COMMERCIAL LAW

Reminders on Transportation Law

Common carriers

Reminders on Transportation Law

Common Carriers

Definition 1. Common carriers are persons, corporations, firms or associations engaged in t he business of carrying or transporting passengers or goods or both, by land, water , or air, for compensation, offering their services to the public (Art. 1732, New Civil Co de). 2. Complimentary to the foregoing definition is Sec. 13, par. (b) of the Public Service Act (CA. 146, as amended). It defines public service. to be x x x every pers on that now or hereafter may own, operate manage or control in the Philippines, for hire or compensation, with general or limited clientele, whether permanent, occasional o r accidental and done for general business purposes, and done for common carrier, railroad, street railway, subway motor vehicle, either for freight or passenger, or steamship line, ferries and transportation, engaged in the transportation of pas sengers or freight or both, shipyard, marine repair shop, wharf or doc , ice plant, ice refrigeration plant, canal, irrigation system, gas, electric light, heat and pow er, water supply and power petroleum, sewerage system, wire or wireless communication systems, wire or wireless broadcasting stations and other similar public service s.. The concept of common carrier under Article 1732 may be seen to coincide neatly with the notion of public service, under the Commonwealth Act No. 146, as amende d, which at least partially supplements the law on common carriers provided for in the New Civil Code (Philippine American General Insurance Company vs. PKS Shipping C o., G.R. No. 149038, 401 SCRA 222). 3. The determination of whether or not a carrier is common or private have consistently followed the fact pattern in De Guzman vs. CA, 168 SCRA 612, a case decided on December 22, 1968. Here, the respondent, a jun dealer, engaged in the busine ss of buying and selling bottles and scrap metal in Pangasinan. Upon gathering suffici ent quantities of jun , he would bring the materials to Manila for resale using two sixwheeler truc s. On the return trip, he would load his vehicles with cargo of cer tain

The Supreme Court ruled in the AFFIRMATIVE, the Respondent is a common carrier. Art. 1732 of the Civil Code ma es no distinction between one whose prin cipal business is the carrying of persons or goods or both, and one who does the same only as an ancillary activity or a sideline. The law does not li ewise require that to b e a common carrier, a person or enterprise should conduct its business in a regular or sche duled basis. A carrier may be common. even if its activities are merely episodic, occas ional or even if unscheduled. Neither does Art. 1732 distinguish between a carrier offeri ng its services to the general public, the general community or population and one who offers services or solicits business only from a narrow segment of the general populati on.

merchants to Pangasinan and would charge freight rates lower than the normal commercial rates. In one of those return trips, petitioner, De Guzman, contracte d the respondent to deliver from Ma ati to Urdaneta, Pangasinan two truc loads of mil . Only one truc reached its destination. The other truc was hijac ed somewhere i n Paniqui, Tarlac. Petitioner now wants to hold respondent liable as a common carr ier. The latter contends that it cannot be liable as a common carrier because the tra nsporting of goods on the return trip is not his usual occupation but a mere casual activi ty and a mere sideline to his jun dealership and that it had no certificate of public co nvenience normally granted by law to common carriers. Is respondent a common carrier?

4. A certificate of public convenience is not required to ma e an entity a commo n carrier. A certificate of public convenience is not a requisite for an enterpris e to be a common carrier (De Guzman vs. CA, 168 SCRA 612, December 22, 1968). Further, a common carrier may be considered as such despite its having a limited clientele (Phil. American General Insurance Co., vs. PKS Shipping Co., G.R. No. 149038, 401 SCRA 222). 5. The absence of a fixed route or the failure of an enterprise to issue tic ets does not prevent it from being considered as a common carrier. The defense that a car rier cannot be considered common because it has no publicly nown route and terminals , with a limited clientele and issues no tic ets is unavailing. The principal busi ness of petitioner is that of lighterage and drayage and that it offers its barges for t he transporting of goods by water for compensation even if done on an irregular rat her than scheduled manner and with only limited clientele. A common carrier need not have fixed and publicly nown routes. Neither does it have to maintain terminals or i ssue tic ets (Asia Lighterage and Shipping co., vs. CA, G.R. No.147246, 409 SCRA 340) . 6. The concept of a common carrier is not limited to moving objects. A corporati on which is a grantee of pipeline concession to install, operate pipelines and thro ugh such pipes, is engaged in the business of transporting and carrying petroleum product s for persons who want to employ its services for compensation is a common carrier eve n if it has a limited clientele. The term common carrier. does not only include entities using trains, truc s, ships and the li e. The definition of the term common carrier. un der Art. 1732 ma es no distinction as to the means of transporting, as long as it is by l and, water, or air. (First Philippine Industrial Corporation vs. CA, G.R. No. 125948, 300 SC RA 661). 7. A customs bro er is considered a common carrier. A customs bro er whose principal function is to prepare the correct customs declaration and proper ship ping documents as required by law is a common carrier. It suffices that it underta es to deliver the goods for pecuniary consideration (A.F. Sanchez Bro erage Inc. vs. C A and FGU Insurance Corp., G.R. 147079, 447 SCRA 427). There is greater reason for holding a person who is a customs bro er to be a common carrier because the transportation of goo ds is an integral part of its business (Calvo vs. UCPB General Insurance Co., Inc., 37 9 SCRA 510). 8. A travel agency engaged in the business of arranging, facilitating, boo ing, tic eting and accommodation of travelers is neither a private nor a common carri er. It

does not underta e to transport people from one place to another, its covenant w ith its customers being to ma e travel arrangements for its customers which services inc lude procuring tic ets and facilitating travel permits or visas as well as boo ing cu stomers for tours. Although one s tic et was bought through the efforts of the travel agency, this does not ma e the latter a common carrier. At most the travel agency is merely a n agent of the airline with whom the customer ultimately contracted for carriage. The co ntract between the travel agency and the traveler is an ordinary contract of services a nd not one of carriage (Crisostomo vs. CA, 409 SCRA 528). 9. Generally, the true test of a common carrier is the carriage of passengers or goods, providing services to those who opt to avail themselves of its transporta tion services for a fee. If the carrier renders and offers its services exclusively f or a particular person or entity and to no other, the carrier is not a common carrier (FGU Insur ance Corp. vs. G.P. Sarmiento Truc ing Corp., 386 SCRA 312).

the business transacted 409 SCRA 340).

In other words, we have to consider whether or not the part of the business engaged in by the carrier which he ral public as his occupation rather than the quantity or extent of (Asia Lighterage and Shipping, Inc., vs. CA, G.R. No. 147246,

given underta ing is has held out to the gene

Specifically, the tests whether a party is a common carrier of goods are: (a) He must be engaged in the business of carrying goods for others as a public employment, and must hold himself out as ready to engage in the transportation of goods for persons generally as a business and not as a casual occupation; (b) He must underta e to carry goods of the ind to which his business is confined; (c) He must underta e to carry by the method by which his business is conducted and over his established roads; and, (d) The transportation must be for hire (First Philippine Industrial Corporation vs. CA, 300 SCRA 661). 10. The electric power industry traditionally consists of three subsectors namel y: (a) generation sector, which consists of generation companies and their power generation facilities; (b) the transmission sector, which conveys electric power through high voltage power bac bone or grids; (c) and the distribution sector, which consists of distribution utilities that convey electricity from the high voltage transmission to end-users via the subtransmission assets. 11. Section 6, Chapter 11 of the Electric Power Industry Reform Act, R.A. 9136 (EPIRA) of 2001 declares that, Generation of electric power shall be competitive and open.. Thus, (a) it shall not be a public utility operation requiring a local or national franchise; (b) the prices charged by a generation company for supply of electrici ty shall not be subject to regulation by the ERC<. 12. Section 7, Chapter 11 of the Electric Power Industry Reform Act (EPIRA) of 2 001 states that, The transmission of electric power shall be a regulated common elect ricity carrier business, subject to the ratema ing powers of the Energy Regulation Comm ission (ERC). 13. The distribution of electricity to end-users shall be a regulated common car rier business requiring a national franchise. Distribution of electric power to all e nd-users may be underta en by private distribution utilities, cooperatives, local governm ent units presently underta ing this function and other duly authorized entities, subject to regulation by the ERC (Sec. 22, RA 9136). Distribution utility refers government-owned utility or e franchise area to operate a r Industry Reform Act (EPIRA) to any electric cooperative, private corporation, existing local government unit which has an exclusiv distribution system in accordance with Electric Powe of 2001 (Sec. 4, par. q, RA 9136).

A distribution utility has the obligation to provide distribution services and connections to its system for any end-user within its franchise area consistent with the distribution code. They are required to provide open and non-discriminatory acce

ss to its distribution system to all users. Diligence required of common carriers

1. The degree of diligence required of common carriers is extraordinary diligence . in the vigilance over the goods and for the safety of its passengers (Art. 1733, NCC). Extraordinary diligence is that extreme measure of care and caution which person s of unusual prudence and circumspection use for securing and preserving their proper ty or

rights (Republic of the Philippines vs. Lorenzo Shipping Corporation, G.R. 15356 3, 450 SCRA 550). 2. This rule does not apply to a private carrier. In the absence of a stipulatio n or a legal provision, the private carrier is deemed to observe only an ordinary dilig ence or the diligence of a good father of a family (Art. 1173, NCC). 3. In case of loss, damage or deterioration of the goods or in case of injury or death to passengers, the carrier is presumed to have been at fault or to have acted ne gligently (Arts. 1735 and 1756, NCC). A private carrier is not burdened by this presumptio n. However, the presumption of fault or negligence, may be overturned by competent evidence showing that the common carrier has observed extraordinary diligence over the goods (Republic of the Philippines vs. Lorenzo Shipping Corpo ration, 450 SCRA 550). 4. The duty of extraordinary diligence of a common carrier, as a rule, is not su bject to a reduction to another degree of diligence, except if the agreement to observ e a degree of diligence less than extraordinary diligence is: (a) in writing, signed by the shipper or owner of the goods; (b) supported by a valuable consideration other than the service rendered; and, (c) the stipulation is reasonable, just and not contrary to public policy. 5. No reduction of diligence is allowed with respect to passengers under Art 175 7 of the New Civil Code. Under this provision, the responsibility of the carrier f or the safety of passengers cannot be lessened by stipulation, by posting of notices, o r by statements in tic ets. The exception is when the passenger is carried gratuitous ly. Here a stipulation limiting the common carrier s liability for negligence is valid, but n ot for willful acts or gross negligence (Art. 1758, NCC). This stipulation is not allow ed when the passenger is carried at a reduced fare. Reduction in fare does not justify a ny limitation of the common carrier s liability. Liabilities of common carriers

1. The obvious source of the liability of common carriers to the shipper or its passengers is contractual. Any suit against the carrier will normally be based o n a breach of contract. When the suit is based on this source of liability, the plaintiff n eed not prove

the negligence of the carrier. This negligence is presumed (Arts. 1735 and 1756, NCC). 2. The liability of a common carrier may also be anchored on a quasi-delict if t he liability originates from the negligence of its employees. Under Art. 2180, an e mployer is liable for the acts of negligence of its employees committed in the exercise of their duties as such. The liability of the employer is its negligence in the selection and su pervision of its employees.

Vigilance over goods Exempting causes 1. Common carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the g oods and for the safety of the passengers transported by them, according to all the circu mstances of each case (Art. 1733, NCC).

2. Common carriers are responsible for the loss, destruction, or deterioration o f the goods, unless the same is due to any of the following causes only: (a) Flood, storm, earthqua e, lightning, or other natural disaster or calamity; (b) Act of the public enemy in war, whether international or civil; (c) Act or omission of the shipper or owner of the goods; (d) The character of the goods or defects in the pac ing or in the containers; (e) Order or act of competent public authority (Art. 1734, NCC). 3. And even if fire were to be considered a natural disaster within the meaning of Article 1734 of the Civil Code, it is required under Article 1739 of the same Co de that the natural disaster. must have been the proximate and only cause of the loss,. and th at the carrier has exercised due diligence to prevent or minimize the loss before, d uring or after the occurrence of the disaster. (Eastern Shipping Lines, Inc. vs. IAC, 150 SCRA 463). 4. If the common carrier negligently incurs in delay in transporting the goods, a natural disaster shall not free such carrier from responsibility (Article 1740, NCC). The cargo having been lost due to typhoon and the delay incurred in unloading not being due to negligence, private respondent is exempt from liability for the loss of the cargo, pursuant to Article 1740 of the Civil Code (Phil. American General In surance Company, Inc. vs. CA, 222 SCRA 155). 5. In order that the common carrier may be exempted from responsibility, the natural disaster must have been the proximate and only cause of the loss. Howeve r, the common carrier must exercise due diligence to prevent or minimize loss before, d uring and after the occurrence of flood, storm or other natural disaster in order that the common carrier may be exempted from liability for the loss, destruction, or dete rioration of the goods. The same duty is incumbent upon the common carrier in case of an a ct of the public enemy referred to in article 1734, No. 2 (Art. 1739, NCC). Contributory negligence 1. If the shipper or owner merely contributed to the loss, destruction or deterioration of the goods, the proximate cause thereof being the negligence of the common carrier, the latter shall be liable in damages, which however, shall be e quitably reduced (Art. 1741, NCC). 2. While the act of Concepcion in furnishing petitioner with an inaccurate weigh t of the payloader cannot successfully be used as an excuse by petitioner to avoid li ability for the damage thus caused, said act constitutes a contributory circumstance to the damage

caused on the payloader, which mitigates the liability for damages of petitioner in accordance with Article 1741 of the Civil Code (Compania Maritima vs. CA, 164 SC RA 685).

Duration of liability 1. The extraordinary responsibility of the common carrier lasts from the time th e goods are unconditionally placed in the possession of, and received by the carri er for transportation until the same are delivered, actually or constructively, by the carrier to the consignee, or to the person who has a right to receive them, without prejudi ce to the provisions of article 1738 (Art. 1736, NCC).

2. There was a complete contract of carriage the consummation of which has already begun when the shipper delivered the cargo to the carrier and the latter too possession of the same by placing it on a lighter manned by its authorized emplo yees, under which Macleod (shipper) became entitled to the privilege secured to him by law. The responsibility of the carrier commenced on the actual delivery to, or receip t by, the carrier or its authorized agent, of the goods. The barges or lighters were merel y employed as the first step of the voyage (Compania Maritime vs. Insurance Co. of North America, G.R. No. L-18965, October 30, 1964). Delivery of goods to common carrier 1. While delivery of the cargo to the customs authorities is not delivery to the consignee or to the person who has right to receive them as contemplated in Art. 1736, NCC because in such case the goods are still in the hands of the government and the owner cannot exercise dominion over them, however, the parties may agree to limi t the liability of the carrier considering that the goods have still to go through ins pection of the customs authorities before they are actually turned over to the consignee (L u Do vs. Binamira, 101 Phil. 120). 2. In the performance of its obligations, an arrastre operator should observe th e same degree of diligence as that required of a common carrier and a warehouseman . In a claim for loss filed by the consignee (or the insurer), the burden of proof to s how compliance with the obligation to deliver the goods to the appropriate party dev olves upon the arrastre operator. It must prove that the losses were not due to its ne gligence or to that of its employees. Limitation in the Management Contract does not apply if the value of the cargo shipment is communicated to the arrastre operator before the discharge of the ca rgoes. It would be unfair and arbitrary to hold the arrastre operator liable for the fu ll value of the merchandise after the consignee has paid the arrastre charges only on a basis much lower than the true value of goods (Asian Terminals, Inc. vs. Daehan Fire and marine Insurance Co., Ltd., 611 SCRA 555).

Actual or constructive delivery

1. However, Article 1736 of the New Civil Code is applicable to the instant suit . Under said article, the carrier may be relieved of the responsibility for loss o r damage to the goods upon actual or constructive delivery of the same by the carrier to the consignee, or to the person who has a right to receive them. There is actual del ivery in contracts for the transport of goods when possession has been turned over to the consignee or to his duly authorized agent and a reasonable time is given him to remove the goods (Samar Mining Co., Inc. vs. Lloyd, 132 SCRA 535). 2. Notice of the arrival and the consignee fails to claim the goods after the la pse of a reasonable period, there will be constructive delivery. If the consignee still f ails to ta e delivery, from that point on, the contract between the carrier and the consignee will no longer be a contract of carriage but a contract of deposit. Therefore, the carri er is no longer required to exercise extraordinary diligence, but only the due diligence of a good father of a family.

Temporary unloading or storage

1. The common carrier s duty to observe extraordinary diligence in the vigilance over the goods remains in full force and effect even when they are temporarily u nloaded or stored in transit, unless the shipper or owner has made use of the right of s toppage in transit (Art. 1737, NCC). 2. Remembering the law on sales, the right of stoppage in transit is one of the rights of an unpaid seller when he has part with the goods and the buyer is or becomes insolvent. The effect of exercising the right of stopping the goods in transit i s that unpaid seller is entitled to the possession of the goods as if he had never parted with it, Thus, the responsibility of the common carrier is reduced to a mere bailee or deposito ry (Diaz, 2006, Transportation Laws Notes and Cases, p. 53). Void stipulations

1. Any of the following or similar stipulations shall be considered unreasonable , unjust and contrary to public policy, thus, considered void: (a) That the goods are transported at the ris of the owner or shipper; (b) That the common carrier will not be liable for any loss, destruction, or deterioration of the goods; (c) That the common carrier need not observe any diligence in the custody of the goods; (d) That the common carrier shall exercise a degree of diligence less than that of a good father of a family, or of a man of ordinary prudence in the vigilance over the movables transported; (e) That the common carrier shall not be responsible for the acts or omission of his or its employees; (f) That the common carrier s liability for acts committed by thieves, or of robbers who do not act with grave or irresistible threat, violence or force, is dispensed with or diminished; (g) That the common carrier is not responsible for the loss, destruction, or deterioration of goods on account of the defective condition of the car, vehicle, ship, airplane or other equipment used in the contract of carriage (Art. 1745, NCC). 2. Under American jurisprudence, a common carrier s underta ing to carry a special cargo or chartered to a special person only, becomes a private carrier. As a private carrier, a stipulation exempting the owner from liability for the neglig ence of its agent is not against public policy, and is deemed valid. The Civil Code provisio ns on common carriers should not be applied where the carrier is not acting as such bu t as a private carrier. The stipulation in the charter party absolving the owner from l iability for loss due to the negligence of its agent would be void only if the strict public policy governing common carriers is applied. Such policy has no force where the public at

large is not involved, as in the case of a ship totally chartered for the use of a single party. Recovery cannot be had thereunder, for loss or damage to the cargo, again st the shipowners, unless the same is due to personal acts or negligence of said owner or its manager, as distinguished from its other agents or employees. In this case, no s uch personal act or negligence has been proved (Home Insurance Co. vs. American Stea mship Agencies, 23 SCRA 24). Limitation of liability to fixed amount

1. A contract fixing the sum that may be recovered by the owner or shipper for t he loss, destruction, or deterioration of the goods is valid, if it is reasonable a nd just under the circumstances, and has been fairly and freely agreed upon (Art. 1750, NCC). 2. The award of damages in the amount of P312,800.00 for the value of the goods lost, based on the alleged mar et value thereof, is erroneous. It is clearly and expressly provided under Clause 6 of the aforementioned bills of lading issued by the CARR IER that its liability is limited to $2.00 per ilo. Basic is the rule, long since e nshrined as a statutory provision, that a stipulation limiting the liability of the carrier to the value of the goods appearing in the bill of lading, unless the shipper or owner declares a greater value, is binding. Further, a contract fixing the sum that may be recovered by t he owner or shipper for the loss, destruction or deterioration of the goods is valid, if it is reasonable and just under the circumstances, and has been fairly and freely agre ed upon (Citadel Lines, Inc. vs. Court of Appeals, 184 SCRA 544).

Limitation of liability in the absence of declaration of greater value

1. Three inds of stipulations have often been made in a bill of lading. The fir st is one exempting the carrier from any and all liability for loss or damage occasion ed by its own negligence. The second is one providing for an unqualified limitation of suc h liability to an agreed valuation. And the third is one limiting the liability of the carrier to an agreed valuation unless the shipper declares a higher value and pays a higher rate of freight.

According to an almost uniform weight of authority, the first and second inds of stipulations are invalid as being contrary to public policy, but the third is valid and enforceable. The first and second stipulations in a bill of lading are invalid w hich either exempt the carrier from liability for loss or damage occasioned by its negligenc e, or provide for an unqualified limitation of such liability to an agreed valuation. The third

stipulation in a bill of lading limiting the liability of the carrier to a certa in amount unless the shipper declares a higher value and pays a higher rate of freight, is valid and enforceable. Thus, if a common carrier gives to a shipper the choice of two rates, the lower of the conditioned upon his agreeing to a stipulated valuation of his property in c ase of loss, even by the carrier's negligence, if the shipper ma es such a choice, understandingly and freely, and names his valuation, he cannot thereafter recove r more than the value which he thus places upon his property (H.E. Heacoc Co. vs. Maco ndray & Co., 42 Phil. 205). Liability for baggage of passengers

1. Baggage of passengers may either be those in the custody of the carrier or th ose baggage in the custody of the passenger. 2. Where the baggage is under the custody of the carrier or its employees the provisions of Arts. 1733 to 1753 of the NCC shall apply. This means that the lia bility shall be governed by the provisions on common carriers. 3. Where the baggage is under the custody of the passenger, the rules governing the responsibility of hotel- eepers shall apply. These rules are those found in Arts. 1998, 2000-2003, NCC. These rules are those governing necessary deposits. The carrier shall be li e a hotel- eeper with respect to those under the custody of the passenger. Th e common carrier shall be responsible for the baggage as a depositary as long as t he carrier was given notice of the presence of the baggage brought by the passenger and also provided that the passenger had observed the precautions which the carrier advised

the passenger to underta e as to the care and vigilance over the baggage. Liabil ity of the carrier will not attach if such requirements of notice and/or precautions are no t met.

Safety of Passengers

1. A common carrier is bound to carry passengers safely as far as human care and foresight can provide, using the utmost diligence of very cautious persons, with due regard for all the circumstances. (Art. 1755, NCC). Such duty of a common carrie r to provide safety to its passengers obligates it not only during the course of the trip but for so long as the passengers are within its premises and where they ought to be in pursuance to the contract of carriage (Light Rail Transit Authority vs. Navidad, G.R. No. 145804, 397 SCRA 75). 2. In case of death or injuries to passengers, the presumption is that the commo n carrier is liable (Art. 1756, NCC). In an action for breach of contract of carri age, the aggrieved party does not have to prove that the common carrier was at fault or w as negligent. All that is necessary to prove is the existence of the contract and t he fact of its non-performance by the carrier (Singapore Airline Limited vs. Fernandez, 417 SCR A 474). 3. The contributory negligence of the passenger does not ta e away the carrier s responsibility although its liability is mitigated by the passenger s contributory negligence (Art. 1762, NCC). 4. The fact that the employee of the carrier acted beyond his authority or acted in violation of the instructions of the common carrier, the latter s responsibility d oes not cease. It is still liable for the death of or injuries of passengers (Art. 1759, NCC). 5. If the injury is suffered by the passenger because of the negligence or willf ul act of a fellow passenger, the carrier will be liable only if through the exercise o f the diligence of a good father of a family, the common carrier s employees could have prevented or stopped the same. Otherwise, it is not liable (Art. 1763, NCC).

Void stipulations

1. The responsibility of a common carrier for the safety of passengers as requir ed in articles 1733 and 1755 cannot be dispensed with or lessened by stipulation, by t he posting of notices, by statements on tic ets, or otherwise (Art. 1757, NCC). 2. While it is true that a passenger s tic et is a complete contract between the common carrier and the passenger, the fact that it contains provision at the bac thereof in fine letters that common carrier will only exercise ordinary diligence is con trary to law (Diaz, 2006, Transportation Laws Notes and Cases, p. 127).

Duration of liability

1. When the bus is not in motion there is no necessity for a person who wants to ride the same to signal his intention to board. A public utility bus, once it st ops, is in effect ma ing a continuous offer to bus riders. Hence, it becomes the duty of th e driver and the conductor, every time the bus stops, to do no act that would have the ef fect of increasing the peril to a passenger while he was attempting to board the same. T he premature acceleration of the bus in this case was a breach of such duty. 2. It is the duty of common carriers of passengers, including common carriers by railroad train, streetcar, or motorbus, to stop their conveyances to a reasonabl e length of time in order to afford passengers an opportunity to board and enter, and they a re liable

for injuries suffered by boarding passengers resulting from the sudden starting up or jer ing of their conveyances while they are doing so. 3. It is not negligence per se, or as a matter of law, for one attempting to boa rd a train or streetcar which is moving slowly. An ordinarily prudent person would ha ve made the attempt to board the moving conveyance under the same or similar circumstances. The fact that passengers board and alight from slowly moving vehi cle is a matter of common experience both the driver and conductor in this case could n ot have been unaware of such an ordinary practice. 4. The victim in this case, by stepping and standing on the platform of the bus, is already considered a passenger and is entitled all the rights and protection per taining to such a contractual relation. Hence, it has been held that the duty which the car rier owes to its patrons extends to persons boarding cars as well as to those alighting th erefrom (Dangwa Transportation Co., Inc. vs. Court of Appeals). 5. When the victim entered the LRT station after having purchased a to en. and he fell from the platform while waiting for the train and was struc by a train which was coming at the exact time he fell, the victim should be treated as passenger. His standing on the platform while waiting for the train was where he was supposed to be (LRT A vs. Navidad, G.R. No. 145804, 397 SCRA 75). 6. If a passenger reaches his destination but he had to stay in the premises of the carrier to claim his luggage and while waiting, he was hit by a crane of the car rier, the latter is liable because the deceased is still deemed to be a passenger (Aboitiz Shipping vs. CA, 179 SCRA 75). 7. Passengers who remain within the premises of the carrier to retrieve their baggage and stay therein for a reasonable time for the purpose are treated as pa ssengers. Injuries or death occasioned by the carrier at that point in time, are liabiliti es of the carrier under the contract of carriage (La Mallorca vs. CA, 17 SCRA 739). In a s imilar vein, a passenger who had disembar ed from a vessel and returned after an hour t o retrieve a baggage which he left unintentionally and died when he was hit by the crane used by a stevedoring company is still a passenger because he was there for a pu rpose and considering that it was the practice of the carrier to offload goods and car go an hour after arrival (Aboitiz Shipping Corp. vs. CA, 179 SCRA 95). Liability for acts of others 1. Whenever an employee s negligence causes damage or injury to another, there instantly arises a presumption, juris tantum, that the employer failed to exerci

se diligentissimi patris families in the selection (culpa in eligiendo) or supervis ion (culpa in vigilando) of its employees. To avoid liability for a quasi-delict committed by his employee, an employer must overcome the presumption by presenting convincing pro of that he exercised the care and diligence of a good father of the family in the s election and supervision of his employee. Bare allegations, unsubstantiated by evidence, are not equivalent to proof (Real vs. Belo 513 SCRA 111 January 26, 2007). 2. A carrier maybe sued based on a tort or a quasi-delict the act that brea s the contract may also be a tort,. although the relationship of passenger and carrier is contractual both in origin and nature (Air France vs. Carrascoso, 18 SCRA 155).

The principle in Air France is more easily understood in a common carrier situation. Assume that a bus filled with passengers fell into an emban ment beca use of the negligence of the bus driver, an employee of the carrier. X, a passenger was severely

injured as a result of the accident. There is no doubt that X can sue the bus co mpany for breach of contract of carriage because of the existing contractual relationship between X and the bus company. May X also sue the bus company based on a quasi-delict? Yes . Under Art. 2180 of the NCC, employers are liable for the negligent acts of its e mployees. When X sues the bus company, it is not suing it based on the contract of carriag e, i.e., on its failure to bring X safely to his destination. Instead, it is suing the carri er on its negligence in the selection and supervision of its driver. 3. If the cause of action of X against the carrier is based on the contract of c arriage, the carrier cannot invo e the defense of diligence in the selection and supervis ion of its driver to relieve it from liability. This defense is not available in a contract ual suit (Art. 1759, NCC). This defense is however, available to the carrier if it is sued unde r a quasidelict (Art. 2180, NCC). On the other hand, the driver, not being a party to the contract of carriage, may not be held liable under the agreement the civil action against him can only be based on culpa aquiliana, which, unli e culpa contractual, would require the claimant for damages to prove negligence or fault on his part (FGU Insurance Cor poration vs. G.P. Sarmiento Truc ing Corporation, 386 SCRA 31). 4. If the injury is suffered by the passenger because of the negligence or willf ul act of a fellow passenger, the carrier will be liable only if through the exercise o f the diligence of a good father of a family, the common carrier s employees could have prevented or stopped the same. Otherwise, it is not liable (Art. 1763, NCC).

Extent of liability for damages

1. Indemnity for Death. Art. 1764 of the Civil Code, in relation to Art. 2206 th ereof, provides for the payment of indemnity for the death of passengers caused by the breach of contract of carriage by a common carrier. Initially fixed in Art. 2206 at P3, 000.00, the amount of the said indemnity for death has through the years been gradually incr eased in view of the declining value of the peso. 2. Actual Damages. Art. 2199 provides that "except as provided by law or by stipulation, one is entitled to an adequate compensation only for such pecuniary loss

suffered by him as has duly proved." 3. Moral Damages. Under Art. 2206, the "spouse, legitimate and illegitimate descendants and ascendants of the deceased may demand moral damages for mental anguish by reason of the death of the deceased." The trial court found that priv ate respondent suffered pain from the death of her husband and worry on how to provi de support for their minor children. 4. Exemplary Damages. Art. 2232 provides that "in contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton, fraudulent , rec less, oppressive, or malevolent rec less manner." 5. Attorney's Fees. Pursuant to Art. 2208, attorney's fees may be recovered when , as in the instant case, exemplary damages are awarded. 6. Compensation for Loss of Earning Capacity. Art. 1764 of the Civil Code, in re lation to Art. 2206 thereof, provides that in addition to the indemnity for death arising from the breach of contrtact of carriage by a common carrier, the "defendant shall be lia ble for the loss of the earning capacity of the deceased, and the indemnity shall be paid to the heirs of the latter." The formula established in decided cases for computing net earni ng capacity is as follows:

Gross Necessary Net Earning = Life x Annual Living

Capacity Expectancy Income Expenses Life expectancy is equivalent to two thirds (2/3) multiplied by the difference o f eighty (80) and the age of the deceased (Fortune Express, Inc. vs. Court of Appe als, 305 SCRA 14).

Bill of Lading 1. A bill of lading is a written ac nowledgement of the receipt of goods and an agreement to transport and to deliver them at a specified place to a person name d or on his or her order. It operates both as a receipt and as a contract. It is a recei pt for the goods shipped and a contract to transport and deliver the same as therein stipul ated. As a receipt, it recites the date and place of shipment, describes the goods as to quantity, weight, dimensions, identification mar s, condition, quality, and value. As a co ntract, it names the contracting parties, which include the consignee; fixes the route, des tination, and freight rate or charges; and stipulates the rights and obligations assumed b y the parties (Unsworth Transportation International-Phils., Inc. vs. Court of Appeals and Pioneer Insurance and Surety Corporation, G.R. No. 166250, July 26, 2010). 2. A bill of lading has three-fold character. It operates both as a (1) receipt and as a (2) contract. It is a contract for the good shipped and a contract to transport and deliver the same as stipulated. It becomes effective upon delivery to and accepted by th e shipper. It is also a (3) document of title. Period for delivery of goods 1. If a period has been fixed for the delivery of the goods, it must be made wit hin such time, and, for failure to do so, the carrier shall pay the indemnity stipul ated in the bill of lading, neither the shipper nor the consignee being entitled to anything else. If no indemnity has been stipulated and the delay exceeds the time fixed in the bill o f lading, the carrier shall be liable for the damages which the delay may have caused (Art . 370, Code of Commerce). 2. If there is no period fixed for the delivery of the goods the carrier shall b e bound to forward them in the first shipment of the same or similar goods which he may

ma e point where he must deliver them; and should he not do so, the damages caused by the delay should be for his account (Art. 358, Code of Commerce).

Delivery without surrender of bill of lading 1. Where the carrier has been instructed by the shipper to deliver the perishabl e goods shipped without awaiting for the bill of lading, or if it was the establis hed practice for the shipper to request the shipping lines to immediately release perishable cargoes through telephone calls, the carrier is justified in ma ing delivery to the pers on named in the instruction even without the presentation of the bill of lading (Macam vs . Court of Appeals, G.R. No. 125524. August 25, 1999). Refusal of consignee to ta e delivery

1. The consignee may refuse to receive the goods in the following instances:

(a) Should a part of the goods transported be delivered, the consignee may refuse to receive it, when he proves that he cannot ma e use of it without the others; (b) If, due to the effects of the damage, the goods are rendered useless for sale or consumption for particular purposes for which they are to be used, the consignee shall not be bound to receive them, and he may leave them in the hands of the carrier, demanding payment of their value at the current mar et price on said day; (c) If among the damaged goods there should be some in good condition and without defect whatsoever, the foregoing provision shall be applicable with regard to the damaged ones, and the consignee shall receive those which are sound, this segregation being made by distinct and separate pieces, without dividing for such purpose on whole article, unless the consignee proves the impossibility of conveniently utilizing them in this form. The same rule shall be applied to goods in bales and pac ages, with distinction of those which appear sound (Diaz, 2006, Transportation Laws Notes and Cases, Rex Printing Company).

Period for filing claims 1. Within the twenty-four hours following the receipt of the merchandise, the cl aim against the carrier for damage or average be found therein upon opening the pac ages, may be made, provided that the indications of the damage or average which gives rise to the claim cannot be ascertained from the outside part of such pac ages, in which case the claim shall be admitted only at the time of receipt. After the periods menti oned have elapsed, or the transportation charges have been paid, no claim shall be admitte d against the carrier with regard to the condition in which the goods transported were del ivered (Art. 366, Code of Commerce). 2. Claims for damage to the merchandise transported may be made upon the carrier within the following times: (a) If the damage is apparent from the exterior of the pac age, the claim must be made upon receipt of the pac age (Par. 1, Art. 366, Code of Commerce). For such purpose, a verbal claim made immediately is sufficient compliance with the law (Mapaso Goldfields vs. Compania Maritima, [CA] 2 O.G. 307). (b) If the damage cannot be nown from the exterior part of the pac ages, the claim must be made within twenty-four hours following the receipt of the merchandise (Par. 1, Art. 366, Code of Commerce). (c) When the consignee receives the merchandise, paying the freight charges without protest, all claims against the carrier are extinguished (Southern Lines, Inc. vs. Court of Appeals, 4 SCRA 261). The object sought to be attained by the requirement of the submission of claims in pursuance of this article is to compel the consignee of goods entrusted to a

carrier to ma e prompt demand for settlement of alleged damages suffered by the goods while in transport, so that the carrier will be enabled to verify all such claims at the time of delivery or within twenty-four hours thereafter, and if necessary fix responsibi lity and secure evidence as to the nature and extent of the alleged damages to the goods while the matter is still fresh in the minds of the parties (Roldan vs. Lim Ponzo & Co ., G.R. No. L11325, December 7, 1917).

Period for filing actions 1. The point that matters here is that the situation is either delivery or misde livery, but not non-delivery. Thus, the goods were either rightly delivered or misdelive red, but they were not lost. There being no loss or damage to the goods, the aforequoted provision of the Carriage of Goods by Sea Act stating that "In any event, the ca rrier and the ship shall be discharged from all liability in respect of loss or damage unless it is brought within one year after delivery of the goods or the date of when the goods should have b een delivered," does not apply. The reason is not difficult to see. Said one-year period of limi tation is designed to meet the exigencies of maritime hazards. In a case where the goods s hipped were neither lost nor damaged in transit but were, on the contrary, delivered in port to someone who claimed to be entitled thereto, the situation is different, and the special need for the short period of limitation in case of loss or damage caused by mari time perils does not obtain. 2. It follows that for suits predicated not upon loss or damage but on alleged misdelivery (or conversion) of the goods, the applicable rule on prescription is that found in the Civil Code, namely, either ten years for breach of a written contra ct or four years for quasi-delict (Ang. vs. American Steamship Agencies, G.R No. L-25047, M arch 18, 1967). Maritime Commerce

Charter Parties

1. A charter party is a maritime contract by virtue of which the owner or agent of a vessel binds himself to transport merchandise of persons for a fixed price and w here the ship or some part thereof is leased by the owner to another person for a specifi ed period, voyage or purpose. There are certain classes of charter parties. They are: (a) Bareboat/Demise Charter (b) Time Charter (c) Voyage/Trip Charter

Bareboat/Demise Charter

1. Here the charterer receives the ship from the ship owner or ship agent in a bare. condition with no provisions, supplies or crew. The charterer therefore pro vides for all of these and is considered the owner of the vessel pro hac vice. during t he existence of the contract. He is therefore liable as a ship owner during this pe riod and is liable for all the consequences of the voyage as if he were the owner. He would not however, be liable if the loss, destruction or damage to the goods or the injuri es or deaths of passengers was due to the unseaworthy condition of the vessel. In this case, it is the ship owner who is liable. Where the charter is bareboat or demise, the ve ssel which is ordinarily a common carrier, becomes a private carrier (Planters Produc ts, Inc. vs. CA, 226 SCRA 476; Caltex Phil., vs. Sulpicio Lines, 315 SCRA 709) Time Charter 1. A "charter-party" is defined as a contract by which an entire ship, or some principal part thereof, is let by the owner to another person for a specified ti me or use; a contract of affreightment by which the owner of a ship or other vessel lets the whole or a part of her to a merchant or other person for the conveyance of goods, on a part icular voyage, in consideration of the payment of freight.

2. Charter parties are of two types: (a) contract of affreightment which involve s the use of shipping space on vessels leased by the owner in part or as a whole, to c arry goods for others; and, (b) charter by demise or bareboat charter, by the terms o f which the whole vessel is let to the charterer with a transfer to him of its entire co mmand and possession and consequent control over its navigation, including the master and the crew, who are his servants. 3. Contract of affreightment may either be time charter, wherein the vessel is l eased to the charterer for a fixed period of time, or voyage charter, wherein the ship is leased for a single voyage. In both cases, the charter-party provides for the hire of v essel only, either for a determinate period of time or for a single or consecutive voyage, t he shipowner to supply the ship's stores, pay for the wages of the master and the c rew, and defray the expenses for the maintenance of the ship (Planters Products, Inc. vs. Court of Appeals, 226 SCRA 476). Voyage/Trip Charter

1. Contract of affreightment may either be time charter, wherein the vessel is l eased to the charterer for a fixed period of time, or voyage charter, wherein the ship is leased for a single voyage. In both cases, the charter-party provides for the hire of v essel only, either for a determinate period of time or for a single or consecutive voyage, t he shipowner to supply the ship's stores, pay for the wages of the master and the c rew, and defray the expenses for the maintenance of the ship (Planters Products, Inc. vs. Court of Appeals, 226 SCRA 476).

Liability of Shipowners and Shipping Agents

1. Ship Owner is the person who has control, possession, management and ownership of the maritime vessel. 2. Ship Agent, also called a naviero, is the person who is entrusted with provisioning and representing the vessel in the port in which it may be found. W hile he is not the ship owner, he is solidarily liable with the owner for such losses or da

mages for which the ship owner is liable for (NDC vs. CA, 164 SCRA 593). Li e the ship own er, he is liable for debts incurred by the captain for the repair and the provisioning of the vessel. The ship agent when sued cannot defend by claiming that he is a mere agent of a disclosed principal because he is not an agent as defined under the Civil Code of the Phil ippines. Even if the ship owner is nown to be his principal, the ship agent is chargeabl e for all the liabilities of the ship owner in relation to the vessel. 3. The ship agent who pays for the liability of the ship owner is however, entit led to reimbursement from the ship owner. The ship agent may also exercise all the righ ts of the ship owner and is subject to all the liabilities of the latter in connection wit h the operation of the vessel because in the absence of the ship owner, it is as if he is the ow ner (Switzerland General Insurance vs. Ramirez, 96 SCRA 297; NDC vs. CA, 164 SCRA 593; Art. 587, Code of Commerce). Thus, the ship agent may ma e an abandonment of the ship to limit the liability of the ship owner to the value of the vessel, its appurtenances and fr eightage. If the ship owner is absent, he is liable for the effects of collision. He may also be held liable for the tax liabilities of the ship owner.

Exceptions to limited liability

1. The limited liability rule, however, is not without exceptions, namely:

(a) where the injury or death to a passenger is due either to the fault of the ship owner, or to the concurring negligence of the ship owner and the captain (Manila Steamship Co., Inc. vs. Abdulhaman, G.R. No. L-9534, September 29, 1956); (b) where the vessel is insured; and (c) in wor men's compensation claims (Abueg vs. San Diego, CA-773 -775, 17 December 1946). In this case, there is nothing in the records to show that the loss of the cargo was due to the fault of the private respondent as shipowners, or to their concurrent negligence with the captain of the vessel (Chua Ye Hong vs. IAC, 166 SCRA 183). Accidents and Damages in Maritime Commerce 1. There are two inds of averages: (a) General or gross average; and, (b) Particular or simple average. 2. Simple or particular average includes all expenses and damages caused to the vessel or her cargo which have not inured to the common benefit of all the perso ns interested in the vessel and cargo. 3. General or gross average includes all the damages and expenses which are deliberately caused in order to save the vessel, its cargo or both from a real a nd nown ris . They are expenses and damages incurred for the benefit of all.

The following are the requisites of general average: (a) The existence of a common danger; (b) The deliberate sacrifice of the vessel and/or cargo or parts of the vessel o r cargo; (c) The ta ing of the legal steps before the deliberate sacrifice; and, (d) Success in saving what was intended to be saved. 4. Before incurring a general average or ma ing a deliberate sacrifice of a part of the ship or of the cargo, the captain should call a meeting among the sailing ma te, the officers of the vessel and all persons interested in the cargo. This meeting sho uld lead to a resolution ma ing a deliberate sacrifice. The resolution shall be entered into a log boo stating the reasons for the decision. The deliberations included the resolution must be stated in the minutes of the meeting. Upon arrival in the first port, the captai n shall deliver a copy of the minutes to the maritime judicial authority of the first po rt within 24 hours from arrival of the ship. There, he must ratify the minutes under oath. 5. All the persons benefited by the deliberate sacrifice must share in the expen ses in proportion to their interests. This is the rule in the liquidation of general av erages. Thus, assuming that while on a voyage a ship run into an unexpected storm.

If in order to save the ship, the cargo owned by Mr. X had to be jettisoned, al l the other cargo owners, the owner of the ship as well as Mr. X shall proportionately share in the loss. The loss is considered a general average. On the other hand, if during the voyage, the hull of the ship was damaged when it hit a submerged roc , the expen ses for the repair of the ship shall constitute only particular average. 6. Losses suffered by the cargo because of the inherent defect in the pac ing sh all be borne by the cargo owner. This is because the loss was not incurred for the c ommon benefit. This is a particular average.

7. The wages and victuals (food) of the crew during the voyage are of course for the account of the ship owner and constitute particular average. This is true even i f the vessel is under quarantine. But wages of the crew held hostage by enemies, priva teers or pirates until they are returned to the vessel or to his domicile constitute gene ral average. Also considered as general average are the expenses for the treatment of the cre w who may have been wounded or crippled in defending or saving the vessel. 8. Goods or cash invested to redeem a vessel and its cargo captured by privateer s constitute general average. The cables and masts cut or rendered useless or part s of the ship disabled to lighten the vessel are also general average. Also deemed genera l average are the expenses for the liquidation of the general average.

Collisions

1. This is the impact of two moving vessels. If one is moving and the other is stationary, the impact is called allision. 2. In case of collision of vessels in transporting goods to the Philippines, the Code of Commerce shall apply, since collision is a matter not regulated by the Civil Code and the Code of Commerce being suppletory to the Civil Code (National Development Company vs. CA, 164 SCRA 593). 3. There are three zones of collision: (a) First Zone This is the time up to the moment when the ris of collision begins. This zone starts the moment the vessels find each other traveling in the same area. (b) Second Zone The time from the moment the ris of collision begins up to the point when the collision becomes a certainty. It is in this zone where the negligence of the vessel is determined and is material. (c) Third Zone - This is the time from the moment the collision becomes certain up to the actual impact. In this zone, if a vessel having the right of way ma es a wrong maneuver or a wrong move to avoid a collision made certain by the negligent acts of the other vessel during the second zone, the wrong move of the innocent vessel is called an error in extremis and even if wrong does not ma e the innocent vessel liable. 4. There are certain important rules to remember in relation to collision of ves sels that have often been subjects of the bar. Most important among these are:

(a) If the collision is imputable to the negligence of one vessel, the vessel at fault shall be liable for all the losses and damages suffered by the other

vessel and by the owners of the cargoes of both vessels (Art. 826, Code of Commerce). (b) If the collision is imputable to both vessels, each shall bear its own damage, and both shall be solidarily liable to the damage to their cargoes (Art. 827, Code of Commerce). (c) If it cannot be determined which of the vessels is at fault, then both shall be considered at fault and each shall bear its own damage, but shall be solidarily liable for the damage to their cargoes. Where the fault cannot be determined and both are considered at fault, this is called the doctrine of inscrutable fault (Art. 828, Code of Commerce).

