall notapply to any purchase and sale, or sale andpurchase and the provisions of Subsection23.3 shall not apply to any sale, of an equitysecurity not then or thereafter held by himin an investment account, by a dealer in theordinary course of his business and incidentto the establishment or maintenance by himof a primary or secondary market, otherwisethan on an Exchange, for such security.

9. Prohibitions

9.1 Manipulation of Security Prices

It shall be unlawful for any person actingfor himself or through a dealer orbroker, directly or indirectly:

(a) To create a false or misleadingappearance of active trading in anylisted security traded in an Exchangeor any other trading market:

By effecting any transaction insuch security which involves nochange in the beneficialownership thereof;

By entering an order or ordersfor the purchase or sale of suchsecurity with the knowledge thata simultaneous order or orders ofsubstantially the same size, timeand price, for the sale orpurchase of any such security,has or will be entered by or forthe same or different parties; or

By performing similar act wherethere is no change in beneficialownership.

(b) To effect, alone or with others, aseries of transactions in securitiesthat:

Raises their price to induce thepurchase of a security;

Depresses their price to induce thesale of a security; or

Creates active trading to inducesuch a purchase or sale throughmanipulative devices such asmarking the close, painting thetape, squeezing the float, hype anddump, boiler room operations andsuch other similar devices.

(c) To circulate or disseminateinformation that the price of anysecurity listed in an Exchange will or islikely to rise or fall because ofmanipulative market operations of anyone or more persons conducted forthe purpose of raising or depressingthe price of the security for thepurpose of inducing the purchase orsale of such security.

(d) To make false or misleadingstatement with respect to anymaterial fact, which he knew or hadreasonable ground to believe was sofalse or misleading, for the purpose ofinducing the purchase or sale of anysecurity listed or traded in anExchange.

(e) To effect any series of transactions forthe purchase and/or sale of anysecurity traded in an Exchange for thepurpose of pegging, fixing orstabilizing the price of such security,unless otherwise allowed by this Codeor by rules of the Commission.

9.2 Insider Trading

Parties covered : Insider insider’s spouse or relatives by affinity

or consanguinity within the seconddegree, legitimate or common-law,

It shall be unlawful for an insider to sell orbuy a security of the issuer, while inpossession of material information withrespect to the issuer or the security that isnot generally available to the public,unless: (Sec. 27)

(a) The insider proves that theinformation was not gained from suchrelationship; or

(b) If the other party selling to or buyingfrom the insider (or his agent) isidentified, the insider proves: that he disclosed the information

to the other party, or that he had reason to believe that

the other party otherwise is also inpossession of the information.

PresumptionA purchase or sale of a security of theissuer shall be presumed to have beeneffected while in possession of material



non-public information if transacted aftersuch information came into existencebut prior to dissemination of suchinformation to the public and the lapseof a reasonable time for the market toabsorb such information

This presumption shall be rebutted upona showing by the purchaser or seller thathe was not aware of the material non-public information at the time of thepurchase or sale.

Material non-public information:

(a) It has not been generally disclosed tothe public and would likely affect themarket price of the security after beingdisseminated to the public and the lapseof a reasonable time for the market toabsorb the information; or

(b) would be considered by a reasonableperson important under thecircumstances in determining his courseof action whether to buy, sell or hold asecurity.

Communication of the InformationIt shall be unlawful for any insider tocommunicate material non-publicinformation about the issuer or thesecurity to any person who, by virtue ofthe communication, becomes an insider,where the insider communicating theinformation knows or has reason tobelieve that such person will likely buyor sell a security of the issuer while inpossession of such information.

Insider Trading in Relation toTender Offers

a.) It shall be unlawful where a tenderoffer has commenced or is about tocommence for: Any person (other than the

tender offeror) who is inpossession of material non-publicinformation relating to suchtender offer, to buy or sell thesecurities of the issuer that aresought or to be sought by suchtender offer if such person knowsor has reason to believe that

o the information is non-public and

o has been acquireddirectly or indirectly fromthe tender offeror, thoseacting on its behalf, theissuer of the securities, orany insider of suchissuer; and

Any tender offeror, those actingon its behalf, the issuer of thesecurities, and any insider tocommunicate material non-publicinformation relating to the tenderoffer to any other person wheresuch communication is likely toresult in a violation of subsection27.4.

10. Regulation of MarketProfessionals and Other Entities

10.1 Registration of Brokers, Dealers,Salesmen and Associated Persons

General Rule :o No person shall engage in the

business of buying or sellingsecurities in the Philippines as abroker or dealer, or act as asalesman, or an associated personof any broker or dealer unlessregistered as such with theCommission.

o No registered broker or dealer shallemploy any salesman or anyassociated person, and no issuershall employ any salesman, who isnot registered as such with theCommission.

o Nicolas vs CA (1998):

The futility of petitioner's actionbecame more pronounced by thefact that he traded securities for theaccount of others without thenecessary license from the SEC.Clearly, such omission was inviolation of Section 19 of theRevised Securities Act.

The purpose of the statute requiringthe registration of brokers sellingsecurities and the filing of dataregarding securities which theypropose to sell, is to protect thepublic and strengthen the securitiesmechanism.

American jurisprudence emphasizesthe principle that:"an unlicensed person may notrecover compensation for servicesas a broker where a statute orordinance requiring a license isapplicable and such statute orordinance is of a regulatory nature,was enacted in the exercise of thepolice power for the purpose ofprotecting the public, requires alicense as evidence of qualificationand fitness, and expressly precludesan unlicensed person fromrecovering compensation by suit, orat least manifests an intent toprohibit and render unlawful thetransaction of business by anunlicensed person."

We see no reason not to apply thesame rule in our jurisdiction. Stockmarket trading, a technical andhighly specialized institution in thePhilippines, must be entrusted toindividuals with proven integrity,competence and knowledge, whohave due regard to therequirements of the law.

Exception:The Commission may conditionallyor unconditionally exempt any



broker, dealer, salesman,associated person of any broker ordealer, or any class of theforegoing, from registration as itdeems consistent with the publicinterest and the protection ofinvestors. (Sec. 28.3)

Procedure (Sec. 28.5):

o A broker or dealer may apply forregistration by filing with theCommission a written application.

o Registration of a salesman or ofan associated person of aregistered broker or dealer maybe made upon written applicationfiled with the Commission by suchsalesman or associated person.For purposes of this action,salesman shall not include anyemployee of an issuer whosecompensation is not determineddirectly or indirectly on sales ofsecurities of the issuer.

10.2 Qualifications of MarketProfessionals (Sec. 28.4)

The Commission shall promulgaterules and regulations prescribing thequalifications for registration of eachcategory of applicant, which shall,among other things, require as acondition for registration that:

(a) If a natural person, theapplicant satisfactorily pass awritten examination as to hisproficiency and knowledge inthe area of activity for whichregistration

(b) In the case of a broker ordealer, the applicant satisfy aminimum net capital andprovide a bond or othersecurity as the Commissionmay prescribe

(c) If located outside of thePhilippines, the applicant filesa written consent to service ofprocess upon the Commissionpursuant to Sec. 65 hereof.

10.3 SEC Action (Sec. 28.8)

a. Within 30 days after the filing of anyapplication, the Commission shall byorder:

(a) Grant registration if itdetermines that therequirements of this Sectionand the qualifications forregistration have beensatisfied; or

(b) Deny said registration.

b. The names and addresses of allpersons approved for registrationand all orders of the Commissionwith respect thereto shall berecorded in a Register of SecuritiesMarket Professionals kept in the

office of the Commission which shallbe open to public inspection.

10.4 Continuing Requirements

o Every person registered shall filewith the Commission informationnecessary to keep the applicationfor registration current andaccurate,.

o Every person registered shall pay tothe Commission an annual fee. Uponnotice by the Commission that suchannual fee has not been paid asrequired, the registration of suchperson shall be suspended untilpayment has been made.

10.5 Termination of Registration ofSalesman or Associated Person

The registration of a salesman orassociated person shall be automaticallyterminated upon the cessation of hisaffiliation with said registered broker ordealer, or with an issuer in the case of asalesman employed, appointed orauthorized by such issuer.

The registered broker or dealer, orissuer, as the case may be, shall filewith the Commission a notice ofseparation of such salesman orassociated person.

10.6 Revocation, Refusal or Suspensionof Registration of Brokers, Dealers,Salesmen and Associated Persons (Sec.29)

If, after due notice and hearing, theCommission determines the applicant orregistrant:

(a) Has willfully violated any provisionof this Code, any rule, regulationor order made hereunder, or anyother law administered by theCommission, or in the case of aregistered broker, dealer orassociated person has failed tosupervise, with a view topreventing such violation, anotherperson who commits suchviolation;

(b) Has willfully made or caused to bemade a materially false ormisleading statement in anyapplication for registration orreport filed with the Commissionor a self-regulatory organization,or has willfully omitted to stateany material fact that is requiredto be stated therein;

(c) Has failed to satisfy thequalifications or requirements forregistration and the rules andregulations;

(d) Has been convicted by acompetent judicial oradministrative authority of anoffense involving moral turpitude,fraud, embezzlement,counterfeiting, theft, estafa,misappropriation, forgery, bribery,false oath, or perjury, or of a



violation of securities,commodities, banking, realestate or insurance laws;

(e) Is enjoined or restrained by acompetent judicial oradministrative body fromengaging in securities,commodities, banking, realestate or insurance activities orfrom willfully violating lawsgoverning such activities;

(f) Is subject to an order of acompetent judicial oradministrative body refusing,revoking or suspending anyregistration, license or otherpermit under this Code, the rulesand regulations promulgatedthereunder, any other lawadministered by theCommission;

(g) Is subject to an order of a self-regulatory organizationsuspending or expelling himfrom membership orparticipation therein or fromassociation with a member orparticipation thereof;

(h) Has been found by a competentjudicial or administrativeauthority, to have willfullyviolated any provisions ofsecurities, commodities,banking, real estate or insurancelaws, or has willfully aided,abetted, counseled, commanded,induced or procured suchviolation; or

(i) Has been judicially declaredinsolvent.

29.4. It shall be sufficient cause for refusal,revocation or suspension of a broker's ordealer’s registration, if any associatedperson thereof or any juridical entitycontrolled by such associated person hascommitted any act or omission or is subjectto any disability enumerated earlier.

Transactions and Responsibility of Brokers andDealers (Sec. 30)

a. Prohibition against dealing orotherwise selling or buying, for itsaccount of customers, securities listedon an Exchange issued by anycorporation where any stockholder,director, associated person or salesman,or authorized clerk of said broker ordealer and all the relatives of theforegoing within the fourth civil degree oconsanguinity or affinity, is at the timeholding office in said issuer corporationas a director, president, vice-president,manager, treasurer, comptroller,secretary or any office or trust andresponsibility, or is a controlling personof the issuer.

b. Prohibition against effecting anytransaction in securities or induce orattempt to induce the purchase or saleof any security except in compliancewith such rules and regulations as theCommission shall prescribe to ensurefair and honest dealings in securities and

provide financial safeguards an otherstandards for the operation o brokers anddealers.

11. Regulation of Exchanges

11.1 Nature of Stock Exchanges

Lopez, et. al vs. Court of Appeals (1988)

An exchange is a voluntary association orcorporation organized for the purpose offurnishing to its members a convenient andsuitable place to transact their business ofpromoting uniformity in the customs andusages of merchants, of inculcating principlesof justice and equity in trade, of facilitatingthe speedy adjustment of business disputes,of acquiring and dissemination valuablecommercial and economic information andgenerally of securing to its members thebenefits of co-operation in the furtherance oftheir legitimate pursuits.

Carolina Industries vs. CMS StockBrokerage (1980)

The rules and regulations of the Exchangeform part of the contract covering securitiestransacted within the facilities of Exchange.

Sec Opinion #11 (2003)

It is important to stress that the SecuritiesRegulation Code (SRC) treats exchangesas a special specie of corporation andsubjects them to rules not otherwiseapplicable to regular corporations.

The stock exchange performs a functionvital to the national economy, a functionvested with public interest. It is said thatthe economy moves on the basis of therise and fall of the stocks traded and thus,the integrity of the exchange overseeingthese transactions can never be overemphasized. It is for this reason that theSRC provides for stricter rules onexchange regulation. The SRC devotes awhole chapter on exchanges and othersecurities trading markets, and it isreplete with provisions designed toprofessionalize the exchange, encouragegreater public participation, ensureincreased transparency, greaterresponsibility and improve corporategovernance. These provisions are notfound in the Corporation Code and aremeant as additional legal requirementsapplicable only to exchanges.

It is thus incorrect to argue that theprovisions of the Corporation Code alonegovern the operation of exchanges. Whilethe Corporation Code applies tocorporations in general, the SRC is aspecial law that primarily governs theregulation of exchanges. As between aspecific statute and a general statute, theformer must prevail since it evinces thelegislative intent more clearly than ageneral statute does.



Thus the SEC has the power ofsupervision over exchanges.Supervision entails overseeing or thepower or authority to see thatsubordinate subject performs its duties.If the latter fails or neglects to fulfillthem the former may take such action orstep as prescribed by law to make themperform its duties. In this specificinstance, the SEC can even take overthe management of the exchange asauthorized by the SRC.

11.2 Registration Procedure (Sec. 33)

Any Exchange may be registered as suchwith the Commission by filing anapplication for registration in such formand containing such information andsupporting documents as theCommission by rule shall prescribe,including the following:

(a) An undertaking to comply andenforce compliance by itsmembers with the provisions ofthis Code, its implementing rulesor regulations and the rules of theExchange;

(b) The organizational charts of theExchange, rules of procedure, anda list of its officers and members;

(c) Copies of the rules of theExchange; and

(d) An undertaking that in the event amember firm becomes insolvent orwhen the Exchange shall havefound that the financial conditionof its member firm has sodeteriorated that it cannot readilymeet the demands of itscustomers for the delivery ofsecurities and/or payment of salesproceeds, the Exchange shall takeover the operation of the insolventmember firm and immediatelyproceed to settle the memberfirm’s liabilities to its customers.

Registration of an Exchange shall be grantedupon compliance with the followingprovisions:

(a) That the applicant is organized asa stock corporation;

(b) That the applicant is engagedsolely in the business of operatingan exchange: Provided, however,That the Commission may, uponapplication, exempti an Exchangeorganized as a stock corporationand owned and controlled byanother juridical person from thisrestriction;

(c) Where the Exchange is organizedas a stock corporation, that noperson may beneficially own orcontrol, directly or indirectly, morethan 5% of the voting rights of theExchange and no industry orbusiness group may beneficiallyown or control more than 20% ofthe voting rights of the Exchange:Provided, however, That theCommission may adopt rules,regulations or issue an order, upon

application, exempting an applicantfrom this prohibition where it findsthat such ownership or control willnot negatively impact on theexchange’s ability to effectivelyoperate in the public interest;

(d) The expulsion, suspension, ordisciplining of a member andpersons associated with a memberfor conduct or proceedinginconsistent with just and equitableprinciples of fair trade, and forviolations of provisions of this Codeor the rules of the Exchange;

(e) A fair procedure for the discipliningof members and persons associatedwith members, the denial ofmembership to any person seekingto be a member, the barring of anyperson from association with amember, and the prohibition orlimitation of any person from accessto services offered by the Exchange;

(f) That the brokers in the board of theExchange shall comprise of notmore than 49% of such board andshall proportionately represent theExchange membership in terms ofvolume/value of trade and paid upcapital, and that any natural personassociated with a juridical entitythat is a member shall himself bedeemed to be a member for thispurpose;

(g) For the board of the Exchange toinclude in its composition(i) the president of the Exchange,and(ii) no less than 51% of theremaining members of the board tobe comprised of 3 independentdirectors and persons who representthe interests of issuers, investors,and other market participants, whoare not associated with any brokeror dealer or member of theExchange for a period of 2 yearsprior to his/her appointment.

No officer or employee of a member,its subsidiaries or affiliates orrelated interests shall become anindependent director: Provided,however, That the Commission mayby rule, regulation, or order uponapplication, permit the exchangeorganized as a stock corporation touse a different governancestructure:

Provided, further, That theCommission is satisfied that theExchange is acting in the publicinterest and is able to effectivelyoperate as a self-regulatoryorganization under this Code.

(h) The president and othermanagement of the Exchange toconsist only of persons who are notmembers and are not associated inany capacity, directly or indirectlywith any broker or dealer ormember or listed company of theExchange: Provided, That theExchange may only appoint, and a



person may only serve, as anofficer of the exchange if suchperson has not been a member oraffiliated with any broker, dealer,or member of the Exchange for aperiod of at least 2 years prior tosuch appointment;

(i) The transparency of transactionson the Exchange;

(j) The equitable allocation ofreasonable dues, fees, and othercharges among members andissuers and other persons usingany facility or system which theExchange operates or controls;

(k) Prevention of fraudulent andmanipulative acts and practices,promotion of just and equitableprinciples of trade, and, in general,protection of investors and thepublic interest; and

(l) The transparent, prompt andaccurate clearance and settlementof transactions effected on theExchange.

11.3 Segregation and Limitation ofFunctions of Members, Brokers and Dealers(Sec. 34)

It shall be unlawful for any member-broker of an Exchange to effect anytransaction on such Exchange for:

its own account, the account of an associated person,

or an account with respect to which it

or an associated person thereofexercises investment discretion

Provided, however, That this section shallnot make unlawful –

(a) Any transaction by a member-broker acting in the capacity of amarket maker;

(b) Any transaction reasonablynecessary to carry on an odd-lottransactions;

(c) Any transaction to offset atransaction made in error; and

(d) Any other transaction of a similarnature as may be defined by theCommission.

Sec Opinion #11 (2003)The above-quoted Sec. 33.2. of the SRC isnot found in the old Revised Securities Act,nor in the Corporation Code. Items (c), (f)and (g) thereof are all intended toencourage greater public participation,ensure increased transparency, greaterresponsibility and improve corporategovernance.

Subsection (c) mandates that the ownershipof the stocks of the exchange be broadenedand democratized, thereby ensuring greaterpublic participation.

On the other hand, Subsections (f) and (g)mandate a board composition where nomore than 49% of the seats shall beoccupied by brokers, and no less than 51%

to be comprised of (3) independent directorsand persons representing other sectors of themarket. With respect to independentdirectors, their election in the Board isintended to ensure that the Board willfaithfully discharge its fiduciary responsibilitiesto its stockholders.

These provisions aim for a morerepresentative, democratic, independentBoard of Directors that is autonomous fromthe control of any sector of the market.

12. Independent Directors

Any corporation with

a class of equity securities listed fortrading on an Exchange or

with assets in excess of P50,000,000.00and having 200 or more holders, at leastof 200 of which are holding at least 100shares of a class of its equity securities orwhich has sold a class of equity securitiesto the public pursuant to an effectiveregistration statement

Shall have at least 2 independent directors orsuch independent directors shall constitute atleast 20% of the members of such board,whichever is the lesser.

An “independent director” shall mean a personother than an officer or employee of thecorporation, its parent or subsidiaries, or anyother individual having a relationship with thecorporation, which would interfere with theexercise of independent judgment in carryingout the responsibilities of a director.

13. Self-Regulatory Organizations

13.1 Scope / Definition (Sec. 39)

The Commission shall have the power toregister as a self-regulatory organizationorganizations whose operations arerelated to or connected with the securitiesmarket such as but not limited to

associations of brokers and dealers, transfer agents, custodians, fiscal and paying agents, computer services, news disseminating services, proxy solicitors, statistical agencies, securities rating agencies, and securities information processors

Which are engaged in the business of:

(a) Collecting, processing, or preparingfor distribution or publication, orassisting, participating in, orcoordinating the distribution orpublication of, information withrespect to transactions in orquotations for any security; or

(b) Distributing or publishing on a currentand continuing basis, information withrespect to such transactions orquotations.



13.2 Registration

An association of brokers and dealersmay be registered as a securitiesassociation by filing with the Commissionan application for registration.

Such association shall not be registeredunless the Commission determines that:

(a) The association is so organized andhas the capacity to be able to carryout the purposes of this Code and tocomply with, and to enforcecompliance by its members andpersons associated with its memberswith the provisions of this Code.

(b) The rules of the association,notwithstanding anything in theCorporation Code to the contrary,provide that:

Any registered broker ordealer may become amember of the association;

There exist a fairrepresentation of itsmembers to serve on theBoard of Directors of theassociation and in theadministration of its affairs,and that any natural personassociated with a juridicalentity that is a member shallhimself be deemed to be amember for this purpose;

The Board of Directors of theassociation includes in itscomposition: (a) Thepresident of the associationand (b) Persons whorepresent the interests ofissuers and public investorsand are not associated withany broker or dealer ormember of the association;that the president and othermanagement of theassociation not be a memberor associated with anybroker, dealer or member ofthe association;

For the equitable allocationof reasonable dues, fees, andother charges amongmembers and issuers andother persons using anyfacility or system which theassociation operates orcontrols;

For the prevention offraudulent and manipulativeacts and practices, thepromotion of just andequitable principles of trade,and the protection ofinvestors and the publicinterest;

That its members andpersons associated with itsmembers, be appropriatelydisciplined for violation of anyprovision of this Code;

That a fair procedure for thedisciplining of members, and

the denial of membership toany person seekingmembership therein, thebarring of any person frombecoming associated with amember thereof, and theprohibition or limitation by theassociation of any person withrespect to access to servicesoffered by the association or amember thereof.

13.3 Denial of Membership / Employment(Sec. 39.4)

(a) A registered securities associationshall deny membership to anyperson who is not a registeredbroker or dealer.

(b) A registered securities associationmay deny membership to, orcondition the membership of, aregistered broker or dealer if suchbroker or dealer:

Does not meet thestandards of financialresponsibility, operationalcapability, training,experience, or competencethat are prescribed by therules of the association; or

Has engaged, and there is areasonable likelihood it willagain engage, in acts orpractices inconsistent withjust and equitable principlesof fair trade.

(c) A registered securities associationmay deny membership to aregistered broker or dealer notengaged in a type of business inwhich the rules of the associationrequire members to be engaged:Provided, however, That noregistered securities associationmay deny membership to aregistered broker or dealer byreason of the amount of businessdone by the broker or dealer.

(d) A registered securities associationmay bar a salesman or personassociated with a broker or dealerfrom being employed by a memberor set conditions for theemployment of a salesman orassociated if such person:

Does not meet thestandards of training,experience, or competencethat are prescribed by therules of the association; or

Has engaged, and there is areasonable likelihood he willagain engage, in acts orpractices inconsistent withjust and equitable principlesof fair trade.

14 Margin Trading

14.1 Margin Requirements (Sec. 48)



For the purpose of preventing theexcessive use of credit for the purchaseor carrying of securities, theCommission, shall prescribe rules andregulations with respect to the amountof credit that may be extended on anysecurity.

For the extension of credit, such rulesand regulations shall be based upon thefollowing standard:

An amount not greater than whichever isthe higher of –

(a) 65% of the current market price ofthe security; or

(b) 100%)of the lowest market priceof the security during thepreceding 36 calendar months, butnot more than 75% of the currentmarket price.

14.2 Prohibited Credit Arrangements (Sec.48.2)

No member of an Exchange or broker ordealer shall, directly or indirectly, extendor maintain credit or arrange for theextension or maintenance of credit to orfor any customer:

(a) On any security unless such creditis extended and maintained inaccordance with the rules andregulations which the Commissionshall prescribe;

(b) Without collateral or on anycollateral other than securities,except to maintain a credit initially

extended in conformity withthe rules and regulations ofthe Commission; and

in cases where the extensionor maintenance of credit isnot for the purpose ofpurchasing or carryingsecurities or of evading orcircumventing the provisionsof par (a) of this subsection.

14.3 Restrictions on Borrowings byMembers, Brokers, and Dealers (Sec. 49)

It shall be unlawful for any registeredbroker or dealer, or member of anExchange, directly or indirectly:

To permit in the ordinary course ofbusiness his aggregate indebtednessincluding customers’ credit balances,to exceed such percentage of the netcapital (exclusive of fixed assets andvalue of Exchange membership)employed in the business, but notexceeding in any case 2,000%, asthe Commission may prescribe.

To pledge, mortgage, or otherwiseencumber any security carried forthe account of any customer undercircumstances:o That will permit the commingling

of his securities, without hiswritten consent, with thesecurities of any customer;

o That will permit such securities tobe commingled with the securitiesof any person other than a bonafide customer; or

o That will permit such securities tobe pledged, mortgaged orencumbered, or subjected to anylien or claim of the pledgee, for asum in excess of the aggregateindebtedness of such customers inrespect of such securities.

To lend or arrange for the lending ofany security carried for the account ofany customer without the writtenconsent of such customer or incontravention of such rules andregulations as the Commission shallprescribe.

14.4 Enforcement of Margin Requirementsand Restrictions on Borrowing (Sec. 50)

To prevent indirect violations of themargin requirements, the broker or dealershall require the customer in non-margintransactions to pay the price of thesecurity within such period as theCommission may prescribe, which shall inno case exceed the prescribed settlementdate.

Otherwise, the broker shall sell thesecurity purchased starting on the nexttrading day but not beyond 10 tradingdays following the last day for thecustomer to pay such purchase price,unless such sale cannot be effected withinsaid period for justifiable reasons.

The sale shall be without prejudice to theright of the broker or dealer to recoverany deficiency from the customer. Toprevent indirect violation of restrictions onborrowings under Section 49, the brokershall, unless otherwise directed by thecustomer, pay the net sales price of thesecurities sold for a customer within thesame period as above prescribed by theCommission

Provided, That the customer shall berequired to deliver the instrumentsevidencing the securities as a condition forsuch payment upon demand by thebroker.

15. Administrative Sanctions andSettlement Offers

15.1 Administrative Sanctions (Sec. 54)

If, after due notice and hearing, theCommission finds that:

(a) There is a violation of this Code, itsrules, or its orders;

(b) Any registered broker or dealer,associated person thereof has failedreasonably to supervise anotherperson subject to supervision, whocommits any such violation;

(c) Any registrant or other person has,in a registration statement or inother reports, applications,accounts, records or documents



made any untrue statement of amaterial fact, or omitted to stateany material fact required to bestated therein or necessary tomake the statements therein notmisleading;

(d) or, in the case of an underwriter,has failed to conduct an inquirywith reasonable diligence to insurethat a registration statement isaccurate and complete in allmaterial respects; or

(e) Any person has refused to permitany lawful examinations into itsaffairs,

The imposition of administrativesanctions shall be without prejudice tothe filing of criminal charges.

15.2 Settlement Offers (Sec. 55)

At any time, during an investigation orproceeding under this Code, partiesbeing investigated and/or charged maypropose in writing an offer of settlementwith the Commission.

The Commission may consider the offerbased on timing, the nature of theinvestigation or proceeding, and thepublic interest.

The Commission may only agree to asettlement offer based on its findingsthat such settlement is in the publicinterest. Any agreement to settle shallhave no legal effect until publiclydisclosed. Such decision may be madewithout a determination of guilt on thepart of the person making the offer.

16. Civil Liabilities (Sec. 56)

16.1 On Account of False RegistrationStatement

Who may sue?

Any person acquiring a security, the registration

statement of which or any partthereof contains on its effectivity anuntrue statement of a material fact oromits to state a material fact requiredto be stated therein or necessary tomake such statements notmisleading, and

who suffers damage

If the person who acquired the securitydid so after the issuer has madegenerally available to its security holdersan income statement covering a periodof at least 12 months, then the right ofrecovery shall be conditioned on proofthat such person acquired the securityrelying upon such untrue statement.

Who may be sued?

(a) The issuer and every person whosigned the registration statement;

(b) Every person who was a director ora partner in the issuer at the time ofthe filing of the registrationstatement or any part, supplementor amendment thereof;

(c) Every person who is named in theregistration statement as being orabout to become a director or apartner;

(d) Every auditor or auditing firmnamed as having certified anyfinancial statements used inconnection with the registrationstatement or prospectus.

(e) Every person who, with his writtenconsent has been named as havingprepared or certified any part of theregistration statement, or as havingprepared or certified any report orvaluation which is used inconnection with the registrationstatement.

(f) Every selling shareholder whocontributed to and certified as to theaccuracy of a portion of theregistration statement.

(g) Every underwriter with respect tosuch security.

Possible Defense :

Such person may allege that at the timeof such acquisition he knew of no suchuntrue statement or omission:

16.2 On Account of Insider Trading (Sec. 61)

Who may be sued?

Any insider who violates Subsection 27.1and any person in the case of a tenderoffer who violates Subsection 27.4 (a)(i),or any rule or regulation thereunder, bypurchasing or selling a security while inpossession of material information notgenerally available to the public, shall beliable in a suit brought by any investorwho, contemporaneously with thepurchase or sale of securities that is thesubject of the violation, purchased or soldsecurities of the same class unless suchinsider, or such person in the case of atender offer, proves that such investorknew the information or would havepurchased or sold at the same priceregardless of disclosure of the informationto him.An insider who communicates materialnon-public information, shall be jointlyand severally liable with and to the sameextent as, the insider, or person in thecase of a tender offer.

17. Limitation of Actions (Sec. 62)

No action shall be maintained to enforce anyliability created under Section 56 (falseregistration statement) or 57 (falseprospectus. Communications, reports) unlessbrought within 2 years after the discovery ofthe untrue statement or the omission.

If the action is to enforce a liability createdunder Subsection 57.1(a) (registration of



securities), unless brought within 2 yearsafter the violation upon which it is based.

In no event shall any such action be broughtto enforce a liability created under Section56 or Subsection 57.1 (a) more than 5 yearsafter the security was bona fide offered tothe public, or under Subsection 57.1 (b)(sale based on false prospectus,communications, reports) more than 5 yearsafter the sale.

No action shall be maintained to enforce anyliability created under any other provision ofthis Code unless brought:

within 2 years after the discoveryof the facts constituting the cause ofaction and

within 5 years after such cause ofaction accrued.

18. Damages to be Awarded (Sec.63)

18.1 Amounts / Kinds of Damages

All suits to recover damages pursuant toSections 56 (false registrationstatement), 57 (false prospectus,communications, reports), 58 (fraud inconnection with securities transactions),59 (manipulation of prices), 60(commodity futures contracts and pre-need plans) and 61 (insider trading)shall be brought before the RTC, whichshall have exclusive jurisdiction to hearand decide such suits.

The Court is hereby authorized to awarddamages in an amount not exceedingtriple the amount of the transaction plusactual damages.

Exemplary damages may also beawarded in cases of bad faith, fraud,malevolence or wantonness in theviolation of this Code, and rules andregulations promulgated hereunder.

The Court is also authorized to awardattorney’s fees not exceeding 30% ofthe award.

18.2 Persons liable to pay

The persons specified in Sections 56, 57,58, 59, 60 and 61 hereof shall be jointlyand severally liable fo he payment ofdamages. However, any person whobecomes liable for the payment of suchdamages may recover contribution fromany other person who, if suedseparately, would have been liable tomake the same payment, unless theformer was guilty of fraudulentrepresentation and the latter was not.

All persons, including the issuer, heldliable under the provisions of Sections56, 57, 58, 59, 60 and 61 shallcontribute equally to the total liabilityadjudged herein.

In no case shall the principal stockholders,directors and other officers, recover theircontribution to the liability from theissuer. However, the right of the issuer torecover from the guilty parties the amountit has contributed shall not be prejudiced.

19. Non-waiver of Provisions

Any condition, stipulation, provision bindingany person to waive compliance with anyprovision of this Code or of any rule of anExchange as well as the waiver itself, shal bevoid.

20. Penalties

Any person who violates any of the provisionsof this Code or any person who, in aregistration statement makes any untruestatement of a material fact or omits to stateany material fact required to be stated thereinor necessary to make the statements thereinnot misleading, shall, upon conviction, suffer

a fine of not less than P50,000.00 normore than P5,000,000.00 or

imprisonment of not less than 7 yearsnor more than 21 years, or

both in the discretion of the court.

If the offender is a corporation, partnership orassociation or other juridical entity, thepenalty may be imposed upon such juridicalentity and upon the officer or officers of thecorporation, partnership, association or entityresponsible for the violation. If such officer isan alien, he shall in addition to the penaltiesprescribed, be deported.


NEGOTIABLE INSTRUMENTS LAW COMMERCIAL LAW

Negotiable Instruments Law

(Act No. 2031)

Chapter I.

INTRODUCTION

1. The Negotiable Instrument

Written contract for the payment of money, byits form intended as substitute for money andintended to pass from hand to hand to give theHDC the right to hold the same and collect thesum due.

Instruments are negotiable when they conformto all the requirements prescribed by the NIL(Act 2031, 03 February 1911).

Although considered as medium for payment ofobligations, negotiable instruments are notlegal tender (Sec. 60, New Central Bank Act,R.A. 7653);

Negotiable instruments shall produce the effectof payment only when they have beenencashed or when through the fault of thecreditor they have been impaired. (Art. 1249,CC) BUT a CHECK which has been cleared andcredited to the account of the creditor shall beequivalent to a delivery to the creditor of cash.

Negotiable Non-negotiable

Contains all therequisites of Sec. 1of the NIL

Does not contain allthe requisites of Sec.1 of the NIL

Transferred bynegotiation

Transferred byassignment

HDC may havebetter rights thantransferor

Transferee acquiresrights only of histransferor

Prior partieswarrant payment

Prior parties merelywarrant legality oftitle

Transferee hasright of recourseagainstintermediateparties

Transferee has noright of recourse

2. Negotiable Instruments Law

o The NIL applies only to instruments whichconform with the requisites laid down by Sec1of the law. Should any of said requisites beabsent, the instrument would not be negotiableand would therefore not be governed by theNIL but by the general law on contracts.

o TIP: It is advised that one memorizes the twomost important provisions of the NIL : Sec. 1(Forms of negotiable instruments) and Sec. 52(What constitutes a holder in due course)

MICHAEL A. OSMEÑA v. CITIBANK (2004)

The Negotiable Instruments Law was enacted forthe purpose of facilitating, not hindering orhampering transactions in commercial paper.Thus, the said statute should not be tampered with

haphazardly or lightly. Nor should it be brushedaside in order to meet the necessities in a singlecase

3. Life of a Negotiable Instrument

1. issue2. negotiation3. presentment for acceptance in certain bills4. acceptance5. dishonor by or acceptance6. presentment for payment7. dishonor by nonpayment8. notice of dishonor9. protest in certain cases10. discharge

4. Kinds of Negotiable Instruments

4.1. Promissory note - a promise to pay money 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 certainin money to order or to bearer

where a note is drawn to the maker’s ownorder, not complete until indorsed by him(Sec. 184, NIL).

4.2. Bill of exchange - an order made by oneperson to another to pay money to a third person.

unconditional order in writing addressed byone person to another signed by theperson giving it

requiring the person to whom it isaddressed to pay on demand or at a fixedor determinable future time a sum certainin money to order or to bearer (Sec. 126,NIL). Check: bill of exchange drawn on a

bank payable on demand.

Promissory Note Bill of Exchange

Unconditionalpromise

Unconditional order

Involves 2 parties Involves 3 parties

Maker primarilyliable

Drawer onlysecondarily liable

Only 1 presentment- for payment

Generally 2presentments - foracceptance and forpayment

5. Parties

5.1. As regards promissory note:1. Promissor/maker2. Payee - person to whom the promise to pay

is made.

5.2. As regards bill of exchange:1. Drawer - person who gives the order to

pay.2. Drawee - addressee of the order.3. Payee - person to whom the payment is to

be made.

Indorser - the payee of an instrument whotransfers it to another by signing it at the backthereof



Indorsee - person to whom the indorsernegotiates the instrument, who, by suchnegotiation, becomes the holder of theinstrument.

Chapter II.

NEGOTIABILITY

1 Requisites of Negotiability4

1.1. Must be in Writing and Signed by theMaker

1. No person liable on the instrument whosesignature does not appear thereon.

2. One who signs in a trade or assumedname liable to same extent as if he hadsigned in his own name. (Sec. 18, NIL)

3. Signature of party may be made by dulyauthorized agent; no particular form ofappointment necessary. (Sec. 19, NIL)

4. "In writing" - includes print; written ortyped

5. Signature, binding so long it is intended oradopted as the signature of the signer ormade with his authority.

1.2. Must contain an Unconditional Order orPromise to Pay

1. “ORDER OR PROMISE TO PAY”a. PROMISSORY NOTE:

i. PROMISE TO PAY: should beexpress on the face of theinstrument

ii. Word "promise" is not absolutelynecessary. Any expressionequivalent to a promise issufficient.

iii. Mere acknowledgment of a debtinsufficient

b. BILLS OF EXCHANGE:i. Order - command or imperative

direction; the instrument, by itsnature, demanding a right.

ii. Words which are equivalent to anorder are sufficient.

iii. A mere request or authority topay does not constitute an order.

iv. Although the mere use of politewords like "please" does not ofitself deprive the instrument of itscharacteristics as an order, itslanguage must clearly indicate ademand upon the drawee to pay.

2. “UNCONDITIONAL”a. The promise or order to pay, to be

unconditional, must be unqualified.b. Sec. 3, NIL: “An unqualified order or

promise to pay is unconditional…thoughcoupled with:“An indication of a particular fund out

of which reimbursement is to bemade, or a particular account to bedebited with the amount UNCONDITIONAL: Mere

indication of the particular fund

4Suggested Mnemonics: UP MaSCoT’S PaWN:

Unconditional order and Promise, payable in Money,Signed by maker, Certainty as to Time, Sum andParties, in Writing, include words of Negotiability.

out of which reimbursement isto be made, or an indication ofa particular account to bedebited with the amount

“A statement of the transaction whichgives rise to the instrument. UNCONDITIONAL: Mere

recital of the transaction orconsideration for which theinstrument was issued

However, the fact that thecondition appearing on theinstrument has been fulfilledwill not convert it into anegotiable one.

But an order or promise to pay out of aparticular fund is not unconditional CONDITIONAL: when

reference to the fund clearlyindicates an intention that suchfund alone should be the sourceof payment

METROPOLITAN BANK v. CA (1991)

The treasury warrants in question are not NIs.They are payable from a particular fund, to wit,Fund 501. The indication of Fund 501 as the sourceof the payment to be made on the treasurywarrants makes the order or promise to pay "notunconditional" and the warrants themselves non-negotiable.

1.3. Sum Payable must be Certain1. Sec. 2, NIL: The sum payable is a sum

certain, even if:a. With interest;b. By stated installments;c. By stated installments with acceleration

clause;d. With exchange, whether at a fixed rate

or at the current rate; ore. With costs of collection or attorney's

fee.2. A sum is certain if from the face of the

instrument it can be mathematicallycomputed.

3. A stipulation to pay a higher rate of interestif the note is not paid or a lower rate if it ispaid on or before maturity does not renderthe instrument non-negotiable.

1.4. Must be Payable in Money1. Capable of being transformed into money.2. NON NEGOTIABLE: an instrument which

contains an order or promise to do an actin addition to the payment of money

3. BUT If the order or promise gives theholder an election to require something tobe done in lieu of payment of money, aninstrument otherwise negotiable would notbe affected thereby. (Sec. 5, NIL) But if the option is with the maker

or person primarily liable,instrument is NOT negotiable.

4. Kind of current money does not affectnegotiability. Since the value of the notecan by a simple mathematical computationbe expressed in the value of the lawfulmoney of the latter country (Incitti vFerrante, 1933, US Jur)

5. Obligations in foreign currency may bedischarged in Philippine currency based on



the prevailing rate at the time of payment,pursuant to RA 8183 (Asia WorldRecruitment v NLRC, 1999).

1.5. Time of Payment must be Certain Purpose: Informing the holder of the

instrument of the date when he mayenforce payment thereof.

An instrument may be payable:

1. on demand (Sec. 7. NIL)1.) Expressed to be payable on demand, or

at sight, or on presentation;2.) No time for payment is expressed;3.) Where an instrument is issued,

accepted, or indorsed when overdue, itis, as regards the person so issuing,accepting, or indorsing it, payable ondemand.

Demand instruments: Holder may callfor payment any time; maker has an optionto pay at any time, and the refusal of theholder to accept payment will terminate therunning of interest, if any, but theobligation to pay the note remains.

2. at a fixed timeo Only on the stipulated date, and not

before, may the holder demand itspayment.

o Should he fail to demand payment, theinstrument becomes overdue butremains valid and negotiable. It ismerely converted to a demandinstrument.

3. at a determinable future time

o Determinable future time, ifexpressed to be payable (Sec. 4, NIL):

1.) At a fixed period after date of sight;2.) On or before a fixed or

determinable future time specifiedtherein;

3.) On or at a fixed period after theoccurrence of a specified eventwhich is certain to happen, thoughthe time of happening be uncertain.

o If payable upon a contingency, bothnegotiable, and the happening of theevent does not cure the defect.

4. Effect of acceleration provisionso If option (absolute or conditional) to

accelerate maturity is on the maker,still NEGOTIABLE. Maker may pay earlier than the

date fixed but this option, ifexercised, would be a payment inadvance of a legal liability to pay.It is still payable on the date fixed,and holder has no right toenforce payment against themaker before such date.

o If option to accelerate is on theholder: If option can be exercised only

after the happening of a specifiedevent/act over which he has no

control (conditional), stillNEGOTIABLE.

If option is unconditional, time ofpayment is rendered uncertain,NOT negotiable.

o Other instances where instrument stillNEGOTIABLE: When option given to the holder to

accelerate the maturity of aninstallment note upon failure of themaker to pay any installment whendue.

Acceleration, automatic upondefault.

Acceleration by operation of law.

5. Provisions extending time of paymento General rule: Negotiability not

affected. Effect is similar with that of anacceleration clause at the option of themaker. Negotiability not affected, even if

the holder is given the option toextend time of payment by mereinaction or indulgence for anindefinite time depending on hiswill, because with or without thisprovision, the holder may alwayschoose to be indulgent.

o Exception: Where a note with a fixedmaturity provides that the maker hasthe option to extend time of paymentuntil the happening of contingency,instrument NOT negotiable. The timefor payment may never come at all.

1.6. Must be Payable to Order or to Bearer/Must contain Words of Negotiability

words of negotiability - serve as anexpression of consent that theinstrument may be transferred.o But the instrument need not follow

the language of the law; any termwhich clearly indicates an intentionto conform with the legalrequirements is sufficient.

CALTEX V. CA (1992)

The negotiability or non-negotiability of aninstrument is determined from the face of theinstrument itself. The duty of the court in such caseis to ascertain, not what the parties may havesecretly intended but what is the meaning of thewords they have used.

TRADERS ROYAL BANK V. CA (1997)The language of negotiability which characterize anegotiable paper as a credit instrument is itsfreedom to circulate as a substitute for money.Hence, freedom of negotiability is the touchtonerelating to the protection of holders in due course,and the freedom of negotiability is the foundationfor the protection which the law throws around aholder in due course.

Postal money order, not negotiable,because it does not contain words ofnegotiability.

Where words "or bearer" printed on acheck are cancelled by the drawer,instrument not negotiable.



Bearer instrument may be negotiated bymere delivery.o When instrument is payable to bearer

(Sec. 9, NIL):a. Expressed to be so payable - ex: "I

promise to pay the bearer thesum…."

b. Payable to a person named thereinor bearer – ex. "Pay to A orbearer."

c. Payable to the order of a fictitiousperson or non-existing person, andsuch fact was known to the personmaking it so payable - ex: "Pay toJohn Doe or order."

d. Name of payee does not purport tobe the name of any person - ex:"Pay to cash;" "Pay to sundries."

e. Only or last indorsement is anindorsement in blank.

ANG TEK LIAN v. CA (1950)

A check drawn payable to the order of cash isa check payable to bearer, and the bank maypay it to the person presenting it for paymentwithout the drawer's indorsement.

A check payable to bearer is authority forpayment to the holder. Where the check is inthe ordinary form and is payable to bearer,so that no indorsement is required, a bank,to which it is presented for payment, neednot have the holder identified, and is notnegligent in failing to do so.

Order Instrument, negotiation requiresdelivery and indorsement of the transferor.o When instrument is payable to order:

Drawn payable to the order of aspecified person or to him or his order(Sec. 8, NIL).

o Without the words "to order" or "to theorder of," the instrument is payableonly to the person designated thereinand is therefore non-negotiable.(Campos, as cited in ConsolidatedPlywood Industries v IFC Leasing,1987)

1.7. Parties must be designated with Certaintya. Maker and drawer

Sign the instrument at the lowerright-hand corner.

b. Payee When negotiating, sign at the back;

same with indorsers.a. Drawee

Name usually at the lower left-handcorner, or across the top.

If instrument addressed to drawee,he must be named or indicated withreasonable certainty.

If it is not clear in what capacity the personsigned, said person is considered anindorser

2 Provisions Not Affecting Negotiability,(Sec. 5)5

1. Authorizes sale of collateral securities;

2. Authorizes confession of judgment if instrumentnot paid at maturity;

3. Waives the benefit of any law intended for theadvantage or protection of the obligor; or

4. Gives holder election to require something tobe done in lieu of payment of money. (if inaddition to money – not NI) Negotiability affected, when instrument

contains a promise or order to do anyact in addition to the payment ofmoney.

PNB v. MANILA OIL REFINING (1922)

In this case, the note contains a provision that incase that it would not be paid at maturity, the"maker authorizes any attorney to appear andconfess judgment thereon."

The Court ruled that said judgment note is illegaland inoperative as such is against public policy. Itnoted that it is in derogation of the constitutionalsafeguards (a day in court). Such judgment notecan only be valid if given express legislativesanction.

In common law, two kinds of judgment byconfession: Judgment by cognovit actionem Confession relicta verificatione

3. Omissions Not Affecting Negotiability(Sec. 6)

A. Non-dating of the instrumentB. Non-specification of value given, or that any

value had been givenC. Non-specification of place where it is drawn or

place where it is payableD. Bears a sealE. Designation of particular kind of currency in

which payment is to be made

4. Rules of Construction (Sec.17)

A. Sum expressed in words takes precedence oversum in numbers; BUT where words are soambiguous or uncertain, reference to thefigures should be made

B. Where interest is stipulated, withoutspecification of the starting date, the interestruns from the date of the instrument, and ifundated, from the issue thereof

C. An undated instrument is considered dated asof time issued.

D. Written provisions prevail over printedprovisions

E. Where the instrument is ambiguous as towhether it is a note or a bill, the holder maytreat it as either at his election

F. When the capacity of signatory is not clear, heis to be deemed an indorser

5Suggested Mnemonic: WEJy S: Waives, gives

holder Election, confession of Judgment, Sale ofSecurities



G. “I promise to pay” when signed by two or morepersons is deemed to be jointly and severallysigned

EVANGELISTA V. MERCATOR FINANCE (2003)

Where two promissory notes, both employing theterms “I promise to pay”, were each signed by twoor more persons, a solidary (joint and several)liability on each note is created on the part of thesignors.

Chapter III.

TRANSFER

1. Delivery and Issuance

A. Delivery means transfer of possession ofinstrument by the maker or drawer, withintent to transfer title to the payee andrecognize him as holder thereof. (de laVictoria v. Burgos)

B. NI incomplete and revocable until delivery forthe purpose of giving effect thereto asbetween (Sec. 16, NIL):1. immediate parties2. a remote party other than holder in due

courseC. delivery, to be effectual, must be made by or

under the authority of the party making /drawing / accepting/indorsing

D. delivery may be shown to have beenconditional, or for a special purpose only, andnot for the purpose of transferring the propertyin the instrument

E. PRESUMPTION OF DELIVERY1. Where the instrument is no longer in the

possession of a party whose signatureappears thereon, a valid and intentionaldelivery by him is presumed until thecontrary is proved

2. if it is in the hands of a HDC, thepresumption is conclusive

3. Camposes: Should an undeliveredinstrument come into the hands of a holderin due course, the maker is liable to himregardless of any proof of the lack of validdelivery.

F. PRESUMPTION AS TO DATE1. Date is not an essential element of

negotiability2. An undated instrument is considered to be

dated as of the time it was issued

GEMPESAW v CA (1993)

Every contract on a negotiable instrument isincomplete and revocable until delivery of theinstrument to the payee for the purpose of givingeffect thereto. The first delivery of the instrument,complete in form, to the payee who takes it as aholder, is called issuance of the instrument.Without the initial delivery of the instrument fromthe drawer of the check to the payee, there can beno valid and binding contract and no liability on theinstrument.

2. Negotiation

When an instrument is transferred from oneperson to another as to constitute thetransferee the holder thereof.

If payable to BEARER, negotiated by delivery; ifpayable to ORDER, negotiated by indorsementof holder + delivery (Sec.30, NIL)

SESBREÑO v. CA (1993)

A NI may, instead of being negotiated, ALSO beassigned or transferred. A non-NI may not benegotiated; but it may be assigned ortransferred, absent an express prohibitionagainst assignment or transfer written in the faceof the instrument.

3. Indorsement

The indorsement must be written on theinstrument itself or on a paper attached thereto(allonge). The signature of the indorser,without additional words, is sufficientindorsement. (Sec.31, NIL)

Indorser generally enters into two contracts(Implied contracts by Indorser):1. sale or transfer of instrument2. to pay instrument in case of default of

maker

Indorsement must be of entire instrument(can’t be indorsement of only part of amountpayable, nor can it be to two or more indorseesseverally. But okay to indorse residue ofpartially paid instrument) (Sec. 32, NIL)

3.1. Kinds of Indorsements (Sec. 33)

1. as to manner of future method ofnegotiation(Sec. 35, NIL):

a. special – specifies the person to whom/towhose order the instrument is to bepayable; indorsement of such indorsee isnecessary to further negotiation. A special indorser is liable to all

subsequent holders, unless theinstrument is an originally bearerinstrument, in which case he is liableonly to those who take title through hisindorsement (Sec 40, NIL)

b. blank – specifies no indorsee, instrumentso indorsed is payable to bearer, and maybe negotiated by delivery

a person who negotiates by meredelivery is liable only to his immediatetransferee.

the holder may convert a blankindorsement into a special indorsementby writing over the signature of theindorser in blank any contractconsistent with the character of theindorsement

An order instrument may be converted intoa bearer instrument by means of a blankindorsement.

But a bearer instrument remains as suchwhether it has been indorsed specially or inblank. It is the liability of the indorserwhich is affected.



2. as to kind of title transferred:

a. restrictive – such indorsement either:1) prohibits further negotiation of

instrument,o In this kind of restrictive

indorsement, the prohibition totransfer or negotiate must bewritten in express words at theback of the instrument, so that anysubsequent party may be forewarnedthat ceases to be negotiable.However, the restrictive indorseeacquires the right to receive paymentand bring any action thereon as anyindorser, but he can no longertransfer his rights as such indorseewhere the form of the indorsementdoes not authorize him to do so.(Gempesaw v CA 1993)

2) constitutes indorsee as agent ofindorser, or

3) vests title in indorsee in trust foranothero rights of indorsee in restrictive

ind.:a) receive payment of inst.b) Bring any action thereon

that indorser could bringc) Transfer his rights as such

indorsee, but allsubsequent indorseesacquire only title of firstindorsee under restrictiveindorsement

b. non-restrictive

3. as to kind of liability assumed by indorsera. qualified

constitutes indorser as mere assignorof title (eg. “without recourse”) (Sec.38, NIL).

But this does not mean that thetransferee only has the rights of anassignee. Transfer remains anegotiation and transferee can still be aholder capable of acquiring a title freefrom defenses of prior parties.

It relieves the qualified indorser of hisliability to pay the instrument shouldthe maker be unable to pay atmaturity.

b. unqualified

4. as to presence/absence of express limitationsput by indorser upon primary obligor’sprivileges of paying the holder:

a. conditional – additional condition annexedto indorser’s liability. (Sec. 39, NIL)

o Where an indorsement is conditional, aparty required to pay the instrumentmay disregard the condition, and makepayment to the indorsee or histransferee, whether condition has beenfulfilled or not

o Any person to whom an instrument soindorsed is negotiated will hold thesame/proceeds subject to rights ofperson indorsing conditionally

b. unconditional

5. other classifications:

a. Absolute – One by which the indorser bindshimself to pay, upon no other conditionthan the failure of prior parties to do so,and of due notice to him of such failure

b. Joint - Where instrument payable to theorder of two or more payees or indorseesnot partners, all must indorse, unless theone indorsing has authority to endorse forthe others (Sec. 41, NIL)

c. Irregular - Where a person, not otherwise aparty to the instrument, places thereon hissignature in blank before delivery, he isliable as indorser

3.2. Other Rules on Indorsement

1. Indorsement by Collecting Bank - holderdeposits check with a bank other than thedrawee, would in effect be negotiating thecheck to such bank, since he would have toindorse the check before the bank will accept itfor deposit. In most cases, the bank is actingas a mere collecting agent.

2. Negotiation by Joint or Alternative Payeesor Indorsees - all must indorse, unless theone indorsing has authority to endorse for theothers

3. Unindorsed instruments – Sec 49, NILWhere holder of instrument transfers for valuewithout indorsing, transfer vests in transferee:

a. such title as transferor had therein, subjectto defenses and equities available to priorpartieso ex: transferee can sue the transferor,

though he does not therebyautomatically become a HDC (Furbeev. Furbee, 1936)

b. right to have indorsement of transferor,after which, he becomes a holder orpossibly a HDCo For purposes of determining whether or

not the transferee becomes a HDC aftersecuring the transferor’s indorsement,note that Sec. 52 must be met at thetime of the negotiation, i.e., whenindorsement is actually made.

BPI vs CA (2007)

The transaction [in Sec. 49, NIL] is an equitableassignment and the transferee acquires theinstrument subject to defenses and equitiesavailable among prior parties. Thus, if thetransferor had legal title, the transferee acquiressuch title and, in addition, the right to have theindorsement of the transferor and also the right, asholder of the legal title, to maintain legal actionagainst the maker or acceptor or other party liableto the transferor. The underlying premise of this



provision, however, is that a valid transfer ofownership of the negotiable instrument in questionhas taken place.Transferees in this situation do not enjoy thepresumption of ownership in favor of holders sincethey are neither payees nor indorsees of suchinstruments… Thus, something more than merepossession by persons who are not payees orindorsers of the instrument is necessary toauthorize payment to them in the absence of anyother facts from which the authority to receivepayment may be inferred.

4. Cancellation of Indorsements - Holder maystrike out indorsements not necessary to histitle. The endorser whose endorsement wasstruck out, and all endorsers subsequent tohim, are relieved from liability on theinstrument (Sec. 48, NIL)

5. Indorsement by Agent - agent should makeit plain that he is signing in behalf of a principalotherwise he may be made personally liable(Sec 20, NIL)

o The Negotiable Instruments Law providesthat where any person is under obligationto indorse in a representative capacity, hemay indorse in such terms as to negativepersonal liability. An agent, when sosigning, should indicate that he is merelysigning in behalf of the principal and mustdisclose the name of his principal;otherwise he shall be held personally liable.(FRANCISCO v CA, 1990)

6. Presumption as to Indorsemento Time (Sec.45, NIL) - Every negotiation

deemed prima facie effected beforeinstrument was overdue, except whereindorsement bears date after maturity ofthe instrument.

o Place (Sec.46, NIL) - Every indorsement ispresumed prima facie made at place whereinstrument is dated

o Where instrument drawn or indorsed toperson as cashier (Sec.42, NIL) - deemedprima facie to be payable to the bank orcorporation of which he is such officer; maybe negotiated by either the indorsement(1) of the bank or corporation or (2) of theofficer.

7. Continuation of Negotiable Character - AnNI, although overdue, retains its negotiabilityunless it has been paid or restrictively indorsedto prevent further negotiation (Sec. 47, NIL)

8. Indorsement of bearer inst.o Where an instrument payable to bearer is

indorsed specially, it may nevertheless befurther negotiated by delivery

o Person indorsing specially liable as indorserto only such holders as make title throughhis indorsement

Chapter IV.

HOLDER IN DUE COURSE

1. Holder (Sec. 191)

Definition: Payee or indorsee of a bill ornote who is in possession of it, or thebearer thereof.

RIGHTS OF HOLDER (Sec. 51, NIL)1.sue thereon in his own name2.payment to him in due course discharges

instrument

2. Three Kinds of DUE COURSE Holding

a. HDC under Sec 52b. HDC under Sec 58 : A holder who derives

title to the instrument through a HDC hasall the rights of the latter even though hehimself satisfies none of the requirementsof due course holding (Campos & Campos)

c. HDC under Sec 59 (presumption): everyholder is deemed prima facie to be a holderin due course

3. Requisites to become a holder in duecourse (Sec.52)6

SALAS v. CA (1990)

The indorsee was a HDC, having taken theinstrument under the following conditions: (1) it iscomplete and regular upon its face; (2) it becamethe holder thereof before it was overdue; (3) ittook the same in good faith and for value; and (4)when it was negotiated to the indorsee, the latterhad no notice of any infirmity in the instrument ordefect in the title of the previous indorser.

HDC is one who has taken the instrument underthe following conditions:

3.1. That it is complete and regular upon itsface

1. COMPLETEo An instrument is complete if it contains

all the requisites for making it anegotiable one, even if it may haveblanks as to non-essentials.

o It is incomplete when it is wanting inany material particular or particularproper to be inserted in a NI withoutw/c the same will not be complete.

2. Material Particularso What are material particulars? A

change in the ff. is considered amaterial alteration (Sec. 125, NIL):i. The date;

6suggested mnemonics: GROIN: Good faith and

value, complete and Regular, not Overdue, no noticeof Infirmity at time of Negotiation; or GROCI: Goodfaith and value, Regular, not Overdue, Complete, noInfirmity,



ii. The sum payable, either forprincipal or interest;

iii. The time or place of payment;iv. The number or the relations of the

parties;v. The medium or currency in which

payment is to be made;vi. Or which adds a place of payment

where no place of payment isspecified,

3. Rights of HDC of instrument that has beenmaterially alteredo enforce payment thereof according to

its original tenor IF not a party to thealteration. (Sec. 124, NIL)

3.2. That he became the holder of it before itwas overdue and without notice that it hadbeen previously dishonored, if such was thefact

1. “OVERDUE”a. The ff. cannot be HDCs: (Sec. 53,

NIL)i. A holder who became such after

the date of maturity of theinstrument (instrument isoverdue);

ii. In case of demand instruments, aholder who negotiates it after anunreasonable length of time afterits issue

b. Instruments with fixed maturity butsubject to acceleration: ultimate date ofmaturity is the date of maturity for thepurpose of determining whether apurchaser is a HDC

c. Undated instruments: Prima faciepresumption that it was negotiatedbefore it was overdue (Sec 45)

d. NOTE: An overdue instrument is stillnegotiable, but it is subject to thedefense existing at the time of thetransfer.

2. DISHONORa. Non-acceptance

i. Occurs when drawee refuses toaccept the order of the drawer asstated in the bill

ii. Applicable only to bills of exchangeiii. May occur before the date of

maturity of the billb. Non-payment

i. Occurs when the party primarilyliable fails to pay at the date ofmaturity

ii. Date of Maturity1) “payable after sight”—date of

presentment2) Payable on the occurrence of a

specified event—date is fixedby happening of event

3. An instrument is not invalid for the reasononly that it is ANTE-DATED OR POST-DATED provided not done for an illegal orfraudulent purpose. The person to whom aninstrument so dated is delivered acquiresthe title thereto as of the date of delivery.(Sec.12, NIL)

3.3. That he took it in good faith AND forvalue:

1. HOLDER FOR VALUE - (a) Where valuehas at any time been given for theinstrument, the holder is deemed a HFV inrespect to all parties who become suchprior to that time (Sec.26, NIL) and (b)Where the holder has a lien on theinstrument, he is deemed a HFV to theextent of his lien (Sec.27, NIL).a. PRESUMPTION – Every NI is deemed

prima facie issued for valuableconsideration; and every person whosesignature appears thereon to havebecome a party thereto for value (Sec.24, NIL)i. In actions based upon a negotiable

instrument, it is unnecessary toaver or prove consideration, forconsideration is imported andpresumed from the fact that it is anegotiable instrument. Thepresumption exists whether thewords "value received" appear onthe instrument or not (Ong vPeople, 2000)

BAYANI VS. PEOPLE (2004)

Under Section 28 of the Negotiable InstrumentsLaw (NIL), absence or failure of consideration is amatter of defense only as against any person not aholder in due course.

Moreover, Section 24 of the NIL provides thepresumption of consideration. Such presumptioncannot be overcome by the petitioner’s bare denialof receipt of the [consideration].

1) Only evidence of the clearestand most convincing kind willsuffice for that purpose.(Travel-On Inc v CA, 1992)

b. VALUE - any consideration sufficient tosupport a simple contract. Anantecedent or pre-existing debtconstitutes value, whether theinstrument is payable on demand or ata future time. (Sec.25, NIL)

MERCHANTS’ NATIONAL BANK OF ST. PAUL v.STA. MARIA SUGAR CO. (1914)

The mere discounting of the note and placing theamount of said discount to the credit of the HFVwould not then have constituted a transfer forvalue. But if the sum had subsequently beenchecked out, then value would have passed. Thegeneral rule as to the application of payments,there being no special facts to interfere, is that thefirst payments apply to the oldest debts. The firstdebits are to be charged against the first credits. Itfollows therefore, upon the facts as found, that thebank was a bona fide HFV without notice, and, inaccordance with the stipulation, judgment shouldbe entered for the plaintiff upon the note.Judgment reversed.

==



Bank credit as value - When the holder of a checkdeposits it with his bank (assuming it is not thedrawee bank) and the bank credits it to hisaccount, is the bank at this stage a HFV?

o Majority View first money inis presumed to be the firstmoney paid out

o Minority View as long asthe balance in the depositor’saccount equals or exceeds theamount of the instrumentdeposited, the latter cannot beconsidered as withdrawn for thepurpose of treating the bank asa HFV.

o (So far, there has been nodecision by the SC on thisissue.)

2. GOOD FAITHa. Holder must have taken the instrument

in good faith and that at the time it wasnegotiated to him he had no notice ofany infirmity in the instrument ordefect in the title of the personnegotiating it.

b. NOT a Holder in GOOD FAITHi. Holder acted in bad faithii. Holder had NOTICE OF DEFECT

1) ACTUAL KNOWLEDGE SEC 56. WHAT

CONSTITUTES NOTICEOF DEFECT—Toconstitute notice of aninfirmity in theinstrument or defect inthe title of the personnegotiating the same,the person to whom itis negotiated must havehad actual knowledgeof the infirmity ordefect, or knowledge ofsuch facts that hisaction in taking theinstrument amountedto bad faith.

It is therefore sufficientthat the buyer of a notehad notice orknowledge that thenote was in some waytainted with fraud. It isnot necessary that heshould know theparticulars of the fraud.

2) SUSPICIOUSCIRCUMSTANCESa. BAD FAITH - does not

require actualknowledge of the exactfraud that waspracticed; knowledgethat there wassomething wrong aboutthe assignor’sacquisition of title issufficient.

b. The burden is upon thedefendant to show thatnotwithstanding theSUSPICIOUSCIRCUMSTANCES, itacquired the check inactual good faith. (De

Ocampo & Co. v.Gatchalian)

o Purchase of aninstrument at aDISCOUNT does not,of itself, constitute badfaith. However, if theinstrument is pruchasedat a heavy discount,this fact together withother facts, may betaken into account indeciding the issue ofpurchase in good faith.(Ham v. Meritt)

VICENTE R. DE OCAMPO & CO. v.GATCHALIAN, ET. AL. (1961)

In order to show that the defendant had knowledgeof such facts that his action in taking theinstrument amounted to bad faith, it is notnecessary to prove that the defendant knew theexact fraud that was practiced upon the plaintiff bythe defendant’s assignor, it being sufficient toshow that the defendant had notice that therewas something wrong about the assignor’sacquisition of title, although he did not havenotice of the particular wrong that was committed.…The fact is that it acquired possession of theinstrument under circumstances that should haveput it to inquiry as to the title of the holder whonegotiated the check to it. The burden was,therefore, placed upon it to show thatnotwithstanding the suspicious circumstances, itacquired the check in actual good faith.One line of cases had adopted the test of thereasonably prudent man and the other that ofactual good faith. It would seem that it was theintent of the Negotiable Instruments Act toharmonize this disagreement by adopting the lattertest. Negligence on the part of the plaintiff, orsuspicious circumstances sufficient to put a prudentman on inquiry, will not of themselves prevent arecovery, but are to be considered merely asevidence bearing on the question of bad faith.

STATE INVESTMENT HOUSE v. IAC (1989)

A check with 2 parallel lines in the upper left handcorner means that it could only be deposited andmay not be converted to cash. Consequently, suchcircumstance should put the payee on inquiry andupon him devolves the duty to ascertain theholders’ title to the check or the nature of hispossession. Failing in this respect, the payee isdeclared guilty of gross negligence amounting tolegal absence of good faith and as such theconsensus of authority is to the effect that theholder of the check is not a holder in good faith.

YANG v. CA (2003)

Where Mr. A obtained by fraud from Mr. B crossedchecks payable to Mr. C, which Mr. C innocentlyreceives from Mr. A for value, Mr. C is still a holderin good faith despite the fact that the checks werecrossed. The crossing of a check does not impairthe negotiability of an instrument nor necessarilypreclude its holder from being a holder in duecourse. The crossing of a check only means that itcould only be deposited and may not be converted



into cash. Thus, such should put the holder oninquiry and upon him devolves the duty toascertain the holder’s title to the check or nature ofhis possession.

The effects are that:1. The check may not be encashed but onlydeposited in the bank.2. The check may be negotiated only once – to onewho has an account with a bank.3. The act of crossing serves as a warning to theholder that the check was issued for a definitepurpose so that he must inquire if he has receivedthe check pursuant to that purpose. Otherwise, hewould not be a holder in due course.

Where the holder Mr. C, as in this case, did nothave knowledge of Mr. A’s fraudulent actions onMr. B, and the fact that he was the payee in saidcheck, he was legally warranted to deposit theinstrument in his account with the drawee bank.Mr. C was a holder in good faith.

iii. FINANCING COMPANY

In installment sales, the buyer usually issues anote payable to the seller to cover the purchaseprice.

Many times, pursuant to a previous arrangementwith the seller, a finance company pays the fullprice of the property sold and the note is indorsedto it by the seller, subrogating it to the right tocollect the price from the buyer.

RULE In such cases, the tendency of the courtsis to protect the buyer against the finance companyin the event that the goods sold turn out to bedefective. The finance company will be subject tothe defense of failure of consideration and cannotrecover the purchase price from the buyer.

CONSOLIDATED PLYWOOD v. IFC (1987)

A FINANCING COMPANY that is the indorsee of anote issued by a buyer payable to the seller ofgoods is NOT a holder in good faith as to thebuyer. In case the goods sold turn out to bedefective, it cannot recover the purchase price ofthe goods from the buyer. The TEST OF PROXIMITYto the transaction was applied in this case. Wherethe financing company was privy to the initialtransaction, it was bound with notice of thewarranties attaching to the transaction. ItACTIVELY PARTICIPATED in the transaction, thus itcannot be a holder in good faith. This is the“protective doctrine” – favoring the interests ofindividual dealers over those of financingcompanies.

NOTE: The instrument in this case was non-negotiable, so the “active participation” discussionwas merely obiter.

SALAS v. Court of Appeals (1990)

Salas defaulted in payments for motor vehicle, thepurchase of which was financed by Filinvest. Ondemand, his defense was that the purchase wasinvested with fraud on the seller’s part. Filinvest(the financing company) was held to be a holder ingood faith, despite privity to the allegedlyfraudulent sale. Salas’ defenses were good onlyagainst the seller-indorser, and where the note wasnegotiable and validly negotiated to Filinvest, thelatter was a holder in good faith, and may recoverfrom Salas.

Note: This is the “less protective” doctrine – not somuch favorable to dealers but as compared toConsolidated, the rule here was actually in the ratiodecidendi and not mere obiter.

3.4. That at time it was negotiated to him, hehad no notice of :

o any infirmity in instrumento any defect in title of person

negotiating;1. title DEFECTIVE when (Sec. 55, NIL):

a. instrument / signature obtained byfraud, duress, force or fear or otherunlawful means OR for an illegalconsideration; or

b. instrument is negotiated in breach offaith, or fraudulent circumstances

2. NOTICE of infirmity or defect –a. actual knowledge of the infirmity or

defect OR knowledge of such facts thathis action in taking the instrumentamounted to bad faith (Sec.56, NIL)

b. Notice to an AGENT is chargeableagainst the principal.

c. INSUFFICIENT NOTICEi. CONSTRUCTIVE NOTICE (ex.

notice of defenses disclosed bypublic records, doctrine of lispendens) is insufficient to charge apurchaser of a NI with notice.

Just as a purchaser of anegotiable instrument is notput on inquiry, neither is hecharged with notice ofdefenses or equitiesdisclosed by public records,nor is he affected by thedoctrine of lis pendens.However, notice to anagent is chargeable againstthe principal.

ii. Notice of an ACCOMODATIONPARTY is not notice of a defect.

Thus, an accomodationparty (one who has signedthe instrument as maker,drawer, acceptor orendorser, withoutreceiveing value therefor,and for the purpose oflending his name to someother person) is liable onthe instrument,notwithstanding the factthat the holder knew him tobe an accomodation party.



d. RIGHT of a transferee who receivesNOTICE of any infirmity or defectBEFORE he has PAID THE FULLamount for the instrument

i. He will be deemed a HDC only tothe extent of the amount thereforepaid by him (Sec.54, NIL)

4. Effect of Qualified, Conditional andRestrictive Indorsements

A. The status of a holder as a HDC is notaffected by his taking under a qualifiedindorsement.

B. A conditional indorsement does notdeprive the conditional indorsee orsubsequent holder of the rights of a HDC.If he fulfills all the requisites in Sec. 52then he is immune from all the personaldefense.

C. A restrictive indorsement which prohibitsfurther negotiation will not prevent theindorsee from being a HDC. BUT, if hefurther indorses the instrument, then thesubsequent indorsee will not be a duecourse holder.

5. Who is Deemed HDC (burden of proof)(Sec.59)

A. General Rule: Prima facie presumption infavor of holder

B. Exception: Burden is reversed (burden onholder to prove that he or some personunder whom he claims acquired title asHDC) when it is shown that the title of anyperson who has negotiated instrument wasdefective

C. Exception to exception: There will be noreversal if the party being made liablebecame bound prior to the acquisition ofsuch defective title (i.e., where defense isnot his own) – presumption in favor ofholder

6. Rights of Holder in Due Course

6.1. Under the NIL7

1. to sue on the instrument in his ownname (Sec. 51, NIL)

2. to receive payment on the instrument– discharges the instrument (Sec. 51,NIL)

3. holds instrument free of any defect oftitle of prior parties (Sec. 57, NIL)

4. free from defenses available to priorparties among themselves (Sec.57,NIL)

5. may enforce payment of instrumentfor full amount, against all parties liable(Sec.57, NIL)

6.2. JUR: BPI v. ALFRED BERWIN & CO.Only a HDC may enforce payment on thePN. In CAB, it is not clear whether A (the

7Suggested Mnemonics: REFS: Receive and

Enforce payment, Free from any defect of title anddefenses, Sue

payee) is still the HDC since D (the maker)believed that A may have negotiated it. Thus,to compel D to pay would expose him to pay asecond time to the HDC (in case A was nolonger one). In short, the drawee may becompelled to pay only to a HOLDER of theinstrument.

6.3. DISADVANTAGE of being a NON HDC:

o The Negotiable Instruments Law doesnot provide that a holder not in duecourse can not recover on theinstrument. The disadvantage of … notbeing a holder in due course is that thenegotiable instrument is subject todefenses as if it were non-negotiable.One such defense is absence or failureof consideration. (Atrium Mgt v deLeon, 2001)

7. Rights of Purchaser from Holder in DueCourse (Sec.58)

7.1. General Rule: In the hands of any holderother than a HDC, NI is subject to samedefenses as if it were non-negotiable.

7.2. Exception: A holder who derives titlethrough a HDC and who is NOT himself APARTY TO ANY FRAUD or illegality has all rightsof such former holder in respect to all partiesprior to the latter EVEN though he himself doesnot satisfy Sec.52

8. Presumption in Favor of Due CourseHolding

A. Every holder is deemed prima facie to be aholder in due course;1. BURDEN SHIFTS when it is shown that

the title of any person who hasnegotiated the instrument wasdefective. Holder MUST PROVE that heor some person under whom he claimsacquired the title as a holder in duecourse.

2. But the last mentioned rule does notapply in favor of a party who becamebound on the instrument prior to theacquisition of such defective title.(Sec.59., NIL)

B. However, this presumption arises only infavor of a person who is a holder as definedin Section 191 of the NegotiableInstruments Law, meaning a “payee orindorsee of a bill or note, who is inpossession of it, or the bearer thereof.”(Yang v CA, 2003)



Chapter V.

DEFENSES & EQUITIES

1. Defenses in General

1.1. REAL defense – attaches to instrumenton the principle that there was no contract atall; available against ALL holders includingholders in due course. They are those whichattach to the instrument itself and generally,disclose an absence of one of the essentialelements of a contract.

1.2. PERSONAL defense – grows out of theagreement or conduct of a particular person inregard to the instrument which renders itinequitable FOR HIM, though holding the legaltitle, to enforce it against the party sought tobe made liable; not available against aHDC.can be raised only against holders not ondue course. Here, the true contract appears ,but for some reason , the defendant is excusedfrom the obligation to perform.

1.3. Equities or Claims of Ownership are of2 Kinds

1. Legal – one who has legal title to theinstrument may recover possessionthereof even from holder in due course

2. Equitable – may only recover from aholder not in due course

2. Real Defenses

2.1. Incapacity: REAL defense but availableonly to the incapacitated party (ex. minor orcorporation); the indorsement or assignmentof the instrument by a corp. or by an infantpasses the property therein, notwithstandingthat from want of capacity, the corp. or infantmay incur no liability thereon. (Sec.22, NIL)

2.2. Incomplete, Undelivered Instrument

1. Instrument will not, if completed andnegotiated without authority, be a validcontract in the hands of ANY holder, asagainst any person whose signaturewas placed thereon before delivery.(Sec. 15, NIL)

2. Who may be estopped from raising thereal defense under Sec 15? A draweebank whose negligent custody of thechecks, after partial execution,contributed to its escape

3. Personal Defenses

3.1. Complete, Undelivered Instrument

a. CONCLUSIVE presumption of a validdelivery – where the instrument is in thehands of a HDC

b. PRIMA FACIE presumption of a validdelivery – where the instrument is nolonger in the possession of a party whosesig appears thereon (Sec. 16, NIL)

3.2. Incomplete, Delivered (sec.14)

1. This is a personal defense only becauseprovision states that if any instrumentso completed is negotiated to a holderin due course, it is valid and effectualfor all purposes

2. 2 Kinds of Writings:i. Where instrument is wanting in

any material particular: personin possession has prima facieauthority to complete it by filing upblanks therein

ii. Signature on blank paperdelivered by person making thesignature IN ORDER that the papermay be CONVERTED into a NI operates as prima facie authority tofill up as such for any amount

3. The authority to fill up is limited by thefollowing:a. When completed, it may be

enforced upon the parties theretoonly if it was filled strictly inaccordance with the authority given

b. The filling up must be within areasonable time

NOTE: If the signature on a paper isgiven only for autograph purposesand the same is converted into a NI,this will amount to forgery,constituting thus a valid defense evenagainst a HDC

4. This provision contemplates deliveredinstruments, so the person in possesioncannot be a thief or a finder but aperson in lawful possession- one towhom the instrument has beendelivered.

5. In order that any such instrument,when completed, may be enforcedagainst any person who became a partythereto prior to its completion:a. must be filled up strictly in

accordance w/ AUTHORITY givenb. within a REASONABLE TIME – in

determining what is reasonabletime, regard is to be had to the (1)nature of the instrument, (2) usageof trade or business (if any) withrespect to such instruments, and 3)the facts of the particular case

6. BUT if negotiated to HDC, may enforceit as if it had been filled up properly

7. What details may be filled up?a. Amount, as to a signed blank paperb. Date (Sec 13 “… The insertion of a

wrong date does not void theinstrument in the hands of asubsequent holder in duecourse…”)

c. Place of paymentd. Name of payee

3.3. Lack of Consideration(Sec. 28)

1. ABSENCE or failure of consideration is amatter of defense as against any personnot a HDC.2. PARTIAL FAILURE of consideration is adefense pro tanto whether the failure is anascertained and liquidated amount orotherwise .



3.4. Illegality

1. In general, a PERSONAL defense even ifCC1409 provides that a contract with anillegal cause is void.

2. REAL when the law expressly providesfor illegality as a real defense (Statutorydeclaration of illegality

RODRIGUEZ v MARTINEZ (1905)

Maker cannot be relieved from the obligation ofpaying the holder the amount of the note allegedto have been executed for an unlawfulconsideration. (Illegality is personal, so defenseonly against a holder not in due course)

The holder paid the value of the note to itsformer holder. He did so without being aware ofthe fact that the note had an unlawful origin. Heaccepted note in good faith, believing the notewas valid and absolutely good. The maker evenassured the holder before the purchase that thenote was good and that he would pay it at adiscount .

3.5. Duress

1. In general, PERSONAL defense.

2. REAL if duress so serious as to giverise to a real defense for lack ofcontractual intent

3. CAMPOS: There may be cases wherethe duress employed is so serious thatit will give rise to a real defensebecause of the lack of contractualintent . Although the signer may knowwhat he is signing, there may bewanting the intent or willingness to bebound. Then it becomes a real defense.

4. Sometimes Real, Sometimes Personal

4.1. Forgery (Sec. 23): made withoutauthority of person whose signature it purportsto be

1. In general, a REAL defense: …Effect

a. signature is wholly inoperativeb. no right to retain instrument, or

give discharge, or enforce paymentagainst any party thereto, can beacquired through or under suchsignature (unless forged signatureunnecessary to holder’s title)

c. No subsequent party can acquirethe right against any party thereto(prior to the forgery) to:i. Retain the instrumentii. Give a discharge there foriii. Enforce payment thereof

2. PERSONAL if the party against whom itis sought to enforce such right is

PRECLUDED from setting upforgery/want of authority;

a. Who are PRECLUDED?i. parties who make certain

warranties, like a generalindorser or acceptor afterforgery (Sec. 62, NIL)

ii. estopped / negligent partiesiii. parties who ratify (BUT there

are conflicting views whether“precluded” includesratification)

b. One view holds that a forgedsignature cannot be ratifiedbecause ratification involves therelation of agency and a forgerdoes not assume to act for another.

3. ACCEPTANCE AND PAYMENT of a forgedinstrumentWhen there is acceptance and paymentof a forged instrument, the rights andliabilities of the parties depend onwhether the forgery pertains to thedrawer/maker’s signature or merelyof an indorsement.a. Drawer/Maker’s signature

i. PRICE v NEAL, The drawee whohad paid an accepted bill aswell as a non-accepted bill,each of which was forged, couldNOT recover the money paidout on the bill. The neglect wason the part of the drawee.

PNB v QUIMPO (1988)

A bank is bound to know the signatures of itsdepositors. If bank pays a forged check it mustbe considered as making the payment out of itsown funds and cannot charge the account of thedepositor whose signature was forged.

SAMSUNG CONSTRUCTION CO., INC. VS. FAREAST BANK AND TRUST CO. AND CA (2004)

Consequently, if a bank pays a forged check, itmust be considered as paying out of its funds andcannot charge the amount so paid to the accountof the depositor. A bank is liable, irrespective ofits good faith, in paying a forged check.

ii. Extensions Of The Price v NealDoctrine: The bar to recovery(Price v Neal doctrine) isextended to overdrafts and stoppayment orders

1) Overdraft occurs when acheck is issued for anamount more than what thedrawer has in deposit withthe drawee bank. RULE:The drawee who pays theholder of the bill cannotrecover from the holderwhat he paid under mistake

2) Stop Payment Order isone issued by the drawer of



a check countermanding hisfirst order to the draweebank to pay the check.RULE: The drawee bank isbound to follow the order,provided it is received priorto its certification orpayment of the check

3) SOME EXCEPTIONS:o If the payment to holder is

a legitimate debt of thedrawer which the holder indue course could haverecovered from the draweranyway.

o If the stop order comesafter the bank has certifiedor accepted the check, thebank is under the legal dutyto pay the holder and willnot be liable to the drawerfor doing so.

iii. Effect Of Negligence OfDepositor - If proximate causeof loss, the bank (drawee) isnot liable

1) It is the duty of thedepositor/drawer tocarefully examine bank’sstatements, cancelledchecks, his check stubs,and other pertinent recordswithin a reasonable timeand to report any errorswithout unreasonabledelay.

2) If a drawer/depositor’snegligence and delayshould cause a bank tohonor a forged check,drawer cannot latercomplain should bankrefuse to recredit hisaccount.

ILUSORIO vs CA (2002)

True, it is a rule that when a signature is forgedor made without the authority of the personwhose signature it purports to be, the check iswholly inoperative.However, the rule does provide for an exception,namely: “unless the party against whom it issought to enforce such right is precludedfrom setting up the forgery or want ofauthority.” In the instant case, it is theexception that applies. Petitioner is precludedfrom setting up the forgery, assuming there isforgery, due to his own negligence in entrustingto his secretary his credit cards and checkbookincluding the verification of his statements ofaccount.

SAMSUNG CONSTRUCTION CO., INC. VS. FAREAST BANK AND TRUST CO. AND CA (2004)

The general rule remains that the drawee whohas paid upon the forged signature bears theloss.The exception to this rule arises only whennegligence can be traced on the part of the

drawer whose signature was forged, and theneed arises to weigh the comparative negligencebetween the drawer and the drawee to determinewho should bear the burden of loss.Still, even if the bank performed with utmostdiligence, the drawer whose signature was forgedmay still recover from the bank as long as he orshe is not precluded from setting up the defenseof forgery. After all, Section 23 of the NegotiableInstruments Law plainly states that no right toenforce the payment of a check can arise out of aforged signature. Since the drawer, SamsungConstruction, is not precluded by negligence fromsetting up the forgery, the general rule shouldapply.

b. Indorsement:i. When it is the signature of

the indorser that is forged,the drawee and drawer CANrecover vs holder1) The drawee can recover the

amount paid by him incases where only anindorsement has beenforged . This is becausedrawee makes no warrantyas to the genuineness ofany indorsement.

2) Generally, the drawee mayonly recover from theholder. Should he fail to doso(for instance due toinsolvency) he cannotrecoup his loss by chargingit to the drawer’s account

3) Although adepositor/drawer owes aduty to his drawee bank toexamine his cancelledchecks, he has no similarduty as to forgedindorsements.

4) The drawer, as soon as hecomes to know of the aforged indorsement shouldpromptly notify the draweebank

REPUBLIC v EBRADA

Drawee can recover. It is not supposed to be theduty of the drawee to ascertain whether thesignatures of the payee or indorsers are genuineor not.

ii. When drawee may recoverfrom DRAWER

1) Where the instrument isoriginally a bearerinstrument, because theindorsement can bedisregarded as beingunnecessary to the holder’stitle

2) Indorsement forged by anemployee or agent of thedrawer

3) If due to the drawer’snegligence/delay, theforgery is not discovered



until it is too late for thebank to recover from theholder or the forger

GEMPESAW v CA, PBC

While there is no duty resting on the drawer to lookfor forged indorsements on his cancelled checks, adepositor is under a duty to set up anaccounting system and business procedure asare reasonably calculated to prevent or renderthe forgery of indorsements difficult,particularly by the depositor’s own employees.As a rule the drawee bank who has paid the checkwith forged indorsement, cannot charge thedrawer’s account for the amount of the said check.An exception to this rule is where the drawer isguilty of such negligence which causes the bank tohonor the check.

iii. When drawee may notrecover from holder

1) Where the instrument isoriginally a bearerinstrument , because theindorsement can bedisregarded as beingunnecessary to the holder’stitle

2) If drawee fails to actpromptly , if he delays ininforming the holder whomhe paid

iv. Between Drawee Bank andCollecting Bank1) Collecting bank only liable

for forged indorsementsand not forgeries of thedrawer or maker’ssignature. (PNB v CA,1968)

2) The collecting bank or lastindorser generally suffersthe loss because it has theduty to ascertain thegenuineness of all priorindorsements consideringthat the act of presentingthe check for payment tothe drawee is an assertionthat the party making thepresentment had done itsduty to ascertain thegenuineness of theindorsements. (BPI v CA,1992)

3) In presenting the checks forclearing the collectingagent, made an expressguarantee on the validity of“all the priorendorsements”. ( BDO vEquitable bank)

4) The drawee bank is notsimilarly situated as thecollecting bank because theformer makes no warrantyas to the genuineness ofany indorsement. Thedrawee bank’s duty is but

to verify the genuineness ofthe drawer’s signature andnot of the indorsementbecause the drawer is itsclient.

5) Where the negligence ofthe drawee bank is theproximate cause of thecollecting bank’s paymentof a check with a forgedindorsement, the draweebank may be held liable tothe collecting bank .

6) When both are guilty ofnegligence, the degree ofnegligence of each will beweighed in considering theamount of loss which eachshould bear. (refer to BPI vCA, 1992)

GREAT EASTERN LIFE v HONGKONG &SHANGHAI BANK (1922)

“Where a check is drawn payable to the order ofone person and is presented to a bank by anotherand purports upon its face to have been dulyindorsed by the payee of the check , it is the dutyof the bank to know that the check was dulyindorsed by the original payee and where the bankpays the amount of the check to a 3rd person , whohas forged the signature of the payee , the lossfalls upon the bank who cashed the check , and itsremedy is against the person to whom it paid themoney.”

BPI v CA (1992)

Section 23 of the NIL has 2 parts. The first partstates the general rule that a forged signature iswholly inoperative and payment made through orunder such signature is ineffectual. The second partadmits of exception. In this jurisdiction, thenegligence of the party invoking the forgery is anexception to the general rule.Both drawee and collecting bank werenegligent in the selection and supervision of theiremployees resulting in the encashment of thechecks by the impostor. Both banks were not ableto overcome the presumption of negligence in theselection and supervision of their employeesConsidering the comparative negligence of theparties, the demands of substantive justice aresatisfied by allocating the loss and the costs on a60-40 ratio.

ASSOCIATED BANK v CA (1996)

By reason of the statutory warranty of a generalindorser in Section 66 of the NegotiableInstruments Law, a collecting bank which indorsesa check bearing a forged indorsement and presentsit to the drawee bank guarantees all priorindorsements, including the forged indorsement. Itwarrants that the instrument is genuine, and that itis valid and subsisting at the time of hisindorsement. Because the indorsement is a forgery,the collecting bank commits a breach of thiswarranty and will be accountable to the draweebank. This liability scheme operates without regardto fault on the part of the collecting/presentingbank. Even if the latter bank was not negligent, it



would still be liable to the drawee bank because ofits indorsement.

PCIB v. CA (2001)

… A bank which cashes a check drawn uponanother bank, without requiring proof as to theidentity of persons presenting it, or makinginquiries with regard to them, cannot hold theproceeds against the drawee when the proceeds ofthe checks were afterwards diverted to the handsof a third party. In such cases the drawee bankhas a right to believe that the cashing bank (or thecollecting bank) had, by the usual properinvestigation, satisfied itself of the authenticity ofthe negotiation of the checks.Thus, one who encashed a check which had beenforged or diverted and in turn received paymentthereon from the drawee, is guilty of negligencewhich proximately contributed to the success of thefraud practiced on the drawee bank.

4.2. Material Alteration (Sec.124)

1. As a DEFENSE:a. PERSONAL defense when used to

deny liability according to the tenorof the instrument

b. REAL defense when relied on todeny liability according to thealtered terms.

2. What constitutes material alteration?a. Statutory: Review Sec.125, NIL

i. change dateii. sum payable, either for

principal or interestiii. time or place of paymentiv. number/relations of partiesv. medium/currency of payment,vi. adds place of payment where

none specified,vii. other change/addition altering

effect ofviii. instrument in any respect

b. Jurispridencei. An alteration is said to be

material if it changes the effectof the instrument. It meansthat an unauthorized change inan instrument that purports tomodify in any respect theobligation of a party or anunauthorized addition of wordsor numbers or other change toan incomplete instrumentrelating to the obligation of aparty. (PNB v CA, 1996)

ii. A material alteration is onewhich changes the items whichare required to be stated underSection 1 of the NegotiableInstruments Law. (Metrobank vCabilzo, 2006)

3. IMMATERIAL ALTERATIONa. Campos: Any other alteration

would be non-material and wouldnot affect the liability of any priorparty . Note that #7 is a catch-all

provision such that sec 125 maystill have broad applicability.

b. Alterations of the serial numbers donot constitute material alterationson the checks... [It] is not anessential requisite for negotiabilityunder Section 1 of the NegotiableInstruments Law. Theaforementioned alteration did notchange the relations between theparties. The name of the drawerand the drawee were not altered.The intended payee was the same.The sum of money due to thepayee remained the same. (PNB vCA, 1996; Int’l Corporate Bank vCA, 2006)

c. EFFECT: an innocent alteration(generally, changes on items otherthan those required to be statedunder Sec. 1, N. I. L.) andspoliation (alterations done by astranger) will not avoid theinstrument, but the holder mayenforce it only according to itsoriginal tenor. (PNB v CA, citing J.Vitug)

4. EFFECT OF MATERIAL ALTERATION

a. General Rule: Where NI materiallyaltered w/o the assent of all partiesliable thereon it is AVOIDED,except as against:i. party who has himself made,

authorized or assented toalteration

ii. subsequent indorser becauseby indorsement he warrantsthat the instrument is in allrespects what it purports to beand that it was valid andsubsisting at the time of hisindorsement (Secs. 65 and66, NIL)

b. As to a HOLDER in DUE COURSEi. When an instrument that has

been materially altered is in thehands of a HDC not a party tothe alteration, HDC mayenforce payment thereofaccording to orig. tenor

ii. Alteration must NOT beapparent on the face of theinstrument for the holder thenwould not be a holder in duecourse

iii. Where the interest rate isaltered , the holder in duecourse can recover the principalsum with the original rate ofinterest

c. When alteration is of the amount orthe interest rate is altered, theholder can recover the ORIGINALAMOUNT/interest rate.

5. DRAWER’S NEGLIGENCEa. The general rule is that the drawee

cannot charge against the drawer’saccount the amount of an alteredcheck.

b. BUT, the drawer’s negligence,before or after the alteration, may



estop him from setting upalteration as a defense.

c. However, the drawer is not boundto so prepare the check thatnobody else can successfullytamper with it (ex. a drawer cannotbe expected to foresee that hisclerk will use acid to alter hischecks, Critten v. Chemical NatlBank)

d. Where the negligence of the drawerconsists in failing to discoveralterations previously made whichhe could have discovered by acomparison of the cancelled checksand check stubs or by diligentobservation of his records andcould thus have prevented thedrawee bank from subsequentlycashing other altered checks , thedrawee can charge the subsequentcheck against the negligentdrawer’s account.

6. EFFECT OF DRAWEE’S ACCEPTANCE OFALTERED CHECKSa. Where the interest rate is altered,

the HDC can recover the principalsum with the original rate ofinterest.i. EXCEPT: A subsequent

indorser, because by theindorsement he warrants thatthe instrument is in allrespects what it purports tobe and that it was valid andsubsisting at the time of hisindorsement (Sec 65 and 66)

b. RECOVERY after acceptance orpayment by the drawee banki. FROM HOLDER

1) Prevailing view - Yes, bec.of (1) payment undermistake, (2) Sec. 124 and(3) Sec.62 in relation toSec. 132

2) Minority view – No, bec. of(1) estoppel, (2) stability oftransactions and (3) bank isin a better position toshoulder the loss.

3) SC:a. adopted the

minority view buton a differentbasis—the CentralBank Circularregulating clearingof checks andlimiting the periodwithin which adrawee bank mayreturn a spuriouscheck

b. but if holder isguilty of negligencewhich proximatelycontributed to theerroneous paymentby drawee, holderliable (PCIB v CA,2001)

MONTINOLA v PNB (1951)

The insertion of the words “Agent PhilippineNational Bank” converted the bank from a meredrawee to a drawer and therefore changes itsliability, constitutes material alteration of theinstrument without consent of the parties liablethereon and so discharges the instrument.Drawee bank is not liable.

HONGKONG & SHANGHAI BANK v PEOPLESBANK (1970)8

The failure of the drawee bank to call theattention of the collecting bank as to suchalteration until after the lapse of 27 days wouldnegate whatever right it might have had. Theremedy of the drawee bank is against the partyresponsible for the forgery or alteration.

REPUBLIC BANK v CA (1991)

The collecting bank is protected by the24-hourclearing house rule from the liability to refund theamount paid by the drawee bank. [Note: Amuch recent Circular changed the point ofreckoning for the return of the altered check fromwithin 24 hours from the clearing to within 24hours from the discovery of the alteration]

ASSOCIATED BANK v CA (1996)The rule mandates that the checks be returnedwithin twenty-four hours after discovery of theforgery but in no event beyond the period fixedby law for filing a legal action. The rationale ofthe rule is to give the collecting bank (whichindorsed the check) adequate opportunity toproceed against the forger. If prompt notice isnot given, the collecting bankmaybe prejudicedand lose the opportunity to go after its depositor.

ii. FROM DRAWER: drawee has noright to seek reimbursementfrom drawer for its erroneouspayment

METROBANK v CABILZO (2006)

In addition, the bank on which the check is drawn,known as the drawee bank, is under strict liabilityto pay to the order of the payee in accordance withthe drawer’s instructions as reflected on the faceand by the terms of the check. Payment madeunder materially altered instrument is not paymentdone in accordance with the instruction of thedrawer.When the drawee bank pays a materially alteredcheck, it violates the terms of the check, as well asits duty to charge its client’s account only for bonafide disbursements he had made. Since thedrawee bank, in the instant case, did not payaccording to the original tenor of the instrument, asdirected by the drawer, then it has no right to claimreimbursement from the drawer, much less, theright to deduct the erroneous payment it madefrom the drawer’s account which it was expected totreat with utmost fidelity.

BPI v BUENAVENTURA (2005)

8 Affirmed the minority view that drawee cannot recover



…It [the bank] should be able to detect alterations,erasures, superimpositions or intercalationsthereon, for these instruments are prepared,printed and issued by itself, it has control of thedrawer's account, and it is supposed to be familiarwith the drawer's signature. It should possessappropriate detecting devices for uncoveringforgeries and/or alterations on theseinstruments…There is nothing inequitable in such a rule for if inthe regular course of business the check comes tothe drawee bank which, having the opportunity toascertain its character, pronounces it to be validand pays it, as in this case, it is not only a questionof payment under mistake, but payment in neglectof duty which the commercial law places upon it,and the result of its negligence must rest upon it.

c. REMEDY: Unless a forgery oralteration is attributable to the faultor negligence of the drawerhimself, the remedy of the draweebank that negligently clears aforged and/or altered check forpayment is against the partyresponsible for the forgery oralteration, otherwise, it bears theloss. (BPI v Buenaventura, 2005)

4.3. Fraud

1. REAL DEFENSEa. fraud in execution / fraud in

factum: did not know that paperwas a NI when it was signed

b. not liable to ANY holder2. PERSONAL DEFENSE

a. Fraud in inducement: knows it is NIbut deceived as to value/termsi. Available as a defense against

non-HDCb. Fraud in factum accompanied by

NEGLIGENCE of maker or signeri. Where the signor does not

know the nature of theinstrument he signs, but where,by the exercise of ordinarycare, he could have discoveredit.

ii. Three factors are typically usedin determining the existence ofnegligence:1) legal character of the

instrument which the signerthinks he is signing

2) the physical condition ofthe signer and his ability toread

3) whether the signer had theopportunity at the time ofsigning, to ascertain thelegal nature of the paper heis executing

Chapter VI.

LIABILITY OF PARTIES

1. In General

1.1. Parties primarily liable:

1. person who by the terms of the instrumentis absolutely required to pay the same.a. Maker of promissory noteb. Acceptor of bill of exchange

2. unconditionally liable; duty bound to paythe holder at date of maturity, WON holderdemands payment from him, and he is notrelieved from liability even if the instrumentshould become overdue due to failure ofholder to make such demand.

1.2. Parties secondarily liable:

1. SECONDARY PARTIES:

a. Indorsers, both note and billb. Drawer of bill

2. Conditionally liable; not bound to pay unlessthe following has been fulfilled

a. Due presentment or demand fromprimary party for payment or acceptance;

b. Dishonor by such party; and

c. Taking of proceedings required by lawafter dishonor.

2. Primary Parties

2.1. PAYMENT: Presentment and Tender1. Presentment for payment not necessary

to charge primary party2. if the instrument is, by its terms, payable

at a special place, and he is able and willingto pay it there at maturity, such ability andwillingness are equivalent to a tender ofpayment upon his part. (Sec. 70, NIL)

2.2. Liability of MAKER1. Promises to pay it according to its tenor

2. Admits existence of payee and his thencapacity to indorse.

a. Therefore, PRECLUDED from setting upthe following defenses:i. the payee is a fictitious personii. the payee was insane, a minor, or a

corporation acting ultra vires

2.3. DRAWEE and ACCEPTOR1. Drawee

a. A person on whom a bill ofexchange or check is drawn andwho is ordered to pay itb. Liability of DRAWEE to:

2. Holder1) Not liable on the instrument

until he accepts it and even aholder in due course cannot suehim on the instrument beforehis acceptance

2) A bill/check of itself does notoperate as an assignment ofthe funds in the hands of thedrawee/bank (Sec 189, NIL),and the drawee/bank is NOT



LIABLE on the bill unless andUNTIL he/it ACCEPTS (orcertifies) the same. (Sec. 127,NIL)

3. Drawer1) Payment despite Stop PaymentOrder

a) Before payment orcertification by the bank,the drawer maycountermand the order,and payment thereafter tothe payee by the bank iswrongful.

b) Since a check is not anassignment of the drawer’sfund, the bank is liable forpaying it in disregard of thecountermand.

c) Moreover, drawee can nolonger recover what itvoluntarily paid to theholder of the uncertifiedand unaccepted instrument.

2) Refusal to Accepta) Under some circumstances,the drawee who refuses toaccept may be made liable forbreach of contract or fordamages based on a tort eitherto the drawer (refer to Aranetav. Bank of America) or to theholder (refer to HSBC v.Catalan)

ARANETA V. BANK OF AMERICA(1971)

This was an action by a depositor against a bankfor damages resulting from the wrongful dishonorof the depositor's checks. HELD: Araneta's claim fortemperate damages is legally justified because ofthe adverse reflection on the financial credit of abusinessman, a prized and valuable asset, w/cconstitutes material loss.

HSBC VS. CATALAN (2004)

HSBC is not being sued on the value of the checkitself but for how it acted in relation to Catalan’sclaim for payment despite the repeated directivesof the drawer Thomson to recognize the check thelatter issued.

Her allegations in the complaint that the grossinaction of HSBC on Thomson’s instructions, as wellas its evident failure to inform Catalan of thereason for its continued inaction and non-paymentof the checks, smack of insouciance on its part, aresufficient statements of clear abuse of right forwhich it may be held liable under Article 19 of theCivil Code for any damages she incurred resultingtherefrom.

HSBANK’s actions, or lack thereof, preventedCatalan from seeking further redress with Thomsonfor the recovery of her claim while the latter wasalive.

3. Acceptor: Liability

a. (Sec.62, NIL) Drawee is not liableunless he accepts the bill and in doingso, he engages to pay the bill accordingto the tenor of his acceptance, andadmits the following:i. existence of drawerii. genuineness of his signatureiii. his capacity and authority to draw

the instrumentiv. existence of payee and his then

capacity to endorseb. Meaning of "according to the tenor

of his acceptance"i. Majority and prevailing view:

Where alteration consists in raisingthe amount payable, acceptor liableto HDC only as to its originalamount; if the alteration of payee'sname, paying banks cannot chargedrawer's account with the amountof the check because its duty is topay only “according to the order ofthe drawer.”

ii. Common law rule: Acceptor ofaltered check not liable to innocentholder except for the originalamount

2.4. Acceptance

1. IN GENERAL:a. Definition:

i. "Acceptance" means an acceptancecompleted by delivery or notification(Sec. 19, NIL)ii. The signification by the drawee of hisassent to the order of the drawer (Sec132, NIL)

b. REQUISITES for a valid acceptance(Sec 132, NIL)

i. It must be in writing and signed bythe drawee;

1) Thus there is no valid orimplied acceptance except asprovided by Sec. 137 relatingto constructive acceptance

ii. It must not express that the draweewill perform his promise by any othermeans than the payment of money.iii. does not change the implied

promise of acceptor to pay only inmoney

c. MANNER of acceptancei. Campos: Usually made by writing

the word “accepted” and signingimmediately below1) BUT, drawee’s signature alone

is sufficient (Campos citingLawless v. Temple)

ii. Sec 133, NIL: The holder of a billpresenting the same for acceptancemay require that the acceptance bewritten on the bill and if suchrequest is denied, may treat the billas dishonored1) Effect: holder may go against

the party’s secondarily liable—the drawer and the indorsers

iii. Acceptance of an INCOMPLETE bill(Sec 138, NIL)1) A bill may be accepted:

a) before it has been signedby the drawer, or



b) while otherwise incomplete,or

c) when it is overdue, ord) after it has been dishonored

by a previous refusal toaccept, or by non payment

2) But when a bill payable aftersight is dishonored by non-acceptance and draweesubsequently accepts it, theholder, in the absence of diffagreement, is entitled to havebill accepted as of date of the1st presentment.a) Sec. 138, NIL allows

acceptance to be madewhile the bill isincomplete.

b) The bill may be acceptedeven after it is overdue ordishonored, since aninstrument DOES NOTLOSE ITS NEGOTIABILITYby the mere fact that itsmaturity date has passed orthe drawee’s refusal toaccept or pay it.

d. PERIOD within which to accepti. The drawee is allowed 24 hours

after presentment to decide WONhe will accept the bill; theacceptance, if given, dates as ofthe day of presentation. (Sec. 136,NIL)

ii. Effect of non-acceptance within theprescribed period1) Where bill is duly presented

and is not accepted withinprescribed time, the personpresenting it must treat the billas dishonored by non-acceptance or he loses right ofrecourse against the drawerand indorsers. (Sec. 150, NIL)

2. CONSTRUCTIVE ACCEPTANCE: occurs inthe following circumstances

a. SEC 137, NIL: Where the drawee

i. destroys the bill, or

ii. refuses within 24hrs or such otherperiod as the holder may allow, toreturn the bill accepted or non-accepted to the holder

b. Under the clearing house rules, thedrawee bank’s failure to return within theprescribed time will be deemed payment oracceptance of the check.

c. If there is not demand for the return ofthe bill and the drawee keeps it until afterthe expiration of said period withoutexpressly accepting or refusing it; twoviews:

i. Constitutes constructive notice

ii. Constitutes dishonor becauseSec.137, NIL uses the word "refuses"

d. Acceptance, if given, will retroact to dateof presentation.

SUMCAD v. PROVINCE OF SAMAR (1956)

There was implied acceptance in view of thecircumstances of the case (furnishing ofphotostatic copies, presentment forcertification) by voluntary assuming theobligation of holding so much deposit as wouldbe sufficient to cover the amount of the check.

3. ACCEPTANCE ON A SEPARATEINSTRUMENT

e. Extrinsic acceptance - acceptance iswritten on a paper other than the billitself; doesn’t bind the acceptor exceptin favor of a person to whom it isshown and who, on the faith thereof,receives the bill for value. (Sec. 134,NIL); acceptance of an existing bill

f. Virtual acceptance - unconditionalpromise in writing to accept a billbefore it is drawn; deemed an actualacceptance in favor of every personwho, upon the faith thereof, receivesthe bill for value. (Sec. 135, NIL);acceptance of future bill

g. In both cases, the acceptance mustclearly and unequivocally identifythe bill to which the acceptance refers.

4. KINDS OF ACCEPTANCE: Anacceptance is either (1) general or (2)qualified.a. GENERAL - assents without

qualification to the order of the drawer.(Sec.139, NIL); Includes acceptanceto pay at a particular place; unlessexpressly states that bill is to be paidthere only and not elsewhere. (Sec.140, NIL)

b. QUALIFIED - in express terms variesthe effect of the bill as drawn. (Sec.139, NIL)i. Conditional; payment by the

acceptor dependent on thefulfillment of a condition thereinstated;

ii. Partial; to pay part only of theamount for which the bill is drawn;

iii. Local; to pay only at a particularplace;

iv. Qualified as to time;v. The acceptance of some, one or

more of the drawees but not of all.(Sec. 141, NIL)1) The holder may refuse to take

a qualified acceptance; maytreat the bill as dishonored bynon-acceptance.

2) Where a qualified acceptance istaken, the drawer and indorsersare discharged from liabilityon the bill unless they haveauthorized the holder to takea qualified acceptance, orsubsequently assent thereto.

3) When the drawer or an indorserreceives notice of a qualifiedacceptance, he must, within areasonable time, express hisdissent to the holder or he willbe deemed to have assentedthereto. (Sec. 142, NIL)



c. TRADE - a draft or bill of exchangewith a definite maturity, drawn by aseller on a buyer for the purchase priceof goods, bearing across its face theacceptance of the buyer; always statesupon its face the transaction fromwhich it arose.

d. BANKER'S acceptance - a negotiabletime draft or bill of exchange drawn onand accepted by a commercial bank.

2.5. CHECKS : acceptance and certification1. Definition: A check is an instrument in theform and nature of a BE, but an unlike anordinary bill, always payable on demand andalways drawn on a bank.2. Kinds:

a. Cashier's or manager's - drawn by abank on itself and its issuance has theeffect of acceptance; since the drawer anddrawee are the same, the holder may treatit is either a BE or PN.b. Memorandum check - where the word"memorandum" or "memo" is writtenacross its face, signifying that the drawerwill pay the holder absolutely, without needof presentment.c. Traveler's check - upon which theholder's signature must appear twice --first when it is issued, and again when it iscashed.d. Crossed – when the name of aparticular banker or a company is writtenbetween the parallel lines drawn.

STATE INVESTMENT HOUSE V. IAC

Crossed check should put the payee on inquiry toascertain the holders’ title to the check or thenature of his possession. Failing this, the payee isdeclared guilty of gross negligence to the effectthat the holder of the check is not a holder in goodfaith. Effects of a crossed check:

(a) the check may not be encashed but onlydeposited in the bank;

(b) the check may be negotiated only once – toone who has an account with the bank; and

(c) the act serves as a warning to the holderthat the check has been issued for adefinite purpose so that he must inquire ifhe has received the check pursuant to thatpurpose, otherwise, he is not a HDC.

BATAAN CIGAR & CIGARETTE FACTORY, INC.v. CA

The negotiability of a check is not affected by itsbeing crossed, whether specially or generally. Itmay legally be negotiated as long as the one whoencashes the check with the drawee bank isanother bank, or if it is especially crossed, by thebank mentioned between the parallel lines.

RP v. PNB (1961)

Demand drafts have not been presented eitherfor acceptance or for payment, thus the bank neverhad any chance of accepting or rejecting them; assuch, these cannot be subject of escheat.

Cashier's check is the substantial equivalent of acertified check and is thus subject to escheat.

Telegraphic transfers are likewise subject toescheat because upon making payment completethe transaction insofar as he is concerned, thoughinsofar as the remitting bank is concerned, thecontract is executory until the credit is established.

PAL V. CA (1990)

A check, whether a manager's check or ordinarycheck, and an offer of a check in payment of a debtis not a valid tender of payment and may berefused receipt by the obligee or creditor.

The issuance of the check to a person authorized toreceive it operates to release the judgment debtorfrom any further obligations on the judgment.

INTERNATIONAL CORPORATE BANK v GUECO(2001)

A manager’s check is one drawn by the bank’smanager upon the bank itself. It is similar to acashier’s check both as to effect and use. Acashier’s check is a check of the bank’s cashier onhis own or another check. In effect, it is a bill ofexchange drawn by the cashier of a bank upon thebank itself, and accepted in advance by the act ofits issuance. It is really the bank’s own check andmay be treated as a promissory note with the bankas a maker. The check becomes the primaryobligation of the bank which issues it andconstitutes its written promise to pay upondemand. The mere issuance of it is consideredan acceptance thereof. If treated as promissorynote, the drawer would be the maker and in whichcase the holder need not prove presentment forpayment or present the bill to the drawee foracceptance

EPCIB v ONG (2006)

A manager’s check is an order of the bank to pay,drawn upon itself, committing in effect its totalresources, integrity and honor behind its issuance.By its peculiar character and general use incommerce, a manager’s check is regardedsubstantially to be as good as the money itrepresents.

3. Clearinga. Clearing - check collection processb. Clearing house - where

representatives of different banks meetevery afternoon of every business day toreceive the envelopes containing checksdrawn against the bank he represents forexamination and clearance.

4. Certificationa.Definition

i. an agreement by which a bankpromises to pay the check at anytime it is presented for payment

ii. When check certified by bank onwhich it is drawn, equivalent toacceptance

b. Requisites for a Valid Certificationi. Must be in writingii. Made on the check or another

instrument



iii. Check must be payable1) Checks cannot be certified

before payablec. Liability

i. Bank which certifies1) Becomes liable as an

acceptor2) REFUSAL to certify a check

doesn’t constitute dishonor; theholder at that stage cannot exercisehis right of recourse against thedrawer and the indorsersii. If procurement by:

1)Holdera) The bank becomes the

solidary debtor, andb) The drawer and all

indorsers discharged fromall liability (versus ordinarybill of exchange – notdischarged)

2) Drawera) secondary parties not

released

ROMAN CATHOLIC BISHOP V. IAC (1990)

A certified personal check is not legal tender nor isit the currency stipulated, and therefore cannotconstitute valid tender of payment.

NEW PACIFIC TIMBER v. SENERIS (1980)

(as cited in EPCIB v. Ong, Sept. 2006)

[S]ince the said check had been certified by thedrawee bank, by the certification, the fundsrepresented by the check are transferred from thecredit of the maker to that of the payee or holder,and for all intents and purposes, the latter becomesthe depositor of the drawee bank, with rights andduties of one in such situation. Where a check iscertified by the bank on which it is drawn, thecertification is equivalent to acceptance. Saidcertification “implies that the check is drawn uponsufficient funds in the hands of the drawee, thatthey have been set apart for its satisfaction, andthat they shall be so applied whenever the check ispresented for payment. It is an understanding thatthe check is good then, and shall continue good,and this agreement is as binding on the bank as itsnotes circulation, a certificate of deposit payable tothe order of depositor, or any other obligation itcan assume. The object of certifying a check,as regards both parties, is to enable theholder to use it as money.” When the holderprocures the check to be certified, “the checkoperates as an assignment of a part of thefunds to the creditors.” Hence, the exception tothe rule enunciated under Section 639 of theCentral Bank Act to the effect “that a check whichhas been cleared and credited to the account of thecreditor shall be equivalent to a delivery to thecreditor in cash in an amount equal to the amount

9“SEC. 63. Legal character . – Checks representing deposit

money do not have legal tender power and their acceptance in thepayment of debts, both public and private, is at the option of thecreditor: Provided, however, that a check which has beencleared and credited to the account of the creditor shall beequivalent to a delivery to the creditor of cash in an amountequal to the amount credited to his account.

credited to his account” shall apply in this case x xx.

5. Surrender of Checka. The surrender of the check by the

holder to the drawee bank upon itspayment is not negotiation. Bypaying the check, the drawee bankextinguishes it as a negotiableinstrument and converts it into a merevoucher.

b. Distinction between surrender of checkupon payment thereof and negotiationi. The delivery of the check by the

holder to the drawee bank upon itspayment is not negotiation. Bypaying the check, the drawee bankextinguishes it as a negotiableinstrument and converts it into amere voucher.

ii. In the case of a deposit of a checkby the holder thereof in a bankother than the drawee bank, thesignature at the back of the checkwould constitute an indorsement,unless otherwise indicated. Theholder in negotiating the check tothe depositary bank, which in turnwill collect on the check from thedrawee bank, through theclearinghouse.

BPI vs CA (2000)

In depositing the check in his name, privaterespondent did not become the outright owner ofthe amount stated therein. He was merelydesignating petitioner as the collecting bank. This isin consonance with the rule that a negotiableinstrument, such as a check, whether a manager’scheck or ordinary check, is not legal tender.

As such, after receiving the deposit, under its ownrules, petitioner shall credit the amount in privaterespondent’s account or infuse value thereon onlyafter the drawee bank shall have paid the amountof the check or the check has been cleared fordeposit.

Again, this is in accordance with ordinary bankingpractices and with this Court’s pronouncement that"the collecting bank or last endorser generallysuffers the loss because it has the duty to ascertainthe genuineness of all prior endorsementsconsidering that the act of presenting the check forpayment to the drawee is an assertion that theparty making the presentment has done its duty toascertain the genuineness of the endorsements."The rule finds more meaning in this case where thecheck involved is drawn on a foreign bank andtherefore collection is more difficult than when thedrawee bank is a local one even though the checkin question is a manager’s check

3. Secondary Parties

3.1. Liability of DRAWER1. Sec. 61, NIL

a. Admits existence of payee and his thencapacity to endorse



b. Engages that on due presentmentinstrument will be accepted, or paid, orboth, according to its tenor

c. That if it be dishonored + necessaryproceedings on dishonor duly taken,will pay the amount thereof to theholder or to a subsequent indorser whomay be compelled to pay it

2. Limiting Liability: drawer may insert in theinstrument an express stipulationnegativing / limiting his own liability toholder

PNB v. PICORNELL (1922)

Picornell obtained money from PNB Cebu topurchase tobacco to be shipped to Manila. Picornellthen drew a bill of exchange drawn against hisprincipal, Hyndman, Tavera & Ventura (HTV), infavor of PNB or his order. Upon presentation of thebill, HTV accepted it. However, HTV subsequentlyrefused to pay the bill because some of the tobaccoshipped were damaged.HELD:A. Liability of Acceptor (HTV)

PNB is a holder in due course and thepartial want of consideration does not existwith respect to the bank who paid full valuefor the bill of exchange.

The want of consideration between theacceptor and drawer does not affect therights of the payee who is a remote party.The payee or holder gives value to thedrawer, and if he is ignorant of the equitiesbetween the drawer and acceptor, his is inthe position of a bona fide indorsee.

B. Liability of Drawer (Picornell) As drawer of the bill, he warranted that it

would be accepted upon properpresentment & paid in due course. As itwas not paid, he became liable to thepayment of its value to PNB.

The fact that Picornell was an agent of HTVin the purchase of the tobacco does notnecessarily make him an agent of HTV indrawing the bill of exchange. These are 2different contracts. He cannot claimexemption from liability by invoking theexistence of agency.

Drawer received notice of protest infulfillment of the condition set by law forhis liability to arise.

Drawer's liability is only secondary as theliability of the acceptor is primary.

BANCO ATLANTICO v AUDITOR GENERAL(1978)

B fraudulently altered checks payable to her drawnby the Embassy by increasing the amounts. Bnegotiated these checks by indorsement to BA w/cpaid the full amount of the checks without firstclearing with the drawee bank, contrary to normalbanking practice. HELD: Drawer (embassy) notliable. BA is guilty of negligence in giving B specialtreatment as a privileged client, in disregard ofelementary principles of prudence that shouldattend banking transactions. Hence, it shouldsuffer the loss. BA could not have been a HDC.

NOTE: The Camposes note that the drawerwas not held liable because the decision wasbased on §23 on forgery instead of §124 onmaterial alteration. If BA had been a HDC,

the Embassy could have been held liable forthe original amount of the checks

3. CRIMINAL LIABILITY FOR BOUNCINGCHECKa. Under BP 22

PEOPLE v NITAFAN(1992)

Lim issued a memorandum check which wassubsequently dishonored for insufficiency of funds.A memorandum check has the same effect as anordinary check and within the ambit of BP 22.What the law punishes is the issuance itself of abouncing check & not the purpose for which it wasissued nor the terms & conditions relating to itsissuance.

b. Estafa under the RPC

PACHECO v CA (1999)

The essential elements in order to sustain aconviction under the above paragraph are:1. that the offender postdated or issued a check inpayment of an obligation contracted at the time thecheck was issued;2. that such postdating or issuing a check wasdone when the offender had no funds in the bank,or his funds deposited therein were not sufficient tocover the amount of the check;3. deceit or damage to the payee thereof.

PEOPLE v REYES (2005)

There is no estafa through bouncing checks when itis shown that private complainant knew that thedrawer did not have sufficient funds in the bank atthe time the check was issued to him. Suchknowledge negates the element of deceit andconstitutes a defense in estafa through bouncingchecks.

3.2. Liability of INDORSERS:

1. Indorser

a. Sec. 63, NIL: A person placing hissignature upon an instrument other than asa maker, drawer, or acceptor unless heindicates by appropriate words his intentionto be bound in some other capacity

i SAPIERA vs CA (1999). It isundisputed that the four (4) checksissued by de Guzman were signedby petitioner at the back withoutany indication as to how she shouldbe bound thereby and, therefore,she is deemed to be an indorserthereof.

b. Sec. 67, NIL: A person, who places hissignature on an instrument negotiable bydelivery, incurs all the liabilities of anindorser.

c. Sec 64, NIL: Irregular Indorseri When a person not otherwise a

party to an instrument, placesthereon his signature in blankbefore delivery, he is liable as anindorser, in accordance w/ theserules:



1) Instrument payable to order of3rd person: liable to payee andto all subsequent parties

2) Instrument payable to theorder of maker/drawer, orpayable to bearer: liable to allparties subsequent tomaker/drawer

3) Signs for accommodation ofpayee, liable to all partiessubsequent to payee

2. WARRANTIES:

a. Every person negotiating an instrumentby delivery or by a qualified indorsementwarrants: (Sec. 65, NIL)

ii Instrument genuine, in all respectswhat it purports to be

iii He has good title to itiv All prior parties had capacity to

contractv He has no knowledge of any fact

w/c would impair validity ofinstrument or render it valueless

vi in case of negotiation by deliveryonly, warranty only extends infavor of immediate transferee

b. General or Unqualified Indorser:Every person who indorses withoutqualification, warrants to all subsequentHDCs: (Sec. 66, NIL)

i. instrument genuine, good title,capacity of prior parties

ii. instrument is at time of indorsementvalid and subsisting

iii. eon due presentment, it shall beaccepted or paid, or both, according totenor

iv. if it is dishonored, and necessaryproceedings on dishonor be duly taken,he will pay the amt. To holder, or toany subsequent indorser who may becompelled to pay it

3. Order of Liability among Indorsers (Sec. 68,NIL):

a. among themselves: liable prima facie inthe order they indorse, but proof of anotheragreement admissible

b. but holder may sue any of the indorsers,regardless of order of indorsement

c. joint payees/indorsees deemed toindorse jointly and severally

TUAZON v RAMOS (2005)

After an instrument is dishonored by nonpayment,indorsers cease to be merely secondarily liable;they become principal debtors whose liabilitybecomes identical to that of the original obligor.The holder of a negotiable instrument need noteven proceed against the maker before suing theindorser.

3.3. Accomodation Party

1. Accomodation Party: one who signedinstrument as maker/drawer/acceptor/ indorser

w/o receiving value thereof, for the purpose oflending his name to some other person

2. Liability : Liable on the instrument to HFVeven if holder knew he was only an AP

MAULINI v. SERRANO (1914)In accommodation indorsement, the indorsermakes the indorsement for the accommodation ofthe maker. Such an indorsement is generally forthe purpose of better securing the payment of thenote, i.e. he lends his name to the maker not tothe holder. An accommodation note is one whichthe accommodation party has put his name,without consideration, for the purpose ofaccommodation some other party who is to use itand is expected to pay it.Note: Campos disagrees with this ruling, referringto the case of Goodman v Gaul where anaccommodation indorsement may be made for theaccommodation of the payee or holder.

ANG TIONG v. TING (1968)

It is not a valid defense that the accommodationparty did not receive any valuable considerationwhen he executed the instrument. Nor is it correctto say that the holder for value is not a holder indue course merely because at the time he acquiredthe instrument, he knew that the indorser was onlyan accommodation party.The fact that the accommodation party stands onlyas a surety in relation to the maker is a matter ofconcern exclusively between accommodationindorser & accommodated party. It is immaterialto the claim of a holder for value. The liability ofthe accommodation party remains primary &unconditional.

SADAYA v. SEVILLA (1967)

The solidary accommodation maker who madepayment has the right of contribution from his co-accommodation maker. This right springs from animplied promise between the accommodationmakers to share equally the burdens that mayensue from their having consented to stamp theirsignatures on the promissory note. The followingare the rules on reimbursement:1. A solidary accommodation maker of a note may

demand from the principal debtorreimbursement for the amount he paid to thepayee; and

2. A solidary accommodation maker who pays onthe note may directly demand reimbursementfrom his co-accommodation maker without firstdirecting his action against the principal debtorprovided that :

(a) he made the payment by virtue of ajudicial demand or

(b) the principal debtor is insolvent.

TRAVEL-ON, INC. v. CA

Travel-On was entitled to the benefit of thestatutory presumption that it was a HDC, that thechecks were supported by valuable consideration.The only evidence private respondent offered washis own testimony that he had issued the checks toTravel-On as payee to "accommodate" its GeneralManager; this claim was in fact a claim that the



checks were merely simulated, that privaterespondent did not intend to bind himself thereon.Only evidence of the clearest and most convincingkind will suffice for that purpose.

CRISOLOGO-JOSE v. CA.

Section 29 of the NIL does not apply tocorporations which are accommodation partiesbecause the issue or indorsement of negotiablepaper by a corporation without consideration isultra vires. Hence, one who has taken theinstrument with knowledge of the accommodationcannot recover against a corporation -accommodation party EXCEPT if the officer or agentof the corp. was specifically authorized to executeor indorse the paper for the accommodation of athird person.

Corporate officers, such as the president and vice-president, have no power to execute for mereaccommodation a NI of the corporation for theirindividual debts or transactions in which thecorporation has no legitimate concern. It is thesignatories thereof that shall be personally liabletherefor.

AGRO CONGLOMERATES v CA (2000)

An accommodation party is a person who hassigned the instrument as maker, acceptor, orindorser, without receiving value therefor, and forthe purpose of lending his name to some otherperson and is liable on the instrument to a holderfor value, notwithstanding such holder at the timeof taking the instrument knew (the signatory) to bean accommodation party. He has the right, afterpaying the holder, to obtain reimbursement fromthe party accommodated, since the relationbetween them has in effect become one ofprincipal and surety, the accommodation partybeing the surety.

3.4. Liability of an AGENT

1. AGENCY:

a. Signature of any party may be made byduly authorized agent, established as inordinary agency

b. Signature per procuration operates asnotice that the agent has limited authorityto sign, and the principal is bound only incase the agent in so signing acted withinthe actual limits of his authority

2. LIABILITY

a. GEN RULE: Where person adds to hissignature words indicating that he signs onbehalf of a principal, not liable if he wasduly authorized

b. WHEN LIABLE:

i. mere addition of words describinghim as an agent without disclosing hisprincipal

ii. Where a broker or agent negotiatesan instrument without indorsement, heincurs all liabilities in Sec. 65, unless hediscloses name of principal and factthat he’s only acting as agent. (Sec.69, NIL)

INSULAR DRUG v. PNB

The right of an agent to indorse commercial paperwill not be lightly inferred. A salesman withauthority to collect money does not have theimplied authority to indorse checks received inpayment. Any person taking checks made payableto a corporation does so at his peril & must abideby the consequences if the agent who indorses thesame is without authority.

PBC v ARUEGO (1981)

Aruego obtained a credit accommodation from PBC.For every printing of the publication, the printercollected the cost of printing by drawing a draftagainst PBC, which will later be sent to Aruego foracceptance. PBC seeks recovery on these drafts.Aruego invokes the defense that he signed thedocument in his capacity as President of the Phil.Education Foundation & only as an accommodationparty.HELD: Aruego is personally liable because nowherein the draft did he disclose that he was signing as arepresentative of the Phil Education Foundation.Neither did he disclose his principal.As an accommodation party, Aruego is liable on theinstrument to a holder for value, notwithstandingsuch holder, at the time of the taking of theinstrument knew him to be only an accommodationparty. Aruego signed as a drawee/acceptor. Asdrawee, he is primarily liable for the drafts.

4. Presentment

4.1. Definition:

1. the production of a BE to the drawee for hisACCEPTANCE, or to the drawer or acceptorfor PAYMENT; or

2. the production of a PN to the party liablefor payment

4.2. Presentment for Acceptance

1. When necessary (Sec. 143, NIL)

a. bill payable after sight, or in othercases where presentment foracceptance necessary to fix maturity

b. where bill expressly stipulates that itshall be presented for acceptance

c. where bill is drawn payable elsewherethan at residence / place of business ofdrawee

d. In no other case is presentment foracceptance necessary in order torender any party to the bill liable.

2. Effect of non-presentment [w/in reasonabletime] (Sec. 144, NIL) - discharges the drawerand all indorsers.

a. Reasonable Time: considerations

i nature of instrumentii usage of trade or business with

respect to instrumentiii facts of each case

3. How made (Sec. 145, NIL)a. BY or ON BEHALF of the holder



b. AT a reasonable hour,c. ON a business day and before the bill is

overdue,d. TO the drawee or some person

authorized to accept or refuseacceptance on his behalf; andi bill addressed to drawees not

partners, MUST be made to themall unless one has authority toaccept or refuse acceptance for all;

ii drawee is dead, MAY be made tohis personal representative;

iii drawee has been adjudged abankrupt or an insolvent or hasmade an assignment for the benefitof creditors, MAY be made:1) to him or2) to his trustee or assignee.

4. When made (Sec. 146, NIL) on any dayon which NIs may be presented forpayment under:a. Sec. 72, NIL – at a reasonable hour on

a business dayi Instruments falling due or

becoming payable on Saturday -next succeeding business day

ii EXCEPT instruments payable ondemand [at the option of theholder] – before twelve o'clocknoon on Saturday WHEN that entireday is not a holiday.

b. Sec. 85, NIL –i at the time fixed therein without

grace.c. Where the holder has no time, with the

exercise of reasonable diligence, topresent the bill for acceptance beforepresenting it for payment, delay isexcused and doesn’t discharge thedrawers and indorsers. (Sec. 147,NIL)

5. When Excused (Sec. 148, NIL) Bill maybe treated as dishonored by non-acceptance:a. Where the drawee is (1) dead, (2)

absconded, (3) fictitious, (4) does nothave capacity to contract by bill.

b. Where, after the exercise of reasonablediligence, presentment can not bemade.

c. Where, although presentment has beenirregular, acceptance has been refusedon some other ground.

6. Dishonor and Effectsa. Dishonor by nonacceptance:

i When duly presented foracceptance – acceptance is refusedor can not be obtained; or

ii When presentment for acceptanceis excused – bill is not accepted.(Sec. 149, NIL)

b. NON ACCEPTANCE of the billi Duty of holder: must treat the bill

as dishonored by nonacceptance orhe loses the right of recourseagainst the drawer and indorsers.(Sec. 150, NIL)

ii Right of holder: immediate rightof recourse against the drawer and

indorsers and no presentment forpayment is necessary. (Sec. 151,NIL)

c. NOTICE OF DISHONORi Recipient- (Sec.89, NIL) Except

as herein otherwise provided,1) to the drawer and2) to each indorser,

ii Effect of omission to give noticeof non-acceptance1) any drawer or indorser to

whom such notice is not givenis discharged

2) does not prejudice the rights ofa HDC subsequent to theomission. (Sec. 117, NIL)

4.3. Presentment for Payment

1. IN GENERAL

a. NECESSARY in order to charge thedrawer and indorsers(Sec. 70, NIL)

b. NOT necessary

i. to charge the person primarily liableon the instrument (Sec. 70, NIL)

ii. to charge the drawer where he hasno right to expect or require that thedrawee or acceptor will pay theinstrument. (Sec. 79, NIL)

iii. to charge an indorser where theinstrument was made or accepted forhis accommodation and he has noreason to expect that the instrumentwill be paid if presented. (Sec. 80,NIL)

iv. Excused:

1) Where, after the exercise ofreasonable diligence,presentment cannot be made;

2) Where the drawee is a fictitiousperson;

3) By waiver of presentment,express or implied.

v. when a bill is dishonored bynonacceptance – immediate right torecourse accrues to holder (Sec. 151,NIL)

vi. in case of waiver of protest, whetherin the case of a foreign bill of exchangeor other NI – deemed to be a waivernot only of a formal protest but also ofpresentment and notice of dishonor.(Sec. 111, NIL)

2. Date and time of presentment

a. bearing fixed maturity / not payableon demand – on the day it falls due

iii if day of maturity falls on Sundayor a holiday, the instruments fallingdue or becoming payable onSaturday are to be presented forpayment on the next succeedingbusiness day (Sec.85, NIL)

b. payable on demand – within areasonable time after its issue,



iv at the option of the holder, may bepresented for payment beforetwelve o'clock noon on Saturdaywhen that entire day is not aholiday (Sec. 85, NIL)

c. demand bill of exchange – within areasonable time after the last negotiation.(Sec. 71, NIL) (NOTE: though reasonabletime from last negotiation, it may beunreasonable time from issuance thusholder may not be HDC under sec. 71)

d. Check - must be presented for paymentwithin reasonable time after its issue ordrawer will be discharged from liabilitythereon to extent of loss caused by delay

i.How time computed. — Whenpayable at a (1) fixed period after date,(2) after sight, or (3) after thathappening of a specified event, excludeday from which the time is to begin torun, include date of payment. (Sec.86, NIL)

ii.Where the day, or the last day forpayment falls on a Sunday or on aholiday – may be done on the nextsucceeding secular or business day.(Sec. 194, NIL)

PNB v. SEETO (1952)

On 13 March, Seeto indorsed to PNB-Surigao abearer check dated 10 March drawn against PBC-Cebu. PNB-Surigao mailed the check to its Cebubranch on 20 March & was presented to the draweebank on 09 April. The check was dishonored forinsufficient funds because the delay in presentmentcause the exhaustion of the drawer's funds.Indorser Seeto asked that the suit be deferredwhile he made inquiries. He assured PNB that hewould refund the value in case of dishonor.HELD: The indorser is discharged from liability byreason of the delay in the presentment forpayment, under §84.Drawer had enough funds when he issued thecheck because his subsequent checks drawnagainst the same bank had been encashed.The assurances of refund by the indorser are theordinary obligation of an indorser which aredischarged by the unreasonable delay inpresentation of the check.NOTE: Camposes note that the discharge of theindorser should have been based on §§ 66 & 71 onpresentment as a condition to the indorser'sliability & presentment for payment of a demandbill made within a reasonable time from its lastnegotiation.

PAPA v A.U. VALENCIA (1998)

Granting that petitioner had never encashedthe check, his failure to do so for more than ten(10) years undoubtedly resulted in the impairmentof the check through his unreasonable andunexplained delay.

While it is true that the delivery of a checkproduces the effect of payment only when it iscashed, the rule is otherwise if the debtor isprejudiced by the creditor’s unreasonable delay inpresentment. The acceptance of a check impliesan undertaking of due diligence in presenting it forpayment, and if he from whom it is received

sustains loss by want of such diligence, it will beheld to operate as actual payment of the debt orobligation for which it was given.

It has, likewise, been held that if nopresentment is made at all, the drawer cannot beheld liable irrespective of loss or injury unlesspresentment is otherwise excused. This is inharmony with Article 1249 of the Civil Code underwhich payment by way of check or other negotiableinstrument is conditioned on its being cashed,except when through the fault of the creditor, theinstrument is impaired. The payee of a check wouldbe a creditor under this provision and if its non-payment is caused by his negligence, payment willbe deemed effected and the obligation for whichthe check was given as conditional payment will bedischarged.

3. Where DELAY excused - when the delay iscaused by circumstances beyond the control ofthe holder and not imputable to his default,misconduct, or negligence; when the cause ofdelay ceases to operate, presentment must bemade with reasonable diligence (Sec. 81,NIL)

4. Manner of Presentment

a. The instrument must be exhibited; whenpaid, must be delivered up to the partypaying it. (Sec. 74, NIL)

b. What constitutes a sufficientpresentment. (Sec. 72, NIL)

i.BY WHOM: the holder, or by someperson authorized to receive paymenton his behalf;

CHAN WAN v. TAN KIM(1960)

Tan Kim drew specially crossed checks payable tobearer. Chan Wan presented the checks forpayment to the drawee bank but they weredishonored due to insufficient funds. Chan Wanseeks recovery on these checks.HELD: Checks crossed specially to China Bankingshould have been presented for payment by thatbank, not by Chan Wan. Inasmuch as Chan Wanpresented them for payment himself, there was noproper presentment & the liability did not attach tothe drawer.But there was due presentment as clearanceendorsements by China Bank can be found at theback of the checks. However, some of the checkswere stamped account closed.As Chan Wan failed to indicate how the checksreached his hands, the court held him not to be aholder in due course who can still recover on thechecks but subject to personal defenses, such aslack of consideration.NOTE: Camposes note that despite the addition ofthe words "non-negotiable" on the specially crossedchecks, the Court considered the checks asnegotiable instruments. A check on its facenormally has all the requisites of negotiability, andthe addition of the above words should not changeits character as a negotiable instrument.

ASSOCIATED BANK v. CA & REYES (1992)

Different department stores issued crossed checksbearing "for payee's account only" payable to



Melissa's RTW. Sayson, acting without authority,deposited & encashed the checks with AssociatedBank.HELD: Citing State Invt House v IAC, the effects ofcrossing a check are:

1. check may not be encashed but onlydeposited in the bank;

2. check may be negotiated only one -- to onewho has an account with a bank; and

3. the act of crossing the check serves as awarning to the holder that the check hasbeen issued for a definite purpose so thathe must inquire if he has received thecheck pursuant to that purpose.

The effects of crossing a check relate to the modeof presentment for payment.The law imposes a duty of diligence on thecollecting bank to scrutinize checks deposited withit, for the purpose of determining their genuineness& regularity.

ii. TIME: reasonable hour on a businessday;

1) where instrument payable atbank. — must be made duringbanking hours, UNLESS theperson to make payment hasno funds there to meet it at anytime during the day, in whichcase presentment at any hourbefore the bank is closed onthat day is sufficient (Sec. 75,NIL)

iii. PLACE: proper place as hereindefined: (Sec. 73, NIL)1) place of payment specified – at

place of payment;2) no place of payment specified

but address of the person tomake payment is given in theinstrument – at the addressgiven;

3) no place of payment and noaddress is given – at the usualplace of business or residenceof the person to makepayment;1) in any other case –

wherever person to makepayment can be (1) found,or if presented (2) at hislast known place ofbusiness or residence

2) where principal debtor isdead and no place ofpayment is specified – tohis personal representative,IF any AND IF he can befound with the exercise ofreasonable diligence (Sec.76, NIL)

3) where persons primarilyliable are partners and noplace of payment isspecified, presentment for- to any one of them, eventhough there has been adissolution of the firm.(Sec. 77, NIL)

4) joint debtors and no placeof payment is specified - tothem all (Sec. 78, NIL)

iv. TO WHOM: (1) person primarilyliable on the instrument, or if he isabsent or inaccessible, (2) to anyperson found at the place wherethe presentment is made.

5. Dishonor by Nonpayment

a. Sec 83, NIL The instrument when:

i. duly presented for payment andpayment refused or cannot beobtained; or

ii. presentment is excused and theinstrument is overdue and unpaid.

b. Effect:: [subject to NIL provs] animmediate right of recourse to all partiessecondarily liable accrues to the holder.(Sec. 84, NIL)

i. Dishonor is a condition precedent tothe enforcement of the liability ofsecondary parties.

ii. This is conditioned upon the giving ofdue notice of dishonor

iii. An indorser whose liability hasbecome fixed by demand and notice is,as to holder, a principal debtor.

5. Notice of Dishonor

5.1.Definition

1. To bring either verbally or by writing, to theknowledge of the drawer or indorser of aninstrument, the fact that a specified NI,upon proper proceedings taken, has notbeen accepted or has not been paid, andthat the party notified is expected to pay it

2. General rule: MUST be given to drawerand to each indorser, and any drawer orindorser to whom such notice is not givenis discharged

5.2. When necessary1. Sec 89, NIL Except as herein provided,when a negotiable instrument has beendishonored by non-acceptance or non-payment, notice of dishonor must be given tothe drawer and to each indorser…2. Parties entitled to notice:

a. Drawerb. Indorserc. Accomodation Indorsers

i Joint maker excluded if not anindorser

3. Acceleration Clausea. If clause is optional on holder:

i The bringing of an action againstthe maker and indorsers constitutesa valid exercise of option and avalid notice of dishonor

b. Clause is automatic:i Notice of dishonor must be givem

at onceii Not sufficient to give it upon

commencement of action

GULLAS v. PNB (1935)



A notice of dishonor is necessary to charge anindorser & that the right of action against him doesnot accrue until the notice is given.As a general rule, a bank has a right of set off ofthe deposits in its hands for the payment of anyindebtedness to it on the part of a depositor.However, prior to the mailing of notice of dishonor& without awaiting any action by Gullas, the bankmade use of the money standing in his account tomake good for the treasury warrant. Gullas wasmerely an indorser & notice should actually havebeen given to him in order that he might protecthis interests.

5.3. Form and Contents (Sec 96)

1. Form of Notice:

a. may either be in writing, or oral

b. Campos: must be in a language that willinform the addressed party that theinstrument has been duly presented

2. Contents – must contain any terms whichsufficiently

a.identify the instrument, and

b. indicate that it has been dishonored bynon-acceptance or non-payment;

3.Mode of delivery

a. Personal service

i. There must be actual personalservice, or

ii. An ordinary intelligent and diligenteffort to make personal service

b. Through the mails

c. Campos: Through the telephonei Party to be notified must be fully

identified as the party at thereceiving end of the line

4.The ff. notice still sufficient: (Sec. 95, NIL)

a. a written notice, not signed

b. insufficient written notice, supplementedand validated by verbal communication

c. instrument suffering from misdescriptionUNLESS the party to whom the notice isgiven is in fact misled thereby.

5.4.Time and Place

1. Notice may be given as soon as theinstrument is dishonored and within the timefixed by NIL, unless delay excused (Sec. 102,NIL)

2. NOTICE to SUBSEQUENT PARTY: Each partywho receives a notice is given the same periodof time within which to notify prior indorsersthat the last holder had. (Sec. 107)

3. TIME FIXED BY THE NIL:

a. Where parties reside in same place (Sec.103, NIL): Must be given w/in the ff.times:

ii If given at the place of business ofthe person to receive notice -before the close of business hourson the day following

iii If given at his residence - beforethe usual hours of rest on the dayfollowing

iv If sent by mail - deposited in thepost office in time to reach him inusual course on the day following.

b. Where parties reside in different places(Sec. 104, NIL).:

i. If sent by mail - deposited in the postoffice in time to go by mail the dayfollowing the day of dishonor, or ifthere be no mail at a convenient houron last day, by the next mail thereafter

ii. Convenient hour: depends on theusual hours of opening of businesshouses and the post-office

iii. If given otherwise - within the timethat notice would have been received indue course of mail, if it had beendeposited in the post office within thetime specified above

c. Delay (Sec. 113, NIL)

i. Excused: when the delay is caused bycircumstances beyond the control ofthe holder and not imputable to hisdefault, misconduct, or negligence

ii. But, when the cause of delay ceasesto operate, notice must be given withreasonable diligence.

4. Sender deemed to have given due notice(Sec. 105, NIL)

a. Where notice of dishonor is dulyaddressed and deposited in the post office,

i. “deposit in post office” — whendeposited in any branch post office orin any letter box under the control ofthe post-office department. (Sec. 106,NIL)

b. notwithstanding any miscarriage in themails

4. Place where notice must be sent (Sec.108, NIL)a. to the address, if any, added by the

party to his signature; if address notgiven:i to the post-office nearest to his

place of residence or where he isaccustomed to receive his letters;or

ii If he lives in one place and has hisplace of business in another, toeither place; or

iii If he is sojourning in another place,to the place where he is sosojourning.

b. Notice sent to place not in accord withNIL, still SUFFICIENT



i Where the notice is actuallyreceived by the party within thetime specified in this Act,

5.5. By Whom Given

1. Sec. 90, NIL

a. By or on behalf of the holder or

b. any party to the instrument who may becompelled to pay it to the holder, and who,upon taking it up, would have a right toreimbursement from the party to whom thenotice is given

2. Agent

a. Notice of dishonor may be given by anagent either in his own name or in thename of any party entitled to give notice,whether that party be his principal or not(Sec. 91, NIL)

b. Where instrument has been dishonoredin hands of agent, he may either himselfgive notice to the parties liable thereon, orhe may give notice to his principal (withinthe same time as if agent were holder)(Sec. 94, NIL)

5.6. To whom notice MAY be given

1. If given by an agenta. to his principal, in case of an

instrument dishonored in the hands ofan agent (Sec. 94, NIL), or

b. to the parties liable thereonc. ex: collecting bank

2. IN GENERAL (Sec. 97)a. Party himselfb. Or his agent in that behalf

3. If party is dead and death known to theparty giving notice (Sec. 98, NIL)a. MUST be given to a personal

representative, if there be one, and ifwith reasonable diligence, he can befound;

b. If no personal representative – MAY besent to the last residence or last placeof business of the deceased.

4. To partners : to any one partner, eventhough there has been a dissolution. (Sec.99, NIL)

5. To joint parties(Sec. 100, NIL)a. to each of the partyb. unless one of them has authority to

receive such notice for the others.6. to bankrupt (Sec. 101, NIL)

a. to the party himself orb. to his trustee or assignee

5.7. In whose favor notice operates

1. when given by/on behalf of holder: inures tobenefit of (Sec. 92, NIL)

a. all subsequent holders and

b. all prior parties who have a right ofrecourse vs. the party to whom it’s given

2. where notice given by/on behalf of a partyentitled to give notice: inures for benefit (Sec.93, NIL)

a. holder

b. all parties subsequent to party to whomnotice given

5.8. When rule requiring notice not applied

1. In general

a. Sec 112: notice of dishonor is dispensedwith when after the exercise of reasonablediligence, it cannot be given to or does notreach the parties sought to be charged

b. Reasonable diligence depends upon thecircumstance of the case

2. When notice of non-acceptance is alreadygiven

a. Sec 116: Where due notice of dishonorby non-acceptance has been given, noticeof a subsequent debtor by non-payment isnot necessary, unless in the meantime theinstrument has been accepted

b. Ratio for the rule: dishonor by non-acceptance confers upon the holder animmediate right against all secondaryparties

3. Waiver

a. Waiver of notice may be made either:

i before the time of giving notice hasarrived or

ii after the omission to give duenotice; may be expressed orimplied. (Sec. 109, NIL)

b. Parties affected by waiver

i. Dependent upon where the waiver iswritten

ii. Where the waiver is embodied in theinstrument itself - binding upon allparties;

iii. where written above the signatureof an indorser - binds him only. (Sec.110, NIL)

5.9. When Notice Not Necessary

1.When not necessary to charge drawer(Sec. 114, NIL)

a. drawer/drawee same person

b. drawee fictitious, incapacitated

c. drawer is person to whom instrument ispresented for payment

d. drawer has no right to expect/requirethat drawee/acceptor will honor instrument

e. drawer countermanded payment

STATE INVESTMENT HOUSE v CA (1993)

Moulic issued 2 checks to Victoriano as security forpieces of jewelry to be sold on commission.Victoriano negotiated these checks to StateInvestment. As Moulic failed to sell the jewelry,she returned them to Victoriano. However, shefailed to retrieve her checks. Moulic withdrew herfunds from the drawee bank. Upon presentment,the checks were dishonored.



HELD: State Investment is a holder in due course& is not subject to the personal defense of lack ofconsideration.There is no need to serve the drawer a noticeof dishonor because she was responsible forthe dishonor of her checks. After withdrawingher funds, she could not have expected her checksto be honored.

2. Where not necessary to charge indorser(Sec. 115, NIL)

a. drawee fictitious, incapacitated, andindorser aware of the fact at time ofindorsement

b. indorser is person to whom instrumentpresented for payment

c. instrument made/accepted for hisaccommodation

7. Protest

A. Definition: testimony of some proper personthat the regular legal steps to fix the liability ofdrawer and indorsers have been taken

B. When necessary:1. In case of a FOREIGN BILL appearing on its

face to be such;2. protest for non-acceptance if dishonored by

nonacceptance &3. protest for nonpayment if not previously

dishonored by nonpayment.4. Effect of failure to protest: the drawer and

indorsers are discharged. (Sec. 152, NIL)C. Form

1. annexed to the bill or must contain a copythereof, and

2. must be under the hand and seal of thenotary making it;

D. Contents1. The time and place of presentment;2. The fact that presentment was made and

the manner thereof;3. The cause or reason for protesting the bill;4. The demand made and the answer given, if

any, or the fact that the drawee or acceptorcould not be found. (Sec. 153, NIL).

E. By whom1. A notary public; or2. any respectable resident of the place where

the bill is dishonored, in the presence oftwo or more credible witnesses. (Sec. 154,NIL)

F. Time1. on the day of its dishonor unless delay is

excused;2. when duly noted, the protest may be

subsequently extended as of the date ofthe noting. (Sec. 155, NIL);

G. Place1. at the place where it is dishonored,2. EXCEPT bill drawn payable at the place of

business or residence of person other thanthe drawee has been dishonored bynonacceptance,a. it must be protested for non-payment

at the place where it is expressed to bepayable, and

b. no further presentment for payment to,or demand on, the drawee isnecessary. (Sec. 156, NIL)

H. Protest for better security against thedrawer and indorsers — where the acceptor hasbeen adjudged a bankrupt or an insolvent orhas made an assignment for the benefit ofcreditors before the bill matures (Sec. 158,NIL)

I. Delay excused1. Requisites:

a. when caused by circumstances beyondthe control of the holder, and

b. not imputable to his default,misconduct, or negligence.

2. When the cause of delay ceases to operate,the bill must be noted or protested withreasonable diligence.;

J. When protest dispensed with - by anycircumstances which would dispense withnotice of dishonor. (Sec. 159, NIL)

K. Waiver of protest: deemed to be a waiver notonly of a formal protest but also ofpresentment and notice of dishonor. (Sec.111, NIL)

TAN LEONCO v GO INQUI(1907)

In exchange for the abaca from Tan Leonco'splantations, Go Inqui drew a bill of exchangeagainst Lim Uyco. Upon presentment of thedraft, it was refused payment due to a stoporder from the drawer. The bill was notprotested.HELD: The action is not brought upon the billof exchange which was used only as evidenceof the indebtedness. Under these conditions,protest & notice of nonpayment areunnecessary in order to render the drawerliable.

NOTE: The ruling of the Court on protest ismerely obiter dictum.

8. Acceptance or Payment for Honor

A. Acceptance1. Practice of accepting for honor is obsolete2. When bill may be accepted for honor. —

When a BE has been (1) protested fordishonor by non-acceptance or protestedfor better security and (2) is not overdue any person not being a party already liablemay, with the CONSENT of the holder,intervene and accept the bill supra protestfor the honor of any party liable thereon orfor the honor of the person for whoseaccount the bill is drawn.

3. The acceptance for honor may be for partonly of the sum for which the bill is drawn;

4. where there has been an acceptance forhonor for one party, there may be a furtheracceptance by a different person for thehonor of another party. (Sec. 161, NIL)

5. Referee in case of need — person whosename is inserted by the drawer of a bill andany indorser to whom the holder mayresort in case bill is dishonored by non-acceptance or non-payment; option of theholder to resort to the referee (Sec. 131,NIL)

B. PAYMENT FOR HONOR - any person mayintervene and pay bill protested for non-payment supra protest (Sec. 171, NIL)



6.3 INSTRUMENTS PAYABLE AT BANK

Sec 87: Where the instrument is made payable at abank, it is equivalent to an order to the bank tonpay the same for the account of the principaldebtor therein

BINGHAMPTON PHARMACY v FIRSTNATIONAL BANK (1915)

There is a distinction between the drawer of acheck & the maker of a note payable at a bank:

Note payable atbank

Check

maker of a noteis primarily liableon theinstrument

drawer of a checkis only liable afterdishonor

Law excusespresentment ofthe instrument

requirespresentment withina reasonable timeat the peril ofdischarging thedrawer

obligation of themaker of a noteis not aconditionalpromise to payonly at a specialplace, but is apromise to paygenerally, eventhough a place ofpayment

Breach of the dutyof the holder of acheck to presentfor payment at theplace where it ispayable at areasonable timedischarges thedrawer fromliability to theextent he isdamaged by thebreach.

9. Bills in Set

A. composed of various parts beingnumbered, and containing a reference tothe other parts, all of which parts constituteone bill of lading

B. Bills in set constitute one bill. (Sec. 178,NIL)

C. Right of HDCs where different parts arenegotiated. — the holder whose title firstaccrues is the true owner of the bill. Butnothing in this section affects the right of aperson who, in due course, accepts or paysthe parts first presented to him. (Sec.179., NIL)

D. Liability of holder who indorses two ormore parts of a set to different persons. —liable on every such part, and everyindorser subsequent to him is liable on thepart he has himself indorsed, as if suchparts were separate bills. (Sec. 180, NIL)

E. Acceptance - may be written on any partand it must be written on one part only. Ifthe drawee accepts more than one part andsuch accepted parts negotiated to differentholders in due course, he is liable on everysuch part as if it were a separate bill. (Sec.181, NIL)

F. Payment - When the acceptor of a billdrawn in a set pays it without requiring thepart bearing his acceptance to be deliveredup to him, and the part at maturity isoutstanding in the hands of a holder in due

course, he is liable to the holder thereon.(Sec. 182, NIL)

G. Effect of discharging one of a set. —Except as herein otherwise provided, thewhole bill is discharged. (Sec. 183, NIL)

Chapter VII

DISCHARGE

1. Definition: Discharge

The release of all parties, whether primary orsecondary, from the obligation on the instrument;renders the instrument non-negotiable

2. Discharge of the INSTRUMENT

2.1. How discharged: (Sec 119)10

1. By Payment in due coursea. Sec. 88: Payment is made in due

course when it is made:i at or after the maturity of the

paymento if payment is made before

maturity and the note isnegotiated to a HDC, the lattermay recover on the instrument.

ii to the holder thereofo payment to one of several

payees or indorsees in thealternative discharges theinstrument,

o but payment to one of severaljoint payees or joint indorsersis not a discharge. The partyreceiving payment must havebeen authorized by others toreceive payment.

iii in good faith and without noticethat his title is defective

b. By whom made:i payment in due course by or on

behalf of principal debtorii payment in due course by party

accommodated where party ismade/ accepted for accommodation

c. When check deemed paid by draweebanki Once the holder receives the cashii If the bank credits the amt of the

check to the depositor’s accountiii Where the drawee bank charges

the check to the account, indicatingintention to honor the check

2. intentional cancellation by holdera. if unintentional or under mistake or

without authority of holder,inoperative;

b. where instrument or signature appearsto have been cancelled, burden of proofon party which alleges it wasunintentional, etc. (Sec. 123, NIL)

3. any other act which discharges a simplecontract for payment of money

10Suggested Mnemonics: PICk ROAD: Payment in

due course, Intentional Cancellation, Renunciation,any Other Act, Debtor becomes holder.



a. ex. issuance of a renewal note—novation

b. Refer to Art 1231 of the Civil Code4. principal debtor becomes holder of

instrument at or after maturity in his ownright

5. renunciation of holder: (Sec. 122, NIL)a. holder may expressly renounce his

rights vs. any party to the instrument,before or after its maturity

b. absolute and unconditional renunciationof his rights against PRINCIPALDEBTOR made at or after maturitydischarges the instrument

c. renunciation does not affect rights ofHDC w/o notice.

d. Renunciation must be in writing unlessinstrument delivered up to personprimarily liable thereon

material alteration – review Sec. 125, NIL:what constitutes material alteration (Sec. 124,NIL: material alteration w/o assent of allparties liable avoids instrument except asagainst party to alteration and subsequentindorsers)

3. OF SECONDARY PARTIES (Sec.120, NIL)11

A. by discharge of instrumentB. intentional cancellation of signature by holderC. discharge of prior partyD. valid tender of payment by prior partyE. release of principal debtor, unless holder’s right

of recourse vs. 2ndary party reservedF. any agreement binding upon holder to extend

time of payment, or to postpone holder’s rightto enforce instrument, UNLESS1. made with assent of party secondarily

liable, or2. right of recourse reserved.

G. Failure to make due presentment (Secs. 70,144, NIL)

H. failure to give notice of dishonorI. certification of check at instance of holderJ. reacquisition by prior party

1. where instrument negotiated back to aprior party, such party may reissue andfurther negotiate, but not entitled toenforce payment vs. any intervening partyto whom he was personally liable

2. where instrument is paid by partysecondarily liable, it’s not discharged, buta. the party so paying it is remitted to his

former rights as regard to all priorparties

b. and he may strike out his own and allsubsequent indorsements, and againnegotiate instrument, excepti where it’s payable to order of 3rd

party and has been paid by drawerii where it’s made/accepted for

accommodation and has been paidby party accommodated

11Suggested Mnemonics: CuPID CRRAFFT:

intentional Cancellation, Prior Party and InstrumentDischarge, Certification, Release, Reacquisition, anyAgreement, Failure to make due presentment,Failure to give notice of dishonor, valid Tender ofpayment.

Chapter VIII

OTHER FORMS OF COMMERCIAL

PAPER

1. In General

1.1. Commercial papers –1. also Negotiable instruments;2. merely special forms of either PNs or BEs;3. also governed by the NIL

1.2. Quasi-negotiable includes commercial paperwhich though not governed by the NIL, havecertain attributes of negotiability.

2.1. Bonds

1. evidences of indebtedness, in the nature ofa PNs

2. usually accompanied by a mortgage of theproperty of the issuer

3. issued by the government (municipal &other public corporations) & privatecorporations;a. though not to mature for a long time,

assure some regular income tobondholders in the form of interest*,usually payable annually

b. bonds and interest coupons (evidencesinterest obligations)*

may be negotiable in form,therefore governed by NIL (Sec65);

both are actually promissorynotes

c. they run for long periods of time, andare often sold to the public in general

d. funds generated by such bonds areused to finance corporate projects andpublic works;

e. there is no warranty on the part of suchindorser or negotiator that prior partieshad capacity to contract. The qualifiedindorser & negotiator by delivery of abond do not warrant therefore that thecorporation which issued the bonds hasany judicial capacity to act. A generalindorser thereof however would beliable for such want of capacity.

2.2. Debentures

1. similar to bonds except that they areusually for a shorter tem and may or maynot be accompanied by a mortgage.

2. they are often issued on the general creditof the issuer corporation

3. Drafts and Letters of Credit

3.1. Drafts and Letters of Credit - The draft andthe letter of credit are generally used together toeffect payment in international transactions.3.2. Draft a form of BE generally used to facilitatethe transactions between persons physically remotefrom each other.3.3. Letters of Credit

1. one person requests some other person toadvance money or give credit to a third

2. Bonds and Debentures



person, and promises that he will repay thesame to the person making theadvancement, or accept bills drawn uponhimself for the like amount.

2. must be issued in favor of a definiteperson, and not to order.

3. under our law, a letter of credit cannot be anegotiable instrument because (a) it maynot contain the words of negotiability; (b)may be issued for an undeterminedamount. See Art 568 Code of Commerce.

4. “INDEPENDENCE PRINCIPLE”: Credits, bytheir nature, are separate transactions fromthe sales or other contract(s) on which theymay be based and banks are in no wayconcerned with or bound by suchcontract(s), even if any referencewhatsoever to such contract(s) is includedin the credit. Consequently, theundertaking of a bank to pay, accept andpay draft(s) or negotiate and/or fulfill anyother obligation under the credit is notsubject to claims or defenses by theapplicant resulting from his relationshipswith the issuing bank or the beneficiary. Abeneficiary can in no case avail himself ofthe contractual relationships existingbetween the banks or between theapplicant and the issuing bank.a. Thus, the engagement of the issuing

bank is to pay the seller or beneficiaryof the credit once the draft and therequired documents are presented toit. This principle assures the seller orthe beneficiary of prompt paymentindependent of any breach of the maincontract and precludes the issuing bankfrom determining whether the maincontract is actually accomplished ornot. Under this principle, banksassume no liability or responsibility forthe form, sufficiency, accuracy,genuineness, falsification or legal effectof any documents, or for the generaland/or particular conditions stipulatedin the documents or superimposedthereon, nor do they assume anyliability or responsibility for thedescription, quantity, weight, quality,condition, packing, delivery, value orexistence of the goods represented byany documents, or for the good faith oracts and/or omissions, solvency,performance or standing of theconsignor, the carriers, or the insurersof the goods, or any other personwhomsoever.

b. The independent nature of the letter ofcredit may be: (a) independence in totowhere the credit is independent fromthe justification aspect and is aseparate obligation from the underlyingagreement like for instance a typicalstandby; or (b) independence may beonly as to the justification aspect like ina commercial letter of credit orrepayment standby, which is identicalwith the same obligations under theunderlying agreement. In both casesthe payment may be enjoined if in thelight of the purpose of the credit thepayment of the credit would constitutefraudulent abuse of the credit.(Transfield vs. Luzon Hydro)

5. Pertinent Code of Commerce provisions:a. Art 567. Letters of credit - issued by

one merchant to another for thepurpose of attending to a commercialtransaction.

b. Art 568. The essential conditions ofletter of credit shall be:i issued in favor of a definite person,

and not to order.ii limited to a fixed and specified

amount, or to one or moreundetermined amount, but allwithin a maximum the limit ofwhich has to be stated exactly.

Note: Those which do not have any ofthese last circumstances shall beconsidered as mere letters ofrecommendation.

c. Art 569. The drawer of a letter ofcredit shall be liable to the person onwhom it was issued, for the amountpaid by virtue thereof, within themaximum fixed therein.Letters of credit may not be protestedeven if not be paid; bearer cannotacquire any right of action by reason ofnon-payment against the person whoissued it.The person paying has right to demandthe proof of the identity of the personin whose favor the letter of credit wasissued.

d. Art 570. The drawer of a letter ofcredit may annul it, informing thebearer and the person to whom it isaddressed

e. Art 571. The bearer of a letter orcredit shall pay the amount received tothe drawer without delay. Should henot do so, an action involving executionmay be brought to recover it, with legalinterest and the current exchange inthe place where it is repaid.

f. Art 572. If the bearer of a letter ofcredit does not make use thereof withinthe (1) period agreed upon with thedrawer, or in default of a period fixed,(2) within 6 months, counted from itsdate, in any point in the Philippines,and within 12 months anywhereoutside thereof, it shall be void in factand in law.

BPI v. DE RENY FABRIC (1970)

The company and its officers cannot shift theburden of loss to the bank because of the terms oftheir Commercial Letter of Credit Agreement withthe bank provides that latter shall not beresponsible for the any difference in character orcondition of the property. Furthermore, the bankwas able to prove the existence of a custom ininternational banking and financing circles negatingany duty of the bank to verify whether what hasbeen described in letters of credits or drafts orshipping documents actually tallies with what wasloaded aboard ship. Banks, in providing financingin international business transactions do not dealwith the property to be exported or shipped to theimporter, but deal only with documents.

LEE v CA (2002)



Modern letters of credit are usually not madebetween natural persons. They involve bank tobank transactions. Historically, the letter of creditwas developed to facilitate the sale of goodsbetween, distant and unfamiliar buyers and sellers.It was an arrangement under which a bank, whosecredit was acceptable to the seller, would at theinstance of the buyer agree to pay drafts drawn onit by the seller, provided that certain documentsare presented such as bills of lading accompaniedthe corresponding drafts. Expansion in the use ofletters of credit was a natural development incommercial banking. Parties to a commercial letterof credit include:

(a) the buyer or the importer,(b) the seller, also referred to asbeneficiary,(c) the opening bank which is usually thebuyer’s bank which actually issues theletter of credit,(d) the notifying bank which is thecorrespondent bank of the opening bankthrough which it advises the beneficiary ofthe letter of credit,(e) negotiating bank which is usually anybank in the city of the beneficiary. Theservices of the notifying bank must alwaysbe utilized if the letter of credit is to beadvised to the beneficiary through cable,(f) the paying bank which buys or discountsthe drafts contemplated by the letter ofcredit, if such draft is to be drawn on theopening bank or on another designatedbank not in the city of the beneficiary. As arule, whenever the facilities of the openingbank are used, the beneficiary is supposedto present his drafts to the notifying bankfor negotiation and(g) the confirming bank which, upon therequest of the beneficiary, confirms theletter of credit issued by the opening bank.

TRANSFIELD VS. LUZON HYDRO (2004)

Can the beneficiary invoke the independenceprinciple? Yes.To say that the independence principle may only beinvoked by the issuing banks would rendernugatory the purpose for which the letters of creditare used in commercial transactions. As it is, theindependence doctrine works to the benefit of boththe issuing bank and the beneficiary.

Certificate of Stock

A. or share certificate is the customary andconvenient evidence of the holder’s interest inthe corporation which issues it.

B. not a NI, but is included in the term “securities”bec does not contain any promise or order topay money;

C. described as Quasi-Negotiable becoftentimes, by application of the principles ofestoppel, and to effectuate the ends of justiceand the intention of the parties, the courtsdecree a better title to the transferee thanactually existed in his transferor, and is thesame as would be reached if the certificatewere negotiable.

D. When the shareholder signs the back ofcertificates of stock without filling in the blanks(for the name of the transferee and attorney-in-fact) and the certificate is delivered toanother, the latter appears to be the owner

thereof. A bona fide purchaser of value withoutnotice, will be protected in his acquisition,although such third person has diverted thecertificate from the purpose for which he wasentrusted therewith. (Principle of Estoppel)

E. The same rule is applicable if the certificate isin bearer form.

F. The rule is applicable where the certificate islost or stolen while signed in blank. Even apurchaser in good faith cannot acquire title asagainst the true owner. (?)

G. At common law, stock certificates are given theattributes of negotiability only where the ownerthereof has entrusted the wrongdoer with thepossession of such certificate and clothed himwith apparent ownership thereof.

SANTAMARIA v HONGKONG & SHANGHAIBANK (1951)

Plaintiff, in failing to take the necessary precautionupon delivering the certificate of stock to herbroker, was chargeable with negligence in thetransaction which resulted to her own prejudice,and as such, she is estopped from asserting title toit as against the defendant bank.A certificate of stock, indorsed in blank, is deemedquasi-negotiable, and as such the transfereethereof is justified in believing that it belongs to theholder and transferor.

DE LOS SANTOS, McGRATH (1955)

Although a stock certificate is sometimes regardedas quasi-negotiable, in the sense that it may betransferred by endorsement, coupled with deliveryit is well settled that the instrument is non-negotiable, because the holder thereof takes itwithout prejudice to such rights or defense as theregistered owner or credit may have under the law,except in so far as such rights or defenses aresubject tot eh limitations imposed by the principlesgoverning estoppel.

CAPCO v. MACASAET (1990)

Certificates of stocks are considered as quasi-negotiable instruments. When the owner orshareholder signs the printed form of sale orassignment at the back of every stock certificateswithout filling in the blanks provided for the nameof the transferee as well as for the name of theattorney-in-fact, the said owner or shareholder, ineffect, confers on another all the indicia ofownership of the said stock certificates.

4. Negotiable Documents of Title

5.1. In General1. as distinguished from negotiable

instruments, refer to goods and not tomoney; the sale of goods covered iseffected by the transfer of said document

2. not governed by the NIL but by the CivilCode.

3. includes any bill of lading, dock warrant,“quedan”, or warehouse receipt or order forthe delivery of goods, or any otherdocument used in the ordinary course ofbusiness in the sale or transfer of goods, asproof of the possession or control of thegoods, or authorizing or purporting toauthorize the possessor of the document to



transfer or receive, either by indorsementor by delivery, goods represented by suchdocument.

4. Documents of title negotiable when goodsrepresented thereby are deliverable to aspecified person , to order or to bearer.

5. valuable in commerce because it facilitatesthe sale and delivery of goods.

5.2. Kinds1. Warehouse receipts an agreement by a

warehouseman to store goods and deliverthem to a named person or his order or tobearer.

2. Bill of Lading a similar contract by acarrier to ship goods and deliver them tothe person named therein or his order or tobearer; negotiable bill of lading is usefulnot only as evidence of the receipt of thegoods by the carrier but as evidencing titleto goods covered by it. It also facilitatesthe purchase of goods by one person fromanother who is physically remote andprobably unknown to him.a. “straight” bill where the goods are to

be delivered to a specified person, it isnot negotiable and is called a “straight”bill. Otherwise, it is referred to as an“order” bill.

3. Certificate of Deposita receipt of a bank forcertain sum of money received upondeposit; generally framed in such FORM asto constitute a promissory note, payable tothe depositor, or to the depositor or order,or to bearer.a. it is taken when depositor does not

need his money for some extendedperiod of time and wants it to earninterest; more of an investment paperthan a commercial paper because it isnot attendant to a commercialtransaction the way a check or apromissory note is.

b. it is negotiable if it meets all therequirements of Sec 1 NIL

5.3. Negotiation - same as those used in NIs; toorder=delivery + indorsement, to bearer = delivery

1. The means of negotiating a document of titleare the same as those used in negotiableinstruments.2. If by the terms of the document, the goodsare deliverable to the order of a specifiedperson, then it should be indorsed by suchperson, either specially or in blank.3. If the goods are deliverable to bearer, or thedocument has been indorsed in blank, thennegotiation may be by mere delivery.

5.4. Rights of a Holder1. When free from personal defense

a. Under Art 1518 Civil Code, a holderof a negotiable document of title ingood faith, for value and without noticeis placed on the same level as a HDC ofa negotiable instrument – i.e., personaldefenses enumerated in said article arenot available against him. Personaldefenses include: negotiation was abreach of duty on the part of theperson making the negotiation, ownerof the document was deprived of thepossession of the same by loss, theft,

fraud, accident, mistake, duress orconversion.

b. Note Art 1518’s conflict with Art 1512.(see p 915)

2. What title acquired (NOTE: see Arts1513, 1514 and 1519 Civil Code)

a. A person to whom a negotiabledocument of title has been dulynegotiated acquires the title of theperson NEGOTIATING it as well as thetitle of the ORIGINAL BAILOR ordepositor of the goods.ex. if the original bailor had noauthority from such owner to depositthe goods, then the holder of thenegotiable document, even if thenegotiation to him was valid, cannotacquire title to the goods; AND even ifthe original bailor had authority, if thenegotiation to the present holder’stransferor was not valid, such holder,even if in good faith and for value, doesnot acquire any right to the goods. the holder’s remedy if any, is againsthis transferor and/or the guilty party.i Thus, if the original bailor or

depositor of the goods was not theowner thereof or had no authorityfrom such owner to deposit thegoods, then the holder of thenegotiable document, even if thenegotiation to him was valid,cannot acquire title to the goods.

ii On the other hand, even if theoriginal bailor or depositor was theowner or had authority from theowner, if the negotiation to thepresent holder’s transferor was notvalid, such holder, even if in goodfaith and for value, does notacquire any right to the goods.

iii In both cases, the holder’s remedyif any, is against his transferorand/or the guilty party.

b. The person to whom the document hasbeen negotiated acquires theobligation of the bailee to makedelivery to him, as if they hadcontracted directly with each other.i By issuing a negotiable document

of title, such bailee had given inadvance his consent to hold thegoods for any person to whom suchdocument is negotiated.

ii If document non-negotiable, noticeof any transfer should be given tothe bailee otherwise bailee or anyother person other than thetransferor not bound

iii Thus, the transferee’s rights maybe defeated by a levy ofattachment on the goods or by anotification to the bailee of a sale ofthe goods to another purchaser.

iv A sale of the goods without thedocument will not prejudice asubsequent purchaser who takesthe document in good faith and forvalue.

v The bailee’s delivery to the legalholder of the document wouldrelieve him of any furtherresponsibility for the goods.



5.5. Liability of Indorser1. The indorsement of a negotiable documentof title carries with it certain implied warrantiesby the indorser.2. As to the document, his warranty covers itsgenuineness, his legal right to negotiate it andhis lack of knowledge of any fact which wouldimpair its validity.3. As to the goods, he warrants that he hasthe right to transfer title thereto and that theyare merchantable.4. However, unlike the indorser of a NI who isliable if the primary party fails to pay, theindorser of a negotiable document of title is notliable for the failure of the bailee to fulfill hisobligation to deliver the goods.

ROMAN v ASIA BANKING CORP. (1922)

A warehouse receipt must be interpretedaccording to its evident intent and it is obviousthat the deposit evidenced by the receipt in thiscase was intended to be made subject to theorder of the depositor and therefore negotiable.The indorsement in blank of the receipt with itsdelivery which took place on the date of theissuance of the receipt demonstrate the intent tomake the receipt negotiable. Furthermore, thereceipt was not marked “non-negotiable.”

SIY CONG BIENG v. HSBC

If the owner of the goods permits another tohave the possession or custody of negotiablewarehouse receipts running to the order of thelatter, or to bearer, it is a representation of titleupon which bona fide purchasers for value areentitled to reply, despite breaches of trust orviolations of agreement on the part of theapparent owner.


INSURANCE CODE COMMERCIAL LAW

Insurance Code (PD 1460)

Chapter I. INTRODUCTION

1. Laws on Insurance

1.1. Sources of Insurance Law in thePhilippines During the Spanish period, all the provisions

concerning insurance in the Philippines werefound in Title 7 of Book 2 and Section 3 of Title3 of Book 3 of the Code of Commerce, and inChapters 2 and 4 of Title 12 of Book 4 of theold Civil Code of 1889.

When Act # 2427, enacted on December 11,1914, otherwise known as the Insurance Act,took effect on July 1 1915 during the AmericanRegime, the provisions of the Code ofCommerce on insurance were expresslyrepealed.

Ang Giok vs. Springfields

Facts: Ang Giok insured the contents of hiswarehouse with three insurance companies for60K. The warehouse and its contents weredestroyed by fire while the policies were in force.The plaintiff instituted action in the CFI of Manilaagainst one of the insurers to recover aproportional part of the loss coming to P8, 170.59. Four special defenses were interposed by theinsurer, one being planted on a violation ofwarranty F fixing the amount of hazardous goodswhich might be stored in the insured building.Securely pasted on the left hand margin of thepolicy reading in part as follows: “It is agreedthat during the currency of this policy nohazardous goods be stored in thebuilding…exceeding in all 3 percent of the totalvalue of the whole merchandise contained in saidwarehouse.”Held: The rider or slip containing said warrantyF attached to the policy in question and referredto therein as making part of the two formsprovided in said Section 65 of the Insurance Law.The law says that every express warranty mustbe “contained in the policy itself.” The word“contained,” according to the dictionaries, meansincluded, enclosed, embraced, comprehendedetc. When therefore, the courts speak of a riderattached to the policy, and thus embodiedtherein, or of a warranty incorporated into thepolicy, it is believed that the phrase ”contained inthe policy itself” must necessarily include suchride and warranty. As to the alternative relatingto “another instrument” as here used could notmean a mere slip of paper like a rider, butsomething akin to the policy itself. The wordinstrument has a well defined definition inCalifornia, and as used in the Codes invariablymeans some written paper or instrument signedand delivered by one person to another,transferring the title to, or giving a lien, onproperty, or giving a right to debt or duty. Therider, warranty F, is contained in the policy itself,because by the contract agreed to by the partiesis made to form part of the same, but is notanother instrument signed by the insured and

referred to in the policy as forming a part of it.The rider is therefore valid and binding.

Gercio vs. Sunlife

Facts: On January 1910, the Sun Life assuranceCo., of Canada issued a 20-year endowmentpolicy on the life of Hilario Gercio. The insurancecompany agreed to insure the life of Gercio forP2, 000, to be paid to him on February 1, 1930,or if the insured should die before said date, thento his wife, should she survive him; otherwise, tothe executors, administrators, or assigns of theinsured. The policy did not include any provisionreserving to the insured the right too change thebeneficiary. When the policy was issued, AndreaZialcita was the lawful wife of Hilario. In 1919,she was convicted of adultery. In 1920, a decreeof divorce was issued in a civil case completelydissolving the bonds of matrimony betweenGercio and Zialcita. In 1922, Fercio formallynotified Sun Life that he had revoked hisdonation in favor of Zialcita, and that he haddesignated in her stead his present wife, AdelaGarcia de Gercio, as the beneficiary of the policy.Gercio requested Sun Life to eliminate Zialcita asbeneficiary. This the insurance company hasrefuse to do and still refuses to do.Held: The Code of Commerce, the Civil Code orthe Insurance Act does not contain any provisioneither permitting or prohibiting the insured tochange the beneficiary. We must perforceconclude that whether the case be considered inthe light of the Code of Commerce, the CivilCode, or the Insurance Act, the deficiencies inthe law will have to be supplemented by thegeneral principles prevailing on the subject. Tothat end, we have gathered the rules whichfollow from the best considered Americanauthorities. In adopting these rules, we do sowith the purpose of having the Philippine Law ofInsurance conform as nearly as possible to themodern Law of Insurance as found in the UnitedStates. The beneficiary has an absolute vestedinterest in the policy from the date of its issuanceand delivery. So when a policy of life insuranceis taken out by the husband in which the wife isnamed the beneficiary, she has a subsistinginterest in the policy.

When RA 386, otherwise known as the CivilCode of the Philippines, took effect on August30, 1950, those provisions of the old Civil Codeon insurance were also expressly repealed.

Presidential Decree # 612, as amended, whichordained and instituted the Insurance Code ofthe Philippines, was promulgated on December18, 1974 during the period of martial law. Itrepealed Act # 2427, as amended. BeforePresidential Decree 612, amendments to theAct were made by PDs # 63, 123, 317.

Presidential Decree # 1460, consolidated allinsurance laws into a single code known as theInsurance Code of 1978. Basically, it reenactedPresidential Decree # 612, as amended. It hasbeen amended by Presidential Decree # 1814and Batas Pambansa Blg. 874.



1.2. Laws Governing Insurance

Insurance Code of 1978The law on insurance is contained now inthe Insurance Code of 1978 (PD # 1460, asamended) and special laws and partly, inthe pertinent provisions of the Civil Code.The Insurance Code primarily governs thedifferent types of insurance contracts andthose engaged in insurance business in thePhilippines. It took effect on June 11,1978, the date of its promulgation “withoutprejudice, however, to the effectivity datesof various laws, decrees and executiveorders which have so far amended theprovisions of the Insurance Code of thePhilippines (PD 612)”

Civil CodeThe provisions of the Civil Code dealing oninsurance are found in articles 739 and2012 (void donations), Article 2011(applicability of the Civil Code), Articles2021-2027 (life annuity contracts), Article2186 (compulsory motor vehicle liabilityinsurance), and Article 2207 (right ofsubrogation).

Special laws» The Insurance Code of 1978 (PD 1460)» The Revised Government Service

Insurance Act of 1977 (PD 1146, asamended), with respect to insurance ofgovernment employees

» The Social Security Act of 1954 (RA1161, as amended) with respect toinsurance of employees in privateemployment

Others – insofar as the Civil Code isconcerned, the Code of Commerce isconsidered a special law» RA 656 (as amended by PD 245),

known as the “Property InsuranceLaw,” dealing with governmentproperty

» RA 4898 (as amended by RA 5756)providing life, disability and accidentinsurance coverage to barangayofficials

» EO 250 (July 25, 1987) increases,integrates and rationalizes theinsurance benefits of barangay officialsunder RA 4898 and members ofSangguniang Panlalawigan,Sangguniang Panlungsod, andSangguniang Bayan under PD 1147.The insurance benefits are extended bythe GSIS.

» RA 3591 (as amended) establishes thePhilippine Deposit InsuranceCorporation which insures the depositsof all banks which are entitled to thebenefits of insurance under this Act

Chapter II

THE CONTRACT OF INSURANCE

1. Definitions

1.1. Section 2, Insurance Code

Sec. 2. Whenever used in this Code, the followingterms shall have the respective meaningshereinafter set forth or indicated, unless thecontext otherwise requires:(1) A "contract of insurance" is an agreementwhereby one undertakes for a consideration toindemnify another against loss, damage or liabilityarising from an unknown or contingent event.A contract of suretyship shall be deemed to be aninsurance contract, within the meaning of thisCode, only if made by a surety who or which, assuch, is doing an insurance business as hereinafterprovided.(2) The term "doing an insurance business" or"transacting an insurance business", within themeaning of this Code, shall include (a) making orproposing to make, as insurer, any insurancecontract; (b) making or proposing to make, assurety, any contract of suretyship as a vocationand not as merely incidental to any other legitimatebusiness or activity of the surety; (c) doing anykind of business, including a reinsurance business,specifically recognized as constituting the doing ofan insurance business within the meaning of thisCode; (d) doing or proposing to do any business insubstance equivalent to any of the foregoing in amanner designed to evade the provisions of thisCode.In the application of the provisions of this Code thefact that no profit is derived from the making ofinsurance contracts, agreements or transactions orthat no separate or direct consideration is receivedtherefore, shall not be deemed conclusive to showthat the making thereof does not constitute thedoing or transacting of an insurance business.(3) As used in this code, the term"Commissioner" means the "InsuranceCommissioner".

1.2. “Contract of Insurance” An agreement by which one party (insurer)

for a consideration (premium) paid by theother party (insured), promises to paymoney or its equivalent or to do some actvaluable to the latter (or his nominee),upon the happening of a loss, damage,liability, or disability arising from anunknown or contingent event.

White Gold Marine Services vs. Pioneer(2005)

An insurance contract is a contract is a contract ofindemnity wherein one undertakes for aconsideration to indemnify another against loss,damage, or liability arising from an unknown orcontingent event. Regulation by the state througha license or certification of authority is necessarysince a contract of insurance involves publicinterest.



1.3. “Doing an Insurance Business”General Rule: An insurance business consists ofundertaking, for a consideration, to indemnifyanother against loss, damage or liability arisingfrom an unknown or contingent event

Supplementary Rule: The fact that anestablishment is not formally designated as oneof insurance does not preclude its beingdeemed to be engaged in an insurancebusiness if it undertakes any of the following(even if not for profit or for any independentconsideration): Making or proposing to make, as insurer,

any insurance contract Making or proposing to make, as surety,

any contract of surety ship as a vocation Doing any king of business, including a

reinsurance business, specificallyrecognized as constituting the doing of aninsurance business with the meaning of thisCode

Doing or proposing to do any business insubstance equivalent to any of theforegoing in a manner designed to evadethe provisions of the Insurance Code

2. Elements

2.1. Insurable interest The insured has an insurable interest in the

thing or the life of the insured

2.2. Risk of Loss or Damage / DesignatedPeril as Cause

The happening of the designated events,either unknown or contingent, past orfuture, will subject such interest to someloss, whether in the form of injury,damage, or liability

2.3. Consideration: Premium The insurer undertakes to assume the

risk of such a loss for a considerationcalled the premium to be paid by theinsured

2.4. Risk Distributing Scheme This assumption of risk is part of a general

scheme to distribute the loss among a largenumber of persons exposed to similar risks

3. Characteristics/Nature ofInsurance Contracts

3.1. Consensual Perfected by the meeting of the minds of

the parties If an application for insurance has not been

either accepted or rejected, there is nocontract as yet

3.2. Voluntary It is not compulsory and the parties may

incorporate such terms and conditions asthey may deem convenient which will bebinding provided they do not contraveneany provision of law and are not opposed topublic policy

» Though generally a voluntarycontract, the carrying ofinsurance, particularly liabilityinsurance, may be required bylaw in certain circumstancessuch as for motor vehicles, oremployees (Labor Code Art.168-184) or as a condition togranting a license to conduct abusiness or calling affectingpublic safety or welfare

» Social insurance for membersof GSIS and for employees ofthe private sector covered bythe SSS is also established bylaw

3.3. Aleatory

Art. 2010. By an aleatory contract, one of theparties or both reciprocally bind themselves to giveor to do something in consideration of what theother shall give or do upon the happening of anevent which is uncertain, or which is to occur at anindeterminate time.

It depends upon some contingent event Not a contract of chance although the

event against the occurrence of which it isintended to provide may never occur

It means one of the parties or bothreciprocally bind themselves to give or todo something in consideration of what theother shall give or do upon the happeningof the event which is uncertain, or which isto occur at an indefinite time

Each party must take a risk» Insurer - being compelled upon the

happening of the contingency, topay the entire sum agreed upon

» Insured – parting with the amountrequired as premium withoutreceiving anything in case thecontingency does not happenexcept what is ordinarily termed“protection” which is itself is avaluable consideration

3.4. Executory (insurer) and executed(insured)

Executory on the part of the insurer in thesense that it is not executed until paymentfor a loss

It is executed as to the insured afterpayment of the premium

It is a unilateral contract imposing legalduties only on the insurer who promises toindemnify in case of loss

3.5. Conditional It is subject to conditions the principal one

of which is the happening of the eventinsured against

The contract usually includes many otherconditions, such as payment of premium orperformance of some other act, which mustbe complied with as precedent to the rightof the insured to claim benefit under it



3.6. A contract of indemnity (except lifeand accident insurance where the resultis death)

The promise of the insurer is to make goodonly the loss of the insured

Any contract that contemplates a possiblegain to the insured by the happening of anyevent upon which the liability of the insurerbecomes fixed is contrary to the nature ofinsurance

No person may secure insurance uponproperty in which he has no interest.

If the insured has no insurable interest, thecontract is void and unenforceable as beingcontrary to public policy because it affordsa temptation to the insured to wish or bringabout the happening of the loss

3.7. An investment (life insurance) Measure of economic security for the

insured during life, and beneficiary afterdeath

Financial assistance during financial crisis Liability of insurer is face value of the policy

and not the earning capacity of the insuredat the time of death

3.8. A personal contract Each party having in view the credit,

character and conduct of another As a rule, the insured cannot assign, before

the happening of the loss, his rights undera property policy without the consent of theinsurer. The obligation of the insurer topay does not attach or run with theproperty whether it be real property orpersonal

» If a person whose property isinsured sells it to another, thebuyer cannot be his successor inthe contract of insurance unless, ofcourse, the sale is with the consentof the insurer or unless by expressstipulation of the parties, thecontract is made to run with theproperty of the transferee

» Where the insurance is “on accountof the owner” or “for whom it mayconcern” or where “the loss ispayable to bearer,” the subsequenttransferees or owners become bythe terms of the contract, the realparties to the contract of insurance.

All insurance contracts share a commontrait of “personal-ness”

» Personal insurance (includes life,health, accident, and disabilityinsurance) – applies only to aparticular individual, and it is notpossible, for example, for theinsured unilaterally declaring thathis health insurance policy shallnow be deemed to cover the healthof someone else

» Liability insurance – each personpurchases coverage for his own (ora group of related persons)potential liability to others. Theinsurer prices the coveragedepending on the characteristicsand traits of the particular insured

» Property insurance - the insuranceis on the insured’s interest in the

property, not on the property itself.It is the damage to the personalinterest not the property that isbeing reimbursed

» Life insurance – GENERALLYASSIGNABLE as they are in thenature of property and do notrepresent a personal agreementbetween insured and insurer

»

3.9. A contract of adhesion Policy is presented to the insured already in

its printed form “Take it or leave it”

3.10. Of highest degree of good faith Each party is enjoined by law to deal with

each other in good faith Disclosure or the duty to disclose Violation of the duty gives the other party

the right to rescind the contract

3.11. It is property in legal contemplation

4. Requisites of a valid contract ofinsurance

A subject matter in which the insurer hasan insurable interest

Event or peril insured against which maybe any (future) contingent or unknownevent, past or future (Sec. 3), and aduration for the risk thereof

A promise to pay or indemnify in a fixedor ascertainable amount

A consideration for the promise known asa “premium”

A meeting of the minds of the partiesupon all of the foregoing essentials

The parties must be competent to enterinto the contract

Under Sec. 226, “no policy of insuranceshall be issued or delivered within thePhilippines unless in the form previouslyapproved by the Insurance Commissioner”

The purpose must not be contrary to lawor public policy



5. Contracts for Contingent Services; Pre-need Plans and Similar Arrangements

5.1. Contracts for Contingent PersonalServices

It does not necessarily follow that acontract containing the abovementionedelements would be an insurance contact

The primary purpose of the parties makingthe contract may negate the existence ofan insurance contract» A law firm which enters into contracts

with clients in consideration ofperiodical payments, where it promisesto represent such clients in all suits foror against them, is not engaged in aninsurance business. Its contracts aresimply for the purpose of renderingpersonal services

» A contract by which a consideration ofa stipulated amount, agrees at its ownexpense to defend a physician againstall suits for damages for malpractice isone of insurance, and the corporationwill be deemed as engaged in thebusiness of insurance

» Unlike the lawyer’s retainer contract,the essential purpose of such a contractis not to render personal services, butto indemnify against loss or damageresulting from the defense of actionsfor malpractice.

» A corporation which enters intocontracts with car owners and agreesto engage and pay for the services of alawyer to handle any damage casearising from collision of their cars, isengaged in the insurance business andmust therefore comply with the lawsrelative to the transaction of insurancebusiness and should be licensed assuch before it can lawfully transactsuch business

» Such contracts do not provide for thepayment of any sum directly to thecontractee, but it does provide for therelief of the contractee from theexpenses of employing an attorney

» It would be immaterial that thecontract states on its face that it is nota contract of insurance, for the natureof the contract cannot be changed bysuch a declaration

5.2. Contracts with Contingent IncidentalBenefit

In the case of Attorney General ex rel Monk vs.C.E. Osgood Co., the defendant company wasengaged in the business of selling householdfurniture on the installment plan. Under thecontracts with its customers, although deliverywould be made at the time of the contract, titleto the furniture would not pass until allpayments have been completed. Saidcontracts also provided that should the buyerdie before full payment of the agreed price, theunpaid balance would be remitted to the extentof $500.

The Insurance Commissioner, through the Atty.Gen., claiming that this last provision made itan insurance contract brought suit to restrainthe defendant from pursuing its business

without first securing the proper license. TheCourt upheld the Attorney General’s contentionand issued an injunction holding that thecontract had all the elements of an insurancecontract. Whether this clause in the contract isancillary to defendant’s chief business or ismainly for advertising ends was held irrelevantin view of the prohibition against the making ofinsurance contracts by companies notauthorized by law.

It would seem, however, that the purpose ofthe stipulation, taken with its effects in case ofthe death of the buyer, did not warrant aholding that the furniture company should firstsecure a license to engage in the insurancebusiness. Although all the elements of aninsurance contract may seem to be present,yet the furniture buyer and/or his heirs did not,under the circumstances, need the protectionwhich the law aims to give the insuring publicby the requirement of a prior license.

First of all, when the buyer purchased thefurniture, he must have seen and examined itand must have believed that it was worth theamount he agreed to pay for it. Secondly, thefurniture was delivered to him at the time ofthe contract and used by him thereafter. Uponhis death, his heirs continued enjoying the useof the furniture. Therefore, the buyer and/orhis heirs stood to lose nothing by thequestioned stipulation, and if at all, stood togain by it.

5.3. Pre-need Plans

Philamcare Health Systems vs. CA

Ratio: Section 3 of the Insurance Code states thatany contingent or unknown event, whether past orfuture, which may damnify a person having aninsurable interest against him, may be insuredagainst. Every person has an insurable interest inthe life and health of himself. Section 10 provides:Every person has an insurable interest in the lifeand health (1) for himself, of his spouse and of hischildren; (2) of any person on whom he dependswholly or in part for education or support, or inwhom he has a pecuniary interest; (3) of anyperson under a legal obligation to him for thepayment of the money, respecting property orservice, of which death or illness might delay orprevent the performance; and (4) of any personupon whose life any estate or interest vested inhim depends. In the case at bar, the insurableinterest of respondent’s husband in obtaining thehealth care agreement was on his own health. Thehealth care agreement was in the nature of non-lifeinsurance, which is primarily a contract ofindemnity. Once the member incurs hospital,medical or any other expense arising fromsickness, injury or other stipulated contingent, thehealth care provider must pay for the same to theextent agreed upon under the contracts.

6. Classification under the Code6.1. Life - defined as a mutual agreement bywhich a party agrees to pay a given sum on thehappening of a particular event contingent on theduration of human life, in consideration of the



payment of a smaller sum immediately, or inperiodical payments by the other party

a) Individual life

Sec. 179. Life insurance is insurance onhuman lives and insurance appertaining thereto orconnected therewith.

Sec. 180. An insurance upon life may bemade payable on the death of the person, or on hissurviving a specified period, or otherwisecontingently on the continuance or cessation of life.Every contract or pledge for the payment ofendowments or annuities shall be considered a lifeinsurance contract for purpose of this CodeIn the absence of a judicial guardian, the father, orin the latter's absence or incapacity, the mother, orany minor, who is an insured or a beneficiary undera contract of life, health or accident insurance, mayexercise, in behalf of said minor, any right underthe policy, without necessity of court authority orthe giving of a bond, where the interest of theminor in the particular act involved does notexceed twenty thousand pesos. Such right mayinclude, but shall not be limited to, obtaining apolicy loan, surrendering the policy, receiving theproceeds of the policy, and giving the minor'sconsent to any transaction on the policy.

Sec. 180-A. The insurer in a life insurance contractshall be liable in case of suicides only when it iscommitted after the policy has been in force for aperiod of two years from the date of its issue or ofits last reinstatement, unless the policy provides ashorter period: Provided, however, That suicidecommitted in the state of insanity shall becompensable regardless of the date of commission.(As amended by Batasang Pambansa Blg. 874)

Sec. 181. A policy of insurance upon life orhealth may pass by transfer, will or succession toany person, whether he has an insurable interest ornot, and such person may recover upon it whateverthe insured might have recovered.

Sec. 182. Notice to an insurer of a transfer orbequest thereof is not necessary to preserve thevalidity of a policy of insurance upon life or health,unless thereby expressly required.

Sec. 183. Unless the interest of a personinsured is susceptible of exact pecuniarymeasurement, the measure of indemnity under apolicy of insurance upon life or health is the sumfixed in the policy.

Insurance on human lives and insuranceappertaining thereto or connectedtherewith

Made payable on the death of a person, oron his surviving a specified period, orotherwise contingently on the continuanceor cessation of life

one insures one’s life or that of anotheragainst death or sickness

Effect of suicide of insuredLiability of insurer in case of suicide

» When liable: The suicide is committed after the

policy has been in force for a periodof 2 years from date of its issue orof its reinstatement;

The suicide is committed after ashorter period provided in thepolicy although within the 2-yearperiod;

The suicide is committed in thestate of insanity regardless of thedate of commission, unless suicideis an excepted risk.

*Note that the policy cannot provide aperiod longer than 2 years. So, if the policyprovides for a 3-year period and suicide iscommitted within the period but after 2years, insurer is liable.» When not liable:

Suicide is not by reason of insanityand is committed within the 2-yearperiod.

Suicide is by reason of insanity butis not among the risks assumed bythe insurer regardless of the dateof commission.

Insurer can show that the policywas obtained with the intention tocommit suicide even in the absenceof any suicide exclusion in thepolicy.

b) Group life

Sec. 50. The policy shall be in printed formwhich may contain blank spaces; and any word,phrase, clause, mark, sign, symbol, signature,number, or word necessary to complete thecontract of insurance shall be written on the blankspaces provided therein.Any rider, clause, warranty or endorsementpurporting to be part of the contract of insuranceand which is pasted or attached to said policy is notbinding on the insured, unless the descriptive titleor name of the rider, clause, warranty orendorsement is also mentioned and written on theblank spaces provided in the policy.Unless applied for by the insured or owner, anyrider, clause, warranty or endorsement issued afterthe original policy shall be countersigned by theinsured or owner, which countersignature shall betaken as his agreement to the contents of suchrider, clause, warranty or endorsement.Group insurance and group annuity policies,however, may be typewritten and need not be inprinted form.

May be typewritten and need not be inprinted form

Members usually a cohesive group» Pay a uniform premium» Usually no medical examination» Normally requires a specified number of

persons insured before policy is issued



c) Industrial life

Sec. 229. The term "industrial life insurance"as used in this Code shall mean that form of lifeinsurance under which the premiums are payableeither monthly or oftener, if the face amount ofinsurance provided in any policy is not more thanfive hundred times that of the current statutoryminimum daily wage in the City of Manila, and ifthe words "industrial policy" are printed upon thepolicy as part of the descriptive matter.An industrial life policy shall not lapse for non-payment of premium if such non-payment was dueto the failure of the company to send itsrepresentative or agent to the insured at theresidence of the insured or at some other placeindicated by him for the purpose of collecting suchpremium; Provided, That the provisions of thisparagraph shall not apply when the premium onthe policy remains unpaid for a period of threemonths or twelve weeks after the grace period hasexpired.

Form of life insurance under which thepremiums are payable either monthly oroftener

Face amount of insurance provided in anypolicy is not more than five hundred timesthat of the current statutory minimum dailywage in the City of Manila

Shall not lapse for non-payment ofpremium if such non-payment was due tothe failure of the company to send itsrepresentative or agent to the insured atthe residence of the insured or at someother place indicated by him for thepurpose of collecting such premium» This shall not apply when the premium

on the policy remains unpaid for aperiod of three months or twelve weeksafter the grace period has expired.

6.2. Non-life – include policies covering risks towhich property may be exposed, as well as thosewhich cover the risk of liability to third persons. Itcovers a specified period of time (not more than 1year) and has a definite period of coverage.

a) Marine

Sec. 99. Marine Insurance includes:(1) Insurance against loss of or damage to:(a) Vessels, craft, aircraft, vehicles, goods,freights, cargoes, merchandise, effects,disbursements, profits, moneys, securities, chosesin action, evidences of debts, valuable papers,bottomry, and respondentia interests and all otherkinds of property and interests therein, in respectto, appertaining to or in connection with any and allrisks or perils of navigation, transit ortransportation, or while being assembled, packed,crated, baled, compressed or similarly prepared forshipment or while awaiting shipment, or during anydelays, storage, transhipment, or reshipmentincident thereto, including war risks, marinebuilder's risks, and all personal property floaterrisks;(b) Person or property in connection with orappertaining to a marine, inland marine, transit ortransportation insurance, including liability for lossof or damage arising out of or in connection withthe construction, repair, operation, maintenance oruse of the subject matter of such insurance (butnot including life insurance or surety bonds norinsurance against loss by reason of bodily injury toany person arising out of ownership, maintenance,or use of automobiles);(c) Precious stones, jewels, jewelry, preciousmetals, whether in course of transportation orotherwise;(d) Bridges, tunnels and other instrumentalitiesof transportation and communication (excludingbuildings, their furniture and furnishings, fixedcontents and supplies held in storage); piers,wharves, docks and slips, and other aids tonavigation and transportation, including dry docksand marine railways, dams and appurtenantfacilities for the control of waterways.(2) "Marine protection and indemnityinsurance," meaning insurance against, or againstlegal liability of the insured for loss, damage, orexpense incident to ownership, operation,chartering, maintenance, use, repair, orconstruction of any vessel, craft or instrumentalityin use of ocean or inland waterways, includingliability of the insured for personal injury, illness ordeath or for loss of or damage to the property ofanother person.

Ocean marine insurance – an insuranceagainst risk connected with navigation, towhich a ship, cargo, freightage, profits orother insurable interest in movableproperty, may be exposed during a certainvoyage or a fixed period of time

Inland marine insurance – it is ofcomparatively recent origin and coversprimarily the land or over the landtransportation perils of property shipped byrailroads, motor trucks, airplanes, andother means of transportation. It alsocovers risks of lake, river, or other inlandwaterway transportation and otherwaterborne perils outside of those risksthat fall definitely within the ocean marinecategory



b) Fire

Sec. 167. As used in this Code, the term "fireinsurance" shall include insurance against loss byfire, lightning, windstorm, tornado or earthquakeand other allied risks, when such risks are coveredby extension to fire insurance policies or underseparate policies.

c) Casualty or Liability Insurance

Sec. 174. Casualty insurance is insurancecovering loss or liability arising from accident ormishap, excluding certain types of loss which bylaw or custom are considered as falling exclusivelywithin the scope of other types of insurance suchas fire or marine. It includes, but is not limited to,employer's liability insurance, motor vehicle liabilityinsurance, plate glass insurance, burglary and theftinsurance, personal accident and health insuranceas written by non-life insurance companies, andother substantially similar kinds of insurance.

d) Suretyship

Sec. 175. A contract of suretyship is anagreement whereby a party called the suretyguarantees the performance by another partycalled the principal or obligor of an obligation orundertaking in favor of a third party called theobligee. It includes official recognizances,stipulations, bonds or undertakings issued by anycompany by virtue of and under the provisions ofAct No. 536, as amended by Act No. 2206.

Sec. 176. The liability of the surety orsureties shall be joint and several with the obligorand shall be limited to the amount of the bond. It isdetermined strictly by the terms of the contract ofsuretyship in relation to the principal contractbetween the obligor and the obligee. (As amendedby Presidential Decree No. 1455)

Sec. 178. Pertinent provisions of the CivilCode of the Philippines shall be applied in asuppletory character whenever necessary ininterpreting the provisions of a contract ofsuretyship.

A contract of suretyship shall be deemed tobe an insurance contract, only if made by asurety who or which is doing an insurancebusiness

6.3. Variations in Life Insurance Contracts

a) Whole life plan The terms of which the insured is required

to pay a certain fixed premium annually orat more frequent intervals throughout lifeand the beneficiary is entitled to receivepayment under the policy only after thedeath of the insured

The ultimate payment of the insuranceproceeds is as certain as death itself

b) Limited payment plan The terms of which the premiums are

payable only during a limited period ofyears, usually ten, fifteen, or twenty

When the specified number of premiumpayments have been made, the insuranceis fully paid for

It is like whole life policies in that it ispayable only at the death of the insured

If the insured should die within thespecified period, his beneficiary is entitledto all the proceeds of the policy without anyliability for the unpaid premiums

Because of the limited number of paymentsto be made by the insured, the premiumsare proportionately higher

c) Term plan One which provides coverage only of the

insured dies during a limited period It is an insurance for a fixed or a specific

term, such as two, five, or ten years If the insured dies within the period

specified, the policy is paid to thebeneficiary

If he survives the period, the contractterminates

The premium paid is levied during thespecified terms and increases with eachrenewal term or the amount of thecoverage declines, and this is because as aperson ages, the risk of death increases

The premium is lower than in the case ofwhole life policies because of the possibilitythat the insurer may not be obliged to payanything in proceeds whatsoever if theinsured survives the term

d) Pure endowment plan Insured pays premium for a specified

period and should he survive the period,the insurance company pays him the facevalue of the policy

If he should die within the period theinsurance company is released from anyliability and unless provided in the contract,need not reimburse any part of thepremiums paid

e) Endowment plan The terms of which the insurer binds

himself to pay a fixed sum to the insured ifhe survives for a specified period (maturitydate stated in the policy), or if he dieswithin such period, to some other personindicated

The premium is higher because the cashvalues of the policy grow more rapidly.

This kind of policy differs from the limitedpayment life policy in that in the case ofthe latter, the policy is paid only upon thedeath of the insured

The insured stands a chance of being paidthe proceeds of the policy while still alive

The proceeds on maturity can be paideither in a lump sum or as an annuity

7. Construction / Interpretation ofInsurance Contracts

7.1. Where there is Ambiguity or Doubt As a general rule, contracts of insurance

are to be construed liberally in favor of theinsured and strictly against the insurer,resolving all ambiguities against the latter,so as to effect its dominant purpose ofindemnity or payment to the insured,especially were a forfeiture is involved

An insurance contract should be sointerpreted as to carry out the purpose forwhich the parties entered into the contract



which is to insure against risk of loss,damage or liability on the part of theinsured

The insurer is under the duty to make itsmeaning clear if it desires to limit or restrictthe operation of the general provisions ofits contract by special proviso, exception orexemption

A policy of insurance which containsexceptions or conditions tending to work aforfeiture of the policy shall be interpretedmost favorably toward those against whomthey are intended to operate and moststrictly against the insurance company orthe party for whose benefit they areinserted

Where restrictive provisions are open totwo interpretations, that which is mostfavorable to the insured is adopted.Limitations of liability must be construed insuch a way as to preclude the insurer fromnon compliance with its obligations

7.2. Where Terms are Clear The cardinal principle of insurance law of

interpreting insurance contracts favorablyto the insured is applicable only in cases ofdoubt, not when the intention of the policyis clear or the language is sufficiently clearto convey the meaning of the parties

The court is bound to adhere to theinsurance contract as the authenticexpression of the intention of the parties,and it must be construed and enforcedaccording to the sense and meaning of theterms which the parties themselves haveused.

If such terms are clear and certain, theymust be taken in their plain and ordinarysense

Obligations arising from contracts have theforce of law between the contractingparties and should be complied with ingood faith

7.3. Literal or Strict Interpretation

First Quezon City Insurance vs. CA

Facts: Del Rosario fell off a De Dios MarikinaTransportation Co. Inc. bus. Del Rosario wasbrought to the hospital and stayed there for 40days. The cost for the hospitalization amountedto P69,444 while unearned salary due toconfinement amounted to P7,500. Del Rosariofiled a complaint against DMTC and its insurancecompany, First Quezon City Insurance Company.Held: The insurance company’s liability shouldbe limited to P12,000 only. The insurance policyclearly placed the maximum limit of First QuezonCity’s liability for damages arising from death orbodily at P12,000 per passenger and itsmaximum liability per accident at P50,000. Thismeans that the insurer’s maximum liability forany single accident will not exceed 50Kregardless of the number of the passengers killedor injured.

Ty vs. First National

Facts: Ty was a mechanic foreman in theBroadway Cotton Factory. A fire broke out whichtotally destroyed the factory. As Ty was fightinghis way out of the factory, he injured his left

hand, causing temporary total disability due tofractures o his index, middle, and fourth fingers.He filed a notice of accident and claim to recoverindemnity from First National Surety $ assuranceCo. Inc., pursuant to his insurance policy whichprovides: “…the loss of a hand shall mean theloss by amputation through the bones of thewrist…” The insurance company rejected Ty’sclaim saying that since there was no severanceby amputation of the hand, the disability sufferedby him was not covered under the policy.Held: The insurance company is not liable toindemnify Ty. We cannot go beyond the clearand express conditions of the insurance policies,all of which define partial disability as loss ofeither hand by “amputation through the bones ofthe wrist” There was no amputation in this case.The agreement contained in the insurancepolicies is the law between the parties. Aninterpretation that would include the merefracture or other temporary disability not coveredby the policies would certainly be unwarranted.

Misamis Lumber vs. Capital Inc.

Facts: Misamis Lumber Corporation, insured itsmotor car for the amount of P14,000. Theinsured car, passed over a water whole which thedriver did not see because an oncoming car didnot dim its lights. The car was later towed andrepaired by Morosi Motors at a total cost ofP302.27. Capital Insurance refused to pay forthe total cost of towage and repairs.Held: The insurance company is not liable forthe payment of the repairs in excess of P150.The insurance policy stipulated in paragraph 4that if the insured authorizes the repair, theliability of the insurer is limited to P150. Theliteral meaning of this stipulation must control, itbeing the actual contract, expressly and plainlyprovided for in the policy. The policy is also drewout not only the limits of the insurer’s liability butalso the mechanics that the insured had to followto be entitled to full indemnity of repairs. Theoption to undertake the repairs is accorded to theinsurance company per paragraph 2. The saidcompany was deprived of the option because theinsured took it upon itself to have the repairsmade, and only notified the insurer when therepairs were done. As a consequence, paragraph4, which limits the company’s liability to P150applies.

Sun Insurance vs. CA

Facts: Tan took from Sun Insurance a propertyinsurance worth 300K to insure his interest in theelectrical supply store of his brother housed in abuilding in Iloilo City. Four days after, thebuilding was burned down including the insuredstore. When Tan filed a claim with the insurancecompany, the same was denied, after which heasked for reconsideration which was againdenied. It is stipulated in the insurance policythat any action should be filed with the InsuranceCommission or any court of competentjurisdiction within 12 months after receipt by theinsured of a rejection of his claim and failure todo so would constitute abandonment of claim andcan no longer be recoverable.Held: The 12-month prescriptive periodcommenced upon receipt by Tan of therejection/denial of his claim by Sun Insuranceand does not stop upon filing of the motion for



reconsideration. The words of the provisions inthe insurance policy is clear and free from anydoubt or ambiguity whatsoever and thus must betaken and understood in its plain, ordinary andpopular sense.

Fortune Insurance vs. CA

Facts: An armored car of Producers Bank, whilein the process of transferring cash in the sum of725K, was robbed of the said cash. After aninvestigation by police authorities, the driver andthe guard were charged with Violation of PD 532,the Anti-Highway Robbery Law. Demands weremade by the bank upon the insurance companyto pay the amount of 725K, but the latter refusedto pay as the loss is excluded from the coverageof the insurance policy which reads: “ Thecompany shall not be liable under this policy inrespect of . . . any loss caused by any dishonest,fraudulent or criminal act of the insured or anyofficer, employee, partner, director, trustee orauthorized representative of the insured whetheracting alone or in conjunction with others…”Held: The insurance company is not liable. It isclear that insofar as Fortune is concerned, it wasits intention to exclude and exempt fromprotection and coverage losses arising fromdishonest, fraudulent, or criminal acts of personsgranted or having unrestricted access to thebank’s money or payroll. When it used the term“employee,” it must have in mind any personwho qualifies as such as generally andequivocally understood, or jurisprudentiallyestablished in light of the determination of theER-EE relationship. It is settled that the terms ofthe policy constitute the measure of the insurer’sliability. In the absence of statutory prohibitionto the contrary, insurance companies have thesame rights as individuals to limit their liabilityand to impose whatever conditions they deembest upon their obligations not inconsistent withpublic policy

7.4. Liberal Interpretation; ReasonableExpectations

Fieldman’s Inc. vs. Vda. De Songco

Facts: Songco owned a private jeepney. Hewas induced by an agent of Fieldmen’s Insuranceto apply for a Common Carrier’s Insurance Policy,which is applicable to public utility vehicles. Thepolicy provides: “the company will, subject tothe limits of liability and under terms of thispolicy, indemnify the insured in the event ofaccident caused by or arising out of the use ofmotor vehicle against all sums which will becomeliable to pay in respect of death or bodily injuryto any fare-paying passenger.” During theeffectivity of the policy, the insured vehiclecollided with another car killing Songco’s son andwounding his wife.Held: Doctrine of estoppel applies. After leadingSongco to believe that he could qualify under thecommon carrier policy and to enter into thecontract of insurance paying the premiums due,Fieldmen’s cannot be permitted to change itsstand. Also, except for the fact that the victimswere not fare-paying passengers, their status asbeneficiaries under the policy is recognized.Even assuming there was an ambiguity,ambiguities or obscurities must be strictlyinterpreted against the party that caused them.

This rigid application of the rule of ambiguitieshas become necessary in view of currentbusiness practices.

Malayan Ins. vs. CA

Facts: TKC Marketing Corp. was theowner/consignee of some 3,189.171 metric tonsof soya bean meal which was loaded on boardthe ship MV Al Kaziemah. Said cargo was insuredagainst the risk of loss by Malayan InsuranceCorporation. While the vessel was docked inSouth Africa on September 1989 enroute toManila, the civil authorities arrested and detainedit because of a lawsuit on a question ofownership and possession. TKC notified theinsurance company of the arrest of the vesseland made a formal claim for the amount ofUS$916,886.66. Malayan replied that the arrestof the vessel by civil authority was not a perilcovered by the policies.Held: Malayan insurance should be held liablefor the payment of the insurance claim. Sincewhat was also excluded in the deleted F.C. & S.Clause was "arrest" occasioned by ordinaryjudicial process, logically, such "arrest" wouldnow become a covered risk under subsection 1.1of Section 1 of the Institute War Clauses,regardless of whether or not said "arrest" by civilauthorities occurred in a state of war. It hasbeen held that a strained interpretation which isunnatural and forced, as to lead to an absurdconclusion or to render the policy nonsensical,should, by all means, be avoided. Likewise, itmust be borne in mind that such contracts areinvariably prepared by the companies and mustbe accepted by the insured in the form in whichthey are written. Exceptions to the generalcoverage are construed most strongly against thecompany. Even an express exception in a policyis to be construed against the underwriters bywhom the policy is framed, and for whose benefitthe exception is introduced.

Western Guaranty vs. CA

Facts: De Dios Transportation Inc. Figured in anaccident when it struck Rodriguez who wascrossing the pedestrian lane on Airport Road.The driver ignored the stop signal given by atraffic enforcer. Rodriguez was thrown to theground and hit her head and resulted to her facegetting permanently disfigured. De DiosTransportation filed a complaint against WesternGuaranty since they were insured by Westernunder a Master Policy which provided protectionagainst third party liability.Held: Western Guaranty is liable to pay for thedamage caused to the victim including loss ofearnings, moral damages and attorney’s fees.The Schedule of Indemnities does not purport tolimit or exhaustively enumerate the species ofbodily injury to the list found in the Schedule ofIndemnities since an accident may result to aninjury to internal organs not necessarily to a lossof limb (amputation of the leg, arm, finger, hand)but such injuries are certainly covered by theMaster Plan since they constituted bodily injuries.Also, the Schedule of Indemnities also does notpurport to restrict the kind of damages that maybe paid by the insurer once liability has arisen,under the Liability to Third Party clause, and doesnot say that the limit is subject to the listindicated in the Schedule of Indemnities. All



other types of damages may be awarded againstthe insurer once liability is shown to have arisen.A contract of insurance is a contract of adhesionand must be construed strictly against the partywhich prepared the contract.

Qua Chee Gan vs. Law Union

Facts: This case involved a claim on a fireinsurance policy which contained a provision asto the installation of fire hydrants the number ofwhich depended on the height of the externalwall perimeter of the bodega that was insured.When it was determined that the bodega shouldhave eleven fire hydrants in the compund asrequired by the terms of the policy, instead ofonly two that it had, the claim under the policywas resisted on that ground.Held: The said deviation from the terms of thepolicy did not prevent the claim under the same.We are in agreement with the trial Court that theappellant is barred by waiver (or rather estoppel)to claim violation of the so called fire hydrantswarranty, for the reason that knowing fully thatthe number of hydrants demanded therein neverexisted from the very beginning, the appellantnevertheless issued the policies in questionsubject to such warranty, and received thecorresponding premiums. It would be perilouslyreceived the corresponding premiums. It wouldbe perilously close to conniving at fraud upon theinsured to allow the appellant to claim now asvoid ab initio the policies that it had issue to theplaintiff without warning of their fatal defect, ofwhich it was informed, and after it had misled thedefendant into believing that the policies wereeffective. When the policy contains a conditionwhich renders it voidable at its inception, and thisresult is known to the insurer, it will be presumedto have intended to waive the conditions and toexecute a binding contract, rather than to havedeceived the insured into thinking he is insuredwhen in fact he is not, and to have taken hismoney without consideration. The insurancecompany is liable on the insurance contract.

Del Rosario vs. Equitable Insurance

Facts: The insurer has bound itself under thepolicy to pay P1,000-3,000 as indemnity for thedeath of the insured for bodily injury, the policycontaining specific amounts that may berecovered. The policy, however, does notpositively state any definitive amount that maybe recoverable in case of death by drowning,although it is a ground for recovery apart fromdeath for bodily injury.Held: There is an ambiguity in this respect inthe policy, which ambiguity must be interpretedin favor of the insured and strictly against theinsurer to allow a greater indemnity, that is,P3,000.

Geagonia vs. CA

Facts: Geagonia is the owner of Norman's Martlocated in the public market of San Francisco,Agusan del Sur. He obtained from the privaterespondent, Country Bankers InsuranceCorporation. The policy contained the followingcondition: “…3. The insured shall give notice tothe Company of any insurance or insurancesalready effected, or which may subsequently beeffected, covering any of the property or

properties consisting of stocks in trade…” Fire ofaccidental origin broke out at the public marketof San Francisco, Agusan del Sur. Geagonia’sinsured stocks-in-trade were completelydestroyed prompting him to file with CBIC aclaim under the policy. The company denied theclaim and the basis of which was the petitioner'salleged violation of Condition 3 of the policy.Held: Geagonia is not precluded from recoveringfrom Country Bankers. Condition 3 of the policyis a condition which is not proscribed by law. Itsincorporation in the policy is allowed by Section75 of the Insurance Code which provides that"[a] policy may declare that a violation ofspecified provisions thereof shall avoid it,otherwise the breach of an immaterial provisiondoes not avoid the policy." Its violation wouldthus avoid the policy. However, in order toconstitute a violation, the other insurance mustbe upon the same subject matter, the sameinterest therein, and the same risk. As to amortgaged property, the mortgagor and themortgagee have each an independent insurableinterest therein and both interests may becovered by one policy, or each may take out aseparate policy covering his interest, either at thesame or at separate times. . It is a cardinalprinciple of law that forfeitures are not favoredand that any construction which would result inthe forfeiture of the policy benefits for the personclaiming, will be avoided, if it is possible toconstrue the policy in a manner which wouldpermit recovery, as, for example, by finding awaiver for such forfeiture. Provisions, conditionsor exceptions in policies which tend to work aforfeiture of insurance policies should beconstrued most strictly against those for whosebenefits they are inserted, and most favorablytoward those against whom they are intended tooperate.

Sun Insurance vs. CA

Facts: Sun Insurance issued a Personal AccidentPolicy to Lim with a face value of 200K. Twomonths later he was dead with a bullet wound onhis head. Lim’s death was caused when he wasplaying with his handgun which accidentally fired.His wife sought payment on the policy but herclaim was rejected. The contention of SunInsurance was that Lim willfully exposed himselfto needless peril and thus removed himself fromthe coverage of the insurance policy. Under theexceptions clause of the policy, the insurancecompany shall not be liable when the insuredperson attempting to commit suicide or willfullyexposing himself to needless peril except in anattempt to save human life.Held: The cause of Lim’s death was an accidentwithin the limits set forth in the policy andtherefore not exempt from the liability of theinsurer. The definition of an accident is “an eventwhich happens without any human agency or, ifhappening through human agency, an eventwhich under the circumstances, is unusual to andnot expected by the person to whom ithappens…” Contrary to the contention of SunInsurance, Lim did not intentionally exposehimself to danger, as testified by his secretary,he removed the magazine of the gun to ensurethat it would not fire and pointed it to his templein the belief that it is safe to do so.



Rizal Surety vs. CA

Facts: Rizal Surety issued a fire insurance policyfor Transworld Knitting Mills. A fire broke out inthe compound of Transworld, razing the middleportion of the four-span building and partlygutting the left and right sections. It alsodestroyed the two-storey annex building wherefun and amusement machines and spare partswere stored. Transworld filed insurance claimwith Rizal but to no avail. Rizal’s contention isthat the policy covered only the contents of thefour-span building which was only partly burnedand not the damage caused to the two-storeyannex building.Held: The annex building and the contents arecovered under the policy. The so called “annex”formed an integral and inseparable part of thefour-span building. It was a [permanentstructure which adjoined the 4-storey buildingdescribed in the policy and consequently, thethings stored therein were covered by theinsurer. Considering that the annex was alreadyexisting when the insurance policy wascontracted, Rizal should have specificallyexcluded it from the coverage of the fireinsurance if it wanted to but it did not. Doubtshould be resolved against Rizal who drafted theinsurance policy contract. This is because theinsured usually has no voice in the selection orarrangement of the words employed and that thelanguage of the contract is selected with greatcare and deliberation by experts and legaladvisers employed by, and acting exclusively inthe interest of the insurance companies.

Gulf Resorts vs Philippine Charter InsuranceCorporation (2005)

Intention of parties is shown by provisions ofcontracts and the amount of premium paid sincepremium is the consideration paid for the riskundertaken by the insurer. When there is anapparent change of the wording of an insurancecontract but no corresponding change in theamount of premium paid, it will be interpreted tomean that there was no intended change at all.An assumption of additional risk is presumed tocause a commensurate additional premiumbecause the premium, not the mere wording ofthe policy, is a more accurate indication of suchan assumption of additional risk.

8. Perfection of the Contract of Insurance

8.1. Offer and Acceptance; consensuality Applicant usually makes the offer to the

insurer. Submission of application, even w/

payment is a mere offer on the part of theapplicant, it does not bind the insurer.

Approval of the application by the insurer isnecessary to perfect contract. If made:

- w/ payment of premium – policybecomes effective- w/o payment – effective uponpayment of premium

i. Delay in Acceptance; Tort Theory Situation where applicant submits

application for insurance, but due tonegligence of company, w/c takes anunreasonably long time beforeprocessing the application, the

applicant dies before the application isprocessed, thus, the contract is notperfected.

REMEDY: Insurer liable for damages(Tort Theory) in the amount of the facevalue of the policy, w/c is given to theestate of the deceased applicant. (notto beneficiary because contract notperfected. Also, no contractual liabilityalso bec. no contact)

Why Tort Theory - because Insurancebusiness is affected w/ public interest.It is thus, the duty of insurer, w/cderives its authority to act as such fromthe State (when it applies to get licenseto be in the insurance business), to actw/ reasonable promptness in eitherrejecting or accepting the application.In case of unreasonable delay andapplicant dies, applicant would havebeen deprived of opportunity to secureinsurance from another source.

ii. Delivery of the Policy Delivery – the act of putting the

insurance policy – the physicaldocument – into the possession of theinsured.

Individual life insurance contractsusually stipulate that:» Premium be paid and» Policy be delivered to the insured

while he is alive and in good health.Concurrence of both is necessary.(see Perez v CA case)

Actual delivery of the policy is notessential unless the parties have soagreed in clear language. Constructivedelivery may be sufficient. (See Vda.De Sindayen case)

WoN policy was delivered after itsissuance depends not upon manualpossession by the insured but ratherupon the intention of the parties asmanifested in their acts or agreements.

WON Delivery to agent is delivery toinsured is a question over w/c therehas been many conflicting opinions.

Effect of Delivery:» Where delivery is conditional –

Non-performance of Conditionprecedent prevents contract fromtaking effect

» Where delivery is unconditional – ifcorresponding terms of application,ordinarily consummates thecontract and policy as deliveredbecomes final contract between theparties. Where parties so intend,insurance becomes effective at thesame time as delivery

» Where premium still unpaid afterunconditional delivery – Policy willlapse if premium unpaid at timeand manner specified in the policy,in the absence of any clearagreement that insurer will extendcredit. Insurer cannot be presumedto have extended credit from themere fact of unconditional deliveryof the policy w/o prepayment ofpremium, and even if suchpresumption may be inferred, theremust be a clear and express



acceptance by insured of theinsurer’s offer to extend credit.

Perez v CA

Facts: Perez, already previously insured with BFLifeman Insurance Co. applied for additionalcoverage. He paid premium and was issued areceipt by the agent of BF Lifeman. However, hedied before his application papers were transmittedto the head office of BF Lifeman.Issue: WON the insurance policy was perfectedHeld: No. There was no acceptance of the offer.The perfection of the contract was conditionedupon compliance with the provision in theapplication form w/c stated that perfection only lieswhen the applicant pays and the premium andreceives and accepts the policy while still in goodhealth. Thus, the assent of BF Life was not givenwhen it merely received the application form ofPerez in its provincial office. Also, delivery to Perezwould be impossible as he is already dead. So longas an application for insurance has not beenaccepted or rejected by the insurer, it is merely anoffer or proposal to make a contract. The contractto be binding from date of application must havebeen a completed contract that leaves nothing tobe done, passed upon or determined, before it shalltake effect..

Vda. De Sindayen v Insular Life Assurance Co.

FACTS Dec. 1932 Arturo Sindayen had partiallypaid his agent the first premium for a life insurancepolicy. Agent and Sindayen agreed that policy,when and if issued, should be delivered toSindayen’s aunt who will complete the payment ofthe first annual premium. Jan. 16, 1933 – agentreceived approved policy and delivered it toSindayen’s aunt on Jan. 18. However, before thepolicy was given to Arturo himself, he died on Jan.19.ISSUE: WON Insular Life assumed the risk coveredby Sindayen’s policyHELD: YES. Delivery to the insured in person is notnecessary, and may be made by mail or dulyconstituted agent (in this case, Sindayen’s aunt).Insurance company is bound by the acts of itsagent. In this case, the agent is not a mereautomaton and is vested w/ some discretion indeciding WON the condition as to the health of theapplicant has been complied with. Once he decidesthat it has and delivers the policy, then, in theabsence of fraud, the insurance company isestopped from claiming the policy has no effect.

Enriquez v Sun Life Assurance Co.

Facts: Herrer applied for insurance and paid thepremium, however, he died before he received thenotice of acceptance (of his application) sent bySun Life from its Montreal head office.Issue: WON the insurance contract was perfectedw/o the notice of acceptance coming to theknowledge of the applicantHeld: NO. Under the CC, Consent is shown by theconcurrence of offer and acceptance. Anacceptance shall not bind the person making theoffer except from the time it came to hisknowledge.

8.2. Premium PaymentSec. 77 &78; 64

Sec. 7712

An Insurer is entitled to payment of the

premium as soon as the thing insured is exposed tothe peril insured against. Notwithstanding anyagreement to the contrary, no policy or contract ofinsurance issued by an insurance company is validand binding unless and until the premium thereofhas been paid, except in the case of a life or anindustrial life policy whenever the grace periodprovision applies.

Premium – the agreed price for assumingand carrying the risk, that is, theconsideration paid an insurer for undertakingto indemnify the insured against the specifiedperil.

- if only one premium is paid forseveral things not separately valued orseparately insured, the contract is indivisibleor entire, not divisible or severable, as toitems insured.

SIR: WORST SECTION of the Insurance Code.This is the cash-and-carry provision (seebelow for explanation why)

Why it raises several questions (Campos): --Is it intended to apply to all classes ofinsurance, or does the word “thing” limit it toproperty insurance? As to exception, it onlyapplies to life policies w/in the grace periodw/c does not support the theory that itapplies only to property insurance.

- As to grace period, grace period in lifeinsurance applies only to premiumssubsequent to the first, therefore, how canthis be an exception to the rule?- With respect to non-life policies, the firstsentence gives the insurer the right todemand the payment of the premium assoon as the “thing insured is exposed toperil insured against” This assumes thecontract is binding even before thepayment of the premium meaning thecontract is perfected when the applicant’soffer is accepted by the insurer. Thisassumption is inconsistent w/ the nextsentence w/c says that no policy can bebinding w/o premium payment.- Also, Sec. 77 and 78 seem contradictory.- However, Sir says above does not applyto life insurance because Life Insurancelapses upon non-payment.

Present provision came from Sec 72 of theold Insurance Code. However, Sec. 77 hasomitted the portion of Sec. 72 w/c permittedcredit extension of the premium due(meaning, extension of period to pay thepremium). Apparently, the intention is to putthe contract of insurance on a “cash-and-carry basis” meaning the premium must bepaid in cash as a condition precedent for anon-life insurance policy to be valid andbinding, and an agreement to grant theinsured credit extension of the premium isvoid. However, Makati Tuscany v CA and thesecond UCPB case says otherwise. Hence,credit extension agreements may be valid.

EXCEPTIONS to Sec. 77:

12This was asked 2006, 1978, and 1977. Note the

effects of non-payment of premiums.



» In the case of a life or an industrial policywhenever the grace period provisionapplies (Sec. 77)

» Article 78 (see below)» Agreement to grant the insured credit

extension for the payment of thepremium

» When there is an agreement allowing theinsured to pay premium in installmentand partial payment has been made atthe time of the loss (See Makati Tuscanyv CA)

BPI vs. Posadas, 56 Phil. 215If the premiums are paid out of the conjugal funds,the proceeds are considered conjugal. If thebeneficiary is other than the insured’s estate, thesource of premiums would not be relevant.

Philippine Pryce Assurance Corp. vs. CA, 230SCRA 164 (1994)

Generally, premium is also necessary in order forthe contract of suretyship or bond to be binding.However, where the oblige has accepted the bond,it is binding even if the premium has not been paidsubject to the right of the insurer to recover thepremium from its principal.

Sec. 78 An acknowledgment in a policy or contractof insurance of receipt of premium is conclusiveevidence of its payment, so far as to make thepolicy binding, notwithstanding any stipulationtherein that it shall not be binding until thepremium is actually paid

Effect of acknowledgment of receipt ofpremium in property – Insurer cannot deny thetruth of the receipt of the premium even if it isunpaid.

Law established a legal fiction of payment(prima facie evidence of payment). Thus insurerpresumed to have waived the condition ofprepayment.

SC has decided that above is an exceptionto Sec. 77

Sec. 64 No policy of insurance other than life shallbe cancelled by the insurer except upon priornotice thereof to the insured, and no notice ofcancellation shall be effective unless it is based onthe occurrence, after the effective date of thepolicy, of one or more of the following:(a) non-payment of premium;(b) conviction of a crime arising out of acts

increasing the hazard insured against;(c) discovery of fraud or material

misrepresentation(d) discovery of willful or reckless acts or

omissions increasing the hazard insuredagainst;

(e) physical changes in the propertyinsured which result in the property becominguninsurable; or

(f) a determination by the Commissionerthat the continuation of the policy would violateor would place the insurer in violation of thisCode

Cancellation – right to rescind, abandon or cancela contract of insurance, termination of policybefore its expiration.

Premium referred to in 64(a) refers to payment“after effective date of the policy” because Sec.77 ordains that insurance policy is valid andbinding unless and until premium has been paid.

Conditions under w/c above exercised:» Prior notice of cancellation to insured» Notice must be based on the occurrence,

after the effective date of the policy, of oneor more of the grounds mentioned

» It must be in writing, mailed or delivered tothe named insured at the address shown inthe policy. In this regard, proof of actualreceipt of the notice is necessary for it totake effect; mere proof that the insurermailed the notice is not sufficient to effectthe cancellation.

» It must state w/c of the ground set forth isrelied upon.

» It is the duty of the insurer upon writtenrequest of the insured to furnish the facts inwhich the cancellation is based.

If there was no premium paid at all, the actionappropriate would be a declaration of nullity,based on Section 77 which provides that “nopolicy or contract of insurance issued by aninsurance company is valid and binding unlessand until the premium thereof has been paid”●

Tibay v CA

Facts: Fortune Life issued a fire insurance policyin favor of Tibay on a bldg in Makati, together w/all their personal effects therein. Violeta paid partof the total premium. 2 mos. Afer, a firecompletely destroyed the bldg. 2 days after thefire, Tibay paid the balance of the premium.Fortune denied Tibay’s claim for violation ofSec77 of Insurance Code.Issue: WON a fire insurance policy is alreadyvalid, binding and enforceable upon mere partialpayment of premiumHeld: NO Sec. 77 applies. Since acceptance ofpartial payment is not mentioned among theexceptions provided in Sec 77 and 78 of theInsurance Code, no policy of insurance can everpretend to be efficacious until premium has beenfully paid.- The policy contained a condition w/c said that“The policy including any renewal thereof is notin force until the premium has been fully paid x xx” Clearly, the Policy provides for payment ofpremium in full.Dissent: (IMPT) The insurance coverage shouldbecome effective from the day that the partialpayment is accepted by the insurer, anystipulation in the policy to the contrarynotwithstanding. Partial payment is enough toestablish the juridical relation between the twoparties. The law does not require a specificamount of premium payment in order to createthe juridical tie.- If the contract is automatically cancelled uponthe non-payment in full by the insured, then theefficacy of the contract will be fully dependent onhis will. This violates the principle of mutuality ofcontracts.



Makati Tuscany v CA

Facts: American Home Assurance (AHAC) issuedin favor or Makati Tuscany an insurance policy onthe latter’s bldg for 1 year. It was renewed overthe course of 3 years. In 1982, the totalpremiums were paid in four installments but in1983, Tuscany paid only 2 installments andrefused to pay the remaining balance. Reason fordiscontinuation: policy contained a reservationwherein “Acceptance of payment by AHAC willnot waive any of the company rights to denyliability on any claim under the policy arisingbefore such payments or after the expiration ofthe credit clause of the policy, and Subject to noloss prior to premium payment. If there be anyloss, such is not covered.” AHAC filed a suit torecover the remaining balance. Makati Tuscanyfiled counterclaim for the total amount ofpremiums it had paid during the previous years.Issue: WON payment by installment ofpremiums due on an insurance policy invalidatesthe contract of insuranceHeld: NO The policies are valid even if thepremiums paid in installments because therecords clearly show that the two partiesintended the policies to be binding and effectivenotwithstanding the staggered payment of thepremiums. Te acceptance of the installmentpayments over the period of 3 years speak loudlyof intention of insurer to honor the policies itissued to Makati Tuscany.- Sec 77 merely prohibits the parties fromstipulating that the policy is valid even ifpremiums were not paid, but it does notexpressly prohibit an agreement granting creditextensions. Sec. 78 also allows the insurer towaive the condition of full payment byacknowledging in the policy that there has beenreceipt of premium despite the fact that premiumis actually unpaid. If the Code allows a waiverwhen no actual payment has been made, then awaiver should also be allowed in this case wherethe insurer has already acknowledged receipt ofpartial payment.NOTE: Difference with Tibay case: In Tibay, therewas an express stipulation w/c said that paymentshall be made in full. In this case, the policy wasbinding because of the prior agreement to allowinstallment payments, hence full payment underSec.77 deemed waived.

UCPB Gen. Ins. v Masagana Telemart

Facts: Masagan Telemart obtained insurancepolicies on its properties from UCPB. The policieshad the effectivity term of May 1991 – May 1992.On June 1992, Masagan’s properties were razedby a fire. On the same day, Masagana tenedered,and UCPB accepted renewal premium payments.The next day, Masagana filed a claim for theburned insured bldgs. UCPB rejected the claimson the ground that the polices exprired on May1992 and were not renewed for another term andthat the fire took place before the tender ofpremium payment under the renewed policy.(Note: This is a motion for reconsideration fromprevious SC decision declaring that there was norenewal of the policy and that UCPB not liable)Issue: WON Sec 77 of the Insurance Code mustbe strictly applied despite its practice of grantinga 60-90 day credit term for payment of premiumHeld: NO There are exceptions to Sec 77:

a.) The first is provided by Sec. 77 itself andthat is, in case of a life or industrial life policywhenever the grace period appliesb.) Sec 78: An acknowledgment in a policy orcontract of insurance of the receipt of premium isconclusive evidence of its payment, so far as tomake the policy binding, notwithstanding anystipulation therein that it shall not be bindinguntil premium is actually paid.c.) Sec. 77may not apply if the parties haveagreed to the payment in installments of thepremium and partial payment has been made atthe time of the loss.d.) The insurer may grant credit extension forthe payment of the premiume.) It would be unjust and inequitable ifrecovery on the policy would not be permittedagainst UCPB, w/c consistently granted the 60-90day credit term for the payment of the premiumsdespite its full awareness of Sec. 77. Estoppelbars it from taking refuge under the action, sinceMasagana relied on good faith on such a practiceDissent (Vitug):-Estoppel cannot create a contract of insuranceneither can it be invoked to create a PRIMARYLIABILITY. So essential is the premium paymentto the creation of the vinculum juris that it wouldbe doubtful to have that payment validly excusedeven for a fortuitous eventDissent (Pardo):- Masagana tried to pay the overdue premiumsbefore giving written notice that a fire has razedthe property. This shows the fraudulent characterof the claim. Failure to give notice is was amaterial misrepresentation affecting the riskinsured against.- Estoppel cannot give validity to an act that isprohibited by law or against public policy. Actualpayment of premiums is a condition precedent tothe validity of an insurance contract other thanthe insurance policy. Any agreement to thecontrary is VOID as against the law and publicpolicy.



8.3. Premium default in life insurance (Sec227, h & j); options; lapsed policy

Sec. 227 In the case of individual life orendowment insurance, the policy shall contain insubstance the following conditions: x x x(h) A table showing in figures cash surrendervalues and paid-up options available under thepolicy each year upon default in premiumpayments, during at least twenty years of thepolicy beginning with the year in which the valuesand options first become available, together with aprovision that in the event of the failure of thepolicy-holder to elect one of the said options withinthe time specified in the policy, one of the saidoptions shall automatically take effect and nopolicyholder shall ever forfeit his right to same byreason of his failure to so elect.x x x x x x x x x x x x(j)A provision that the policy shall be entitled tohave the policy reinstated at any time within 3years from the date of default of premium paymentunless tha cash surrender value has been dulypaid, or the extension period has expired, uponproduction of evidence of insurablility satisfactoryto the company and upon payment of all overduepremiums and any indebtedness to the companyupon said policy, with interest rate not exceedingthat which would have been applicable to saidpremiums and indebtedness in athe policy yearsprior to reinstatement x x x

NON-LIFE (Refer to Sec.77) Seems to say that policy is in

effect as soon as the thing is exposed to riskeven if the premium has not been paid yet.

Where contract covers a period of 1 year, therewould normally be only one premium paymentfor the period.

If parties agreed to pay in installments, andthere is a failure to pay any installment when itfalls due insurer may:- cancel policy after due notice- compel the payment of installments

LIFE Intended to be in force for a period longer than

a year; involves several periodical premiumpayments (annual, semi-annual, etc)

Contract not binding until first periodicalpremium payment. After first payment, insuredunder no legal obligation to pay subsequentpremium.

Insurance Code grants grace period withinwhich to pay subsequent premiums. If policybecomes a claim during the grace period butbefore overdue premium is paid, overdue maybe deducted from proceeds of policy

Failure to pay w/in grace period = automaticlapse

Exception: Insured has paid three full annualpremiums. Entitled to the following Optionsupon default:» Cash Surrender Value

The amount the insured, in case ofdefault, after the payment of at least 3full annual premiums, is entitled toreceive if he surrenders the policy andreleases his claims upon it. It is theportion of reserve on a life policy.

Nature of CSV: Premium is uniformthroughout lifetime of policy, so duringthe earlier years of the policy, the

premium charges will be more than theactual cost of the protection against therisk in order to meet the higher cost ofrisk during the latter years of the policywhen the insured is older. ReserveValue - Surrender Charge = CashSurrender Value

The more premiums he has paid, thegreater will be the CSV but the value isalways a lesser sum than the total amtof premiums paid.

CSV is the amount company holds intrust for insured deliverable upondemand. So long as the policy remainsin force, the company has practically nobeneficial interest in it except as itscustodian; this is the practical, thoughnot the legal, relation of the companyto this fund.

EFFECT: Surrender policy; terminatesthe contract of insurance

» Extended Insurance EFFECT: Policy continues in force from

date of default, for a period eitherstated or equal to the amount of thecash surrender value, taken as a singlepremium, will purchase; the insured isgiven the right, upon default, after thepayment of at least three full annualpremiums to have the policy continuedin force from the date of default for atime either stated or equal to theamount as the net value of the policytaken as a single premium, willpurchase Also called “term insurance”,“temporary insurance” or “paid-upextended insurance”

Depends on availability of CSV. During extended period: If insured

dies, beneficiary can recover faceamount of policy. Insured can alsoreinstate the policy w/in this period.

Beyond extended period: If he survivesNo benefits. He cannot even reinstatethe policy by paying past premiums;has to purchase new policy

Better option if insured not in goodhealth or geriatric

» Paid-up Insurance Amount of Insurance that the CSV,

applied as a single premium, canpurchase.

EFFECT: Policy continues in force fromdate of default for the whole period andunder the same conditions of theoriginal contract w/o further paymentof premiums. However, in case of deathof insured, he may recover only the“paid-up” value of the policy w/c ismuch less than the original amountagreed upon. (In other words, na-reduce yung original insurance contractto one with a lower value)

Better option if insured is still youngand in good health because unlikeextended insurance, he may laterreinstate policy if he wishes.

» Automatic Premium Loan Upon default, insurer

lends/advances to the insuredwithout any need of application on hispart, amount necessary to payoverdue premium, but not to exceedthe CSV of the policy.



Only applies if requested in writing bythe insured either in the application orat any time before the expiration of thegrace period.

EFFECT: Insurance continues in forcefor period covered by the payment.After period, if insured still does notresume paying his premiums, policylapses, unless there remains CSV.

If there is still CSV, auto premium loancontinues until it is exhausted.

Advantageous to the insured because ithelps to continue the contract and allits features in full force and effect.

Insured under no legal obligation torepay “loan”

» Reinstatement (Sec j) EFFECT: Does not create a new

contract, merely REVIVES the oldpolicy. Thus, insurer cannot requirehigher premium than amount stipulatedin the contract.

Required by Insurance Code for everyindividual and industrial life policy

Not required that 3 annual premiumshave been paid

REQUISITES: exercised w/in 3 years from

default insured must present evidence of

insurability satisfactory to thecompany

pay all back premiums and allhis indebtedness to the insurancecompany

CSV has not been duly paid northe extension period expired

Insurability – does not mean that insured isin good health. Other factors affectinsurability like nature of work, age, etc.

Application for reinstatement must be filedduring the insured’s lifetime.

Other Effect:» Forfeiture – Absolute forfeiture of all

insured rights. Generally not favored. Dueto liberal spirit in the conduct of lifeinsurance, insurers instead, give theinsurer the benefit of the reserve value ofthe policy.

8.4. Form and contents of policy

Sec. 49 The written instrument in which a contractof insurance is set forth is called a policy insurance.

Sec. 50 The policy shall be in printed form whichmay contain blank spaces; and any word, phrase,clause, mark, sign, symbol, signature, number, orword necessary to complete the contract ofinsurance shall be written on the blank spacesprovided therein.

Any rider, clause, warranty, orendorsement purporting to be part of the contractof insurance and which is pasted or attached tosaid policy is not binding on the insured, unless thedescriptive title or name of the rider, clause,warranty, or endorsement is also mentioned andwritten on the black spaces provided in the policy.

Unless applied for by the insured or owner,any rider, clause, warranty or endorsement issuedafter the original policy shall be countersigned by

the insured or owner, which countersignature shallbe taken as his agreement to the contents of suchrider, clause, warranty, or endorsement.

Group insurance and group annuitypolicies, however, may be typewritten and neednot be in printed form.

Sec 51. A policy of insurance must specify:(a) The parties between whom the contract is

made;(b) The amount to be insured except in the

cases of open or running policies;(c) The premium, or if the insurance is of a

character where the exact premium is onlydeterminable upon the termination of thecontract, a statement of the basis and ratesupon which the final premium is to bedetermined;

(d) The property or life insured;(e) The interest of the insured in property

insured, if he is not he absolute owner thereof;(f) The risks insured against; and(g) The period during which the insurance is

to continue

The Insurance Code does not require aparticular form for the validity of thecontract. However, the policy must containthe enumeration in Art. 51 (see above)

The policy is different from the contractitself.

Policy - written instrument embodyingthe terms and stipulations of a contract ofinsurance. Not essential to the validity ofthe contract as long as all the essentialelements for the existence of contract arepresent. (Consent, object, consideration,competent parties)

Other stipulations not required by lawmay be included as long as they are notprohibited or inconsistent with the law.

Missing provisions required does not voidpolicy. Missing provisions will be read intothe policy and will substitute those w/c arein conflict w/ the law.

Stipulations not in the exact terms of thestatute, if more favorable to the insured,will be enforced.

SIR (on oral contracts): In somejurisdictions of the US, oral contract isvalid, provided that all the terms areagreed upon. In our Insurance Code,although written form not required forvalidity, some provisions say that aPRINTED POLICY is best evidence ofcontract. SC has not ruled categorically onthis matter.

The following are required to appear ininsurance policies:» The policy, which must be in printed form

(except group insurance policies whichmay be typewritten), may contain blankspaces; any word, phrase, clause, mark,sign, symbol, signature, number, or wordnecessary to complete the contract ofinsurance shall be written on the blankspaces provided.

» Any rider, clause, warranty, orendorsement may only be deemed partof the insurance policy if, after havingbeen attached to the policy itself, itsdescriptive title or name is also



mentioned and written in the blankspaces in the policy.

» Required clauses in the policy: The parties between whom the

contract is made; The amount to be insured except

in the cases of open or runningpolicies;

The premium, or if the insuranceis of a character where the exactpremium is only determinable uponthe termination of the contract, astatement of the basis and ratesupon which the final premium is tobe determined;

The property or life insured; The interest of the insured in

property insured, if he is not theabsolute owner thereof;

The risks insured against; and The period during which the

insurance is to continue.» Express warranties must also be contained

in the policy, or in another instrumentsigned by the insured and referred to inthe policy as making a part of it.

i. Riders, clauses, endorsements If parties wish to include special

stipulations, may attach riders,endorsements, warranties.

Rider – a printed or typed stipulationcontained on a slip of paper attached to thepolicy and forming an integral part of thepolicy.

To be binding:-Must be attached/pasted to the policy- Descriptive title or name of the rider,clause, warranty, or endorsement ismentioned and written on the blank spacesprovided in the policy.

Countersignature by insuredGeneral Rule: Not necessary if rider

attached to the policy when issued.Exception: Necessary when added AFTER

policy is issued. REASON: To prevent an insurerfrom adding or inserting provisions w/o theconsent of the insured. In case of conflict between rider and

printed stipulation, the rider prevails asbeing a more deliberate expression of theagreement of the contracting parties.

Warranty – inserted or attached to apolicy to eliminate specific potentialincreases of hazard during the policy termowing to: 1) actions of the insured or 2)condition of the property.

Clause – an agreement between theinsurer and the insured on certain mattersrelating to the liability of the insurer in caseof loss.

Endorsement – any provision added to aninsurance contract altering its scope orapplication. Ex. Endorsements extendingthe perils covered. Most times, they aremerely typewritten additions to thecontract, changing its amount, rate, orterm.

ii. Cover Notes or binding receipts

Sec 52. Cover notes may be issued to bindinsurance temporarily pending the issuance of thepolicy. Within sixty days after issue of a cover note,a policy shall be issued in lieu thereof, includingwithin its terms the identical insurance boundunder the cover note and the premium therefore.

Cover notes may be extended or renewedbeyond such sixty days with the written approval ofthe Commissioner if he determines that suchextension is not contrary to and is not for thepurpose of violating any provisions of this Code.The Commissioner may promulgate rules andregulations governing such violation and may besuch rules and regulations dispense with therequirement of written approval by him in the caseof extension in compliance with such rules andregulations (n)

Cover notes/Binders – a writtenmemorandum of the most important items of apreliminary ocntract intended to givetemporary protection (to insured) pending theinvestigation of the risk by the insurer, or untilthe issue of the formal policy, provided it islater determined that the applicant wasinsurable at the time it was given.

It is a binding contract and has full forceand effect during its duration.

Insurer not obliged to give cover notes butmany do so in order to gain goodwill.

Usually contain only the bare essentials ofan insurance contract: i.e. the name of theparties, risk insured against, amount ofinsurance, premium, property/life insured.

Issuance of cover notes is ordinarily aconclusive evidence of making a contract

The issuance and effectivity of cover notesare governed by the following rules:

1) May be issued temporarily, pendingissuance of policy2) Deemed a contract of insurancewithin meaning of §1[1]3) No cover note may be issued or renewedunless in the Code’s previously prescribedform4) Cover notes are valid and binding fora period not over 60 days from date ofissuance, whether or not premiumtherefor has been paid, but it may only becancelled by either party upon at least 7days notice to other party5) If it is not cancelled, policy shall,within 60 days after issuance of covernote, be issued in lieu thereof. Policy willinclude within its terms the identicalinsurance bond under the cover note andthe premium therefor6) Cover note may be extended orrenewed beyond the 60-day periodwith the written approval of theInsurance Commission, provided thatthe written approval may be dispensed withupon the certificate of the Pres, VP, orgeneral manager of the company that therisks involved, the values of such risksand/or premiums therefor have not as yetbeen determined or established and thatsuch extension or renewal is not contraryto and is not for the purpose of violatingany provisions of the Insurance Code, or ofany of the rulings, instructions, circulars,



orders or decisions of the InsuranceCommissioner7) Companies may impose on cover notes adeposit premium equivalent to at least25% of the estimated premium of theintended insurance coverage but never lessthan 500 pesos.

iii. Open and Valued Policies (non-life)

Sec 59. A policy is either open, valued or running.

Sec 60. An open policy is one in which the value ofthe thing insured is not agreed upon, but is left tobe ascertained in case of loss.

Sec 61. A valued policy is one which expresses onits face an agreement that the thing insured shallbe valued at a specified sum.

Sec. 62. A running policy is one whichcontemplates successive insurances, and whichprovides that the object of the policy may be fromtime to time defined, especially as to the subjectsof insurance, by additional statements orindorsements.

8.5. Kinds of insurance policies:

Open or Unvalued Policy- One in which a certain agree sum is written onthe face of the policy not as the value of theproperty insured, but as the maximum limit of theinsurer’s liability (i.e. face value) in case ofdestruction by the peril insured against.- Insurer only pays the actual cash value of theproperty as determined at the time of loss.

Valued Policy- One in which the parties expressly agree on thevalue of the subject matter of the insurance.-Two values:

1) Face value of the policy w/c is the max amtinsurer pays in case of loss2) Value of the thing insured

- In the absence of fraud or mistake, the agreedvalue of the thing insured will be paid in case oftotal loss of the property, unless the insurance isfor a lower amount- In case of loss, parties may claim that value ofinsured property is more or less than agreed upon.- The liability of the insurer in a life policy ismeasured by the face value of the policy (becausethe value of a human life cannot be measured inactual monetary terms).

Running Policy- Intended to provide indemnity for property w/ccannot well be covered by a valued policy becauseof its frequent change of location and quantity, orfor property of such a nature as not to admit of agross valuation. Also denotes insurance over aclass of property rather than any particular thing.Ex. Insurance over constantly changing stock ofgoods- In reality, these are open policies.- Contemplates successive insurances.- Advantages of a running policy

1) Neither underinsured noroverinsured at any time, premium beingbased on monthly values reported;2) Avoids cancellations otherwisenecessary to keep insurance adjusted to

the thing’s value at each location and forwhich cancellations the inured would becharged the expensive short rate;3) Saves trouble of watching theinsurance and danger of beingunderinsured in spite of care, throughoversight or mistake;4) Rate is adjusted to 100% insurance,whereas valued policies requiring insuranceonly up to, say 80% of value, give either asmall, if any, reduction for amounts ofinsurance above this figure.

9. Parties

Essential Requisites for a person to be a partyin an insurance contract:

» Must be COMPETENT to enter (hascapacity)

» Must possess INSURABLE INTEREST» Must NOT be a PUBLIC ENEMY

13

9.1. Insurer

Sec. 6. Every person, partnership, association, orcorporation duly authorized to transact insurancebusiness as elsewhere provided in this Code, maybe an insurer. (a)

Sec 184 For purposes of this Code, the term“insurer” or “insurance company” shall include allindividuals, partnerships, associations, orcorporations, including government-owned orcontrolled corporations or entities, engaged asprincipals in the insurance business, exceptingmutual benefit associations. Unless the contextotherwise requires, the term shall also includeprofessional reinsurers, defined in Section 280.“Domestic company” shall include companiesformed, organized or existing under the laws of thePhilippines. “Foreign company” when used withoutlimitation shall include companies formed,organized, or existing under any laws other thanthose in the Philippines.

Sec 185 Corporations formed or organized to saveany person or persons or other corporationsharmless from loss, damage, or liability arisingfrom any unknown or future or contingent event, orto indemnify or to compensate any person orpersons or other corporations for any such loss,damage, or liability, or to guarantee theperformance of or compliance with contractualobligations or the payment of debts or others shallbe known as “insurance corporations”

The provisions of the Corporation Law (BPBlg 68) shall apply to all insurance corporationsnow or hereafter engaged in business in thePhilippines insofar as they do not conflict with theprovisions of this Chapter.

Insurer – party who assumes or accepts therisk of loss and undertakes for a considerationto indemnify the insured or to pay him acertain sum on the happening of a specifiedcontingency or event; This can be an

13Who is a public enemy and the prohibition was

asked in 2002.



individual, a corporation, an association, eventhe State, as long as it is authorized to engagein a business of insurance.

Summary of 184 and 185:184: What term “insurer” includes185: What “Insurance Corporations” areregulated by the State: To engage in thebusiness of insurance, required to getcertificate of authority from the InsuranceCommissioner, and must possess sufficientcapital assets. (Will not include otherrequirements, medyo technical. We only needto know defn of insurer and insurancecorporations); Banking institutions are notallowed to engage in insurance business(General Banking Act 173)

9.2. Insured

Sec. 7 Anyone except a public enemy must beinsured

Sec. 56 When the description of the insured in apolicy is so general that it may comprehend anyperson or any class of persons, only he who canshow that it was intended to include him can claimthe benefit under the policy.

RA 6809 - Lowered the age of EMANCIPATIONAND AGE OF MAJORITY

Art. 234. Emancipation takes place by theattainment of majority. Unless otherwise provided,majority commences at the age of eighteen years.(as amended by RA 6809)

Art. 236. Emancipation for any cause shallterminate parental authority over the person andproperty of the child who shall then be qualifiedand responsible for all acts of civil life, save theexceptions established by existing laws in specialcases. x x x (as amended by RA 6809)

Art. 110 (Family Code) The spouses retain theownership, possession, administration andenjoyment of their exclusive properties.

Either spouse may, during the marriage, transferthe administration of his or her exclusive propertyto the other by means of a public instrument,which shall be recorded in the registry of propertyof the place the property is located. (137a, 168a,169a)

Art. 111 (Family Code) A spouse of age maymortgage, encumber, alienate or otherwise disposeof his or her exclusive property, without theconsent of the other spouse, and appear alone incourt to litigate with regard to the same. (n)

Art. 1390 (Civil Code). The following contractsare voidable or annullable, even though there mayhave been no damage to the contracting parties:(1) Those where one of the parties is incapable ofgiving consent to a contract;

(2) Those where the consent is vitiated by mistake,violence, intimidation, undue influence or fraud.

These contracts are binding, unless they areannulled by a proper action in court. They aresusceptible of ratification.

Insured – the party in whose favor thecontract is operative and who is indemnifiedagainst, or is to receive a certain sum upon thehappening of a specified contingency or event.He is the person whose loss is the occasion forthe payment of the proceeds by the insurer;But the proceeds need not go to him but thedesignated beneficiary or someone the insuredassigns the proceeds to.

As in all other contracts, only persons whohave the capacity to enter into a contract maybe insured.

Policy must specify the parties between whomthe contract is made. (Sec. 51)

Public enemy – citizen or subject of a nationat war with the Philippines. Does not includerobbers, thieves, criminals.- a private corporation may be deemed an

enemy corporation if controlled by enemyaliens.

9.3. Beneficiaries

Sec 11 The insured shall have the right to changethe beneficiary he designated in the policy, unlesshe has expressly waived this right in said policy.

Refers to the person who designated in acontract of life, health or accident insurance asthe one who is to receive the benefits whichbecome payable, according to the terms of thecontract, upon the death of the insured.

Words used in designating the beneficiaries of alife policy will not be given their technicalsignificance but will be construed broadly.

Chosen exclusively by insured who maydesignate anyone (irrespective of lack ofinsurable interest) so long as s/he notdisqualified by law.

Proceeds of life insurance policy become theexclusive property of the beneficiary upon thedeath of the insured.

Cestui que vie- Person on whose life the policy wastaken.

- Must be a risk acceptable to the insurer Kinds of beneficiaries – either insured himself

or his personal representatives or someoneother than the insured. If others are recipients,their relations to the insured may be:

» Insured himself – one who boughtthe policy and paid the premiums.Such is an immediate party to thecontract and is usually called theassured (creditor insures debtor’slife).

» Third person who paid aconsideration - as when insuredtook up the policy for the benefit ofthe creditor or to secure someother obligation; or

» Third person through mere bountyof insured – no consideration paidbut made beneficiary (may be theinsured’s estate or a third party).



In the 2nd and 3rd cases, beneficiary is not a partyto the contract. In all 3 cases, proceeds of a lifeinsurance policy become the exclusive property ofthe beneficiary upon insured’s death. So if insuredwas judicially insolvent before he died, proceeds togo to the beneficiary and not to the assignee ininsolvency.

Rules governing beneficiaries» Selection of the beneficiary must be in

good faith and without intent to make thetransaction a cover for a forbiddenwagering contract.

General Rule: The insured may changethe designated beneficiary without the consentof the latter and retain the right to receive thecash value of the policy, to take out loansagainst the cash value, to assign the policy orto surrender it without the beneficiary’sconsent. However, this right belongs onlypersonally to the insured and cannot beexercised by his representatives or assigneesupon his death.

Exception: If there has been an expresswaiver of the right to change the beneficiarywithout the latter’s consent, the beneficiaryacquires an absolute vested interest to allbenefits under the policy. A new beneficiarycannot be added to the original one/s becausesuch would amount to the diminution of theoriginal benefits. The insured also loses thepower to destroy the policy because thebeneficiary can pay the premiums himself toensure the continued effectivity of the contract.

» DE LEON is inclined to believe that, in casethe beneficiary dies before the insured, theproceeds shall go to the estate of theinsured, rather than to the estate of thebeneficiary. He believes that the purpose ofthe insured in taking out the policy is toprovide a fund for the benefit of those he isaccustomed to supporting. He would nothave intended to extend such provision offunds to the heirs/ assignees of thebeneficiary.

» In designating the beneficiaries, wordsused will not be given their technicalsignificance but will be broadly construedso that the benefit shall be received bythose intended by the insured as the objectof his bounty.

» The interest of a beneficiary in a lifeinsurance policy shall be forfeited when thebeneficiary is the principal, accomplice, oraccessory in willfully bringing about thedeath of the insured. In this case, thenearest relative of the insured shall receivethe proceeds of said insurance if nototherwise disqualified

» The right to receive the proceeds of lifeinsurance policies shall follow the order ofintestate succession in the Civil Code indefault of any specific designation in thepolicy:

a. Legitimate children;b. Father and mother, if living;

c. Grandfather and grandmother; orascendants nearest in degree, if living;d. Illegitimate children;e. Surviving spouse; andf. Collateral relatives, to wit:

f.a. brothers and sisters of the fullblood;f.b. brothers and sisters of the half-blood; andf.c. nephews and nieces

g. In default of above, State is entitled toreceive the proceeds

» General Rule: The person designated inthe policy as the insured or the beneficiaryshall be the only one entitled to recover theproceeds of the policy.Exception: A third person may recoverfrom the policy as against the insured ifthere has been a prior contract of expressor implied trust between the insured andthe third person. A third person mayrecover from the policy as against theinsurer only if such person has beenspecifically given the right of recovery inthe insurance policy.

i. Statutory Limitations on life insurance

Art. 2012 (Civil Code) Any person who isforbidden from receiving any donation under Article739 cannot be named beneficiary of a life insurancepolicy by the person who cannot make anydonation to him, according to said article. (n)

Art. 739 (Civil Code) The following donationsshall be void:

(1) Those made between persons who were guiltyof adultery or concubinage at the time of thedonation;

(2) Those made between persons found guilty ofthe same criminal offense, in consideration thereof;

(3) Those made to a public officer or his wife,descedants and ascendants, by reason of his office.

In the case referred to in No. 1, the action fordeclaration of nullity may be brought by the spouseof the donor or donee; and the guilt of the donorand donee may be proved by preponderance ofevidence in the same action. (n)

In the first case (adultery/ concubinage),no need of criminal conviction to void policy.Enough if there is a preponderance of evidence.

In the second case however, the CC usesthe words “found guilty” hence criminalconviction necessary.

Public Enemies also disqualified from beingbeneficiary.

Insular Life Assurance Co v Ebrado

FACTS Ebrado took out a life insurance policy andnamed his common-law partner, Carponia, hisbeneficiary. Upon his death, his lawful wife alsofiled a claim w/ Insular Life as the widow. RTCdisqualified Carponia from claiming benefitsunder the policy



ISSUE: WON Carponia disqualified from claiminginsurance proceeds because of her illicit relationwith the insured.HELD: YES. (SC applied CC) Since the InsuranceCode does not contain any specific provision onrules respecting who may be named beneficiary,the CC will apply. Art 2012 states that “anyperson forbidden from receiving donations underArt 739 cannot be named beneficiary of a lifeinsurance policy” Art. 739 declares voiddonations made between persons who are guiltyof adultery or concubinage at the time of thedonation. Hence, Carponia is disqualified frombeing named a beneficiary.

Vda. de Consuegra v GSIS

FACTS: Jose Consuegra contracted twomarriages, to Diaz and Berdin. After his death,the proceeds of his life insurance w/ the GSISwent to Berdin. However, he was also entitled toretirement benefits to which he did not designateany beneficiary.ISSUE: WON Berdin should be considered thesole beneficiary of the retirement benefits beingthe beneficiary of the life insurance policyHELD: NO. Life Insurance and retirementinsurance are separate and distinct funds. LifeInsurance is paid to whoever is named thebeneficiary and may not necessarily be the heirof the insured. Retirement benefits on the otherhand, are primarily intended for the benefit of theee – to provide for his old age, incapacity, etc. Ifthe ee reaches the age retirement, he gets thebenefits even to the exclusion of the beneficiarynamed in the policy. The beneficiary of theretirement insurance can only claim the proceedsof the retirement insurance if the ee dies beforeretirement. IF there is no beneficiary designatedin the policy, benefits will accrue to the estate,hence Diaz is also entitled to the retirementbenefits.

Del Val v Del Val

FACTS: Plaintiff and Defendant are siblings. Priorto their father’s death, he took out a lifeinsurance policy and made the Def the solebeneficiary.ISSUE: WON the insurance proceeds belongexclusively to the DEF who was the solebeneficiaryHELD: YES The proceeds of an insurance policybelong exclusively to the beneficiary and not tothe estate of the person whose life was insured,and that such proceeds are the separate andindividual property of the beneficiary.

9.4. Other parties to an insurance contract

● Assignee of the thing insured -----General Rule: If the thing insured is assigned toanother, the policy is not deemed transferred withthe thing. The policy is instead deemed suspendeduntil the assignee also becomes the owner of thepolicy. The assignor, on the other hand, cannotrecover on the policy after the transfer since he hasalready lost insurable interest over the thing.Exceptions: The general rule on suspension ofpolicy is not applicable in the following cases:

a. In life, health and accident insurance(§20)

b. A change of interest in the thinginsured after an injury occurs resulting ina loss (§21);c. A change of interest in one or moreof several things, separately insured byone policy (§22);d. A change of interest by will orsuccession on the death of the insured(§23);e. A transfer of interest by one of severalpersons, joint owners or owners incommon, jointly insured, to the others(§24);f. When a policy will inure to thebenefit of the one who may becomethe new owner of the interest insuredduring the continuance of the risk (§57);andg. When there is an express prohibitionagainst alienation in the policy, alienationwill cause the contract to be avoided, notsuspended (Article 1306, §24, Civil Code)

● Agent or trustee -----If an agent or trustee takes out an insurance policyfor the benefit of his principal or beneficiary, heshall state that the latter is the real party ininterest by designating himself as an agent ortrustee in the insurance policy itself. He can alsosignify his designation by some other generalwords in the policy.

Valenzuela vs CA (1990)

The general rule that the principal reserves theright to terminate the agent-principal relationshipat its will admits of an exception: when the agencyhas been given not only for the interests of theprincipal but of 3rd persons or for the mutualinterest of agent and principal. Also, an insuranceagent can’t be held liable for all uncollectedpremiums under his account because the remedyfor non-payment of premiums is the termination ofany insurance policy.

● Partner or co-owner -----Insurable interest in the property of a partnershipexists in both the partnership and the partners anda partner has an insurable interest in the firmproperty which will support the policy taken outthereon for his own benefit. But a partner whotakes out the policy in own name limits thecoverage to his individual share unless the termsclearly show the policy was meant to cover all theshares.

● Mortgagor/ mortgagee -----General Rule: When a mortgagor takes out aninsurance policy on his own name but stipulatesthat the proceeds shall be payable to themortgagee, or assigns the said policy to themortgagee, the insurance shall be deemed to beupon the insurable interest of the mortgagor.Consequently, three rules apply: (1) any act of themortgagor prior to the loss, which would otherwiseavoid the insurance, shall have the same effecteven if the property insured is in the hands of themortgagee (2) any act which would have to beperformed by the mortgagor may be performed bythe mortgagee, with the same effect as if it wereperformed by the former (3) if an insurer assentsto the transfer of an insurance from a mortgagor toa mortgagee, and, at the time of his assent,imposes further obligation on the assignee, making



a new contract with him, the act of the mortgagorcannot affect the rights of said assignee.

SUPPLEMENTARY RULES:On the insurable interest of mortgagor andmortgagee:

a. Separate insurable interests – each hashis own insurable interest in the mortgagedproperty which is kept separate from eachother. The benefits of such belongs to theinsured alone and if the two insure thesame property or take out a policy coveringtheir respective interests, this is not doubleinsurance.

b. Extent of insurable interest of mortgagor– the owner-mortgagor has an interest tothe extent of the property’s value even ifthe mortgage debt equals it since the lossor destruction of the insured property willnot extinguish his debt.

c. Extent of insurable interest of mortgagee– he or his assignee has an interest to theextent of the debt secured, the propertyused as security. His interest is prima faciethe value mortgaged, only as to theamount owed, not exceeding the value ofthe property.

d. Extent of amount of recovery –Mortgagor: only up to full amount of loss;Mortgagee: up to the amount of credit atthe time of the loss or the value of theproperty.

Insurance by mortgagee of his own interest

a. Right in case of loss – the mortgagee isentitled to proceeds if loss happens beforepayment of mortgage.

b. Subrogation of insurer to the right of themortgagee – mortgagee’s claim passes bysubrogation to the insurer to the extent ofthe insurance money paid.

c. Change of creditor – payment of theinsurance to the mortgagee due to lossdoes not extinguish the principal obligationbut only changes the creditor. Themortgagee can’t claim both the insuranceand the debt.

Insurance taken out by mortgagor

a. For his own benefit, as owner – proceedswon’t go to the mortgagee who has nogreater right than unsecured creditors.

b. For the mortgagee’s benefit – loss ispayable to the mortgagee (usual practice),to the extent of the credit. Upon paymentof the proceeds to the extent of the credit,the debt is extinguished. The mortgageecan be made the beneficial payee by:

1. Becoming the assignee of thepolicy with insurer’s consent;2. Becoming the mere pledgewithout such consent;3. A rider (§50), making the policypayable to the Mortgagee “as his

interest may appear” , may beattached;4. A “standard mortgage clause”containing a collateral independentcontract between the two partiesmay be attached; or5. The policy, though by its termspayable to the mortgagor, mayhave been procured by a mortgagorunder a contract duty to insure forthe mortgagee’s benefit, where thelatter acquires an equitable lineupon the proceeds.



Chapter III

INSURABLE INTEREST14

1. Definition and Purpose

Sec 21 A change on interest in a thing insured,after the occurrence of an injury which results in aloss does not affect the right of the insured toindemnity for the loss.

Sec 25 Every stipulation in a policy of insurancesfor the payment of loss whether the person insuredhas or has not any interest n the property insured,or that the policy shall be received as proof of suchinterest, and every policy executed by way ofgaining or wagering, is void.

Insurable interest – interest which the lawrequires policy owner to have in the person or thinginsured.

- A person is said to have an insurable interestin the subject matter insured where he has arelation or connection with, or concern in it that hewill derive pecuniary benefit or advantage from itspreservation and will suffer pecuniary loss ordamage from its destruction, termination, or injuryby the happening of the event insured against. Essential element of an insurance contract. Not legally possible to waive requirement Rationale for requiring insurable interest:

» As deterrence to the insured – public policyholds wager policies invalid for beingagainst public interest and demoralizing inthat: The insured has an interest in the

destruction rather than thepreservation of a subject matter.

It tempts or induces the insured, withnothing to lose and everything to gain,to bring about the event upon thehappening of which the policy becomespayable.

» As a measure of limit of recovery – incontracts to pay indemnity, the insurableinterest will be the measure of the upperlimit of his provable loss under thecontract. The policy should not provide theinsured with the means of making a netprofit from the happening of the eventinsured against.

Difference between life and non-life insurance(pertaining to interest):LIFE - basically a contract of INVESTMENT;can only recover face amount of the policyNON-LIFE – based on principle of INDEMNITYfor exact pecuniary value; can only recover onthe policy the value of the actual loss

14This topic came out in 2002, 2001, 2000, 1997,

1996, 1994, 1984, 1983, 1982, 1980, 1979 and1977. Note the difference between insurable interestin property versus insurable interest in life insurance;insurable interest in bank deposits; and existinginterest in property insurance.

2. Insurable Interest in life/health

Sec 10 Every person has an insurable interest inthe life and health:

a) Of himself, of his spouse and of hischildren;

b) On any person on whom hedepends wholly or in part for education orsupport, or in whom he has a pecuniaryinterest;

c) Of any person under a legalobligation to him for the payment of money,or respecting property or services of whichdeath or illness might delay or prevent theperformance, and

d) Of any person upon whose life anyestate or interest vested in him depends.

Person may take out insurance on own life orsomeone else’s life provided insurable interestexists.

Cestui que vie must consent. Sec. 10 provides the test of presence of

insurable interest. Said section does not requirethe consent of the person being insured for thepolicy to be effective. The policy is valid as longas the presence of insurable interest can beadequately shown.

2.1. In one’s own life/health

Sec 11 The insured shall have the right to changethe beneficiary he designated in the policy, unlesshe has expressly waived this right in said policy.

Sec 12 The interest of a beneficiary in a lifeinsurance policy shall be forfeited when thebeneficiary is the principal, accomplice, oraccessory in willfully bringing about the death ofthe insured, in which event, the nearest relative ofthe insured shall receive the proceeds of saidinsurance if not otherwise disqualified.

Insured is the cestui que vie As a rule, each has unlimited insurable interest

in his own life, whether the insurance is for thebenefit of himself or another

In insuring one’s own life for another’s benefit,insurable interest is only needed as evidence ofgood faith of the parties; it is contrary tohuman experience that a person will insure hisown life for the benefit of another for thepurpose of speculation, to take his own life tosecure payment to another, or designate as abeneficiary, a person interested in thedestruction, not the continuance of theinsured’s life.

The nearest relative of the insured shall receivethe proceeds of said insurance if not otherwisedisqualified

GENERAL RULE: Beneficiary is the choice ofthe insured regardless of WoN beneficiary hasan insurable interest in insured’s lifeAssumption: Insured would not designate ashis beneficiary a person whom he would nottrust with his own life

EXCEPTIONS» Waiver



» Irrevocable beneficiary (right to proceedvests)

2.2. In the life/health of others

Art 195 (Family Code). Subject to the provisionsof the succeeding articles, the following are obligedto support each other to the whole extent set forthin the preceding article:(1) The spouses;(2) Legitimate ascendants and descendants;(3) Parents and their legitimate children and thelegitimate and illegitimate children of the latter;(4) Parents and their illegitimate children and thelegitimate and illegitimate children of the latter;and(5) Legitimate brothers and sisters, whether of fullor half-blood (291a)

Insured is not the cestui que vie but is thebeneficiary When person names himself the beneficiary in

a policy taken out on the life of another, hemust have insurable interest in the life of theother person (his interest must show somepecuniary interest and it exists whenever therelation between the assured and the insured,whether by blood, marriage or commercialintercourse)

Mere love and affection NOT insurable interest

CESTUI QUE VIE: person upon whose lifeinsurance is taken out on

Must agree to the taking out of insurance No law saying you don’t need his consent

public policy demands consent be obtained Exception: Parent taking policy out on

minor child No amount of consent can make up for lack

on surable interest When the owner of the policy insures the

life of another—the cestui que vie—anddesignates a third party as beneficiary,both the owner and beneficiary must havean insurable interest in the life of the cestuique vie. If the insurable interestrequirement is satisfied, a life policy isassignable regardless of whether theassignee has an insurable interest in thelife of the cestui que vie. In our law,insurable interest in another’s life must beone of those mentioned in §10. Beingengaged with one another is not suchinterest.

CLOSE RELATIVES Spouse and children (minor or not, married or

unmarried dependent or not)- Law presumes natural affection existing

between spouses, parents and children.Thus, Law recognizes a parent’s insurableinterest in child’s life but is silent as towhether or not a child has insurableinterest in the parent’s life.

- Child entitled to support required by law,whether or not he/she is financiallyindependent sufficient to constitutepecuniary interest.

Other close relatives (brothers and sisters) notexpressly covered by law (but look at Art 195,FC)

Blood relationship or relationship by affinity isIMMATERIAL when relative is source of support(where no legal obligation exists)- There is insurable interest both ways

OTHER RELATIVES and STRANGERS Must prove that he has some pecuniary interest

in the life of the cestui que vie otherwise policyis void

Mere relationship will not suffice The requirements of insurable interest cannot

be circumvented by an agreement between theinsured (cestui que vie) and a 3rd person whohas no interest, whereby the latter, havinginduced the insured to take out a policy,promises to pay of premiums if the policy isassigned to him.» The intention to take out policy is clearly

not to insure life but rather to circumventthe requirement

» Is different from taking a policy out on selfand then later assigning it to someone whohas no insurable interest, because lawallows policy to transfer whether or notthere is insurable interest

Sec 181 A policy of insurance upon life or healthmay pass by transfer, will or succession to anyperson, whether he has an insurable interest ornot, and such person may recover upon it whateverthe insured might have recovered.

Sec 182 Notice to an insurer of a transfer orbequest thereof is not necessary to preserve thevalidity of a policy of insurance upon life or health,unless thereby expressly required.

Insurable interest of assignee in lifeinsurance not required - since it is not acontract of indemnity. Life insurance is oneof the best recognized forms of investmentand self-compelled savings. So far asreasonable safety permits, it is desirable togive life policies the ordinary characteristicsof property. To require insurable interest inassignee is to diminish the investmentvalue of the contract to the owner.

No insurable interest is required wherepolicy is procured by the person whose lifeis insured on his own initiative. Sinceanyone can be named beneficiary, anassignment would not be invalidated by thelack of insurable interest of the assignee.

Assignment is distinguished from a changein the designated beneficiary.

COMMERCIAL or CONTRACT RELATIONS Creditor may take out insurance on life of his

debtor» The extent of the creditor’s interest is only

as to the amount of debt and cost ofcarrying the insurance on debtor’s life. Thetotal value must not make the policy awagering or speculative one. This kind ofpolicy is not taken out for the benefit of thedebtor. The debtor cannot claim theproceeds because the creditor does not actas an agent of the former.



Sec 183 Unless the interest of a person insured issusceptible of exact pecuniary measurement, themeasure of indemnity under a policy of insuranceupon life or health is the sum fixed in the policy.

Debtor may insure self and name creditor asbeneficiary» Creditor is entitled to full proceeds of policy

just as any other beneficiary when debtordies even if his credit is much less.

Debtor assigns policy to creditor as collateralsecurity» Creditor can only recover amount of his

credit» Balance will go to designated beneficiary

EMPLOYER/BUSINESS ASSOCIATE May take out policy on life of business partner

» Interest exists death of partner results ininterruption of operations which can lead tofinancial losses.

Firm may take out policy on officers/employees» Services are valuable to the business» Proceeds of policy not taxable income

because it serves as indemnity to theemployee for the loss the business suffersupon the death of the valued officer ofemployee.

2.3. Time when it should exist

Sec 19 An interest in property insured must existwhen the insurance takes effect, and when the lossoccurs, but need not exist in the meantime’ andinterest in the life or health of a person insuredmust exist when the insurance takes effect, butneed not exist thereafter or when the loss occurs.

General Rule: insurable interest must existonly at inception» Policy not indemnifying loss but rather

giving financial security to insured or tobeneficiaries

» Law gives insured the right to convertpolicy into cash by selling it to a 3rd personwho doesn’t have any insurable interest inhis life.

» Policy is an investmentExceptions: (cases where interest of theinsured is capable of exact pecuniary benefit)» Creditor who takes insurance out on life of

debtor to secure debt Once debt has been paid insurable

interest disappears No liability to pay proceeds because

there is not longer anything toindemnify

If debt already been paid should bedenied recovery on the policy

Debtor should have the right to takeover the policy from creditor after thetermination of relationship prevent thepremium paid from going to waste.

» Company takes out insurance on life ofemployee Employee leaves company Policy is to indemnify employee for

losses upon death of employee notresigning

Company cannot recover on life ofemployee who has already left/resigned– there is nothing to indemnify

Relationship slightly different becauseno esact pecuniary value dan be given.BUT same principle holds that thecannot recover.

3. Insurable Interest In property

3.1. Definition

Sec 13 Every interest in property, whether real orpersonal, or any relation thereto, or liability inrespect thereof, of such nature that a contemplatedperil might directly damnify the insured, is aninsurable interest.

Contract of indemnity - measure of insurableinterest in property is the extent to which theinsured might be indemnified by loss or injury.

3.2. In what it may consist of

Sec 14 An insurable interest in property mayconsist in:a) an existing interest;b) An inchoate interest founded on an existinginterest; orc) An expectancy, coupled with an existing interestin that out of which the expectancy arises

Sec 16 A mere contingent or expectant interest inanything, not founded on an actual right to thething, nor upon any valid contract for it, is notinsurable.

Insurable interest deemed to exist as long assuch interest, relation or liability is of suchnature that a contemplated part might directlydamnifty the insured

Even without legal or equitable title as long asit can be shown that the insured will bebenefited by property’s continued existence orwill suffer pecuniary loss by its destruction.