(d) If the collision is due to fortuitous event, no one shall be liable. Hence, each vessel and each cargo owner shall bear his own damage (Art. 830, Code of Commerce). (e) If a vessel should be forced by a third vessel to collide with another vessel, the owner of the third vessel shall indemnify the losses and damages caused, and the captain shall be liable to the owner (Art. 831, Code of Commerce). (f) If by reason of a storm or force majeure, a vessel which is properly anchored and moored shall collide with another, causing it damage, the injury occasioned shall be considered as particular average of the vessel run into. The vessel hitting the latter will not be liable as long it has been properly moored and anchored (Art. 832, Code of Commerce). (g) The rules on collision do not apply to small boats in rivers and in bay traffic (Lopez vs. Duruelo, 52 Phil. 229). 5. There are some civil law concepts which should not be applied to maritime collisions, thus: (a) The defense of diligence of a good father of a family is not available in maritime torts because this will render useless the provision that in case both vessels are at fault, both shall bear its own damage and shall be solidarily liable for their cargoes. (b) The doctrine of last clear chance cannot be invo ed in maritime collisions. (c) The doctrine of contributory negligence cannot be invo ed in maritime collisions.

Carriage of Goods by Sea Act

1. The law of the country to which the goods are to be transported govern the liability of the common carrier in case of loss, destruction, or deterioration ( Eastern Shipping Lines, Inc. vs. IAC, 150 SCRA 464; NDC vs. CA, 164 SCRA 593). The Carri age of Goods by Sea Act (COGSA), which is suppletory to the provisions of the Civil Cod e, supplements the latter by establishing a statutory provision limiting the carrie r s liability in the absence of a shipper s declaration of a higher value in the bill of lading - the provisions on limited liability are as much a part of the bill of lading as thou gh physically in it and as though placed there by agreement of the parties (Belgian Overseas Chartering and Shipping N.V. vs. Philippine First Insurance Co., Inc., 383 SCRA 23). 2. If suit is brought against the carrier for delay in delivery, this is not a l oss or damage to the goods contemplated by Sec. 3 of the COGSA. You have to use instead , the New Civil Code provisions on prescription. 3. If the cargo is shipped from New Yor to the Cebu pursuant to the bill of lad ing, but the ship s final port is Manila, losses to the goods while being transshipped from

Manila to Cebu aboard an inter-island vessel is still covered by the COGSA (Amer ican Insurance Co. of North America vs. CIA Maritima, 21 SCRA 998).

Notice of Loss or Damage

1. Unless notice or loss or damage and the general nature of such loss or damage by given in writing to the carrier or his agent at the port of discharge or at the time of the

removal of the goods into the custody of the person entitled to delivery thereof under the contract of carriage, such removal shall be prima facie evidence of the deli very by the carrier of the goods as described in the bill of lading. If the loss or dama ge is not apparent, the notice must be given within three days of the delivery (Par. 6, Se c. 3, Carriage of Goods by Sea Act). 2. Under Section 3 (6) of the Carriage of Goods by Sea Act, notice of loss or damages must be filed within three days of delivery. Admittedly, respondent did not comply with this provision. 3. Under the same provision, however, a failure to file a notice of claim within three days will not bar recovery if a suit is nonetheless filed within one year from d elivery of the goods or from the date when the goods should have been delivered. 4. Inasmuch as neither the Civil Code nor the Code of Commerce states a specific prescriptive period on the matter, the Carriage of Goods by Sea Act (COGSA) whic h provides for a one-year period of limitation on claims for loss of, or damage to , cargoes sustained during transit may be applied suppletorily to the case at bar (Wallem Philippines Shipping, Inc. vs. S.R. Farms, Inc., G.R. No. 161849, July 9, 2010).

Period of Prescription

1. The action should be filed within one (1) year from the delivery of the goods or from the date when the goods should have been delivered. This is the prescriptiv e period for the action. Where the action is not filed within said period, the car rier shall be discharged from liability (Sec. 3(6), COGSA). 2. The one (1) year period does not apply to conversions or misdeliveries. They are not contemplated within the meaning of loss. of goods mentioned in the COGSA (CIA Maritima vs. Insurance Co. of North America, 19 SCRA 123; Ang vs. CIA Maritima, 133 SCRA 600). Here, use the New Civil Code provisions on prescription: Ten (10) years if there is a written contract or bill of lading or six (6) years if the contract is oral. For losses or damage to the goods or non-delivery which is also a loss, apply the one (1) year period under the COGSA. 3. A stipulation reducing the one (1) year period is null and void although an agreement suspending the period is valid. There must be an agreement between the

parties to suspend the running of the prescriptive period. Hence, a mere letter of demand by the shipper or any other extra-judicial demand, does not toll the runn ing of the period (Dole Philippines vs. Maritime Co., 148 SCRA 118). The law admits of an exception to the prescriptive period: if the one-year period is suspended by exp ress agreement of the parties. In such a case, the agreement becomes the law of the p arties (Phil. American Gen. Insurance vs. Mutuc, 61 SCRA 22, 23). 4. If the suit is filed by the insurer under its subrogatory right, the one (1) year period applies (Fil. Merchants vs. Alejandro, 145 SCRA 42). However, where the s hipper or consignee files the suit against the insurer for payment under the insurance policy, the one (1) year period does not apply but the ten (10) year prescriptive period under the Civil Code because the suit is not against the carrier arising from the contract of carriage (Mayer Steel Pipe Corp. vs. CA, 274 SCRA 432).

Limitation of liability

1. The liability of the carrier is US$500 per pac age in the absence of a shippe r s declaration of a higher value in the bill of lading (Sec. 4(5), COGSA). When wha t would ordinarily be considered pac ages are shipped in a container supplied by the car rier and

the number of such units is disclosed in the shipping documents, each of those u nits and not the container constitutes the pac age. referred to in the liability limitatio n provision of COGSA (Belgian Overseas Chartering and Shipping N.V. vs. Philippine First Insurance Co., Inc., 383 SCRA 23).

Public Service Act

Definition of public utility

1. Public utility is a business or service engaged in supplying the public with some commodity or service of public consequence (Albano vs. Reyes, 175 SCRA 264), or essential to the general public (Kilusang Mayo Uno Labor Center vs. Garcia, Jr., 239 SCRA 386). Necessity for certificate of public convenience 1. Under the Public Service Act, unless otherwise exempt by law, no public servi ce shall operate without having been issued a certificate of public convenience or a certificate of public convenience and necessity (Sec. 15, CA. 146, as amended). 2. A certificate of convenience is not the same as a certificate of convenience and necessity. In the former no legislative franchise is required. A certificate of convenience and necessity requires a franchise. Whether or not a legislative franchise is requir ed depends upon the law. If there is no statute requiring a franchise, the same shall not b e required. For example, P.D. No. 576-A requires a franchise for the operation of radio and television stations. 3. A certificate of public convenience is not required to operate the following:

(a) warehouses; (b) animal drawn vehicles, bancas powered by oars or sails, tugboats and lighters;

(c) airships except as to fixing of rates; (d) radio companies except as to fixing of rates; (e) public utilities operated by the government or its political subdivisions (Surigao Electric vs. Mun. of Surigao, 24 SCRA 898); (f) ice plants; and (g) public mar ets (Chamber of Filipino Retailers vs. Villegas, 44 SCRA 405). 4. A certificate of public convenience, in relation to the state, is a mere lice nse or a privilege and is neither a franchise nor a contract. It confers no vested or pro perty right or interest on the part of the holder. It can be withdrawn by the state, it bein g a mere privilege. In its purely private aspect, it may be deemed property because it as value and may be subject to levy (Vda. De Lat vs. PSC, G.R. 34978, February 26, 1988). 5. The original Public Service Commission under the Public Service Act has been replaced by several agencies: (a) The Land Transportation Franchising Regulatory Board (LTFRB) regulates land transportation while the registration of motor vehicles is done by the Land Transportation Office (LTO); (b) The Civil Aeronautics Board (CAB) regulates land transportation. The Air Transportation Office (ATO) registers aircraft and maintains airports; (c) The Energy Regulatory Board (ERB) regulates electric or power companies;

(d) The National Telecommunications Commission (NTC) regulates communication utilities and services, radio communication systems, wire or wireless telephone and telegraph systems, radio and television broadcasting systems and similar public facilities; (e) The National Water Resources Council (NWRC) regulates water resources and utilities; and, (f) The Maritime Industry Authority (MARINA) regulates water transportation. 6. Public utilities are regulated pursuant to the police power of the state. Whe n private property is used for a public interest, it ceases to be strictly private and thus becomes subject to regulation in order to promote the common good (Republic vs. Manila Electric Company, G.R. No. 141314, November 15, 2002).

7. The issuance of a certificate of public convenience (and necessity) requires a hearing. When granted, it may be revo ed if the holder violates or contumaciousl y refuses to comply with any applicable rules or regulations, or the holder is fou nd out to be a mere dummy or when the holder ceases operations or abandons the franchise.

Requisites

1. The following must be met before a person is granted a certificate of public convenience (and necessity):

(a) The applicant must be a Filipino citizen of a corporation or entity 60% of the stoc belongs to Filipino citizens; (b) The applicant must have sufficient financial capability to underta e the service; (c) The service to be operated should be one that would promote public interest, necessity and convenience. Prior operator rule

1. The first licensee is usually protected in his investment and will not be exp

osed to a ruinous type of competition. Hence, a certificate of public convenience wil l not be issued to a second operator if the first operator is rendering sufficient, adequ ate and satisfactory service and is complying with all laws, rules, and regulations. Thi s is called the prior operator rule.. 2. Prior-Operator Rule does not apply when: (a) Where public interest would be better served by the new operator (Guico vs. Estate of Buan, L-9769, August 30, 1957), as when operator has failed, despite ample time and opportunity given to it by the Commission, to render adequate, sufficient and satisfactory service and had violated the important conditions of its certificate. The protection given to prior operator refers only to operators of good standing (Rizal Light & Ice Co., Inc. vs. Mun. of Morong, Rizal, 25 SCRA 286). The prior-operator rule cannot ta e precedence over the convenience of the public. The resulting competition will undoubtedly benefit the public through improvement in the service and reduction in retail prices (Intestate Estate of Tiongson vs. Public Service Commission, 36 SCRA 241). (b) Where the old operator has failed to ma e an offer to meet the increase in traffic (Manila Yellow Taxicab Co., Inc. vs. Castelo, L-13910, May 30, 1960).

(c) Where the certificate of public convenience granted to the new operator is a maiden certificate, which does not overlap with the entire route of the old operator but only a short portion thereof as a convergence point (Mandbusco, Inc. vs. Francisco, 32 SCRA 405). (d) If the application of the rule will be conducive to monopoly of the service, and contrary to the principle that promotes healthy competition (Villa Rey Transit, Inc. Vs. Pangasinan Trans. Co., Inc., 5 SCRA 234). Ruinous competition

1. Ruinous competition means that because of the competition, his income will be so reduced that it will not give him an adequate return on his investment.

Fixing of rate 1. In determining the just and reasonable rates to be charged by a public utilit y, three major factors are considered by the regulating agency: a) rate of return; b) rate base and c) the return itself or the computed revenue to be earned by the public util ity based on the rate of return and rate base. The rate of return is a judgment percentage which, if multiplied with the rate base, provides a fair return on the public utility for the use of its property for service to the public. The rate of return of a public utility is no t prescribed by statute but by administrative and judicial pronouncements. This Court has consistently adopted a 12% rate of return for public utilities. The rate base, o n the other hand, is an evaluation of the property devoted by the utility to the public serv ice or the value of invested capital or property which the utility is entitled to a return (Republic of the Philippines vs. Manila Electric Company, G.R. No. 141314, November 15, 2002) . 2. Rate ma ing or rate fixing is a delicate and sensitive government function th at requires dexterity of judgment and sound discretion with the settled goal of arr iving at a just and reasonable rate acceptable to both the public utility and the public (K ilusang vs. Garcia, 239 SCRA 386). 3. The elements to be considered in rate ma ing are the following: (a) fair return on the value of property employed by the operator; (b) nature and extent or ris involved in the investment; (c) whether monopoly exists in this field; (d) expenses of operation including depreciation; and (e) valuation of property used and useful to the public service concerned

Exclusion of income tax as expense

1. The Energy Regulating Board (ERB) correctly ruled that income tax should not be included in the computation of operating expenses of a public utility. Income tax paid by a public utility is inconsistent with the nature of operating expenses. In ge neral, operating expenses are those which are reasonably incurred in connection with bu siness operations to yield revenue or income. They are items of expenses which contribu te or are attributable to the production of income or revenue. As correctly put by the ERB, operating expenses "should be a requisite of or necessary in the operation of a utility, recurring, and that it redounds to the service or benefit of customers." Income tax, it should be stressed, is imposed on an individual or entity as a fo rm of excise tax or a tax on the privilege of earning income. In exchange for the p rotection extended by the State to the taxpayer, the government collects taxes as a source of

revenue to finance its activities. Clearly, by its nature, income tax payments o f a public utility are not expenses which contribute to or are incurred in connection with the production of profit of a public utility. Income tax should be borne by the taxp ayer alone as they are payments made in exchange for benefits received by the taxpayer from the State. No benefit is derived by the customers of a public utility for the taxes paid by such entity and no direct contribution is made by the payment of income tax to the op eration of a public utility for purposes of generating revenue or profit. Accordingly, t he burden of paying income tax should be Meralco's alone and should not be shifted to the consumers by including the same in the computation of its operating expenses. By charging their income tax payments to their customers, public utilities virtually become "tax collectors" rather than taxpayers (Republic of the Philipp ines vs. Manila Electric Company, G.R. No. 141314, November 15, 2002). Boundary system 1. The boundary system is a scheme by an owner/operator engaged in transporting passengers as a common carrier to primarily govern the compensation of the drive r, that is, the latter s daily earnings are remitted to the owner/operator less the excess of the boundary which represents the driver s compensation. 2. Jeepney owner/operator-driver relationship under the boundary system is that of employer-employee and not lessor-lessee (Villamaria, Jr. vs. CA, G.R. No. G.R. N o. 165881, April 19, 2006). Kabit system

1. The abit system is an arrangement whereby a person who has been granted a certificate of public convenience allows another person who owns a motor vehicle to operate under such franchise for a fee. Although not outrightly penalized as a c riminal offense, the abit system is recognized as being contrary to public policy and t herefore, is void and inexistent (Lita Enterprises vs. IAC, 129 SCRA). It is a fundamental pr inciple that the courts will not aid either party to enforce an illegal contract but wil l leave them both where it finds them. Where the parties are in pari delicto, no affirmative relief of any ind will be given to one against the other (Teja Mar eting vs. IAC, 148 SCRA 34 7). Approval of sale, encumbrance or lease of property

1. To sell, alienate, mortgage, encumber or lease its property, franchises, cert ificates, privileges, or rights or any part thereof; or merge or consolidate its property, franchises privileges or rights, or any part thereof, with those of any other public servic e. 2. The approval of the Commission herein required shall be given, after notice t o the public and hearing the persons interested at a public hearing, if it be show n that there are just and reasonable grounds for ma ing the mortgage or encumbrance, fo r liabilities of more than one year maturity, or the sale, alienation, lease, merg er, or consolidation to be approved, and that the same are not detrimental to the publi c interest, and in case of a sale, the date on which the same is to be consummated shall be fixed in the order of approval: Provided, however, that nothing herein contained shall be construed to prevent the transaction from being negotiated or completed before i ts approval or to prevent the sale, alienation, or lease by any public service of a ny of its property in the ordinary course of its business (Sec. 20[g], Public Service Act) .

The Warsaw Convention

1. The Warsaw Convention was enforced in the Philippines effective February 9, 1951 although earlier concurred in by the Philippine Senate as early as May 16, 1950. The convention sought to regulate in a uniform manner the conditions of internationa l transportation by air in respect to the documents used for transportation and of the liability of the carrier. 2. Under the Warsaw Convention, the carrier must deliver to the passenger a tic et. However, the absence, irregularity, or loss of the passenger s tic et shall not af fect the existence or the validity of the contract of transportation, which shall nonethe less be subject to the rules of the convention. If the carrier accepts a passenger witho ut a passenger tic et having the carrier shall not be entitled to avail itself of the provisions of the convention which exclude or limit its liability. 3. Every carrier when transporting goods has the right to require the shipper/consignor to submit to it an airway bill. and every shipper/consignor has the right to require the carrier to accept the airway bill. The absence, irregularit y or loss of the airway bill, shall not affect the existence or the validity of the contract of transportation. 4. The carrier shall be liable for the death or injuries of a passenger if the e vent too place in the aircraft or in the course of any of the operations of embar ing or disembar ing. It shall be liable for the loss of, destruction or damage to the c hec ed in baggage if the occurrence which caused the damage too place during the transportation by air. The transportation by air covers the period during which the baggage are in the charge of the carrier whether in the airport or on board the aircraft or in any place where the carrier is in charge of said baggage or goods. 5. The carrier shall also be liable for damage occasioned by delay in the transportation by air of passengers, baggage or goods. 6. The carrier shall not be liable if it proves that the carrier and its agents have ta en all the necessary measures to avoid the damage or that it was impossible for it to ta e such measures. However, in the case of the transportation of goods and baggage, Sec. 20 of the Warsaw Convention provides, that in the transportation of goods and bagga ge, the carrier shall not be liable if it proves that the damage was caused by an error in piloting, in the handling of the aircraft, or n navigation and that, in all other respects , the carrier and its agents have ta en all necessary measures to avoid the damage. Note: The Warsaw Convention does not preclude the stringent rules under the Civil Code of the Phi

lippines. 7. In the transportation of passengers, the liability of the carrier for each pa ssenger shall be limited to the sum of 125,000 francs or the equivalent value in the cou rts of the country where the case is submitted. By special contract, the carrier and the pa ssenger may agree to a higher limit of liability. In the transportation of goods or bagg age and of goods the liability of the carrier shall be 250 francs per ilogram, unless the consignor has made, at the time when the pac age was handed to the carrier, a special decl aration of the value and has paid a supplementary sum. In that case the carrier shall be liable for an amount not exceeding the declared value. As regards objects of which the pass enger ta es charge himself, the liability shall be limited to 5,000 francs per passeng er. The sums mentioned refers to the French franc which may be converted into any nation al currency in round figures (Art. 22, Warsaw Convention). 8. The Warsaw Convention should be deemed a limit of liability only in those cas es where the cause of the death or injury to person, or destruction to or attended by any willful misconduct, bad faith, rec lessness, or otherwise improper conduct on th e part of any official or employee for which the carrier is responsible, and there is othe rwise no

special or extraordinary form of resulting injury (Northwest Airlines, Inc. vs. CA, 284 SCRA 408). 9. Under Art. 23 of the Warsaw Convention, any stipulation fixing a lower limit of liability shall be null and void, but the nullity of such provision shall not in volve the nullity of the whole contract. 10. In a contract of air carriage, a declaration by the passenger of a higher va lue is needed to recover a greater amount. An air carrier is not liable for the loss of baggage in an amount in excess of the limits specified in the tariff which was filed with t he proper authorities, such tariff being binding on the passenger regardless of the passen ger s lac of nowledge thereof or assent thereto (British Airways vs. CA, 285 SCRA 450). 11. Receipt of the person entitled to the delivery of the baggage or goods witho ut complaint shall be prima facie evidence that the same has been delivered in good condition. In case of damage, a complaint must be made with the carrier within t hree (3) days from date of receipt in case of baggage and seven (7) days from the date of receipt in the case of goods. In case of delay, the complaint must be made within fourte en (14) days at the latest. Every complaint must be made in writing upon the document or by a separate notice in writing. Failure to ma e such complaint within the period men tioned shall bar any action against the carrier, except in case of fraud on its part. 12. In this jurisdiction, the filing of a claim with the air carrier within the time limitation mentioned in the contract actually constitutes a condition precedent to the accrual of a right of action against a carrier for loss of or damage to the good s. The shipper or consignee must allege and prove the fulfillment of the condition. If it fails to do so, no right of action against the carrier can accrue in favor of the former. 13. The requirement of giving notice of loss of or injury to the goods is not an empty formalism. The fundamental reasons for such a stipulation are: (a) to inform the carrier that the cargo has been damaged, and that it is being charged with liability therefore; and, (b) to give it an opportunity to examine the nature and extent of the injury. This protects the carrier by affording it an opportunity to ma e an investigation of a claim while the matters is fresh and easily investigated so as to safeguard itself from false an fraudulent claims. 14. When an airway bill or any contract of carriage for that matter has a stipul ation that requires a notice of claim for loss of or damage to goods shipped and the s tipulation is not complied with, its enforcement can be prevented and the liability cannot be imposed on the carrier (Federal Express Corporation vs. American Home Assurance Company

and Philam Insurance Company, Inc., G.R. No. 150094, August 18, 2004). 15. The action for damages must be brought either before the court of the domici le of the carrier or of its principal place of business or before the court at the pla ce of destination, at the option of the plaintiff. These venues must be in the territo ry of a contracting party to the Warsaw Convention. The procedural rules of the country where the action is brought shall govern (Art. 28, Warsaw Convention). 16. The prescriptive period for the action is two (2) years rec oned from the da te of arrival at the destination, or from the date on which the aircraft ought to have arrived, or from the date on which the transportation stopped. The method of calculating the period of prescription shall be determined by the law of the court to which the case is submitted (Art. 29, Warsaw Convention). 17. NOTE: In Luna vs. CA, 216 SCRA 107, November 27, 1992, the Supreme Court hel d that the alleged failure to file a claim with the common carrier as mandated by the

Warsaw Convention should not be a ground for the summary dismissal of the compla int where the carrier may be held liable for the breach of other pertinent laws. It is error to limit the case to the provisions of the Warsaw Convention and to completely disr egard the provisions of the Civil Code. Even if it has the force and effect of law because it is a treaty commitment, it does operate as an exclusive enumeration of the rights of the par ties and the obligations of the carrier. Citing Alitalia vs. IAC, 192 SCRA 9, the Court l i ewise ruled that the application of the Warsaw Convention must not be construed to preclude the operation of the Civil Code and other pertinent laws 18. In the case of transportation to be performed by successive carriers, each c arrier shall be deemed to be a contracting party to the contract of transportation inso far as the contract deals with the part of the transportation performed under its supervisi on. In such a case, the passenger can ta e action only against the carrier which perfor med the transportation during which the accident occurred, save in the case where by exp ress agreement, the first carrier has assumed liability for the whole journey (Art. 3 0, Warsaw Convention). However, even if the transportation is to be performed by successiv e air carriers, it shall be deemed to be one undivided transportation if so regarded b y the parties as a single operation even if written under a single contract or a serie s of contracts (Art. 1(3), Warsaw Convention). 19. Under a general pool partnership agreement, the tic et-issuing airline is th e principal in a contract of carriage while the endorsee-airline is the agent. The obligation of the tic et-issuing airline remained and did not cease, regardless of the fact that another airline had underta en to carry the passengers to one of their destinati ons (China Airlines vs. Chio , 407 SCRA 432). 20. In a contract of carriage, an airline s obligation is limited to transporting the passenger and the latter s luggage safely to the agreed destination. An airline do es not breach its contract with the passenger if he is held in custody by immigration o fficials during a stop-over. The obligation of an airline to inspect the necessary travel documents of a passenger does not extend to chec ing the veracity of every entry in the travel documents. The power to admit an alien into a country is a sovereign act which cannot be interfered with by an airline (Japan Airlines vs. Asuncion, G.R. No. 1 61730, January 28, 2005).

Applicability 1. The Warsaw Convention applies to all international transportation of persons, baggage, or goods by air and for compensation. There is international transporta tion if the place of departure and destination are within the territories of two contrac ting parties or even if the place of departure and destination are within the territo ry of a single contracting party as long as there is an agreed stopping place within the territory of another country, whether or not said country is a contracting party to the co nvention (Art. 1, Warsaw Convention). 2. The Warsaw Convention is a treaty commitment voluntarily assumed by the Philippine government and, as such, has the force and effect of law in this coun try (Lhuiller vs. British Airways, 615 SCRA 380). 3. For the purposes of this Convention the expression "international carriage" means any carriage in which, according to the contract made by the parties, the place of departure and the place of destination, whether or not there be a brea in the c arriage or a transshipment, are situated either within the territories of two High Contract ing Parties, or within the territory of a single High Contracting Party, if there is an agreed stopping place within a territory subject to the sovereignty, suzerainty, mandat e or authority of another Power, even though that Power is not a party to this Conven tion. A

carriage without such an agreed stopping place between territories subject to th e sovereignty, suzerainty, mandate or authority of the same High Contracting Party is not deemed to be international for the purposes of this Convention. Thus, when the place of departure and the place of destination in a contract of carriage are situated within the territories of two High Contracting Parties, sa id carriage is deemed an "international carriage" (Lhuiller vs. British Airways, 615 SCRA 38 0). 4. Under Article 28(1) of the Warsaw Convention, the plaintiff may bring the act ion for damages before (a) the court where the carrier is domiciled; (b) the court where the carrier has its principal place of business; (c) the court where the carrier has an establishment by which the contract has been made; or (d) the court of the place of destination (Lhuiller vs. British Airways, 615 SCR A 380).

Limitation of liability 1. In the transportation of passengers, the liability of the carrier for each pa ssenger shall be limited to the sum of 125,000 francs or the equivalent value in the cou rts of the country where the case is submitted. By special contract, the carrier and the pa ssenger may agree to a higher limit of liability. In the transportation of goods or bagg age and of goods the liability of the carrier shall be 250 francs per ilogram, unless the consignor has made, at the time when the pac age was handed to the carrier, a special decl aration of the value and has paid a supplementary sum. In that case the carrier shall be liable for an amount not exceeding the declared value. As regards objects of which the pass enger ta es charge himself, the liability shall be limited to 5,000 francs per passeng er. The sums mentioned refers to the French franc which may be converted into any nation al currency in round figures (Art. 22, Warsaw Convention). 2. The Warsaw Convention should be deemed a limit of liability only in those cas es where the cause of the death or injury to person, or destruction to or attended by any willful misconduct, bad faith, rec lessness, or otherwise improper conduct on th e part of any official or employee for which the carrier is responsible, and there is othe rwise no special or extraordinary form of resulting injury (Northwest Airlines, Inc. vs.

CA, 284 SCRA 408). 3. The same convention li ewise provides that for the transportation of baggage, other than small personal objects of which the passenger ta es charge of himself , the carrier must deliver a baggage chec . The absence, irregularity, or loss of the baggage chec shall not affect the validity of the contract of transportation. Neverthel ess, if the carrier accepts baggage without a baggage chec the carrier shall not be entitle d to avail itself of those provisions of the convention excluding or limiting its liability . 4. The carrier shall not be liable if it proves that the carrier and its agents have ta en all the necessary measures to avoid the damage or that it was impossible for it to ta e such measures. However, in the case of the transportation of goods and baggage, Sec. 20 of the Warsaw Convention provides, that in the transportation of goods and bagga ge, the carrier shall not be liable if it proves that the damage was caused by an error n piloting, in the handling of the aircraft, or n navigation and that, in all other respects , the carrier and its agents have ta en all necessary measures to avoid the damage. Note: The Warsaw Convention does not preclude the stringent rules under the Civil Code of the Phi lippines.

Willful Misconduct

1. Under the Warsaw Convention, 16 an air carrier is made liable for damages for : (a) the death, wounding or other bodily injury of a passenger if the accident causing it too place on board the aircraft or in the course of its operations of embar ing or disembar ing; (b) the destruction or loss of, or damage to, any registered luggage or goods, if the occurrence causing it too place during the carriage by air;" and (c) delay in the transportation by air of passengers, luggage or goods. 2. The Warsaw Convention however denies to the carrier availment "of the provisions which exclude or limit his liability, if the damage is caused by his willful misconduct or by such default on his part as, in accordance with the law of the court seized of the case, is considered to be equivalent to willful misconduct," or "i f the damage is (similarly) caused by any agent of the carrier acting within the scope of his employment." 3. Slight reflection readily leads to the conclusion that it should be deemed a limit of liability only in those cases where the cause of the death or injury to perso n, or destruction, loss or damage to property or delay in its transport is not attribu table to or attended by any willful misconduct, bad faith, rec lessness, or otherwise improp er conduct on the part of any official or employee for which the carrier is respons ible, and there is otherwise no special or extraordinary form of resulting injury. The Con vention's provisions, in short, do not "regulate or exclude liability for other breaches o f contract by the carrier. or misconduct of its officers and employees, or for some particular or exceptional type of damage. Otherwise, an air carrier would be exempt from any liability for damages in the event of its absolute refusal, in bad faith, to com ply with a contract of carriage, which is absurd (Alitalia vs. IAC, 192 SCRA 9).

Freight forwarder 1. The term freight forwarder. refers to a firm holding itself out to the general

public (other than as a pipeline, rail, motor, or water carrier) to provide tran sportation of property for compensation and, in the ordinary course of its business, (1) to as semble and consolidate, or to provide for assembling and consolidating, shipments, and to perform or provide for brea -bul and distribution operations of the shipments; (2) to assume responsibility for the transportation of goods from the place of receipt

to the place of destination; and (3) to use for any part of the transportation a carrie r subject to the federal law pertaining to common carriers (Unsworth Transportation Internati onalPhils., Inc. vs. Court of Appeals and Pioneer Insurance and Surety Corporation, G.R. No. 166250, July 26, 2010). 2. A freight forwarder s liability is limited to damages arising from its own negligence, including negligence in choosing the carrier; however, where the for warder contracts to deliver goods to their destination instead of merely arranging for their transportation, it becomes liable as a common carrier for loss or damage to good s. A freight forwarder assumes the responsibility of a carrier, which actually execut es the transport, even though the forwarder does not carry the merchandise itself (Unsw orth Transportation International-Phils., Inc. vs. Court of Appeals and Pioneer Insur ance and Surety Corporation, G.R. No. 166250, July 26, 2010).

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REMINDERS IN CORPORATION LAW

The Corporation Code

Definition of a corporation

1. A corporation is an artificial being created by operation of law, having the right of succession, and the powers, attributes and properties expressly authorized by law or incident to its existence (Sec. 2, Corporation Code).

2. The above definition refers only to a private corporation. The definition doe s not cover public corporations.

3. The attributes of a private corporation are found in the definition. Specific ally, a private corporation is (a) an artificial being. (b) is created by operation of law (c) has the right of succession. (d) has powers which are either expressly authorized by law or incident to its existence (Sec. 2, Corporation Code).

4. As an artificial being, a corporation has a personality separate and distinct from its members. A private corporation is a person. under the law and is classified a s a juridical or an artificial person. It becomes a person only when the law grants it a juridical personality, separate and distinct from that of each shareholder or me mber. The separate personality of a private corporation is recognized in the Civil Code. A corporation for private interest or purpose. is one of the juridical persons expr essly enumerated in the Civil Code of the Philippines (Art. 44, New Civil Code).

5. A corporation is a person within the meaning of Section 1, Article III of the 1987 Constitution. But in so far as liberty is concerned, a private corporation is no t a person within the language of the constitutional provision, the liberty guaranteed is t he liberty of natural persons. Neither is it a person within the protection against self-in crimination in Section 17, Article III of the 1987 Constitution (BASECO vs. PCGG, 150 SCRA 1 81).

6. A private corporation as defined in the Corporation Code is created by operation of law.. It is not created by law. but by operation of law.. This means t hat it is created by tolerance of the law or by authority of the law through a gener al law. This general law is the Corporation Code (BP 68, Effective May 1, 1980). In the Philippines, the Corporation Code is the general law under which private corpora tions are organized. Private corporations under the Corporation Code are not created d irectly by law but by mere authority of the law. Thus, it is not legally accurate to sta te that private corporations are created by law.. They are more appropriately described i n Section 2 of the Corporation Code as entities created by operation of law..

7. The Constitution (Sec. 16, Art. XII) prohibits the formation of private corporations by a special law, i.e. a law specifically enacted to create a priva te corporation and which applies to that same corporation. Congress may provide for the formation, organization or regulation of private corporations only by a general law li e the Corporation Code. Thus, the creation of a private corporation pursuant to a special law is unconstitutional (NDC vs. Phil. Veterans Ban , 192 SCRA 257). Section 16, Art. XII of the Constitution, however, allows the creation of government-owned or control led

corporations (GOCCs) by special laws even if organized to pursue a proprietary o r private purpose of the government provided its formation is economically viable and is in the interest of the common good. Public corporations (local political subdivi sions e.g. provinces, cities and municipalities) are li ewise created pursuant to a special law.

Classifications of corporation

One which has capital stoc divided into shares and is permitted to distribute earnings to their shareholders by way of dividends.

a) Earnings are incidental to its existence. b) Normally does not have share of stoc and is not permitted to distribute dividends to its members. c) Extends only during the lifetime of its members.

Non-Stoc

Stoc

1. Distinguish stoc

from non-stoc corporation:

NOTE: The main distinguishing factor is whether or not the entity concerned is permitted in its articles of incorporation to distribute dividends.

If the articles of incorporation does not permit declaration of dividends, surpl us earnings, to its members, the entity remains to be a non-stoc corporation despi te or though it may have capital stoc divided into shares.

2. Other classifications of corporations

A. As to number of persons who compose them: a) Corporate aggregate or a corporation consisting of more than one member or corporator; or b) Corporation sole or a special form of corporation usually associated with the clergy.

B. As to whether they are for religious purpose or not: a) Ecclesiastical corporation or one organized for religious purpose. Under the Code, religious corporations are classified into corporation sole and religious societies (Sec. 109, par 2, Corporation Code); or b) Lay corporation or one organized for a purpose other than for religion. Lay corporations, in turn, may be either eleemosynary or civil.

C. As to whether they are for charitable purpose or not: a) Eleemosynary corporation or one established for or devoted to charitable purposes or those supported by charity; or b) Civil corporation or one established for business or profit, with a view toward realizing gains to be distributed among its members.

D. As to the State under or by whose laws they have been created: a) Domestic corporation or one incorporated under the laws of the Philippines; or

b) Foreign corporation or one formed, organized or existing under any laws other than those of the Philippines. It includes multinational corporations created under the laws of another state (Sec. 123, Corporation Code).

E. As to their legal right to corporate existence: a) De jure corporation or a corporation existing in fact and in law; or b) De facto corporation or a corporation existing in fact but not in law (Sec. 21, Corporation Code).

De jure De facto a. created in accordance with the requirements of the law b. no defect in incorporation c. those which have strictly/ substantially complied with the requirements of incorporation d. can exercise rights conferred by Sec. 56 of the Corporation Code a. colorable compliance with the requirements of the law. b. defect in the manner of incorporation c. an attempt, in good faith, to form a corporation according to the requirements of law d. may also perform Sec. 36 since it may not be attac ed collaterally by anyone not even the State

The presumption is that all corporations are de jure, in terms of rights and privileges, performance of powers which the law confers upon de jure corporation s, de facto may still do the same.

F. As to whether they are open to the public or not: a) Close corporation or one which is limited to selected persons or members of a family (Sections 96-105, Corporation Code); or b) Open corporation or one which is open to any person who may wish to become a stoc holder or member thereto.

G. As to their relation to another corporation: a) Parent or holding corporation or one which is so related to another corporation that it has the power, either directly or indirectly, to elect the majority of the directors of such other corporation; b) Subsidiary corporation or one which is so related to another corporation that the majority of the directors can be elected, either directly or indirectly by such other corporation. It is one in which another corporation owns at least a majority of the shares and thus has control, or; c) Affiliated corporation or one related to another by owning or by being owned in common management or by a long term lease of its properties or other control device.

H. As to whether they are for public or private purpose: a) Public corporation or those formed or organized for the government of a portion of the state for the general good and welfare; or b) Private corporations or those formed for some private purpose, benefit or end.

3. If a group of persons operate as a corporation without a certificate of incorporation and represent themselves to the public as a corporation, there is a corporation by estoppel.

Nationality of corporations

1. There are various tests to determine the nationality of a corporation. These are: a) The incorporation test declares that a corporation is a national of the country under whose laws it was incorporated. This is embodied in Section 123 of the Corporation Code. b) The control test determines the nationality of the corporation by the nationality of the controlling stoc holders. c) Under the place of principal business test, the corporation is a national of the place where its principal office or center of management is located. 2. Although the incorporation test is the primary test of nationality in the Corporation Code, the control test applies in certain cases li e: a) In the exploitation and development of natural resources, the State may enter into a joint venture with Filipino citizens or corporations or associations wherein at least 60% of its capital is owned by Filipino citizens (Sec. 2, Art. XII, Philippine Constitution). b) In operation of public utilities, the operator must be a Filipino or the corporation must be organized under Philippine laws and at least 60% of its capital is owned by Filipino citizens (Sec. 11, Art XII, Philippine Constitution). c) The ownership of mass media shall be limited to Filipino citizens or corporations wholly owned (100%) and managed by Filipino citizens (Sec. 11, Art. XVI, Philippine Constitution). d) Corporations engaged in advertising must have Filipino control of at least 70% of its capital (Sec. 11, Art. XVI, Philippine Constitution). e) In war, the nationality of a corporation is determined by the citizenship of its controlling stoc holders (Filipinas Compania De Seguros vs. Christem, 89 Phil. 54). 3. The grandfather rule is a method by which the percentage of Filipino equity i s computed in a corporation to comply with nationalization laws of the country. Un der this test, shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as with Philippine natio nality. But if the percentage of Filipino ownership is less than 60%, only the number of shares corresponding to such percentage shall be counted as with Philippine nationality (DOJ Opinion, No. 18, S. 1989).

4. There is no need for a mathematical computation where the shares of stoc s ar e owned by individuals or by natural persons. But if the shares are owned by a corporation, how to now if it meets the 60% Filipino capital requirement is qui te challenging. The following situations illustrate the formula. Assume that in ABC Corporation, 69% of the shares are owned by XYZ Corporation while 31% of the shares are owned by Filipinos. XYZ Corporation on t

he other hand has the following ownership: 47% (Filipino owned) and 53% (Alien owne d). May ABC Corporation engage in the development of natural resources in the Philippines (In other words, is 60% of its capital Filipino owned)? Under the grandfather rule there is need to determine Filipino ownership in ABC Corporation. Thus, 47/100 multiplied by 69 = 32.43 % (Filipino owned capital of XYZ Corporation in ABC Corporation). This should be added to the given 31% Filipino

ownership in ABC Corporation. It appears that 63.43% of the capital of ABC Corpo ration is Filipino owned. It is qualified under the Constitution.

Doctrine of separate juridical personality

1. A corporation is invested by law with a personality separate and distinct fro m those of the persons composing it as well as from that of any other legal entity to which it may be related. Mere ownership by a single stoc holder or by other corporatio n of all or nearly all of the capital stoc of a corporation is not of itself sufficient ground for disregarding the separate corporate personality (Elcee Farms, Inc. vs. NLRC , 51 2 SCRA 602 January 25, 2007).

2. The following are the consequences of the separate personality of the corporation:

(a) a corporation can acquire property of its own, enter into transactions, business dealings, contracts or any other contemplated juridical acts under its own name; (b) the obligations and liabilities arising from said contracts are regarded as that of the corporation and not those of the individual members nor of the officers of the corporation. Obligations of the corporation are not to be regarded as obligations of its members. Conversely personal obligations of its members are not regarded as obligations of the corporation; (c) properties of the corporation are not to be considered as property of its individual members or shareholders and vice versa. Following this theory, it is improper for a shareholder to intervene in any action involving the assets and properties of the corporation. Conversely, it is improper for the corporation to intervene in any action or proceeding involving personal properties of its members or shareholders; (d) the interest of the shareholder in the properties of the corporation is inchoate only, not direct and actual. A direct interest arises only when after liquidation of corporate assets, a particular property is assigned to the stoc holder; (e) accordingly, the property of the corporation is not the property of its stoc holders or members and may not be sold by the stoc holders or members without the express authorization from the corporation s board of directors (Woodchild Holdings, Inc. vs. Roxas Electric and Construction Company, Inc., 436 SCRA 235); (f) the corporate debt or credit is not the debt or credit of the stoc holder no r is the stoc holder s debt or credit that of the corporation (Good Earth Emporium Inc. and Lim Ka Ping vs. CA, 194 SCRA 544); (g) a corporation has no interest in the individual property of its stoc holders

or members unless the property is transferred to the corporation. A corporation enjoys a personality of its own. Properties of the corporation are not property of its stoc holders or members. Conversely, properties of stoc holder are not properties of the corporation (Sulo ng Bayan vs. Araneta, 72 SCRA 347);

(h) a share of stoc in the corporation does not vest the owner thereof with any legal right or interest or title to any of the corporate property. His interest is only beneficial or equitable. Shareholders are in no legal sense the owners of the corporate property, which is owned by the corporation as a distinct legal person (Concepcion Magsaysay Labrador vs. CA, 180 SCRA 266); (i) personal obligations of individual shareholders of a corporation cannot be considered obligations of the corporation following the principle that a corporation has a personality of its own (Francisco Motors vs. C.A. 309 SCRA 72); (j) if a stoc holder passes away, the properties registered in the name of the corporations organized by the deceased before his death are not to be included in the inventory of the estate of the deceased. The personality of the corporation is distinct from those who organized the corporation (Lim vs. CA, G.R. No. 1245715, January 24, 2000). 3. A corporation is a person under the Constitution and enjoys the protection afforded by the due process and equal protection clauses. The term person. in the Constitution encompasses even juridical persons. Hence, a corporation cannot be deprived of its life without due process of law. It is also entitled to protecti on against unreasonable searches and seizures.