FORMS OR INSURABLE INTEREST» INTEREST in the

property itself, whether such property bereal or personalex. Ownership of or a lien on property

» any RELATION to such propertyex. interest of a commission agent ongoods he is selling

» LIABILITY inrespect thereofex. interest of carrier on cargo which heought to carry safely to destination

NATURE OF INSURABLE INTEREST» An existing interest

may arise from legal title (ex.mortgagor of the property mortgaged;lessor of the property leased; assigneeof property for the benefit of creditors,etc.); clearly definably based on somelegal title

may also be from equitable title (ex.Purchaser of property before delivery;builders in the building underconstruction or upon completion ofbuilding)

» An inchoate interest founded on anexisting interest



must be founded on an existingcontract but not yet clearly defined oridentified (Ex. A stockholder has aninchoate interest in the property of thecorporation w/c is founded on anexisting interest arising from hisownership shares)

A partner has an insurable interest inthe firm’s property which will support aseparate policy for his benefit

» An expectancy, coupled with an existinginterest in that out of which the expectancyarises such must be coupled with an existing

interest in that our of which suchexpectancy arises. (Ex. Farmer insuringfuture crops if it be grown on landowned by him at the time of theissuance of the policy)

3.3. Measure of interest in property

Sec 15 A carrier or depository of any kind has aninsurable interest in a thing held by him as such, tothe extent of his liability but not to exceed thevalue thereof.

Sec 17 A mere contingent or expectant interest inanything, not founded on an actual right to thething, not upon any valid contract for it, is notinsurable.

Other Interests STOCKHOLDER/PARTNER to FIRM

- Has sufficient interest in property ofcorporation- Interest does not rise to the dignity ofa title yet he stands in such a relation tosuch corporate property to vest him withan inchoate right to dividends in case ofprofits and to share in the assets uponliquidation- Interest not measured by value ofwhat is destroyed- Interest is to share in the distributionof the proceeds only after payment ofcorporation’s debts- Must prove actual injury, otherwisecannot recover more than nominaldamages

GENERAL CREDITOR No insurable interest in the property of

the debtor No right to posses, no lien, no relation

that would cause him direct damage Cannot take out policy on debtor’s

property Cannot recover as appointee or

beneficiary on policy taken out bydebtor

JUDGEMENT CREDITOR Sufficient interest in debtor’s property

because given right to levy (generallien)

In order to recover must show debtorhas no other property with which tosatisfy debt

May insure debtor’s property due topecuniary interest

MORTGAGE CREDITOR

Has insurable interest (general lien) Direct prejudice if there is loss Recognized by insurance Code (SEC8)

3.4. When it should exist

Sec 19 An interest in property insured must existwhen the insurance takes effect, and when the lossoccurs, but need not exist in the meantime; andinterest in the life or health of a person insuredmust exist when the insurance takes effect, butneed not exist thereafter or when the loss occurs.

General Rule: Interest must exist at inception andat time of loss, but not in the meantime PROPERTY must exist when the insurance takes

effect and when the loss occurs but not exist inthe meantime.

Nature of contract as indemnity Mere transfer of thing does not carry transfer of

policy Doesn’t own it anymore cannot recover New owner not a party to contract cannot

recover Can recover if valid assignment to buyer

made, notation of contract Transfer suspends the contract until same

person owns thing and policyException: (21) A CHANGE IN INTEREST IN A THING

INSURED. After occurrence of an injury whichresults in a loss does not affect the right of theinsured to indemnify for the loss

insured of the policy, after fire may sellremains of property without prejudicinghis right to recovery

(22) A change of interest IN ONE OR MORESEVERAL DISTINCT THINGS, SEPARATELYINSURED by one policy does not avoid theinsurance as to the others.

Single fire policy covers several pieces offurniture and appliances, insurance valueof each on indicated, sale of one item willnot prevent insured from recovering onitems he did not sell

(23) A change on interest by WILL or SUCESSIONon the death of the insured, does not avoid aninsurance and his interest in the insurance passesto the person taking his interest in the thinginsured

Fire insurance on building owned byfather, father dies, son inherits buildingand the fire insurance

(24) A transfer of interest by one of SEVERALPARTNERS, JOINT OWNERS, or OWNERS INCOMMON WHO ARE JOINTLY INSURED to theothers, does not avoid an insurance even thoughit has been agreed that the insurance shall ceaseupon an alienation of the thing insured

Acquiring co-owner has the sameinterest, interest merely increases uponacquiring other co-owners interest

Although there may be a stipulation thatinsurance ceases upon alienation

Law allows policy to be framed in such away that it will inure to the benefit ofwhomever during the continuance of therisk may become owner of the interestinsured.

Sale of property will not suspend thepolicy or render it ineffective.



3.5. Special Provisions on mortgagor andmortgagee

Sec 8 Unless the policy otherwise provides, wherea mortgagor of property effects insurance in hisown name providing that the loss shall be payableto the mortgagee, or assigns a policy of insuranceto a mortgagee, the insurance is deemed to beupon the interest of the mortgagor, who does notcease to be a party to the original contract, andany of his , prior to the loss which would otherwiseavoid the insurance, will have the same effect,although the property is in the hands of themortgagee, but any act which , under the contractof insurance, is to be performed by the mortgagor,may be performed by the mortgagee thereinnamed, with the same effect as it had beeperformed by the mortgagee.

Sec 9 If an insurer assents to the transfer of aninsurance from a mortgagor to a mortgagee, and atthe time of this assent imposes further obligationson the assignee, making a new contract with him,the acts of the mortgagor cannot affect the rightsof said assignee.

See part IV-C “Open mortgage clause” and “union

mortgage”a) Open Mortgage (Sec 8) – mortgage that canbe paid-off to maturity w/o penalty; mortgagee isthe beneficiary for insurance taken by mortgagor

Lenders generally do not like openmortgages because the early pay-offreduces the interest they earn

Acts of mortgagor invalidates the insuranceb) Union Mortgage – standard mortgage clause

Mortgagee may perform the acts ofmortgagor

Clause included wherein the insuranceinterest of mortgagee shall not beinvalidated by any act of the mortgagor orowner of property at the time.

Protects mortgagee’s interest frominvalidation due to mortgagor’s acts

3.6. Change of interest; instances ofautomatic transfer of interest

Sec 21 A change on interest in a thing insured,after the occurrence of an injury which results in aloss does not affect the right of the insured toindemnity for the loss.

Sec 22 A change of interest in one or more ofseveral distinct things, separately insured by onepolicy, does not affect the right of the insured toindemnity for the loss.

Sec 23 A change of interest, by will or succession,on the death of the insured, does not avoid aninsurance; and his interest in the insurance passesto the person taking his interest in the thinginsured.

Sec 24 A transfer of interest by one of severalpartners, joint owners, or owners in common, whoare jointly insured, to the others, does not avoid aninsurance even though it has been agreed that theinsurance shall cease upon an alienation of thething insured.

Sec 53 The insurance proceeds shall be appliedexclusively to the proper interest of the person inwhose name or for whose benefit it is made unlessotherwise specified in the policy.

Sec 57 A policy may be so framed that it willinsure to the benefit of whomever, during thecontinuance of the risk, may become the owner ofthe interest insured.

General Rule: If the thing insured isassigned to another, the policy is notdeemed transferred with the thing. Thepolicy is instead deemed suspended untilthe assignee also becomes the owner of thepolicy. The assignor, on the other hand,cannot recover on the policy after thetransfer since he has already lost insurableinterest over the thing. When there hasbeen a change of interest in a propertyinsured collectively with others in onepolicy and paid for with a gross premium,the policy is suspended. If, however, thechange of interest affects only one propertyinsured together with others under adivisible contract of insurance, thesuspension takes effect only with regard tothe property affected.Exceptions: The general rule onsuspension of policy is not applicable in thefollowing cases: Secs. 20 to 24, 57, Art1306, §24, Civil Code

3.7. Several interests; double insurance (cf.over insurance)

Sec 93 A double insurance exists where the sameperson is insured by several insurers separately inrespect in the same subject and interest.

Prohibition against additional insurance – When apolicy contains a prohibition against additionalinsurance on the property insured without theinsurer’s consent, such provision being valid andreasonable, a violation thereof by the insuredavoids the policy. (Sta. Ana vs. CommercialUnion Assurance Co. 55 Phil 329).

Sec 94 Where this insured is over insured bydouble insurance:

(a) The insured, unless the policy otherwiseprovides, may claim payment from the insurersin such order as he may select, up to theamount for which the insurers are severallyliable under their respective contracts;

(b) Where the policy under which the insuredclaims is a valued is a valued policy, theinsured must give credit as against, thevaluation for any sum received by him underany other policy without regard to the actualvalue of the subject matter insured.



(c) Where the policy under which the insuredclaims is an unvalued policy he must give credit, as against the full insurable value, for anysum received by him under any other policy.

(d) Where the insured receives any sum in excessof the valuation in the case of valued policies,and the insurable value in the case of unvaluedpolicies, and the insurable value in the case ofunvalued policies, he must hold such sum intrust for the insurers, according to their right ofcontribution among themselves.

(e) Each insurer is bound, as between himself andthe other insurers, to contribute ratably to theloss in proportion to the amount for which he isliable under the contract.

DOUBLE INSURANCE – when one gets severalpolicies to cover against the same danger/peril

- exists where the same person is insuredby several insurers separately in respect tothe same subject and interest- may recoverfrom insurer, insurer who pays may collectfrom other insurers

- a co-insurance by two or more insurers.“Double insurance,” “additional insurance”and “other insurance” are sometimes usedinterchangeably, although there is a technicaldifference in their meaning.

- Requisites of double insurance1. Same person insured2. Two or more insurers insuring

separately3. Same subject matter4. Same interest insured5. Same Risk or peril insured

OVER INSURANCE – when amount insured isover the value of the property the insured isover insured by double insurance The insured may claim payment from the

insurers in such order as he may select,up to the amount for which the insurersare severally liable under theirrespective contracts.

Valued policy – the insured must givecredit as against the valuation for anysum received by him under any otherpolicy without regard to the actual valueof the subject matter insured.

Unvalued policy – he must give credit, asagainst the full insurable value, for anysum received by him under any policy

Insured receives any sum in excess – hemust hold such sum in trust for theinsurers, according to their right ofcontribution among themselves.

Each insurer is bound as betweenhimself and the other insurers, tocontribute RATABLY to the loss inproportion to the amount for which he isliable under the contract.

Cannot get above value of propertyminus that of proceeds from otherpolicies

Cannot be more than loss because thatwould be wagering

Doubleinsurance

Over-insurance

Amount of theinsurance isbeyond the valueof the insured’sinsurable interest

There may be noover-insurance aswhen the sum totalof the amounts ofthe policies issueddoes not exceed theinsurable interest ofthe insured.

There may be onlyone insurerinvolved

There are alwaysseveral insurers



Chapter IV

CONCEALMENT,

MISREPRESENTATION & BREACH

OF WARRANTIES15

A contract of insurance is:UBERRIMAE FIDAE - A contract of utmost goodfaith

1. PRIMARY CONCERNS OF PARTIES TOAN INSURANCE CONTRACT

The following are affected by an act of concealment1. Correct estimation of the risk which enables

the insurer to decide whether he is willingto assume it, and if so at what rate ofpremium

2. The precise delimitation of the risk whichdetermines the extent of the contingentduty to pay undertaken by the insurer

3. Control of the risk after it is assumed aswill enable the insurer to guard against theincrease of the risk because of change inconditions

4. Determining whether a lost occurred and ifso, the amount of such loss.

2. DEVICES FOR ASCERTAINING ANDCONTROLLING RISK AND LOSS

2.1. CONCEALMENT & REPRESENTATION Developed for the purpose of enabling the

insurer to secure the same information withrespect to the risk that was possessed bythe applicant for insurance so that he maybe equally capable of forming a justestimate of its quality.

2.2. AFFIRMATIVE WARRANTIES &CONDITIONS

Deals with conditions existing at theinception of the contract, and operates tomake more definite and certain the generalwords used to describe the risk the insurerundertook to bear.

It involve facts the existence of whichshows the risk to be greater than thatintended to be assumed and operates tocreate in the insurer the power toextinguish, if he so desires, the legalrelations already created.

Ex.. Where an insured is required towarrant something and when found guiltyof concealment or misrepresentation,operates to void the contract.

2.3. EXCEPTIONS Makes more definite the coverage indicated

by the general description of the risk byexcluding certain specified risks thatotherwise could have been included underthe general language describing the riskassumed.

2.4. EXECUTORY WARRANTIES &CONDITIONS

15The effects of concealment was asked in 1997,

1993, 1989, 1987, 1983, 1980, 1979, 1977, 1976,and 1975.

Are used to enable the insurer to rescindthe contract in case subsequent eventsincreased the risk to such an extent that heis no longer willing to bear. That is,undertakings that certain conditions shouldor should not exist in the future.

2.5. CONDITIONS PRECEDENT Used by the insurer to protect himself

against fraudulent claims of loss; these areconditions requiring immediate notice ofloss or injury and detailed proofs of losswithin a limited period.

3. CONCEALMENT

3.1. Definition

Sec. 26. A neglect to communicate that which aparty knows and ought to communicate,is called a concealment.

3.2. Requisites of concealment:1. A party knows the fact which he

neglects to communicate or disclose tothe other

2. the fact concealed is material to the risk3. such party is duty bound to disclose such

fact to the other4. the other party has not the means of

ascertaining the fact concealed5. such party makes no warranty of the

fact concealed. (If a warranty is made ofthe fact concealed, the non-disclosure ofsuch fact is not concealment but constitutesa violation of the warranty)

Sec. 27. A concealment whether intentional orunintentional, entitles the injured party to rescinda contract of insurance. (As amended by BP Blg.874)

The effect of concealment on the partof the insured makes the contractVOIDABLE at the insurer’s option

Insurer NEED NOT PROVE FRAUD inorder to rescind a contract on thegrounds of concealment.

The duty of communication isindependent of the intention and isviolated by the mere fact ofconcealment even when there is nodesign to deceive.

Section 27 must be read in relation toSection 29.

Sec. 28 Each party to a contract of insurancemust communicate to the other, in good faith, allfacts within his knowledge which are material tothe contract, and which the other has not themeans of ascertaining, and as to which he makesno warranty

3.3. Matters that Must Be Communicated Evenin the Absence of Inquiry:

1. Matters material to the contract2. Matters which the other has not the

means of ascertaining the said facts3. Matters as to which the party with the duty

to communicate makes no warranty.



TEST: If the applicant is aware of the existence ofsome circumstance which he knows would influencethe insurer in acting upon his application, goodfaith requires him to disclose that circumstance,though unasked.

3.4. Fraudulent Intent

Sec. 29. An intentional and fraudulent omission,on the part of one insured, to communicateinformation of matters proving or tending to provethe falsity of a warranty, entitles the insured torescind.

When Fraudulent Intent Necessary:

Under section 29, concealment relates tothe falsity of a warranty.

For the section to operate it is necessarythat the nondisclosure be intentional andfraudulent before the contract may berescinded.

The concealment refers to matters provingor tending to prove the falsity of thewarranty.

3.5. MATTERS WHICH NEED NOT BEDISCLOSED

Sec. 30. Neither party to a contract of insuranceis bound to communicate information of themattes following, except in answer to the inquiriesof the others:

(a) Those which the other knows;(b) Those which, in the exercise of ordinary

care, the other ought to know, and of whichthe former has no reason to suppose himignorant;

(c) Those of which the other waivescommunication;

(d) Those which prove or tend to prove theexistence of a risk excluded by a warranty,and which are not otherwise material; and

(e) Those which relate to a risk excepted fromthe policy, and which are not otherwisematerial.

Sec. 32. Each party to a contract of insurance isbound to know all the general causes which areopen to his inquiry, equally with that of the other,and which may affect the political or materialperils contemplated; and all general usages oftrade.

Sec. 33. The right to information of material factsmay be waived, either by the terms of insuranceor by neglect to make inquiries as to such factswhere they are distinctly implied in other facts ofwhich information is communicated.

Sec. 34. Information of the nature or amount ofthe interest of one insured need not becommunicated unless in answer to an inquiry,except as prescribed by section 51.

Sec. 35. Neither party to a contract of insurance isbound to communicate, even upon inquiry,information of his own judgment upon the mattersin question.

Sections 30, 32 – 35 pertains tomatters which need not be disclosed

Exception found in Sec. 30 last phraseof first sentence: “except in answer tothe inquiries of the other”

Matters Which Need Not Be Disclosed:1. Mattes already known to the insurer2. Matters of which the insurer waives

communication – he is in estoppel.3. Matters that concern only risks

excepted, either expressly or by warranty,from the liability assumed under thepolicy. **Important Note: The undisclosedfact must NOT BE MATERIAL otherwise theinsured is still bound to make disclosure.

4. Information of the nature or amount ofthe interest of one insured except ifinquired upon by the insurer.

5. Matters each party are bound to knowsuch as public events, general informationetc.

6. The right to information of materialfact may be waived either expressly, bythe terms of insurance or impliedly byneglecting to make inquiry as to the factsalready communicated.

7. If the interest of the insured to theproperty being insured is absolute thenthere is no necessity to disclose theextent of his interest, if not then he isrequired to disclose under Section 51

8. Matters of opinion.

3.6. MATERIALITY

Sec. 31. Materiality is to be determined not bythe event, but solely by the probable andreasonable influence of the fact upon the party towhom the communication is due, in forming hisestimate of the disadvantages of the proposedcontract, or in making his inquiries.

Test of Materiality: The effect which theknowledge of the fact in question would have onthe making of the contract. To be material, a factneed not increase the risk or contribute to any lossor damage suffered. IT IS SUFFICIENT IF THEKNOWLEDE OF IT WOULD INFLUENCE THE PARTYIN MAKING THE CONTRACT.

Materiality is to be determined not by theevent, but solely by the probable andreasonable influence of the facts upon theparty to whom the communication is due,in forming his estimate of thedisadvantages of the proposed contract, orin making his inquiries. HOWEVER, mattersthat may be deemed immaterial in otherrespects will be deemed material if madethe subject of an inquiry.

The DUTY TO COMMUNICATE is to theextent that, in good faith, all facts withinthe knowledge of either party which arematerial to the contract and as to which hemakes no warranty, and which the other



has not the means of ascertaining, must becommunicated. The EXCEPTION to thisrule is that both parties are charged withthe knowledge of the general causes whichare open to his inquiry, equally with that ofthe other, and which may affect thepolitical or material perils contemplated;and all general usages of trade. TheInsurance Code exempts a party from theduty to communicate with regard tomatters which are deemed of publicknowledge and which a prudent manengaged in the insurance business ought toknow.

GENERALLY, the right to information ofmaterial facts may be waived, either by theterms of the insurance or by neglect tomake inquiry as to such facts, PROVIDEDthey are distinctly implied in other facts ofwhich information is communicated.

Concealment must take place at the timethe contract is entered into in order thatthe policy may be avoided. Informationobtained after the perfection of the contractis no longer necessary to be disclosed bythe insured, even if the policy has not beenissued (**Exception is when the contract isto be effective only upon the issuance ofthe policy – the insured is still duty boundto disclose to the insurer any material factwhich comes to his knowledge.)

The duty of disclosure ends with thecompletion and effectivity of the contract.

Sunlife Assurance vs CA,245 SCRA 268 (1995)

Insured need not die of the disease he had failed todisclose to the insurer. It is sufficient that hisnondisclosure misled the insurer in forming hisestimates of the risks of the proposed policy or inmaking inquiries.

4. MISREPRESENTATION

4.1. Definition

Sec. 36. A representation may be oral or written

4.2. Representation vs. Misrepresentation

Representation: factual statements made by the insured at

the time of, or prior to, the issuance of thepolicy to give information to the insurerand otherwise induce him to enter into theinsurance contract. They may also be madeby the insurer but cases nearly always referto representations made by the insured.

Misrepresentation: a statement (a) as a fact of something

which is untrue; (b) which the insuredstated with knowledge that it is untrue andwith an intent to deceive, or which hestates positively as true without knowing itto be true and which has a tendency tomislead; (c) where such fact in either caseis material to the risk

4.3. Distinguished from Concealment

In concealment, the insured maintainssilence when he ought to speak, while inmisrepresentation, the insured makes astatement of fact which is not true – activeform of concealment.

Sec. 37. A representation may be made at thetime of, or before, issuance of the policy (a)

Sec. 38. The language of a representation is tobe interpreted by the same rules as the languageof contracts in general.

4.4. Construction of Representations:o Construed liberally in favor of the

insured and are required to be onlysubstantially true.

Sec. 39. A representation as to the future is to bedeemed a promise, unless it appears that I wasmerely a statement of belief or expectation.

4.5. Kinds of Representation:1. Oral or Written (Sec. 36)2. Made at the time of issuing the policy or

before (Sec. 37)3.Affirmative or promissory (Sec. 39 & 42)

Affirmative Representation: Is any allegation as to the existence or

non-existence of a fact when the contractbegins.

Promissory Representation: Is any promise to be fulfilled after the

contract has come into existence or anystatement concerning what is to happenduring the existence of the insurance. Apromise representation is substantially acondition or warranty.

4.6. When Representation Deemed a MereExpression of Opinion:

General Rule: a representation of theexpectation, belief, opinion, or judgment of theinsured, although false, will not avoid the policy,even if such was material to the risk.

Exception: Such representation will avoidthe policy if there is a concurrence of materialityand fraudulence or intent to deceive. However, ifthe representation is one of fact, the insurer needonly prove the materiality of the representation,because in such cases the intent to deceive ispresumed.

ILLUSTRATION: The statement “I am anintelligent student” will produce the followingeffects:

a. Even if intelligence is material, if therewas no intent to deceive and theinsured was merely relying on his ownassessment of his abilities, the policywill not be avoided.

b. If intelligence is material and it wasproven that there was intent on thepart of the insured to mislead theinsurer as to his intelligence, the policywill be avoided.



c. If the statement was actually astatement of fact and not merejudgment, the policy will be avoided, aswhen the insured was not even astudent to begin with (“student” is afact, “intelligence” is an opinion”).Fraudulent intent in this case ispresumed.

Sec. 40. A representation cannot qualify anexpress provision in a contract of insurance; but itmay qualify an implied warranty

A representation cannot qualify an expressprovision or an express warranty in acontract of insurance because arepresentation is not a part of the contractbut only a collateral inducement to it. Itmay however qualify an implied warranty.

Sec. 41. A representation may be altered orwithdrawn before the insurance is effected, butnot afterwards.

o A representation, not being a part of thecontract of insurance, may be altered orwithdrawn before the contract actuallytakes effect but not afterwards since theinsurer has already been led by therepresentation in assuming the riskcontemplated.

Sec. 42. A representation must be presumed torefer to the date on which the contract goes ineffect.

NO FALSE REPRESENTATION IF: If it is true at the time the contract

takes effect although false at the timeit

was

made/represent

ed.

THERE IS FALSE REPRESENTATION IF: If it is true at the time it was

made/represented but false at the timethe contract takes effect.

Sec. 43. When a person insured has no personalknowledge of a fact, he may nevertheless repeatinformation which he has upon the subject, andwhich he believes to be true, with the explanationthat he does so on the information of others; or

he may submit the information, in its wholeextent, to the insurer; and in neither case is heresponsible for its truth, unless it proceeds froman agent of the insured, whose duty is to give theinformation.

Art. 44. A representation is to be deemed falsewhen the facts fail to correspond with itsassertions or stipulations.

Sec. 44 defines misrepresentation Representations are not required to be

literally true (unlike warranties); they needonly be SUBSTANTIALLY TRUE

Sec. 45. If a representation is false in a materialpoint, whether affirmative or promissory, theinjured party is entitled to rescind the contractfrom the time when the representation becomesfalse. The right to rescind granted by this Code tothe insurer is waived by the acceptance ofpremium payments despite knowledge of thegrounds for rescission. (As amended by BP Blg.474)

General Rule: Any misrepresentation on amaterial point entitles the injured party to rescindthe contract from the time the representationbecomes false.

Exceptions: The right to rescind on theground of misrepresentation is deemed waivedwhen the insurer accepts premium paymentsdespite knowledge of the misrepresentation.However, a person cannot be held liable for anymisrepresentation that he may apparently havecommitted if (1) he has no personal knowledge ofthe matter in question, (2) he relies on theinformation of others and (3) he believes suchinformation to be true based on such externalsource, or if he submits the information from anexternal source in its entirety to the insurer. TheEXCEPTION to this rule is when the informationrelied upon proceeds from an agent of the insured,whose duty it is to give the information

Fraud or intent to misrepresent facts notessential to entitle the injured party torescind a contract of insurance on theground of false representation.

To be deemed false, it is sufficient if therepresentation fails to correspond with thefacts in a material point.

Sec. 46. The materiality of a representation isdetermined by the same rules as the materialityof a concealment.

4.7. CONCEALMENT vs. MISREPRESENTATION

Sec. 47. The provisions of this chapter apply aswell to a modification of a contract of insurance asto its original formation.

Ng v Asian Crusaders

Facts: The insured applied for a 20-yearendowment insurance on his life and named hiswife as beneficiary. Upon application he gaveinformation regarding a previous operation (that

CONCEALMENT MISREPRESENTATION

Insuredwithholdsinformation ofmaterial factsfrom the insurer

Insured makeserroneous statements offacts with the intent ofinducing the insurer toenter into the insurancecontract

Determined by the same rules as tomateriality

Same effects on the part of the insured;insurer has right to rescind

Injured party is entitled to rescind acontract of insurance on ground ofconcealment or false representation,whether intentional or not

Rules on concealment and representationapply likewise to the insurer as insurancecontract is one of utmost good faith



a tumor was taken out). Insured died of livercancer. The insurer denied the claim of thebeneficiary claiming misrepresentation since theoperation which the insured undertook was for“peptic ulcer” and not removal of a tumor.Ratio: Concealment exist where the insured hadknowledge of a fact material to the risk, andhonesty, good faith and fair dealing requires thathe should communicate it to the insurer, but heintentionally withhold the same. The insuredinformed the medical examiner that the tumor hewas operated on was associated with ulcer of thestomach. In the absence of evidence that theinsured had sufficient medical knowledge as toenable him to distinguish between “peptic ulcer”and tumor” his statement was an expressionmade in good faith of his belief as to the natureof his ailment and operation. If the operationand ailment of the insured had such an importantbearing on the assumption of risk by the insurer,it should have made further inquires on thematter or required copies of the hospital recordsbefore approving the application. As provided bySection 32 where the right to materialinformation may be waived “…by neglect to makeinquires as to such facts where they are distinctlyimplied in other facts of which information iscommunicated”

Canilang vs. CA, 223 SCRA 443 (1993)

Facts: The insured failed to disclose to theinsurer that he was diagnosed to be sufferingfrom “sinus tachycardia” and that he hadconsulted with a doctor. He died of congestiveheart failure. His wife, as the beneficiary filed aclaim with the insurer who denied the same.Ratio: The information the insured failed todisclose was material to the ability of the insurerto estimate the probable risk he presented as asubject of life insurance, had he disclosed it, itmay be reasonably assumed that the insurerwould have made further inquires and wouldhave probably refused to issue a non-medicalinsurance policy or at the very least required ahigher premium for the same coverage.Materiality is the probable and reasonableinfluence of the facts upon the party to whom thecommunication should have been made, inassessing the risk involved, in making or omittingto make further inquires and in accepting theapplication for insurance.

Yu v CA

Facts: The insured applied for a life insurancewith private respondent insurance company. Heconcealed a material/important fact in hisapplication form when he failed to disclose thathe had consulted a doctor prior to his applicationand that he was suffering from certainsymptoms. Insured died and his brother, thepetitioner in the case filed a claim which wasdenied by the insurer.Ratio: The insured is guilty of concealment asthe fact which he failed to disclose to theinsurance company deprived the respondent ofthe opportunity to make the necessary inquiry asto the nature of his past illness so that it mayform its estimate relative to the approval of hisapplication. “A neglect to communicate thatwhich a party knows and ought to communicate,is called concealment” and “Whether intentionalor unintentional, the concealment entitles the

insurer to rescind the contract of insurance”.Insurer is relieved from liability.

Pacific Banking v CA

Facts: The insured, Paramount is in the businessof shirt manufacturing, it took out a fireinsurance policy with Oriental Insurance for 61K.Because of it’s indebtedness to Pacific BankingCorp., the policy was endorsed to Pacific asmortgagee/trustor. The property insured wasgutted by fire. Pacific made a claim on theinsurance policy which was denied by Orientalbecause it appeared that Paramount failed todisclose co-insurance with 3 other insurancecompanies (only declared 3 others) in violation ofPolicy Condition # 3.Ratio: By reason of the unrevealed co-insurances, the insured had been guilty of afalse declaration; a clear misrepresentation and avital one because where the insured had beenasked to reveal but did not, that was deception.Had the insurer known that there were many co-insurers, it could have hesitated or plainlydesisted from entering into such contract.Hence, the insured was guilty of clear fraud. Theinsurance policy against fire expressly requiredthat notice should be given by the insured ofother insurance upon the same property, thetotal absence of such notices nullifies the policy.

Eguaras v Great Eastern

Facts: The insured applied for a life insurancepolicy with defendant and named beneficiary hismother-in-law, the petitioner in the case.Insured falsely answered questions on theapplication form regarding his health and medicalhistory. Also, when he the insurance company’sphysician conducted a physical examination,another person pretending to be the insured waspresented. Insured died of intestinal occlusion.Ratio: The insured permitted fraud to becommitted against the insurance company in thefact that he allowed a healthy and robust personto substitute in his place since he knew that hewas in bad health. It is immaterial the cause ofdeath since at the time he applied for theinsurance on his life he was affected by a maladythat would have been sufficient cause for therejection of his application by the insurancecompany. The contract of insurance is null andvoid because it is false, fraudulent and illegal.

Great Pacific Life v CA (1999)

Facts: A group life insurance was executedbetween GrePaLife and DBP for mortgagors ofDBP to the amount of debt to DBP. The insuredin this case was one such mortgagor to DBP.GrePaLife granted insurance and a couple ofmonths later, insured died of “massive cerebralhemorrhage”. Upon DBP’s claim GrePaLifedenied claiming non-disclosure of insured that hewas suffering from hypertension at the time ofapplication for the insurance based on thetestimony of a doctor who declared that thecause of death was “possible hypertensionseveral years ago”Ratio: GrePaLife failed to establish that theinsured concealed a material fact as the medicalfindings were not conclusive since the doctor whogave the testimony did not conduct an autopsyon the insured nor had he any knowledge of



insured’s previous hospital confinements. Thedeath certificate only stated that hypertension as“possible cause of death”. Concealment existwhere the assured had knowledge of a factmaterial to the risk, and honesty, good faith andfair dealing requires that he should communicateit to the assurer, but he intentionally withholdsthe same. Fraudulent intent on the part of theinsured must be established to entitle the insurerto rescind the contract. Misrepresentation as adefense of the insurer to avoid liability is anaffirmative defense and the duty to establishsuch defense rests upon the insurer.

Edillon v Manila Bankers Life

Facts: The insured applied for a 90-dayinsurance coverage against accident and injuries.She clearly indicated in the application form thather date of birth was July 11, 1904 (which madeher almost 65 at the time of application). Theinsurer accepted her premium payment andissued her a certificate of insurance. Under theinsurance policy, there contained a provisionwhich excludes the company from any liability topay claims when the insured is under 16 or over60. Insured died of a vehicular accident duringthe effectivity of the insurance coverage.Ratio: The insurer is deemed estopped fromclaiming that the insured is disqualified. She didnot conceal nor misrepresent her age and theinsurance corporation has been given sufficientinformation to know that the insured is over 60years of age, yet they continued to accept thepremium payment and issued her the policy.

New Life Enterprise v Court of Appeals

Facts: The insured contracted 3 insurancepolicies from 3 different insurance companies forthe stocks-in-trade of New Life Enterprises. Itwas undisputed that the plaintiff failed to indicateany co-insurance in any of the three policies.When the building occupied by the insuredenterprise was gutted and the stocks-in-tradeinsured against were burned, the plaintiff filedclaims with the 3 insurers which were all denied.The reason was that the insured violated theterms of policy in relation to co-insurance.Ratio: The terms of the contract are clear andunambiguous. The insured is specifically requiredto disclose to the insurer any other insurance andits particulars which he may have effected on thesame subject. The excuse of the plaintiff that theagent of the insurance company was aware of theother insurers or that he failed to read the termsof the policies cannot be accepted when thewords and language of the documents are clearand plain or readily understandable by anordinary reader. There is absolute no room forinterpretation or construction and the courts arenot allowed to make contracts for the parties.The parties must abide by the terms of thecontract because such terms constitute themeasure of the insurer’s liability and compliancetherewith is a condition precedent to theinsured’s right to recovery from the insurer.

American Home v CA

Facts: The insured took out a fire insurancepolicy to cover the stocks-in-trade of his businessfrom the plaintiff insurer. When a fire gutted thebusiness, he filed a claim against plaintiff insurer

and several other insurance companies for whichhe also had a policy for the same stocks-in-trade.The plaintiff insurer refused payment claimingthat the insured violated the policy in severalinstances – for our purposes the violation was thefailure of the insured to disclose co-insurance.However, during trial, the trial court found thatalthough the insured failed to disclose co-insurance, the loss adjuster of the insurancecompany had previous knowledge of the co-insurance prior to the claim.Ratio: The insurer is estopped from claimingexemption from liability due to the violation ofthe policy on non-disclosure. It cannot be saidthat petitioner was deceived by respondent bythe latter’s non-disclosure of the other insurancecontracts when petitioner actually had priorknowledge as petitioner’s loss adjuster hadknown all along of the other existing insurancecontracts. The loss adjuster being an employeeof petitioner is deemed a representative of thelatter whose awareness of the other insurancecontracts binds the petitioner and thus there wasno violation of the “other insurance” clause bythe respondent and petitioner is liable to pay itsshare of the loss.

Life insurance policy wording that providesa time limit on the insurer’s right to disputea policy’s validity based on materialmisstatements in the application.

Incontestability means that after therequisites are shown to exist, the insurershall be estopped from contesting thepolicy or setting up any defense, except asis allowed, on the ground of public policy

Sec. 48. Whenever a right to rescind a contract ofinsurance is given to the insurer by any provisionof this chapter, such right must be exercisedprevious to the commencement of an action onthe contract..After a policy of life insurance made payable onthe death of the insured shall have been in forceduring the lifetime of the insured for a period oftwo years from the date of its issue or of its lastreinstatement, the insurer cannot prove that thepolicy is void ab initio or is rescindable by reasonof the fraudulent concealment ormisrepresentation of the insured or his agent.

5. RESCISSION

5.1. Grounds1. Concealment2. False representation – misrepresentation3. Breach of Warranty

5.2. When Insurer Must Exercise Right toRescind:

Non-Life Policy Must be exercised prior to the

commencement of an action on thecontract. The insurer is no longer entitledto rescind a contract of insurance after theinsured has filed an action to collect theamount of the insurance.

**However, it has been held that whereany of the material representations is false,the insurer’s tender of the premiums andnotice that the policy is cancelled before



commencement of the suite, operates torescind a contract of insurance

Life Policy The defense is available only during the

first two years of a life insurance policy. Orupon the first two years afterreinstatement.

5.3. Incontestability clauses16

The principle of incontestability states that,after the requisites are shown to exist, theinsurer shall be estopped from contestingthe policy or setting up any defense, exceptas is allowed, on the grounds of publicpolicy. In life insurance policies, theincontestability begins after two years fromthe time the policy took effect. After thisperiod, the insurer is no longer allowed todeclare the policy void or file an action forrescission on the grounds of concealment ofmisrepresentation of the insured. It has thefollowing requisites:

1. The policy is a life insurance policy

2. It is payable on the death of theinsured

3. It has been in force during thelifetime of the insured for a period ofat least two years from the date ofissue or its last reinstatement. Thistwo-year period may be shortened butit cannot be extended by stipulation.

The period of two years for contesting a lifeinsurance policy by the insurer may beshortened but it cannot be extended bystipulation.

Sec. 227 In the case of individual life orendowment insurance, the policy shall contain insubstance the following conditions:

(b) A provision that the policy shall beincontestable after it shall have been in forceduring the lifetime of the insured for a period oftwo years from its date of issue as shown in thepolicy, or date of approval of last reinstatement,except for non-payment of premium and exceptfor violation of the conditions of the policy relatingto military or naval service in time of war.

Defenses Not Barred by Incontestable Clause:1. That the person taking the insurance

lacked insurable interest as required bylaw.

2. That the cause of the death of theinsured is an excepted risk.

3. That the premiums have not been paid.4. That the conditions of the policy

relating to military or naval servicehave been violated.

5. That the fraud is of a particularlyvicious type, as where the policy wastaken out in furtherance of a scheme tomurder the insured, or where the insuredsubstitutes another person for the medical

16This was covered in 1998, 1997, 1994, 1991, and

1984. Take note of the 2 year period and the date ofissuance and their relevance.

examination, or where the beneficiaryfeloniously kills the insured.

6. That the beneficiary failed to furnishproof of death or to comply with anyconditions imposed by the policy afterthe loss has happened.

7. That the action was not brought withinthe time specified.

Argente v West Coast Life Ins. Co.

Facts: The insured spouses signed an applicationfor joint insurance which was accepted by theinsurer. The wife died of cerebral apoplexy acouple of month after the effectivity of the policy.When the husband filed a claim, the insurer deniedthe claim due to fraud and misrepresentation of theinsured. It appeared that the answers the spousesgave in their medical examinations with regard totheir health and previous illnesses and medicalattendance were untrue.Ratio: The spouses were guilty of concealment.As to the issue of the application of section 47 (nowsec. 48) on the time the insurer must exercise theright to rescind, the court held that a failure toexercise the right of rescission cannot prejudiceany defense to the action which the concealmentmay furnish. Where any of the materialrepresentations are false, the insurer’s tender ofthe premium and notice that the policy is cancelled,before the commencement of suit thereon, operateto rescind the contract of insurance, and are asufficient compliance with the law.

6. WARRANTIES

6.1. Definition

Is a statement or promise set forth in the policyitself or incorporated in it by proper reference, theuntruth or non-fulfillment of which in any respectand without reference to whether the insurer wasin fact prejudiced by such untruth or non-fulfillment, renders the policy voidable by theinsurer. A warranty may also be made by aninsurer.

Sec. 67. A warranty is either expressed orimplied.

6.2. Kinds of Warranties:

1. Express Warranty (Sec 67 & 71) is anagreement contained in the policy or clearlyincorporated whereby the insured stipulatesthat certain facts relating to the risk are orshall be true or certain acts relating to thesame subject have been or shall be done.

2. Implied Warranty (marine insuranceonly) is a warranty which from the verynature of the contract or from the generaltenor of the words, although no expresswarranty is mentioned, is necessarilyembodied in the policy as a part thereofand which binds the insured as thoughexpressed in the contract. (There is animplied warranty that the ship is seaworthywhen the policy attaches)

3. Affirmative Warranty (Sec. 68) is onewhich asserts the existence of a fact orcondition at the time it is made

4. Promissory warranty or ExecutoryWarranty (Sec. 72 & 73) is one where



the insured stipulates that certain facts orconditions pertaining to the risk shall existor that certain things with reference theretoshall be done or omitted. It is in the natureof a condition subsequent.

**Warranties are either affirmative orpromissory and expressed or implied – so itcomes in pairs you can have an impliedaffirmative warranty or an expressedaffirmative warranty..**A warranty is presumed to be affirmativeunless the contrary intention appears

Sec. 68. A warranty may relate to the past, thepresent, the future, or to any or all of these.

Sec. 69. No particular form of words is necessaryto create a warranty.

6.3. Warranties v Representation

WARRANTY REPRESENTATION

Considered part of thecontract

Collateral inducementto the contract

Always written on theface of the policy,actually or by reference

May be written in atotally disconnectedpaper or may be oral

Must be strictlycomplied with

Only substantial truth isrequired.

Falsity or non-fulfillment of a warrantyoperates as a breach ofcontract

Falsity of arepresentation rendersthe policy void on theground of fraud.

Presumed material Insurer must show themateriality of arepresentation in orderto defeat an action onthe policy.

Sec. 70. Without prejudice to section fifty-one,every express warranty, made at or before theexecution of a policy, must be contained in thepolicy itself, or in another instrument signed bythe insured and referred to in the policy asmaking a part of it.

In order that a stipulation may beconsidered a warranty, it must not only beclearly shown that the parties intended it assuch but it must also form a part of thecontract itself or if contained in anotherinstrument, it must be signed by theinsured and referred to in the policy asmaking a part of it. Mere reference aloneis not sufficient to give this effect.

The designation or non-designation of aclause as a warranty is not controlling.What is essential is the intent of thecontracting parties to create a warranty,regardless of the form of words used.

Sec. 71. A statement in a policy, of a matterrelating to the person or thing insured, or to the

risk, as a fact, is an express warranty thereof.

Sec. 72. A statement in a policy, which importsthat it is intended to do or not to do a thing whichmaterially affects the risk, is a warranty that suchact or omission shall take place.

Section 72 refers to promissory warranty. Breach of promises or agreements as to

future acts will not avoid a policy unless thepromises are material to the risk.

Express warranties regarding the person,thing, or risk must refer to a statement offact. If it is a mere belief, it will notconstitute a warranty as far as the policy isconcerned, but merely a warranty that thestatement is his honest opinion orjudgment.

Sec. 73. When, before the time arrives for theperformance of a warranty relating to the future,a loss insured against happens, or performancebecomes unlawful at the place of the contract, orimpossible, the omission to fulfill the warrantydoes not avoid the policy.

6.4. When Breach of Warranty does not avoidpolicy:

1. When loss occurs before time forperformance

2. When performance becomes unlawful3. When performance becomes impossible

(legal & physical impossibility)4. When insurer waives the warranty,

impliedly or expressly.

6.5. Materiality and Fraud in Warranty

Sec. 74. The violation of a material warranty, orother material provision of a policy, on the part ofeither party thereto, entitles the other to rescind.

Sec. 75. A policy may declare that a violation ofspecified provision thereof shall avoid it, otherwisethe breach of an immaterial provision does notavoid the policy.

Sec. 76. A breach of warranty without fraud,merely exonerates an insurer from the time that itoccurs, or where it is broken in its inception,prevents the policy from attaching to the risk.

Fraud is not essential to entitle the insurerto rescind a contract for breach ofwarranty.

Falsity, not fraud, is the basis of liability inwarranty.

If the breach of the warranty wasWITHOUT FRAUD – insured is entitled to:1. Return of premium paid at a pro-rata

rate from the time of breach if it occursafter the inception of the contract

2. To all the premiums if it is brokenduring the inception of thecontract. In this case the contract isvoid ab initio and never becamebinding.



If the breach of the warranty was WITHFRAUD – policy is void ab initio and theinsured is not entitled to the return of thepremium paid

6.6. Warranties in Fire Insurance

Sec. 167. As used in this Code, the term “fireinsurance” shall include insurance against loss byfire, lightning, windstorm, tornado or earthquakeand other allied risks, when such risks are coveredby extension to fire insurance policies or underseparate policies. (a)

A fire insurance is a contract of indemnityby which the insurer, for consideration,agrees to indemnify the insured againstloss of, or damage to, property by fire.

Sec. 168. An alteration in the use or condition ofa thing insured from that to which it is limited bythe policy made without the consent of theinsurer, by means within the control of theinsured, and increasing the risk, entitles aninsurer to rescind a contract of fire insurance.

Sec. 169. An alteration in the use or condition ofa thing insured from that to which it is limited bythe policy, which does not increase the risk, doesnot affect a contract of fire insurance.

Requisites Alteration to Entitle Insurer toRescind:

1. The use or condition of the thing isspecifically limited or stipulated in thepolicy.

2. Such use or condition as limited by thepolicy is altered.

3. The alteration is made without theconsent of the insurer

4. The alteration is made by means withinthe control of the insured

5. The alteration increases the risk.

Increase of Risk or Hazard in General Increase of hazard takes place whenever

the insured property is put to some newuse, and the new use increases the chanceof loss.

Premise: Every insurance policy is made inreference to the conditions surrounding the subjectmatter of the risk and the premium is fixed withreference thereto. There is thus an implied promiseor undertaking on the part of the insured that hewill not change the premises or the character of thebusiness carried there, or to be carried on there, soas to increase the risk of loss by fire.

General Rule: Insurer is not liable if there wasan increase in the risk or hazard. There is increasein hazard when the new use increases the chanceof loss. The increase of the risk of loss must in allcases be of a substantial character.

Exceptions: (Alterations which will not warrantthe avoidance of the policy):

1. The use of the property is changed but it didnot in any way increased the risk of loss2. The use of materials prohibited from beingused as per the policy if such materials are

necessary or ordinarily used in the insured’sbusiness.3. Increase in risks brought about by theundertaking of necessary repairs in thepremises4. Increase in risks due to negligent actstemporarily endangering the property, ortemporary acts or conditions which haveceased prior to the occurrence of the loss.5. Alteration made by accident or without theknowledge of the insured.Qualifier: However, the acts of the insured’s

tenants which cause alterations are deemedpresumptively known to the insured.

Exception to the exception: Under Section75, the breach of an immaterial provision will notavoid the policy, but the insurer is given the rightto insert terms which, if violated, would avoid it.The increase in risk brought by an alteration istherefore irrelevant if there is already a provision inthe policy which stipulates that ANY alteration, ofwhatever nature and effect, shall avoid the policy.

For sec. 168 to operate, entitling theinsurer the right to rescind, there mustbe an actual increase of risk and whileit is not necessary that the increasedrisk should have cause or contributedto the loss, it is necessary that theincrease be of a substantial character.

Sec. 170. A contract of fire insurance is notaffected by any act of the insured subsequent tothe execution of the policy, which does not violateits provisions, even though it increases the riskand is the cause of a loss.

If the policy does not contain anyprohibition limiting the use or condition ofthe thing insured, an alteration in said useor condition does not constitute a violationof the policy. The contract is not affectedby such alteration even though it increasesthe risk and is the cause of the loss.

Sec. 171. If there is no valuation in the policy,the measure of indemnity in an insurance againstfire is the expense it would be to the insured atthe time of the commencement of the fire toreplace the thing lost of injured in the condition inwhich it was at the time of the injury; but if thereis a valuation in a policy of fire insurance, theeffect shall be the same as in a policy of marineinsurance.

Sec. 172. Whenever the insured desires to have avaluation named in his policy, insuring anybuilding or structure against fire, he may requiresuch building or structure to be examined by anindependent appraiser and the value of theinsured’s interest therein may then be fixed asbetween the insurer and the insured. The cost ofsuch examination shall be paid for by the insured.A clause shall be inserted in such policy statingsubstantially that the value of the insured’sinterest in such building or structure has beenthus fixed. In the absence of any changeincreasing the risk without the consent of theinsurer or of fraud on the part of the insured, thenin case of a total loss under such policy, the wholeamount so insured upon the insured’s interest insuch building or structure, as stated in the policy



upon which the insurers have received a premium,shall be paid, and in case of a partial loss, the fullamount of the partial loss shall be so paid, and incase there are two or more policies covering theinsured’s interest therein, each policy shallcontribute pro rata to the payment of such wholeor partial loss. But in no case the insurer berequired to pay more than the amount thus statedin such policy. This section shall not prevent theparties from stipulating in such policies concerningthe repairing, rebuilding or replacing of buildingsor structures wholly or partially damaged ordestroyed.

Measure of Indemnity Under an Open Policy Entitled to recover amount of actual loss

sustained (burden of establishing theamount of loss by a preponderance ofevidence is upon the insured)

Measure of Indemnity Under a Valued Policy The valuation in the policy of fire insurance

is conclusive between the parties in theadjustment of either partial or total loss ifthe insured has an insurable interest andwas not guilty of fraud

In case of total loss, the insured canrecover the whole amount so insured asstated in the policy (the valuated amount)

In case of partial loss, the full amount ofthe partial loss (but should not exceed thevaluated amount)

Total loss exists when the result of the fireis such as to render the property whollyunfit for use.

If the thing is insured under two or morepolicies, each policy shall contribute pro-rata to the payment of such whole orpartial loss.

The insured is not a co-insurer under a fireinsurance policy in the absence ofstipulation unlike in marine insurance.

Co-Insurance Clause Is a clause requiring the insured to

maintain insurance to an amount equal to aspecified percentage of the value of theinsured property under penalty of becomingco-insurer to the extent of such deficiency.Many property owners realizing thepossibility of total destruction is slight,merely take out a small percentage of thevalue of the building or goods. To preventthe insured from taking out such smallamount of insurance, and thereby reducepremium payments the insurers ofteninsert as a rider to the standard fire policya so called “co-insurance” clause whichresults in reducing the recovery in case ofpartial loss to but a portion of the sumnamed in the policy though in case of totalloss, the insurer is liable for the amountnamed in the policy.

Option to rebuild clause The insurer is given the option to reinstate

the property damaged or destroyed or anypart thereof, instead of paying the amountof loss or damage. If the insurer chooses torebuild, he has to completely undertake itno matter how much it will cost him, unlessthe policy expressly states that any repair

shall only be to the extent of the amount ofthe insurance.

Sec. 173. No policy of fire insurance shall bepledged, hypothecated, or transferred to anyperson, firm or company who acts as agent for orotherwise represent the issuing company, and anysuch pledge, hypothecation, or transfer hereaftermade shall be void and of no effect insofar as itmay affect other creditors of the insured.

Effect of Pledge of Fire Insurance Policy After a loss has occurred, the insured MAY

pledge, hypotheticate or transfer a fireinsurance policy or rights thereunder.

What is being transferred is not the policyitself but the right to claim against theinsurer.

This right however is subject to theprohibition of Section 173.

Pioneer v Yap

Facts: The insured was the owner of a storeselling bags and footwear, she took out a fireinsurance from petitioner insurance companycovering her stocks, office furniture, fixtures andfittings of every kind and description. A conditionwas set which required the insured to disclose tothe insurer of any insurance or insurances“already effected, or which may be subsequentlyeffected”. It further stipulated that “…unless suchnotice be given and the particulars of suchinsurance or insurances be stated in or endorsedon this Policy by or on behalf of the Companybefore the occurrence of any loss or damage, allbenefits under this Policy shall be forfeited”. Theinsured failed to inform the insurer of another co-insurance. Fire broke out, gutted the store ofinsured. Upon filing of claim, petitioner insurancecompany denied the claim for violation ofcondition in the policy.Ratio: By the plain terms of the policy, otherinsurance without the consent of petitioner wouldipso facto avoid the contract. It required notaffirmative act of election on the part of thecompany to make operative the clause avoidingthe contract, wherever the specified conditionsoccur. Its obligation ceases, unless, beinginformed of the fact, it consented to theadditional insurance. Furthermore, the courtquoting Justice Bengson (Gen Insurance & SuretyCorp v Ng Hua) said that “…and considering theterms of the policy which required the insured todeclare other insurances, the statement inquestion must be deemed to be a statement(WARRANTY) binding on both insurer andinsured, that there were no other insurance onthe property….the annotation then, must bedeemed to be a warranty that the property wasnot insured by any other policy. Violation thereofentitled the insured to rescind.”

Young v Midland Textile Insurance

Facts: The insured, an owner of a candy andfruit store took out a fire insurance policy fromthe defendant insurance company to insure hisresidence and his bodega. Under the policy, acondition was set as "warranty B" whichstipulates that no hazardous goods be stored orkept for sale and no hazardous trade or processshall be carried in the building. During the



enforcement of the insurance policy, the insuredkept 3 boxes of fire crackers. Sometime later afire broke out which partially destroyed thebuilding but it appeared that the fire crackerswere not the cause of the fire as they were foundin an area not burned. Upon claim insurer deniedpayment.Ratio: The terms of the contract constitute themeasure of the insurer's liability. If the contracthas been terminated by a violation of its termson the part of the insured, there can be norecovery. Compliance with the terms of thecontract is a condition precedent to the right ofrecovery. A violation of the terms of a contract ofinsurance, by either party, will constitute thebasis for a termination of the contractualrelations, at the election of the other (in this casethe insurer). The right to terminate thecontractual relations exist even though theviolation was not the direct cause of the loss,since the deposit of the “hazardous goods” in thebuilding insured was a violation of the terms ofthe contract. The insurer is relieved from hisliability since the deposit of the hazardousmaterials created a new risk not included in theterms of the contract. The insurer had neitherbeen paid, nor had he entered into a contract tocover the increased risk.

EXCEPTIONS/& EXCLUSION

Intends to limit the liability of the insurerunder certain circumstances.

Musngi v West Coast Insurance Co. Inc.

Facts: The insured took out two life insurancepolicies with defendant insurer designating as hisbeneficiaries the plaintiffs in the case. In hisapplication the insured untruthfully answeredquestions regarding his health particularly abouthaving consulted any physician regarding anillness or ailment. It appeared that prior to hisapplication for insurance, the insured had beentreated for a number of ailments including pepticulcer, TB etc. The insured died, and upon hisdeath his beneficiaries filed a claim withdefendant insurance company who denied theclaim.Ratio: The insured is guilty of concealment andthus relieves the insurer from paying the claim.The insured knew that he had suffered from anumber of ailment before subscribing theapplication, yet he concealed them and omittedthe hospital where he was confined as well as thename of his physician who treated him. Theconcealment and false statement constitutedfraud, since this caused the defendant insurer toaccept the risk when it would have otherwiserefused. Such concealment of the insuredrendered the policy null and void (as held also inArgente v West Coast).

Filipinas Cia de Seguros v Nava

Facts: On February 1939, plaintiff Nava anddefendant Filipinas Life Assurance entered into 17separate contracts of life insurance for which theinsured issued 17 life insurance policies for whichthe insurer issued 17 life insurance policies, oneof said policies having a face value of P10,000while the rest a face value of P5,000 each, or atotal of P90K. Each and every policy contains apolicy loan clause. On April 1948, plaintiff

applied for a loan of P5,000 in line with the loanclause but defendants refused citing certainregulations issed by the Insurance Commissioneron May 1946.Held: Defendant’s refusal to give the loanapplied for by the plaintiff violated the loanclause embodied in each of the life insurancepolicies. This violation of the loan clause in thepolicy entitled plaintiff to rescind all policiesunder Section 69 of the Insurance Act, whichprovides: “the violation of a material warranty, orother material provision of a policy, on the part ofeither party thereto, entitles the other torescind.” Our Insurance Law does not contain anexpress provision as to what the court should doin cases of rescission of an insurance policy underSection 69, the provision that should apply is thatembodied in Art. 1295 of the old civil code, aspostulated in Art. 16 of the same Code, whichprovides that on matters which are not governedby special laws the provision of said Code shallsupplement its deficiency. The CA was correct inordering defendant to refund to plaintiff allpremiums paid by him up to the filing of theaction amounting to P34,644.60.

GROUNDS AND EXERCISE OF RIGHT OFRESCISSION

Sec. 48. Whenever a right to rescind a contract ofinsurance is given to the insurer by any provisionof this chapter, such right must be exercisedprevious to the commencement of an action onthe contract.After a policy of life insurance made payable onthe death of the insured shall have been in forceduring the lifetime of the insured for a period oftwo years from the date of its issue or of its lastreinstatement, the insurer cannot prove that thepolicy is void ab initio or is rescindable by reasonof the fraudulent concealment ormisrepresentation of the insured or his agent.

Sec. 63. A condition, stipulation, or agreement, inany policy of insurance, limiting the time forcommencing an action thereunder to a period ofless than one year from the time when the causeof action accrues is void.

When Cause of Action Accrues The right of the insured to the payment of

his loss accrues from the happening of theloss.

The cause of action in an insurancecontract does not accure UNTIL THEINSURED’S CLAIM IS FINALLY REJECTEDBY THE INSURER, because before such finalrejection, there is no real necessity forbinging suit.

The period is to be computed not from thetime the loss actually occurs but from thetime when the insured has a right to bringan action against the insurer.

**Cause of Action – requires as essentialelements not only a legal right of the plaintiffand a correlative obligation of the defendantbut also “AN ACT OR OMISSION OF THEDEFENDANT IN VIOLATION OF SAID LEGALRIGHT”, the cause of action in favor of theinsured does not accrue until the insurerrefuses expressly or impliedly to comply withhis duty to pay the amount of the loss.



General Rule: a clause in the policy to theeffect that an action upon the policy must bebrought within a certain period is valid and willprevail over the general law on limitations ofactions as prescribed by the Civil Code, if notcontrary to Sec. 63, IC.

Exceptions: In industrial life insurancepolicies, the period cannot be less than 6 yearsafter the cause of action accrues.

Jacqueline Jiminez Vda. De Gabriel vs. CA,G.R. No. 103883 (November 14, 1996)

Under 384 of the Insurance Code, notice of claimmust be filed within six months from the date ofaccident, otherwise teh claim shall be deemedwaived. Action or suit must be brought to propercases, with the Commission of the court within oneyear from the denial of claim, otherwise, theclaimant’s right of action shall prescribe.

Sec. 64. No policy of insurance other than lifeshall be cancelled by the insurer except upon priornotice thereof to the insured and no notice ofcancellation shall be effective unless it is based onthe occurrence, after the effective date of thepolicy, of one or more of the following:

(a) non payment of premium;(b) conviction of a crime arising out of acts

increasing the hazard insured against(c) discovery of fraud or material

misrepresentation;(d) discovery of willful or reckless acts or

omissions increasing the hazard insuredagainst;

(e) physical changes in the property insuredwhich results in the property becominguninsurable; or

(f) a determination by the Commissioner thatthe continuation of the policy wouldviolate or would place the insurer inviolation of this Code.

Sec. 65. All notices of cancellation mentioned inthe preceding section shall be in writing, mailed ordelivered to the named insured at the addressshown in the policy and shall state:

(a) which of the grounds set forth in section64 is relied upon; and

(b) that, upon written request of the namedinsured, the insurer will furnish the factson which the cancellation is based.

Form and Sufficiency of Notice of Cancellation1. There must be prior notice of

cancellation to the insured.2. The notice must be based on the

occurrence, after the effective of thepolicy, of one or more of the groundsmentioned in section 64.

3. It must be in writing, mailed ordelivered to the named insured at theaddress shown in the policy.

4. It must state which of the grounds setforth is relied upon

5. It is the duty of the insurer uponwritten request of the insured tofurnish the facts in which thecancellation is based. The premiumreferred to in Section 64 must be a

premium subsequent to the first, because itspeaks of non-payment “after the effectivedate of the policy”. If there was nopremium paid at all, the action appropriatewould be a declaration of nullity, based onSection 77 which provides that “no policyor contract of insurance issued by aninsurance company is valid and bindingunless and until the premium thereof hasbeen paid”

Sec. 170. A contract of fire insurance is notaffected by any act of the insured subsequent tothe execution of the policy, which does not violateits provisions, even though it increases the riskand is the cause of a loss.

Sec. 227 In the case of individual life orendowment insurance, the policy shall contain insubstance the following conditions:

(b) A provision that the policy shall beincontestable after it shall have been in forceduring the lifetime of the insured for a period oftwo years from its date of issue as shown in thepolicy, or date of approval of last reinstatement,except for non-payment of premium and exceptfor violation of the conditions of the policy relatingto military or naval service in time of war.

Sec. 380. No cancellation of the policy shall bevalid unless written notice thereof is given to theland transportation operator or owner of thevehicle and to the Land TransportationCommission at least fifteen days prior to theintended effective date thereof.Upon receipt of such notice, the LandTransportation Commission, unless it receivesevidence of a new valid insurance or guaranty incash or surety bond as prescribed in this Chapter,or an endorsement of revival of the cancelled one,shall order the immediate confiscation of theplates of the motor vehicle covered by suchcancelled policy. The same may be reissued onlyupon presentation of a new insurance policy orthat a guaranty in cash or surety bond has beenmade or posted with the Commissioner and whichmeets the requirements of this chapter, or anendorsement or revival of the cancelled one. (Asamended by PD No. 1455)



Chapter V: MARINE INSURANCE17

1. DEFINITION

Sec. 99. Marine Insurance includes:(1) Insurance against loss of or damage to:(a) Vessels, craft, aircraft, vehicles, goods,freights, cargoes, merchandise, effects,disbursements, profits, moneys, securities, chosesin action, evidences of debts, valuable papers,bottomry, and respondentia interests and all otherkinds of property and interests therein, in respectto, appertaining to or in connection with any and allrisks or perils of navigation, transit ortransportation, or while being assembled, packed,crated, baled, compressed or similarly prepared forshipment or while awaiting shipment, or during anydelays, storage, transhipment, or reshipmentincident thereto, including war risks, marinebuilder's risks, and all personal property floaterrisks;(b) Person or property in connection with orappertaining to a marine, inland marine, transit ortransportation insurance, including liability for lossof or damage arising out of or in connection withthe construction, repair, operation, maintenance oruse of the subject matter of such insurance (butnot including life insurance or surety bonds norinsurance against loss by reason of bodily injury toany person arising out of ownership, maintenance,or use of automobiles);(c) Precious stones, jewels, jewelry, preciousmetals, whether in course of transportation orotherwise;(d) Bridges, tunnels and other instrumentalitiesof transportation and communication (excludingbuildings, their furniture and furnishings, fixedcontents and supplies held in storage); piers,wharves, docks and slips, and other aids tonavigation and transportation, including dry docksand marine railways, dams and appurtenantfacilities for the control of waterways.(2) "Marine protection and indemnityinsurance," meaning insurance against, or againstlegal liability of the insured for loss, damage, orexpense incident to ownership, operation,chartering, maintenance, use, repair, orconstruction of any vessel, craft or instrumentalityin use of ocean or inland waterways, includingliability of the insured for personal injury, illness ordeath or for loss of or damage to the property ofanother person.

1.1. “Navigational Exposure” – basic conceptin definition.

Dean says that since the IC (InsuranceCode) does not really define what marineinsurance is, most important is to just pointout that NAVIGATIONAL EXPOSURE is thecommon thread that runs through theenumeration in Sec. 99

Related to Navigation of the ship

17This was asked in 2005, 2002, 1992, and 1982.

Note the definition of constructive total loss, totalloss, and notice of abandonment. Also know impliedwarranties and instances when vessel may proceedto a port other than its port of destination.

Definition of marine insurance under the ICand under the Insurance Act (Law w/c ICamended)

Campos: the IC gives the terms of marineinsurance a very wide coverage includingproperty exposed to risks not connectedwith navigation.

The simple clear definition in the IA wasbetter: Marine insurance is an insuranceagainst risks connected with navigation towhich a ship, cargo, freightage, profits, orother insurable interest in movableproperty may be exposed during a certainvoyage or a fixed period of time.

Insurance Act(old definition)

Insurance Code(present def’n)

Marine insurancecovers all kinds ofmovable property,but it operated onlyif such property isexposed to risksconnected withnavigation.

Covers propertyexposed to risks ofnavigation and eventhose exposed torisks not connectedwith navigation, likerisks connected withall other means oftransportation,including overlandand perhaps evenair transportaion.

Criticism of IC def’n: It’s confusing impracticaland unrealistic to apply provision intendedspecifically and only for risks of navigation (w/ccame down to us from the usages and customsof merchants) to risks connected with land andair transportation.

IC definition also didn’t serve any legal purposeby widening the scope of the definition sincemost of the special provisions in the IC relatingto marine insurance can properly apply only toships or other property exposed to navigationalrisks.

Everything covered by the new definition wouldanyway be necessarily governed by the generalprovisions of the IC, even if the old definitionhad just been retained.

Transportation insurance is concerned with theperils of property in transit as opposed to perilsat a generally fixed location.

Major divisions of transportation (marine)insurance

1) OCEAN MARINE INSURANCE. Aninsurance against risk connected withnavigation, to which a ship, cargo,freightage, profits or other insurableinterest in movable property may beexposed during a certain voyage or a fixedperiod of time.

- Scope of ocean marineinsurance: it provide protectionfor: (a) ships or hulls, (b) goodsor cargoes; (c) earnings such asfreight, passage money,commissions, or profits; (d)liability incurred by the owner orany party interested in orresponsible for the insuredproperty by reason of maritimeperils.

- All risks or losses may beinsured against, except such asare repugnant to public policy or



positively prohibited. A generalmarine insurance policy whichdoes not state the risks assuredis valid and covers the usualmarine risks; and in a marinepolicy, the general enumerationof “all other perils, etc.” extendsonly to marine damage of likekind to those enumerated. Tosustain recovery on a marinepolicy, the loss must have beenproximately caused by the riskor peril insured against.

2) INLAND MARINE INSURANCE. Coversprimarily the land or over the landtransportation perils of property shipped byrailroads, motor trucks, airplanes, andother means of transportation. It alsocovers risks of lake, river, or other inlandwaterway transportation and waterborneperils outside of those risks that falldefinitely within the ocean marine category.

- to be eligible for inland marinecontract, the risk must involvean element of transportation.Either the property is actually intransit held by persons who arenot its owners, or at a fixedlocation but an importantinstrument of transportation, oris a movable type of goodswhich is often at differentlocations.

- Divisions of inland marineinsurance:

1. Property in transit – the insurance providesprotection to property frequently exposedto loss while it is in transportation from onelocation to another

2. Bailee liability – the insurance providesprotection to persons who have temporarycustody of the goods or personal propertyof others, such as carriers, laundrymen,warehousemen, garagekeepers

3. Fixed transportation property – theinsurance covers bridges, tunnels, andother instrumentalities of transportationand communication, although as a matterof fact they are fixed property. They areinsured because they are essential to thetransportation system. Marine policies mustexclude buildings, their furniture, fixtures,fixed contents, and supplies held instorage. They invariably extend to covermore perils than those included in the usualfire policy. In order for a risk to qualify fora marine contract, there must be includedsome additional marine peril such ascollapse, collision, flood, etc.

4. Floater – in inland marine insurance, theterm is used in the sense that it providesinsurance to follow the insured propertywherever it may be located, subject alwaysto territorial limits of the contract. Althoughthe basis for eligibility is the fact thattransportation or movement of property isoften present, the condition need notnecessarily occur. Floaters have beenissued covering property that is seldommoved.

Property covered by marine policy A marine policy may cover any property or

interest therein which may be subjected to

the risks of navigation. Definition in policymay be modified or enlarged by riders,warranties, or indorsements attached tothe policy.

Term “goods and merchandise” usuallyfound in a marine policy includes all articleswhich are carried on the ship forCOMMERCIAL purposes. (Does not incl ex.Clothing of crew, food, etc). Expectedprofits from the sale of such goods mayalso be protected.

Freight or Freightage – all benefitsderived by the owner, either fromchartering (borrowing the entire ship) ofthe ship or its employment for the carriageof his own goods or those of others. This isnot covered unless expressly stated in thepolicy.

Freight Insurance doesn’t cover passagemoney payable by passenger at thecompletion of the voyage unless expresslyprovided.

Risks which may be insured against Insurer is liable for all losses PROXIMATELY

caused by the perils covered by the marinepolicy

Usually enumerated

1.2. “Perils of the Sea” and “Perils of theShip”

o Peril of the Sea- includes only casualties arising from

the violent action of the elements anddoes not cover ordinary wear andtear like the silent, natural and gradualaction of the elements on the vesselitself, or other damage usually incidentto the voyage.

- It also does not include (1) an injurydue to the violence of some marineforce if such violence was not unusualor unexpected; (2) loss of a sail duringa tempest, for neither events areunusual (but carrying away of a mastor loss of an anchor will be covered, forin such cases the storm’s violence isdefinitely unusual and not to beexpected as incident to navigation)

- Fortuitous and unusual- Must be connected with maritime

navigation- It is a relative term and the meaning

may vary with the circumstances.- It embraces all kinds of marine casualty

such as (1) shipwreck, foundering,stranding, collision, and damages doneto the ship or goods at sea by violentaction of wind and waves; (2) losesoccasioned by the jettisoning of cargo ifit is made for the purpose of saving avessel rendered unworthy during thevoyage, not through the fault of thecaptain; (3) barratry, or any willfulmisconduct on the part of the master orcrew in pursuance of some unlawful orfraudulent purpose without the consentof the owners, and to the prejudice ofthe owner’s interest. Barratry requiresa willful and intentional act in itscommission. No honest error ofjudgment or mere negligence, unlesscriminally gross, can be barratry.



- The meaning of “perils of the sea”varies with circumstances. FOREXAMPLE, a vessel designed for inlandwaters was insured. It was towed in theGulf of Mexico. The insurer was awareof the hazardous nature of the journeyand charged extra premium. If any lossoccurs, it will be held to be due to perilsof the sea although a sea-going vesselwould not have been damaged by themoderate waves encountered.

Peril of the Ship- Loss which in the ordinary course of

events results from (a) the Naturaland inevitable action of the sea; (b)ordinary Wear and Tear of the ship;(c) the negligent failure of theship’s owner to provide the vesselwith proper equipment to convey thecargo under ordinary conditions

- The insurer does not undertake toinsure against perils of the ship.

Note: Everything that happens thru the inherentvice of the thing, or by the act of the owner,master or shipper shall not be reputed a peril if nototherwise borne in the policy

Barratry - willful and intentional act on thepart of the master or crew, in pursuance ofsome unlawful or fraudulent purpose,without the consent of the owner, and tothe prejudice of his interest; Neither honesterror or judgment nor mere negligence.- May be covered by policy

Taking at sea, arrests, restraints, anddetainments of all kings, princes andpeople - extraordinary acts by asovereign authority in time of war, or underother unusual international conditions likeblockades and embargoes. Acts done in thecourse of regular proceedings not included(i.e. vessel libeled and detained for non-payment of debt) since there is nothingfortuitous about the situation.- Includes not only “arrests” caused by

political acts of a seizing state but alsoby ordinary legal processes such as alawsuit on ownership and possession ofgoods. (see Malayan Insurance Corp vCA case)

All other perils, losses and misfortunes- covers risks which are of like kind withthe particular risks which are enumeratedin the preceding part of the same clause ofthe contract

La Razon Social “Go Tiaoco y Hermanos” vUnion Insurance Society of Canton Ltd.

Facts: A drain pipe passing through the holdwhere the insured rice was stowed had becomecorroded in course of time, w/c created a hole inthe pipe. An attempt was made to cement thehole and cover it with a strip of iron but due tothe loading of the ship, this part of the pipe wassubmerged in water during the trip and waswashed out. Water flowed into the hold anddamaged the rice.Issue: WON the insurer was liable

Held: NO. A loss which in the ordinary course ofevents, results from the natural and inevitableaction of the sea, from the ordinary wear andtear of the ship, or from the negligent failure ofthe ship’s owner to provide the vessel withproper equipment to convey the cargo underordinary conditions, is not a peril of the sea, butrather a “peril of the ship.” In such a case, theremedy of the insured shipper or consignee is notagainst the insurer but against the shipowner.

Cathay Insurance v CA

Facts: Remington Industrial Sales filed for therecovery of losses incurred due to the rusting ofsteel pipes it imported from Japan while it was intransit. Cathay Insurance refused paymentclaiming that the rusting was not due to a peril ofthe sea since it was not a casualty which couldnot be foreseen.Held: There is no question that rusting of steelpipes in the course of voyage is a “peril of thesea” in view of the toll on the cargo by wind,water and salt conditions. (HANGLABO! But inany case, the SC decided through construction)We would fail to observe a cardinal rule in theinterpretation of contracts, namely, that anyambiguity therein should be construed againstthe issuer/drafter, namely, the insurer.

Malayan Insurance Corp v CA (1997)

Facts TKC Marketing was the owner/consignee ofsoya bean meal shipped from Brazil to Manila. Itwas insured by Malayan Insurance. While thevessel was in South Africa it was arrested anddetained due to a lawsuit questioning itsownership and possession. As a result, TKCMarketing filed a claim with Malayan for the non-delivery of the cargo.Issue WoN the arrest of the vessel by the civilauthority was a peril of the seaHeld The “arrest” caused by ordinary judicialprocess is deemed included among the coveredrisks. (Decision detailed the history of the “Freefrom Capture and Seizure” clause) Although theFree from Capture and Seizure” clause wasoriginally inserted in marine policies to protectagainst risks of war, its interpretation in recentyears to include seizure or detention by civilauthorities seems consistent with the generalpurposes of the clause.

Filipino Merchants Insurance Co v CA

Facts A shipment of fishmeal insured by FilipinoMerchants Co. was found to be damaged uponits unloading in the Port of Manila. Theowner/consignee filed action to recover theamount represented by the damages based onthe “all risks” clause of the policy butFil.Merchants refused claiming that there must besome casualty or accidental cause to which theloss is attributable.Held An “all risks policy” should be read literally(not technically) as meaning all risks whatsoeverand covering all losses by an accidental cause ofany kind. It has evolved to grant a greaterprotection than that afforded by the “perils”clause in order to assure that no loss can happenthrough the incident of a cause neither insuredagainst nor creating liability in the ship. Theinsured under an all risks policy has the initialburden of proving that the cargo was damaged



when unloaded from the vessel, thereafter, theburden then shifts to the insurer to show theexception to the coverage. Under this policy it issufficient to show that there was damageoccasioned by some accidental cause of any kindand there is no necessity to point to anyparticular cause.

2. INSURABLE INTEREST

Sec. 100. The owner of a ship has in all casesan insurable interest in it, even when it has beenchartered by one who covenants to pay him itsvalue in case of loss: Provided, That in this casethe insurer shall be liable for only that part of theloss which the insured cannot recover from thecharterer.

Owner of Vessel has insurable interest inthe vessel even if he has mortgaged it.However, if ship is chartered and chartereragrees to pay him its value in case of loss,it is only liable for that part of the losswhich the insured cannot recover from thecharterer.

Insurable interest of insured in marineinsurance

General Rule: there can be no validmarine insurance unless supported by aninsurable interest in the thing insured.

Exception: in certain cases of marineinsurance, the insurer will still be held liableif he agreed to insure a ship or cargo “lostor not lost”, that is, he agreed to be boundin any case, even if it would later on beproved that the insured had nothing toinsure when the contract was made.

Sec. 101. The insurable interest of the ownerof the ship hypothecated by bottomry is only theexcess of its value over the amount secured bybottomry.

Sec. 102. Freightage, in the sense of a policyof marine insurance, signifies all the benefitsderived by the owner, either from the chartering ofthe ship or its employment for the carriage of hisown goods or those of others.

Sec. 103. The owner of a ship has aninsurable interest in expected freightage whichaccording to the ordinary and probable course ofthings he would have earned but for theintervention of a peril insured against or other perilincident to the voyage.

Sec. 104. The interest mentioned in the lastsection exists, in case of a charter party, when theship has broken ground on the chartered voyage.If a price is to be paid for the carriage of goods itexists when they are actually on board, or there issome contract for putting them on board, and bothship and goods are ready for the specified voyage.

Sec. 105. One who has an interest in thething from which profits are expected to proceedhas an insurable interest in the profits.

Sec. 106. The charterer of a ship has aninsurable interest in it, to the extent that he isliable to be damnified by its loss.

In Ship Bottomry Loan – one given on the

security of the ship, on condition that theloan be repaid only if the ship arrives safelyat the port of destination; money given inadvance; if ship sinks, bottomry loanextinguished and owner doesn’t have topay it.

Bottomry loans and marine insurance canshare protection and coverage of samerisks; but cannot coextend with each other.

Where a vessel is hypothecated by way ofbottomry, the owner has an insurableinterest only in the excess of the vessel’svalue over the amount of the bottomryloan. This is so because when the vesselbottomed is lost, the owner need not paythe loan and is therefore benefited to theextent of the amount of the load obtainedand the loss he actually suffers is only thedifference bet the actual value of the vesseland the bottomry.

The lender in bottomry is entitled to receivea high rate of interest to compensate himfor the risk of losing his loan.



3. CONCEALMENT

Sec. 107. In marine insurance each party is boundto communicate, in addition to what is required bysection twenty-eight, all the information whichhe possesses, material to the risk, except such asis mentioned in Section thirty, and to state theexact and whole truth in relation to all matters thathe represents, or upon inquiry discloses orassumes to disclose.

Sec. 108. In marine insurance, information ofthe belief or expectation of a third person, inreference to a material fact, is material.

Sec. 109. A person insured by a contract ofmarine insurance is presumed to have knowledge,at the time of insuring, of a prior loss, if theinformation might possibly have reached him in theusual mode of transmission and at the usual rate ofcommunication.

Sec. 110. A concealment in a marineinsurance, in respect to any of the followingmatters, does not vitiate the entire contract, butmerely exonerates the insurer from a loss resultingfrom the risk concealed:(a) The national character of the insured;(b) The liability of the thing insured to captureand detention;(c) The liability to seizure from breach offoreign laws of trade;(d) The want of necessary documents;(e) The use of false and simulated papers.

Concealment in marine insurance is thefailure to disclose any material fact or

circumstance which in fact or law is within,or which ought to be, within the knowledgeof one party and of which the other has noactual or presumptive knowledge.

The rules are stricter than in the case offire insurance because, in the latter, theinsurer can easily obtain informationregarding the property insured. In marineinsurance, the vessels insured are oftenabsent or afloat. Under Section 107, it issufficient that the insured is in possessionof the material fact concealed although hemay not be aware of it.

Opinions or expectations of third persons:General Rule in insurance: the

insured is not bound to communicateinformation of his own judgment and whathe learns from a third person.

In marine insurance: the insured isbound to communicate the beliefs/ opinionsand expectations of third persons, as longas the information is in reference to amaterial fact.

Presumptive knowledge by insured of priorloss: Sec. 109 establishes a rebuttablepresumption of knowledge of prior loss onthe part of the insured, on the recognitionof the fact that communications technologynowadays makes it possible for the insuredto be apprised of the loss of his vesselimmediately after it occurs. The insured isnot bound, however, to use all accessiblemeans of information at the very lastinstant of time to ascertain the condition ofthe property insured.

When concealment does not vitiate entirecontract

General Rule in insurance:concealment of a material fact entitles theinjured party to rescind.

In marine insurance: if loss happensunder any of the conditions in Section 110and such was concealed, the insurer is

In Ship In Goods Shippedand Profits

In Freightage

Owner ofthe Ship

-Has insurable interestin ALL cases even ifthe ship has beenchartered by one whohas agreed to pay, itsvalue in case of loss.In this case, insurer’s(of the ship owner)liability is limited to thepart of the loss whichinsured cannot recoverfrom the charterer.- If ship is subjected tobottomry loan,Owner’s interest isonly in excess of valueover amount securedby bottomry.

Interest in goods shipcarries to the extentthat he may be liablefor their loss, but NOTTO EXCEED THE VALUEthereof

-Has insurable interest inexpected freightage w/caccdg to the ordinaryand probable course ofthings he would haveearned but for theintervention of a perilinsured against or otherperil incident to thevoyage- If Freight is Payableupon the Completion ofvoyage- OWNER hasinsurable interest

Charterer/Shipper

May take out policycovering insurableinterest, which can beonly to the extent thathe may be damnifiedby the loss

Has insurable interestin goods since they willsuffer damage in caseof loss

Freight PAID inADVANCE – Charterer orShipper has insurableinterest



merely exonerated from liability. Theinsurer, however, remains liable to pay fordamage or loss brought by other perils ofthe sea.

REPRESENTATION

Sec. 111. If a representation by a personinsured by a contract of marine insurance, isintentionally false in any material respect, or inrespect of any fact on which the character andnature of the risk depends, the insurer may rescindthe entire contract.

Sec. 112. The eventual falsity of arepresentation as to expectation does not, in theabsence of fraud, avoid a contract of marineinsurance. (Note: Will be void if there is fraud)

Applicability of rules on representation tomarine insurance:

The rules on representation are applicable tomarine insurance, like the rules on distinctionbetween representations and warranties,construction of representations, and avoidance ofthe policy based on a substantial misrepresentationof any material fact or circumstance. The test ofmateriality of representations also applies inmarine insurance.

Anything which concerns the state of thevessel at any particular period of hervoyage are material. Statements of thenature and amount of cargo, or whetherthe vessel was overloaded, or where theinsurer did not rely thereon, have beenheld to be immaterial.

Effect of falsity of representation as toexpectation:

Representations of expectations are statementsof future facts or events which are in their naturecontingent and which the insurer is bound to knowthat the insured could not have intended to stateas known facts, but as mere expectations orintentions. Unless made with fraudulent intent,failure of the fulfillment of a representation ofexpectation is not a ground for rescission. Theymust be carefully distinguished from promissorywarranties.

Special Rule in Marine Insurance Substantial truth of any material statement

is NOT sufficient Law requires the insured to state the exact

and whole truth in relation to all mattersthat he represents, or upon inquiry,discloses or assumes to disclose.

Due to nature of contract

Rules on Concealment and Misrepresentationare STRICTER in marine insurance. Why?

Failure to disclose any material fact orcircumstance which in law or fact is within,or which ought to be within the knowledgeof one party and of which the other has noactual or presumptive knowledge.

Failure to disclose the ff. will give theinsurer the right to rescincd (No moreliability).- Material facts within knowledge of party

- All information he posessess whichare material to risk, except as ismentioned in Sec. 30 (cf with Sec. 28which only require communication offacts which are material to the contractas to which he makes no warranty)

- Beliefs and expectations of 3rd personsin reference to a material fact.

Sec. 28. Each party to a contract ofinsurance must communicated to the other, in goodfaith, all facts within his knowledge which arematerial to the contract and as to which he makesno warranty, and which the other has not themeans of ascertaining.

Sec. 30. Neither party to a contract ofinsurance is bound to communicate information ofthe matters following, except in answer to theinquiries of the other:(a) Those which the other knows;(b) Those which, in the exercise of ordinarycare, the other ought to know, and of which theformer has no reason to suppose him ignorant;(c) Those of which the other waivescommunication;(d) Those which prove or tend to prove theexistence of a risk excluded by a warranty, andwhich are not otherwise material; and(e) Those which relate to a risk excepted fromthe policy and which are not otherwise material.

TEST of Materiality: Whether the concealed factcaused the loss and not its probable influence onthe other party in deciding whether or not to enterthe contract.

Representations: Insured must state the exactand whole truth in relation to all matters that herepresents of upon inquiry discloses or assumes todisclose.

False representations:1. Any misrepresentation of a material fact

made with fraudulent intent2. The character and nature of the risk

depends on the fact misrepresentedEffect: Insurer may RESCIND the contractException: Eventual falsity of a representation asto expectation, in the absence of fraud, does notavoid the contract.

Coastwise v CA

Facts: Pag-Asa Sales had molasses transportedfrom Negros to Manila using Coastwise LighterageCorp’s open barges. However, one of the bargessank when it hit an unknown sunken object whileapproaching Manila Bay Port. Because of this, Pag-Asa rejected the shipment as a total loss and Phil.General Insurance Company paid for the loss.PhilGen then filed an action against CoastwiseLighterage seeking to recover the amount it paidPag-asa. Coastwise claims that it was unaware ofthe hidden danger in its path, thus it becameimpossible for Coastwise to avoid it, even with theexercise of extraordinary diligence.Held: Coastwise’s assertion is belied by theevidence. The patron of the vessel which sankadmitted that he was not licensed thus, it cannotsafely claim to have exercised extraordinary



diligence by placing a person whose navigationalskills are questionable at the helm of the vessel w/cmet the accident. Logically, a person w/o license tonavigate lacks not just the skill to do so, but alsothe familiarity with the usual and safe routes takenby seasoned and legally authorized persons.

4. IMPLIED WARRANTIES

Sec. 113. In every marine insurance upon aship or freight, or freightage, or upon any thingwhich is the subject of marine insurance, awarranty is implied that the ship is seaworthy.

Sec. 114. A ship is seaworthy whenreasonably fit to perform the service and toencounter the ordinary perils of the voyagecontemplated by the parties to the policy.

Sec. 115. An implied warranty ofseaworthiness is complied with if the ship beseaworthy at the time of the of commencement ofthe risk, except in the following cases:(a) When the insurance is made for a specifiedlength of time, the implied warranty is not compliedwith unless the ship be seaworthy at thecommencement of every voyage it undertakesduring that time;(b) When the insurance is upon the cargowhich, by the terms of the policy, description of thevoyage, or established custom of the trade, is to betranshipped at an intermediate port, the impliedwarranty is not complied with unless each vesselupon which the cargo is shipped, or transhipped,be seaworthy at the commencement of eachparticular voyage.

Sec. 116. A warranty of seaworthinessextends not only to the condition of the structure ofthe ship itself, but requires that it be properlyladen, and provided with a competent master, asufficient number of competent officers andseamen, and the requisite appurtenances andequipment, such as ballasts, cables and anchors,cordage and sails, food, water, fuel and lights, andother necessary or proper stores and implementsfor the voyage.

Sec. 117. Where different portions of thevoyage contemplated by a policy differ in respect tothe things requisite to make the ship seaworthytherefor, a warranty of seaworthiness is compliedwith if, at the commencement of each portion, theship is seaworthy with reference to that portion.

Sec. 118. When the ship becomesunseaworthy during the voyage to which aninsurance relates, an unreasonable delay inrepairing the defect exonerates the insurer on shipor shipowner's interest from liability from any lossarising therefrom.Sec. 119. A ship which is seaworthy for thepurpose of an insurance upon the ship may,nevertheless, by reason of being unfitted to receivethe cargo, be unseaworthy for the purpose of theinsurance upon the cargo.

Sec. 120. Where the nationality or neutralityof a ship or cargo is expressly warranted, it isimplied that the ship will carry the requisitedocuments to show such nationality or neutralityand that it will not carry any documents which castreasonable suspicion thereon.

Warranty, in marine insurance, has beendefined as a stipulation, either expressed orimplied, forming part of the policy as tosome fact, condition or circumstancerelating to the risk.

Implied Warranties - conditions upon theunderwriter's liability for the risks assumedin every insurance upon any marineventure whether of vessel, cargo, orfreight.

4.1. Implied warranties in marine insurancea) Seaworthinessb) Deviationc) Other Implied Warranties:

- Carry the requisite documents to shownationality or neutrality

- Not engage in any illegal ventured) it is also impliedly warranted that theinsured has an insurable interest in the subjectmatter insured

General provisions on warranties also applyto marine insurance

ONLY marine insurance has IMPLIEDWARRANTIES provided by law

a) Seaworthiness:Meaning

Ship is seaworthy when reasonably fit toperform the services and to encounter theordinary perils of the voyage contemplatedby the parties to the policy.

NOT absolute guarantee that vessel willsafely meet all possible perils

CIRCUMSTANCES determine WON vessel isreasonably seaworthy

Seaworthiness extends not only tocondition of ship’s structure, but requires- ship to be properly laden- competent master- sufficient number of competent

officers and crew- requisite appurtenances and

equipment (ballasts, cables, anchors,cordage, sails, food, water, fuel, lights,necessary/proper stores andimplements for the voyage)

- In a fit state as to repair, equipment,crew and in all other respects toperform the voyage insured and toencounter the ordinary perils ofnavigation

- Must also be in a suitable conditionto carry the cargo put on board orintended to be put on board

Such warranty can be excluded only byclear provisions of the policy

Where seaworthiness admitted by insurer:a. Admission is stipulated in the contract:

the issue of seaworthiness cannot beraised by the insurer without showingconcealment or misrepresentation bythe insured.

b. The admission may mean:



(1) that the warranty ofseaworthiness is to be taken asfulfilled; or(2) that the risk of unseaworthinessis assumed by the insurer

c. Insertion of waiver clauses in cargopolicies is in recognition of the realisticfact that cargo owners cannot controlthe state of the vessel.

Where unseaworthiness unknown to ownerof cargo insured:a. SUBJECT MATTER IS CARGO: the

implied warranty of seaworthinessattaches to whoever is insuring thecargo, WON he is the shipowner.

b. Lack of knowledge by the insured isimmaterial in ordinary marineinsurance and is not a defense in orderto recover on the policy.

c. Since the law provides for an impliedwarranty, it becomes the obligation of acargo owner to look for a reliablecommon carrier which keeps its vesselsin seaworthy condition. Shipper mayhave no control over the vessel but hehas full control in the choice of thecommon carrier that will transport hisgoods.

d. Cargo owner may also enter into acontract of insurance which specificallyprovides that the insurer answers notonly for the perils of the sea but alsoprovides for coverage of perils of theship.

e. A charterer of a vessel has noobligation before transporting its cargoto ensure that the vessel complied withall the legal requirements. The dutyrests upon the common carrier simplyfor being engaged in "public services."

f. Because of the implied warranty ofseaworthiness, shippers are notexpected, when transacting withcommon carriers, to inquire into thevessel's seaworthiness, genuineness ofits licenses and compliance with allmaritime laws.

Seaworthiness is a relative term dependingupon the nature of ship (must be in a fitstate as to repair, equipment, crew and inall other respects to perform the voyageinsured and encounter the ordinary perils;suitable condition to carry cargo), natureof voyage (determines WON vessel is well-fitted), nature of service (nature of cargoshould be determined; the vessel should bereasonable capable of safely carrying thecargo to the port of destination).

Failure of a common carrier to maintain inseaworthy condition the vessel is a clearbreach of its duty prescribed in Article1755, CC.

It is not necessary that the cargo itself shallbe seaworthy.

When warranty deemed complied with;exceptions

Implied warranty of seaworthiness isdeemed complied with if ship is seaworthyAT THE TIME OF THE COMMENCEMENT OFTHE RISK; What matters is that at the startof the voyage insured, ship is seaworthy.Assured makes no warranty that vessel will

continue to be seaworthy, or that the crewwon’t be negligent- Principle Behind this: If vessel, crew, andequipment be originally sufficient, theassured has done all that he contracted todo (not anymore responsible for futuredeficiency).

Exceptions: Secs. 115a, 115b, 117- (115a) In case of TIME policy –

insurance made for a specified lengthof time, ship must be seaworthy at thecommencement of every voyageshe may undertake

- (115b) in case of Cargo policy –Insurance is upon the cargo which bythe terms of the policy, description ofthe voyage, or established custom ofthe trade, is to be transshipped18 at anintermediate port; each vessel uponwhich the cargo is shipped must beseaworthy at the commencement ofeach particular voyage

- (117) In case of Voyage policycontemplating a voyage in differentstages – ship must be seaworthy at thecommencement of each portion; stagesmust be separate and distinct in orderto have a different degree ofseaworthiness for particular parts.

Scope of Seaworthiness of vessel1. INSURANCE ON CARGO: it must be properlyloaded, stowed, dunnaged, and secured so as notto imperil the navigation of the vessel to causeinjury to the vessel or cargo.2. INSURANCE ON VESSEL: ship is notunseaworthy because of some defect in loading orstowage which is easily curable by those on board,and was cured before the loss.3. DECK CARGO: carrying it raises a presumptionof unseaworthiness which can be overcome only byshowing affirmatively that the deck cargo was notlikely to interfere with the due management of thevessel.

Where ship becomes unseaworthy duringvoyage

General Rule: There is no impliedwarranty that the vessel will remain in a seaworthycondition throughout the life of the policy.

1. When the vessel becomes unseaworthyduring the voyage, it is the duty of themaster, as the shipowner's representative,to exercise due diligence to make itseaworthy again, and if loss should occurbecause of his negligence in repairing thedefect, the insurer is relieved of liability butthe contract of insurance is not affected asto any other risk or loss covered and notcaused or increased by such particulardefect.

18Transshipment - the act of taking cargo out of one ship and

loading it in another or the transfer of goods from the vesselstipulated in the contract of affreightment to another vessel beforethe place of destination named in the contract has been reachedor the transfer for further transportation from one ship orconveyance to another. Fact of transshipment is not dependentupon the ownership of the transporting conveyances but rather onthe fact of actual physical transfer or cargoes from one vessel toanother. Transshipment of freight without legal excuse, howevercompetent and safe the vessel into which the transfer is made, isan infringement on the right of the shipper and subjects the carrierto liability if the freight is lost even by a cause otherwise excepted.



2. Benefit of exoneration is given only to an"insurer on ship or shipowner's interest."

Due diligence not a defense Warranty precludes any defense that

insured had exercised due diligence tomake the ship seaworthy.

SHIP MUST ACTUALLY BE SEAWORTHY

Seaworthiness as to cargo Ship may be seaworthy for purpose of

insurance on the ship, but may still beunseaworthy for purpose of insurance ofthe cargo (ex. Ship with porthole only 1foot above waterline may be fit to travelthe sea, but not fit to carry wheat or ricebecause water will go into the ship via theporthole and damage the cargo)

Roque v IAC

Facts: Manila Bay Lighterage Corp, a commoncarrier, entered into a contract w/ Roquewhereby Manila Bay Lighterage would carry onboard its barge Roque’s logs from Palawan toManila. The logs were insured by PioneerInsurance. However, the barge sank. It wasfound that the barge was not seaworthy (one ofthe hatches was left open, there was a leak in thebarge). Pioneer refused to pay damages becauseof the breach of the implied warranty onseaworthiness. Roque’s defense is that as a mereshipper of cargo, they have no control of the shiptherefore seaworthiness has nothing to do withthe matter of insurance over the logs.Issue: WON the implied warranty ofseaworthiness also applies to marine insuranceon cargo.Held: YES For every contract of insurance whichis a subject of marine insurance, a warranty isimplied that the ship will be seaworthy. Since thelaw provides for an implied warranty ofseaworthiness in every contract of marineinsurance, it becomes the obligation of a cargoowner to look for a reliable common carrier whichkeeps its vessels in seaworthy condition. Theshipper of the cargo may have no control overthe vessel but he has full control in the choice ofthe common carrier that will transport his goods.

Delsan Transport v CA

Facts: Caltex entered into a contract ofaffreightment with Delasan Transport Lines totransport Caltex’s fuel oil from its refinery todifferent parts of the country. However, the shipto Zamboanga which was insured by AmericanHome Corp. sank. American Home paid Caltexrepresenting the insured value of the lost cargo.American Home, exercising its right ofsubrogation, demanded of Delsan the same amtit paid to Caltex but Delsan refused. It was foundthat the chief mate of the vessel was notqualified under the Phil. Merchant Marine Rules.Issue: WON the payment made by AmericanHome to Caltex amounted to admission that thevessel was seaworthyHeld: NO. The payment made by AmericanHome operates as a waiver of its right to enforcethe term of the implied warranty against Caltexunder the insurance policy. However, the samecannot be validly interpreted as an automaticadmission of the vessel’s seaworthiness byAmerican home as to foreclose recourse against

Delsan for any liability under its contractualobligation as a common carrier. The fact ofpayment grants the private respondentsubrogatory right w/c enables it to exercise legalremedies that would otherwise be available toCaltex as owner of the lost cargo..

b) Voyage and Deviation

Sec. 121. When the voyage contemplated bya marine insurance policy is described by theplaces of beginning and ending, the voyage insuredin one which conforms to the course of sailing fixedby mercantile usage between those places.

Sec. 122. If the course of sailing is not fixedby mercantile usage, the voyage insured by amarine insurance policy is that way between theplaces specified, which to a master of ordinary skilland discretion, would mean the most natural, directand advantageous.

Sec. 123. Deviation is a departure from thecourse of the voyage insured, mentioned in the lasttwo sections, or an unreasonable delay in pursuingthe voyage or the commencement of an entirelydifferent voyage.

Sec. 124. A deviation is proper:(a) When caused by circumstances over whichneither the master nor the owner of the ship hasany control;(b) When necessary to comply with a warranty,or to avoid a peril, whether or not the peril isinsured against;(c) When made in good faith, and uponreasonable grounds of belief in its necessity toavoid a peril; or(d) When made in good faith, for the purposeof saving human life or relieving another vessel indistress.

Sec. 125. Every deviation not specified in thelast section is improper.

Sec. 126. An insurer is not liable for any losshappening to the thing insured subsequent to animproper deviation.

What Voyage Insured

Policy What ship must do

Names:1. Ports of

depature2. Ports of

destination3. Intermediate

ports of call

Vessel insured MUST followcourse SPECIFIED

Names:1. Ports of

departure2. Ports of

destination -Several routesto destination

1. Voyage insured is the onewhich conforms to courseof sailing fixed bymercantile usage betweenports (Sec. 121)

2. if not fixed by mercantileusage, course betweenports specified which to amaster of ordinary skilland discretion would be



most natural, direct, andadvantageous (Sec. 122)

Rule:- Fixed Route- Usual Custom- Discretionary (most

natural)

Deviation (Sec. 123) Is any unexcused departure from the

regular course or route of the insuredvoyage or any other act which substantiallyalters the risk constitutes a deviation

Departure from course of ship Unreasonable delay in pursuing voyage Commencement of entirely different

voyage

Proper and Improper Deviation PROPER deviation – those allowed by law

(Sec. 124) IMPROPER deviation – all other deviation

not mentioned in Sec. 124; any losssuffered by thing insured subsequent toimproper deviation exonerates insurer fromliability, regardless of whether deviationincreased risk or not

WHY does improper deviation exonerate?Because insured novated contract withoutconsent of insurer!

TEST: WON deviation was proper or not(NOT WON risk was increased ordiminished)

General Rule: when the voyage covered bythe policy is described by the places of beginningand ending, the voyage insured is the one whichconforms to the course of sailing fixed bymercantile usage between the places, or in absenceof the latter, the way between the places that to amaster of ordinary skill and discretion would meanthe most natural, direct and advantageous route.The insurer is not liable for a loss after an improperdeviation from the “usual” course or the “best”course [terms in quotation mine].

Exception: the insurer is not exonerated fromliability for loss happening after proper deviation.The effect is as if there was no deviation.

When deviation is proper No vitiation of the policy if the deviation is

justified or caused by actual necessitywhich is equal in importance to suchdeviation.

Such compulsory deviations are risksimpliedly assumed by the underwriter.While deviation to save property is notjustified, unless it is to save anothervessel in distress, a deviation for thepurpose of saving life does not constitutea breach of warranty. Justification rests onground of humanity.

Deviation to repair damaged ship If during voyage, vessel becomes so

damaged as to render it unsafe withoutundergoing repairs, insurer is not relievedby deviation from the ship’s course in orderto make the nearest port for such repairs(can fall under “avoid peril”)

Master must consider distance, facilities ofport, quickness new material can beprocured, etc. (not necessarily nearest

port, but must be most proper port forrepair).

Once repair is made, ship must pursue newcourse without deviation in shortest andmost expeditious manner (otherwise, this isdeviation and will absolve insurer)

Waiver of warranty against improperdeviation

Done by expressly permitting waiver inpolicy “at a PREMIUM to be hereafterarranged,” provided DUE NOTICE be givenby insured upon recipt of advice of suchdeviation.

Requirement: EXPRESSED in policy.PREMIUM paid, NOTICE given

c) Other Implied Warranties When Nationality or Neutrality of ship or

cargo is expressly warranted, it’s impliedship will carry requisite documentsshowing nationality or neutrality andwill not carry documents that will causereasonable suspicion- Nationality - doesn’t mean that the ship

was built in such country, but that theproperty belongs to a subject thereof

- Neutrality – property insured belongs toneutrals; a warranty of neutralityimports that the property insured isneutral in fact, and in appearance andconduct, that the property shall belongto neutrals, that no act of insured or hisagent shall be done which can legallycompromise its neutrality; warrantyextends to insured's interest in all theproperty intended to be covered by thepolicy, but not to the interest of a thirdperson not covered by the policy.

A warranty of national character may begathered from the language of the policyalthough an exception has been madewhere the fact recited could have norelation to the risk.

Implied that ship will not engage in anyventure which is illegal under the laws ofthe country where contract is made orbefore whose courts question may come;CANNOT be waived since rule of publicpolicy.

Implied warranty to carry requisitedocuments:1) Warranty of nationality also requiresthat the vessel be conducted anddocumented as of such nation, a breach ofwarranty in either particular will avoid thepolicy.2) Warranty is a continuing one, change ofnationality is a breach of the warranty, butwarranty is not broken by a contract forsale and transfer to an alien at a futuredate.3) Proper papers must be produced whennecessary to prove ownership. Productionnot excused because the papers were lostby the fault of the master.

5. LOSS

5.1. Kinds covered, Actual and ConstructiveLoss



Sec. 127. A loss may be either total orpartial.

Sec. 128. Every loss which is not total ispartial.

Sec. 129. A total loss may be either actual orconstructive.

Sec. 130. An actual total loss is cause by:(a) A total destruction of the thing insured;(b) The irretrievable loss of the thing bysinking, or by being broken up;(c) Any damage to the thing which renders itvalueless to the owner for the purpose for which heheld it; or(d) Any other event which effectively deprivesthe owner of the possession, at the port ofdestination, of the thing insured.

Sec. 131. A constructive total loss is onewhich gives to a person insured a right to abandon,under Section one hundred thirty-nine.

Sec. 132. An actual loss may be presumedfrom the continued absence of a ship without beingheard of. The length of time which is sufficient toraise this presumption depends on thecircumstances of the case.

Sec. 133. When a ship is prevented, at anintermediate port, from completing the voyage, bythe perils insured against, the liability of a marineinsurer on the cargo continues after they are thusreshipped.Nothing in this section shall prevent an insurerfrom requiring an additional premium if the hazardbe increased by this extension of liability.

Sec. 134. In addition to the liabilitymentioned in the last section, a marine insurer isbound for damages, expenses of discharging,storage, reshipment, extra freightage, and all otherexpenses incurred in saving cargo reshippedpursuant to the last section, up to the amountinsured.Nothing in this or in the preceding section shallrender a marine insurer liable for any amount inexcess of the insured value or, if there be none, ofthe insurable value.

Sec. 135. Upon an actual total loss, a personinsured is entitled to payment without notice ofabandonment.

Sec. 136. Where it has been agreed that aninsurance upon a particular thing, or class ofthings, shall be free from particular average, amarine insurer is not liable for any particularaverage loss not depriving the insured of thepossession, at the port of destination, of the wholeof such thing, or class of things, even though itbecomes entirely worthless; but such insurer is

liable for his proportion of all general average lossassessed upon the thing insured.

Sec. 137. An insurance confined in terms toan actual loss does not cover a constructive totalloss, but covers any loss, which necessarily resultsin depriving the insured of the possession, at theport of destination, of the entire thing insured.

KINDS of LOSS

1) Total – underwriter is liable for the whole of theamount insured

- may be actual or absolute OR constructiveor technical

2) Partial (refer to gen. and part average)TOTAL LOSS (any loss not total is partial)

a. Actual Total Loss1. Total destruction thing insured2. Irretrievable loss of thing by

sinking or by being broken up3. Any damage to thing which renders it

valueless to owner for the purpose for whichthe owner held it Loss by sinking may not be irretrievable,

but there’s still actual total loss if thingbecomes valueless to owner for purpose forwhich he held it

TOTAL LOSS is cost of RETRIEVAL equal toor more than original value

4. Any other event which effectively deprivesowner of possession, at the port of destinationof thing insured.

5. Under Section 130, the complete physicaldestruction of the subject matter as in the caseof fire is not essential to constitute an actualtotal loss ([b], [c], [d]). Such loss may existwhere the form and specie of the thing isdestroyed although the materials of which itconsisted still exist (Pan Malayan v. CA [91]).For example, when repairs would be moreexpensive than the original cost of the vesseland effective deprivation of use and possessionof property.

Presumed from continued absence of shipwithout being heard of (for length of timesufficient to raise such presumption)

General Rule: if a vessel is not heard of atall within a reasonable time after sailing or for areasonable time after she was last seen, she will bepresumed to have been lost from a peril insuredagainst.

How presumption is established:Plaintiff must prove that vessel left the port ofoutfit for the voyage insured. Then, he must showthat the vessel was not heard of at port ofdeparture after sailing, without calling witnessesfrom port of destination to show she never arrivedthere. No rule as to the time after which missingvessel is presumed lost—depends on thecircumstances of the case.

Insured has ABSOLUTE right to claim wholeamount of insurance even without notice ofabandonment. Once he receives amount, ittakes the place of the vessel and must beused to pay for any damage for which it beheld liable.



b. Constructive (or Technical) total loss;Abandonment (refer to the next few sections)

Loss, although not actually loss, is ofcharacter that the insured is entitled, if hethinks fit, to treat it as total byabandonment.

Gives the insured the right to abandon thething insured by relinquishing to the insurerhis interest in such a thing, entitling him torecover for a total loss thereof

Right to abandon granted by law if the perilinsured against causes a loss of more than¾ the value of the thing insured.

Insurer acquires all rights over the thinginsured

If abandonment is not proper or properlymade, the insurer would still be liable asupon the Actual total loss, deducting fromthe amount any proceeds from the thinginsured which may have come to the handsof the insured.

Why differentiate between the 2 types of totalloss: the kind of loss is the basis for theapplication of the doctrine of abandonment(Section 138, 139). In actual total loss, noabandonment necessary; but if loss merelyconstructively total, an abandonment becomesnecessary to recover as for a total loss.

Stipulation of “actual total loss” only strictlyconstrued: an insurance against “total lossonly” covers any total loss, actual orconstructive, although there is authority to thecontrary. If against “absolute” or “actual totalloss, insurer not liable for constructive loss.

Liability of insurer in case of partial loss ofship or its equipment There is a deduction from the cost of repairs of

“one third new for old”, on the theory that thenew materials render the vessel much morevaluable than it was before the loss. Whenrepairs are made, one-third of the cost of therepair is laid upon the insured as his burden,and the implied agreement under the policy isthat in case of damage to the ship by a perilwithin the policy, the loss shall be estimated attwo-thirds of the cost of repairs fairly executedor one-third new for old, as is commonlyexpressed.

IF VOYAGE CAN’T BE COMPLETED (See Sec.133)

In Insurance Act (Sec.126), if ship isprevented from leaving an intermediateport by perils insured against, the mastermust make every exertion to procure, inthe same or contiguous port, another shipfor the purpose of conveying the cargo toits destination and the liability of a marineinsurer thereon continues after they arethus reshipped. However, such anobligation was deleted from the InsuranceCode. Campos says that this may be eitheran unintentional omission/error orintentional. In any case, in case ofreshipment, the insurer is liable:

1. For any loss which may take place ongoods until they are reshipped if voyagecannot be completed in any insurance uponcargo – insurer may required additionalpremium if the hazard be increased by theextension of liability (Sec. 133)

2. Insurer also liable for expenses necessaryto complete the transportaion of cargoreshipped; damages, expenses ofdischarging, storage, reshipment, extrafreiathage, and all other expenses incurredin saving cargo reshipped – such liability,however, cannot exceed the amount ofinsurance (Sec 134)

General Rule: if the original ship bedisabled, and the master, acting with a wisediscretion, as the agent of the merchant and theshipowner, forwards the cargo in another ship,such necessary and justifiable change of ship willnot discharge the underwriter on the goods fromliability for any loss which may take place on goodsafter such reshipment.

Exception: the general rule is notobligatory if the crew had to procure a vessel fromdistant places and there are serious impediments inthe way of putting the cargo on board.

Subsidiary Rule: additional premium maybe required if the hazard is increased by extensionof liability.

LIABILITY OF INSURER IN CASE OF AVERAGEAverage – any extraordinary or accidentalexpenses incurred during the voyage for thepreservation of the vessel, cargo or both and alldamages to the vessel and cargo from the time it isloaded and the voyage commenced until it endsand the cargo unloaded

Two kind of Averages (Under Admiralty Law):a. Particular Average – partial loss caused by theperil insured against which is not a general averageloss out of the ordinary use of the thing

Not everyone benefits. Not intentionally caused to prevent a

common danger Insurer liable for the particular average

unless policy excludes it. Liability is limited to the proportion of the

contribution attaching to his policy valuewhere this is less than the contributingvalue of the thing insured.

Liability for particular insuranceGeneral Rule: an insurer is liable for both

general and particular average loss.Exception: parties can stipulate, as it

often happens in marine insurance, that the insurerwill not be liable for loss, partial or total, arisingfrom perils of the sea, of a certain class of goodswhich are perishable or peculiarly subject todamage.

Exception: they may also agree to exemptparticular average. Then, insurer is liable only forgeneral average and not for particular averageEXCEPT if the particular average loss has the effectof “depriving insured of possession at the port ofdestination of the whole” of the thing insured.

b. General Average – common benefit (toeveryone) INTENTIONAL damage to save themajority thing (something is sacrificed).

Applies only when it is SUCCESSFUL Includes all damages and expenses which

are deliberately caused in order to save thevessel, its cargo or both at the same time,from a real and known risk

Therefore, when everyone benefits,everyone has to spend for it, so the personwhose cargo was sacrificed cannot recover



everything because part of that will go tothe pro-rata damage to save the majority

“General average” contribution is a devicefor a limited distribution of loss. Loss is protanto made up by proportionate or “generalaverage” contributions from owners ofinterests benefited by the sacrifice.

A principle of customary law, independentof contract

Ex. Entering another port for repairs,rehandling of cargo, and jettisoning ofgoods to lighten vessel in case of danger ofshipwreck

Gives rise to right of owner to contributionform those benefited thereby or frominsurer

Formalities in Art. 813 and 814 of the Codeof Commerce must be complied with toincur expenses and cause damagescorresponding to gross average.

Liability of Insurer: If owner is insured,he has the alternative of seeking from hisinsurer, subrogating the latter to his saidright of contribution. He loses thisalternative, however, if he neglects orwaives his right to such contribution

Exception: There can be no recovery forgeneral average loss against the insurer:

1. After the separation of the interestsliable to the contribution

2. When the insured has neglected orwaived his right to contribution.

Requisites for Gen. Ave to exist1. There must be common danger to

ship and cargo2. For common safety, part of the

vessel or cargo is sacrificeddeliberately

3. From the expenses or damagescaused follows the saving of thevessel and cargo

4. That the expenses or damagesshould have been incurred orinflicted after taking the properlegal steps.

5. Made by the master or upon hisauthority

6. Not caused by any fault of partyasking for contribution

7. Necessary Liability of insurer for general average

Art. 859, Code of Commerce. The underwriters ofthe vessels, of the freightage and of the cargo shallbe obliged to pay for the indemnity of the grossaverage in so far as is required of each one ofthese objects respectively.

The above provision is mandatory in terms, andinsurers, whether for vessel, cargo or freightage,are bound to contribute to the indemnity of thegeneral average. This places insurer on samefooting as others who have an interest in the vesselor cargo, at time of occurrence of the generalaverage and who are compelled to contribute.

Formula for computing liability ofinsurer

Amt of insurance____ x General Aveage =Proportion of GAL forTotal amt or value involved Loss (GAL)which insurer is liable

Limit as to liability of insurer forgeneral average loss

It is limited to the proportion of contributionattaching to his policy value where this is less thanthe contributing value of the thing insured. In otherwords, the liability of the insurer shall be less thanthe proportion of the general average loss assessedupon the thing insured where its contributing valueis more than the amount of the insurance. In sucha case, the insured is liable to contribute ratablywith the insurer to the indemnity of the generalaverage:

Philippine Manufacturing Co v InsuranceSociety of Canton Ltd.

Facts: The insured vessel owned by Phil.Manufacturing Co. sand due to a typhoon.Despite the offer of Phil Man. To abandon thevessel as an absolute total loss, the insurer, Ins.Society of Canton refused it and required that theship be salvaged. After several futile attempts,the ship was finally raised about two months laterand was repaired. The cost of salvage and repairwas substantially equal to the original cost of thevessel.Issue: WON Insurance Society can be held fortotal loss of the vessel even after its recoveryHeld: YES. Insurer liable for total loss becausewhile the ship was in the bottom of the sea, itwas of no value to the owner. To render itvalueless to the insured, it is no necessary thatthere be an actual or total loss or destruction ofall the different parts of the entire vessel.

Choa v CA

Facts: Choa imported some lactose crystals fromHolland. The goods were insured with FilipinoMerchants against all risks. Upon arrival inManila, it was found that out of the 600 bags,403 were in bad order. Choa filed a claim for theloss but Fil. Mer rejected.Issue: WON an “all risks” coverage covers onlylosses occasioned by fortuitous eventsHeld: NO. An all risk insurance policy insuresagainst all cause of conceivable loss or damageexcept as otherwise excluded in the policy or dueto fraud. The terms of the policy are clear andrequire no interpretation. An “all risks” provisioncreates a special type of insurance w/c extendscoverage to risks not usually contemplated andavoids putting upon the insured the burden ofestablishing that insurer can avoid coverage upondemonstrating that a specific provision expresslyexcludes the loss from coverage.

Aboitiz Shipping v PHILAMGEN

Facts: Marinduque Mining Industrial Crop hadshipped from the US a shipment of one skidcarton parts for valves. When cargo arrived inManila, it was deposited in the office of AboitizShipping Corp for transshipment to Nonoc Island.However, before it was transshipped, said cargowas pilfered. Marinduque filed a claim againstAboitiz in the amount of the pilfered cargo. Italso filed for the same amount against Philippine

Amount of insurance __ X Proportion of general Limit of liabilityValue of the thing average loss assessed = of insurer

insured upon thing insured



American General Insurance Co (Phil-Am), itsinsurer.Issue: WON Aboitiz should be held liable for thepilfered cargo.Held: YES. The questioned shipment is coveredby a continuing open insurance coverage fromthe time it was loaded in the US to the time itwas delivered to the possession of Aboitiz in itsManila office. Aboitiz’s contention is that it couldnot be held liable for the pilferage as it wasstolen even before it was loaded on the vessel.This is untenable as the logs were in itspossession before it was pilfered.

Oriental Assurance v CA

Facts: Panama Sawmill Co had logs shipped fromPalawan aboard the barges of TranspacificTowage Inc. It was insured with OrientalAssurance Corp and loaded on 2 barges.However, during the voyage, 497 pieces of the598 pieces loaded on one of the barges was lost.Issue: WON Panama can demand payment forconstructive loss of the logs on one of the bargesHeld: NO. The logs involved, although placed intwo barges, were not separately valued by thepolicy, nor separately insured. Resultantly, thelogs lost in the barge in relation to the totalnumber of logs loaded on the same barge can notbe made the basis for determining constructivetotal loss. The logs having been insured as oneinseparate unit, the correct basis for determiningthe existence of constructive total loss is thetotality of the shipment of logs. (OF the 1,208logs, only 497 pieces were lost or 41% thereforeit cannot fall under constructive total loss)

Pan Malayan Insurance v CA

Facts: The barge carrying a shipment of certifiedrice seeds to Kampuchea sank. The owner of therice seeds, the Food and Agricultural Organizationof the U.N. (FAO) filed its claim under a marineinsurance policy with Pan Malayan. Later, it wasinformed by Luzon Stevedoring Corporation, thecarrier, that the shipment was recovered, henceFAO filed a claim w/ Luzon Stevedoring forcompensation fo damages of its cargo.Issue: WoN FAO can recover for total loss evenif some of the rice seeds was recovered.Held: YES. The complete physical destruction ofthe subject matter is not essential t oconstitutean actual total loss. Such a loss may exist wherethe form and specie of the thing is destroyedalthough the materials which it consisted stillexist. Of the 34,122 bags of rice seeds shipped,27,922 bags were determined to belost/damaged (78% of cargo damaged).

6. ABANDONMENT

6.1. Requisites and Conditions

Sec. 138. Abandonment, in marine insurance,is the act of the insured by which, after aconstructive total loss, he declares therelinquishment to the insurer of his interest in thething insured.

Sec. 139. A person insured by a contract ofmarine insurance may abandon the thing insured,or any particular portion thereof separately valuedby the policy, or otherwise separately insured, andrecover for a total loss thereof, when the cause ofthe loss is a peril insured against:(a) If more than three-fourths thereof in valueis actually lost, or would have to be expended torecover it from the peril;(b) If it is injured to such an extent as toreduce its value more than three-fourths;(c) If the thing insured is a ship, and thecontemplated voyage cannot be lawfully performedwithout incurring either an expense to the insuredof more than three-fourths the value of the thingabandoned or a risk which a prudent man wouldnot take under the circumstances; or(d) If the thing insured, being cargo orfreightage, and the voyage cannot be performed,nor another ship procured by the master, within areasonable time and with reasonable diligence, toforward the cargo, without incurring the likeexpense or risk mentioned in the preceding sub-paragraph. But freightage cannot in any case beabandoned unless the ship is also abandoned.

Sec. 140. An abandonment must be neitherpartial nor conditional.

Sec. 141. An abandonment must be madewithin a reasonable time after receipt of reliableinformation of the loss, but where the informationis of a doubtful character, the insured is entitled toa reasonable time to make inquiry.

Sec. 142. Where the information upon whichan abandonment has been made proves incorrect,or the thing insured was so far restored when theabandonment was made that there was then in factno total loss, the abandonment becomesineffectual.

Sec. 143. Abandonment is made by givingnotice thereof to the insurer, which may be doneorally, or in writing; Provided, That if the notice bedone orally, a written notice of such abandonmentshall be submitted within seven days from suchoral notice.

Sec. 144. A notice of abandonment must beexplicit, and must specify the particular cause ofthe abandonment, but need state only enough toshow that there is probable cause therefor, andneed not be accompanied with proof of interest orof loss.

Sec. 145. An abandonment can be sustainedonly upon the cause specified in the notice thereof.

Sec. 146. An abandonment is equivalent to atransfer by the insured of his interest to theinsurer, with all the chances of recovery andindemnity.



Sec. 147. If a marine insurer pays for a loss as if itwere an actual total loss, he is entitled to whatevermay remain of the thing insured, or its proceeds orsalvage, as if there had been a formalabandonment.

Sec. 148. Upon an abandonment, acts done ingood faith by those who were agents of the insuredin respect to the thing insured, subsequent to theloss, are at the risk of the insurer and for hisbenefit.

Sec. 149. Where notice of abandonment is properlygiven, the rights of the insured are not prejudicedby the fact that the insurer refuses to accept theabandonment.

Sec. 150. The acceptance of an abandonment maybe either express or implied from the conduct ofthe insurer. The mere silence of the insurer for anunreasonable length of time after notice shall beconstrued as an acceptance.

Sec. 151. The acceptance of anabandonment, whether express or implied, isconclusive upon the parties, and admits the lossand the sufficiency of the abandonment.

Sec. 152. An abandonment once made andaccepted is irrevocable, unless the ground uponwhich it was made proves to be unfounded.

Sec. 153. On an accepted abandonment of aship, freightage earned previous to the loss belongsto the insurer of said freightage; but freightagesubsequently earned belongs to the insurer of theship.

Sec. 154. If an insurer refuses to accept avalid abandonment, he is liable as upon actual totalloss, deducting from the amount any proceeds ofthe thing insured which may have come to thehands of the insured.

Sec. 155. If a person insured omits toabandon, he may nevertheless recover his actualloss.

ABANDONMENT Abandonment, in marine insurance, is the

act of the insured by which, after aconstructive total loss, he declares therelinquishment to the insurer of his interestin the thing insured. The insured chooses totake the proceeds in place of the remainingparts of the thing, which is ceded to the

insurer. Right to abandon is granted by law to the

insured if peril insured against causes aloss of more than ¾ the thing insured, orwhere its value is reduced by more than ¾

Remember: 75% loss = Constructive Losswhich entitles recovery of the full amountin the policy. Does not mean that recoveryis only up to 75%.

When Constructive TOTAL loss exists: ¾ Rule(Sec. 139)

1. If more than ¾ thereof in value is actuallylost, or would have to be expended torecover from peril

2. If it is injured to such an extent as toreduce its value more than ¾

3. IF the thing insured is a ship, and thecontemplated voyage can’t be lawfullyperformed w/o incurring either an expenseto the insured or more than ¾ the value ofthe thing abandoned or a risk which aprudent man would not take under thecircumstances

4. If the thing insured, being cargo orfreightage, and the voyage can’t beperformed, nor another ship procured bythe master, within a reasonable time andwith reasonable diligence, to fowrward thecargo, without incurring the like expenseor risk mentioned in the preceding sub-paragraph. But freightage cannot in anycase be abandoned unless the ship is alsoabandoned.

Requirements:1. There must be actual relinquishment by

the person insured of his interest in thething insured (138)

2. There must be constructive total loss(139). Any particular portion of the thinginsured separately valued by the policymay be separately abandoned as it isdeemed separately insured

3. It must be total and absolute (140)4. It must be within a reasonable time

after the receipt of reliable information ofthe loss (141)

5. It must be factual (142)6. It must be made by giving notice thereof

to the insurer which may be done orally orin writing (143)

7. Notice must be explicit and mustspecify the particular cause of theabandonment (144)



Necessity for abandonment TECHNICAL TOTAL LOSS: insured can’t

claim the whole insurance without showingdue regard to the interest the underwritermay take in the abandoned property. Ifunderwriter can save some parts, he isentitled to timely notice of abandonmentand he can’t be liable for a total losswithout it. But there is no obligation toabandon—insured’s choice. He still recoversactual loss even if he doesn’t abandon(§155).

International Rule: right of abandonment of vessels, as a legal

limitation of a ship owner’s liability, doesnot apply where injury or average wascaused by ship owner’s own fault. Art.587(Code of Commerce) refers only to cases ofcaptain’s fault or negligence. If owner isalso at fault, Civil Code provisions onCommon Carriers apply.

When there is constructive total loss Philippine rule – insured many not abandon

unless loss/damage is more than ¾ ofvalue as indicated in §139.

Abandonment where insurance divisible andwhere indivisible

Things separately valued by the policy maybe separately abandoned because they areseparately insured (Section 139) This is aquestion of intention to be determined bythe language used

Criterion as to extent of lossGeneral Rule: The extent of injury to the

vessel is considered with reference to the generalmarket value immediately before the disaster. Therule is said to apply even though the policy isvalued but some think otherwise. If the policy isexpressly provides that the valuation will be used,it should be followed. The expenses incurred or tobe incurred by the insured recovering the thinginsured are also considered (ex. cost for refloatingthe ship).

Abandonment must be absoluteGeneral Rule: To cover the whole interest

insured, abandonment must be unconditional.Exception: if only part of the thing is

covered by the insurance, the insurer need onlyabandon that part.

Abandonment must be made within areasonable time

Once the insured received the notice ofloss, he must choose within a reasonabletime WON he will abandon to the insurer. Ifhe chooses to do so, he must give notice sothat the insurer may not be prejudiced bythe delay and may take immediate stepsfor the preservation of the property.

Reasonable time - depending on the factsand circumstances in each case. If the firstnotice is not clearly made, the insuredmust have sufficient time to ascertain thefacts. He cannot wait an undue length oftime to see if it will be more profitable toabandon or claim for partial loss.

Abandonment must be factual1. Existence of loss at time of abandonment -

the right of the insured to choose betweenabandonment or recovery for total lossdepends on the facts at the time of theoffer to abandon and not upon the statedisclosed by the information received orstate of loss before the time of offer

2. Effect of subsequent events - none. Oncethe abandonment is made good the rightsof the parties become fixed. The same istrue when the abandonment is not madegood. Subsequent events will not affect itas to retroactively impart validity.a. Insured cannot abandon when the thing

is safe or when he knew at the time hemade the offer that the vessel hadbeen repaired and is continuingvoyage.

b. If after abandonment, the thing isrecovered, insured may not withdraw.

Ineffective abandonment

Abandonment can besustainedonly uponcausespecified

If cause isunfoundedand infoupon whichit was madeprovesincorrect

Thinginsured wasso farrestoredwhen theabandonment wasmade thatthere was infact no totalloss

Equivalent to transfer bythe insured of his interest tothe insurer, with all thechances of recovery andindemnity

IF proper and notice isproperly given, refusal toaccept abandonment doesnot prejudice insured.Insured still liable for actualtotal loss, minus amount anyproceeds of thing insuredwhich may have come to thehands of the insured.

IF insurer acceptsabandonment, it’sconclusive between theparties and admits the lossand the sufficiency of theabandonment

Irrevocable unless groundsprove to be unfounded

ACCEPTANCEExpress or Impliedfrom conduct ofinsurer

Mere silence forunreasonablelength of time maybe deemedacceptance

NO ABAN-DON-MENTInsured stillentitled to recoveractual loss

Same rule applieswhere abandon-ment wasn’tproper or where itwasn’t properlymade



3. Instances justifying abandonment - insuredmay abandon for a total loss in case ofcapture, seizure, or detention of the ship orcargo; restraint by blockade or embargo;funds for repair cannot be raised w/o faultof owner; where voyage absolutely lost;where sale made by master of the vesselbecause of urgent necessity.

Information need not be direct or positive Direct or positive information not necessary

(ex. newspaper report, letter from anagent)

The information must be of such facts andcircumstances as to render it highlyprobable that a constructive total loss hasoccurred, and facts sufficient to constitute atotal loss must exist. But the facts andinformation need not be the same.

Form of notice of abandonmentGeneral Rule: no particular form of giving

notice of abandonment is required by law. It maybe made orally unless the policy requires that it bemade in writing. Notice by telegraph may besufficient.

Subsidiary Rule: if notice is done orally,the insured must submit to the insurer a writtennotice w/in 7 days from the oral notice

Notice of abandonment must be explicit Notice cannot just be inferred from some

equivocal acts. There must be an intentionto abandon, apparent from thecommunication.

The use of the word “abandon” is notnecessary.

There is no abandonment although theinsured has given notice of an intention toabandon if he continues to claim and usethe property as his own.

Notice of abandonment must specifyparticular cause thereof

The grounds must be stated with suchparticularity as to enable the insurer todetermine WON he is bound to accept theoffer.

Probable cause of abandonment containedin the notice is sufficient.

Proof of interest or of loss is not necessaryin the notice.

Proof of other causes not admissible Sufficient grounds for abandonment must

be stated to make the abandonment valid.He cannot avail himself of any ground otherthan those he stated.

Form of acceptance of abandonment Need not be express. It may be implied by

conduct, as from an act of the insurer inconsequence of an abandonment, whichcan only be justified under a right derivedfrom the abandonment (ex. when theinsurer took possession of the ship andmade repairs already followed by retentionfor an unreasonable amount of time)

Silence, if not for an unreasonable amountof time will not operate as an acceptance

Right of the insurer to freightage

General Rule: a validly madeabandonment passes to the insurer the interestthat the insured has over the thing

Subsidiary Rule, as to a ship: theinsurer, after abandonment, becomes the ownerthereof and his title becomes vested as of the timeof the loss.

Subsidiary Rule, as to freightage:depends upon when such freightage was earned. Ifsubsequent to the loss, it belongs to the insurer ofthe ship. If previously earned, to the insurer of thefreightage who is subrogated to the rights of theinsured up to the time of the loss.

Effects of acceptance of abandonment1. Upon receiving notice of abandonment, the

insurer may accept or rejectabandonment.

2. Insurer becomes liable for wholeamount of insurance and becomesentitled to all the rights which theinsured has over the thing

3. The parties’ rights become fixed.4. The insurer may no longer rely on any

insufficiency in the form, time or rightof abandonment. WON the insured has aright to abandon is immaterial where offeris already accepted and there is no fraud.

5. EXCEPTION to the general effects ofacceptance: when the ground upon which itwas made proves to be unfounded.

6. Abandonment can be sustained onlyupon the ground specified in the notice.

Effect of refusal to accept a validabandonment on insurer’s liability

General Rule: the insured’s right toabandon is absolute when it is justified bycircumstances. Acceptance is not necessary tovalidate it.

(Actual Loss)- (Proceeds the insurer

might have receivedfrom the damagedproperty)_________

(Liability of insurer)

Subsidiary Rule: upon properabandonment, insured may still recover to theextent of the damage proved

7. MEASURE OF INDEMNITY

7.1. Open and Valued Policy

Sec. 156. A valuation in a policy of marineinsurance in conclusive between the parties theretoin the adjustment of either a partial or total loss, ifthe insured has some interest at risk, and there isno fraud on his part; except that when a thing hasbeen hypothecated by bottomry or respondentia,before its insurance, and without the knowledge ofthe person actually procuring the insurance, hemay show the real value. But a valuationfraudulent in fact, entitles the insurer to rescind thecontract.

Sec. 157. A marine insurer is liable upon apartial loss, only for such proportion of the amountinsured by him as the loss bears to the value of the



whole interest of the insured in the propertyinsured.

Sec. 158. Where profits are separatelyinsured in a contract of marine insurance, theinsured is entitled to recover, in case of loss, aproportion of such profits equivalent to theproportion which the value of the property lostbears to the value of the whole.

Sec. 159. In case of a valued policy of marineinsurance on freightage or cargo, if a part only ofthe subject is exposed to the risk, the evaluationapplies only in proportion to such part.

Sec. 160. When profits are valued andinsured by a contract of marine insurance, a loss ofthem is conclusively presumed from a loss of theproperty out of which they are expected to arise,and the valuation fixes their amount.

Sec. 161. In estimating a loss under an openpolicy of marine insurance the following rules are tobe observed:(a) The value of a ship is its value at thebeginning of the risk, including all articles orcharges which add to its permanent value or whichare necessary to prepare it for the voyage insured;(b) The value of the cargo is its actual cost tothe insured, when laden on board, or where thecost cannot be ascertained, its market value at thetime and place of lading, adding the chargesincurred in purchasing and placing it on board, butwithout reference to any loss incurred in raisingmoney for its purchase, or to any drawback on itsexportation, or to the fluctuation of the market atthe port of destination, or to expenses incurred onthe way or on arrival;(c) The value of freightage is the grossfreightage, exclusive of primage, without referenceto the cost of earning it; and(d) The cost of insurance is in each case to beadded to the value thus estimated.

Sec. 162. If cargo insured against partial lossarrives at the port of destination in a damagedcondition, the loss of the insured is deemed to bethe same proportion of the value which the marketprice at that port, of the thing so damaged, bearsto the market price it would have brought if sound.

Sec. 163. A marine insurer is liable for all theexpenses attendant upon a loss which forces theship into port to be repaired; and where it isstipulated in the policy that the insured shall laborfor the recovery of the property, the insurer isliable for the expense incurred thereby, suchexpense, in either case, being in addition to a totalloss, if that afterwards occurs.

Sec. 164. A marine insurer is liable for a lossfalling upon the insured, through a contribution inrespect to the thing insured, required to be madeby him towards a general average loss called for bya peril insured against; provided, that the liability

of the insurer shall be limited to the proportion ofcontribution attaching to his policy value where thisis less than the contributing value of the thinginsured.

Sec. 165. When a person insured by acontract of marine insurance has a demand againstothers for contribution, he may claim the wholeloss from the insurer, subrogating him to his ownright to contribution. But no such claim can bemade upon the insurer after the separation of theinterests liable to the contribution, nor when theinsured, having the right and opportunity toenforce the contribution from others, has neglectedor waived the exercise of that right.

Sec. 166. In the case of a partial loss of shipor its equipment, the old materials are to beapplied towards payment for the new. Unlessotherwise stipulated in the policy, a marine insureris liable for only two-thirds of the remaining cost ofrepairs after such deduction, except that anchorsmust be paid in full.

A. Valued Policy Valuation fixes in advance the value of the

property and thus avoids the necessity ofproving its actual value in case of loss

Valuation is conclusive between the partiesin the adjustment of either a total or partialloss.

Exception: If there is FRAUD on the part ofthe insured, insurer would have the right toRESCISSION

The change in a vessel’s value after a longperiod of voyage cannot bind the parties,as the insured value stated in the policy isconclusive upon them.

Neither party can give evidence of the realvalue of the thing insured. But when thething has been hypothecated by bottomryor respondentia before its insurance andwithout the knowledge of the person whoactually procured the insurance, the insurermay show the real value but he is notentitled to rescind the contract unless hecan prove that the valuation was in factfraudulent.

When insured a co-insurer in marineinsurance

- In marine insurance, the insured isexpected to cover by insurance the fullvalue of the property insured. If thevalue of his interest exceeds theamount of the insurance, he isconsidered the co-insurer for anamount determined by the differencebetween the insurance taken out andthe value of the property:

- Section 157 applies only if (1) the loss ispartial and (2) the amount of insurance isless than the insured entire insurableinterest in the property insured.

Loss of profits separately insured- If the profits to be realized areseparately insured from the vessel or

_ (partial) Loss___ Amount Amountvalue of thing X of Profits = of Recovery

insured



cargo, the insured is entitled torecover, in case of loss, such proportionof the profits as the value of theproperty lost bears to the value of thewhole property:

- If policy is valued, loss of such profitsis conclusively presumed from a loss ofthe property out of which they areexpected to arise, and the valuationfixes their amount.

Where only part of a cargo or freightageinsured exposed to risk

- The valuation will be reducedproportionately. The insurer is bound toreturn such portion of the premium ascorresponds with the portion of thecargo which had been exposed to therisk.

Presumption of loss of profits- Where profits are separately insured

from the property out of which they areexpected to arise, the insured, in caseof partial loss of the property, isentitled merely to partial indemnity forthe profits lost.

- If the property is totally lost, pro tantothe total profits are also lost. Such lossof the profits is conclusively presumedfrom the loss of the property and thevaluation agreed upon in the policyfixes the amount of recovery.

B. Open Policy Loss is estimated in accordance with

certain rules laid down in the code (refer totable below)

Cost of insurance must be added to thevalue of ship, cargo, or freightage as thecase may be

However, maximum recovery may only beup to the face value of the policy

WHAT VALUE in OPEN POLICY

Ship Value at beginning of risk (inclall articles which add to itspermanent value or which arenecessary to prepare if for thevoyage insured), not the valueat time she was built

Cargo Actual cost when laden onboard.IF actual cost can’t bedetermined, market value attime and place of lading, PLUSexpenses incurred inpurchasing and placing them onboard.Expected profits are notconsidered since they can beseparately isnured.

Freightage Gross freightage withoutreference to cost of earning it

The cost of insurance is added incalculating the value of the ship, cargo, or

freightage of other subject matter in anopen policy.

Where cargo insured against partial loss isdamaged

- Section 162 is applicable if the cargois insured against a partial loss and itsuffers damage as a result of which itsmarket value at the port of destinationis reduced:

Market price in sound stateLess: Market price in damaged state_= Reduction in value (depreciation)

Reduced in value X amount of = amountMarket price in insurance of

sound state recovery

C. Total LossIn case of open policy:

Value of total loss will be computed in rulesstated above

Insurer liable for total loss, but it can’texceed face amount of policy

In case of valued policy: Insurer must pay valuation fixed in the

policy without any right to argue against itscorrectness except on basis of fraud

Liability can’t exceed amount in policy

D. Partial Loss; Co-Insurance In both open and valued policies, in case of

partial loss, the insured is deemed by lawas co-insurer if the value of the insurance isless than the value of the property orinterest insured, even in the absence of anyagreement to that effect.

However, law does not prevent parties fromstipulating otherwise

Difference with Fire Insurance: Policyshould expressly provide for co-insurance otherwise, insurer is liable forthe full amount of the partial loss. Inmarine insurance, co-insurance ismandated by law.

Example of Co-Insurance:Ship: $100 MInsurance: $80MLoss: $50MWhat does insured get? $40M

- only gets proportion

E. Other Expenses Chargeable to Insurer If ship has to make port for repairs, marine

insurer must bear the attendant expenses Insurer also liable for expenses for

recovery of the property if policy imposedupon the insured the duty of such recovery,such expenses being additional to total loss

F. Franchise Clause Franchise = Designated Percentage Sometimes, policy on cargo may provide

that unless damage reaches a designatedpercentage of the value of such cargo, noamount will be paid by insurer.

If loss reaches such percentage, insuredwill be entitled to full amount of loss

Value of property lost____ Amount of Amount ofValue of the whole property X profits = recovery

insured



Chapter VI

CLAIMS, SETTLEMENT &

SUBROGATION

1. NOTICE AND PROOF OF LOSS

Title 10 – Notice and Proof of Loss

Sec. 88. In case of loss upon an insuranceagainst fire, an insurer is exonerated, if noticethereof be not given to him by an insured, orsome person entitled to the benefit of theinsurance, without unnecessary delay.

Sec. 89. When a preliminary proof of loss isrequired by a policy, the insured is not boundto give such proofs as would be necessary in acourt of justice; but it is sufficient for him togive the best evidence3 which he has in hispower at the time.

Notice of Loss – the formal notice given the insurerby the insured or claimant under a policy of theoccurrence of the loss insured against.

The purpose is to apprise the insurancecompany so that it may make properinvestigation and take such action as maybe necessary to protect its interest.

It is necessary as the insurer cannot beliable to pay a claim unless he receivesnotice of that claim.

Under Sec. 88 insurer is exonerated ifnotice of loss is not given to the insurer bythe insured or by the person entitled to thebenefit without unnecessary delay.

It has been held however that formal noticeof loss is not necessary if insurer has actualnotice of loss already.

Proof of Loss – is the formal evidence given theinsurance company by the insured or claimantunder a policy of the occurrence of the loss, theparticulars and the data necessary to enable thecompany to determine its liability and the amount.Is not tantamount to proof or evidence under thelaw on evidence.

Proof of loss is distinct from notice of lossand intended to:1. give the insurer information by which

he may determine the extent of hisliability

2. afford him a means of detecting anyfraud that may have been practicedupon him.

The law does not stipulate any requirementas to the form in which notice or proof ofloss must be given. However according toDe Leon, it is advisable to give the notice inwriting for the protection of the insured orhis beneficiary. Notice may be an informalor provisional claim containing a minimumof information as distinguished from aformal claim which contains full details ofthe loss, computations of the amountsclaimed, and supporting evidence, togetherwith a demand or request for payment.

Nature of notice and proof of loss

Although they are in the form of conditionsprecedent, they are in the nature ofconditions subsequent the breach of whichaffects a right that has already accrued(before the loss, insurer’s liability iscontingent but with the happening of theloss, his liability becomes properly fixed).

These conditions are intended merely forevidentiary purposes and do not form anypart of the conditions of liability and areconstrued with much less strictness thanthose conditions that operate prior to loss.