4. There are, however, constitutional rights which do not apply to a corporation . For instance, the guarantee against self-incrimination would only extend to a na tural person. The guarantee cannot be made to apply to a private corporation, otherwis e, the State would not be able to inquire into the activities of the entity concerned. Since corporations are creatures of the state, as such, the state would always have th e reserve power to inquire into the activities of such entities in exercising its police p ower. It has the right to now whether or not abuses of its franchise have been committed or violations of the Corporation Code or other laws committed. Unli e denial of constitutional guaranties, the denial of said guaranty would not really invite p hysical intrusion into the premises as well as activities of the entity concerned. What the court would li e to require is only the production of documents, financial documents e tc. for the state to inquire on the legality of said activity. The state authorities do not really unduly interfere with the private activities of private corporations involved (B ataan Shipyard vs. PCGG 150 SCRA 181). 5. A corporation itself cannot be criminally liable for felonies described in th e Revised Penal Code or in special laws because it cannot perform physical overt a cts of a crime. It cannot even be imprisoned. Nevertheless, the officers of the corporation may, in their individual capacitie

s be liable for crimes done in behalf of the corporation. While the act of the office rs may impose certain obligations on the corporation because of the criminal act of its officers, the officer who performed the criminal act must assume the criminal liability (E xecutive Secretary vs. Court of Appeals, 429 SCRA 81; Singian, Jr. vs. Sandiganbayan, 478 SCRA 348). 6. Caveat: Under Section 144 of the Corporation Code, a corporation may be liabl e for fines for violations of the Corporation Code but the officer, director or tr ustee responsible may be proceeded against. Note also that corporate criminal liability seems to be recognized in the AntiMoney Laundering Law of 2001. The term offender. under the AMLA refers to any person who commits a money laundering offense. It then defines a person. as any

natural or juridical person.. The penalty clause of the law also mentions a corp oration as offender (Sec. 14, AMLA). 7. A corporation may be civilly liable for torts as when its employees commit a quasi-delict in the performance of their functions as employees. Article 2180 of the New Civil Code ma es the employer liable to the plaintiff unless it can prove its ex ercise of diligence in the selection and supervision of the erring employee. The employer under Article 2180 of the New Civil Code may be a corporation. 8. Supreme Court ruled that a juridical person is not entitled to moral damages because, not being a natural person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish, or moral shoc . Mental suffering can be experienced only by one having a nervous system. However , a corporation may have a good reputation which, if debased or besmirched resulting in social humiliation, may be a ground for recovery of moral damages and attorney s f ees (Mambulao Lumber Co. vs. PNB, 22 SCRA 359; People vs. Manero, 218 SCRA 85; Solid Homes vs. CA, 275 SCRA 267). But a corporation whose credit reputation is not exactly something to be considered sound and wholesome cannot be entitled to a big amoun t of moral damages (Asset Privatization Trust vs. CA, 300 SCRA 579). 9. However, in a much later case, the Supreme Court held that the award of moral damages cannot be granted in favor of a corporation because, being an artificial person and having existence only in legal contemplation, it has no feelings, no emotion s, and no senses. It cannot, therefore, experience physical suffering and mental anguish, which can be experienced only by one having a nervous system.. The statement in People vs. Manero and Mambulao Lumber Co. vs. PNB that a corporation may recover moral damages if it has a good reputation that is debased, resulting in social humiliat ion. is an obiter dictum. On this score alone, the award for moral damages must be set a side, since RBS is a corporation. (ABS-CBN Broadcasting Corporation vs. CA, 301 SCRA 5 72). 10. In Jardine Davies vs. C.A., 333 SCRA 684, moral damages were awarded on the ground of besmirched reputation. Moral damages were awarded to a corporation in another case because it was defamed and a victim of libel. Accordingly, the enti tlement to moral damages under the Civil Code (Art. 2219[7]) for libel, slander, and oth er forms of defamation does not qualify whether the plaintiff is a natural or a juridical person (Filipinas Braodcasting Networ s, Inc. vs. Ago Medical and Educational Center, 4 48 SCRA 113). 11. There is no doubt however, that a corporation is entitled to actual, exempla ry or liquidated damages (Filipinas Broadcasting Networ Inc. vs. Ago Med. & Education

al Centre, 448 SCRA 413). Pointer: When confronted with an issue on whether private corporations are entitled to moral damages, loo at the alleged basis of the damages. If the basi s is physical suffering, mental anguish, serious anxiety, wounded feelings, moral sho c or similar injury, then a corporation cannot see for moral damages. If it could be shown however, that it is claiming damages for its, reputation, which had been unduly besmirched by the defendant, and if it could be shown that indeed the latter per formed the alleged act, then a claim for moral damages is in order.

Doctrine of piercing the corporate veil

1. The general rule is that a corporation is invested by law with a personality separate and distinct from that of the persons composing it. By reason of this a ttribute, the corporation cannot be made to answer for the acts and liabilities of its off icers, stoc holders or members. The converse is also true.

2. The separateness in personality is only a fiction created by law for convenie nce and to promote the ends of justice (Suldao vs. Cimech System Construction, Inc., 506 SCRA 256). The theory of corporate fiction or the separate personality theory cannot therefore, be invo ed for a purpose that subverts the law, morals, public order and public policy. If this happens, the separate personality of the corporation may be disregarded or pierced.. 3. The separate personality of a corporation may be pierced or disregarded when that personality is used for any of the following purposes: (a) to defeat public convenience; (b) to justify a wrong; (c) to protect fraud; (d) to defend a crime, or in any manner; (e) to circumvent the law; or (f) when the corporation is merely the alter ego of an individual or of another corporation.

In the above cases, the courts will not hesitate to disregard the separate personality of the corporation. In doing so, the courts are said to pierce the ve il of corporate entity. and loo into the substance. of the corporation, not into its c orporate form (Villanueva vs. Andre, 172 SCRA 876; Francisco Motors Corporation vs. CA, 3 09 SCRA 72). 4. Authorities are agreed on at least three (3) basic areas where piercing the v eil, with which the law covers and isolates the corporation from any other legal enti ty to which it may be related, is allowed. These are: (1) defeat of public convenience , as when the corporate fiction is used as vehicle for the evasion of an existing obl igation; (2) fraud cases or when the corporate entity is used to justify a wrong, protect fra ud, or defend a crime; or (3) alter ego cases, where a corporation is merely a farce si nce it is a mere alter ego or business conduit of a person, or where the corporation is so o rganized and controlled and its affairs are so conducted as to ma e it merely an instrume ntality, agency, conduit or adjunct of another corporation (General Credit Corp. v. Alson s Devt. & Investment Corp., et al., G.R. No. 154975, January 29, 2007).

5. Effects of piercing the veil of corporate entity are the following:

a) When the corporate existence is pierced, the law will treat the corporation and its members, stoc holders or officers as one and the corporation will not be considered as having a separate personality. Consequently, the officers or stoc holders or members may now be held liable for the liabilities of the corporation and vice versa (Matugina Integrated Wood Products vs. CA, 263 SCRA 490 ;Aratea v. Suico, G.R. No. 170284, March 16, 2007). b) Piercing the veil. removes the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for underta ing certain proscribed activities (Francisco Motors Corporation vs. CA, 309 SCRA 72). c) It must be remembered that in order to justify piercing the veil of corporate entity, the wrongdoing must be clear and convincing. It cannot

be presumed (Matugina Integrated Wood Products vs. CA, 263 SCRA 490; Del Rosario vs. NLRC, 187 SCRA 777). 6. The alter ego rule or conduit theory is a rule which states that where a corporation is so organized and controlled, and its affairs conducted, so that i t is in fact a mere instrumentality or adjunct of the other, the fiction of corporate entity of the instrumentality may be disregarded. However, mere ownership by a single or a sma ll group of stoc holders of nearly all of the capital stoc of the corporation is n ot, without more, sufficient to disregard the fiction of separate personality (Union Ban of the Philippines vs. Ong, 491 SCRA 581). This a reiteration of a previous ruling that the mere fact that a person owns the majority or nearly all of the capital stoc of the c orporation is not a sufficient ground to disregard the corporate fiction (Traders Royal Ban vs. CA, 269 SCRA 15). The fact also that one or more corporations are controlled by a si ngle stoc holder is not of itself a sufficient ground for disregarding their separate entities (Liddel & Co. vs. BIR, 2 SCRA 632).

To justify the application of the alter ego rule, the following must be present : (1) control, not mere majority or complete stoc control but complete domination, no t only of the finances but of policy and business practice in respect to the transactio n attac ed so that the corporate entity as to this transaction had at that time no separate mind, will or existence of its own; (2) such control must have been used by the defendant t o commit fraud or wrong, to perpetuate the violation of a statutory or other positive leg al duty, or dishonest and unjust act in contravention of plaintiff s legal rights, and; (3) th e aforesaid control and breach of duty must proximately cause the injury or unjust loss comp lained of (Nisce vs. Equitable PCI Ban Inc 516 SCRA 231). The absence of any of these elements prevents piercing the corporate veil.. In applying the instrumentality. or alter ego. doctrine, the courts are concerned wit h reality and not form, with how the corporation operated and the individual defen dant s relationship to that operation (Nisce vs. Equitable PCI Ban Inc, 516 SCRA 231 F ebruary 19, 2007). In relation to the second element, to disregard the separate juridical personal ity

of a corporation, the wrongdoing or unjust act in contravention of a plaintiff s l egal rights must be clearly and convincingly established, it cannot be presumed. With out a demonstration that any of the evils sought to be prevented by the doctrine is pr esent, it does not apply (Ryuichi Yamamoto v. Nishino Leather Industries Inc., G.R. No. 15 0283, April 16, 2008).

Number and qualifications of incorporators 1. Corporators are those who compose a corporation, whether as stoc holders or members (Sec. 5, Corporation Code). Corporators in a stoc corporation are calle d stoc holders or shareholders while those corporators in a non-stoc corporation are called members (Sec. 5, Corporation Code). 2. Corporators are not necessarily incorporators. Incorporators are those mentio ned in the articles of incorporation as originally forming and composing the corpora tion, having signed the articles (Sec. 5, Corporation Code).

A person who originally composes a corporation is not necessarily an incorporator. It is necessary that his name is mentioned in the articles as such and he has signed the articles of incorporation. 3. Since incorporators originally compose the corporation, their names will rema in in the articles as incorporation until the end of the corporate existence. They cannot be

changed by amending the articles of incorporation. That they originally formed t he corporation is a fact that cannot be changed. 4. The following are required for incorporators: (a) must be a natural person; (b) there must be at least five (5) but not more than fifteen (15) incorporators ; (c) must be of legal age; (d) majority must be residents of the Philippines; and (e) if the corporation is a stoc corporation, the incorporator must own or be a subscriber to at least one (1) share of the capital stoc (Sec. 10, Corporation Code). 5. The law requires that an incorporator must be a natural person. Section 4 of the Rural Ban s Act of 1992, however, provides an exception to this rule. Duly estab lished cooperatives and corporations primarily engaged to hold equities in rural ban s may organize a rural ban . 6. Even if as a rule, corporations cannot be incorporators because they are not natural persons, corporations may nevertheless, be original subscribers to the s hares of a corporation and such corporations may appear as such in the articles of incorpor ation as subscribers, although not as incorporators (SEC Opinion, July 18, 1989 and 1993) . Thus, the incorporators are not always the only original subscribers to the corporate shares because the law does not limit the number of original subscribers although it li mits the number of incorporators. It is even possible that the incorporators own shares v ery much less that that owned by the other original subscribers. 7. Aliens and non-residents may be incorporators because as a general rule, ther e is no citizenship requirement for incorporators. What the law merely requires is th at majority be residents (not citizens) of the Philippines. Some incorporators ther efore, may be non-residents. This rule is however, subject to special laws and constitution al requirements.

Minimum capital stoc and subscription requirements

except as otherwise specifically provided for by special laws.

1. Stoc

corporations are not required to have a minimum authorized capital stoc

However, corporations are required to have a minimum subscription and paid up. At least 25% of the authorized capital stoc as stated in the articles of in corporation must be subscribed at the time of incorporation. At least 25% of the total subsc ription must be paid upon subscription, provided that in no case, shall the paid up capi tal be less than P5,000.00 (Sec. 13, Corporation Code). Hence, if the authorized capita l stoc of the applicant corporation is P4 million, at least P1 million worth of shares mus t be subscribed. The law does not however, require that the entire P 1 million must b e paid up. The minimum paid up should be at least 25% of that P1 million or P250,000. 2. It does not also mean that each subscriber must pay at least 25% of his subscription. The determining factor is the total minimum subscription and paid up of all the subscribers. It is possible that a particular subscriber may only pay 15 % of his subscribed shares while the others pay 50% or even 100%.

Corporate term 1. A corporation shall exist for a period not exceeding fifty (50) years from th e date of incorporation unless sooner dissolved or unless said period is extended (Sec. 11, Corporation Code)

2. The corporate term may be extended under the following rules: a. it may be extended for periods not exceeding fifty (50) years in any single instance by amendment of the articles of incorporation; and b. an extension cannot be earlier than five (5) years prior to its expiration unless authorized for justifiable reasons by SEC. 3. However, condominium corporations can be organized for two hundred (200) years. Classification of shares 1. Founder s shares are shares given to the founders of the corporation and are classified as such by virtue of a provision in the articles of incorporation. Ho lders of such shares may be given special rights and privileges not enjoyed by other hold ers of shares. If the privilege is to have the exclusive right to vote and be voted for in the election of directors, such right must be only for a limited period not exceedin g five (5) years. Before such privilege may ta e effect, it must be approved by the SEC. Th e fiveyear period limitation starts from the date of approval by of the SEC (Sec. 7, C orporation Code). The five-year period of privileges granted to holders of founder s shares cannot be extended because other shareholders would be deprived of the right of representation in the board of directors. 2. Treasury shares are shares which have been previously issued and fully paid f or but were subsequently reacquired by the corporation by lawful means li e by purc hase, redemption, donation or other means. If it is to be disposed of by the corporati on it must be with a reasonable price (Sec. 9, Corporation Code). A treasury share cannot b e the object of subscription because this term refers to the acquisition of unissued stoc s ( Sec. 9, Corporation Code) and a treasury share has already been previously issued. Under Section 57 of the Corporation Code, treasury shares shall have no voting rights as long as such shares remain in the treasury (with the corporation as sh ares of the corporation). 3. Preferred shares are those which are given preference in the distribution of assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences given in the articles of incorporation which are not violative of the provisions of the Corporation Code. A preferred share may be deprived of voting rights

(Sec. 6, Corporation Code). A preferred share may be preferred cumulative. In this type of share, if the dividends are not paid for any year, the unpaid dividends shall be added to the dividends for the next year and the holder of such share shall be entitled to be paid the accumulated dividends before dividends shall be paid to the holder of a common s hare. If the preferred share is non-cumulative, its preference for any given year is l ost by the failure to pay the dividend for that year. A preferred participating share participates in the distribution of ual to the dividend paid to the holder of a common share even after the e preferred participating share already received his dividend for the are. If the articles of incorporation do not expressly provide for this type of the preferred stoc is deemed non-participating. dividends eq holder of th preferred sh share, then

4. Redeemable shares are shares which can be issued only upon express authorization in the articles of incorporation. This share may be redeemed by th e corporation even if it has no unrestricted retained earnings in the boo (Sec. 8 ,

Corporation Code). This principle is contrary to Section 41 which authorizes a c orporation to acquire its own shares provided the corporation has unrestricted retained ear nings. Redeemable shares should be considered as an exception to the rule in Section 41 of the Corporation Code. A redeemable share li e a preferred share maybe deprived of voting rights (Sec. 6, Corporation Code). Once redemption is made, the shares which are redeemed are retired (cancellation of such shares from the statement of oc ) unless the articles of incorporation would expressly allow ed shares, then for the meantime, they would form part of the corporation. 5. Par value shares are those with a stated value fixed in the articles of incorporation and appears in the certificate of stoc . The value of par value sh ares do not actually reflect the mar et value and the fixing of the value of the shares is an arbitrary act on the part of the corporation. 6. No par value shares do not have their values stated although they have issued values. Not all corporations are allowed to issue no par value shares. Those corporation s which affect public interests should inform the public of the value of the share s before investments are made by the public. The concept of a no par value share would be contrary to the intent of transparency sought by the law. The following corporat ions cannot issue no par value shares:

The foregoing entities are engaged in business activities imbued with public interest. The public has the right to now the principal capacity of such entiti es which could be reflected in the articles of incorporation, indicating the stated par p rice of share which they could issue. This way, it is easier to compute the capital needed to be raised by way of subscription. No par value shares when issued are deemed fully paid and non-assessable and

(a) (b) (c) (d) (e)

ban s; trust companies; insurance companies; public utilities; and building and loan associations (Sec. 6, Corporation Code).

automatically authorized capital st re-issuance of redeem treasury stoc of the

the holder of such shares shall not be liable to the corporation or to its credi tors in respect thereto (Sec. 6, Corporation Code). There can be no balance on the subsc ription of no par value shares because they are deemed fully paid. While no par value shares do not have their value stated in the certificate of s toc or in the articles of incorporation, it has an issued value and cannot be issued for a consideration of less than P5.00 per share (Sec. 6, Corporation Code). The entire consideration received by the corporation for its no par value shares shall be treated as capital and shall not be available for distribution of divid ends (Sec. 6, Corporation Code). 7. A common share is the ordinary share of the corporation entitling the owner t o a pro-rata dividend, without priority or preference over other shares. While it is true that under the Corporation Code, only preferred shares and redeemable shares can be deprived of voting rights, as an exception to this rule , under the following instances, a common share can be deprived of voting rights:

(a) When shares are declared delinquent; and (b) When shares have already exercised appraisal rights.

8. A deferred share gives the holder thereof a right to dividends after that of the common shares. 9. Over-issued stoc s are stoc s issued in excess of the authorized capital stoc . The issuance is null and void. 10. Bonus stoc s are those issued gratuitously by a corporation to purchasers of bonds as an inducement to purchasers to ta e the bonds. 11. Street certificate is a certificate of stoc duly indorsed in blan by its o wner and is transferable by mere delivery, and upon its face, the holder is entitled to d emand its transfer in his name from the issuing corporation. 12. Escrow stoc is one which is a product of an agreement by virtue of which th e stoc is deposited by its owner with a depositary to be delivered later to a thi rd person upon the happening of an event or the fulfillment of a condition contained in th e agreement.

Promoter

the business or enterprise of the issuer and receives considerati 3, Securities Regulation Code). He is deemed an agent of the inco corporation.

2. Contracts by the promoter for and in behalf of a proposed corporation general

1. Promoter is ng and organizing on therefor (Sec. rporators but not of the

one who, acting alone, or with others, ta es initiative in foundi

ly bind only him, subject to and to the extent of his representations and not the corporation. A corporation, until organized, has no being, franchises or faculties. A corporation should have a full and complete organization and existence as an ent ity before it can enter into any ind of a contract or transact any business, would seem to be self evident (Cagayan Fishing Dev t. Co. vs. Sandi i, 65 PHIL 223). 3. It should be pointed out, however, that the Supreme Court did not say in the case of Cagayan Fishing Dev t. Co. vs. Sandi i that the rule is absolute. Of cours e, there are exceptions. It will be noted that American courts generally hold that a contract made by the promoters of a corporation on its behalf may be adopted, accepted or ratifie d by the corporation when organized (Rizal Light & Ice Co., Inc. vs. Public Service Commi ssion, 25 SCRA 285). 4. The promoter was released from liability despite the fact that he entered int o a contract in behalf of a to-be-formed corporation. Among the circumstances consid ered by the court was the fact that the other contracting party agrees to loo to the corporation and not to the promoters for payment. Qua er was well aware that the corporation was not yet formed and even urged that the contract be made in the n ame of the to-be formed corporation. The entire transaction contemplated the corporatio n as the contracting party. There was clearly intent on the part of Qua er to contract wi th the corporation and not with the promoter (Qua er Hill vs. Parr, 148 Colo. 45, 364 P .2d 1056 [1961]). 5. Generally, a corporation is not bound by engagements made on its behalf by it s promoters before its organization. However, when the corporation, after it has c ome into

existence, derived benefits from the contract, it is only proper to compensate t he promoter. Failure to compensate would result in a situation wherein one party is unjustly enriched at the expense of another. Subscription contract A subscription contract is the acquisition of unissued stoc in an existing corporation or a corporation still to be formed (Sec. 60, Corporation Code). Fro m the moment of subscription, the stoc holder has all the rights and obligations of a stoc holder even though he has not fully paid the subscription. Note the term, unissued. in Section 60 of the Corporation Code, which signifies that previously issued shares and which went bac to the corporation by any lawful means li e treasury shares cannot be the subject of a subscription contract because such shares are no long er unissued shares. Pre-incorporation subscription agreements 1. This is a subscription made before the corporation is incorporated (Sec. 61, corporation Code). 2. A pre-incorporation subscription is mandatory and must be complied with by the applicant corporation because the law prescribes a minimum subscription requirement. Once made, it is irrevocable for at least six (6) months from the d ate of subscription except if the revocation is consented to by the other subscribers o r when the incorporation fails to materialize (Sec. 61, Corporation Code). The irrevocabili ty of the preincorporation subscription is not difficult to understand. If made revocable at any time, there is danger that the corporation cannot meet the minimum subscription requir ement for incorporation. 3. The pre-incorporation subscription may not be revo ed even after the lapse of six (6) months if the articles of incorporation have already been submitted to the S EC (Sec. 61, Corporation Code).

Consideration for stoc s

a) Actual cash paid to the corporation; b) Property, tangible and intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stoc issued; c) Labor performed for or services actually rendered to the corporation; d) Previously incurred indebtedness of the corporation; e) Amounts transferred from unrestricted retained earnings to stated capital; f) Outstanding shares exchanged for stoc s in the event of reclassification or conversion.

Furthermore, the law imposes the following conditions; a) Stoc s shall not be issued for a consideration less than the par or issued price thereof. b) Shares of stoc s shall not be issued in exchange for promissory notes or future services;

Consideration for the issuance of stoc or more of the following:

may be any or a combination of any two

c) Where the consideration is property, tangible or intangible, such as patents or copyrights, the valuation thereof shall initially be determined by the incorporators or the BOD, subject to approval by the SEC (Sec. 62, Corporation Code).

Articles of incorporation 1. Every applicant private corporation is required to submit its articles of incorporation to the Securities and Exchange Commission (SEC) whether the corporation is a stoc or a non-stoc corporation. The articles of incorporation (AOI) is the charter of the corporation. It actually is a contract between the State and the corporation and also defines the relationship between the State and the stoc hol ders, and between the corporation and the stoc holders. The articles of incorporation, therefore, bind all those involved n the corporation.

It is the charter of the corporation and the contractual relationships between the State and the corporation, the stoc holders and the State, and between the corpo ration and its stoc holders (Lanuza vs. CA, GR No. 131394, March 28, 2005). 2. The form of the articles need not be in the exact language of the Corporation Code. Here, we follow the doctrine of substantial compliance. The law itself pro vides that it is enough that the submitted articles be substantially. in accordance with the fo rm provided in Section 15 of the Corporation Code. 3. All corporations organized under the Corporation Code shall file with the SEC , AOI in any of the official languages, duly signed and ac nowledged by all the incorporators containing substantially the following: a) corporate name; b) specific purpose/s; c) place of principal office; d) corporate term; e) names, nationalities and residences of incorporators; f) numbers of directors and trustees; g) names, nationalities and residences of persons who shall act as directors or trustees until the first directors or trustees are duly elected and qualified; h) capitalization, if stoc corporation; the number of shares into which it is divided; i) capitalization, if non stoc corporation; the names, nationalities and residences of its contributors; and j) other matters that the incorporators deem necessary and not inconsistent with law (Sec. 14, Corporation Code).

4. The following are the grounds for the rejection or disapproval of the article s of incorporation: a) failure to substantially comply with the form prescribed under the Code; b) the purpose is patently unconstitutional, illegal or immoral; c) the treasurer s affidavit is wrong/false; or d) the required percentage of ownership was not complied with. 5. Sections 14 and 15 of the Corporation Code state the minimum requirements needed to be complied with. For as long as the proposed AOI contains substantial ly all the provisions mentioned in Section 14, the SEC would approve it. The words of t he

articles of incorporation need not strictly follow the language of Sections 14 a nd 15 but it should contain all the material provisions of Section 14 of the Corporation Code . The SEC would ta e into consideration the legality of the business activities o f which the corporation wishes to engage in. Fraud on the part of the corporation is a ground for revocation or suspension of the license depending upon the extent of the violation committed. 6. There are corporations required by law to comply with nationalization laws of the country. The SEC would loo into the initial subscription appearing in the a rticles of incorporation to determine whether or not the corporation s articles of incorporat ion may be rejected for non-compliance with the percentage requirement. Among these corporations are: a) In the exploitation and development of natural resources the State may enter into a joint venture with Filipino citizens or corporations or associations at least 60% of whose capital is owned by Filipino citizens (Sec. 2, Art. XII, Philippine Constitution). b) In operation of public utilities, the operator must be a Filipino or the corporation must be organized under Philippine laws and at least 60% of whose capital is owned by Filipino citizens (Sec. 11, Art. XII, Philippine Constitution). c) The ownership of mass media shall be limited to Filipino citizens or corporations wholly owned (100%) and managed by Filipino citizens (Sec. 11, Art. XVI, Philippine Constitution). d) Corporations engaged in advertising must have Filipino control of at least 70% of its capital (Sec. 11, Art. XVI, Philippine Constitution). In war, the nationality of a corporation is determined by the citizenship of its controlling stoc holders (Filipinas Compania De Seguros vs. Christem, 89 Phil. 5 4). 7. The names of the incorporators and the date of its incorporation appearing in the AOI shall not be subject to amendment. Corporate Name 1. Corporate name is required by law to identify a corporation and to distinguis h it from other corporations. 2. Section 18 of the Corporation Code expressly prohibits the use of a corporate name which is identical or deceptively or confusingly similar to that of any exis ting corporation or to any other name already protected by law or is patently decepti ve, confusing or contrary to existing laws.. The policy behind the foregoing prohibi

tion is to avoid fraud upon the public that will occasion to deal with the entity concerned , the evasion of legal obligations and duties, and the reduction of difficulties of administration and supervision over corporations (Industrial Refractories Corp. vs. Court of Appeals, 390 SCRA 252). 3. To fall within the prohibition of SEC s Revised Guidelines in the Approval of Corporate and Partnership Names, two requisites must be proven, to wit:

(a) The complainant corporation acquired a prior right over the use of such corporate name; and (b) The proposed name is either: i. identical;

ii. deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law; or iii. patently deceptive, confusing or contrary to existing laws. As regards the first requisite, it has been held that the right to the exclusiv e use of a corporate name with freedom from infringement by similarity is determined b y priority of adoption. Anent the second requisite, in determining the existence of confusing similarit y in corporate names, the test is whether the similarity is such as to mislead a p erson using ordinary case and discrimination and the Court must loo at the record as well a s the names themselves. It can even cover words that are deemed generic (Philips Expor t B.V. vs. Court of Appeals, 206 SCRA 457). 4. Amendment in the articles of incorporation changing its corporate name does not extinguish the personality of the original corporation. The corporation upon such change of its name, is in no sense a new entity, nor the successor of the origin al corporation. It is the same corporation with a different name, and its character is in no respect changed. Consequently, the new. corporation is still liable for the debts and obligations of the old. corporation (Republic Planters Ban vs. Court of Appeals, 216 SCRA 738). 5. Issues involving corporate names fall within the ambit of SEC s regulatory powers (Industrial Refractories Corp. vs. Court of Appeals, 390 SCRA 252). 6. The following words shall not be used as part of a corporate or partnership names:

a. As provided by special laws: i. "Finance", "Financing" or "Finance and Investment" by corporations or partnerships not engaged in the financing business (R.A. 5980, as amended) ii. "Engineer", "Engineering" or "Architects" as part of the corporate name (R. A. 546 and R.A. 1582) iii. "Ban ", "Ban ing", "Ban er", Building and Loan Association", Trust Corporation", "Trust Company" or words of similar import by corporations or associations not engaged in ban ing business. (R.A. 337, as amended) iv. "United Nations" in full or abbreviated form cannot be part of a corporate or partnership name (R.A. 226) v. "Bonded" for corporations or partnerships with unlicensed warehouse (R.A. 245) b. As a matter of policy:

i. "Investment(s)" by corporations or partnership not organized as investment house company or holding company. ii. "National" by all stoc corporations and partnership. iii. "Asean", "Calabarzon" and "Philippines 2000. (SEC Memo Circular No. 142000).

Registration and issuance of certificate of incorporation

1. The issuance of the certificate of incorporation signifies the start of corpo rate existence.

Under Section 19 of the Corporation Code, the private corporation organized under said Code commences to have corporate existence and a juridical personalit y and is deemed incorporated from the date the Securities and Exchange Commission issu es a certificate of incorporation under its official seal. Whether it be a claim for a de facto or de jure status, issuance of certificate of incorporation brings the corporation into existence (Hall vs. Piccio, 86 Phil 60 3). 2. Doctrine of substantial compliance is applicable when there is substantial compliance with the requirements of the statute authorizing the formation of corporation, the registration of the proposed corporation becomes a matter of ri ght. 3. A corporation is required to (a) formally organize and (b) commence the transaction of its business or the construction of its wor s within 2 years from the date of its incorporation. If it does not do so, its corporate powers shall cease and th e corporation shall be deemed dissolved.

On the other hand, the corporation may have formally organized and commenced business operations within 2 years, but if it becomes continuously inoperative for at least 5 years, the same shall be a ground for suspension or r evocation of its corporate franchise or certificate of incorporation. The above rules shall not apply if it can be shown that the failure to comply is due to causes beyond the control of the corporation as may be determined by the SEC (Se c. 22, Corporation Code).

Election of board of directors or trustees 1. During the meeting in which the election shall be held, the owners of the majority of the outstanding capital stoc must be present either in person or by proxy. In case of a non-stoc corporation, majority of the members entitled to vote must b e present.

2. The election must be by ballot if requested by any voting stoc holder or memb er; 3. Voting may be in person or by proxy. 4. In stoc corporations, cumulative voting shall be observed. A stoc holder sha ll have as many votes as he has number of shares times the number of the directors up for election. This is a device to enable the minority, by concentrating their cumula tive votes on at least one candidate, to have a representative in the board of directors. C umulative voting is mandatory for the election of the board of directors in a stoc corpor ation (Villanueva, Commercial Law Review, 2009 Ed., p. 615). 5. Members of the board in a non-stoc corporation shall not be voted cumulative ly unless specifically provided for in the by-laws. (Sec. 24, Corporaton Code). 6. The candidates receiving the highest number of votes shall be elected (Sec. 2 4, Corporaton Code).

By-laws 1. By-laws are rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stoc holders or members and directors and officers with relation thereto and among themselves in their

relation to it, by-laws are indispensable to corporations in this jurisdiction. These may not be essential to corporate birth but certainly, these are required by law for an orderly governance and management of corporations. Nonetheless, failure to file them wit hin the period required by law by no means tolls the automatic dissolution of a corp oration.

By-laws may be necessary for the "government" of the corporation but these are subordinate to the articles of incorporation as well as to the Corporation Code and related statutes. There are in fact cases where by-laws are unnecessary to corpo rate existence or to the valid exercise of corporate powers (Loyola Grand Villas Home owners (South Association vs. Court of Appeals, 276 SCRA 681). 2. Every corporation formed under this Code must, within one (1) month after receipt of official notice of the issuance of its certificate of incorporation b y the Securities and Exchange Commission, adopt a code of by-laws for its government not inconsis tent with this Code (Sec.46, Corporation Code).

A corporation which has failed to file its by-laws within the prescribed period does not ipso facto lose its powers as such, and may be considered a de facto co rporation whose right to exercise corporate powers may not be inquired into collaterally i n any private suit to which such corporations may be a party (Sawadjaan vs. Court of A ppeals, 459 SCRA 516). 3. By-laws may be adopted in two ways, to wit: a) by filing the by-laws prior to incorporation; or b) by filing the by-laws after incorporation. In the first, such by-laws are required to be approved and signed by all the incorporators and submitted to the SEC, together with the articles of incorporat ion. In the second, the affirmative vote of the stoc holders representing at least a majority of the outstanding capital stoc , or of at least a majority of the memb ers in case of non-stoc corporations, shall be necessary. The by-laws shall be signed by th e stoc holders or members voting for them and shall be ept in the principal offic e of the

corporation, subject to the inspection of the stoc holders or members during off ice hours. A copy thereof, duly certified to by a majority of the directors or trust ees countersigned by the secretary of the corporation, shall be filed with the Secur ities and Exchange Commission which shall be attached to the original articles of incorpor ation (Section 46, Corporation Code). 4. Since by-laws operate merely as internal rules among the stoc holders, they cannot affect or prejudice third persons who deal with the corporation, unless, they have nowledge of the same (PMI College vs. NLRC, 277 SCRA 462).

The purpose of a by-law is to regulate the conduct and define the duties of the members towards the corporation and among themselves. They are self-imposed and, although adopted pursuant to statutory authority, have no status as public law. Therefore, it is the generally accepted rule that third persons are not bound by by-laws, except when they have nowledge of the provisions either actually or constructiv ely at the time the transaction or agreement between such third-party and the sharehold ers was entered into (China Ban ing Corp. vs. Court of Appeals, 270 SCRA 503). 5. The following are the requisites for a valid by-laws:

a) it must be consistent with the law, Corporation Code, morals and public policy; b) it must not impair obligations and contracts; c) it must be general and uniform in their operation and not directed against particular individuals; d) it must be consistent with the articles of incorporation; and e) it must be reasonable, or be discriminatory, because by-laws are meant to regulate and not restrict rights. 6. Generally, amendments must be done by the board of directors or trustees, by a majority vote thereof, and the vote of owners of at least majority of the outsta nding capital stoc , or at least majority of the members of a non stoc corporation, a t a regular of special meeting called for the purpose.

By way of exception, the board alone can amend the by-laws if there was prior delegation of such power by the stoc holders. Such delegation must have the vote of stoc holders representing two-thirds (2/3) of the outstanding capital stoc or t wo-thirds (2/3) of the members if a non stoc corporation. Note, however, that any power delegated to the board of directors or trustees to amend or repeal by-laws or adopt new by-laws shall be considered revo ed wheneve r stoc holders representing a majority of the outstanding capital stoc or a major ity of the members in non stoc corporations, shall so vote at a regular or special meeting (Sec. 48, Corporation Code). 7. The power to adopt the first original by-laws cannot be delegated to the boar d of directors or trustees. Only the power to adopt new by-laws that will supplant th e old bylaws can be validly delegated (Villanueva, Commercial Law Review, 2009 Ed., p. 6 03).

Powers of a corporation

Theories on corporate powers 1. A corporation possesses powers but by virtue of Section 2 and 45 of the Corporation Code (ultra vires act provisions), corporations are governed by the doctrine of limited or special capacity rather than the doctrine of general capacity. The la tter is not

applicable because corporate powers are limited to those expressly authorized by law or those incidental to its existence. It cannot exercise powers not given to it. 2. Partnerships have a general capacity. This means that they can perform any ac t as long as they are not prohibited by law.

Corporate powers 1. Corporate powers may be: a) Expressed power; b) Implied power; or c) Incidental power.

2. Express powers are those mentioned in the articles of incorporation, the Corporation Code and applicable special laws and regulations. These powers may b e either general or specific. The general powers are mentioned in Section 36 of th e

Corporation Code. The specific powers are scattered in various sections of the C ode li e Sections 11, 16 and 37 to 44. 3. The following are the general express powers:

a) To sue and be sued in its corporate name; b) To have a right of succession; c) To amend its articles; d) To adopt and use a corporate seal; e) To adopt by-laws; f) To acquire and hold corporate property; g) To merge or consolidate with another corporation; h) To ma e reasonable donations; i) To establish pension and retirement funds; and j) To exercise such powers as may be essential or necessary to carry out its purpose or purposes (Sec. 36, Corporation Code). Section 36 enumerates powers that a corporation enjoys in addition to the specia l powers that may be provided for in the purpose clause of the articles of incorpo ration, which would also constitute express powers (Villanueva, Commercial Law Review, 2 009 Ed., p. 603). 4. The following are the specific express powers: a) The power to extend or shorten the corporate term (Sec. 11 and 37, Corporation Code); b) The power to amend the articles of incorporation (Sec. 16, Corporation Code); c) The power to increase or decrease the capital stoc (Sec. 38, Corporation Code); d) The power to deny pre-emptive right (Sec. 39, Corporation Code); e) The power to sell or to dispose of all or substantially all of corporate property (Sec. 40, Corporation Code); f) The power to acquire own shares (Sec. 41, Corporation Code); g) The power to invest corporate funds in another corporation or business (Sec. 42, Corporation Code); h) The power to declare dividends (Sec. 43, Corporation Code); and i) The power to enter into management contracts (Sec. 44, Corporation Code); 5. Implied powers refer to those which are reasonably necessary or proper for th e implementation of the expressed powers. Section 45 of the Corporation Code autho rizes the corporation to exercise such powers as may be essential or necessary to carr y out its purpose or purposes as stated in its articles of incorporation (Teresa Electric and Power plant vs. Philippine Service Commission, 21 SCRA 198). 6. Incidental powers are the powers which a corporation as an incident to or as a consequence of its separate juridical personality or corporate existence. Exampl es are

right to succession, right to bear a name, right to adopt by-laws, right to sue and be sued and right to acquire and dispose of properties.

Power to extend or shorten corporate term 1. Majority vote of the board of directors or trustees and ratified by stoc hold ers representing at least two-thirds (2/3) of the outstanding capital stoc or by at least twothirds (2/3) of the members if it be a non stoc corporation is required for a p rivate

corporation to extend or shorten its corporate term as stated in the articles of incorporation. 2. Notice must be given of the time and place of the meeting either by mail or personal service. 3. Any dissenting stoc holder may exercise his appraisal right under the conditi ons provided by the Corporation Code (Sec.37, Corporation Code). 4. Under the doctrine of relation, when the delay in effecting or filing the ame nded articles of incorporation for the extension of corporate term is due to an insup erable interference occurring without the corporation s intervention which could not have been prevented by prudence, diligence, and care, the same will be treated as having b een effected before the expiration of the original term of the corporation.

1. The following are the requirements for the valid exercise of this power:

a) approval by majority vote of the board of directors and ratified by stoc holders representing at least two-thirds (2/3) of the outstanding capital stoc ; b) prior written notice of the proposed increase or decrease of the capital stoc stating the time and place of the meeting; c) a certificate in duplicate signed by majority of the directors countersigned by the chairman and the secretary of the stoc holders meeting; d) in case of increase in capital stoc , twenty-five percent (25%) of such increased capital must be subscribed and that at least twenty-five percent (25%) of the subscribed amount must be paid either in cash or property; e) for decrease in capital, the right of the creditors must not be prejudiced; f) filing thereof to the SEC; and g) approval of the SEC (Sec.38, Corporation Code). 2. The required twenty-five percent (25%) subscription is based on the additiona l amount by which the capital stoc is increased and not on the total capital stoc as increased. 3. Ways in order to increase or decrease authorized capital stoc are the follow ing: a) by increasing/decreasing the number of shares and retaining the par value; b) by increasing/decreasing the par value of existing shares without increasing/decreasing the number of shares; or c) by increasing/decreasing the number of shares and increasing/decreasing the par value.

Power to increase or decrease capital stoc

Power to incur, create or increase bonded indebtedness 1. Bonded Indebtedness is one secured by a mortgage on corporate property. 2. Debentures are serial obligations or notes issued on the basis of the general credit of the corporation. They are not bonded indebtedness. 3. The requirements to incur, create or increase bonded indebtedness are the sam e to that of increase or decrease of capital stoc . This power is also relevant to non-stoc corporations.

Power to deny pre-emptive rights 1. The pre-emptive right is a common law doctrine which gives existing stoc holders the preference to subscribe or purchase shares issued by the corpor ation before the shares are offered to non-stoc holders to preserve a shareholder s proportionate interest in the corporation as in voting and entitlement to divide nds.

The right exists even if not provided for in the law or in the corporate article s or by-laws. This is a personal right of a stoc holder and cannot be waived by votin g in a meeting. Only the individual stoc holder can waive the right. 2. The pre-emptive right is not the right of first refusal. The latter is a cont ractual arrangement between a stoc holder and a purchaser of shares. The stipulation may be in the articles, by-laws or in the certificate of stoc . The pre-emptive right is a common law right and is one involving a right of a stoc holder as against the corporation. The right of first refusal is one granted to the corporation or its stoc holders to be ent itled to purchase shares offered by a stoc holder when the latter decides to sell his sha res. 3. Under the old Corporation Code, the pre-emptive right covered only shares tha t are issued out of new shares resulting from the increase in the corporation s capi tal stoc . Under the existing provisions of Section 39 of the Corporation Code, the preemptive right covers also issues of existing unsubscribed shares. The coverage o f the pre-emptive right of a stoc holder is very much broader now because it extends to all issues or disposition of shares of any class.. It is so broad enough to cover no t only issues but also disposition of shares. Hence, the right covers not only new shares but even old shares because of the term disposition.. Besides it covers also any class of shar es. Hence, even treasury shares are subject to the stoc holder s right of pre-emption because it is covered by the terms, disposition. and any class.. The right now cov ers also issues of existing unsubscribed shares (See also SEC Opinion, January 14, 1 993).

4. In close corporations, the coverage is clear and extends to re-issuance even of treasury shares (Sec. 102, Corporation Code). 5. The pre-emptive right may be denied by the articles of incorporation or by an amendment thereto. Even if not denied, the pre-emptive right does not exists in certain cases li e the following: a) shares issued in compliance with laws requiring stoc offerings or minimum stoc ownership by the public; b) shares issued in good faith with the approval of stoc holders representing two-thirds (2/3) of the outstanding capital stoc ; and c) shares issued in exchange for property needed for corporate purposes or in payment of a previously contracted debt (Sec. 39, Corporation Code).

Power to sell or dispose of corporate assets 1. The following are the requirements for the valid exercise of this power: a) it must be approved by the majority of the board of directors or trustees; b) prior delegation of such power by the stoc holders, such delegation must have the vote of stoc holders representing two-thirds (2/3) of the outstanding capital stoc or two-thirds (2/3) of the members if it be a non stoc corporation; c) prior written notice of the proposed action and the time and place of the meeting shall be given to each stoc holder or member either by mail of personal service;

d) in non-stoc corporations, the vote of at least majority of the trustees in office shall be sufficient to authorize the corporation to exercise such power to sell or dispose assets (Sec.40, Corporation Code). SEC approval is not required. 2. Such power is subject to the provisions of existing laws on illegal combinati ons and monopolies. 3. Any dissenting stoc holder may exercise his appraisal right under the conditi ons provided by the Corporation Code (Sec.40, Corporation Code). 4. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporat ed. 5. There are, however, instances where the vote of stoc holders or members is no t needed, to wit: a) if such disposal is necessary in the usual and regular course of business; b) if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of the remaining business; and c) when the transaction does not cover all or substantially all of the assets of the corporation. Power to acquire own shares 1. A corporation has the power to acquire its own shares provided:

a) the acquisition is for a legitimate purpose; b) the corporation has unrestricted retained earnings in its boo s to cover the shares to be purchased or acquired; c) the terms of corporate affairs allow it; and d) the corporation acts in good faith and without prejudice to the rights of creditors and stoc holders (Sec. 41, Corporation Code). In case of redeemable shares, the corporation may acquire the same even if it ha s no unrestricted retained earnings in the corporate boo s (Sec. 8, Corporation Co de). 2. The acquisition of the shares may be for any of the following reasons; a) to eliminate fractional shares arising out of stoc dividends; b) to collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale and to purchase delinquent shares sold during said sale; or c) to pay dissenting or withdrawing stoc holders (Sec. 41, Corporation Code). 3. The elimination of fractional shares may be a result of the declaration of st oc dividends. If stoc holder X has 275 shares and the corporation declared a 5% sto c dividend, X would have now a total of 288.75 shares. Let us assume that another

stoc holder Y gets a total of 270. 25 shares as a result of such declaration, th e corporation may acquire the .75 share of X and the .25 of Y to ma e the share 1 whole share, thus, eliminating the fractional shares of X and Y. 4. If there is no bidder in the auction sale of delinquent subscriptions, the corporation may bid for the same under the conditions set forth in Section 68 of the Corporation Code. Title to the shares shall now be vested in the corporation as treasury shares.

5. Dissenting stoc holders who exercise their appraisal right may be paid by the corporation the value of their shares. In doing so, the corporation acquires its own shares (Sec. 82, Corporation Code). Power to invest corporate funds in another corporation or business 1. The requisites for the valid exercise of this corporate power are the followi ng: a) approval by a majority of the board of directors or trustees; b) ratification by the stoc holders representing at least two-thirds (2/3) of the outstanding capital stoc , or by at least two thirds (2/3) of the members in the case of non-stoc corporations, at a stoc holder's or member's meeting duly called for the purpose; and c) prior written notice of the proposed investment and the time and place of the meeting shall be addressed to each stoc holder or member at his place of residence and deposited to the addressee by mail or served personally (Sec 42, Corporation Code).

2. Any dissenting stoc holder shall have appraisal right as provided for in the Corporation Code. 3. The approval of the stoc holders or members shall not be necessary where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation (Sec. 42, Corporation Code). 4. Investment of funds includes not only investment of money but also investment of property of the corporation. If the business of a corporation is such as to r ender it necessary for it to own a certain ind of property and at times such property is not necessary to its business, it may employ the property in a business or for a pur pose which is not strictly within the primary purpose in order to prevent the same fr om remaining idle and profitable. Power to declare dividends 1. The board of directors of a stoc corporation may declare dividends out of th e unrestricted retained earnings which shall be payable in cash, in property, or i n stoc to all stoc holders on the basis of outstanding stoc held by them (Sec. 43, Corpor ation Code).

The declaration of dividends is illegal where there are no unrestricted retained

earnings or will result in rendering the corporation insolvent or unable to pay corporate debts. The directors may be held solidarily liable for damages in favor of the c orporate creditors and the stoc holders who received the dividends illegally declared may be required to refund payments made to them under the trust fund doctrine. 2. Only stoc holders are entitled to dividends, i.e. to the owners of the shares . Payment to the wrong person will not excuse the corporation from not paying the dividends to the right person or owner of shares (Aranas vs. Tutaan, 127 SCRA 82 8).