Sec. 90. All defects in a notice of loss; or inpreliminary proof thereof, which the insuredmight remedy, and which the insurer omits tospecify to him, without unnecessary delay, asgrounds of objection, are waived.

Sec. 91. Delay in the presentation to aninsurer of notice or proof of loss is waived ifcaused by any act of him, or if he omits totake objection promptly and specifically uponthat ground

Delay in the presentation of notice andproof of loss is deemed waived when due toan act of the insurer, by failure to takeobjection promptly and specifically uponthat ground.

If the insured attempted to comply and thecompany made objections, the insured willbe allowed a reasonable time after he isappraised within which to remedy thedefects regardless of the time prescribed bythe policy for furnishing proofs. Delay as aground for resisting a claim places theinsurer on duty to inquire when the losstook place, so that it could determinewhether delay would be a valid ground toobject to a claim.

Sec. 92. If the policy requires, by way ofpreliminary proof of loss, the certificate ortestimony of a person other than the insured,it is sufficient for the insured to use reasonablediligence to procure it, and in case of therefusal of such person to give it, then tofurnish reasonable evidence to the insurer thatsuch refusal was not induced by any justgrounds of disbelief in the facts necessary tobe certified or testified.

Certificate or Testimony of Person other thanInsured as Preliminary Proof

May be required by the policy Sufficient that he insured use reasonable

diligence to procure it If person refuses to give it, it is sufficient to

furnish reasonable evidence to the insurerthat such refusal was not induced by anygrounds of DISBELIEF in the factsnecessary to be certified.

General Rule: Insured must give, by way ofpreliminary proof of loss, the certificate ortestimony of a person other than the insured whenrequired by the policy.

Supplementary Rules: It is sufficient for theinsured to use reasonable diligence to procure it.In case of the refusal of such person to give it,



insured must furnish reasonable evidence to theinsurer that such refusal was not induced by anyjust grounds of disbelief in the facts necessary tobe certified or testified, but because of othergrounds. This requirement must be liberallyconstrued in favor of the insured.

Phil. Am. Life v CA & Pulido

Facts: The insured Florence Pulido took out anon-medical life insurance policy from Philamlifein the amount of 100K and the policy was issuedon Feb. 11, 1989. She died on Sept. 10, 1991and her beneficiary, her sister Eliza Pulido filed aclaim which was denied by Philamlife on theground of fraud claiming that at the time theinsured applied for the policy, she was alreadyactually dead.Ratio: There was no fraud, the death certificatesand notes by the municipal health officerprepared in the regular performance of duties areprima facie evidence of facts. A duly-registereddeath certificate is considered a public documentand the entries found therein are presumedcorrect, unless the party who contests itsaccuracy can produce positive evidence toestablish otherwise which in the case at barPhilamlife failed to do.

2. GUIDELINES ON CLAIMS SETTLEMENT

Title 11 – Claims Settlement

Sec. 241.(1) No insurance company doing business

in the Philippines shall refuse, withoutjust cause, to pay or settle claimsarising under coverages provided by itspolicies, nor shall any such companyengage unfair claim settlementpractices. Any of the following acts byan insurance company, if committedwithout just cause and performed withsuch frequency as to indicate a generalbusiness practice, shall constituteunfair claim settlement practice:

(a) knowingly misrepresenting toclaimants pertinent facts orpolicy provisions relating tocoverages at issue;

(b) failing to acknowledge withreasonable promptnesspertinent communications withrespect to claims arising underits policies;

(c) failing to adopt and implementreasonable standards for theprompt investigation of claimsarising under its policies;

(d) not attempting in good faith toeffectuate prompt, fair andequitable settlement of claimssubmitted in which liability hasbecome reasonably clear; or

(e) compelling policyholders toinstitute suits to recoveramounts due under its policesby offering without justifiablereason substantially less thanthe amounts ultimatelyrecovered in suites brought by

them.

(2) Evidence as to the numbers and typesof valid and justifiable complaints tothe Commissioner against an insurancecompany, and the Commissioner’scomplaint experience with otherinsurance companies writing similarlines of insurance shall be admissible inevidence in an administrative orjudicial proceeding brought under thissection.

(3) If it is found, after notice and anopportunity to be heard, that aninsurance company has violated thissection, each instance of noncompliance with paragraph (1) may betreated as a separate violation of thissection and shall be consideredsufficient cause for the suspension orrevocation of the company’s certificateof authority.

Sec. 242. The proceeds of a life insurancepolicy shall be paid immediately upon maturityof the policy, unless such proceeds are madepayable in installments or as an annuity, inwhich case the installments, or annuities shallbe paid as they become due: Provided,however, That in the case of a policy maturingby the death of the insured, the proceedsthereof shall be paid within sixty days afterpresentation of the claim and filing of the proofof the death of the insured. Refusal or failureto pay the claim within the time prescribedherein will entitle the beneficiary to collectinterest on the proceeds of the policy for theduration of the delay at the rate of twice theceiling prescribed by the Monetary Board,unless such failure or refusal to pay is basedon the ground that the claim is fraudulent.The proceeds of the policy maturing by thedeath of the insured payable to the beneficiaryshall include the discounted value of allpremiums paid in advance of their due dates,but are not due and payable at maturity.

Sec. 243. The amount of any loss or damagefor which an insurer may be liable, under anypolicy other than life insurance policy, shall bepaid within thirty days after proof of loss isreceived by the insurer and ascertainment ofthe loss or damage is made either byagreement between the insured and theinsurer or by arbitration; but if suchascertainment is not had or made within sixtydays after such receipt by the insurer of theproof of loss, then the loss or damage shall bepaid within ninety days after such receipt.Refusal or failure to pay the loss or damagewithin the time prescribed herein will entitlethe assured to collect interest on the proceedsof the policy for the duration of the delay atthe rate of twice the ceiling prescribed by theMonetary Board, unless such failure or refusalto pay is based on the ground that the claim isfraudulent.



Sec. 244. In case of any litigation for theenforcement of any policy or contact ofinsurance, it shall be the duty of theCommissioner or the Court, as the case maybe, to make a finding as to whether thepayment of the claim of the insured hasunreasonably denied or withheld; and in theaffirmative case, the insurance company shallbe adjudged to pay damages which shallconsist of attorney’s fees and other expensesincurred by the insured person by reasons ofsuch unreasonable denial or withholding ofpayment plus interest of twice the ceilingprescribed by the Monetary Board of theamount of the claim due the insured, from thedate following the time prescribed in Sectiontwo hundred forty-two or in Section twohundred forty-three, as the case may be, untilthe claim is fully satisfied; Provided, That thefailure to pay any such claim within the timeprescribed in said section shall be consideredprima facie evidence of unreasonable delay inpayment.

2.1. Unfair Claims Settlement

Sec. 241 (1) provides instances of unfair claimssettlement done by an insurance company:

(a) knowingly misrepresenting toclaimants pertinent facts or policyprovisions relating to coverages atissue;

(b) failing to acknowledge withreasonable promptness pertinentcommunications with respect toclaims arising under its policies;

(c) failing to adopt and implementreasonable standards for the promptinvestigation of claims arising underits policies;

(d) not attempting in good faith toeffectuate prompt, fair andequitable settlement of claimssubmitted in which liability hasbecome reasonably clear; or

(e) compelling policyholders to institutesuits to recover amounts due underits polices by offering withoutjustifiable reason substantially lessthan the amounts ultimatelyrecovered in suites brought bythem.

2.2. Civil Code Rules on Presumption of Death

Art. 390. After an absence of seven years, itbeing unknown whether or not the absenteestill lives, he shall be presumed dead for allpurposes except for those of succession.The absentee shall not be presumed dead forthe purpose of opening his succession till afteran absence of ten years. If he disappearedafter the age of seventy-five years, anabsence of five years shall be sufficient inorder that his succession may be opened. (n)

Art. 391. The following shall be presumeddead for all purposes, including the division ofthe estate among the heirs:

(1) A person on board a vessel lost

during a sea voyage, or an aeroplanewhich is missing, who has not beenheard of for four years since the lossof the vessel or aeroplane;

(2) A person in the armed forces whohas taken part in war, and has beenmissing for four years;

(3) A person who has been in dangerof death under other circumstancesand his existence has not been knownfor four years. (n)

Art. 392. If the absentee appears, or withoutappearing his existence is proved, he shallrecover his property in the condition in whichit may be found, and the price of any propertythat may have been alienated or the propertyacquired therewith; but he cannot claim eitherfruits or rents. (194)

Londres v National Life Insurance Co.

Facts: National Life issued a life insurance policyon the life of Jose C. Londres in the amount ofPhp3,000.00 on April 14, 1943 (during the warperiod). He died on Feb. 7, 1945. His beneficiaryfiled a claim which National denied claiming thatthere was a lack of proof of death and a slew ofother special defenses, including the paymentshould be made based on the Ballantyne scales.Ratio: National must pay the beneficiary of theinsured the amount of the policy (3,000.00) as theagreement was that the obligation will be made inthe currency prevailing at the end of the stipulatedperiod which in this case is the Philippine currency.The proof of death was substantially made by theclaimant and was not properly disproved byNational.

Fernandez v National Life Insurance Co.

Facts: National insured the life of Juan Fernandezfor the period of July 15, 194 to July 14, 1945.Juan died on Nov. 2, 1944. His beneficiaries filedtheir claim 7 years after his death or on Aug. 1,1952. The dispute is WON the Ballantyne scale isapplicable in computing the amount which shouldbe paid to the beneficiaries. The CFI renderedjudgment that National should pay the proceed ofPHp 500.00 Ballantyne scale applicable.Ratio: CFI correct. Ballantyne scale is applicablesince in life insurance, the policy matures upon theexpiration of the term set forth therein – in thiscase upon the death of Juan. The obligation ofNational arose as of that date and not at the timeof the claim. Since the National could have paid hisobligation at any time during the Japaneseoccupation. Payment after liberation must beadjusted in accordance with the Ballantyneschedule.

Tio Khe Chio v CA & Eastern Assurance

Facts: Tio Khe Chio imported fishmeal. Thesewere insured with Eastern Assurance. The vesselused to ship the fishmeal was Far Eastern ShippingCo. When the goods reached Manila, they werefound to be damaged – and therefore useless. Theissue is WON the interest to be paid by EasternAssurance is 12% or 6%?



Ratio: 6% only, as Sec. 243 and 244 of theInsurance Code is not applicable to the case asthese provisions apply only when the court finds anunreasonable delay or refusal in the payment ofthe claims. The applicable law according to SC isArt. 2209 of the Civil Code which stipulates that inthe absence of stipulation the legal interestapplicable is 6%

Cathay v CA

Facts: Lugay insured against fire with the 6insurance companies named as petitioner in thiscase for the total sum of 4 million her printingpress which was razed by fire on December 15,1982. She filed a claim submitting all the requiredproof of loss. After nearly 10 months of waiting forher claim to be paid she filed a suit to collect herclaim. After the trial on the merits, the TC renderedjudgment in favor of Lugay and directed the 6insurance companies to pay their share in theinsurance and further made them pay plaintiffinterest at the rate of 2x the ceiling beingprescribed by the Monetary board from the timewhen the case was filed. Upon appeal to the CA,the CA affirmed the decision of the TC.Ratio: The award made by the TC of doubleinterest is justified under Sections 243 and 244 ofthe Insurance Code which provides that “Sec. 243.…Refusal or failure to pay the loss or damagewithin the time prescribed herein will entitle theassured to collect interest on the proceeds ofthe policy for the duration of the delay at therate of twice the ceiling prescribed by theMonetary Board…” and “Sec. 244. In case of anylitigation for the enforcement of any policy orcontract of insurance, it shall be the duty of theCommissioner or the Court, as the case maybe to make a finding as to whether thepayment of the claim of the insured has beenunreasonably denied or withheld; and in theaffirmative case, the insurance company shall beadjusted to pay damages which shall consist ofattorney’s fees and other expenses incurred

by the insured person by reason of suchunreasonable denial or withholding ofpayment plus interest of twice the ceilingprescribed by the Monetary Board of theamount of claim due the insured…”.

Noda v Cruz-Arnaldo

Facts: Noda obtained from Zenith 2 fire insurancepolicies for 2 of his properties. Both was destroyedby fire. When Noda filed a claim, it was denied byZenith due to premiums not paid and the other onewas settled only for 15K++. IC denied Noda toclaim full amount due to insufficient proof of thevalue of his losses.Ratio: Noda was able to prove sufficient losses,since the document offered by Noda were offeredby Zenith itself to proof the amount of it’s liabilitybeing 1/6th of the total loss only. Thus could verywell be considered as an admission of its liability upto the amount recommended.

Finman General v CA

Facts: USIPHIL obtained a fire insurance policyfrom FINMAN. The property insured was loss dueto fire and USIPHIL filed a claim. H.H. Bayne wasappointed by FINMAN to undertake evaluation.USIPHIL submitted all the required proof of lossessubstantially. Despite all these, FINMAN refused topay USIPHIL’S claim due to failure to comply withCondition 13 of the policy. TC and CA rule dinfavor of USIPHIL and ordered FINMAN to pay +double the interest (24%)Ratio: Substantial compliance, not strictcompliance with the requirements will be deemedsufficient. The double interest of 24% is authorizedby Sections 243 and 244 of the Insurance Code.

Delsan Transport v CA (supra)

CLAIMS LIFE INSURANCE NON-LIFE INSURANCE

Maturity 1. Upon death of the personinsured;

2. Upon his surviving a specificperiod

3. Otherwise contingently onthe continuance or cessationof life (Sec. 180)

Upon happening of event insuredagainst

Event must occur within theperiod specified in policy, otherwiseinsurer has no liablity

Delivery of Proceeds GENERAL RULE: Immediately upon maturity

of policy.

EXCEPTION: If payable in INSTALLMENTS

or as an ANNUITY, whensuch installments orannuities become due

IF MATURITY IS UPON DEATH: Within 60 days after

presentation of claim andfiling of proof of death ofinsured.

Within 30 days after(1) Proof of loss is received by

insurer; and(2) Ascertainment of loss or damage

is made either by agreementbetween the insured and insureror by arbitration

If ascertainment not made within60 days after such receipt by insurerof proof of loss, loss or damage shallbe paid within 90 days after suchreceipt.



Effect of Refusal or Failure to payclaim within time prescribed:

In case of litigation, it isthe duty of theCommissioner or theCourt to determine WONclaim has beenunreasonably denied ofwithheld.

Failure to pay any suchclaim within the timeprescribed shall beconsidered prima facieevidence of unreasonabledelay in payment.

Entitles beneficiary to collectinterest on the proceeds ofpolicy for the duration of thedelay at rate of twice ceilingprescribed by the monetaryboard (unless refusal to payis based on ground thatclaim in fraudulent)

In case damages awarded,this includes attorney’s feesand other expenses incurreddue to delay (plus theinterest)

Entitles beneficiary to collectinterest on the proceeds of policyfor the duration of the delay atrate of twice ceiling prescribed bythe monetary board (unlessrefusal to pay is based on groundthat claim in fraudulent)

In case damages awarded, thisincludes attorney’s fees and otherexpenses incurred due to delay(plus the interest)

3. PRESCRIPTION OF ACTION

3.1. Title 6 – The Policy

Sec. 63. A condition, stipulation, oragreement in any policy of insurance, limitingthe time for commencing an action thereunderto a period of less than one year from the timewhen the cause of action accrues, is void.

A clause in an insurance policy to the effectthat an action upon the policy by theinsured must be brought within a certainperiod is VALID and will prevail over thegeneral law on limitations of actions.

HOWEVER, if the period fixed is less thanone year from the time the cause of actionaccrues, it is VOID.

Nature of condition limiting period for filingclaim:

It is not merely a proceduralrequirement. It is essential for theprompt settlement of claims as itdemands for suits to be brought whilethe evidence as to the origin and causeof the loss or destruction has not yetdisappeared. It is a conditionprecedent to the insurer’s liability or aresolutory cause in case the action isnot filed by the insured within thestipulated period.

Insurance Code empowers the InsuranceCommissioner to adjudicate disputesrelating to an insurance company’s liabilityto an insured under a policy. A complaint orclaim filed with such official is consideredan “action” or “suit” the filing of whichwould have the effect of tolling thesuspending the running of the prescriptiveperiod.

Cause of Action – The violation of a legal rightcommitted knowingly; An act or omission of oneparty in violation of the legal right/s of the other.

3.2. Requisites/Essential Elements:1. A legal right of the plaintiff2. A correlative obligation of the defendant3. An act or omission of the defendant in

violation of the legal right of plaintiff.

The cause of action in an insurancepolicy therefore does not accrue

until the insurer refuses expresslyor impliedly to comply with his dutyto pay the amount of the loss.

3.3. Compulsory Motor Vehicle LiabilityInsurance

Sec. 384. Any person having any claim uponthe policy issued pursuant to this chaptershall, without any unnecessary delay, presentto the insurance company concerned a writtennotice of claim setting forth the nature, extentand duration of the injuries sustained ascertified by a duly licensed physician. Noticeof claim must be filed within six months fromdate of the accident, otherwise, the claim shallbe deemed waived. Action or suit for recoveryof damage due to loss or injury must bebrought, in proper cases, with theCommissioner or the Courts within one yearfrom the denial of the claim, otherwise theclaimant’s right of action shall prescribe (Asamended by PD No. 1814 and BP Blg. 874.)

Compulsory Motor Vehicle Liability Insurance(CPTL) – The Insurance Code makes it unlawfulfor any land transportation operator or owner ofmotor vehicle to operate the same in publichighways unless there is an insurance or guarantyto indemnify the death or bodily injury of a thirdparty or passenger arising from the use thereof.

Rules of CPTL1. Registration of any vehicle will not

be made or renewed withoutcomplying with the requirement.

2. The protection may be compliedwith using any of the following:

Insurance policy Surety bond Cash bond

First Integrated Bonding and Ins. Co., Inc. vs.Hernando, 199 SCRA 746

The purpose of CPTL is to give immediate financialassistance to victims of motor vehicle accidentsand/or their dependents, especially if they are poorregardless of the financial capability of motorvehicle owners or operators responsible for theaccident.

3.4. Civil Code – Prescription



Art. 1144. The following action must bebrought within ten years from the time theright of action accrues:

(1) Upon a written contract;(2) Upon an obligation created by law(3) Upon a judgment. (n)

General Rules on Prescription: 10 Years (CC)

Exceptions to the General Rule: Stipulation in the contract (Sec.

63) – a clause in an insurance policylimiting the period for which anaction upon the policy bay bebrought is valid provided it be notless than one year.

Motor Vehicle Insurance – One(1) year only

4. THE INSURANCE COMMISSIONERADMINISTRATIVE AND ADJUDICATORYPOWERS

Sec. 416. The Commissioner shall havethe power to adjudicate claims andcomplaints involving any loss, damage orliability for which in insurer may beanswerable under any kind of policy orcontract of insurance, or for which suchinsurer may be liable under a contract ofsuretyship, or for which a reinsurer maybe sued under any contract of reinsuranceit may have entered into; or for which amutual benefit association may be heldliable under the membership certificates ithas issued to its members, where theamount of any such loss, damage orliability, excluding interest, cost andattorney's fees, being claimed or suedupon any kind of insurance, bond,reinsurance contract, or membershipcertificate does not exceed in any singleclaim one hundred thousand pesos.The insurer or surety may, in the sameaction file a counterclaim against theinsured or the obligee. The insurer orsurety may also file a cross-claim againsta party for any claim arising out of thetransaction or occurrence that is thesubject matter of the original action or ofa counterclaim therein.With leave of the Commissioner, aninsurer or surety may file a third-partycomplaint against its reinsurers forindemnification, contribution, subrogationor any other relief, in respect of thetransaction that is the subject matter ofthe original action filed with theCommissioner.The party filing an action pursuant to theprovisions of this section thereby submitshis person to the jurisdiction of theCommissioner. The Commissioner shallacquire jurisdiction over the person of theimpleaded party or parties in accordancewith and pursuant to the provisions of theRules of Court.The authority to adjudicate granted to theCommissioner under this section shall beconcurrent with that of the civil courts,but the filing of a complaint with the

Commissioner shall preclude the civilcourts from taking cognizance of a suitinvolving the same subject matter.Any decision, order or ruling rendered bythe Commissioner after a hearing shallhave the force and effect of a judgment.Any party may appeal from a final order,ruling or decision of the Commissioner byfiling with the Commissioner within thirtydays from receipt of copy of such order,ruling or decision a notice of appeal to theIntermediate Appellate Court in themanner provided for in the Rules of Courtfor appeals from the Regional Trial Courtto the Intermediate Appellate Court. (Asamended by Batas Pambansa Blg. 874).As soon as a decision, order or ruling hasbecome final and executory, theCommissioner shall motu proprio or onmotion of the interested party, issue awrit of execution requiring the sheriff orthe proper officer to whom it is directedto execute said decision, order or award,pursuant to Rule thirty-nine of the Rulesof Court.For the purpose of any proceeding underthis section, the Commissioner, or anyofficer thereof designated by him,empowered to administer oaths andaffirmation, subpoena witnesses, compeltheir attendance, take evidence, andrequire the production of any books,papers, documents, or contracts or otherrecords which are relevant or material tothe inquiry. In case of contumacy by, orrefusal to obey a subpoena issued to anyperson, the Commissioner may invoke theaid of any court of first instance withinthe jurisdiction of which such proceedingis carried on, where such person residesor carries on his own business, inrequiring the attendance and testimony ofwitnesses and the production of books,papers, documents, contracts or otherrecords. And such court may issue anorder requiring such person to appearbefore the Commissioner, or officerdesignated by the Commissioner, there toproduce records, if so ordered or to givetestimony touching the matter inquestion. Any failure to obey such orderof the court may be published by suchcourt as a contempt thereof.A full and complete record shall be kept ofall proceedings had before thecommissioner, or the officers thereofdesignated by him, and all testimony shallbe taken down and transcribed by astenographer appointed by theCommissioner.A transcribed copy of the evidence andproceeding, or any specific part thereof,of any hearing taken by a stenographerappointed by the Commissioner, beingcertified by such stenographer to be atrue and correct transcript of thetestimony on this hearing of a particularwitness, or of a specific proof thereof,carefully compared by him from hisoriginal notes, and to be a correctstatement of evidence and proceedinghad in such hearing so purporting to betaken and subscribed, may be received as



evidence by the Commissioner and by anycourt with the same effect as if suchstenographer were present and testifiedto the facts so certified. (As amended byPresidential Decree No. 1455).

4.1. Jurisdiction of Insurance Commission

Includes the following as long as any SINGLECLAIM does NOT EXCEED 100,000.00:

(1) Claims and complaints involving liability ofinsurer under any kind of policy orcontract

(2) Suretyship(3) Reinsurance(4) Mutual Benefit membership certificates

2. Relation to RTC The RTC and IC have concurrent

jurisdiction. HOWEVER, filling a complaintwith the IC PRECLUDES civil courts fromtaking cognizance of suit involving thesame subject.

Lopez v Filipinas

Facts: Lopez insured with FCS his Biedermantruck tractor and Winter Weils trailer from loss ordamages. It appeared that Lopez concealedsome material fact with regard to questionsasked by FCS. The vehicles figured in anaccident. Lopez filed a claim which FCS denied.Lopez filed a complaint with IC less than 2months after the denial and a complaint with theCourt 17 months after the denial when FCS toldthe IC that it refused to subject itself toarbitration. FCS claimed prescription.Ratio: The right of action has prescribed. Thereis nothing in the Insurance Law, nor in any of itsallied Legislations which empower the IC toadjudicate on disputes relating to an insurancecompany’s liability to an insured under a policyissued by the insurer to an insured. The validityof an insured’s claim under a specific policy, itsamount, and all such other matters as mightinvolve the interpretation and construction of theinsurance policy, are issues which only a regularcourt of justice may resolve and thus thecomplaint filed by Lopez with the IC could nothave been an action or suit. The prescriptionperiod started to run on August 28, 1960 whenFCS rejected the claim of Lopez and thecommencement of an action was filed only onSeptember 19, 1961with the CFI of Manila,nearly 17 months after the claim was rejected.Thus the action has already prescribed.

Finman v Inocencio

Facts: Pan Pacific obtained a surety bond fromFinman in compliance with POEA rules. Inocencioet.al filed complaint against Pan Pacific. POEAordered Pan Pacific and Finman jointly andseverally to pay the claim of Inocencio et.al.Ratio: POEA has jurisdiction over the suretybonds as it is a well settled doctrine that theconditions of a bond specified in the statuteproviding for the submission of a bond are builtinto all bonds tendered under that statue even

through not printed therein. Finman may be heldliable, if it is solidarily liable with Pan Pacificunder the terms of the bond, it must follow thatit is also liable to both Inocencio et.al and POEA. sorry guys I don’t get how prescription figuresinto this case!!!

Eagle Star v Chin Yu

Facts: Chin Yu consigned 14 bales ofunderwear. Insured with Eagle Star. Uponarrival to Manila, 4 bales were lost and 3 weredamages. Chin Yu filed claim for the lost anddamages bales against he carrier and then withthe insurer. Both denied liability.Ratio: Action has not prescribed under Sec. 61-A, the period of prescription starts to run whenthe cause of action accrues and the cause ofaction accrues only upon the rejection of theinsurer of the claim and not upon the filing of theclaim.

ACCFA v Alpha Ins

Facts: FACOMA took out a fidelity bond ofPhp5,000.00 to insure its funds from AlphaInsurance which it later assigned to ACCFA. Thefunds were misappropriated upon which ACCFAimmediately notified Alpha of the loss andpresented proof of loss within the period fixed,but despite repeated demands, the suretycompany refused and failed to pay. It filed a suitagainst Alpha. Alpha moved to dismiss claimingthat ACCFA’s right of action has prescribed sinceit filed an action one year after it filed its noticeof loss -- claiming that ACCFA’s right of actionaccrued upon submission of notice of loss asstipulated under Condition 8 of the contract.Ratio: The action does not accrue until the partyobligated refuses, expressly or implied to complywith its duty (in this case refusal of Alpha to paythe amount of the bond). The year for institutingthe action in court must be reckoned from thetime of Alpha refused to comply with its bond andnot from the creditor’s filling of the claim of loss(since the creditor does not know yet upon fillingthat the claim would be denied or refused).Therefore, condition #8 which required action tobe filed within one year from the filling of theclaim for loss contradicts the public policyexpressed in Sec. 61-A of the PhilippineInsurance Act and is thus null and void

Ang v Fulton

Facts: Ang insured his property against fire for1 year with Fulton through its agent Paramount..12.27.1973 -- Store was destroyed through fire(3 days later, Ang filed claim)1.13.1955 – Ang charged with arson, acquitted4.6.1956 – Fulton denied Ang’s claim4.19.1956 – Ang received Fulton denial5.1956 – Ang instituted claim against Paramountwhich was dismissed w/o prejudice on 9.19575.5.1958 – Ang instituted present action againstFulton.According to CFI, action not yet prescirbedRatio: Action already prescribed. The action ofAng against Paramount does not have any legal



effect except that of notifying the agent andserves no other purpose. It did not stop theprescription from running. The filing of a claimwithin one year after rejection is a conditionprecedent to the liability of the insurer – aresolutory cause, the purpose of which is toterminate all liabilities in case action is not filedwithin the said period.

Travellers Insurance v CA

Facts: A 78 year old woman was hit by a taxicab, died. Her son (Vicente) filed a claim againstthe owner of the Lady Love taxi cab, the driverand Travellers as the compulsory insurerRatio: Travellers cannot be held jointly andseverally liable with the owner and driver of theLady Love taxi cab as Vicente failed to attach acopy of the insurance contract to his complaint,there could be no basis to apprise the real natureand pecuniary limits of Travellers liability.Further, he also failed to file a written notice ofclaim with Traveller, which is an indispensablerequirement thus his cause of action did notaccrue.

Sun Insurance v CA (supra)

5. SUBROGATION

5.1. Civil Code Provisions

Obligations & Contracts – Extinguishment ofObligations

Art. 1236. The creditor is not bound to acceptpayment or performance by a third personwho has no interest in the fulfillment of theobligation, unless there is a stipulation to thecontrary.

Whoever pays for another may demand fromthe debtor what he has paid, except that if hepaid without the knowledge or against the willof the debtor, he can recover only insofar asthe payment has been beneficial to the debtor(1158a)

Damages

Art. 2207. If the plaintiff’s property has beeninsured, and he has received indemnity fromthe insurance company for the injury or lossarising out of the wrong or breach of contractcomplained of, the insurance company shall besubrogated to the rights of the insured againstthe wrongdoer or the person who has violatedthe contract. If the amount paid by theinsurance company does not fully cover theinjury or loss, the aggrieved party shall beentitled to recover the deficiency from theperson causing the loss or injury.

According to sir – there is only subrogationin property insurance.

5.2. Concept: Process of legal substitution (insurer steps

into shoes of insured) Reason: EQUITY – to prevent the insured

from receiving more than his actual loss,

while at the same time makes the personwho caused loss legally responsible.

Loss Due to Wrongful Act or Breach ofContract by Third Person, NOT APPLICLABLETO LIFE INSURANCE.

Options available to insured when throughwrongful act or breach of contractcommitted by 3rd person, insured propertysuffers loss:(1) Collect from insurer – if insurer pays,

insurer subrogates insured under CivilCode

o Right of subrogation exist evenif no express agreementrecognizing it since it’s underthe CC

o Arises only after insurer paysinsured.

(2) Demand payment from wrongdoer Since Life Insurance is not

contract of INDEMNITY, subrogationobviously cannot apply.

When May Liability to Subrogee be Limited: Bill of Lading (St. Paul v Macondray) Contributory Negligence (Tabacalera v NFS)

Effect of Voluntary Payment

Right of Subrogation does not exist in favorof mere volunteer

If insurer has right to rescind, but still paysinsured, there is still subrogation – the 3rd

party has no privity. Where the insurer pays the insured for a

loss or liability which is not a risk coveredby the policy, it will be considered as avolunteer with no right of subrogation.HOWEVER, insurer may still recover underArt. 1236 of the Civil Code – to the extentthat the debtor had been benefited.

If insured gets amount of policy not aspayment but as a LOAN, repayable to theextent of any recovery from the 3rd partyresponsible, there can be no subrogation.

In Case of General Averages:1. Demand contributions directly from

different persons liable.2. Clam whole loss from the insurer – insurer

subrogates right of contribution.

Coastwise v CA (supra)

Maglana v Concolacion (supra)

Cebu Shipyard v Willaim Lines

Facts: William Lines, Inc contracted the services ofCSEW for its ships annual dry-docking and repairs.The vessel was insured with Prudential for 45million for hull and machinery. The coverageincluded an “Additional Perils” clause covering lossof or damage to the vessel through the negligenceof ship repairman. The vessel caught fire and sankresulting to its eventual total loss. Prudential paidWilliam Lines the total amount of the insurancepolicy and sued CSEW, as subrogee to the rights ofWilliam Lines.Ratio: Since it has already been resolved that thecause of the fire which gutted MV Manila City was



the negligence act of CSEW, the proof of paymentmade by Prudential to William Lines, Inc operatedto properly subrogate Prudential to the rights ofWilliam Lines under Art. 2207 of the Civil Code

Pioneer Insurance v CA

Facts: Jacob Lim purchased 2 aircrafts from JDAusing funds from Bormaheco, the Cervantes andMaglana. Insured it with Pioneer as surety. Limfailed to pay, Pioneer paid (Pioneer reinsured thesurety with an unnamed reinsurer) and collectedfrom the reinsurer. Also foreclosed aircraft, sold itand collected proceeds.Ratio: Pioneer no longer has any claim since it hasalready collected the proceeds of the reinsuranceon its bond. Under the principle of Art. 2207 of theCC, the reinsurer, on payment of a loss acquiresthe same rights by subrogation as are acquired insimilar cases where the original insurer pays a loss.

Manila Mahogany v CA

Facts: Manila Mahogany insured its MercedezBenz with Zenith. Car was bumped and damagedby SMC truck. Zenith paid Mahogany in amicablesettlement. Zenith then demanded reimbursementfrom SMC, but it appeared that SMC already paidMahogany evidenced by a Release of Claim.Ratio: By the act of Manila Mahogany issuing arelease claim to SMC, the right of Zenith againstSMC is nullified since the insurer can besubrogated to only such rights as the insured mayhave, should the insured, after receiving paymentfrom the insurer, release the wrongdoer whocauses the loss, the insurer loses his rights againsthim. But in such a case the insurer will be entitledto recover from the insured whatever it has paid,unless it was made with the consent of the insurer.

Pan Malayan v CA & Fabie

Facts: The driver of Erlinda Fabie hit the insuredMitsubishi Colt Lancer owned by the CanlubangAutomotive Resources Corporation. The vehiclewas insured with PANMALAY who paid the amountinsured under the “own damage” coverage” of theinsurance policy. PANMALAY then demanded fromFabie the payment of whatever amount it paidclaiming that they were subrogated to the rights ofCanlubang.Ratio: Art. 2207 of the Civil Code apply in the caseat bar, under the principle of subrogation. If theinsured property is destroyed or damaged throughthe fault or negligence of a party other than theassured, then the insurer, upon payment to theassured will be subrogated to the rights of theassured to recover from the wrongdoer to theextent that the insurer has been obligated to pay.Payment by the insurer to the assured operates asan equitable assignment to the former of allremedies which the latter may have against thethird party whose negligence or wrongful actcaused the loss. The right of subrogation is notdependent upon, nor does it grow out of, anyprivity of contract or upon written assignment ofclaim. It accrues simply upon payment of theinsurance claim.

Fireman’s Fund v Jamila & Co.

Facts: Firestone loss some properties due to theacts of its employees and the security guardsprovided by the security agency of Jamila & Co.Fireman’s Fund, the insurer of Firestone paid theloss and proceeded against Jamila and Jamila’sinsurer First Quezon City Ins. Co. Both deniedliability, TC dismissed complaint due to no cause ofaction.Ratio: Firestone no longer has cause of actionsince it has already been paid by Fireman’s Fund.Fireman’s Fund however has a cause of action asthis falls under Art. 2207 under the doctrine ofsubrogation.

Tabacalera v North Front Shipping

Facts: Sacks of corn grain valued at over 3M wereconsigned to RFM under a bill of lading and insuredwith Tabacalera et al. The vessel was owned byNorth Front. Prior to leaving port, the vessel wasinspected and was deemed fit to carrymerchandise. When it arrived, it advised RFM whodid not immediately commence unloading withoutany apparent reason. When unloaded, there wasshortage and the rest were moldy, rancid and unfitfor its purpose. RFM rejected cargo and demandedfrom North Front payment for damages which wasdenied. Tabacalera et.al paid, then sued NorthFront. TC and CA dismissed case.Ratio: North Point is liable since it is a commoncarrier and as such is required to observeextraordinary diligence in its vigilance over thegoods it transports. When goods placed in its careare lost or damaged, the carrier is presumed tohave been at fault or to have acted negligently.North Front has burden of proving it observedextraordinary diligence in order to avoidresponsibility which it failed to do. However sinceRFM was guilty of contributory negligence, theyshould share at least 40% of the loss. North Pointordered to pay Tabacalera et al 60% of the totalamount it paid to RFM.

Philamgen v CA

Facts: Coca-Cola Bottlers Philippines, Inc. (CCBPI)loaded on board “MV Asilda” 7,500 cases of 1-literCoke to be transported from Zamboanga City toCebu City. The vessel was owned and operated byFELMAN. The shipment was insured withPHILAMGEN. The vessel sank. CCBPI filed a claimwith FELMAN for recovery of damages which wasdenied and thus CCBPI filed an insurance claimwith PHILAMGEN which paid its claim forPHp755,250.00. Claiming its right of subrogation,PHILAMGEN sought recourse against FELMAN whodisclaimed any liability from the lost.Ratio: Clearly falls under Art. 2207 of the CivilCode. The payment by the assurer to the assuredoperates as an equitable assignment to the assurerof all the remedies which the assured may haveagainst the third party whose negligence orwrongful act caused the loss. The right ofsubrogation is not dependent upon, nor does itgrow out of any privity of contract. It accruessimply upon payment by the insurance company ofthe insurance claim.



St Paul v Macondray

Facts: Winthrop Products consigned to WinthropStearns drugs and medicines (from NY to Mla)through Macondray & Co. Insured with St. PaulFire. Arrastre services provided by Mla. PortServices. Upon arrival to Manila one drum andseveral cartons arrived in bad condition. WinthropStearms filed a claim for damages. St. Paul paidclaim. St. Paul then proceeded against the ArrastreService who resisted action which claimed itdelivered goods in same condition it received fromthe carrier (Macondray). Macondray denied liabilityclaiming liability ceased upon discharge of goodsfrom ship’s tackle. Note: there is a bill of ladingwhich stipulated that the amount of the liabilityshould only be Php1K++, but St. Paul paid amountUS$1k++Ratio: St. Paul should receive the amountaccording to the bill of lading. The purpose of thebill of lading is to provide for the rights andliabilities of the parties. The stipulation in the billof lading limiting the common carrier’s liability tothe value of the goods appearing in the bill is validand binding. St. Paul after paying the claim of theinsured for damages under the policy is subrogatedmerely to the rights of the assured as subrogee, itcan recover only the amount that is recoverable bythe latter. Since the right of Winthrop in case ofloss or damage to the goods is limited or restrictedby the provision in the bill of lading, a suit by St.Paul as subrogee is necessarily subject to likelimitations and restrictions.

Chapter VII

REINSURANCE

Title 12 – Reinsurance

Sec. 95. A contract of reinsurance is one bywhich an insurer procures a third person toinsure him against loss or liability by reason ofsuch original insurance.

1. DEFINITION OF REINSURANCE

It is a contract whereby one party, thereinsurer, agrees to indemnify another, thereinsured, either in whole or in part,against loss or liability which the latter maysustain or incur during a separate andoriginal contract of insurance with a thirdparty, the original insured.

A contract of reinsurance is an insurance ofan insurance or when insurance business istransferred from one insurance company toanother. Sometimes called “treaties.”

2. RATIONALE OF REINSURANCE

It is one type of liability insurance. It represents a further extension of the

fundamental idea of insurance, that is,distribution among many of the risksresting upon one.

Where an insurer desires to entirely relievehimself of liability under contracts madeand reinsures all his risks.

Contracts/treaties of reinsurance are plainlybeneficial to the public inasmuch as theypromote both efficiency and stability in theconduct of the insurance business.

3. BENEFITS OF REINSURANCE TO THEINSURER

1. Insurers are able to issue policies inexcess of such retention limits or themaximum claim it wishes to pay out of its ownresources.

2. Pooling the resources of manycompanies also extends greater coverage ofinsurance protection, extended even amongAPPLICANTS requiring large amounts and those noteligible for insurance at standard rates.

3. UNDERWRITERS benefit through theplacing of additional insurance in anexpanded market.

4. The insurance INDUSTRY benefits byreducing the waste arising out of policieswhich are applied for but not issued.

5. The REINSURER benefits through theacquisition of business which is expected toprove profitable in the long run.

4. BENEFITS OF REINSURANCE TO THEINSURED

1. It gives insurance companies greaterfinancial stability and thus makes theinsured’s individual policy more reliable.

2. If a large amount of insurance is needed,the insured may obtain it withoutnegotiating with numerous companies.

3. It enables the insured to obtainprotection promptly, without the delaythat would be required to divide anddistribute the amount among manycompanies.

4. All the insurance can be written underidentical contract provisions, whereasotherwise these might vary with thedifferent companies among whom theinsurance is divided.

5. Small companies are encouraged todivide large exposures for safety andenabled to accept a wide variety ofapplicants.

5. NATURE OF CONTRACT OFREINSURANCEThe subject of the contract of reinsurance is theprimary insurer’s risk and not the property insuredunder the original policy.

1. CONTRACT OF INDEMNITY AGAINSTLIABILITY. The reinsurer agrees toindemnify the insurer, not against actualpayment made but against liabilitiesincurred. It is not necessary that theinsurer first pay the loss accruing todemand payment from reinsurer.

2. CONTRACT SEPARATE FROM ORIGINALINSURANCE POLICY. Contracts of insuranceand reinsurance are independent from eachother. The practice is for the reinsurer topay the insurer even before the latter hasindemnified the original insured.

3. CONTRACT BASED ON ORIGINAL POLICY.The reinsurance policy is necessarily basedon the original contract, and the rights ofthe parties in the reinsurance are greatly



affected by the latter’s terms andconditions. The reinsured risk must be thesame as that covered by the original policy.

4. INSURABLE INTEREST REQUIREMENTAPPLICABLE. The doctrine of insurableinterest used in the original policy is alsoapplicable to reinsurance. Hence, theprimary insurer is not entitled to contractfor reinsurance exceeding the limits of thepolicy ceded to the reinsurer.

5. RULE ON SUBROGATION AVAILABLE. Ingeneral, a reinsurer, on payment of a loss,acquires the same rights by subrogation asare acquired in similar cases where theoriginal insurer pays a loss.

6. REINSURANCE VS DOUBLE INSURANCEDISTINGUISHED

19

Reinsurance Double Insurance

Insurer becomes theinsured, insofar asthe reinsurer isconcerned

Insurer remains asthe insurer of theoriginal insured

The subject of theinsurance is theoriginal insurer’s risk

The subject of theinsurance is theproperty beinginsured

Insurance of adifferent interest

Insurance of thesame interest

Original insured hasno interest in thecontract ofreinsurance which isindependent of theoriginal contract ofinsurance

Insured is the partyin interest in all thecontracts

Consent of theoriginal insured is notnecessary

The insured has togive his consent.

Sec. 96. Where an insurer obtainsreinsurance, except under automaticreinsurance treaties, he must communicate allthe representations of the original insured, andalso all the knowledge and information hepossesses, whether previously or subsequentlyacquired, which are material to the risk.

The reinsured has the duty to disclose allmaterial facts to the reinsurer (since therisk insured against in a contract ofreinsurance is the probability that theoriginal insurer may be compelled toindemnify form the loss under the policyissued by him), the duty imposed is similarto persons seeking an original insurance –that of the strictest good faith.

When called TREATIES – where the insurer insuresall or a substantial portion of its risk with oneinsurer

7. REINSURANCE TREATIES VSREINSURANCE POLICIES

19This was asked in 2005. Note when double

insurance occurs and the nature of the liabilities ofthe various insurers.

ReinsuranceTreaty

ReinsurancePolicy

Merely anagreement betweentwo insurancecompanies whereone agrees to cedeand the other toaccept reinsurancebusiness pursuantto provisionsspecified in thetreaty

Contract forindemnity oneinsurer makes withanother to protectthe first insurerfrom risk it hasalready assumed

Contracts forinsurance

Contracts ofinsurance

Automatic Reinsurance Treaties – the cedingcompany (reinsured) is bound to cede and thereinsurer is obligated to accept a fixed share of therisk which has to be reinsured under the contract.

Facultative Reinsurance Treaties – there is noobligation either to cede or to accept participationin the risk insured, each party having a free choice.

Advantage to the insurer - The advantage of theautomatic method is avoidance of delay in issuingthe insurer’s policy. The advantage of thefacultative method is that it receives the reinsurer’sunderwriting opinion before the policy is issued.

Protection to the reinsurer - By agreeing toaccept business automatically, the reinsurer isrelying on the underwriting judgment of the insurerand is bound to accept a case even though it maynot agree with the underwriting decision. Theinsurer is protected by the requirement that theoriginal insurer retains its full retention limit, whichassures a measure of self-interest

History: In the 1950’s, domestic insurer’s cededrisks to foreign reinsurers because there was noreinsurance company in the Philippines. Although,today even when there are domestic reinsurancecompanies operating in the country, domestic risksare still ceded to foreign reinsurance companiessince the Philippines is a CALAMITY PRONE country.

Limitation Code limits risk which a non-life insurer

may retain on any one subject of insuranceto 20% of its net worth.

Any reinsurance ceded by it is deducted indetermining the risk retained.

Sec. 97. A reinsurance is presumed to be acontract of indemnity against liability, and notmerely against damage.

Sec. 98. The original insured has no interestin a contract of reinsurance.

8. RELATIONSHIP OF INSURED TOREINSURERGeneral Rule

Original insured has NO INTEREST in thereinsurance contract

Whatever the reinsurer pays the insurerupon the happening of the loss becomespart of the insurer’s assets, and all itscreditors share equal rights with the



insured to demand payment from suchfunds.

Exceptions: Contract may expressly bind the reinsurer

to pay directly to the original owner anyloss for which the original insurer may beliable.

o Insured may choose to sue eitherinsurer, reinsurer or BOTH.However, total recovery cannot bemore than the actual loss.

o Liability of reinsurer to originalinsured would not be affected byany defense which the reinsurermay have against the originalinsurer.

o No novation which dischargesoriginal policy – original policyremains in full force and originalinsured has right to demand that allits terms and conditions becomplied with.

If insured agreed with insurer and reinsurerthat he will look only to reinsurer forindemnity in case of loss

o Novation discharged original insurero Technically not a reinsurance.

9. LIABILITY OF REINSURER TOREINSUREDReinsurer is entitled to avail himself of everydefense which the reinsured might urge in anaction by the person originally insured. Thus, thereinsurer is not liable to the reinsured for a lossunder an original policy if the latter is not liable tothe original insured or for an amount more than thesum actually paid to the insured.

Philam v Auditor

Facts: Philamlife had a reinsurance treaty withAIRCO with an agreement to pay reinsurancepremiums on an annual basis. The Central Bankcollected foreign exchange margin on theremittances of Philamlife to AIRCO. Philamlifefiled for refund contending that the reinsurancepremiums remitted were paid pursuant to thereinsurance treaty and therefore were pre-existing obligations expressly exempt fro themargin fee.Ratio: Philamlife is not entitled to refund.Reinsurance treaties and reinsurance policies arenot one and the same. Reinsurance treaties arecontracts FOR insurance while reinsurancepolicies are contracts OF insurance. Philamlife’sobligation to remit reinsurance premiumsbecomes fixed and definite only upon theexecution of the reinsurance policy, because it isonly after a reinsurance policy is made thatpayment of reinsurance premiums may beexacted as it is only after Philamlife seeks toremit the reinsurance premiums that theobligation to pay the margin fee arises.

Fieldman’s v Asian Surety

Facts: Fieldman’s and Asian entered into areinsurance treaty wherein Asian will cede toFieldmen’s a specified portion of the amount ofinsurance underwritten by ASIAN. The contract

stipulates that if either party wishes to terminateor cancel the agreement, they must give at least3 moths notice by registered mail to the otherparty and the cancellation was to take effect asof the 31st of December of the year in which thenotice was given. Sometime in September 1961Fieldmen’s gave notice to Asian which Asian didnot reply to, Fieldmen’s gave 2 other notices.During this time, one of the reinsurance contracts– GSIS property was razed by fire. Asian filed aclaim with Fieldmen’s who denied liabilitypointing out that they have already terminatedthe reinsurance treaty.Ratio: The Facultative-Obligatory ReinsuranceTreaty Fire (part of the reinsurancecontract/treaty) provides that “in the event oftermination of this Agreement x x x, the liabilityof the Fieldmen’s under current cessions shallcontinue in full force and effect until theirnatural expiry x x x.” and “On the terminationof this Agreement from any cause whatever, theliability of the REINSURER (Fieldmen’s) under anycurrent cession including any amounts due to beceded under the terms of this Agreement whichare not cancelled in the ordinary course ofbusiness shall continue in full force untiltheir expiry unless the COMPANY (Asian)shall, prior to the 31st of December nextfollowing such notice, elect to withdraw theexisting cessions.” Thus insofar as the 2reinsurance agreements as concerned, theexpress stipulations did not ipso facto terminateall reinsurance cessions. Such cessionscontinued to be in full force until their respectivedates of expiration. Since it was under one ofsaid agreements, namely, the FacultativeObligatory Reinsurance Treaty-Fire, that thereinsurance cessions corresponding to the GSISpolicy had been made, FIELDMEN’S cannot avoidliability which arouse by reason of the burning ofthe insured property.

Coquia v Fieldmen’s Insurance

Facts: Fieldmen’s issued to Manila YellowTaxicab a common carrier accident insurancepolicy which will “indemnify the insured in theevent of accident caused by or arising out of theuse of Motor Vehicle against all sums which theinsured will become legally liable to pay inrespect of: death or bodily injury to any fare-paying passenger including the driver, conductorand/or inspector…” While policy was in force,Carlito Coquia driving the insured vehicle met anaccident and died. His heirs field complaintagainst Fieldmen’sRatio: Heirs of Coquia have cause of actionagainst Fieldmen’s under Art. 1311 of the Civil(contracts pour autrui). This rule is the exceptionto the general rule that only parties to a contractmay bring an action. Under this exception, thirdparties may demand the enforcement of thecontract which was made for his benefit.

Eternal Gardens Memorial Park Corp. v. ThePhil. American Life Insurance Co.April 9, 2008

Facts: This was a complaint of Eternal GardensMemorial Park Corp. (Eternal) seeking to claim on agroup life policy under which the clients of Eternalwho purchased burial lots from it on installmentbasis would be insured by Philippine American Life



Insurance Company (Philamlife). One such clientdied one year and eight months after Eternal hadsubmitted his application to Philamlife, which didnot act on the application. Philamlife, however,denied Eternal’s insurance claim. Eternal filed thecase before the Makati RTC, which had orderedPhilamlife to pay the proceeds of the policy. Onappeal, the CA reversed the RTC, dismissing thecase.

Held: The Court noted that the group life policywas ambiguous as to whether the insurancecoverage of Eternal’s clients became effective uponcontracting a loan with Eternal or upon Philamlife’sapproval. Emphasizing that an insurance contract isa contract of adhesion which must be construedliberally in favor of the insured and strictly againstthe insurer, which was the party which preparedand had exclusive control over the terms andphraseology of the insurance contract, theSupreme Court interpreted the ambiguity to meanthat upon a party’s purchase of a memorial lot oninstallment from Eternal, an insurance contractcovering the lot purchaser is created and the sameis effective until terminated by Philamlife’sdisapproval of the application. The Court likewisefound that Philamlife’s receipt of a letter, thecontents of which state that attached thereto areinsurance forms for a list of burial lot ownersincluding the disputed application, is an admissionof Philamlife against its own interest, as well as anacknowledgement of the receipt of the lettertogether with the attachments. Such receipt, theCourt said, shifted the burden of evidence toPhilamlife to prove that the letter did not containthe disputed application. Having failed to do so,Philamlife is deemed to have received theinsurance application. The Court thus orderedPhilamlife to pay Eternal PhP100,000 representingthe proceeds of the insurance policy, in addition tolegal interest and attorney’s fees.

Yolanda Signey v. Social Security SystemJanuary 28, 2008

Facts: The deceased in this case had 2 common-law wives, petitioner and Gina, and one legal wife,Editha. Petitioner had filed a claim with the SSSalleging that she was the legal wife and that herhusband had a common-law wife, Gina. Gina,however, filed the same claim with the SSS,alleging that both she and petitioner werecommon-law wives and that deceased had a legalwife. The SSS had denied petitioner’s claim statingthat the marriage between she and the deceasedwas not valid as it was executed during a priorexisting marriage of the deceased against Editha,that deceased’s only legitimate child hadpredeceased him, that deceased’s 4 children withpetitioner were all over 21 years of age and hencecannot qualify as dependents, and declareddeceased’s 2 children with Gina as primarybeneficiaries.

Held: Whoever claims entitlement to the benefitsprovided by law should establish his or her rightthereto by substantial evidence. Since petitioner isdisqualified to be a beneficiary and because thedeceased has no legitimate child, it follows that thedependent illegitimate minor children of thedeceased shall be entitled to the death benefits asprimary beneficiaries. The SSS Law is clear that fora minor child to qualify as a “dependent,” the only

requirements are that he/she must be below 21years of age, not married nor gainfully employed.In this case, the minor illegitimate children Ginalynand Rodelyn were born on 13 April 1996 and 20April 2000, respectively. Had the legitimate child ofthe deceased and Editha survived and qualified asa dependent under the SSS Law, Ginalyn andRodelyn would have been entitled to a shareequivalent to only 50% of the share of the saidlegitimate child. Since the legitimate child of thedeceased predeceased him, Ginalyn and Rodelyn,as the only qualified primary beneficiaries of thedeceased, are entitled to 100% of the benefits.

Filipinas Life Assurance Company v. ClementeN. Pedroso, et al.

February 4, 2008

Facts: The respondents were duped by an agent(Valle) of the petitioner into investing in a“promotional investment” program offering 8%prepaid interest a month for certain deposits madeon a monthly basis. Basically, the issue is whetheror not the insurance company should be heldsolidarily liable, or whether it should hold only theagent solely liable to the respondents.

Held: Filipinas Life, as the principal, is liable forobligations contracted by its agent Valle. By thecontract of agency, a person binds himself torender some service or to do something inrepresentation or on behalf of another, with theconsent or authority of the latter. The general ruleis that the principal is responsible for the acts of itsagent done within the scope of its authority, andshould bear the damage caused to third persons.When the agent exceeds his authority, the agentbecomes personally liable for the damage. Buteven when the agent exceeds his authority, theprincipal is still solidarily liable together with theagent if the principal allowed the agent to act asthough the agent had full powers. In other words,the acts of an agent beyond the scope of hisauthority do not bind the principal, unless theprincipal ratifies them, expressly or impliedly.Filipinas Life cannot profess ignorance of Valle’sacts. Even if Valle’s representations were beyondhis authority as a debit/insurance agent, FilipinasLife expressly and knowingly ratified Valle’s acts.It cannot even be denied that Filipinas Lifebenefited from the investments deposited by Vallein the account of Filipinas Life. In our consideredview, Filipinas Life had clothed Valle with apparentauthority; hence, it is now estopped to deny saidauthority. Innocent third persons should not beprejudiced if the principal failed to adopt theneeded measures to prevent misrepresentation,much more so if the principal ratified his agent’sacts beyond the latter’s authority.

Blue Cross Health Care v. Neomi and DaniloOlivares

February 12, 2008

Facts: Neomi suffered a stroke and applied forreimbursement of her medical bills from petitioner,her health care provider. Petitioner refused until acertification could be issued that her stroke was notdue to pre-existing conditions. Dr. Saniel, herphysician, however, was not able to issue such acertification, stating that because the patientinvoked the doctor-patient confidentiality, suchinformation could not be given ot the petitioner.



The issue is whether petitioner was able to provethat Neomi’s stroke was caused by pre-existingconditions and was therefore outside the coverageof her plan.Held: It is an established rule in insurancecontracts that when their terms contain limitationson liability, they should be construed strictlyagainst the insurer. These are contracts ofadhesion the terms of which must be interpretedand enforced stringently against the insurer whichprepared the contract. This doctrine is equallyapplicable to health care agreements. Petitionernever presented any evidence to prove thatrespondent Neomi's stroke was due to a pre-existing condition. It merely speculated that Dr.Saniel's report would be adverse to Neomi, basedon her invocation of the doctor-patient privilege.This was a disputable presumption at best. Sufficeit to say that this presumption does not apply if thesuppression is an exercise of a privilege. Here,respondents' refusal to present or allow thepresentation of Dr. Saniel's report was justified. Itwas privileged communication between physicianand patient. Furthermore, limitations of liability onthe part of the insurer or health care provider mustbe construed in such a way as to preclude it fromevading its obligations. Accordingly, they should bescrutinized by the courts with “extreme jealousy”and “care” and with a “jaundiced eye.” Sincepetitioner had the burden of proving exception toliability, it should have made its own assessment ofwhether respondent Neomi had a pre-existingcondition when it failed to obtain the attendingphysician's report. It could not just passively waitfor Dr. Saniel's report to bail it out. The merereliance on a disputable presumption does notmeet the strict standard required under ourjurisprudence.

Philippine Deposit Insurance Corporation v.COA

February 22, 2008

Facts: The former Finance Secretary, Mr.Roberto de Ocampo, in his capacity as ex-officio Chairman of the Philippine DepositInsurance Corporation (PDIC) Board for theyears 1994-1996 received a total amountof P440,068.62 representing BusinessPolicy Development and EnforcementExpenses (BPDEE) and Christmas giftchecks. The Auditor thereat issued Noticeof Disallowance disallowing in audit thepayment of said expenses on the groundthat it partook of the nature of additionalcompensation or remuneration in violationof the rule on multiple positions proscribedunder Section 13, Article VII of thePhilippine Constitution and Section 2(9),Republic Act No. 3591, as amended. PDICsought reconsideration of the subjectdisallowance but the same was denied byCOA. The SC affirmed with finality said COAdecision and resolution. The Final Order ofAdjudication (FOA) was issued to PDIC forenforcement of the decision. However,instead of complying with the Order, PDICcondoned the amount of P413,866.62invoking its power to condone underSection 8, paragraph 12 of its charter.Held: It is a fundamental rule that when ajudgment becomes final and executory it becomesimmutable and unalterable, the prevailing party

can have it executed as a matter of right, and theissuance of a writ of execution becomes aministerial duty of the court. The writ of executionmust conform to the judgment to be executed andadhere strictly to the very essential particulars.Following this rule, PDIC should have reasonablyexpected that an order directing the payment orrefund of the disallowed amount was forthcomingin accordance with the COA Rules as, in fact, aFinal Order of Adjudication was issued. Whatevermay have been the reason for the dismissal ofPDIC’s petition, the fact remains that the decisionupholding the audit disallowance had become finaland executory. At the risk of sounding trite, thedecision is now unalterable and immutable. It is nolonger subject to any revision, modification orappeal.In dismissing the petition and affirming the auditdisallowance, this Court effectively declared thatthe payment of the BPDEE to Secretary De Ocampois prohibited as it violates the rule against doublecompensation. This declaration necessarily alsomeans that condonation of the same payment infavor of the same person is likewise prohibited. Tosettle the matter once and for all, the auditdisallowance is not subject to condonation followingthe principle that what is prohibited directly is alsoprohibited indirectly. The audit disallowancecannot be circumvented and legitimized byresorting to condonation. The authority of PDIC tocondone applies only to ordinary receivables,penalties and surcharges and must be submitted tothe Commission before it is implemented. Thisprocedure would enable the Commission to inquireinto the propriety of the condonation and todetermine whether the same will not prejudice thegovernment’s interest, consistent with COA’sconstitutional mandate to examine, audit and settleall accounts of the government, its subdivisions,agencies and instrumentalities, includinggovernment-owned and controlled corporations.Furthermore, PDIC’s authority to condone under itscharter is circumscribed by the phrase “to protectthe interest of the Corporation.” This authority doesnot include the power to condone a liability thatarises from a violation of law. With greater reason,the condonation of a liability that arise from aviolation of no less than the Constitution, as in thiscase, is not encompassed by PDIC’s charter. It isnot in the interest of PDIC to forego auditdisallowances as it is neither its mandate nor itstask to perpetuate breaches of law.Gloria Sondayon v. P.J. Lhullier, Inc andRicardo DiagoFebruary 27, 2008

Facts: Petitioner had pledged her P250K watch torespondent pawnshop. The pawnshop was robbed,and among the items seized was petitioner’s watch.Petitioner tried to recover the watch butrespondent argued that the robbery was afortuitous event, hence, they were not liable.

Held: Had respondent company insured thearticles pledged against burglary, petitioner wouldhave been compensated for the loss from theburglary. Respondent company’s failure to insurethe article is, therefore, a contributory cause topetitioner’s loss. Considering, however, thatpetitioner agreed to a valuation of P15,000 for thearticle pledged in case of a loss, the replacementvalue for failure to insure is likewise limited toP15,000. Nevertheless, this Court, taking intoaccount all the circumstances of this case, deems it



fair and just to award exemplary damages againstrespondent company for its failure to comply withthe rule and regulation requiring it to insure thearticles pledged against fire and burglary, in theamount of Twenty Five Thousand (P25,000) Pesos.This is without prejudice to appropriate proceedingsto recover any excess value of the article pledgedfrom amounts that may be or have been awardedpayable by third parties answerable for the lossarising from the robbery.

Philippine Deposit Insurance

Corporation Act

(RA 3591 as amended by RAs 6037, 7400,8791 and 9302 and PDs 120, 1094, 1451 and

1935)

1. Basic Policy

To insure the deposits of all banks which areentitled to the benefits of insurance under thisAct

To promote and safeguard the interests of thedepositing public by way of providingpermanent and continuing insurance coverageon all insured deposits.

2. PDIC Functions

Can lend money to banks before closure Insurer of deposits against bank closures Acts as receiver for banks The PDIC Act is not applicable to Offshore

Banking Units Nature of insurance function: compulsory

insurance on all bank deposits

Administrative Functions:

2.1. Authority to Examine BanksThe PDIC has the power to conduct examination ofbanks with prior approval of the Monetary Board:

Provided, No examination can be conductedwithin 12 months from the last examinationdate.

2.2. Authority to Underwrite and AdvanceLegal Fees and Litigation Expenses

Who are covered?The Corporation shall underwrite or advancelitigation costs and expenses, or provide legalassistance to its directors, officers, employees oragents in connection with any civil, criminal,administrative or any other action or proceeding, towhich such director, officer, employee or agent ismade a party by reason of the exercise of authorityor performance of functions and duties under thisAct.

Directors, officers, employees or agents who shallresign, retire, transfer to another agency or beseparated from the service, shall continue to beprovided with such legal protection in connectionwith any act done or omitted to be done by them ingood faith during their tenure or employment.

This shall not apply to any civil, criminal,administrative or any action or proceeding initiated

by the Corporation against such director, officer,employee or agent.

What fees / expenses are covered? Litigation costs and expenses, including legal

fees and other expenses of external counsel, orproviding legal assistance

Legal assistance shall include the grant oradvance of reasonable legal fees to enable theemployee to engage counsel of his choice.

In the event of a settlement or compromise,indemnification shall be provided only when theCorporation is advised by counsel that thepersons to be indemnified did not commit anynegligence or misconduct.

The costs and expenses incurred may be paidby the Corporation in advance of the finaldisposition upon receipt of an undertaking bythe employee to repay the amount advancedshould it ultimately be determined by the Boardof Directors that he is not entitled to beindemnified.

2.3. Authority to Provide FinancialAssistance

What entities are covered?

Insured banks in danger of closingWhen the Corporation has determined that

» an insured bank is in danger ofclosing

» the continued operation of suchbank is essential to provideadequate banking service in thecommunity maintain financialstability in the economy.

Insured banks that have alreadyclosed

The authority to extend financial assistance mayalso be exercised in the case of a closed insuredbank if the Corporation finds that

» the resumption of operations ofsuch bank is vital to the interests ofthe community, or

» a severe financial climate existswhich threatens the stability of anumber of banks possessingsignificant resources

Entities acquiring /merging withclosed / closing insured banks

The Corporation may provide any corporation» acquiring control of» merging with» consolidating with» acquiring the assets of

an insured bank in danger of closing in order toprevent such.

Closure of entities that may producesystemic consequences

When the Monetary Board has determined thatthere are systemic consequences of a probableclosure of an insured bank, the Corporation maygrant financial assistance in such amount as maybe necessary to prevent its failure or closure and/or restore the insured bank to viable operations.

A systemic risk refers to the possibility thatfailure of one bank to settle net transactions withother banks will trigger a chain reaction, deprivingother banks of funds leading to a general shutdown



of normal clearing and settlement activity. It alsomeans the likelihood of a sudden, unexpectedcollapse of confidence in a significant portion of thebanking or financial system with potentially largereal economic effects.

What are PDIC’s powers with regard tofinancial assistance?

It is authorized to make loans purchase the assets assume liabilities make deposits Provide financial assistance which may take the

form of equity or quasi-equity of the insuredbank Provided That the Corporation shalldispose of such equity as soon as practicable.

The Corporation, prior to the exercise of its powers,shall determine that actual payoff and liquidationwill be more expensive than the exercise of thispower.

The Corporation may not use its authority topurchase the voting or common stock of an insuredbank but it can enter into and enforce agreementsthat it determines to be necessary to protect itsfinancial interests.

3. Concept of Insured Deposits

The term “insured deposit” means the amountdue to any depositor for deposits in an insuredbank net of any obligation of the depositor to theinsured bank as of the date of closure, but not toexceed P250,000.00.

In determining such amount due to any depositor,there shall be added together all deposits in thebank maintained in the same right and capacity forhis benefit either in his own name or in the nameof others.

A joint account regardless of whether theconjunction “and,” “or,” “and/or” is used, shall beinsured separately from any individually-owneddeposit account:

Provided, Thata. If the account is held jointly by two or more

natural persons, or by two or more juridicalpersons or entities, the maximum insureddeposit shall be divided into as many equalshares as there are individuals, juridicalpersons or entities, unless a differentsharing is stipulated in the document ofdeposit and

b. If the account is held by a juridical personor entity jointly with one or more naturalpersons, the maximum insured depositshall be presumed to belong entirely tosuch juridical person or entity

c. The aggregate of the interests of each co-owner over several joint accounts, whetherowned by the same or differentcombinations of individuals, juridicalpersons or entities, shall likewise besubject to the maximum insured deposit ofP250,000.00

No owner/holder of any negotiable certificate ofdeposit shall be recognized as a depositorentitled to the rights provided in this Act unless

his name is registered as owner/holder thereofin the books of the issuing bank.

4. Liability to Depositors

4.1. Commencement of LiabilityLiability commences when an insured bank isclosed by the Monetary Board pursuant to Sec 30of R.A. 7653.

4.2. Extent of LiabilityLiability covers the amount due to any depositor fordeposits in an insured bank net of any obligation ofthe depositor to the insured bank as of the date ofclosure, but not to exceed P250,000.00.

4.3. Determination of Insured DepositsThe Corporation shall commence the determinationof insured deposits upon its actual takeover of theclosed bank.

In order that a claim for deposit insurance with thePDIC may prosper, the law requires that acorresponding deposit be placed in the insuredbank. A deposit as defined in Section 3(f), may beconstituted only if money or the equivalent ofmoney is received by a bank:

(f) The term "deposit" means the unpaidbalance of money or its equivalent receivedby a bank in the usual course of businessand for which it has given or is obliged togive credit to a commercial, checking,savings, time or thrift account or which isevidenced by passbook, check and/orcertificate of deposit (PDIC vs CA, 1997)

The Corporation shall publish the notice once aweek for at least 3 consecutive weeks in anewspaper of general circulation or, whenappropriate, in a newspaper circulated in thecommunity or communities where the closed bankor its branches are located.

4.4. Calculation of Liability(See Part III)

Special Provisions for Joint Accounts (PDIC Bulletin2004-04)

1. A joint account regardless of whether theconjunction “and”, “or” or “and/or” is used,shall be insured separately from anindividually-owned deposit account.

2. If the account is held jointly by two or morenatural persons, or by two or more juridicalpersons or entities, the maximum insureddeposit shall be divided into as many equalshares as there are individuals, juridicalpersons or entities, unless a differentsharing is stipulated in the document ofdeposit.

Document of deposit referred to in thepreceding paragraph pertains to jointaccount agreements, account ledgers,certificate of time deposits, passbooks orother evidence of deposits, specimensignature cards, corporate resolutions,contracts or similar instruments, copies ofwhich must be in the custody or possessionof the bank upon takeover by PDIC.



3. If the account is held by a juridical personor entity jointly with one or more naturalpersons, the maximum insured depositshall be presumed to belong entirely to thejuridical person or entity.

4. The aggregate of the interests or totalshare of each co-owner over several jointaccounts, whether owned by the same ordifferent combinations of individuals,juridical persons or entities, shall likewisebe subject to the maximum insured depositof P250,000.00.

5. The amount of insurance due to anydepositor for deposits in an insured bankshall be net of any matured or unmaturedobligation of the depositor to the insuredbank as of date of closure. In case of jointdeposit accounts where only one of the co-depositors has an obligation to the closedbank, the following shall apply:

a. Where the deposit is a joint“and/or” or “or” account which iscovered by a hold-out agreement,the obligation secured by the hold-out agreement shall be deductedfrom the balance of the jointaccount, regardless of the fact thatonly one of the co-depositors in thejoint account is indebted to theclosed bank.

b. When the deposit is a joint “and”account which is covered by a hold-out agreement, the obligationsecured by the hold-out agreementshall be deducted only from theshare in the joint account of thedepositor who is indebted to theclosed bank, unless his co-depositor is himself a co-signatoryto the hold-out agreement.

c. Where the deposit is either a joint“and”, “or” or “and/or” accountwhich is not covered by a hold-outagreement, the obligation of thedepositor who is indebted to theclosed bank shall be deducted onlyfrom his share in the balance of thejoint deposit account.

4.5. Mode of PaymentPayment of the insured deposits shall be made bythe Corporation as soon as possible either

» by cash or» by making available to each depositor a

transferred deposit in another insured.

The term “transfer deposit” means a deposit inan insured bank made available to a depositor bythe Corporation as payment of insured deposit ofsuch depositor in a closed bank and assumed byanother insured bank.

4.6. Conditions that may be imposed prior topayment

» The Corporation, in its discretion, mayrequire proof of claims to be filed beforepaying the insured deposits

» Where the Corporation is not satisfied as tothe viability of a claim for an insureddeposit, it may require final determination

of a court of competent jurisdiction beforepaying such claim

4.7. Effect of Payment of Insured Deposit» PDIC is discharged from obligations

Payment of an insured deposit to anyperson by the Corporation shalldischarge the Corporation

Payment of a transferred deposit by thenew bank or by an insured bank inwhich a transferred deposit has beenmade available shall discharge theCorporation and such new bank orother insured bank

» PDIC is subrogated to depositor’s rights The Corporation, upon payment of any

depositor shall be subrogated to allrights of the depositor against theclosed bank. But the depositor shallretain his claim for any uninsuredportion of his deposit.

All payments by the Corporation ofinsured deposits in closed bankspartake of the nature of public funds,and must be considered a preferredcredit similar to taxes due to theNational Government.

4.8. Failure to settle claim of insureddepositorFailure to settle the claim, within 6 months fromthe date of filing of claim for insured deposit, wheresuch failure was due to grave abuse of discretion,gross negligence, bad faith, or malice, shall subjectthe directors, officers or employees responsible toimprisonment from 6 months to 1 year.

The period shall not apply if the validity of theclaim requires the resolution of issues of facts andor law by another office, body or agency.

4.9. Failure of Depositor to Claim InsuredDepositUnless otherwise waived by the Corporation, if thedepositor in the closed bank shall fail to claim hisinsured deposits with the Corporation

» within 2 years from actual takeover of theclosed bank by the receiver, or

» within 2 years after the two-year period tofile a claim,

all rights of the depositor against the Corporationshall be barred.

However, all rights of the depositor against theclosed bank and its shareholders or thereceivership estate to which the Corporation mayhave become subrogated, shall revert to thedepositor.

5. Restriction on Payment of Dividends byInsured Bank

5.1. General Rule:No insured bank shall pay any dividend on itscapital stock or interest on its capital notes ordebentures (if such interest is required to be paidonly out of net profits) or distribute any of itscapital assets while it remains in default in thepayment of any assessment due to the Corporation

5.2. Exception: If such default is due to a dispute between the

insured bank and the Corporation over theamount of such assessment and Bank deposits



security satisfactory to the Corporation forpayment upon final determination

6. Prohibition against Splitting ofDeposits

The penalty of prision mayor or a fine of not lessthan P50,000 but not more than P2,000,000 orboth shall be imposed upon any director, officer,employee or agent of a bank for :

xxx5) splitting of deposits or creation of fictitious loansor deposit accounts.

xxx

7. Prohibition against Issuance of TROs

No court, except the CA, shall issue any TRO,preliminary injunction or preliminary mandatoryinjunction against the Corporation.

This prohibition shall apply in all cases, disputesor controversies instituted by a private party, theinsured bank, or any shareholder.)

The Supreme Court may issue a restraining orderor injunction wheno the matter is of extreme urgency involving a

constitutional issueo grave injustice and irreparable injury will

ariseo The party applying shall file a bond in an

amount to be fixed by the Supreme Court

Effects of issuing TRO: Any restraining order or injunction issued in

violation of this Section is void and of no forceand effect

Any judge who has issued the same shall sufferthe penalty of suspension of at least 60 dayswithout pay


TRANSPORTATION LAW COMMERCIAL LAW

TRANSPORTATION LAW

I. General Considerations

A. Public Utilities

1987 Constitution, Article XII

Section 11

No franchise, certificate, or any other form ofauthorization for the operation of a public utilityshall be granted except to citizens of thePhilippines or to corporations or associationsorganized under the laws of the Philippines, at leastsixty per centum of whose capital is owned by suchcitizens; nor shall such franchise, certificate, orauthorization be exclusive in character or for alonger period than fifty years. Neither shall anysuch franchise or right be granted except under thecondition that it shall be subject to amendment,alteration, or repeal by the Congress when thecommon good so requires. The State shallencourage equity participation in public utilities bythe general public. The participation of foreigninvestors in the governing body of any public utilityenterprise shall be limited to their proportionateshare in its capital, and all the executive andmanaging officers of such corporation orassociation must be citizens of the Philippines.

Section 17

In times of national emergency, when the publicinterest so requires, the State may, during theemergency and under reasonable terms prescribedby it, temporarily take over or direct the operationof any privately-owned public utility or businessaffected with public interest.

Agan, Jr. vs. PIATCO, 402 SCRA 612 (2003)

The Constitution envisions a situation wherein theexigencies of the times necessitated thegovernment to “temporarily take over or direct theoperation of any privately owned public utility orbusiness affected with public interest”. Since theState, in this case, is merely exercising its policepower, such exercise must not be unreasonablyhampered nor can it be a source of obligation, inthe absence of damage due to arbitrariness. Also,requiring, the government pay reasonablecompensation for the reasonable use of theproperty pursuant to the operation of the businesscontravenes the Constitution.

Section 18

The State may, in the interest of national welfareor defense, establish and operate vital industriesand, upon payment of just compensation, transferto public ownership utilities and other privateenterprises to be operated by the Government.

Section 19

The State shall regulate or prohibit monopolieswhen the public interest so requires. Nocombinations in restraint of trade or unfaircompetition shall be allowed.

The Public Service Law, CA 146, as amended

Sec. 13(b)

The term "public service" includes every personthat now or hereafter may own, operate, manage,or control in the Philippines, for hire orcompensation, with general or limited clientele,whether permanent, occasional or accidental, anddone for general business purposes, any commoncarrier, railroad, street railway, traction railway,sub-way motor vehicle, either for freight orpassenger, or both with or without fixed route andwhether may be its classification, freight or carrierservice of any class, express service, steamboat orsteamship line, pontines, ferries, and water craft,engaged in the transportation of passengers orfreight or both, shipyard, marine railways, marinerepair shop, [warehouse] wharf or dock, ice plant,ice-refrigeration plant, canal, irrigation system,gas, electric light, heat and power water supply andpower, petroleum, sewerage system, wire orwireless communications system, wire or wirelessbroadcasting stations and other similar publicservices: Provided, however, That a personengaged in agriculture, not otherwise a publicservice, who owns a motor vehicle and uses itpersonally and/or enters into a special contractwhereby said motor vehicle is offered for hire orcompensation to a third party or third partiesengaged in agriculture, not itself or themselves apublic service, for operation by the latter for alimited time and for a specific purpose directlyconnected with the cultivation of his or their farm,the transportation, processing, and marketing ofagricultural products of such third party or thirdparties shall not be considered as operating apublic service for the purposes of this Act.

WHAT IS A PUBLIC UTILITY?

Kilusang Mayo Uno Labor Center v. Garcia(1994)

Public utilities are privately owned and operatedbusinesses whose services are essential to thegeneral public. They are enterprises which speciallycater to the needs of the public and conduce totheir comfort and convenience. As such, publicutility services are impressed with public interestand concern. When, therefore, one devotes hisproperty to a use in which the public has aninterest, he, in effect grants to the public aninterest in that use, and must submit to the controlby the public for the common good, to the extentof the interest he has thus created.

Albano v. Reyes (1989)Franchises issued by Congress are not requiredbefore each and every public utility may operate.A public utility is a business or service engaged inregularly supplying the public with somecommodity or service of public consequence, suchas electricity, gas, water, transportation, telephoneor telegraph services. Apart from statutes whichdefine public utilities that are within the purview ofsuch statutes, it would be difficult to construct adefinition of a public utility which would fit everyconceivable case. As its name indicates, however,the term public utility implies a public use andservice to the public.



WHEN IS A BUSINESS A PUBLIC UTILITY?When it involves a commodity or service of

public consequence.

2 CONCEPTS OF PUBLIC UTILITY UNDER THE 1987CONSTITUTION:

1. A public utility is a partly nationalized businessendeavor

2. It is a business affected with the public interest.(“national emergency”; “general welfare”;“common good”)

2 TESTS FOR DETERMINING PUBLIC UTILITY:1. Is it engaged in regularly supplying the public

with some commodity or service (per definitionin Albano v. Reyes below)

2. If #1 is uncertain, is it a public service asdefined in the Public Service Law under CA 146Sec 13(b)? If it falls under any one of theexamples given under CA 146 Sec 13(b), then itis a public utility.

WHAT DOES “REGULARLY SUPPLYING THE PUBLIC…”MEAN?The utility must hold itself out to the public as apublic utility by demand and as a matter of right,and not by permission. To determine whatconstitutes regularity, look at it from theperspective of the public, and not the operator.It is a service or a readiness to serve an indefiniteportion of the population subject only to thelimitations of the service as given by the grant suchthat [the utility] incurs a liability as a violation ofits duty if it refuses, such that the availment of theservice has become, through time, a matter ofright and not of mere privilege. (also in US v. TanPiaco)

ARE ALL PUBLIC UTILITIES COMMODITIES OR SERVICE OF

PUBLIC CONSEQUENCE?Yes. All public utilities have a public consequence.But not all businesses bearing public consequenceare public utilities. This is because almost all typesof business have some form of regulation from theState.

TO WHOM DOES “PUBLIC” REFER TO? IS THE WORD

“PUBLIC” IN “PUBLIC UTILITY” THE SAME IN “PUBLIC

SERVICE”?There are three senses of the word “public” inTransportation Law: a) public utility; b) publicservice; and c) definition of a common carrierunder Art. 1732 of the Civil Code.To determine a public utility, the two tests above &the definition under Albano v. Reyes apply.

WHAT IS A PUBLIC SERVICE?

Kilusang Mayo Uno Labor Center v. Garcia Jr.(1994)

In determining public need, the presumptionof need for a service shall be deemed in favor ofthe applicant. The burden of proving that there isno need for a proposed service shall be with theoppositor(s).

Public convenience and necessity exists whenthe proposed facility or service meets a reasonablewant of the public and supply a need which theexisting facilities do not adequately supply. Theexistence or nonexistence of public convenienceand necessity is therefore a question of fact thatmust be established by evidence, real and/ortestimonial; empirical data; statistics and suchother means necessary, in a public hearing

conducted for that purpose. The object andpurpose of such procedure, among other things, isto look out for, and protect, the interests of boththe public and the existing transport operators.

Albano v. Reyes (1989)Franchises issued by Congress are not

required before each and every public utility mayoperate.

A public utility is a business or serviceengaged in regularly supplying the public withsome commodity or service of public consequence,such as electricity, gas, water, transportation,telephone or telegraph services. Apart fromstatutes which define public utilities that are withinthe purview of such statutes, it would be difficult toconstruct a definition of a public utility which wouldfit every conceivable case. As its name indicates,however, the term public utility implies a public useand service to the public.

Tatad v GarciaWhat constitutes a public utility is not their

ownership but their use to serve the public.

PAL v. Civil Aeronautics Board (1997)WON “certificates of Public Convenience and

Necessity” (franchise required) as used in RA 776to authorize the Board is different from“Certificates of Public Convenience” (no franchiserequired)? No

There is no authoritative basis indistinguishing a Certificate of Public Convenienceand Necessity (franchise required) and a Certificateof Public Convenience (no franchise required)based only on the use of the words convenienceand necessity. The use of the word “necessity” inconjunction with “public convenience” in acertificate of authorization to a public service entityto operate, does not in any way modify the natureof such certification, or the requirements for theissuance of the same. It is the law whichdetermines the requisites for the issuance of suchcertification, and not the title indicating thecertificate.

WHAT IS THE DIFFERENCE BETWEEN APUBLIC UTILITY AND A PUBLIC SERVICE?

For all intents and purposes, they are thesame and are used interchangeably.

However, public utility is a broader conceptthat embraces public service. A public service isnecessarily a public utility, but not all public utilitiesare public services.

WHEN IS A PUBLIC UTILITY NOT A PUBLICSERVICE?

If it is not included in the enumeration in thePublic Service Act (CA 146 Sec. 13(b)) and Albanov. Reyes.

HOW DO THEY DIFFER IN CONSTITUTIONALRESTRICTIONS AND REQUIREMENTS?

If a business is a public utility, then it issubject to the limitations and restrictions providedfor in the 1987 Constitution (Art 12 Secs.11,17,18,19) Since a public service is necessarily apublic utility, therefore public services are subjectto the same Constitutional limitations andrestrictions.



If a public utility is not a public service, it isstill subject to the same Constitutional limitationsand restrictions.

Therefore, public utility = Constitutionpublic service = Constitution + Public

Service Act

B. Transportation

DEFINITIONThe movement of goods or persons from one

place to another, by a carrier. (Black’s LawDictionary)

A contract of transportation is one whereby acertain person or association of persons obligatethemselves to transport persons, things, news fromone place to another for a fixed price. It is theremoval of goods or persons from one place toanother.

NOTE:Art. 1766 In all matters not regulated by this

Code, the rights and obligations of common carriersshall be governed by the Code of Commerce and byspecial laws.

PUBLIC NATUREIt is for public use, which means that the

use is not confined to privileged individuals, but isinstead open to an indefinite public. It is thisindefinite or unrestricted quality that gives it itspublic character. The true criterion by which tojudge the character of the use is whether the publicmay enjoy it by right or by permission. There mustbe, in general, a right under the law which compelsthe owner to give the service for the general public.

PUBLIC SERVICE ACT

THE PUBLIC SERVICE LAW (CA 146)

(As amended, and as modified particularly by PDNo. 1, Integrated Reorganization Plan and EO 546)

CHAPTER IORGANIZATION

SECTION 1

This Act shall be known as the "Public Service Act."

SECTION 2

There is created under the Department of Justice acommission which shall be designated and knownas the Public Service Commission, composed of onePublic Service Commissioner and five AssociateCommissioners, and which shall be vested with thepowers and duties hereafter specified. Wheneverthe word "Commission" is used in this Act, it shallbe held to mean the Public Service Commission,and whenever the word "Commissioner" is used inthis Act it shall be held to mean the Public ServiceCommissioner or anyone of the AssociateCommissioners. The Public Service Commissionerand the Associate Public Service Commissionersshall be natural born citizens and residents of thePhilippines, not under thirty years of age; membersof the Bar of the Philippines, with at least five yearsof law practice or five years of employment in thegovernment service requiring a lawyer's diploma;

and shall be appointed by the President of thePhilippines, with the consent of the Commission onAppointments of the Congress of the Philippines:Provided, however, That the present Commissionerand the personnel of the Commission shall continuein office without the necessity of re-appointment.The Commissioners shall have the rank andprivilege of retirement of Judges of the Courts ofFirst Instance. (As amended by Republic Act Nos.178 and 2677)

SECTION 3

The Commissioner and Associate Commissionersshall hold office until they reach the age of seventyyears, or until removed in accordance with theprocedures prescribed in section one hundred andseventy-three of Act Numbered Twenty-sevenhundred and eleven, known as the RevisedAdministrative Code: Provided, however, That uponretirement any Commissioner of AssociateCommissioner shall be entitled to all retirementbenefits and privileges for Judges of the Courts ofFirst Instance or under the retirement law to whichhe may be entitled on the date of his retirement. Incase of the absence, for any reason, of the PublicService Commissioner, the Associate Commissionerwith seniority of appointment shall act asCommissioner. If on account of absence, illness, orincapacity of any of three Commissioners, orwhenever by reason of temporary disability of anyCommissioner or of a vacancy occurring therein,the requisite number of Commissioners necessaryto render a decision or issue an order in any case isnot present, or in the event of a tie vote among theCommissioners, the Secretary of Justice maydesignate such number of Judges of the Courts ofFirst Instance, or such number of attorneys of thelegal division of the Commission, as may benecessary to sit temporarily as Commissioners inthe Public Service Commission.

The Public Service Commission shall sit individuallyor as a body en banc or in two divisions of threeCommissioners each. The Public ServiceCommissioner shall preside when the Commissionsits en banc and in one division. In the otherdivision, the Associate Commissioner with seniorityof appointment in that division shall preside. FiveCommissioners shall constitute a quorum forsessions en banc and two Commissioners shallconstitute a quorum for the sessions of a division.In the absence of a quorum, the session shall beadjourned until the requisite number is present.

All the powers herein vested upon the Commissionshall be considered vested upon any of theCommissioners, acting either individually or jointlyas hereinafter provided. The Commissioners shallequitably divide among themselves all pendingcases and those that may hereafter be submittedto the Commissioner, in such manner and form asthey may determine, and shall proceed to hear anddetermine the case assigned to each or to theirrespective divisions, or to the Commission en bancas follows: uncontested cases, except thosepertaining to the fixing of rates, shall be decided byone Commissioner; contested cases and all casesinvolving the fixing of rates shall be decided by theCommission in division and the concurrence of atleast two Commissioners in the division shall benecessary for the promulgation of a decision ornon-interlocutory order in these cases: Provided,



however, That any motion for reconsideration of adecision or non-interlocutory order of anyCommissioner or division shall be heard directly bythe Commission en banc and the concurrence of atleast four Commissioners shall be necessary for thepromulgation of a final decision or order resolvingsuch motion for reconsideration. (As amended byRepublic Act Nos. 723 and 2677)

SECTION 4

The Public Service Commissioner shall receive anannual compensation of thirteen thousand pesos;and each of the Associate Commissioners an annualcompensation of twelve thousand pesos. TheCommissioners shall be assisted by one chiefattorney, one finance and rate regulation officer,one chief utilities regulation engineer, one chiefaccountant, one transportation regulation chief,one secretary of the Public Service Commission,and three public utilities advisers who shall receivean annual compensation of not less than tenthousand eight hundred pesos each; five assistantchiefs of division who shall receive an annualcompensation of not less than nine thousand sixhundred pesos each; twelve attorneys who shallreceive an annual compensation of not less thannine thousand pesos each; and a technical andconfidential staff to be composed of two certifiedpublic accounts, two electrical engineers, twomechanical or communication engineers, and twospecial assistants who shall receive an annualcompensation of not less than seven thousand twohundred pesos each. (As amended by Republic ActNos. 723, 2677 and 3792)

SECTION 5

The Public Service Commissioner, the AssociatePublic Service Commissioners, and all other officersand employees of the Public Service Commissionshall enjoy the same privileges and rights as theofficer and employees of the classified civil serviceof the Government of the Philippines. They shallalso be entitled to receive from the Government ofthe Philippines their necessary travelling expenseswhile travelling on the business of the Commission,which shall be paid on proper voucher therefor,approved by the Secretary of Justice, out of fundsappropriated for the contingent expenses of theCommission.

When the exigency of the service so requires andwith the approval of the Secretary of Justice, andsubject to the provisions of Commonwealth ActNumbered Two hundred forty-six, as amended,funds may be set aside from the appropriationsprovided for the Commission and/or from the feescollected under Section forty of this Act to defraythe expenses to be incurred by the Public ServiceCommissioner or any of the AssociateCommissioners, officers or employees of theCommission to be designated by the Commissioner,with the approval of the Secretary of Justice, in thestudy of modern trends in supervision andregulation of public services. (As amended byRepublic Act No. 3792)

SECTION 6

The Secretary of Justice, upon recommendation ofthe Public Service Commissioner, shall appoint allsubordinate officers and employees of theCommission as may be provided in theAppropriation Act. The Public Service Commissionershall have general executive control, direction, andsupervision over the work of the Commission andof its members, body and personnel, and over alladministrative business. (As amended by RepublicAct Nos. 178 and 3792)

SECTION 7

The Secretary of the Commission, under thedirection of the Commissioner, shall have charge ofthe administrative business of the Commission andshall perform such other duties as may be requiredof him. He shall be the recorder and officialreporter of the proceedings of the Commission andshall have authority to administer oaths in allmatters coming under the jurisdiction of theCommission. He shall be the custodian of therecords, maps, profiles, tariffs, itineraries, reports,and any other documents and papers filed with theCommission or entrusted to his care and shall beresponsible therefor to the Commission. He shallhave authority to designate from time to time anyof his delegates to perform the duties of DeputySecretary with any of the Commissioners.

SECTION 8

The Commission shall furnish the Secretary such ofits findings and decisions as in its judgment may beof general public interest; the Secretary shallcompile the same for the purpose of publication ina series of volumes to be designated "Reports ofthe Public Service Commission of the Philippines,"which shall be published in such form and manneras may be best adapted for public information anduse, and such authorized publications shall becompetent evidence of the reports and decisions ofthe Commission therein contained without anyfurther proof or authentication thereof.

SECTION 9

No member or employee of the Commission shallhave any official or professional relation with anypublic service as herein defined, or hold any officeof profit or trust with the Government of thePhilippines.

SECTION 10

The Commission shall have its office in the City ofManila or at such other place as may bedesignated, and may hold hearings on anyproceedings at such times and places, within thePhilippines, as it may provide by order in writing:Provided, That during the months of April and Mayof each year, at least three Commissioners shall beon vacation in such manner that once every twoyears at least three of them shall be on duty duringApril and May: Provided, however, That in theinterest of public service, the Secretary of Justicemay require any or all the Commissioners not onduty to render services and perform their duties



during the vacation months. (As amended byRepublic Act Nos. 176 and 3792)

SECTION 11

The Commission shall have the power to makeneedful rules for its Government and otherproceedings not inconsistent with this Act and shalladopt a common seal, and judicial notice shall betaken for such seal. True copies of said rules andother amendments shall be promptly furnished tothe Bureau of Printing and shall be forthwithpublished in the Official Gazette.

SECTION 13

(a) The Commission shall have jurisdiction,supervision, and control over all public services andtheir franchises, equipment, and other properties,and in the exercise of its authority, it shall have thenecessary powers and the aid of the public force:Provided, That public services owned or operatedby government entities or government-owned orcontrolled corporations shall be regulated by theCommission in the same way as privately-ownedpublic services, but certificates of publicconvenience or certificates of public convenienceand necessity shall not be required of such entitiesor corporations: And provided, further, That it shallhave no authority to require steamboats, motorships and steamship lines, whether privately-owned, or owned or operated by any Governmentcontrolled corporation or instrumentality to obtaincertificate of public convenience or to prescribetheir definite routes or lines of service.

(b) The term "public service" includes every personthat now or hereafter may own, operate, manage,or control in the Philippines, for hire orcompensation, with general or limited clientele,whether permanent, occasional or accidental, anddone for general business purposes, any commoncarrier, railroad, street railway, traction railway,sub-way motor vehicle, either for freight orpassenger, or both with or without fixed route andwhether may be its classification, freight or carrierservice of any class, express service, steamboat orsteamship line, pontines, ferries, and water craft,engaged in the transportation of passengers orfreight or both, shipyard, marine railways, marinerepair shop, [warehouse] wharf or dock, ice plant,ice-refrigeration plant, canal, irrigation system,gas, electric light, heat and power water supply andpower, petroleum, sewerage system, wire orwireless communications system, wire or wirelessbroadcasting stations and other similar publicservices: Provided, however, That a personengaged in agriculture, not otherwise a publicservice, who owns a motor vehicle and uses itpersonally and/or enters into a special contractwhereby said motor vehicle is offered for hire orcompensation to a third party or third partiesengaged in agriculture, not itself or themselves apublic service, for operation by the latter for alimited time and for a specific purpose directlyconnected with the cultivation of his or their farm,the transportation, processing, and marketing ofagricultural products of such third party or thirdparties shall not be considered as operating apublic service for the purposes of this Act.

(c) The word "person" includes every individual,co-partnership, joint-stock company or corporation,whether domestic or foreign, their lessees,trustees, or receivers, as well as any municipality,province, city, government-owned or controlledcorporation, or agency of the Government of thePhilippines, and whatever other persons or entitiesthat may own or possess or operate publicservices. (As amended by Com. Act 454 and RA No.2677)

SECTION 14

The following are exempted from the provisions ofthe preceding section:

(a) Warehouses;

(b) Vehicles drawn by animals and bancas movedby oar or sail, and tugboats and lighters;

(c) Airships within the Philippines except asregards the fixing of their maximum rates onfreight and passengers;

(d) Radio companies except with respect to thefixing of rates;

(e) Public services owned or operated by anyinstrumentality of the National Government or byany government-owned or controlled corporation,except with respect to the fixing of rates. (Asamended by Com. Act 454, RA No. 2031, and RANo. 2677)

SECTION 15

With the exception of those enumerated in thepreceding section, no public service shall operate inthe Philippines without possessing a valid andsubsisting certificate from the Public ServiceCommission known as "certificate of publicconvenience," or "certificate of public convenienceand necessity," as the case may be, to the effectthat the operation of said service and theauthorization to do business will promote the publicinterests in a proper and suitable manner.

The Commission may prescribe as a condition forthe issuance of the certificate provided in thepreceding paragraph that the service can beacquired by the Republic of the Philippines or anyinstrumentality thereof upon payment of the costprice of its useful equipment, less reasonabledepreciation; and likewise, that the certificate shallbe valid only for a definite period of time; and thatthe violation of any of these conditions shallproduce the immediate cancellation of thecertificate without the necessity of any expressaction on the part of the Commission.

In estimating the depreciation, the effect of the useof the equipment, its actual condition, the age ofthe model, or other circumstances affecting itsvalue in the market shall be taken intoconsideration.

The foregoing is likewise applicable to anyextension or amendment of certificates actually inforce and to those which may hereafter be issued,to permit to modify itineraries and time schedules



of public services, and to authorizations to renewand increase equipment and properties.

SECTION 1620

Proceedings of the Commission, upon notice andhearing. - The Commission shall have power, uponproper notice and hearing in accordance with therules and provisions of this Act, subject to thelimitations and exceptions mentioned and savingprovisions to the contrary:

(a) To issue certificates which shall be known ascertificates of public convenience, authorizing theoperation of public service within the Philippineswhenever the Commission finds that the operationof the public service proposed and theauthorization to do business will promote the publicinterest in a proper and suitable manner. Provided,That thereafter, certificates of public convenienceand certificates of public convenience and necessitywill be granted only to citizens of the Philippines orof the United States or to corporations, co-partnerships, associations or joint-stock companiesconstituted and organized under the laws of thePhilippines; Provided, That sixty per centum of thestock or paid-up capital of any such corporations,co-partnership, association or joint-stock companymust belong entirely to citizens of the Philippines orof the United States: Provided, further, That nosuch certificates shall be issued for a period ofmore than fifty years.

(b) To approve, subject to constitutional limitationsany franchise or privilege granted under theprovisions of Act No. Six Hundred and Sixty-seven,as amended by Act No. One Thousand and twenty-two, by any political subdivision of the Philippineswhen, in the judgment of the Commission, suchfranchise or privilege will properly conserve thepublic interests, and the Commission shall in soapproving impose such conditions as toconstruction, equipment, maintenance, service, oroperation as the public interests and conveniencemay reasonably require, and to issue certificates ofpublic convenience and necessity when such isrequired or provided by any law or franchise.

(c) To fix and determine individual or joint rates,tolls, charges, classifications, or schedules thereof,as well as commutation, mileage, kilometrage, andother special rates which shall be imposedobserved and followed thereafter by any publicservice: Provided, That the Commission may, in itsdiscretion, approve rates proposed by publicservices provisionally and without necessity of anyhearing; but it shall call a hearing thereon withinthirty days, thereafter, upon publication and noticeto the concerns operating in the territory affected:Provided, further, That in case the public serviceequipment of an operator is used principally orsecondarily for the promotion of a private business,the net profits of said private business shall beconsidered in relation with the public service ofsuch operator for the purpose of fixing the rates.

(d) To fix just and reasonable standards,classifications, regulations, practices,measurement, or service to be furnished, imposed,

20The powers of the Public Service Commission

were asked in 1993.

observed, and followed thereafter by any publicservice.

(e) To ascertain and fix adequate and serviceablestandards for the measurement of quantity,quality, pressure, initial voltage, or other conditionpertaining to the supply of the product or servicerendered by any public service, and to prescribereasonable regulations for the examination and testof such product or service and for themeasurement thereof.

(f) To establish reasonable rules, regulations,instructions, specifications, and standards, tosecure the accuracy of all meters and appliancesfor measurements.

(g) To compel any public service to furnish safe,adequate, and proper service as regards themanner of furnishing the same as well as themaintenance of the necessary material andequipment.

(h) To require any public service to establish,construct, maintain, and operate any reasonableextension of its existing facilities, where in thejudgment of said Commission, such extension isreasonable and practicable and will furnishsufficient business to justify the construction andmaintenance of the same and when the financialcondition of the said public service reasonablywarrants the original expenditure required inmaking and operating such extension.

(i) To direct any railroad, street railway or tractioncompany to establish and maintain at any junctionor point of connection or intersection with anyother line of said road or track, or with any otherline of any other railroad, street railway or tractionto promote, such just and reasonable connection asshall be necessary to promote the convenience ofshippers of property, or of passengers, and in likemanner direct any railroad, street railway, ortraction company engaged in carryingmerchandise, to construct, maintain and operate,upon reasonable terms, a switch connection withany private sidetrack which may be constructed byany shipper to connect with the railroad, streetrailway or traction company line where, in thejudgment of the Commission, such connection isreasonable and practicable and can be out in withsafety and will furnish sufficient business to justifythe construction and maintenance of the same.

(j) To authorize, in its discretion, any railroad,street railway or traction company to lay its tracksacross the tracks of any other railroad, streetrailway or traction company or across any publichighway.

(k) To direct any railroad or street railwaycompany to install such safety devices or aboutsuch other reasonable measures as may in thejudgment of the Commission be necessary for theprotection of the public are passing grade crossingof (1) public highways and railroads, (2) publichighways and streets railway, or (3) railways andstreet railways.

(l) To fix and determine proper and adequate ratesof depreciation of the property of any public servicewhich will be observed in a proper and adequate



depreciation account to be carried for theprotection of stockholders, bondholders or creditorsin accordance with such rules, regulations, andform of account as the Commission may prescribe.Said rates shall be sufficient to provide theamounts required over and above the expense ofmaintenance to keep such property in a state ofefficiency corresponding to the progress of theindustry. Each public service shall conform itsdepreciation accounts to the rates so determinedand fixed, and shall set aside the moneys soprovided for out of its earnings and carry the samein a depreciation fund. The income frominvestments of money in such fund shall likewisebe carried in such fund. This fund shall not beexpended otherwise than for depreciation,improvements, new construction, extensions orconditions to the properly of such public service.

(m) To amend, modify or revoke at any timecertificate issued under the provisions of this Act,whenever the facts and circumstances on thestrength of which said certificate was issued havebeen misrepresented or materially changed.

(n) To suspend or revoke any certificate issuedunder the provisions of this Act whenever theholder thereof has violated or willfully andcontumaciously refused to comply with any orderrule or regulation of the Commission or anyprovision of this Act: Provided, That theCommission, for good cause, may prior to thehearing suspend for a period not to exceed thirtydays any certificate or the exercise of any right orauthority issued or granted under this Act by orderof the Commission, whenever such step shall in thejudgment of the Commission be necessary to avoidserious and irreparable damage or inconvenience tothe public or to private interests.

(o) To fix, determine, and regulate, as theconvenience of the state may require, a specialtype for auto-busses, trucks, and motor trucks tobe hereafter constructed, purchased, and operatedby operators after the approval of this Act; to fixand determine a special registration fee for auto-buses, trucks, and motor trucks so constructed,purchased and operated: Provided, That said feesshall be smaller than more those charged for auto-busses, trucks, and motor trucks of types not maderegulation under the subsection.

SECTION 18

It shall be unlawful for any individual, co-partnership, association, corporation or joint-stockcompany, their lessees, trustees or receiversappointed by any court whatsoever, or anymunicipality, province, or other department of theGovernment of the Philippines to engage in anypublic service business without having first securedfrom the Commission a certificate of publicconvenience or certificate of public convenienceand necessity as provided for in this Act, exceptgrantees of legislative franchises expresslyexempting such grantees from the requirement ofsecuring a certificate from this Commission as wellas concerns at present existing expressly exemptedfrom the jurisdiction of the Commission, eithertotally or in part, by the provisions of sectionthirteen of this Act.

SECTION 19

Unlawful Acts. - It shall be unlawful for any publicservice:

(a) To provide or maintain any service that isunsafe, improper, or inadequate or withhold orrefuse any service which can reasonably bedemanded and furnished, as found and determinedby the Commission in a final order which shall beconclusive and shall take effect in accordance withthis Act, upon appeal of otherwise.

(b) To make or give, directly or indirectly, by itselfor through its agents, attorneys or brokers, or anyof them, discounts or rebates on authorized rates,or grant credit for the payment of freight charges,or any undue or unreasonable preference oradvantage to any person of corporation or to anylocality or to any particular description of traffic orservice, or subject any particular person orcorporation or locality or any particular descriptionof traffic to any prejudice or disadvantage in anyrespect whatsoever; to adopt, maintain, or enforceany regulation, practice or measurement whichshall be found or determined by the Commission tobe unjust, unreasonable, unduly preferential orunjustly discriminatory in a final order which shallbe conclusive and shall take effect in accordancewith the provisions of this Act, upon repeal orotherwise.

(g) To sell, alienate, mortgage, encumber or leaseits property, franchises, certificates, privileges, orrights or any part thereof; or merge or consolidateits property, franchises privileges or rights, or anypart thereof, with those of any other public service.The approval herein required shall be given, afternotice to the public and hearing the personsinterested at a public hearing, if it be shown thatthere are just and reasonable grounds for makingthe mortgaged or encumbrance, for liabilities ofmore than one year maturity, or the sale,alienation, lease, merger, or consolidation to beapproved, and that the same are not detrimental tothe public interest, and in case of a sale, the dateon which the same is to be consummated shall befixed in the order of approval: Provided, however,that nothing herein contained shall be construed toprevent the transaction from being negotiated orcompleted before its approval or to prevent thesale, alienation, or lease by any public service ofany of its property in the ordinary course of itsbusiness.

(h) To sell or register in its books the transfer orsale of shares of its capital stock, if the result ofthat sale in itself or in connection with anotherprevious sale, shall be to vest in the transfereemore than forty per centum of the subscribedcapital of said public service. Any transfer made inviolation of this provision shall be void and of noeffect and shall not be registered in the books ofthe public service corporation. Nothing hereincontained shall be construed to prevent the holdingof shares lawfully acquired. (As amended by Com.Act No. 454.)

(i) To sell, alienate or in any manner transfershares of its capital stock to any alien if the resultof that sale, alienation, or transfer in itself or inconnection with another previous sale shall be the



reduction to less than sixty per centum of thecapital stock belonging to Philippine citizens. Suchsale, alienation or transfer shall be void and of noeffect and shall be sufficient cause for ordering thecancellation of the certificate.

Y Transit v. NLRCThe sale, alienation or other encumbrance of a

public service operator’s properties requires theprevious approval and authorization of theCommission.

NOTE: The Public Service Commission does notexist anymore. It is now the Department ofTransportation and Communications.

THE CERTIFICATE OF PUBLIC CONVENIENCE (CPC); THE

CERTIFICATE OF PUBLIC CONVENIENCE & NECESSITY

(CPCN) AND THE PRIOR OPERATOR RULE

Does the sale of a CPC, CPCN or other properties ofthe public utility have to be approved before it issold to a third person?No. The approval of the sale of CPCs, CPCNs orother properties does not affect the validity(perfection) of the sale between the parties as longas all the elements of a contract are met. This onlyaffectes the relation of the parties to the DOTC orto 3rd parties. If there is no approval, then the saledoes not bind the DOTC or 3rd parties. Thecontrolling factor therefore is the registration.

If a stockholder of a public utility transfers hisstock to the 3rd person, is there a need to obtainthe approval of the DOTC?

It depends. If the transfer results in the transfereeowning more than 40% of the stock of the publicutility, then the approval of the DOTC is needed.

When must the approval of the DOTC be secured?

Before or after the execution of the contract.

What if the transferree is an alien?

VOID. An alien cannot own more than 40% ofthe stock of a public utility.

What is a Certificate of Public Convenience? (CPC)

The Public Service Law, Sec. 15

With the exception of those enumerated in thepreceding section, no public service shall operate inthe Philippines without possessing a valid andsubsisting certificate from the Public ServiceCommission known as "certificate of publicconvenience," or "certificate of public convenienceand necessity," as the case may be, to the effectthat the operation of said service and theauthorization to do business will promote the publicinterests in a proper and suitable manner.

The Commission may prescribe as a condition forthe issuance of the certificate provided in thepreceding paragraph that the service can beacquired by the Republic of the Philippines or anyinstrumentality thereof upon payment of the costprice of its useful equipment, less reasonabledepreciation; and likewise, that the certificate shallbe valid only for a definite period of time; and thatthe violation of any of these conditions shall

produce the immediate cancellation of thecertificate without the necessity of any expressaction on the part of the Commission.

A CPC is any authorization to operate a publicservice issued by the PSC (now DOTC).

It is an authorization issued by theCommission for the operation of public services forwhich no franchise, either municipal orlegislative, is required by law) e.g. motorvehicles

It constitutes neither a franchise nor acontract, it does not confer property rights, and is amere license or privilege. (Pantranco v. PSC) Suchprivilege is forfeited when the grantee fails tocomply with his commitments to serve the publicand public necessity. However, these certificatesrepresent property rights to the extent that if therights which any public utility is exercising pursuantto the lawful orders of the PSC (now DOTC) hasbeen invaded by another public utility, inappropriate cases, actions may be maintained bythe complainant public utility.

Which public utilities are exempted from getting aCPC?

The Public Service Law, Sec. 14

The following are exempted from the provisions ofthe preceding section:

(a) Warehouses;

(b) Vehicles drawn by animals and bancas movedby oar or sail, and tugboats and lighters;

(c) Airships within the Philippines except asregards the fixing of their maximum rates onfreight and passengers;

(d) Radio companies except with respect to thefixing of rates;

(e) Public services owned or operated by anyinstrumentality of the National Government or byany government-owned or controlled corporation,except with respect to the fixing of rates. (Asamended by Com. Act 454, RA No. 2031, and RANo. 2677)

What is a Certificate of Public Convenience &Necessity? (CPCN)

It is a certificate issued by the PSC to a publicservice to which any political subdivision hasgranted a franchise under RA 667 after thePSC has approved the same under Sec. 16(b).It is an authorization issued by the PSC for theoperation of public services for which a franchiseis required by law. (e.g. electric, telephone)

What is the difference between a CPC & a CPCN?

A CPCN requires a franchise from Congress.The public utility cannot be issued a CPCN andcannot operate, therefore, without a franchise fromCongress



A CPC does not.

What is a franchise?

It is a legislative grant from Congress or alocal legislative body. If it is of nationwideapplication (e.g. Philippine Air Lines), then it musttake the form of a Republic Act.

How does one get a franchise?

It is the same procedure for any law (file a bill,3 readings in Congress, etc) The applicant musta)prove that he or she is a Filipino citizen; b)demonstrate financial capacity, and c) must showthat he or she is applying for a business of publicconvenience, that the public shall benefit from thegrant of the franchise.

Is a franchise enough in order to operate?

No. All public utilities require either a CPC orCPCN to operate. Those public utilities for whichfranchises have been granted still require a CPCNin order to operate. Those public utilities that didnot require a franchise for there creation stillrequire a CPC in order to operate.

Raymundo v. Luneta Motor Corporation(1933)

The Public Service Law, Act No. 3108, asamended, authorizes certificates of publicconvenience to be secured by public serviceoperators from the PSC. A CPC granted to theowner or operator of public service motor vehiclesgrants a right in the nature of a limited franchise.

The Code of Civil Procedure establishes thegeneral rule that "property, both real and personal,or any interest therein of the judgment debtor, notexempt by law, and all property and rights ofproperty seized and held under attachment in theaction, shall be liable to execution." The statutoryexemptions do not include franchises orcertificates; of public convenience. The word"property" as used in section 450 of the Code ofCivil Procedure comprehends every species of title,inchoate or complete, legal or equitable. The TESTto determine whether or not property can beattached and sold upon execution is whether thejudgment debtor has such a beneficial interesttherein that he can sell or otherwise dispose of itfor value.

Now the Public Service Law permits the PSC toapprove the sale, alienation, mortgaging,encumbering, or leasing of property, franchises,privileges, or rights or any part thereof (sec. 16[h]), and in practice the purchase and sale ofcertificates of public convenience has beenpermitted by the PSC. If the holder of a CPC cansell it voluntarily, there is no valid reason why thesame certificate cannot be taken and soldinvoluntarily pursuant to court process.CPCs secured by public service operators are liableto execution, and the Public Service Commission isauthorized to approve the transfer of thecertificates of public convenience to the executioncreditor.

What is the prior operator rule?

The prior operator rule works to protect theprior operator if it maintains an adequate serviceand is able to meet the demands of the public. Hisor her investment is protected by not allowing asubsequent operator to be granted a license for thesame route. The rationale for this rule is for thepreservation of public convenience and to preventruinous competition.

What are some of the instances where the prioroperator rule does NOT apply?

The prior operator rule does not apply whenthe CPC or CPCN granted to the applicant is amaiden franchise that covers a new route, even if itoverlaps with the route of the prior operator.

The prior operator rule is inapplicable wherethe corporate existence of the prior operator hasexpired.

Regular operators are preferred over irregularoperators.

The Commission cannot grant a CPC or CPCNthat comprises a larger territory than that appliedfor.

How do you know whether there is ruinouscompetition enough for the prior operator rule totake effect?

Ruinous competition means that there isactual ruin of the business of the operator; that theexisting operator will not gain enough profits ifanother person is allowed to enter the business;that which will result in the deprivation of sufficientgain in respect of reasonable return of investment,therefore the oppositor, alleging this, must showthat he will be deprived of a reasonable return onhis investment.

The mere possibility of reduction in theearnings of the business or the deterioration in theincome of his business is not sufficient to proveruinous competition. It must be shown that thebusiness would not have sufficient gains to pay afair rate of interest on his capital investments.

Does the prior operator rule create a monopoly?

Legally speaking, there cannot be a monopolywhen a property is operated as a public utility. Theprior operator rule does not encourage a monopolybecause the theory is that one operator keeps theprices low.

Batangas Transportation Co. v. CayetanoOrlanes (1928)

So long as the 1st licensee keeps and performsthe terms and conditions of its license and complieswith the reasonable rules and regulations of theCommission and meets the demands of the public,it should have more or less of a bested andpreferential right over a person who seeks toacquire another and a later license over sameroute. Otherwise, the first licensee would not haveprotection on his investment and would be subject



to ruinous competition and this defeat the verypurpose and intent for the PSC was created.

San Pablo v. Pantranco (1987)

Before private respondent may be issued afranchise or CPC for the operation of the saidservice as a common carrier, it must comply withthe usual requirements of filing an application,payment of the fees, publication, adducingevidence at a hearing and affording the oppositorsthe opportunity to be heard, among others, asprovided by law. Considering the environmentalcircumstances of the case, the conveyance ofpassengers, trucks and cargo from Matnog to Allenis certainly not a ferry boat service but a coastwiseor interisland shipping service. Under nocircumstance can the sea between Matnog andAllen be considered a continuation of the highway,Matnog and Allen are separated by an open sea. ItsCPC as a bus transportation cannot be merelyamended to include this water service under theguise that it is a mere private ferry service.

What is an example of the “kabit system”?21

A, a grantee of a CPC from the LTFRB, is giventhe authority to operate 10 units of taxis. B, a non-grantee, wishes to operate as a common carriedand “kabits” with the CPC of A who will obtainapproval from the LTFRB to operate another taxi.The taxi will be registered in the name of A, whowill be paid by B.

Assume that A executed a deed of sale infavor of B in case B decides not to go on with thearrangement, in order to safeguard the rights of B.However, in case of injury to a passenger of thetaxi actually operated by B (and previously sold toB as well) it is still A who will be liable. The illegalcontract of sale between A & B cannot be put up asa defense.

A does not have a cause of action against Beither. They are in pari delicto.

Teja Marketing v. IAC (1987)Parties operated under an arrangement, commonlyknown as the "kabit system" whereby a person whohas been granted a certificate of publicconvenience allows another person who ownsmotor vehicles to operate under such franchise fora fee. A certificate of public convenience is aspecial privilege conferred by the government.Although not outrightly penalized as a criminaloffense, the kabit system is invariably recognizedas being contrary to public policy and, therefore,void and in existent under Article 1409 of the CivilCode.

PRIVATE NATURE; RIGHTS AND OBLIGATIONSOF PARTIES ARISING FROM TRANSACTIONSRELATING TO TRANSPORTATION

ABSENT A TRANSPORTATION CONTRACT

Lara v. Valencia (1958)The owner and driver of a vehicle owes toaccommodation passengers or invited guestsmerely the duty to exercise reasonable care so thatthey may be transported safely to their destination.

21This was asked in 2005. Know the definition of the

Kabit System and the liability of the party.

Thus, “The rule is established by the weight ofauthority that the owner or operator of anautomobile owes the duty to an invited guest toexercise reasonable care in its operation, and notunreasonably to expose him to danger and injuryby increasing the hazard of travel. Valenciatherefore is only required to observe ordinary care,and is not in duty bound to exercise extraordinarydiligence as required of a common carrier by ourlaw (Art. 1755 & 1756, new CC)

ARISING FROM A TRANSPORTATION CONTRACT

Contract of transportation, defined;A contract of transportation is one whereby

a certain person or association of persons obligatethemselves to transport persons, things, or newsfrom one to another for a fixed price.

Contract of transportation, elements;Parties to the contract:Shipper - one who gives rise to the contract oftransportation by agreeing to deliver the things ornews to be transported, or to present his ownperson or those of other or others in the case oftransportation of passengersCarrier or conductor - one who binds himself totransport person, things, or news, as the case maybe, or one employed in or engaged in the businessof carrying good for others for hireConsignee - the party to whom the carrier is todeliver the things being transported; to whom thecarrier may lawfulyy make delivery in accordancewith its contract of carriage. The shipper and theconsignee may be the same person.



III. Code of Commerce Provisions on

Overland Transportation

(unless otherwise indicated, reference is to Code ofCommerce)

What does the Code of Commerce cover?It governs over overland transporation andmaritime admiralty. It governs only commercialcontracts.

Commercial contracts involving common carriers refer first to the Civil Code, then to the Code ofCommerce

Private carriers involved in commercial contracts refer first to the Code of Commerce, then to theCivil Code, but excluding the Civil Code provisionson common carriers

A. Scope of Overland Transportation

What is overland transport?Overland transport applies to transport on land andon small bodies of water, waterways, both naturaland artificial, including transport on rivers whichare not very large. (If it is transport at sea, then itis admiralty)

B. Nature of Contract

ARTICLE 349A contract for all kinds of transportation over landor river shall be considered commercial:1. When it involves merchandise or anycommercial goods.2. When, no matter what its object may be,the carrier is a merchant or is customarily engagedin making transportation for the public.

C. Effect of Civil Code

Art 1766In all matters not regulated by this Code, the rightsand obligations of common carriers shall begoverned by the Code of Commerce and by speciallaws.

Art. 2270The following laws and regulations are herebyrepealed:(1) Those parts and provisions of the Civil Code of1889 which are in force on the date when this newCivil Code becomes effective:

(2) The provisions of the Code of Commercegoverning sales, partnership, agency, loan, depositand guaranty;

(3) The provisions of the Code of Civil Procedure onprescription as far as inconsistent with this Code;and

(4) All laws, Acts, parts of Acts, rules of court,executive orders, and administrative regulationswhich are inconsistent with this Code. (n)

D. Contract of Carriage

1. BILL OF LADING

DEFINITION, SUBJECT MATTER

ARTICLE 352Bills of lading or tickets in the case oftransportation of passengers may be different, onefor persons and another for baggage, but all ofthem shall contain the name of the carrier, thedate of shipment, the points of departure andarrival, the price, and with regard to baggage, thenumber and weight of the packages, with any otherindications which may be considered necessary inorder to easily identify them.

What is a bill of lading?

It may be defined as a written acknowledgment ofthe receipt of goods and an agreement to transportand to deliver them at a specified place to a personnamed or on his order. It comprehends all methodsof transportation.

Each bill of lading is a contract in itself and theparties are bound by its terms. A bill of lading isalso a receipt, and it is likewise a symbol of thegoods covered by it. It is also a document of title.

Who are the parties to a bill of lading?

1. shipper2. consignee3. carrier

FORM, CONTENTS

ARTICLE 350The shipper as well as the carrier of merchandiseand goods may mutually demand of each other theissue of a bill of lading in which there shall bestated:1. The name, surname, and domicile of theshipper.2. The name, surname, and domicile of thecarrier.3. The name, surname and domicile of theperson to whom or to whose order the goods areaddressed, or whether they are to be delivered tothe bearer of the said bill.4. A description of the goods, stating theirgeneric character, their weight, and the externalmarks or signs of the packages containing thesame.5. The cost of the transportation.6. The date on which the shipment is made.7. The place of the delivery to the carrier.8. The place and time at which the delivery isto be made to the consignee.9. The damages to be paid by the carrier incase of delay, if any agreement is made on thispoint.

ARTICLE 351In shipments made over railroads or by otherenterprises which are subject to schedules or thetime fixed by regulations, it shall be sufficient thatthe bills of lading or declarations of shipmentfurnished by the shipper refer, with regard to therate, terms, and special conditions of the



transportation, to the schedules and regulations,the application of which is requested; and shouldno schedule be determined the carrier must applythe rate of the merchandise paying the lowest, withthe condition inherent thereto, always includingsuch statement or reference in the bill of ladingdelivered to the shipper.

Is the form material?

No. As long as it contains an acknowledgment bythe carrier of the receipt of goods for transporation,it is in legal effect, a bill of lading.

FUNCTION

ARTICLE 353The legal basis of the contract between the shipperand the carrier shall be the bills of lading, by thecontents of which all disputes which may arise withregard to their execution and fulfillment shall bedecided without admission of other exceptions thanforgery or material errors in the drafting thereof.After the contract has been complied with the bill oflading issued by the carrier shall be returned tohim, and by virtue of the exchange of thiscertificate for the article transported, the respectiveobligations and actions shall be considered ascanceled, unless in the same act the claims whichthe contracting parties desired to reserve arereduced to writing, exception being made of theprovisions of Article 366.If in case of loss or for any other reasonwhatsoever, the consignee can not return uponreceiving the merchandise the bill of ladingsubscribed by the carrier, he shall give said carriera receipt for the goods delivered, this receiptproducing the same effects as the return of the billof lading.

2. REFUSAL TO TRANSPORTARTICLE 356Carrier may refuse to accept packages whichappear unfit for transportation; and if saidtransportation is to be made by railway and theshipment is insisted on, the company shall carrythem, being exempt from all liability if itsobjections are so stated in the bill of lading.

3. DOUBTFUL DECLARATION OFCONTENTSARTICLE 357If the carrier by reason of well-founded suspicionsas to the correctness of the declaration of thecontents of a package should determine to examineit, he shall do so before witnesses, in the presenceof the shipper or of the consignee.Should the shipper or consignee to be cited notappear, the examination shall be made before anotary, who shall draft a certificate of the result ofthe examination, for the proper purposes.If the declaration of the shipper should be correct,the expenses caused by the examination and thoseof carefully repacking the packages shall bedefrayed by the carrier, and in a contrary case bythe shipper.

4. NO BILL OF LADINGARTICLE 354In the absence of a bill of lading the respectiveclaims of the parties shall be decided by the legalproofs that each one may submit in support of hisclaims, in accordance with the general provisionsestablished in this Code for commercial contracts.

ARTICLE 351In transporation made by railroads or otherenterprises which are subject to schedules or thetime fixed by regulations, it shall be sufficient thatthe bills of lading or the declarations of shipmentfurnished by the shipper refer, with respect to therate, terms, and special conditions of thetransportation, to the schedules and regulations,the application of which he requests, and should noschedule by determined, the carrier must apply therate of the merchandise paying the lowest, with theconditions inherent therein, always including suchstatement or reference to them in the bill of ladingwhich he delivers to the shipper.

Is a bill of lading essential to a contract oftransportation?No. While under Art. 350 the shipper and thecommon carrier may mutually demand that a bill oflading be made, it is not obligatory. The fact that abill of lading is not issued does not preclude theexistence of a contract of transportation.Where no bill of lading is issued, the disputesbetween the parties shall be decided according tothe rules laid down in Art. 354.

E. Responsibility of the carrier

1. WHEN IT COMMENCESARTICLE 355The liability of the carrier shall begin from themoment he receives the merchandise, in person orthrough a person intrusted thereto in the placeindicated for their reception.

2. ROUTEARTICLE 359If there should be an agreement between theshipper and the carrier with regard to the road overwhich the transportation is to be made, the carriercan not change the route, unless obliged to do soby force majeure; and should he do so withoutbeing forced to, he shall be liable for any damagewhich may be suffered by the goods transportedfor any other cause whatsoever, besides beingrequired to pay the amount which may have beenstipulated for such a case.When on account of the said force majeure thecarrier is obliged to take another route, causing anincrease in the transportation charges, he shall bereimbursed for said increase after presenting theformal proof thereof.

3. CARE OF GOODSARTICLE 361Merchandise shall be transported at the risk andventure of the shipper, if the contrary was notexpressly stipulated.Therefore, all damages and impairment suffered bythe goods during the transportation, by reason ofaccident, force majeure, or by virtue of the natureor defect of the articles, shall be for the accountand risk of the shipper. cdtaThe proof of these accidents is incumbent on thecarrier.



ARTICLE 362The carrier, however, shall be liable for the lossesand damages arising from the causes mentioned inthe foregoing article if it is proved that theyoccurred on account of his negligence or becausehe did not take the precautions usually adopted bycareful persons, unless the shipper committedfraud in the bill of lading, making him believe thatthe goods were of a class or quality different fromwhat they really were.If, notwithstanding the precaution referred to inthis article, the goods transported run the risk ofbeing lost on account of the nature or by reason ofan unavoidable accident, without there being timefor the owners of the same to dispose thereof, thecarrier shall proceed to their sale, placing them forthis purpose at the disposal, of the judicialauthority or the officials determined by specialprovisions.

Art 1734Common carriers are responsible for the loss,destruction, or deterioration of the goods, unlessthe same is due to any of the following causesonly:(1) Flood, storm, earthquake, lightning, or othernatural disaster or calamity;(2) Act of the public enemy in war, whetherinternational or civil;(3) Act of omission of the shipper or owner of thegoods;(4) The character of the goods or defects in thepacking or in the containers;(5) Order or act of competent public authority.

Art. 1735. In all cases other than those mentionedin Nos. 1, 2, 3, 4, and 5 of the preceding article, ifthe goods are lost, destroyed or deteriorated,common carriers are presumed to have been atfault or to have acted negligently, unless theyprove that they observed extraordinary diligence asrequired in Article 1733.

4. DELIVERY

CONDITION OF GOODS

ARTICLE 363With the exception of the cases prescribed in thesecond paragraph of Article 361, the carrier shallbe obliged to deliver the goods transported in thesame condition in which, according to the bill oflading, they were at the time of their receipt,without any detriment or impairment, and shouldhe not do so, he shall be obliged to pay the valueof the goods not delivered at the point where theyshould have been and at the time the deliveryshould have taken place.If part of the goods transported should be deliveredthe consignee may refuse to receive them, when heproves that he can not make use thereof withoutthe others.

ARTICLE 364If the effect of the damage referred to in Article361 should be only a reduction in the value of thegoods, the obligation of the carrier shall be reducedto the payment of the amount of said reduction invalue, after appraisal by experts.

ARTICLE 365If, on account of the damage, the goods arerendered useless for purposes of sale orconsumption in the use for which they are properlydestined the consignee shall not be bound toreceive them, and may leave them on the hands ofthe carrier, demanding payment therefor at currentmarket prices.If among the goods damaged there should be somein good condition and without any defectwhatsoever, the foregoing provision shall beapplicable with regard to the damaged ones, andthe consignee shall receive those which are sound,this separation being made by distinct and separatearticles, no object being divided for the purpose,unless the consignee proves the impossibility ofconveniently making use thereof in this form.The same provision shall be applied to merchandisein bales or packages, with distinction of thepackages which appear sound.

ARTICLE 366Within the twenty-four hours following the receiptof the merchandise a claim may be brought againstthe carrier on account of damage or average foundtherein on opening the packages, provided that theindications of the damage or average giving rise tothe claim can not be ascertained from the exteriorof said packages, in which case said claim wouldonly be admitted on the receipt of the packages.After the periods mentioned have elapsed, or afterthe transportation charges have been paid, noclaim whatsoever shall be admitted against thecarrier with regard to the condition in which thegoods transported were delivered.

ARTICLE 367If there should occur doubts and disputes betweenthe consignee and the carrier with regard to thecondition of goods transported at the time of theirdelivery to the former, the said goods shall beexamined by experts appointed by the parties, anda third one, in case of disagreement, appointed bythe judicial authority, the result of the examinationbeing reduced to writing; and if the personsinterested should not agree to the report of theexperts and could not settle their disputes, saidjudicial authority shall order the deposits of themerchandise in a safe warehouse, and the partiesinterested shall make use of their rights in theproper manner.

TO WHOM DELIVERY MADE

ARTICLE 368The carrier must deliver to the consignee withoutany delay or difficulty the merchandise received byhim, by reason of the mere fact of beingdesignated in the bill of lading to receive it; andshould said carrier not do so he shall be liable forthe damages which may arise therefrom.

JUDICIAL DEPOSIT

ARTICLE 369Should the consignee be not found at the domicileindicated in the bill of lading, or should refuse topay the transportation charges and expenses, or toreceive the goods, the deposit of said goods shallbe ordered by the municipal judge, where there isno judge of first instance, to be placed at thedisposal of the shipper or sender, without prejudice



to a person having a better right, this deposithaving all the effects of a delivery.

Art. 1752

Even when there is an agreement limiting theliability of the common carrier in the vigilance overthe goods, the common carrier is disputablypresumed to have been negligent in case of theirloss, destruction or deterioration.

WHEN TO BE MADE

ARTICLE 370If a period has been fixed for the delivery of thegoods, it must be made within the same, andotherwise the carrier shall pay the indemnityagreed upon in the bill of lading, neither theshipper nor consignee being entitled to anythingelse.Should no indemnity have been agreed upon andthe delay exceeds the time fixed in the bill oflading, the carrier shall be liable for the damageswhich may have been caused by the delay.

ARTICLE 358Should no period within which goods are to bedelivered be previously fixed, the carrier shall beunder the obligation to forward them in the firstshipment of the same or similar merchandise whichhe may make to the point of delivery; and shouldhe not do so, the damages occasioned by the delayshall be suffered by him.

TWO OR MORE CARRIERS

ARTICLE 373A carrier who delivers merchandise to a consigneeby virtue of agreements or combined services withother carriers shall assume the obligations of thecarriers who preceded him, reserving his right toproceed against the latter if he should not bedirectly responsible for the fault which gives rise tothe claim of the shipper or of the consignee.The carrier making the delivery shall also assumeall the actions and rights of those who may havepreceded him in the transportation.The sender and the consignee shall have animmediate right of action against the carrier whoexecuted the transportation contract, or against theother carriers who received the goods transportedwithout reserve.The reservations made by the latter shall notexempt them, however, from the liabilities theymay have incurred by reason of their own acts.

OBLIGATION TO KEEP REGISTRY

ARTICLE 378Transportation agents shall be obliged to keep aspecial registry, with the formalities required byArticle 36, in which there shall be entered, inprogressive order of numbers and dates, all thegoods the transportation of which is undertaken,stating the circumstances required by Articles 350et seq. for the responsive bills of lading.

COMPLIANCE WITH ADMINISTRATIVE REGULATIONS

ARTICLE 377The carrier shall be liable for all the consequencesarising from noncompliance on his part with theformalities prescribed by the laws and regulationsof the public administration during the entirecourse of the trip and on the arrival at the point ofdestination, except when his omission arises fromhis having been induced into error by falsestatements of the shipper in the declaration of themerchandise.If the carrier has acted in accordance with a formalorder received from the shipper or consignee of themerchandise both shall incur liability.

F. Rights and Obligations of Shipper and/orConsignee

1. RIGHTS TO DAMAGES

CONDITION IMPOSED ON RIGHT

ARTICLE 366Within the twenty-four hours following the receiptof the merchandise a claim may be brought againstthe carrier on account of damage or average foundtherein on opening the packages, provided that theindications of the damage or average giving rise tothe claim can not be ascertained from the exteriorof said packages, in which case said claim wouldonly be admitted on the receipt of the packages.After the periods mentioned have elapsed, or afterthe transportation charges have been paid, noclaim whatsoever shall be admitted against thecarrier with regard to the condition in which thegoods transported were delivered.

ARTICLE 357If the carrier by reason of well-founded suspicionsas to the correctness of the declaration of thecontents of a package should determine to examineit, he shall do so before witnesses, in the presenceof the shipper or of the consignee.Should the shipper or consignee to be cited notappear, the examination shall be made before anotary, who shall draft a certificate of the result ofthe examination, for the proper purposes.If the declaration of the shipper should be correct,the expenses caused by the examination and thoseof carefully repacking the packages shall bedefrayed by the carrier, and in a contrary case bythe shipper.

ARTICLE 353The legal basis of the contract between the shipperand the carrier shall be the bills of lading, by thecontents of which all disputes which may arise withregard to their execution and fulfillment shall bedecided without admission of other exceptions thanforgery or material errors in the drafting thereof.After the contract has been complied with the bill oflading issued by the carrier shall be returned tohim, and by virtue of the exchange of thiscertificate for the article transported, the respectiveobligations and actions shall be considered ascanceled, unless in the same act the claims whichthe contracting parties desired to reserve arereduced to writing, exception being made of theprovisions of Article 366.



If in case of loss or for any other reasonwhatsoever, the consignee can not return uponreceiving the merchandise the bill of ladingsubscribed by the carrier, he shall give said carriera receipt for the goods delivered, this receiptproducing the same effects as the return of the billof lading.

AMOUNT OF DAMAGES FOR LOSS

ARTICLE 372The appraisement of the goods which the carriermust pay in case of their being lost or mislaid shallbe fixed in accordance with what is stated in the billof lading, no proofs being allowed on the part ofthe shipper that there were among the goodsdeclared therein articles of greater value, andmoney.Horses, vehicles, vessels, equipment, and all theother principal and accessory means oftransportation, shall be especially obligated in favorof the shipper, although with relation to railroadssaid obligation shall be subordinated to theprovisions of the laws of concession with regard toproperty and to those of this Code with regard tothe manner and form of making attachments andretentions against the said companies.

Art. 1744

A stipulation between the common carrier and theshipper or owner limiting the liability of the formerfor the loss, destruction, or deterioration of thegoods to a degree less than extraordinary diligenceshall be valid, provided it be:

(1) In writing, signed by the shipper or owner;

(2) Supported by a valuable consideration otherthan the service rendered by the common carrier;and

(3) Reasonable, just and not contrary to publicpolicy.

AMOUNT OF DAMAGES FOR DELAY

ARTICLE 371(3).Should the abandonment not occur the indemnityfor loss and damages on account of the delays cannot exceed the current price of the goodstransported on the day and at the place where thedelivery was to have been made. The sameprovision shall be observed in all cases where thisindemnity is due.

2. RIGHT TO ABANDONARTICLE 371In cases of delay on account of the fault of thecarrier, referred to in the foregoing articles, theconsignee may leave the goods transported on thehands of the carrier, informing him thereof inwriting before the arrival of the same at the pointof destination.When this abandonment occurs, the carrier shallsatisfy the total value of the goods, as if they hadbeen lost or mislaid. aisadcShould the abandonment not occur the indemnityfor loss and damages on account of the delays cannot exceed the current price of the goods

transported on the day and at the place where thedelivery was to have been made. The sameprovision shall be observed in all cases where thisindemnity is due.

ARTICLE 360The shipper may, without changing the place wherethe delivery is to be made, change theconsignment of the goods delivered to the carrier,and the latter shall comply with his orders,provided that at the time of making the change ofthe consignee the bill of lading subscribed by thecarrier be returned to him, if one were issued,exchanging it for another containing the novationof the contract.The expenses arising from the change ofconsignment shall be defrayed by the shipper.

ARTICLE 363With the exception of the cases prescribed in thesecond paragraph of Article 361, the carrier shallbe obliged to deliver the goods transported in thesame condition in which, according to the bill oflading, they were at the time of their receipt,without any detriment or impairment, and shouldhe not do so, he shall be obliged to pay the valueof the goods not delivered at the point where theyshould have been and at the time the deliveryshould have taken place.If part of the goods transported should be deliveredthe consignee may refuse to receive them, when heproves that he can not make use thereof withoutthe others.

ARTICLE 365If, on account of the damage, the goods arerendered useless for purposes of sale orconsumption in the use for which they are properlydestined the consignee shall not be bound toreceive them, and may leave them on the hands ofthe carrier, demanding payment therefor at currentmarket prices.If among the goods damaged there should be somein good condition and without any defectwhatsoever, the foregoing provision shall beapplicable with regard to the damaged ones, andthe consignee shall receive those which are sound,this separation being made by distinct and separatearticles, no object being divided for the purpose,unless the consignee proves the impossibility ofconveniently making use thereof in this form.The same provision shall be applied to merchandisein bales or packages, with distinction of thepackages which appear sound.

3. RIGHT TO CHANGE CONSIGNMENTARTICLE 360The shipper may, without changing the place wherethe delivery is to be made, change theconsignment of the goods delivered to the carrier,and the latter shall comply with his orders,provided that at the time of making the change ofthe consignee the bill of lading subscribed by thecarrier be returned to him, if one were issued,exchanging it for another containing the novationof the contract.The expenses arising from the change ofconsignment shall be defrayed by the shipper.



4. OBLIGATION TO PAYTRANSPORTATION CHARGES

ARTICLE 374The consignees to whom the remittance may havebeen made can not defer the payment of theexpenses and transportation charges on the goodsthat they received after twenty-four hours haveelapsed from the time of the delivery; and in caseof delay in making this payment, the carrier mayrequest the judicial sale of the goods hetransported to a sufficient amount to cover thetransportation charges and the expenses incurred.

ARTICLE 375The goods transported shall be specificallyobligated to answer for the transportation chargesand for the expenses and fees caused by the sameduring their transportations, or until the time oftheir delivery.This special right shall be limited to eight daysafter the delivery has been made, and after saidprescription the carrier shall have no further rightof action than that corresponding to an ordinarycreditor.

ARTICLE 376The preference of the carrier to the payment ofwhat is due him for the transportation andexpenses of the goods delivered to the consigneeshall not be affected by the bankruptcy of thelatter, provided the action is brought within theeight days mentioned in the foregoing article.

Art. 2241

With reference to specific movable property of thedebtor, the following claims or liens shall bepreferred:

(9) Credits for transportation, upon the goodscarried, for the price of the contract and incidentalexpenses, until their delivery and for thirty daysthereafter;

5. OBLIGATION TO RETURN BILL OFLADINGARTICLE 353. (2) (3)After the contract has been complied with the bill oflading issued by the carrier shall be returned tohim, and by virtue of the exchange of thiscertificate for the article transported, the respectiveobligations and actions shall be considered ascanceled, unless in the same act the claims whichthe contracting parties desired to reserve arereduced to writing, exception being made of theprovisions of Article 366.If in case of loss or for any other reasonwhatsoever, the consignee can not return uponreceiving the merchandise the bill of ladingsubscribed by the carrier, he shall give said carriera receipt for the goods delivered, this receiptproducing the same effects as the return of the billof lading.

G. Applicability of Provisions

ARTICLE 379The provisions contained in Articles 349 et seq.shall also be understood as relating to persons

who, although they do not personally effect thetransportation of commercial goods, contract to doso through others, either as contractors for aspecial and fixed transaction or as freight andtransportation agents.In either case they shall be subrogated to the placeof the carriers with regard to the obligations andliability of the latter, as well as with regard to theirright.

IV. Admiralty and Maritime Commerce

A. Sources of Maritime/Admiralty Laws in thePhilippines

Main source of law: Code of Commerce

If common carrier, apply Civil Code first,then Code of Commerce and special laws.

Maritime law includes coastwise, oceanwiseand commercial laws.

B. Concept of Admiralty; jurisdiction overadmiralty cases

Admiralty is distinguished from overlandtransportation on the size of the vessel and size

of the body of water over which a vesseltraverses. However, it is now the amount of the

claim that is relevant, and not whether it isan admiralty or maritime claim.