As far as the corporation is concerned, whoever owns the stoc s at the time of the declaration owns the dividend. The owner is the one who is recorded as owner in the corporate boo s even if he has previously sold his shares but not recorded i n the boo s of the corporation. As between the seller and the buyer, their contract wi ll govern (Wise vs. Meer, 78 Phil. 655). 3. Stoc holders who have not fully paid their shares are still entitled to divid ends because under Section 72 of the Corporation Code, they shall be entitled to all the rights

of stoc holders which include the right to dividends. However, when the stoc s a re delinquent, any cash dividends due shall first be applied to the unpaid balance on the subscription plus costs and expenses. On the other hand, stoc dividends shall b e withheld from the delinquent stoc holder until his subscription is fully paid (S ec. 43, Corporation Code). 4. Conditions for the declaration of dividends: a) the existence of unrestricted retained earnings out of which dividends may be declared and paid; and b) a corporate resolution of the board of directors declaring the payment of a portion or all of such earnings to the stoc holders. 5. Under the Corporation Code, dividends are to be distributed out of the unrestricted retained earnings of the corporation (Sec. 43, Corporation Code). T he term refers to the accumulated profits realized by the corporation out of its normal and con tinuous business operations and consists of undistributed earnings which have not been allocated for any managerial, contractual or legal purposes and which are free f or distribution to the stoc holders as dividends. 6. Dividends therefore, cannot be declared out of capital. Doing so is illegal a nd is contrary to the trust fund doctrine which is aimed to protect corporate creditor s. The capital is necessary for the pursuit of the business of the corporation and is i ntended to answer for the claims of creditors. Hence, a contract between a corporation and its preferred stoc holders to pay dividends even though no profits are made is contr ary to public policy and hence, void. This doctrine is also the reason why the Code allows a corporation to acquire i ts own shares only if it has unrestricted retained earnings in its boo s to cover t he shares to be purchased or acquired (Sec. 41, Corporation Code). Note also that under Section 6 of the Corporation Code, the entire consideratio n received by the corporation for its no par value shares shall be treated as capi tal and shall not be available for distribution as dividends. 7. The only dividends coming from capital are the so-called liquidating dividend s which are not really true dividends because they come form corporate assets dist ributed as a result of liquidation of corporate assets and winding up of corporate affai rs. In some jurisdictions, there are also the so-called dividends from wasting assets .. Dividends may be paid from receipts less the usual deductions, but without ma in

g any allowance for depletion from capital exhaustion. Here the corporation distribute s its capital gradually by dividends until a point may be reached where, if liquidatio n were to ta e place, there would be little or no capital left. 8. Dividends are portions of the profit set aside and ordered by the directors t o be paid ratably to the stoc holders on demand or at a fixed time. There is a differ ence between the term profits. and dividends.. A dividend is that part of the profits already set aside to be divided among stoc holders. Profits are not dividends un til so declared or set aside by the corporation. 9. Dividends may be paid in the following forms: (a) cash, (b) property, or (c) stoc . (Sec. 43, Corporation Code).

Dividends may be paid in the form of property (property dividend) if the corporation lac s cash. This may be in the form of shares of stoc of the declar ing

corporation in another corporation other than its own stoc s, or some other form s of property. If there is no cash, the corporation may also issue a scrip dividend w hich is a certificate entitling its holder at some future date to cash dividends when cash becomes available. This however, presupposes that the corporation has unrestricted retai ned earnings but has no available cash at the moment. If the dividend is partly in cash and partly in stoc s, the dividend is called composite dividend. If the stoc holder has the choice, whether to receive divide nds in cash or in stoc s, the dividend is called an optional dividend. 10. Distinctions between cash and stoc dividends are the following: (a) a cash dividend is a form of dividend distributed in cash or property. Hence, a property dividend is also a form of a cash dividend. A stoc dividend is paid in the form of stoc s of the declaring corporation. The dividend is in the form of the shares of stoc of the corporation itself. If the shares distributed are the shares owned by the corporation in another corporation, the dividend is property dividend, not stoc dividend. A stoc dividend comes from the unissued portion of the original or increased capital stoc of the corporation. Thus, assume that the capital stoc of the corporation is P10 million divided into 1 million shares. Of these shares 700,000 shares have been subscribed and are now in the hands of stoc holders (thus, the term outstanding shares). If the corporation distributes stoc dividends, the said dividends shall come from the unissued 300,000 shares and not from the 700,000 shares already issued. (b) when cash dividends are issued, the assets of the corporation are diminished to the extent of the amount of dividends declared and issued because there is actual disbursement to the stoc holders who now become the owner of the dividends. When stoc dividends are issued, there is no actual disbursement of corporate assets to the stoc holders. The corporation parts with nothing to the stoc holder. The latter receives not an actual dividend but a certificate of stoc which evidences an increase in the number of his shares in the corporation but his proportionate interest remains the same. This is sometimes termed, a capitalization of surplus.. This means that the fund represented by the new stoc has been transferred from surplus to capital stoc and no longer available for actual distribution. (c) when a cash dividend is paid to the stoc holder, the latter becomes the owner of the dividend and cannot be reached by corporate creditors in the absence of fraud. A stoc dividend is still the property of the corporation and may be reached by creditors and sold as part of corporate property. (d) cash dividends are income of stoc holders and hence, taxable to the stoc holder. Stoc dividends are capital and assets of the corporation and hence, not taxable. (e) the issuance of cash dividends is the sole prerogative of the board of

directors. No consent from the stoc holders is required. On the other hand, stoc dividends cannot be issued without the approval of the

stoc holders representing at least two-thirds (2/3) of the outstanding capital stoc (Sec. 43, Corporation Code). 11. Dividends are distributed so as stoc holders could have returns on their investments. Aside from this reason, the Corporation prohibits stoc corporation s from retaining surplus profits in excess of 100% percent of their paid-in capital sto c except when (a) justified by definite corporate expansion projects or programs approved by the board of directors; (b) when the corporation is prohibited to distribute dividen ds by a loan agreement; or (c) when such retention is necessary under special circumstan ces as when there is a need to have reserves for contingencies (Sec. 43, Corporation Co de). Note that unless so declared, a stoc holder has no actual interest yet in the corporate profits because they remain as part of the corporate property. Before an action to compel the declaration of a dividend can be maintained, it must be shown that a demand must first have been made upon the board to declare dividends. The mere presence of profits is not enough basis for the suit. There must be a clear abus e of discretion of the board and the refusal to declare dividends is unjustified. Power to enter into management contract 1. Management contract is an agreement whereby a corporation underta es to manage or operate all or substantially all of the business of another corporatio n, whether such contracts are called service contracts, operating agreements or otherwise.

Section 44 of the Corporation Code applies to situations where the contract is between two (2) corporations. It does not apply to a contract between a corporat ion and a natural person. 2. No corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the board of directors or trust ees (in case of a non-stoc corporation) and ratified by stoc holders or members owning at least the majority of the outstanding capital stoc of both the managing and the manag ed corporation, at a meeting duly called for the purpose. 3. The management contract must be approved by the stoc holders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital st oc entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stoc corporation in the following instances:

a) where a stoc holder or stoc holders representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stoc entitled to vote of the managing corporation; and b) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation 4. No management contract shall be entered into for a period longer than five (5 ) years for any one term (Sec. 44, Corporation Code).

Ultra vires acts 1. An ultra vires act is one which although not prohibited by law is an act whic h a corporation cannot perform because it is not within its expressed, implied or in cidental powers. An ultra vires act is not necessarily illegal but an illegal act is alwa ys ultra vires.

Ultra vires act is any act committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the power s conferred upon it by law (Republic vs. Acoje Mining Co., G.R. No. L-18062, Feb. 28, 1963). 2. Where the act is merely ultra vires and not illegal, it may be ratified. A va lid ratification requires the concurrence of the following elements:

a) the act to be ratified must be consummated or already done; b) the corporate creditors are not prejudiced; c) the rights of the State and the public are not involved or affected; and d) all the stoc holders must give their consent (Maria Carla vs. De la Rama Steamship Co, Inc., December 29, 1954). 3. Ultra vires act may be in the form of the following:

a) acts done beyond the powers of the corporation as provided in the law or its articles of incorporation; b) acts or contracts entered into in behalf of a corporation by persons who have no corporate authority ; and c) acts or contracts which are per se illegal as being contrary to law. 4. It is well settled in the cases of Pirovano vs. Dela Rama Steamship Co. and R epublic vs. Acoje Mining Co. that an ultra vires act can be ratified and parties may be estopped from raising such defense. However, an ultra vires contract cannot be ratified ( Phil Corporate Law, Aquino, 2006 Ed.).

Doctrine of equality of shares 1. Unless otherwise indicated in the articles of incorporations, all shares enjo y the same right and privileges and that they are subject to the same obligations and liabilities. 2. If the articles of incorporation is silent on whether a particular share, pre ferred or redeemable (as the case may be), has voting rights, but, there is no categorical statement preventing them to vote, then it is presumed that they are voting shares, becaus e all shares are presumed to be equal.

Trust fund doctrine 1. This is a doctrine which recognizes the prior rights of corporate creditors. This doctrine holds that the assets of the corporation and all other corporate proper ties are held by the corporation in trust for its creditors. Thus, in case of liquidation of corporate assets, creditors enjoy preference in payment. Any distribution of corporate ass ets without satisfying the claims of creditors is in fraud of creditors. 2. The capital stoc , property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. The subscribed capit al stoc of the corporation is a trust fund for the payment of debts of the corporation whic h the creditors have the right to loo up to satisfy their credits. Corporations may n ot dissipate this and the creditors may sue stoc holders directly for the unpaid subscription (Phil. Trust Co. v. Rivera, 44 PHIL 469).

Corporate powers of the stoc holders 1. While the board exercises powers of management, some acts cannot be performed by the board to the exclusion of its stoc holders or members. These ac ts are

not deemed mere acts of management but acts affecting the fundamental aspects of corporate life and hence, requires assent of the corporate stoc holders or membe rs. For instance, amendments to the articles of incorporation are not the sole prerogati ve of the board. The amendments require the vote or written assent of the stoc holders representing 2/3 of the outstanding capital stoc . The same vote requirement (2/ 3) and assent of stoc holders are required in the following acts: (a) to extend or shorten the corporate term (Sec. 37, Corporation Code); (b) to decrease or increase the capital stoc (Sec. 38, Corporation Code). (c) to incur, create or decrease bonded indebtedness (Sec. 38, Corporation Code). (d) to deny pre-emptive right through an amendment of the articles of incorporation (Sec. 39, Corporation Code). (e) to sell or dispose of all or substantially all of corporate assets or properties (Sec. 40, corporation Code). (f) to invest corporate funds in another corporation or business (Sec. 42, Corporation Code). (g) to declare stoc dividends (Sec. 43, Corporation Code).

2. The following corporate acts would need a vote or written assent of the stoc holders representing at least a majority of the outstanding capital stoc o r majority of its members: (a) to adopt by-laws (Sec. 46, Corporation Code); (b) to enter into a management contract with another corporation (Sec. 44, Corporation Code); (c) to grant compensation to the members of the board (Sec. 30, Corporation Code).

Corporate powers of board of directors or trustees 1. The grant of corporate power is to the board as a body, and not to the indivi dual members thereof, and that the corporation can be bound only by the collective ac t of the board. The rationale for this rule is the public policy, that it ma es better ma nagement practice for the board to sit down, to discuss corporate affairs, and decide on the basis of their consensus

It must be noted however, that the principle that the corporation can be bound only by the collective act or will of the board sets only the general rule. As w

ill be seen, a corporation can be bound even by the act of its officers, but always because of the act or default of the board. In a corporation, members or stoc holders do not have the power to bind the entity concerned since such power is vested upon the board of directors. The board must act as a body. A member of the board must not act alone; there should always be a decision from the board. 2. The concentration of powers on the board is a reflection of the centralized management. concept adopted by the Corporation Code. The stoc holders do not manage the corporation. By becoming stoc holders of a corporation which the law mandates should have a board, the stoc holders are deemed to have consented to t he management and control of the corporation by the board. 3. Acts of the board which cause injury to the corporation and its stoc holders or members do not automatically give rise to liability. Where the acts of the board were

performed in good faith and in the reasonable exercise of their duties, its acts and any consequence of such acts are not reviewable by the courts. This is nown as the business judgment rule.

Questions of policy or of management are left solely to the honest decisions of officers and directors of a corporation, and so long as they act in good faith, their orders are not reviewable by the courts (Saber vs. Court of Appeals, G.R. No. 132981, A ugust 31, 2004). A resolution or transaction pursued within the corporate powers and business operations of the corporation, and passed in good faith, is binding and valid. C ourts cannot supplant the discretion of the board on administrative and management mat ters as to which they have legitimate power of action and contracts entered into with in the corporate powers are binding upon the corporation and the courts will not interf ere unless shown to be unconscionable and oppressive as to amount to a wanton destruction of rights of the minority (Gamboa vs. Victorisano, 90 SCRA 450; Mont elibano vs. Bacolod-Murcia Milling Co,Inc., 5 SCRA 36; Philippinje Stoc Exchange, Inc. vs. Court of Appeals, 281 SCRA 232). 4. The general rule remains that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. If a corporation, however, consciously lets one of its officers, or any other agent, to act within the scope of an apparent authority, it will be estopped from denying such officer s authority (Westmont Ban , et al. vs. Inland Construction and Development Corp. & Westmont Ban , et. al. vs. Court of Appeals et al., G.R. No. 123650/ G.R. No. 12 3822, March 23, 2009). 5. While a corporation may appoint agents to negotiate for the sale of its real properties, the final say will have to be with the board of directors through it s officers and agents as authorized by a board resolution or by its by-laws. An unauthorize d act of an officer of the corporation is not binding on it unless the latter ratifies th e same expressly or impliedly by its board of directors. Any sale of real property by a corporation by a person purporting to be an agent thereof but without written au thority from the corporation is null and void. The declarations of the agent alone are g enerally insufficient to establish the fact or extent of his/her authority (Eduardo vs. L itonjua Jr., et.

al. vs. Eternit Corporation, et. al., G.R. No. 144805, 08 June 2006).

Corporate powers of the officers 1. Corporate officers have some discretion but in general deemed to execute policies formulated by the board. The board of directors and corporate officers are frequently referred to as management.

Stoc holders or members

Fundamental rights of stoc holders A stoc holder has various rights recognized by the law. These rights are as follows: (a) the right to attend and vote in person or by proxy at stoc holders meetings (Secs. 50 and 58, Corporation Code); (b) the right to elect and remove directors (Secs. 24 and 28, Corporation Code); (c) right to adopt, amend the by-laws (Secs. 46 and 48, Corporation Code);

(d) right to dividends (Sec. 43, Corporation Code); (e) right to approve certain corporate acts (Secs.37-44; 49-54, Corporation Code); (f) right to inspect corporate boo s including financial statement (Sec. 74 and 75, Corporation Code); (g) right to compel the calling of meetings of stoc holders when for any cause there is no person authorized to call the meeting (Sec. 50, Corporation Code); (h) right to transfer shares and have stoc s transferred n the corporate boo s (Sec. 63, Corporation Code); (i) right to issuance of certificates of stoc or other evidence of stoc ownership (Sec. 63, Corporation Code); (j) right of pre-emption (Sec. 39, Corporation Code); ( ) right to recover stoc s unlawfully sold during delinquency sale (Sec. 69, Corporation Code); (l) right to bring suits; (m) right to enter into a voting trust agreement (Sec. 59, Corporation Code); (n) appraisal right/ right to withdraw from the corporation (Sec. 81, Corporation Code); and (o) right to have the corporation dissolved voluntarily (Secs. 118-119, Corporation Code).

Proxy 1. Section 58 of the Corporation Code allows stoc holders and members to vote by proxy in all meetings of stoc holders or members. 2. A proxy actually gives rise to an agency to vote. It is a purely personal act of the shareholder and is incident of ownership of shares. In 1975, the SEC had opined that a provision in the by-laws prohibiting the use of proxy is contrary to law (SEC Op inion, June 3, 1975). The right to vote by proxy, however, may now be denied by the art icles of incorporation or by the by-laws of a non-stoc corporation (Sec. 89, 2nd par., C orporation Code). 3. A proxy may be viewed as the formal authority given by a shareholder to another person so the latter may vote in the absence of the shareholder. The ter m proxy may also refer to the representative. 4. Proxy, as an authority has a particular form. It must be in writing, signed b y the stoc holder or member and filed before the scheduled meeting with the corporate secretary. 5. As a rule, the proxy shall be valid only for the meeting for which it is inte nded, unless otherwise provided in the proxy. No proxy, however, shall be valid for mo re than five (5) years (Sec. 58, Corporation Code). 6. Voting by proxy is recognized only for the meeting of stoc holders and members. Directors cannot be represented by proxies during board meetings. Under the

last paragraph of Section 25 of the Corporation Code directors or trustees cannot attend or vote by proxy at board meetings.. 7. The power to appoint a proxy is purely personal. The right to vote is insepar able from the right of ownership of stoc . Therefore, to be valid, a proxy must have been given by the person who is the legal owner of the stoc and is entitled (SEC Opi nion, Sept. 9, 1991).

8. The by-laws may impose restrictions as to the person who can be proxies and t he manner of voting them. In the absence of such provision, anybody can be appointe d as proxy without limitation as to the number of members to be represented (SEC Opin ion, Sept. 8, 1995). 9. A proxy may be given to two or more persons jointly (SEC Opinion, March 12, 2002). 10. One who has given a proxy the right to vote may revo e the same at anytime, unless, said proxy is coupled with interest even though it may appear by its ter ms to be revocable. Proxy may be revo ed in writing, orally or by conduct (SEC Opinion, Oct. 28, 1991). Voting trust agreement 1. This is a written agreement whereby one or more stoc holders of a stoc or a non-stoc corporation transfers his shares to another to act as his trustee for the purpose of vesting in such person voting or other rights pertaining to the shares for a certain period fixed by law, not exceeding five (5) years under Section 59 of the Corpor ation Code, and upon such terms and conditions agreed upon. 2. One reason for a voting trust agreement is when it is required as a condition for a loan made by the shareholder. The agreement shall li ewise not exceed five (5) y ears but shall automatically expire once the loan is fully paid even before the lapse of five (5) years (Sec. 59, Corporation Code). 3. The trustee in the agreement is not the true owner of the shares. He is said to be vested only with a colorable title for the primary purpose of exercising voting rights. Consequently even if the true owner is no longer the stoc holder of record becau se of the voting trust agreement, he may still exercise the right to inspect the corpo rate boo s concurrently with the voting trustee (Sec. 59, par. 3, Corporation Code). 4. A voting trust agreement must be in writing and must be notarized. A certifie d copy of the same shall be filed with the corporation and with the SEC, otherwise , the voting trust agreement shall be ineffective and unenforceable. The certificate o f stoc of the shareholder shall be cancelled and new ones shall be issued in the name of t he trustee but the corporate boo s shall indicate that the transfer is made only pu rsuant to a voting trust agreement (Sec. 59, Corporation Code). 5. The distinctions between proxy and a voting trust agreement are the following : (a) in a proxy, there is no transfer in the title of the shares while in a votin g

trust agreement, there is a transfer of title; (b) in a proxy, when the owner is present in the meeting, the proxy cannot vote, voting trust agreement, on the other hand, trustee can vote even if the owner is present; (c) generally, the proxy is effective only for the intended meeting while voting trust agreement is effective even after one meeting but not to exceed five (5) years; and (d) proxy is revocable generally unless it is coupled with an interest while a voting trust agreement is generally irrevocable.

Proprietary rights of stoc holders 1. The following are considered proprietary rights of stoc holders:

(a) right to dividends;

(b) (c) (d) (e)

right of appraisal; right to inspect; preemptive right; and right to vote.

Right to dividends of stoc holders 1. Dividends are distributed so as stoc holders could have returns on their investments. 2. Note that unless so declared, a stoc holder has no actual interest yet in the corporate profits because they remain as part of the corporate property. Before an action to compel the declaration of a dividend can be maintained, it must be shown that a demand must first have been made upon the board to declare dividends. The mere presence of profits is not enough basis for the suit. There must be a clear abus e of discretion of the board and the refusal to declare dividends is unjustified. 3. Stoc holders who have not fully paid their shares are still entitled to divid ends because under Section 72, they shall be entitled to all the rights of stoc holde rs which include the right to dividends. However, when the stoc s are delinquent, any cas h dividends due shall first be applied to the unpaid balance on the subscription p lus costs and expenses. On the other hand, stoc dividends shall be withheld from the deli nquent stoc holder until his subscription is fully paid (Sec. 43, Corporation Code). 4. The right of the stoc holders to be paid dividends accrues as soon as the declaration is made in accordance with Section 43 of the Corporation Code. From such time, the stoc holder can already demand payment thereof (SEC Opinions, October 10, 1992 & November 12, 1986).

Appraisal right of stoc holders 1. The appraisal right refers to the right of the stoc holder to demand payment of the fair value of his shares, after he dissents from a proposed corporate act involv ing a fundamental change in the corporation. The right however, cannot be exercised fo r any reason (except in close corporations). The following are the allowable reasons f or the

exercise of the appraisal right: (a) in case there is an amendment to the articles of incorporation which has the effect of changing the or restricting the rights of a stoc holder or of a class of shares (Sec. 81, Corporation Code); (b) in case there is an extension or a shortening of the term of the corporation (Sec. 81, Corporation Code). Under Sec. 37, the appraisal right shall be exercised when there is an extension (not shortening) of the corporate term. Sections 81 and 37 may be harmonized. (c) in case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets (Sec. 81, Corporation Code); (d) in case of merger or consolidation (Sec. 81, Corporation Code); (e) in case of investment by the corporation in another corporation or business (Sec. 42, Corporation Code); and

(f) in a close corporation, a stoc holder may exercise the right for any reason, when the corporation has sufficient assets in its boo s (Sec. 105, Corporation Code). 2. This right is exercised when the withdrawing stoc holder ma es a written demand within thirty (30) days after the vote is ta en on the proposal he object s to. Within ten (10) days from the written demand, he submits his shares for notation of being a dissenting stoc holder. The corporation shall pay the stoc holder upon surrender of the certificate, the fair value of his shares within thirty (30) da ys after demanding payment for his shares (Sec. 86, Corporation Code). 3. From the time of the demand for payment, all rights accruing to the shares ar e suspended, including right to dividends. The only right not suspended is the rig ht to receive payment of the fair value of the shares. If however, the stoc holder is not paid within thirty (30) days after the award, his voting and dividend rights shall im mediately be restored (Sec. 83, Corporation Code).

Stoc holders right to inspect corporate boo s 1. The basic boo s and records to be ept by a corporation are the following:

(a) records of all business transactions (Sec. 74, Corporation Code);

Code). 2. The records of all business transactions of the corporation and the minutes o f the meetings shall be open to inspection by: (a) any director or trustee;

(b) minutes of all meetings directors or trustees (Sec. (c) other boo s and records (d) stoc and transfer boo

of all stoc holders or members or of the board of 75, par. 2, Corporation Code); required by law; and for stoc corporations (Sec. 74, par. 4, Corporation

(b) stoc holder or member;

The right to inspect is based on the stoc holders right of ownership of stoc s and a right to the property of the corporation as investors. The right, therefor e, is an incident to ownership and self-protection (Angbuya vs. Ang, 573 SCRA 129). 3. The inspection shall be at reasonable hours in business days. This right incl udes the right to demand, in writing, a copy of the excerpts from said records or min utes, at his expense. A violation of this right shall ma e the erring officer or agent of the corporation liable for damages and shall be guilty of an offense punishable unde r Art. 144 of the Corporation Code. If the refusal is due to a resolution of the board, the members of the board who voted for such refusal shall be liable (Sec. 74, Corpor ation Code). If a corporation wholly owns a subsidiary corporation, the latter s boo s may also be inspected even if the stoc holder is only a stoc holder of the parent co rporation alone and not of the subsidiary. The subsidiary is wholly owned by the parent corporation and under its control. Thus, the stoc holder has an interest in what the parent company owns (Go ongwei vs. SEC, 89 SCRA 338). 4. A defense against the right to inspection is that the person demanding the examination has improperly used the information before or is not acting in good faith or for a legitimate purpose (Sec. 74, Corporation Code). If the purpose is to obtai n business secrets or to reveal said secrets, to find faults to bring nuisance suits , or to e mbarrass

the company and cause depression of the value of corporate assets, then the righ t of inspection may be denied. To avoid any of these, the corporation may require tha t the person inspecting should state his purpose for inspection. Hence, if the purpose is valid as when the purpose is to ascertain whether the corporation is managed well, to ascertain the financial condition of the corporation, or to obtain simply a list of stoc holders for purposes of proxy solicitation, then the inspection is for a le gitimate purpose and cannot be denied. 5. If what is to be inspected is the financial statements of the corporation, th ere must be a written request for the same. Within ten (10) days from receipt of the request, the requested statement shall be given which shall include a balance sheet and a profit and loss statement showing the assets and liabilities and the result of its oper ations (Sec. 75. Corporation Code). 6. If the inspection is denied, the remedy is mandamus plus damages. A criminal suit under Section 144 of the Corporation may also lie.

Pre-emptive right of stoc holders 1. The pre-emptive right is a common law doctrine which gives existing stoc holders the preference to subscribe or purchase shares issued by the corpor ation before the shares are offered to non-stoc holders to preserve a shareholder s proportionate interest in the corporation as in voting and entitlement to divide nds.

2. The right exists even if not provided for in the law or in the corporate arti cles or by-laws. This is a personal right of a stoc holder and cannot be waived by votin g in a meeting. Only the individual stoc holder can waive the right.

Stoc holder s right to vote 1. Stoc holders have the right to vote in the election of the members of the boa rd. They may also vote to remove a director (Secs. 24 and 28, Corporation Code). The y have the right to approve certain corporate acts (Sec. 37 to 44 and 49 to 54, Corpora tion Code). 2. The right to vote does not depend on the existence of a certificate of stoc

which is issued only upon full payment of the subscription (Sec. 64, Corporation Code) but holders of shares not fully paid as long as these are not delinquent, shall have all the rights of a stoc holder (Sec. 72, Corporation Code). 3. In case the shares are pledged or mortgaged, the pledgor or mortgagor shall h ave the right to attend and vote at meetings of stoc holders, unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing a s recorded on the appropriate corporate boo (Sec. 55, Corporation Code). 4. In case shares are jointly owned by two or more persons, the consent of all t he co-owners is necessary to vote the shares. If there is a proxy, the same must be signed by all authorizing one or another to vote such shares. If the shares are owned in a n and/or. capacity, anyone of the joint owners can vote the share or appoint a prox y (Sec. 56, Corporation Code).

Remedial rights

1. There are three

inds of suits which a stoc holder may file. They are:

(a) individual suit is a suit brought by an individual stoc holder whose right has been transgressed as when his right to vote, to receive dividends or to inspect corporate boo s has been unlawfully denied. (b) representative suit is one brought by the stoc holders whose common rights have been denied ad there is a common question of law or fact. (c) derivative suit is a suit brought by a stoc holder n the name of the corporation where the board refuses to sue and after exhausting all intracorporate remedies.

Derivative suit 1. This is a suit defined by the Court as a suit of a shareholder to enforce a corporate cause of action (Chua vs. Court of Appeals, 278 SCRA 216). Here, the c orporation is a necessary party to the suit because it is the real party in interest. Hence , to be a derivative suit, the corporation must be impleaded as a party. The cause of acti on does not belong to the stoc holder but belongs to the corporation.

2. The suit is brought by a stoc holder or some of the stoc holders to redress a wrong committed against the corporation and when the directors refuse to sue. Un der the law, the power to sue is lodged in the board but when the board does not wan t to sue, the corporation will be at a disadvantage. When the board does not sue, a d erivative suit is in order as a means of protecting the corporate interests (Filipinas Por t services, Inc. vs. Go, 518 SCRA 453; R.N. Symaco Trading Corp. vs. Santos, 467 SCRA 312). 3. The right to institute a derivative suit is not based on any express provisio n of the Corporation Code or even the Securities Regulation Code. It is impliedly rec ognized

when the board or its officers violate their fiduciary duties. Hence, the right has been extended to a situation where a stoc holder suffers a special injury for which h e is without redress if such injury is a result of mismanagement, waste or dissipatio n of corporate assets (Yu vs. Yu ayguan, G.R. No. 177549, June 18, 2009). 4. The jurisprudential requisites in bringing a derivative suit are: (a) the shareholder bringing the suit should be a shareholder as of the time of the act or transaction complained of, and at the time of the filing of the suit; the number of his shares are immaterial; (b) the shareholder must have exhausted intra-corporate remedies li e demanding from the board for the appropriate relief but the board has failed or refused to heed the plea; and (c) the cause of action should be owned by the corporation, the harm being caused to the corporation and not to the particular stoc holder bringing the suit (San Miguel Corporation vs. Kahn, 176 SCRA 447; Gochan vs. Young, 354 SCRA 207; R.N. Symaco Trading Corporation vs. Santos, 467 SCRA 312; Reyes vs. Regional Trial Court of Ma ati, Br. 142, 561 SCRA 593).

harassment suit. It also cannot be of the court.

Obligations of stoc holders 1. The following are obligations bore by the stoc holders of a corporation:

(a) liability to the corporation for unpaid subscription;

Under the Interim Rules for Intracorporate remain a stoc holder during the pendency of is available and the suit is not a nuisance or compromised or settled without the approval

Controversies, the stoc holder must the action; that no appraisal right

Meetings

1. Meetings of directors, trustees, stoc holders, or members may be regular or special (Sec. 49, Corporation Code). Regular meetings of stoc holders or members shall be held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the board of directors or trustees. Special meetings of stoc holders or members shall be held when deemed necessary or on a date fixed in the by-laws (Sec. 50, Corporation Code). 2. Written notice of regular meetings shall be sent to all stoc holders or membe rs of record at least two (2) wee s prior to the meeting, unless a different period is required by the by-laws Written notice of special meetings shall be sent at least one (1) wee prior to the meeting, unless otherwise provided in the by-laws. Notice of any meeting may be waived, expressly or impliedly, by any stoc holder or member. Failure to give notice would render a meeting voidable at the instance of an absent stoc holder, who was not notified of the meeting (Board v. Tan, 105 Phil. 426(1959). 3. Attendance to a meeting despite want of notice will be deemed implied waiver. All proceedings had and any business transacted at any meeting of the stoc holde rs or members, if within the powers or authority of the corporation, shall be valid ev en if the meeting be improperly held or called, provided all the stoc holders or members o f the corporation are present or duly represented at the meeting. 4. Stoc holders' or members' meetings, whether regular or special, shall be held in the city or municipality where the principal office of the corporation is locate d, and if practicable, in the principal office of the corporation.

(b) liability (c) liability subscription; (d) liability (e) liability (f) liability

to the corporation for the interest of unpaid subscription; to the creditors of the corporation on the unpaid for watered stoc ; for dividend unlawfully paid; and for failure to create a corporation.

Metro Manila shall, for purposes of this section, be considered a city or municipality. All proceedings had and any business transacted at any meeting of the stoc holders or members, if within the powers or authority of the corporation, s hall be valid even if the meeting be improperly held or called, provided all the stoc ho lders or members of the corporation are present or duly represented at the meeting (Sec.5 1, Corporation Code). 6. Whenever, for any cause, there is no person authorized to call a meeting, the SEC, upon petition of a stoc holder or member on a showing of good cause therefo re, may issue an order to the petitioning stoc holder or member directing him to cal l a meeting of the corporation by giving proper notice required by this Code or by t he bylaws. The petitioning stoc holder or member shall preside thereat until at least a

majority of the stoc holders or members present have been chosen one of their nu mber as presiding officer (Sec. 50[4], Corporation Code).

The SEC may only direct the calling of the meeting if there is no person authorized to do so or in the event the person authorized in the by-laws refuses to call for a meeting on the date fixed in the by-laws (SEC Opinion, July 13, 1995). 7. Quorum shall consist of the stoc holders representing a majority of the outstanding capital stoc or a majority of the members in the case of non-stoc corporations unless otherwise provided for in this Code or in the by-laws (Sec.5 2, Corporation Code). 8. Boo of minutes of meetings of the stoc holders must set forth the following: (a) (b) (c) (d) (e) (f) the time and place of holding the meeting; how the meeting was authorized; the fact that notice was given; whether the meeting was regular or special; if special, its object; those present and absent; and every act done or ordered done at the meeting.

The following shall be stated in the boo of minutes only upon demand of any stoc holder or member: (a) the time when any director, trustee, stoc holder or member entered or left the meeting; (b) the yeas and nays ta en on any motion or proposition, and a record thereof carefully made; and (c) the protest of any director, trustee, stoc holder or member on any action or proposed action (Sec 74[1], Corporation Code).

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REMINDERS IN CORPORATION LAW

Board of directors or trustees Repository powers 1. Unless otherwise provided in this Code, the corporate powers of all corporati ons formed under the Corporation Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors (BOD ) or board of trustees (BOT) to be elected from among the holders of stoc s, or where there is no stoc , from among the members of the corporation (Sec.23, Corporation Code). 2. Note that Section 23 states Unless provided in this Code.. In a close corporat ion, the articles of incorporation may provide that the business of the corporation s hall be managed by the stoc holders of the corporation, rather than by the board of dire ctors. So long as this provision in the articles is in effect, a meeting of stoc holder s need not be called to elect the members of the board because the stoc holders shall be deeme d to be

the directors. Hence, the stoc holders of the corporation shall be subject to al l the liabilities of directors (Sec. 97, Corporation Code). 3. Section 23 of the Corporation Code in defining the powers of the board indica tes that the powers of the board do not come from a delegation by the stoc holders o r members of the corporation. The powers of the board are original and undelegated . The board, therefore, has powers because of the law and not because of a conferment of powers by the stoc holders or members thereof. 4. The concentration of powers on the board is a reflection of the centralized management. concept adopted by the Corporation Code. The stoc holders do not manage the corporation. By becoming stoc holders of a corporation, which the law mandates should have a board, the stoc holders are deemed to have consented to t he management and control of the corporation by the board. 5. Authority of BOD can be delegated to agents, officers, or committees (YU Chuc v Kong Li Po, 46 Phil 608). Delegation may be explicit, implicit, or based on exig encies of the business (Board of Liquidators vs. Kalaw, G.R. No. L-24109, August 10, 1967) .

The BOD may delegate its corporate powers to either an executive committee or officials or contracted managers. The delegation, except for the executive commi ttee, must be for specific purposes.

The delegation ma es the corporate officers the agents of the corporation. For such officers to be deemed fully clothed by the corporation to exercise a power of the BOD, the latter must specially authorize them to do so (ABS-CBN Broadcasting Cor p vs. Court of Appeals, 301 SCRA 572). 6. A board is needed to perform the physical acts which the corporation itself cannot perform, the corporation having no actual physical existence. The board represents the corporate body and the existence of which grows out of necessity because of the inability of the corporation to act for itself. 7. The acts of the board are usually expressed through resolutions adopted durin g board meetings. The board exercises powers as a body and individually through ea ch member of the board. The acts of a director or even by the highest officer canno

t be deemed a corporate act unless there exists a valid delegation from the board as a body. Any disposition of corporate property, therefore, cannot be done by an officer a lone. Such disposition if not authorized by the board does not bind the corporation (A F Realty & Development Corporation vs. Dieselman Freight Services, Inc., G.R. No. 111448, January 16, 2002). 8. The general rule remains that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. If a corporation, however, consciously lets one of its officers, or any other agent, to act within the scope of an apparent authority, it will be estopped from denying such officer s authority (Westmont Ban , et al. vs. Inland Construction and Development Corp. & Westmont Ban , et. al. vs. Court of Appeals et al., G.R. No. 123650/ G.R. No. 12 3822, March 23, 2009). 9. While the board exercises powers of management, some acts cannot be performed by the board to the exclusion of its stoc holders or members. These ac ts are not deemed mere acts of management but acts affecting the fundamental aspects of corporate life and hence, requires assent of the corporate stoc holders or membe rs. For instance, amendments to the articles of incorporation are not the sole prerogati ve of the

board. The amendments require the vote or written assent of the stoc holders representing two-thirds (2/3) of the outstanding capital stoc . The same vote requirement two-thirds (2/3) and assent of stoc holders are required in the foll owing acts:

(a) to extend or shorten the corporate term (Sec. 37, Corporation Code); (b) to decrease or increase the capital stoc (Sec. 38, Corporation Code); (c) to incur, create or decrease bonded indebtedness (Sec. 38, Corporation Code); (d) to deny pre-emptive right through an amendment of the articles of incorporation (Sec. 39, Corporation Code); (e) to sell or dispose of all or substantially all of corporate assets or properties (Sec. 40, corporation Code); (f) to invest corporate funds in another corporation or business (Sec. 42, Corporation Code); and (g) to declare stoc dividends (Sec. 43, Corporation Code). 10. The following corporate acts would need a vote or written assent of the stoc holders representing at least a majority of the outstanding capital stoc o r majority of its members:

(a) to adopt by-laws (Sec. 46, Corporation Code); (b) to enter into a management contract with another corporation (Sec. 44, Corporation Code); and (c) to grant compensation to the members of the board (Sec. 30, Corporation Code). Tenure, qualifications and disqualifications of directors 1. The directors or trustees shall hold office for one (1) year until their succ essors are elected and qualified (Sec.23, Corporation Code). 2. The qualifications provided under the Corporation Code for board of directors or trustees are the following:

(a) every director must own at least one (1) share of the capital stoc of the corporation of which he is a director, which share shall stand in his name on the boo s of the corporation (Sec.23, Corporation Code); (b) a majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines (Sec.23, Corporation Code); (c) only natural persons may be directors or trustees; (d) must be of legal age; and (e) other qualifications as may be prescribed in special laws or regulations or in the by-laws of the corporation. 3. In order to be eligible as a director, what is material is the legal title, n ot beneficial ownership of the stoc s appearing on the boo s of the corporation.

A person who does not own a stoc at the time of his election or appointment does not disqualify him as a director if he becomes a shareholder before assumin g the duties of his office. A person who is not a stoc holder cannot be a director but he can be an ex offic io member without voting rights in the board (Grace Christian HS vs. CA G.R. No. 11 1155, Oct. 23, 1997).

4. The disqualifications of directors are as follows: (a) any director who ceases to be the owner of at least one (1) share of the capital stoc of the corporation of which he is a director shall thereby ceases to be a director (Sec.23, Corporation Code);

(b) conviction by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years; and (c) violation of the Corporation Code committed within five (5) years prior to the date of his election or appointment (Sec.27, Corporation Code). 5. If no election is held, the directors and officers shall hold over until thei r successors are elected. This rule on hold over directors and officers applies to a going concern where there is no brea in the exercise of the duties of the officers an d directors (SEC Opinion, December 15, 1987).

Elections 1. The following are certain principles in connection with the election of the members of the board: (a) during the meeting in which the election shall be held, the owners of the majority of the outstanding capital stoc must be present either in person or by proxy. In case of a non-stoc corporation, majority of the members entitled to vote must be present; (b) the election must be by ballot if requested by any voting stoc holder or member; (c) in stoc corporations, cumulative voting shall be observed; and (d) the candidates receiving the highest number of votes shall be elected (Sec. 24, Corporaton Code). 2. A stoc holder shall have as many votes as he has number of shares times the number of the directors up for election. This is a device to enable the minority , by concentrating their cumulative votes on at least one candidate, to have a repres entative in the board of directors. Cumulative voting is mandatory for the election of th e Board

of directors in a stoc corporation (Villanueva, Commercial Law Review, 2009 Ed. , p. 615).

unless specifically provided for in the by-laws. (Sec. 24, Corporaton Code). In non-stoc corporations, the default rule in the election of trustees is straight voting. U nli e the mandatory rule for cumulative voting for stoc corporations, in non-stoc corpor ations, it is possible to provide for other types of voting in either the articles of in corporation or the by-laws of the corporation. 3. Any provision in the by-laws or the practice of the corporation giving a stoc holder a permanent seat in the board of directors or trustees would be agai nst the provisions of Sections 28 and 29 of the Corporation Code which require members o f the board of corporation to be elected. 4. Unless the articles of incorporation or the by-laws provide for a greater maj ority, a majority of the number of directors or trustees as fixed in the articles of in corporation shall constitute a quorum for the transaction of corporate business (Sec. 25, Co rporation Code).

Removal of board of directors or members

Members of the board in a non-stoc

corporation shall not be voted cumulatively

1. Under the Corporation Code, the authority to remove directors is the prerogat ive of the stoc holders or members of the corporation reposed under Section 28. Henc e, they cannot indirectly usurp or disregard the said power of the stoc holders (SEC Opi nion, June 3, 1981). 2. The following are the underlying rules in the removal of a director or a memb er: (a) any director or trustee of a corporation may be removed from office by a vote of the stoc holders holding or representing at least two-thirds (2/3) of the outstanding capital stoc ; (b) if the corporation be a non-stoc corporation, by a vote of at least twothirds (2/3) of the members entitled to vote; (c) such removal shall ta e place either at a regular meeting of the corporation or at a special meeting called for the purpose; (d) in either case, after previous notice to stoc holders or members of the corporation of the intention to propose such removal at the meeting; (e) if the director was elected by the minority, there must be cause for removal; (f) a director who was elected by the majority may be removed with or without cause. The requirement of removal with a cause is only limited to those who are elected by the minority; and (g) there is no need to follow the procedure for removal required under Section 28 if the director is disqualified (SEC Opinion, February 3, 1992).

Filling of vacancies 1. Vacancies in the board may be filled up either by the remaining directors or by the stoc holders or members depending on the reason for the vacancy. [If the vac ancy occurs because a director was removed by the stoc holders, the stoc holders shal l fill up the vacancy. The rule applies when the vacancy is due to expiration of the term. If there is no more quorum, then the stoc holders or members shall fill-up the vacancy (S ec. 29, Corporation Code). 2. If there is a vacancy because of an increase in the number of directors as a result of an amendment of the by-laws or articles, then the vacancy shall be filled up by the stoc holders or members. In all other cases, the vacancy shall be filled up by a vote of at least a majority of the remaining directors or trustees.

Compensation of directors 1. As a rule, directors have no compensation. They only receive reasonable per diems. The exception is when compensation is provided for in the by-laws or give n by a voter of at least a majority of the outstanding capital stoc (Sec. 30, Corporat ion Code). 2. Directors or trustees are not entitled to salary or other compensation when t hey perform nothing more than the usual and ordinary duties of their office. This ru le is founded upon a presumption that directors or trustees render services gratuitous ly and that the return upon their shares adequately furnishes the motives for service, without compensation (Western Institute of Technology vs. Salas, G.R. No. 113032, August 21, 1997). 3. The term per diem is limited to pay for a day s services. They are allowances of money for expenses each day.

4. Compensation on the other hand, does not imply an immediate payment or direct return nor the payment of cash fare or its equivalent. It is treated as s ynonymous to salary, thus, it includes salaries, remunerations, bonuses, gifts or any incent ives for services rendered for the corporation (SEC Opinion, May 21, 1992). 5. The remedies in case of clear abuse of discretion to give salaries or in case of compensations or per diems that are contrary to the provisions of the Corporatio n Code include a derivative suit (SEC Opinion, August 4, 1993). Disloyalty of directors

1. A director who ta es advantage of his position (by virtue of his office), acq uires for himself a business opportunity which should belong to the corporation, and i n the process obtains profits to the prejudice of the corporation, shall account for s uch profits and he is mandated by the law to refund the same to the corporation. The duty to refund applies even if the director used and ris ed his own funds in the process (Sec. 34, Corporation Code). In effect, as a result of his disloyalty, he holds the profit s as a mere trustee of the corporation. 2. He may, however, eep the profits and not be obligated to effect a refund if his act of disloyalty has been ratified by a vote of the stoc holders owning or represen ting at least two-thirds (2/3) of the outstanding capital stoc . 3. Doctrine of corporate opportunity provides that where a director, by virtue o f his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he is guilty of disloyalty and thus, must account to the latter for all such profits by refundin g the same.

Except when such act is ratified by a vote of the stoc holders owning or

representing at least two-thirds (2/3) of the outstanding capital stoc (Sec. 34 , Corporation Code). The same rule applies even though the director ris ed his own funds in the venture (Sec. 34, Corporation Code). 4. Section 34 of the Corporation Code applies if the corporate opportunity is an y of the following:

(a) one which the corporation is financially able to underta e; (b) from its nature, is in line with corporations business and is of practical advantage to it; and (c) one in which the corporation has an interest or a reasonable expectancy Philippine Corporate Law, Aquino, 2006 Ed.).