BP 129 Sec 19

Jurisdiction in civil cases. — Regional Trial Courtsshall exercise exclusive original jurisdiction:

(3) In all actions in admiralty and maritimejurisdiction where he demand or claim exceeds Onehundred thousand pesos (P100,000.00) or , inMetro Manila, where such demand or claim exceedsTwo hundred thousand pesos (200,000.00);

Section 33. Jurisdiction of Metropolitan Trial Courts,Municipal Trial Courts and Municipal Circuit TrialCourts in civil cases. — Metropolitan Trial Courts,Municipal Trial Courts, and Municipal Circuit TrialCourts shall exercise:

(1) Exclusive original jurisdiction over civil actionsand probate proceedings, testate and intestate,including the grant of provisional remedies inproper cases, where the value of the personalproperty, estate, or amount of the demand doesnot exceed One hundred thousand pesos(P100,000.00) or, in Metro Manila where suchpersonal property, estate, or amount of thedemand does not exceed Two hundred thousandpesos (P200,000.00) exclusive of interest damagesof whatever kind, attorney's fees, litigationexpenses, and costs, the amount of which must bespecifically alleged: Provided, That where there areseveral claims or causes of action between thesame or different parties, embodied in the samecomplaint, the amount of the demand shall be the



totality of the claims in all the causes of action,irrespective of whether the causes of action aroseout of the same or different transactions;

C. Vessels

1. MEANINGVessels are those engaged in navigation,

whether coastwide or on the high seas, includingfloating docks, pontoons, dredges, scows, and anyother floating apparatus destined for the services ofthe industry or maritime commerce.

Vessels engaged in the business of carryingor transporting passengers or goods forcompensation, offering their services to the public,are common carriers, and are governed primarilyby the Civil Code and suppletorily by the Code ofCommerce and special laws.

2. NATURE AND ACQUISITION OFLopez v. Duruelo

The word vessel used in the section was notintended to include all ships, craft or floatingstructures of every kind without limitation, and theprovision of that section should not be held toinclude minor craft engaged only in river or baytraffic. Vessels of a minor nature, such as riverboats and those carrying passengers from ship toshore, are governed as to their liability inpassengers by the Civil Code.

ARTICLE 573Merchant vessels constitute property which may beacquired and transferred by any of the meansrecognized by law. The acquisition of a vessel mustbe included in a written instrument, which shall notproduce any effect with regard to third persons ifnot recorded in the mercantile registry.The ownership of a vessel shall also be acquired bythe possession thereof in good faith for threeyears, with a good title duly recorded.In the absence of any of these requisites,uninterrupted possession for ten years shall benecessary in order to acquire ownership.A captain can not acquire by prescription the shipof which he is in command.

ARTICLE 574The builders of vessels may employ the materialand with regard to their construction and riggingmay follow the system which is most convenient totheir interests. Ship agents and seamen shall besubject to the provisions of the laws andregulations of the public administration onnavigation, customs, health, safety of the vessels,and other similar provisions.

ARTICLE 585For all purposes of law not modified or restricted bythe provisions of this Code, vessels shall continueto be considered as personal property.

Art. 712Ownership is acquired by occupation and byintellectual creation.Ownership and other real rights over property areacquired and transmitted by law, by donation, byestate and intestate succession, and inconsequence of certain contracts, by tradition.They may also be acquired by means ofprescription.

D. Persons Participating in MaritimeCommerce

1. SHIPOWNERS AND SHIPAGENTS22

Owners of Vessels and Ship Agents

ARTICLE 586The owner of a vessel and the agent shall be civillyliable for the acts of the captain and for theobligations contracted by the latter to repair, equip,and provision the vessel, provided the creditorproves that the amount claimed was investedtherein.By agent is understood the person intrusted withthe provisioning of a vessel, or who represents herin the port in which she happens to be.

ARTICLE 587The agent shall also be civilly liable for theindemnities in favor of third persons which arisefrom the conduct of the captain in the care of thegoods which the vessel carried; but he may exempthimself therefrom by abandoning the vessel with allher equipments and the freight he may haveearned during the voyage.

ARTICLE 588Neither the owner of the vessel nor the agent shallbe liable for the obligations contracted by thecaptain if the latter exceeds his powers andprivileges which are his by reason of his position orhave been conferred upon him by the former.However, if the amounts claimed were made use offor the benefit of the vessel, the owner or agentshall be liable.

ARTICLE 589If two or more persons should be part owners of amerchant vessel, an association shall be presumedas established by the part owners.This association shall be governed by theresolutions of a majority of the members.A majority shall be the relative majority of thevoting members.If there should be only two part owners, in case ofdisagreement the vote of the member having thelargest interest shall be decisive. If the interestsare equal, it shall be decided by lot.The representation of the smallest part in theownership shall have one vote; and proportionatelythe other part owners as many votes as they haveparts equal to the smallest one. aisadcA vessel can not be detained, attached or leviedupon execution in her entirety for the private debtsof a part owner, but the proceedings shall belimited to the interest the debtor may have in thevessel, without interfering with her navigation.

ARTICLE 590The owners of a vessel shall be civilly liable in theproportion of their contribution to the common

22The liabilities of shipowners and shipagents were

asked in 1989, 1984, and 1981.



fund, for the results of the acts of the captain,referred to in Article 587.Each part owner may exempt himself from thisliability by the abandonment before a notary of thepart of the vessel belonging to him.

ARTICLE 591All the part owners shall be liable, in proportion totheir respective ownership, for the expenses ofrepairs to the vessel, and for other expenses whichare incurred by virtue of a resolution of themajority.They shall likewise be liable in the same proportionfor the expenses of maintenance, equipment, andprovisioning of the vessel, necessary fornavigation.

ARTICLE 592The resolutions of the majority with regard to therepair, equipment, and provisioning of the vessel inthe port of departure shall bind the majority unlessthe partners in the minority renounce theirparticipation therein, which must be acquired bythe other part owners after a judicial appraisementof the value of the portion or portions assigned.The resolutions of the majority relating to thedissolution of the association and sale of the vesselshall also be binding on the minority.The sale of the vessel must take place at a publicauction, subject to the provisions of the law of civilprocedure unless the part owners unanimouslyagree otherwise, the right of option to purchaseand to withdraw mentioned in Article 575 beingalways reserved in favor of said part owners.

ARTICLE 593The owners of a vessel shall have preference in hercharter to other persons, offering equal conditionsand price. If two or more of the former shouldclaim said right the one having greater interestshall be preferred, and should they have an equalinterest it shall be decided by lot.

ARTICLE 594The part owners shall elect the manager who is torepresent them in the capacity of agent.The appointment of director or agent shall berevocable at the will of the members.

ARTICLE 595The agent, be he at the same time an owner of avessel or a manager for an owner or for anassociation of co-owners, must be qualified to tradeand must be recorded in the merchant's registry ofthe province.The agent shall represent the ownership of thevessel, and may in his own name and in suchcapacity take judicial and extrajudicial steps in allthat relates to commerce.

ARTICLE 596The agent may discharge the duties of captain ofthe vessel, subject, in every case, to the provisionscontained in Article 609.If two or more co-owners request the position ofcaptain, the disagreement shall be decided by avote of the members; and if the vote should resultin a tie, the position shall be given to the partowner having the larger interest in the vessel.

If the interest of the petitioners should be thesame, and there should be a tie, the matter shallbe decided by lot.

ARTICLE 597The agent shall select and come to an agreementwith the captain, and shall contract in the name ofthe owners, who shall be bound in all that refers torepairs, details of equipment, armament,provisions, fuel, and freight of the vessel, and, ingeneral, in all that relates to the requirements ofnavigation.

ARTICLE 598The agent can not order a new voyage, nor makecontracts for a new charter, nor insure the vessel,without the authority of her owner or by virtue of aresolution of the majority of the co-owners, unlessthese privileges were granted him in the certificateof his appointment.If he should insure the vessel without authoritytherefor he shall be secondarily liable for thesolvency of the underwriter.

ARTICLE 599The managing agent of an association, shall givehis co-owners an account of the results of eachvoyage of the vessel, without prejudice to alwayshaving the books and correspondence relating tothe vessel and to its voyages at the disposal of thesame.

ARTICLE 600After the account of the managing agent has beenapproved by a relative majority, the co-ownersshall satisfy the expenses in proportion to theirinterest, without prejudice to the civil or criminalactions which the minority may deem fit to instituteafterwards.In order to enforce the payment, the managingagent shall have a right of action to secureexecution, which shall be instituted by virtue of aresolution of the majority, and without furtherproceedings than the acknowledgment of thesignatures of the persons who voted the resolution.

ARTICLE 601Should there be any profits, the co-owners maydemand of the managing agent the amount duethem, by means of an executory action withoutfurther requisites than the acknowledgment of thesignatures of the instrument approving theaccount.

ARTICLE 602The agent shall indemnify the captain for all theexpenses he may have incurred from his own fundsor from those of other persons, for the benefit ofthe vessel.

ARTICLE 603Before a vessel goes out to sea the agent shallhave at his discretion, a right to discharge thecaptain and members of the crew whose contractdid not state a definite period nor a definitevoyage, paying them the salaries earned accordingto their contracts, and without any indemnitywhatsoever, unless there is a special and specificagreement in respect thereto.

ARTICLE 604If the captain or any other member of the crewshould be discharged during the voyage, they shallreceive their salary until the return to the place



where the contract was made, unless there aregood reasons for the discharge, all in accordancewith Articles 636 et seq. of this Code.

ARTICLE 605If the contracts of the captain and members of thecrew with the agent should be for a definite periodor voyage, they can not be discharged until thefulfillment of their contracts, except for reasons ofinsubordination in serious matters, robbery, theft,habitual drunkenness, and damage caused to thevessel or to its cargo by malice or manifest orproven negligence.

ARTICLE 606If the captain should be a part owner in the vessel,he can not be discharged without the agentreturning him the amount of his interest therein,which, in the absence of an agreement between theparties, shall be appraised by experts appointed inthe manner established in the law of civilprocedure.

ARTICLE 607If the captain who is a part owner should haveobtained the command of the vessel by virtue of aspecial agreement contained in the articles of co-partnership, he can not be deprived thereof exceptfor the reasons mentioned in Article 605.

ARTICLE 608In case of the voluntary sale of the vessel, allcontracts between the agent and captain shallterminate, the right to proper indemnity beingreserved in favor of the captain, according to theagreements made with the agent.They vessel sold shall remain subject to thesecurity of the payment of said indemnity if, afterthe action against the vendor has been instituted,the latter should be insolvent.

ARTICLE 618The captain shall be civilly liable to the agent, andthe latter to the third persons who may have madecontracts with the former —1. For all the damages suffered by the vesseland his cargo by reason of want of skill ornegligence on his part. If a misdemeanor or crimehas been committed he shall be liable inaccordance with the Penal Code. cda2. For all the thefts committed by the crew,reserving his right of action against the guiltyparties.3. For the losses, fines, and confiscationsimposed an account of violation of the laws andregulations of customs, police, health, andnavigation.4. For the losses and damages caused bymutinies on board the vessel, or by reason of faultscommitted by the crew in the service and defenseof the same, if he does not prove that he made fulluse of his authority to prevent or avoid them.5. For those arising by reason of an undue useof powers and non-fulfillment of the obligationswhich are his in accordance with Articles 610 and612.6. For those arising by reason of his going outof his course or taking a course which he shouldnot have taken without sufficient cause, in theopinion of the officers of the vessel, at a meeting

with the shippers or supercargoes who may be onboard.

No exception whatsoever shall exempt himfrom this obligation.7. For those arising by reason of hisvoluntarily entering a port other than hisdestination, with the exception of the cases orwithout the formalities referred to in Article 612.8. For those arising by reason of the non-observance of the provisions contained in theregulations for lights and evolutions for the purposeof preventing collisions.

Standard Oil v. Castelo (1921)

In considering the question now before us it isimportant to remember that the owner of the shipordinarily has vastly more capital embarked upon avoyage than has any individual shipper of cargo.Moreover, the owner of the ship, in the person ofthe captain, has complete and exclusive control ofthe crew and of the navigation of the ship, as wellas of the disposition of the cargo at the end of thevoyage. It is therefore proper that any personwhose property may have been cast overboard byorder of the captain should have a right of actiondirectly against the ship's owner for the breach ofany duty which the law may have imposed on thecaptain with respect to such cargo. To adopt theinterpretation of the law for which the appellantcontends would place the shipowner in a position toescape all responsibility for a general average ofthis character by means of the delinquency of hisown captain. This cannot be permitted. The evidentintention of the Code, taken in all of its provisions,is to place the primary liability upon the personwho has actual control over the conduct of thevoyage and who has most capital embarked in theventure, namely, the owner of the ship, leavinghim to obtain recourse, as it is very easy to do,from other individuals who have been drawn intothe venture as shippers.

RESPONSIBILITIES AND LIABILITIES

Yu Con v. Ipil (1916)

As to the shipowner: Estasen, makes thefollowing remarks: It is well and good that theshipowner be not held criminally liable for suchcrimes or quasi crimes; but the cannot be excusedfrom liability for the damage and harm which, inconsequence of those acts, may be suffered by thethird parties who contracted with the captain, in hisdouble capacity of agent and subordinate of theshipowner himself. In maritime commerce, theshippers and passengers in making contracts withthe captain do so through the confidence they havein the shipowner who appointed him; they presumethat the owner made a most careful investigationbefore appointing him, and, above all, theythemselves are unable to make such aninvestigation, and even though they should do so,they could not obtain complete security, inasmuchas the shipowner can, whenever he sees fir,appoint another captain instead.



DOCTRINE OF LIMITED LIABILITY AND EXCEPTIONS23

ARTICLE 587The agent shall also be civilly liable for theindemnities in favor of third persons which arisefrom the conduct of the captain in the care of thegoods which the vessel carried; but he may exempthimself therefrom by abandoning the vessel with allher equipments and the freight he may haveearned during the voyage.

ARTICLE 590The owners of a vessel shall be civilly liable in theproportion of their contribution to the commonfund, for the results of the acts of the captain,referred to in Article 587.Each part owner may exempt himself from thisliability by the abandonment before a notary of thepart of the vessel belonging to him.

ARTICLE 837The civil liability contracted by the shipowners inthe cases prescribed in this section, shall beunderstood as limited to the value of the vesselwith all her appurtenances and all the freightearned during the voyage.

Yangco v. Laserna et al (1941)If the shipowner or agent may in any way be heldcivilly liable at all for injury to or death ofpassengers arising from the negligence of thecaptain in cases of collisions or shipwrecks, hisliability is merely co-extensive with his interest inthe vessel such that a total loss thereof results inits extinction. In arriving at this conclusion, the factis not ignored that the ill-fated S. S. Negros, as avessel engaged in interisland trade, is a commoncarrier, and that the relationship between thepetitioner and the passengers who died in themishap rests on a contract of carriage. Butassuming that petitioner is liable for a breach ofcontract of carriage, the exclusively "real andhypothecary nature" of maritime law operates tolimit such liability to the value of the vessel, or tothe insurance thereon, if any. In the instant case itdoes not appear that the vessel was insured.Art. 587 of the Code of Commerce appears to dealonly with the limited liability of shipowners oragents for damages arising from the misconduct ofthe captain in the care of the goods which thevessel carries, but this is a mere deficiency oflanguage and in no way indicates the true extent ofsuch liability.Whether the abandonment of the vessel sought bythe petitioner in the instant case was in accordancewith law or not is immaterial. The vessel havingtotally perished, any act of abandonment would bean idle ceremony. Judgment is reversed andpetitioner is hereby absolved of all the complaints,without costs.

ABUEG vs. SAN DIEGO(1946)The real and hypothecary nature of the liability ofthe shipowner or agent embodied in the provisionsof the Maritime Law, Bk III, Code of Commerce,had its origin in the prevailing continues of themaritime trade and sea voyages during themedieval ages, attended by innumerable hazardsand perils. To offset against these adverse

23The definition and exceptions of the Doctrine of

Limited Liability were asked in 2000, 1999, 1997,1994, 1989, 1985, and 1982.

conditions and encourage shipbuilding andmaritime commerce, it was deemed necessary toconfine the liability of the owner or agent arisingfrom the operation of a ship to the vessel,equipment, and freight, or insurance, if any, sothat if the shipowner or agent abandoned the ship,equipment, and freight, his liability wasextinguished.If an accident is compensable under the Workmen'sCompensation Act, it must be compensated evenwhen the workman's right is not recognized by or isin conflict with other provisions of the Civil Code orthe Code of Commerce. The reason behind thisprinciple is that the Workmen's Compensation Actwas enacted by the Legislature in abrogation of theother existing laws.

SPECIFIC RIGHTS AND PREROGATIVES

ARTICLE 575Part owners of vessels shall enjoy the right ofoption of purchase and withdrawal in the salesmade to strangers; but they can only exercise itwithin the nine days following the record of the salein the registry and by delivering the price at once.

ARTICLE 593The owners of a vessel shall have preference in hercharter to other persons, offering equal conditionsand price. If two or more of the former shouldclaim said right the one having greater interestshall be preferred, and should they have an equalinterest it shall be decided by lot.

ARTICLE 594The part owners shall elect the manager who is torepresent them in the capacity of agent.The appointment of director or agent shall berevocable at the will of the members.

ARTICLE 596The agent may discharge the duties of captain ofthe vessel, subject, in every case, to the provisionscontained in Article 609.If two or more co-owners request the position ofcaptain, the disagreement shall be decided by avote of the members; and if the vote should resultin a tie, the position shall be given to the partowner having the larger interest in the vessel.If the interest of the petitioners should be thesame, and there should be a tie, the matter shallbe decided by lot.

ARTICLE 601. Should there be any profits, the co-owners may demand of the managing agent theamount due them, by means of an executory actionwithout further requisites than the acknowledgmentof the signatures of the instrument approving theaccount.

2. CAPTAINS AND MASTERS

QUALIFICATIONS AND LICENSING



ARTICLE 609Captains and masters of vessels must be Spaniards* having legal capacity to bind themselves inaccordance with this Code, and must prove thatthey have the skill, capacity, and qualificationsrequired to command and direct the vessel, asestablished by marine laws, ordinances, orregulations, or by those of navigation, and thatthey are not disqualified according to the same forthe discharge of the duties of that position. cdtIf the owner of a vessel desires to be the captainthereof and does not have the legal qualificationstherefor, he shall limit himself to the financialadministration of the vessel, and shall intrust hernavigation to a person possessing the qualificationsrequired by said ordinances and regulations.

POWERS AND DUTIES

ARTICLE 610The following powers are inherent in the position ofcaptain or master of a vessel:1. To appoint or make contracts with the crewin the absence of the agent and propose said crew,should said agent be present; but the agent shallnot be permitted to employ any member againstthe captain's express refusal.2. To command the crew and direct the vesselto the port of its destination, in accordance with theinstructions he may have received from the agent.3. To impose, in accordance with theagreements and the laws and regulations of themerchants marine, on board the vessel,correctional punishment upon those who do notcomply with his orders or who conduct themselvesagainst discipline, holding a preliminaryinvestigation on the crimes committed on board thevessel on the high seas, which shall be turned overto the authorities, who are to take cognizancethereof, at the first port touched.4. To make contracts for the charter of thevessel in the absence of the agent or of herconsignee, acting in accordance with theinstructions received and protecting the interests ofthe owner most carefully.5. To adopt all the measures which may benecessary to keep the vessel well supplied andequipped, purchasing for the purpose all that maybe necessary, provided there is no time to requestinstructions of the agent.6. To make, in similar urgent cases and on avoyage, the repairs to the hull and engines of thevessel and to her rigging and equipment which areabsolutely necessary in order for her to be able tocontinue and conclude her voyage; but if sheshould arrive at a point where there is a consigneeof the vessel, he shall act in concurrence with thelatter.

ARTICLE 611In order to comply with the obligations mentionedin the foregoing article, the captain, when he hasno funds and does not expect to receive any fromthe agent, shall procure the same in the successiveorder stated below:1. By requesting said funds of the consigneesor correspondents of a vessel.2. By applying to the consignees of the cargoor to the persons interested therein.3. By drawing on the agent.

4. By borrowing the amount required bymeans of a bottomry bond.5. By selling a sufficient amount of the cargoto cover the amount absolutely necessary to repairthe vessel, and to equip her to pursue the voyage.In the two latter cases he must apply to the judicialauthority of the port, if in Spain * and to theSpanish * consul, if in a foreign country; and wherethere should be none, to the local authority,proceeding in accordance with the prescriptions ofArticle 583, and with the provisions of the law ofcivil procedure.

ARTICLE 622

If while on a voyage the captain should learn of theappearance of privateers or men of war against hisflag, he shall be obliged to make the nearestneutral port, inform his agent or shippers, andawait an occasion to sail under convoy, or until thedanger is over or he has received express ordersfrom the ship agent or the shippers.

ARTICLE 624

A captain whose vessel has gone through ahurricane or who believes that the cargo hassuffered damages or averages, shall make aprotest thereon before the competent authority atthe first port he touches, within 24 hours followinghis arrival and shall ratify it within the same periodwhen he arrives at his destination, immediatelyproceeding with the proof of the facts, and he maynot open the hatches until after this has beendone.

The captain shall proceed in the same manner, if,the vessel having been wrecked; he is saved aloneor with part of his crew, in which case he shallappear before the nearest authority, and make asworn statement of facts.

The authority or the consul shall verify the saidfacts receiving sworn statements of the membersof the crew and passengers who may have beensaved; and taking such other steps as may assist inarriving at the facts he shall make a statement ofthe result of the proceedings in the log book and inthat of the sailing mate, and shall deliver to thecaptain the original records of the proceedings,stamped and folioed, with a memorandum of thefolios, which he must rubricate, in order that it maybe presented to the judge or court of the port ofdestination.

The statement of the captain shall be accepted if itis in accordance with those of the crew andpassengers; if they disagree, the latter shall beaccepted, always saving proof to the contrary.

ARTICLE 625

The captain, under his personal responsibility, assoon as he arrives at the port of destination, shouldget the necessary permission from the health andcustoms officers, and perform the other formalitiesrequired by the regulations of the administration,delivering the cargo without any defalcation, to theconsignee, and in a proper case, the vessel, riggingand freightage to the ship agent.



If by reason of the absence of the consignee or onaccount of the nonappearance of a legal holder ofthe bills of lading, the captain should not know towhom he is to legally make the delivery of thecargo, he shall place it at the disposal of the properjudge or court or authority, in order that he maydetermine what is proper with regards to itsdeposit, preservation and custody.

PROHIBITED ACTS AND TRANSACTIONS

ARTICLE 613A captain who navigates for freight in common oron shares can not make any transaction for hisexclusive account, and should he do so the profitshall belong to the other persons in interest, andthe losses shall be for his own exclusive account.

ARTICLE 614A captain who, having made an agreement to makea voyage, fails to perform his undertaking, withoutbeing prevented by fortuitious accident or forcemajeure, shall indemnify for all the losses which hemay cause, without prejudice to the criminalpenalties which may be proper.

ARTICLE 615Without the consent of the agent, the captain cannot have himself substituted by another person;and should he do so, besides being liable for all theacts of the substitute and bound to the indemnitiesmentioned in the foregoing article, the substituteas well as the captain may be discharged by theagent.

ARTICLE 617The captain can not contract loans onrespondentia, and should he do so the contractsshall be void.Neither can he borrow money on bottomry for hisown transactions, except on the portion of thevessel he owns, provided no money has beenpreviously borrowed on the whole vessel, andprovided there does not exist any other kind of lienor obligation thereon. When he is permitted to doso, he must necessarily state what interest he hasin the vessel.In case of violation of this article the principal,interest, and costs shall be charged to the privateaccount of the captain, and the agent mayfurthermore have the right to discharge him.

ARTICLE 621A captain who borrows money on bottomry, or whopledges or sells merchandise or provisions in othercases and without the formalities prescribed in thisCode, shall be liable for the principle, interest, andcosts, and shall indemnify for the damages he maycause.The captain who commits fraud in his accountsshall reimburse the amount defrauded, and shall besubject to the provisions contained in the PenalCode.

ARTICLE 583If the ship being on a voyage the captain shouldfind it necessary to contract one or more of theobligations mentioned in Nos. 8 and 9 of Article580, he shall apply to the judge or court if he is inSpanish * territory, and otherwise to the consul of

Spain, * should there be one, and, in his absenceto the judge or court or to the proper localauthority, presenting the certificate of the registryof the vessel treated of in Article 612, and theinstruments proving the obligation contracted.The judge or court, the consul or the local authorityas the case may be, in view of the result of theproceedings instituted, shall make a temporarymemorandum in the certificate of their result, inorder that it may be recorded in the registry whenthe vessel returns to the port of her registry, or sothat it can be admitted as a legal and preferredobligation in case of sale before the return, byreason of the sale of the vessel by virtue of adeclaration of unseaworthiness.The lack of this formality shall make the captainpersonally liable to the creditors who may beprejudiced through his fault.

3. OTHER OFFICERS AND CREW

CONTRACTS AND FORMALITIES

ARTICLE 634The captain may make up his crew with thenumber he may consider advisable, and in theabsence of Spanish * sailors he may ship foreignersresiding in the country, the number thereof not toexceed one-fifth of the total crew. If in foreignports the captain should not find a sufficientnumber of Spanish * sailors, he may make up thecrew with foreigners, with the consent of the consulor marine authorities.The agreements which the captain may make withthe members of the crew and others who go tomake up the complement of the vessels, to whichreference is made in Article 612, must be reducedto writing in the account book without theintervention of a notary public or clerk, signed bythe parties thereto, and vised by the marineauthority if they are executed in Spanish *territory, or by the consuls or consular agents ofSpain * if executed abroad, stating therein all theobligations which each one contracts and all therights they acquire, said authorities taking carethat these obligations and rights are recorded in aconcise and clear manner, which will not give riseto doubts or claims. cdThe captain shall take care to read to them thearticles of this Code, which concern them, statingthat they were read in the said document.If the book includes the requisites prescribed inArticle 612, and there should not appear any signsof alterations in its clauses, it shall be admitted asevidence in questions which may arise between thecaptain and the crew with regard to theagreements contained therein and the amountspaid on account of the same.Every member of the crew may request a copy ofthe captain, signed by the latter, of the agreementand of the liquidation of his wages, as they appearin the book.

DUTIES AND LIABILITIES

ARTICLE 635A sailor who has been contracted to serve on avessel can not rescind his contract nor fail to



comply therewith except by reason of a legitimateimpediment which may have occurred.Neither can he pass from the service of one vesselto another without obtaining the written consent ofthe vessel on which he may be.If, without obtaining said permission, the sailorwho has signed for one vessel should sign foranother one, the second contract shall be void, andthe captain may choose between forcing him tofulfill the service to which he first bound himself orlook for a person to substitute him at his expense.Said sailor shall furthermore lose the wages earnedon his first contract to the benefit of the vessel forwhich he may have signed.A captain who, knowing that a sailor is in theservice of another vessel, should have made a newagreement with him, without having requested thepermission referred to in the foregoing paragraphs,shall be personally liable to the captain of thevessel to which the sailor first belonged for thatpart of the indemnity, referred to in the thirdparagraph of this article, which the sailor could notpay.

RIGHTS

ARTICLE 636Should a fixed period for which a sailor has signednot be stated, he can not be discharged until theend of the return voyage to the port where heenrolled.

ARTICLE 637Neither can the captain discharge a sailor duringthe time of his contract except for sufficient cause,the following being considered as such:1. The perpetration of a crime which disturbsorder on the vessel.2. Repeated offenses of insubordination,against discipline, or against the fulfillment of theservice.3. Repeated incapacity or negligence in thefulfillment of the service to be rendered.4. Habitual drunkenness.5. Any occurrence which incapacitates thesailor to carry out the work under his charge, withthe exception of the provisions contained in Article644.6. Desertion.The captain may, however, before setting out on avoyage and without giving any reason whatsoever,refuse to permit a sailor he may have engagedfrom going on board and may leave him on land, inwhich case he will be obliged to pay him his wagesas if he had rendered services.This indemnity shall be paid from the funds of thevessel if the captain should have acted for reasonsof prudence and in the interest of the safety andgood service of the former. Should this not be thecase, it shall be paid by the captain personally.aisadcAfter the vessel has sailed, and during the voyageand until the conclusion thereof, the captain cannot abandon any member of his crew on land or onthe sea, unless, by reason of being guilty of somecrime, his imprisonment and delivery to thecompetent authority is proper in the first porttouched, which will be obligatory on the captain.

ARTICLE 638If, the crew having been engaged, the voyage isrevoked by the will of the agent or of thecharterers before or after the vessel has put to seaor if the vessel is in the same manner given adifferent destination than that fixed in theagreement with the crew, the latter shall beindemnified because of the rescission of thecontract according to the case, viz:1. If the revocation of the voyage should bedecided before the departure of the vessel from theport, each sailor engaged shall be given onemonth's salary, besides what may be due him inaccordance with his contract, for the servicesrendered to the vessel up to the date of therevocation.2. If the agreement should have been for afixed amount for the whole voyage, there shall begraduated what may be due for said month anddays, calculating the same in proportion to theestimated duration of the voyage, in the judgmentof experts, in the manner established in the law ofcivil procedure; and if the proposed voyage shouldbe of such short duration that it is calculated at onemonth more or less, the indemnity shall be fixedfor fifteen days, discounting in all cases the sumsadvanced.3. If the revocation should take place after thevessel has put to sea, the sailors engaged for afixed amount for the voyage shall receive thesalary which may have been offered them in full asif the voyage had terminated, and those engagedby the month shall receive the amountcorresponding to the time they might have been onboard and to the time they may require to arrive atthe port of destination, the captain being obliged,furthermore, to pay said sailors the passage to thesaid port or to the port of sailing of the vessel, asmay be convenient for them.4. If the agent or the charterers of the vesselshould give said vessel a destination other thanthat fixed in the agreement, and the members ofthe crew should not agree thereto, they shall begiven by way of indemnity half the amount fixed incase No. 1, besides what may be owed them forthe part of the monthly wages corresponding to thedays which have elapsed from the date of theiragreements.If they accept the change, and the voyage, onaccount of the greater distance or for otherreasons, should give rise to an increase of wages,the latter shall be privately regulated, or throughamicable arbitrators in case of disagreement. Eventhough the voyage may be to a nearer point, thisshall not give rise to a reduction in the wagesagreed upon.If the revocation or change of the voyage shouldoriginate from the shippers or charterers, the agentshall have a right to demand of them the indemnitywhich is justly due.

ARTICLE 639If the revocation of the voyage should arise from ajust cause independent of the will of the agent orcharterers, and the vessel should not have left theport, the members of the crew shall not have anyother right than to receive the wages earned up tothe day on which the revocation took place.

ARTICLE 640The following shall be just causes for the revocationof the voyage:



1. A declaration of war or interdiction ofcommerce with the power to whose territory thevessel was bound.2. The blockade of the port of destination orthe breaking out of an epidemic after theagreement.3. The prohibition to receive in said port thegoods which make up the cargo of the vessel.4. The detention or embargo of the same byorder of the Government, or for any other reasonindependent of the will of the agent.5. The inability of the vessel to navigate.

ARTICLE 641If, after a voyage has been begun, any of the firstthree causes mentioned in the foregoing articleshould occur, the sailors shall be paid at the portthe captain may deem it advisable to make for thebenefit of the vessel and cargo, according to thetime they may have served thereon; but if thevessel is to continue the voyage, the captain andthe crew may mutually demand the enforcement ofthe contract.In case of the occurrence of the fourth cause, thecrew shall continue to be paid half wages, if theagreement is by month but if the detention shouldexceed three months, the engagement shall berescinded and the crew shall be paid what theyshould have earned, according to the contract, ifthe voyage had been made. And if the agreementhad been made for a fixed sum for the voyage, thecontract must be complied within the terms agreedupon.In the fifth case, the crew shall not have any otherright than be entitled to recover the wages earned;but if the disability of the vessel should have beencaused by the negligence or lack of skill of thecaptain, engineer, or sailing mate, they shallindemnify the crew for the loss suffered, alwaysreserving the criminal liability which may beproper.

ARTICLE 642If the crew has been engaged to work on sharesthey shall not be entitled, by reason of therevocation, delay, or greater extension of thevoyage, to anything but the proportionate part ofthe indemnity paid into the common funds of thevessel by the persons liable for said occurrences.

ARTICLE 643If the vessel and her freight should be totally lost,by reason of capture or wreck, all rights of the crewto demand any wages whatsoever shall beextinguished, as well as that of the agent for therecovery of the advances made.If a portion of the vessel or freight should besaved, or part of either, the crew engaged onwages, including the captain, shall retain theirrights on the salvage, so far as they go, on theremainder of the vessel as well as value of thefreightage or the cargo saved; but sailors who areengaged on shares shall not have any rightwhatsoever to the salvage of the hull, but only onthe portion of the freightage saved. If they shouldhave worked to collect the remainder of the ship-wrecked vessel, they shall be given an award inproportion to the efforts made and to the risksencountered in order to accomplish the salvage.

ARTICLE 644A sailor who falls sick shall not lose his right towages during the voyage, unless the sickness is theresult of his own fault. At any rate, the costs of the

attendance and cure shall be defrayed from thecommon funds, in the form of a loan.If the sickness should be caused by an injuryreceived in the service or defense of the vessel thesailor shall be attended and cured from thecommon funds, there being deducted beforeanything else from the proceeds of the freight, thecost of the attendance and cure.

ARTICLE 645If a sailor should die during the voyage his heirshall be given the wages earned and not received,according to his engagement and the reason for hisdeath, namely —If he should have died a natural death and shouldhave been engaged on wages there shall be paidwhat may have been earned up to the date of hisdeath.If the engagement had been made for a fixed sumfor the whole voyage there shall be paid half theamount earned if the sailor died on the voyage out,and the whole amount if he died on the returnvoyage.And if the engagement had been made on sharesand the death should have occurred after thevoyage was begun, the heirs shall be paid theentire portion due the sailor; but should the latterhave died before the departure of the vessel fromthe port, the heirs shall not be entitled to claimanything.If the death should have occurred in the defense ofthe vessel, the sailor shall be considered as living,and his heirs shall be paid, at the end of thevoyage, the full amount of wages or the full part ofthe profits due him as to the others of his grade.The sailor shall likewise be considered as present inthe event of his capture when defending the vessel,in order to enjoy the same benefits as the rest; butshould he have been captured on account ofcarelessness or other accident not related to theservice, he shall only receive the wages due up tothe day of his capture.

ARTICLE 646The vessel with her engines, rigging, equipment,and freights shall be liable for the wages earned bythe crew engaged per month or for the trip, theliquidation and payment ought to take placebetween one voyage and the other.After a new voyage has been undertaken, creditssuch as the former shall lose their right ofpreference.

ARTICLE 647The officers and the crew of the vessel shall beexempted from all obligations contracted, if theydeem it proper, in the following cases:1. If, before the beginning of the voyage, thecaptain attempts to change it, or there occurs anaval war with the power to which the vessel wasdestined.2. If a disease should break out and beofficially declared epidemic in the port ofdestination.3. If the vessel should change owner orcaptain.



4. SUPERCARGOES

ARTICLE 649Supercargoes shall discharge on board the vesselthe administrative duties which the agent orshippers may have assigned them; they shall keepan account and record of their transactions in abook which shall have the same conditions andrequisites as required for the accounting book ofthe captain, and shall respect the latter in hisduties as chief of the vessel. cdtaThe powers and liabilities of the captain shallcease, when there is a supercargo, with regard tothat part of the administration legitimatelyconferred upon the latter, but shall continue inforce for all acts which are inseparable from hisauthority and office.

ARTICLE 650All the provisions contained in the second section ofTitle III, Book II, with regard to qualifications,manner of making contracts, and liabilities offactors shall be applicable to supercargoes.

ARTICLE 651Supercargoes can not, without special authorizationor agreement, make any transaction for their ownaccount during the voyage, with the exception ofthe ventures which, in accordance with the customof the port of destination, they are permitted to do.Neither shall they be permitted to invest in thereturn trip more than the profits from the ventures,unless there is a special authorization thereto fromthe principals.

What is a supercargo?

He or she is an agent of the owner of goodsshipped as cargo on a vessel, who has charge ofthe cargo on board, sells the same to the bestadvantage in the foreign markets, buys cargo to bebrought back on the return voyage of the ship, andcomes home with it.

E. Accidents and Damages in MaritimeCommerce

1. AVERAGES24

NATURE AND KINDS

ARTICLE 806For the purposes of this Code the following shall beconsidered averages:1. All extraordinary or accidental expenseswhich may be incurred during the navigation forthe preservation of the vessel or cargo, or both.2. All damages or deterioration the vesselmay suffer from the time she puts to sea from theport of departure until she casts anchor in the portof destination, and those suffered by themerchandise from the time it is loaded in the portof shipment until it is unloaded in the port ofconsignment.

ARTICLE 807

24General averages, requisites and jettison were

asked in 2000, 1983, and 1982.

The petty and ordinary expenses of navigation,such as pilotage of coasts and ports, lighterage andtowage, anchorage dues, inspection, health,quarantine, lazaretto, and other so-called portexpenses, costs of barges, and unloading, until themerchandise is placed on the wharf, and any otherexpenses common to navigation shall beconsidered ordinary expenses to be defrayed bythe shipowner, unless there is a special agreementto the contrary.

ARTICLE 808Averages shall be:1. Simple or particular.2. General or gross.

i. Simple or Particular

(a) Defined

ARTICLE 809Simple or particular averages shall be, as a generalrule, all the expenses and damages caused to thevessel or to her cargo which have not redounded tothe benefit and common profit of all the personsinterested in the vessel and her cargo, andespecially the following:1. The damages suffered by the cargo fromthe time of its embarkation until it is unloaded,either on account of the nature of the goods or byreason of an accident at sea or force majeure, andthe expenses incurred to avoid and repair thesame.2. The damages suffered by the vessel in herhull, rigging, arms, and equipment, for the samecauses and reasons, from the time she puts to seafrom the port of departure until she anchored in theport of destination.3. The damages suffered by the merchandiseloaded on deck, except in coastwise navigation, ifthe marine ordinances allow it.4. The wages and victuals of the crew whenthe vessel should be detained or embargoed by alegitimate order or force majeure, if the chartershould have been for a fixed sum for the voyage.5. The necessary expenses on arrival at aport, in order to make repairs or secure provisions.6. The lowest value of the goods sold by thecaptain in arrivals under stress for the payment ofprovisions and in order to save the crew, or tocover any other requirement of the vessel againstwhich the proper amount shall be charged.7. The victuals and wages of the crew duringthe time the vessel is in quarantine.8. The damage suffered by the vessel or cargoby reason of an impact or collision with another, ifit were accidental and unavoidable. If the accidentshould occur through the fault or negligence of thecaptain, the latter shall be liable for all the damagecaused.9. Any damage suffered by the cargo throughthe faults, negligence, or barratry of the captain orof the crew, without prejudice to the right of theowner to recover the corresponding indemnity fromthe captain, the vessel, and the freight.

(b) Effects

ARTICLE 810The owner of the goods which gave rise to theexpense or suffered the damage shall bear thesimple or particular averages.ii. Gross or General



(a) Defined

ARTICLE 811General or gross averages shall be, as a generalrule, all the damages and expenses which aredeliberately caused in order to save the vessel, hercargo, or both at the same time, from a real andknown risk, and particularly the following:1. The goods or cash invested in theredemption of the vessel or cargo captured byenemies, privateers, or pirates, and the provisions,wages, and expenses of the vessel detained duringthe time the arrangement or redemption is takingplace.2. The goods jettisoned to lighten the vessel,whether they belong to the vessel, to the cargo, orto the crew, and the damage suffered through saidact by the goods kept.3. The cables and masts which are cut orrendered useless, the anchors and the chains whichare abandoned in order to save the cargo, thevessel, or both.4. The expenses of removing or transferring aportion of the cargo in order to lighten the vesseland place her in condition to enter a port orroadstead, and the damage resulting therefrom tothe goods removed or transferred.5. The damage suffered by the goods of thecargo through the opening made in the vessel inorder to drain her and prevent her sinking.6. The expenses caused through floating avessel intentionally stranded for the purpose ofsaving her.7. The damage caused to the vessel which itis necessary to break open, scuttle, or smash inorder to save the cargo.8. The expenses of curing and maintaining themembers of the crew who may have been woundedor crippled in defending or saving the vessel.9. The wages of any member of the crewdetained as hostage by enemies, privateers, orpirates, and the necessary expenses which he mayincur in his imprisonment, until he is returned tothe vessel or to his domicile, should he prefer it.10. The wages and victuals of the crew of avessel chartered by the month during the time itshould be embargoed or detained by force majeureor by order of the Government, or in order to repairthe damage caused for the common good.11. The loss suffered in the value of the goodssold at arrivals under stress in order to repair thevessel because of gross average.12. The expenses of the liquidation of theaverage.

ARTICLE 817If in lightening a vessel on account of a storm, inorder to facilitate her entry into a port orroadstead, part of her cargo should be transferredto lighters or barges and be lost, the owner of saidpart shall be entitled to indemnity, as if the losshas originated from a gross average, the amountthereof being distributed between the entire vesseland cargo which caused the same.If, on the contrary, the merchandise transferredshould be saved and the vessel should be lost, noliability can be demanded of the salvage.

ARTICLE 818If, as a necessary measure to extinguish a fire in aport; roadstead; creek, or bay, it should be decidedto sink any vessel, this loss shall be consideredgross average, to which the vessels saved shallcontribute.

(b) Essential Requisites

ARTICLE 813In order to incur the expenses and cause thedamages corresponding to gross average, aprevious resolution of the captain, adopted afterdeliberation with the sailing mate and other officersof the vessel, and with a hearing of the personsinterested in the cargo who may be present, shallbe required.If the latter shall object, and the captain andofficers, or a majority, or the captain, if opposed tothe majority, should consider certain measuresnecessary, they may be executed under hisliability, without prejudice to the freightersexercising their rights against the captain beforethe judge or court of competent jurisdiction, if theycan prove that he acted with malice, lack of skill, ornegligence.If the persons interested in the cargo, being on thevessel, should not be heard, they shall notcontribute to the gross average, which contributionshall be paid by the captain, unless the urgency ofthe case should be such that the time necessary forprevious deliberation was lacking.

ARTICLE 814The resolution adopted to cause the damageswhich constitute a general average mustnecessarily be entered in the log book, stating themotives and reasons therefor, the votes against it,and the reasons for the disagreement should therebe any, and the irresistible and urgent causeswhich moved the captain if he acted of his ownaccord.In the first case the minutes shall be signed by allthe persons present who could do so before takingaction if possible, and if not at the first opportunity;in the second case by the captain and by theofficers of the vessel.In the minutes and after the resolution there shallbe stated in detail all the goods cast away, andmention shall be made of the injuries caused tothose kept on board. The captain shall be obligedto deliver one copy of these minutes to themaritime judicial authority of the first port he maymake within twenty-four hours after his arrival, andto ratify it immediately by an oath.

ARTICLE 860If, notwithstanding the jettison of the merchandise,breakage of masts, ropes, and equipment, thevessel should be lost running said risk, nocontribution whatsoever by reason of grossaverage shall be proper.The owners of the goods saved shall not be liablefor the indemnity of those jettisoned, lost, ordamaged.

MAGSAYSAY INC. vs AGAN (1955)REQUISITES FOR GENERAL AVERAGE:

1. There must be a common danger. Thismeans, that both the ship and the cargo, after ithas been loaded, are subject to the same danger,whether during the voyage, or in the port ofloading or unloading; that the danger arises fromthe accidents of the sea, dispositions of theauthority, or faults of men, provided that thecircumstances producing the peril should beascertained and imminent or may rationally be saidto be certain and imminent. This last requirementexclude measures undertaken against a distantperil.



2. That for the common safety, part of thevessel or of the cargo or both is sacrificeddeliberately.3. That from the expenses or damages causedfollows the successful saving of the vessel andcargo.4. That the expenses or damages should havebeen incurred or inflicted after taking proper legalsteps and authority

(c) Effects

ARTICLE 812In order to satisfy the amount of the gross orgeneral averages, all the persons having aninterest in the vessel and cargo therein at the timeof the occurrence of the average shall contribute.

(d) Jettison

ARTICLE 815The captain shall supervise the jettison, and shallorder the goods cast overboard in the followingorder:1. Those which are on deck, beginning withthose which embarrass the handling of the vesselor damage her, preferring, if possible, the heaviestones and those of least utility and value. cda2. Those in the hold, always beginning withthose of the greatest weight and smallest value, tothe amount and number absolutely indispensable.

ARTICLE 816In order that the goods jettisoned may be includedin the gross average and the owners thereof beentitled to indemnity, it shall be necessary in so faras the cargo is concerned that their existence onboard be proven by means of the bill of lading; andwith regard to those belonging to the vessel, bymeans of the inventory made up before thedeparture, in accordance with the first paragraph ofArticle 612.

(e) Jason Clauses (York - Antwerp Rules,Rule D)

Rights to contribution in general average shall notbe affected, though the event which gave rise tothe sacrifice or expenditure may have been due tothe fault of one of the parties to the adventure; butthis shall not prejudice any remedies which may beopen against that party for such fault.

What are the York-Antwerp Rules and theJason Clause?The York-Antwerp Rules is an international systemof rules (they are not law or international treaties,but are just widely in use) for the liquidation andpayment of average to avoid the problem ofcharacterization.

The Jason Clause is a standard provision inmaritime contracts. It provides for uniform rules onadjustment, proof and liquidation of avergaes inmaritime accidents to address various systems ofdetermining the same.

PROOF AND LIQUIDATION OF AVERAGES

i. Modes

ARTICLE 846

The persons interested in the proof and liquidationof averages may mutually agree and bindthemselves at any time with regard to the liability,liquidation, and payment thereof. cdtIn the absence of agreements, the following rulesshall be observed:1. The proof of the average shall take place inthe port where the repairs are made, should any benecessary, or in the port of unloading.2. The liquidation shall take place in the portof unloading should it be a Spanish * port.3. Should the average have occurred outsideof the waters under the jurisdiction of thePhilippines or the cargo should have been sold in aforeign port by reason of an arrival under stress,the liquidations shall be made in the port ofarrival.4. If the average should have occurred nearthe port of destination, so that said port can bemade, the proceedings treated of in Rules 1 and 2shall be held there.

ARTICLE 847In case of making the liquidation of the averagesprivately by virtue of agreement, as well as when ajudicial authority takes part therein at the requestof any of the parties interested who do not agreethereto, all of them shall be cited and heard, shouldthey not have renounced this right.Should they not be present or not have a legitimaterepresentative, the liquidation shall be made by theconsul in a foreign port, and where there is none,by the judge or court of competent jurisdiction,according to the laws of the country, and for theaccount of the proper person.When the representative is a person well known inthe place where the liquidation takes place, hisintervention shall be admitted and produce legaleffects, even though he be authorized only by aletter of the shipowner, freighter, or underwriter.

ARTICLE 848Claims for averages shall not be admitted if they donot exceed 5 per cent of the interest which theclaimant may have in the vessel or cargo if it isgross average, and 1 per cent of the goodsdamaged if particular average, deducting in bothcases the expenses of appraisal, unless there is anagreement to the contrary.

ii. Appraisal of general average

ARTICLE 850If by reason of one or more accidents of the seaparticular and gross averages of the vessel or thecargo, or of both, should take place on the samevoyage, the expenses and damages correspondingto each one shall be determined separately in theport where the repairs are made or where thecargo is discharged, or sold, or the merchandise isbenefited.For this purpose the captains shall be obliged todemand of the expert appraisers and of thecontractors making the repairs, as well as of thoseappraising and taking part in the unloading, repair,sale, or the benefiting of the merchandise, thatthey separate and detail exactly in theirappraisements or estimates and accounts all theexpenses and damages belonging to each average,and in those of each average those correspondingto the vessel and to the cargo, stating alsoseparately whether there are or not any damagesproceeding from the nature of the goods, and notby reason of a sea accident; and in case there



should be expenses common to the differentaverages and to the vessel and her cargo, theremust be calculated the amount corresponding toeach and stated distinctly.

SECTION IILiquidation of Gross AveragesARTICLE 851At the instance of the captain, the adjustment,liquidation, and distribution of gross averages shallbe held privately, with the consent of all the partiesin interest.For this purpose, within forty-eight hours followingthe arrival of the vessel at the port, the captainshall call all the persons interested, in order thatthey may decide as to whether the adjustment orliquidation of the gross average is to be made byexperts and liquidators appointed by themselves, inwhich case this shall be done should the personsinterested agree.Should an agreement not be possible, the captainshall apply to the judge or court of competentjurisdiction, who shall be the one of the port wherethese proceedings are to be held in accordancewith the provisions of this Code, or to the consul ofSpain, * should there be one, and otherwise to thelocal authority when they are to be held in aforeign port. cdta

ARTICLE 852

If the captain should not comply with the provisionscontained in the foregoing article, the shipowner oragent or the freighters shall demand theliquidation, without prejudice to the action theymay bring to demand indemnity from him.

ARTICLE 853After the experts have been appointed by thepersons interested, or by the judge or court, beforethe acceptance, an examination of the vessel andof the repairs required shall be made, as well as anestimate of their cost, separating these losses anddamages from those arising from the natural viceof the thing.The experts shall also declare whether the repairscan be made immediately, or whether it isnecessary to unload the vessel to examine andrepair her.With regard to the merchandise, if the averageshould be visible at a mere glance, the examinationthereof must be made before it is delivered. Shouldit not be visible at the time of unloading, saidexamination may be held after the deliveryprovided it is done within forty-eight hours fromthe unloading and without prejudice to the otherproofs which the experts may deem necessary.

ARTICLE 854The appraisement of the goods which are tocontribute to the gross average, and that of thosewhich constitute the average, shall conform to thefollowing rules:1. The merchandise saved which is tocontribute to the payment of the gross averageshall be valued at the current price thereof at theport of unloading, deducting the freights, customsduties, and charges for unloading, as may appearfrom a material inspection of the same, not takinginto consideration the bills of lading, unless there isan agreement to the contrary.2. If the liquidation is to take place in the portof sailing, the value of the merchandise loaded

shall be fixed by the purchase price, including theexpenses until they are put on board, excluding theinsurance premium.3. If the merchandise should be damaged, itshall be appraised at its true value.4. If the voyage should be interrupted, themerchandise having been sold in a foreign port andthe average can not be estimated, there shall betaken as the contributing capital the value of themerchandise in the port of arrival, or the netproceeds obtained at the sale thereof.5. Merchandise lost, which should constitutethe gross average, shall be appraised at the valuemerchandise of its kind may have in the port ofunloading, provided its kind and quality appears inthe bill of lading; and should this not be the case,the invoices of the purchase issued in the port ofshipment shall be taken as a basis, adding to itsvalue the expenses and freights subsequentlyarising. cd6. The masts cut down, the sails, cables, andother equipment of the vessel rendered useless forthe purpose of saving her, shall be appraised at thecurrent value, deducting one-third by reason of thedifference between new and old.

This deduction shall not be made in regardto anchors and chains.7. The vessel shall be appraised at her realvalue in her condition at the time.8. The freights shall represent 50 per cent byway of contributing capital.

ARTICLE 855The merchandise loaded on the upper deck of thevessel shall contribute to the gross average shouldit be saved; but there shall be no right to indemnityif it should be lost by reason of being jettisoned forgeneral safety, except when the marine ordinancesallow its shipment in this manner in coastwisenavigation.The same shall take place with that which is onboard and is not included in the bills of lading orinventories, according to the cases.In any case the shipowner and the captain shall beliable to freighters for the loss of the jettison, if thestorage on the upper deck took place without theconsent of the latter.

ARTICLE 857After the appraisement of the goods saved hasbeen concluded by the experts, as well as that ofthe goods lost which constitute the gross average,and after the repairs have been made to thevessel, should any have to be made, and in suchcase after the approval of the accounts of the sameby the persons interested or by the judge or court,the entire record shall be turned over to theliquidator appointed, in order that he may proceedwith the distribution of the average.

iii. Liquidation of general averages

ARTICLE 858In order to effect the liquidation the liquidator shallexamine the sworn statement of the captain,comparing it, if necessary, with the log book and allthe contracts which may have been made betweenthe persons interested in the average, theappraisements, expert examinations, and accountsof repairs made. If, as a result of this examination,he should find any defect in this procedure whichmight injure the rights of the persons interested oraffect the liability of the captain, he shall callattention thereto in order that it be corrected, if



possible, and otherwise he shall include it in thepreliminaries of the liquidation.Immediately thereafter he shall proceed with thedistribution of the amount of the average, for whichpurpose he shall fix:1. The contributing capital, which he shalldetermine by the value of the cargo, in accordancewith the rules established in Article 854.2. That of the vessel in her actual condition,according to a statement of experts.3. The 50 per cent of the amount of thefreight, deducting the remaining 50 per cent forwages and maintenance of the crew.After the amount of the gross average has beendetermined in accordance with the provisions ofthis Code, it shall be distributed pro rata among thegoods which are to cover the same.

ARTICLE 865The distribution of the gross average shall not befinal until it has been agreed to, or in the absencethereof, until it has been approved by the judge orcourt after an examination of the liquidation and ahearing of the persons interested who may bepresent, or of their representatives.

ARTICLE 866After the liquidation has been approved it shall bethe duty of the captain to collect the amount of thedistribution, and he shall be liable to the owners ofthe goods averaged for the losses they sufferthrough his delay or negligence.

ARTICLE 867If the contributors should not pay the amount ofthe assessment within the third day after havingbeen requested to do so, the goods saved shall beattached, at the request of the captain, and shallbe sold to cover the payment.

ARTICLE 868If the persons interested in receiving the goodssaved should not give security sufficient to answerfor the amount corresponding to the gross average,the captain may defer the delivery thereof untilpayment has been made. aisadc

SECTION IIILiquidation of Ordinary Averages

ARTICLE 869The experts which the judge or court or thepersons interested may appoint, according to thecases, shall proceed with the appraisement andexamination of the averages in the mannerprescribed in Article 853 and in Article 854, Rules 2to 7, in so far as they are applicable.

iv. Liquidation of particular average

ARTICLE 869The experts which the judge or court or thepersons interested may appoint, according to thecases, shall proceed with the appraisement andexamination of the averages in the mannerprescribed in Article 853 and in Article 854, Rules 2to 7, in so far as they are applicable.

2. ARRIVALS UNDER STRESS

CAUSES

ARTICLE 819

If the captain during the navigation should believethat the vessel can not continue the voyage to theport of destination on account of the lack ofprovisions, well founded fear of seizure, privateersor pirates, or by reason of any accident of the seadisabling her to navigate, he shall assemble theofficers and shall call the persons interested in thecargo who may be present, and who may attendthe meeting without the right to vote; and if, afterexamining the circumstances of the case, thereasons should be considered well founded, it shallbe decided to make the nearest and mostconvenient port drafting and entering in the logbook the proper minutes, which shall be signed byall.The captain shall have the deciding vote and thepersons interested in the cargo may make theobjections and protests they may deem proper,which shall be entered in the minutes in order thatthey may make use thereof in the manner theymay consider advisable.

ARTICLE 820The arrival under stress shall not be consideredlegal in the following cases:1. If the lack of provisions should arise fromthe failure to take the necessary provisions for thevoyage, according to usage and custom, or if theyshould have been rendered useless or lost throughbad stowage or negligence in their care.2. If the risk of enemies, privateers, or piratesshould not have been well known, manifest, andbased on positive and justifiable facts.3. If the injury to the vessel should have beencaused by reason of her not being repaired, rigged,equipped, and arranged in a convenient manner forthe voyage, or by reason of some erroneous orderof the captain.4. Whenever malice, negligence, want offoresight, or lack of skill on the part of the captainis the reason for the act causing the damage.

FORMALITIES

ARTICLE 819If the captain during the navigation should believethat the vessel can not continue the voyage to theport of destination on account of the lack ofprovisions, well founded fear of seizure, privateersor pirates, or by reason of any accident of the seadisabling her to navigate, he shall assemble theofficers and shall call the persons interested in thecargo who may be present, and who may attendthe meeting without the right to vote; and if, afterexamining the circumstances of the case, thereasons should be considered well founded, it shallbe decided to make the nearest and mostconvenient port drafting and entering in the logbook the proper minutes, which shall be signed byall.The captain shall have the deciding vote and thepersons interested in the cargo may make theobjections and protests they may deem proper,which shall be entered in the minutes in order thatthey may make use thereof in the manner theymay consider advisable.

ARTICLE 822If in order to make repairs to the vessel or becausethere should be danger of the cargo sufferingdamage it should be necessary to unload, thecaptain must request authorization of the judge orcourt of competent jurisdiction to lighten thevessel, and do so with the knowledge of the person



interested or representative of the cargo, shouldthere be one.In a foreign port, it shall be the duty of the Spanish* consul, where there is one, to give theauthorization.In the first case, the expenses shall be defrayed bythe ship agent or owner, and in the second, theyshall be for the account of the owners of themerchandise, for whose benefit the act took place.If the unloading should take place for both reasons,the expenses shall be defrayed in proportion to thevalue of the vessel and that of the cargo.

EXPENSES

ARTICLE 821The expenses caused by the arrival under stressshall always be for the account of the shipowner oragent, but the latter shall not be liable for thedamage which may be caused the shippers byreason of the arrival under stress, provided thelatter is legitimate.Otherwise, the shipowner or agent and the captainshall be jointly liable.

ARTICLE 822If in order to make repairs to the vessel or becausethere should be danger of the cargo sufferingdamage it should be necessary to unload, thecaptain must request authorization of the judge orcourt of competent jurisdiction to lighten thevessel, and do so with the knowledge of the personinterested or representative of the cargo, shouldthere be one.In a foreign port, it shall be the duty of the Spanish* consul, where there is one, to give theauthorization.In the first case, the expenses shall be defrayed bythe ship agent or owner, and in the second, theyshall be for the account of the owners of themerchandise, for whose benefit the act took place.If the unloading should take place for both reasons,the expenses shall be defrayed in proportion to thevalue of the vessel and that of the cargo.

RESPONSIBILITY OF THE CAPTAIN

ARTICLE 823The care and preservation of the cargo which hasbeen unloaded shall be in charge of the captain,who shall be responsible for the same, except incases of force majeure.

ARTICLE 824If the entire cargo or part thereof should appear tobe damaged, or there should be imminent dangerof its being damaged, the captain may request ofthe judge or court of competent jurisdiction or theconsul, in a proper case, the sale of all or of part ofthe former, and the person taking cognizance ofthe matter shall authorize it after an examinationand declaration of experts, advertisements, andother formalities required by the case and an entryin the book, in accordance with the provisions ofArticle 624.The captain shall, in a proper case, justify thelegality of the procedure, under the penalty ofanswering to the shipper for the price themerchandise would have brought if it should havearrived at the port of its destination in goodcondition.

ARTICLE 825The captain shall answer for the damages causedby his delay, if the reason for the arrival understress having ceased, he should not continue thevoyage.If the reason for said arrival should have been thefear of enemies, privateers, or pirates, beforesailing, a discussion and resolution of a meeting ofthe officers of the vessel and persons interested inthe cargo who may be present shall take place, inaccordance with the provisions contained in Article819.

3. COLLISIONS

NOTE:

Collision – the impact of two vessels both of whichare moving.

Allision – the striking of a moving vessel againsone that is stationary.

CLASSES AND EFFECTS

i. Fortuitous

ARTICLE 830If a vessel should collide with another by reason ofan accident or through force majeure, each vesseland her cargo shall be liable for their own damage.

ARTICLE 831If a vessel should be forced to collide with anotherone by a third vessel, the owner of the third vesselshall indemnify for the losses and damages caused,the captain thereof being civilly liable to saidowner.

ARTICLE 832If, by reason of a storm or other cause of forcemajeure, a vessel which is properly anchored andmoored should collide with those in her immediatevicinity, causing them damage, the injuryoccasioned shall be looked upon as particularaverage to the vessel run into.

ii. Culpable

ARTICLE 826If a vessel should collide with another through thefault, negligence, or lack of skill of the captain,sailing mate, or any other member of thecomplement, the owner of the vessel at fault shallindemnify the losses and damages suffered, afteran expert appraisal. aisadc

ARTICLE 827If both vessels may be blamed for the collision,each one shall be liable for his own damages, andboth shall be jointly responsible for the losses anddamages suffered by their cargoes.

ARTICLE 831If a vessel should be forced to collide with anotherone by a third vessel, the owner of the third vesselshall indemnify for the losses and damages caused,the captain thereof being civilly liable to saidowner.



iii. Inscrutable Fault25

ARTICLE 828The provisions of the foregoing article areapplicable to the case in which it can not bedecided which of the two vessels was the cause ofthe collision.

PRESUMPTION OF LOSS BY COLLISION

ARTICLE 833A vessel shall be presumed as lost thru a collisionwhich, upon being run into, sinks immediately, andalso any vessel which is obliged to make a port torepair the damages caused by the collision shouldbe lost during the voyage, or should be obliged tobe stranded in order to be saved.

LIABILITIES26

i. Shipowner or agent

ARTICLE 837The civil liability contracted by the shipowners inthe cases prescribed in this section, shall beunderstood as limited to the value of the vesselwith all her appurtenances and all the freightearned during the voyage.

ARTICLE 838When the value of the vessel and herappurtenances should not be sufficient to cover allthe liabilities, the indemnity due by reason of thedeath or injury of persons shall have preference.

ii. Captain, pilot, others

ARTICLE 829In the cases above mentioned the civil action of theowner against the person liable for the damage isreserved, as well as the criminal liabilities whichmay be proper.

ARTICLE 834If the vessels colliding should have pilots on boarddischarging their duties at the time of the collision,their presence shall not exempt the captains fromthe liabilities they incur; but the latter shall havethe right to be indemnified by the pilots withoutprejudice to the criminal liability which the lattermay incur.

iii. Conditions, protest27

Maritime Protest – a written statement underoath, made by the master of a vessel, after theoccurrence of an accident or disaster in which thevessel or cargo is lost or injured, with respect tothe circumstances attending such occurrence. It isusually intended to show that the loss or damageresulted from a peril of the sea, or from some othercause for which neither the master nor owner wasresponsible, and conludes with the protestationagainst any liability of the owner for such loss ordamage.

25See footnote 12. Distinguish inscrutable fault with

the doctrine of last clear chance and with thedoctrine of limited liabilities.26

See footnote 15.27

Take note of the concept of maritime protest, andwhen and where it should be file. This was asked in2007, 1988, 1978, and 1977.

ARTICLE 835The action for the recovery of losses and damagesarising from collisions can not be admitted if aprotest or declaration is not presented withintwenty-four hours to the competent authority ofthe point where the collision took place, or that ofthe first port of arrival of the vessel, if in Spain, *and to the consul of Spain * if it should haveoccurred in a foreign country.

ARTICLE 836In so far as the damages caused to persons or tothe cargo are concerned, the absence of a protestcan not prejudice the persons interested who werenot on board or were not in a condition to makeknown their wishes.

ARTICLE 839If the collision should occur between Spanish *vessels in foreign waters, or if it should take placein open waters, and the vessels should make aforeign port, the Spanish * consul in said port shallhold a summary investigation of the accident,forwarding the proceedings to the captain-generalof the nearest department * for continuation andconclusion.

4. SHIPWRECKS

ARTICLE 840The losses and deteriorations suffered by a vesseland her cargo by reason of shipwreck or strandingshall be individually for the account of the owners,the part of the wreck which may be savedbelonging to them in the same proportion.

ARTICLE 841If the wreck or stranding should arise through themalice, negligence, or lack of skill of the captain, orbecause the vessel put to sea insufficiently repairedand prepared, the owner or the freighters maydemand indemnity of the captain for the damagescaused to the vessel or cargo by the accident, inaccordance with the provisions contained in Articles610, 612, 614, and 621.ARTICLE 842The goods saved from the wreck shall be speciallyliable for the payment of the expenses of therespective salvage, and the amount thereof mustbe paid by the owners of the former before theyare delivered to them, and with preference to anyother obligation, if the merchandise should be sold.

ARTICLE 843If several vessels navigate under convoy, and anyof them should be wrecked, the cargo saved shallbe distributed among the rest in the proportion tothe amount each one can receive.If any captain should refuse, without sufficientcause, to receive what may correspond to him, thecaptain of the wrecked vessel shall enter a protestagainst him before two sea officials of the lossesand damages resulting therefrom, ratifying thecomplaint within twenty-four hours after arrival atthe first port, and including it in the proceedings hemust institute in accordance with the provisionscontained in Article 612.Should it not be possible to transfer to the othervessels the entire cargo of the one wrecked, thegoods of the highest value and smallest volumeshall be saved first, the designation thereof beingmade by the captain, in concurrence with theofficers of his vessel.



F. Special Contracts of Maritime Commerce

1. CHARTER PARTIES28

DEFINITION

A charter party is a contract by virture of which theowenr or agent of a vessel binds himself totransport merchandise or persons for a fixed price.It is a contract by which the owner or agent of thevessel leases for a certain price the whole orportion of a vessel for the transportation of thegoods or persons from one port to another. Towageis not a charter party. It is a contract for the hire ofservices by which a vessel is engaged to towanother vessel from one port to another forconsideration.

KINDS

As to extent of vessel hired:

Total Partial - charterer as a rule does not

acquire the right to fix the datewhen the vessel

should depart, unless such right isexpressly granted in

the contract

As to time:

Until a fixed day or for a determinednumber of days or months

For a voyage

As to freightage: For a fixed amount for the whole cargo For a fixed rate per ton For so much per month

Coastwise Lighterage Corp vs. CA and Phil.Gen. Insurance Co. (1995)

The distinction between the two kinds of charterparties (i.e. bareboat or demise and contract ofaffreightment) is more clearly set out in the case ofPuromines, Inc. vs. Court of Appeals:Under the demise or bareboat charter of the vessel,the charterer will generally be regarded as theowner for the voyage or service stipulated. Thecharterer mans the vessel with his own people andbecomes the owner pro hac vice, subject to liabilityto others for damages caused by negligence. Tocreate a demise, the owner of a vessel mustcompletely and exclusively relinquish possession,command and navigation thereof to the charterer,anything short of such a complete transfer is acontract of affreightment (time or voyage charterparty) or not a charter party at all.A contract of affreightment is one in which theowner of the vessel leases part or all of its space tohaul goods for others. It is a contract for specialservice to be rendered by the owner of the vesseland under such contract the general owner retainsthe possession, command and navigation of the

28The topic was covered in 2004, 2003, 1991, and

1989. Take note of the definition and kinds of acharter party, who should bear the loss of cargo incase of death of crewmembers, validity of stipulationexempting owner from liability, and owner pro hacvice.

ship, the charterer or freighter merely having useof the space in the vessel in return for his paymentof the charter hire.Although a charter party may transform a commoncarrier into a private one, the same however is nottrue in a contract of affreightment on account ofthe aforementioned distinctions between the two.Thus, Coastwise, by the contract of affreightment,was not converted into a private carrier, butremained a common carrier and was still liable assuch.

Owner Pro Hac Vice – demise charter to whomthe owner of the vessel has completely andexclusively relinquished possession, command andnavigation of the vessel. In this kind of charter,the charterer mans and equips the vessel andassumes all responsibility for navigation,management and operation. He thus acts as theowner of the vessel in all important aspects duringthe duration of the charter.

FORMS AND EFFECTS

Charter Parties1. Forms and Effects of Charter Parties

ARTICLE 652A charter party must be drawn in duplicate andsigned by the contracting parties, and when eitherdoes not know how or can not do so, by twowitnesses at their request.The charter party shall include, besides theconditions unrestrictedly stipulated, the followingstatements:1. The kind, name, and tonnage of the vessel.2. Her flag and port of registry.3. The name, surname, and domicile of thecaptain.4. The name, surname, and domicile of theagent, if the latter should make the charter party.5. The name, surname, and domicile of thecharterer, and if he states that he is acting bycommission, that of the person for whose accounthe makes the contract.6. The port of loading and unloading.7. The capacity, number of tons or weight, ormeasure which they respectively bind themselvesto load and transport, or whether it is the totalcargo.8. The freightage to be paid, stating whetherit is to be a fixed amount for the voyage or somuch per month, or for the space to be occupied,or for the weight or measure of the goods of whichthe cargo consists, or in any other mannerwhatsoever agreed upon.9. The amount of primage to be paid to thecaptain.10. The days agreed upon for loading andunloading.11. The lay days and extra lay days to beallowed and the rate of demurrage.

ARTICLE 653If the freight should be received without thecharter party having been signed, the contract shallbe understood as executed in accordance with whatappears in the bill of lading, which shall be the onlyinstrument with regard to the freight to determinethe rights and obligations of the owner, of thecaptain, and of the charterer. cdt

ARTICLE 654



The charter parties executed with the interventionof a broker, who certifies to the authenticity of thesignatures of the contracting parties made in hispresence, shall be full evidence in court; and if saidsignatures should not agree the ones identical withthe signatures the broker must keep in his registry,if kept in accordance to law, shall be final.The contracts shall also be admitted as evidence,even though a broker has not taken part therein, ifthe contracting parties acknowledge the signaturesto be the same as their own.Should no broker have taken part in the charterparty and should the signatures not have beenacknowledged, doubts shall be decided by what isprovided for in the bill of lading, and in the absencethereof by the proofs submitted by the parties.

ARTICLE 655Charter parties executed by the captain in theabsence of the agent shall be valid and efficient,even though in executing them he should haveacted in violation of the orders and instructions ofthe agent or shipowner; but the latter shall have aright of action against the captain to recoverdamages.

ARTICLE 656If in the charter party the time in which the loadingand unloading is to take place is not stated, thecustoms of the port where these acts take placeshall be observed. After the period stipulated or thecustomary one has passed, and should there not bein the freight contract an express clause fixing theindemnification for the delay, the captain shall beentitled to demand demurrage for the usual andextra lay days which may have elapsed in loadingand unloading.

ARTICLE 657If during the voyage the vessel should be renderedunseaworthy the captain shall be obliged to charteranother one at his expense, in good condition, totake the cargo to its destination, for which purposehe shall be obliged to look for a vessel not only atthe port of arrival but in the other ports within adistance of 150 kilometers.If the captain should not furnish a vessel to takethe cargo to its destination, either throughindolence or malice, the freighters, after a demandof the captain to charter a vessel within anunextendible period, may charter one and apply tothe judicial authority requesting that the charterparty which may have been made be immediatelyapproved.The same authority shall judicially compel thecaptain to confirm the charter made by theshippers for his account and under hisresponsibility.If the captain, notwithstanding his efforts, shouldnot find a vessel to charter, he shall deposit thecargo at the disposal of the freighters, to whom heshall communicate the facts on the first opportunitypresenting itself, the charter being regulated insuch cases by the distance covered by the vessel,there being no right to any indemnificationwhatsoever.

Is there a valid contract if there was nocharter party and bill of lading?If we take Art. 653 literally, no. However, if wetake into account the fact that delivery of the cargodoes not constitute the making of a contract butrather the partial performance thereof, the merefact of delivery and receipt of such cargo, the good

faith and mutual consent with which they havebeen made, should be a better substitute for thechater party than the bill of lading which is nothingmore than proof of such delivery.

What is primage?It was formerly a small allowance or compensationpayable to the master and marines of a ship, to theformer for the use of his cables and ropes todischarge the goods of the merchant; to the latterfor the lading and unlading in any port of haven.Today, it is no longer a gratuity but is included inthe freight rate.

What is demurrage?It is the sum fixed by the contract of carriage, orwhich is allowed, as remuneration to the owner of aship for the detention of his vessel beyond thenumber of days allowed by the charter party forloading and unloading of for sailing. It is anextended freight or reward to the vessel incompensation for the earnings she is improperlycaused to lose.

What are lay days?Lay days are days allowed to charter parties forloading and unloading the cargo.

RIGHTS AND OBLIGATIONS OF SHIPOWNERS

2. Rights and Obligations of OwnersARTICLE 669The owners or the captain shall observe in charterparties the capacity of the vessel or that expresslydesignated in the registry of the same, a differencegreater than 2 per cent between that stated andher true capacity not being permissible.If the owners or the captain should contract tocarry a greater amount of cargo than the vesselcan hold, in view of her tonnage, they shallindemnify the freighters whose contracts they donot fulfill for the losses they may have caused themby reason of their default, according to the cases,viz:If the vessel has been chartered by one freighteronly, and there should appear to be an error orfraud in her capacity, and the charterer should notwish to rescind the contract, when he has a right todo so, the charter should be reduced in proportionto the cargo the vessel can not receive, the personfrom whom the vessel is chartered beingfurthermore obliged to indemnify the charterer forthe losses he may have caused.If, on the contrary, there should be several charterparties, and by reason of the want of space all thecargo contracted for can not be received, and noneof the charterers desires to rescind the contract,preference shall be given to the person who hasalready loaded and arranged the freight in thevessel, and the rest shall take the placecorresponding to them in the order of the dates oftheir contracts.Should there be no priority, the charterers mayload, if they wish, pro rata of the amounts ofweight or space they may have engaged, and theperson from whom the vessel was chartered shallbe obliged to indemnify them for the loss anddamage.

ARTICLE 670If the person from whom the vessel is chartered,after receiving a part of the freight, should not findsufficient to make up at least three-fifths of theamount which the vessel can hold, at the price he



may have fixed, he may substitute for thetransportation another vessel inspected anddeclared suitable for the same voyage, theexpenses of transfer being defrayed by him, as wellas the increase, should there be any, in the price ofthe charter. Should he not be able to make thischange, the voyage shall be undertaken at the timeagreed upon; and should no time have been fixed,within fifteen days from the time of beginning toload, should nothing to the contrary have beenstipulated.If the owner of the part of the freight alreadyloaded should procure some more at the sameprice and under similar or proportionate conditionsto those accepted for the freight received, theperson from whom the vessel is chartered or thecaptain can not refuse to accept the rest of thecargo; and should he do so, the freighter shall havea right to demand that the vessel put to sea withthe cargo she may have on board.

ARTICLE 671After three-fifths of the vessel is loaded, the personfrom whom she is chartered can not, without theconsent of the charterers or freighters substitutethe vessel designated in the charter party byanother one, under the penalty of making himselfthereby liable for all the losses and damagesoccurring during the voyage to the cargo of theperson who did not consent to the change.

ARTICLE 672If the vessel has been chartered in whole, thecaptain can not, without the consent of the personchartering her, accept freight from any otherperson; and should he do so, said charterer mayoblige him to unload it and require him toindemnify him for the losses suffered thereby.

ARTICLE 673The person from whom the vessel is chartered shallbe liable for all the losses caused the charterer byreason of the voluntary delay of the captain inputting to sea, according to the rules prescribed,provided he has been requested to put to sea atthe proper time through a notary or judicially.

ARTICLE 674If the charterer should carry to the vessel morefreight than that contracted for, the excess may beadmitted in accordance with the price stipulated inthe contract, if it can be well stowed withoutinjuring the other freighters, but if in order to stowsaid freight it should be necessary to stow it insuch manner as to throw the vessel out of trim thecaptain must refuse it or unload it at the expenseof its owner.The captain may likewise, before leaving the port,unload the merchandise placed on boardclandestinely, or transport it, if he can do so andkeep the vessel in trim, demanding by way offreightage the highest price which may have beenstipulated for said voyage.

ARTICLE 675If the vessel has been chartered to receive thecargo in another port, the captain shall appearbefore the consignee designated in the charterparty, and, should the latter not deliver the cargoto him, he shall inform the charterer and await hisinstructions, and in the meantime the lay daysagreed upon shall begin to run, or those allowed bycustom in the port, unless there is a specialagreement to the contrary.

Should the captain not receive an answer withinthe time necessary therefor, he shall make effortsto find freight; and should he not find any after thelay days and extra lay days have elapsed, he shallmake a protest and return to the port where thecharter was made.The charterer shall pay the freightage in full,discounting that which may have been earned onthe merchandise which may have been carried onthe voyage out or on the return trip, if carried forthe account of third persons.The same shall be done if a vessel, having beenchartered for the round trip, should not be givenany cargo for her return.

ARTICLE 676The captain shall lose the freightage and shallindemnify the charterers if the latter should prove,even against the certificate of inspection, shouldone have taken place at the port of departure, thatthe vessel was not in a condition to navigate at thetime of receiving the cargo.

ARTICLE 677The charter party shall be enforced if the captainshould not have any instructions from thecharterer, and a declaration of war or a blockadeshould take place during the voyage.In such case the captain shall be obliged to makethe nearest safe and neutral port, and request andawait orders from the freighter; and the expensesincurred and salaries earned during the detentionshall be paid as general average.If, by orders of the freighter, the cargo should bedischarged at the port of arrival, the freight for thevoyage out shall be paid in full.

ARTICLE 678If the time necessary, in the opinion of the judge orcourt, in which to receive orders from the freightersshould have elapsed without the captain havingreceived any instructions, the cargo shall bedeposited, and it shall be liable for the payment ofthe freight and expenses incurred by reason of thedelay which shall be paid from the proceeds of thepart first sold.

OBLIGATIONS OF CHARTERERS

3. Obligations of CharterersARTICLE 679The charterer of an entire vessel may subcharterthe whole or part thereof for the amounts he mayconsider most convenient, without the captainbeing allowed to refuse to receive on board thefreight delivered by the second charterers,provided the conditions of the first charter are notchanged, and that the person from whom thevessel is chartered be paid the full price agreedupon even though the full cargo is not embarked,with the limitation established in the next article.cdtai

ARTICLE 680A charterer who does not make up the full cargo hebound himself to ship shall pay the freightage ofthe amount he fails to ship, if the captain did nottake other freight to make up the cargo of thevessel, in which case he shall pay the firstcharterer the difference should there be any.

ARTICLE 681If the charterer should ship goods different fromthose indicated at the time of executing the charter



party, without the knowledge of the person fromwhom the vessel was chartered or of the captain,and should thereby give rise to losses, by reason ofconfiscation, embargo, detention, or other causes,to the person from whom the vessel was charteredor to the shippers, the person giving rise theretoshall be liable with the value of his shipment andfurthermore with his property, for the fullindemnity to all those injured through his fault.

ARTICLE 682If the merchandise shipped should have been forthe purpose of illicit commerce, and was taken onboard with the knowledge of the person from whomthe vessel was chartered or of the captain, thelatter, jointly with the owner of the same, shall beliable for all the losses which may be caused theother shippers, and even though it may have beenagreed, they can not demand any indemnitywhatsoever of the charterer for the damage causedthe vessel.

ARTICLE 683In case of making a port to repair the hull,machinery, or equipment of the vessel, thefreighters must wait until the vessel is repaired,being permitted to unload her at their own expenseshould they deem it advisable.If, for the benefit of the cargo subject todeterioration, the freighters or the court, or theconsul, or the competent authority in a foreign landshould order the merchandise to be unloaded, theexpenses of loading and unloading shall be for theaccount of the former.

ARTICLE 684If the charterer, without the occurrence of any ofthe cases of force majeure mentioned in theforegoing article, should wish to unload hismerchandise before arriving at the port ofdestination, he shall pay the full freight, theexpenses of the stop made at his request, and thelosses and damages caused the other freighters,should there be any.

ARTICLE 685In charters for transportation of general freight anyof the freighters may unload the merchandisebefore the beginning of the voyage, by paying one-half the freight, the expense of stowing andrestowing the cargo, and any other damage whichmay be caused the other shippers.

ARTICLE 686After the vessel has been unloaded and the cargoplaced at the disposal of the consignee, the lattermust immediately pay the captain the freight dueand the other expenses to which he may be liablefor said cargo.The primage must be paid in the same proportionand at the same time as the freight, all thechanges and modifications to which the lattershould be subject also governing the former.

ARTICLE 687The charters and freighters can not abandonmerchandise damaged on account of the inherentvice of the goods or by reason of an accidentalcase, for the payment of the freight and otherexpenses. aisadcThe abandonment shall be proper, however, if thecargo should consist of liquids and should theyhave leaked out, there not remaining in thecontainers more than one-quarter of their contents.

RESCISSION

4. Total or Partial Rescissions of CharterPartiesARTICLE 688A charter party may be annulled at the request ofthe charterer:1. If before loading the vessel he shouldabandon the charter, paying half of the freightageagreed upon.2. If the capacity of the vessel should notagree with that stated in the certificate of thetonnage, or if there is an error in the statement ofthe flag under which she sails.3. If the vessel should not be placed at thedisposal of the charterer within the period and inthe manner agreed upon.4. If, after the vessel has put to sea, sheshould return to the port of departure, on accountof risk of pirates, enemies, or bad weather, and thefreighters should agree to unload her.In the second and third cases the person fromwhom the vessel was chartered shall indemnify thecharterer for the losses he may suffer.In the fourth case the person from whom thevessel was chartered shall have a right to thefreightage in full for the voyage out.If the charter should have been made by themonths, the charterers shall pay the full freightagefor one month, if the voyage were to a port in thesame waters, and two months, if the voyage wereto a port in different waters.From one port to another of the Peninsula andadjacent islands, the freightage for one month onlyshall be paid.5. If a vessel should make a port during thevoyage in order to make urgent repairs and thefreighters should prefer to dispose of themerchandise.When the delay does not exceed thirty days, thefreighters shall pay the full freight for the voyageout.Should the delay exceed thirty days, they shall onlypay the freight in proportion to the distancecovered by the vessel.

ARTICLE 689At the request of the person from whom the vesselis chartered the charter party may be rescinded:1. If the charterer at the termination of theextra lay days does not place the cargo alongsidethe vessel.In such case the charterer must pay half the freightstipulated besides the demurrage for the lay daysand extra lay days elapsed.2. If the person from whom the vessel waschartered should sell her before the charterer hasbegun to load her and the purchaser should loadher for his own account.In such case the vendor shall indemnify thecharterer for the losses he may suffer.If the new owner of the vessel should not load herfor his own account the charter party shall berespected, and the vendor shall indemnify thepurchaser if the former did not inform him of thecharter pending at the time of making the sale.

ARTICLE 690The charter party shall be rescinded and all actionarising therefrom shall be extinguished if, beforethe vessel puts to sea from the port of departure,any of the following cases should occur:



1. A declaration of war or interdiction ofcommerce with the power to whose ports thevessel was going to sail.2. A condition of blockade of the port ofdestination of said vessel, or the breaking out of anepidemic after the contract was executed.3. The prohibition to receive the merchandiseof the vessel at the said port.4. An indefinite detention, by reason of anembargo of the vessel by order of the governmentor for any other reason independent of the will ofthe agent.5. The impossibility of the vessel to navigate,without fault of the captain or agent.The unloading shall be made for the account of thecharterer.ARTICLE 691If the vessel can not put to sea on account of theclosing of the port of departure, or any othertemporary cause, the charter shall be in forcewithout any of the contracting parties having aright to claim damages.The subsistence and wages of the crew shall beconsidered as general average.During the interruption the charterer may, at theproper time and for his own account, unload andload the merchandise, paying demurrage if thereloading should continue after the reason for thedetention has ceased.

ARTICLE 692A charter party shall be partially rescinded, unlessthere is an agreement to the contrary, and thecaptain shall only be entitled to the freight for thevoyage out, if, by reason of a declaration of war,closing of ports, or interdiction of commercialrelations during the voyage, the vessel shouldmake the port designated for such a case in theinstructions of the charterer.2. LOANS ON BOTTOMRY ANDRESPONDENTIA29

Ordinary Loan Loan on Bottomry orRespondentia

Collateral is notrequired

Collateral required

Collateral may be anyproperty, real orpersonal

Collateral must be avessel or cargo subjectto maritime risks

Absolutely repayable Depends upon the safearrival at the port ofthe collateral of theloan

Subject to usury law Not subject to usurylaw

Need not be in writingexcept the interest

Must be in writing

Need not be registeredto be binding on thirdpersons

Must be registered inthe registry of vesselsof the port of entry ofregistry of the vessel

Loss of collateral doesnot extinguish thesame

Loss of collateralextinguishes the same

LOAN ON BOTTOMRY, DEFINED

It is a contract in the nature of a mortgage, bywhich the owner of the ship borrows money for theuse, equipment and repair of the vessel for a

29The definitions of loan on bottomry and loan on

respondentia were asked in 1980 and 1975.

definite term, and pledges the ship as a security forits repayment, with maritime or extraordinaryinterest on account of the maritime risks to beborne by the lender, it being stipultaed that if theship be lost in the course of the specific voyage orduring the limited time, by any of the perilsenumerated in the contract, the lender shall alsolose his money.

LOAN ON RESPONDENTIA, DEFINED

It is a contract made on the goods laden on boardthe hsip, and which are to be sold or exchanged inthe course of the voyage, the borrower’s personalresponsibility being deemed the principal securityfor the performance of the contract. The lendermust be paid his principal and interest, though theship perishes, provided that the goods are saved.

CHARACTER OF LOAN, ART. 719

ARTICLE 719A loan on bottomry or respondentia shall beconsidered that which the repayment of the sumloaned and the premium stipulated, under anycondition whatsoever, depends on the safe arrivalin port of the goods on which it is made, or of theirvalue in case of accident.

FORMS AND REQUISITES

ARTICLE 720Loans on bottomry or respondentia may beexecuted:1. By means of a public instrument.2. By means of a bond signed by thecontracting parties and the broker who took parttherein. cdt3. By means of a private instrument.Under whichever of these forms the contract isexecuted, it shall be entered in the certificate of theregistry of the vessel and shall be recorded in thecommercial registry, without which requisites thecredits originating from the same shall not have,with regard to other credits, the preference which,according to their nature, they should have,although the obligation shall be valid between thecontracting parties.The contracts made during a voyage shall begoverned by the provisions of Articles 583 and 611,and shall be effective with regard to third personsfrom the date of their execution, if they should berecorded in the commercial registry of the port ofregistry of the vessel before eight days haveelapsed from the date of her arrival. If said eightdays should elapse without the record having beenmade in the commercial registry, the contractsmade during the voyage of a vessel shall not haveany effect with regard to third persons, except fromthe day and date of their entry.In order that the bonds of the contracts celebratedin accordance with No. 2 may have legal force,they must conform to the registry of the brokerwho took part therein. In those celebrated inaccordance with No. 3 the acknowledgment of thesignature must precede.Contracts which are not reduced to writing shall notbe the basis for a judicial action.

ARTICLE 721In a bottomry or respondentia bond there must bestated:1. The kind, name, and registry of the vessel.2. The name, surname, and domicile of thecaptain.



3. The names, surnames, and domicile of theperson giving and of the person receiving the loan.4. The amount of the loan and the premiumstipulated.5. The time for repayment.6. The goods pledged to secure repayment.7. The voyage for which the risk is run.

ARTICLE 722The bonds may be issued to order, in which casethey shall be transferable by indorsement, and theassignee shall acquire all the rights and run all therisks corresponding to the indorser.

ON WHAT CONSTITUTED

ARTICLE 724The loans may be constituted jointly or separately:1. On the hull of the vessel.2. On the rigging.3. On the equipment, provisions, and fuel.4. On the engine, if the vessel is a steamer.5. On the cargo.If the loan is constituted on the hull of the vessel,there shall be understood as also subject to theliability of the loan, the rigging, equipment andother goods, provisions, fuel, steam engines, andthe freight earned during the voyage subject to theloan. cdtaIf the loan is made on the cargo, all thatconstitutes the same shall be subject to therepayment; and if on a particular object of thevessel or of the cargo, the object exclusively andspecifically mentioned only shall be liable.

ARTICLE 725No loans can be made on the salaries of the crew,nor on the profits which it is expected to earn.

AMOUNT

ARTICLE 723Loans made be made in goods and in merchandise,fixing their value in order to determine the principalof the loan.

ARTICLE 726If the lender should prove that he loaned a largeramount than the value of the article liable for thebottomry loan, by reason of fraudulent measuresemployed by the borrower the loan shall only bevalid for the amount at which said object isappraised by experts.The surplus principal shall be returned with legalinterest for the whole period of the duration of thedisbursement.

ARTICLE 727If the full amount of the loan contracted to load thevessel should not be made use of for the cargo, thesurplus shall be returned before clearing.The same procedure shall be observed with regardto the goods taken as a loan if they could not allhave been loaded.

ARTICLE 728The loan which the captain takes at the point ofresidence of the owners of the vessel shall onlyaffect that part of the latter which belongs to thecaptain, if the other owners or their agents shouldnot have given their express authorization theretoor should not have taken part in the transaction.If one or more of the owners should be requestedto furnish the amount necessary to repair or

provision the vessel, and should not do so withintwenty-four hours, the interest which the parties indefault may have in the vessel shall be liable forthe loan in the proper proportion.Outside of the residence of the owners the captainmay contract loans in accordance with theprovisions of Articles 583 and 611.

BY WHOM

ARTICLE 611In order to comply with the obligations mentionedin the foregoing article, the captain, when he hasno funds and does not expect to receive any fromthe agent, shall procure the same in the successiveorder stated below:1. By requesting said funds of the consigneesor correspondents of a vessel.2. By applying to the consignees of the cargoor to the persons interested therein.3. By drawing on the agent.4. By borrowing the amount required bymeans of a bottomry bond.5. By selling a sufficient amount of the cargoto cover the amount absolutely necessary to repairthe vessel, and to equip her to pursue the voyage.In the two latter cases he must apply to the judicialauthority of the port, if in Spain * and to theSpanish * consul, if in a foreign country; and wherethere should be none, to the local authority,proceeding in accordance with the prescriptions ofArticle 583, and with the provisions of the law ofcivil procedure.

ARTICLE 617The captain can not contract loans onrespondentia, and should he do so the contractsshall be void.Neither can he borrow money on bottomry for hisown transactions, except on the portion of thevessel he owns, provided no money has beenpreviously borrowed on the whole vessel, andprovided there does not exist any other kind of lienor obligation thereon. When he is permitted to doso, he must necessarily state what interest he hasin the vessel.In case of violation of this article the principal,interest, and costs shall be charged to the privateaccount of the captain, and the agent mayfurthermore have the right to discharge him.

ARTICLE 583If while on voyage the captain should find itnecessary to contract one or more obligationsmentioned in subdivisions 8 and 9 of Article 580,he shall apply to the judge or court if he is inPhilippine territory, and otherwise to the consul ofthe Republic of the Philippines, should there beone, and in his absence, to the judge or court orproper local authority, presenting the certificate ofthe registration sheet treated of in Article 612 andthe instruments proving the obligation contracted.

The judge or court, the consul, or the localauthority, as the case may be, in view of the resultof the proceedings instituted, shall make atemporary memorandum of their result in thecertficate, in order that it may be recorded in theregistry when the vessel returns to the port of itsregistry, or so that it can be admitted as a legaland preferred obligation in case of sale before itsreturn, by reason of the sale of the vessel onaccount of a declaration of unseaworthiness.



EFFECTS OF CONTRACT

ARTICLE 719A loan on bottomry or respondentia shall beconsidered that which the repayment of the sumloaned and the premium stipulated, under anycondition whatsoever, depends on the safe arrivalin port of the goods on which it is made, or of theirvalue in case of accident.

ARTICLE 726If the lender should prove that he loaned a largeramount than the value of the article liable for thebottomry loan, by reason of fraudulent measuresemployed by the borrower the loan shall only bevalid for the amount at which said object isappraised by experts.The surplus principal shall be returned with legalinterest for the whole period of the duration of thedisbursement.

ARTICLE 727If the full amount of the loan contracted to load thevessel should not be made use of for the cargo, thesurplus shall be returned before clearing.The same procedure shall be observed with regardto the goods taken as a loan if they could not allhave been loaded.

ARTICLE 729Should the goods on which money is taken not besubjected to any risk, the contract shall beconsidered an ordinary loan, the borrower beingunder the obligation to return the principal andinterest at the legal rate, if the interest stipulatedshould not have been lower.

ARTICLE 730Loans made during the voyage shall havepreference over those made before the clearing ofthe vessel, and they shall be graduated by theinverse order to that of their dates.The loans for the last voyage shall have preferenceover prior ones.Should several loans have been made at a portmade under stress and for the same purpose, all ofthem shall be paid pro rata.

G. Bill of Lading30

1. CONTENTS

ARTICLE 706The captain and the freighter of the vessel areobliged to draft the bill of lading, in which thereshall be stated:1. The name, registry, and tonnage of thevessel.2. The name of the captain and his domicile.3. The port of loading and that of unloading.4. The name of the shipper.5. The name of the consignee, if the bill oflading is issued to order.6. The quantity, quality, number of packages,and marks of the merchandise.7. The freight and the primage stipulated.The bill of lading may be issued to bearer, to order,or in the name of a specific person, and must besigned within twenty-four hours after the cargo has

30The presentation of the bill of lading and the

liability of the ship owner when bill of lading is notpresented were asked in 2005. In 1998 it definitionand two-fold character was also asked.

been received on board, the freighter being able torequest the unloading thereof at the expense of thecaptain should he not sign it, and in every caseindemnity for the losses and damages sufferedthereby.

ARTICLE 707Four true copies of the original bill of lading shall bemade, all of which shall be signed by the captainand by the freighter. Of these copies the freightershall keep one and send another to the consignee;the captain shall take two, one for himself andanother for the agent.There may, furthermore, be made as many copiesof the bill of lading as may be considered necessaryby the persons interested; but when they areissued to order or to the bearer there shall bestated in all the copies, be they either of the firstfour or of the subsequent ones, the destination ofeach one, stating whether it is for the agent, forthe captain, for the freighter, or for the consignee.If the copy sent to the latter should be duplicatedthere must be stated in said duplicate this fact, andthat it is not valid except in case of the loss of thefirst one.

ARTICLE 713If before delivering the cargo a new bill of ladingshould be demanded of the captain, it being allegedthat the previous ones are not presented onaccount of their loss or for any other sufficientcause, he shall be obliged to issue it, providedsecurity for the value of the cargo is given to hissatisfaction; but without changing the consignmentand stating therein the circumstances prescribed inthe last paragraph of Article 707, when the bills oflading referred to therein are in question, under thepenalty otherwise to be liable for said cargo if notproperly delivered through his fault.

ARTICLE 714If before the vessel puts to sea the captain shoulddie or should discontinue in his position throughany accident, the freighters shall have a right todemand of the new captain the ratification of thefirst bills of lading, and the latter must do so,provided all the copies previously issued bepresented or returned to him, and it should appearfrom an examination of the cargo that they arecorrect.The expenses arising from the examination of thecargo shall be defrayed by the agent, withoutprejudice to the right of action of the latter againstthe first captain, if he ceased to be such throughhis own fault. Should said examination not bemade, it shall be understood that the new captainaccepts the cargo as it appears from the bills oflading issued.

2. PROBATIVE VALUE

ARTICLE 709A bill of lading drawn up in accordance with theprovisions of this title shall be proof as between allthose interested in the cargo and between thelatter and the underwriters, proof to the contrarybeing reserved by the latter.

ARTICLE 710Should the bills of lading not agree, and thereshould not be observed any correction or erasure inany of them, those possessed by the freighter orconsignee signed by the captain shall be proofagainst the captain or agent in favor of the



consignee or freighter; and those possessed by thecaptain or agent signed by the freighter shall beproof against the freighter or consignee in favor ofthe captain or agent.

H. Passengers on Sea Voyage

1. NATURE OF CONTRACT

ARTICLE 695The right to passage, if issued to a specifiedperson, can not be transferred without the consentof the captain or of the consignee.

2. OBLIGATIONS OF PASSENGERS

ARTICLE 693Should the passage price not have been agreedupon, the judge or court shall summarily fix it,after a statement of experts.

ARTICLE 699After the contract has been rescinded, before orafter the commencement of the voyage, thecaptain shall have a right to claim payment forwhat he may have furnished the passengers.

ARTICLE 704The captain, in order to collect the price of thepassage and expenses of maintenance, may retainthe goods belonging to the passenger, and in caseof the sale of the same he shall be given preferenceover the other creditors, acting in the same way asin the collection of freight.

ARTICLE 694Should the passenger not arrive on board at thetime fixed, or should leave the vessel withoutpermission from the captain, when the latter isready to leave the port, the captain may continuethe voyage and demand the full passage price.

ARTICLE 700In all that relates to the preservation of order andpolice on board the vessel the passengers shallconform to the orders given by the captain, withoutany distinction whatsoever.

3. RIGHTS OF PASSENGERS

ARTICLE 697If before beginning the voyage it should besuspended through the sole fault of the captain oragent, the passengers shall be entitled to havetheir passage refunded and to recover for lossesand damages; but if the suspension was due to anaccidental cause, or to force majeure, or to anyother cause beyond the control of the captain oragent, the passengers shall only be entitled to thereturn of the passage money.

ARTICLE 698In case a voyage already begun should beinterrupted the passengers shall be obliged only topay the passage in proportion to the distancecovered, and shall not be entitled to recover forlosses and damages if the interruption is due to anaccidental cause or to force majeure, but have aright to indemnity if the interruption should havebeen caused by the captain exclusively. If theinterruption should be by reason of the disability ofthe vessel, and the passenger should agree toawait her repair, he can not be required to pay any

increased price of passage, but his living expensesduring the delay shall be for his own account.In case the departure of the vessel is delayed thepassengers have a right to remain on board and tobe furnished with food for the account of thevessel, unless the delay is due to an accidentalcause or to force majeure. If the delay shouldexceed ten days, the passengers who request itshall be entitled to the return of the passage; and ifit were due exclusively to the captain or agent theymay furthermore demand indemnity for losses anddamages.A vessel which is exclusively destined to thetransportation of passengers must take themdirectly to the port or ports of destination, nomatter what the number of passengers may be,making all the stops indicated in her itinerary.

4. RESPONSIBILITIES OF CAPTAIN

ARTICLE 701The convenience or the interest of the passengersshall not obligate nor empower the captain to standin shore or enter places which may take the vesselout of her course, nor to remain in the ports hemust or is under the necessity of touching for aperiod longer than that required for the business ofthe navigation.

ARTICLE 702In the absence of an agreement to the contrary, itshall be understood that the maintenance of thepassengers during the voyage is included in theprice of the passage; but should said maintenancebe for the account of the latter, the captain shall beunder the obligation, in case of necessity, tofurnish them the victuals at a reasonable pricenecessary for their maintenance.

ARTICLE 703A passenger shall be looked upon as a shipper in sofar as the goods he carries on board are concerned,and the captain shall not be liable for what saidpassenger may preserve under his immediate andspecial custody unless the damage arises from anact of the captain or of the crew.

ARTICLE 705In case of the death of a passenger during thevoyage the captain is authorized, with regard tothe body, to take the steps required by thecircumstances, and shall carefully take care of thepapers and goods there may be on board belongingto the passenger, observing the provisions of CaseNo. 10 of Article 612 with regard to members ofthe crew.

ARTICLE 612The following obligations are inherent in the officeof captain:1. To have on board before starting on avoyage a detailed inventory of the hull, engines,rigging, tackle, stores, and other equipments ofthe vessel; the navigation certificate; the roll of thepersons who make up the crew of the vessel, andthe contracts entered into with the crew; the list ofpassengers; the health certificate; the certificate ofthe registry proving the ownership of the vessel,and all the obligations which encumber the sameup to that date; the charters or authenticatedcopies thereof; the invoices or manifest of thecargo, and the instrument of the expert visit orinspection, should it have been made at the port ofdeparture.



2. To have a copy of this Code on board.3. To have three folioed and stamped books,placing at the beginning of each one a note of thenumber of folios it contains, signed by the maritimeofficial, and in his absence by the competentauthority.In the first book, which shall be called "log book,"he shall enter every day the condition of theatmosphere, the prevailing winds, the coursesailed, the rigging carried, the horsepower of theengines, the distance covered, the maneuversexecuted, and other incidents of navigation. Heshall also enter the damage suffered by the vesselin her hull, engines, rigging, and tackle, no matterwhat is its cause, as well as the imperfections andaverages of the cargo, and the effects andconsequence of the jettison, should there be any;and in cases of grave resolutions which require theadvice or a meeting of the officers of the vessel, oreven of the passengers and crew, he shall recordthe decision adopted. For the informationsindicated he shall make use of the binnacle book,and of the steam or engine book kept by theengineer.In the second book, called the "accounting book,"he shall enter all the amounts collected and paidfor the account of the vessel, entering specificallyarticle by article, the sources of the collection, andthe amounts invested in provisions, repairs,acquisition of rigging or goods, fuel, outfits, wages,and all other expenses. He shall furthermore entertherein a list of all the members of the crew,stating their domiciles, their wages and salaries,and the amounts they may have received onaccount, either directly or by delivery to theirfamilies.In the third book, called "freight book," he shallrecord the entry and exit of all the goods, statingtheir marks and packages, names of the shippersand of the consignees, ports of loading andunloading, and the freight earned. In the samebook he shall record the names and places ofsailing of the passengers and the number ofpackages of which their baggage consists, and theprice of the passage.4. To make, before receiving the freight, withthe officers of the crew, and the two experts, ifrequired by the shippers and passengers, anexamination of the vessel, in order to ascertainwhether she is watertight, and whether the riggingand engines are in good condition; and if she hasthe equipment required for good navigation,preserving a certificate of the memorandum of thisinspection, signed by all the persons who may havetaken part therein, under their liability.The experts shall be appointed one by the captainof the vessel and the other one by the persons whorequest the examination, and in case ofdisagreement a third shall be appointed by themarine authority of the port.5. To remain constantly on board the vesselwith the crew during the time the freight is takenon board and carefully watch the stowage thereof;not to consent to any merchandise or goods of adangerous character to be taken on, such asinflammable or explosive substances, without theprecautions which are recommended for theirpacking, management and isolation; not to permitthat any freight be carried on deck which by reasonof its disposition, volume, or weight makes thework of the sailors difficult, and which mightendanger the safety of the vessel; and if, onaccount of the nature of the merchandise, thespecial character of the shipment, and principally

the favorable season it takes place, he allowsmerchandise to be carried on deck, he must hearthe opinion of the officers of the vessel, and havethe consent of the shippers and of the agent.6. To demand a pilot at the expense of thevessel whenever required by navigation, andprincipally when a port, canal, or river, or aroadstead or anchoring place is to be entered withwhich neither he, the officers nor the crew areacquainted.7. To be on deck at the time of sighting landand to take command on entering and leavingports, canals, roadsteads, and rivers, unless thereis a pilot on board discharging his duties. He shallnot spend the night away from the vessel exceptfor serious causes or by reason of official business.cdtai8. To present himself, when making a port indistress, to the maritime authority if in Spain * andto the Spanish * consul if in a foreign country,before twenty-four hours have elapsed, and makea statement of the name, registry, and port ofdeparture of the vessel, of its cargo, and reason ofarrival, which declaration shall be vised by theauthority or by the consul if after examining thesame it is found to be acceptable, giving thecaptain the proper certificate in order to show hisarrival under stress and the reasons therefor. Inthe absence of marine officials or of the consul, thedeclaration must be made before the localauthority.9. To take the steps necessary before thecompetent authority in order to enter in thecertificate of the Commercial Registry of the vesselthe obligations which he may contract inaccordance with Article 583.10. To put in a safe place and keep all thepapers and belongings of any members of the crewwho might die on the vessel, drawing up a detailedinventory, in the presence of passengers aswitnesses, and, in their absence, of members ofthe crew.11. To conduct himself according to the rulesand precepts contained in the instructions of theagent, being liable for all that he may do inviolation thereof.12. To give an account to the agent from theport where the vessel arrives, of the reasonthereof, taking advantage of the semaphore,telegraph, mail, etc., according to the cases; notifyhim the freight he may have received, stating thename and domicile of the shippers, freight earned,and amounts borrowed on bottomry bond, advisehim of his departure, and give him any informationand data which may be of interest.13. To observe the rules on the situation oflights and evolutions to prevent collisions.14. To remain on board in case of danger tothe vessel, until all hope to save her is lost, andbefore abandoning her to hear the officers of thecrew, abiding by the decision of the majority; and ifhe should have to take a boat he shall take withhim, before anything else, the books and papers,and then the articles of most value, being obligedto prove in case of the loss of the books and papersthat he did all he could to save them.15. In case of wreck he shall make the properprotest in due form at the first port reached, beforethe competent authority or the Spanish * consul,within twenty-four hours, stating therein all theincidents of the wreck, in accordance with case 8 ofthis article.



16. To comply with the obligations imposed bythe laws and rules of navigation, customs, health,and others.

I. Carriage of Goods by Sea Act(Commonwealth Act No. 65; Public Act No. 65;Public Act 521, 74th US Congress)

CA No. 65 ACT TO DECLARE THATPUBLIC ACT NUMBERED FIVE HUNDRED ANDTWENTY-ONE, KNOWN AS "CARRIAGE OFGOODS BY SEA ACT," ENACTED BY THESEVENTY-FOURTH CONGRESS OF THE UNITEDSTATES, BE ACCEPTED, AS IT IS HEREBYACCEPTED BY THE NATIONAL ASSEMBLY

WHEREAS, the Seventy-fourth Congress of theUnited States enacted Public Act Numbered Fivehundred and twenty-one, entitled:

"Carriage of Goods by Sea Act";

WHEREAS, the primordial purpose of the said Actsis to bring about uniformity in ocean bills of ladingand to give effect to the Brussels Treaty, signed bythe United States with other powers;

WHEREAS, the Government of the United Stateshas left it to the Philippine Government to decidewhether or not the said Act shall apply to carriageof goods by sea in foreign trade to and fromPhilippine ports;

WHEREAS, the said Act of Congress containsadvanced legislation, which is in consonance withmodern maritime rules and the practices of thegreat shipping countries of the world;

WHEREAS, shipping companies, shippers, andmarine insurance companies, and variouschambers of commerce, which are directly affectedby such legislation, have expressed their desirethat said Congressional Act be made applicable andextended to the Philippines; therefore,

Be it enacted by the National Assembly of thePhilippines:

Section 1

That the provisions of Public Act Numbered Fivehundred and twenty-one of the Seventy-fourthCongress of the United States, approved on Aprilsixteenth, nineteen hundred and thirty-six, beaccepted, as it is hereby accepted to be madeapplicable to all contracts for the carriage of goodsby sea to and from Philippine ports in foreigntrade: Provided, That nothing in the Act shall beconstrued as repealing any existing provision of theCode of Commerce which is now in force, or aslimiting its application.

Section 2

This Act shall take effect upon its approval.

Approved: October 22,1936.

An Act Relating to the Carriage of Goods by Sea.

Be it enacted by the Senate and House ofRepresentatives of the United States of America inCongress assembled, That every bill of landing orsimilar document of title which is evidence of acontract for the carriage of goods by sea to or fromports of the United States, in foreign trade, shallhave effect subject to the provisions of the Act.

TITLE I

Section 1

When used in this Act —

(a) The term "carrier" includes the owner or thecharterer who enters into a contract of carriagewith a shipper.

(b) The term "contract of carriage" applies only tocontracts of carriage covered by a bill of lading orany similar document of title, insofar as suchdocument relates to the carriage of goods by sea,including any bill of lading or any similar documentas aforesaid issued under or pursuant to a charterparty from the moment at which such bill of ladingor similar document of title regulates the relationsbetween a carrier and a holder of the same.

(c) The term "goods" includes goods, wares,merchandise, and articles of every kindwhatsoever, except live animals and cargo whichby the contract of carriage is stated as beingcarried on deck and is so carried.

(d) The term "ship" means any vessel used for thecarriage of goods by sea.

(e) The term "carriage of goods" covers the periodfrom the time when the goods are loaded on to thetime when they are discharged from the ship.

RISKS

Section 2

Subject to the provisions of section 6, under everycontract of carriage of goods by sea, the carrier inrelation to the loading handling, stowage, carriage,custody, care, and discharge of such goods, shallbe subject to the responsibilities and liabilities andentitled to the rights and immunities hereinafter setforth.

RESPONSIBILITIES AND LIABILITIES

Section 3

1) The carrier shall be bound, before and at thebeginning of the voyage, to exercise due diligenceto —

(a) Make the ship seaworthy;

(b) Properly man, equip, and supply the ship;



(c) Make the holds, refrigerating and coolingchambers, and all other parts of the ship in whichgoods are carried, fit and safe for their receptioncarriage and preservation.

(2) The carrier shall properly and carefully load,handle, stow, carry, keep, care for, and dischargethe goods carried.

(3) After receiving the goods into his charge thecarrier, or the master or agent of the carrier, shall,on demand of the shipper, issue to the shipper abill of lading showing among other things —

(a) The leading marks necessary for identificationof the goods as the same are furnished in writingby the shipper before the loading of such goodsstarts, provided such marks are stamped orotherwise shown clearly upon the goods ifuncovered, or on the cases or coverings in whichsuch goods are contained, in such a manner asshould ordinarily remain legible until the end of thevoyage.

(b) Either the number of packages or pieces, or thequantity or weight, as the case may be, asfurnished in writing by the shipper.

(c) The apparent order and condition of the goods:Provided, That no carrier, master, or agent of thecarrier, shall be bound to state or show in the bill oflading any marks, number, quantity, or weightwhich he has reasonable ground for suspecting notaccurately to represent the goods actually received,or which he has had no reasonable means ofchecking.

(4) Such a bill of lading shall be prima facieevidence of the receipt by the carrier of the goodsas therein described in accordance with paragraphs(3) (a), (b), and (c) of this section: Provided, Thatnothing in this Act shall be construed as repealingor limiting the application of any part of the Act, asamended, entitled "An Act relating to bills of ladingin interstate and foreign commerce," approvedAugust 29, 1916 (U. S. C. title 49, secs. 81-124),commonly known as the "Pomerene Bills of LadingAct."

(5) The shipper shall be deemed to haveguaranteed to the carrier the accuracy at the timeof shipment of the marks, number, quantity, andweight, as furnished by him; and the shipper shallindemnify the carrier against all loss damages, andexpenses arising or resulting from inaccuracies insuch particulars. The right of the carrier to suchindemnity shall in no way limit his responsibilityand liability under the contract of carriage or to anyperson other than the shipper.

(6) Unless notice of loss or damage and the generalnature of such loss or damage be given in writingto the carrier or his agent at the port of dischargebefore or at the time of the removal of the goodsinto the custody of the person entitled to deliverythereof under the contract of carriage, suchremoval shall be prima facie evidence of thedelivery by the carrier of the goods as described inthe bill of lading. If the loss or damage is notapparent, the notice must be given within threedays of the delivery.

Said notice of loss or damage maybe endorsedupon the receipt for the goods given by the persontaking delivery thereof.

The notice in writing need not be given if the stateof the goods has at the time of their receipt beenthe subject of joint survey or inspection.

In any event the carrier and the ship shall bedischarged from all liability in respect of loss ordamage unless suit is brought within one year afterdelivery of the goods or the date when the goodsshould have been delivered: Provided, That if anotice of loss or damage, either apparent orconcealed, is not given as provided for in thissection, that fact shall not affect or prejudice theright of the shipper to bring suit within one yearafter the delivery of the goods or the date whenthe goods should have been delivered

In the case of any actual or apprehended loss ordamage the carrier and the receiver shall give allreasonable facilities to each other for inspectingand tallying the goods.

(7) After the goods are loaded the bill of lading tobe issued by the carrier, master, or agent of thecarrier to the shipper shall, if the shipper sodemands, be a "shipped" bill of lading Provided,That if the shipper shall have previously taken upany document of title to such goods, he shallsurrender the same as against the issue of the"shipped" bill of lading, but at the option of thecarrier such document of title may be noted at theport of shipment by the carrier, master, or agentwith name or name the names of the ship or shipsupon which the goods have been shipped and thedate or dates of shipment, and when so noted thesame shall for the purpose of this section bedeemed to constitute a "shipped" bill of lading.

(8) Any clause, covenant, or agreement in acontract of carriage relieving the carrier or the shipfrom liability for loss or damage to or in connectionwith the goods, arising from negligence, fault, orfailure in the duties and obligations provided in thissection, or lessening such liability otherwise thanas provided in this Act, shall be null and void and ofno effect. A benefit of insurance in favor of thecarrier, or similar clause, shall be deemed to be aclause relieving the carrier from liability.

RIGHTS AND IMMUNITIES

Section 4

(1) Neither the carrier nor the ship shall be liablefor loss or damage arising or resulting fromunseaworthiness unless caused by want of duediligence on the part of the carrier to make the shipseaworthy, and to secure that the ship is properlymanned, equipped, and supplied, and to make tothe holds, refrigerating and cool chambers, and allother parts of the ship in which goods are carriedfit and safe for their reception, carriage, andpreservation in accordance with the provisions ofparagraph (1) of section 3. Whenever loss ordamage has resulted from unseaworthiness, theburden of proving the exercise of due diligence



shall be on the carrier or other persons claimingexemption under the section.

(2) Neither the carrier nor the ship shall beresponsible for loss or damage arising or resultingfrom —

(a) Act, neglect, or default of the master, mariner,pilot, or the servants of the carrier in thenavigation or in the management of the ship;

(b) Fire, unless caused by the actual fault or privityof the carrier;

(c) Perils, dangers, and accidents of the sea orother navigable waters;

(d) Act of God;

(e) Act of war,

(f) Act of public enemies;

(g) Arrest or restraint of princes, rulers, or people,or seizure under legal process;

(h) Quarantine restrictions;

(i) Act or omission of the shipper or owner of thegoods, his agent or representative;

(j) Strikes or lockouts or stoppage or restraint oflabor from whatever cause, whether partial orgeneral; Provided, That nothing herein containedshall be construed to relieve a carrier fromresponsibility for the carrier's own acts;

(k) Riots and civil commotions

(l) Saving or attempting to save life or property atsea;

(m) Wastage in bulk or weight or any other loss ordamage arising from inherent defect, quality, orvice of the goods;

(n) Insufficiency of packing;

(o) Insufficiency of inadequacy of marks;

(p) Latent defects not discoverable by duediligence; and

(q) Any other cause arising without the actual faultand privity of the carrier and without the fault orneglect of the agents or servants of the carrier, butthe burden of proof shall be on the person claimingthe benefit of this exception to show that neitherthe actual fault or privity of the carrier nor the faultor neglect of the agents or servants of the carriercontributed to the loss or damage.

(3) The shipper shall not be responsible for loss ordamage sustained by the carrier or the ship arisingfrom any cause without the act, fault, or neglect ofthe shipper, his agents, or servants.

(4) Any deviation in saving or attempting to savelife or property at sea, or any reasonable deviationshall not be deemed to be an infringement orbreach of this Act or of the contract of carriage,and the carrier shall not be liable for any loss ordamage resulting therefrom: Provided, however,That if the deviation is for the purpose of loadingcargo or unloading cargo or passengers it shall,prima facie, be regarded as unreasonable.

(5) Neither the carrier nor the ship shall in anyevent be or become liable for any loss or damageto or in connection with the transportation of goodsin an amount exceeding $600 per package lawfulmoney of the United States, or in case of goods notshipped in packages, per customary freight unit, orthe equivalent of that sum in other currency,unless the nature and value of such goods havebeen declared by the shipper before shipment andinserted in the bill of lading. This declaration, ifembodied in the bill of lading, shall be prima facieevidence, but shall not be conclusive on the carrier.

By agreement between the carrier, master, oragent of the carrier, and the shipper anothermaximum amount than that mentioned in thisparagraph may be fixed: Provided, That suchmaximum shall not be less than the figure abovenamed. In no event shall the carrier be liable formore than the amount of damage actuallysustained.

Neither the carrier nor the ship shall be responsiblein any event for loss or damage to or in connectionwith the transportation of the goods if the nature orvalue thereof has been knowingly and fraudulentlymisstated by the shipper in the bill of lading.

(6) Goods of an inflammable, explosive, ordangerous nature to the shipment whereof thecarrier, master or agent of the carrier, has notconsented with knowledge of their nature andcharacter, may at any time before discharge belanded at any place or destroyed or renderedinnocuous by the carrier without compensation,and the shipper of such goods shall be liable for alldamages and expenses directly or indirectly arisingout of or resulting from such shipment. If any suchgoods shipped with such knowledge and consentshall become a danger to the ship or cargo, theymay in like manner be landed at any place, ordestroyed or rendered innocuous by the carrierwithout liability on the part of the carrier except togeneral average, if any.

SURRENDER OF RIGHTS AND IMMUNITIESAND INCREASE OF RESPONSIBILITIES ANDLIABILITIES

Section 5

A carrier shall be at liberty to surrender in whole orin part all or any of his rights and immunities or toincrease any of his responsibilities and liabilitiesunder this Act, provided such surrender or increaseshall be embodied in the bill of lading issued to theshipper.



The provisions of this Act shall not be applicable tocharter parties; but if bills of lading are issued inthe case of a ship under charter party, they shallcomply with the terms of this Act. Nothing in thisAct shall be held to prevent the insertion in a bill oflading of any lawful provision regarding generalaverage.

SPECIAL CONDITIONS

Section 6

Notwithstanding the provisions of the precedingsections, a carrier, master or agent of the carrier,and a shipper shall, in regard to any particulargoods be at liberty to enter into any agreement inany terms as to the responsibility and liability ofthe carrier for such goods, and as to the rights andimmunities of the carrier in respect of such goods,or his obligation as to seaworthiness (so far as thestipulation regarding seaworthiness is not contraryto public policy), or the care or diligence of hisservants or agents in regard to the loading,handling stowage, carriage, custody, care, anddischarge of the goods carried by sea: Provided,That in this case no bill of lading has been or shallbe issued and that the terms agreed shall beembodied in a receipt which shall be a non-negotiable document and shall be marked as such.

Any agreement so entered into shall have full legaleffect: Provided, That this section shall not apply toordinary commercial shipments made in theordinary course of trade but only to othershipments where the character or condition of theproperty to be carried or the circumstances, terms,and conditions under which the carriage is to beperformed are such as reasonably to justify aspecial agreement.

Section 7

Nothing contained in this Act shall prevent a carrieror a shipper from entering into any agreement,stipulation, condition, reservation, or exemption asto the responsibility and liability of the carrier orthe ship for the loss or damage to or in connectionwith the custody and care and handling of goodsprior to the loading on and subsequent to thedischarge from the ship on which the goods arecarried by sea.

Section 8

The provisions of this Act shall not affect the rightsand obligations of the carrier under the provisionsof the Shipping Act, 1916, or under the provisionsof section 4281 to 4289, inclusive, of the RevisedStatutes of the United States, or of anyamendments thereto; or under the provisions ofany other enactment for the time being in forcerelating to the limitation of the liability of theowners of seagoing vessels.

TITLE II

Section 9

Nothing contained in this Act shall be construed aspermitting a common carrier by water todiscriminate between competing shippers similarlyplace in time and circumstances, either (a) withrespect to the right to demand and receive bills oflading subject to the provisions of this Act; or (b)when issuing such bills of lading, either in thesurrender of any of the carrier's rights andimmunities or in the increase of any of the carrier'sresponsibilities and liabilities pursuant to section 6,title I, of this Act or (c) in any other way prohibitedby the Shipping Act, 1916, s amended.

Section 10

Section 25 of the Interstate Commerce Act ishereby amended by adding the following proviso atthe end of paragraph 4 thereof: "Provided,however, That insofar as any bill of ladingauthorized hereunder relates to the carriage ofgoods by sea, such bill of lading shall be subject tothe provisions of the Carriage of Goods by SeaAct."

Section 11

Where under the customs of any trade the weightof any bulk cargo inserted in the bill of lading is aweight ascertained or accepted by a third partyother than the carrier or the shipper, and the factthat the weight is so ascertained or accepted isstated in the bill of lading, then, notwithstandingany thing in this Act, the bill of lading shall not bedeemed to be prima facie evidence against thecarrier of the receipt of goods of the weight soinserted in the bill of lading, and the accuracythereof at the time of shipment shall not bedeemed to have been guaranteed by the shipper.

Section 12

Nothing in this Act shall be construed assuperseding any part of the Act entitled "An actrelating to navigation of vessels, bills of lading, andto certain obligations, duties, and rights inconnection with the carriage of property," approvedFebruary 13,1893, or of any other law which wouldbe applicable in the absence of this Act, insofar asthey relate to the duties, responsibilities, andliabilities of the ship or carrier prior to the timewhen the goods are loaded on or after the timethey are discharged from the ship.

Section 13

This Act shall apply to all contracts for carriage ofgoods by sea to or from ports of the United Statesin foreign trade. As used in this Act the term"United States" includes its districts, territories,and possessions: Provided, however, That thePhilippine legislature may by law exclude itsapplication to transportation to or from ports of thePhilippine Islands. The term "foreign trade" meansthe transportation of goods between the ports ofthe United States and ports of foreign countries.Nothing in this Act shall be held to apply tocontracts for carriage of goods by sea between any



port of the United States or its possessions, andany other port of the United States or itspossession: Provided, however, That any bill oflading or similar document of title which is evidenceof a contract for the carriage of goods by seabetween such ports, containing an expressstatement that it shall be subject to the provisionsof this Act, shall be subjected hereto as fully as ifsubject hereto as fully as if subject hereto by theexpress provisions of this Act: Provided, further,That every bill of lading or similar document of titlewhich is evidence of a contract for the carriage ofgoods by sea from ports of the United States, inforeign trade, shall contain a statement that it shallhave effect subject to the provisions of this Act.

Section 14

Upon the certification of the Secretary ofCommerce that the foreign commerce of the UnitedStates in its competition with that of foreignnations is prejudiced the provisions, or any ofthem, of Title I of this Act, or by the laws of anyforeign country or countries relating to the carriageof goods by sea, the President of the United States,may, from time to time, by proclamation, suspendany or all provisions of Title I of this Act for suchperiods of time or indefinitely as may bedesignated in the proclamation. The President mayat any time rescind such suspension of Title Ihereof, and any provisions thereof which may havebeen suspended shall thereby be reinstated andagain apply to contracts thereafter made for thecarriage of goods by sea. Any proclamation ofsuspension or rescission of any such suspensionshall take effect on a date named therein, whichdate shall be not less than ten days from the issueof the proclamation.

Any contract for the carriage of goods by sea,subject to the provisions of this Act, effectiveduring any period when title I hereof, or any partthereof, is suspended, shall be subject to allprovisions of law now or hereafter applicable tothat part of Title I which may have thus beensuspended.

Section 15

This Act shall take effect ninety days after the dateof its approval; but nothing in this Act shall applyduring a period not to exceed one year following itsapproval to any contract for the carriage of goodsby sea, made before the date on which this Act isapproved, nor to any bill of lading or similardocument of title issued, whether before or aftersuch date of approval in pursuance of any suchcontract as aforesaid.

Section 16

This Act may be cited as the "Carriage of Goods bySea Act."

Approved, April 16, 1936.

PUBLIC ACT 521 CARRIAGE OFGOODS BY SEA ACT

Section 1That the provisions of Public Act No. 521 of the 7thCongress of the United States, approved on April16, 1936, be accepted, as it is hereby accepted tobe made applicable to all contracts for the carriageof goods by sea to and from Philippine ports inforeign trade: Provided, that nothing in this Actshall be construed as repealing any existingprovision of the Code of Commerce which is now inforce, or as limiting its application. .

Sec. 2This Act shall take effect upon its approval.(Approved October 22, 1936).

TITLE ISec. 1When used in this Act —.(a) The term "carrier" includes the owner orthe charterer who enters into a contract of carriagewith a shipper.(b) The term "contract of carriage" applies onlyto contracts of carriage by covered by a bill oflading or any similar document of title, insofar assuch document relates to the carriage of goods bysea, including any bill of lading or any similardocument as aforesaid issued under or pursuant toa character party from the moment at which suchbill of lading or similar document of title regulatesthe relations between a carrier and a holder of thesame. .(c) The term "goods" includes goods, wares,merchandise, and articles of every kindwhatsoever, except live animals and cargo whichby the contract of carriage is stated as beingcarried on deck and is so carried..(d) The term "ship" means any vessel used forthe carriage of goods by sea..(e) The term "carriage of goods" covers theperiod from the time when the goods are loaded tothe time when they are discharged from the ship.

RISKSSec. 2Subject to the provisions of Section 6, under everycontract of carriage of goods by sea, the carrier inrelation to the loading, handling, stowage, carriage,custody, care, and discharge of such goods shall besubject to the responsibilities and liabilities andentitled to the rights and immunities hereinafter setforth..

RESPONSIBILITIES AND LIABILITIESSec. 3(1) The carrier shall be bound before and at thebeginning of the voyage to exercise due diligenceto —(a) Make the ship seaworthy;(b) Properly man,equip, and supply the ship;(c) Make the holds, refrigerating and coolingchambers, and all other parts of the ship in whichgoods are carried, fit and safe for their reception,carriage, and preservation.(2) The carrier shall properly and carefullyload, handle, stow, carry, keep, care for,anddischarge the goods carried.(3) After receiving the goods into his carrier, orthe master or agent of the carrier, shall, ondemand of the shipper, issue to the shipper a bill oflading showing among other things —.



(a) The loading marks necessary foridentification of the goods as the same arefurnished in writing by the shipper before theloading of such goods starts, provided suchmarksare stamped or otherwise shown clearly uponthe goods if uncovered,in such a manner as shouldordinarily remain legible until the end of thevoyage..(b) Either the number of packages or pieces, orthe quantity or weight, as the casemay be, asfurnished in writing by the shipper.(c) The apparent order and conditions of thegoods: Provided, that no carrier, master, or agentof the carrier, shall be bound to state or show inthe bill of lading any marks, number, quantity, orweight which he has reasonable ground forsuspecting not accurately to represent the goodactually received or which he has had noreasonable means of checking..(4) Such a bill of lading shall be prima facieevidence of the receipt by the carrier of the goodsas therein described in accordance with paragraphs(3) (a), (b), and (c), of this section: (The rest ofthe provision is not applicable to the Philippines).(5) The shipper shall be deemed to haveguaranteed to the carrier the accuracy at the timeof shipment of the marks, number, quantity, andweight, as furnished by him; and the shipper shallindemnify the carrier against all loss, damages, andexpenses arising or resulting from inaccuracies insuch particulars. The right of the carrier to suchindemnity shall in no way limit his responsibilityand liability under the contract of carriage to anyperson other than the shipper..(6) Unless notice or loss or damage and thegeneral nature of such loss or damage by given inwriting to the carrier or his agent at the port ofdischarge or at the time of the removal of thegoods into the custody of the person entitled todelivery thereof under the contract of carriage,such removal shall be prima facie evidence of thedelivery by the carrier of the goods as described inthe bill of lading. If the loss or damage is notapparent, the notice must be given within threedays of the delivery..Said notice of loss or damage may be endorsedupon the receipt for the goods given by the persontaking delivery thereof.The notice in writing need not be given if the stateof the goods has at the time of their receipt beenthe subject of joint survey or inspection.In any event the carrier and the ship shall bedischarged from all liability in respect of loss ordamage unless suit is brought within one year afterdelivery of the goods or the date when the goodsshould have been delivered: Provided, that, if anotice of loss or damage, either apparent orconcealed, is not given as provided for in thissection, that fact shall not affect or prejudice theright of the shipper to bring suit within one yearafter the delivery of the goods or the date whenthe goods should have been delivered.In the case of any actual or apprehended loss ordamage, the carrier and the receiver shall give allreasonable facilities to each other for inspectingand tallying the goods..(7) After the goods are loaded the bill of ladingto be issued by the carrier, master, or agent of thecarrier to the shipper shall if the shipper sodemands, be a "shipped" bill of lading: Provided,that if the shipper shall have previously taken upany document of title to such goods, he shallsurrender the same as against the issue of the"shipped" bill of lading, but at the option of the

carrier such document of title may be noted at theport of shipment by the carrier, master, or agentwith the name or names of the ship or ships uponwhich the goods have been shipped and the date ordates of shipment, and when so noted the sameshall for the purpose of this section be deemed toconstitute a "shipped" bill of lading.(8) Any clause, covenant, or agreement in acontract of carriage relieving the carrier of the shipfrom liability for loss or damage to or in connectionwith the goods, arising from negligence, fault, orfailure in the duties and obligations provide in thissection or lessening such liability otherwise than asprovided in this Act, shall be null and void and ofno effect. A benefit of insurance in favor of thecarrier, or similar clause, shall be deemed to be aclause relieving the carrier from liability.

RIGHTS AND IMMUNITIESSec. 4(1) Neither the carrier nor the ship shall be liablefor loss or damage arising or resulting fromunseaworthiness unless caused by want of duediligence on the part of the carrier to make the shipseaworthy and to secure that the ship is properlymanned, equipped, and supplied, and to make theholds, refrigerating and cooling chambers, and allother parts of the ship in which goods are carriedfit and safe for their reception, carriage, andpreservation, in accordance with the provisions ofparagraph (1) of Section (3). Whenever loss ordamage has resulted from unseaworthiness, theburden of proving the exercise of due diligenceshall be on the carrier or other person claimingexemption under this section..(2) Neither the carrier nor the ship shall beresponsible for loss or damage arising or resultingfrom —(a) Act, neglect, or default of the master,mariner, pilot, or the servants of the carrier in thenavigation or in the management of the ship;(b) Fire, unless caused by the actual fault orprivity of the carrier;.(c) Perils, dangers, and accidents of the sea orother navigable water;.(d) Act of God;.(e) Act of war;.(f) Act of public enemies;(g) Arrest or restraint of princes, rulers, orpeople, or seizure under legal process;(h) Quarantine restrictions;.(i) Act or omission of the shipper or owner ofthe goods, his agent or representative;.(j) Strikes or lockouts or stoppage or restraintof labor from whatever cause, whether partial orgeneral: Provided, that nothing herein containedshall be construed to relieve a carrier fromresponsibility for the carrier's own acts;.(k) Riotsand civil commotions;.(l) Saving or attempting to save life orproperty at sea;.(m) Wastage in bulk or weight or any other lossor damage arising from inherent defect, quality, orvice of the goods;(n) Insufficiency or packing;(o) Insufficiency or inadequacy of marks;.(p) Latent defects not discoverable by duediligence; and.(q) Any other cause arising without the actualfault and privity of the carrier and without the faultor neglect of the agents or servants of the carrier,but the burden of proof shall be on the personclaiming the benefit of this exception to show thatneither the actual fault or privity of the carrier nor



the fault or neglect of the agents or servants of thecarrier contributed to the loss or damage.(3) The shipper shall not be responsible for lossor damage sustained by the carrier or the shiparising or resulting from any cause without the act,or neglect of the shipper, his agents, or hisservants..(4) Any deviation in saving or attempting tosave life or property at sea, or any reasonabledeviation shall not be deemed to be aninfringement or breach or this Act or of the contractof carriage, and carrier shall not be liable for anyloss or damage resulting therefrom: Provided,however, that if the deviation is for the purpose ofloading or unloading cargo or passengers it shall,prima facie, be regarded as unreasonable..(5) Neither the carrier nor the ship shall in anyevent be or become liable for any loss or damageto or in connection with the transportation of goodsin an amount exceeding $500 per package of lawfulmoney of the United States, or in case of goods notshipped in packages, per customary freight unit, orthe equivalent of that sum in other currency,unless the nature and value of such goods havebeen declared by the shipper before shipment andinserted in the bill of lading. This declaration, ifembodied in the bill of lading, shall be prima facieevidence, but shall not be conclusive on thecarrier..By agreement between the carrier, master or agentof the carrier, and the shipper another maximumamount than that mentioned in this paragraph maybe fixed: Provided, that such maximum shall not beless than the figure above named. In no event shallthe carrier be liable for more than the amount ofdamage actually sustained..Neither the carrier nor the ship shall be responsiblein any event for loss damage to or in connectionwith the transportation of the goods if the nature orvalue thereof has been knowingly and fraudulentlymisstated by the shipper in the bill of lading..(6) Goods of an inflammable, explosive, ordangerous nature to the shipment whereof, thecarrier, master or agent of the carrier, has notconsented with knowledge of their nature andcharacter, may at any time before discharge belanded at any place or destroyed or renderedinnocuous by the carrier without compensation,and the shipper of such goods shall be liable for alldamages and expenses directly or indirectly arisingout of or resulting from such shipment. If any suchgoods shipped with such knowledge and consentshall become a danger to the ship or cargo, theymay in like manner be landed at any place, ordestroyed or rendered innocuous by the carrierwithout liability on the part of the carrier except togeneral average if any..

SURRENDER OF RIGHTS AND IMMUNITIESAND INCREASE OF RESPONSIBILITIES ANDLIABILITIESSec. 5A carrier shall be at liberty to surrender in whole orin part all or any of his rights and immunities or toincrease any of his responsibilities and liabilitiesunder this Act, provided such surrender or increaseshall be embodied in the bill of lading issued to theshipper.The provisions of this Act shall not be applicable tocharter parties; but if bills of lading are issued inthe case of a ship under a charter party, they shallcomply with the terms of this Act. Nothing in thisAct shall be held to prevent the insertion in a bill oflading of any lawful provisions regarding general

average..

SPECIAL CONDITIONSSec. 6Notwithstanding the provisions of the precedingsection, a carrier, master or agent of the carrier,and a shipper shall, in regard to any particulargoods be at liberty to enter into any agreement inany terms as to the responsibility and liability ofthe carrier for such goods, and as to the rights andimmunities of the carrier in respect to such goods,or his obligation to seaworthiness, (so far as thestipulation regarding seaworthiness is contrary topublic policy), or the care or diligence of hisservants or agents in regard to the loading,handling, stowage, carriage, custody, care anddischarge of the goods carried by sea; provided,that in this case no bill of lading has been or shallbe issued and that the terms agreed shall be anon-negotiable document and shall be marked assuch. .Any agreement so entered into shall have full legaleffect: Provided, that this section shall not apply toordinary commercial shipments made in theordinary course of trade but only to othershipments where the character or condition of theproperty to be carried or the circumstances, termsand conditions under which the carriage is to beperformed are such as reasonably to justify aspecial agreement.

Sec. 7Nothing contained in this Act shall prevent a carrieror a shipper from entering into any agreement,stipulation, condition, reservation, or exemption asto the responsibility and liability of the carrier orthe ship for the loss or damage to or in connectionwith the custody and care and handling of goodsprior to the loading on and subsequent to thedischarge from the ship on which the goods arecarried by sea..

Sec. 8The provisions of this Act shall not affect the rightsand obligations of the carrier under the provisionsof the Shipping Act, 1916, or under the provisionsof Sections 4281 to 4292, inclusive, of the RevisedStatutes of the United States, or of anyamendments thereto, or under the provisions ofany other enactment for the time being in forcerelating to the limitation of the liability of theowners of seagoing vessels..

TITLE IISec. 9Nothing contained in this Act shall be construed aspermitting a common carrier by water todiscriminate between competing shippers similarlyplaced in time and circumstances, either (a) withrespect to their right to demand and receive bills oflading subject to the provisions of this Act; or (b)when issuing such bills of lading either in thesurrender of any of the carrier's rights andimmunities or in the increase of any of the carrier'sresponsibilities and liabilities pursuant to Section 5,Title I, of this Act; (c) in any other way prohibitedby the Shipping Act, 1916, as amended..

Sec. 10(Not applicable to the Philippines.).

Sec. 11When under the custom of any trade the weight ofany bulk cargo inserted in the bill of lading is a



weight ascertained or accepted by a third partyother than the carrier or the shipper and the factthat the weight as ascertained or accepted is statedin the bill of lading, then notwithstanding anythingin this Act, the bill of lading shall not be deemed tobe prima facie evidence against the carrier of thereceipt of goods of the weight so inserted in thebills of lading, and the accuracy thereof at the timeof shipment shall not be deemed to have beenguaranteed by the shipper..

Sec. 12(Not applicable to the Philippines.).

Sec. 13This Act shall apply to all contracts for carriage ofgoods by seas to or from ports of the United Statesin foreign trade. As used in this Act the term"United States" includes its districts, territories,and possessions: Provided, however, that thePhilippine Legislature may by law exclude itsapplication to transportation to or from ports of thePhilippine Islands. The term "foreign trade" meansthe transportation of goods between the ports ofthe United States and ports of foreign countries.Nothing in this Act shall be held to apply tocontracts for carriage of goods by sea between anyport of the United States or its possessions and anyother port of the United States or its possessions:Provided, however, that any bill of lading or similardocument of the title which is evidence of acontract for the carriage of goods by sea betweensuch ports, containing an express statement that itshall be subject to the provisions of this Act; shallbe subjected hereto as fully as if subject hereto bythe express provisions of this Act: Provided,further, that every bill of lading or similardocument of title which is evidence of a contract forthe carriage of goods by sea from ports of theUnited States in foreign trade, shall contain astatement that it shall have effect subject to theprovisions of this Act. .

Sec. 14Upon the certification of the Secretary ofCommerce that the foreign commerce of the UnitedStates in its competition with that of foreignnations is prejudiced by the provisions, or any ofthem, of the Title I of this Act, or by the laws ofany foreign country or countries relating to thecarriage of goods by sea, the President of theUnited States may, from time to time byproclamation, suspend any or all provisions of TitleI of this Act for such periods of time or indefinitelyas may be designated in the proclamation. ThePresident may at any time rescind such suspensionof Title I hereof, and any provisions thereof whichmay have been suspended shall thereby bereinstated and again apply to contracts thereaftermade for carriage of goods by sea. Anyproclamation of suspension or rescission of anysuch suspension shall take effect on the datenamed therein, which date shall be not less thanten days from the issue of the proclamation.Any contract for the carriage of goods by sea,subject to the provisions of this Act, effectiveduring any period when Title I hereof, or any partthereof, is suspended, shall be subject to allprovisions of law now or hereafter applicable tothat part of Title I which may have thus beensuspended..