5. The doctrine of corporate opportunity is precisely a recognition by the court s that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interests. This doctrine rests fundamentally on the unfa irness, in particular circumstances, of an officer or director ta ing advantage of an oppor tunity for his own personal profit when the interest of the corporation justly calls for pr otection (Go ongwei, Jr. vs. SEC, G.R. No.L-45911, April 11, 1979).

Business judgment rule 1. Acts of the board which cause injury to the corporation and its stoc holders or members do not automatically give rise to liability. Where the acts of the board were

performed in good faith and in the reasonable exercise of their duties, its acts and any consequence of such acts are not reviewable by the courts. 2. Questions of policy or of management are left solely to the honest decisions of officers and directors of a corporation, and so long as they act in good faith, their orders are not reviewable by the courts (Saber vs. Court of Appeals, G.R. No. 132981, A ugust 31, 2004). 3. A resolution or transaction pursued within the corporate powers and business operations of the corporation, and passed in good faith, is binding and valid. C ourts cannot supplant the discretion of the board on administrative and management mat ters as to which they have legitimate power of action and contracts entered into with in the corporate powers are binding upon the corporation and the courts will not interf ere unless shown to be unconscionable and oppressive as to amount to a wanton destruction of rights of the minority (Gamboa vs. Victorisano, 90 SCRA 450; Mont elibano vs. Bacolod-Murcia Milling Co,Inc., 5 SCRA 36; Philippine Stoc Exchange, Inc. v s. Court of Appeals, 281 SCRA 232).

Solidary liabilities for damages 1. The liabilities of the board arise from a breach of the following duties:

(a) duty of (b) duty of (c) duty of 2. The duty

loyalty; obedience; and diligence. of obedience requires the performance of acts in accordance with all

rules and laws affecting the corporation. This includes the duty not to perform ultra vires acts. The duty of loyalty involves allegiance to the corporation, a loyalty that is undivided and an allegiance that is not influenced by any other consideration ex cept the loyalty addressed to the welfare of the corporation. The duty of diligence requi res that members of the board must exercise due care in the performance of their duties a nd in

the exercises of their prerogatives. 3. The first set of the source of liability of members of the board is found in Sec. 31 of the Corporation Code. Members of the board are liable for the following: (a) willfully and nowingly voting for or assenting to patently unlawful acts; (b) being guilty of gross negligence or bad faith in directing the affairs of th e corporation; and (c) acquiring any personal or pecuniary interest in conflict with their duty as such directors or trustees. 4. The nature of the liability of the members of the board is joint and several (solidary) in favor of the (a) corporation, (b) stoc holders or members, and oth er persons. 5. From the tenor of the law, it is apparent that merely voting for or assenting to unlawful acts does not give rise to liability. For liability to arise, members o f the board must do so willfully and nowingly and that the illegality of the act is patent. Also, negligence is not a source of liability unless that negligence is gross. Simple negligence therefore, will not ma e the director or trustee liable.

Liability for watered stoc s

1. Directors are also liable for watered stoc s. The liability arises when any d irector or officer of a corporation consents to the issuance of stoc s for a considerati on less than its par or issued value. The liability is also imposed on those who despite now ledge of the issuance of watered stoc s, does not oppose or object to the same in writing filed with the corporate secretary. The erring director shall be solidary liable with the stoc holder concerned in favor of the corporation and its creditors for the diff erence (Sec. 65, Corporation Code). 2. Watered stoc s are those issued for a consideration less than its par or issu ed value or for a consideration in any form other than cash, valued in excess of it s fair value.

Personal liability 1. Personal liability of corporate directors, trustees or officers attaches only when:

(a) they assent to a patently unlawful act of the corporation, or when they are guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stoc holders or other persons; (b) they consent to the issuance of watered down stoc s or when, having nowledge of such issuance, do not forthwith file with the corporate secretary their written objection; (c) they agree to hold themselves personally and solidarily liable with the corporation; or (d) they are made by specific provision of law personally answerable for their corporate action (J. F. McLeod vs. NLRC, et al., G.R. No. 146667, January 23, 2007).

Responsibility for crimes

1. A corporation itself cannot be criminally liable for felonies described in th

e Revised Penal Code or in special laws because it cannot perform physical overt a cts of a crime. It cannot even be imprisoned. 2. Nevertheless, the officers of the corporation may, in their individual capaci ties be liable for crimes done in behalf of the corporation. While the act of the office rs may impose certain obligations on the corporation because of the criminal act of its officers, the officer who performed the criminal act must assume the criminal liability (E xecutive Secretary vs. Court of Appeals, 429 SCRA 81; Singian, Jr. vs. Sandiganbayan, 478 SCRA 348).

Special fact doctrine 1. Directors owe no fiduciary duty to stoc holders but they may deal with them a t arm s length. No duty to disclose facts nown to the director or officer. 2. Conceding the absence of a fiduciary relationship in the ordinary case, court s nevertheless hold that where special circumstances of facts are present which ma e it inequitable for the director to withhold information from the stoc holder, the d uty to disclose arises and concealment is fraud. This is nown as the special facts doc trine (Strong vs. Repide, 213 U.S. 419). Inside information

1. The fiduciary position of insiders, directors, and officers prohibits them fr om using confidential information relating to the business of the corporation to be nefit themselves or any competitor corporation in which they may have a mere substanti al interest. 2. The liability of a director or officer guilty of using inside information is to the corporation and not to any individual stoc holder. 3. Since loss and prejudice to the corporation is not a requirement for liabilit y, the corporation has a cause of action as long as there is unfair use of inside infor mation. 4. It is inside information if it is not generally available to others and is ac quired because of the close relationship of the director or officer of the corporation.

Dealings of directors, trustees or officers with the corporation (self-dealing d irectors) 1. Self-dealing directors or trustees are those who personally contract with the corporation in which they are directors or trustees. Such practice is discourage d because directors or trustees have fiduciary relationship with the corporation and there can be no real bargaining where the same is acting on both sides of the trade (Philippine Corporate Law, Aquino, 2006 Ed.). 2. If a director, trustee or officer of the corporation enters into a contract w ith the corporation of which he is a director, trustee or officer, the contract is presu med to be voidable. This means that the contract is subject to annulment at the option of the corporation. Hence, whether or not an action to annul the contract shall be file d is a choice of the corporation. 3. The contract shall however, be valid and not voidable if the following requis ites concur: (a) the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum; (b) the vote of such director or trustee was not necessary for the approval of the contract; (c) the contract is fair and reasonable under the circumstances; and (d) if the contract is with an officer, such contract was previously authorized by the board (Sec. 32, Corporation Code). Interloc ing directorate 1. An interloc ing directorate exists when one, some, or all of the directors in one

corporation is/are also the directors in another corporation. A question of vali dity of the contract is raised when corporations with interloc ing directors enter into a co ntract with one another. 2. Under Section 33 of the Corporation Code, a contract between two or more corporations with interloc ing directors is not rendered invalid by the mere fac t that the corporations have interloc ing directors as long as the contract is fair and rea sonable under the circumstances. 3. If the interest of the interloc ing director in one corporation is substantia l and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of Section 32 of the Corporation Code insofar as the latter corpo ration or corporations are concerned. The conditions set forth under Section 32 are the following:

shall be considered substantial for purposes of interloc ing directors.

Executive Committee 1. In corporate practice, the board may delegate certain powers to a committee t o enable the corporation to meet exigencies at a time when some directors cannot b e contacted or be able to attend urgent board meetings. The committee is nown as an executive committee.

The Corporation Code allows the creation of an executive committee because the board may not readily face the contingency of confronting urgent matters which requires its attention. 2. The by-laws of a corporation may create an executive committee, composed of not less than three members of the board, to be appointed by the board (Sec. 35, Corporation Code). The board alone cannot create an executive committee if nothi ng is stated in the by-laws. 3. The committee is composed of not less than three (3) members of the board to be appointed by the board. The committee may exercise acts as may be delegated to i t by the by-laws or by the board and can perform management acts. 4. The executive committee however, is not allowed to perform the following acts : (a) approval of any action which requires approval of shareholders; (b) filling up of vacancies n the board; (c) amendment or repeal of by-laws or the adoption of new by-laws; (d) amendment or repeal of any resolution of the board which by express terms is not so amendable or repealable; and (e) distribution of cash dividends (Sec. 35, Corporation Code).

Meetings

(a) that the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; (b) that the vote of such director or trustee was not necessary for the approval of the contract ; (c) that the contract is fair and reasonable under the circumstances; and (d) that in case of an officer, the contract with the officer has been previousl y authorized by the board of directors (Section 32, Corporation Code). 4. Stoc holdings exceeding twenty percent (20%) of the outstanding capital stoc

1. Regular meetings of directors or trustees shall be held monthly, unless the b ylaws provide otherwise.

Special meetings of the board of directors or trustees may be held at any time upon the call of the president or as provided in the by-laws (Sec. 53, Corporati on Code). 2. The president shall preside at all meetings of the directors or trustee, unle ss the by- laws provide otherwise (Sec. 54, Corporation Code). 3. Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least one (1) day prior to the scheduled meeting, unless otherwise provided by the by-laws. A director or trust ee may waive this requirement, either expressly or impliedly (Sec. 53, Corporation Code ).

4. Unless the articles of incorporation or the by-laws provide for a greater maj ority, a majority of the number of directors or trustees as fixed in the articles of inco rporation shall constitute a quorum for the transaction of corporate business, and every d ecision of at least a majority of the directors or trustees present at a meeting at which t here is a quorum shall be valid as a corporate act, except for the election of officers wh ich shall require the vote of majority of all the members of the board. 5. In case of abstention during a board meeting on a vote ta en on any issue, th e general rule is that an abstention is counted in favor of the issue that won the majority vote since by their act of abstention, the abstaining directors are deemed to ab ide by the rule of the majority (Lopez vs. Ericta, 45 SCRA 539).

Capital affairs

1. A certificate of stoc is the evidence that the person named therein possesse s those rights and duties of a stoc holder. The certificate is a muniment of title , but not the title itself. It is also the written ac nowledgement of the corporation that a p erson has interest in the corporation. 2. A certificate of stoc is not necessary to render one a stoc holder in a corporation. Nevertheless a certificate of stoc is the paper representative or tangible evidence of the stoc itself and of the various interests therein. It expresses the contract between the corporation and the stoc holder, but it is not essential to the exis tence of a share in stoc or the creation of the relation of shareholder to the corporation (Tan vs. SEC, 206 SCRA 740). Uncertified shares 1. Under Section 63 of the Corporation Code, unrecorded transfers are valid and binding between the parties. 2. Under Section 43.2 of the Securities Regulation Code, the SEC may, by specifi c rule or regulation, allow corporations to provide in their articles of incorpora tion and by-laws for the use of uncertified securities. Uncertified security. is defined as security evidenced by electronic or similar

Nature of certificate of stoc

records (Sec. 3.14, The Securities Regulation Code, R.A. 8799).

1. The certificate of stoc itself once issued is a continuing affirmation or representation that the stoc described therein is valid and genuine and is at l east prima facie evidence that it was legally issued in the absence of evidence to the cont rary, however, this presumption may be rebutted (Bitong vs. Court of Appeals, 292 SCRA 503). 2. A certificate of stoc is not a negotiable instrument, but is regarded as qua sinegotiable in the sense that it may be transferred by endorsement, coupled with delivery, but it is not negotiable because the holder thereof ta es it without p rejudice to such rights or defenses as the registered owners or transferor s creditor may have under the law, except insofar as such rights or defenses are subject to the limitation s imposed by the principles governing estoppels (De los Santos vs. Republic, 96 Phil. 577) . 3. The certificate of stoc shall be signed by the president or the vice-preside nt, countersigned by the secretary or assistant secretary (Sec. 63, Corporation Code ). Hence, a

Negotiability of certificate of stoc

mere typewritten statement advising a stoc holder of his ownership of shares in a corporation cannot be considered a certificate of stoc (SEC Opinion, September 21, 1970). 4. Shares of stoc s may be transferred by delivery of the certificate of stoc w hich is indorsed by the owner or his attorney-in-fact or by any other person authorized to ma e the transfer. This mode of transfer does not ma e a certificate of stoc a negot iable instrument which is one payable in a sum certain in money. 5. To bind the corporation, the transfer must be recorded in the boo s of the corporation. Unrecorded transfers do not bind the corporation and the owner regi stered in the boo s remains the owner as far as the corporation is concerned despite th e transfer. Said owner as registered in the corporate boo s is the person who can exercise the rights of a stoc holder li e the right to receive dividends. The transferee of an unrecorded transfer does not give the transferee the right to receive notices an d to vote at meetings (Price and Sulu Development Co. vs. Martin, 59 Phil. 207). Note that the corporation shall not register transfers if there are still unpaid claims on the shares of stoc s (Sec. 63, Corporation Code). 6. Under Section 63 of the Corporation Code, unrecorded transfers are valid and binding between the parties.

Issuance of certificate of stoc s 1. Certificates of stoc shall be issued to the subscriber only upon full paymen t of the subscription together with of the applicable interests and expenses incurred if the shares have become delinquent (Sec. 64, Corporation Code). A corporation is unde r obligation to issue a certificate of stoc to a stoc holder who has fully paid f or his subscription. If the corporation refuses, it may be sued for damages (SEC Opinio n, February 10, 1981). 2. Section 63 of the Corporation Code cannot be utilized by the corporation to refuse to recognize ownership over pledged shares purchased at public auction. T he term unpaid claims. refers to any unpaid claims arising from unpaid subscription, and not to any indebtedness which a subscriber or stoc holder may owe the corporatio n arising from any other transactions. Obligations arising from unpaid monthly due s do not fall within the coverage of Section 63 (China Ban ing Corp. vs.Court of Appe als 270 SCRA 503). 3. The SEC opined on several occasions that a stoc holder who has not paid the f

ull amount of his subscription cannot transfer part of his subscription in view of t he indivisible nature of a subscription contract (SEC Opinion, 9 October 1995). 4. On the other hand, the SEC opined that the entire subscription, although not yet fully paid, may be transferred to a single transferee, who as a result of the tr ansfer must assume the unpaid balance. It is necessary, however, to secure the consent of th e corporation since the transfer of subscription rights and obligations contemplat es a novation of contract (ibid). 5. The holder of delinquent stoc s shall not be entitled to any of the rights of a stoc holder except the right to dividends unless he pays the full amount due. Th us, he cannot vote or be represented in meetings, cannot examine the corporate boo s, e xercise his pre-emptive right and other rights. 6. If the subscription is merely not fully paid but not delinquent, holders of t he subscribed shares shall have all the rights of a stoc holder (Sec. 72, Corporati on Code).

Stoc and transfer boo

1. A stoc corporation must eep a boo to be nown as the stoc and transfer boo ,. in which a record of the following must be ept: (a) all stoc s in the name of the stoc holders alphabetically arranged; (b) amount paid and unpaid on all stoc s and the date of payment of any installment; (c) alienation, sale or transfer of stoc s; and (d) other entries as the by-laws may prescribe (Sec. 72, Corporation Code). 2. The corporate secretary is the officer duly authorized to ma e entries on the stoc and transfer boo . Hence, entries made by the Chairman or President are in valid (Torres, Jr. vs. CA, 278 SCRA 793 [1997]). Lost or destroyed certificates 1. The following procedure shall be followed for the issuance by a corporation o f new certificates of stoc in lieu of those which have been lost, stolen or destr oyed: (a) file an affidavit, in triplicate, setting forth the circumstances as to how it was lost, stolen or destroyed, the number of shares represented by such, the serial number and the name of the corporation; (b) after verifying the affidavit and other information and evidence, the corporation shall publish a notice in a newspaper of general circulation published in the place where the corporation has its principal office, once a wee for three wee s at the expense of the owner; (c) after the expiration of one year from the date of last publication, if no contest has been presented, the right to ma e such contest shall be barred; (d) the said corporation shall cancel in its boo s the certificate of stoc whic h has been lost, stolen, or destroyed and issue a new certificate of stoc , unless the registered owner files a bond or other security effective for one year in which case a new certificate may be issued even before the expiration of one year; (e) if there is a contest, or if an action is pending in court regarding the ownership of said certificate, the issuance of new certificate shall be suspended until the final decision by the court regarding the ownership of the lost, stolen or destroyed certificate; and (f) no action may be brought against the corporation which shall have issued certificate of stoc in lieu of those lost, stolen or destroyed except in case of fraud, bad faith or negligence (Sec. 73, Corporation Code).

Watered stoc s 1. Watered stoc s are those issued for a consideration less than its par or issu ed value or for a consideration in any form other than cash, valued in excess of it s fair value. 2. These include the following: (a) bonus share; (b) discounted share;

(c) issued for consideration other than actual cash, the fair valuation of which is less than its par value; (d) issued as stoc dividend when there are no sufficient retained earnings or surplus to justify it.

3. Any director or officer of a corporation consenting to the issuance of stoc s of a consideration less than its par or issued value or for a consideration in any fo rm other cash, valued in excess of its fair value, or who, having nowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary shall be solidarily liable with the stoc holder concerned, to the corporation an d its creditors for the difference between the fair value received at the time of issu ance of the stoc and the par or issued value of the same (Sec. 65, Corporation Code). 4. Three theories have been advanced as basis for holding stoc holders and offic ers liable for watered stoc s, to wit: (a) subscription contract theory; (b) fraud theory; and (c) trust fund doctrine ((Villanueva, Philippine Corporate Law, 2001 Ed., pp. 38 4386). 5. The subscription theory holds that the subscription contract is the source an d measure of the duty of a subscriber to pay for his shares; if the contract relea ses him from further liability, the subscriber ceases to be liable. The subscription the ory is unacceptable in our jurisdiction because of the peremptory language of Sections 62 and 65 of the Corporation Code. 6. The fraud theory holds that a shareholder is liable for watered stoc on the basis of tort or misrepresentation. According to the theory, the wrong done to the cre ditor is fraud or deceit in falsely representing that the par value has been paid or agre ed to be paid in full. Subsequent creditor without notice is, thus, presumed to have been deceived by this misrepresentation but prior creditors with notice are not prote cted. 7. The trust fund doctrine holds that all corporate creditors would have a legal basis to recover against stoc holders and guilty officers. In Philippine jurisdi ction, the trust fund doctrine on watered stoc prevails. It is an established doctrine that subscriptions to the capital of a corporatio n constitute a fund to which creditors have a right to loo for satisfaction of th eir claims and that the assignee in insolvency can maintain an action upon any unpaid stoc

subscription in order to realize assets for the payment of his debts. A corporat ion has no power to release an original subscriber to its capital stoc from the obligation of paying his shares, without a valuable consideration for such release (Philippine Trust Corp. vs.

Rivera, 44 Phil. 469). Payment of balance of subscription 1. Any balance on the subscription is payable on the date fixed in the contract of subscription between the corporation and the subscriber. The subscription contra ct governs the terms of the agreement and the board cannot disregard the contractua l stipulations of the parties. The action of the board as to payment of the balanc e is hence, subject to the provisions of the contract. If the contract does not fix the date of payment or for reasons allowed under the contract, the board may at any time declare the unpaid subscription due and payable. This is termed, the call. of the board. This term r efers to an official declaration of the corporation through its board that the unpaid sub scription be now paid. It is not a declaration that the stoc holder incurred a default in payment. When the subscription contract provides for a specific date for payment, a call. is not necessary. 2. The call. shall state the date for the payment of the subscription. Failure to pay the unpaid subscription on the date set in the call. or in the date of the subscr iption

contract, shall ma e the subscriber liable for interest but the subscription sha ll not yet be deemed delinquent. The subscription becomes delinquent if no payment is made wit hin 30 days from the due date. All stoc s covered by the subscription shall thereupo n become delinquent. 3. A notice of call is necessary to bind the stoc holders. Notice is mandatory i n nature and must strictly be complied with. When not complied with, the call woul d be unlawful and ineffective. The reason for the strict compliance is not only to as sure notice to all subscribers but also to assure equality and uniformity in the assessment on stoc holders (Lingayen Gulf Electric Power vs. Baltazar, 14 SCRA 522).

Procedure for extrajudicial sale of delinquent shares of stoc s 1. The board of directors will issue a resolution ordering the sale of delinquen t stoc ; The resolution shall state the amount due on the subscription plus all accrued i nterest, and the date, time and place of the sale which shall not be less than thirty (30 ) days nor more than sixty (60) days from the date the stoc s become delinquent. 2. Notice of the sale with a copy of the resolution, shall be sent to the delinq uent stoc holder. The notice may either be personal or by registered mail. 3. The notice and a copy of the resolution shall be published once a wee for 2 consecutive wee s in a newspaper of general circulation in the province or city where the principal office of the corporation is located. 4. The delinquent stoc s shall be sold at public auction if the delinquent stoc holder does not pay to the corporation on or before the date of sale, the b alance due on the subscription plus (a) accrued interests; and (b) cost of advertisement an d expenses of sale if any. 5. The sale shall be made to the highest bidder. The highest bidder is the perso n who offers to pay the full amount due (which includes the balance on the subscri ption, accrued interests, cost of advertisement and expenses of sale), for the smallest number of shares or fraction of shares. 6. The stoc s so purchased shall be transferred to the purchaser in the boo s of the corporation. Since the shares are to be fully paid, a certificate of stoc will be issued. The remaining shares shall be credited in favor of the delinquent stoc holder who sh all li ewise be entitled to a certificate of stoc covering covering such shares (Se c. 68, Corporation Code).

Example of highest bidder: Suppose A subscribes to 1,000 shares at P10.00 par va lue per share and he pays only P5, 000. The shares covered by the subscription subse quently become delinquent. The total amount due now is P7, 000 (including the balance of P5, 000 and P2, 000 by way of interests, cost of ads, etc.). During the auction sale , B offers P7, 000 for 1,000 shares; C offers P7, 000 for 900 shares; D offers P7, 000 for 800 shares; and E offers P6, 900 for 500 shares. E is a disqualified bidder because he did even if mathematically, he is the highest all be considered because all of them offered to , D offered the smallest number of shares and not offer to pay the full amount due bidder. Only the bids of B, C and D sh pay the full amount due. Of these bids so is the highest bidder.

7. Should there be no bidder at the public auction who offers to pay the full amount, the Corporation may bid for the same, and the total amount due shall be

credited as paid in full in the boo s of the corporation. The shares shall becom e treasury shares (Sec. 63, Corporation Code).

Effect of delinquency on the rights of stoc holders; unpaid shares 1. The holder of delinquent stoc s shall not be entitled to any of the rights of a stoc holder except the right to dividends unless he pays the full amount due. Th us, he cannot vote or be represented in meetings, cannot examine the corporate boo s, e xercise his pre-emptive right and other rights. 2. If the subscription is merely not fully paid but not delinquent, holders of t he subscribed shares shall have all the rights of a stoc holder (Sec. 72, Corporati on Code).

Alienation of shares 1. It is mandatory under Section 96 of the Corporation Code for the articles of incorporation of a close corporation to provide that all of the issued stoc s of all classes shall be subject to one or more restrictions. Under Section 98 of the Corporatio n Code, the restriction shall not be more onerous than granting the existing stoc holder s of the corporation the option to purchase the shares of the transferring stoc holder wi th such reasonable terms, conditions or period stated therein (Philippine Corporate Law, Aquino, 2006 Ed.). 2. Where the corporation issues watered stoc s and thereby assumed an ostensible capitalization in excess of its real assets, the transaction necessarily involve s the misleading of subsequent creditors and whether done with that purpose actually i n mind or not, is at least a constructive fraud upon creditor (De Leon, 2006 Ed.). 3. The SEC opined on several occasions that a stoc holder who has not paid the f ull amount of his subscription cannot transfer part of his subscription in view of t he indivisible nature of a subscription contract (SEC Opinion, 9 October 1995). 4. On the other hand, the SEC opined that the entire subscription, although not yet fully paid, may be transferred to a single transferee, who as a result of the tr ansfer must assume the unpaid balance. It is necessary, however, to secure the consent of th e corporation since the transfer of subscription rights and obligations contemplat es a

novation of contract (ibid). 5. The failure to register a sale or transfer in the stoc and transfer boo of the corporation would render the sale invalid and not binding to all persons, includ ing attaching creditors (Uson vs. Diosomito, 61 Phil. 535). Involuntary dealings 1. The right of a stoc holder to pledge, mortgage or otherwise encumber his shar es is recognized under Section 55 of the Corporation Code, which regulates the mann er of voting on pledged or mortgaged shares. 2. The SEC recognizes the well-settled principle that shares of stoc in a corpo ration are personal property and the owner thereof has an inherent right, as an inciden t of his ownership, to transfer the same at will, which would include the power to encumb er said shares (SEC Opinion, 8 August 1995). 3. The SEC has, however, as a matter of policy, allowed reasonable restrictions on the right of shareholders to encumber their shares if the restrictions comply wi th the provisions of Section 93 of the Corporation Code (ibid).

4. If the restriction on the right to pledge or mortgage shares of stoc absolut ely prohibits the stoc holders from pledging or mortgaging their shares without the consent of the board of directors, it would be violative of the statutory right of the s toc holders to encumber shares of stoc as allowed in Section 55 of the Corporation Code (ib id). 5. However, when the restriction merely allows the corporation or existing stoc holders to accept the offer within the option period, and thereafter, if no one accepts the offer, the stoc holder is free to pledge or mortgage his shares in f avor of any third party, such provision is valid and binding (ibid).

Dissolution of corporations Voluntary dissolutions 3. A corporation is said to be dissolved when its existence is terminated, its a rticles no longer in effect and its affairs. 4. Voluntary dissolution is effected in the following manner: (a) by the vote of the board and the stoc holders/members (2/3 vote) (Sec. 118, Corporation Code); (b) by judgment of the SEC after hearing a petition for voluntary dissolution (Sec. 119, Corporation Code); (c) by amending the articles of incorporation to shorten the corporate term (Sec. 120, Corporation Code); and (d) in the case of a corporation sole, by submitting to the SEC , a verified declaration of dissolution (Sec. 115, Corporation Code). 5. The following are the requirements in case dissolution affects the creditors:

(a) administrative application filed with the SEC by a majority vote of the BOD; (b) notice thru registered mail or delivered thirty days prior to the meeting; (c) publication of the notice for three (3) consecutive wee s in a newspaper of general circulation; (d) resolution approved by shareholders representing at least two-thirds (2/3) of the outstanding capital stoc ; and (e) copy of resolution certified by majority of Board of Directors countersigned by the Secretary (Section 118, Corporation Code). 6. The following are the applicable requirements in case dissolution does not af fect the creditors: (a) petition signed by majority of BOD or BOT or officers verified by the President/ Secretary/ Director for Administration and Personnel; (b) claims and demands must be stated in the petition; (c) stoc holders approval representing two-thirds (2/3) outstanding capital stoc ; (d) sec order setting date for objections; (e) publication of the order and posting;

(f) hearing; and (g) appointment of receiver if necessary (Section 119, Corporation Code). 7. A corporation may also be dissolved by shortening the corporate term. The following are the requirements: (a) amendment of Articles of Incorporation;

(b) publication; (c) oath of underta ing by majority of stoc holder or officers to personally answer for obligations; (d) BIR clearance for tax liability; (e) listing of creditors and consent to the shortening of the term; (f) affidavit of assumption of liability by stoc holder; and (g) latest audited financial statement of the corporation.

Involuntary dissolution 1. Involuntary dissolution may ta e place in the following manners: (a) by legislative act; (b) by expiration of the term (Sec. 11); (c) by failure to formally organize within two (2) years from date of incorporation (Sec. 22 of the Corporation Code); or (d) by dissolution by the SEC under Article 121 of the Corporation Code or by a quo warranto proceeding under Section 66 of the Rules of Court.

A change in name does not dissolve the corporation. 2. A corporation is required to (a) formally organize and (b) commence the transaction of its business or the construction of its wor s within two (2) year s from the date of its incorporation. If it does not do so, its corporate powers shall ceas e and the corporation shall be deemed dissolved. On the other hand, the corporation may have formally organized and commenced business operations within 2 years, but if it becomes continuously inoperative for at least 5 years, the same shall be a ground for suspension or r evocation of its corporate franchise or certificate of incorporation. The above rules shall not apply if it can be shown that the failure to comply is due to causes beyond the control of the corporation as may be determined by the SEC (Sec. 22, Corporation Code). 3. A corporation may be dissolved by SEC on grounds provided rules and regulations to wit: (a) fraud in procuring its certificate of registration; (b) serious misrepresentation as to what the corporation can to the great prejudice of or damage to the general public; (c) refusal to comply or defiance of any lawful order of the restraining Commission of acts which would amount to a grave of its franchise; (d) failure to file by-laws within the required period; or (e) failure to file required reports in appropriate forms as Commission within the prescribed period. by existing laws, do or is doing Commission and violation determined by the

4. The existence of the dissolved corporation shall continue for three (3) years after its dissolution for the following purposes: (a) to prosecute and defend suits by or against I the corporation; (b) to enable the corporation to settle and close its affairs; (c) to dispose of and convey its property; and (d) to distribute its assets (Sec. 122, Corporation Code).

Note that it is deemed dissolved only for purposes of continuing its business (Sec. 122, Corporation Code). Liquidation of corporations 1. Liquidation is the process by which all the assets of the corporation are converted into liquid assets (cash) in order to facilitate the payment of obliga tions to creditors and the remaining balance if any is to be distributed to the stoc hold ers or members. 2. Liquidation may be underta en by the board of directors themselves to manage the corporate affairs. This also includes the power and authority to liquidate o r wind up corporate affairs. Liquidation has a period of three (3) years only. 3. Liquidation may be made by conveying the assets of a corporation to a trustee within the three-year period. In this case the trustee will be in charge of the liquidation. 4. The three-year period will not apply in case the corporation is substituted b y a receiver. The appointment of a receiver does not necessarily mean that the corpo ration is dissolved or in the process of liquidation or of winding up its corporate affair s. Under Presidential Decree No. 902-A, particularly Section 6, a receiver may be appoint ed by SEC even while a corporation is a going-concern. So a receiver is actually one w ho is merely there to preserve the assets of a corporation. 5. Liquidation is supposed to be made within three (3) years. However, if full liquidation can only be effected after the three -year period and there is no tr ustee, the directors may be permitted to complete the liquidation by continuing as trustees by legal implication.

Consistently, there is also nothing that bars recovery of the debts of the corporation after the three-year liquidation period. The claim of the creditors follows the assets of the corporation.

Close corporation 1. To be a close corporation, its articles of incorporation must provide that: ( a) all of the corporation s issued stoc of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20) ; (b) all

of the issued stoc s of all classes shall be subject to one or more specified re strictions on transfer permitted by this title; and (c) the corporation shall not list any sto c exchange or ma e any public offering of any of its stoc of any class (San Juan Structura l and Steel Fabricators, Inc. vs. CA, 296 SCRA 631, 1998). 2. It is considered a special type of close corporation when two-thirds (2/3) of the voting stoc s or voting rights is owned or controlled by another corporation whi ch is not a close corporation. 3. Certain corporations cannot be organized as a close corporation such as: (a) mining or oil corporations; (b) stoc exchanges;

Validity of restrictions on transfer of shares 1. The restrictions must appear in the articles of incorporation and in the by-l aws as well as in the certificate of stoc , otherwise, the same shall not be binding on any purchaser thereof in good faith. 2. The restrictions must not be more onerous than granting the existing stoc holders or the corporation the option to purchase the shares of the transfe rring stoc holder with such reasonable terms, conditions, or period stated therein (Se c. 98, Corporation Code).

1. If stoc of a close corporation is issued or transferred to any person who is not entitled under any provision of the articles of incorporation to be a holder of record of its stoc , and if the certificate for such stoc conspicuously shows the qualificati ons of the persons entitled to be holders of record thereof, such person is conclusively pr esumed to have notice of the fact of his ineligibility to be a stoc holder. 2. If the articles of incorporation of a close corporation states the number of persons, which does not exceed twenty (20), who are entitled to be holders of record of i ts stoc , and if the certificate for such stoc conspicuously states such number, and if t he issuance or transfer of stoc to any person would cause the stoc to be held by more than such number of persons, the person to whom such stoc is issued or transferred is conclusively presumed to have notice of this fact. 3. If a stoc certificate of any close corporation conspicuously shows a restric tion on transfer of stoc of the corporation, the transferee of the stoc is conclusivel y presumed to have notice of the fact that he has acquired stoc in violation of the restri ction, if such acquisition violates the restriction. 4. Whenever any person to whom stoc of a close corporation has been issued or transferred has, or is conclusively presumed under this section to have notice e ither (a) that he is a person not eligible to be a holder of stoc of the corporation, or (b) that

Effects of issuance or transfer of stoc

(c) (d) (e) (f) (g)

ban s; insurance companies; public utilities; educational institutions; or corporations vested with public interest.

in breach of qualifying conditions

transfer of stoc to him would cause the stoc of the corporation to be held by more than the number of persons permitted by its articles of incorporation to hold stoc o f the corporation, or (c) that the transfer of stoc is in violation of a restriction on transfer of stoc , the corporation may, at its option, refuse to register the transfer of st oc in the name of the transferee (Sec.99, Corporation Code). When board meeting is unnecessary or improperly held 1. Unless the by-laws provide otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if: (a) before or after such action is ta en, written consent thereto is signed by all the directors; (b) all the stoc holders have actual or implied nowledge of the action and ma e no prompt objection thereto in writing;

(c) the directors are accustomed to ta e informal action with the express or implied acquiescence of all the stoc holders; or (d) all the directors have express or implied nowledge of the action in question and none of them ma es prompt objection thereto in writing (Sec. 101, Corporation Code). 2. If a director's meeting is held without proper call or notice, an action ta e n therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his written objection with the secretary of the

Pre-emptive right in close corporations 1. The pre-emptive right of stoc holders in close corporations shall extend to a ll stoc to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provides otherwise (Sec 102, Corporation Code).

Amendment of the articles of incorporation 1. Any amendment to the articles of incorporation which see s to (a) delete or remove any provision required by the Corporation Code to be contained in the art icles of incorporation, or (b) to reduce a quorum or voting requirement stated in said articles of incorporation shall not be valid or effective unless approved by the affirmat ive vote of at least two-thirds (2/3) of the outstanding capital stoc , whether with or with out voting rights, or of such greater proportion of shares as may be specifically provided in the articles of incorporation for amending, deleting or removing any of the aforesai d provisions, at a meeting duly called for the purpose (Sec. 103, Corporation Code ).

corporation after having

nowledge thereof.

1. There is a deadloc when the directors or stoc holders are so divided respect ing the management of the corporation s business and affairs that the votes required f or any corporate action cannot be obtained, with the consequence that the business and affairs of the corporation can no longer be conducted to the advantage of the stoc holde rs generally (Sec. 104, Corporation Code). 2. The Securities and Exchange Commission, upon written petition by any stoc holder, shall have the power to arbitrate the dispute. In the exercise of s uch power, the Commission shall have authority to ma e such order as it deems appropriate, including an order:

(a) cancelling or altering any provision contained in the articles of incorporation, by-laws, or any stoc holder's agreement; (b) canceling, altering or enjoining any resolution or act of the corporation or its board of directors, stoc holders, or officers; (c) directing or prohibiting any act of the corporation or its board of directors, stoc holders, officers, or other persons party to the action (d) requiring the purchase at their fair value of shares of any stoc holder, either by the corporation regardless of the availability of unrestricted retained earnings in its boo s, or by the other stoc holders; (e) appointing a provisional director; (f) dissolving the corporation; and

Deadloc

(g) granting such other relief as the circumstances may warrant.

Non-stoc corporations

1. A non-stoc corporation is one where no part of its income is distributable a s dividends to its members, trustees, or officers (Sec. 8, Corporation Code). The codal definition discloses that the test of being a non-stoc corporation is the non-d istribution of dividends and not the fact that it has no shares of stoc s. 2. As a general rule, non-stoc corporations are not empowered to venture in profitable business, except only as an incident to its operations, whenever nece ssary or proper for the furtherance of the purpose or purposes for which the corporation was organized. 3. Non-stoc corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, ci vic service, or similar purposes li e trade, industry, agricultural or any combination thereof ( Sec. 88, Corporation Code).

Treatment of profits 1. Any profit which a non-stoc corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of t he purpose or purposes for which the corporation was organized.

Distribution of assets upon dissolution 1. In case dissolution of a non-stoc corporation in accordance with the provisi ons of this Code, its assets shall be applied and distributed as follows:

(a) all liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be made therefore; (b) assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements; (c) assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations engaged in activities in the Philippines substantially similar to those of the dissolving corporation according to a plan of distribution adopted pursuant to the Code; (d) assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the provisions of the articles of incorporation or the by-laws, to the extent that the articles of incorporation or the by-laws, determine the distributive rights of members, or any class or classes of members, or provide for distribution; and

(e) in any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in an adopted plan of distribution.

2. Distribution of assets to members upon dissolution is allowed if expressly provided for in the articles of incorporation or by-laws. In the absence of any provision, the assets may be distributed in accordance with the plan of distribution to per sons, societies, organizations, or corporations whether or not organized for profit as specified in the plan (Aquino, 2006, p. 397).

Religious corporations

1. Religious corporations may be incorporated by one or more persons. Such corporations may be classified into:

(a) corporation sole; and (b) religious societies (Sec. 109, Corporation Code). 2. Corporations sole is established for the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church, a corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious denomination, sect or church (Sec. 110, Corporation Code).

A corporation sole consists of one person only, and his successors (who will always be one at a time).

As to the nationality of a corporation sole, the Corporation Code provides that the place where the principal office of the corporation sole is to be established must be within the Philippines (Sec. 111, [5], Corporation Code).

3. Religious societies, on the other hand, are established for the purpose of the incorporation of a religious society is for the administration of its affair s, properties, and estate. At least two-thirds (2/3) of its members must have given their written consent or have voted to incorporate. A religious society s board of trustees must be composed of not less than five nor more than fifteen trustees (Sec. 116, Corporation Code).

Foreign corporations

1. Foreign corporation is one formed, organized or existing under any laws other than those of the Philippines. It includes multinational corporations created un der the laws of another state (Sec. 123, Corporation Code). 2. A foreign corporation will be recognized and will be allowed to do business i n any state which gives its consent (Secs. 125-128, Public International Law Conce pt). 3. Foreign corporations may be allowed to conduct business in the Philippines provided their home countries allow the same right to Philippine corporations un der the theory of reciprocity. But in order to be allowed to conduct business in the Phi lippines, it should obtain a license to do so and a certificate of authority from the proper government agency (Sec. 123, Corporation Code).

Only foreign corporations doing business in the Philippines need a license to conduct such business. If the foreign corporation does not transact a business i n the Philippines, no such license is needed.

Doctrine of doing business 1. Transacting business. means continuity of commercial dealings and arrangements. An isolated transaction. is not transacting business..

Sometimes however, a single act of a foreign corporation may be considered as transacting business. as when it performs any of the following acts: (a) it solicits orders, purchase and service contracts; (b) it opens an office in the Philippines whether it be called a liaison office or a branch; (c) it appoints distributors domiciled in the Philippines or if not domiciled, stays in the country for a total period of 180 days or more in a calendar year; (d) it participates in the management, supervision or control of any domestic business, firm or entity in the Philippines; or (e) it performs any other act that imply a continuity of commercial dealings (Sec. 44, Omnibus Investments Code). 2. Doing business. implies a community of commercial dealings and arrangements, and contemplates to some extent the performance of acts or wor s o r the exercise of some functions normally incident to and in progressive prosecution o f the purpose and object of its organization (Continuity test). 3. There is no general rule or governing principle laid down as to what constitu tes doing. or engaging in. or transacting. business in the Philippines. Thus, it has of ten been held that a single act or transaction may be considered as doing business. w hen a corporation performs acts for which it was created or exercises some of the func tions for which it was organized. We have held that the act of participating in a bidding process constitutes doing business. because it shows the foreign corporation s intention to engage in business the foreign corporation of the ss, that determines whether ces and Technologies, Inc. nd Broc stedt GMBH and Co., G.R. in the Philippines. In this regard, it is the performance by acts for which it was created, regardless of volume of busine a foreign corporation needs a license or not (European Resour and Delfin Wenceslao vs. Ingenieuburo Bir hahn Nolte, Heers a No. 159586, July 26, 2004).

Requisites for the issuance of license

1. The purpose of the Philippines in requiring that foreign corporations doing business in the Philippines to be licensed to do so is to subject the foreign co rporations to the jurisdiction of the local courts (Aquino, 2006, p. 453). 2. The following are the requisites for the issuance of a license to a foreign corporation: (a) an application for a license filed with the Securities and Exchange Commission, together with a copy of its articles of incorporation and bylaws, certified in accordance with law, and their translation to an official language of the Philippines, if necessary.

(b) the application shall be under oath and, unless already stated in its articles of incorporation, shall specifically set forth the following: i. the date and term of incorporation; ii. the address, including the street number, of the principal office of the corporation in the country or state of incorporation; (Sec. 125, Corporation Code); iii. the name and address of its resident agent authorized to accept summons and process in all legal proceedings and, pending the establishment of a local office, all notices affecting the corporation; iv. the place in the Philippines where the corporation intends to operate; v. the specific purpose or purposes which the corporation intends to pursue in the transaction of its business in the Philippines: Provided, That said purpose or purposes are those specifically stated in the certificate of authority issued by the appropriate government agency; vi. the names and addresses of the present directors and officers of the corporation; vii. a statement of its authorized capital stoc and the aggregate number of shares which the corporation has authority to issue, itemized by classes, par value of shares, shares without par value, and series, if any; viii. a statement of its outstanding capital stoc and the aggregate number of shares which the corporation has issued, itemized by classes, par value of shares, shares without par value, and series, if any; ix. a statement of the amount actually paid in; x. a duly executed certificate under oath by the authorized official or officials of the jurisdiction of its incorporation, attesting to the fact that the laws of the country or state of the applicant allow Filipino citizens and corporations to do business therein, and that the applicant is an existing corporation in good standing. If such certificate is in a foreign language, a translation thereof in English under oath of the translator shall be attached thereto. xi. A statement under oath of the president or any other person authorized by the corporation, showing to the satisfaction of the Securities and Exchange Commission and other governmental agency in the proper cases that the applicant is solvent and in sound financial condition, and setting forth the assets and liabilities of the corporation as of the date not exceeding one (1) year immediately prior to the filing of the application; and xii. such additional information as may be necessary or appropriate in order to enable the Securities and Exchange Commission to determine whether such corporation is entitled to a license to transact business in the Philippines, and to determine and assess the fees payable. Resident agent 1. A resident agent may be either an individual residing in the Philippines or a domestic corporation lawfully transacting business in the Philippines, provided, That in the case of an individual, he must be of good moral character and of sound finan cial standing (Sec. 127, Corporation Code).

2. The power of a resident agent is limited to receive, for and in behalf of the corporation, services and other legal processes in all actions and other legal p roceedings against the foreign corporation.

Personality to sue 1. A foreign corporation transacting business in the Philippines without a licen se shall not be allowed to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines but it may be sued or proceede d against (Sec. 133, Corporation Code). In other words, such corporation cannot su e but can be sued. 2. The Supreme Court has summarized the rules governing the right to sue of foreign corporations as follows: (a) if a foreign corporation does business in the Philippines without a license, it cannot sue before Philippine courts; (b) if a foreign corporation does business in the Philippines with the required license, it can sue before Philippine courts on any transaction; (c) if a foreign corporation is not doing business in the Philippines and therefore needs no license to engage in business, it may sue on an isolated transaction it may have entered into or to protect its goodwill or reputation; and (d) if a foreign corporation does business in the Philippines without a license, a Philippine national who has contracted with said corporation might be estopped from challenging the foreign corporation s personality in a suit before Philippine courts (Agilent Technologies Singapore (PTE) vs. Integrated Silicon technology Philippines Corporation, G.R. No. 154618, April 14, 2004). The principle of estoppel applies when the Philippine national is aware that the foreign corporation possesses no license to do business in the Philippines but nevertheless enters into a contract with it (Merril Lynch Futures vs. CA, 211 SCRA 824; National Trading Corporation vs. Court of Appeals, 246 SCRA 465). 3. The contract entered into by a foreign corporation conducting business in the Philippines without a license is not necessarily void ab initio. Any defect may subsequently be cured if the foreign corporation subsequently obtains a license to do business. Only the right to sue is affected (Home Insurance Company vs. Eastern Shipping, 123 SCRA 424).