Sec. 15

This Act shall take effect ninety days after the dateof its approval; but nothing in this Act shall applyduring a period not to exceed one year following itsapproval to any contract for the carriage of goodsby sea, made before the date on which this Act isapproved nor to any bill of lading or similardocument of title issued, whether before or aftersuch date of approval in pursuance of any suchcontract as aforesaid..

Sec. 16This Act may be cited as the "Carriage of Goods bySea Act.".

1. CONTRACTS COVERED UNDER COGSA

COGSA is a special law that governs in all contractsof carriage of:

goodsby seabetween or to and from Philippine

portsvessels involved in foreign trade

Application of laws:If the common carrier is

coming to the Philippines:First: Civil CodeSecond: COGSA (in foreign

trade)Third: Code of Commerce

If the private carrier iscoming to the Philippines:

First: COGSASecond: Code of CommerceThird: Civil Code (excluding

rules on common carriers)

If the private or commoncarrier is from the Philippines to a foreign country:

Apply the law of the foreigncountry (per Art. 1753, CC) UNLESS the parties

make COGSA applicable

Hierarchy of laws:1) Art. 1766, CC (COGSA as only in matters notregulated by this Code) Thisis notwitstanding that COGSA is a special law.Goods in a foreign country shippedto the Philippines are governed by the Civil Code

2) Art. 1753, CC (Conflict of Laws provision)

2. LIMIT OF LIABILITY PER PACKAGE

BELGIAN OVERSEAS vs. PHILIPPINE FIRSTINSURANCE CO., INC. (2002)

The Civil Code does not limit the liability of thecommon carrier to a fixed amount per package. Inall matters not regulated by the Civil Code, theright and the obligations of common carriers shallbe governed by the Code of Commerce and speciallaws. Thus, the COGSA, which is suppletory to theprovisions of the Civil Code, supplements the latterby establishing a statutory provision limiting thecarrier's liability in the absence of a shipper'sdeclaration of a higher value in the bill of lading. Inthe case before us, there was no stipulation in theBill of Lading limiting the carrier's liability. Neitherdid the shipper declare a higher valuation of thegoods to be shipped. Petitioners' liability shouldbe computed based on US$500 per package



and not on the per metric ton price declaredin the Letter of Credit.

On Notice of Claim/On Prescription of Action:First, the provision of COGSA provides that thenotice of claim need not be given if the state of thegoods, at the time of their receipt, has been thesubject of a joint inspection or survey. Prior tounloading the cargo, an Inspection Report as to thecondition of the goods was prepared and signed byrepresentatives of both parties. Second, as statedin the same provision, a failure to file a notice ofclaim within three days will not bar recovery if it isnonetheless filed within one year. This one-yearprescriptive period also applies to the shipper, theconsignee, the insurer of the goods or any legalholder of the bill of lading. "Inasmuch as theneither the Civil Code nor the Code of Commercestates a specific prescriptive period on the matter,the Carriage of Goods by Sea Act (COGSA)--whichprovides for a one-year period of limitation onclaims for loss of, or damage to, cargoes sustainedduring transit--may be applied suppletorily to thecase at bar." In the present case, the cargo wasdischarged on July 31, 1990, while the Complaintwas filed by respondent on July 25, 1991, withinthe one-year prescriptive period.

3. NOTICE OF LOSS OF CLAIM

4. PRESCRIPTION OF ACTION

Filipino Merchants Insurance, Inc. v.Alejandro (1986)

Clearly, the coverage of the Act includes theinsurer of the goods. Otherwise, what the Actintends to prohibit after the lapse of the one-yearprescriptive period can be done indirectly by theshipper or owner of the goods by simply filing aclaim against the insurer even after the lapse ofone year.

Maritime Agencies & Services, Inc. v. CAThe period for filing the claim is one year, inaccordance with the Carriage of Goods by Sea Act.This was adopted and embodied by our legislaturein Com. Act No. 65 which, as a special law, prevailsover the general provisions of the Civil Code onprescription of actions. Section 3(6) of that Actprovides as follows: In any event, the carrier andthe ship shall be discharged from all liability inrespect of loss or damage unless suit is broughtwithin one year after delivery of the goods or thedate when the goods should have been delivered;Provided, that if a notice of loss for damage; eitherapparent or concealed, is not given as provided forin this section, that fact shall not effect or prejudicethe right of the shipper to bring suit within oneyear after the delivery of the goods or the datewhen the goods should have been delivered.

5. WAIVER UNDER COGSA

V. INTERNATIONAL AIR TRANSPORT

A. The Warsaw Convention

Chapter III - Liability of the Carrier

Article 17The carrier is liable for damage sustained in theevent of the death or wounding of a passenger orany other bodily injury suffered by a passenger, ifthe accident which caused the damage so sustainedtook place on board the aircraft or in the course ofany of the operations of embarking ordisembarking.

Article 181. The carrier is liable for damage sustained in theevent of the destruction or loss of, or of damage to,any registered luggage or any goods, if theoccurrence which caused the damage so sustainedtook place during the carriage by air.2. The carriage by air within the meaning of thepreceding paragraph comprises the period duringwhich the luggage or goods are in charge of thecarrier, whether in an aerodrome or on board anaircraft, or, in the case of a landing outside anaerodrome, in any place whatsoever.3. The period of the carriage by air does not extendto any carriage by land, by sea or by riverperformed outside an aerodrome. If, however, sucha carriage takes place in the performance of acontract for carriage by air, for the purpose ofloading, delivery or transshipment, any damage ispresumed, subject to proof to the contrary, to havebeen the result of an event which took place duringthe carriage by air.

Article 19The carrier is liable for damage occasioned by delayin the carriage by air of passengers, luggage orgoods.

Article 201. The carrier is not liable if he proves that he andhis agents have taken all necessary measures toavoid the damage or that it was impossible for himor them to take such measures.2. In the carriage of goods and luggage the carrieris not liable if he proves that the damage wasoccasioned by negligent pilotage or negligence inthe handling of the aircraft or in navigation andthat, in all other respects, he and his agents havetaken all necessary measures to avoid the damage.

Article 21If the carrier proves that the damage was causedby or contributed to by the negligence of theinjured person the Court may, in accordance withthe provisions of its own law, exonerate the carrierwholly or partly from his liability.

Article 221. In the carriage of passengers the liability of thecarrier for each passenger is limited to the sum of125,000 francs. Where, in accordance with the lawof the Court seised of the case, damages may beawarded in the form of periodical payments, theequivalent capital value of the said payments shallnot exceed 125,000 francs. Nevertheless, byspecial contract, the carrier and the passenger mayagree to a higher limit of liability.2. In the carriage of registered luggage and of



goods, the liability of the carrier is limited to a sumof 250 francs per kilogram, unless the consignorhas made, at the time when the package washanded over to the carrier, a special declaration ofthe value at delivery and has paid a supplementarysum if the case so requires. In that case the carrierwill be liable to pay a sum not exceeding thedeclared sum, unless he proves that that sum isgreater than the actual value to the consignor atdelivery.3. As regards objects of which the passenger takescharge himself the liability of the carrier is limitedto 5,000 francs per passenger.4. The sums mentioned above shall be deemed torefer to the French franc consisting of 65 «milligrams gold of millesimal fineness 900. Thesesums may be converted into any national currencyin round figures.

Article 23Any provision tending to relieve the carrier ofliability or to fix a lower limit than that which is laiddown in this Convention shall be null and void, butthe nullity of any such provision does not involvethe nullity of the whole contract, which shall remainsubject to the provisions of this Convention.

Article 241. In the cases covered by Articles 18 and 19 anyaction for damages, however founded, can only bebrought subject to the conditions and limits set outin this Convention.2. In the cases covered by Article 17 the provisionsof the preceding paragraph also apply, withoutprejudice to the questions as to who are thepersons who have the right to bring suit and whatare their respective rights.

Article 251. The carrier shall not be entitled to avail himselfof the provisions of this Convention which excludeor limit his liability, if the damage is caused by hiswilful misconduct or by such default on his part as,in accordance with the law of the Court seised ofthe case, is considered to be equivalent to wilfulmisconduct.2. Similarly the carrier shall not be entitled to availhimself of the said provisions, if the damage iscaused as aforesaid by any agent of the carrieracting within the scope of his employment.

Article 261. Receipt by the person entitled to delivery ofluggage or goods without complaint is prima facieevidence that the same have been delivered ingood condition and in accordance with thedocument of carriage.2. In the case of damage, the person entitled todelivery must complain to the carrier forthwithafter the discovery of the damage, and, at thelatest, within three days from the date of receipt inthe case of luggage and seven days from the dateof receipt in the case of goods. In the case of delaythe complaint must be made at the latest withinfourteen days from the date on which the luggageor goods have been placed at his disposal.3. Every complaint must be made in writing uponthe document of carriage or by separate notice inwriting despatched within the times aforesaid.4. Failing complaint within the times aforesaid, noaction shall lie against the carrier, save in the caseof fraud on his part.

Article 27

In the case of the death of the person liable, anaction for damages lies in accordance with theterms of this Convention against those legallyrepresenting his estate.

Article 281. An action for damages must be brought, at theoption of the plaintiff, in the territory of one of theHigh Contracting Parties, either before the Courthaving jurisdiction where the carrier is ordinarilyresident, or has his principal place of business, orhas an establishment by which the contract hasbeen made or before the Court having jurisdictionat the place of destination.2. Questions of procedure shall be governed by thelaw of the Court seised of the case.

Article 291. The right to damages shall be extinguished if anaction is not brought within two years, reckonedfrom the date of arrival at the destination, or fromthe date on which the aircraft ought to havearrived, or from the date on which the carriagestopped.2. The method of calculating the period oflimitation shall be determined by the law of theCourt seised of the case.

Article 301. In the case of carriage to be performed byvarious successive carriers and falling within thedefinition set out in the third paragraph of Article 1,each carrier who accepts passengers, luggage orgoods is subjected to the rules set out in thisConvention, and is deemed to be one of thecontracting parties to the contract of carriage in sofar as the contract deals with that part of thecarriage which is performed under his supervision.2. In the case of carriage of this nature, thepassenger or his representative can take actiononly against the carrier who performed the carriageduring which the accident or the delay occurred,save in the case where, by express agreement, thefirst carrier has assumed liability for the wholejourney.3. As regards luggage or goods, the passenger orconsignor will have a right of action against thefirst carrier, and the passenger or consignee who isentitled to delivery will have a right of actionagainst the last carrier, and further, each may takeaction against the carrier who performed thecarriage during which the destruction, loss, damageor delay took place. These carriers will be jointlyand severally liable to the passenger or to theconsignor or consignee.

B. Applicability; meaning of internationaltransportation

International air transportation istransportation by air between points of contact oftwo high contracting parties, or those countriesthat have acceded to the Convention.

C. Liabilities under the Convention

The enumeration of causes of action in theWarsaw Convention is not an exclusive list. You canhave a cause of action even if it is not: a) death orwounding of the passenger; b) damage or loss ordestruction of checked baggage, or c) delay in thetransportation of passengers, luggage and goods.



Note however, that the limitations of liability in theConvention favor the carrier.

NORTHWEST AIRLINES, INC., vs. CUENCA(1965)

The Articles merely declare the carrier liable fordamages in the enumerated cases, if the conditionstherein specified are present. Neither saidprovisions nor others in the aforementionedConvention regulate or exclude liability for otherbreaches of contract by the carrier. Underpetitioner's theory, an air carrier would be exemptfrom any liability for damages in the event of itsabsolute refusal, in bad faith, to comply with acontract of carriage, which is absurd.

ALITALIA vs IAC (1990)Under the Warsaw Convention, an air

carrier is made liable for damages for:1. the death, wounding or other bodily injuryof a passenger if the accident causing it took placeon board the aircraft or in the course of itsoperations of embarking/disembarking2. the destruction or loss of, or damage to,any registered luggage or goods, if the occurrencecausing it took place during the carriage by air3. delay in the transportation by air ofpassengers, luggage or goods.

In these cases, the Convention providesthat the “action for damages, however founded,can only be brought subject to the conditions andlimits set out therein.”

The Warsaw Convention however denies tothe carrier availment “of the provisions w/c excludeor limit his liability, if the damage is caused by hiswillful misconduct or by such default on his part as,in accordance w/ the law of the court seized of thecase, is considered to be equivalent to willfulmisconduct, or if the damage is similarly caused byany agent of the carrier acting w/n the scope of hisemployment.”

The Convention does not operate as anexclusive enumeration of the instances of anairline’s liability, or as an absolute limit of theextent of that liability.

Moreover, it should be deemed a limit ofliability only in those cases where the cause of thedeath or injury to person, or destruction, loss ordamage to property or delay in its transport is notattributable to or attended by any willfulmisconduct, bad faith, recklessness, or otherwiseimproper conduct on the part of any official oremployee for which the carrier is responsible, andthere is otherwise no special or extraordinary formof resulting injury.

The Convention has invariably been heldinapplicable, or as not restrictive of the carrier’sliability, where there was satisfactory evidence ofmalice or bad faith attributable to its officers andemployees.

Note: Liability of carrier in case of loss of luggage islimited to a sum of $USD 20 per kilo or $USD 9.07per pound unless a higher value is declared inadvance and additional charges are paid.

D. Limitations on Liability

PAL INC. v CA and JESUS SAMSON (1981)Ratio: The limitation of their liability under 1711 ofNCC: If the mishap was due to the employee's ownnotorious negligence, or voluntary act, ordrunkenness, the employer shall not be liable forcompensation. When the employee's lack of due

care contributed to his death or injury, thecompensation shall be equitably reduced. ANDunder 1712 If a fellow worker's intentionalmalicious act is the only cause of the death orinjury, the employer shall not be answerable…

PAL vs. CA, DR. JOSEFINO MIRANDA andLUISA MIRANDA (1996)

The appellees do not seek payment for loss of anybaggage. They are claiming damages arising fromthe discriminatory off-loading of their baggage.That cannot be limited by the printed conditions inthe tickets and baggage checks. Neither can theWarsaw Convention exclude nor regulate theliability for other breaches of contract by aircarriers. A recognition of the Warsaw Conventiondoes not preclude the operation of our Civil Codeand related laws in determining the extent ofliability of common carriers in breach of contract ofcarriage, particularly for willful misconduct of theiremployees. Said convention does not operate as anexclusive enumeration of the instances fordeclaring a carrier liable for breach of contract ofcarriage or as an absolute limit of the extent of thatliability. The Warsaw Convention declares thecarrier liable in the enumerated cases and undercertain limitations. However, it must not beconstrued to preclude the operation of the CivilCode and pertinent laws. It does not regulate,much less exempt, the carrier from liability fordamages for violating the rights of its passengersunder the contract of carriage, especially if willfulmisconduct on the part of the carrier's employeesis found or established, which is the case beforeUs.

E. When Limitations Unavailable

TWA v. CA and Vinluan (1988)

The petitioner’s contention that it is not liable isdevoid of merit. Private respondent had a firstclass ticket for Flight No. 41 of petitioner from NewYork to San Francisco on April 20, 1979. It wastwice confirmed and yet respondentunceremoniously told him that there was no firstclass seat available for him and that he had to bedowngraded to the economy class. As he protested,he was arrogantly threatened by one Mr. Braam.Worst still, while he was waiting for the flight, hesaw that several Caucasians who arrived muchlater were accommodated in first class seats whenthe other passengers did not show up. Thediscrimination is obvious and the humiliation towhich private respondent was subjected isundeniable. Consequently, the award of moral andexemplary damages by the respondent court is inorder.

At the time of this unfortunate incident, the privaterespondent was a practicing lawyer, a seniorpartner of a big law firm in Manila. He was adirector of several companies and was active incivic and social organizations in the Philippines.Considering the circumstances of this case and thesocial standing of private respondent in thecommunity, he is entitled to the award of moraland exemplary damages. However, the moraldamages should be reduced to P300,000.00, andthe exemplary damages should be reduced toP200,000.00. This award should be reasonablysufficient to indemnify private respondent for the



humiliation and embarrassment that he sufferedand to serve as an example to discourage therepetition of similar oppressive and discriminatoryacts.

F. Conditions on Liability

Luna v. Estrada (1992)

HELD:

The Warsaw Convention was a treaty commitmentvoluntarily assumed by the Philippine government;consequently, it has the force and effect of law inthis country. But, in the same token, jurisprudenceshows that the Warsaw Convention does notoperate as an exclusive enumeration of theinstances for declaring an airline liable for breach ofcontract of carriage or as an absolute limit of theextent of that liability.

The failure of private respondent to deliver theirluggage at the designated time and place does notipso facto amount to willful misconduct. For willfulmisconduct to exist, there must be a showing thatthe acts complained of were impelled by anintention to violate the law, or were in persistentdisregard of one's rights. It must be evidenced by aflagrantly or shamefully wrong or improperconduct.

G. Venue of Court Actions

SANTOS vs NORTHWEST ORIENT AIRLINES(1992)

(Petitioner claims that Art 28(1) is a rule merely ofvenue and was waived by NOA when it did notmove to dismiss on the ground of improper venue.)

SC: A number of reasons tend to supportthe characterization of Art 28(1) as a jurisdictionand not a venue provision.1. the wording of Art. 32, w/c indicates theplaces where the action for damages “must” bebrought, underscores the mandatory nature of Art28(1)2. this characterization is consistent w/ one ofthe objectives of the Convention, w/c is to regulatein a uniform manner the conditions of int’ltransportation by air.3. the Convention doesn’t contain anyprovision prescribing rules of jurisdiction other thanArt 28(1), w/c means that the phrase “rules as tojurisdiction” used in Art 32 must refer only to Art28(1). In fact, the last sentence of Art 32specifically deals w/ the exclusive enumeration inArt 28(1) as “jurisdictions”, w/c as such, cannot beleft to the will of the parties regardless of the timewhen the damage occurred.

Where the matter is governed by theWarsaw Convention, jurisdiction takes on a dualconcept. Jurisdiction in the international sensemust be established in accordance w/ Art 28(1) ofthe Warsaw Convention, following w/c thejurisdiction of a particular court must beestablished pursuant to the applicable domesticlaw. Only after the question of which court hasjurisdiction is determined will the issue of venue betaken up. This second question shall be governedby the law of the court to w/c the case issubmitted.


CODE OF COMMERCE COMMERCIAL LAW

CODE OF COMMERCE

a.

Merchants and Commercial

Transactions

(Articles 1-63)

1. Definition of Merchants

Merchant- is the middleman between theconsumer and manufacturer; a merchant must dobusiness in his own name

1.1. Natural persons Those, who having legal capacity to engage in

commerce, habitually devote themselves thereto(Art 1)» Legal capacity to engage in commerce:

having completed the age of 18 years31

» Having free disposition of their property (Art4)

Legal presumption of habitually engaging incommerce exists from the moment the personwho intends to engage therein announcesthrough circulars, newspapers, handbills,posters exhibited to the public, or in anymanner whatsoever, an establishment whichhas for its object some commercial operation.(Art 3)

A merchant need not devote his full time tocommerce

1.2. Foreign entities Foreigners and companies created abroad may

engage in commerce subject to the laws oftheir country with respect to their capacity tocontract,

Foreign corporations and partnerships canengage business here, provided they get alicense from the SEC. For insurance companies,they need a certificate of authority from theInsurance Commission. Banks need a licensefrom the Monetary Board.

Code of Commerce governs:» regards the creation of their establishments

in Philippine territory,» their mercantile operations, and» the jurisdiction of the courts of the

Philippines. But if there’s a special treaty, the treaty

governs.

2. Applicable Laws

(whether or not executed by merchants)a. Code of Commerceb. If no provision, commercial customsc. In the absence of these two, Civil Code

Customs take precedence over civil lawbecause of the progressive character ofcommerce. For centuries, negotiableinstruments are governed mostly by customsrather than law. But civil law can alsosupplement the Code of Commerce – the Codedoes not contain provisions on extinguishmentsof obligations or damages.

31The Code of Commerce sets it at 21 years, but RA

6809 lowered the majority age to 18 years

3. Absolute Disqualification from Trade

The following cannot engage in commerce nor holdoffice or have any direct, administrative, orfinancial intervention in commercial or industrialcompanies:

a. Persons sentenced to the penalty of civilinterdiction, while they have not servedtheir sentence or have not been amnestiedor pardoned

b. Persons who have been declaredbankrupt, while they have not obtainedtheir discharge, or been authorized byvirtue of an agreement accepted at ageneral meeting of creditors and approvedby judicial authority, to continue at thehead of their establishments; the dischargebeing considered in such cases is limited tothat expressed in the agreement

c. Persons who, on account of laws orspecial provisions, may not engage incommerce

4. Relative Disqualification from Trade

The following cannot engage in the commerce,either in person or by proxy, nor can they hold anyoffice or have any direct, administrative or financialintervention in commercial or industrial companies,within the limits of the districts, provinces or townsin which they discharge their duties:

a. Justices of the Supreme Court, judges32

and officials of the department of publicprosecutors in active service. This provisionshall not be applicable to the municipalmayors, judges or prosecuting attorneys,nor to those who by chance are temporarilydischarging the functions of judges orprosecuting attorneys.

b. Administrative, economic or militaryheads of districts, provinces or posts

c. Employees engaged in the collectionand administration of funds of theState, appointed by the Government.Persons who by contract administer andcollect temporarily or their representativesare exempted.

d. Stock and commercial brokers ofwhatever class they may be.

e. Those who by virtue of laws or specialprovisions, may not engage incommerce in a determinate territory.

f. Members of Congress (’87 Consti)g. President, Vice President, Cabinet

members and their deputies orassistants (’87 Consti)

h. Members of Constitutional Commission(’87 Consti)

i. President, Vice President, Members of theCabinet, Congress, Supreme Court and theConstitutional Commission, Ombudsmanwith respect to any loan, guaranty, orother form of financial accommodationfor any business purpose by anygovernment-owned or controlled bank tothem (Art XI, Sec. 16, ’87 Consti)

32Judges are no longer disqualified, as per Macariola vs.

Asuncion (114 SCRA 77, 1982). Since the relativedisqualification of judges is political in nature, this wasdeemed abrogated by change in sovereignty from Spainto the United States.



Absolute Incapacity Relative Incapacity

Extends throughout thePhilippines

Extends only to theterritory where theofficer is exercising hisfunctions

Effect of act is null andvoid

Effect is to subject theviolator to disciplinaryaction or punishment

5. Acts of Commerce (Commercial

Transactions)

a. Those acts contained in the Code ofCommerce

b. all others of analogous character

The Code of Commerce does not attemptanywhere to define what commercialtransactions are. It only specifies 2 generalclasses.

An act need not be performed by a merchant inorder that it may be considered an act ofcommerce (Cia Agricola de Ultramar vs. Reyes,4 Phil 2)

6. Commercial Contracts

6.1. Enforceability of Contractsi. Commercial contracts shall be valid,

whatever the form and language,provided their existence is shown by anymeans established by the civil law.EXCEPT when the contract exceeds P300(the equivalent of 1,500 pesetas), itcannot be proved by the testimony of awitness alone. There must be some otherevidence.

6.2. Efficacy of Contractsi. General Rule: Commercial contracts are

consensual, so a written instrument isnot necessary.Exception: in the ff cases in Art 52 Contracts stated in the Code33 or in

special laws34 which must bereduced to writing or require formsor formalities necessary for theirefficacy

Contracts executed in a foreigncountry in which the law requirescertain instruments, forms orformalities for their validity,although Philippine law does notrequire them.

ii. if these contracts do not satisfy thecircumstances respectively required, itshall not give rise to obligations orcauses of action

6.3. Perfection of Contractsi. Contracts entered into by correspondence

shall be perfected from the moment ananswer is made accepting the offer orthe conditions by which the latter maybe modified. (Art 54)

33The Code requires specific forms for charter parties

and loans on bottomry and respondentia (Arts 267, 578,652 and 720).34

Negotiable Instruments Law requires negotiable

instruments to be in writing. Insurance Code requirespayment of premium for a fire insurance contract to exist.

ii. Note that receipt of the acceptance bythe offeror is immaterial,

» Theory of manifestation: incommercial transactions, since timeis of the essence the contract isperfected from the moment theacceptance is sent, even if it has notyet been received by the offeror. Theofferor can no longer withdraw theoffer or change the terms of his offer.

» Theory of cognition: in civil law, whena contract is entered into bycorrespondence, it will be perfectedonly upon receipt by the offeror ofthe unconditional acceptance of theofferee.

iii. Compare with Art 1319, Civil Code:Perfection is only from the time theofferor has actual knowledge ofacceptance.

iv. BUT different rule when a broker oragent intervenes: perfection is whenthe contracting parties shall haveaccepted his offer. (Art 55)

6.4. Indemnificationi. If the penalty for indemnification is

fixed, the injured party may demandthrough legal means the fulfillment ofthe contract or the penalty stipulated.Recourse to one extinguishes the otherunless the contrary is stipulated. (Art56)

6.5. Interpretationi. Interpretation and compliance in good

faith and full enforceability of theirprovisions in their plain, usual andproper meanings (Art 57)

ii. In case of conflicts between copies of thecontract, and an agent intervened inthe negotiation, that which appears inthe agent’s book shall prevail (Art 58)

iii. In case of doubt, and the rules cannotresolve the conflict, issues shall bedecided in favor of the debtor (Art 59)

6.6. Miscellaneous provisionsi. Days of grace, courtesy or others which

under any name whatsoever defer thefulfillment of commercial obligations,shall not be recognized, except those inwhich the parties may have previouslyfixed in contract or which are based ona definite provision of law. (Art 61).Ratio: Time is of the essence incommercial contracts, so days of graceare prohibited.Exception: 30-day grace period in theInsurance Code to pay premiums

ii. Debtor is in delay when:» If day of performance is fixed by

the parties or by law, debtor is indefault on the day following the dayfixed (art 63)

» If no period is fixed, 10 days fromexecution of contract and on 11th

day, debtor in delay without needof demand (Art 62)

» Potestative period (”when debtordesires”), debtor is in delay fromdemand

iii. Art. 50. Commercial contracts. Theyare governed by:



a) Code of Commerceb) Special law – if it’s the appropriate

law like the Insurance Codec) Civil Code – to be applied in a

suppletory manner to other speciallaws.

(This is not the same as in Art. 2. If what isinvolved is an act of commerce, apply Art.2. But if it is a commercial contract, applyArt. 50.)

7. Commercial Registry

a. A book where entries are made of merchantsand of documents affecting their commercialtransactions, or

b. An office established for the purpose of copyingand recording verbatim certain classes ofdocuments of commercial nature

7.1. Nature of registration:» by individual merchants – optional» by corporation – compulsory, as it is the fact

of registration which creates the corporation» partnerships with a capital of P3000 or more

or where the contributions consists of realestate properties – compulsory, per Art.1772, Civil Code

» Philippine vessels with more than 3 tons gross –

compulsory with gross tonnage of 3 tons or less –

optional (Bar Review Materials inCommercial Law – J. Miravite, 2005 ed.)

7.2. Effect of failure to register» an individual merchant who fails to register

cannot request the inscription of anydocument in the mercantile registry, nortake advantage of its effects (Art. 18, Codeof Commerce)

» failure to register the articles ofincorporation will not create the corporation

» failure to register the partnership does notaffect the existence of juridical personality,whether or not it has P3000 or more or realestate properties in contributions by thepartners (Bar Review Materials inCommercial Law – J. Miravite, 2005 ed.)

7.3. Bookkeeping of Commerce

National Internal Revenue Code: a taxpayermust keep a journal and a ledger. But if hisgross quarterly receipts do not exceed P5000,he can keep a simplified set of books. In thecase of corporations and partnerships, if theirgross income exceed P25,000 quarterly, theirbooks must be audited by an independent CPA.

NIRC also requires that the books must be keptfor 3 years. In case of corporations, theCorporation Code requires them to keep recordof all business transactions, minutes of meetingof BOD and stockholder, and stock and transferbook.

Art. 48 lays down certain evidentiary rulesregarding keeping of books:» This is an admission against interest. The

entries in the books of merchants may beused as evidence against them.

» If the books of 2 merchants conflict where1 book is kept in accordance with law whilethe other is not, the former will prevail.

» If one merchant does not present hisbooks, while the other presents his and arekept in accordance with law, the one whopresents will prevail, unless the reason forfailure to produce is caused by a fortuitousevent.

» If both books are kept in accordance withlaw and they conflict, the court will decideon the basis of the rules of preponderanceof evidence by taking into consideration thetotality of the evidence presented by bothsides.

8. Cuentas en Participacion

A partnership the existence of which wasonly known to those who had an interest inthe same, being no mutual agreementsbetween the partners and without acorporate name indicating to the public insome way that there were other peoplebesides the one who ostensibly managedand conducted the business, is exactly theaccidental partnership of cuentas enparticipacion defined in article 239 of theCode of Commerce.

Those who contract with the person underwhose name the business of suchpartnership of cuentas en participacion isconducted, shall have only a right of actionagainst such person and not against theother persons interested, and the latter, onthe other hand, shall have no right ofaction against the third person whocontracted with the manager unless suchmanager formally transfers his right tothem. (Art 242 of the code Of Commerce.)(Bourns vs Carman, 1906)

Joint Account Partnership

No firm name Has a firm name

No common fund Has common fund

No juridical personality Has juridical personality

Only ostensible partnerliable to 3rd persons

All general partnersliable to 3rd persons

Only ostensible partnermanages

All general partnersmanage

Liquidation done byostensible partner

Liquidation entrusted toany partner/s



b.

Letters of Credit

(Articles 567-572)

1. Definition

An engagement by a bank or other personmade at the request of a customer that theissuer (bank) will honor a draft or otherdemands for payment or other complaints withthe conditions specified in the credit.(Prudential Bank vs. IAC, 1992).

An instrument issued by a bank in behalf of acustomer authorizing a beneficiary to draw adraft or drafts which will be honored onpresentation to the bank if drawn in accordancewith the terms and conditions specified in theletter of credit.

Art. 567, Code of Commerce: those issued byone merchant to another or for the purpose ofattending to a commercial transaction.

2. Purpose

To satisfy the seemingly irreconcilable interestsof a seller, who refuses to part with his goodsbefore he is paid, and a buyer, who wants tohave control of the goods before paying. (Bankof America vs. CA, 1993)

The primary purpose of the LoC is to substitutefor and support the agreement of thebuyer/importer to pay money under a contractor other arrangement. It creates in theseller/exporter a secure expectation ofpayment.

3. Nature

The buyer may be required to contract a bank toissue a letter of credit in favor of the seller sothat the issuing bank can authorize the seller todraw drafts and engage to pay them upon theirpresentment simultaneously with the tender ofdocuments required by the letter of credit. Theseller gets paid only if he delivers the documentsof title over the goods, while the buyer gets thegoods only after reimbursing the bank.

Basic principle: bank deals with documents only.As such, they are not qualified to deal withgoods. They will act on the basis of documentsonly.

3 distinct and separate contracts in the LoC:» One links the party applying for the LoC

(buyer) and the party for whose benefit theLoC is issued (seller).

» Between the account party (buyer) and theissuing bank. Under this contract,(sometimes called the "Application andAgreement" or the "ReimbursementAgreement"), the account party applies tothe issuing bank for a specified LoC andagrees to reimburse the bank for amountspaid by that bank

» Between the issuing bank and thebeneficiary (seller), in order to support thecontract. It is the LoC proper in which thebank promises to pay the seller pursuant tothe terms and conditions stated therein

Independent contracts involved in a LoC:» contract of sale between buyer and seller» contract of the issuing bank» LoC

4. How it works:

5. Perfection of the LoC

From the time the correspondent bank makespayment to persons in whose favor the LoC hasbeen opened (Belman Inc. vs. Central Bank,1958)

Take note: The opening of a LoC is only a modeof payment, which is not an essential requisiteof a contract (Johannes Schuback & Sons vs.CA, 1993). A contract can still be perfected,even without the perfection of a LoC.

6. Rules on LoC

Bank of America vs. CA (1993)

If there is no provision in the Code ofCommerce, follow Uniform Customs andPractice or generally observed usages andcustoms

Rule of Strict Conformity/Compliance:Documents tendered must strictly conform tothe terms of the LoC. The tender of documentsby the beneficiary (seller) must include alldocuments required by the letter. Acorrespondent bank which departs from whathas been stipulated under the letter of credit,as when it accepts a faulty tender, acts on itsown risks and it may not thereafter be able torecover from the buyer or the issuing bank, asthe case may be, the money thus paid to thebeneficiary

Feati Bank vs CA (1991)

An advising or notifying bank does not incurany obligation by the notification. Its onlyobligation is to check the apparent authenticityof the LoC

Negotiating bank has a right of recourseagainst the issuer bank. Until the negotiating

Issuing bank issues LoC in favor of seller

Seller ships goods to the buyer and deliversdocuments of title and draft to the issuing (or

negotiating) bank to recover payment

Buyer procures LoC and obliges himself toreimburse the issuing bank upon receipt of the

documents of title

Issuing bank opens a LoCwith a correspondent bank

abroad (bank-to-banktransaction



bank is reimbursed, drawer of the draft is stillcontingently liable.

Relationship between the seller and thenegotiating bank is like that between drawerand purchaser of drafts, ie. the involved bankdeals only with documents and not on thegoods described in the documents.

7. Obligations of Parties in Letter of Credit

Independence Principle: Negotiating bank hasno duty to verify if what is described in the LoCor shipping documents actually tallies with thatloaded aboard a ship. Banks do not deal withthe property to be exported or shipped to theimporter, but deal only with documents.International custom negates any duty on thepart of a bank to verify whether what has beendescribed in letters of credits or drafts orshipping documents actually tallies with whatwas loaded aboard ship

BPI vs De Reny Fabrics (1970)

LoC is a primary obligation of the bank. It isseparate from the underlying contract it maysupport, and is not merely an accessorycontract.

8. Parties

8.1. Buyer- procures the LoC and obliges himself to

reimburse the issuing bank upon receipt of thedocument’s title

8.2. Issuing bank- undertakes to pay the seller upon receipt

of the draft and proper documents of titles and tosurrender the documents to the buyer uponreimbursement

8.3. Seller- who, in compliance with the contract of

sale, ships the goods to the buyer and delivers thedocuments of title and draft to the issuing bank torecover payment.

8.4. Other parties may include:» Advising (notifying) bank

- may be utilized to convey to theseller the existence of the credit

» Confirming bankwill lend credence to the LoCissued by a lesser known issuingbank. The confirming bank isdirectly liable to pay the seller-beneficiary

» Paying bank- undertakes to encash the draftsdrawn by the exporter/seller

» Instead of going to the place of theissuing bank to claim payment, thebuyer may approach another bank(termed the negotiating bank) to havethe draft discounted (Charles Lee vsCA, 2002)

9. Letter of Credit-Trust Receipt

Transaction

Bank extends loan to borrower. Loan is coveredby a LoC, and the security for the loan is atrust receipt.

10. Kinds of LoC

10.1. Commercial LoC10.2. Traveller’s LoC

Note: No protest is required in case ofdishonor. LoCs are issued to definite personsand not to order, thus non-negotiable.

10.3. Other kinds: (Sundiang Reviewer)» Confirmed LoC - whenever the

beneficiary stipulates that theobligation of the opening bank shallalso be made the obligation ofanother bank to himself

» Irrevocable LoC- a definiteundertaking on the part of theissuing bank and constitutes theengagement of that bank to thebeneficiary and bona fide holders ofdrafts drawn and/or documentspresented thereunder, that theprovisions for payment, acceptanceor negotiation contained in thecredit will be duly fulfilled, providedthat all terms and conditions of thecredit are complied with.

- Issuing bank cannot revokewithout consent of beneficiary andapplicant (Without such consent, itcannot be cancelled even by a courtorder)

» Revolving LoC - one that providesfor renewed credit to becomeavailable as soon as the openingbank has advised that thenegotiating or paying that thedrafts already drawn by thebeneficiary have been reimburse tothe opening bank by the buyer

» Back-to-Back LoC - a credit withidentical documentary requirementsand covering the samemerchandise as another LoC,except for a difference in the priceof the merchandise as shown bythe invoice and the draft. Thesecond letter can be negotiatedonly after the first is negotiated.

» Standby LoC - a securityarrangement for the performanceof certain obligations. It can bedrawn against only if anotherbusiness transaction is notperformed. It may be issued in lieuof a performance bond.

- an absolute undertaking topay the money advanced or theamount for which credit is given onthe faith of the instrument. Theyare primary obligations and notaccessory contracts. But while theyare a security arrangement, theyare not converted thereby intocontracts of guaranty. (IBAA vsIAC, 1988)



11. Sight Drafts

No presentment required beforeacceptance.

12. Margin Fee

Tax on sale of foreign exchange. Since thecontract of sale is consensual, it falls dueas soon as the local bank opens the LoC(Pacific Oxygen Company vs. Central Bank,1968).

1.I.

Bulk Sales Law

(Act3952,asamended)

1. Purpose

To regulate the sale, transfer, mortgage orassignment of goods, wares, merchandise,provisions or materials in bulk, andprescribing penalties for the violation of theprovisions thereof.

To prevent the defrauding of creditors bythe secret sale or disposal or mortgage inbulk of all or substantially all of amerchant’s stock of goods bulk until thecreditor of the seller shall have been paid infull.

The law is penal in nature. Thus, itsprovisions must be strictly construedagainst the government and liberally infavor of the accused.

The general scheme of the law is to declaresuch bulk sales fraudulent and void as tocreditors of the vendor, or presumptivelyso, unless specified formalities areobserved, such as the demanding and thegiving of a list of creditors, the giving ofactual or constructive notice to suchcreditors, by the record or otherwise, andthe making of an inventory. (Commentsand Cases on Sales – De Leon, 2005 ed.)

Justification: police power of the state(Liwanag vs Mengraj)

2. Types of Sales in Bulk35

Not in the ordinary course of trade or businessAny sale, transfer, mortgage or assignment ofa stock of goods, wares, merchandise,provisions, or materials (Sec 2)

In the course of trade or businessSale, transfer, mortgage or assignment of all,or substantially all, of the business or tradeconducted or of all, or substantially all, of

35This topic came out in 2007, 2006, 2005, 2001, 2000,

1997, 1995, 1994, 1993, 1988. Specific questions wereasked of sec. 2 and sec. 5. In 1982 questions on therights and liabilities of parties were asked, these arecovered in sections 3, 4, 5 and 9.

the fixtures and equipment used in and aboutthe business (Sec 2)

Exempt Transactions:» Sale or mortgage is made in the ordinary

course of business» When accompanied with a written waiver

by all the seller/mortgagor’s creditors (Sec.2)

» Sale by virtue of a judicial order (Sec. 8)» Sale by assignee in insolvency or those

beyond the reach of creditors» Sale of properties exempt from attachment

or execution (Rule 39, Sec. 13, Rules ofCourt)

Creditors contemplated:» Creditor at the time of the sale/mortgage» Need not be judgment creditors» Claim need not be due

Fraudulent conveyance under the Bulk SalesLaw as against transfer in fraud of creditorsunder the CC:» The former is null and void while the latter

(under Arts. 1381-1389) is rescissible andis valid until set aside by a competent court

» When the law is duly complied with, thecreditors may not object to the transaction,but it may be rescinded if it is shown that itwas, in fact, made in fraud of creditors(Pandect of Commercial Law andJurisprudence - Justice Vitug, 1997 ed.)

The law covers all transactions, whether donein good faith or not, or whether the seller is ina state of insolvency or not, as long as thetransaction falls within the description of whatis a “bulk sale”. Neither the motive nor theintention of the seller, nor the resultingconsequence thereof to his estate, constitutesan element of what is a bulk sale; nor is theproof thereof relevant in determining whetherthe said transaction falls within the coverage ofthe law.

Albercht vs Cudikee (79 Pac. 628)

The common use of the term stock when applied togoods in a mercantile house refers to that whichare kept for sale.

Boise Credit Men’s Assoc. vs Ellis (133 Pac. 6)

Merchandise must be construed to mean suchthings as are usually bought and sold in trade bymerchants. (People’s Savings Bank vs BenAllsburg, 131 N.W. 101) It means something that issold everyday, and is constantly going out of thestore and being replaced by other goods.

Brown vs Quigley (130 N.W. 690)

The term (fixtures) refers to such articles ofmerchandise usually possessed and annexed to thepremises occupied by merchants to enable thembetter to store, handle, and display their waresalthough removable without material injury to thepremises at or before the end of tenancy.

Comments ad Cases on Sales – De Leon, 2000 ed.

Lands and buildings are not “goods, merchandiseand fixtures” therefore not covered by the BSL.



Philippine Law on Sales – Villanueva, 1998 ed.

The qualification “in the normal course ofbusiness” applies only to the first type ofbulk sale defined by law.

Fraud and insolvency is not an element ofwhat constitutes “Bulk Sales”.

The law covers all transactions, whetherdone in good faith or bad faith.

3. Duties of Persons Selling in Bulk

3.1. Statement of Creditors

Vendor must, before receiving from thevendee, mortgagee, or agent any part of thepurchase price, or any promissory note,memorandum, or other evidence thereforedeliver a written statement of creditors with thefollowing information:

i. names and addresses of allcreditors to whom said vendor ormortgagor may be indebted

ii. amount of indebtedness due orowing, or to become due or owingto each of said creditors (Sec 3)

The sworn statement shall be registered in theBureau of Commerce. For the registration ofeach such sworn statement a fee of five pesosshall be charged. (Sec 9)

If the vendor/mortgagor receives any part ofthe purchase price, or any promissory note, orother evidence of indebtedness without havingfirst delivered the sworn statement and withoutapplying the purchase or mortgage money ofthe said property to the pro rata payment ofthe bona fide claims of the creditors of thevendor or mortgagor, he shall be deemed tohave violated this Act, and any such sale,transfer or mortgage shall be fraudulent andvoid. (Sec 4)

If the vendor / mortgagor shall knowingly orwillfully make, deliver or cause to be made ordelivered, a statement which shall not includethe names of all such creditors, w/ the correctamount due and to become due to each ofthem, or shall contain any false or untruestatement, shall be deemed to have violatedthe provisions of this Act. (Sec 6)

The vendor, mortgagor, transferor or assignormust apply the purchase money to the pro-ratapayment of bona fide claims of the creditors asshown in the verified statement.

3.2. Inventory and Notification

Vendor / mortgagor must, at least ten daysbefore the sale, transfer or execution of amortgage

i. make a full detailed inventoryii. preserve the same showing the

quantity and, so far as is possiblewith the exercise of reasonablediligence, the cost price to thevendor, transferor, mortgagor orassignor of each article to be

included in the sale, transfer ormortgage

iii. notify every creditor whose nameand address is set forth in theverified statement personally or byregistered mail, of the price, termsconditions of the sale, transfer,mortgage, or assignment.

3.3. Transfer for Consideration

It shall be unlawful for vendor to transfer titlewithout consideration or for a nominalconsideration only. (Sec 7)

4. Consequences of Non-compliance

Any person violating any provision of this Act shall,be punished by imprisonment not less than sixmonths, nor more than five years, or fined in sumnot exceeding five thousand pesos, or both. (Sec11)

4.1. Incomplete or false or untrue swornwritten statement is a violation

4.2. Effects of false statements in theschedule of creditors

» Without knowledge of the buyer: if thestatement is fair upon its face he willbe protected

» With knowledge or imputed knowledgeof buyer: the vendee accepts it at hisperil. The sale is valid between thevendor and the vendee but void as theagainst the creditors

» With names of certain creditors withoutnotice: the sale is void as to suchcreditors, whether that omission wasfraudulent or not

» With respect to an innocent purchaserfor value from the original purchaser:purchaser shall be protected

4.3. Effects of violation of law on transfer» As between the parties: valid contract» As between persons other than the

creditors: valid» As to affected creditors of the

seller/mortgagor: void» Criminal liability, if expressly provided

1.II

Warehouse

Receipts Law

(Act 2137)

1. Purpose and Coverage

To regulate the status, rights and liabilities ofthe parties in a warehousing contract

To protect those who, in good faith and forvalue, acquire negotiable warehouse receiptsby negotiation

To render the title to, and the right ofpossession of, property stored in warehousesmore easily convertible

To facilitate the use of warehouse receipts asdocuments of title



In order to accomplish these, to place a muchgreater responsibility on the warehouseman

Covers negotiable warehouse receipts, whichcan only be issued by a warehouseman in thebusiness of receiving commodities on depositfor storage. In all other cases where receiptsare not issued by a warehouseman, Art. 1507-1520 of the Civil Code applies

For public and private warehouses Bills of lading and quedans are governed by Art

1507-1520 and 1636 of the Civil Code (Ratio:Sugar centrals that issue quedans are notwarehousemen)

But note: a warehouse receipt is also cited inArt 1636 as a document of title

All other negotiable receipts are covered by thelaw on negotiable instruments

2. Definitions

2.1. Warehouseman» Person lawfully engaged in the business of

storing goods for profit (Sec. 58a)» Duly authorized officer/agent of a

warehouseman may validly issue awarehouse receipt (National Bank vsProducer’s Warehouse Association, 42 Phil609)

2.2. Warehouse» Building or place where goods are

deposited and stored for profit

2.3. Warehouse receipt» Written acknowledgment by a

warehouseman that he has received andholds certain goods therein described instore for the person to whom it is issued

» Simple written contract between the ownerof the goods and the warehouseman to paythe compensation for that service

» Bilateral contract; imports that goods are inthe house of the warehouseman and is asymbolical representation of the propertyitself.

» Not a negotiable instrument although it isnegotiable as provided by the act.

3. Nature/Characteristics of Warehouse

Receipts36

3.1. Function of Warehouse Receipt

Negotiation carries with it transfer of title overthe commodity covered by the receipt (thus, ithas the same function as a negotiable bill oflading)

Except: Where a negotiable warehousereceipt is indorsed and delivered to acreditor as a collateral for a loan

If commodity covered by receipt is lost througha fortuitous event, the debtor will bear loss

Martinez vs PNB (1953)

36The negotiation and transfer of receipts was ask in

2007, 2005, 1993 and 1979.

Where a warehouse receipt or quedan istransferred or endorsed to a creditor only to securethe payment of a loan or debt, the transferee orendorsee does not automatically become the ownerof the goods covered by the warehouse receipt orquedan but he merely retains the right to keep,and with the consent of the owner to sell, them soas to satisfy the obligation from the proceeds of thesale, this for the simple reason that the transactioninvolved is not a sale but only a mortgage orpledge, and if the property covered by the quedansor warehouse receipts is lost later without the faultor negligence of the mortgagee or pledgee or thetransferee or endorsee of the warehouse receipt orquedan, then said goods are to be regarded as loston account of the real owner, mortgagor orpledgor.

3.2. Form of Warehouse Receipt

Sec 2. Warehouse receipts need not be in anyparticular form but every such receipt mustembody within its written or printed terms:

i. The location of the warehousewhere the goods are stored

ii. The date of the issue of thereceipt

iii. The consecutive number of thereceipt

iv. A statement whether the goodsreceived will be delivered to thebearer, to a specified person, orto a specified person in hisorder

v. The rate of storage chargesvi. A description of the goods or of

the packages containing themvii. The signature of the

warehouseman or his authorizedagent

viii. If the receipt is issued for goods ofwhich the warehouseman is owner,either solely or in common withothers, the fact of suchownership, and

ix. A statement of the amount ofadvances made and of liabilitiesincurred for which thewarehouseman claims a lien. Ifthe precise amount of suchadvances made or of such liabilitiesincurred is, at the time of the issueof, unknown to the warehousemanor to his agent who issues it, astatement of the fact that advanceshave been made or liabilitiesincurred and the purpose thereof issufficient.

The date of issue appearing in the receiptindicates prima facie the date when thecontract of deposit is perfected and when thestorage charges shall begin to run against thedepositor.

The mere fact that the goods deposited areincorrectly described does not make ineffectivethe receipt when the identity of the goods isfully established by evidence. Thus, itsendorsement and delivery shall constitute asufficient transfer of the title of the goods(American Foreign Banking Corp. vs Herridge,49 Phil 975).



3.3. Effect of Non-compliance:

» Sec. 2. A warehouseman shall be liable toany person injured thereby for all damagescaused by the omission from a negotiablereceipt of any of the terms herein required.

» If any of these requisites in Sec 2 areabsent, it becomes a deposit only

3.4. Effect of omission of any of the essentialterms:

» Validity of receipt is not affected» Warehouseman is liable for damages» Negotiability of receipt is not affected» The issuance of a warehouse receipt in

the form provided by the law is merelypermissive and directory and notmandatory in the sense that if therequirements are not observed, then thegoods delivered for storage becomeordinary deposits

3.5. Terms that cannot be included» Those contrary to the provisions of the

Warehouse Receipts Law» Those which may impair his obligation

to exercise that degree of care in thesafekeeping of the goods entrusted tohim which a reasonably careful man wouldexercise in regard to similar goods of hisown

» Those contrary to law, morals, publiccustoms, public order or public policy

» Those exempting the warehousemanfrom liability for misdelivery

» Those exempting the warehousemanfrom liability for negligence

3.6. Kinds of Warehouse Receiptsi. Non-negotiable

Sec. 4. A receipt in which it is stated thatthe goods received will be delivered to thedepositor or to any other specified person

Sec. 7. A non-negotiable receipt shall haveplainly placed upon its face by thewarehouseman issuing it “non-negotiable”or “not negotiable.” In case of thewarehouseman’s failure so to do, a holderof the receipt who purchased it for valuesupposing it to be negotiable, may, at hisoption, treat such receipt as imposing uponthe warehouseman the same liabilities hewould have incurred had the receipt beennegotiable.This section shall not apply to letters,memoranda, or written acknowledgementof an informal character.

It is transferred by its delivery to thetransferee accompanied by a deed ofassignment, donation or other form oftransfer

Effect of failure to mark “negotiable”: doesnot render it non-negotiable if it containswords of negotiability

ii. Negotiable

Sec. 5. A receipt in which it is stated thatthe goods received will be delivered to the

bearer or to the order of any person namedin such receiptNo provision shall be inserted in anegotiable receipt that it is non-negotiable.Such provision shall be void.

It is negotiated either by delivery orindorsement

When negotiable receipt not required to besurrendered

Estrada vs CAR (1961)

(No surrender needed if ordered by court) The SCordered the manager of Moncada BondedWarehouse to release shares in palay without thenecessity of producing and surrendering theoriginal of the warehouse receipts issued. The SCstated “our order must be carried out in themeantime that this cases have not been finallydecided in order to ameliorate the precarioussituation in which said petitioners find themselves.”

Duplicate Receipts

Sec. 6. When more than one negotiablereceipt is issued for the same goods, theword “duplicate” shall be plainly placedupon the face of every such receipt, exceptthe first one issued. A warehouseman shallbe liable for all damages caused by hisfailure to do so to any one who purchasedthe subsequent receipt for value supposingit to be an original, even though thepurchase be after the delivery of the goodsby the warehouseman to the holder of theoriginal receipt.

Negotiable vs Non-negotiable receipts37

Non-Negotiable Negotiable

If goods are sold byassignment, assignee mustadvise warehouseman.Until he does, his rightsmay be defeated by asubsequent attachingcreditor, or a subsequentlevy on execution, or avendor’s lien or stoppage intransitu that could beenforced against theassignor

As long as the goodscovered by anegotiablewarehouse receipt,these goods may notbe attached etc.

Rights of the transferee:1. Title of the goods, asagainst the transferor(merely steps into theshoes)2. Right to notify thewarehouseman of thetransfer and acquire thedirect obligation of thewarehouseman to hold thegoods for him

Rights of the personto whom it isnegotiated (holder):1. Title to the goodsof the personnegotiating thereceipt and title ofthe person to whoseorder the goods wereto be delivered2. Direct obligation ofthe warehousemanto hold possession ofthe goods for him, asif the warehousemandirectly contracted

37The comparison between negotiable versus non-

negotiable warehouse receipts was asked in 2007, 1988,1984, 1983 and 1982.



Non-Negotiable Negotiable

with him

Negotiation defeatsthe lien of the sellerof the goods (sec. 9)

Goods represented can besubject to attachment orlevy by execution (Sec. 42)

Goods representedcannot be subject toattachment or levyby execution, unlessin propercircumstances (Sec.25)

38

» Deliver to X – this is non-negotiable. Tosell the goods, the warehouse receiptmust be assigned

» Deliver to X or order - this isnegotiable. The goods can be sold byspecial endorsement and delivery

» Deliver to X or bearer- this isnegotiable because it is deliverable tobearer. The goods can be sold bydelivery.

Lost/destroyed receipts

Sec. 14. Lost / destroyed receiptsWhere a negotiable receipt has been lost /destroyed, a court may order the deliveryof the goods upon

» satisfactory proof of loss/destruction

» giving of a bond with sufficientsureties to be approved by thecourt to protect the warehousemanfrom any liability or expense, whichhe or any person injured by suchdelivery may incur by reason of theoriginal receipt remainingoutstanding

A court may also order payment ofwarehouseman’s reasonable costs andcounsel fees.

The delivery of goods shall not relieve thewarehouseman from liability to a person towhom the negotiable receipt has been/shallbe negotiated for value without notice ofthe proceedings/delivery of goods.

4. Assignment and Negotiation

Sec 41. A person to whom a negotiable receipt hasbeen duly negotiated acquires thereby:

a. Such title to the goods as the personnegotiating the receipt to him had or hadability to convey to a purchaser in goodfaith for value, and also such title to thegoods as the depositor or person to whoseorder the goods were to be delivered by theterms of the receipt had or had ability toconvey to a purchaser in good faith forvalue, and

b. The direct obligation of the warehousemanto hold possession of the goods for himaccording to the terms of the receipt asfully as if the warehouseman andcontracted directly with him.

38Sec. 25 was asked in 1999 and 1981.

Note: Negotiable Warehouse Receipt is differentfrom a Negotiable Instrument

Note: Negotiation takes effect as of the time whenthe indorsement is actually made.

NegotiableInstruments

Negotiable WarehouseReceipts

Allow negotiation

If deliberately altered,it becomes null andvoid

If altered, it is still valid,but can be enforced onlyaccdg to its original tenor

Subject is money Subject is merchandise

Object of value is theinstrument itself

Object of value is thegoods deposited

Liability ofintermediate parties issecondary (NIL)

Liability of intermediateparties is none (for failureto deliver goods)

If originally payable tobearer, it will alwaysremain so even if it isendorsed specially orin blank

If originally payable tobearer but is endorsedspecially, it will becomedeliverable to order andcan only be negotiated byindorsement and delivery

Holder in due coursemay obtain a titlebetter than that whichthe party negotiatingto him had

Endorsee, even if a holderin due course, obtainsonly such title as theperson negotiating hadover the goods

Who may negotiate a warehouse receipt:» its owner» any person to whom the possession

or custody of the receipt has beenentrusted by the owner, if, by theterms of the receipt, the goods aredeliverable to the person to whom thepossession or custody of receipt hasbeen entrusted or in such a form that itmay be negotiated by delivery (Sec.40)

Warranties:» that receipt is genuine» legal right to negotiate» no knowledge of defects that may

impair receipt» right of transfer to title over goods

and that the goods are merchantable The indorser does not guarantee that the

warehouseman will comply with hisduties (Sec. 45)

Creditor receiving the warehouse receiptwhich is given as a collateral makes nowarranty (Sec. 46)

5. Rights and Duties of a Warehouseman39

5.1. Rights» Degree of Care

39The obligation and liabilities of a warehouseman was

asked in 200, 1999, 1998, 1993, 1991, 1984, 1989,1980, 1978 and 1977.



Sec 3. A warehouseman may insert in a receiptissued by him any other terms and conditionsprovided that such terms and conditions shallnot:

xxxa) in any wise impair his obligation to exercise

that degree of care which a reasonablycareful man would exercise in regard tosimilar goods of his own

General Rule: Warehouseman is requiredto exercise such degree of care which areasonable careful owner would exerciseover similar goods of his own. He shall beliable for any loss or injury to the goodscaused by his failure to exercise such care.

Exception: He shall not be liable for anyloss or injury which could not have beenavoided by the exercise of such care.

Exception to the exception: He may limithis liability to an agreed value of theproperty received in case of loss. Hecannot stipulate that he will not beresponsible for any loss caused by hisnegligence.

» To be paid

» In case of non-payment, to exercise his lienon the goods deposited

» To refuse delivery in proper legalcircumstances

5.2. Duties» Issue a warehouse receipt in the

required form for goods received

» Obligation to Deliver Goods

Sec 8. A warehouseman, in the absence ofsome lawful excuse provided by this Act, isbound to deliver the goods upon a demandmade either by the holder of a receipt for thegoods or by the depositor; if such demand isaccompanied with:

1. an offer to satisfy the warehouse man’slien

2. an offer to surrender the receipt, ifnegotiable, with such indorsements aswould be necessary for the negotiationof the receipt; and

3. a readiness and willingness to sign,when the goods are delivered, anacknowledgement that they have beendelivered, if such signature is requestedby the warehouseman.

The burden shall be upon the warehouseman toestablish the existence of a lawful excuse forsuch refusal.

General Rule: a demand should be madeon the warehouseman in order that theduty to deliver the goods will arise

Exception: when the warehouseman hasrendered it beyond his power to deliver thegoods, demand may be dispensed with[Art. 1169(3), Civil Code]

Sec 9. A warehouseman is justified indelivering the goods to one who is:

1. the person lawfully entitled to thepossession of the goods, or his agent;

2. a person who is either himself entitledto delivery by the terms of a non-negotiable receipt issued for the goods,or who has written authority from theperson so entitled either indorsed uponthe receipt or written upon anotherpaper; or

3. a person in possession of a negotiablereceipt by the terms of which the goodsare deliverable to him or order, or tobearer, or which has been indorsed tohim or in blank by the person to whomdelivery was promised by the terms ofthe receipt or by his mediate orimmediate indorser.

Sec. 10. When a warehouseman delivers thegoods to one who is not in fact lawfully entitledto the possession of them, the warehousemanshall be liable as for conversion to all having aright of property or possession in the goods ifhe delivered the goods otherwise than asauthorized by (b) and (c) of Sec 9

Though he delivered the goods as authorizedby said subdivisions he shall be so liable, ifprior to such delivery he had either:

1. been requested, by or on behalf of theperson lawfully entitled, not to makesuch delivery or

2. had information that the delivery aboutto be made was to one not lawfullyentitled

Conversion- an unauthorized assumption and exercise

of the right of ownership over goods belongingto another through the alteration of theircondition or the exclusion of the owner’s right(Bouvier’s Law Dictionary)

Sec. 17.40

If more than one person claims the

title/possession of the goods, thewarehouseman may, either as a defense to anaction or as an original suit, require all knownclaimants to interplead.

Sec. 18. If:1. someone other than the depositor or

person claiming under him has a claimto the title or possession of goods AND

2. the warehouseman has information ofsuch claim

the warehouseman shall be excused fromliability for refusing to deliver the goods untilhe has had:

2. reasonable time to ascertain thevalidity of the adverse claim OR

3. bring legal proceedings to compelclaimants to interplead

Sec. 18 not applicable to cases where thewarehouseman himself makes a claim tothe goods (67 C.J. 536)

In case there are adverse claimants, thewarehouseman can refuse to deliver thegoods to anyone of them until he has had

40This topic on adverse claimants was asked in 2005 and

1975.



reasonable time to ascertain the validity ofthe various claims; he is not excused fromliability in case he makes a mistake(Comments and Cases on CreditTransactions – De Leon, 2002 ed.)

Original action or counterclaim forinterpleader, whichever is appropriate. Insuch case, the warehouseman will berelieved from liability in delivering thegoods to the person found by the court tohave a better right (Comments and Caseson Credit Transactions – De Leon, 2002ed.)

Other instances when the warehousemanmay refuse to deliver:

» when the holder of the receipt doesnot satisfy the conditionsprescribed in Sec. 8

» when the warehouseman has legaltitle in himself on the goods, suchtitle or right being derived directlyor indirectly from the transfer madeby the depositor at the time orsubsequent to the deposit forstorage, or from thewarehouseman’s lien (Sec. 16)

General rule: The warehouseman cannotrefuse to deliver on the ground that he ownsthe goods (bailee cannot assert title to thegoods entrusted to him).Exceptions: In the 2 cases mentioned above

» Where the goods have already beenlawfully sold to third persons tosatisfy the warehouseman’s lien ordisposed of because of theirperishable nature (Sec. 36)

» In the valid exercise of thewarehouseman’s lien (Sec. 31)

» The warehouseman will not berequired to deliver the goods if suchhad been lost. But this is withoutprejudice to liabilities which may beincurred by him due to such loss.

» On commingling of Goods

General Rule :Sec. 22 A warehouseman shall keep the goods sofar separate from

1. the goods of other depositors and2. from other goods of the same

depositor for which a separatereceipt has been issued

as to permit at all times the identification andredelivery of the goods deposited.

Exception:Sec. 23.

1. If authorized by agreement or custom and2. Goods are fungible

the warehouseman may mingle with other goods ofthe same kind and grade.

The various depositors shall own the entire massand each shall be entitled to such portion as theamount deposited by him bears to the whole.

The warehouseman shall be severallyliable to each depositor for the care andredelivery of his share of such mass tothe same extent and under the same

circumstances as if the goods had beenkept separate.

» To insure the goods in propercircumstances Where the law provides Where it was an inducement for the

depositor to enter into the contract Established practice Where the warehouse receipt

contains a representation to thateffect

» To mark a non-negotiable warehousereceipt as such

» To mark as such the duplicates of anegotiable warehouse receipt

» To give the proper notice in case ofsale of the goods as provided in the law

» To take up and cancel the warehousereceipt when the goods are delivered

» Other Duties If warehouseman fails to cancel receipt

when he delivers goods, he is liable ifreceipt should turn up again (Sec 11)

Warehouseman should record partialdelivery on receipt, or else he is liableon entire receipt (Sec 12)

If alteration is authorized,warehouseman is liable as altered. Ifnot authorized, warehouseman is liableas originally issued (Sec 13)

Effects of alteration:

Alteration immaterial(tenor of receipt notchanged)

(WON fraudulent; WONauthorized)warehouseman is liableon the altered receiptaccdg to its originaltenor

Alteration material butauthorized

Warehouseman is liableaccdg to its terms asaltered

Material alterationinnocently made

Liable accdg to itsoriginal tenor

Material alterationfraudulently made

Liable accdg to theoriginal tenor to apurchaser of receipt forvalue without notice andeven to the alterer andsubsequent purchaserswith notice (except thatliability is limited only todelivery as he isexcused from anyliability)

A fraudulent alteration cannot divestthe title of the owner of the storedgoods and the warehouseman is liableto return them to the owner

A bona fide holder acquires no right tothe goods under a lost or stolennegotiable receipt or to which theindorsemant of the depositor has beenforged



Warehouseman is liable for issuing receiptfor non-existing goods or misdescribedgoods (Sec. 20)

Effect of misdescription of goods: Warehouseman is under the obligation

to deliver the identical propertystored with him and if he fails to doso, he is liable directly to the owner.

As against a bona fide purchaser of awarehouse receipt, the warehousemanis estopped from denying that hehas received the goods described inthe receipt

If the description consists merely ofmarks or label upon the goods or uponthe packages containing them, thewarehouseman is not liable even ifthe goods are not of the kind asindicated in the marks or labels.

Warehouseman is estopped to set up titlein himself (Sec 16)

Non-delivery or goods do not correspond todescription => warehouseman is liable

6. Warehouseman’s Lien

Sec. 27. A warehouseman shall have a lien on thegoods deposited or on the proceeds thereof for

1. all lawful charges for storage andpreservation of goods

2. all lawful claims for moneyadvanced, interest, insurance,transportation, labor, weighing,coopering, and other charges in relationto such goods

3. all reasonable charges for noticeand advertisements of sale

4. sale of goods where default has beenmade in satisfying the warehouseman’slien

In case of a negotiable receipt, the chargesthat are present at the time of the issuance ofthe receipt must be so stated in the receiptwith the amounts thereof specified. If theexisting charges are not stated, thewarehouseman shall have no lien thereon,except only for charges for storage of thosegoods subsequent to the date of the receipt.

Sec. 28. A warehouseman’s lien may be enforced:1. against all goods belonging to the

person who is liable as debtor for theclaims

2. against all goods belonging to otherswhich have been deposited at any timeby the person who is liable as debtor forthe claims

If such person had been soentrusted with the possession ofgoods such that a pledge by him atthe time of the deposit to one whotook the goods in good faith forvalue would have been valid.

Sec. 29. A warehouseman loses his lien:1. by surrendering possession of the goods2. by refusing to deliver the goods when a

demand is made with which he is bound tocomply

Sec. 31. A warehouseman having a valid lienagainst the person demanding the goods mayrefuse to deliver the goods until the lien is satisfied.

The warehouseman’s lien is possessory innature (PNB vs Judge Se)

Involuntary parting with possession of goodsordinarily does not result in loss of his lien by awarehouseman (93 C.J.S. 59)

A warehouseman who has released his lien bythe surrender of the goods may not thereafterclaim a lien on other goods of the samedepositor for unpaid charges on the goods ifthe goods were delivered to him under differentbailments

The loss of the warehouseman’s lien does notnecessarily mean the extinguishments of thedepositor’s obligation to pay the warehousingfees and charges which subsists to be apersonal liability

Remedies discussed in PNB vs. Sajo, 292 SCRA202 (1998)

» To refuse to deliver the goods untilhis lien is satisfied (Sec 31)

» To sell the goods by public auctionand apply the proceeds to the valueof the lien (Sec 33 and 34)

Effects: the warehouseman is not

liable for non-delivery even ifthe receipt given for thegoods were negotiated (Sec.36)

where the sale was madewithout the publicationrequired and before the timeprovided by law, such sale isvoid and the purchaser of thegoods acquires no title inthem (Eastern Paper MillsCo., Inc. vs RepublicWarehousing Corp, 170 SCRA595)

» By other means allowed by law to acreditor against his debtor, to collectfrom the depositor all charges andadvances which the depositorexpressly or impliedly contracted withthe warehouseman to pay (Sec 32)

» Other remedies allowed by law toenforce a lien against personalproperty (Sec 35)

The warehouseman may refuse to delivergoods to any holder of the receipt when thestorage fee stipulated in the receipt has not yetbeen paid

PNB vs. Se (1996)

While the PNB is entitled to the stocks of sugar asthe endorsee of the quedans, delivery to it shall beeffected only upon payment of the storage fees.Imperative is the right of the warehouseman todemand payment of his lien at this juncture,because in accordance with Section 29 of theWarehouse Receipts Law, the warehouseman loseshis lien upon goods by surrendering possessionthereof. In other words, the lien may be lost wherethe warehouseman surrenders the possession ofthe goods without requiring payment of his lien,because a warehouseman's lien is possessory innature.



But the warehouseman cannot refuse to deliverthe goods because of an adverse claim ofownership [PNB vs. Sayo, 292 SCRA 202(1998)]

Rules on attachment/execution of goodsdeposited:» In case of negotiable receipt, the goods

cannot be attached or levied in executionunless: receipt is first surrendered its negotiation is enjoined receipt is impounded by the court (Sec.

25)Creditor’s remedies: seek for the

attachment of the receipt or seek aid fromcourts to compel the debtor to satisfyclaims by means allowed by law in regardto property which cannot readily beattached or levied upon by ordinary process(Sec. 26)

Not applicable: If the depositor is not the owner of the

goods (thief) or one who has no rightto convey title to the goods bindingupon the owner

Actions for recovery or manual deliveryof goods by the real owner

Where attachment is made prior to theissuance of receipt

Rights acquired by attaching creditorscannot be defeated by the issuance of anegotiable receipt of title thereafter(International Breeding Co. vs TerminalWarehouse Co., 126 Atl. 902)

» In case of a non-negotiable receipt, thegoods can be attached, provided it is doneprior to the notification of thewarehouseman of the transfer (Sec. 42);reason: absent such notice, both thewarehouseman and the sheriff have a rightto assume that the goods are still owned bythe person whose name appears in thereceipt

7. Liabilities41

Civil liabilities Criminalliabilities

Warehousemanor his agent

For damagessuffered forfailure tocomply withlegal duties

1. issuance ofreceipts forgoods notreceived (Sec.50)2. issuance ofreceiptcontainingfalsestatement(Sec. 51)3. issuance ofduplicatenegotiablewarehousereceipt notmarked assuch (Sec. 52)4. issuance of

41Please read footnote 6.

Civil liabilities Criminalliabilities

a negotiablewarehousereceipt forgoods ofwhich he is anowner withoutstating suchfact ofownership(Sec. 51)5. delivery ofgoods withoutobtainingnegotiablewarehousereceipt (Sec.54)

3rd persons Negotiation ofwarehousereceipt issuedfor mortgagedgoods withintent todeceive

General Bonded Warehouse Act

(Act 3893 as amended by RA 247)

1. Purpose

An act to regulate the business of receivingcommodities for storage, giving the directorof Commerce and Industry the duty toenforce if, providing penalties for violationof the provisions, exempting cooperativemarketing associations of commodityproducers from application thereof.

To protect depositors by giving them adirect recourse against the bond filed bythe warehouseman in case of the latter’sinsolvency

To encourage the establishment of morewarehouses

2. Definition of Terms

2.1. Warehouse

Every building, structure, or other protectedenclosure in which commodities are kept forstorage.

2.2. Warehouseman

A person engaged in the business receivingcommodities for storage

2.3. Receipt

Any receipt issued by a warehouseman forcommodities delivered to him.

Gonzales vs Go Tiong (1958)

The kind or nature of the receipts issued byhim for the deposits is not very material, muchless decisive. Though it is desirable thatreceipts issued by a bonded warehousemanshould conform to the provisions of the



Warehouseman Receipts Law, said provisionsare not mandatory. Under Section 1 of theWarehouse Receipts Act, the issuance of awarehouse receipt in the form provided by it ismerely permissive and directory and notobligatory.

Commodities» Any farm, agricultural or horticultural

product;» animal and animal husbandry or

livestock, dairy or poultry product;» water, marine or fish product;» mineral, chemical, drug or medicinal

product;» forestry product; and any raw,

processed, manufactured or finishedproduct or by-product

» good, article, or merchandise, either ofdomestic or of foreign production ororigin, which may be traded or dealt inopenly and legally.

3. Business of Receiving Commodities for

Storage

The business of receiving commodities for storageshall include any contract or transaction wherein

1. the warehouseman is obligated toreturn the very same commoditiesdelivered to him or pay its value;

2. the commodities delivered is to bemilled for and on account of theowner thereof;

3. the commodities delivered iscommingled with the commoditiesdelivered by or belonging to otherpersons and the warehouseman isobligated to return the commodities ofthe same kind or pay its value.

The kinds of commodity to be deposited mustbe those, which may be traded or dealt inopenly and legally. Thus, illegal and prohibitedgoods may not be validly received (Sec. 2)

The warehouseman is not covered by law if theowner merely rents space to a certain group ofpersons because the law covers warehouse thataccepts goods: (a) storage, (b) milling andcommingling with the obligation to return thesame quantity or to pay their value.

Limjoco vs Director of Commerce (1965)

Any contract or transaction wherein the palaydelivered is to be milled for and on account of theowner shall be deemed included in the business ofreceiving rice for storage. In other words, it isenough that the palay is delivered, even if only tohave it milled.In this case it is a fact that palay is delivered toappellant and sometimes piled inside her "camalig"in appreciable quantities, to wait for its turn in themilling process. This is precisely the situationcovered by the statute.The main intention of the law-maker is to giveprotection to the owner of the commodity againstpossible abuses (and we might add negligence) ofthe person to whom the physical control of hisproperties is delivered.

4. Requirement of License

No person shall engage in the business of receivingcommodities for storage without first securing alicense therefore from the Director of the Bureau ofCommerce and Industry. Said license shall beannual and shall expire on the thirty-first day ofDecember.

Any person applying for a license shall set forth inthe application

the place or places where the businessand warehouse are to be established orlocated and

the maximum quantity of commoditiesto be received.

There shall be imposed an annual license fee of: P50 for the first 1000 square meters of

protected enclosure or 1000 cubic metersof storage space, or any fraction of suchenclosure or space, and

2 ½ centavos for each additional squaremeter or cubic meter.

5. Requirement of Bond

The application shall be accompanied by a cashbond or a bond secured by real estate or signed bya duly authorized bonding company at not lessthan 33 1/3% of the market value of the maximumquantity or commodities to be received.Said bond shall be so conditioned as to respond forthe market value of the commodities actuallydelivered and received at any time thewarehouseman is unable to return the commoditiesor to pay its value.The bond shall be approved by the Director of theBureau of Commerce and Industry before issuing alicense under this Act.Whenever the Director shall determine that a bondapproved by him has become insufficient, he mayrequire an additional bond or bonds to be given bythe warehouseman concerned.Any person injured by the breach of any obligationto secure which a bond is given, shall be entitled tosue on the bond in his own name in any court ofcompetent jurisdiction to recover the damages hemay have sustained by such breach.

Nothing contained herein shall except any propertyof assets of any warehouseman from being sued onin case the bond given is not sufficient to respondfor the full market value of the commoditiesreceived by such warehouseman.

6. Requirement of Insurance

Every person licensed to engage in the business ofreceiving commodities for storage shall insure thecommodities so received and stored against fire.

For palay and corn license, a bond with theNational Grains Authority is required; also aninsurance cover is required

7. Duties of Bonded Warehouseman

7.1. Storage of Commodities

Every warehouseman shall receive for storage,so far as his license and the capacity of hiswarehouse permit, any commodities, of thekind customarily stored therein by him, which



may be tendered to him in a suitable conditionfor warehousing, in the usual manner and inthe ordinary and usual course of business,without making any discrimination betweenpersons desiring to avail themselves ofwarehouse facilities.

7.2. Give the necessary bond

7.3. Insure against fire the commodityreceived (Sec. 6)

7.4. Record-Keeping and ReportingRequirements

Every warehouseman shall keep a completerecord of:

the commodities received by him, the receipts issued therefor of the

withdrawals, the liquidations and all receipts returned to

and cancelled by him.

He shall make reports to the Director of Bureauof Commerce and Industry concerning hiswarehouse and the conditions, contents,operations, and business.

7.5. Observe rules and regulations of theBureau of Domestic Trade (Sec. 9)

A person injured by the breach of thewarehouseman may sue on the bond putup by the warehouseman to recoverdamages he may have sustained on countof such breach. In case the bond isinsufficient to cover full market value of thecommodity stored, he may sue on anyproperty or assets of the warehousemannot exempt by law from attachment andexecution (Sec. 7)

8. Warehouse Receipts Law vs. General

Bonded Warehouse Act

Warehouse ReceiptsLaw

General BondedWarehouse Act

Prescribes the mutualduties and rights of awarehouseman whoissues warehousereceipts, and hisdepositor, and covers allwarehouses whetherbonded or not

Regulates andsupervises warehouseswhich put up a bond

*Bar Review Materials in Commercial Law - JorgeMiravite, 2002 ed.

9. Liabilities

a. civil: breach of obligations secured by the bondb. criminal:

i. engaging in business covered by the Act inviolation of the license requirement (Sec.11)

ii. receiving a quantity of commodity greaterthan its capacity or that specified in thelicense, if the goods deposited are lost ordestroyed (Sec. 12)

iii. connivance with a warehouseman for thepurpose of evading the license requirement(Sec. 13)

1.III

Trust Receipts Law

(PD 115)

1. Definition of Trust Receipt

As a document, it is a written or printeddocument signed by the entrustee in favor ofthe entruster whereby the latter releases thegoods to the possession of the former upon theentrustee’s promise to hold said goods in trustfor the entruster, to sell or dispose of thegoods, and to return the proceeds thereof tothe extent of what is owing to the entruster;OR to return the goods, if unsold or nototherwise dispose of (Sec. 4)

Trust Receipt transaction – a separate andindependent security transaction intended toaid in financing importers and retail dealerswho do not have sufficient funds to finance theimportation/purchases and who may not beable to acquire credit except throughutilization, as collateral, of the merchandiseimported/purchased (Nacu vs. CA; South CityHome vs. BA Finance)

Goods are owned by the bank, and are onlyreleased to the importer in trust after the grantof the loan. The bank acquires a securityinterest in the goods as holder of a securitytitle for the advances it made to the entrustee.

Entrustee must deliver money or return unsoldgoods to entrustor

Bank is preferred over other creditors. Bank is also not liable to buyer of goods as

vendor Purchaser from entrustee gets good title. No particular form is required for trust receipt,

but it must substantially contain:» Description of the goods, documents or

instruments subject of the TR» Total invoice value of the goods and the

amount of the draft to be paid by theentrustee

» Undertaking or a commitment of theentrustee to hold in trust for the entruster

the goods, documents orinstruments therein described

to dispose of them in themanner provided for in the trustreceipt

to turn over the proceeds of thesale of the goods, documents orinstruments to the entruster to theextent of the amount owing to theentruster or as appears in the trustreceipt or to return the goods,documents or instruments in theevent of their non-sale within theperiod specified therein (Sec. 5)

» the trust receipt may contain other termsand conditions agreed upon by the partiesin addition to those hereinaboveenumerated provided that such terms andconditions shall not be contrary toprovisions of this Decree, any existing laws,public policy or morals, public order orgood customs (Sec. 5)

» trust receipts are denominated in Philippinecurrency or acceptable and eligible foreigncurrency



2. Purposes of the Law

To encourage the use of and promotetransactions based on trust receipts; regulatethe use of trust receipts; encourage andpromote the use of trust receipts as anadditional and convenient aid to commerce andtrade

To regulate trust receipt transactions in orderto assure the protection of the rights and theenforcement of the obligations of the partiesinvolved

To declare the misuse or misappropriation ofgoods or the proceeds realized from the sale ofgoods released under trust receipts as anoffense punishable under Art. 315, RPC (Sec.2)

To punish the dishonesty and abuse ofconfidence in the handling of money or goodsto the prejudice of another regardless ofwhether or not the latter is the owner(Colinares vs. CA, 2000)

3. Nature of Trust Receipt Transaction

Sec 4. Any transaction by and between anentruster and an entrustee, whereby the entruster, who owns/holds absolute title or

security interests over certain specified goods,documents or instruments

releases the same to the possession of theentrustee upon the latter's execution anddelivery of a signed document called a "trustreceipt" wherein the entrustee binds himself

» to hold the designated goods,documents or instruments in trust forthe entruster and

» to sell or otherwise dispose of thegoods, documents or instruments withthe obligation to turn over to theentruster the proceeds or the goods,documents or instruments themselvesif they are unsold or for other purposessubstantially equivalent to any of thefollowing:

In the case of goods or documents to sell / procure their sale; or to manufacture or process the

goods with the purpose ofultimate sale: Provided that theentruster shall retain title overthe goods whether in itsoriginal or processed form untilthe entrustee has complied fullywith his obligation under thetrust receipt; or

to load, unload, ship or transhipor otherwise deal with them ina manner preliminary ornecessary to their sale; or

In the case of instruments, to sell or procure their sale or

exchange; or to deliver them to a principal;

or to effect the consummation of

some transactions involvingdelivery to a depository orregister; or

to effect their presentation,collection or renewal

The sale of goods/documents/instruments by aperson in the business of selling such for profitwho, at the outset of the transaction, has, asagainst the buyer,

general property rights in such goods/documents/instruments, or

who sells the same to the buyer on credit,retaining title or other interest as securityfor the payment of the purchase price

does not constitute a trust receipt transaction andis outside the purview and coverage of this Decree.

Notes : This is not a simple loan transaction between a

creditor and debtor-importer The law warrants the validity of the entruster’s

security interest as against the creditors of thetrust receipt agreement.

PD 115 Civil Code

Although the entrusteeis not the owner of thegoods, anyone who buysfrom him acquires goodtitle over the goods

Buyer acquires onlywhatever title the sellerhas at the time the saleis perfected (Art 1505)

Even if the entrustee isnot the owner, he bearsrisk of loss while thegoods are in hispossession

Generally, owner bearsloss

Landl & Co. (Phil) Inc. vs Metropolitan Bank(2004)

A trust receipt agreement is merely a collateralagreement, the purpose of which is to serve assecurity for a loan.

Allied Banking vs Ordonez (1990)(Capital goods are covered.)

Applies even to goods not destined for sale ormanufacture, and would include items obtained torepair and maintain equipment used in business

4. Trust Receipts as Against Other

Transactions

(Notes on Selected Commercial Laws: A Guide forBar Reviewees, Tristan Catindig, 2003 ed.)

Othertransactions

Trust ReceiptTransaction

ChattelMortgage

subjects theproperty to alien

no lien is createdover the property

Pledge financerpossessesthe property

person financedpossesses theproperty

ConditionalSale

There is asale of thepropertyfrom theseller to thebuyer

There is no sale ofthe property fromthe entruster tothe entrustee

Consignment 1.Bipartite2.Consignorretainsownership ofthe property

1. Tripartite2. Seller does notretain title to theproperty



Colinares vs CA (2000)(Loan vs trust receipts transaction)

This situation belies what normally obtains in apure trust receipt transaction where goods areowned by the bank and only released to theimporter in trust subsequent to the grant of theloan. The bank acquires a “security interest” in thegoods. The ownership of the merchandisecontinues to be vested in the person who hadadvanced payment until he has been paid in full, orif the merchandise has already been sold, theproceeds of the sale should be turned over to him.The bank takes full title to the goods and continuesto hold that as his indispensable security until thegoods are sold and the vendee is called upon topay for them. Trust receipts partake of the natureof a conditional sale where the importer becomesabsolute owner of the imported merchandise assoon as he has paid its price.

Consolidated Bank vs CA (2001)(Simple loan vs trust receipt transaction)

The delivery to Corporation of the goods subject ofthe trust receipt occurred long before the trustreceipt itself was executed. This situation isinconsistent with what normally obtains in a puretrust receipt transaction, wherein the goods belongin ownership to the bank and are only released tothe importer in trust after the loan is granted.

Robles vs CA (1991)(Bipartite transactions are covered).

In deciding WON the delivery trust receipts covereda trial sale transaction or one that fell under thetrust receipts law, the SC found that the requisitesunder Sec 4 were met:

1) Paramount retained ownership of the officeequipment covered by the receipts;

2) possession of the goods was subject to afiduciary obligation to return them within aspecified period or to account for theproceeds thereof

5. Parties

5.1. Entruster» lender/financier» person holding title over the goods,

documents or instruments subject of atrust receipt transaction; releasespossession of the goods upon executionof trust receipt

» not the owner of the goods, but merelya holder of security interest

» if it is made to appear in the trustreceipt as the owner of the goodspurchased, it is merely theoretical, anartificial expedient and more of fictionthan fact (Garcia vs. CA; Vintola vs.IBAA; PNB vs. Pineda); see, however,the contrary view of Prof. Catindig andthe rulings in Colinares vs. CA andPrudential Bank vs. IAC

5.2. Entrustee» borrower/buyer/importer» person to whom the goods are

delivered for sale or processing in trust,with the obligation to return the

proceeds of sale of the goods or thegoods themselves to the entruster

» the owner of the goods purchased; infact, the law imposes on him the risk ofloss of the goods. Res perit domino.

DBP vs. Pudential Bank, G.R. 143772,Nov. 22, 2005

The entrustee has NO authority to mortgage goodscovered by trust receipt.

5.3. Seller of the goods» not strictly and actually a party to the

trust receipt transaction, but a party tothe contract of sale with thebuyer/importer (entrustee)

6. Rights/Duties of the Entruster

6.1. Rights of Entruster

» Sec.7. The entruster shall be entitled to the proceeds from the sale of the

goods, documents or instruments tothe extent of the amount owing to theentruster or as appears in the trustreceipt, or

to the return of the goods, documentsor instruments in case of non-sale, and

to the enforcement of all other rightsconferred on him in the trust receipt

» Extent of security interest as against the innocent purchaser

for value – not preferred (Sec. 11) as against creditors of entrustee –

preferred (Sec. 12)

Prudential Bank vs NLRC (1995)(Nature of interest of entruster in goods covered)

The security interest of the entruster is notmerely an empty or idle title. To a certain extent,such interest becomes a "lien" on the goodsbecause the entruster's advances will have to besettled first before the entrustee can consolidatehis ownership over the goods. The law warrantsthe validity of petitioner's security interest asagainst all creditors of the trust receiptagreement. The only exception is when theproperties are in the hands of an innocentpurchaser for value and in good faith.

Prudential Bank vs NLRC (1995)The goods covered by trust receipts cannot belevied upon by creditors of the entrustee.

The entruster may cancel the trust and takepossession of the goods, documents orinstruments subject of the trust or of theproceeds realized therefrom at any time upondefault or failure of the entrustee to complywith any of the terms and conditions of thetrust receipt or any other agreement betweenthe entruster and the entrustee.

The entruster in possession of the goods,documents or instruments may, on or afterdefault, give notice to the entrustee of theintention to sell, and may, not less than fivedays after serving or sending of such notice,sell the goods, documents or instruments atpublic or private sale, and the entruster may,at a public sale, become a purchaser.



The proceeds of any such sale, whether publicor private, shall be applied

to the payment of the expensesthereof;

to the payment of the expenses of re-taking, keeping and storing the goods,documents or instruments;

to the satisfaction of the entrustee'sindebtedness to the entruster.

The entrustee shall receive any surplus butshall be liable to the entruster for anydeficiency.

6.2. Duties of Entruster» To give possession of the goods to the

entrustee» To give at least 5 days notice to the

entrustee of the intention to sell the goodsat an intended public sale

State Investment vs CA (2000)(Entruster not entitled to proceeds of sale of

goods not covered by trust receipt)

The evidence for PNB fails to establish that thevehicles sold to the Francos were among thosecovered by the trust receipts. Neither the trustreceipts covering the units imported nor thecorresponding bills of lading contain the chassisand engine numbers of the vehicles in question.

7. Rights/Duties of the Entrustee

7.1. Rights of Entrustee

» To receive the surplus from the publicsale

» To have possession of the goods as acondition for his liability under the TrustReceipt Law (Ramos vs. CA)

7.2. Duties of Entrustee

Sec. 9.» hold the goods, documents or

instruments in trust for the entruster andshall dispose of them strictly in accordancewith the terms and conditions of the trustreceipt;

» receive the proceeds in trust for theentruster and turn over the same to theextent of the amount owing to theentruster or as appears on the trustreceipt;

» insure the goods for their total valueagainst loss from fire, theft, pilferage orother casualties;

» keep said goods or proceeds separateand capable of identification;

» return the goods, documents orinstruments in the event of non-sale orupon demand;

» observe all other terms and conditionsof the trust receipt

Vintola vs IBAA (1987)(Liability of entrustee not extinguished by return

of goods to entruster)

IBAA did not become the real owner of the goods; it was merely the holder of a security title for

the advances it had made to the Vintolas. Thegoods remain the Vintolas’ own property. Thetrust receipt arrangement did not convert theIBAA into an investor. The fact that the Vintolaswere unable to sell the seashells does not affectIBAA's right to recover the advances made underthe Letter of Credit

7.3. Risk of Loss borne by entrustee

Sec. 10. The risk of loss shall be borne by theentrustee ; irrespective of whether or not it wasdue to the fault or negligence of the entrustee,shall not extinguish his obligation to the entrusterfor the value thereof.

7.4. Non-Liability of Entruster for Sale byEntrustee

Sec. 8. The entruster holding a security interestshall not, merely by virtue of such interest orhaving given the entrustee liberty of sale or otherdisposition of the goods, documents or instrumentsbe responsible as principal or as vendor under anysale or contract to sell made by the entrustee.

8. Purchaser in Good Faith

Acquisition by purchaser of goods in goodfaith

Sec 11. Any purchaser of goods from an entrusteewith right to sell, or of documents or instrumentsthrough their customary form of transfer, who buyssuch for value and in good faith from the entrustee,acquires said goods, documents or instruments freefrom the entruster's security interest.

9. Remedies Available

Failure to turn over proceeds of the sale ofgoods or to return unsold goods is a publicnuisance to be abated by the imposition ofpenal sanctions (Tiomico vs. Court of Appeals,1999).

The offense is malum prohibitum. There is noneed to prove damage to the entrustor.(Metropolitan Bank vs. Tonda, 2000), or intentto defraud (People vs. Cuervo, 1981)

Offense: estafa under Art 315 of the RevisedPenal Code.

Also, liable for damages under Art. 33, CC(Prudential vs. IAC, PP vs. Cuervo, MBTC vs.Tonda)

Effect of compliance:» before criminal charge – no criminal

liability» after charge, before conviction –

extinguishments of criminal liability Liability of entrustee accrues on his failure to

comply with his obligation to return. It is notabsolutely necessary that the entruster cancelsthe trust and take possession of the goods tobe able to enforce his rights under this law.

PD 115 allows the bank to take possession ofthe goods covered by the trust receipts. Thus,even though the bank took possession of thegoods covered by the trust receipts, theentrustees remained liable for the entireamount of the loans covered by the trustreceipts (Phil. Blooming vs. CA)

Lee vs Rodil (1989)



Acts involving the violation of trust receiptagreements occurring after 29 Jan 1973 wouldmake the accused criminally liable for estafa underpar1(b), Art 315 of the RPC, pursuant to theexplicit provision in Sec. 13 of P.D. 115.

Allied vs. Ordoñez

The penal provisions of PD 115 encompasses anyact violative of the obligation covered by the trustreceipt. It is not limited to transactions in goodswhich are to be sold, reshipped or stored, but alsoapplies to goods processed as a component of aproduct ultimately sold to the general public.

Sarmiento, Jr. vs. CA (2002)

The breach of obligation of a trust receiptagreement is separate and distinct from anycriminal liability for “misuse and/ormisappropriation of goods or proceeds realizedfrom the sale of goods, documents or instrumentsreleased under trust receipts”, punishable underSec. 13 of the Trust Receipts Law (PD 115) inrelation to Article 315(1) (b) of the Revised PenalCode. Being based on an obligation ex contractuand not ex delicto, the civil action may proceedindependently of the criminal proceedings institutedagainst petitioners regardless of the result of thelatter.

People vs Nitafan (1992)(Violation of PD 115 is an offense against public

order, not property)

The Trust Receipts Law punishes the dishonestyand abuse of confidence in the handling of moneyor goods - it does not seek to enforce payment ofthe loan. Thus, there can be no violation of a rightagainst imprisonment for non-payment of a debt.P.D. 115, like BP 22, punishes the act "not as anoffense against property, but as an offense againstpublic order.” Thus the law states that a breach ofa trust receipt agreement makes one liable forestafa.

Philippines Bank vs Ong (2002)

The Supreme Court ruled that a Memorandum ofAgreement entered into between the bank-entruster and entrustee extinguished the obligationunder the existing trust receipt because theagreement did not only reschedule the debts of theentrustee but it provided principal conditions whichare incompatible with the trust agreement. Hence,the liability for breach of the Memorandum ofAgreement would be purely civil in nature and nocriminal liability under the Trust Receipt Law can beimposed.

Prudential Bank vs. NLRC (1995)

Entrustor can:o cancel trust and take possession of the

goodso file a 3rd party claim or separate civil action

at any time upon default or failure ofentrustee to comply with terms andconditions of the trust agreement

Tupaz VI, et. al. vs. CA and BPI, G.R. 145578,Nov. 18, 2005

Here, BPI chose not to file a separate civil action torecover payment under the trust receipts. Instead,respondent bank sought to recover payment inCriminal Case Nos. 8848 and 8849. Although thetrial court acquitted petitioner Jose Tupaz, hisacquittal did NOT extinguish his civil liability. Hisliability arose not from the criminal act of which hewas acquitted (ex delicto) but from the trustreceipt contract (ex contractu) of 30 September1981. Petitioner Jose Tupaz signed the trustreceipt of 30 September 1981 in his personalcapacity. Acquittal in a criminal case for estafadoes not extinguish civil liability arising frombreach of trust receipt contract.


BANKING LAW COMMERCIAL LAW

General Banking Law of 2000

(RA 8791)

Section 1 – General Provisions

1.01. LONG TITLE

An act providing for the regulation of andorganization and operations of banks, quasi-banks,trust entities and for other purposes.

1.02. LAWS PRIMARILY APPLICABLE TO

DIFFERENT BANKS42

1. The General Banking Law (GBL) governs

a. Universal Banks (UB) (esp. Secs. 23-28)

b. Commercial Banks (KB) (esp. Secs. 29-32)

2. The GBL has suppletory application to

a. Thrift Banks (primarily governed by RA7906, the Thrift Banks Act)

b. Rural Banks (primarily governed by RA7353, the Rural Banks Act)

c. Cooperative Banks (primarily governedby RA 6938, the Cooperative Code)(Sec. 71)

Note: Sec 71: [1] For puposes of prescribing theminimum ratio which the net worth of a thrift bankmust bear to its total risk assets, the provisions ofSection 33 [should be Sec. 34] of the GBL shallgovern. [2] Although Sec. 71 provides that “Islamicbanks shall be governed by special laws.” It doesnot include Thrift Banks in the enumeration ofBanks to which the GBL has application.

3. The entry of foreign banks in the Phil.through the establishment of branches shallbe governed by the provisions of theForeign Banks Liberalization Act. Theconduct of offshore banking business in thePhil. shall be governed by PD 1034, the"Offshore Banking System Decree." (Sec.72)

1.03. POLICY OF THE GBL

The State recognizesa. the vital role of banks in providing an

environment conducive to the sustaineddevelopment of the national economy and

b. the fiduciary nature of banking thatrequires high standards of integrity andperformance.

The State shall promote and maintain a stableand efficient banking and financial system thatis globally competitive, dynamic and responsive

42This topic was asked in 1980 and 2002. Note the

characteristics or functions of these banks. Also, payattention to the limitations and restrictions on loans andcredit transactions which may be extended by the banks.

to the demands of a developing economy. (Sec.2)

1.04. BANKS, DEFINED: CORE BANKING

"Banks" shall refer to entities engaged in1. the lending of funds2. obtained in the form of deposits. (SubSec.

3.1) The “lending of funds obtained in the form of

deposits” is classical or core banking function ofmobilizing savings (through deposit-taking) andallocating resources (through lending). It washeld in the case of RP v Security Credit andAcceptance Corp (1967) that a bank is “amoneyed institute founded to facilitate theborrowing, lending and safe-keeping of moneyand to deal, in notes, bills of exchange andcredits…. Moreover, …an investment companywhich loans out the money of its customers,collects the interest and charges a commissionto both lender and borrower, is a bank. xxx anyperson engage in the business carried on bybanks of deposit, of discount, or of circulationis doing a banking business, although but oneof these functions is exercised.” In reality,however, banks do more than deposit-takingand lending. Secs. 29 to 53 of the GBLenumerate these other activities which can allbe conducted by a Universal Bank (UB). Whatis more, both a UB and a Commercial Bank(KB) can have equity interests in alliedenterprises. UBs can also be stockholders innon-allied enterprises and can even exercisethe powers of an investment house. (Morales)

1.05. QUASI-BANKS, DEFINED

“Quasi-banks" (QB) refer to entities engaged inthe borrowing of funds through the issuance,endorsement or assignment with recourse oracceptance of deposit substitutes (as defined inSec. 95 RA 7653, the New Central Bank Act)for purposes of relending or purchasing ofreceivables and other obligations. (last par ofSec. 4)

This is an inherent power of UBs and KBs. Thusthey do not require separate licensing orauthorization for this purpose. Thus, they cantake “deposit substitutes” for re-lending.(Morales)

1.06. DEPOSIT SUBSTITUTES

Deposit substitutes are- deposits other than savings,

demand/current, time/fixed deposits, butalso in the form of cash

- obtained from the public, i.e. 20 or morelenders at any one time

- obtained through the issuance,endorsement, or acceptance with recourseto, of debt instruments (including, but notlimited to banker's acceptances, promissorynotes, participations, certificates ofassignment, similar instruments withrecourse, and repurchase agreements)

- obtained for the purpose of relending orpurchasing of receivables and otherobligations. (Sec 95 NCBA; Subsec.X234.2.d Manual of Regulations for Banks)



Deposit substitute taking may be classified as acore-banking operation, especially in the caseof UBs and KBs, which are allowed, under Sec.6 of the GBL, to engage in Quasi-bankingactivities (more appropriately termed depositsubstitute operations, as there is nothing"quasi" about banks performing theseoperations themselves). Since a depositsubstitute is merely a product of the activitycalled Quasi-banking (deposit substituteoperations), deposit substitute taking may beconsidered a core banking function in the sensethat it mobilizes savings through deposit-substitute taking. It should likewise be notedthat the purpose of a deposit-substitute isrelending, which is also a core bankingfunction. (Morales)

The BSP supervises QBs, i.e. entities engagedin obtaining deposit substitutes. Thissupervision was premised on the finding by theJoint IMF-CBP Banking Survey Commission that“institutions… regularly engaged in the lendingof funds obtained from the public through theissuance of their own debt instruments (otherthan deposit instruments) [and] …beyond thepale of CB regulatory authority” weakened “to alarge extent the effectiveness of CB action inthe field of credit regulations.” This unregulatedsegment of the financial system was the“money market” that had developed since the1960s by what later became known as“investment houses.” The said money marketinvolved short-term instruments, and emergedin response to interest rate ceilings imposed bythe Usury Law. These ceilings then applied todeposits in banks but not to placements coursethrough the investment houses. Naturally,investors flocked to these houses for higheryields. Before long, the deposit generatingability of the banks was seriously underminedby the competition. In 1972, the hithertounfettered money market was called Quasi-banking and subjected to CB regulation, andfunds placed with quasi-banks were labeled as“deposit substitutes.” (Morales)

1.07. CLASSIFICATION OF BANKS

1. Universal banks (UB);2. Commercial banks (KB);3. Thrift banks, composed of:

a. Savings and mortgage banks,b. Stock savings and loan associations, andc. Private development banks,;

4. Rural banks;5. Cooperative banks;6. Islamic banks (under RA 6848, Charter of Al

Amanah Islamic Investment Bank of thePhils.);

7. Other classifications of banks as determined bythe MB of the BSP.

1.08. RULE ON BANKING OPERATIONS

No person or entity shall engage in bankingoperations or quasi-banking functions withoutauthority from the BSP. Persons or entitiesfound to be performing banking or quasi-banking functions without authority from theBSP shall be subject to appropriate sanctionsunder the NCBA and other applicable laws.(Sec. 6)

No person, association, or corporation unlessduly authorized to engage in the business of abank, QB, trust entity, or savings and loanassociation shall advertise or hold itself out asbeing engaged in the business of such bank,QB, trust entity, or association, or use inconnection with its business title, the word orwords "bank", "banking", "banker", "QB ","quasi-banking", "quasi-banker", "savings andloan association", "trust corporation", "trustcompany" or words of similar import ortransact in any manner the business of anysuch bank, corporation or association. (Sec.64)

An entity authorized by the BSP to perform UBor KB functions shall likewise have theauthority to engage in quasi-banking functions.(Sec. 6)

Note: The determination of whether a person orentity is performing banking or quasi-bankingfunctions without Bangko Sentral authority shall bedecided by the MB. To resolve such issue, the MBmay, through the appropriate supervising andexamining department of the BSP, examine,inspect or investigate the books and records ofsuch person or entity. Upon issuance of thisauthority, such person or entity may commence toengage in banking operations or quasi-bankingfunctions and shall continue to do so unless suchauthority is sooner surrendered, revoked,suspended or annulled by the BSP in accordancewith this Act or other special laws. The departmenthead and the examiners of the appropriatesupervising and examining department are herebyauthorized to administer oaths to any such person,employee, officer, or director of any such entityand to compel the presentation or production ofsuch books, documents, papers or records that arereasonably necessary to ascertain the facts relativeto the true functions and operations of such personor entity. Failure or refusal to comply with therequired presentation or production of such books,documents, papers or records within a reasonabletime shall subject the persons responsible thereforto the penal sanctions provided under the NCBA.(Sec. 6)

1.09. AUTHORITY OF THE BSP

A. Supervision

The operations and activities of banks shall besubject to supervision of the Bangko Sentral."Supervision" shall include the following:

1. The issuance of rules of conduct or theestablishment of standards of operation foruniform application to all institutions orfunctions covered;

2. The conduct of examination to determinecompliance with laws and regulations;

3. Overseeing to ascertain that laws andregulations are complied with;

4. Regular investigation (not oftener thanonce a year) to determine whether aninstitution is conducting its business on asafe or sound basis;

5. Inquiring into the solvency and liquidity ofthe institution; or

6. Enforcing prompt corrective action. (Sec. 4)



* The BSP shall also have supervision overQBs, trust entities and other financialinstitutions which under special laws aresubject to BSP supervision. (Sec. 4)

The BSP shall, when examining a bank, havethe authority to examine an enterprise which iswholly or majority-owned or controlled by thebank. (Sec. 7)

B. Policy Direction

The BSP shall provide policy direction in the areasof money, banking and credit. For this purpose, theMB may prescribe ratios, ceilings, limitations, orother forms of regulation on the different types ofaccounts and practices of banks and QBs whichshall, to the extent feasible, conform tointernationally accepted standards, including thoseof the Bank for International Settlements (BIS).The Monetary Board may exempt particularcategories of transactions from such ratios, ceilingsand limitations, but not limited to exceptional casesor to enable a bank or quasi-bank underrehabilitation or during a merger or consolidation tocontinue in business with safety to its creditors,depositors and the general public. (Sec. 5)

C. Authority of BSP over Building and HomeAssociations

Within a period of 3 years from the effectivity ofthe GBL, the BSP shall phase out and transfer itssupervising and regulatory powers overbuilding and loan associations to the HomeInsurance and Guaranty Corporation which shallassume the same. (Sec. 94)

Section 2 – Organization, Management and

Administration of Banks, Quasi-Banks and

Trust Entities

2.01. CONDITIONS FOR THE ORGANIZATIONOF BANKS AND QBS

The Monetary Board may authorize theorganization of a bank or quasi-bank subject to thefollowing conditions:

1. entity must be a stock corporation andmust only issue par value stocks;

2. its funds must be obtained from the public,which shall mean 20 or more persons; and

3. minimum capital requirements prescribedby the MB for each category of banks mustbe satisfied (Sec. 8).

2.02. CERTIFICATE OF AUTHORITY TOREGISTER

The SEC shall not register the articles ofincorporation or the by-laws of any bank, or anyamendment thereto, unless accompanied by acertificate of authority issued by the MB, under itsseal. Such certificate shall not be issued unless theMB is satisfied from the evidence submitted to itthat:

1. all requirements of existing laws andregulations to engage in the business forwhich the applicant is proposed to beincorporated have been complied with;

2. the public interest and economicconditions, both general and local, justifythe authorization; and

3. the amount of capital, the financing,organization, direction and administration,as well as the integrity and responsibility ofthe organizers and administratorsreasonably assure the safety of depositsand the public interest. (Sec. 14)

2.03. PSE-LISTED BANKING CORPORATIONSUBJECT TO SEC REPORTORIAL RULES

A commercial banking corporation listed in the PSEmust adhere not only to the banking and otherallied special laws, but also to the rulespromulgated by the SEC, the government entitytasked not only with the enforcement of theRevised Securities Act, but also the supervision ofall corporations, partnerships or associations whichare grantees of government-issued primaryfranchises and/or licenses or permits to operate inthe Phils.. That such banking institution is underthe supervision of BSP and PSE, does not exempt itfrom complying with the continuing discluserequirements embodied in the RSA Rules. Thebank is primarily subject to the control of BSP; andas a corporation trading its securities in the stockmarket, it is under the supervision of SEC. There isno over-supervision here; each regulating authorityoperates within the sphere of its powers; thestringent requirement imposed are understandable,considering the paramount importance given to theinterests of the investing public. (Union Bank of thePhils. v SEC, 2001)

2.04. PROHIBITION ON TREASURY STOCKS

No bank shall purchase or acquire shares of its owncapital stock or accept its own shares as a securityfor a loan, except when authorized by the MB:Provided, That in every case the stock sopurchased or acquired shall, within 6 months fromthe time of its purchase or acquisition, be sold ordisposed of at a public or private sale. (Sec. 10)

2.05. RESTRICTIONS ON FOREIGNSTOCKHOLDINGS

Foreign individuals and non-bank corporations mayown or control up to 40% of the voting stock of adomestic bank. This rule shall apply to Filipinos anddomestic non-bank corporations. (Sec. 11)



2.06. GRANDFATHER RULE

The percentage of foreign-owned voting stocks in abank shall be determined by the citizenship of theindividual stockholders in that bank. The citizenshipof the corporation which is a stockholder in a bankshall follow the citizenship of the controllingstockholders of the corporation, irrespective of theplace of incorporation. (Sec. 11)

BSP Circular 256 (2000)Section 1. Foreign individuals and non-bankcorporations may own or control up to 40% of thevoting stock of a domestic bank: Provided, That theaggregate foreign owned voting stocks shall notexceed 40% of the outstanding voting stock of thebank.Section 2. A Filipino individual and a domestic non-bank corporation may each own up to 40% of thevoting stock of a domestic bank. There shall be noaggregate ceiling on the ownership by suchindividuals and corporations in a domestic bank.Section 3. The citizenship of the corporation whichis a stockholder of a bank shall follow thecitizenship of the controlling stockholders of thecorporation, irrespective of the place ofincorporation. The term "controlling stockholders"shall refer to individuals holding more than 50% ofthe voting stock of the corporate stockholder.Section 4 The right of Philippine corporations,however, under Sec. 8 of RA 7721 (Act Liberalizingthe Entry of Foreign Banks), to wit:

"x x x Any right, privilege or incentive grantedto foreign banks or their subsidiaries oraffiliates under this Act, shall be equallyenjoyed by and extended under the sameconditions to Philippine banks. Philippinecorporations whose shares of stocks are listedin the PSE or are of long standing for at least10 years shall have the right to acquire,purchase or own up to 60% of the voting stockof a domestic bank."

shall continue to be in force and effect.

2.07. DISCLOSURE OF STOCKHOLDINGS OFFAMILY GROUPS OR RELATED INTERESTS

Stockholdings of individuals related to eachother within the fourth degree of consanguinityor affinity, legitimate or common-law, shall beconsidered family groups or related interestsand must be fully disclosed in all transactionsby such an individual with the bank. (Sec. 12)

Two or more corporations owned or controlledby the same family group or same group ofpersons shall be considered related interestsand must be fully disclosed in all transactionsby such corporations or related groups ofpersons with the bank. (Sec. 13)

BSP Circular 332 (2002)

Stockholdings of Family Groups or RelatedInterests. Individuals related to each otherwithin the 4th degree of consanguinity or affinity,whether legitimate, illegitimate or common-law,shall be considered family groups or relatedinterests but may each own up to 40% of the

voting stock of a domestic bank: Provided, Thatsaid relationship must be fully disclosed in alltransactions by such individual or family group withthe bank.

Corporate Stockholdings. 2/more corporationsowned or controlled by the same family group orsame group of persons shall be considered relatedinterests but may each own up to 40% of thevoting stock of a domestic bank: Provided, Thatsaid relationship must be fully disclosed in alltransactions by such corporations or related groupsof persons with the bank.

A natural person and a corporation orcorporations which are wholly-owned, or amajority of the voting stock of which isowned, by him may own only up to acombined 40% of the voting stock of adomestic bank.

Every natural person acquiring sharescumulatively amounting to at least 2% ofthe total subscribed capital of a domesticbank must disclose all relevant informationon all persons related to him within the 4thdegree of consanguinity or affinity as well ascorporations, partnerships or associationswhere he has controlling interests. Acorporation acquiring shares amounting to atleast 2% of the total subscribed capital of adomestic bank must disclose its controllingstockholder or group of stockholders as wellas the corporations, partnerships orassociations where such controllingstockholder or group of stockholders havecontrolling interest.

Ceilings on stockholdings in acooperative bank. The equity investmentof any cooperative in any Cooperative Bankshall not exceed 40% of the subscribedcapital stock of such Cooperative Bank.

Any arrangement, such as voting trustagreement or proxy, which vests on anyperson or corporation the right to vote orcontrol voting stocks in banks, if suchagreement in itself, or in relation withanother previous similar agreement orprevious sale or transfer shall result in theacquisition of control, in excess of theprescribed limitations is unlawful and void.

Transfers requiring prior Monetary Boardapproval.(a) Any sale or transfer or series of sales or

transfers which will result in ownership orcontrol of more than 20% of the voting stock ofa bank by any person whether natural orjuridical or which will enable such person toelect, or be elected as, a director of such bank;and

(b) Any sale or transfer or series of sales ortransfers which will effect a change in themajority ownership or control of the votingstock of the bank from one group of persons toanother group: Provided, That in no case shallsuch sale or transfer be approved unless thebank concerned shall immediately comply withthe prescribed minimum capital requirement fornew banks



Section 3 – Board of Directors and Officers

3.01. COMPOSITION OF THE BOARD OFDIRECTORS

The provisions of the Corporation Code to thecontrary notwithstanding, there shall be atleast 5, and a maximum of 15 members of theboard of directors of bank, 2 of whom shall beindependent directors. An "independentdirector" shall mean a person other than anofficer or employee of the bank, its subsidiariesor affiliates or related interests. (Sec. 15)

In the case of a bank merger or consolidation,the number of directors shall not exceed 21.(Sec. 17)

Non-Filipino citizens may become members ofthe board of directors of a bank to the extent ofthe foreign participation in the equity of saidbank. (Sec. 15 with Sec. 7, RA 7721)

3.02. QUALIFICATIONS /DISQUALIFICATIONS OF DIRECTORS (BSPCIRCULAR 296 ; 2001)

A director shall have the following minimumqualifications:

At least 25 years of age at the time ofhis election or appointment;

At least a college graduate or have atleast 5 years experience in business;

Must have attended a special seminarfor board of directors conducted oraccredited by the BSP:

Must be fit and proper for the positionof a director of the bank/quasi-bank/trust entity. In determiningwhether a person is fit and proper forthe position of a director, the followingmatters must be considered:

- integrity/probity;- competence;- education;- diligence; and- experience/training.

The following are Permanently disqualified frombeing directors : Directors/officers/employees permanently

disqualified by the MB; Persons who have been convicted by final

judgement for offenses involvingdishonesty or breach of trust;

Persons who have been convicted by finaljudgement for violation of banking laws;

Persons who have been judiciallydeclared insolvent, spendthrift orincapacitated to contract; or

Directors, officers or employees of closedbanks/quasi-banks/trust entities whowere responsible for such institution’sclosure.

The following are Temporarily disqualified: Directors/officers/employees disqualified

by the MB .Persons who refuse to fully disclose the

extent of their business interest. Thisdisqualification shall be in effect as longas the refusal persists;

Directors who have been absent or whohave not participated for whateverreasons in more than 50% of all

meetings, both regular and special, of theboard of directors during theirincumbency, or any 12 month periodduring said incumbency. Thisdisqualification applies for purposes ofthe succeeding election;

Persons who are delinquent in thepayment of their obligations.Delinquency in the payment ofobligations means that an obligation of aperson with a bank/quasi bank/trustentity where he/she is a director orofficer, or at least two obligations withother banks/financial institution, underdifferent credit lines or loan contracts,are past due. This disqualification shallbe in effect as long as the delinquencypersists.

Persons convicted for offenses involvingdishonesty, breach of trust or violation ofbanking laws but whose conviction hasnot yet become final and executory;

Directors and officers of closedbanks/quasi-banks/trust entities pendingtheir clearance by the MB;

Directors disqualified for failure toobserve/discharge their duties andresponsibilities prescribed under existingregulations. This disqualification appliesuntil the lapse of the specific period ofdisqualification or upon approval by theMB;Directors who failed to attend thespecial seminar for board of directorsrequired;

Persons dismissed/terminated fromemployment for cause. Thisdisqualification shall be in effect untilthey have cleared themselves ofinvolvement in the alleged irregularity;

Those under preventive suspension; or Persons with derogatory records with the

NBI, court, police, interpol and monetaryauthority (central bank) of othercountries (for foreign directors andofficers) involving violation of any law,rule or regulation of the Government orany of its instrumentalities adverselyaffecting the integrity and/or ability todischarge the duties of a bank/quasibank/trust entity director/officer. Thisdisqualification applies until they havecleared themselves of involvement in thealleged irregularity.

3.03.QUALIFICATIONS/DISQUALIFICATIONSOF OFFICERS (BSP CIRCULAR 296 ; 2001)

An officer shall have the following minimumqualifications: At least 21 years of age; At least a college graduate, or have at

least 5 years experience in banking ortrust operations or related activities or ina field related to his position andresponsibilities, or have undergonetraining in banking or trust operationsacceptable to the appropriate supervisingand examining department of the BSP:Provided, however, That trust officersshall have at least 2 years of actualexperience or training in trust operationsor fund management or other relatedfields; and



Must be fit and proper for the position heis being proposed/appointed to. Indetermining whether a person is fit andproper for a particular position, thefollowing matters must be considered:- integrity/probity;- competence;- education;- diligence; and- experience/training.

The disqualifications for directorsmentioned for shall likewise apply toofficers, except that stated in Items b.2(persons who refuse to fully disclose theextent of their business interest ) and b.7(directors disqualified for failure toobserve/discharge their duties andresponsibilities).

Except as may be authorized, the spouse ora relative within the 2nd degree ofconsanguinity or affinity of any personholding the position of Chairman,President, Executive Vice President orany position of equivalent rank, GeneralManager, Treasurer, Chief Cashier orChief Accountant is disqualified fromholding or being elected or appointed toany of said positions in the samebank/quasi-bank; and the spouse orrelative within the second degree ofconsanguinity or affinity of any personholding the position of Manager, Cashier,or Accountant of a branch or office of abank/quasi-bank/trust entity isdisqualified from holding or beingappointed to any of said positions in thesame branch or office.

In the case of UBs, CBs, and TBs, anyappointive or elective officials whetherfull time or part time, except in caseswhere such service is incident to financialassistance provided by the governmentor government-owned or controlledcorporations or in cases allowed underexisting law.

In the case of Cooperative Banks, anyofficer or employee of the CooperativeDevelopment Authority or any electivepublic official, except a barangay official.

Except as may otherwise be allowed under“The Anti-Dummy Law”, as amended,foreigners cannot be officers oremployees of banks.

3.04. FIT AND PROPER RULE

To maintain the quality of bank managementand afford better protection to depositors andthe public in general, the MB shall prescribe,pass upon and review the qualifications anddisqualifications of individuals elected orappointed bank directors or officers anddisqualify those found unfit. After due notice tothe board of directors of the bank, the MB maydisqualify, suspend or remove any bankdirector or officer who commits or omits an actwhich render him unfit for the position. Indetermining whether an individual is fit andproper to hold the position of a director orofficer of a bank, regard shall be given to hisintegrity, experience, education, training, andcompetence. (Sec. 16)

The suspension of bank officers which is onlypreventive in nature would require no notice or

hearing, and until such time that the officershave proved their innocence, they may bepreventively suspended from holding office soas not to influence the conduct of investigation,and to prevent the commission of furtherirregularities. (Busego v CA, 1999)

As a general rule, a banking corporation isliable for the wrongful or tortuous acts anddeclarations of its officers or agents within thecourse and scope of their employment. A bankwill be held liable for the negligence of itsofficers or agents when acting within the courseand scope of their employment. It may beliable for the tortuous acts of its officers evenas regards that species of tort of which maliceis an essential element. A bank holding out itsofficers and agents as worthy of confidence willnot be permitted to profit by the frauds theseofficers or agents were enabled to perpetrate inthe apparent course of their employment; norwill it be permitted to shirk its responsibility forsuch frauds, even though no benefit mayaccrue to the bank therefrom. If an officer orofficial of a bank in his official capacity receivesmoney to satisfy an evidence of indebtednesslodged for his bank collection, the bank is liablefor his misappropriation of such sum. (PCI Bankv CA, 2001)

3.05. GOOD GOVERNANCE (BSP CIRCULAR283; 2001)The position of a bank/quasi-bank/trust entitydirector is a position of trust. A director assumescertain responsibilities to different constituencies orstakeholders These constituencies or stakeholdershave the right to expect that the institution is beingrun in a prudent and sound manner.”

The board of directors is primarily responsible forthe corporate governance of the bank/quasi-bank/trust entity. To ensure good governance ofthe bank/quasi-bank/trust entity, the board ofdirectors should establish strategic objectives,policies and procedures that will guide and directthe activities of the bank/quasi-bank/ trust entityand the means to attain the same as well as themechanism for monitoring management’sperformance.

3.06. REGULATION OF THE COMPENSATIONAND OTHER BENEFITS OF DIRECTORS ANDOFFICERS

To protect the funds of depositors andcreditors, the MB may regulate the payment bythe bank to its directors and officers ofcompensation, allowance, fees, bonuses, stockoptions, profit sharing and fringe benefits onlyin exceptional cases and when thecircumstances warrant, such as but not limitedto the following instances when a bank is1. under comptrollership or conservatorship;

or2. found by the MB to be conducting business

in an unsafe or unsound manner;3. found by the MB to be in an unsatisfactory

financial condition. (Sec. 18)

3.07. PROHIBITION AGAINST PUBLICOFFICIALS



No appointive or elective public official,whether full-time or part-time shall at the sametime serve as officer of any private bank, savein cases where1. such service is incident to financial

assistance provided by the government ora GOCC to the bank or

2. unless otherwise provided in the RuralBanks Act,

3. unless otherwise provided under existinglaws. (Sec. 19)

3.08. CONDUCT OF BOARD OF DIRECTORS’MEETINGS

The meetings of the board of directors may beconducted through modern technologies suchas, but not limited to, teleconferencing andvideo-conferencing. (Sec. 15)

3.09. BANK BRANCHES

Universal or commercial banks may openbranches or other offices within or outside thePhils. upon prior approval of the BSP.Branching by all other banks shall be governedby pertinent laws. (Sec. 20)

A bank authorized to establish branches orother offices shall be responsible for allbusiness conducted in such branches andoffices to the same extent and in the samemanner as though such business had all beenconducted in the head office. A bank and itsbranches and offices shall be treated as oneunit. (Sec. 20)

A bank may, subject to prior approval of theMB, use any or all of its branches as outlets forthe presentation and/or sale of the financialproducts of its allied undertaking or of itsinvestment house units. (Sec. 20)

3.10. BANKING DAYS AND HOURS

Unless otherwise authorized by the BSP in theinterest of the banking public, all banksincluding their branches and offices shalltransact business on all working days for atleast 6 hours a day. (Sec. 21)

“Working days” shall mean Mondays to Fridays,except if such days are holidays. (Sec. 21)

Banks or any of their branches or offices mayopen for business on Saturdays, Sundays orholidays for at least 3 hours a day. Bankswhich opt to open on days other than workingdays shall report to the BSP the additional daysduring which they or their branches or officesshall transact business. (Sec. 21)

3.11. STRIKES AND LOCKOUTS

The banking industry is hereby declared asindispensable to the national interest. (Sec. 22)

Notwithstanding the provisions of any law tothe contrary, any strike or lockout involvingbanks, if unsettled after 7 calendar days shallbe reported by the BSP to the Secretary ofLabor who may assume jurisdiction over thedispute, decide it, or certify the same to theNLRC for compulsory arbitration. However, thePresident of the Philippines may at any time

intervene and assume jurisdiction over suchlabor dispute in order to settle or terminate thesame. (Sec.22)

Section 4 – Deposits

4.01. ACCEPTANCE OF DEMAND DEPOSITS

A bank other than a UB or KB cannot accept orcreate demand deposits except upon prior approvalof, and subject to such conditions and rules as maybe prescribed by the Monetary Board. (Sec. 33)

4.02. TYPES OF DEPOSITS1. Time Deposit — Interest rate stipulated

depending on the number of days. During thisperiod, the money deposited cannot bewithdrawn. High interest rates.

2. Savings Deposit — Under the fine print, if youdeposit today, you cannot withdraw the amountuntil 60 days later. Bank pays an interest rate,but not as high as time deposits.

3. Demand Deposits / Current Accounts — Nointerest is paid by the bank because thedepositor can take out his funds any time. It iscalled demand deposit because the depositorcan withdraw the money he deposited on thevery same day when he deposited it.(Villanueva)

4.03. MAY ALL BANKS ACCEPT DEMANDDEPOSITS?

GR: A bank cannot accept or create demanddeposits except upon prior approval of, and subjectto such conditions and rules as may be prescribedby the MB. (Sec. 33)Exc: UBs and KBs

4.04. BANKS AS DEBTORS

As per Art. 1980 of the Civil Code, loans from thedepositor (creditor) to a bank (debtor) may be inthe form of savings deposits, demand/currentdeposits (“all those liabilities of the BSP and ofother banks which are denominated in Phil currencyand are subject to payment in legal tender upondemand by the presentation of checks” as per Sec.58 of NCBA) and time/fixed deposits. For thisreason, San Carlos Milling Co., Ltd v. BPI, 1933)declared that “banks are run for gain, and theysolicit deposits in order that they can use themoney for that very purpose.” For the samereason, it has been held that “a bank has a right ofset off of the deposits in its hands for the paymentof any indebtedness to it on the part of adepositor.” (Gullas v. PNB, 1935) Conversely, thedepositor has every right to apply his deposit in abank against his loan from such bank. (RP v. CA,1975) (Morales; Villanueva cites Serrano v. CB,1980; Ppl v. Ong, 1991)

4.05. PRESUMPTION OF OWNERSHIP OFDEPOSITS

It is presumed that money deposited in a bankaccount belongs to the person in whose namethe deposit account is opened. A bank isjustified in paying out the money to thedepositor or upon his order, and cannot beliable to any other person who turned out to he



the true owner of the funds deposited. Thus, itwas held in Fulton Iron Works Co v ChinaBanking Corp (1930), “The specialized functionof a bank is to serve as a place of deposit formoney, to keep it safely while on deposit, andto pay it out, upon demand, to the person whoeffected the deposit or upon his order. A bankis not a guardian of trust funds deposited w/ itin the sense that it must see to their properapplication, not is it its business to pry into theuses to which money on deposit in its vault arebeing put; and so long as it serves its functionand pays the money out in good faith to theperson who deposited it, or upon his order,w/out knowledge or notice that it is in factassisting in the misappropriation of the fund,the bank will be protected. As is well said… itwould seriously interfere w/ commercialtransactions to charge banks w/ the duty ofsupervising the administration of trust funds,when, in due course of business, they receivechecks and drafts in proper form drawn uponsuch funds in their custody. The law imposesno such duty upon them.” Note however thatthere is a limitation in this regard as persurvivorship agreements. (Morales)

4.06. OBLIGATION OF BANKS TO DEPOSITORS

The bank is under the obligation to treatdeposit accounts of it depositors withmeticulous care. It must bear the blame forfailing to discover the mistake of its employeesdespite the established procedure requiringbank papers to pass through bank personnelwhose duty it is to check and countercheckthem for possible errors. (Metropolitan Bankand Trust Co. v. CA, 1994 and Firestone Tire vCA, 2001)

As a business affected with public interest andbecause of the nature of its functions, a bank isunder obligation to treat the accounts of itsdepositors with meticulous case, always havingin mind the fiduciary nature of theirrelationship. (PCI Bank v. CA, 1997)

Solidbank Corporation/ Metropolitan Bank and Trust Co.v. Sps. TanGR No. 167346April 2, 200710 checks were deposited by representative of Sps. Tanand upon checking their passbook, it was discovered thatone check was not posted. The bank proffered theduplicate deposit slip which indicated that the said checkwas not deposited but it was discovered that it had beencleared in another bank by another person. Sps. Tan fileda collection case against the bank and was able to getfavorable judgment from RTC and CA.HELD: Bank was negligent and so Sps. Tan entitled todamages. Failure to present original deposit slip, whichcould have proven its claim that it did not receiverespondents’ missing check was a suppression of the bestevidence that could have bolstered its claim andconfirmed its innocence, the presumption now arises thatit withheld the same for fraudulent purposes. Citing thecase of Canlas v. Asian Savings Bank (2000), the Courtheld that the degree of diligence required of banks ismore than that of a good father of a family in keepingwith their responsibility to exercise the necessary care

and prudence in handling their clients’ money. It find nocompelling reason to disallow the application of theprovisions on common carriers to this case if only toemphasize the fact that banking institutions (likepetitioner) have the duty to exercise the highest degreeof diligence when transacting with the public. By thenature of their business, they are required to observe thehighest standards of integrity and performance, andutmost assiduousness as well.

4.07. OPTION TO EXERCISE SET-OFF ONDEPOSIT FOR OUTSTANDING LOANA bank is under no duty or obligation to make anapplication or set-off against the deposit accountsof a borrower. To apply the deposit to thepayment of a loan is a privilege, a right of set-offwhich the bank has the option to exercise, but notthe obligation. (BPI v. CA, 1994)

4.08. NOTE ON SAFETY DEPOSIT BOXESIn the case of rent of safety deposit box. Thecontract is a special kind of deposit and cannot becharacterized as an ordinary contract of leasebecause the full and absolute possession andcontrol of the deposit box is not given to therenters. The prevailing rule is that the relationbetween the bank renting out and the renter is thatof bailer and bailee the bailment being for hire andmutual benefiit. (CA Agro-industrial Dev. Corp. v.CA, 1983; reiterated in Sia v. CA, 1993, according

to Villanueva)43

4.09. MB ORDER OF CLOSUREIn case a bank or QB notifies the BSP or publiclyannounces a bank holiday, or in any mannersuspends the payment of its deposit liabilitiescontinuously for more than 30 days, the MB maysummarily and without need for prior hearing closesuch banking institution and place it underreceivership of the Phil. Deposit Insurance Corp.(PDIC). (Sec. 53)

Section 5 – Loans

5.01. RISK-BASED CAPITAL RATIO

The MB shall prescribe the minimum ratio whichthe net worth of a bank must bear to its total riskassets which may include contingent accounts [i.e.net worth : total risk assets] (Sec. 33)

5.02. BSP CIRCULAR 280 (2001)The risk-based capital ratio of a bank, expressed asa percentage of qualifying capital to risk-weightedassets, shall not be less than 10% for both solobasis (head office plus branches) and consolidatedbasis (parent bank plus subsidiary financial alliedundertakings, but excluding insurancecompanies). The ratio shall be maintained daily.

5.03. POWER OF THE MB IN THIS REGARD

The MB mayrequire that such ratio be determined on

the basis of the net worth and risk assets of

43This topic was asked in 2004. Note the liability of back

in case of loss.



a bank and its subsidiaries, financial orotherwise;

- prescribe the composition and the mannerof determining the net worth and total riskassets of banks and their subsidiaries.Provided, thatin the exercise of this authority, the MB

shall, to the extent feasible, conform tointernationally accepted standards,including those of the Bank forInternational Settlements (BIS),relating to risk-based capitalrequirements;

- the MB may alter or suspendcompliance with such ratio whenevernecessary for a maximum period of 1year; and,

- such ratio shall be applied uniformly tobanks of the same category. (Sec. 33)

In case of a bank merger or consolidation, orwhen a bank is under rehabilitation under aprogram approved by the BSP, the MB maytemporarily relieve the surviving bank,consolidated bank, or constituent bank orcorporations under rehabilitation from fullcompliance with the required capital ratio undersuch conditions as it may prescribe. (Sec. 33)

5.04. EFFECT OF NON-COMPLIANCE

The MB may limit or prohibit the distribution ofnet profits by such bank and may require thatpart or all of the net profits be used to increasethe capital accounts of the bank until theminimum requirement has been met.

The MB may, furthermore, restrict or prohibitthe acquisition of major assets and the makingof new investments by the bank, with theexception of purchases of readily marketableevidences of indebtedness of the RP and theBSP and any other evidences of indebtednessor obligations the servicing and repayment ofwhich are fully guaranteed by the RP, until theminimum required capital ratio has beenrestored. (Sec. 33)

5.05. SINGLE BORROWER’S LIMIT (SBL)

Except as the MB may otherwise prescribe forreasons of national interest, the total amountof loans, credit accommodations andguarantees as may be defined by the MB thatmay be extended by a bank to any person,partnership, association, corporation or otherentity shall at no time exceed 20% of the networth of such bank. (Sec. 35.1)

The basis for determining compliance with SBLis the total credit commitment of the bank tothe borrower. (Sec. 35.1)

Unless the MB prescribes otherwise, the totalamount of loans, credit accommodations andguarantees prescribed in the precedingparagraph may be increased by an additional10% of the net worth of such bank providedthe additional liabilities of any borrower areadequately secured by trust receipts, shippingdocuments, warehouse receipts or other similardocuments transferring or securing titlecovering readily marketable, non-perishable

goods which must be fully covered byinsurance. (Sec. 35.2)

Inclusions. The above prescribed ceilings shallinclude:a. the direct liability of the maker or acceptor

of paper discounted with or sold to suchbank and the liability of a general indorser,drawer or guarantor who obtains a loan orother credit accommodation from ordiscounts paper with or sells papers to suchbank;

b. in the case of an individual who owns orcontrols a majority interest in acorporation, partnership, association or anyother entity, the liabilities of said entities tosuch bank;

c. in the case of a corporation, all liabilities tosuch bank of all subsidiaries in which suchcorporation owns or controls a majorityinterest; and

d. in the case of a partnership, association orother entity, the liabilities of the membersthereof to such bank. (35.3)

* Even if a parent corporation, partnership,association, entity or an individual whoowns or controls a majority interest in suchentities has no liability to the bank, the MBmay prescribe the combination of theliabilities of subsidiary corporations ormembers of the partnership, association,entity or such individual under certaincircumstances, including but not limited toany of the following situations:

a. the parent corporation, partnership,association, entity or individualguarantees the repayment of theliabilities;

b. the liabilities were incurred for theaccommodation of the parentcorporation or another subsidiary or ofthe partnership or association or entityor such individual; or

c. the subsidiaries though separateentities operate merely as departmentsor divisions of a single entity. (35.4)

** Certain types of contingent accountsof borrowers may be included amongthose subject to these prescribed limitsas may be determined by the MB.(35.7)

*** Loans and other creditaccommodations, deposits maintainedwith, and usual guaranteed by a bankto any other bank or non-bank entity,whether locally or abroad, shall besubject to the limits as hereinprescribed. (35.6)

Exclusions. For purposes of this Section, loans,other credit accommodations and guaranteesshall exclude:

a. loans and other credit accommodationssecured by obligations of the BSP or of thePhil. Gov’t;

b. loans and other credit accommodationsfully guaranteed by the gov’t as to thepayment of principal and interest;



c. loans and other credit accommodationscovered by assignment of depositsmaintained in the lending bank and held inthe Phils.;

d. loans, credit accommodations andacceptances under letters of credit to theextent covered by margin deposits; and

e. other loans or credit accommodationswhich the MB may from time to time,specify as non-risk items. (35.5)

5.06. RESTRICTION ON BANK EXPOSURE TO

DOSRI44

DOSRI = Directors, Officers, Stockholders and theirRelated Interests;

NOTE: The MB shall define the term "relatedinterests." (Sec. 36 par. 5)

GR: A director or officer of any bank shallneither,1. directly or indirectly, for himself or as

the representative or agent of others,borrow from such bank; nor

2. become a guarantor, indorser or suretyfor loans from such bank to others, orin any manner be an obligor or incurany contractual liability to the bank.

EXC. Except with the written approval ofthe majority of all the directors of thebank, excluding the directorconcerned. The required approvalshall be entered upon the records ofthe bank and a copy of such entryshall be transmitted forthwith to theappropriate supervising andexamining department of the BSP.

* Such written approval shall not berequired for loans, other creditaccommodations and advancesgranted to officers under a fringebenefit plan approved by the BSP.(Sec. 36 par. 1)

** The limit on loans, creditaccommodations and guaranteesprescribed herein shall not apply toloans, credit accommodations andguarantees extended by acooperative bank to its cooperativeshareholders. (Sec. 36 par. 6)

Principles Involved.

- Dealings of a bank with any of its directors,officers or stockholders and their relatedinterests shall be upon terms not lessfavorable to the bank than those offered toothers. (Sec. 36 par. 2)

- After due notice to the board of directors ofthe bank, the office of any bank director orofficer who violates the provisions of thisSection may be declared vacant and thedirector or officer shall be subject to thepenal provisions of the NCBA. (Sec. 36 par.3)

- The MB may regulate the amount of loans,credit accommodations and guarantees thatmay be extended, directly or indirectly, by

44This topic was asked in 2006 specifically on requisites

before a bank can lend to DOSRI.

a bank to its DOSRI, as well as investmentsof such bank in enterprises owned orcontrolled by said directors, officers,stockholders and their related interests.

* The outstanding loans, creditaccommodations and guarantees which abank may extend to each of its DOSRI,shall be limited to an amount equivalent totheir respective unencumbered depositsand book value of their paid-in capitalcontribution in the bank.

** The loans, credit accommodations andguarantees secured by assets consideredas non-risk by the MB shall be excludedfrom such limit.

*** The loans, credit accommodations andadvances to officers in the form of fringebenefits granted in accordance with rulesas may be prescribed by the MonetaryBoard shall not be subject to the individuallimit. (Sec. 36 par. 4)

5.07. LIMITS ON LOANS AND OTHER CREDITACCOMMODATIONS ON…

Loans and other credit accommodationsagainst…

real estate shall not exceed 75%of the appraised valueof the respective realestate security, plus60% of the appraisedvalue of the insuredimprovements, andsuch loans may bemade to the owner ofthe real estate or to hisassignees. (Sec. 37)

security ofchattelsandintangibleproperties(such as,but notlimited to,patents,trademarks,tradenames, andcopyrights)

shall not exceed 75%of the appraised valueof the security, andsuch loans and othercredit accommodationsmay be made to thetitle-holder of thechattels and intangibleproperties or hisassignees. (Sec. 38)

Exception. In both cases, the MB may prescribeotherwise. (Sec. 37-38)

5.08. FORECLOSURE OF REAL ESTATEMORTGAGE

In the event of foreclosure, whether judiciallyor extrajudicially, of any mortgage on realestate which is security for any loan or othercredit accommodation granted, the mortgagoror debtor whose real property has been sold forthe full or partial payment of his obligationshall have the right within one year after thesale of the real estate, to redeem the propertyby paying the amount due under the mortgagedeed, with interest thereon at the rate specifiedin the mortgage, and all the costs andexpenses incurred by the bank or institution



from the sale and custody of said property lessthe income derived therefrom. However, thepurchaser at the auction sale concernedwhether in a judicial or extrajudicial foreclosureshall have the right to enter upon and takepossession of such property immediately afterthe date of the confirmation of the auction saleand administer the same in accordance withlaw. Any petition in court to enjoin or restrainthe conduct of foreclosure proceedingsinstituted pursuant to this provision shall begiven due course only upon the filing by thepetitioner of a bond in an amount fixed by thecourt conditioned that he will pay all thedamages which the bank may suffer by theenjoining or the restraint of the foreclosureproceeding.

Juridical Mortgagor. Notwithstanding Act 3135,juridical persons whose property is being soldpursuant to an extrajudicial foreclosure, shallhave the right to redeem the property inaccordance with this provision until, but notafter, the registration of the certificate offoreclosure sale with the applicable Register ofDeeds which in no case shall be more than 3months after foreclosure, whichever is earlier.Owners of property that has been sold in aforeclosure sale prior to the effectivity of theGBL shall retain their redemption rights untiltheir expiration. (Sec. 47)

5.09. OTHER SECURITY REQUIREMENTS OFBANKS

Grant and Purpose of Loans and Other CreditAccommodations A bank shall grant loans and other credit

accommodations only in amounts and forthe periods of time essential for theeffective completion of the operations to befinanced. (Sec. 39)

Such grant of loans and other creditaccommodations shall be consistent withsafe and sound banking practices. (Sec.39)

The purpose of all loans and other creditaccommodations shall be stated in theapplication and in the contract between thebank and the borrower. If the bank findsthat the proceeds of the loan or other creditaccommodation have been employed,without its approval, for purposes otherthan those agreed upon with the bank, itshall have the right to terminate the loan orother credit accommodation and demandimmediate repayment of the obligation.(Sec. 39)

Debtor is Capable Before granting a loan or other credit

accommodation, a bank must ascertainthat the debtor is capable of fulfilling hiscommitments to the bank. Toward this end,a bank may demand from its creditapplicants a statement of their assets andliabilities and of their income andexpenditures and such information as maybe prescribed by law or by rules andregulations of MB to enable the bank toproperly evaluate the credit applicationwhich includes the corresponding financialstatements submitted for taxation purposes

to the BIR. Should such statements proveto be false or incorrect in any materialdetail, the bank may terminate any loan orother credit accommodation granted on thebasis of said statements and shall have theright to demand immediate repayment orliquidation of the obligation. (Sec. 40)

5.10. AMMORTIZATION Amortization on Loans and Other Credit

Accommodations. — The amortization scheduleof bank loans and other credit accommodationsshall be adapted to the nature of the operationsto be financed.