Instances when unlicensed foreign corporations may be allowed to sue

1. There are instances when an unlicensed foreign corporation may be allowed to

sue in the Philippines: (a) intellectual property cases; (b) estoppel cases wherein a party who has dealt with a foreign corporation, nowing it to be such, is stopped to deny its existence and capacity; and (c) in pari delicto cases.

2. Foreign corporations can sue or be sued on a transaction or series of transac tion set apart from the common business of a foreign enterprise in the sense that there i s no

intention to engage in a progressive pursuit of the purpose and object of busine ss transaction. This is considered as an isolated transaction. Grounds for revocation of license 1. The following are the grounds for the revocation of license of foreign corporations:

(a) failure to file its annual report or pay any fees as required by this Code; (b) failure to appoint and maintain a resident agent in the Philippines; (c) failure, after change of its resident agent or of his address, to submit to the Securities and Exchange Commission a statement of such change as; (d) failure to submit to the Securities and Exchange Commission an authenticated copy of any amendment to its articles of incorporation or by-laws or of any articles of merger or consolidation within the time prescribed; (e) a misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation; (f) failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions; (g) transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized under its license; (h) transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines; or (i) any other ground as would render it unfit to transact business in the Philippines.

Merger and consolidation of corporations

1. In merger, two or more corporations unite into a single corporation. The othe rs are dissolved and one survives. In consolidation two or more corporations unite and all are dissolved. A new corporation is born.

The Supreme Court calls a merger a union of two or more existing corporations whereby the others are absorbed by another corporation which survives and contin ues the combined business (Mcleod vs. NLRC, 512 SCRA 222). Consolidation, on the other hand, is the union of two or more existing corporations to form a new corporation called the consolidated corporation. It i s a combination by agreement between two or more corporations by which their rights, franchises, privileges and properties are united and become those of a new, sing le corporation, composed generally, but not necessarily of the stoc holders of the original corporations (ibid). 2. Merger and consolidation of corporations is not an inherent right and must be allowed by law in order to be underta en by corporations (PNB vs. Andrada Electr ic & Engineering Company, 381 SCRA 244). Merger and consolidation is authorized by Se ction 76 of the Corporation Code. 3. In both merger and consolidation, there is no liquidation of the assets and t he surviving or consolidated corporation assumes ipso facto the liabilities of the dissolved corporations. The surviving or consolidated corporation also assumes and possess es all

the rights, privileges, immunities and franchises of the dissolved corporations (Sec. 80, Corporation Code). 4. Under Section 77, of the Corporation Code, the merger or consolidation must b e approved by the boards of the corporations involved and ratified by the votes of stoc holders representing at least two-thirds (2/3) of the outstanding capital s toc or two-thirds (2/3) of the members if it be a non-stoc corporation.

Consolidation is the union of two or more corporations that necessarily results in the creation of a new corporation, the consolidated corporation, and the term ination of the constituent corporations.

Plan of merger or consolidation 1. The board of directors or trustees of each corporation, party to the merger o r consolidation, shall approve a plan of merger or consolidation setting forth the following:

(a) the names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations; (b) the terms of the merger or consolidation and the mode of carrying the same into effect; (c) a statement of the changes, if any, in the articles of incorporation of the surviving corporation in case of merger; and, with respect to the consolidated corporation in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations

organized under the Code; and (d) such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable (Sec. 76, Corporation Code).

Articles of Merger or Consolidation 1. After the approval by the stoc holders or members as required by the Code, articles of merger or articles of consolidation shall be executed by each of the constituent corporations, to be signed by the president or vice-president and certified by t he secretary or assistant secretary of each corporation setting forth: (a) the plan of the merger or the plan of consolidation; (b) as to stoc corporations, the number of shares outstanding, or in the case of non-stoc corporations, the number of members; and (c) as to each corporation, the number of shares or members voting for and against such plan, respectively (Sec. 78, Corporation Code).

Procedure for merger or consolidation 1. The following is the procedure for merger and consolidation of corporations: (a) the board of each corporation shall draw up a plan of merger or consolidation;

(b) the plan of merger or consolidation shall be approved by majority vote of each of the board of the concerned corporations at separate meetings; (c) the plan of merger or consolidation shall be approved by a vote of stoc holders holding or representing two-thirds (2/3) of the outstanding capital stoc or by a vote of at least two-thirds (2/3) of the members if it be a non-stoc corporation; (d) articles of merger or consolidation shall be executed by each of the constituent corporations, signed by the president or vice-president and certified by the secretary or assistant secretary; (e) four copies of the articles of merger or consolidation (together with the favorable recommendation of pertinent government agency in certain cases) shall be submitted to the SEC for approval; (f) the SEC shall issue a certificate of merger; and (g) if, upon investigation, the SEC has reason to believe that the proposed merger or consolidation is contrary to or inconsistent with the provisions of laws, it shall set a hearing to give the concerned corporations the opportunity to be heard (Secs. 76-79,Corporation Code; Aquino, [2006] p. 373).

Effectivity of merger or consolidation 1. If the Commission is satisfied that the merger or consolidation of the corporations concerned is not inconsistent with the provisions of this Code and existing laws, it shall issue a certificate of merger or of consolidation, at which time the merger or consolidation shall be effective (Sec. 79, Corporation Code).

Effects of merger or consolidation The effects of merger or consolidation are the following: 1. the constituent corporations shall become a single corporation; 2. the separate existence of the constituent corporations shall cease except that of the surviving corporation (in merger) or the consolidated corporation (in consolidation); 3. the surviving or the consolidated corporation shall possess all the rights, privileges, immunities, and powers and shall be subject to all duties and liabilities of a corporation; 4. the surviving or the consolidated corporation shall possess all rights, privileges, immunities, and franchises of each constituent and properties shall be deemed transferred to the surviving or the consolidated corporation; 5. all liabilities of the constituents shall pertain to the surviving or the consolidated corporation (Sec. 80; Aquino, [2006] pp. 371-372).

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Securities Regulation Code (RA 8799)

State policy 1. Establish a socially-conscious free mar et that regulates itself; 2. Encourage widest participation of ownership in enterprises and enhance democratization of wealth;

3. Promote development of capital mar et; 4. Protect investors and ensure full and fair disclosure about securities; and 5. Minimize, if not totally eliminate insider trading and other fraudulent or manipulative devices and practices which distorts the free mar et (Sec. 2, Secur ities Regulation Code). Powers and functions of SEC 1. Jurisdiction and supervision over all corporations, partnerships or associati ons who are grantees of primary franchises; 2. Formulate policies and recommendations on securities mar et, advise Congress and other government agencies on all aspects of securities mar et, and propose legislation and amendments thereto; 3. Approve, reject, suspend, revo e, or require amendments to the registration statements, and registration and licensing applications; 4. Regulate, investigate or supervise activities of persons to ensure compliance ; 5. Supervise, monitor, suspend or ta e over activities of exchanges clearing agencies and other SROs; 6. Impose sanctions for violation of laws, rules, regulations, and orders; 7. Prepare, approve, amend or repeal rules and regulations and orders, and issue opinions and provide guidance on and supervise compliance therewith; 8. Enlist aid and support of and/or deputize any and all enforcement agencies of government, as well as any private institution, corporation, firm, association o r person in the implementation of its powers and functions; 9. Issue cease and desist orders to prevent fraud or injury to investing public; 10. Punish for both direct and indirect contempt; 11. Compel corporate officers to call meetings of stoc holders or members thereo f under its supervision; 12. Issue subpoena duces tecum and summon witnesses, and order the examination, search and seizure of all documents, papers, files and records, tax returns, and boo s of accounts of any entity or person under investigation; 13. Suspend, or revo e, after proper notice and hearing, franchise or certificat e of registration of corporations, partnerships or associations; 14. Exercise such other powers as may be provided by law, implied from, or which are necessary or incidental to the carrying out of the express powers (Sec. 5, S RC). Securities required to be registered Securities shall not be sold or offered for sale or distribution within the Phil ippines without registration statement duly filed with and approved by SEC; and prior to such sale,

information on the securities, in such form and with such substance as SEC may p rescribe, shall be made available to each prospective purchaser (Sec. 8, SRC). Exempt securities The following securities may be sold without need of registration: a) Issued or guaranteed by the government or by any political subdivision, agency, or by any person controlled or supervised by, and acting as an instrumentality of the government; b) Issued or guaranteed by the government of any country with which the Philippines has diplomatic relations, or by any state, province, or political subdivision thereof on the basis of reciprocity, although the SEC may require compliance with the form and content of disclosures;

c) Issued by the receiver or by the trustee in a ban ruptcy duly approved by the proper adjudicatory body; d) Those involving the sale or transfer of which, by law, is under the supervision and regulation of the OIC, HLURB, or BIR; e) Issued by a ban , except its own shares (Sec. 9, SRC). Exempt transactions The requirement of registration under Subsection 8.1 shall not apply to the sale of any security in any of the following transactions:

a. At any judicial sale, or sale by an executor, administrator, guardian or rece iver or trustee in insolvency or ban ruptcy.

b. By or for the account of a pledge holder, or mortgagee or any other similar l ien holder selling or offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding the provisions of this code, to liquidate a bona fide debt, a security pledged in good faith as security for such debt.

c. An isolated transaction in which any security is sold, offered for sale, subs cription or delivery by the owner thereof, or by his representative for the owner s account, s uch sale or offer for sale, subscription or delivery not being made in the course of repe ated and successive transactions of a li e character by such owner, or on his account by such representative and such owner or representative not being the underwriter of suc h security.

d. The distribution by a corporation, actively engaged in the business authorize d by its articles of incorporation, of securities to its stoc holders or other security h olders as a stoc dividend or other distribution out of surplus.

e. The sale of capital stoc y, where no

of a corporation to its own stoc holders exclusivel

commission or other remuneration is paid or given directly or indirectly in conn ection with the sale of such capital stoc .

f. The issuance of bonds or notes secured by mortgage upon real estate or tangib le personal property, where the entire mortgage together with all the bonds or note s secured thereby are sold to a single purchaser at a single sale.

g. The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion entitling the holder of the security su rrendered in exchange to ma e such conversion provided that the security so surrendered ha s been registered or was, when sold, exempt from the provisions of this code, and that the security issued and delivered in exchange, if sold at the conversion price, woul d at the time of such conversion fall within the class of securities entitled to registra tion. Upon such conversion the par value of the security surrendered in such exchange shall be deemed the price at which the securities issued and delivered in such exchange a re sold.

h. Bro er s transactions, executed upon customer s orders, on any registered exchang e or other trading mar et.

i. Subscriptions for shares of the capital stoc of a corporation prior to its i ncorporation or in pursuance of an increase in its authorized capital stoc , when no expense is incurred, or no commission, compensation or remuneration is paid or given in connection wi th the sale or disposition of such securities, and only when the purpose for solici ting,

giving or ta ing of such subscriptions is to comply with the requirements of suc h law as to the percentage of the capital stoc of a corporation which should be subscrib ed before it can be registered and duly incorporated, or its authorized capital increased.

j. The exchange of securities by the issuer with its existing security holders e xclusively, where no commission or other remuneration is paid or given directly or indirectl y for soliciting such exchange.

. The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelve-month period.

l. The sale of securities to any number of the following qualified buyers: i. Ban ; ii. Registered investment house; iii. Insurance company; iv. Pension fund or retirement plan maintained by the government of the Philippines or any political subdivision thereof or managed by a ban ; v. other persons authorized by the Bang o Sentral to engage in trust functions; vi. Investment company; or vii. Such other person as SEC may by rule determine as qualified buyers, on the basis of such factors as financial sophistication, net worth, nowledge, and experience in financial and business matters, or amount of assets under management (Sec. 10, SRC). Procedure for registration of securities 1. Application - All securities required to be registered under Subsection 8.1 o f the SRC shall be registered through the filing by the issuer in the main office of S EC, of a sworn registration statement;

2. Prospectus - The registration statement shall include any prospectus required or permitted to be delivered;

3. Other information - The information required for the registration of any ind , and all securities, shall include, among others, the effect of the securities is sue on ownership, on the mix of ownership, especially foreign and local ownership;

4. Signatories to registration statement - The registration statement shall be s igned by the issuer s executive officer, its principal operating officer, its principal financial officer, its comptroller, principal accounting officer, its corporate secretary or persons performing similar functions accompanied by a duly verified resolution of the bo ard of directors of the issuer corporation;

5. Written consent of expert - The written consent of the expert named as having certified any part of the registration statement or any document used in connect ion shall also be filed;

6. Certification by selling stoc holders - Where the registration statement includes shares to be sold by selling shareholders, a written certification by s uch selling shareholders as to the accuracy of any part of the registration statement contri buted to by such selling shareholders shall also be filed;

7. Fees The issuer shall pay to the SEC; the SEC shall prescribe by rule diminishing fees in inverse proportion to the value of the aggregate price of th e offering;

9. SEC power for production of boo s The SEC may compel the production of all the boo s and papers of such issuer, and may administer oaths to, and examin e the officers of such issuer, or any other person connected therewith as to its busin ess and affairs.

10. Ruling - Within forty-five (45) days after the date of filing of the registr ation statement, or by such later date to which the issuer has consented, the SEC shal l declare the registration statement effective or rejected, unless the applicant is allowe d to amend the registration statement (Sec. 12, SRC). Manipulation of security prices It shall be unlawful for any person acting for himself or through a dealer or br o er, directly or indirectly: 1. Wash sales For the purpose of creating a false or misleading appearance of active trading in any listed security traded in an exchange or any other trading mar et:

8. Notice and publication - Notice of the filing of the registration statement s hall be immediately published by the issuer, at its own expense, in two (2) newspaper s of general circulation in the Philippines, once a wee for two (2) consecutive wee s, or in such other manner as the SEC by rule shall prescribe, reciting that a registrati on statement for the sale of such security has been filed, and that the aforesaid r egistration statement, as well as the papers attached thereto are open to inspection at the SEC during business hours, and copies thereof, photostatic or otherwise, shall be fu rnished to interested parties at such reasonable charge;

a. To effect any transaction in such security which involves no change in the beneficial ownership thereof; b. To enter order or orders for the purchase or sale of such security with the nowledge that a simultaneous order or orders of substantially the same size, time and price, for the sale or purchase of any such security, has or will be entered by or for the same or different parties; c. Perform similar act where there is no change in beneficial ownership.

2. To effect alone or with others a series of transactions, with the purpose of inducing the sale or purchase of any security:

a. That raises or depresses the price of a security to induce sale or purchase o f such security; b. That creates active trading to induce such purchase or sale through manipulat ive devices such as: i. Mar ing the close buying and selling securities at the close of the mar et in an effort to alter the closing price of the security. ii. Painting the tape engaging in a series of transactions that are reported publicly to give the impression of activity of price movement in a security.

iii. Squeezing the float ta ing advantage of a shortage of securities in the mar et by controlling demand side, and exploiting mar et congestion during such shortages in a way as to create artificial prices. iv. Hype and dump engaging in buying activity at increasingly higher prices and then selling the securities in the mar et at higher prices. v. Improper matched orders engaging in transactions where both the buy and sell orders are entered at the same time with the same price and quantity by different but colluding parties. vi. Boiler room operations a well-organized operation where in a room, there would be well-trained salesman operating over several phones and using high-pressure sales tal to get investors to invest in securities offered. vii. Scalping where a person, li e an investment advisor, purchases securities for his own account before recommending that security, and then sells the share at a profit upon the rise in the mar et price following the recommendation. viii. Daisy chain a pattern of fictitious trading activity by a group of persons who lures innocent people into the scheme. ix. Flipping operated where one office buys a particular stoc for customers, while another office simultaneously recommends that its customers sell the stoc , with the stoc being shifted from one office to another, and the firm ma es a profit, and the bro ers earn their commissions.

c. By circulation or dissemination of information to the effect that the price o f any such security will or is li ely to rise or fall because of mar et operations; d. To ma e, regarding any security registered on an exchange, any statement whic h is false or misleading with respect to any material fact, and which he new or had reasonable ground to believe is false or is misleading; e. To effect series of transactions for the purpose of pegging, fixing or stabil izing the price of security trade in an exchange, unless otherwise allowed by the SRC or the SEC rules (Sec. 24, SRC). Short sales to use or employ any stop-loss order in connection with the purchase or sale of any security registered on an exchange, in contravention of the SEC rules and re gulations. Fraudulent transactions It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of any securities: (a) To employ any device, scheme, or artifice to defraud, or (b) To obtain money or property by means of any untrue statement of a material

fact of any omission to state a material fact necessary in order to ma e the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, transaction, practice or course of business which

operates or would operate as a fraud or deceit upon any person (Sec. 26, SRC). Insider trading It shall be unlawful for an insider to sell or buy a security of the issuer, whi le in possession of material information with respect to the issuer or the security that is not g enerally available to the public, unless (a) the insider proves that the information was not gained from such relationship; or (b) if the other party selling to or buying from the insider (o r his agent) is identified, the insider proves (i) that he disclosed the information to the othe r party, or (ii) that

he had reason to believe that the other party otherwise is also in possession of the information (Sec. 27, SRC). Tender offer rule A tender offer is an offer by the acquiring person to the stoc holders of a pub lic company for them to tender their shares therein on the terms specified in the of fer. The Tender Offer Rule applies also in an indirect acquisition arising from the purchase of shares of a holding company of the listed firm. Tender offer is in place to protect minority shareholders against any scheme that dilutes the share value of their investments. It gives t he minority shareholders the chance to exit the company under reasonable terms, giving them the opportunity to sell their shares at the same price as those of the majority shar eholders (CEMCO Holdings vs. National Life Insurance Co., G.R. No. 171815). Under existing SEC rules, the 15% and 30% threshold acquisition of shares under the foregoing provision was increased to thirty-five percent (35%). It is further pr ovided therein that mandatory tender offer is still applicable even if the acquisition is less than 35% when the purchase would result in ownership of over 51% of the total outstanding equity s ecurities of the public company. Whatever maybe the method by which control of a public company i s obtained, either through the direct purchase of its stoc s or an indirect means, mandatory tender offer applies (CEMCO Holdings vs. National Life Insurance Co., G.R. No. 1 71815). Any person, group of persons acting in concert, who intend to acquire at least fifteen per centum (15%) of or, acquire at least thirty per centum (30%) over a period of tw elve (12) months of any class of equity security of a listed corporation or a corporation with as sets of at least 50 million and having 200 or more stoc holders with at least 100 shares each are ob liged to ma e a tender offer to all stoc holders by filing with the SEC a declaration to that ef fect, and paying the filing fee; furnishing the Issuer a statement containing the information require d of the issuers as SEC may prescribe, including subsequent or additional materials; publishing all requests or invitations for tender, or materials ma ing a tender offer or requesting or invi ting letters of such a security (Sec. 57.2, SRC). Rule on proxy solicitation Proxies must be issued and proxy solicitation must be made in accordance with ru les

and regulations to be issued by the SEC: 1. Proxies must be in writing, signed by the stoc holder or his duly authorized representative and filed before the scheduled meeting with the corporate secreta ry; 2. Unless otherwise provided in the proxy, it shall be valid only for the meetin g for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at one time; 3. No bro er or dealer shall give any proxy, consent or authorization, in respec t of any security carried for the account of a customer, to a person other than the custo mer, without the express written authorization of such customer; 4. A bro er or dealer who holds or acquires the proxy for at least ten per centu m (10%) or such percentage as the SEC may prescribe of the outstanding share of the issuer, shall submit a report identifying the beneficial owner within ten (10) days after such acquisition, for its own account or customer, to the issuer of the security, to the Exchange where the security is traded and to the SEC (Sec. 20, SRC). 5. For proxy or consent solicitation, the SEC may require that the person ma ing such filing pay a fee of not more than one-tenth (1/10) of one per centum (1%) of the proposed payment in cash, and the value of any securities or property to be transferred in the acquisition, merger or consolidation, or the cash and value o f any

securities proposed to be received upon the sale or disposition of such assets i n the case of a solicitation (Sec. 21, SRC).

Disclosure rule Under the policy of full material disclosure, all companies, listed or applying for listing, are required to divulge truthfully and accurately, all material information abou t themselves and the securities they sell, for the protection of the investing public, and under pain of administrative, criminal and civil sanctions. A fact is deemed material if it te nds to induce or otherwise effect sale or purchase of its securities (PSE vs. CA, 281 SCRA 232). Civil liabilities on account of false registration statement Any person acquiring security: 1. The registration statement of which or any part thereof contains an untrue st atement of a material fact or omits to state a material fact required to be stated there in or necessary to ma e such statements not misleading 2. Who suffers damage 3. Unless it is proved that at the time of such acquisition he new of such untr ue statement or omission 4. May sue in court: (a) Every person who signed the registration statement; (b) Director of, or any other person performing similar functions, or a partner the Issuer at the time of the filing of the registration statement, with respect to which liability is asserted; (c) Every director or partner of issuer and who written consent thereto is filed with the registration statement; (d) Every professional who gives authority to a statement made by him, who, with his written consent, has been named as having prepared or certified any part of the registration statement, or any report or valuation which is used with the registration statement; (e) Every underwriter with respect to such security (Sec. 56, SRC).

Civil liabilities arising in connection with the prospectus

Any person who: 1. Unlawfully offers to sell or sells a security; or 2. Offers to sell or sells a security, whether or not exempted by: a. Use of any means or instruments of transportation or communication; b. Or by means of a prospectus or oral communications, which includes an untrue statement of a material fact, or omits to state a material fact necessary in order to ma e the statements; c. With purchaser not nowing they were made of such untruth or omission; and d. And such person shall fail in the burden of proof that he did not now, and in the exercise of reasonable care could not have nown, of such untruth or omission shall be liable to the buyer of such security from him (Sec. 57, SRC).

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General Ban ing Law of 2000 (RA 8791) Definition and classification of ban s Ban s refer to entities engaged in the lending of funds obtained in the form of deposits (Sec. 3, General Ban ing Law of 2000). Ban s are classified into: i. Universal ban s; ii. Commercial ban s; iii. Thrift ban s, composed of: a. Savings and mortgage ban s; b. Stoc savings and loan associations; and c. Private development ban s iv. Rural ban s; v. Cooperative ban s; vi. Islamic ban s; vii. Domestic ban s; viii. Foreign ban s; and ix. Offshore ban ing units. Distinction of ban s from quasi-ban s and trust entities Ban s are entities engaged in the lending of funds obtained in the form of depo sits (Sec. 3, GBL). Quasi-ban s refer to entities engaged in the borrowing of funds through the iss uance, endorsement or assignment with recourse or acceptance of deposit substitutes (Se c. 4, last par., GBL). A trust entity is a stoc corporation or a person duly authorized by the Moneta ry Board to engage in trust business as a trustee or administer any trust or hold propert y in trust or on deposit for the use, benefit of others (Sec. 3, GBL). Organization/capital structure of ban s and quasi-ban s

1. The entity is a stoc corporation; 2. Its funds are obtained from the public, which shall mean twenty (20) or more persons; 3. The minimum capital requirements prescribed by the MB for each category of ba n s are satisfied (Sec. 8, GBL).

The Monetary Board may authorize the organization of a ban ct to the following conditions:

or quasi-ban subje

No person, association, or corporation unless duly authorized to engage in the business of a ban , quasi-ban , trust entity, or savings and loan association, or other b an ing laws, shall advertise or hold itself out as being engaged in the business of such ban , quas i-ban , trust

Use of

ban /ban ing

entity, or association, or use in connection with its business title, the word o r words ban ,. ban ing,. ban er,. quasi-ban ,. quasi-ban ing,. quasi-ban er,. savings and loan associ ation,. trust corporation,. trust company. or words of similar import or transact in any m anner the business of any such ban , corporation or association (Sec. 64, GBL).

Foreign individuals and non-ban corporations may own or control up to forty pe rcent (40%) of the voting stoc of a domestic ban . This rule shall apply to Filipinos and domestic non-ban corporations. The percentage of foreign-owned voting stoc s in a ban shall be determined by the citizenship of the individual stoc holders in that ban . The citizenship of the corporation which is a stoc holder in a ban shall follow the citizenship of the controlling stoc holders of the corporation, irrespective of the place of incorporation (Sec. 11, GBL).

The MB may authorize a foreign ban to acquire up to one hundred (100%) of the voting stoc of only one (1) ban organized under Philippine laws. However, this is all owed only within seven (7) years from the effectivity of the GBL, which is on June 13, 200 0. Further, at all times, the control of seventy percent (70%) of the resources or assets of the en tire ban ing system are held by ban s which are at least majority-owned by Filipinos (Sec. 73 , GBL). Section 8 of the Thrift Ban s Act (TBA) provides that forty percent (40%) of th e voting stoc of a thrift ban shall be owned by Philippine citizens. In case of a merge r or consolidation with a foreign holding, foreign ownership is limited to sixty percent (60%). Sec tion 4 of the Rural Ban s Act (RBA) provides that the capital stoc of any rural ban shall be fully owned and held directly or indirectly by citizens of the Philippines or corporations, associations or cooperatives qualified under Philippine laws to own and hold such capital stoc . May a foreign ban be allowed to own 100% of the voting stoc of a thrift ban or a rural ban by virtue of Section 73 of the GBL?

Minimum capitalization: A foreign ban of a Philippine ban

may acquire up to 100% of the voting stoc

Ownership of stoc

of a domestic ban

Yes. Section 73 of the GBL which too effect on June 13, 2000 effectively repea led Section 8 of the TBA that was approved on April 2, 1992. Section 73 of the GBL now allow s 100% ownership of the voting stoc in any Philippine ban . It must be noted further that the second paragraph of Section 8 of the TBA prov ides: Any provision of existing laws to the contrary notwithstanding, stoc holdings in a thrift ban shall be exempt from any ownership ceiling for a period of ten (10) years from t he effectivity of this Act.. There is a similar provision in Section 4 of the RBA. Foreign individuals or non-ban corporations are not allowed to own or acquire 100% of a domestic ban . They may only own or control up to forty percent (40%) of the v oting stoc of a domestic ban (Sec. 11, GBL). 100% ownership of the voting stoc of a Philippi ne ban is allowed only to foreign ban s (Sec. 73, GBL). Distinction between universal and commercial ban s

A universal ban shall have the authority to exercise, in addition to the power s authorized for a commercial ban , the powers of an investment house and the powe r to invest in non-allied enterprises (Sec. 23, GBL). A commercial ban shall have, in addition to the general powers incident to corporations, all such powers as may be necessary to carry on the business of co mmercial ban ing such as accepting drafts and issuing letters of credit; discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; accept ing or creating demand deposits; receiving other types of deposits and deposit substitutes; buyi ng and selling foreign exchange and gold or silver bullion; acquiring mar etable bonds and othe r debt securities; and extending credit, subject to such rules as the Monetary Board ma y promulgate. These rules may include the determination of bonds and other debt securities eli gible for investment, the maturities and aggregate amount of such investment (Sec. 29, GBL ). Basic function of ban s Loan and deposit function Ban s refer to entities engaged in the lending of funds obtained in the form of deposits (Sec. 3.1., GBL). The essence of ban ing is the ta ing of deposits from the publ ic and lending out these funds. The basic ban ing function is the mobilization of savings (through deposit-ta ing) and allocating resources (through lending). Thus, a financial institution obtain ing deposits from the public, which was lent to persons deemed suitable by it, is engaged in ban i ng (Republic vs. Security Credit and Acceptance Corp., 19 SCRA 58). Other functions In addition to the operations of ban s, they may perform the following services : i. Act as financial agent and buy and sell, by order of and for the account of t heir customers, shares, evidences of indebtedness and all types of securities; ii. Ma e collections and payments for the account of others and perform such oth er services for their customers as are not incompatible with ban ing business; iii. Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts; and iv. Rent out safety deposit boxes (Sec. 53, GBL). Diligence required of ban s

A ban should exercise its functions and treat the accounts of their clients not only with the diligence of a good father of a family but it should do so with the highest degree of care considering the fiduciary nature of its relationship with its depositors (BPI vs . CA, 326 SCRA 641).

a family (Solidban

The fiduciary relationship means that the ban ards of integrity and performance is deemed written een a ban and its depositor. The fiduciary nature of ban gree of diligence higher than that of a good father of CRA 562).

s obligations to observe high stand into every deposit agreement betw ing requires ban s to assume a de vs. CA, 410 S

The ban s are under obligation to treat the accounts of its depositors with meti culous care always having in mind the fiduciary nature of their relationship (BPI vs. I AC, 206 SCRA 408).

However, the higher degree of diligence is not expected to be exerted by ban s i n commercial transactions that do not involve their fiduciary relationship with th eir depositors (Reyes vs. CA, G.R. No. 118492, August 15, 2001).

By the very nature of the wor of ban s, the degree of responsibility, care and trustworthiness expected of their employees and officials is far greater that th ose of ordinary cler s and employees. Ban s are expected to exercise the highest degree of dilig ence in the selection and supervision of their employees (PCI Ban vs. CA, 350 SCRA 446). Nature of ban funds and ban deposits All inds of deposits, whether fixed or current, are to be treated as loans and are to be covered by the law on loans (People vs. Ong, 204 SCRA 942). They are in the nature of irregular deposits, they are really loans because the y earn interest (BPI vs. CA, 232 SCRA 302). With regard to the Secrecy of Ban Deposits Act (RA 1405), the rule is that all deposits of whatever nature with ban s are considered as absolutely confidential in nature a nd may not be examined, inquired, or loo ed into by any person, government official, bureau or office (Sec. 2, RA 1405). Section 2 of RA 1405 is broad enough to cover trust accounts. The phrase of what ever nature. proscribes any restrictive interpretation of deposits.. Moreover, it is c lear from Section 2 of RA 1405 that, generally, the law applies not only to money which is deposited but also to those which are invested. This further shows that the law was not intended to ap ply only to deposits. in the strict sense of the word. Otherwise, there would have been no ne ed to add the phrase or invested. (Ejercito vs. Sandiganbayan, GR. Nos. 157294-95, Nov. 30, 200 6). The term deposits. as used in RA 1405 is to be understood broadly and not limite d only to accounts which give rise to a creditor-debtor relationship between the d epositor and the

ban . Said the Supreme Court: The contention that trust accounts are not covered by the term deposits. as used in RA 1405, by the mere fact that they do not entail a creditor -debtor relationship between the trustor and the ban , does not lie. An examination of t he law shows that the term deposits. used therein is to be understood broadly and not limited only to accounts which give rise to a creditor-debtor relationship between the depositor and the ban . The policy behind the law is laid down in Section 1 which reads: It is hereby dec lared to be the policy of the government to give encouragement to the people to deposit their mo ney in ban ing institutions and to discourage private hoarding so that the same may be properly utilized by ban s in authorized loans to assist in the economic development of t he country (Ejercito vs. Sandiganbayan, GR. Nos. 157294-95, Nov. 30, 2006). The trust account of JV is covered. Section 2 of RA 1405 is broad enough to cov er trust accounts. The phrase of whatever nature. proscribes any restrictive interpretatio n of deposits.. Moreover, it is clear from Section 2 of RA 1405 that, generally, the l aw applies not only to money which is deposited but also to those which are invested. This furt her shows that

the law was not intended to apply only to deposits in the strict sense of the wo rd (Ejercito vs. Sandiganbayan, GR. Nos. 157294-95, Nov. 30, 2006). Kinds of deposits Savings deposits Interest at say, 8%. Under the fine prints, if you deposit today, you cannot wi thdraw the amount not until 60 days later. The ban can lend out such funds; that is why it pays interests on such deposit (Villanueva, Commercial Law Review, 2009 ed., p. 913). Time deposits Interest rates stipulated depend on the number of days, which may be 30, 60, 90 , 180, 360 or 540 days. During this period, money deposited cannot be withdrawn. The ban s use this money to lend to others. That is why in such accounts, depositors are paid high interest as compensation for the use of the money by the ban (Villanueva, Commercial Law Re view, 2009 ed., p. 913). Demand deposits They are popularly nown as current accounts. They are deposits, which are with drawn only through the use of a depositor s chec , payable on demand to the bearer of th e chec upon order of the depositor, and non-interest bearing except upon special arrangement . The term demand deposits. means all those liabilities of the Bang o Sentral and of other ban s which are denominated in Philippine currency and are subject to paym ent in legal tender upon demand by the presentation of chec s (Sec. 58, RA 7653). No interest is paid by the ban , because the depositor can ta e out his funds a t any time. It is called demand deposit because the depositor can withdraw the money he depo sited on the very same day he deposited it (Villanueva, Commercial Law Review, 2009 ed., p. 9 13). Deposit substitutes Deposit substitutes are alternative forms of obtaining funds from the public, o ther than deposits, through the issuance, endorsement, or acceptance of debt instruments f or the borrower s own account, for the purpose of relending or purchasing of receivables and other obligations. These instruments may include ban er s acceptances, promissory notes and similar instruments with recourse and repurchase agreements (Sec. 95, RA 7653).

Stipulation on interests If the stipulated interest on deposits is unusually high compared with the prev ailing applicable interest rate, the Phil. Deposit Insurance Corporation (PDIC) as rece iver may exercise such powers which may include a reduction of the interest rate to a reasonable r ate provided that any modification or reduction shall apply only to unpaid interest (As added by Phil. Deposit Insurance Corporation, (R.A. 9302), 12 August 2004).

Ratio of net worth to total ris

assets

The Monetary Board shall prescribe the minimum ratio which the net worth of a b an must bear to its total ris assets which may include contingent accounts (Sec. 3 4, GBL). The Monetary Board may require such ratio be determined on the basis of the net worth and ris assets of a ban and its subsidiaries, financial or otherwise, as well as prescribe the composition and the manner of determining the net worth and total ris assets of ban s and their subsidiaries (Sec. 34, GBL). If a ban does not comply with the prescribed minimum ratio, the Monetary Board may limit or prohibit the distribution of net profits by such ban and may require t hat part or all of the net profits be used to increase the capital accounts of the ban until the m inimum requirement has been met (Sec. 34, GBL). In case of a ban merger or consolidation, or when a ban is under rehabilitati on, the Monetary Board may temporarily relieve the surviving ban , consolidated ban , or constituent ban or corporations under rehabilitation from full compliance with the required capital ratio (Sec. 34, GBL).

I. Loan Function A ban shall grant loans and other credit accommodations only in amounts and fo r the periods of time essential for the effective completion of the operations to be f inanced. The essence of ban ing is the ta ing of deposits from the public and lending ou t these funds. The basic ban ing function is the mobilization of savings (through deposi t-ta ing) and allocating resources (through lending) (Republic vs. Security Credit and Accepta nce Corp., 19 SCRA 58). Limitation on loans and credit accommodations 1. Single borrower s limit (SBL) Except as the Monetary Board may otherwise prescribe for reasons of national interest, the total amount of loans, credit accommodations and guarantees as may be defined by the Monetary Board that may be extended by a ban to any person, partnership, as sociation, corporation or other entity shall at no time exceed twenty percent (20%) of the net worth of such

Functions of ban

ban (Sec. 35, GBL). Unless the Monetary Board prescribes otherwise, the SBL may be increased by an additional ten percent (10%) of the net worth, provided the additional is suppor ted adequately secured by trust receipts, shipping documents, warehouse receipts or other simil ar documents transferring or securing title covering readily mar etable, non-perishable goods which must be fully covered by insurance, which shall include: i. direct liability of the ma er or acceptor of paper discounted with or sold to such ban and the liability of a general endorser, drawer or guarantor who obtains a loan or other credit accommodation from or discounts paper with or sells papers to such ban

ii. in the case of an individual who owns or controls a majority interest in a corporation, partnership, association or any other entity, the liabilities of sa id entities to such ban ; iii. in the case of a corporation, all liabilities to such ban of all subsidiar ies in which such corporation owns or controls a majority interest; and iv. in the case of a partnership, association or other entity, the liabilities o f the members thereof to such ban (Sec. 35, GBL). 2. Restrictions on ban exposure to DOSRI No director or officer of any ban shall, directly or indirectly, for himself o r as the representative or agent of others, borrow from such ban nor shall he become a g uarantor, endorser or surety for loans from such ban to others, or in any manner be an ob ligor or incur any contractual liability to the ban except with the written approval of the ma jority of all the directors of the ban , excluding the director concerned (Sec. 36, GBL). Arms length rule

Extent of loan to DOSRI The DOSRI accounts shall be limited to an amount equivalent to their respective unencumbered deposits and boo value of their paid-in capital contribution in th e ban (Sec. 36, GBL). The exceptions are: 1. Loans, credit accommodations and guarantees secured by assets considered as n onris by the Monetary Board shall be excluded from such limit (Sec. 36, GBL). 2. Loans, credit accommodations and advances to officers in the form of fringe b enefits granted shall not apply to loans, credit accommodations, and guarantees extended by a cooperative ban to its cooperative shareholders (Sec. 36, GBL). No commercial ban shall ma e any loan/discount on security of shares of its ow n capital stoc . Penalties for violations If the offender is a director or officer of a ban , quasi-ban or trust entity, the Monetary Board may suspend or remove such director or officer. If the violation is commit ted by a

The account should be upon terms not less favorable to the ban red to others.

than those offe

corporation, such corporation may be dissolved by quo warranto proceedings insti tuted by the Solicitor General (Sec. 66, GBL). II. Deposit function Concept The definition of the term ban . indicates its basic services/functions, viz.: a cceptance of deposits from the public, and lending the funds obtained from deposits. The i nstitution is not

a ban if these functions, particularly deposit function, are absent. Although o ther entities or persons may extend loans, they will not be considered performing ban ing busines s if they do not accept deposits from the public (Aquino, Notes and Cases on Ban ing Law and Negotiable Instruments Law, 2010 ed., p. 37). Relationship of ban and depositor: debtor-creditor The contract entered into between the ban and the depositor is substantially a contract of loan. Article 1980 of the Civil Code provides that fixed, savings and current deposits of money in ban s and similar institutions shall be governed by the provisions conc erning simple loans. However, unli e ordinary contracts of simple loan, ban deposits are subj ect to special rules provided for by special laws as well as BSP regulations (Aquino, Notes and Cases on Ban ing Law and Negotiable Instruments Law, 2010 ed., p. 37). A depositor is one who pays money into the ban in the usual course of business, to be placed to his credit and subject to his chec or beneficiary held by the ban (C hina Ban ing Corp. vs. CA, 511 SCRA 120). Joint accounts Ban account may be opened by one individual or by two or more persons. Whenever two (2) persons open an account, the same may be an and/or. or an and. account. If the joint is an and/or. account, any one of the depositors may withdraw funds therefrom and the s ignature of one is enough to authorize the ban to allow such withdrawal. If it is an and. account, the depositors are joint creditors of the ban and the signatures of all depositors are necessary to allow withdrawal (Aquino, Notes and Cases on Ban ing Law and Negotiable Instrume nts Law, 2010 ed., p. 69). Related rules on joint accounts In case of death of one of the depositors in a joint account, it is presumed tha t the depositors own the account share and share-ali e, hence, if there are two deposi tors, half of the deposit shall pertain to the estate of the deceased depositor and the other half shall pertain to the surviving co-depositor (Aquino, Notes and Cases on Ban ing Law and Negotiabl e Instruments Law, 2010 ed., p. 73). The depositors may avoid the inconvenience of settling the estate of the decease d codepositor by entering into what is nown as a survivorship agreement. A survivor

ship agreement is an aleatory contract supported by consideration where the joint dep ositors agree to permit either of them to withdraw the whole deposit during their lifetime and transferring the balance to the survivor upon the death of one of them (Aquino, Notes and Cas es on Ban ing Law and Negotiable Instruments Law, 2010 ed., p. 73). Fit and proper rule To maintain the quality of ban management and afford better protection to depos itors and the public in general, the Monetary Board prescribes, passes upon and review s the qualifications and disqualifications of individuals elected or appointed ban di rectors or officers and disqualify those found unfit (Sec. 16, GBL).

After due notice to the board of directors of the ban , the Monetary Board may disqualify, suspend or remove any ban director or officer who commits or omits an act which render him unfit for the position (Sec. 16, GBL). In determining whether an individual is fit and proper to hold the position of a director or officer of a ban , regard shall be given to his integrity, experience, educat ion, training, and competence (Sec. 16, GBL).

Prohibition on ban s A ban shall not directly engage in insurance business as the insurer (Sec. 54, GBL).

1. Ma e false entries in any ban report or statement or participate in any frau dulent transaction, thereby affecting the financial interest of, or causing damage to, the ban or any person; 2. Without order of a court of competent jurisdiction, disclose to any unauthori zed person any information relative to the funds or properties in the custody of the ban b elonging to private individuals, corporations, or any other entity: Provided, That with r espect to ban deposits, the provisions of existing laws shall prevail; 3. Accept gifts, fees, or commissions or any other form of remuneration in conne ction with the approval of a loan or other credit accommodation from said ban ; 4. Overvalue or aid in overvaluing any security for the purpose of influencing i n any way the actions of the ban or any ban ; or 5. Outsource inherent ban ing functions (Sec. 55.1, GBL). No borrower of a ban shall: 1. Fraudulently overvalue property offered as security for a loan or other credi t accommodation from the ban ; 2. Furnish false or ma e misrepresentation or suppression of material facts for the purpose of obtaining, renewing, or increasing a loan or other credit accommodation or ex tending the period thereof; 3. Attempt to defraud the said ban in the event of a court action to recover a loan or other credit accommodation; or 4. Offer any director, officer, employee or agent of a ban any gift, fee, commi ssion, or any other form of compensation in order to influence such persons into approving a l oan or other credit accommodation application (Sec. 55.2, GBL).

No director, officer, employee, or agent of any ban

shall:

No examiner, officer or employee of the Bang o Sentral or of any department, bur eau, office, branch or agency of the government that is assigned to supervise, examin e, assist or render technical assistance to any ban shall commit any of the acts enumerated in this Section or aid in the commission of the same (Sec. 55.3, GBL).

The ma ing of false reports or misrepresentation or suppression of material fact s by personnel of the Bang o Sentral ng Pilipinas is subject to the administrative an d criminal sanctions provided under the New Central Ban Act (Sec. 55.3, GBL). Consistent with the provisions of Republic Act No. 1405, otherwise nown as the Ban s Secrecy Law, no ban shall employ casual or non regular personnel or too lengthy probationary personnel in the conduct of its business involving ban deposits (Sec. 55.4, GBL ). In determining whether a particular act or omission, which is not otherwise proh ibited by any law, rule or regulation affecting ban s, quasi-ban s or trust entities, may be deemed as conducting business in an unsafe or unsound manner, the Monetary Board shall con sider any of the following circumstances: 1. The act or omission has resulted or may result in material loss or damage, or abnormal ris or danger to the safety, stability, liquidity or solvency of the institutio n; 2. The act or omission has resulted or may result in material loss or damage or abnormal ris to the institution's depositors, creditors, investors, stoc holders or to t he Bang o Sentral or to the public in general; 3. The act or omission has caused any undue injury, or has given any unwarranted benefits, advantage or preference to the ban or any party in the discharge by t he director or officer of his duties and responsibilities through manifest partiali ty, evident bad faith or gross inexcusable negligence; or 4. The act or omission involves entering into any contract or transaction manife stly and grossly disadvantageous to the ban , quasi-ban or trust entity, whether or not the director or officer profited or will profit thereby (Sec. 56, GBL). Whenever a ban , quasi-ban or trust entity persists in conducting its business in an unsafe or unsound manner, the Monetary Board may ta e action and/or immediately exclude the erring ban from clearing (Sec. 56, GBL).

1. Its clearing account with the Bang o Sentral is overdrawn; or 2. It is deficient in the required liquidity floor for government deposits for f ive (5) or more consecutive days, or 3. It does not comply with the liquidity standards/ratios prescribed by the Bang o Sentral for purposes of determining funds available for dividend declaration; or 4. It has committed a major violation as may be determined by the Bang o Sentral

No ban or quasi-ban

shall declare dividends, if at the time of declaration:

(Sec. 57, GBL). A ban , quasi-ban or trust entity incorporated under the laws of the Philippine s shall not publish the amount of its authorized or subscribed capital stoc without indicat ing at the same time and with equal prominence, the amount of its capital actually paid up (Sec. 62, GBL). No branch of any foreign ban doing business in the Philippines shall announce t he amount of the capital and surplus of its head office, or of the ban in its entirety wi thout indicating at

the same time and with equal prominence the amount of the capital, if any, defin itely assigned to such branch, such fact shall be stated in, and shall form part of the publica tion (Sec. 62, GBL).