- In case of loans and other creditaccommodations with maturities of morethan 5 years, provisions must be made forperiodic amortization payments, but suchpayments must be made at least annually:Provided, however, That when theborrowed funds are to be used for purposeswhich do not initially produce revenuesadequate for regular amortizationpayments therefrom, the bank may permitthe initial amortization payment to bedeferred until such time as said revenuesare sufficient for such purpose, but in nocase shall the initial amortization date belater than 5 years from the date on whichthe loan or other credit accommodation isgranted.

- In case of loans and other creditaccommodations to microfinance sectors,the schedule of loan amortization shall takeinto consideration the projected cash flowof the borrower and adopt this into theterms and conditions formulated by banks.(Sec. 44)

5.11. PREPAYMENT OF LOANS AND OTHERCREDIT ACCOMMODATIONS A borrower may at any time prior to the agreed

maturity date prepay, in whole or in part, theunpaid balance of any bank loan and othercredit accommodation, subject to suchreasonable terms and conditions as may beagreed upon between the bank and itsborrower. (Sec. 45)

5.12. SOME OF MB’S POWERS RELATED TOLOANS AND CREDIT ACCOMMODATIONS

The MB is hereby authorized to issue suchregulations as it may deem necessary withrespect to unsecured loans or other creditaccommodations that may be granted bybanks. (Sec. 41)

The MB may, by regulation, prescribe furthersecurity requirements to which the varioustypes of bank credits shall be subject, and, inaccordance with the authority granted to it inSec. 106 of the NCBA, the Board may byregulation, reduce the maximum ratiosestablished in Secs. 36 and 37 [should be Secs.37 and 38] of this Act, or, in special cases,increase the maximum ratios establishedtherein. (Sec. 42)

The MB may, in accordance with the authoritygranted to it in Sec. 106 of the NCBA, and



taking into account the requirements of theeconomy for the effective utilization of long-term funds, prescribe the maturities, as well asrelated terms and conditions for various typesof bank loans and other creditaccommodations. Any change by the MB in themaximum maturities shall apply only to loansand other credit accommodations made afterthe date of such action. (Sec. 43)

The Monetary Board shall regulate the interestimposed on microfinance borrowers by lendinginvestors and similar lenders, such as, but notlimited to, the unconscionable rates of interestcollected on salary loans and similar creditaccommodations. (Sec. 43)

Development Assistance Incentives. The BSPshall provide incentives to banks which, withoutgovernment guarantee, extend loans to financeeducational institutions, cooperatives, hospitalsand other medical services, socialized or low-cost housing, local government units and otheractivities with social content. (Sec. 46)

Renewal or Extension of Loans and Other CreditAccommodations. The MB may, by regulation,prescribe the conditions and limitations underwhich a bank may grant extensions or renewalsof its loans and other credit accommodations.(Sec. 48)

Provisions for Losses and Write-Offs. The MBmay fix, by regulation or by order in a specificcase, the amount of reserves for bad debts ordoubtful accounts or other contingencies.Writing off of loans, other creditaccommodations, advances and other assetsshall be subject to regulations issued by theMB. (Sec. 49)

Section 6 – Other Operations

6.01. MAJOR INVESTMENTS

For the purpose of enhancing bank supervision, theMB shall establish criteria for reviewing majoracquisitions or investments by a bank includingcorporate affiliations or structures that may exposethe bank to undue risks or in any way hindereffective supervision. (Sec. 50)

6.02. ACQUISITION OF REAL ESTATE

Any bank may acquire real estate as shall benecessary for its own use in the conduct of itsbusiness. (Sec. 51)

The total investment in such real estate andimprovements thereof, including bankequipment, shall not exceed 50% of combinedcapital accounts.

- Unless otherwise provided by the MB, theequity investment of a bank in anothercorporation engaged primarily in real estateshall be considered as part of the bank'stotal investment in real estate. (Sec. 51)

6.03. BY WAY OF SATISFACTION OF CLAIMS

Notwithstanding the limitations just mentioned,a bank may acquire, hold or convey realproperty under the following circumstances:

1. Such as shall be mortgaged to it in goodfaith by way of security for debts;

2. Such as shall be conveyed to it insatisfaction of debts previously contractedin the course of its dealings; or

3. Such as it shall purchase at sales underjudgments, decrees, mortgages, or trustdeeds held by it and such as it shallpurchase to secure debts due it. (Sec. 52)

Any real property acquired or held under thesecircumstances shall be disposed of by the bankwithin a period of 5 years or as may beprescribed by the MB. The bank may, after saidperiod, continue to hold the property for itsown use, subject to the limitation that the totalinvestment in real estate and improvementsthereof, including bank equipment, shall notexceed 50% of combined capital accounts.(Sec. 52)

6.04. OTHER BANKING SERVICES

1. Receive in custody funds, documents andvaluable objects;

2. Act as financial agent and buy and sell, byorder of and for the account of their customers,shares, evidences of indebtedness and all typesof securities;

3. Make collections and payments for the accountof others and perform such other services fortheir customers as are not incompatible withbanking business;

4. Upon prior approval of MB, act as managingagent, adviser, consultant or administrator ofinvestment management/advisory/consultancyaccounts; and

5. Rent out safety deposit boxes. (Sec. 53)

The bank shall perform the services permittedunder 1-4 as depositary or as an agent.Accordingly, it shall keep the funds, securitiesand other effects which it receives dulyseparate from the bank's own assets andliabilities. (Sec. 53)

The MB may regulate all these operations inorder to ensure that such operations do notendanger the interests of the depositors andother creditors of the bank. (Sec. 53)

6.05. PROHIBITIONSA. Against Acting as an Insurer

A bank shall not directly engage ininsurance business as the insurer. (Sec.54)

B. Prohibited Transactions of Directors,Officers, Employees, or Agents of AnyBank*1. Making false entries in any bank report

or statement or participating in anyfraudulent transaction, therebyaffecting the financial interest of, orcausing damage to, the bank or anyperson;

2. Without order of a court of competentjurisdiction, disclosing to anyunauthorized person any information



relative to the funds or properties inthe custody of the bank belonging toprivate individuals, corporations, or anyother entity: Provided, That withrespect to bank deposits, the provisionsof existing laws shall prevail;

3. Accepting gifts, fees or commissions orany other form of remuneration inconnection with the approval of a loanor other credit accommodation fromsaid bank;

4. Overvaluing or aiding the overvaluingof any security for the purpose ofinfluencing in any way the actions ofthe bank or any bank; or

5. Outsourcing inherent bankingfunctions. (SubSec. 55.1)

C. BSP Circular 268 (2000)Section 2.1 Outsourcing of inherentbanking functions shall refer to anycontract between the bank and a serviceprovider for the latter to supply themanpower to service the deposittransactions of the former.Section 2.2 Banks cannot outsourcemanagement functions except as may beauthorized by the Monetary Board whencircumstances justify.Section 3. Outsourcing of InformationTechnology Systems/Processes. Subject toprior approval of the MB, banks mayoutsource all information technologysystems and processes except for functionsexcluded in Section 3.1.

Section 3.1 Functions affecting theability of the bank to ensure the fit oftechnology services deployed to meetits strategic and business objectivesand to comply with all pertinentbanking laws and regulations may notbe outsourced. Subject to priorapproval of the MB, consultants and/orservice providers may be engaged toprovide assistance/support.

Section 4. Outsourcing of Other BankingFunctions.

Section 4.1 Subject to prior approvalof the MB, banks may outsource dataimaging, storage, retrieval and otherrelated systems; clearing andprocessing of checks not included in thePhilippine Clearing House System;printing of bank deposit statements.Section 4.2. Banks may outsourcecredit card services; printing of bankloan statements and other non-depositrecords, bank forms and promotionalmaterials; credit investigation andcollection; processing of export, importand other trading transactions; transferagent services for debt and equitysecurities; property appraisal;property management services;messenger, courier and postal services;security guard services; vehicle servicecontracts; janitorial services.

Section 5. Service Providers. Whenallowed by law and under this circular,banks may enter into outsourcing contractsonly with service providers withdemonstrable technical and financialcapability commensurate to the services tobe rendered.

Consistent with the provisions of theBanks Secrecy Law, no bank shallemploy casual or nonregular personnelor too lengthy probationary personnelin the conduct of its business involvingbank deposits. (Subsec. 55.4)

6.06. PROHIBITED TRANSACTIONS OFBORROWERS OF BANK*

1. Fraudulently overvaluing property offered assecurity for a loan or other creditaccommodation from the bank;

2. Furnishing false or misrepresenting orsuppressing material facts for the purpose ofobtaining, renewing, or increasing a loan orother credit accommodation or extending theperiod thereof;

3. Attempting to defraud the said bank in theevent of a court action to recover a loan orother credit accommodation; or

4. Offering any director, officer, employee oragent of a bank any gift, fee, commission, orany other form of compensation in order toinfluence such persons into approving a loan orother credit accommodation application.(SubSec. 55.2)

* No examiner, officer or employee of the BSPor of any department, bureau, office, branch oragency of the Gov’t that is assigned tosupervise, examine, assist or render technicalassistance to any bank shall commit any of theacts enumerated in Subsecs. 55.1 and 55.2 oraid in the commission of the same. The makingof false reports or misrepresentation orsuppression of material facts by personnel ofthe BSP shall constitute fraud and shall besubject to the administrative and criminalsanctions provided under the NCBA. (Subsec.55.3)

6.07. CONDUCTING BUSINESS IN AN UNSAFEOR UNSOUND MANNER

In determining whether a particular act oromission, which is not otherwise prohibited by anylaw, rule or regulation affecting banks, QBs or trustentities, may be deemed as conducting business inan unsafe or unsound manner, the MB shallconsider any of the following circumstances wherethe act or omission has…

1. resulted or may result in material loss ordamage, or abnormal risk or danger to thesafety, stability, liquidity or solvency of theinstitution;

2. resulted or may result in material loss ordamage or abnormal risk to the institution'sdepositors, creditors, investors,stockholders or to the BSP or to the publicin general;

3. has caused any undue injury, or has givenany unwarranted benefits, advantage orpreference to the bank or any party in thedischarge by the director or officer of hisduties and responsibilities through manifestpartiality, evident bad faith or grossinexcusable negligence; or such involvesentering into any contract or transactionmanifestly and grossly disadvantageous to



the bank, QB or trust entity, WON thedirector or officer profited or will profitthereby.

Whenever a bank, QB or trust entity persists inconducting its business in an unsafe or unsoundmanner, the MB may, without prejudice to theadministrative sanctions provided in Sec. 37 of theNCBA, take action under Sec. 30 of the same Actand/or immediately exclude the erring bank fromclearing, the provisions of law to the contrarynotwithstanding. (Sec. 56)

6.08. ON DIVIDEND DECLARATION

No bank or QB shall declare dividends greaterthan its accumulated net profits then on hand,deducting therefrom its losses and bad debts.(Sec. 57)

No bank nor QB shall declare dividends, if atthe time of declaration:

1. Its clearing account with the BSP isoverdrawn; or

2. It is deficient in the required liquidity floorfor gov’t deposits for 5 or more consecutivedays; or

3. It does not comply with the liquiditystandards/ratios prescribed by the BSP forpurposes of determining funds available fordividend declaration; or

4. It has committed a major violation as maybe determined by the BSP. (Sec. 57)

6.09. INDEPENDENT AUDITOR

The MB may require a bank, QB or trust entityto engage the services of an independentauditor to be chosen by the bank, QB or trustentity concerned from a list of CPAs acceptableto the MB.

The term of the engagement shall be asprescribed by the MB which may either be on acontinuing basis where the auditor shall act asresident examiner, or on the basis of specialengagements, but in any case, the independentauditor shall be responsible to the bank's, QB’sor trust entity's board of directors.

A copy of the report shall be furnished to theMB.

The MB may also direct the board of directorsof a bank, QB, trusty entity and/or theindividual members thereof, to conduct, eitherpersonally or by a committee created by theboard, an annual balance sheet audit of thebank, QB or trust entity to review the internalaudit and control system of the bank, QB ortrust entity and to submit a report of suchaudit. (Sec. 58)

6.10. FINANCIAL STATEMENTS

Every bank, QB or trust entity shall submit tothe appropriate supervising and examiningdepartment of the BSP financial statements insuch form and frequency as may be prescribedby the BSP. (Sec. 60)

Such statements, which shall be as of a specificdate designated by the BSP, shall show theactual financial condition of the institutionsubmitting the statement, and of its branches,offices, subsidiaries and affiliates, including theresults of its operations, and shall contain suchinformation as may be required in BSPregulations. (Sec. 60)

In periods of national and/or local emergencyor of imminent panic which directly threatenmonetary and banking stability, the MB, by avote of at least 5 of its members, in specialcases and upon application of the bank, quasi-bank or trust entity, may allow such bank, QBor trust entity to defer for a stated period oftime the publication of the statement offinancial condition required herein. (Sec. 61)

6.11. PUBLICATION/POSTING OF FINANCIALSTATEMENTS

Every bank, QB or trust entity, shall publish astatement of its financial condition, includingthose of its subsidiaries and affiliates, in suchterms understandable to the layman and insuch frequency as may be prescribed by theBSP, in English or Filipino, at least once everyquarter in a newspaper of general circulation inthe city or province where the principal office,in the case of a domestic institution, or theprincipal branch or office in the case of aforeign bank, is located, but if no newspaper ispublished in the same province, then in anewspaper published in Metro Manila or in thenearest city or province. The Bangko Sentralmay by regulation prescribe the newspaperwhere the statements prescribed herein shallbe published. (Sec. 61)

The Monetary Board may allow the posting ofthe financial statements of a bank, QB or trustentity in public places it may determine, in lieuof the publication required in the precedingparagraph, when warranted by thecircumstances. (Sec. 61)

Banks shall also make available to the public insuch form and manner as the BSP mayprescribe the complete set of its auditedfinancial statements as well as such otherrelevant information including those onenterprises majority-owned or controlled by thebank, that will inform the public of the truefinancial condition of a bank as of any giventime. (Sec. 61)

6.12. PUBLICATION OF CAPITAL STOCK

A bank, QB or trust entity incorporated underthe laws of the Phils. shall not publish theamount of its authorized or subscribed capitalstock without indicating at the same time andwith equal prominence, the amount of itscapital actually paid up. (Sec. 62)

No branch of any foreign bank doing businessin the Phils. shall in any way announce theamount of the capital and surplus of its headoffice, or of the bank in its entirety withoutindicating at the same time and with equal



prominence the amount of the capital, if any,definitely assigned to such branch. In case nocapital has been definitely assigned to suchbranch, such fact shall be stated in, and shallform part of the publication. (Sec. 62)

6.13. ELECTRONIC TRANSACTIONS

The BSP shall have full authority to regulatethe use of electronic devices, such ascomputers, and processes for recording, storingand transmitting information or data inconnection with the operations of a bank, QB ortrust entity, including the delivery of servicesand products to customers by such entity.(Sec. 59)

6.14. OTHER RELATED PROVISIONS OF THEGBL

The Bangko Sentral may charge equitablerates, commissions or fees, as may beprescribed by the Monetary Board forsupervision, examination and other serviceswhich it renders under this Act. (Sec. 65)

Unless otherwise provided, the violation of anyof the provisions of this Act shall be subject toSecs 34, 35, 36 and 37 of the NCBA. If theoffender is a director or officer of a bank,quasi-bank or trust entity, the MB may alsosuspend or remove such director or officer. Ifthe violation is committed by a corporation,such corporation may be dissolved by quowarranto proceedings instituted by theSol.Gen.. (Sec. 66)

The provisions of any law to the contrarynotwithstanding, the BSP shall be consulted byother government agencies or instrumentalitiesin actions or proceedings initiated by orbrought before them involving controversies inbanks, QBs or trust entities arising out of andinvolving relations between and among theirdirectors, officers or stockholders, as well asdisputes between any or all of them and thebank, QBs or trust entity of which they aredirectors, officers or stockholders. (Sec. 63)

Universal Banks Commercial Banks

Powers

THE POWERS AUTHORIZEDFOR A COMMERCIALBANK;

the powers of aninvestment houseas provided inexisting laws;

andthe power to investin non-alliedenterprises asprovided in theGBL. (Sec. 23)

THE GENERAL POWERS INCIDENT TOCORPORATIONS,

ALL SUCH POWERS AS MAY BENECESSARY TO CARRY ON THEBUSINESS OF COMMERCIAL BANKING,SUCH AS

ACCEPTING DRAFTS AND ISSUINGLETTERS OF CREDIT;

DISCOUNTING AND NEGOTIATINGPROMISSORY NOTES, DRAFTS, BILLS OFEXCHANGE, AND OTHER EVIDENCES OFDEBT;

ACCEPTING OR CREATING DEMANDDEPOSITS;

RECEIVING OTHER TYPES OF DEPOSITSAND DEPOSIT SUBSTITUTES;

BUYING AND SELLING FOREIGNEXCHANGE AND GOLD OR SILVERBULLION;

ACQUIRING MARKETABLE BONDS ANDOTHER DEBT SECURITIES; AND

EXTENDING CREDIT,

SUBJECT TO SUCH RULES AS THE MBMAY PROMULGATE. THESE RULES MAYINCLUDE THE DETERMINATION OFBONDS AND OTHER DEBT SECURITIESELIGIBLE FOR INVESTMENT, THEMATURITIES AND AGGREGATE AMOUNTOF SUCH INVESTMENT. (SEC. 29)

BSP Circular 271 (2002)(1) invest in the equities of

allied enterprises;(2) purchase, hold and

convey real estate;(3) receive in custody

funds, documents andvaluable objects;

(4) act as financial agent;(5) make collections and

payments for the accountof others;

(6) act as managing agent,adviser, consultant oradministrator ofinvestmentmanagement/advisory/-consultancy accounts;

(7) rent out safety depositboxes; and

(8) engage in quasi-bankingfunctions.

Equity Investments

A UB MAY INVEST IN THEEQUITIES OF

ALLIED (EITHER FINANCIALOR NON-FINANCIAL) AND

NON-ALLIEDENTERPRISES. (SEC. 24)

EXCEPT AS THE MB MAYOTHERWISE PRESCRIBE:

THE TOTAL INVESTMENTIN EQUITIES OF ALLIEDAND NON-ALLIEDENTERPRISES SHALL NOT

A KB MAY INVEST ONLY IN THE EQUITIESOF ALLIED ENTERPRISES (EITHERFINANCIAL OR NON-FINANCIAL). (SEC.30)

EXCEPT AS THE MB MAY OTHERWISEPRESCRIBE:

THE TOTAL INVESTMENT IN EQUITIES OFALLIED ENTERPRISES SHALL NOTEXCEED 35% OF THE NET WORTH OF THEBANK; AND

THE EQUITY INVESTMENT IN ANY ONEENTERPRISE SHALL NOT EXCEED 25% OFTHE NET WORTH OF THE BANK. (SEC.



EXCEED 50% OF THE NETWORTH OF THE BANK; AND

THE EQUITY INVESTMENTIN ANY ONE ENTERPRISE,WHETHER ALLIED OR NON-ALLIED, SHALL NOTEXCEED 25% OF THE NETWORTH OF THE BANK.(SEC. 24)

30)

"NET WORTH" SHALL MEAN THE TOTAL OF THE UNIMPAIRED PAID-INCAPITAL INCLUDING PAID-IN SURPLUS, RETAINED EARNINGS ANDUNDIVIDED PROFIT, NET OF VALUATION RESERVES AND OTHERADJUSTMENTS AS MAY BE REQUIRED BY THE BSP. (SEC. 24)

THE ACQUISITION OF SUCH EQUITY OR EQUITIES IS SUBJECT TO THEPRIOR APPROVAL OF THE MB WHICH SHALL PROMULGATEAPPROPRIATE GUIDELINES TO GOVERN SUCH INVESTMENTS. (SEC. 24& 30)

Equity Investments in Financial AlliedEnterprises

A UB CAN OWN UP TO100% OF THE EQUITY IN…

A THRIFT BANK,

A RURAL BANK OR

A FINANCIAL ALLIEDENTERPRISE. (SEC. 25)

A KB MAY OWN UP TO 100% OF THEEQUITY OF

A THRIFT BANK OR

A RURAL BANK. (SEC. 31)

WHERE THE EQUITY INVESTMENT OF AKB IS IN OTHER FINANCIAL ALLIEDENTERPRISES, INCLUDING ANOTHERCOMMERCIAL BANK, SUCHINVESTMENT SHALL REMAIN AMINORITY HOLDING IN THATENTERPRISE. (SEC. 31)

A PUBLICLY-LISTED UB OR KB MAY OWN UP TO ONE 100% OF THEVOTING STOCK OF ONLY ONE OTHER UB OR KB. (SEC. 25)

BSP Circular 263 (2000)With prior BSP approval, banks may investin equities of the following financial alliedundertakings:

a. Leasing companies including leasingof stalls and spaces in a commercialestablishment; Provided, That bankinvestment in/acquisition of sharesof such leasing company shall belimited/applicable only in cases ofconversion of outstanding loanobligations into equity.

b. Banks;c. Investment houses;d. Financing companies;e. Credit card companies;f. Financial institutions catering to small

and medium scale industries includingventure capital corporations;

g. Companies engaged in stockbrokerage/securities dealership; and

h. Companies engaged in foreign exchangedealership/brokerage.

Equity Investments in Non-Financial AlliedEnterprises

A UB OR KB MAY OWN UP TO ONE HUNDRED PERCENT (100%) OF THEEQUITY IN A NON-FINANCIAL ALLIED ENTERPRISE. (SEC. 26 AND 32)Equity Investments in QBs

TO PROMOTE COMPETITIVE CONDITIONS IN FINANCIAL MARKETS, THEMB MAY FURTHER LIMIT TO 40% EQUITY INVESTMENTS OF UBS ANDKBS IN QBS. (SEC. 28)

EquityInvestments inNon-AlliedEnterprises

THE EQUITY INVESTMENTOF A UB, OR OF ITSWHOLLY OR MAJORITY-OWNED SUBSIDIARIES, INA SINGLE NON-ALLIEDENTERPRISE

1. shall not exceed35% of the totalequity in thatenterprise nor2. shall it exceed35% of the votingstock in thatenterprise. (Sec.27)

Section 7 – Foreign Banks

7.01. TRANSACTING BUSINESS IN THE PHILS

The entry of foreign banks in the Phils. throughthe establishment of branches shall begoverned by the provisions of the ForeignBanks Liberalization Act. (Sec. 72)

In the case of a foreign bank which has morethan 1 branch in the Phils., all such branchesshall be treated as 1 unit for the purpose of theGBL, and all references to the Phil. branches offoreign banks shall be held to refer to suchunits. (Sec. 74)

In all matters not specifically covered byspecial provisions applicable only to a foreignbank or its branches and other offices in thePhils., any foreign bank licensed to do businessin the Phils. shall be bound by the provisions ofthe GBL and all other laws, rules andregulations applicable to banks organized underthe laws of the Phils. of the same class, exceptthose that provide for the creation, formation,organization or dissolution of corporations orfor the fixing of the relations, liabilities,responsibilities, or duties of stockholders,members, directors or officers of corporationsto each other or to the corporation. (Sec. 77)



The conduct of offshore banking business in thePhilippines shall be governed by OffshoreBanking System Decree (PD 1034) (Sec. 72)

7.02. ACQUISITION OF VOTING STOCK IN ADOMESTIC BANK

Within 7 years from the effectivity of the GBLand subject to guidelines issued pursuant tothe Foreign Banks Liberalization Act, the MBmay authorize a foreign bank to acquire up to100% of the voting stock of only 1 domesticbank.

Within the same period, the MB may authorizeany foreign bank, which prior to the effectivityof the GBL availed itself of the privilege toacquire up to 60% of the voting stock of a bankunder the Foreign Banks Liberalization Act andthe Thrift Banks Act, to further acquire votingshares of such bank to the extent necessary forit to own 100% of the voting stock thereof.

In the exercise of this authority, the MB shalladopt measures as may be necessary to ensurethat at all times the control of 70% of theresources or assets of the entire bankingsystem is held by banks which are at leastmajority-owned by Filipinos.

Any such right, privilege or incentive granted toa foreign bank shall be equally enjoyed by andextended under the same conditions to banksorganized under Philippine laws. (Sec. 73)

7.03. HEAD OFFICE GUARANTEE

In order to provide effective protection of theinterests of the depositors and other creditorsof Phil. branches of a foreign bank, the headoffice of such branches shall fully guarantee theprompt payment of all liabilities of its Phil.branch.

Residents and citizens of the Phils. who arecreditors of a branch in the Phils. of a foreignbank shall have preferential rights to the assetsof such branch in accordance with existinglaws. (Sec. 75)

7.04. SUMMONS AND LEGAL PROCESS

Upon the Phil. Agent or Head of the ForeignBank Designated to Accept Service

Summons and legal process served uponthe Phil. agent or head of any foreign bankdesignated to accept service thereof shallgive jurisdiction to the courts over suchbank, and service of notices on such agentor head shall be as binding upon the bankwhich he represents as if made upon thebank itself.

Should the authority of such agent or headto accept service of summons and legalprocesses for the bank or notice to it berevoked, or should such agent or headbecome mentally incompetent or otherwiseunable to accept service while exercisingsuch authority, it shall be the duty of thebank to name and designate promptlyanother agent or head upon whom service

of summons and processes in legalproceedings against the bank and ofnotices affecting the bank may be made,and to file with the SEC a dulyauthenticated nomination of such agent.(Sec. 76)

Upon the BSP Deputy Governor In-Charge ofthe Supervising and Examining Departments

In the absence of the agent or head orshould there be no person authorized bythe bank upon whom service of summons,processes and all legal notices may bemade, service of summons, processes andlegal notices may be made upon the BSPDeputy Governor In-Charge of thesupervising and examining departmentsand such service shall be as effective as ifmade upon the bank or its duly authorizedagent or head.

The said Deputy Governor shall registerand transmit by mail to the president or thesecretary of the bank at its head orprincipal office a copy, duly certified byhim, of the summons, process, or notice.The sending of such copy of the summons,process, or notice shall be a necessary partof the services and shall complete theservice.

The registry receipt of mailing shall beprima facie evidence of the transmission ofthe summons, process or notice.

All costs necessarily incurred by the saidDeputy Governor for the making andmailing and sending of a copy of thesummons, process, or notice to thepresident or the secretary of the bank at itshead or principal office shall be paid inadvance by the party at whose instance theservice is made. (Sec. 76)

7.05. REVOCATION OF LICENSE

The MB may revoke the license to transactbusiness in the Phils. of any foreign bank, if itfinds that the foreign bank is insolvent or inimminent danger thereof or that itscontinuance in business will involve probableloss to those transacting business with it.

After the revocation of its license, it shall beunlawful for any such foreign bank to transactbusiness in the Phils. unless its license isrenewed or reissued. The BSP shall take thenecessary action to protect the creditors ofsuch foreign bank and the public.

The provisions of the NCBA on sanctions andpenalties shall likewise be applicable. (Sec. 78)



Section 8 – Trust Operations

8.01. AUTHORITY TO ENGAGE IN TRUSTBUSINESS

Only a stock corporation or a person dulyauthorized by the MB to engage in trust businessshall act as a trustee or administer any trust orhold property in trust or on deposit for the use,benefit, or behalf of others. For purposes of theGBL, such a corporation is referred to as a trustentity. (Sec. 79)

A trust receipt is a written/printed document anddelivered by the entrustee in favor of the entruster,whereby the latter releases the goods, documentsor instruments over which he holds absolute title ora security interest ot the possession of the former,upon the entrustee’s promist to hold said goods intrust for the entruster, an to sell or otherwisedispose of the goods, etc. with the obligation toturn over the proceeds thereof to the extent ofwhat is owing to the enstruster; or to return the

goods if UNSOLD, or for other purposes.45

8.02. BRANCHES OF TRUST ENTITY

The ordinary business of a trust entity shallbe transacted at the place of businessspecified in its articles of incorporation.Such trust entity may, with prior approvalof the MB, establish branches in thePhilippines, and the said entity shall beresponsible for all business conducted insuch branches to the same extent and inthe same manner as though such businesshad all been conducted in the head office.For the purpose of this Act, the trust entityand its branches shall be treated as oneunit. (Sec. 93)

8.03. APPLICABILITY OF CIVIL CODE

Art 1442 of the Civil Code: “The principles of thegeneral law of trusts, insofar as they are not inconflict w/ the Civil Code, the Code of Commerce,the Rules of Court and special laws [including theGBL] are hereby adopted.

8.04. HISTORY

“The idea of property held “in trust” is a greatlegacy from the Wars of the Roses and themessiness of the English Reformation. The purposeof the arrangement is to separate the benefits fromthe responsibilities of ownership—to permit, forexample, land or a business left to a widow orchildren to be managed by a strong third partycommitted to act solely in the interest of the“beneficiaries” of the trust. Though beneficiarieshave since the 15th century had the right to calltrustees to the law courts to account for theirstewardship, in fact the guts of the system is thepride of the trustee, for whom the opportunity toemploy his powers unselfishly should be an honor

45In 2007, the definition of Trust Receipt was asked.

and a privilege. “Obviously, the trustee asdescribed in law needs a soul, and comments couldbe made about the American innovation of 1818which first chartered a soulless corp to performtrust functions. The “trust company,” so called,performed a number of functions closely analogousto banking: its basic job, after all, was to investand manage safely the assets left w/ it by others.The question of the standard of care to which sucha company could be held was variously resolvedxxx. In 1833 the Supreme Judicial Council ofMassachusetts ruled that a trustee could manage atrust in any way a “prudent man” would treat hisown assets; but other states lagged far behind andwill into the 20th century most laws prescribed a“legal list” of investments approved for trusts xxx”(Morales quoting Martin Mayer in The Bankers(1974))

8.05. PRUDENT MAN AND SELF-DEALINGRULES

Prudent Man Rule A trust entity shall administer the funds or

property under its custody with the diligencethat a prudent man would exercise in theconduct of an enterprise of a like character andwith similar aims. (Sec. 80 par. 1)

The MB shall promulgate such rules andregulations as may be necessary to preventcircumvention of the prudent man rule and theresponsibility therein imposed on a trust entity.(Sec. 80 par. 3)

This rule is part of the code of conduct requiredof a trustee and thus set out in the behavioralguidelines of the Manual of Regulation ofBanks: “Sec X401 Statement of Principles. Thecardinal principle common to all trust and otherfiduciary relationships is fidelity. Policiespredicated upon this principle are directedtowards confidentiality, scrupulous care, safetyand prudent management of property includingreasonable probability of income w/ properaccounting and appropriate reporting thereon.Practices are designed to promote efficiency inadministration and operation; to adhere andconform w/ the terms of the instrument orcontract; and to maintain absolute separationof property free from any intrusion of conflict ofinterest.

“A bank authorized to engage in trust andfiduciary business is under no obligation,either legal or moral, to accept any suchbusiness being offered nor has it the rightto accept if the same is contrary to law,rules, regulations public order and publicpolicy. It shall advertise its services in adignified manner and enter such businessonly when demand for such service isevident, when specially equipped to rendersuch service and upon full appreciation ofthe responsibilities involved. It shall beready and willing to give full disclosure ofthe services being offered and shall conductits dealing w/ transparency. Harmoniousrelationship shall likewise be pursued w/other professions to achieve the commongoal of mutual service to the public andprotection of its interest.” (Morales notingthat there is a similar statement of



principles in Sec 4401Q of the Manual ofRegulations for Non-Financial Institutions)

Self-Dealing Rule GR:No trust entity shall, for the account of the

trustor or the beneficiary of the trust,

1. purchase or acquire property from, or2. sell, transfer, assign or lend money or

property to, or3. purchase debt instruments of

a. any of the departments, directors,officers, stockholders, or employeesof the trust entity

b. relatives within the 1st degree ofconsanguinity or affinity, or therelated interests, of such directors,officers and stockholders,

EXC.

1. the transaction is specifically authorizedby the trustor and

2. the relationship of the trustee and theother party involved in the transactionis fully disclosed to the trustor orbeneficiary of the trust prior to thetransaction. (Sec. 80 par. 2)

The MB shall promulgate such rules andregulations as may be necessary to preventcircumvention of the self-dealing rule or theevasion of the responsibility therein imposed ona trust entity. (Sec. 80 par. 3)

Basically, a trustee cannot engage in a selfdealing transaction unless: (1) the transactionis specifically authorized by the trustor and (2)the relationship of the trustee and itscounterparty is fully disclosed to the trustor orbeneficiary of the trust prior to the transactions(either in a separate instrument of in the trustinstrument itself). (Morales on the basis ofSubsec. X409.3 of the Manual of Regulationsfor Banks and Subsec. 4409Q.3 of the Manualof Regulations for Non-Bank FinancialInstitutions)

Rationale of the Rules

“For the protection of the public xxx, there isneed for writing into the law provisionsintended to ensure that trust managers shallhandle trust accounts along the “prudent man”concept of managing funds in trust, sincetrustors usually entrust their funds xxx in fullconfidence, secure in the belief that the trusteewill manage his funds as a prudent man would.

“There is need therefore to put in safeguards inthe law so as to ensure that the expectedprudence in management shall indeed be thenorm, Such safeguards or guidelines may takethe form of prohibition form purchasing oracquiring property for the trust or for accountof the trustor or beneficiary of the trust fromthe bank proper or any of its dep’ts ordirectors, officers or employees, unlessspecifically authorized by the trustor.

“It has been said that the essence oftrusteeship is that the trustee would not be

motivated by self-interest, that on no accountshall it receive any personal advantage fromthe trusteeship, that it shall permit no dealingsof any character between itself as an individualor corp and itself in its capacity as trustee, andthat it shall receive from the trust no profit orfinancial return, directly or indirectly, otherthan its rightful compensation for servicesrendered.” (Morales citing Recommendation 70of Joint IMF-CBP Banking Survey Commission)

8.06. REGISTRATION REQUIREMENT

The SEC shall not register the articles ofincorporation and by-laws or any amendmentthereto, of any trust entity, unlessaccompanied by a certificate of authority issuedby the BSP. (Sec. 80)

Reiterates the requirements under theCorporation Code. (Morales)

Note: Sec 17 par 2 of the Corporation Code: “Noarticles of incorporation or amendment to thearticles of incorporation of banks, banking andQuasi-banking institutions, building and loanassociations, trust companies and other financialintermediaries, insurance companies, publicutilities, educational institutions, and other corpsgoverned by special laws shall be accepted orapproved by the SEC unless accompanied by afavorable recommendation of the appropriategovernment agency to the effect that such articlesor amendment is in accordance with law.” AND Sec46 par 4: “The SEC shall not accept for filing theby-laws or any amendment thereto of any bank,banking institution, building and loan association,trust company, insurance company, public utility,educational institution or other special corpsgoverned by special laws, unless accompanied by acertificate of the appropriate government agency tothe effect that such by-laws or amendments are inaccordance with law.

The certificate of authority need not be issuedby the MB itself under its seal. (Morales)

8.07. MINIMUM CAPITALIZATION

A trust entity, before it can engage in trust orother fiduciary business, shall comply with theminimum paid-in capital requirement which willbe determined by the MB. (Sec. 82)

This means it must have combined capitalaccounts of P250M. “Combined capitalaccounts” refers to the the total capital stock,retained earnings and profit and loss summary,net of (1) such unbooked valuation reservesand other capital adjustments as may berequired by the BSP and (2) total outstandingunsecured credit accommodations, both directand indirect, to DOSRI When applicant is adomestic bank, the combined capital accountsmust not be less that the minimum capitalprescribed by the MB for such bank but in nocase less than P250M; and when applicant is abranch of a foreign bank, it must comply with /



the capital requirement applicable to such localbank. (Morales citing various provisions of theManual of Regulations for Non-Bank FinancialInstitutions and the Manual of Regulation forBanks)

8.08. POWERS OF A TRUST ENTITYA trust entity, in addition to the general powersincident to corporations, shall have the power to:

1. Act as trustee on any mortgage or bondissued by any municipality, corporation, orany body politic and to accept and executeany trust consistent with law;

2. Act under the order or appointment of anycourt as guardian, receiver, trustee, ordepositary of the estate of any minor orother incompetent person, and as receiverand depositary of any moneys paid intocourt by parties to any legal proceedingsand of property of any kind which may bebrought under the jurisdiction of the court;

3. Act as the executor of any will when it isnamed the executor thereof;

4. Act as administrator of the estate of anydeceased person, with the will annexed, oras administrator of the estate of anydeceased person when there is no will;

5. Accept and execute any trust for theholding, management, and administrationof any estate, real or personal, and therents, issues and profits thereof; and

6. Establish and manage common trust funds,subject to such rules and regulations asmay be prescribed by the MB. (Sec. 83)

8.09. GENERAL GROUPINGS

1. Trust Business

- any activity resulting from a trustor-trustee relationship (trusteeship)involving the appointment of a trusteeby a trustor for the administration,holding management of funds and/orproperties of the trustor by the trusteefor the use benefit or advantage of thetrustor or of others called beneficiaries

- Trust entity enters into a propertyrelationship, wherein legal title to theproperty is transferred to it (as trustee)by a trustor for the benefit of one ormore beneficiaries, who may or maynot include the trustor. There is thus adivision of legal and beneficial interestsin and to the property entrusted to thetrust entity. The trustor is able to shiftthe burden of management of theproperty to the trustee and, at thesame time, confer the benefits ofownership on the beneficiary.

Note: Art 1440 Civil Code. A person whoestablishes a trust is called the trustor; one inwhom confidence is reposed as regards propertyfor the benefit of another person is known as thetrustee; and the person for whose benefit the trusthas been created is referred to as the beneficiary.

2. Other fiduciary business

- any activity of a trust licensed bankresulting from a contract or agreementwhereby the bank binds itself to renderservices or to act in a representativecapacity such as in an agency,guardianship, Administratorship ofwills, properties and estates,executorship, receivership, and othersimilar services which do not create orresult in a trusteeship.

- It shall exclude collecting or payingagency arrangements and similarfiduciary services which are inherent inthe use of the facilities of the otherdep’ts of said bank. Investmentmanagement activities, which areconsidered as among other fiduciarybusiness, shall be separately defined inthe succeeding item to highlights itsbeing a major source of fiduciarybusiness.

- Does not act as a trustee but rendersservices to its counterparty in arepresentative capacity. In particular,the trust entity acts as agent, adviser,consultant or administrator, in respectof an investment management account.

- Art 1060 Civil Code. A corporation orassociation authorized to conduct thebusiness of a trust company in the Philsmay be appointed as an executor,administrator, guardian of an estate, ortrustee, in like manner as an individual;but it shall not be appointed guardianof the person of a ward.

3. Investment management activity

- Any activity resulting from a contract oragreement primarily for financial returnwhereby the bank (the investmentmanager) binds itself to handle ormanage investible funds or anyinvestment portfolio in a representativecapacity as financial or managingagent, adviser, consultant oradministrator of financial or investmentmanagement, advisory, consultancy orany similar arrangement which doesnot create of result in a trusteeship.(Morales)

8.10. NECESSARY DEPOSITS

1. Basic Security

- Before transacting trust business, everytrust entity shall deposit with the BSP assecurity for the faithful performance of itstrust duties, cash or securities approved bythe MB in an amount equal to not less thanP500,000 or such higher amount as may befixed by the MB.

- The MB shall require every trust entity toincrease the amount of its cash orsecurities on deposit with the BSPwhenever in its judgment such increase isnecessary by reason of the trust businessof such entity. (Sec. 84)



2. Paid-In Capital and Security

- The paid-in capital and surplus of suchentity must be at least equal to the amountrequired to be deposited with the BSP inaccordance with the provisions of thisparagraph. (Sec. 84)

3. Reserves

- In addition to basic security, a trust entityis required to maintain reserves againstpeso-denominated common trust funds aswell as certain trust and other fiduciaryaccounts. (Morales citing Subsec X405.5Manual of Regulation for banks; Subsec4405Q.5 Manual of regulation for Non-bankFinancial Institutions)

Failure to Maintain such Amounts

Should the capital and surplus fall belowsaid amount, the MB shall have the sameauthority as that granted to it under theprovisions of the fifth paragraph of Sec. 34of the GBL.

A trust entity so long as it shall continue to besolvent and comply with laws or regulationsshall have the right to collect the interestearned on such securities deposited with theBSP and, from time to time, with the approvalof the BSP, to exchange the securities forothers.

If the trust entity fails to comply with any lawor regulation, the BSP shall retain such intereston the securities deposited with it for thebenefit of rightful claimants.

All claims arising out of the trust business of atrust entity shall have priority over all otherclaims as regards the cash or securitiesdeposited as above provided. The MB may notpermit the cash or securities deposited to bereduced below the prescribed minimum amountuntil the depositing entity shall discontinue itstrust business and shall satisfy the MB that ithas complied with all its obligations inconnection with such business. (Sec. 84)

4. Bond

- Before an executor, administrator,guardian, trustee, receiver or depositaryappointed by the court enters upon theexecution of his duties, he shall, upon orderof the court, file a bond in such sum, as thecourt may direct. (Sec. 85)

- Upon the application of any executor,administrator, guardian, trustee, receiver,depositary or any other person in interest,the court may, after notice and hearing,order that the subject matter of the trust orany part thereof be deposited with a trustentity. Upon presentation of proof to thecourt that the subject matter of the trusthas been deposited with a trust entity, thecourt may order that the bond given bysuch persons for the faithful performance of

their duties be reduced to such sums as itmay deem proper: Provided, however, Thatthe reduced bond shall be sufficient tosecure adequately the properadministration and care of any propertyremaining under the control of suchpersons and the proper accounting for suchproperty. Property so deposited with anytrust entity shall be held by such entityunder the orders and direction of the court.(Sec.85)

- No bond or other security shall be requiredby the court from a trust entity for thefaithful performance of its duties as court-appointed trustee, executor, administrator,guardian, receiver, or depositary. However,the court may, upon proper application withit showing special cause therefor, requirethe trust entity to post a bond or othersecurity for the protection of funds orproperty confided to such entity. (Sec. 86)

- That trust entities need not post a bond,unless required by the court, for the faithfulperformance of Sec 85 GBL duties is basedon the presumption that trust entitiesalready have a basic security deposit withthe BSP. (Morales)

8.11. SEPARATION OF TRUST BUSINESS ANDASSETS FROM THE OTHER BUSINESSES ANDASSETS OF THE BANK

The trust business and all funds, properties orsecurities received by any trust entity asexecutor, administrator, guardian, trustee,receiver, or depositary shall be kept separateand distinct from the general business includingall other funds, properties, and assets of suchtrust entity. The accounts of all such funds,properties, or securities shall likewise be keptseparate and distinct from the accounts of thegeneral business of the trust entity. (Sec. 87)

Trust Business Separation. “Trust and otherfiduciary business of a bank shall be carried outthrough a trust dep’t which shall beorganizationally, operationally, administrativelyand functionally separate and distinct from theother dep’ts and/or business of the institution.”(Morales citing Subsec X406.1.a Manual ofRegulations for Banks)

Trust Assets Separation. “All moneys,properties or securities by a bank in its capacityas trustee, fiduciary or invesmtnet managershall be kept physically separate and distinctfromt eh other assets of its other business andshal be under the joint custody of at least 2persons, one of whom shall be an officer of thetrust or investment management dep’t,designated for that purpose by the board ofdirectors. The investment of each trust, otherfiduciary or investment management accountshall be kept physically separate from those ofother trust, other fiduciary or investmentmanagement accounts, and adequatelyidentifies as the assets of property of therelevant account.” (Morales citing Sec X422Ibid.)



Investment of Non-Trust Funds. Theinvestment of funds other than trust funds of atrust entity which is a bank, financing companyor an investment house shall be governed bythe relevant provisions of the GBL and otherapplicable laws. (Sec. 90)

If the trust entity is a unit of a bank, afinancing company or an investment house,then non-trust business activities areconducted by other units of such bank,financing company or investment house.(Morales)

8.12. INVESTMENT LIMITATIONS

Unless otherwise directed by the instrumentcreating the trust, the lending and investmentof funds and other assets acquired by a trustentity as executor, administrator, guardian,trustee, receiver or depositary of the estate ofany minor or other incompetent person shall belimited to loans or investments as may beprescribed by law, the MB or any court ofcompetent jurisdiction. (Sec. 88)

Historical Note. It used to be that a trustcompany, particularly in the US could ownanything. In fact, many national banks werethen subsidiaries of trust companies. Whenmonopolies were being made in the 19th and20th centuries, the devise used was the trust,as it could hold the stock of all companies w/inthe group. Accordingly, then the US Congresswas breaking up monopolies, what were passedwere “anti-trust” laws. (Morales)

8.13. LOANS OR INVESTMENTS PRESCRIBEDBY MB

“Unless otherwise specifically enumerated in theagreement or indenture and directed in writing bythe client, court of competent jurisdiction or othercompetent authority, loans and investments of the[trust or other fiduciary] fund shall be limited to:

1. (a) evidences of indebtedness of the RPand BSP, and(b) any other evidences of indebtedness orobligations the servicing and repayment ofwhich are fully guaranteed by the RP or(c) loans against such governmentsecurities;

2. loans fully guaranteed by the RP as to thepayment of principal and interest;

3. loans fully secured by [a] a hold-out on, [b]assignment or [c] pledge of depositsmaintained either w/ the bank or otherbanks, or of deposit substitutes of thebank, or of [d] chattel mortgage bondsissued by the trustee or fiduciary; and

4. loans fully secured by real estate orchattels” (Morales referring to SubsecX409.2 Ibid; similar rule in Subsec 4409Q.2Manual o Regulations for Non-BankFinancial Institutions)

8.14. REAL ESTATE INVESTMENTS

Unless otherwise specifically directed by thetrustor or the nature of the trust, real estate

acquired by a trust entity in whatever mannerand for whatever purpose, shall likewise begoverned by the relevant provisions of Sec. 52of the GBL. (Sec. 89)

The reference to Sec 52 is w/out prejudice tothe directives of the trustor or the nature of thetrust itself. It is to be understood that the trustentity can take specific directives from thetrustor only if the trust is revocable. But if it isirrevocable, then the trustor is out of thepicture and the trust entity should takeinstructions from the beneficiaries themselvesin the context of the trust instrument inquestion. (Morales)

8.15. SANCTIONS AND PENALTIES

A trust entity or any of its officers and directorsfound to have willfully violated any pertinentprovisions of the GBL, shall be subject to thesanctions and penalties provided under Sec. 66of the GBL and Secs. 36 and 37 of the NCBA.

8.16. EXEMPTION OF TRUST ASSETS FROMCLAIMS

No assets held by a trust entity in its capacityas trustee shall be subject to any claims otherthan those of the parties interested in thespecific trusts. (Sec. 92)

Rationale. The creditors of the trustee will notbe able to attach, garnish or otherwise claimthe trust assets, because the trustee is not thebeneficial owner thereof. Only the :”partiesinterested in the specific trust” (normally, thebeneficiaries of the trust) can claim thoseassets. This is further reinforced by thefollowing: “Art 2240 Civil Code. Property heldby the insolvent debtor as a trustee of anexpress or implied trust, shall be excluded fromthe insolvency proceedings.” (Morales)



Section 9 – Conservatorship and Cessation

of Banking Business

9.01. CONSERVATORSHIP

The grounds and procedures for placing a bankunder conservatorship, as well as, the powersand duties of the conservator appointed for thebank shall be governed by the provisions ofSec. 29 and the last two paragraphs of Sec. 30of the NCBA: Provided, That this Section shallalso apply to conservatorship proceedings ofQBs. (Sec. 67, please refer to companionreviewer)

9.02. VOLUNTARY LIQUIDATION

In case of the voluntary liquidation of any bankorganized under the laws of the Phils., or ofany branch or office in the Phils. of a foreignbank, written notice of such liquidation shall besent to the MB before such liquidation isundertaken, and the MB shall have the right tointervene and take such steps as may benecessary to protect the interests of creditors.(Sec. 68)

9.03. RECEIVERSHIP AND INVOLUNTARYLIQUIDATION

The grounds and procedures for placing a bankunder receivership or liquidation, as well as thepowers and duties of the receiver or liquidatorappointed for the bank shall be governed bythe provisions of Secs. 30, 31, 32, and 33 ofthe NCBA: Provided, That the petitioner orplaintiff files with the clerk or judge of the courtin which the action is pending a bond, executedin favor of the BSP, in an amount to be fixed bythe court. This shall also apply to the extentpossible to the receivership and liquidationproceedings of QBs. (Sec. 69)

9.04. PENALTY FOR TRANSACTIONS AFTER ABANK BECOMES INSOLVENT

Any director or officer of any bank declaredinsolvent or placed under receivership by theMB shall be subject to the penal provisions ofthe NCBA if he1. refuses to turn over the bank's records and

assets to the designated receivers,2. tampers with banks records,3. appropriates for himself or another party or

destroys or causes the misappropriationand destruction of the bank's assets,

4. receives or permits or causes to bereceived in said bank any deposit,collection of loans and/or receivables,

5. pays out or permits or causes to be paidout any funds of said bank, or

6. transfers or permits or causes to betransferred any securities or property ofsaid bank (Sec. 70)

II. The New Central Bank Act (RA

7653)

A. Creation, Responsibilities and

Corporate Powers of the BSP

1. DECLARATION OF POLICY

1. The State shall maintain a central monetaryauthority that shall function and operate as anindependent and accountable body corporate inthe discharge of its mandated responsibilitiesconcerning money, banking and credit. (Sec. 1)

2. In line with this policy, and considering itsunique functions and responsibilities, thecentral monetary authority established underthe NCBA, while being a gov’t-ownedcorporation, shall enjoy fiscal andadministrative autonomy. (Sec. 1)

NOTEThe NCBA establishes the independent centralmonetary authority, which is a body corporateknown as the BSP. (Sec. 2)

2. PRIMARY OBJECTIVE AND ROLE OF THEBSP

1. To maintain price stability conducive to abalanced and sustainable growth of theeconomy. (Primary Objective)

2. To promote and maintain monetary stabilityand the convertibility of the peso.

3. To provide policy directions in the areas ofmoney, banking, and credit.

4. To have supervision over the operations ofbanks

5. To exercise such regulatory powers (asprovided under the NCBA and other pertinentlaws) over the operations of finance companiesand non-bank financial institutions performingquasi-banking functions and institutionsperforming similar functions. (Sec. 3)

NOTEPhase-out of Regulatory Powers Over theOperations of Finance Corporations and OtherInstitutions Performing Similar Functions. The BSPshall, within a period of 5 years from the effectivityof this Act, phase out its regulatory powers overfinance companies without quasi-banking functionsand other institutions performing similar functionsas provided in existing laws, the same to beassumed by the SEC. (Sec. 130)

3. CAPITAL OF THE BSP

The capital of the BSP shall be P50B, to be fullysubscribed by the Gov’t of the RP. (Sec. 2)

4. PLACE OF BUSINESS OF THE BSP

The BSP shall have its principal place of business inMetro Manila, but may maintain branches, agenciesand correspondents in such other places as theproper conduct of its business may require. (Sec.4)



5. CORPORATE POWERS

1. To adopt, alter, and use a corporate seal whichshall be judicially noticed;

2. To enter into contracts;3. To lease or own real and personal property,

and to sell or otherwise dispose of the same;4. To sue and be sued; and5. To acquire and hold such assets and incur such

liabilities in connection with its operationsauthorized by the provisions of the NCBA, or asare essential to the proper conduct of suchoperations;

6. To compromise, condone or release, in wholeor in part, any claim of or settled liability to theBSP, regardless of the amount involved, undersuch terms and conditions as may beprescribed by the MB to protect the interests ofthe BSP;

7. To do and perform any and all things that maybe necessary or proper to carry out thepurposes of the NCBA (Sec. 5)

NOTEThe powers and functions of the BSP shall beexercised by the BSP MB. (Sec. 6)

6. CREATION: FROM CB TO BSP

1. Transfer of Assets and Liabilities

Upon the effectivity of this Act, 3 members ofthe MB, which may include the Governor, inrepresentation of the BSP, the Secretary ofFinance and the Secretary of Budget andManagement in representation of the NationalGovernment, and the Chairmen of theCommittees on Banks of the Senate and theHouse of Representatives shall determine theassets and liabilities of the Central Bank (CB)which may be transferred to or assumed by theBSP. (Sec. 132)46

46 “The Committee shall complete its work within 90 daysfrom the constitution of the MB submitting a comprehensivereport with all its findings and justification. The followingguidelines shall be strictly observed in the determination ofwhich assets and liabilities shall be transferred to the BSP:(a) the MB and the Secretary of Finance shall have primaryresponsibility for working out creative monetary and financialsolutions to retire the Central Bank liabilities and losses at theleast cost to the Government; (b) the BSP shall remit 75% ofits net profits to a special deposit account (sinking fund) untilsuch time as the net liabilities of the Central Bank shall havebeen liquidated through generally accepted financemechanisms such as, but not limited to, write-offs, set-offs,condonation, collections, reappraisal, revaluation and bondissuance by the National Government, or to the NationalGovernment as dividends; (c) the assets and liabilities to betransferred shall be limited to an amount that will enable theBSP to perform its responsibilities adequately and operate ona viable basis: Provided, That the assets shall exceed theliabilities as certified by the COA, by an initial amount ofP10B; (d) liabilities to be assumed by the BSP shall includeliability for notes and coins in circulation as of the effectivedate of this Act; and (e) any asset or liability of the CentralBank not transferred to the BSP shall be retained andadministered, disposed of and liquidated by the Central Bankitself which shall continue to exist as the CB Board ofLiquidators only for the purposes provided in this paragraphbut not later than twenty-five (25) years or until such timethat liabilities have been liquidated: Provided, That the BSPmay financially assist the Central Bank of Liquidators in the

2. Mandate to Organize

The BSP shall be organized by the MB byadopting, if it so desires, an entirely newstaffing pattern on organizational structure tosuit the operations of the BSP. No preferentialor priority right shall be given to or enjoyed byany personnel for appointment to any positionin the new staffing pattern, nor shall anypersonnel be considered as having prior orvested rights with respect to retention in theBSP or in any position which may be created inthe new staffing pattern, even if he should bethe incumbent of a similar position prior toorganization. The formulation of the programof organization shall be completed within 6months after the effectivity of this Act, andshall be fully implemented within a period of 6months thereafter. Personnel who may not beretained are deemed separated from theservice. (Sec. 133)

3. Separation Benefits

Pursuant to Sec. 15 of this Act, the MB isauthorized to provide separation incentives,and all those who shall retire or be separatedfrom the service on account of reorganizationunder the preceding section shall be entitled tosuch incentives, which shall be in addition to allgratuities and benefits to which they may beentitled under existing laws. (Sec. 134)

4. Transfer of Powers

All powers, duties and functions vested by lawin the Central Bank of the Philippines notinconsistent with the provisions of this Act shallbe deemed transferred to the BSP. Allreferences to the Central Bank of thePhilippines in any law or special charters shallbe deemed to refer to the BSP. (Sec. 136)

5. Implementing Details

The BSP shall be made operational by theperformance of the following acts: (a) thePresident shall constitute the MB by appointingthe members thereof within 60 days from theeffectivity of this Act; and (b) the transfer ofsuch assets and liabilities from the CentralBank to the BSP as provided in Sec. 132 shallbe completed within 90 days from theconstitution of the MB.

All incumbent personnel in the Central Bank asof the date of the approval of this Act shallcontinue to exercise their duties and functionsas personnel of the BSP subject to theprovisions of Section 133: Provided, That suchpersonnel in the Central Bank as may benecessary for the purpose of implementingSection 132 may be assigned by the BSP MB tothe Central Bank. (Sec. 131)

liquidation of CB liabilities: Provided, finally, That upondisposition of said retained assets and liquidation of saidretained liabilities, the Central Bank shall be deemedabolished.

“All actions taken by the BSP MB under this section shallbe reported to Congress and the President within 30 days.”(Sec. 132)



B. The Monetary Board

1. COMPOSITION

The MB is composed of 7 members appointed bythe President for a term of 6 years. No member ofthe MB may be reappointed more than once.

1. BSP Governor, who shall be the Chairman ofthe MB — shall be head of a department andhis appointment shall be subject toconfirmation by the COA. Whenever theGovernor is unable to attend a meeting of theBoard, he shall designate a Deputy Governor toact as his alternate: Provided, That in suchevent, the MB shall designate one of itsmembers as acting Chairman;

2. Cabinet Member — designated by thePresident. Whenever the designated CabinetMember is unable to attend a meeting of theBoard, he shall designate an Undersecretary inhis Department to attend as his alternate; and

3. 5 Members from the Private Sector —all ofwhom shall serve full-time: Provided, however,That three 3 shall have a term of 6 years, andthe other 2, 3 years.

2. MEMBERS

1 . Qualifications of Members

1. Must be natural-born citizens of thePhilippines,

2. Must be at least 35 years of age, with theexception of the Governor who should atleast be 40 years of age,

3. Must be of good moral character,4. Must be of unquestionable integrity,5. Must be of known probity and patriotism,

and6. Must be with recognized competence in

social and economic disciplines. (Sec. 8)

2 . Disqualifications of Members

1. The disqualifications imposed by RA 6713(Code of Conduct and Ethical Standards forPublic Officials and Employees), and

2. A Member may not be a director, officer,employee, consultant, lawyer, agent orstockholder of any bank, QB or any otherinstitution which is subject to supervision orexamination by the BSP. In such cases, heshall resign from, and divest himself of anyand all interests in such institution beforeassumption of office as member of the MB.

3. The members of the MB coming from theprivate sector shall not hold any otherpublic office or public employment duringtheir tenure.

4. No person shall be a member of the MB ifhe has been connected directly with anymultilateral banking or financial institutionor has a substantial interest in any privatebank in the Phils., within 1 year prior to hisappointment;

5. No member of the MB shall be employed inany such institution within 2 years after theexpiration of his term except when heserves as an official representative of thePhilippine Government to such institution.(Sec. 9)

NOTE1. In addition to the requirements of RA 6713

(Code of Conduct and Ethical Standards forPublic Officials and Employees), anymember of the MB with personal orpecuniary interest in any matter in theagenda of the MB shall disclose his interestto the MB and shall retire from the meetingwhen the matter is taken up. The decisiontaken on the matter shall be made public.The minutes shall reflect the disclosuremade and the retirement of the memberconcerned from the meeting. (Sec. 14)

2. Outside Interests of the Governor and theFull-time Members of the Board. TheGovernor of the BSP and the full-timemembers of the Board shall limit theirprofessional activities to those pertainingdirectly to their positions with the BSP.Accordingly, they may not accept any otheremployment, whether public or private,remunerated or ad honorem, with theexception of positions in eleemosynary,civic, cultural or religious organizations orwhenever, by designation of the President,the Governor or the full-time member istasked to represent the interest of theGovernment or other government agenciesin matters connected with or affecting theeconomy or the financial system of thecountry. (Sec. 20)

3. Vacancies

Any vacancy in the MB created by the death,resignation, or removal of any member shall befilled by the appointment of a new member tocomplete the unexpired period of the term of themember concerned. (Sec. 7)

4. Removal

The President may remove any member of the MBfor any of the following reasons:

1. If he no longer possesses the qualificationsspecified

2. If he is subsequently disqualified under anyof the instances provided fordisqualification;

3. If he is physically or mentally incapacitatedthat he cannot properly discharge hisduties and responsibilities and suchincapacity has lasted for more than 6months; or

4. If he is guilty of acts or operations whichare of fraudulent or illegal character orwhich are manifestly opposed to the aimsand interests of the BSP. (Sec. 10)

5. Salary

The salary of the Governor and the members of theMB from the private sector shall be fixed by thePresident at a sum commensurate to theimportance and responsibility attached to theposition. (Sec. 13)



3. EXERCISE OF AUTHORITY

In the exercise of its authority, the MB shall:1. Issue rules and regulations it considers

necessary for the effective discharge of theresponsibilities and exercise of the powers vestedupon the MB and the BSP. The rules andregulations issued shall be reported to thePresident and the Congress within 15 days fromthe date of their issuance;

2.Direct the management, operations, andadministration of the BSP, reorganize itspersonnel, and issue such rules and regulationsas it may deem necessary or convenient for thispurpose. The legal units of the BSP shall beunder the exclusive supervision and control of theMB;

3.Establish a human resource management systemwhich shall govern the selection, hiring,appointment, transfer, promotion, or dismissal ofall personnel. Such system shall aim to establishprofessionalism and excellence at all levels of theBSP in accordance with sound principles ofmanagement.47

4.Adopt an annual budget for and authorize suchexpenditures by the BSP as are in the interest ofthe effective administration and operations of theBSP in accordance with applicable laws andregulations; and

5. Indemnify its members and other officials of theBSP, including personnel of the departmentsperforming supervision and examinationfunctions against all costs and expensesreasonably incurred by such persons inconnection with any civil or criminal action, suitor proceedings to which he may be, or is, made aparty by reason of the performance of hisfunctions or duties, unless he is finally adjudgedin such action or proceeding to be liable fornegligence or misconduct.48 (Sec. 15)

47 “A compensation structure, based on job evaluationstudies and wage surveys and subject to the MB's approval,shall be instituted as an integral component of the BSP'shuman resource development program: Provided, That theMB shall make its own system conform as closely as possiblewith the principles provided for under RA 6758(Compensation and Position Classification Act of 1989):Provided, however, That compensation and wage structure ofemployees whose positions fall under salary grade 19 andbelow shall be in accordance with the rates prescribed underRA 6758.

“On the recommendation of the Governor, appoint, fixthe remunerations and other emoluments, and removepersonnel of the BSP, subject to pertinent civil service laws:Provided, That the MB shall have exclusive and final authorityto promote, transfer, assign, or reassign personnel of the BSPand these personnel actions are deemed made in the interestof the service and not disciplinary: Provided, further, That theMB may delegate such authority to the Governor under suchguidelines as it may determine.” (Sec. 15)

48 “In the event of a settlement or compromise,indemnification shall be provided only in connection with suchmatters covered by the settlement as to which the BSP isadvised by external counsel that the person to be indemnifieddid not commit any negligence or misconduct.

“The costs and expenses incurred in defending theaforementioned action, suit or proceeding may be paid by theBSP in advance of the final disposition of such action, suit orproceeding upon receipt of an undertaking by or on behalf ofthe member, officer, or employee to repay the amountadvanced should it ultimately be determined by the MB thathe is not entitled to be indemnified as provided in thissubsection.” (Sec. 15)

4. MEETINGS

NOTES

1. The MB shall meet at least once a week. (Sec.11)

2. The MB may be called to a meeting by theGovernor or by 2 other members of the MB.(Sec. 11)

3. The presence of 4 members shall constitute aquorum: Provided, That in all cases theGovernor or his duly designated alternate shallbe among the 4 (Sec. 11)

4. Unless otherwise provided in this Act, alldecisions of the MB shall require theconcurrence of at least 4 members. (Sec. 11)

5. The BSP shall maintain and preserve acomplete record of the proceedings anddeliberations of the MB, including the tapes andtranscripts of the stenographic notes, either intheir original form or in microfilm. (Sec. 11)

6. The Deputy Governors may attend themeetings of the MB with the right to be heard.(Sec. 12)

7. In case of emergencies where time isinsufficient to call a meeting of the MB, theGovernor of the BSP, with the concurrence of 2other members of the MB, may decide anymatter or take any action within the authorityof the Board. The Governor shall submit areport to the President and Congress within 72hours after the action has been taken. At thesoonest possible time, the Governor shall call ameeting of the MB to submit his action forratification. (Sec. 19)

5. SANCTIONS

NOTES

1. Members of the MB, officials, examiners, andemployees of the BSP who willfully violate thisAct or who are guilty of negligence, abuses oracts of malfeasance or misfeasance or fail toexercise extraordinary diligence in theperformance of his duties shall be held liablefor any loss or injury suffered by the BSP orother banking institutions as a result of suchviolation, negligence, abuse, malfeasance,misfeasance or failure to exercise extraordinarydiligence. (Sec. 16)

2. Similar responsibility shall apply to members,officers, and employees of the BSP for:

a.the disclosure of any information of aconfidential nature, or any information on thediscussions or resolutions of the MB, or aboutthe confidential operations of the BSP, unlessthe disclosure is in connection with theperformance of official functions with theBSP, or is with prior authorization of the MBor the Governor; or

b.the use of such information for personal gainor to the detriment of the Government, theBSP or third parties: Provided, however, Thatany data or information required to besubmitted to the President and/or theCongress, or to be published under theprovisions of this Act shall not be consideredconfidential. (Sec. 16)



6. GOVERNOR

1. Powers and Duties

The Governor shall be the chief executive officer ofthe BSP. (Sec. 17)

1. prepare the agenda for the meetings of the MBand to submit for the consideration of the MBthe policies and measures which he believes tobe necessary to carry out the purposes andprovisions of the NCBA;

2. execute and administer the policies andmeasures approved by the MB;

3. direct and supervise the operations and internaladministration of the BSP. The Governor maydelegate certain of his administrativeresponsibilities to other officers or may assignspecific tasks or responsibilities to any full-timemember of the MB without additionalremuneration or allowance whenever he maydeem fit or subject to such rules andregulations as the MB may prescribe;

4. appoint and fix the remunerations and otheremoluments of personnel below the rank of adepartment head in accordance with theposition and compensation plans approved bythe MB, as well as to impose disciplinarymeasures upon personnel of the BSP, subjectto the provisions of Section 15(c) of this Act:Provided, That removal of personnel shall bewith the approval of the MB;

5. render opinions, decisions, or rulings, whichshall be final and executory until reversed ormodified by the MB, on matters regardingapplication or enforcement of laws pertaining toinstitutions supervised by the BSP and lawspertaining to quasi-banks, as well asregulations, policies or instructions issued bythe MB, and the implementation thereof; and

6. exercise such other powers as may be vestedin him by the MB. (Sec. 17)

2. Representation of the MB and the BSP

The Governor of the BSP shall be the principalrepresentative of the MB and of the BSP and, insuch capacity and in accordance with theinstructions of the MB, he shall be empowered to:

1. represent the MB and the BSP in all dealingswith other offices, agencies andinstrumentalities of the Government and allother persons or entities, public or private,whether domestic, foreign or international;

2. sign contracts entered into by the BSP, notesand securities issued by the BSP, all reports,balance sheets, profit and loss statements,correspondence and other documents of theBSP. The signature of the Governor may be infacsimile whenever appropriate;

3. represent the BSP, either personally or throughcounsel, including private counsel, as may be

authorized by the MB, in any legal proceedings,action or specialized legal studies; and

4. delegate his power to represent the BSP, asprovided in subsections (a), (b) and (c) of thissection, to other officers upon his ownresponsibility: Provided, however, That in orderto preserve the integrity and the prestige of hisoffice, the Governor of the BSP may choose notto participate in preliminary discussions withany multilateral banking or financial institutionon any negotiations for the Gov’t within oroutside the Phils. During the negotiations, hemay instead be represented by a permanentnegotiator. (Sec. 18)

3. Deputy Governor(s)

NOTES1. The Governor of the BSP, with the approval of

the MB, shall appoint not more than 3 DeputyGovernors who shall perform duties as may beassigned to them by the Governor and theBoard.

2. In the absence of the Governor, a DeputyGovernor designated by the Governor shall actas chief executive of the BSP and shall exercisethe powers and perform the duties of theGovernor. Whenever the Government is unableto attend meetings of government boards orcouncils in which he is an ex officio memberpursuant to provisions of special laws, a DeputyGovernor as may be designated by theGovernor shall be vested with authority toparticipate and exercise the right to vote insuch meetings. (Sec. 21)

C. Operations of the BSP

1. SUPERVISION AND EXAMINATION

The BSP shall have supervision over, and conductperiodic or special examinations of, bankinginstitutions and quasi-banks, including theirsubsidiaries and affiliates49 engaged in alliedactivities. (Sec. 24)

The department heads and the examiners of thesupervising and/or examining departments arehereby authorized to administer oaths to anydirector, officer, or employee of any institutionunder their respective supervision or subject totheir examination and to compel the presentationof all books, documents, papers or recordsnecessary in their judgment to ascertain the factsrelative to the true condition of any institution aswell as the books and records of persons andentities relative to or in connection with theoperations, activities or transactions of theinstitution under examination, subject to theprovision of existing laws protecting orsafeguarding the secrecy or confidentiality of bankdeposits as well as investments of private persons,

49 Subsidiary —a corporation more than 50% of thevoting stock of which is owned by a bank or QB.

Affiliate —a corporation the voting stock of which, to theextent of 50% or less, is owned by a bank or QB or which isrelated or linked to such institution or intermediary throughcommon stockholders or such other factors as may bedetermined by the MB. (Sec. 24)



natural or juridical, in debt instruments issued bythe Gov’t. (Sec. 24)

1. No Restraining Order

No restraining order or injunction shall be issued bythe court enjoining the BSP from examining anyinstitution subject to supervision or examination bythe BSP, unless there is convincing proof that theaction of the BSP is plainly arbitrary and made inbad faith and the petitioner or plaintiff files with theclerk or judge of the court in which the action ispending a bond executed in favor of the BSP, in anamount to be fixed by the court. (Sec. 24)50

2. Waiver of Secrecy of Deposits in DOSRIAccounts

Any director, officer or stockholder who, togetherwith his related interest (DOSRI), contracts a loanor any form of financial accommodation from:

1. his bank; or2. from a bank (a) which is a subsidiary of a

bank holding company of which both hisbank and the lending bank are subsidiariesor (b) in which a controlling proportion ofthe shares is owned by the same interestthat owns a controlling proportion of theshares of his bank,

in excess of 5% of the capital and surplus of thebank, or in the maximum amount permitted bylaw, whichever is lower, shall be required by thelending bank to waive the secrecy of his deposits ofwhatever nature in all banks in the Philippines.51

(Sec. 26)

3. Examination and Fees

The supervising and examining departmenthead, personally or by deputy, shall examinethe books of every banking institution once inevery 12 months, and at such other times asthe MB by an affirmative vote of 5 members,may deem expedient and to make a report onthe same to the MB: Provided, That there shallbe an interval of at least twelve 12 monthsbetween annual examinations.

The bank concerned shall afford to the head ofthe appropriate supervising and examiningdepartments and to his authorized deputies fullopportunity to examine its books, cash andavailable assets and general condition at anytime during banking hours when requested todo so by the BSP: Provided, however, Thatnone of the reports and other papers relative tosuch examinations shall be open to inspectionby the public except insofar as such publicity isincidental to the proceedings hereinafterauthorized or is necessary for the prosecutionof violations in connection with the business ofsuch institutions.

50 “The provisions of Rule 58 of the New Rules of Courtinsofar as they are applicable and not inconsistent with theprovisions of this section shall govern the issuance anddissolution of the restraining order or injunction contemplatedin this section.” (Sec. 24)

51 “Any information obtained from an examination of hisdeposits shall be held strictly confidential and may be used bythe examiners only in connection with their supervisory andexamination responsibility or by the BSP in an appropriatelegal action it has initiated involving the deposit account.”(Sec. 26)

Banking and quasi-banking institutions whichare subject to examination by the BSP shall payto the BSP, within the first 30 days of eachyear, an annual fee in an amount equal to apercentage as may be prescribed by the MB ofits average total assets during the precedingyear as shown on its end-of-month balancesheets, after deducting cash on hand andamounts due from banks, including the BSPand banks abroad. (Sec. 28)

2. HANDLING OF BANKS IN DISTRESS

1. Conservatorship

1. Powers of Conservator

Whenever, on the basis of a report submitted bythe appropriate supervising or examiningdepartment, the MB finds that a bank or a QB is ina state of continuing inability or unwillingness tomaintain a condition of liquidity deemed adequateto protect the interest of depositors and creditors,the MB may appoint a conservator with suchpowers as the MB shall deem necessary to:

a. take charge of the assets, liabilities,and the management thereof,

b. reorganize the management,c. collect all monies and debts due said

institution, andd. exercise all powers necessary to

restore its viability. (Sec. 29)

2. Period of Conservatorship

The conservatorship shall not exceed 1 year. (Sec.29) The MB shall terminate the conservatorshipwhen it is satisfied that the institution can continueto operate on its own and the conservatorship is nolonger necessary. The conservatorship shalllikewise be terminated should the MB, on the basisof the report of the conservator or of its ownfindings, determine that the continuance inbusiness of the institution would involve probableloss to its depositors or creditors, in which case theprovisions of Section 30 shall apply. (Sec. 29)

3. Conservator

The conservator shall report and be responsible tothe MB and shall have the power to overrule orrevoke the actions of the previous managementand board of directors of the bank or quasi-bank.(Sec. 29)

While the Central Bank law gives vast and far-reaching powers to the conservator of a bank,such powers must be related to thepreservation of the assets of the bank, thereorganization of the management and therestoration of viability. Such powers cannotextend to the post-facto repudiation ofperfected transactions, otherwise they wouldinfringe against the non-impairment clause ofthe Constitution. The law merely gives theconservator power to revoke contracts that aredeemed to be defective - i.e., void, voidable,unenforceable or rescissible. The conservatormerely takes the place of a bank’s board ofdirectors. What the said board cannot do - suchas repudiating a contract validly entered into



under the doctrine of implied authority - theconservator cannot do either. Ineluctably, hispower is not unilateral and he cannot simplyrepudiate valid obligations of the Bank. Hisauthority would be only to bring court actionsto assail such contracts. (First PhilippineInternational Bank vs CA ; 1996)

The conservator should be competent andknowledgeable in bank operations andmanagement. (Sec. 29)

The conservator shall receive remuneration tobe fixed by the MB in an amount not to exceed2/3 of the salary of the president of theinstitution in 1 year, payable in 12 equalmonthly payments: Provided, That, if at anytime within one-year period, theconservatorship is terminated on the groundthat the institution can operate on its own, theconservator shall receive the balance of theremuneration which he would have received upto the end of the year; but if theconservatorship is terminated on othergrounds, the conservator shall not be entitledto such remaining balance. The MB mayappoint a conservator connected with the BSP,in which case he shall not be entitled to receiveany remuneration or emolument from the BSPduring the conservatorship. The expensesattendant to the conservatorship shall be borneby the bank or quasi-bank concerned. (Sec. 29)

2. Closure

1. When closure is ordered

Whenever, upon report of the head of thesupervising or examining department, the MB findsthat a bank or quasi-bank:

is unable to pay its liabilities as theybecome due in the ordinary course ofbusiness: Provided, That this shallnot include inability to pay caused byextraordinary demands induced byfinancial panic in the bankingcommunity;

has insufficient realizable assets, asdetermined by the BSP, to meet itsliabilities; or

cannot continue in business withoutinvolving probable losses to itsdepositors or creditors; or

has willfully violated a cease anddesist order under Sec. 37 that hasbecome final, involving acts ortransactions which amount to fraudor a dissipation of the assets of theinstitution;

in which cases, the MB may summarily and withoutneed for prior hearing forbid the institution fromdoing business in the Philippines (Sec. 30)

2. Related Provisions in RA 8791 (General BankingLaw of 2000)

In case a bank or quasi-bank notifies the BSPor publicly announces a bank holiday, or in anymanner suspends the payment of its depositliabilities continuously for more than 30 days,the MB may summarily and without need forprior hearing close such banking institution andplace it under receivership of the PhilippineDeposit Insurance Corporation. (Sec 53)

Whenever a bank, quasi-bank or trust entitypersists in conducting its business in an unsafeor unsound manner, the MB may take actionunder Sec 30. Conducting business in anunsafe or unsound manner means:

- The act or omission has resulted ormay result in material loss ordamage, or abnormal risk or dangerto safety, stability, liquidity orsolvency or

- to the institution's depositors,creditors, investors, stockholders orto the Bangko Sentral or to the publicin general or

- The act or omission has caused anyundue injury, or has given anyunwarranted benefits, advantage orpreference to the bank or any partyin the discharge by the director orofficer of his duties andresponsibilities through manifestpartiality, evident bad faith or grossinexcusable negligence or

- The act or omission involves enteringinto any contract or transactionmanifestly and grosslydisadvantageous to the bank, quasi-bank or trust entity, whether or notthe director or officer profited or willprofit thereby (Sec. 56)

3. Receivership

1. When Receiver is Designated

Whenever, upon report of the head of thesupervising or examining department, the MB findsthat a bank or quasi-bank:

is unable to pay its liabilities as theybecome due in the ordinary course ofbusiness: Provided, That this shallnot include inability to pay caused byextraordinary demands induced byfinancial panic in the bankingcommunity;

has insufficient realizable assets, asdetermined by the BSP, to meet itsliabilities; or

cannot continue in business withoutinvolving probable losses to itsdepositors or creditors; or

has willfully violated a cease anddesist order under Sec. 37 that hasbecome final, involving acts ortransactions which amount to fraudor a dissipation of the assets of theinstitution;



in which cases, the MB may summarilyand without need for prior hearing forbidthe institution from doing business in thePhilippines and designate the PhilippineDeposit Insurance Corporation (PDIC) asreceiver of the banking institution. For aquasi-bank, any person of recognizedcompetence in banking or finance may bedesigned as receiver. (Sec. 30)

There is no requirement whetherexpress or implied, that a hearing befirst conducted before a bankinginstitution may be placed underreceivership. The law is explicit as tothe conditions prerequisite to theaction of the MB to forbid theinstitution to do business in thePhilippines and to appoint a receiverto immediately take charge of thebank's assets and liabilities. Theyare: (a) an examination made by theexamining department of the CB; (b)report by said department to the MB;and (c) prima facie showing that thebank is in a condition of insolvency orso situated that its continuance inbusiness would involve probable lossto its depositors or creditors. (RuralBank of Buhi vs CA ; 1988)

2. Functions and Obligations of the Receiver

The receiver shall immediately gather and takecharge of all the assets and liabilities of theinstitution, administer the same for the benefit ofits creditors, and exercise the general powers of areceiver under the Revised Rules of Court but shallnot, with the exception of administrativeexpenditures, pay or commit any act that willinvolve the transfer or disposition of any assetof the institution: Provided, That the receiver maydeposit or place the funds of the institution innon-speculative investments.

The receiver shall determine as soon as possible,but not later than 90 days from take over, whetherthe institution may be rehabilitated or otherwiseplaced in such a condition so that it may bepermitted to resume business with safety to itsdepositors and creditors and the general public:Provided, That any determination for theresumption of business of the institution shall besubject to prior approval of the MB. (Sec. 30)


The petitioner or plaintiff must file with the clerk orjudge of the court in which the action ispending a bond, executed in favor of the BSP,in an amount to be fixed by the court. (Sec 69)

Any director or officer of any bank placed underreceivership who refuses to turn over the bank’srecords and assets to designated receivers,tampers with records, appropriates or destroys orcauses the misappropriation and destruction of thebank’s assets, receives or permits or causes to bereceived in said bank any deposit, collection ofloans and/or receivables, pays out or permits orcauses to be transferred any securities or property

of said bank shall be subject to the penal provisionsof the New Central Bank Act. (Sec 70)

4. Liquidation

If the receiver determines that the institutioncannot be rehabilitated or permitted to resumebusiness in accordance with the next precedingparagraph, the MB shall notify in writing the boardof directors of its findings and direct the receiver toproceed with the liquidation of the institution.

1. Receiver’s Acts

1. file ex parte with the proper RTC, andwithout requirement of prior notice or anyother action, a petition for assistance in theliquidation of the institution pursuant to aliquidation plan adopted by the PhilippineDeposit Insurance Corporation for generalapplication to all closed banks. In case ofquasi-banks, the liquidation plan shall beadopted by the MB.

2. upon acquiring jurisdiction, the court shall,upon motion by the receiver after duenotice, adjudicate disputed claims againstthe institution, assist the enforcement ofindividual liabilities of the stockholders,directors and officers, and decide on otherissues as may be material to implement theliquidation plan adopted. The receiver shallpay the cost of the proceedings from theassets of the institution.

The exclusive jurisdiction of theliquidation court pertains only to theadjudication of claims against thebank. It does not cover the reversesituation where it is the bank whichfiles a claim against another person orlegal entity. (Manalo vs CA ; 2001)

3. convert the assets of the institutions tomoney, dispose of the same to creditorsand other parties, for the purpose of payingthe debts of such institution in accordancewith the rules on concurrence andpreference of credit under the Civil Codeand

4. he may, in the name of the institution, andwith the assistance of counsel as he mayretain, institute such actions as may benecessary to collect and recover accountsand assets of, or defend any action against,the institution. (Sec. 30)

5. In case of liquidation of a bank or quasi-bank, after payment of the cost ofproceedings, including reasonable expensesand fees of the receiver to be allowed bythe court, the receiver shall pay the debtsof such institution, under order of thecourt, in accordance with the rules onconcurrence and preference of credit asprovided in the Civil Code. (Sec. 31)

6. All revenues and earnings realized by thereceiver in winding up the affairs andadministering the assets of any bank orquasi-bank within the purview of this Actshall be used to pay the costs, fees andexpenses mentioned in no. 5, salaries ofsuch personnel whose employment isrendered necessary in the discharge of the



liquidation together with other additionalexpenses caused thereby. The balance ofrevenues and earnings, after the paymentof all said expenses, shall form part of theassets available for payment to creditors.(Sec. 32)

The assets of an institution underreceivership or liquidation shall be deemedin custodia legis in the hands of thereceiver and shall, from the moment theinstitution was placed under suchreceivership or liquidation, be exempt fromany order of garnishment, levy,attachment, or execution. (Sec. 30)

The BSP may, if public interest so requires,award to an institution, upon such termsand conditions as the MB may approve, thebanking franchise of a bank underliquidation to operate in the area wheresaid bank or its branches were previouslyoperating: Provided, That whateverproceeds may be realized from such awardshall be subject to the appropriateexclusive disposition of the MB. (Sec. 33)


The petitioner or plaintiff must file with theclerk or judge of the court in which the actionis pending a bond, executed in favor of theBSP, in an amount to be fixed by the court.(Sec 69)

3. Provisions common to Conservatorship andReceivership

The actions of the MB taken under thesesections shall be final and executory, andmay not be restrained or set aside by thecourt except on petition for certiorari on theground that the action taken was in excessof jurisdiction or with such grave abuse ofdiscretion as to amount to lack or excess ofjurisdiction. The petition for certiorari mayonly be filed by the stockholders of recordrepresenting the majority of the capitalstock within 10 days from receipt by theboard of directors of the institution of theorder directing receivership, liquidation orconservatorship.

The designation of a conservator or theappointment of a receiver shall be vestedexclusively with the MB. Furthermore, thedesignation of a conservator is not aprecondition to the designation of areceiver. (Sec. 30)

5. Other Operations

1. Research, Statistics, Data and Information

Research and Statistics. The BSP shall preparedata and conduct economic research for theguidance of the MB in the formulation andimplementation of its policies.52 (Sec. 22)

52 “Such data shall include, among others, forecasts ofthe balance of payments of the Philippines, statistics on themonthly movement of the monetary aggregates and of pricesand other statistical series and economic studies useful forthe formulation and analysis of monetary, banking, credit andexchange policies.” (Sec. 22)

The BSP shall have the authority to requestfrom government offices and instrumentalities,or GOCCs, any data which it may require forthe proper discharge of its functions andresponsibilities. The BSP through the Governoror in his absence, a duly authorizedrepresentative shall have the power to issue asubpoena for the production of the books andrecords for the aforesaid purpose. Those whorefuse the subpoena without justifiable cause,or who refuse to supply the bank with datarequested or required, shall be subject topunishment for contempt in accordance withthe provisions of the Rules of Court. (Sec. 23)

Data on individual firms, other than banks,gathered by the Department of EconomicResearch and other departments or units of theBSP shall not be made available to any personor entity outside of the BSP whether public orprivate except under order of the court orunder such conditions as may be prescribed bythe MB: Provided, however, That the collectivedata on firms may be released to interestedpersons or entities: Provided, finally, That inthe case of data on banks, the provisions ofSec. 27 of this Act (infra) shall apply. (Sec. 23)

2. Training of Technical Personnel

The BSP shall promote and sponsor the trainingof technical personnel in the field of money andbanking. (Sec. 23)53

3. Operating Departments

The MB shall, in accordance with itsauthority under this Act, determine andprovide for such operating departmentsand other offices, including a publicinformation office, of the BSP as it deemsconvenient for the proper and efficientconduct of the operations and theaccomplishment of the objectives of theBSP. The functions and duties of suchoperating departments and other officesshall be determined by the MB. (Sec. 38)

4. Reports and Publications

The BSP shall publish a general balancesheet showing the volume and compositionof its assets and liabilities as of the lastworking day of the month within sixty (60)days after the end of each month exceptfor the month of December, which shall besubmitted within ninety (90) days after theend hereof. (Sec. 39)

The MB shall publish and submit thefollowing reports to the President and tothe Congress:

not later than 90 days after the end of eachquarter, an analysis of economic andfinancial developments, including thecondition of net international reserves andmonetary aggregates;

53 “Toward this end, the BSP is hereby authorized todefray the costs of study, at home or abroad, of qualifiedemployees of the BSP, of promising university graduates or ofany other qualified persons who shall be determined byproper competitive examinations. The MB shall prescriberules and regulations to govern the training program of theBSP.”



within 90 days after the end of the year,the preceding year's budget and profit andloss statement of the BSP showing inreasonable detail the result of itsoperations;

120 days after the end of each semester, areview of the state of the financial system;and

as soon as practicable, abnormalmovements in monetary aggregates andthe general price level, and, not later than72 hours after they are taken, remedialmeasures in response to such abnormalmovements. (Sec. 39)

5. Annual Report

Before the end of March of each year, the BSPshall publish and submit to the President andthe Congress an annual report on the conditionof the BSP including a review of the policiesand measures adopted by the MB during thepast year and an analysis of the economic andfinancial circumstances which gave rise to saidpolicies and measures. The annual report shallalso include a statement of the financialcondition of the BSP and a statisticalappendix.54 (Sec. 40)

The BSP shall publish another version of theannual report in terms understandable to thelayman. (Sec. 40)55

6. Profits, Losses and Special Accounts

Within the 30 days following the end of eachfiscal year56, the BSP shall determine its netprofits or losses. In the calculation of netprofits, the BSP shall make adequate allowanceor establish adequate reserves for bad anddoubtful accounts. (Sec. 43)

Within the first 60 days following the end ofeach fiscal year, the MB shall determine andcarry out the distribution of the net profits, inaccordance with the following rule: 50% of thenet profits shall be carried to surplus and theremaining 50% shall revert back to theNational Treasury, except as otherwiseprovided in the transitory provisions of this Act.(Sec. 44)

54 The statistical appendix “shall present, as a minimum,the following data: (a) the monthly movement of monetaryaggregates and their components; (b) the monthly movementof purchases and sales of foreign exchange and of theinternational reserves of the BSP; (c) the balance ofpayments of the Philippines; (d) monthly indices of consumerprices and of import and export prices; (e) the monthlymovement, in summary form, of exports and imports, byvolume and value; (f) the monthly movement of the accountsof the BSP and of other banks; (g) the principal data ongovernment receipts and expenditures and on the status ofthe public debt, both domestic and foreign; and (h) the textsof the major legal and administrative measures adopted bythe Government and the MB during the year which relate tothe functions or operations of the BSP or of the financialsystem.” (Sec. 40)

55 “Failure to comply with the reportorial requirementspursuant to this article without justifiable reason as may bedetermined by the MB shall cause the withholding of thesalary of the personnel concerned until the requirements arecomplied with.” (Sec. 40)

“The balance sheets and other financial statements ofthe BSP shall be signed by the officers responsible for theirpreparation, by the Governor, and by the auditor of the BSP.”(Sec. 41)

56 “The fiscal year of the BSP shall begin on January firstand end on December thirty-first of each year.” (Sec. 42)

Profits or losses arising from any revaluation ofthe BSP's net assets or liabilities in gold orforeign currencies with respect to the Philippinepeso shall not be included in the computationof the annual profits and losses of the BSP.Any profits or losses arising in this mannershall be offset by any amounts which, as aconsequence of such revaluations, are owed bythe Philippines to any international or regionalintergovernmental financial institution of whichthe Philippines is a member or are owed bythese institutions to the Philippines. Anyremaining profit or loss shall be carried in aspecial frozen account which shall be named"Revaluation of International Reserve" and thenet balance of which shall appear either amongthe liabilities or among the assets of the BSP,depending on whether the revaluations haveproduced net profits or net losses. TheRevaluation of International Reserve accountshall be neither credited nor debited for anypurposes other than those specificallyauthorized in this section. (Sec. 45)57

7. n.b. Auditor

The Chairman of the COA shall act as the exofficio auditor of the BSP and, as such, he isempowered and authorized to appoint arepresentative who shall be the auditor of theBSP and, in accordance with law, fix his salary,and to appoint and fix salaries and number ofpersonnel to assist said representative in hiswork. The salaries and other emoluments shallbe paid by the COA. The auditor of the BSPand personnel under him may be removed onlyby the Chairman of the COA. (Sec. 47)

The representative of the Chairman of the COAmust be a CPA with at least 10 yearsexperience as such. No relative of any memberof the MB or the Chairman of the COA withinthe 6th degree of consanguinity or affinity shallbe appointed such representative. (Sec. 47)

3. PROHIBITIONS ON BSP PERSONNEL

In addition to the prohibitions found in RA 3019(Anti-Graft and Corrupt Practices Act) and 6713(Code of Conduct and Ethical Standards for PublicOfficials and Employees), personnel of the BSP arehereby prohibited from:

1. being an officer, director, lawyer or agent,employee, consultant or stockholder, directly orindirectly, of any institution subject tosupervision or examination by the BSP,

EXC:a. non-stock savings and loan associations

and provident funds organizedexclusively for employees of the BSP,and

57 “Sections 43 and 43-A of RA 265, as amended,creating the Monetary Adjustment Account (MAA) and theExchange Stabilization Adjustment Account (ESAA),respectively, are hereby repealed. Amounts outstanding as ofthe effective date of this Act based on these accounts shallcontinue to be for the account of the CB and shall begoverned by the transitory provisions of this Act. TheRevaluation of International Reserve (RIR) account as of theeffective date of this Act of the CB shall continue to be for theaccount of the same entity and shall be governed by theprovisions of Sec. 44 of RA 265, as amended, until otherwiseprovided for in accordance with the transitory provisions ofthis Act.” (Sec. 46)



b. as otherwise provided in the NCBA inthis Act;

2. directly or indirectly requesting or receiving anygift, present or pecuniary or material benefitfor himself or another, from any institutionsubject to supervision or examination by theBSP;

3. revealing in any manner, except under ordersof the court, the Congress or any governmentoffice or agency authorized by law, or undersuch conditions as may be prescribed by theMB, information relating to the condition orbusiness of any institution. This prohibitionshall not be held to apply to the giving ofinformation to the MB or the Governor of theBSP, or to any person authorized by either ofthem, in writing, to receive such information;and

4. borrowing from any institution subject tosupervision or examination by the BSP shall beprohibited unless said borrowings areadequately secured, fully disclosed to the MB,and shall be subject to such further rules andregulations as the MB may prescribe: Provided,however, That personnel of the supervising andexamining departments are prohibited fromborrowing from a bank under their supervisionor examination. (Sec. 27)

4. SANCTIONS

1. Refusal to Make Reports or PermitExamination

Any officer, owner, agent, manager, director or OICof any institution subject to the supervision orexamination by the BSP within the purview of thisAct who, being required in writing by the MB or bythe head of the supervising and examiningdepartment willfully refuses to file the requiredreport or permit any lawful examination into theaffairs of such institution shall be punished by afine of not less than P50,000 nor more thanP100,000 or by imprisonment of not less than 1year nor more than 5 years, or both, in thediscretion of the court. (Sec. 34)

2. False Statement

The willful making of a false or misleadingstatement on a material fact to the MB or to theexaminers of the BSP shall be punished by a fine ofnot less than P100,000 nor more than P200,000, orby imprisonment of not more 5 years, or both, atthe discretion of the court. (Sec. 35)

3. Violation of This Act and Other BankingLaws, Rules, Regulations, Orders orInstructions

Whenever a bank or QB, or whenever any personor entity willfully violates this Act or other pertinentbanking laws being enforced or implemented by theBSP or any order, instruction, rule or regulationissued by the MB, the person or personsresponsible for such violation shall unless otherwiseprovided in this Act be punished by a fine of notless than P50,000 nor more than P200,000 or by

imprisonment of not less than 2 years nor morethan 10 years, or both, at the discretion of thecourt.

Whenever a bank or QB persists in carrying on itsbusiness in an unlawful or unsafe manner, theBoard may, without prejudice to the penaltiesprovided in the preceding paragraph of this sectionand the administrative sanctions provided in Sec.37, take action under Sec. 30. (Sec. 36)

4. Administrative Sanctions on Banks andQBs

Without prejudice to the criminal sanctions againstthe culpable persons provided in Secs. 34-36, theMB may, at its discretion, impose upon any bank orQB, their directors and/or officers, for any…

1. willful violation of its charter or by-laws,2. willful delay in the submission of reports or

publications thereof as required by law,rules and regulations;

3. any refusal to permit examination into theaffairs of the institution;

4. any willful making of a false or misleadingstatement to the Board or the appropriatesupervising and examining department orits examiners;

5. any willful failure or refusal to comply with,or violation of, any banking law or anyorder, instruction or regulation issued bythe MB, or any order, instruction or rulingby the Governor; or

6. any commission of irregularities, and/orconducting business in an unsafe orunsound manner as may be determined bythe MB,

…the following administrative sanctions (whichneed not be applied in the order of their severity),whenever applicable:

2. fines in amounts as may be determined bythe MB to be appropriate, but in no case toexceed P30,000 a day for each violation,taking into consideration the attendantcircumstances, such as the nature andgravity of the violation or irregularity andthe size of the bank or quasi-bank;

3. suspension of rediscounting privileges oraccess to BSP credit facilities;

4. suspension of lending or foreign exchangeoperations or authority to accept newdeposits or make new investments;

5. suspension of interbank clearing privileges;and/or

6. revocation of quasi-banking license.

Resignation or termination from office shallnot exempt such director or officer fromadministrative or criminal sanctions. (Sec.37)

5. Preventive Suspension

The MB may, whenever warranted bycircumstances, preventively suspend any directoror officer of a bank or quasi-bank pending aninvestigation: Provided, That should the case benot finally decided by the BSP within a period of120 days after the date of suspension, said directoror officer shall be reinstated in his position:



Provided, further, That when the delay in thedisposition of the case is due to the fault,negligence or petition of the director or officer, theperiod of delay shall not be counted in computingthe period of suspension herein provided. (Sec. 37)

6. Cease and Desist Order

WON there is an administrative proceeding, if theinstitution and/or the directors and/or officersconcerned continue with or otherwise persist in thecommission of the indicated practice or violation,the MB may issue an order requiring the institutionand/or the directors and/or officers concerned tocease and desist from the indicated practice orviolation, and may further order that immediateaction be taken to correct the conditions resultingfrom such practice or violation. The cease anddesist order shall be immediately effective uponservice on the respondents.

The respondents shall be afforded an opportunityto defend their action in a hearing before the MB orany committee chaired by any MB member createdfor the purpose, upon request made by therespondents within 5 days from their receipt of theorder. If no such hearing is requested within saidperiod, the order shall be final. If a hearing isconducted, all issues shall be determined on thebasis of records, after which the MB may eitherreconsider or make final its order. (Sec. 37)

7. Daily Fines

The Governor is hereby authorized, at hisdiscretion, to impose upon banking institutions, forany failure to comply with the requirements of law,MB regulations and policies, and/or instructionsissued by the MB or by the Governor, fines not inexcess of P10,000 a day for each violation, theimposition of which shall be final and executoryuntil reversed, modified or lifted by the MB onappeal. (Sec. 37)

D. Peso, Currency, Legal Tender, and Bank

Deposit Accounts

1. PESO

The unit of monetary value in the Philippines is the"peso," which is represented by the sign "P." Thepeso is divided into 100 equal parts called"centavos," which are represented by the sign "c."(Sec. 48)

2. CURRENCY

The word "currency" is hereby defined, forpurposes of this Act, as meaning all Philippinenotes and coins issued or circulating inaccordance with the provisions of this Act.(Sec. 49)

The MB, with the approval of the President ofthe Philippines, shall prescribe thedenominations, dimensions, designs,inscriptions and other characteristics of notesissued by the BSP: Provided, however, Thatsaid notes shall state that they are liabilities ofthe BSP and are fully guaranteed by theGovernment of the Republic of the Philippines.Said notes shall bear the signatures, infacsimile, of the President of the Philippines

and of the Governor of the BSP. Similarly, theMB, with the approval of the President of thePhilippines, shall prescribe the weight, fineness,designs, denominations and othercharacteristics of the coins issued by the BSP.In the minting of coins, the MB shall give fullconsideration to the availability of suitablemetals and to their relative prices and cost ofminting. (Sec. 53)

The MB shall prescribe the amounts of notesand coins to be printed and minted,respectively, and the conditions to which theprinting of notes and the minting of coins shallbe subject. The MB shall have the authority tocontract institutions, mints or firms for suchoperations. All expenses incurred in theprinting of notes and the minting of coins shallbe for the account of the BSP. (Sec. 54)

The BSP shall exchange, on demand andwithout charge, Philippine currency of anydenomination for Philippine notes and coins ofany other denomination requested. If for anyreason the BSP is temporarily unable to providenotes or coins of the denominations requested,it shall meet its obligations by delivering notesand coins of the denominations which mostnearly approximate those requested. (Sec. 55)

The BSP shall withdraw from circulation andshall demonetize all notes and coins which forany reason whatsoever are unfit for circulationand shall replace them by adequate notes andcoins: Provided, however, That the BSP shallnot replace notes and coins the identification ofwhich is impossible, coins which show signs offiling, clipping or perforation, and notes whichhave lost more than 2/5 of their surface or allof the signatures inscribed thereon. Notes andcoins in such mutilated conditions shall bewithdrawn from circulation and demonetizedwithout compensation to the bearer. (Sec. 56)

The BSP may call in for replacement notes ofany series or denomination which are morethan 5 years old and coins which are more 10years old. Notes and coins called in forreplacement in accordance with this provisionshall remain legal tender for a period of 1 yearfrom the date of call. After this period, theyshall cease to be legal tender but during thefollowing year, or for such longer period as theMB may determine, they may be exchanged atpar and without charge in the BSP and byagents duly authorized by the BSP for thispurpose. After the expiration of this latterperiod, the notes and coins which have notbeen exchanged shall cease to be a liability ofthe BSP and shall be demonetized. The BSPshall also demonetize all notes and coins whichhave been called in and replaced. (Sec. 57)

3. EXCLUSIVE ISSUE POWER

The BSP shall have the sole power andauthority to issue currency, within the territoryof the Philippines. No other person or entity,public or private, may put into circulationnotes, coins or any other object or documentwhich, in the opinion of the MB, might circulateas currency, nor reproduce or imitate thefacsimiles of BSP notes without prior authorityfrom the BSP. The MB may issue suchregulations as it may deem advisable in orderto prevent the circulation of foreign currency orof currency substitutes as well as to prevent



the reproduction of facsimiles of BSP notes.The BSP shall have the authority to investigate,make arrests, conduct searches and seizures inaccordance with law, for the purpose ofmaintaining the integrity of the currency.

Violation of this provision or any regulationissued by the BSP pursuant thereto shallconstitute an offense punishable byimprisonment of not less than 5 years but notmore than 10 years. In case the RPC providesfor a greater penalty, then that penalty shall beimposed. (Sec. 50)

4. LIABILITY FOR NOTES AND COINS

Notes and coins issued by the BSP shall beliabilities of the BSP and may be issued onlyagainst, and in amounts not exceeding, theassets of the BSP. Said notes and coins shallbe a first and paramount lien on all assets ofthe BSP.

The BSP's holdings of its own notes and coinsshall not be considered as part of its currencyissue and, accordingly, shall not form part ofthe assets or liabilities of the BSP. (Sec. 51)

5. LEGAL TENDER POWER

All notes and coins issued by the BSP shall be fullyguaranteed by the Government of the Republic ofthe Philippines and shall be legal tender in thePhilippines for all debts, both public and private:Provided, however, That, unless otherwise fixed bythe MB, coins shall be legal tender in amounts notexceeding P50 for denominations of 25 centavosand above, and in amounts not exceeding P20 for

denominations of 10 centavos or less. (Sec. 52)58

6. DEMAND DEPOSITS

For purposes of this Act, the term "demanddeposits" means all those liabilities of the BSPand of other banks which are denominated inPhilippine currency and are subject to paymentin legal tender upon demand by thepresentation of checks. (Sec. 58)

Only banks duly authorized to do so mayaccept funds or create liabilities payable inpesos upon demand by the presentation ofchecks, and such operations shall be subject tothe control of the MB in accordance with thepowers granted it with respect thereto underthis Act. (Sec. 59)

Checks representing demand deposits do nothave legal tender power and their acceptancein the payment of debts, both public andprivate, is at the option of the creditor:Provided, however, That a check which hasbeen cleared and credited to the account of thecreditor shall be equivalent to a delivery to thecreditor of cash in an amount equal to theamount credited to his account. (Sec. 60)

58This topic on Legal Tender was asked in 2000.

E. Monetary Administration by the BSP

1. DOMESTIC MONETARY STABILIZATION

The MB shall endeavor to control any expansionor contraction in monetary aggregates which isprejudicial to the attainment or maintenance ofprice stability.59 (Sec. 61)

Whenever abnormal movements in themonetary aggregates, in credit, or in pricesendanger the stability of the Philippineeconomy or important sectors thereof, the MBshall take such remedial measures as areappropriate and within the powers granted tothe MB and the BSP under the provisions of thisAct; and submit to the President of thePhilippines and the Congress, and make public,a detailed report which shall include, as aminimum, a description and analysis of: (1) thecauses of the rise or fall of the monetaryaggregates, of credit or of prices; (2) theextent to which the changes in the monetaryaggregates, in credit, or in prices have beenreflected in changes in the level of domesticoutput, employment, wages and economicactivity in general, and the nature andsignificance of any such changes; and (3) themeasures which the MB has taken and theother monetary, fiscal or administrativemeasures which it recommends to be adopted.

Whenever the monetary aggregates, or thelevel of credit, increases or decreases by morethan 15%, or the cost of living index increasesby more than 10%, in relation to the levelexisting at the end of the corresponding monthof the preceding year, or even though any ofthese quantitative guidelines have not beenreached when in its judgment thecircumstances so warrant, the MB shall submitthe reports mentioned in this section, and shallstate therein whether, in the opinion of theBoard, said changes in the monetaryaggregates, credit or cost of living represent athreat to the stability of the Philippine economyor of important sectors thereof.

The MB shall continue to submit periodicreports to the President of the Philippines andto Congress until it considers that themonetary, credit or price disturbances havedisappeared or have been adequatelycontrolled. (Sec. 63)

2. INTERNATIONAL MONETARYSTABILIZATION

The BSP shall exercise its powers under this Actto preserve the international value of the pesoand to maintain its convertibility into otherfreely convertible currencies primarily for,although not necessarily limited to, currentpayments for foreign trade and invisibles. (Sec.64)

59 “For purposes of this article and of this Act, the MBshall formulate definitions of monetary aggregates, credit andprices and shall make public such definitions and any changesthereof.” (Sec. 62)



In order to maintain the international stabilityand convertibility of the Philippine peso, theBSP shall maintain international reservesadequate to meet any foreseeable net demandson the BSP for foreign currencies. In judgingthe adequacy of the international reserves, theMB shall be guided by the prospective receiptsand payments of foreign exchange by thePhilippines. The Board shall give specialattention to the volume and maturity of theBSP's own liabilities in foreign currencies, tothe volume and maturity of the foreignexchange assets and liabilities of other banksoperating in the Philippines and, insofar as theyare known or can be estimated, the volumeand maturity of the foreign exchange assetsand liabilities of all other persons and entities inthe Philippines. (Sec. 65)

The international reserves of the BSP mayinclude but shall not be limited to the followingassets:1. gold; and2. assets in foreign currencies in the form of:

documents and instruments customarilyemployed for the international transfer offunds;

3. demand and time deposits in central banks,treasuries and commercial banks abroad;foreign government securities; and foreignnotes and coins. (Sec. 66)

The MB shall endeavor to hold the foreignexchange resources of the BSP in freelyconvertible currencies; moreover, the Boardshall give particular consideration to theprospects of continued strength andconvertibility of the currencies in which thereserve is maintained, as well as to theanticipated demands for such currencies. TheMB shall issue regulations determining theother qualifications which foreign exchangeassets must meet in order to be included in theinternational reserves of the BSP. The BSP shallbe free to convert any of the assets in itsinternational reserves into other assets asdescribed in subsecs (a) and (b) of Sec. 66.(Sec. 66)

Whenever the international reserve of the BSPfalls to a level which the MB considersinadequate to meet prospective net demandson the BSP for foreign currencies, or wheneverthe international reserve appears to be inimminent danger of falling to such a level, orwhenever the international reserve is falling asa result of payments or remittances abroadwhich, in the opinion of the MB, are contrary tothe national welfare, the MB shall:

1. take such remedial measures as areappropriate and within the powers grantedto the MB and the BSP under the provisionsof this Act; and

2. submit to the President of the Philippinesand to Congress a detailed report whichshall include, as a minimum, a descriptionand analysis of:

a. the nature and causes of theexisting or imminent decline;

b. the remedial measures alreadytaken or to be taken by the MB;

c. the monetary, fiscal oradministrative measures furtherproposed; and

d. the character and extent of thecooperation required from othergovernment agencies for thesuccessful execution of the policiesof the MB.

If the resultant actions fail to check thedeterioration of the reserve position of the BSP,or if the deterioration cannot be checkedexcept by chronic restrictions on exchange andtrade transactions or by sacrifice of thedomestic objectives of a balanced andsustainable growth of the economy, the MBshall propose to the President, with appropriatenotice of the Congress, such additional actionas it deems necessary to restore equilibrium inthe international balance of payments of thePhilippines. The MB shall submit periodicreports to the President and to Congress untilthe threat to the international monetarystability of the Philippines has disappeared.(Sec. 67)

3. INSTRUMENTS OF BSP ACTION

In order to achieve the primary objective of pricestability, the MB shall rely on its moral influenceand the powers granted to it under this Act for themanagement of monetary aggregates. (Sec. 68)

1. Purchases in Gold

The BSP may buy and sell gold in any form, subjectto such regulations as the MB may issue. Thepurchases and sales of gold authorized by thissection shall be made in the national currency atthe prevailing international market price asdetermined by the MB. (Sec. 69)

2. Purchases in Gold and Foreign Exchange

The BSP may buy and sell foreign notes and coins,and documents and instruments of typescustomarily employed for the international transferof funds. The BSP may engage in future exchangeoperations. The BSP may engage in foreignexchange transactions with the following entities orpersons only:

1. banking institutions operating in thePhilippines;

2. the Government, its politicalsubdivisions & instrumentalities;

3. foreign or international financialinstitutions;

4. foreign governments and theirinstrumentalities; and

5. other entities or persons which the MBis hereby empowered to authorize asforeign exchange dealers, subject tosuch rules and regulations as the MBshall prescribe. (Sec. 70)

In order to maintain the convertibility of thepeso, the BSP may, at the request of anybanking institution operating in the Philippines,buy any quantity of foreign exchange offered,and sell any quantity of foreign exchange



demanded, by such institution, provided thatthe foreign currencies so offered or demandedare freely convertible into gold or United Statesdollars. This requirement shall not apply todemands for foreign notes and coins. (Sec. 70)

The BSP shall effect its exchange transactionsbetween foreign currencies and the Philippinepeso at the rates determined in accordancewith the provisions of Section 74 of this Act.60

(Sec. 70)

The BSP shall endeavor to maintain at all timesa net positive foreign asset position so that itsgross foreign exchange assets will alwaysexceed its gross foreign liabilities. In the eventthat the equivalent amount in pesos of theforeign exchange liabilities of the BSP exceedtwice the equivalent amount in pesos of theforeign exchange assets of the bank, the BSPshall, within 60 days from the date the limit isexceeded, submit a report to the Congressstating the origin of these liabilities, and themanner in which they will be paid. (Sec. 71)

The BSP shall avoid the acquisition and holdingof currencies which are not freely convertible,and may acquire such currencies in an amountexceeding the minimum balance necessary tocover current demands for said currencies onlywhen, and to the extent that, such acquisitionis considered by the MB to be in the nationalinterest. The MB shall determine theprocedures which shall apply to the acquisitionand disposition by the BSP of foreign exchangewhich is not freely utilizable in the internationalmarket. (Sec. 73)

3. Emergency Restrictions on ExchangeOperations

In order to achieve the primary objective of theBSP as set forth in Sec. 3 of this Act, or protectthe international reserves of the BSP in theimminence of, or during an exchange crisis, orin time of national emergency and to give theMB and the Government time in which to takeconstructive measures to forestall, combat, orovercome such a crisis or emergency, the MB,with the concurrence of at least 5 of itsmembers and with the approval of thePresident of the Philippines, may temporarilysuspend or restrict sales of exchange by theBSP, and may subject all transactions in goldand foreign exchange to license by the BSP,and may require that any foreign exchangethereafter obtained by any person residing orentity operating in the Philippines be deliveredto the BSP or to any bank or agent designated

60 “Sec 74. Exchange Rates. — The MB shall determinethe exchange rate policy of the country.

“The MB shall determine the rates at which the BSP shallbuy and sell spot exchange, and shall establish deviationlimits from the effective exchange rate or rates as it maydeem proper. The BSP shall not collect any additionalcommissions or charges of any sort, other than actualtelegraphic or cable costs incurred by it.

“The MB shall similarly determine the rates for othertypes of foreign exchange transactions by the BSP, includingpurchases and sales of foreign notes and coins, but themargins between the effective exchange rates and the ratesthus established may not exceed the corresponding marginsfor spot exchange transactions by more than the additionalcosts or expenses involved in each type of transactions.”

by the BSP for the purpose, at the effectiveexchange rate or rates: Provided, however,That foreign currency deposits made under RA6426 (FCDU Law) shall be exempt from theserequirements. (Sec. 72)

4. Operations with Foreign Entities

The MB may authorize the BSP to grantloans to and receive loans from foreignbanks and other foreign or internationalentities, both public and private, and mayengage in such other operations with theseentities as are in the national interest andare appropriate to its character as a centralbank. The BSP may also act as agent orcorrespondent for such entities. Uponauthority of the MB, the BSP may pledgeany gold or other assets which it possessesas security against loans which it receivesfrom foreign or international entities. (Sec.75)

4. REGULATION OF FOREIGN EXCHANGEOPERATIONS OF THE BANKS

In order that the BSP may at all times haveforeign exchange resources sufficient to enableit to maintain the international stability andconvertibility of the peso, or in order topromote the domestic investment of bankresources, the MB may require the banks to sellto the BSP or to other banks all or part of theirsurplus holdings of foreign exchange. Suchtransfers may be required for all foreigncurrencies or for only certain of suchcurrencies, according to the decision of the MB.The transfers shall be made at the ratesestablished under the provisions of Sec. 74 ofthis Act. (Sec. 76)

The MB may, whenever warranted, determinethe net assets and net liabilities of banks andshall, in making such a determination, take intoaccount the bank's networth, outstandingliabilities, actual and contingent, or such otherfinancial or performance ratios as may beappropriate under the circumstances. Any suchdetermination of net assets and net liabilitiesshall be applied in all banks uniformly andwithout discrimination. (Sec. 76)

The MB may require the banks to maintain abalanced position between their assets andliabilities in Philippine pesos or in any othercurrency or currencies in which they operate.The banks shall be granted a reasonable periodof time in which to adjust their currencypositions to any such requirement. (Sec. 77)61

In order to restrain the banks from takingspeculative positions with respect to futurefluctuations in foreign exchange rates, the MBmay issue such regulations governing bankpurchases and sales of non-spot exchange as itmay consider necessary for said purpose. (Sec.78)

61 “The powers granted under this section shall beexercised only when special circumstances make such actionnecessary, in the opinion of the MB, and shall be applied to allbanks alike and without discrimination.” (Sec. 77)



The banks shall bear the risks of non-compliance with the terms of the foreignexchange documents and instruments whichthey buy and sell, and shall also bear any othertypically commercial or banking risks, includingexchange risks not assumed by the BSP underthe provisions of the preceding section. (Sec.79)

The banks shall report to the BSP the volumeand composition of their purchases and sales ofgold and foreign exchange each day, and mustfurnish such additional information as the BSPmay request with reference to the movementsin their accounts in foreign currencies. The MBmay also require other persons and entities toreport to it currently all transactions oroperations in gold, in any shape or form, and inforeign exchange whether entered into orundertaken by them directly or through agents,or to submit such data as may be required onoperations or activities giving rise to or inconnection with or relating to a gold or foreignexchange transaction. The MB shall prescribethe forms on which such declarations must bemade. The accuracy of the declarations maybe verified by the BSP by whatever inspection itmay deem necessary. (Sec. 80)

5. LOANS TO BANKING AND OTHERFINANCIAL INSTITUTIONS

Guiding Principles. The rediscounts, discounts,loans and advances which the BSP isauthorized to extend to banking institutionsunder the provisions of the present article ofthis Act shall be used to influence the volumeof credit consistent with the objective of pricestability. (Sec. 81)

1. Normal Credit Operations

Authorized Types of Operations. Subject to theprinciple stated in the preceding section of thisAct, the BSP may normally and regularly carryon the following credit operations with bankinginstitutions operating in the Philippines:

1. Commercial credits. — The BSPmay rediscount, discount, buy andsell bills, acceptances, promissorynotes and other credit instrumentswith maturities of not more than180 days from the date of theirrediscount, discount or acquisitionby the BSP and resulting fromtransactions related to:

the importation, exportation,purchase or sale of readilysaleable goods and products, ortheir transportation within thePhilippines;

the storing of non-perishablegoods & products w/c are dulyinsured & deposited, underconditions assuring theirpreservation, in authorizedbonded warehouses or in otherplaces approved by the MB.

2. Production credits. — The BSP mayrediscount, discount, buy and sellbills, acceptances, promissory notesand other credit instruments havingmaturities of not more than 360days from the date of theirrediscount, discount or acquisitionby the BSP and resulting fromtransactions related to theproduction or processing ofagricultural, animal, mineral, orindustrial products. Documents orinstruments acquired in accordancewith this subsection shall besecured by a pledge of therespective crops or products:Provided, however, That the cropsor products need not be pledged tosecure the documents if the originalloan granted by the BSP is securedby a lien or mortgage on real estateproperty 70% of the appraisedvalue of which equals or exceedsthe amount of the loan granted.

3. Other credits. — Special creditinstruments not otherwiserediscountable under theimmediately preceding subsections(a) and (b) may be eligible forrediscounting in accordance withrules and regulations which the BSPshall prescribe. Whenevernecessary, the BSP shall providefunds from non-inflationarysources: Provided, however, Thatthe MB shall prescribe additionalsafeguards for disbursing thesefunds.

4. Advances. — The BSP may grantadvances against the followingkinds of collaterals for fixed periodswhich, with the exception ofadvances against collateral namedin clause (4) of the presentsubsection, shall not exceed 180days:a. gold coins or bullion;b. securities representing

obligations of the BSP or ofother domestic institutions ofrecognized solvency;

c. the credit instruments to whichreference is made in subsection(a) of this section;

d. the credit instruments to whichreference is made in subsection(b) of this section, for periodswhich shall not exceed 360days;

e. utilized portions of advances incurrent amount covered byregular overdraft agreementsrelated to operations includedunder subsections (a) and (b)of this section, and certified asto amount and liquidity by theinstitution soliciting theadvance;

f. negotiable treasury bills,certificates of indebtedness,notes and other negotiableobligations of the Government



maturing within 3 years fromthe date of the advance; and

g. negotiable bonds issued by theGovernment of the Philippines,by Philippine provincial, city ormunicipal governments, or byany Philippine Governmentinstrumentality, and havingmaturities of not more than 10years from the date of advance.

Advances made against thecollateral named in clauses (6) and(7) may not exceed 80% of thecurrent market value of thecollateral.

The rediscounts, discounts, loansand advances made in accordancewith the provisions of this sectionmay not be renewed or extendedunless extraordinary circumstancesfully justify such renewal orextension. (Sec. 82)

2. Special Credit Operation

The BSP may extend loans and advances tobanking institutions for a period of not more than 7days without any collateral for the purpose ofproviding liquidity to the banking system in timesof need. (Sec. 83)

3. Emergency Credit Operation

In periods of national and/or local emergencyor of imminent financial panic which directlythreaten monetary and banking stability, theMB may, by a vote of at least 5 of its members,authorize the BSP to grant extraordinary loansor advances to banking institutions secured byassets as defined hereunder: Provided, Thatwhile such loans or advances are outstanding,the debtor institution shall not, except uponprior authorization by the MB, expand the totalvolume of its loans or investments.62

62 “The amount of any emergency loan or advance shallnot exceed the sum of 50% of total deposits and depositsubstitutes of the banking institution and shall be disbursed in2 or more tranches. The amount of the first tranche shall belimited to 25% of the total deposit and deposit substitutes ofthe institution and shall be secured by government securitiesto the extent of their applicable loan values and otherunencumbered first class collaterals which the MB mayapprove: Provided, That if as determined by the MB, thecircumstances surrounding the emergency warrant a loan oradvance greater than the amount provided hereinabove, theamount of the first tranche may exceed 25% of the bank'stotal deposit and deposit substitutes if the same is adequatelysecured by applicable loan values of government securitiesand unencumbered first class collaterals approved by the MB,and the principal stockholders of the institution furnish anacceptable undertaking to indemnify and hold harmless fromsuit a conservator whose appointment the MB may findnecessary at any time. Prior to the release of the firsttranche, the banking institution shall submit to the BSP aresolution of its board of directors authorizing the BSP toevaluate other assets of the banking institution certified by itsexternal auditor to be good and available for collateralpurposes should the release of the subsequent tranche bethereafter applied for. The MB may, by a vote of at least 5 ofits members, authorize the release of a subsequent trancheon condition that the principal stockholders of the institution:(a) furnish an acceptable undertaking to indemnify and holdharmless from suit a conservator whose appointment the MBmay find necessary at any time; and (b) provide acceptablesecurity which, in the judgment of the MB, would be adequate

The MB may, at its discretion, likewiseauthorize the BSP to grant emergency loans oradvances to banking institutions, even duringnormal periods, for the purpose of assisting abank in a precarious financial condition orunder serious financial pressures brought byunforeseen events, or events which, thoughforeseeable, could not be prevented by thebank concerned: Provided, however, That theMB has ascertained that the bank is notinsolvent and has the assets defined hereunderto secure the advances: Provided, further, Thata concurrent vote of at least 5 members of theMB is obtained.

In connection with the exercise of thesepowers, the prohibitions in Sec. 128 of this Actshall not apply insofar as it refers to acceptanceas collateral of shares and their acquisition as aresult of foreclosure proceedings, including theexercise of voting rights pertaining to saidshares: Provided, however, That should theBSP acquire any of the shares it has acceptedas collateral as a result of foreclosureproceedings, the BSP shall dispose of saidshares by public bidding within 1 year from thedate of consolidation of title by the BSP.Whenever a financial institution incurs anoverdraft in its account with the BSP, the sameshall be eliminated within the period prescribedin Sec. 102 of this Act. (Sec. 84)

Credit Terms

The BSP shall collect interest and otherappropriate charges on all loans and advancesit extends, the closure, receivership orliquidations of the debtor-institutionnotwithstanding. This provision shall applyprospectively. (Sec. 85)

The MB shall fix the interest and rediscountrates to be charged by the BSP on its creditoperations in accordance with the characterand term of the operation, but after dueconsideration has been given to the creditneeds of the market, the composition of theBSP's portfolio, and the general requirementsof the national monetary policy. Interest andrediscount rates shall be applied to all banks ofthe same category uniformly and withoutdiscrimination. (Sec. 85)

The documents rediscounted, discounted,bought or accepted as collateral by the BSP inthe course of the credit operations authorizedin this article shall bear the endorsement of theinstitution from which they are received. (Sec.86)

Documents rediscounted, discounted oraccepted as collateral by the BSP must bewithdrawn by the borrowing institution on thedates of their maturities, or upon liquidation ofthe obligations which they represent or towhich they relate whenever said obligationshave been liquidated prior to their dates ofmaturity. Banks shall have the right at anytime to withdraw any documents which theyhave presented to the BSP as collateral, upon

to supplement, where necessary, the assets tendered by thebanking institution to collateralize the subsequent tranche.”(Sec. 84)



payment in full of the corresponding debt tothe BSP, including interest charges. (Sec. 87)

The MB may prescribe, within the generalpowers granted to it under this Act,additional conditions which borrowinginstitutions must satisfy in order to haveaccess to the credit of the BSP. Theseconditions may refer to the rates of interestcharged by the banks, to the purposes forwhich their loans in general are destined,and to any other clearly definable aspect ofthe credit policy of the bank. (Sec. 88)

The BSP may make direct provisionaladvances with or without interest to theNational Government to financeexpenditures authorized in its annualappropriation: Provided, That saidadvances shall be repaid before the end of3 months extendible by another 3 monthsas the MB may allow following the date theNational Government received suchprovisional advances and shall not, in theiraggregate, exceed 20% of the averageannual income of the borrower for the last3 preceding fiscal years. (Sec. 89)

6. OPEN MARKET OPERATIONS

Principles. The open market purchases and sales ofsecurities by the BSP shall be made exclusively inaccordance with its primary objective of achievingprice stability. (Sec. 90)

1. Purchases and Sales of GovernmentSecurities

The BSP may buy and sell in the open market forits own account: (a) evidences of indebtednessissued directly by the Government of thePhilippines or by its political subdivisions; and (b)evidences of indebtedness issued by governmentinstrumentalities and fully guaranteed by theGovernment.

The evidences of indebtedness acquired under theprovisions of this section must be freely negotiableand regularly serviced and must be available to thegeneral public through banking institutions andlocal government treasuries in denominations of athousand pesos or more. (Sec. 91)

2. Issue and Negotiation of BSP Obligations

In order to provide the BSP with effectiveinstruments for open market operations, the BSPmay issue, place, buy and sell freely negotiableevidences of indebtedness of the BSP: Provided,That issuance of such certificates of indebtednessshall be made only in cases of extraordinarymovement in price levels.

Said evidences of indebtedness may be issueddirectly against the international reserve of the BSPor against the securities which it has acquired ormay be issued without relation to specific types ofassets of the BSP.

The MB shall determine the interest rates,maturities and other characteristics of saidobligations of the BSP, and may, if it deems itadvisable, denominate the obligations in gold orforeign currencies.

The evidences of indebtedness of the BSP to whichthis section refers may be acquired by the BSPbefore their maturity, either through purchases inthe open market or through redemptions at parand by lot if the BSP has reserved the right tomake such redemptions. The evidences ofindebtedness acquired or redeemed by the BSPshall not be included among its assets, and shall beimmediately retired and cancelled. (Sec. 92)

7. BSP PORTFOLIO

VIBSP PORTFOLIO

At least once every month the MB shall reviewthe portfolio of the BSP in relation to its futurecredit policy. In reviewing the BSP's portfolio,the MB shall especially consider whether asufficiently large part of the portfolio consists ofassets with early maturities, in order that acontraction in BSP credit may be effectedpromptly whenever the national monetarypolicy so requires. (Sec. 93)

8. BANK RESERVES

1. Reserve Requirements

In order to control the volume of money created bythe credit operations of the banking system, allbanks operating in the Philippines shall be requiredto maintain reserves against their depositliabilities: Provided, That the MB may, at itsdiscretion, also require all banks and/or quasi-banks to maintain reserves against funds held intrust and liabilities for deposit substitutes asdefined in this Act.

The required reserves of each bank shall beproportional to the volume of its deposit liabilitiesand shall ordinarily take the form of a deposit inthe BSP. Reserve requirements shall be applied toall banks of the same category uniformly andwithout discrimination.

Reserves against deposit substitutes, if imposed,shall be determined in the same manner asprovided for reserve requirements against regularbank deposits, with respect to the imposition,increase, and computation of reserves.

The MB may exempt from reserve requirementsdeposits and deposit substitutes with remainingmaturities of 2 years or more, as well as interbankborrowings.

Since the requirement to maintain bank reserves isimposed primarily to control the volume of money,the BSP shall not pay interest on the reservesmaintained with it unless the MB decides otherwiseas warranted by circumstances. (Sec. 94)



2. Deposit Substitutes

The term "deposit substitutes" is defined as analternative form of obtaining funds from the public,other than deposits, through the issuance,endorsement, or acceptance of debt instrumentsfor the borrower's own account, for the purpose ofrelending or purchasing of receivables and otherobligations. These instruments may include, butneed not be limited to, bankers acceptances,promissory notes, participations, certificates ofassignment and similar instruments with recourse,and repurchase agreements. The MB shalldetermine what specific instruments shall beconsidered as deposit substitutes for the purposesof Section 94 of this Act: Provided, however, Thatdeposit substitutes of commercial, industrial andother non-financial companies for the limitedpurpose of financing their own needs or the needsof their agents or dealers shall not be covered bythe provisions of Sec. 94 of this Act. (Sec. 95)

3. Required Reserves

Against Peso Deposits. The MB may fix and, whenit deems necessary, alter the minimum reserveratios to peso deposits, as well as to depositsubstitutes, which each bank and/or quasi-bankmay maintain, and such ratio shall be applieduniformly to all banks of the same category as wellas to quasi-banks. (Sec. 96)

Against Foreign Currency Deposits. The MB issimilarly authorized to prescribe and modify theminimum reserve ratios applicable to depositsdenominated in foreign currencies. (Sec. 97)

Against Unused Balances of Overdraft Lines. Inorder to facilitate BSP control over the volume ofbank credit, the MB may establish minimumreserve requirements for unused balances ofoverdraft lines. The powers of the MB to prescribeand modify reserve requirements against unusedbalances of overdraft lines shall be the same as itspowers with respect to reserve requirementsagainst demand deposits. (Sec. 98)

Increase in Reserve Requirements. Wheneverin the opinion of the MB it becomes necessaryto increase reserve requirements againstexisting liabilities, the increase shall be made ina gradual manner and shall not exceed fourpercentage points in any thirty-day period.Banks and other affected financial institutionsshall be notified reasonably in advance of thedate on which such increase is to becomeeffective. (Sec. 99)

4. Computation on Reserves

The reserve position of each bank or quasi-bankshall be calculated daily on the basis of theamount, at the close of business for the day, of theinstitution's reserves and the amount of its liabilityaccounts against which reserves are required to bemaintained: Provided, That with reference toholidays or non-banking days, the reserve positionas calculated at the close of the business dayimmediately preceding such holidays and non-banking days shall apply on such days. For thepurpose of computing the reserve position of eachbank or quasi-bank, its principal office in thePhilippines and all its branches and agencies

located therein shall be considered as a single unit.(Sec. 100)

5. Reserve Deficiencies

Whenever the reserve position of any bank orquasi-bank, computed in the manner specified inthe preceding section of this Act, is below therequired minimum, the bank or quasi-bank shallpay the BSP 1/10 of 1% per day on the amount ofthe deficiency or the prevailing ninety-one-daytreasury bill rate plus three percentage points,whichever is higher: Provided, however, That banksand quasi-banks shall ordinarily be permitted tooffset any reserve deficiency occurring on one ormore days of the week with any excess reserveswhich they may hold on other days of the sameweek and shall be required to pay the penalty onlyon the average daily deficiency during the week.In cases of abuse, the MB may deny any bank orquasi-bank the privilege of offsetting reservedeficiencies in the aforesaid manner. (Sec. 101)

If a bank or quasi-bank chronically has a reservedeficiency, the MB may limit or prohibit the makingof new loans or investments by the institution andmay require that part or all of the net profits of theinstitution be assigned to surplus. The MB maymodify or set aside the reserve deficiency penaltiesprovided in this section, for part or the entireperiod of a strike or lockout affecting a bank or aquasi-bank as defined in the Labor Code, or of anational emergency affecting operations of banksor quasi-banks. The MB may also modify or setaside reserved deficiency penalties forrehabilitation program of a bank. (Sec. 101)

7. Interbank Settlement

The BSP shall establish facilities for interbankclearing under such rules and regulations as the MBmay prescribe: Provided, That the BSP may chargeadministrative and other fees for the maintenanceof such facilities.

The deposit reserves maintained by the banks inthe BSP in accordance with the provisions ofSection 94 of this Act shall serve as basis for theclearing of checks and the settlement of interbankbalances, subject to such rules and regulations asthe MB may issue with respect to such operations:Provided, That any bank which incurs onoverdrawing in its deposit account with the BSPshall fully cover said overdraft, including interestthereon at a rate equivalent to 1/10 of 1% per dayor the prevailing ninety-one-day treasury bill rateplus three percentage points, whichever is higher,not later than the next clearing day: Provided,further, That settlement of clearing balances shallnot be effected for any account which continues tobe overdrawn for 5 consecutive banking days untilsuch time as the overdrawing is fully covered orotherwise converted into an emergency loan oradvance pursuant to the provisions of Sec. 84 ofthis Act: Provided, finally, That the appropriateclearing office shall be officially notified of bankswith overdrawn balances. Banks with existingoverdrafts with the BSP as of the effectivity of thisAct shall, within such period as may be prescribedby the MB, either convert the overdraft into anemergency loan or advance with a plan ofpayment, or settle such overdrafts, and that, uponfailure to so comply herewith, the BSP shall take



such action against the bank as may be warrantedunder this Act. (Sec. 102)

8. Exemption from Attachment and OtherPurposes

Deposits maintained by banks with the BSP as partof their reserve requirements shall be exempt fromattachment, garnishments, or any other order orprocess of any court, government agency or anyother administrative body issued to satisfy theclaim of a party other than the Government, or itspolitical subdivisions or instrumentalities. (Sec.103)

9. SELECTIVE REGULATION OF BANKOPERATIONS

Guiding Principle. The MB shall use the powersgranted to it to ensure that the supply,availability and cost of money are in accordwith the needs of the Philippine economy andthat bank credit is not granted for speculativepurposes prejudicial to the national interests.Regulations on bank operations shall be appliedto all banks of the same category uniformly andwithout discrimination. (Sec. 104)

Margin Requirements Against Letters of Credit.The MB may at any time prescribe minimumcash margins for the opening of letters ofcredit, and may relate the size of the requiredmargin to the nature of the transaction to befinanced. (Sec. 105)

Required Security Against Bank Loans. In orderto promote liquidity and solvency of thebanking system, the MB may issue suchregulations as it may deem necessary withrespect to the maximum permissible maturitiesof the loans and investments which the banksmay make, and the kind and amount ofsecurity to be required against the varioustypes of credit operations of the banks. (Sec.106)

Portfolio Ceilings. Whenever the MB considers itadvisable to prevent or check an expansion ofbank credit, it may place an upper limit on theamount of loans and investments which thebanks may hold, or may place a limit on therate of increase of such assets within specifiedperiods of time. The MB may apply such limitsto the loans and investments of each bank or tospecific categories thereof. In no case shall theMB establish limits which are below the value ofthe loans or investments of the banks on thedate on which they are notified of suchrestrictions. The restrictions shall be applied toall banks uniformly and without discrimination.(Sec. 107)

Minimum Capital Ratios. The MB may prescribeminimum ratios which the capital and surplusof the banks must bear to the volume of theirassets, or to specific categories thereof, andmay alter said ratios whenever it deemsnecessary. (Sec. 108)

RELATED PROVISIONS IN RA 8791 (GENERALBANKING ACT OF 2000)

Except as the MB may otherwise prescribe,loans and other credit accommodations againstreal estate shall not exceed 75% of theappraised value of the respective real estate

security, plus 60% of the appraised value of theinsured improvements, and such loans may bemade to the owner of the real estate or to hisassignees. (Sec 37)

Except as the MB may otherwise prescribe,loans and other credit accommodations onsecurity of chattels and intangible propertiessuch as patents, trademarks, trade names, andcopyrights shall not exceed 75% of theappraised value of the security, an such loansand other credit accommodation may be madeto the title-holder of the chattels and intangibleproperties or his assignees.

The MB may prescribe the maturities, as wellas related terms and conditions for varioustypes of bank loans and other creditaccommodations. (Sec 43)

10. COORDINATION OF CREDIT POLICIES BYGOVERNMENT INSTITUTIONS

Coordination of Credit Policies. GOCCs whichperform banking or credit functions shallcoordinate their general credit policies withthose of the MB. Toward this end, the MB may,whenever it deems it expedient, makesuggestions or recommendations to suchcorporations for the more effective coordinationof their policies with those of the BSP. (Sec.109)

F. BSP’S Functions as Banker and

Financial Advisor of the Gov’t

1. FUNCTION AS BANKER OF THE GOV’T

IFUNCTION AS BANKER

OF THE GOV’T

The BSP shall act as a banker of theGovernment, its political subdivisions andinstrumentalities. (Sec. 110)

A. Representing the Government

With the International Monetary Fund(IMF). The BSP shall represent theGovernment in all dealings, negotiationsand transactions with the IMF and shallcarry such accounts as may result fromPhilippine membership in, or operationswith, the IMF. (Sec. 111)

With Other Financial Institutions. — TheBSP may be authorized by the Governmentto represent it in dealings, negotiations ortransactions with the International Bank forReconstruction and Development and withother foreign or international financialinstitutions or agencies. The Presidentmay, however, designate any of his otherfinancial advisors to jointly represent theGovernment in such dealings, negotiationsor transactions. (Sec. 112)



B. Official Depositary

The BSP shall be the official depository ofthe Government, its political subdivisionsand instrumentalities as well as ofgovernment-owned or controlledcorporations and, as a general policy, theircash balances should be deposited with theBSP, with only minimum working balancesto be held by government-owned banksand such other banks incorporated in thePhilippines as the MB may designate,subject to such rules and regulations as theBoard may prescribe: Provided, That suchbanks may hold deposits of the politicalsubdivisions and instrumentalities of theGovernment beyond their minimumworking balances whenever suchsubdivisions or instrumentalities haveoutstanding loans with said banks. The BSPmay pay interest on deposits of theGovernment or of its political subdivisionsand instrumentalities, as well as ondeposits of banks with the BSP. (Sec. 113)

C. Fiscal Operations

The BSP shall open a general cash accountfor the Treasurer of the Philippines, inwhich the liquid funds of the Governmentshall be deposited. Transfers of funds fromthis account to other accounts shall bemade only upon order of the Treasurer ofthe Philippines. (Sec. 114)

D. Other Banks as Agents of the BSP

In the performance of its functions as fiscalagent, the BSP may engage the services ofother government-owned and controlledbanks and of other domestic banks foroperations in localities at home or abroadin which the BSP does not have offices oragencies adequately equipped to performsaid operations: Provided, however, Thatfor fiscal operations in foreign countries,the BSP may engage the services of foreignbanking and financial institutions. (Sec.115)

E. Remuneration for Services

The BSP may charge equitable rates,commissions or fees for services which itrenders to the Government, its politicalsubdivisions and instrumentalities. (Sec.116)

2. MARKETING AND STABILIZING SECURITIESFOR THE ACCOUNT OF THE GOV’T

1. The Issue and Placing of GovernmentSecurities

Issue of Government Obligations. The issue ofsecurities representing obligations of theGovernment, its political subdivisions orinstrumentalities, may be made through the BSP,which may act as agent of, and for the account of,the Government or its respective subdivisions orinstrumentality, as the case may be.