No person, association, or corporation unless duly authorized to engage in the b usiness of a ban , quasi-ban , trust entity, or savings and loan association as defined in th is Act, or other ban ing laws, shall advertise or hold itself out as being engaged in the busines s of such ban , quasi-ban , trust entity, or association, or use in connection with its business title, the word or words ban ,. ban ing,. ban er,. quasi-ban ,. quasi-ban ing,. quasi-ban er,. savings an loan association,. trust corporation,. trust company. or words of similar import or tra nsact in any manner the business of any such ban , corporation or association (Sec. 64, GBL). Ownership of real property Any ban may acquire real estate as shall be necessary for its own use in the co nduct of its business provided that the total investment in such real estate and improvem ents thereof including ban equipment, shall not exceed fifty percent (50%) of combined capit al accounts provided, further, that the equity investment of a ban in another corporation e ngaged primarily in real estate shall be considered as part of the ban s total investmen t in real estate, unless otherwise provided by the Monetary Board (Sec. 51, GBL). A ban may acquire, hold or convey real property under the following circumstanc es: 1. Such as shall be mortgaged to it in good faith by way of security for debts; 2. Such as shall be conveyed to it in satisfaction of debts previously contracte d in the course of its dealings; or 3. Such as it shall purchase at sales under judgments, decrees, mortgages, or tr ust deeds held by it and such as it shall purchase to secure debts due it (Sec. 52, GBL). Any real property acquired or held under the circumstances enumerated in the abo ve paragraph shall be disposed of by the ban within a period of five (5) years or as may be prescribed by the Monetary Board provided that the ban may, after said period, continue to hold the property for its own use (Sec. 52, GBL). Trust operations Only a stoc corporation or a person duly authorized by Monetary Board to engage in trust business shall act as trustee or administer any trust hold property in tru

st or on deposit for the use, benefit, or behalf of others (Sec. 79, GBL). Powers of trust entities A trust entity shall have the power to: 1. Act as trustee on any mortgage or bond issued by any municipality, corporatio n, or any body politic and to accept and execute any trust consistent with law; 2. Act under the order or appointment of any court as guardian, receiver, truste e, or depositary of the estate of any minor or other incompetent person, and as receiv er and depositary of any moneys paid into court by parties to any legal proceedings and of property of any ind which may be brought under the jurisdiction of the court;

3. Act as the executor of any will when it is named the executor thereof; 4. Act as administrator of the estate of any deceased person, with the will anne xed, or as administrator of the estate of any deceased person when there is no will; 5. Accept and execute any trust for the holding, management, and administration of any estate, real or personal, and the rents, issues and profits thereof; and 6. Establish and manage common trust funds, subject to such rules and regulation s as may be prescribed by the Monetary Board (Sec. 83, GBL).

State policies The Bang o Sentral ng Pilipinas (BSP) is the state s central monetary authority mandated in the 1987 Philippine Constitution, which shall function and operate a s an independent and accountable body corporate in the discharge of its mandated resp onsibilities concerning money, ban ing and credit (Sec. 1, New Central Ban Act). Creation of the Bang o Sentral ng Pilipinas (BSP) Bang o Sentral ng Pilipinas is an independent central monetary authority with a capital of fifty billion pesos (P50,000,000,000) fully subscribed by the Government of t he Republic, hereafter referred to as the government, ten billion pesos (P10,000,000,000) ful ly paid for by the government and the balance to be paid for within a period of two (2) years from the effectivity of RA 7653 (Sec. 1, NCBA). Responsibility and primary objective The primary objectives of the BSP are: 6. To maintain price stability conducive to a balanced and sustainable growth of the economy; 7. To promote and maintain monetary stability and the convertibility of the peso ; 8. To provide policy directions in the areas of money, ban ing, and credit, with supervision over the operations of ban s, and with regulatory powers over the operations of finance companies and non-ban financial institutions performing quasi-ban ing functions (Sec. 3, NCBA).

The New Central Ban

Act (RA 7653)

Monetary board composition The powers and functions of the Bang o Sentral is exercised by the Bang o Sentr al Monetary Board composed of seven (7) members appointed by the President of the P hilippines for a term of six (6) years. The seven (7) members are:

1. Governor of the Bang o Sentral, who shall be the Chairman of the Monetary Boa rd. 2. Member of the Cabinet to be designated by the President of the Philippines 3. Five (5) members who shall come from the private sector, all of whom shall se rve fulltime (Sec. 6, NCBA).

Monetary board powers and functions In the exercise of its authority, the Monetary Board shall: i. issue rules and regulations it considers necessary for the effective discharg e of the responsibilities and exercise of the powers vested upon the Monetary Board and the Bang o Sentral. The rules and regulations issued is reported to the President and the Congress within fifteen (15) days from the date of their issuance; ii. direct the management, operations, and administration of the Bang o Sentral, reorganize its personnel, and issue such rules and regulations as it may deem necessary or convenient for this purpose. The legal units of the Bang o Sentral is under the exclusive supervision and control of the Monetary Board; iii. establish a human resource management system which shall govern the selection, hiring, appointment, transfer, promotion, or dismissal of all personn el. iv. adopt an annual budget for and authorize such expenditures by the Bang o Sentral as are in the interest of the effective administration and operations of the Bang o Sentral; and v. indemnify its members and other officials of the Bang o Sentral, including personnel of the departments performing supervision and examination functions against all costs and expenses reasonably incurred by such persons in connection with any civil or criminal action, suit or proceedings to which he may be, or is , made a party by reason of the performance of his functions or duties, unless he is finally adjudged in such action or proceeding to be liable for negligence or misconduct (Sec. 15, NCBA). How the BSP handles ban s in distress Conservatorship Whenever a ban or a quasi-ban is in a state of continuing inability or unwill ingness to maintain a condition of liquidity deemed adequate to protect the interest of dep ositors and creditors, the Monetary Board may: i. appoint a conservator to ta e charge, for a period not exceeding one (1) year , of the assets, liabilities, and the management thereof; ii. reorganize the management

iii. collect all monies and debts due said ban ; and iv. exercise all powers necessary to restore its viability, with power to overru le or rebu e the actions of the previous management and board of directors of the ban or quasi-ban (Sec. 29, NCBA). A conservator is a person appointed, after a ban is placed under conservatorsh ip, to ta e over the management of the ban and shall assume exclusive powers to overse e every aspect of the ban s operation and affairs (Central Ban vs. CA, 208 SCRA 652). Closure The ban s closure did not diminish the authority and powers of the designated liquidator to effectuate and carry on the administration of the ban . During the closure of respondent ban , it could still function as a bonding institution, hence, could continue collecting interests from petitioners (Sps. Z. & C. Bacolor vs. Banco Filipino S avings etc., et al., G.R. No. 148491). It is a well-settled rule that the closure of a ban may be considered an exerc ise of the police power of the State. The action of the Monetary Board on this matter is de emed final and executory (Rural Ban of San Miguel, Inc. vs. Monetary Board, Bang o Sentral ng Pilipinas, G.R. No. 150886, February 16, 2007). Moreover, under Republic Act 7653, an examination is no longer required to be conducted before the Monetary Board can issue a closure order. This can be glean ed from the use of the word report. instead of examination.. The purpose of the law is to ma e the closure of a ban summary in nature and expeditious in order to protect public i nterest. Prior notice and hearing are no longer required before a ban can be closed (Rural Ban of San Miguel, Inc. vs. Monetary Board, Bang o Sentral ng Pilipinas, G.R. No. 150886, February 16, 2007). Close now, hear later doctrine Under the law, the sanction of closure could be imposed upon a ban by the BSP even without notice and hearing. The apparent lac of procedural due process would no t result in the invalidity of action by the MB. This close now, hear later. scheme is grounde d on practical and legal considerations to prevent unwarranted dissipation of the ban s assets a nd as a valid exercise of police power to protect the depositors, creditors, stoc holders, and the general public. The action of the MB on this matter is final and executory. Such exercis e may nonetheless be subject to judicial inquiry and can be set aside if found to be i

n excess of jurisdiction or with grave abuse of discretion as to amount to lac or excess of jurisdiction (Rural Ban of San Miguel, Inc. vs. Monetary Board, Bang o Sentral ng Pilipinas, G.R. N o. 150886, February 16, 2007). The close now, hear later. doctrine has already been justified as a measure for the protection of the public interest. Swift action is called for on the part of the BSP when it finds that a ban is in dire straits. Unless adequate and determined efforts are ta en by the government against distressed and mismanaged ban s, public faith in the ban ing system is certain to deteriorate to the prejudice of the national economy itself, not to m ention the losses suffered by the ban depositors, creditors, and stoc holders, who all deserve th e protection of

the government (MB vs. Valenzuela, G.R. No. 184778, October 2, 2009). Receivership Whenever the Monetary Board finds that a ban or a quasi-ban is unable to pay its liabilities as they become due in the ordinary course of business but shall not include inability to pay caused by extraordinary demands induced by financial panic in the ban ing co mmunity; has insufficient realizable assets to meet its liabilities; cannot continue in b usiness without involving probable losses to its depositors or creditors; or has willfully viola ted a cease and desist order that has become final, involving acts or transactions which amount to fraud or dissipation of the assets of the institution; in which cases, the Monetary Board may summarily and without need for prior hearing, forbid the institution from doing business i n the Philippines, and designate the Philippine Deposit Insurance Corporation (PDIC) a s the receiver of the ban ing institution (Sec. 30, New Central Ban Act). Receivership is the summary closure of a ban by the BSP without prior notice a nd hearing after a finding that the continuance in business would involve probable loss to its depositors and creditors (Central Ban vs. Court of Appeals, 220 SCRA 536). When a ban is placed under receivership, its officers, including its acting pr esident, are no longer authorized to transact business in connection with the ban s assets and property (Abacus Real Estate Dev t Center vs. Manila Ban , G.R. No. 162270). The appointment of a receiver does not dissolve the ban as a corporation nor do es it interfere with the exercise of corporate rights. Ban s under liquidation retain their corporate personality. The ban can sue and be sued but any case should be initiated and p rosecuted through the liquidator (Manalo vs. CA, October 2002).

When a ban is declared insolvent and placed under receivership, the BSP through the Monetary Board, determines whether to proceed with the liquidation or reorganiza tion of the financially distressed ban (Sps. Larrobis, Jr. vs. Phil Veterans Ban , G.R. No. 135706).

The assets of the ban shall be deemed in custodia legis in the hands of the re ceiver and shall, from the moment the ban was placed under receivership or liquidation, be exempt from

any order of garnishment, levy, attachment, or execution (Phil. Veterans Ban vs . NLRC, G.R. No. 13039). Grounds for receivership

1. is unable to pay its liabilities as they become due in the ordinary course of business: provided that this shall not include inability to pay caused by extraordinary de mands induced by financial panic in the ban ing community; 2. has insufficient realizable assets to meet its liabilities; or 3. cannot continue in business without involving probable losses to its deposito rs or creditors; or 4. has willfully violated a cease and desist order that has become final, involv ing acts or

A ban or quasi-ban ard finds that:

will be placed under receivership whenever the Monetary Bo

transactions which amount to fraud or a dissipation of the assets of the institu tion; in which cases, the Monetary Board may summarily and without need for prior hearing forbid the institution from doing business in the Philippines and designate the PDIC as receiver of the ban ing institution (Sec. 30, NCBA). 5. When a ban notifies the BSP or publicly announces a ban holiday (Sec. 53, l ast par., GBL). In the event of a ban holiday, the MB may summarily and without need of p rior hearing close such ban ing institution and place it under receivership of the PD IC. Who may be receivers to ban s and quasi-ban s The only person or entity who may be designated as a receiver of a ban under t he General Ban ing Law is the Philippine Deposit Insurance Corporation (Aquino, Not es and Cases on Ban ing Law and Negotiable Instruments Law, 2010 ed., p. 316). However, for a quasi-ban , any person of recognized competence in ban ing or fi nance may be designated as receiver (Aquino, Notes and Cases on Ban ing Law and Negoti able Instruments Law, 2010 ed., p. 316). Period to decide when to undergo rehabilitation/liquidation The conservatorship shall not exceed one (1) year (Sec. 29, NCBA). Within a per iod of one year, the conservator shall ma e a report to the Monetary Board regarding its recommendations: whether to terminate the conservatorship or to place the ban u nder receivership. If during the conservatorship, it was found out that the continuance of the ope rations of the ban or quasi-ban would involve probable loss to depositors and other credi tors, the conservatorship will be terminated and the ban or quasi-ban will be placed und er receivership. The Monetary Board may terminate the conservatorship in the following instances : a. When the ban can continue to operate on its own; and b. When the continuance in business of the ban , on the basis of the report of t he conservator or on its own findings, would involve probable loss to depositors an d other creditors (Sec. 29, NCBA). In such event, the ban shall be placed under receive rship or liquidation.

The receiver shall determine as soon as possible, but not later than ninety (90 ) days from ta e over, whether the institution may be rehabilitated or otherwise placed in s uch a condition so that it may be permitted to resume business with safety to its depositors and creditors and the general public (Sec. 30, NCBA). Liquidation If the receiver determines that the institution cannot be rehabilitated or perm itted to resume business, the Monetary Board shall notify in writing the board of directo rs of its findings and direct the receiver to proceed with the liquidation of the institut ion (Sec. 30, NCBA).

The receiver shall then: i. File ex parte with the proper regional trial court, and without requirement o f prior notice or any other action, a petition for assistance in the liquidation of the institu tion pursuant to a liquidation plan adopted by the PDIC; ii. Upon acquiring jurisdiction, the RTC shall, upon motion by the receiver afte r due notice, adjudicate disputed claims against the institution, assist the enforcement of in dividual liabilities of the stoc holders, directors and officers, and decide on other iss ues as may be material to implement the liquidation plan adopted; iii. Convert the assets of the institutions to money, dispose of the same to cre ditors and other parties, for the purpose of paying the debts of such institution in accord ance with the rules on concurrence and preference of credit under the Civil Code; iv. Institute such actions as may be necessary to collect and recover accounts a nd assets of, or defend any action against, the institution (Sec. 30, NCBA). How the BSP handles exchange crisis Legal tender power Pursuant to BSP Circular No. 537, Series 2006, coins in denomination of 1-,5- a nd 10-piso shall be legal tender in amounts not exceeding P1,000.00 while coins in denomina tion of 1-, 5and 10- and 25- sentimo shall be legal tender in amounts not exceeding P100.00.

Rate of exchange The Bang o instruments s. The Bang Sentral may Sentral may buy and sell foreign notes and coins, and documents and of types customarily employed for the international transfer of fund o engage in future exchange operations (Sec. 70, NCBA).

The Bang o Sentral may engage in foreign exchange transactions with the followi ng entities or persons only: i. ban ing institutions operating in the Philippines; ii. the government, its political subdivisions and instrumentalities; iii. foreign or international financial institutions; iv. foreign governments and their instrumentalities; and v. other entities or persons which the Monetary Board is empowered to authorize as foreign exchange dealers (Sec. 70, NCBA).

In order to maintain the convertibility of the peso, the Bang o Sentral may, at the request of any ban ing institution operating in the Philippines, buy any quantit y of foreign exchange offered, and sell any quantity of foreign exchange demanded, by such in stitution, provided that the foreign currencies so offered or demanded are freely convertib le into gold or United States dollars. This requirement shall not apply to demands for foreign n otes and coins (Sec. 70, NCBA).

Miscellaneous topics

The Bang o Sentral shall exchange, on demand and without charge, Philippine cur rency of any denomination for Philippine notes and coins of any other denomination req uested. If for any reason the Bang o Sentral is temporarily unable to provide notes or coins of the denominations requested, it shall meet its obligations by delivering notes and c oins of the denominations which most nearly approximate those requested (Sec. 55, NCBA).

The Bang o Sentral shall withdraw from circulation and shall demonetize all not es and coins which for any reason whatsoever are unfit for circulation and shall replac e them by adequate notes and coins provided that the Bang o Sentral shall not replace note s and coins the identification of which is impossible, coins which show signs of filing, clippin g or perforation, and notes which have lost more than two-fifths (2/5) of their surface or all of the signatures inscribed thereon. Notes and coins in such mutilated conditions shall be withdra wn from circulation and demonetized without compensation to the bearer (Sec. 56, NCBA).

The Bang o Sentral may call in for replacement notes of any series or denominat ion which are more than five (5) years old and coins which are more than (10) years old (Sec. 57, NCBA).

Notes and coins called in for replacement in accordance with this provision sha ll remain legal tender for a period of one (1) year from the date of call. After this peri od, they shall cease to be legal tender but during the following year, or for such longer period as t he Monetary Board may determine, they may be exchanged at par and without charge in the Bang o Sentral and by agents duly authorized by the Bang o Sentral for this purpose. After the expiration of this latter period, the notes and coins which have not been exchanged shall ceas e to be a liability of the Bang o Sentral and shall be demonetized. The Bang o Sentral shall also de monetize all notes and coins which have been called in and replaced (Sec. 57, NCBA).

Purpose The law is enacted to discourage hoarding and to encourage people to deposit the ir money in ban ing institutions so that the same may properly be utilized by ban i ng institutions in authorized loans to assist in the economic development of the country (Sec. 1 , Secrecy of Ban Deposits Act). Prohibited acts The rule is that all deposits of whatever nature with ban s are considered as a bsolutely confidential in nature and may not be examined, inquired, or loo ed into by any person, government official, bureau or office (Sec. 2, SBD). Deposits covered All deposits of whatever including investments in government bonds (Sec. 2, SBD) . Section 2 of RA 1405 is broad enough to cover trust accounts. The phrase of whate ver nature. proscribes any restrictive interpretation of deposits.. Moreover, it is c lear from Section

Law on Secrecy of Ban

Deposits (RA 1405)

2 of RA 1405 that, generally, the law applies not only to money which is deposit ed but also to those which are invested. This further shows that the law was not intended to ap ply only to deposits in the strict sense of the word. Otherwise, there would have been no ne ed to add the phrase or invested. (Ejercito vs. Sandiganbayan, G.R. No. 157294-95, Nov. 30, 200 6). The term deposits. as used in RA 1405 is to be understood broadly and not limited only to accounts which give rise to a creditor-debtor relationship between the d epositor and the ban (Ejercito vs. Sandiganbayan, G.R. No. 157294-95, Nov. 30, 2006). Exceptions

Garnishments of deposits, including foreign deposits

i. In case of an examination, general or special of the Monetary Board after bei ng satisfied that there is reasonable ground to believe that a ban fraud or seriou s irregularity has been or is being committed and that it is necessary to loo int o the deposit to establish such fraud or irregularity (Sec. 2, SBD). ii. In case of an examination by an independent auditor hired by the ban for au dit purposes only and the results thereof shall be for the exclusive use of the ban (Sec. 2, SBD). iii. Written permission of the depositor (Sec. 2, SBD). iv. In cases of impeachment (Sec. 2, SBD). v. Upon order of a competent court in cases of bribery or dereliction of duty of public officials (Sec. 2, SBD). - Plunder is analogous to bribery (Ejercito vs. Sandiganbayan, G.R. No. 157294-9 5, Nov. 30, 2006). vi. In cases where the money deposited or invested is the subject matter of liti gation (Sec. 2, SBD). vii. In cases of inquiry of the BIR of ban accounts of a decedent for estate ta x purposes or in case of a tax compromise (Sec. 6[F], NIRC of 1997). viii. Incidental disclosures of unclaimed balances under the Unclaimed Balances Law (Act 3696). ix. Upon order of a competent court in cases of violation of the Anti-Money Laun dering Act (Sec. 11, AMLA). x. The examination of ban account based on Section 10, Rule 57 of the Rules of Court (Onate vs. Abrogar, 230 SCRA 181).

The following are the exceptions to the law on secrecy of ban

deposits:

The prohibition against examination of or inquiry into a ban deposit under the Secrecy of Ban Deposits Act does not preclude its being garnished to insure satisfactio n of judgment. There is no real inquiry in such a case, and if the existence of the deposit is disclosed, the disclosure is purely incidental to the execution process (ChinaBan vs. Ortega, 49 SCRA 355). The notice of garnishment does not order any inquiry or examination of the amoun t deposited. The garnishment simply orders that the amount deposited be left intac t for the time being until further orders of the court. It was not the intention of the lawma e rs by enacting RA 1405 to place ban deposits beyond the reach of execution to satisfy a final jud gment (ChinaBan vs. Ortega, 49 SCRA 355).

The foreign currency deposit shall be exempt from attachment, garnishment or any other order or process of any court, legislative body, government agency or any administrative body whatsoever (Sec 8, RA 6426, FCDA) except when it has been established that there is probable cause that the deposits involved are in any way related to money launde ring (Sec. 11, AMLA). The provision of RA 6426 or the Foreign Currency Deposits Act (FCDA), which prohibits garnishment of foreign currency deposits, is inapplicable to a foreign transient. Attachment of the foreign currency deposits of an American tourist is allowed wh o idnapped and raped a twelve-year old Filipino child. The FCDA applies to accounts of lend ers and investors (Salvacion vs. Central Ban of the Philippines and China Ban , 278 SCR A 27). Penalties for violation Any violation of the law will subject the offender upon conviction, to an impris onment of not more than five years or a fine of not more than twenty thousand pesos or both, in the discretion of the court (Sec. 5, SBD). Foreign Investments Act (RA 7042) Policy of the law The law was enacted to attract, promote and welcome productive investments from foreign individuals, partnerships, corporations, and governments, including thei r political subdivisions, in activities which significantly contribute to national industria lization and socioeconomic development to the extent that foreign investment is allowed in su ch activity by the Constitution and relevant laws (Sec. 2, Foreign Investments Act). Definition of terms Foreign investment Foreign investment means equity investment made by a non-Philippine national in the form of foreign exchange and/or other assets actually transferred to the Philipp ines and duly registered with the Central Ban which shall assess and appraise the value of su ch assets other than foreign exchange (Sec. 3, FIA). Doing business in the Philippines

The phrase doing business. in the Philippines is deemed to include the following acts:

i. soliciting orders, service contracts, opening offices, whether called "liaiso n" offices or branches; ii. appointing representatives or distributors domiciled in the Philippines or w ho in any calendar year stay in the country for a period or periods totaling one hundred eighty (180) days or more; iii. participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and iv. and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or wor s, or the exercise of some of the functions normally incident to, and in progressiv e

prosecution of, commercial gain or of the purpose and object of the business organization (Sec. 3, FIA). Section 133 of the Corporation Code provides that a foreign corporation doing b usiness in the Philippines without first obtaining the license to do business: 1. shall not be permitted to maintain or intervene in any action, suit or procee ding in any court or administrative agency of the Philippines; 2. but such foreign corporation may be sued or proceeded against before Philippi ne courts or administrative tribunals on any valid cause of action recognized under Philippine laws.

Export enterprise An export enterprise is a manufacturing, processing or service (including touri sm) enterprise, which exports 60% or more of its output, or a trader which purchases products manufactured domestically or exports 60% or more of such purchases (Sec. 3, FIA) . Domestic mar et enterprise A domestic mar et enterprise is one that produces goods for sale or renders ser vices to the domestic mar et entirely, or, if exporting a portion of its output fails to consistently export at least 60% thereof (Villanueva, Commercial Law Review, 2009 ed., p. 1261). In a domestic mar et enterprise, foreigners can invest as much as 100% equity, except in areas included in Negative Lists (Sec. 7, FIA). Where a corporation and its non-Filipino stoc holders own stoc in a SEC-regist ered enterprise, at least 60% of members of Board of Directors of each of both corpor ation must be citizens of the Philippines, in order that corporation be considered a Philippin e national. The control test shall be applied for this purpose (Amendments to the IRR of FIA).

Registration of investments of non-Philippine nationals Without need of prior approval, a non-Philippine national can do business or in vest in a domestic enterprise up to one hundred percent (100%) of its capital, unless part icipation of nonPhilippine nationals in the enterprise is prohibited or limited to a smaller per centage by existing law and/or limited to a smaller percentage (Sec. 5, FIA). Foreign investments in export enterprises Foreign investment in export enterprises whose products and services do not fal l within Lists A and B of the Foreign Investment Negative List provided under Section 8 h ereof is allowed up to one hundred percent (100%) ownership (Sec. 6, FIA). Foreign investments in domestic mar et enterprises Non-Philippine nationals may own up to one hundred percent (100%) of domestic mar et enterprises unless foreign ownership therein is prohibited or limited by existing law or the Foreign Investment Negative List (Sec. 7, FIA).

A domestic mar et enterprise may change its status to export enterprise if over a three (3) year period it consistently exports in each year thereof sixty per cent (60% ) or more of its output (Sec. 7, FIA). Foreign investment negative list The Foreign Investment Negative List has three (3) component lists: A, B, and C : i. List A enumerates the areas of activities reserved to Philippine nationals by mandate of the Constitution and specific laws. ii. List B contains the areas of activities and enterprises pursuant to law: a. Which are defense-related activities, requiring prior clearance and authorization from Department of National Defense (DND) to engage in such activity, such as the manufacture, repair, storage and/or distribution of firearms, ammunition, lethal weapons, military ordnance, explosives, pyrotechnics and similar materials; unless such manufacturing or repair activity is specifically authorized, with a substantial export component, to a non-Philippine national by the Secretary of National Defense; or b. Which have implications on public health and morals, such as the manufacture and distribution of dangerous drugs; all forms of gambling; nightclubs, bars, beerhouses, dance halls; sauna and steambath houses and massage clinics. c. List C contains the areas of investment in which existing enterprises already serve adequately the needs of the economy and the consumer and do not require further foreign investments, as determined by NEDA (Sec. 8, FIA).

Anti-Money Laundering Act (RA 9194) Policy of the law The law is enacted to: i. protect and preserve the integrity and confidentiality of ban accounts and t o ensure that the Philippines shall not be used as a money laundering site for the proceeds of any unlawful activity; ii. pursue the State s foreign policy to extend cooperation in transnational investigations and prosecutions of persons involved in money laundering activities whenever committed (Sec. 2, Anti-Money Laundering Act). Covered institutions The covered institutions are: i. Ban s, offshore ban ing units, quasi-ban s, trust entities, non-stoc savings and loan associations, pawnshops, and all other institutions, including their

subsidiaries and affiliates supervised and/or regulated by the BSP (Rule 3.a.1., Revised Implementing Rules and Regulations of the AMLA [RIRR]). ii. Insurance companies, insurance agents, insurance bro ers, professional reinsurers, reinsurance bro ers, holding companies, holding company systems

and all other persons and entities supervised and/or regulated by the Insurance Commission (Rule 3.a.2., RIRR). iii. SEC supervised/regulated: a. Securities dealers, bro ers, salesmen, investment houses, and other entities managing securities or rendering services as investment agents, advisor, or consultants; b. Mutual funds, closed-end investment companies, common trust funds, preneed companies, and other similar entities; c. Foreign exchange corporations, money changers, money payment, remittance, and transfer companies, and other similar entities; d. Other entities dealing in currency, commodities or financial derivatives base d thereon, valuable objects, cash substitutes and other similar monetary instruments or property (Rule 3.a.3., RIRR).

Obligations of covered institutions i. Establish and record, and maintain a system of verifying, the true identities of clients, including the legal existence and organizational structure of a corpora te client, and their representatives, based on official documents; ii. Keep records for five (5) years; iii. Report covered transactions and suspicious transactions to AMLC within five (5) wor ing days from occurrence but cannot communicate to any person or media the fact of report of covered transaction, or the contents of the report; iv. Prohibited are anonymous accounts, accounts under fictitious names and all other similar accounts (however, numbered accounts are allowed except for chec ing account); and v. BSP may conduct an annual testing of ban ing institutions solely limited to t he determination of the existence and true identity of the owners of such accounts (Sec. 10, AMLA). Covered transactions Covered transaction is a transaction in cash or other equivalent monetary instr ument involving a total amount in excess of five hundred thousand pesos (PhP 500,000.0 0) within one (1) ban ing day (Sec. 1, AMLA). Suspicious transactions Suspicious transactions are transactions with covered institutions, regardless of the amounts involved, where any of the following circumstances exist: i. no underlying legal or trade obligation, purpose or economic justification; ii. client is not properly identified; iii. amount involved is not commensurate with the business or financial capacity of the client; iv. ta ing into account all nown circumstances, it may be perceived that the cl

ient's transaction is structured in order to avoid being the subject of reporting requirements;

v. any circumstances relating to the transaction which is observed to deviate fr om the profile of the client and/or the client's past transactions with the covered institution; vi. transaction is in a way related to an unlawful activity or offense that is a bout to be, is being or has been committed; or vii. similar or analogous transactions (Sec. 2, AMLA). When money laundering is committed Money laundering is committed when proceeds of an unlawful activity are transac ted ma ing them appear to have originated from legitimate sources. It is committed b y the following: i. Any person nowing that any monetary instrument or property represents, involves, or relates to, the proceeds of any unlawful activity, transacts or attempts to transacts said monetary instrument or property; ii. Any person nowing that any monetary instrument or property involves the proceeds of any unlawful activity, performs or fails to perform any act as a res ult of which he facilitates the offense of money laundering; and iii. Any person nowing that any monetary instrument or property is required to be disclosed and filed with the Anti-Money Laundering Council (AMLC), fails to do so (Sec. 4, AMLA). Unlawful activities or predicate crimes Unlawful activity refers to any act or omission or series or combination thereo f involving or having direct relation to the following: i. Kidnapping for ransom ii. Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16 of the Comprehensive Dang erous Act of 2002; iii. Section 3, paragraphs B, C, E, G, H and I of the Anti-Graft and Corrupt Pra ctices Act; iv. Plunder under RA 7080; v. Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and 302 of the Revised Penal Code vi. Jueteng and masiao punished as illegal gambling under PD 1602; vii. Piracy on the high seas viii. Qualified theft ix. Swindling x. Smuggling under RA 455 and RA 1937; xi. Violations under RA 8792, otherwise nown as the Electronic Commerce Act of 2000; xii. Hijac ing and other violations under RA 6235; destructive arson and murder, as defined under the Revised Penal Code, as amended, including those perpetrated

by terrorists against non-combatant persons and similar targets; xiii. Fraudulent practices and other violations of the Securities Regulation Cod e of 2000; and

xiv. Felonies or offenses of a similar nature that are punishable under the pena l laws of other countries (Sec. 3, AMLA). Anti-Money Laundering Council (AMLC) The AMLC is composed of the governor of the Bang o Sentral ng Pilipinas as chai rman, the commissioner of the Insurance Commission and the chairman of the Securities and Exchange Commission as member. The AMLC shall act unanimously in the discharge o f its functions (Sec. 7, AMLA).

Functions The functions of the AMLC are the following: i. require and receive covered or suspicious transaction reports from covered institutions; ii. issue orders addressed to the appropriate supervising authority or the cover ed institutions to determine the true identity of the owner of any monetary instrument or property subject of a covered transaction or suspicious transactio n report or request for assistance from a foreign state, or believed by the AMLC, on the basis of substantial evidence, to be, in whole or in part, wherever located, representing, involving, or related to directly or indirectly, in any manner or by any means, the proceeds of an unlawful activity; iii. institute civil forfeiture proceedings and all other remedial proceedings t hrough the Office of the Solicitor General; iv. cause the filing of complaints with the Department of Justice or the Ombudsm an for the prosecution of money laundering offenses; v. investigate suspicious transactions and covered transactions deemed suspiciou s after an investigation by AMLC, money laundering activities and other violations; vi. apply before the Court of Appeals, ex parte, for the freezing of any monetar y instrument or property alleged to be the proceeds of any unlawful activity; vii. implement such measures as may be necessary and justified to counteract mon ey laundering; viii. receive and ta e action in respect of any request from foreign states for assistance in their own anti-money laundering operations; ix. develop educational programs on the pernicious effects of money laundering, the methods and techniques used in the money laundering, the viable means of preventing money laundering and the effective ways of prosecuting and punishing offenders;

x. enlist the assistance of any branch, department, bureau, office, agency, or instrumentality of the government, including government-owned and controlled corporations, in underta ing any and all anti-money laundering operations, which may include the use of its personnel, facilities and resources for the more resolute prevention, detection, and investigation of money laundering offenses and prosecution of offenders; and

xi. impose administrative sanctions for the violation of laws, rules, regulation s, and orders and resolutions issued pursuant thereto (Sec. 5, AMLA). Freezing of monetary instrument or property The Court of Appeals, upon application ex parte by the AMLC and after determina tion that probable cause exists that any monetary instrument or property is in any wa y related to an unlawful activity, may issue a freeze order which shall be effective immediately . The freeze order shall be for a period of twenty (20) days unless extended by the court (Se c. 7, R.A. 9194).

The AMLC may inquire into or examine any particular deposit or investment with a ny ban ing institution or non-ban financial institution upon order of any competen t court when it has been established that there is probable cause that the deposits or investmen ts are related to an unlawful activities or a money laundering offense, except that no court order shall be required in cases involving unlawful activities defined in Sections 3(I)1, (2) a nd (12) (Sec. 8, AMLA).

Authority to inquire into ban

deposits

Philippine Deposit Insurance Corporation Act (RA 3591 as amended by RA 9302)

Basic policy The Philippine Deposit Insurance Corporation Act is created with the basic poli cy to promote and safeguard the interests of the depositing public by way of providing permanent and continuing insurance coverage on all insured deposits (Sec. 1, Phil. Deposit Insurance Corporation Act). Concept of insured deposits The term insured deposit. means the amount due to any bona fide depositor for legitimate deposits in an insured ban net of any obligation of the depositor to the insured ban as of the date of closure, but not to exceed five hundred thousand pesos (P500,0 00.00) (Sec. 4, PDICA). Liability to depositors Deposit liabilities required to be insured with PDIC Savings account, current account, time deposits. Deposits in acceptable foreign currencies are also insured pursuant to the Foreign Currency Deposits Act (RA 64 26). Trust funds were deleted from the coverage of insured deposits (PD 1974). The ind of insured deposits that the PDIC will pay are those deposits that wer e made in the usual course of business (PDIC vs. CA, 402 SCRA 194). Commencement of liability The PDIC shall commence the determination of insured deposits due the depositor s of a closed ban upon its actual ta eover of the closed ban . It shall give notice to the depositors of the closed ban of the insured deposits due them by whatever means deemed approp riate by the board of directors (Sec. 16, PDICA). PDIC shall publish the notice once a wee for at least three (3) consecutive we e s in a newspaper of general circulation or, when appropriate, in a newspaper circulated in the community or communities where the closed ban or its branches are located (Sec. 16, PDICA).

Deposit accounts not entitled to payment PDIC shall not pay deposit insurance for the following accounts or transactions : i. Investment products such as bonds and securities, trust accounts, and other similar instruments; ii. Deposit accounts or transactions which are unfunded, fictitious or fraudulen t; iii. Deposit accounts or transactions constituting, and/or emanating from, unsaf e and unsound ban ing practice/s, as determined by PDIC, in consultation with

the BSP, after due notice and hearing, and publication of a cease and desist ord er issued by the BSP against such deposit accounts or transactions; and iv. Deposits that are determined to be the proceeds of an unlawful activity as defined under RA 9160 (Sec. 4, PDICA). Extent of liability The PDIC s liability is up to five hundred thousand pesos (P500,000.00) per depos itor (Sec. 4, PDICA). The aggregate of the interest of each co-owner over several joint accounts, whe ther owned by the same or different combinations of individuals, juridical persons or entities, shall li ewise be subject to the maximum insured deposit of five hundred thousand peso s (P500,000.00) (Sec. 4, PDICA). Determination of insured deposits In determining the amount due to any depositor, there shall be added together a ll deposits in the ban maintained in the same right and capacity for his benefit e ither in his own name or in the name of others (Sec. 4g, R.A. 3591). Calculation of liability In determining such amount due to any depositor, there shall be added together all deposits in the ban maintained in the same right and capacity for his benefit e ither in his own name or in the name of others (Sec. 4, PDICA). Joint accounts A joint account regardless of whether the conjunction "and," "or," "and/or" is used, shall be insured separately from any individually-owned deposit account provided that: (1) If the account is held jointly by two or more natural persons, or by two or more juridical persons or entities, the maximum insured deposit shall be divided into as many e qual shares as there are individuals, juridical persons or entities, unless a different sharing is stipulated in the document of deposit, and (2) if the account is held by a juridical person or entity jointly with one or m ore natural persons, the maximum insured deposit shall be presumed to belong entirely to such juridic al person or entity provided that the aggregate of the interest of each co-owner over several joint accounts, whether owned by the same or different combinations of individuals, juridical pe

rsons or entities, shall li ewise be subject to the maximum insured deposit of five hundr ed thousand pesos (P500,000.00) (Sec. 4, PDICA). Mode of payment Whenever an insured ban is closed by the Monetary Board, payment of the insure d deposits shall be made by PDIC as soon as possible either: i. by cash; or ii. by ma ing available to each depositor a transferred deposit in another insur ed ban in an amount equal to insured deposit of such depositor (Sec. 14, PDICA).

The corporation may require proof of claims to be filed before paying the insur ed deposits, and that in any case where the Corporation is not satisfied as to the viability of a claim for an insured deposit, it may require final determination of a court of compete nt jurisdiction before paying such claim (Sec. 14, PDICA). Effect of payment of insured deposit Payment of an insured deposit to any person by PDIC discharge the PDIC (Sec. 16 , PDICA). PDIC, upon payment of any depositor, shall be subrogated to all rights of the d epositor against the closed ban to the extent of such payment (Sec. 15, PDICA). Such subrogation shall include the right to receive the same dividends and paym ents from the proceeds of the assets and recoveries on account of stoc holders liabili ty as would have been payable to the depositor on a claim for the insured deposits but, such depositor shall retain his claim for any uninsured portion of his deposit (Sec. 15, PDICA). Payments of insured deposits as preferred credit All payments by the PDIC of insured deposits in closed ban s parta e of the nat ure of public funds, and as such, must be considered a preferred credit in the order of preference under Article 2244 of the New Civil Code (Sec. 15, PDICA). Failure to settle claim of insured depositor Failure to settle the claim within six (6) months from the date of filing of cl aim for insured deposit, where such failure was due to grave abuse of discretion, gross negligence, bad faith, or malice, shall, upon conviction, subject the directors, officers or emp loyees of PDIC responsible for the delay, to imprisonment from six (6) months to one (1) year ( Sec. 14, PDICA). Failure of depositor to claim insured deposits If the depositor in the closed ban shall fail to claim his insured deposits wi th the PDIC within two (2) years from actual ta eover of the closed ban by the receiver, or does not enforce his claim filed with the corporation within two (2) years after the two-year per iod to file a claim, all rights of the depositor against the PDIC with respect to the insured deposit shall be barred; however, all rights of the depositor against the closed ban and its shareholder s or the

receivership estate to which the PDIC may have become subrogated, shall thereupo n revert to the depositor (Sec. 16, PDICA). Examination of ban s and deposit accounts The PDIC is authorized to conduct examination of ban s with prior approval of t he Monetary Board provided that no examination can be conducted within twelve (12) months from the last examination date and that the PDIC may, in coordination with the B ang o Sentral, conduct a special examination as the Board of Directors, by an affirmative vote of a majority of all of its members, if there is a threatened or impending closure of a ban .

The PDIC and/or the Bang o Sentral, may inquire into or examine deposit account s and all information related in case there is a finding of unsafe or unsound ban ing practice (Sec. 8, PDICA). Prohibition against splitting of deposits Splitting of deposits occurs whenever a deposit account with an outstanding bal ance of more than the statutory maximum amount of insured deposit maintained under the n ame of natural or juridical persons is bro en down and transferred into two (2) or more accounts in the name/s of natural or juridical persons or entities who have no beneficial owners hip on transferred deposits in their names within one hundred twenty (120) days immedia tely preceding or during a ban declared ban holiday, or immediately preceding a clo sure order issued by the Monetary Board of the Bang o Sentral ng Pilipinas for the purpose of availing of the maximum deposit insurance coverage (Sec. 21, PDICA). Prohibition against issuances of TROs, etc. No court, except the Court of Appeals, shall issue any temporary restraining or der, preliminary injunction or preliminary mandatory injunction against the PDIC for any action (Sec. 22, PDICA). This prohibition shall apply in all cases, disputes or controversies instituted by a private party, the insured ban , or any shareholder of the insured ban (Sec. 22, PDICA) . The Supreme Court may issue a restraining order or injunction when the matter i s of extreme urgency involving a constitutional issue, such that unless a temporary r estraining order is issued, grave injustice and irreparable injury will arise. The party applying for the issuance of a restraining order or injunction shall file a bond in an amount to be fixed by the Supreme Court, which bond shall accrue in favor of the PDIC if the court should finally decide that the applicant was not entitled to the relief sought (Sec. 22, PDICA). Any restraining order or injunction issued in violation of this Section is void and of no force and effect and any judge who has issued the same shall suffer the penalty of suspension of at least sixty (60) days without pay (Sec. 22, PDICA).

Warehouse Receipts Law (Act 2137)

Nature and functions of a warehouse receipt

Under Article 1636 of the Civil Code, a warehouse receipt, being designated as a species of documents of title, has the following twin functions:

i. Proof of the possession or control of the goods described therein; and ii. Authorizing or purporting to authorize the possession of the warehouse recei pt to transfer or receive, either by endorsement or by delivery, of the goods represented by such receipt.

To whom delivered Warehouseman is justified in delivering the goods to one who is:

i. Person lawfully entitled to the possession of the goods, or his agent; ii. Person entitled to delivery by the terms of the non-negotiable receipt issue d for the goods, or who has written authority from the person so entitled; or iii. The proper holder of a negotiable receipt by which the terms of which the g oods are deliverable to him or order to bearer (Sec. 9, Warehouse Receipts Act). Kinds i. Non-negotiable receipt one which states that the goods received by the warehouseman will be delivered to the depositor or to any other specified person. ii. Negotiable receipt one which states that the goods received by the warehouseman will be delivered to the bearer or to the order of any person named in such receipt (Secs. 4 and 5, WRA). Distinction between a negotiable instrument and a negotiable warehouse receipt i. When a negotiable instrument is deliberately altered, it becomes null and voi d; when a negotiable warehouse receipt is altered, it is still valid, but it may be enforced only in accordance with its original tenor;

ii. If a negotiable instrument is originally payable to bearer, it will always r emain so payable regardless of the way it is endorsed, whether specially or in blan ; if a negotiable warehouse receipt payable to bearer is endorsed specially it will be converted into a receipt deliverable to order and can only be negotiated further by indorsement and delivery;

iii. In a negotiable instrument, a holder in due course may be title better than that which the party who negotiated the instrument negotiable warehouse receipt, the endorsee, even if the holder obtains only such title as the person negotiating had over the , Commercial Law Review, 2009 ed., p. 530).

able to obtain a to him had; in a in due course, goods (Villanueva

Rights of a holder of a negotiable warehouse receipt as against a transferee of a nonnegotiable warehouse receipt The following are the rights acquired by a person to whom a negotiable receipt has been negotiated:

i. Title to the goods as the person negotiating or transferring the receipt coul d convey; and ii. Direct obligation of the warehouseman to hold possession of the goods for hi m as fully as if the warehouseman contracted with him directly (Sec. 41, WRA). Duties of a warehouseman A warehouseman is obliged, in the absence of lawful cause, to deliver the goods upon demand by either the holder of the receipt or by the depositor, when demand is a ccompanied by:

iii. An order to satisfy warehouseman s lien; iv. An offer to surrender the duly endorsed negotiable receipt; v. A readiness to sign an ac nowledgment of delivery of the goods, when such is requested by the warehouseman (Sec. 8, WRA).