Provided:That the BSP shall not guarantee theplacement of said securities, and shall notsubscribe to their issue except to replace itsmaturing holdings of securities with the same typeas the maturing securities. (Sec. 117)

Methods of Placing Government Securities. The BSPmay place the securities through direct sale tofinancial institutions and the public. The BSP shallnot be a member of any stock exchange orsyndicate, but may intervene therein for the solepurpose of regulating their operations in theplacing of government securities. (Sec. 118)

The Government, or its political subdivisions orinstrumentalities, shall reimburse the BSP for theexpenses incurred in the placing of the aforesaidsecurities. (Sec. 118)

Servicing and Redemption of the Public Debt. Theservicing and redemption of the public debt shallalso be effected through the BSP. (Sec. 119)

2. BSP Support of the Government SecuritiesMarket

The Securities Stabilization Fund. There shall beestablished a "Securities Stabilization Fund" (SSF)which shall be administered by the BSP for theaccount of the Government. The operations of theSSF shall consist of purchases and sales, in theopen market, of bonds and other evidences ofindebtedness issued or fully guaranteed by theGovernment. The purpose of these operationsshall be to increase the liquidity and stabilize thevalue of said securities in order thereby to promoteinvestment in government obligations. The MB shalluse the resources of the SSF to prevent, ormoderate, sharp fluctuations in the quotations ofsaid government obligations, but shall notendeavor to alter movements of the marketresulting from basic changes in the pattern or levelof interest rates. (Sec. 120)63

Phase-out of Fiscal Agency Functions. Unlesscircumstances warrant otherwise and approved bythe Congress Oversight Committee, the BSP shall,within a period of 3 years but in no case longerthan 5 years from the approval of this Act, phaseout all fiscal agency functions provided for inSecs.117-120 and 120 as well as in other pertinentprovisions of this Act and transfer the same to theDepartment of Finance. (Sec. 129)

Profits and Losses of the Fund. The SSF shall retainnet profits which it may make on its operations,regardless of whether said profits arise from capitalgains or from interest earnings. The SSF shallcorrespondingly bear any net losses which it mayincur. (Sec. 122)

3. FUNCITON AS FINANCIAL ADVISOR OF THEGOV’T

63 “Resources of the SSF. Subject to Sec. 132 of this Act,the resources of the SSF shall come from the balance of thefund as held by the CB under RA 265 as of the effective dateof this Act.” (Sec. 121)



Financial Advice on Official Credit Operations.Before undertaking any credit operationabroad, the Government, through theSecretary of Finance, shall request the opinion,in writing, of the MB on the monetaryimplications of the contemplated action. Suchopinions must similarly be requested by allpolitical subdivisions and instrumentalities ofthe Government before any credit operationabroad is undertaken by them. The opinion ofthe MB shall be based on the gold and foreignexchange resources and obligations of thenation and on the effects of the proposedoperation on the balance of payments and onmonetary aggregates. (Sec. 123)

Whenever the Government, or any of itspolitical subdivisions or instrumentalities,contemplates borrowing within the Philippines,the prior opinion of the MB shall likewise berequested in order that the Board may renderan opinion on the probable effects of theproposed operation on monetary aggregates,the price level, and the balance of payments.(Sec. 123)

Representation on the National Economic andDevelopment Authority (NEDA). In order toassure effective coordination between theeconomic, financial and fiscal policies of theGovernment and the monetary, credit andexchange policies of the BSP, the DeputyGovernor designated by the Governor of theBSP shall be an ex officio member of the NEDABoard. (Sec. 124)

4. PRIVILEGES AND PROHIBITIONS

1. Privileges

1. Tax Exemptions. The BSP shall be exempt for aperiod of 5 years from the approval of this Actfrom all national, provincial, municipal and citytaxes, fees, charges and assessments. Thisexemption shall apply to all property of theBSP, to the resources, receipts, expenditures,profits and income of the BSP, as well as to allcontracts, deeds, documents and transactionsrelated to the conduct of the business of theBSP: Provided, however, That said exemptionsshall apply only to such taxes, fees, chargesand assessments for which the BSP itself wouldotherwise be liable, and shall not apply totaxes, fees, charges, or assessments payableby persons or other entities doing business withthe BSP: Provided, further, That foreign loansand other obligations of the BSP shall beexempt, both as to principal and interest, fromany and all taxes if the payment of such taxeshas been assumed by the BSP. (Sec. 125)

2. Exemption from Customs Duties. Theimportation and exportation by the BSP ofnotes and coins, and of gold and other metalsand the importation of all equipment neededfor bank note production, minting of coins,metal refining and other security printingoperations shall be fully exempt from allcustoms duties and consular fees and from allother taxes, assessments and charges relatedto such importation or exportation. (Sec. 126)

3. Applicability of the Civil Service Law (CSL).Appointments in the BSP, except as to thosewhich are policy-determining, primarilyconfidential or highly technical in nature, shall

be made only according to the CSL andregulations: Provided, That no qualificationrequirements for positions in the BSP shall beimposed other than those set by the MB:Provided, further, That, the MB or Governor, inaccordance with Secs. 15(c)64 and 17(d)65 ofthis Act, respectively, may without need ofobtaining prior approval from any othergovernment agency, appoint personnel in theBSP whose services are deemed necessary inorder not to unduly disrupt the operations ofthe BSP. Officers and employees of the BSP,including all members of the MB, shall notengage directly or indirectly in partisanactivities or take part in any election except tovote. (Sec. 127)

2. PROHIBITIONS

The BSP shall not acquire shares of any kind oraccept them as collateral, and shall not participatein the ownership or management of any enterprise,either directly or indirectly.

The BSP shall not engage in development bankingor financing: Provided, however, That outstandingloans obtained or extended for developmentfinancing shall not be affected by the prohibition ofthis section. (Sec. 128)

64 “Sec. 15. Exercise of Authority. — In the exercise of itsauthority, the Monetary Board shall: xxx (c) establish ahuman resource management system which shall govern theselection, hiring, appointment, transfer, promotion, ordismissal of all personnel.

“Such system shall aim to establish professionalism andexcellence at all levels of the Bangko Sentral in accordancewith sound principles of management.

“A compensation structure, based on job evaluationstudies and wage surveys and subject to the Board'sapproval, shall be instituted as an integral component of theBangko Sentral's human resource development program:Provided, That the Monetary Board shall make its own systemconform as closely as possible with the principles provided forunder Republic Act No. 6758: Provided, however, Thatcompensation and wage structure of employees whosepositions fall under salary grade 19 and below shall be inaccordance with the rates prescribed under Republic Act No.6758.

“On the recommendation of the Governor, appoint, fixthe remunerations and other emoluments, and removepersonnel of the Bangko Sentral, subject to pertinent civilservice laws: Provided, That the Monetary Board shall haveexclusive and final authority to promote, transfer, assign, orreassign personnel of the Bangko Sentral and these personnelactions are deemed made in the interest of the service andnot disciplinary: Provided, further, That the Monetary Boardmay delegate such authority to the Governor under suchguidelines as it may determine. xxx”

65 “Sec. 17. Powers and Duties of the Governor. — TheGovernor shall be the chief executive officer of the BangkoSentral. His powers and duties shall be to: xxx (d) appointand fix the remunerations and other emoluments of personnelbelow the rank of a department head in accordance with theposition and compensation plans approved by the MonetaryBoard, as well as to impose disciplinary measures uponpersonnel of the Bangko Sentral, subject to the provisions ofSec. 15(c) of this Act: Provided, That removal of personnelshall be with the approval of the Monetary Board; xxx”



III. Law on Secrecy of Bank

Deposits (RA 1405)

A. Purpose

1. To give encouragement to the people to deposittheir money in banking institutions and todiscourage private hoarding (Sec. 1)

2. So that the people’s money may be properlyutilized by banks in authorized loans to assist inthe economic development of the country.(Sec. 1)

B. Coverage

All deposits of whatever nature* with banks orbanking institutions in the Phils. are herebyconsidered as of an absolutely confidential natureand may not be examined. (Sec. 2)

NOTEThis includes investments in bonds issued by thePhilippine Government, its political subdivisions andits instrumentalities. (Sec. 2)

C. Prohibited Acts

1. No person, government official, bureau or officemay examine, inquire into or look into suchdeposits; and

2. No official or employee of any bankinginstitution may disclosure to any unauthorizedperson any information concerning saiddeposits (Sec. 3).

NOTERA 1405 does not prohibit attachment orgarnishment of bank accounts. (China BankingCorp v. Ortega, 1973, Philippine Commercial andIndustrial Bank v. CA, 1991)

D. Exceptions (Under RA 1405)66

1. upon written permission of the depositor, (Sec.2)

2. in cases of impeachment, (Sec. 2)

3. upon order of a competent court in cases of

a. bribery,b. dereliction of duty of public officials, orc. where the money deposited or invested is

the subject matter of the litigation. (Sec. 2)

NOTES1. RA 1405 does not prohibit attachment or

garnishment of bank accounts. (China BankingCorp v. Ortega, 1973, Philippine Commercialand Industrial Bank v. CA, 1991)

2. In a collection suit by an insurance company todetermine how the defendant has applied the

66Exceptions were asked in 2006, 2005, 2000, 1998,

1997, 1995, 1994, 1991, 1990, 1989, 1988, 1983 and1977.

proceeds of a check paid to it, the grant by thetrial court of examination of the pertinentrecords of the bank was allowed without needof notice to the depositor himself, pursuant toSec. 10, Rule 57 of the Rules of Court coveringexamination of party who property is attachedand persons indebted to him or controlling hisproperty; delivery of property to officer. (Onatev Aborgar, 1994)

3. The exception applies to cases of concealmentof illegally acquired property in anti-graftcases. The inquiry into illegally acquiredproperty — or property NOT "legitimatelyacquired" — extends to cases where suchproperty is concealed by being held by orrecorded in the name of other persons. Thisproposition is made clear by R.A. No. 3019which quite categorically states that the term,"legitimately acquired property of a publicofficer or employee shall not include .. propertyunlawfully acquired by the respondent, but itsownership is concealed by its being recorded inthe name of, or held by, respondent's spouse,ascendants, descendants, relatives or any otherpersons." (Banco Filipino vs Purisima ; 1988)

4. It also extends to cases of concealment ofillegally acquired property not involving anti-graft cases. In the case of Mellon Bank, N.A. v.Magsino, 1990, which involved the erroneouswire transfer and of US$ 1 Million instead of theintended US$ 1,000, and the resulting illegalconversion by the recipients, the SupremeCourt held that “an inquiry into thewhereabouts of money illegally acquiredextends to whatever is concealed or being heldor recorded in the name of persons other thanthe one responsible for the illegal acquisition,”inasmuch as the case is aimed at recoveringthe amount converted.

OTHER EXCEPTIONS

1. upon order of a competent court in cases ofunexplained wealth under RA 3019 or the Anti-Graft and Corrupt Practices Act (PNB v.Gancayco, 1965; Banco Filipino v. Purisima,1988; Marquez v. Desierto, 2001)

a. Sec. 8 of RA 3019 provides that bankdeposits “shall be taken into considerationin the enforcement of this section,notwithstanding any provision of law to thecontrary.”

b. Sec. 8 of RA 3019 is intended to amendSec. 2 of RA 1405 by providing anadditional exception to the rule against thedisclosure of bank deposits. Cases ofunexplained wealth are similar to cases ofbribery or dereliction of duty. (PNB v.Gancayco)

c. In Banco Filipino v. Purisima, 1988, thecourt went further and stated that theprovisions of the Anti-Graft Law warrantexamination of bank records not only in thename of the respondent but also those inthe name of the respondents’ relatives or inthe name of other persons.

2. when inquiry is conducted under the authorityof the Commissioner of Internal Revenue intothe bank accounts of the following:

a. a decedent in order to determine his grossestate



b. any taxpayer who has filed an applicationfor compromise of his tax liability, whichapplication shall include a written waiver ofhis privilege under RA 1405 or under othergeneral or special laws. (Sec. 6(F) RA 8424or the National Internal Revenue Code of1997)

3. in the following cases under the Anti-MoneyLaundering Lact of 2001 (RA 9160):

a. when a banking and other coveredinstitutions are required to report to theAnti-Money Laundering Council (AMLC) anysingle, series or combination of transationsinvolving a total amount in excess of P4.0Million (or an equivalent in foreigncurrency) within 5 working days fromoccurrence thereof, unless the SupervisingAuthority concerned prescribes a longerperiod not to exceed 19 working days.(Sec. 9(c) RA 9160)

b. when the AMLC inquires into or examinesany particular deposit or investment uponorder of any competent court, when it hasbeen established that there is probablecause that deposits or investments involvedare in any way related to money launderingoffense, except that no court order isrequired in the following cases:

i. kidnapping for ransomii. unlawful activities under Sections 4, 5,

6, 8, 9, 10, 12, 13, 14, 15, and 16 ofthe Comprehensive Dangersous DrugsAct of 2002

iii. hijacking and other violations under TA6235, and

iv. destructive arson and murder includingthose perpetrated by terrorists againstnon-combatants and similar targets.(Sec. 11 RA 9160)

c. Bangko Sentral’s inquiry into orexamination of deposits or investmentswith any bank, when the inquiry orexamination is made in the course of theBangko Sentral’s periodic or specialexamination of such bank (Sec. 11 RA9160)

4. In the following cases under the NIRC:

a. Inquiry by the Commissioner of InternalRevenue into the deposits of a decedent forthe purpose of determining the gross estateof such decedent. (Sec. 6(F), NIRC)

b. In case a taxpayer offers to compromise histax liabilities on the ground of financialincapacity, he must waive, in writing thesecrecy of his bank deposits in favor of theCommissioner of Internal Revenue (Sec.6(F), NIRC)

5. under Sec. 26 of RA 7653 or the New CentralBank Act of 1993, when the examination isconducted pursuant to the required waiver ofthe secrecy of deposits (of whatever nature inall banks in the Philippines) made by anyDOSRI (Director, Officer or Stockholder who,

together with his Related Interest, contracts aloan or any form of financial accommodationfrom:

a. his bank; or

b. from a bank

i. which is a subsidiary of a bank holdingcompany of which both his bank andthe lending bank are subsidiaries or

ii. in which a controlling proportion of theshares is owned by the same interestthat owns a controlling proportion ofthe shares of his bank, in excess of 5%of the capital and surplus of the bank,or in the maximum amount permittedby law, whichever is lower.

Any information obtained from an examinationof his deposits shall be held strictly confidentialand may be used by the examiners only inconnection with their supervisory andexamination responsibility or by the BangkoSentral in an appropriate legal action it hasinitiated involving the deposit account.

6. Disclosure of certain information about bankdeposits which have been dormant for at leastten years, to the Treasurer of the Philippine ina sworn statement, a copy of which is posted inthe bank premises. (Sec. 2, UnclaimedBalances Law (Act No. 3926, as amended))

[not included in the above enumeration forreasons that shall be soon be provided]

a. In 1981, PD 1792 added the followinggrounds when the bank can be compelledto reveal the amount of a depositor:

i. “made in the course of a special orgeneral examination of a bank and isspecifically authorized by the MonetaryBoard after being satisfied that there isreasonable ground to believe that abank fraud or serious irregularity hasbeen or is being committed and that itis necessary to look into the deposit toestablish such fraud or irregularity,” or

ii. “made by an independent auditor hiredby the bank to conduct its regular auditprovided that the examination is foraudit purposes only and the resultsthereof shall be for the exclusive use ofthe bank.” However, Sec. 135 of RA7653 or the New Central Bank Actreverted RA 1405 to its version prior tothe promulgation of the decree.

a) Thus Villanueva says that these twoinstances as excluded from theenumeration of exceptions to thesecrecy of bank deposits(Villanueva, Commercial LawReview, 2004).

b) Morales however notes that “Withthe Amendment of the Anti-MoneyLaudering Act of 2001, exception(1) has been substantiallyresurrected. While there is nosimilar development of exception(2), the exclusion of the Bangko



Sentral examiners and independentauditors from the coverage of theSecrecy of Bank Deposits Law findsbasis in Opinion No. 243 (s. 1975)of then Secretary of Justice PedroTuason. (Morales, The Phil. Generalbanking Law Annotated, 2nd ed.2004)

b. It used to be believed that the RA 1405 didnot apply to the Ombudsman, on accountof his authority under Sec. 15(8) of RA6770 or the Ombudsman Act of 1989 to“examine and have access to bankaccounts and records.” However, the SC(Marquez v. Desierto, 2001) restricted theOmbudsman’s power as follows: “…beforean in camera inspection may be allowed,there must be a pending case before acourt of competent jurisdiction. Further, theaccount must be clearly identified, theinspection limited to the subject matter ofthe pending case before the court ofcompetent jurisdiction. The bank personneland the account holder must be notified tobe present during the inspection, and suchinspection may cover only the accountidentified in the pending case.” (Morales,The Phil. General banking Law Annotated,2nd ed. 2004)

c. “Further, it is interesting to note that theSecretary of Justice in his Opinion No. 13(s. 1987) concluded that the PresidentialCommission on Good Government cancompel banks to disclose or produce bankrecords without violating the bank secrecylaws.” (Morales, The Phil. General bankingLaw Annotated, 2nd ed. 2004)

d. “Moreover, under Sec. 1(d) of RA 6382(1990), which created the DavideCommission that conducted a fact findinginvestigation of the failed coup d’ etat ofDecember 1989, the commission had thepower to ‘ask the Monetary board todisclose information on and/or grantauthority to examine bank deposits, trustfinds, or banking transactions in the nameof and/or utilized by a person, natural orjuridical, under investigation by theCommission, in any bank or bankinginstitution in the Philippines, when theCommission has reasonable ground tobelieve that said deposits, trust orinvestment funds, or banking transactionshave been used in support of furtherance ofthe objectives of the coup d’ etat.’”(Morales, The Phil. General banking LawAnnotated, 2nd ed. 2004)

E. When May Foreign Currency Deposits

Be Examined/Garnished

GENERAL RULE:

Sec. 8. Secrecy of Foreign Currency Deposits.- Allforeign currency deposits authorized under this Act,as amended by PD 1035, as well as foreigncurrency deposits authorized under PD 1034, aredeclared and considered of an absolutelyconfidential nature and, except upon the writtenpermission of the depositor, in no instance shall

such foreign currency deposits be examined,inquired or looked into by any person, governmentofficial bureau or office whether judicial oradministrative or legislative or any other entitywhether public or private: Provided, however, thatsaid foreign currency deposits shall be exempt fromattachment, garnishment, or any other order orprocess of any court, legislative body, governmentagency or any administrative body whatsoever

EXCEPTIONS:1. upon written permission of the depositor (Sec.

8, Foreign Currency Deposit Act ; Intengan vsCA ; 2002)

2. upon order of a competent court in cases ofviolation of the Anti-Money Laundering Act of2001 [as in the case of peso deposits, supra]

3. during Bangko Sentral’s periodic or specialexaminations [as in the case of peso deposits,supra], and

4. disclosure ot the Treasurer of the Philippineswhen the unclaimed balances law applies(Morales, The Phil. General banking LawAnnotated, 2nd ed. 2004)

5. In a case where a Filipino child was raped by aforeigner, the SC allowed garnishment offoreign currency deposits stating : We rule thatthe questioned Section 113 of Central BankCircular No. 960 which exempts fromattachment, garnishment, or any other order orprocess of any court. Legislative body,government agency or any administrative bodywhatsoever, is applicable to a foreign transient,injustice would result especially to a citizenaggrieved by a foreign guest. (Salvacion vs CB; 1997)

F. Penalty For Violations

Any violation of this law will subject offender uponconviction to an imprisonment of not more than 5years or a fine of not more than P20,000 or both,in the discretion of the court. (Sec. 5)

G. What Else Should I Know About RA

1405?

1. It took effect on April 9, 1955, and is entitled“An act prohibiting disclosure of or inquiry into,deposits with any banking institution andproviding the penalty therefore.”

2. Sec. 6 of RA 6426 or The Foreign CurrencyDeposit Act provides that “the secrecy ofdeposits under this act shall be governed inaccordance with the provisions of” RA 1405.”

3. SubSec. 55.4 of RA 8791 or the GeneralBanking Law of 1991 provides that in line withRA 1405, no bank shall employ casual or non-regular personnel or too lengthy probationarypersonnel in the conduct of its businessinvolving bank deposits.



ANTI-MONEY LAUNDERING ACT

(RA 9160 as amended by RA 9194)

Exception of the Secrecy of Bank Deposits

Act

1. POLICY OF THE LAW to protect and preserve the integrity and

confidentiality of bank accounts to ensure that the Philippines shall not be used

as a money laundering site for the proceeds ofany unlawful activity

consistent with its foreign policy, to extendcooperation in transnational investigations andprosecutions of persons involved in moneylaundering activities whenever committed.(Sec. 2 RA 9160)

2. POLICY AGAINST POLITICAL HARASSMENT

This Act shall not be used for political prosecutionor harassment or as an instrument to hampercompetition in trade and commerce. No case formoney laundering may be filed against and noassets shall be frozen, attached or forfeited to theprejudice of a candidate for an electoral officeduring an election period. (Sec. 16)

3. COVERED TRANSACTION

a covered transaction is a transaction in cash orother equivalent monetary instrument involving atotal amount in excess of PhP 500,000.00 withinone banking day. (Sec. 3(b))

4. SUSPICIOUS TRANSACTIONS

Transactions with covered institutions, regardlessof the amounts involved, where any of thefollowing circumstances exist:

1. there is no underlying legal or tradeobligation, purpose or economicjustification;

2. the client is not properly identified;

3. the amount involved is not commensuratewith the business or financial capacity ofthe client;

4. taking into account all knowncircumstances, it may be perceived that theclient's transaction is structured in order toavoid being the subject of reportingrequirements under the Act;

5. any circumstances relating to thetransaction which is observed to deviatefrom the profile of the client and/or theclient's past transactions with the coveredinstitution;

6. the transactions is in a way related to anunlawful activity or offense under this Actthat is about to be, is being or has beencommitted; or

7. any transactions that is similar oranalogous to any of the foregoing. (Sec.3(b-1))

5. COVERED INSTITUTIONS

1. banks, non-banks, quasi-banks, trust entities,and all other institutions and their subsidiariesand affiliates supervised or regulated by theBSP;

2. insurance companies and all other institutionssupervised or regulated by the InsuranceCommission; and

3. the following entities supervised or regulatedby SEC:

a. securities dealers, brokers, salesmen,investment houses and other similarentities managing securities or renderingservices as investment agent, advisor, orconsultant,

b. mutual funds, close and investmentcompanies, common trust funds, pre-needcompanies and other similar entities,

c. foreign exchange corporations, moneychangers, money payment, remittance, andtransfer companies and other similarentities, and

d. other entities administering or otherwisedealing in currency, commodities orfinancial derivatives based thereon,valuable objects, cash substitutes andother similar monetary instruments orproperty (Sec. 3(a))

6. OBLIGATIONS OF COVERED

INSTITUTIONS67

1. Customer Identification

establish and record the true identity of itsclients based on official documents.

maintain a system of verifying the trueidentity of their clients

in the case of corporate clients, require asystem of verifying their legal existenceand organizational structure, as well as theauthority and identification of all personspurporting to act on their behalf.

anonymous accounts, accounts underfictitious names, and all other similaraccounts shall be absolutely prohibited.

exception: peso and foreign currencynon-checking numbered accounts shallbe allowed; but the BSP may conductannual testing solely limited to thedetermination of the existence and trueidentity of the owners of such accounts.(Sec. 9(a))

2. Record Keeping

all records of all transactions of coveredinstitutions shall be maintained and safely

67This topic was asked in 2006.



stored for five years from the date oftransactions.

with respect to closed accounts, the recordson customer identification, account filesand business correspondence, shall bepreserved and safety stored for at least fiveyears from the dates when they wereclosed. (Sec. 9(b))

3. Reporting of Covered and SuspiciousTransactions

report to the Anti-Money LaunderingCouncil (AMLC) all covered transactions andsuspicious transactions within 5 workingdays from occurrences thereof, unless theSupervising Authority prescribes a longerperiod not exceeding 10 working days.

when reporting covered or suspicioustransactions, covered institutions and theirofficers and employees shall not be deemedto have violated the Secrecy of BankDeposits Act (RA 1405), the ForeignCurrency Deposits Act (RA 6426) and theGeneral Banking Law of 2000 (RA 8791)and other similar laws, but they areprohibited from communicating, directly orindirectly, in any manner or by an means,to any person, the fact that a covered orsuspicious transaction report was made,the contents thereof, or any otherinformation in relation thereto. In case ofviolation thereof, the concerned officer andemployee of the covered institution shall becriminally liable. However, noadministrative, criminal or civilproceedings, shall lie against any personfor having made a covered or suspicioustransaction report in the regularperformance of his duties in good faith,whether or not such reporting results inany criminal prosecution under this Act ofany other law.

when reporting covered or suspicioustransactions to the AMLC, coveredinstituting and their officers and employeesare prohibited from communicating directlyor indirectly, in any manner or by anymeans, to any person or entity, the media,the fact that a covered or suspicioustransaction report was made, the contentsthereof, or any other information in relationthereto. Neither may such reporting bepublished or aired in any manner or formby the mass media, electronic mail, orother similar devices. In case of violationthereof, the concerned officer andemployee of the covered institution andmedia shall be held criminally liable. (Sec.9(c))

7. WHEN IS MONEY LAUNDERING

COMMITTED?68

Money laundering is a crime whereby the proceedsof an “unlawful activity” are transacted, therebymaking them appear to have originated from

68This topic was asked in 2007 and 2006. Note the

predicate crimes to money laundering and that priorconviction for the predicate crimes is necessary.

legitimate sources. It is committed by thefollowing:

1. transacting or attempting to transacts withmonetary instrument or property, knowingsuch to represent, involve, or relate to theproceeds of any “unlawful activity”;

2. facilitating the offense of money launderingreferred to in (1) by knowingly performingor failing to perform any act; or

3. knowingly failing to disclose and file areport with the AMLC of any monetaryinstrument or property as required. (Sec.4)

8. UNLAWFUL ACTIVITIES

Unlawful activity refers to any act or omission orseries or combination thereof involving or havingdirect relation to following:

1. Kidnapping for ransom (Art 267 RPC)2. Drug Trafficking (Sections. 4-6, 8-10, 12-

16 Comprehensive Dangerous Act of2002);

3. Graft and Corrupt Practices (Sec. 3 par B,C, E, G, H, I of the Anti-Graft and CorruptPractices Act);

4. Plunder (RA 7080);5. Robbery and extortion (Articles 294-96,

299-302 RPC);6. Jueteng and Masiao (PD 1602);7. Piracy on the high seas (RPC and PD 532);8. Qualified theft (Art. 310 RPC);9. Swindling (Art. 315 RPC);10. Smuggling (RA 455 and 1937);11. Violations of the E-Commerce Act of 2000;12. Hijacking (RA 6235); destructive arson and

murder, including those perpetrated byterrorists against non-combatant personsand similar targets (RPC);

13. Fraudulent practices and other violationsunder Securities Regulation Code of 2000;

14. Felonies or offenses of a similar nature thatare punishable under the penal laws ofother countries."(Sec. 3(i))

NOTEAny person may be charged with and convictedof both the offense of money laundering andthe unlawful activity. Any proceeding relatingto the unlawful activity shall be givenprecedence over the prosecution of any offenseor violation under RA 9160, as amended,without prejudice to freezing and otherremedies provided RA 9160. (Sec. 6)

9. FREEZING OF MONETARY INSTRUMENT OFPROPERTY

The Court of Appeals may issue a freeze orderwhich shall be effective immediately1. upon application ex parte by the AMLC and2. after determination that probable cause

exists that any monetary instrument orproperty is in any way related to an“unlawful activity”,

The freeze order shall be for a period of twentydays unless extended by the court. (Sec. 10)



10. EXAMINATION OF ACCOUNTS

1. Examination by the AMLC

Notwithstanding the provisions of theSecrecy of Bank Deposits Act (RA1405), the Foreign Currency DepositsAct (RA 6426) and the General BankingLaw of 2000 (RA 8791) and other laws,the AMLC may inquire into or examineany particular deposit or investmentwith any banking institution or non-bank financial institution.

This inquiry must be upon order of anycompetent court in cases of violation ofthe Anti-Money Laundering Act, when ithas been established that there isprobable cause that the deposits orinvestments are related to an “unlawfulactivity” or a money launderingoffense, except that no court ordershall be required in the followingunlawful activities:1. Kidnapping for ransom2. Drug Trafficking;3. Hijacking; destructive arson and

murder, including thoseperpetrated by terrorists againstnon-combatant persons and similartargets;

2. Examination by the BSP

To ensure compliance with this Act, theBangko Sentral ng Pilipinas (BSP) mayinquire into or examine any deposit ofinvestment with any banking institutionor non-bank financial institution whenthe examination is made in the courseof a periodic or special examination, inaccordance with the rules ofexamination of the BSP. (Sec. 11)

11. FORFEITURE PROVISIONS

1. Civil Forfeiture

When there is a covered transactionreport made, and the court has, in apetition filed for the purpose orderedseizure of any monetary instrument orproperty, in whole or in part, directly orindirectly, related to said report, theRevised Rules of Court on civilforfeiture shall apply.

2. Claim on Forfeited Assets

Where the court has issued an order offorfeiture of the monetary instrumentor property in a criminal prosecution forany money laundering offense, theoffender or any other person claimingan interest therein may apply, byverified petition,

for a declaration that the samelegitimately belongs to him and

for segregation or exclusion of themonetary instrument or propertycorresponding thereto.The verified petition shall be filed withthe court which rendered the judgment

of conviction and order of forfeiture,within fifteen days from the date of theorder or forfeiture, in default of whichthe said order shall become final andexecutory. This provision shall apply inboth civil and criminal forfeiture.

3. Payment in Lieu of Forfeiture

Where the court has issued an order offorfeiture of the monetary instrumentor property subject of a moneylaundering offense, and said ordercannot be enforced because anyparticular monetary instrument orproperty

cannot, with due diligence, be located,or

has been substantially altered,destroyed, diminished in value orotherwise rendered worthless by anyact or omission, directly or indirectly,attributable to the offender, or

has been concealed, removed,converted or otherwise transferred toprevent the same from being found orto avoid forfeiture thereof, or

is located outside the Philippines or hasbeen placed or brought outside thejurisdiction of the court, or

has been commingled with othermonetary instruments or propertybelonging to either the offender himselfor a third person or entity, therebyrendering the same difficult to identifyor be segregated for purposes offorfeiture,the court may, instead of enforcing theorder of forfeiture of the monetaryinstrument or property or part thereofor interest therein, accordingly orderthe convicted offender to pay anamount equal to the value of saidmonetary instrument or property. Thisprovision shall apply in both civil andcriminal forfeiture. (Sec. 12)

NOTERestitution for any aggrieved party shall begoverned by the Civil Code. (Sec. 17)

12. ANTI-MONEY LAUNDERING COUNCIL(AMLC)

Composition: Three Members1. Governor of the BSP (chairman),2. Commissioner of the Insurance Commission3. Chairman of the SEC.

FunctionsThe AMLC shall shall act unanimously in thedischarge of its functions which are as follows:

to require and receive covered orsuspicious transaction reports from coveredinstitutions;

to issue orders addressed to theappropriate Supervising Authority or thecovered institutions or to request forassistance from a foreign State todetermine the true identity of the owner of



any monetary instrument or propertysubject of a covered transaction orsuspicious transaction report, believed bythe Council, on the basis of substantialevidence, to be, in whole or in part,wherever located, representing, involving,or related to directly or indirectly, in anymanner or by any means, the proceeds ofan unlawful activity.

to institute civil forfeiture proceedings andall other remedial proceedings through theOffice of the Solicitor General;

to cause the filing of complaints with theDOJ or the Ombudsman for the prosecutionof money laundering offenses;

to investigate suspicious transactions andcovered transactions deemed suspiciousafter an investigation by AMLC, moneylaundering activities and other violations ofthe Anti-Money Laundering Act;

to apply before the Court of Appeals, exparte, for the freezing of any monetaryinstrument or property alleged to be theproceeds of any “unlawful activity”;

to implement such measures as may benecessary and justified under the Anti-Money Laundering Act to counteract moneylaundering;

to receive and take action in respect of,any request from foreign states forassistance in their own anti-moneylaundering operations provided in this Act;

to develop educational programs on thepernicious effects of money laundering, themethods and techniques used in the moneylaundering, the viable means of preventingmoney laundering and the effective ways ofprosecuting and punishing offenders;

to enlist the assistance of any branch,department, bureau, office, agency, orinstrumentality of the government,including GOCCs, in undertaking any andall anti-money laundering operations, whichmay include the use of its personnel,facilities and resources for the moreresolute prevention, detection, andinvestigation of money laundering offensesand prosecution of offenders; and

to impose administrative sanctions for theviolation of laws, rules, regulations, andorders and resolutions issued pursuantthereto. (Sec. 7)

Secretariat The AMLC is also authorized to establish a

secretariat to be headed by an ExecutiveDirector who shall be appointed by theCouncil for a term of 5 years.

The Executive Director must be a memberof the Philippine Bar, at least thirty-fiveyears of age and of good moral character,unquestionable integrity and knownprobity.

All members of the Secretariat must haveserved for at least 5 years either in theInsurance Commission, the SEC or the BSPand shall hold full-time permanentpositions within the BSP. (Sec. 8)

13. MUTUAL ASSISTANCE AMONG STATES

1. Request for Assistance from a ForeignState.

Where a foreign State makes a request forassistance in the investigation orprosecution of a money laundering offense,the AMLC may execute the request orrefuse to execute the same and inform theforeign State of any valid reason for notexecuting the request or for delaying theexecution thereof. The principles ofmutuality and reciprocity shall, for thispurpose, be at all times recognized.

2. Power of the AMLC to Act on a Request forAssistance from a Foreign State.

The AMLC may execute a request forassistance from a foreign State by:1) tracking down, freezing, restraining and

seizing assets alleged to be proceeds ofany unlawful activity under theprocedures laid down in the Anti-MoneyLaundering Act;

2) giving information needed by theforeign State within the procedures laiddown in this Act; and

3) applying for an order of forfeiture ofany monetary instrument or property inthe court:Provided, That the court shall not issuesuch an order unless the application isaccompanied by an authenticated copyof the order of a court in the requestingState ordering the forfeiture of saidmonetary instrument or property of aperson who has been convicted of amoney laundering offense in therequesting State, and a certification ofan affidavit of a competent officer ofthe requesting State stating that theconviction and the order of forfeitureare final and that no further appeal liesin respect or either.

3. Obtaining Assistance from Foreign States.

The AMLC may make a request to anyforeign State for assistance in:1) tracking down, freezing, restraining and

seizing assets alleged to be proceeds ofany unlawful activity;

2) obtaining information that it needsrelating to any covered transaction,money laundering offense or any othermatter directly or indirectly, relatedthereto;

3) to the extent allowed by the law of theForeign State, applying with the propercourt therein for an order to enter anypremises belonging to or in thepossession or control of, any or all ofthe persons named in said request,and/or search any or all such personsnamed therein and/or remove anydocument, material or object named insaid request:Provided, That the court shall not issuesuch an order unless the application isaccompanied by an authenticated copyof the order of a court in the requestingState ordering the forfeiture of said



monetary instrument or property of aperson who has been convicted of amoney laundering offense in therequesting State, and a certification ofan affidavit of a competent officer ofthe requesting State stating that theconviction and the order of forfeitureare final and that no further appeal liesin respect or either.

4. Limitations on Request for MutualAssistance.

The AMLC may refuse to comply with anyrequest for assistance where the actionsought by the request contravenes anyprovision of the Constitution or theexecution of a request is likely to prejudicethe national interest of the Philippinesunless there is a treaty between thePhilippines and the requesting Staterelating to the provision of assistance inrelation to money laundering offenses.

5. Requirements for Requests for MutualAssistance from Foreign State.

A request for mutual assistance from aforeign State must1) confirm that an investigation or

prosecution is being conducted inrespect of a money launderer namedtherein or that he has been convictedof any money laundering offense;

2) state the grounds on which any personis being investigated or prosecuted formoney laundering or the details of hisconviction;

3) gives sufficient particulars as to theidentity of said person;

4) give particulars sufficient to identityany covered institution believed to haveany information, document, material orobject which may be of assistance tothe investigation or prosecution;

5) ask from the covered institutionconcerned any information, document,material or object which may be ofassistance to the investigation orprosecution;

6) specify the manner in which and towhom said information, document,material or object detained pursuant tosaid request, is to be produced;

7) give all the particulars necessary forthe issuance by the court in therequested State of the writs, orders orprocesses needed by the requestingState; and

8) contain such other information as mayassist in the execution of the request.

6. Authentication of Documents.

A document is authenticated if the same issigned or certified by a judge, magistrateor equivalent officer in or of, the requestingState, and authenticated by the oath oraffirmation of a witness or sealed with anofficial or public seal of a minister,secretary of State, or officer in or of, thegovernment of the requesting State, or ofthe person administering the governmentor a department of the requesting territory,

protectorate or colony. The certificate ofauthentication may also be made by asecretary of the embassy or legation,consul general, consul, vice consul,consular agent or any officer in the foreignservice of the Philippines stationed in theforeign State in which the record is kept,and authenticated by the seal of his office.

7. Extradition.

The Philippines shall negotiate for theinclusion of money laundering offenses asherein defined among extraditable offensesin all future treaties. (Sec. 13)

13. WHAT ELSE SHOULD I KNOW ABOUT THEANTI-MONEY LAUNDERING ACT?

The complete title of the Act is “An Act Definingthe Crime of Money Laundering, ProvidingPenalties Therfore and for Other Purposes.”

The Act was approved by President Macapagal-Arroyo on Sept. 29, 2001. It was subsequentlyamended by RA 9194 which was approved bythe same President on Mar. 7, 2003.

One of the many amendments made by RA9194 was the deletion of the phrase thatprovided that “The provisions of this Act shallnot apply to deposits and investments madeprior to its effectivity.”

The Act provided the AMLC with an initialappropriation of Php 25,000,000.

The Act also required the BSP, the InsuranceCommission and the SEC to (1) promulgaterules and regulations implementing the act,which would be submitted to a CongressionalOversight Committee, and (2) to formulatemoney laundering prevention programs inaccordance with the Act.

INTELLECTUAL PROPERTY CODE COMMERCIAL LAW


INTELLECTUAL PROPERTY CODE

(RA 8293, as amended by RA 9150)

Chapter I.

INTELLECTUAL PROPERTY RIGHTS IN

GENERAL

1. State Policies

Sec. 2. Declaration of State Policy. - The Staterecognizes that an effective intellectual andindustrial property system is vital to thedevelopment of domestic and creative activity,facilitates transfer of technology, attracts foreigninvestments, and ensures market access for ourproducts. It shall protect and secure the exclusiverights of scientists, inventors, artists and othergifted citizens to their intellectual property andcreations, particularly when beneficial to thepeople, for such periods as provided in this Act.The use of intellectual property bears a socialfunction. To this end, the State shall promote thediffusion of knowledge and information for thepromotion of national development and progressand the common good.It is also the policy of the State to streamlineadministrative procedures of registering patents,trademarks and copyright, to liberalize theregistration on the transfer of technology, and toenhance the enforcement of intellectual propertyrights in the Philippines.

2. Intellectual Property Rights

Sec. 4.1 The term "intellectual property rights"consists of:

1. Copyright and Related Rights;2. Trademarks and Service Marks;3. Geographic Indications;4. Industrial Designs;5. Patents;6. Layout-Designs (Topographies) of

Integrated Circuits; and7. Protection of Undisclosed Information

[TRIPS].

Kho v. CA, et al., 379 SCRA 410 [2002]

Trademark, copyright and patents are differentintellectual property rights that cannot beinterchanged with one another. A trademark is anyvisible sign capable of distinguishing the goods(trademark) or services (service mark) of anenterprise and shall include a stamped or markedcontainer of goods.

In relation thereto, a trade name means the nameor designation identifying or distinguishing anenterprise. Meanwhile, the scope of a copyright isconfined to literary and artistic works which areoriginal intellectual creations in the literary andartistic domain protected from the moment of theircreation. Patentable inventions, on the other hand,refer to any technical solution of a problem in anyfield of human activity which is new, involves aninventive step and is industrially applicable.

3. Reverse Reciprocity

Sec. 231. Reverse Reciprocity of Foreign Laws. -Any condition, restriction, limitation, diminution,requirement, penalty or any similar burdenimposed by the law of a foreign country on aPhilippine national seeking protection of intellectualproperty rights in that country, shall reciprocally beenforceable upon nationals of said country, withinPhilippine jurisdiction.

Chapter II.

PATENTS

1. What are Patentable

1.1. Inventions

Sec. 21. Patentable Inventions. - Any technicalsolution of a problem in any field of humanactivity which is new, involves an inventivestep and is industrially applicable shall bepatentable. It may be, or may relate to, aproduct, or process, or an improvement of anyof the foregoing. (Sec. 7, RA 165a)

Sec. 23. Novelty. - An invention shall not beconsidered new if it forms part of a prior art.(Sec. 9, RA 165a)

Sec. 24. Prior Art. - Prior art shall consist of:

24.1. Everything which has been madeavailable to the public anywhere in theworld, before the filing date or the prioritydate of the application claiming theinvention; and

24.2. The whole contents of an applicationfor a patent, utility model, or industrialdesign registration, published in accordancewith this Act, filed or effective in thePhilippines, with a filing or priority date thatis earlier than the filing or priority date ofthe application: Provided, That theapplication which has validly claimed thefiling date of an earlier application underSection 31 of this Act, shall be prior artwith effect as of the filing date of suchearlier application: Provided further, Thatthe applicant or the inventor identified inboth applications are not one and thesame. (Sec. 9, RA 165a)

Sec. 26. Inventive Step. - An inventioninvolves an inventive step if, having regard toprior art, it is not obvious to a person skilled inthe art at the time of the filing date or prioritydate of the application claiming the invention.

Sec. 27. Industrial Applicability. - An inventionthat can be produced and used in any industryshall be industrially applicable.

1.2. Utility Model

Sec. 109.1 (a) An invention qualifies forregistration as a utility model if it is new andindustrially applicable.(b) Section 21, "Patentable Inventions", shallapply except the reference to inventive step asa condition of protection.



1.3. Industrial Designs

Sec. 112.1 An Industrial Design is anycomposition of lines or colors or any three-dimensional form, whether or not associatedwith lines or colors: Provided, That suchcomposition or form gives a special appearanceto and can serve as pattern for an industrialproduct or handicraft;

1.4. Lay-out Designs (Topographies) ofIntegrated Circuits

Sec. 112.2 Integrated Circuit means aproduct, in its final form, or an intermediateform, in which the elements, at least one ofwhich is an active element and some or all ofthe interconnections are integrally formed inand/or on a piece of material, and which isintended to perform an electronic function; and

Sec. 112.3 Layout-Design is synonymous with'Topography' and means the three-dimensionaldisposition, however expressed, of theelements, at least one of which is an activeelement, and of some or all of theinterconnections of an integrated circuit, orsuch a three-dimensional disposition preparedfor an integrated circuit intended formanufacture.

2. Exclusions from Patent Protection

Sec. 22. Non-Patentable Inventions. - Thefollowing shall be excluded from patentprotection:

22.1. Discoveries, scientific theories andmathematical methods;22.2. Schemes, rules and methods ofperforming mental acts, playing games ordoing business, and programs forcomputers;

22.3 Methods for treatment of the humanor animal body by surgery or therapy anddiagnostic methods practiced on the humanor animal body. This provision shall notapply to products and composition for usein any of these methods;

22.4. Plant varieties or animal breeds oressentially biological process for theproduction of plants or animals. Thisprovision shall not apply to micro-organisms and non-biological andmicrobiological processes.

Provisions under this subsection shallnot preclude Congress to consider theenactment of a law providing suigeneris protection of plant varieties andanimal breeds and a system ofcommunity intellectual rightsprotection:

22.5. Aesthetic creations; and

22.6. Anything which is contrary to publicorder or morality. (Sec. 8, RA 165a)

3. First-To-File Rule

Sec. 29. First to File Rule. - If two (2) or morepersons have made the invention separatelyand independently of each other, the right tothe patent shall belong to the person who filedan application for such invention, or where twoor more applications are filed for the sameinvention, to the applicant who has the earliestfiling date or, the earliest priority date. (3rdSentence, Sec. 10, RA 165a.)

4. Right of Priority

Sec. 31. Right of Priority. - An application forpatent filed by any person who has previouslyapplied for the same invention in another countrywhich by treaty, convention, or law affords similarprivileges to Filipino citizens, shall be considered asfiled as of the date of filing the foreign application:Provided, That: (a) the local application expresslyclaims priority; (b) it is filed within twelve (12)months from the date the earliest foreignapplication was filed; and (c) a certified copy of theforeign application together with an Englishtranslation is filed within six (6) months from thedate of filing in the Philippines. (Sec. 15, RA 165a)

5. Contents of the Application for Patent

Sec. 32. The Application. -

32.1. The patent application shall be in Filipinoor English and shall contain the following:

(a) A request for the grant of a patent;(b) A description of the invention;(c) Drawings necessary for the

understanding of the invention;(d) One or more claims; and(e) An abstract.

32.2. No patent may be granted unless theapplication identifies the inventor. If theapplicant is not the inventor, the Office mayrequire him to submit said authority. (Sec. 13,RA 165a)

Sec. 34. The Request. - The request shall contain apetition for the grant of the patent, the name andother data of the applicant, the inventor and theagent and the title of the invention.

Sec. 35. Disclosure and Description of theInvention. -

35.1. Disclosure. - The application shalldisclose the invention in a manner sufficientlyclear and complete for it to be carried out by aperson skilled in the art. Where the applicationconcerns a microbiological process or theproduct thereof and involves the use of amicro-organism which cannot be sufficientlydisclosed in the application in such a way as toenable the invention to be carried out by aperson skilled in the art, and such material isnot available to the public, the application shallbe supplemented by a deposit of such materialwith an international depository institution.

35.2. Description. - The Regulations shallprescribe the contents of the description andthe order of presentation. (Sec. 14, RA 165a)

Sec. 36. The Claims. -



36.1. The application shall contain one (1) ormore claims which shall define the matter forwhich protection is sought. Each claim shall beclear and concise, and shall be supported bythe description.

36.2. The Regulations shall prescribe themanner of the presentation of claims.

Sec. 37. The Abstract. - The abstract shall consistof a concise summary of the disclosure of theinvention as contained in the description, claimsand drawings in preferably not more than onehundred fifty (150) words. It must be drafted in away which allows the clear understanding of thetechnical problem, the gist of the solution of thatproblem through the invention, and the principaluse or uses of the invention. The abstract shallmerely serve for technical information.

6. Procedure for Grant of Patent

6.1. Filing Date

Sec. 40. Filing Date Requirements. -

40.1. The filing date of a patent applicationshall be the date of receipt by the Office ofat least the following elements:

(a) An express or implicit indicationthat a Philippine patent is sought;

(b) Information identifying theapplicant; and

(c) Description of the invention andone (1) or more claims in Filipinoor English.

40.2. If any of these elements is notsubmitted within the period set by theRegulations, the application shall beconsidered withdrawn.

Sec. 41. According a Filing Date. - The Officeshall examine whether the patent applicationsatisfies the requirements for the grant of dateof filing as provided in Section 40 hereof. If thedate of filing cannot be accorded, the applicantshall be given an opportunity to correct thedeficiencies in accordance with theimplementing Regulations. If the applicationdoes not contain all the elements indicated inSection 40, the filing date should be that datewhen all the elements are received. If thedeficiencies are not remedied within theprescribed time limit, the application shall beconsidered withdrawn.

1. Formality Examination

Sec. 42. Formality Examination. -

42.1. After the patent application has beenaccorded a filing date and the required feeshave been paid on time in accordance withthe Regulations, the applicant shall complywith the formal requirements specified bySection 32 and the Regulations within theprescribed period, otherwise the applicationshall be considered withdrawn.

42.2. The Regulations shall determine theprocedure for the re-examination andrevival of an application as well as theappeal to the Director of Patents from any

final action by the examiner. (Sec. 16, RA165a)

6.2. Classification and Search

Sec. 43. Classification and Search. - Anapplication that has complied with the formalrequirement shall be classified and a searchconducted to determine the prior art.

6.3. Publication

Sec. 44. Publication of Patent Application. -

44.1. The patent application shall bepublished in the IPO Gazette together witha search document established by or onbehalf of the Office citing any documentsthat reflect prior art, after the expiration ofeighteen (18) months from the filing dateor priority date.

44.3. The Director General, subject to theapproval of the Secretary of Trade andIndustry, may prohibit or restrict thepublication of an application, if in hisopinion, to do so would be prejudicial to thenational security and interests of theRepublic of the Philippines.

6.4. Inspection

Sec. 45. Confidentiality Before Publication. - Apatent application, which has not yet beenpublished, and all related documents, shall notbe made available for inspection without theconsent of the applicant.

Sec. 44.2. After publication of a patentapplication, any interested party may inspectthe application documents filed with the Office.

Sec. 47. Observation by Third Parties. -Following the publication of the patentapplication, any person may presentobservations in writing concerning thepatentability of the invention. Suchobservations shall be communicated to theapplicant who may comment on them. TheOffice shall acknowledge and put suchobservations and comment in the file of theapplication to which it relates.

6.5. Request for Substantive Examination

Sec. 48. Request for Substantive Examination.-

48.1. The application shall be deemedwithdrawn unless within six (6) monthsfrom the date of publication under Section41, a written request to determine whethera patent application meets therequirements of Sections 21 to 27 andSections 32 to 39 and the fees have beenpaid on time.

48.2. Withdrawal of the request forexamination shall be irrevocable and shallnot authorize the refund of any fee.

SEC. 49. Amendment of Application. - Anapplicant may amend the patent applicationduring examination: Provided, That such



amendment shall not include new matteroutside the scope of the disclosure contained inthe application as filed.

6.6. Grant or Refusal of Application

Sec. 50. Grant of Patent. -

50.1. If the application meets therequirements of this Act, the Office shallgrant the patent: Provided, That all thefees are paid on time.50.2. If the required fees for grant andprinting are not paid in due time, theapplication shall be deemed to bewithdrawn.

50.3. A patent shall take effect on the dateof the publication of the grant of the patentin the IPO Gazette. (Sec. 18, RA 165a)

Sec. 51. Refusal of the Application. -

51.1. The final order of refusal of theexaminer to grant the patent shall beappealable to the Director in accordancewith this Act.

51.2. The Regulations shall provide for theprocedure by which an appeal from theorder of refusal from the Director shall beundertaken.

6.7. Publication of the Grant of Patent

Sec. 52. Publication Upon Grant of Patent. -

52.1. The grant of the patent together withother related information shall be publishedin the IPO Gazette within the timeprescribed by the Regulations.

52.2. Any interested party may inspect thecomplete description, claims, and drawingsof the patent on file with the Office. (Sec.18, RA 165a)

7. Rights Conferred by Patent

Sec. 71. Rights Conferred by Patent. -

71.1.A patent shall confer on its owner the followingexclusive rights:

(a) Where the subject matter of a patentis a product, to restrain, prohibit andprevent any unauthorized person orentity from making, using, offering forsale, selling or importing thatproduct;

(b) Where the subject matter of a patentis a process, to restrain, prevent orprohibit any unauthorized person orentity from using the process, andfrom manufacturing, dealing in,using, selling or offering for sale, orimporting any product obtaineddirectly or indirectly from suchprocess.

71.2. Patent owners shall also have theright to assign, or transfer by succession

the patent, and to conclude licensingcontracts for the same. (Sec. 37, RA 165a)

Pearl and Dean, Inc v. Shoemart Inc (2003)

To be able to effectively and legally preclude othersfrom copying and profiting from the invention, apatent is a primordial requirement. No patent, noprotection. The ultimate goal of a patent system isto bring new designs and technologies into thepublic domain through disclosure. Ideas, oncedisclosed to the public without the protection of avalid patent, are subject to appropriation withoutsignificant restraint.

8. Term

Sec. 54. Term of Patent. - The term of a patentshall be twenty (20) years from the filing date ofthe application. (Sec. 21, RA 165a)

Sec. 109.3. A utility model registration shallexpire, without any possibility of renewal, at theend of the seventh year after the date of the filingof the application.

Sec. 118. The Term of Industrial Design or Layout-Design Registration. - 118.1. The registration of anindustrial design shall be for a period of five (5)years from the filing date of the application.

118.2. The registration of an industrial designmay be renewed for not more than two (2)consecutive periods of five (5) years each, bypaying the renewal fee. xxx xxx xxx

118.5. Registration of a layout-design shall bevalid for a period often (10) years, withoutrenewal, and such validity to be counted fromthe date of commencement of the protectionaccorded to the layout-design. The protectionof a layout-design under this Act shallcommence:

a) on the date of the first commercialexploitation, anywhere in the world, ofthe layout-design by or with theconsent of the right holder: Provided,That an application for registration isfiled with the Intellectual PropertyOffice within two (2) years from suchdate of first commercial exploitation;or

b) on the filing date accorded to theapplication for the registration of thelayout-design if the layout-design hasnot been previously exploitedcommercially anywhere in the world.

9. Limitations on Rights of Patentees

Sec. 72. Limitations of Patent Rights. - The ownerof a patent has no right to prevent third partiesfrom performing, without his authorization, the actsreferred to in Section 71 hereof in the followingcircumstances:

72.1. Using a patented product which has beenput on the market in the Philippines by theowner of the product, or with his expressconsent, insofar as such use is performed afterthat product has been so put on the saidmarket;



72.2. Where the act is done privately and on anon-commercial scale or for a non-commercialpurpose: Provided, That it does not significantlyprejudice the economic interests of the ownerof the patent;

72.3. Where the act consists of making orusing exclusively for the purpose ofexperiments that relate to the subject matter ofthe patented invention;

72.4. Where the act consists of the preparationfor individual cases, in a pharmacy or by amedical professional, of a medicine inaccordance with a medical prescription or actsconcerning the medicine so prepared;

72.5. Where the invention is used in any ship,vessel, aircraft, or land vehicle of any othercountry entering the territory of the Philippinestemporarily or accidentally: Provided, That suchinvention is used exclusively for the needs ofthe ship, vessel, aircraft, or land vehicle andnot used for the manufacturing of anything tobe sold within the Philippines. (Secs. 38 and39, RA 165a)

Sec. 73. Prior User. -

73.1. Notwithstanding Section 72 hereof, anyprior user, who, in good faith was using theinvention or has undertaken seriouspreparations to use the invention in hisenterprise or business, before the filing date orpriority date of the application on which apatent is granted, shall have the right tocontinue the use thereof as envisaged in suchpreparations within the territory where thepatent produces its effect.

73.2. The right of the prior user may only betransferred or assigned together with hisenterprise or business, or with that part of hisenterprise or business in which the use orpreparations for use have been made. (Sec. 40,RA 165a)

Sec. 74. Use of Invention by Government. -

74.1. A Government agency or third personauthorized by the Government may exploit theinvention even without agreement of the patentowner where:

(a) the public interest, in particular,national security, nutrition, health orthe development of other sectors, asdetermined by the appropriate agencyof the government, so requires; or

(b) A judicial or administrative body hasdetermined that the manner ofexploitation, by the owner of thepatent or his licensee, is anti-competitive.

74.2. The use by the Government, or thirdperson authorized by the Government shall besubject, mutatis mutandis, to the conditions setforth in Sections 95 to 97 and 100 to 102.(Sec. 41, RA 165a)

10. Notice Requirement

Sec. 80. Damages; Requirement of Notice. -Damages cannot be recovered for acts ofinfringement committed before the infringer hadknown; or had reasonable grounds to know of thepatent. It is presumed that the infringer had knownof the patent if on the patented product, or on thecontainer or package in which the article is suppliedto the public, or on the advertising material relatingto the patented product or process, are placed thewords "Philippine Patent" with the number of thepatent. (Sec. 44, RA 165a)

11. Patent Infringement

11.1. Civil Action

Sec. 76. Civil Action for Infringement. -

76.1. The making, using, offering for sale,selling, or importing a patented product ora product obtained directly or indirectlyfrom a patented process, or the use of apatented process without the authorizationof the patentee constitutes patentinfringement.

76.2. Any patentee, or anyone possessingany right, title or interest in and to thepatented invention, whose rights have beeninfringed, may bring a civil action before acourt of competent jurisdiction, to recoverfrom the infringer such damages sustainedthereby, plus attorney’s fees and otherexpenses of litigation, and to secure aninjunction for the protection of his rights.

76.3. If the damages are inadequate orcannot be readily ascertained withreasonable certainty, the court may awardby way of damages a sum equivalent toreasonable royalty.

76.4. The court may, according to thecircumstances of the case, award damagesin a sum above the amount found as actualdamages sustained: Provided, That theaward does not exceed three (3) times theamount of such actual damages.

76.5. The court may, in its discretion,order that the infringing goods, materialsand implements predominantly used in theinfringement be disposed of outside thechannels of commerce or destroyed,without compensation.

76.6. Anyone who actively induces theinfringement of a patent or provides theinfringer with a component of a patentedproduct or of a product produced becauseof a patented process knowing it to beespecially adopted for infringing thepatented invention and not suitable forsubstantial non-infringing use shall beliable as a contributory infringer and shallbe jointly and severally liable with theinfringer. (Sec. 42, RA 165a)

11.2. Criminal Action



Sec. 84. Criminal Action for Repetition ofInfringement. - If infringement is repeated bythe infringer or by anyone in connivance withhim after finality of the judgment of the courtagainst the infringer, the offenders shall,without prejudice to the institution of a civilaction for damages, be criminally liable thereforand, upon conviction, shall suffer imprisonmentfor the period of not less than six (6) monthsbut not more than three (3) years and/or a fineof not less than One hundred thousand pesos(P100,000) but not more than Three hundredthousand pesos (P300,000), at the discretion ofthe court. The criminal action herein providedshall prescribe in three (3) years from date ofthe commission of the crime. (Sec. 48, RA165a)

Sony Computer v Supergreen, Inc. (2007)

Supergreen is engaged in reproduction anddistribution of counterfeit “PlayStation” gamesoftware, consoles and accessories, violative ofSony’s intellectual property rights. NBI servedsearch warrants on subject premises [Cavite] andseized a replicating machine and several units ofcounterfeit “PlayStation” consoles, joy pads,housing, labels and game software. Respondent filedMotion to Quash – which was granted by RTC –alleging impropriety of venue/lack of jurisdiction.SC: The alleged acts constitute a transitory orcontinuing offense under Section 168, IPC [RA8293] – in relation to Art. 189(1) RPC on unfaircompetition. Respondent’s imitation of the generalappearance of petitioner’s goods was doneallegedly in Cavite, but sold such in MandaluyongCity, Metro Manila.

12. Tests of infringement

Godines v. CA, 226 SCRA 576 [1993]

Tests have been established to determineinfringement. These are [a] literal infringement;and [b] the doctrine of equivalents. In using literalinfringement as a test, resort must be had in thefirst instance to the words of the claim. Todetermine whether the particular item falls withinthe literal meaning of the patent claims, the courtmust juxtapose the claims of the patent and theaccused product within the overall context of theclaims and specifications, to determine whetherthere is exact identity of all material elements. Onthe other hand, under the doctrine of equivalents,an infringement also occurs when a deviceappropriates a prior invention by incorporating itsinnovative concept and, albeit with somemodification and change, performs substantially thesame function in substantially the same way toachieve substantially the same result.

13. Patent infringement

Del Rosario v CA (1996)

It is elementary that a patent may be infringedwhere the essential or substantial features of thepatented invention are taken or appropriated, orthe device, machine or other subject matter allegedto infringe is substantially identical with the patentinvention. In order to infringe a patent, a machineor device must perform the same function, oraccomplish the same result by identical or

substantially identical means and the principle ormode of operation must be substantially the same.

Creser Precision Systems, Inc. v. CA, et al.,286 SCRA 13 [1998]

Only the patentee or his successor-in-interest mayfile an action for infringement. Moreover, there canbe no infringement of a patent until a patent hasbeen issued, since whatever right one has to theinvention covered by the patent arises alone fromthe grant of patent. In short, a person or entitywho has not been granted letter of patent over aninvention and has not acquired any rights or titlethereto either as an assignee or a licensee, has nocause of action for infringement because the rightto maintain an infringement suit depends upon theexistence of a patent.

SMITH KLINE BECKMAN CORPORATION vCA (2003)

The doctrine of equivalents provides that aninfringement also takes place when a deviceappropriates a prior invention by incorporating itsinnovative concept and, although with somemodification and change, performs substantially thesame function in substantially the same way toachieve substantially the same result… Theprinciple or mode of operation must be thesame or substantially the same.

The doctrine of equivalents thus requiressatisfaction of the function-means-and-result test,the patentee having the burden to show that allthree components of such equivalency test aremet.

14. Voluntary Licensing

Sec. 85. Voluntary License Contract. - Toencourage the transfer and dissemination oftechnology, prevent or control practices andconditions that may in particular cases constitutean abuse of intellectual property rights having anadverse effect on competition and trade, alltechnology transfer arrangements shall complywith the provisions of this Chapter.

Sec. 88. Mandatory Provisions. - The followingprovisions shall be included in voluntary licensecontracts:

88.1. That the laws of the Philippines shallgovern the interpretation of the same and inthe event of litigation, the venue shall be theproper court in the place where the licenseehas its principal office;

88.2. Continued access to improvements intechniques and processes related to thetechnology shall be made available during theperiod of the technology transfer arrangement;

88.3. In the event the technology transferarrangement shall provide for arbitration, theProcedure of Arbitration of the Arbitration Lawof the Philippines or the Arbitration Rules of theUnited Nations Commission on InternationalTrade Law (UNCITRAL) or the Rules ofConciliation and Arbitration of the InternationalChamber of Commerce (ICC) shall apply andthe venue of arbitration shall be the Philippinesor any neutral country; and



88.4. The Philippine taxes on all paymentsrelating to the technology transfer arrangementshall be borne by the licensor.

Sec. 87. Prohibited Clauses. - Except in casesunder Section 91, the following provisions shall bedeemed prima facie to have an adverse oncompetition and trade:

87.1. Those which impose upon the licenseethe obligation to acquire from a specific sourcecapital goods, intermediate products, rawmaterials, and other technologies, or ofpermanently employing personnel indicated bythe licensor;

87.2. Those pursuant to which the licensorreserves the right to fix the sale or resaleprices of the products manufactured on thebasis of the license;

87.3. Those that contain restrictions regardingthe volume and structure of production;

87.4. Those that prohibit the use ofcompetitive technologies in a non-exclusivetechnology transfer agreement;

87.5. Those that establish a full or partialpurchase option in favor of the licensor;

87.6. Those that obligate the licensee totransfer for free to the licensor the inventionsor improvements that may be obtained throughthe use of the licensed technology;

87.7. Those that require payment of royaltiesto the owners of patents for patents which arenot used;

87.8. Those that prohibit the licensee to exportthe licensed product unless justified for theprotection of the legitimate interest of thelicensor such as exports to countries whereexclusive licenses to manufacture and/ordistribute the licensed product(s) have alreadybeen granted;

87.9. Those which restrict the use of thetechnology supplied after the expiration of thetechnology transfer arrangement, except incases of early termination of the technologytransfer arrangement due to reason(s)attributable to the licensee;

87.10. Those which require payments forpatents and other industrial property rightsafter their expiration, terminationarrangement;

87.11. Those which require that thetechnology recipient shall not contest thevalidity of any of the patents of the technologysupplier;

87.12. Those which restrict the research anddevelopment activities of the licensee designedto absorb and adapt the transferred technologyto local conditions or to initiate research anddevelopment programs in connection with newproducts, processes or equipment;

87.13. Those which prevent the licensee fromadapting the imported technology to local

conditions, or introducing innovation to it, aslong as it does not impair the quality standardsprescribed by the licensor;

87.14. Those which exempt the licensor forliability for non-fulfillment of his responsibilitiesunder the technology transfer arrangementand/or liability arising from third party suitsbrought about by the use of the licensedproduct or the licensed technology; and

87.15. Other clauses with equivalent effects.(Sec. 33-C[2], RA 165a)

15. Compulsory Licensing

Sec. 93. Grounds for Compulsory Licensing. - TheDirector of Legal Affairs may grant a license toexploit a patented invention, even without theagreement of the patent owner, in favor of anyperson who has shown his capability to exploit theinvention, under any of the followingcircumstances:

93.1. National emergency or othercircumstances of extreme urgency;

93.2. Where the public interest, in particular,national security, nutrition, health or thedevelopment of other vital sectors of thenational economy as determined by theappropriate agency of the Government, sorequires; or

93.3. Where a judicial or administrative bodyhas determined that the manner of exploitationby the owner of the patent or his licensee isanti-competitive; or

93.4. In case of public non-commercial use ofthe patent by the patentee, without satisfactoryreason;

93.5. If the patented invention is not beingworked in the Philippines on a commercialscale, although capable of being worked,without satisfactory reason: Provided, That theimportation of the patented article shallconstitute working or using the patent. (Secs.34, 34-A, and 34-B, RA 165a)

Sec. 97. Compulsory License Based onInterdependence of Patents. - If the inventionprotected by a patent, hereafter referred to as the"second patent," within the country cannot beworked without infringing another patent, hereafterreferred to as the "first patent," granted on a priorapplication or benefiting from an earlier priority, acompulsory license may be granted to the owner ofthe second patent to the extent necessary for theworking of his invention, subject to the followingconditions:

97.1. The invention claimed in the secondpatent involves an important technical advanceof considerable economic significance inrelation to the first patent;

97.2. The owner of the first patent shall beentitled to a cross-license on reasonable termsto use the invention claimed in the secondpatent;



97.3. The use authorized in respect of the firstpatent shall be non-assignable except with theassignment of the second patent; and

97.4. The terms and conditions of Sections 95,96 and 98 to 100 of this Act. (Sec. 34-C, RA165a)

16. Assignment and Transfer of Patent

Sec. 104. Assignment of Inventions. - Anassignment may be of the entire right, title orinterest in and to the patent and the inventioncovered thereby, or of an undivided share of theentire patent and invention, in which event theparties become joint owners thereof. Anassignment may be limited to a specified territory.(Sec. 51, RA 165)

Sec. 105. Form of Assignment. - The assignmentmust be in writing, acknowledged before a notarypublic or other officer authorized to administer oathor perform notarial acts, and certified under thehand and official seal of the notary or such otherofficer. (Sec. 52, RA 165)

Sec. 106. Recording. -

106.1. The Office shall record assignments,licenses and other instruments relating to thetransmission of any right, title or interest inand to inventions, and patents or applicationfor patents or inventions to which they relate,which are presented in due form to the Officefor registration, in books and records kept forthe purpose. The original documents togetherwith a signed duplicate thereof shall be filed,and the contents thereof should be keptconfidential. If the original is not available, anauthenticated copy thereof in duplicate may befiled. Upon recording, the Office shall retain theduplicate, return the original or theauthenticated copy to the party who filed thesame and notice of the recording shall bepublished in the IPO Gazette.

106.2. Such instruments shall be void asagainst any subsequent purchaser ormortgagee for valuable consideration andwithout notice, unless, it is so recorded in theOffice, within three (3) months from the date ofsaid instrument, or prior to the subsequentpurchase or mortgage. (Sec. 53, RA 165a)

17. Cancellation of Patent

Sec. 61. Cancellation of Patents. -

61.1. Any interested person may, uponpayment of the required fee, petition to cancelthe patent or any claim thereof, or parts of theclaim, on any of the following grounds:

(a) That what is claimed as the invention isnot new or patentable;

(b) That the patent does not disclose theinvention in a manner sufficiently clearand complete for it to be carried out byany person skilled in the art; or

(c) That the patent is contrary to publicorder or morality.

61.2. Where the grounds for cancellation relateto some of the claims or parts of the claim,cancellation may be effected to such extentonly. (Secs. 28 and 29, RA 165a)

Sec. 62. Requirement of the Petition. - The petitionfor cancellation shall be in writing, verified by thepetitioner or by any person in his behalf who knowsthe facts, specify the grounds upon which it isbased, include a statement of the facts to be reliedupon, and filed with the Office. Copies of printedpublications or of patents of other countries, andother supporting documents mentioned in thepetition shall be attached thereto, together with thetranslation thereof in English, if not in Englishlanguage. (Sec. 30, RA 165)

Sec. 63. Notice of Hearing. - Upon filing of apetition for cancellation, the Director of LegalAffairs shall forthwith serve notice of the filingthereof upon the patentee and all persons havinggrants or licenses, or any other right, title orinterest in and to the patent and the inventioncovered thereby, as appears of record in the Office,and of notice of the date of hearing thereon onsuch persons and the petitioner. Notice of the filingof the petition shall be published in the IPOGazette. (Sec. 31, RA 165a)

Sec. 66. Effect of Cancellation of Patent or Claim. -The rights conferred by the patent or any specifiedclaim or claims cancelled shall terminate. Notice ofthe cancellation shall be published in the IPOGazette. Unless restrained by the Director General,the decision or order to cancel by Director of LegalAffairs shall be immediately executory evenpending appeal. (Sec. 32, RA 165a)

Chapter III.

INDUSTRIAL DESIGNSAND LAY-OUT

DESIGNS (TOPOGRAPHIES) OF

INTEGRATED CIRCUITS

1. Substantive Conditions for Protection

Sec. 113. Substantive Conditions for Protection. -113.1. Only industrial designs that are new orornamental shall benefit from protection under thisAct.

113.2. Industrial designs dictated essentiallyby technical or functional considerations toobtain a technical result or those that arecontrary to public order, health or morals shallnot be protected.

113.3. Only layout -designs of integratedcircuits that are original shall benefit fromprotection under this Act. A layout-design shallbe considered original if it is the result of itscreator's own intellectual effort and is notcommonplace among creators of layout-designsand manufacturers of integrated circuits at thetime of its creation.

113.4. A layout-design consisting of acombination of elements and interconnectionsthat are commonplace shall be protected only ifthe combination, taken as a whole, is original.



1.1. Rights Conferred on Registered Owner ofLay-out Design

Sec. 119.4. Rights Conferred to the Owner of aLayout-Design Registration. - The owner of alayout-design registration shall enjoy the followingrights:

(1) to reproduce, whether by incorporation inan integrated circuit or otherwise, theregistered layout-design in its entirety orany part thereof, except the act ofreproducing any part that does notcomply with the requirement oforiginality; and

(2) to sell or otherwise distribute forcommercial purposes the registeredlayout design, an article or an integratedcircuit in which the registered layout-design is incorporated.

Sec. 119.5. Limitations of Layout Rights. - Theowner of a layout design has no right to preventthird parties from reproducing, selling or otherwisedistributing for commercial purposes the registeredlayout-design in the following circumstances:

(1) Reproduction of the registered layout-design for private purposes or for thesole purpose of evaluation, analysis,research or teaching;

(3) Where the act is performed in respect of alayout-design created on the basis of suchanalysis or evaluation and which is itselforiginal in the meaning as providedherein;

(4) Where the act is performed in respect of aregistered lay-out-design, or in respect ofan integrated circuit in which such alayout-design is incorporated, that hasbeen put on the market by or with theconsent of the right holder;

(5) In respect of an integrated circuit wherethe person performing or ordering suchan act did not know and had noreasonable ground to know whenacquiring the integrated circuit or thearticle incorporating such an integratedcircuit, that it incorporated an unlawfullyreproduced layout-design: Provided,however, That after the time that suchperson has received sufficient notice thatthe layout-design was unlawfullyreproduced, that person may perform anyof the said acts only with respect to thestock on hand or ordered before suchtime and shall be liable to pay to the rightholder a sum equivalent to at least 5% ofnet sales or such other reasonable royaltyas would be payable under a freelynegotiated license in respect of suchlayout-design; or

(6) Where the act is performed in respect ofan identical layout-design which is originaland has been created independently by athird party.

1.2. Grounds for Cancellation of Registration

Sec. 120. Cancellation of Design Registration. –

120.1. At any time during the term of theindustrial design registration, any person uponpayment of the required fee, may petition the

Director of Legal Affairs to cancel the industrialdesign on any of the following grounds:

(a) If the subject matter of the industrialdesign is not registerable within theterms of Sections 112 and 113;

(b) If the subject matter is not new; or(c) If the subject matter of the industrial

design extends beyond the content ofthe application as originally filed.

120.2. Where the grounds for cancellationrelate to a part of the industrial design,cancellation may be effected to such extentonly. The restriction may be effected in theform of an alteration of the effected features ofthe design.

120.3. Grounds for Cancellation of Layout-Design of Integrated Circuits.- Any interestedperson may petition that the registration of alayout-design be canceled on the ground that:

(a) the layout-design is not protectableunder this Act;

(b) the right holder is not entitled toprotection under this Act; or

(c) where the application for registrationof the layout-design, was not filedwithin two (2) years from its firstcommercial exploitation anywhere inthe world.

Where the grounds for cancellation areestablished with respect only to a part of thelayout-design, only the corresponding part ofthe registration shall be canceled.Any canceled layout-design registration or partthereof, shall be regarded as null and void fromthe beginning and may be expunged from therecords of the Intellectual Property Office.Reference to all canceled layout-designregistration shall be published in the IPOGazette.

Chapter IV.

TRADEMARKS

1. Marks and Names

Sec. 121. Definitions. - As used in Part III, thefollowing terms have the following meanings:

121.1. "Mark" means any visible sign capableof distinguishing the goods (trademark) orservices (service mark) of an enterprise andshall include a stamped or marked container ofgoods; (Sec. 38, RA 166a)

121.2. "Collective mark" means any visiblesign designated as such in the application forregistration and capable of distinguishing theorigin or any other common characteristic,including the quality of goods or services ofdifferent enterprises which use the sign underthe control of the registered owner of thecollective mark; (Sec. 40, RA 166a)

121.3. "Trade name" means the name ordesignation identifying or distinguishing anenterprise; (Sec. 38, RA 166a)



1.1. Product name and container not propersubjects of copyright and patent registration

Kho v. CA, et al., 379 SCRA 410 [2002]

The name and container of a beauty cream productare proper subjects of a trademark inasmuch asthe same falls squarely within its definition. Inorder to be entitled to exclusively use the same inthe sale of the beauty cream product, the usermust sufficiently prove that she registered or usedit before anybody else did. The petitioner’scopyright and patent registration of the name andcontainer would not guarantee her right to theexclusive use of the same for the reason that theyare not appropriate subjects of the said intellectualrights. Consequently, a preliminary injunction ordercannot be issued for the reason that the petitionerhas not proven that she has a clear right over thesaid name and container to the exclusion of others,not having proven that she has registered atrademark thereto or used the same before anyonedid.

2. Acquisition of Ownership

Sec. 122. How Marks are Acquired. - The rights ina mark shall be acquired through registration madevalidly in accordance with the provisions of thislaw. (Sec. 2-A, RA 166a)

Sec. 165. Trade Names or Business Names. -

165.1. A name or designation may not be usedas a trade name if by its nature or the use towhich such name or designation may be put, itis contrary to public order or morals and if, inparticular, it is liable to deceive trade circles orthe public as to the nature of the enterpriseidentified by that name.

165.2. (a) Notwithstanding any laws orregulations providing for any obligation toregister trade names, such names shall beprotected, even prior to or without registration,against any unlawful act committed by thirdparties.(b) In particular, any subsequent use of thetrade name by a third party, whether as atrade name or a mark or collective mark, orany such use of a similar trade name or mark,likely to mislead the public, shall be deemedunlawful.

3. Use of Mark as a Requirement

Sec. 124.2. The applicant or the registrant shallfile a declaration of actual use of the mark withevidence to that effect, as prescribed by theRegulations within three (3) years from the filingdate of the application. Otherwise, the applicationshall be refused or the mark shall be removed fromthe Register by the Director.

4. Non-Registrable Marks

Sec. 123.1. A mark cannot be registered if it:

(a) Consists of immoral, deceptive orscandalous matter, or matter which maydisparage or falsely suggest a connectionwith persons, living or dead, institutions,

beliefs, or national symbols, or bring theminto contempt or disrepute;

(b) Consists of the flag or coat of arms orother insignia of the Philippines or any ofits political subdivisions, or of any foreignnation, or any simulation thereof;

(c) Consists of a name, portrait or signatureidentifying a particular living individualexcept by his written consent, or thename, signature, or portrait of a deceasedPresident of the Philippines, during the lifeof his widow, if any, except by writtenconsent of the widow;

(d) Is identical with a registered markbelonging to a different proprietor or amark with an earlier filing or priority date,in respect of:

1) The same goods or services, or2) Closely related goods or services,

or3) If it nearly resembles such a mark

as to be likely to deceive or causeconfusion;

(e) Is identical with, or confusingly similar to,or constitutes a translation of a markwhich is considered by the competentauthority of the Philippines to be well-known internationally and in thePhilippines, whether or not it is registeredhere, as being already the mark of aperson other than the applicant forregistration, and used for identical orsimilar goods or services: Provided, Thatin determining whether a mark is well-known, account shall be taken of theknowledge of the relevant sector of thepublic, rather than of the public at large,including knowledge in the Philippineswhich has been obtained as a result of thepromotion of the mark;

(f) Is identical with, or confusingly similar to,or constitutes a translation of a markconsidered well-known in accordance withthe preceding paragraph, which isregistered in the Philippines with respectto goods or services which are not similarto those with respect to which registrationis applied for: Provided, That use of themark in relation to those goods or serviceswould indicate a connection betweenthose goods or services, and the owner ofthe registered mark: Provided further,That the interests of the owner of theregistered mark are likely to be damagedby such use;

(g) Is likely to mislead the public, particularlyas to the nature, quality, characteristics orgeographical origin of the goods orservices;

(h) Consists exclusively of signs that aregeneric for the goods or services that theyseek to identify;

(i) Consists exclusively of signs or ofindications that have become customaryor usual to designate the goods orservices in everyday language or in bonafide and established trade practice;

(j) Consists exclusively of signs or ofindications that may serve in trade todesignate the kind, quality, quantity,intended purpose, value, geographicalorigin, time or production of the goods orrendering of the services, or othercharacteristics of the goods or services;



(k) Consists of shapes that may benecessitated by technical factors or by thenature of the goods themselves or factorsthat affect their intrinsic value;

(l) Consists of color alone, unless defined bya given form; or

(m) Is contrary to public order or morality.

A mark is valid if it is distinctive and hence notbarred from registration under the TrademarkLaw. However, once registered, not only themark’s validity but also the registrant’s ownershipthereof is prima facie presumed.

5. Tests to Determine Confusing Similarity

Between Marks

5.1. Colorable imitation

Societe des Produits Nestlé, S.A. v. CA, 356SCRA 207 [2001]

Colorable imitation denotes such a close oringenious imitation as to be calculated to deceiveordinary persons, or such a resemblance to theoriginal as to deceive an ordinary purchaser givingsuch attention as a purchaser usually gives, as tocause him to purchase the one supposing it to bethe other. In ascertaining whether one mark isconfusingly similar to or is a colorable imitation ofanother, no set rules can be deduced. Each casemust be decided on its own merits. Thecomplexities attendant to an accurate assessmentof likelihood of confusion require that the entirepanoply of elements constituting the relevantfactual landscape be comprehensively examined.

5.2. Holistic test

Del Monte Corporation, et al. v. CA, 181 SCRA410 [1990]

To determine whether a trademark has beeninfringed, we must consider the mark as a wholeand not as dissected. If the buyer is deceived, it isattributable to the marks as a totality, not usuallyto any part of it. The court therefore should beguided by its first impression, for the buyer actsquickly and is governed by a casual glance, thevalue of which may be dissipated as soon as thecourt assumed to analyze carefully the respectivefeatures of the mark.

5.3. Test of dominancy

Asia Brewery v. CA and San Miguel, 224 SCRA437 [1993]

Infringement is determined by the test of“dominancy” rather than by differences orvariations in the details of one trademark and ofanother. Similarity in size, form and color, whilerelevant, is not conclusive. If the competingtrademark contains the main or essential ordominant features of another, and confusion islikely to result, infringement takes place.

Societe Des Produits Nestle, S.A. v. CA (2001)

The totality or holistic test is contrary to theelementary postulate of the law on trademarks andunfair competition that confusing similarity is to be

determined on the basis of visual, aural,connotative comparisons and overall impressionsengendered by the marks in controversy as theyare encountered in the marketplace. The totality orholistic test only relies on visual comparisonsbetween two trademarks whereas the dominancytest relies not only on the visual but also on theaural and connotative comparisons and overallimpressions between the two trademarks.

McDonald’s Corporation v. L.C. Big MakBurger, Inc., et al., 437 SCRA 10 [2004]

This Court, xxx, has relied on the dominancy testrather than the holistic test. The dominancy testconsiders the dominant features in the competingmarks in determining whether they are confusinglysimilar. Under the dominancy test, courts givegreater weight to the similarity of the appearanceof the product arising from the adoption of thedominant features of the registered mark,disregarding minor differences. Courts willconsider more the aural and visual impressionscreated by the marks in the public mind, givinglittle weight to factors like prices, quality, salesoutlets and market segments.

McDonald’s Corp v MACJOY Fastfood Corp(2007)

Applying the dominancy test to the instant case,the Court finds that herein petitioner’s“MCDONALD’S” and respondent’s “MACJOY” marksare confusingly similar with each other such that anordinary purchaser can conclude an association orrelation between the marks.To begin with, both marks use the corporate “M”design logo and the prefixes “Mc” and/or “Mac” asdominant features. The first letter “M” in bothmarks puts emphasis on the prefixes “Mc” and/or“Mac” by the similar way in which they are depictedi.e. in an arch-like, capitalized and stylized manner.For sure, it is the prefix “Mc,” an abbreviation of“Mac,” which visually and aurally catches theattention of the consuming public. Verily, the word“MACJOY” attracts attention the same way as did“McDonalds,” “MacFries,” “McSpaghetti,” “McDo,”“Big Mac” and the rest of the MCDONALD’S markswhich all use the prefixes Mc and/or Mac.Besides and most importantly, both trademarks areused in the sale of fastfood products. Indisputably,the respondent’s trademark application for the“MACJOY & DEVICE” trademark covers goods underClasses 29 and 30 of the InternationalClassification of Goods, namely, fried chicken,chicken barbeque, burgers, fries, spaghetti, etc.Likewise, the petitioner’s trademark registration forthe MCDONALD’S marks in the Philippines coversgoods which are similar if not identical to thosecovered by the respondent’s application.

6. Well-known Marks

Sec. 123.1. (e) Is identical with, or confusinglysimilar to, or constitutes a translation of a markwhich is considered by the competent authority ofthe Philippines to be well-known internationally andin the Philippines, whether or not it is registeredhere, as being already the mark of a person otherthan the applicant for registration, and used foridentical or similar goods or services: Provided,That in determining whether a mark is well-known,account shall be taken of the knowledge of the



relevant sector of the public, rather than of thepublic at large, including knowledge in thePhilippines which has been obtained as a result ofthe promotion of the mark;(f) Is identical with, or confusingly similar to, orconstitutes a translation of a mark considered well-known in accordance with the preceding paragraph,which is registered in the Philippines with respectto goods or services which are not similar to thosewith respect to which registration is applied for:Provided, That use of the mark in relation to thosegoods or services would indicate a connectionbetween those goods or services, and the owner ofthe registered mark: Provided further, That theinterests of the owner of the registered mark arelikely to be damaged by such use;

Sec. 147.2. The exclusive right of the owner of awell-known mark defined in Subsection 123.1(e)which is registered in the Philippines, shall extendto goods and services which are not similar tothose in respect of which the mark is registered:Provided, That use of that mark in relation to thosegoods or services would indicate a connectionbetween those goods or services and the owner ofthe registered mark: Provided, further, That theinterests of the owner of the registered mark arelikely to be damaged by such use.

7. Registration

7.1. Requirements for Registration

Sec. 124. Requirements of Application. -

124.1. The application for the registra(a) A request for registration;

tion of the mark shall be in Filipino or in Englishand shall contain the following:

(b) The name and address of theapplicant;

(c) The name of a State of which theapplicant is a national or where hehas domicile; and the name of aState in which the applicant has areal and effective industrial orcommercial establishment, if any;

(d) Where the applicant is a juridicalentity, the law under which it isorganized and existing;

(e) The appointment of an agent orrepresentative, if the applicant isnot domiciled in the Philippines;

(f) Where the applicant claims thepriority of an earlier application, anindication of:1) The name of the State with

whose national office the earlierapplication was filed or it filedwith an office other than anational office, the name ofthat office,

2) The date on which the earlierapplication was filed, and

3) Where available, the applicationnumber of the earlierapplication;

(g) Where the applicant claims color asa distinctive feature of the mark, astatement to that effect as well asthe name or names of the color orcolors claimed and an indication, inrespect of each color, of the

principal parts of the mark whichare in that color;

(h) Where the mark is a three-dimensional mark, a statement tothat effect;

(i) One or more reproductions of themark, as prescribed in theRegulations;

(j) A transliteration or translation of themark or of some parts of the mark,as prescribed in the Regulations;

(k) The names of the goods or servicesfor which the registration is sought,grouped according to the classes ofthe Nice Classification, together withthe number of the class of the saidClassification to which each group ofgoods or services belongs; and

(l) A signature by, or other self-identification of, the applicant or hisrepresentative.

124.2. The applicant or the registrant shallfile a declaration of actual use of the markwith evidence to that effect, as prescribedby the Regulations within three (3) yearsfrom the filing date of the application.Otherwise, the application shall be refusedor the mark shall be removed from theRegister by the Director.

124.3. One (1) application may relate toseveral goods and/or services, whetherthey belong to one (1) class or to severalclasses of the Nice Classification.

124.4. If during the examination of theapplication, the Office finds factual basis toreasonably doubt the veracity of anyindication or element in the application, itmay require the applicant to submitsufficient evidence to remove the doubt.(Sec. 5, RA 166a)

7.2. Priority Right

Sec. 131. Priority Right. -

131.1. An application for registration of a markfiled in the Philippines by a person referred toin Section 3, and who previously duly filed anapplication for registration of the same mark inone of those countries, shall be considered asfiled as of the day the application was first filedin the foreign country.

131.2. No registration of a mark in thePhilippines by a person described in this sectionshall be granted until such mark has beenregistered in the country of origin of theapplicant.

131.3. Nothing in this section shall entitle theowner of a registration granted under thissection to sue for acts committed prior to thedate on which his mark was registered in thiscountry: Provided, That, notwithstanding theforegoing, the owner of a well-known mark asdefined in Section 123.1(e) of this Act, that isnot registered in the Philippines, may, againstan identical or confusingly similar mark, opposeits registration, or petition the cancellation ofits registration or sue for unfair competition,



without prejudice to availing himself of otherremedies provided for under the law.

131.4. In like manner and subject to the sameconditions and requirements, the right providedin this section may be based upon asubsequent regularly filed application in thesame foreign country: Provided, That anyforeign application filed prior to suchsubsequent application has been withdrawn,abandoned, or otherwise disposed of, withouthaving been laid open to public inspection andwithout leaving any rights outstanding, and hasnot served, nor thereafter shall serve, as abasis for claiming a right of priority. (Sec. 37,RA 166a)

7.3. Classification of Goods and Services

Sec. 144. Classification of Goods and Services. -

144.1. Each registration, and any publicationof the Office which concerns an application orregistration effected by the Office shall indicatethe goods or services by their names, groupedaccording to the classes of the NiceClassification, and each group shall bepreceded by the number of the class of thatClassification to which that group of goods orservices belongs, presented in the order of theclasses of the said Classification.

144.2. Goods or services may not beconsidered as being similar or dissimilar toeach other on the ground that, in anyregistration or publication by the Office, theyappear in different classes of the NiceClassification. (Sec. 6, RA 166a)

7.4.Registration Procedure

Sec. 132. Application Number and Filing Date. -

132.1. The Office shall examine whether theapplication satisfies the requirements for thegrant of a filing date as provided in Section 127and Regulations relating thereto. If theapplication does not satisfy the filingrequirements, the Office shall notify theapplicant who shall within a period fixed by theRegulations complete or correct the applicationas required, otherwise, the application shall beconsidered withdrawn.

132.2. Once an application meets the filingrequirements of Section 127, it shall benumbered in the sequential order, and theapplicant shall be informed of the applicationnumber and the filing date of the applicationwill be deemed to have been abandoned.

Sec. 133. Examination and Publication. -

133.1. Once the application meets the filingrequirements of Section 127, the Office shallexamine whether the application meets therequirements of Section 124 and the mark asdefined in Section 121 is registrable underSection 123.

133.2. Where the Office finds that theconditions referred to in Subsection 133.1 are

fulfilled, it shall, upon payment of theprescribed fee. Forthwith cause the application,as filed, to be published in the prescribedmanner.

133.3. If after the examination, the applicantis not entitled to registration for any reason,the Office shall advise the applicant thereof andthe reasons therefor. The applicant shall have aperiod of four (4) months in which to reply oramend his application, which shall then be re-examined. The Regulations shall determine theprocedure for the re-examination or revival ofan application as well as the appeal to theDirector of Trademarks from any final action bythe Examiner.

133.4. An abandoned application may berevived as a pending application within three(3) months from the date of abandonment,upon good cause shown and the payment ofthe required fee.

133.5. The final decision of refusal of theDirector of Trademarks shall be appealable tothe Director General in accordance with theprocedure fixed by the Regulations. (Sec. 7, RA166a)

Sec. 134. Opposition. - Any person who believesthat he would be damaged by the registration of amark may, upon payment of the required fee andwithin thirty (30) days after the publicationreferred to in Subsection 133.2, file with the Officean opposition to the application. Such oppositionshall be in writing and verified by the oppositor orby any person on his behalf who knows the facts,and shall specify the grounds on which it is basedand include a statement of the facts relied upon.Copies of certificates of registration of marksregistered in other countries or other supportingdocuments mentioned in the opposition shall befiled therewith, together with the translation inEnglish, if not in the English language. For goodcause shown and upon payment of the requiredsurcharge, the time for filing an opposition may beextended by the Director of Legal Affairs, who shallnotify the applicant of such extension. TheRegulations shall fix the maximum period of timewithin which to file the opposition. (Sec. 8, RA165a)

Sec. 135. Notice and Hearing. - Upon the filing ofan opposition, the Office shall serve notice of thefiling on the applicant, and of the date of thehearing thereof upon the applicant and theoppositor and all other persons having any right,title or interest in the mark covered by theapplication, as appear of record in the Office. (Sec.9 RA 165)

Sec. 136. Issuance and Publication of Certificate. -When the period for filing the opposition hasexpired, or when the Director of Legal Affairs shallhave denied the opposition, the Office uponpayment of the required fee, shall issue thecertificate of registration. Upon issuance of acertificate of registration, notice thereof makingreference to the publication of the application shallbe published in the IPO Gazette. (Sec. 10, RA 165)

Sec. 138. Certificates of Registration. - Acertificate of registration of a mark shall be primafacie evidence of the validity of the registration, the



registrant’s ownership of the mark, and of theregistrant’s exclusive right to use the same inconnection with the goods or services and thosethat are related thereto specified in the certificate.(Sec. 20, RA 165)

7.5. Duration of Registration

Sec. 145. Duration.- A certificate of registrationshall remain in force for ten (10) years: Provided,That the registrant shall file a declaration of actualuse and evidence to that effect, or shall show validreasons based on the existence of obstacles to suchuse, as prescribed by the Regulations, within one(1) year from the fifth anniversary of the date ofthe registration of the mark. Otherwise, the markshall be removed from the Register by the Office.(Sec. 12, RA 166a)

Sec. 146. Renewal. -

146.1. A certificate of registration may berenewed for periods of ten (10) years at itsexpiration upon payment of the prescribed feeand upon filing of a request. The request shallcontain the following indications:

(a) An indication that renewal is sought;(b) The name and address of the

registrant or his successor-in-interest, hereafter referred to as the"right holder";

(c) The registration number of theregistration concerned;

(d) The filing date of the applicationwhich resulted in the registrationconcerned to be renewed;

(e) Where the right holder has arepresentative, the name andaddress of that representative;

(f) The names of the recorded goods orservices for which the renewal isrequested or the names of therecorded goods or services for whichthe renewal is not requested,grouped according to the classes ofthe Nice Classification to which thatgroup of goods or services belongsand presented in the order of theclasses of the said Classification; and

(g) A signature by the right holder or hisrepresentative.

146.2. Such request shall be in Filipino or Englishand may be made at any time within six (6)months before the expiration of the period forwhich the registration was issued or renewed, or itmay be made within six (6) months after suchexpiration on payment of the additional fee hereinprescribed.

146.3. If the Office refuses to renew theregistration, it shall notify the registrant of hisrefusal and the reasons therefor.

146.4. An applicant for renewal not domiciled inthe Philippines shall be subject to and comply withthe requirements of this Act. (Sec. 15, RA 166a)

7.6. Rights Conferred by Registration

Sec. 147. Rights Conferred. -

147.1. The owner of a registered mark shallhave the exclusive right to prevent all thirdparties not having the owner’s consent fromusing in the course of trade identical or similarsigns or containers for goods or services whichare identical or similar to those in respect ofwhich the trademark is registered where suchuse would result in a likelihood of confusion. Incase of the use, of an identical sign for identicalgoods or services, a likelihood of confusionshall be presumed.

147.2. The exclusive right of the owner of awell-known mark defined in Subsection123.1(e) which is registered in the Philippines,shall extend to goods and services which arenot similar to those in respect of which themark is registered: Provided, That use of thatmark in relation to those goods or serviceswould indicate a connection between thosegoods or services and the owner of theregistered mark: Provided, further, That theinterests of the owner of the registered markare likely to be damaged by such use.

7.7. Protection limited to goods specified inregistration certificate

Faberge, Inc. v. IAC and Co Beng Kay, 215SCRA 316 [1992]

The certificate of registration can confer upon thepetitioner the exclusive right to use its own symbolonly to those goods specified in the certificate,subject to any conditions a limitations statedtherein. One who has adopted and used atrademark on his goods does not prevent theadoption and use of the same trademark by othersfor products which are of a different description.

8. Infringement and Remedies

Sec. 155. Remedies; Infringement. - Any personwho shall, without the consent of the owner of theregistered mark:

155.1. Use in commerce any reproduction,counterfeit, copy, or colorable imitation of aregistered mark or the same container or adominant feature thereof in connection with thesale, offering for sale, distribution, advertisingof any goods or services including otherpreparatory steps necessary to carry out thesale of any goods or services on or inconnection with which such use is likely tocause confusion, or to cause mistake, or todeceive; or

155.2. Reproduce, counterfeit, copy orcolorably imitate a registered mark or adominant feature thereof and apply suchreproduction, counterfeit, copy or colorableimitation to labels, signs, prints, packages,wrappers, receptacles or advertisementsintended to be used in commerce upon or inconnection with the sale, offering for sale,distribution, or advertising of goods or serviceson or in connection with which such use islikely to cause confusion, or to cause mistake,or to deceive, shall be liable in a civil action forinfringement by the registrant for the remedieshereinafter set forth: Provided, That the



infringement takes place at the moment any ofthe acts stated in Subsection

155.1. or this subsection are committedregardless of whether there is actual sale ofgoods or services using the infringing material.(Sec. 22, RA No 166a)

Sec. 156. Actions, and Damages and Injunction forInfringement. -

156.1. The owner of a registered mark mayrecover damages from any person whoinfringes his rights, and the measure of thedamages suffered shall be either thereasonable profit which the complaining partywould have made, had the defendant notinfringed his rights, or the profit which thedefendant actually made out of theinfringement, or in the event such measure ofdamages cannot be readily ascertained withreasonable certainty, then the court may awardas damages a reasonable percentage basedupon the amount of gross sales of thedefendant or the value of the services inconnection with which the mark or trade namewas used in the infringement of the rights ofthe complaining party. (Sec. 23, First Par., RA166a)

156.2. On application of the complainant, thecourt may impound during the pendency of theaction, sales invoices and other documentsevidencing sales.156.3. In cases where actual intent to misleadthe public or to defraud the complainant isshown, in the discretion of the court, thedamages may be doubled. (Sec. 23, First Par.,RA 166)

156.4. The complainant, upon proper showing,may also be granted injunction. (Sec. 23,Second Par., RA 166a)

Sec. 157. Power of Court to Order InfringingMaterial Destroyed. -

157.1. In any action arising under this Act, inwhich a violation of any right of the owner ofthe registered mark is established, the courtmay order that goods found to be infringing be,without compensation of any sort, disposed ofoutside the channels of commerce in such amanner as to avoid any harm caused to theright holder, or destroyed; and all labels, signs,prints, packages, wrappers, receptacles andadvertisements in the possession of thedefendant, bearing the registered mark ortrade name or any reproduction, counterfeit,copy or colorable imitation thereof, all plates,molds, matrices and other means of makingthe same, shall be delivered up and destroyed.

157.2. In regard to counterfeit goods, thesimple removal of the trademark affixed shallnot be sufficient other than in exceptional caseswhich shall be determined by the Regulations,to permit the release of the goods into thechannels of commerce. (Sec. 24, RA 166a).

Sec. 170. Penalties. - Independent of the civil andadministrative sanctions imposed by law, a criminalpenalty 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 isfound guilty of committing any of the actsmentioned in Section 155, Section 168 andSubsection 169.1. (Arts. 188 and 189, RevisedPenal Code)

Sec. 159. Limitations to Actions for Infringement. -Notwithstanding any other provision of this Act, theremedies given to the owner of a right infringedunder this Act shall be limited as follows:

159.1. Notwithstanding the provisions ofSection 155 hereof, a registered mark shallhave no effect against any person who, in goodfaith, before the filing date or the priority date,was using the mark for the purposes of hisbusiness or enterprise: Provided, That his rightmay only be transferred or assigned togetherwith his enterprise or business or with that partof his enterprise or business in which the markis used.

159.2. Where an infringer who is engagedsolely in the business of printing the mark orother infringing materials for others is aninnocent infringer, the owner of the rightinfringed shall be entitled as against suchinfringer only to an injunction against futureprinting.

159.3. Where the infringement complained ofis contained in or is part of paid advertisementin a newspaper, magazine, or other similarperiodical or in an electronic communication,the remedies of the owner of the right infringedas against the publisher or distributor of suchnewspaper, magazine, or other similarperiodical or electronic communication shall belimited to an injunction against thepresentation of such advertising matter infuture issues of such newspapers, magazines,or other similar periodicals or in futuretransmissions of such electroniccommunications. The limitations of thissubparagraph shall apply only to innocentinfringers: Provided, That such injunctive reliefshall not be available to the owner of the rightinfringed with respect to an issue of anewspaper, magazine, or other similarperiodical or an electronic communicationcontaining infringing matter where restrainingthe dissemination of such infringing matter inany particular issue of such periodical or in anelectronic communication would delay thedelivery of such issue or transmission of suchelectronic communication is customarilyconducted in accordance with the soundbusiness practice, and not due to any methodor device adopted to evade this section or toprevent or delay the issuance of an injunctionor restraining order with respect to suchinfringing matter.

Mighty Corporation v. E. & J. Gallo Winery,434 SCRA 473 [2004]

A crucial issue in any trademark infringement caseis the likelihood of confusion, mistake or deceit asto the identity, source or origin of the goods oridentity of the business as a consequence of usinga certain mark. Likelihood of confusion isadmittedly a relative term, to be determined rigidly



according to the particular (and sometimespeculiar) circumstances of each case. Indetermining likelihood of confusion, the court mustconsider: [a] the resemblance between thetrademarks; [b] the similarity of the goods towhich the trademarks are attached; [c] the likelyeffect on the purchaser; and [d] the registrant’sexpress or implied consent and other fair andequitable considerations.


To establish trademark infringement, the followingelements must be shown: [1] the validity of themark; [2] the plaintiff’s ownership of the mark;and [3] the use of the mark or its colorableimitation by the alleged infringer results in“likelihood of confusion.” Of these, it is the elementof likelihood of confusion that is the gravamen oftrademark infringement. Two types of confusionarise from the use of similar or colorable imitationmarks, namely, confusion of goods (productconfusion) and confusion of business (“source ororigin confusion). While there is confusion of goodswhen the products are competing, confusion ofbusiness exists when the products are non-competing but related enough to produce confusionof affiliation.

Canon Kabushiki Kaisha v. CA, et al., 336SCRA 266 [2000]

The likelihood of confusion of goods or business is arelative concept, to be determined according to theparticular, and sometimes peculiar, circumstancesof each case. In cases of confusion of business ororigin, the question that usually arises is whetherthe respective goods or services of the senior userand the junior user are so related as to likely causeconfusion of business or origin, and thereby renderthe trademark or tradenames confusingly similar.Goods are related when they belong to the sameclass or have the same descriptive properties;when they possess the same physical attributes oressential characteristics with reference to theirform, composition, texture or quality. They mayalso be related because they serve the samepurpose or are sold through the same channels ofdistribution.

Samson v. Daway, 434 SCRA 612 [2004]

R.A. No. 8293 and R.A. No. 166 are special lawsconferring jurisdiction over violations of intellectualproperty rights to the Regional Trial Court. Theyshould therefore prevail over R.A. No. 7691, whichis a general law. Hence, jurisdiction is properlylodged with the Regional Trial Court even if thepenalty therefore is imprisonment of less than sixyears, or from 2 to 5 years and a fine ranging fromP50,000 to P200,000.

8.1. Notice Requirement

Sec. 158. Damages; Requirement of Notice. - Inany suit for infringement, the owner of theregistered mark shall not be entitled to recoverprofits or damages unless the acts have beencommitted with knowledge that such imitation islikely to cause confusion, or to cause mistake, or todeceive. Such knowledge is presumed if theregistrant gives notice that his mark is registered

by displaying with the mark the words "RegisteredMark" or the letter R within a circle or if thedefendant had otherwise actual notice of theregistration. (Sec. 21, RA 166a)

9. Unfair Competition

Sec. 168. Unfair Competition, Rights, Regulationand Remedies. -

168.1. A person who has identified in the mindof the public the goods he manufactures ordeals in, his business or services from those ofothers, whether or not a registered mark isemployed, has a property right in the goodwillof the said goods, business or services soidentified, which will be protected in the samemanner as other property rights.

168.2. Any person who shall employ deceptionor any other means contrary to good faith bywhich he shall pass off the goods manufacturedby him or in which he deals, or his business, orservices for those of the one having establishedsuch goodwill, or who shall commit any actscalculated to produce said result, shall be guiltyof unfair competition, and shall be subject to anaction therefor.

168.3. In particular, and without in any waylimiting the scope of protection against unfaircompetition, the following shall be deemedguilty of unfair competition:

(a) Any person, who is selling his goodsand gives them the generalappearance of goods of anothermanufacturer or dealer, either as tothe goods themselves or in thewrapping of the packages in whichthey are contained, or the devices orwords thereon, or in any other featureof their appearance, which would belikely to influence purchasers tobelieve that the goods offered arethose of a manufacturer or dealer,other than the actual manufacturer ordealer, or who otherwise clothes thegoods with such appearance as shalldeceive the public and defraudanother of his legitimate trade, or anysubsequent vendor of such goods orany agent of any vendor engaged inselling such goods with a like purpose;

(b) Any person who by any artifice, ordevice, or who employs any othermeans calculated to induce the falsebelief that such person is offering theservices of another who has identifiedsuch services in the mind of thepublic; or

(c) Any person who shall make any falsestatement in the course of trade orwho shall commit any other actcontrary to good faith of a naturecalculated to discredit the goods,business or services of another.

168.4. The remedies provided by Sections156, 157 and 161 shall apply mutatismutandis. (Sec. 29, RA 166a)



Del Monte Corporation, et al. v. CA, 181 SCRA410 [1990]

The following are the distinctions betweeninfringement of trademark and unfair competition:

1. Infringement of trademark is theunauthorized use of a trademark, whereasunfair competition is the passing off ofone’s goods as those of another.

2. In infringement of trademark, fraudulentintent is unnecessary, whereas in unfaircompetition fraudulent intent is essential.

3. In infringement of trademark the priorregistration of the trademark is aprerequisite to the action, whereas in unfaircompetition registration is not necessary.

Mighty Corporation v. E. & J. Gallo Winery,434 SCRA 473 [2004]

The law on unfair competition is broader and moreinclusive than the law on trademark infringement.The latter is more limited but it recognizes a moreexclusive right derived from the trademarkadoption and registration by the person whosegoods or business is first associated with it. Hence,even if one fails to establish his exclusive propertyright to a trademark, he may still obtain relief onthe ground of his competitor’s unfairness or fraud.Conduct constitutes unfair competition if the effectis to pass off on the public the goods of one man asthe goods of another.


The elements of an action for unfair competitionare: [1] confusing similarity in the generalappearance of the goods, and [2] intent to deceivethe public and defraud a competitor. The confusingsimilarity may or may not result from similarity inthe marks, but may result from other externalfactors in the packaging or presentation of thegoods. The intent to deceive and defraud may beinferred from the similarity in appearance of thegoods as offered for sale to the public. Actualfraudulent intent need not be shown.

Caterpillar, Inc v. Samson (2006)

An action for unfair competition is based on theproposition that no dealer in merchandise shouldbe allowed to dress his goods in simulation of thegoods of another dealer, so that purchasersdesiring to buy the goods of the latter would beinduced to buy the goods of the former. The mostusual devices employed in committing this crimeare the simulation of labels and the reproduction ofform, color and general appearance of the packageused by the pioneer manufacturer or dealer.

Chapter V.

COPYRIGHTS

1. Basic Principles

1. Works are protected by the sole fact of theircreation.Sec. 172.2. Works are protected by the solefact of their creation, irrespective of their modeor form of expression, as well as of theircontent, quality and purpose. (Sec. 2, PD No.49a)

2. Protection extends only to the expression of anidea, not the idea itself.

Sec. 175. Unprotected Subject Matter. -Notwithstanding the provisions of Sections 172 and173, no protection shall extend, under this law, toany idea, procedure, system method or operation,concept, principle, discovery or mere data as such,even if they are expressed, explained, illustrated orembodied in a work; xxx xxx xxx

2. Definition

Sec. 177. Copy or Economic Rights. - Subject tothe provisions of Chapter VIII, copyright oreconomic rights shall consist of the exclusive rightto carry out, authorize or prevent the followingacts:

177.1. Reproduction of the work or substantialportion of the work;

177.2. Dramatization, translation, adaptation,abridgment, arrangement or othertransformation of the work;

177.3. The first public distribution of theoriginal and each copy of the work by sale orother forms of transfer of ownership;

177.4. Rental of the original or a copy of anaudiovisual or cinematographic work, a workembodied in a sound recording, a computerprogram, a compilation of data and othermaterials or a musical work in graphic form,irrespective of the ownership of the original orthe copy which is the subject of the rental;

177.5. Public display of the original or a copyof the work;

177.6. Public performance of the work; and

177.7. Other communication to the public ofthe work (Sec. 5, PD No. 49a)

3. Copyrightable Works

Sec. 172. Literary and Artistic Works. -

172.1. Literary and artistic works, hereinafterreferred to as "works", are original intellectualcreations in the literary and artistic domainprotected from the moment of their creationand shall include in particular:

(a) Books, pamphlets, articles and otherwritings;

(b) Periodicals and newspapers;(c) Lectures, sermons, addresses,

dissertations prepared for oraldelivery, whether or not reduced inwriting or other material form;

(d) Letters;



(e) Dramatic or dramatico-musicalcompositions; choreographic worksor entertainment in dumb shows;

(f) Musical compositions, with or withoutwords;

(g) Works of drawing, painting,architecture, sculpture, engraving,lithography or other works of art;models or designs for works of art;

(h) Original ornamental designs ormodels for articles of manufacture,whether or not registrable as anindustrial design, and other works ofapplied art;

(i) Illustrations, maps, plans, sketches,charts and three-dimensional worksrelative to geography, topography,architecture or science;

(j) Drawings or plastic works of ascientific or technical character;

(k) Photographic works including worksproduced by a process analogous tophotography; lantern slides;

(l) Audiovisual works andcinematographic works and worksproduced by a process analogous tocinematography or any process formaking audio-visual recordings;

(m) Pictorial illustrations andadvertisements;

(n) Computer programs; and(o) Other literary, scholarly, scientific

and artistic works.

Sec. 173. Derivative Works. -

173.1. The following derivative works shallalso be protected by copyright:

(a) Dramatizations, translations,adaptations, abridgments,arrangements, and other alterationsof literary or artistic works; and

(b) Collections of literary, scholarly orartistic works, and compilations ofdata and other materials which areoriginal by reason of the selection orcoordination or arrangement of theircontents. (Sec. 2, [P] and [Q], PDNo. 49)

173.2. The works referred to in paragraphs (a)and (b) of Subsection 173.1 shall be protectedas a new works: Provided however, That suchnew work shall not affect the force of anysubsisting copyright upon the original worksemployed or any part thereof, or be construedto imply any right to such use of the originalworks, or to secure or extend copyright in suchoriginal works. (Sec. 8, PD 49; Art. 10, TRIPS)

Sec. 174. Published Edition of Work. - In additionto the right to publish granted by the author, hisheirs or assigns, the publisher shall have a copyright consisting merely of the right of reproductionof the typographical arrangement of the publishededition of the work.

3.1. Format of a show not copyrightable

Joaquin, Jr., et al. v. Drilon, et al., 302 SCRA225 [1999]

The format of a show is not copyrightable. Section2 of PD No. 49, otherwise known as the Decree onIntellectual Property, enumerates the classes ofwork entitled to copyright protection. This provisionis substantially the same as Section 172 of theIntellectual Property Code (R.A. No. 8293). Theformat or mechanics of a television show is notincluded in the list of protected works. For thisreason, the protection afforded by the law cannotbe extended to cover them. Copyright, in the strictsense of the term, is purely a statutory right.Being a statutory grant, the rights are only such asthe statute confers, and may be obtained andenjoyed only with respect to the subjects and bythe persons, and on terms and conditions specifiedin the statute.

4. Non-copyrightable Works (175, 176)

Sec. 175. Unprotected Subject Matter. -Notwithstanding the provisions of Sections 172 and173, no protection shall extend, under this law, toany idea, procedure, system method or operation,concept, principle, discovery or mere data as such,even if they are expressed, explained, illustrated orembodied in a work; news of the day and othermiscellaneous facts having the character of mereitems of press information; or any official text of alegislative, administrative or legal nature, as wellas any official translation thereof.

Sec. 176. Works of the Government. -

176.1. No copyright shall subsist in any workof the Government of the Philippines. However,prior approval of the government agency oroffice wherein the work is created shall benecessary for exploitation of such work forprofit. Such agency or office may, among otherthings, impose as a condition the payment ofroyalties. No prior approval or conditions shallbe required for the use of any purpose ofstatutes, rules and regulations, and speeches,lectures, sermons, addresses, anddissertations, pronounced, read or rendered incourts of justice, before administrativeagencies, in deliberative assemblies and inmeetings of public character. (Sec. 9, FirstPar., PD No. 49)

176.2. The Author of speeches, lectures,sermons, addresses, and dissertationsmentioned in the preceding paragraphs shallhave the exclusive right of making a collectionof his works.176.3. Notwithstanding the foregoingprovisions, the Government is not precludedfrom receiving and holding copyrightstransferred to it by assignment, bequest orotherwise; nor shall publication or republicationby the government in a public document of anywork in which copy right is subsisting be takento cause any abridgment or annulment of thecopyright or to authorize any use orappropriation of such work without the consentof the copyright owners. (Sec. 9, Third Par., PDNo. 49)

5. Standard for Copyright Protection

Ching Kian Chuan v. Court of Appeals, 363SCRA 142 [2001]



A person to be entitled to a copyright must be theoriginal creator of the work. He must have createdit by his own skill, labor, and judgment withoutdirectly copying or evasively imitating the work ofanother.

Ching v Salinas (2005)

Ownership of copyrighted material is shown byproof of originality and copyrightability. Byoriginality is meant that the material was notcopied, and evidences at least minimal creativity;that it was independently created by the authorand that it possesses at least same minimal degreeof creativity. Copying is shown by proof of accessto copyrighted material and substantial similaritybetween the two works. The applicant must thusdemonstrate the existence and the validity of hiscopyright because in the absence of copyrightprotection, even original creation may be freelycopied.

6. Economic Rights

Sec. 177. Copy or Economic Rights. - Subject tothe provisions of Chapter VIII, copyright oreconomic rights shall consist of the exclusive rightto carry out, authorize or prevent the followingacts:

177.1. Reproduction of the work or substantialportion of the work;

177.2. Dramatization, translation, adaptation,abridgment, arrangement or othertransformation of the work;

177.3. The first public distribution of theoriginal and each copy of the work by sale orother forms of transfer of ownership;

177.4. Rental of the original or a copy of anaudiovisual or cinematographic work, a workembodied in a sound recording, a computerprogram, a compilation of data and othermaterials or a musical work in graphic form,irrespective of the ownership of the original orthe copy which is the subject of the rental;

177.5. Public display of the original or a copyof the work;

177.6. Public performance of the work; and

177.7. Other communication to the public ofthe work (Sec. 5, PD No. 49a)

7. Droit de Suite

Sec. 200. Sale or Lease of Work. - In every sale orlease of an original work of painting or sculpture orof the original manuscript of a writer or composer,subsequent to the first disposition thereof by theauthor, the author or his heirs shall have aninalienable right to participate in the grossproceeds of the sale or lease to the extent of fivepercent (5%). This right shall exist during thelifetime of the author and for fifty (50) years afterhis death. (Sec. 31, PD No. 49)

Sec. 201. Works Not Covered. - The provisions ofthis Chapter shall not apply to prints, etchings,engravings, works of applied art, or works of

similar kind wherein the author primarily derivesgain from the proceeds of reproductions. (Sec. 33,PD No. 49)

8. Moral Rights

Sec. 193. Scope of Moral Rights. - The author of awork shall, independently of the economic rights inSection 177 or the grant of an assignment orlicense with respect to such right, have the right:

193.1. To require that the authorship of theworks be attributed to him, in particular, theright that his name, as far as practicable, beindicated in a prominent way on the copies,and in connection with the public use of hiswork;

193.2. To make any alterations of his workprior to, or to withhold it from publication;

193.3. To object to any distortion, mutilationor other modification of, or other derogatoryaction in relation to, his work which would beprejudicial to his honor or reputation; and

193.4. To restrain the use of his name withrespect to any work not of his own creation orin a distorted version of his work. (Sec. 34, PDNo. 49)

9. Ownership of Copyright

Sec. 178. Rules on Copyright Ownership. -Copyright ownership shall be governed by thefollowing rules:

178.1. Subject to the provisions of thissection, in the case of original literary andartistic works, copyright shall belong to theauthor of the work;

178.2. In the case of works of joint authorship,the co-authors shall be the original owners ofthe copyright and in the absence of agreement,their rights shall be governed by the rules onco-ownership. If, however, a work of jointauthorship consists of parts that can be usedseparately and the author of each part can beidentified, the author of each part shall be theoriginal owner of the copyright in the part thathe has created;

178.3. In the case of work created by anauthor during and in the course of hisemployment, the copyright shall belong to:

(a) The employee, if the creation of theobject of copyright is not a part of hisregular duties even if the employeeuses the time, facilities and materialsof the employer.

(b) The employer, if the work is the resultof the performance of his regularly-assigned duties, unless there is anagreement, express or implied, to thecontrary.

178.4. In the case of a work-commissioned bya person other than an employer of the authorand who pays for it and the work is made inpursuance of the commission, the person whoso commissioned the work shall have



ownership of work, but the copyright theretoshall remain with the creator, unless there is awritten stipulation to the contrary;

178.5. In the case of audiovisual work, thecopyright shall belong to the producer, theauthor of the scenario, the composer of themusic, the film director, and the author of thework so adapted. However, subject to contraryor other stipulations among the creators, theproducers shall exercise the copyright to anextent required for the exhibition of the work inany manner, except for the right to collectperforming license fees for the performance ofmusical compositions, with or without words,which are incorporated into the work; and

178.6. In respect of letters, the copyright shallbelong to the writer subject to the provisions ofArticle 723 of the Civil Code. (Sec. 6, PD No.49a)

Sec. 179. Anonymous and Pseudonymous Works. -For purposes of this Act, the publishers shall bedeemed to represent the authors of articles andother writings published without the names of theauthors or under pseudonyms, unless the contraryappears, or the pseudonyms or adopted nameleaves no doubts as to the author’s identity, or ifthe author of the anonymous works discloses hisidentity. (Sec. 7, PD 49)

10. Limitations on Copyright

Sec. 184. Limitations on Copyright. -

184.1. Notwithstanding the provisions ofChapter V, the following acts shall notconstitute infringement of copyright:

(a) the recitation or performance of awork, once it has been lawfully madeaccessible to the public, if doneprivately and free of charge or ifmade strictly for a charitable orreligious institution or society; (Sec.10(1), PD No. 49)

(b) The making of quotations from apublished work if they are compatiblewith fair use and only to the extentjustified for the purpose, includingquotations from newspaper articlesand periodicals in the form of presssummaries: Provided, That thesource and the name of the author, ifappearing on the work, arementioned; (Sec. 11, Third Par., PDNo. 49)

(c) The reproduction or communicationto the public by mass media ofarticles on current political, social,economic, scientific or religious topic,lectures, addresses and other worksof the same nature, which aredelivered in public if such use is forinformation purposes and has notbeen expressly reserved: Provided,That the source is clearly indicated;(Sec. 11, PD No. 49)

(d) The reproduction and communicationto the public of literary, scientific orartistic works as part of reports ofcurrent events by means of

photography, cinematography orbroadcasting to the extent necessaryfor the purpose; (Sec. 12, PD No. 49)

(e) The inclusion of a work in apublication, broadcast, or othercommunication to the public, soundrecording or film, if such inclusion ismade by way of illustration forteaching purposes and is compatiblewith fair use: Provided, That thesource and of the name of theauthor, if appearing in the work, arementioned;

(f) The recording made in schools,universities, or educationalinstitutions of a work included in abroadcast for the use of suchschools, universities or educationalinstitutions: Provided, That suchrecording must be deleted within areasonable period after they werefirst broadcast: Provided, further,That such recording may not bemade from audiovisual works whichare part of the general cinemarepertoire of feature films except forbrief excerpts of the work;

(g) The making of ephemeral recordingsby a broadcasting organization bymeans of its own facilities and foruse in its own broadcast;

(h) The use made of a work by or underthe direction or control of theGovernment, by the National Libraryor by educational, scientific orprofessional institutions where suchuse is in the public interest and iscompatible with fair use;

(i) The public performance or thecommunication to the public of awork, in a place where no admissionfee is charged in respect of suchpublic performance orcommunication, by a club orinstitution for charitable oreducational purpose only, whose aimis not profit making, subject to suchother limitations as may be providedin the Regulations;

(j) Public display of the original or acopy of the work not made by meansof a film, slide, television image orotherwise on screen or by means ofany other device or process:Provided, That either the work hasbeen published, or, that original orthe copy displayed has been sold,given away or otherwise transferredto another person by the author orhis successor in title; and

(k) Any use made of a work for thepurpose of any judicial proceedingsor for the giving of professionaladvice by a legal practitioner.

184.2. The provisions of this section shallbe interpreted in such a way as to allow thework to be used in a manner which doesnot conflict with the normal exploitation ofthe work and does not unreasonablyprejudice the right holder's legitimateinterest.

Sec. 187. Reproduction of Published Work. -



187.1. Notwithstanding the provision ofSection 177, and subject to the provisions ofSubsection 187.2, the private reproduction of apublished work in a single copy, where thereproduction is made by a natural personexclusively for research and private study, shallbe permitted, without the authorization of theowner of copyright in the work.

187.2. The permission granted underSubsection 187.1 shall not extend to thereproduction of:

(a) A work of architecture in form ofbuilding or other construction;

(b) An entire book, or a substantial pastthereof, or of a musical work in whichgraphics form by reprographic means;

(c) A compilation of data and othermaterials;

(d) A computer program except asprovided in Section 189; and

(e) Any work in cases where reproductionwould unreasonably conflict with anormal exploitation of the work orwould otherwise unreasonablyprejudice the legitimate interests of theauthor.

Sec. 188. Reprographic Reproduction by Libraries.-

188.1. Notwithstanding the provisions ofSubsection 177.6, any library or archive whoseactivities are not for profit may, without theauthorization of the author of copyright owner,make a single copy of the work by reprographicreproduction:

(a) Where the work by reason of its fragilecharacter or rarity cannot be lent touser in its original form;

(b) Where the works are isolated articlescontained in composite works or briefportions of other published works andthe reproduction is necessary tosupply them; when this is consideredexpedient, to person requesting theirloan for purposes of research or studyinstead of lending the volumes orbooklets which contain them; and

(c) Where the making of such a copy is inorder to preserve and, if necessary inthe event that it is lost, destroyed orrendered unusable, replace a copy, orto replace, in the permanent collectionof another similar library or archive, acopy which has been lost, destroyedor rendered unusable and copies arenot available with the publisher.

188.2. Notwithstanding the above provisions,it shall not be permissible to produce a volumeof a work published in several volumes or toproduce missing tomes or pages of magazinesor similar works, unless the volume, tome orpart is out of stock; Provided, That everylibrary which, by law, is entitled to receivecopies of a printed work, shall be entitled,when special reasons so require, to reproduce acopy of a published work which is considerednecessary for the collection of the library butwhich is out of stock. (Sec. 13, PD 49a)

Sec. 189. Reproduction of Computer Program. –

189.1. Notwithstanding the provisions ofSection 177, the reproduction in one (1) back-up copy or adaptation of a computer programshall be permitted, without the authorization ofthe author of, or other owner of copyright in, acomputer program, by the lawful owner of thatcomputer program: Provided, That the copy oradaptation is necessary for:

(a) The use of the computer program inconjunction with a computer for thepurpose, and to the extent, for whichthe computer program has beenobtained; and

(b) Archival purposes, and, for thereplacement of the lawfully owned copyof the computer program in the eventthat the lawfully obtained copy of thecomputer program is lost, destroyed orrendered unusable.

189.2. No copy or adaptation mentioned in thisSection shall be used for any purpose otherthan the ones determined in this Section, andany such copy or adaptation shall be destroyedin the event that continued possession of thecopy of the computer program ceases to belawful.

189.3. This provision shall be without prejudiceto the application of Section 185 wheneverappropriate.

Sec. 190. Importation for Personal Purposes. -

190.1. Notwithstanding the provision ofSubsection 177.6, but subject to the limitationunder the Subsection 185.2, the importation ofa copy of a work by an individual for hispersonal purposes shall be permitted withoutthe authorization of the author of, or otherowner of copyright in, the work under thefollowing circumstances:

(a) When copies of the work are notavailable in the Philippines and:

1) Not more than one (1) copy atone time is imported for strictlyindividual use only; or

2) The importation is by authority ofand for the use of the PhilippineGovernment; or

3) The importation, consisting of notmore than three (3) such copiesor likenesses in any one invoice,is not for sale but for the use onlyof any religious, charitable, oreducational society or institutionduly incorporated or registered,or is for the encouragement ofthe fine arts, or for any stateschool, college, university, or freepublic library in the Philippines.

(b) When such copies form parts oflibraries and personal baggagebelonging to persons or familiesarriving from foreign countries and arenot intended for sale: Provided, Thatsuch copies do not exceed three (3).



190.2. Copies imported as allowed by thisSection may not lawfully be used in any way toviolate the rights of owner the copyright orannul or limit the protection secured by thisAct, and such unlawful use shall be deemed aninfringement and shall be punishable as suchwithout prejudice to the proprietor’s right ofaction.

190.3. Subject to the approval of theSecretary of Finance, the Commissioner ofCustoms is hereby empowered to make rulesand regulations for preventing the importationof articles the importation of which is prohibitedunder this Section and under treaties andconventions to which the Philippines may be aparty and for seizing and condemning anddisposing of the same in case they arediscovered after they have been imported.(Sec. 30, PD No. 49)

11. Doctrine of Fair Use

Sec. 185. Fair Use of a Copyrighted Work. -

185.1. The fair use of a copyrighted work forcriticism, comment, news reporting, teachingincluding multiple copies for classroom use,scholarship, research, and similar purposes isnot an infringement of copyright.Decompilation, which is understood here to bethe reproduction of the code and translation ofthe forms of the computer program to achievethe inter-operability of an independentlycreated computer program with other programsmay also constitute fair use. In determiningwhether the use made of a work in anyparticular case is fair use, the factors to beconsidered shall include:

(a) The purpose and character of theuse, including whether such use is ofa commercial nature or is for non-profit education purposes;

(b) The nature of the copyrighted work;(c) The amount and substantiality of the

portion used in relation to thecopyrighted work as a whole; and

(d) The effect of the use upon thepotential market for or value of thecopyrighted work.

185.2. The fact that a work is unpublishedshall not by itself bar a finding of fair use ifsuch finding is made upon consideration of allthe above factors.

12. Notice of Copyright

Sec. 192. Notice of Copyright. - Each copy of awork published or offered for sale may contain anotice bearing the name of the copyright owner,and the year of its first publication, and, in copiesproduced after the creator’s death, the year of suchdeath. (Sec. 27, PD No. 49a)

13. Duration of Copyright

Sec. 213. Term of Protection. - 213.1. Subject tothe provisions of Subsections 213.2 to 213.5, thecopyright in works under Sections 172 and 173shall be protected during the life of the author andfor fifty (50 years after his death. This rule also

applies to posthumous works. (Sec. 21, FirstSentence, PD No. 49a)

213.2. In case of works of joint authorship, theeconomic rights shall be protected during thelife of the last surviving author and for fifty(50) years after his death. (Sec. 21, SecondSentence, PD No. 49)

213.3. In case of anonymous orpseudonymous works, the copyright shall beprotected for fifty (50) years from the date onwhich the work was first lawfully published:Provided, That where, before the expiration ofthe said period, the author's identity isrevealed or is no longer in doubt, the provisionsof Subsections 213.1 and 213.2 shall apply, asthe case may be: Provided, further, That suchworks if not published before shall be protectedfor fifty (50) years counted from the making ofthe work. (Sec. 23, PD No. 49)

213.4. In case of works of applied art theprotection shall be for a period of twenty-five(25) years from the date of making. (Sec.24(B), PD No. 49a)

213.5. In case of photographic works, theprotection shall be for fifty (50) years frompublication of the work and, if unpublished, fifty(50) years from the making. (Sec. 24(C), PD49a)

213.6. In case of audio-visual works includingthose produced by process analogous tophotography or any process for making audio-visual recordings, the term shall be fifty (50)years from date of publication and, ifunpublished, from the date of making. (Sec.24(C), PD No. 49a)

Sec. 214. Calculation of Term. - The term ofprotection subsequent to the death of the authorprovided in the preceding Section shall run fromthe date of his death or of publication, but suchterms shall always be deemed to begin on the firstday of January of the year following the eventwhich gave rise to them. (Sec. 25, PD No. 49)

14. Transfer and Assignment of Copyright

Sec. 180. Rights of Assignee. -

180.1. The copyright may be assigned in wholeor in part. Within the scope of the assignment,the assignee is entitled to all the rights andremedies which the assignor had with respectto the copyright.

180.2. The copyright is not deemed assignedinter vivos in whole or in part unless there is awritten indication of such intention.

180.3. The submission of a literary,photographic or artistic work to a newspaper,magazine or periodical for publication shallconstitute only a license to make a singlepublication unless a greater right is expresslygranted. If two (2) or more persons jointly owna copyright or any part thereof, neither of theowners shall be entitled to grant licenseswithout the prior written consent of the otherowner or owners. (Sec. 15, PD No. 49a)



Sec. 181. Copyright and Material Object. - Thecopyright is distinct from the property in thematerial object subject to it. Consequently, thetransfer or assignment of the copyright shall notitself constitute a transfer of the material object.Nor shall a transfer or assignment of the sole copyor of one or several copies of the work implytransfer or assignment of the copyright. (Sec. 16,PD No. 49)

Sec. 182. Filing of Assignment of License. - Anassignment or exclusive license may be filed induplicate with the National Library upon paymentof the prescribed fee for registration in books andrecords kept for the purpose. Upon recording, acopy of the instrument shall be, returned to thesender with a notation of the fact of record. Noticeof the record shall be published in the IPO Gazette.(Sec. 19, PD No. 49a)

Sec. 183. Designation of Society. - The copyrightowners or their heirs may designate a society ofartists, writers or composers to enforce theireconomic rights and moral rights on their behalf.(Sec. 32, PD No. 49a)

15. Neighboring Rights

Sec. 203. Scope of Performers' Rights. - Subject tothe provisions of Section 212, performers shallenjoy the following exclusive rights:

203.1. As regards their performances, theright of authorizing:

(a) The broadcasting and othercommunication to the public of theirperformance; and

(b) The fixation of their unfixedperformance.

203.2. The right of authorizing the direct orindirect reproduction of their performancesfixed in sound recordings, in any manner orform;

203.3. Subject to the provisions of Section206, the right of authorizing the first publicdistribution of the original and copies of theirperformance fixed in the sound recordingthrough sale or rental or other forms of transferof ownership;

203.4. The right of authorizing the commercialrental to the public of the original and copies oftheir performances fixed in sound recordings,even after distribution of them by, or pursuantto the authorization by the performer; and

203.5. The right of authorizing the makingavailable to the public of their performancesfixed in sound recordings, by wire or wirelessmeans, in such a way that members of thepublic may access them from a place and timeindividually chosen by them. (Sec. 42, PD No.49a)

Sec. 208. Scope of Right. - Subject to theprovisions of Section 212, producers of soundrecordings shall enjoy the following exclusiverights:

208.1. The right to authorize the direct orindirect reproduction of their sound recordings,

in any manner or form; the placing of thesereproductions in the market and the right ofrental or lending;

208.2. The right to authorize the first publicdistribution of the original and copies of theirsound recordings through sale or rental orother forms of transferring ownership; and

208.3. The right to authorize the commercialrental to the public of the original and copies oftheir sound recordings, even after distributionby them by or pursuant to authorization by theproducer. (Sec. 46, PD No. 49a)

Sec. 211. Scope of Right. - Subject to theprovisions of Section 212, broadcastingorganizations shall enjoy the exclusive right tocarry out, authorize or prevent any of the followingacts:

211.1. The rebroadcasting of their broadcasts;

211.2. The recording in any manner, includingthe making of films or the use of video tape, oftheir broadcasts for the purpose ofcommunication to the public of televisionbroadcasts of the same; and

211.3. The use of such records for freshtransmissions or for fresh recording. (Sec. 52,PD No. 49)

Sec. 215. Term of Protection for Performers,Producers and Broadcasting Organizations.-

215.1. The rights granted to performers andproducers of sound recordings under this lawshall expire:

(a) For performances not incorporated inrecordings, fifty (50) years from theend of the year in which theperformance took place; and

(b) For sound or image and soundrecordings and for performancesincorporated therein, fifty (50) yearsfrom the end of the year in which therecording took place.

215.2. In case of broadcasts, the term shall betwenty (20) years from the date the broadcasttook place. The extended term shall be appliedonly to old works with subsisting protectionunder the prior law. (Sec. 55, PD 49a)

16. Infringement

Habana, et al., v. Robles, et al., 310 SCRA 511[1999]

Infringement consists in the doing by any person,without the consent of the owner of the copyright,of anything the sole right to do which is conferredby statute on the owner of the copyright. The act oflifting from another’s book substantial portions ofdiscussions and examples and the failure toacknowledge the same is an infringement ofcopyright. For there to be substantial reproductionof a book it does not necessarily require that theentire copyrighted work, or even a large portion ofit, be copied. If so much is taken that the value ofthe original work is substantially diminished, thereis an infringement of copyright and to an injurious



extent, the work is appropriated. It is no defensethat the pirate did not know whether or not he wasinfringing any copyright; he at least knew thatwhat he was copying was not his, and he copied athis peril. In cases of infringement, copying alone isnot what is prohibited. The copying must producean “injurious effect”.

Columbia Picture Entertainment, Inc v CA

It is evidently incorrect to suggest, as the ruling in20th Century Fox may appear to do, that incopyright infringement cases, the presentation ofmaster tapes of the copyrighted films is alwaysnecessary to meet the requirement of probablecause and that, in the absence thereof, there canbe no finding of probable cause for the issuance ofa search warrant. It is true that such master tapesare object evidence, with the merit that in thisclass of evidence the ascertainment of thecontroverted fact is made through demonstrationsinvolving the direct use of the senses of thepresiding magistrate. (City of Manila v. Cabangis,10 Phil. 151 [1908]; Kabase v. State, 31 Ala. App.77, 12 So. 2ND, 758, 764). Such auxiliaryprocedure, however, does not rule out the use oftestimonial or documentary evidence, depositions,admissions, or other classes of evidence tending toprove the factum probandum (See Phil. MovieWorkers Association v. Premiere Productions, Inc.,92 Phil. 843 [1953]) especially where theproduction in court of object evidence would resultin delay, inconvenience or expenses out ofproportion to its evidentiary value.

17. Remedies for Infringement

17.1. Civil Action

Sec. 216. Remedies for Infringement. -

216.1. Any person infringing a rightprotected under this law shall be liable:

(a) To an injunction restraining suchinfringement. The court may alsoorder the defendant to desistfrom an infringement, amongothers, to prevent the entry intothe channels of commerce ofimported goods that involve aninfringement, immediately aftercustoms clearance of such goods.

(b) Pay to the copyright proprietor orhis assigns or heirs such actualdamages, including legal costsand other expenses, as he mayhave incurred due to theinfringement as well as theprofits the infringer may havemade due to such infringement,and in proving profits the plaintiffshall be required to prove salesonly and the defendant shall berequired to prove every elementof cost which he claims, or, inlieu of actual damages andprofits, such damages which tothe court shall appear to be justand shall not be regarded aspenalty.

(c) Deliver under oath, forimpounding during the pendencyof the action, upon such terms

and conditions as the court mayprescribe, sales invoices andother documents evidencingsales, all articles and theirpackaging alleged to infringe acopyright and implements formaking them.

(d) Deliver under oath fordestruction without anycompensation all infringingcopies or devices, as well as allplates, molds, or other means formaking such infringing copies asthe court may order.

(e) Such other terms and conditions,including the payment of moraland exemplary damages, whichthe court may deem proper, wiseand equitable and the destructionof infringing copies of the workeven in the event of acquittal in acriminal case.

216. 2. In an infringement action, thecourt shall also have the power to order theseizure and impounding of any article whichmay serve as evidence in the courtproceedings. (Sec. 28, PD 49a)

17.2. Criminal Action

Sec. 217. Criminal Penalties. -

217. 1. Any person infringing any rightsecured by provisions of Part IV of this Actor aiding or abetting such infringementshall be guilty of a crime punishable by:

(a) Imprisonment of one (1) year tothree (3) years plus a fine rangingfrom Fifty thousand pesos(P50,000) to One hundred fiftythousand pesos (P150,000) for thefirst offense.

(b) Imprisonment of three (3) yearsand one (1) day to six (6) yearsplus a fine ranging from Onehundred fifty thousand pesos(P150,000) to Five hundredthousand pesos (P500,000) for thesecond offense.

(c) Imprisonment of six (6) years andone (1) day to nine (9) years plus afine ranging from Five hundredthousand pesos (P500,000) to Onemillion five hundred thousandpesos (P1,500,000) for the thirdand subsequent offenses.

(d) In all cases, subsidiaryimprisonment in cases ofinsolvency.

217. 2. In determining the number ofyears of imprisonment and the amount offine, the court shall consider the value ofthe infringing materials that the defendanthas produced or manufactured and thedamage that the copyright owner hassuffered by reason of the infringement.

217. 3. Any person who at the time whencopyright subsists in a work has in hispossession an article which he knows, or



ought to know, to be an infringing copy ofthe work for the purpose of:

(a) Selling, letting for hire, or by wayof trade offering or exposing forsale, or hire, the article;

(b) Distributing the article for purposeof trade, or for any other purposeto an extent that will prejudice therights of the copyright owner in thework; or

(c) Trade exhibit of the article inpublic, shall be guilty of an offenseand shall be liable on conviction toimprisonment and fine as abovementioned. (Sec. 29, PD No. 49a)

SUMMERVILLE vs. CA (2007)

Summerville holds copyrights and patents overROYAL brand playing cards; it alleges that fakesthereof proliferate. Stemming from a letter-complaint, seizure of cards [CROWN brand] insidea [fake, allegedly] ROYAL brand plastic container,and the printing machines manufacturing the cardswere seized.Are the machines and cards inside the supposedlyinfringing case proper subjects of the seizure? NO.First, private respondents are the owners ofcopyrights and patents pertaining to the CROWNbrand. Second, the cards, and the machines areuseless to prove trademark infringement withrespect to the plastic container, hence unnecessaryto retain.

18. Affidavit Evidence

Sec. 218. Affidavit Evidence. -

218.1. In an action under this Chapter, anaffidavit made before a notary public by or onbehalf of the owner of the copyright in anywork or other subject matter and stating that:

(a) At the time specified therein, copyrightsubsisted in the work or other subjectmatter;

(b) He or the person named therein is theowner of the copyright; and

(c) The copy of the work or other subjectmatter annexed thereto is a true copythereof, shall be admitted in evidencein any proceedings for an offenseunder this Chapter and shall be primafacie proof of the matters thereinstated until the contrary is proved, andthe court before which such affidavit isproduced shall assume that theaffidavit was made by or on behalf ofthe owner of the copyright.

218.2. In an action under this Chapter.

(a) Copyright shall be presumed tosubsist in the work or other subjectmatter to which the action relates ifthe defendant does not put in issuethe question whether copyrightsubsists in the work or other subjectmatter; and

(b) Where the subsistence of thecopyright is established, the plaintiffshall be presumed to be the owner ofthe copyright if he claims to be the

owner of the copyright and thedefendant does not put in issue thequestion of his ownership.

(d) Where the defendant, without goodfaith, puts in issue the questions ofwhether copyright subsists in a workor other subject matter to which theaction relates, or the ownership ofcopyright in such work or subjectmatter, thereby occasioningunnecessary costs or delay in theproceedings, the court may direct thatany costs to the defendant in respectof the action shall not be allowed byhim and that any costs occasioned bythe defendant to other parties shall bepaid by him to such other parties.

19. Presumption of Ownership

Sec. 219. Presumption of Authorship. -

219.1. The natural person whose name isindicated on a work in the usual manner as theauthor shall, in the absence of proof to thecontrary, be presumed to be the author of thework. This provision shall be applicable even ifthe name is a pseudonym, where thepseudonym leaves no doubt as to the identityof the author.

219.2. The person or body, corporate whosename appears on an audio-visual work in theusual manner shall, in the absence of proof tothe contrary, be presumed to be the maker ofsaid work.