A warehouseman shall be liable for any loss or injury to the goods caused by his failure to exercise such care in regard to them as reasonably careful owner of similar good s would exercise, but he shall not be liable, in the absence of an agreement to the cont rary, for any loss or injury to the goods which could not have been avoided by the exercise of such ca re (Sec. 21, WRA). Except as provided in section 23, a warehouseman shall eep the goods so far sep arate from goods of other depositors and from other goods of the same depositor for which a separate receipt has been issued, as to permit at all times the identification and redeli very of the goods deposited (Sec. 22, WRA). If authorized by agreement or by custom, a warehouseman may mingle fungible good s with other goods of the same ind and grade (Sec. 23, WRA). The warehouseman shall be severally liable to each depositor for the care and re delivery of his share of such mass to the same extent and under the same circumstances as if the goods had been ept separate (Sec. 24, WRA). Warehouseman s lien Generally, a warehouseman, by issuing the receipt, is estopped from setting up a ny title or right to the possession of the goods, except when it pertains to enforcement of his lien (Sec. 16, WRA). However, he has a lien on the goods deposited or on the proceeds thereof in his hands, for all lawful charges and fees (Secs. 27 and 28, WRA). The remedies available to a warehouseman to enforce his lien are as follows: a. To refuse to deliver the goods until his lien is satisfied, pursuant to Sec. 31 of WRA;

b. To sell the goods and apply the proceeds thereof to the value of the lien pur suant to Secs. 33 and 34 of WRA;

c. By other means allowed by law to a creditor against his debtor, for the colle ction from the depositor of all charges and advances which the depositor expressly or impliedly contracted with the warehouseman to pay under Sec. 32 of WRA;

d. Such other remedies allowed by law for enforcement of a lien against personal property under Sec. 35 of WRA (Philippine National Ban vs. Sayo, 292 SCRA 202).

Chattel Mortgage Law (Act 1508) Chattel mortgage is a security for the performance of obligation effected by th e recording of the personal property mortgaged in the chattel mortgage register (A rt. 2140, Civil Code; Northern Motors, Inc. vs. Coquia, 66 SCRA 415). Only personal property may be the object of a chattel mortgage (Sec. 2, Act 150 8). While the subject of a chattel mortgage is personal property, the parties thereto may by agreement treat as personal property that which by nature would be real property, such as a building, as the subject of a chattel mortgage, and the owner thereof may be estopped from su bsequently claiming otherwise (Tumalad vs. Vicencio, 41 SCRA 143 [1971]). Such agreement, h owever, is valid only as between the contracting parties (Evangelista vs. Alto Surety, 103 Phil 401). Essential requisites 1. Constituted to secure the fulfillment of a principal obligation; 2. The mortgagor be the absolute owner of the thing mortgaged; 3. The persons constituting the mortgage have the free disposal of their propert y or, in the absence thereof, that they be legally authorized for the purpose (Art. 2085, Civ il Code). 4. The document in which the mortgage appears be recorded in the Chattel Mortgag e Register (Art. 2140, Civil Code). Formal requisites 1. It must be signed by the person executing the same in the presence of two wit

nesses; 2. It must be accompanied by an affidavit of good faith and a certificate of oat h; 3. The mortgaged property must be described in such a manner as to enable anybod y reading the document, after reasonable inquiry and investigation, to be able to identify the same.

Affidavit of good faith Section 5 of Act 1508 requires the following form of an affidavit of good faith to be appended to the chattel mortgage: We severally swear that the foregoing mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of fraud.. The absence of such affidavit vitiates a mortgage as against creditors and subs equent encumbrances (Phil. Refining Co. v. Jarque, 61 Phil 229; Giberson v. Jureideni B ros., 44 Phil 216; Benedicto de Tarrosa v. Yap Tico & Co., 46 Phil 753) but may, however, be valid as between the parties (Lilius & Lilius v. Manila Railroad Co., 62 Phil 56). Registration, when and where In ordinary cases, where the property is located in the same province or city a s the place of residence of the mortgagor, then registration must be made with the register of deeds of that province or city (Sec. 4, Act 1508). Where these places are different, the contract will have to be registered in bo th places (Sec. 4, Act 1508). If the mortgagor is a non-resident, registration at the city or province where the chattel is located, is sufficient (Sec. 4, Act 1508). With respect to motor vehicles, they have to be registered with the Chattel Mor tgage Register and the Land Transportation Office (Motor Vehicles Law). With respect to shares of stoc , they have to be registered in the province whe re the corporation has its principal office and in the domicile of the mortgagor, unles s their domicile is the same, in which case, a single registration is sufficient (Chua Guan vs. Sama hang Magsasa a, 62 Phil 472). With respect to vessels, they have to be registered with the Office of the Coll ector of Customs at the port of entry (Arroyo vs. Yu, 54 Phil 111). After-acquired property Chattel mortgage shall cover only the property described in the deed and not in any other li e or substituted property (Sec. 7, Act 1508). While pledge, real estate mortgage, or antichresis may exceptionally secure aft

eracquired obligations so long as these future debts are accurately described, a c hattel mortgage, however, can only cover obligations existing at the time the mortgage is constit uted (Acme Shoe Rubber vs. CA, 260 SCRA 714). Provision of section 7 of Chattel Mortgage Act is deemed not to apply to stores open to the public for retail business where the goods are constantly sold and substitut ed with new stoc . A stipulation in the mortgage extending its coverage to properties acquir ed after its constitution is valid and binding where the after-acquired property is in renewa l of, or in

substitution for, goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale of such goods (Torres vs. Limjap 56 Phil 141). After-incurred obligation While pledge, real estate mortgage, or antichresis may exceptionally secure aft eracquired obligations so long as these future debts are accurately described, a c hattel mortgage, however, can only cover obligations existing at the time the mortgage is constit uted (Acme Shoe Rubber vs. CA, 260 SCRA 714). A promise expressed in chattel mortgage to include debts that are yet to be con tracted can be a binding commitment that can be compelled upon the security itself, howe ver, it does not come into existence until after a chattel mortgage agreement covering the ne wly-contracted debt is executed either by concluding a fresh chattel mortgage or by amending th e old contract conformably with form prescribed by the Chattel Mortgage Law. This ruling is due to the requirement in the Affidavit of Good Faith which must contain an oath that the m ortgage is made for the purpose of securing the obligation specified in the conditions ther eof, and for no other purpose, and that the same is a just and valid obligation, and not one ent ered into for the purpose of fraud which ma es it obvious that the debt referred to in the law is a current, not an obligation that is yet merely contemplated (Acme Shoe Rubber vs. CA, 260 SCRA 714). Right of junior mortgagee After a first mortgage is executed, there remains in the mortgagor a mere right of redemption and only this right passes to the second mortgagee by virtue of the s econd mortgage (Art. 13, Act 1508). Foreclosure procedure The mortgagee, thirty (30) days after the condition of a chattel mortgage is br o en, may cause the mortgaged property or any part thereof to be sold at public auction by a public officer at a public place in the municipality where the mortgagor resides or where the p roperty is situated. The application for the foreclosure of the mortgage should be filed wi th the executive judge through the cler of court. After receipt of the application, the cler of court shall, among other duties, raffle the application among the sheriffs, and cause the posting o f the notice of sale (Sec. 14, Act 1508).

Notice of the time, place and purpose of such sale must be posted, at least ten (10) days before the date of sale, at two or more public places in the municipality where the mortgagor resides or where the property is situated (Sec. 14, Act 1508). The mortgagee shall notify the mortgagor and the persons holding the subsequent mortgages of the time and place of sale, at least ten (10) days before the sale, either by notice in writing directed to him or left at his abode, if within the municipality, or sen t by mail if he does not reside in such municipality (Sec. 14, Act 1508). The officer ma ing the sale shall, within thirty (30) days thereafter, ma e in writing a return of his doings and file the same in the office of the registry of deeds wh ere the mortgage is recorded, and the registry of deeds shall record the same. The return shall part icularly describe the articles sold and state the amount received for each article (Sec. 14, Act 1 508).

Redemption When the condition of a chattel mortgage is bro en, the following may redeem: i. Mortgagor; ii. Person holding a subsequent mortgage; iii. Subsequent attaching creditor (Sec. 13, Act 1508).

An attaching creditor who redeems shall be subrogated to the rights of the mort gagee and entitled to foreclose the mortgage (Sec. 13, Act 1508). The redemption is made by paying or delivering to the mortgagee the amount due on such mortgage and the costs and expenses incurred by such breach of condition be fore the sale thereof (Sec. 13, Act 1508). Claim for deficiency General rule If in an extrajudicial foreclosure of chattel mortgage a deficiency exists, an independent civil action may be instituted for recovery of said deficiency, the chattel mort gage being given only as security and not as payment for debt in case of failure of payment (Bico l Savings & Loan Assn. vs. Guinhawa, 188 SCRA 642). The credit shall always be entitled to collect the deficiency judgment (Ablaza vs. Ignacio, 103 Phil 1151). Where the proceeds of the sale are insufficient to cover the debts in an extraj udicial foreclosure of chattel mortgage, the mortgagee is entitled to claim the deficien cy from the debtor (State Investment House vs. CA, 217 SCRA 32). Exception Article 1484 of the Civil Code, which contains the so-called Recto Law, in sale s of personal property on installments, where two or more installments have not been paid and unpaid seller decides to foreclose mortgage, there is no deficiency judgment (Ar t. 1484, Civil Code). In a contract of sale of personal property the price of which is payable in ins tallments, the vendor may exercise any of the following remedies: i. Exact fulfillment of the obligation, should the vendee fail to pay; ii. Cancel the sale, should the vendee's failure to pay cover two or more

installments; Foreclose the chattel mortgage on the thing sold, if one has been constituted, s hould the vendee's failure to pay cover two or more installments. In this case, he shall h ave no further action against the purchaser to recover any unpaid balance of the price. Any agr eement to the contrary shall be void (Art. 1484, Civil Code).

Real Estate Mortgage Law (Act 3135 as amended by RA 4118)

A real estate mortgage is a contract in which the debtor guarantees to the credi tor the fulfillment of a principal obligation, subjecting for the faithful compliance th erewith a real property in case of non-fulfillment of said obligation at the time stipulated (M anresa).

It is a lien on specific or identified immovable property. It directly and immed iately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted. It creates a real right enforceable against the whole world (DBP vs. NLRC, 183 SCRA 328 [1990]).

Coverage

Only the following property may be the object of a contract of mortgage:

i. Immovables; ii. Alienable real rights imposed upon immovables (Art. 2124, Civil Code).

A contract of real estate mortgage shall cover the following:

i. property mortgaged ii. Natural accessions iii. Improvements iv. Growing fruits v. Rents and income not yet received when the obligation becomes due vi. Indemnity granted or owing to the proprietor from the insurers of the proper ty mortgaged, or by virtue of expropriations for public use (Art. 2127, Civil Code) .

Remedies available to mortgagee upon default of the mortgagor

Foreclosure of mortgage is the process by which a property covered may be subjec ted to sale to pay the demand for which mortgages stand as security (Pacific Commercial Co. vs. Alvarez, 38 OG 758).

Foreclosure is the necessary consequence of non-payment of mortgage indebtedness . The mortgage can be foreclosed only when the debt remains unpaid at the time it is due (Producers Ban vs. CA, GR No. 111584, 17 Sept. 2001; Gov t of the PI vs. Espejo, 57 Phil 496) or in case of default in the payment of obligation (PNB vs. CA, GR No. 126908; Chinaba n vs. CA, 265 SCRA 327).

Demand is essential for default

Demand, however, is necessary for default to exist and which gives the right to collect debt and foreclose the mortgage. The maturity date in the promissory notes or th e acceleration clause ( [i]n case of non-payment of this note or any portion of it on demand, whe n due, on account of this note, the entire obligation shall become due and demandable. . ..) therein stated only indicates when payment can be demanded. It is the refusal to pay after demand that gives t he creditor a cause of action against the debtor (DBP vs. Licuanan, GR No. 150097).

Default commences upon judicial or extrajudicial demand (UCPB vs. Beluso, G.R. N o. 159912).

Mora solvendi or debtor s default is defined as a delay in the fulfillment of an obligation, by reason of a cause imputable to the debtor. There are three requisites necessa ry for a finding of default. First, the obligation is demandable and liquidated; second, the debt or delays performance; and third, the creditor judicially or extrajudicially requires the debtor s performance (Selegna Management & Dev t. Corp. vs. UCPB, GR No. 165662). Two modes of foreclosure of real estate mortgage

Foreclosure of real estate mortgage is either done extra-judicially or judicial ly. The provisions of Rule 68 of the 1997 Rules of Civil Procedure govern judicial forec losure. The extrajudicial foreclosure of real estate mortgage, on the other hand, is carried out in the procedure governed by the provisions of Act 3135, as amended, otherwise nown as An Act to Regulate the Sale of Property Under Special Powers Inserted in or Annexed to Real Estate Mort gages..

Judicial foreclosure of real estate mortgage under Rule 68 of the Rules of Court Judicial foreclosure of real estate mortgage is governed by the provisions of R ule 68 of the Rules of Court. It is li e any ordinary civil action filed in court which sh all be proved by preponderance of evidence. Procedure 1. Preparation and filing of complaint which shall set forth the following alleg ations (Sec. 1, Rule 68, Rules of Court):

a) Date and due execution of the mortgage and its assignments, if any;

b) Names and residences of the mortgagor and mortgagee;

c) Description of the mortgaged property/ies;

d) Documentary evidence of the obligation/s secured by the mortgage and the unpa id obligation;

e) Names and residences of all persons having or claiming an interest in the mor tgaged property.

2. The trial court shall render a judgment based on the facts proved and shall a scertain the amount due based on the mortgage debt or obligation, including interests, charge s and costs. The court shall then direct the defendant to pay said amount within a per iod of not less than ninety (90) days nor more than one-hundred twenty (120) days (Sec. 2, Rule 68, Rules of Court). 3. In the event of failure to pay as directed within 90 to 120 days, the mortgag e realty/ies shall be sold at an auction sale, the proceeds of which shall be applied to the mortgage debt, pursuant to Rule 39 of the Rules of Court (Sec. 3, Rule 68, Rules of Court ). 3.1. Before the sale of the real property/ies, notice must be given: a) By posting for 20 days in three (3) public places. If the assessed value is m ore than P50,000.00, by publishing a copy of the notice once a wee for two (2) consecuti ve wee s in one newspaper selected by raffle (Sec. 15c, Rule 39, Rules of Court).

b) Written notice to the judgment obligor at least three (3) days before the sal e (Sec. 15d, Rule 39, Rules of Court). 3.2. The highest bidder shall be issued a certificate of sale (Sec. 25, Rule 39, Rules of Court). 4. Upon motion and after notice and hearing, the trial court will issue an order of confirmation of the sale (Rural Ban of Oroquieta vs. CA, 101 SCRA 5). 4.1. The final order of confirmation shall be registered with the Registry of De eds (Sec. 7, Rule 68, Rules of Court). a) If no right of redemption exists, the certificate of title in the name of the mortgagor shall be cancelled and a new one issued in the name of the purchaser. b) Where a right of redemption exists, the certificate of title of the mortgagor shall not be cancelled. Instead, the certificate of sale and order of confirmation sha ll be registered with a memorandum of the right of redemption. If the property is not redeemed a final deed of sale shall be executed by the sheriff in favor of the purchaser which shall be registered in the Register of Deeds, whereupon the titl e of the mortgagor shall be cancelled and a new one issued in the name of the purchas er. 5. If the proceeds of the auction sale of the property are not sufficient, the t rial court, upon motion, shall render a deficiency judgment against the defendant (Sec. 6, Rule 6 8, Rules of Court). Equity of redemption Equity of redemption is the right of the mortgagor to redeem the mortgaged prop erty after his default in the performance of the conditions of the mortgage but befor e the sale of the property or the confirmation of the sale after judicial foreclosure thereof (Int ernational Services, Inc. vs. IAC, 142 SCRA 467). This is the right of the defendant mortgagor to ext inguish the mortgage and retain ownership of the property by paying the secured debt within a 90-day period after the judgment becomes final or after the foreclosure sale but prior to its confirmation (GSIS vs. CFI, 175 SCRA 19). No right of redemption in judicial foreclosure There is no right of redemption in a judicial foreclosure of mortgage, except f oreclosure of mortgage by ban s or ban ing institutions (GSIS vs. CFI, 175 SCRA 19; Huerta

Alba Resort, Inc. vs. CA, 339 SCRA 534).

Equity of redemption vs. right of redemption The Supreme Court already ruled on the distinction between the equity of redemp tion and the right of redemption as follows: The equity of redemption is, to be sure, different from and should not be confused with the right of redemption. The right of redemption in relation to a mortgage understood in the sense of a prerogative to re-acquire mortgaged property after registration of the foreclosure sale exists only in the case of the extrajudicial foreclosure of the mortgage. No such right is recognized in a judicial foreclosure, except only whe re the mortgagee is the Philippine National Ban or a ban or ban ing institution.

Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of redemption within one (1) year from the registration of the sheriff s certificate of foreclosure sale. Where the foreclosure is judicially effected, however, no equivalent right of redemption exists. The law declares that a judicial foreclosure sale, when confir med by an order of the court, x x shall operate to divest the rights of all the part ies to the action and to vest their rights in the purchaser, subject to such rights of rede mption a may be allowed by law. Such rights exceptionally allowed by law (i.e. even after confirmation by an order of the court) are those granted by the charter of the Philippine National Ban (Acts 2747 and 2938), and the General Ban ing Act (RA 337). These laws confer on the mortgagor, his successors in interest or any judg ment creditor of the mortgagor, the right to redeem the property sold on foreclosure after confirmation by the court of the foreclosure sale which may be exercised w ithin a period of one (1) year, counted from the date of registration of the certifica te of sale in the Registry Property. But, to repeat, no such right of redemption exists in case of judicial foreclosu re of a mortgage if the mortgagee is not the PNB or a ban or ban ing institution. In such a case, the foreclosure sale, when confirmed by an order of the court x x shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser. Then there exists only what is nown as the equity of redemption. This is simply the right of the defendant mortgagor to extinguish th e mortgage and retain ownership of the property by paying the secured debt within the 90day period after the judgment becomes final, in accordance with Rule 68, or even after the foreclosure sale but prior to its confirmation. Section 2, Rule 68 provides that xx If upon the trial xx the court shall find the facts set forth in the complaint to be true, it shall ascertain the amount due to the plaintiff upon th e mortgage debt or obligation, including interest and costs, and shall render judgment for the sum so found due and order the same to be paid into court within a period of not less than ninety (90) days from the date of the service o f such order, and that in default of such payment the property be sold to realize the mortgage debt and costs. This is the mortgagor s equity (not right) of redemption which, as above stated, may be exercised by him even beyond the 90-day period from the date of service of the or der, and even after the foreclosure sale itself, provided it be before the order of confi rmation of the sale. After such order of confirmation, no redemption can be effected any longer. (Ita lics supplied,

Huerta Alba Resort, Inc. vs. CA, 339 SCRA 534 citing Limpin vs. IAC, 166 SCRA 87 ). Deficiency judgment It refers to judgment for any unpaid balance of the obligation which remains af ter foreclosure of mortgage, judicial or extrajudicial, which a creditor may secure from the court (Phil. Ban of Commerce vs. de Vera, 6 SCRA 1026). In extrajudicial foreclosure of mortgage, where the proceeds of the sale are insufficient to pay the debt, the mortgagee has the right to recover the deficiency from the debtor (Prudential Ban vs. Martinez, 189 SCRA 612). In a foreclosure, the deficiency is determined by simple arithmetical computation immediately after fo reclosure (United Planters Sugar Milling Co., Inc. (UPSUMCO) vs. CA, 527 SCRA 336). Extrajudicial foreclosure (EJF) vs. judicial foreclosure (JF)

1. On the governing law. EJF is governed by the provisions of Act 3135, as amend ed, while JF is governed by the provisions of Rule 68 of the Rules of Court. 2. On the publication requirement. In EJF, the auction sale shall be published o nce a wee for three (3) consecutive wee s in a newspaper of general circulation. In JF, th e publication shall only be for two (2) consecutive wee s. 3. On the notice requirement. Personal notice to the mortgagor is not required i n EJF as a rule, UNLESS stipulated upon. In JF, written notice to the judgment obligor at l east three (3) days before the auction sale is required. On redemption There is a right of redemption in EJF, which is one year from registration of t he certificate of sale. If the mortgagor is a juridical person, the redemption peri od is until, but not after, the registration of the certificate of foreclosure sale with the applicab le Register of Deeds which in no case shall be more than three (3) months after the foreclosure, whic hever is earlier. In JF, there is no right of redemption but only equity of redemption, unless the mortgagee is a ban or ban ing institution, the redemption period of which shall be one (1) yea r from the date of registration of the certificate of sale. Extrajudicial foreclosure of real estate mortgage under Act 3135 Essential requirements under Act 3135 Under Act 3135, as amended and settled jurisprudence, the following essential requirements must be met: 1. There must be a special power of attorney inserted in or attached to the real estate mortgage authorizing the sale pursuant to the provisions as amended (Section 1, Act 3135; Paguyo vs. Gatbunton, 523 SCRA 2. The sale must be made within the province where the property thereof is located, unless otherwise stipulated (Section 2, Act of Act, 3135, 156). or any part 3135; Supena vs.

de la Rosa, 267 SCRA 1). 3. There must be a notice of sale to be posted in three public places of the municipality or city where the property is situated. If the property is worth more than P400.00, the notice shall also be published once a wee for three consecutive wee s in a newspaper of general circulation in the city or municipality (Section 3, Act 3135). 4. The sale shall be made at public auction between the hours of nine in the morning and four in the afternoon, and shall be under the direction of the sheriff of the province, the justice or auxiliary justice of the peace (now municipal judge) of the municipality in which such sale shall be made, or a notary public of said municipality (Section 4, Act 3135). Procedure of extrajudicial foreclosure under Act 3135

In Administrative Matter No. 99-10-05-0 (as further amended on 07 August 2001), the Supreme Court prescribed the following procedures in the extra-judicial foreclos ure of mortgage: 1. All applications for extra-judicial foreclosure of mortgage whether under the direction of the sheriff or a notary public pursuant to Act 3135, as amended, sh all be

filed with the executive judge through the cler of court who is also the ex-off icio sheriff. 2. Upon receipt of an application for extra-judicial foreclosure of mortgage, it shall be the duty of the cler of court to: a) receive and doc et said application and to stamp thereon the corresponding file number, date and time of filing; b) collect the filing fees therefore pursuant to Rule 141, Section 7(c) as amend ed by A.M. No. 00-2-01-SC, and issue the corresponding official receipt; c) examine, in case of real estate mortgage foreclosure, whether the applicant has complied with all the requirements before the public auction is conducted under the direction of the sheriff or a notary public, pursuant to Sec. 4 of Act 3135, as amended; d) sign and issue the certificate of sale, subject to the approval of the execut ive judge, or in his absence, the vice-executive judge. No certificate of sale shall be issued in favor of the highest bidder until all fees provided in the aforementioned sections and in Rule 141, Section 9(1) as amended by A.M. 00-2-01-SC, shall have been paid; Provided, that in no case shall the amount payable under Rule 141, Section 9(1), as amended, exceed P100,000.00; e) after the certificate of sale has been issued to the highest bidder, eep the complete records, while awaiting any redemption within a period of one (1) year from date of registration of the certificate of sale with the Register of Deed concerned, after which, the records shall be archived. Notwithstanding the foregoing provision, juridical persons whose property is sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property until, but not after, the registration of the certificate of foreclosure sale which in no case shall be more than three (3) months after foreclosure, whichever is earlier, as provided in Section 47 of Republic Act No. 8791 (as amended, Res. of August 7, 2001).

Where the application concerns the extrajudicial foreclosure of mortgages of rea l estates and/or chattels in different locations covering one indebtedness, only o ne filing fee corresponding to such indebtedness shall be collected. The collecting cler of court shall, apart from the official receipt of the fees, issue a certificate of payme nt indicating the amount of indebtedness, the filing fees collected, the mortgages sought to b e foreclosed, the real estates and/or chattels mortgaged and their respective loca tions, which certificate shall serve the purpose of having the application doc eted wit h the cler s of court of the places where the other properties are located and of allo wing the extrajudicial foreclosures to proceed thereat. 3. The notices of auction sale in extrajudicial foreclosure for publication by t

he sheriff or by a notary public shall be published in a newspaper of general circulation pursuant to Section 1, Presidential Decree No. 1079, dated January 2, 1977, and noncompliance therewith shall constitute a violation of Section 6 thereof. 4. The executive judge shall, with the assistance of the cler of court, raffle applications for extrajudicial foreclosure of mortgage under the direction of the sheriff inc luding those assigned to the office of the cler of court and sheriffs IV assigned in t he branches.

The name/s of the bidder/s shall be reported by the sheriff or notary public wh o conducted the sale to the cler of court before the issuance of the certificate of sale. Need for special power of attorney and authority to foreclose extrajudicially The creditor or mortgagee cannot foreclose a mortgage extrajudicially unless th e authority to foreclose, although not mentioned in the deed itself, is attached t o the mortgage deed. The special power of attorney authorizing the extrajudicial foreclosure of the real property must either be inserted into or attached to the deed of real estate mor tgage (Sec. 1, Act 3135). Procedure 1. Filing of application before the executive judge before the cler of court. 2. Cler of court will examine whether the requirement of the law has been compl ied with, that is, whether the notice of sale has been posted for not less than twenty (20 ) days in at least three (3) public places of the municipality or city where the property is situated, and if the same is worth more than P400,000, that such notice has been published once a wee for at least three (3) consecutive wee s in a newspaper of general circulat ion in the city or municipality. 3. The certificate of sale must be approved by the executive judge. 4. In extrajudicial foreclosure of real mortgages in different locations coverin g one indebtedness, only one filing fee corresponding to such debt shall be collected. 5. The cler of court shall issue a certificate of payment indicating the amount of indebtedness, the filing fees collected, the mortgages sought to be foreclosed, the description of the real estates and their respective locations. 6. The notice of sale shall be published in a newspaper of general circulation. 7. The application shall be raffled among all sheriffs. 8. After the redemption period has expired, the cler of court shall archive the records. 9. No auction sale shall be held unless are at least two (2) participating bidde rs, otherwise the sale shall be postponed to another date. If on the new date there shall not be at least two bidders, the sale shall then proceed. The names of the bidders shall be repo rted to the sheriff or the notary public, who conducted the sale to the cler of court b efore the issuance of the certificate of sale (A.M. No. 99-10-05-0, January 15, 2000). The mortgagor and the mortgagee have no right to waive the posting and publicat ion requirements under Act 3135. Notices are given to secure bidders and prevent a s

acrifice of the property. Clearly, the statutory requirements of posting and publication are man dated, not for the mortgagor s benefit, but for the public or third persons. Failure to comply wi th the statutory requirements as to publication of notice of auction sale constitutes a jurisdict ional defect which invalidates the sale. Lac of republication of notice of foreclosure sale made s ubsequently after the original date renders such sale void (PNB vs. Nepomuceno, G.R. No. 139479). Possession by purchaser of foreclosed property

The purchaser of the foreclosed property is not automatically entitled to the p ossession thereof during the redemption period. He must petition the Regional Trial Court of the province or city where the property is situated to give him possession thereof d uring the redemption period. He must also put up a bond equivalent in value to the use of the property for a period of twelve (12) months to indemnify the debtor in case it is shown t hat the sale was made without complying with the requirements of Act 3135 or that there was no vi olation of the mortgage deed (Sec. 7, Act 3135). Redemption Who may redeem The following may redeem a foreclosed property: i. The debtor; or ii. His successor in interest; or iii. Any judicial creditor or judgment creditor of the debtor; or iv. Any person having a lien on the property subsequent to the mortgage under which the property is sold (Sec. 6, Act 3135).

Amount of redemption price If the mortgagee is not a ban : i. Purchase price of the property ii. 1% interest per month on the purchase price iii. Taxes paid and amount of purchaser s prior lien, if any, with the same rate o f interest computed from the date of registration of sale, up to the time of redemption (Act 3135, in relation to Sec. 28, Rule 39, Rules of Court).

If the mortgagee is a ban : i. Amount due under the mortgage deed ii. Interest iii. Cost and expenses

Redemption price in this case is reduced by the income received from the proper ty (RA 8791). In case of redemption, a written notice of redemption must be served on the off icer who made the sale and a duplicate filed with the applicable Register of Deeds (Rosal

es v. Yboa, 120 SCRA 869; Section 28[par. 3], Rule 39, Rules of Court). The redemption price shall be: the purchase price with one percent (1%) per mon th interest; assessment or taxes paid with 1% per month interest (Section 28, Rule 39, Rules of Court). When the mortgagee is a ban or a ban ing or credit institution, the redemption price is that which is stipulated in the mortgage document or the outstanding obligation of th e mortgage plus interest and expenses (Unionban vs. CA, GR No. 134068; Ponce de Leon vs. R FC, 36 SCRA 289; Sy vs. CA, 172 SCRA 125).

The redemption amount includes the assessment of taxes paid by the purchaser an d the interest on the auction price that should be computed from the date of the regis tration of the certificate of sale (Sps. Estanislao, Jr. vs. CA, GR No. 143687). Period of redemption After the issuance of the certificate of sale to the highest bidder, it shall b e registered with the Register of Deeds where the property is located. At this point, the rem aining right of the mortgagor/debtor is to redeem the property. The period to redeem property so ld extrajudicially following the foreclosure of mortgage is one (1) year from the r egistration of the sheriff s certificate of foreclosure sale (Bernardez vs. Reyes, 201 SCRA 648; Sect ion 6, Act 3135, as amended). In case the mortgagor is a juridical person Section 47, RA 8791, the General Ba n ing Law of 2000 provides: Notwithstanding Act 3135, juridical persons x x x shall have the r ight to redeem the property in accordance with this provision until, but not after, the registratio n of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after the foreclosure, whichever is earlier.. The foreclosed property shall be redeemed within one year from and after the da te of sale (Sec. 6, Act 3135). If the mortgagor is a juridical person whose property has been mortgaged in fav or of a ban , quasi-ban or trust entity, the one-year period redemption is not availabl e if the foreclosure is done extrajudicially. In such a case, the redemption shall be mad e until, but not after, the registration of the certificate of foreclosure sale with the Register of Deeds which in no case shall be more than three (3) months after the foreclosure, whichever is ear lier (Sec. 47, RA 8791). The period to redeem was not suspended by the institution of a separate civil c ase for annulment of mortgage, foreclosure, etc. (Sumerariz vs. DBP, 21 SCRA 1374; Union ban vs. CA, GR No. 134068) and neither is it suspended by the issuance of a TRO by the court s (Peoples Financing Corp. vs. CA, 192 SCRA 34). Effect of pendency of action for annulment of sale As a rule, any question regarding the validity of the mortgage or its foreclosu re cannot be a legal ground for refusing the issuance of a writ of possession. The right o

f the purchaser to have possession of the subject property would not be defeated notwithstanding th e pendency of a civil case see ing the annulment of the mortgage or of the extrajudicial forec losure (De Vera vs. Agloro, 448 SCRA 203). The pendency of a separate civil suit questioning the validity of the mortgage cannot bar the issuance of the writ of possession because the same is a ministerial act of the trial court after the title on the property has been consolidated in the name of the mortgagee. An y question regarding the validity of the mortgage or its foreclosure cannot be a legal grou nd for refusing the issuance of the writ of possession (Samson vs. Rivera, G.R. 154355). Writ of possession Ministerial duty of the court

If no redemption is made within the prescribed period, the buyer at foreclosure sale becomes the absolute owner of the property purchased (Joven vs. CA, 212 SCRA 700 ; PNB vs. Adil, 118 SCRA 110). The purchaser then has the absolute right to a writ of possession that is the f inal process to carry out or consummate the extrajudicial foreclosure. Henceforth, the mortga gor/debtor loses his right over the property (Bernardez vs. Reyes, 201 SCRA 648; Section 6, Act 3135, as amended). Consolidation of title li ewise becomes a matter of right on the part of the auction buyer, and the issuance of a certificate of title in favor of the purchaser beco mes ministerial upon the Register of Deeds (Unionban vs. CA, GR No. 133366, 05 August 1999). Enforcement against third parties In case of an adverse possessor, it is no longer the ministerial duty of the co urt to issue writ of possession (Act 3135, as amended). The possession of the foreclosed property may be awarded to the purchaser or hi ghest bidder unless a third party is actually holding the property adversely to the ju dgment debtor (Chinaban vs. Ordinario, G. R. No. 121943). The granting of the writ of possession ceases to be ministerial only when a thi rd party is actually holding the property adversely to the judgment debtor/mortgagor (Capita l Credit Dimension vs. Chua, G. R. No. 157213).

Truth in Lending Act (RA 3765)

Purpose The Truth in Lending Act is enacted to: i. Protect the debtor from the effects of misrepresentation or concealment; ii. Permit him to fully appreciate and evaluate the real cost of his borrowing; and iii. Avoid circumvention of usury laws (Villanueva, Commercial Law Review, 2009 ed., p. 988). The rationale of this provision is to protect users of credit from a lac of aw areness of the true cost thereof, proceeding from the experience that ban s are able to conceal such true cost by hidden charges, uncertainty of interest rates, deduction of interests from th e loaned amount, and the li e. The law thereby see s to protect debtors by permitting them to ful ly appreciate the true cost of their loan, to enable them to give full consent to the contract , and to properly evaluate their options in arriving at business decisions. Upholding UCPB s claim o f substantial compliance would defeat these purposes of the Truth in Lending Act. The belated discovery of the true cost of credit will too often not be able to reverse the ill effects of an already consummated business decision (UCPB vs. Sps. Samuel and Odette Beluso, G.R. No. 159912). Obligation of creditors to person to whom credit is extended Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing setting forth the following information: i. cash price or delivered price of the property or service to be acquired; ii. amounts, if any, to be credited as down payment and/or trade-in; iii. difference between the amounts set forth under clauses (1) and (2); iv. charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit; v. total amount to be financed; vi. finance charge expressed in terms of pesos and centavos; and vii. percentage that the finance bears to the total amount to be financed expres sed as a simple annual rate on the outstanding unpaid balance of the obligation (Sec. 4 , Truth in Lending Act). Covered and excluded transactions The credit transactions within the scope are: i. Any loans, mortgages, deeds of trust, advances and discounts;

ii. Any conditional sales contracts, any contract to sell, or sale or contract o f sale of property or services, either for present or future delivery, under which part or all of the price is payable subsequent to the ma ing of such sale or contract; iii. Any rental-purchase contract; iv. Any contract for the hire, bailment or leasing of property; v. Any option, demand, lien, pledge or other claim against, or for delivery of, property or money; vi. Any purchase, or other acquisition of, or any credit upon the security of, a ny obligation or claim arising out of any of the foregoing; and

vii. Any transaction or series of transactions having a similar purpose or effec t (CB Circular No. 158). The credit transactions outside the scope are: i. Those that do not involve the payment of any finance charge by the debtor; an d ii. Those in which the debtor is the one specifying a definite and fixed set of credit terms such as ban deposits, insurance contracts, sale of bonds, etc (CB Circula r 158). Consequences of non-compliance with obligation Non-compliance would authorize the debtor to recover any interest payment made (Sec. 6, TLA). Failure to comply with the law ma es the creditor liable for double finance cha rges plus attorney s fees (Sec. 6, TLA).

Letter of Credit Definition/concept It is a request by one ban to another ban to advance or to give money to a th ird person on the basis of the letter and on the credit of the person issuing it (7 Am. Jur . 917). A letter of credit is a written instrument whereby the writer requests or autho rizes the addressee to pay money or deliver goods to a third person and assumes responsibi lity for payment of debt therefor to the addressee (Transfield Philippines vs. Luzon Hydr o Corp., 443 SCRA 307). A letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sale of goods to satisfy the seemingly irre concilable interest of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. The use of credits in commercial transaction s serves to reduce the ris of non-payment of the purchase price under the contract for the sale of goods (Transfield Philippines vs. Luzon Hydro Corp., 443 SCRA 307). However, letters of credits are also used in non-sale settings where they serve to reduce

the ris of nonperformance. Generally, credits in the non-sale settings have com e to be nown as standby credits (Transfield Philippines vs. Luzon Hydro Corp., 443 SCRA 307). Governing laws i. Articles 567-572 of the Code of Commerce, which provides a s eletal introduction to the subject of letters of credit; ii. The Uniform Customs and Practice for Documentary Credits issued by the International Chamber of Commerce, which reflects accepted commercial usage and practice on the subject of letters of credit and the application of which in the Philippines has been ac nowledged by the Supreme Court based on Article 2 of the Code of Commerce which provides that in the absence of any applicable

provision in the Code of Commerce, commercial transactions shall be governed by usages generally observed (BPI vs. De Reny Fabric Industries, G. R. No. 24821 ). Nature of letters of credit The primary purpose of a letter of credit is to substitute for and support, the agreement of the buyer-importer to pay money under a contract or other arrangement; but it does not necessarily constitute as a condition for the perfection of such arrangement (Re liance Commodities, Inc. vs. Daewoo Industrial Co., Ltd., 228 SCRA 545).

In a letter of credit arrangement, there are three distinct and independent con tracts, thus:

(a) Sale between buyer and seller; (b) Contract of buyer with issuing ban ; (c) Letter of credit proper in which the ban promises to pay seller pursuant to the terms and conditions stated therein (Keng Hua Paper Products vs. Court of Appeals, 286 SCRA 257). Parties to a letter of credit There would be at least three (3) parties to a letter of credit arrangement: (a) Buyer (applicant), who procures the letter of credit and obliges himself to reimburse the issuing ban upon receipt of the documents of title;

(b) Ban issuing the letter of credit, which underta es to pay the seller upon r eceipt of the draft and proper documents of titles and to surrender the documents to buyer upon reimbursement; and

(c) Seller (beneficiary), who, in compliance with the contract of sale, ships th e goods to buyer and delivers the documents of title and draft to the issuing ban to recov er payment (Ban of America vs. Court of Appeals, 228 SCRA 357). But the parties may increase, such requiring the services of:

(a) Advising (notifying) ban , to convey to the seller the existence of the cred it;

(b) Confirming ban , which will lend credence to the letter of credit issued by a lesser nown as issuing ban ;

(c) Paying ban , which underta es to encash the drafts drawn by the exporter; or

(d) Negotiation ban , where instead of going to the place of the issuing ban to claim payment, the buyer may approach the negotiating ban to have the draft discounte d (Ban of America vs. Court of Appeals, 228 SCRA 357). Rights and obligations of parties

While it is the ban which is bound to honor the credit, it is the beneficiary w ho has the right to as the ban to honor the credit by allowing him to draw thereon, and n ot the buyerapplicant (Transfield Philippines vs. Luzon Hydro Corp., 443 SCRA 307). In commercial transactions involving letters of credit, the functions assumed by a correspondent ban are classified according to the obligations ta en up by it wh ether as a notifying ban , a negotiation ban , or as a confirming ban . As advising or notifying ban , correspondent ban assumes no liability except to notify and/or transmit to the beneficiary the existence of the letter of credit. It is not liable to pay the drafts drawn against the letter of credit. It may suggest to the seller its will ingness to negotiate, but this fact alone does not imply that the notifying ban promises to accept th e draft drawn under the documentary credit. It has no privity to the contract of sale between the buyer and seller, and its relationship is only with that of the issuing ban (Feati Ban v s. Court of Appeals, 196 SCRA 576). Obligations of the ban s issuing letters of credit is solidary with that of the person or entity requesting for its issuance, the same being a direct primary, absolute an d definite underta ing to pay the beneficiary upon the presentation of the set of documents required therein (Metropolitan Waterwor s vs. Daway, 432 SCRA 559). Basic principles of letters of credit Doctrine of independence The independence principle liberates the issuing ban from the duty of ascertain ing compliance by the parties in the main contract. As the principle s nomenclature cl early suggests, the obligation under the letter of credit is independent of the related and orig inating contract. In brief, the letter of credit is separate and distinct from the underlying transac tion (Transfield Philippines vs. Luzon Hydro Corp., 443 SCRA 307). The engagement of the issuing ban is to pay the seller-beneficiary of the credi t once the draft and the required documents are presented to it. The so-called independence principle. assures the seller or the beneficiary of prompt payment independent of any breac h of the main contract and precludes the issuing ban from determining whether the main contra ct is actually accomplished or not (Transfield Philippines vs. Luzon Hydro Corp., 443 SCRA 307) .

The so-called independence principle. assures the seller or the beneficiary of pr ompt payment independent of any breach of the main contract and precludes the issuing ban from determining whether the main contract is actually accomplished or not. Under thi s principle, ban s assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or partic ular conditions stipulated in the documents or superimposed thereon, nor do they assume any liab ility or responsibility for the description, quantity, weight, quality, condition, pac in g, delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever (Transfield Philippines vs. Luzon Hydr o Corp., 443 SCRA 307). Fraud exception principle

Professor Dolan opines that the untruthfulness of a certificate accompanying a d emand for payment under a standby credit may qualify as fraud sufficient to support an injunction against payment. The remedy for fraudulent abuse is an injunction which should n ot be granted unless: a. There is clear proof of fraud; b. fraud constitutes fraudulent abuse of the independent purpose of the letter o f credit and not only fraud under the main agreement; and c. irreparable injury might follow if injunction is not granted or the recovery of damages would be seriously damaged (Transfield Philippines vs. Luzon Hydro Corp. , 443 SCRA 307). Doctrine of strict compliance The rule of strict compliance in a letter of credit transaction means that the documents tendered by the seller or beneficiary must strictly conform to the terms of the letter of credit, i. e., they must include all documents required by the letter of credit. Thus, a co rrespondent ban which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own ris and may not thereafter be able to recover fr om the buyer or the issuing ban (Feati Ban vs. CA, G. R. No. 94209).

Trust Receipts Law (PD 115) Definition/concept of a trust receipt transaction A trust receipt is considered as a security transaction designed to provide fin ancial assistance to importers and retail dealers who do not have sufficient funds or r esources to finance the importation or purchase of merchandise, and who may not be able to a cquire credit except through utilization, as collateral, of the merchandise imported or purcha sed. It is a document in which is expressed a security transaction where the lender, having n o prior title to the goods on which the lien is to be constituted, and not having possession over the same since possession thereof remains in the borrower, lends his money to the borrower on s ecurity of the goods which the borrower is privileged to sell, clear of the lien, with an agree ment to pay all or part of the proceeds of the sale to the lender. It is a security agreement pursu ant to which a ban acquires a security interest. in the goods. It secures a debt, and there can be no such

The subject trust receipts, being contracts of adhesion, are not per se invalid and inefficacious. But should there be ambiguities therein, such ambiguities are to be strictly construed against Metroban , the party that prepared them (Metropolitan Ban and Trust Company vs. Jimmy Go, G.R. No. 155647).

In general, a trust receipt transaction imposes upon the entrustee the obligatio n to deliver to the entruster the price of the sale, or if the merchandise is not sol d, to return the same to the entruster. There are thus two obligations in a trust receipt transaction: the first, refers to money received under the obligation involving the duty to turn it over (entregar la) to the owner of the merchandise sold, while the second refers to merchandise received under t he obligation to return. it (devolvera) to the owner. A violation of any of these underta ings constitutes estafa defined under Article 315(1)(b) of the Revised Penal Code, as provided by

thing as security interest that secures no obligation (Metropolitan Ban st Company vs. Jimmy Go, G.R. No. 155647).

and Tru

Section 13 of PD 115 (Jose Antonio U. Gonzalez vs. Hong ong and Shanghai Ban ing Corp. etc., G.R. No. 164904).

The offense punished under PD 115 is in the nature of malum prohibitum. A mere f ailure to deliver the proceeds of the sale or the goods if not sold, constitutes a crim inal offense that causes prejudice not only to another, but more to the public interest (Jose Anto nio U. Gonzalez vs. Hong ong & Shanghai Ban ing Corp. etc., G.R. No. 164904).

The last sentence of Section 13 of the Trust Receipts Law,. explicitly imposes t he penalty provided therein upon directors, officers, employees or other officials o r persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense,. of a corporation, partnership, association or other juridical entities found to have violated the obligation imposed under the law. The rationale for ma ing suc h officers and employees responsible for the offense is that they are vested with the authority and responsibility to devise means necessary to ensure compliance with the law and, if they fail to do so, are held criminally accountable; thus, they have a responsible share in t he violations of the law. A corporation or other juridical entity cannot be arrested and imprison ed; hence, cannot be penalized for a crime punishable by imprisonment (Jose Antonio U. Gonz alez v. Hong ong and Shanghai Ban ing Corp. etc., G.R. No. 164904). A trust receipt is a commercial document whereby the ban releases the goods in the possession of the entrustee but retains ownership thereof while the entrustee sh all sell the goods and apply the proceeds for the full payment of his liability with the ban (Garcia vs. Court of Appeals, 258 SCRA 446).

A trust receipt transaction imposes upon the entrustee the obligation to deliver to the entruster the price of the sale, or if the merchandise is not sold, to return th e same to the entruster, and a violation of any of these underta ings constitutes estafa defin ed under Article 315 (1)(b) of the Revised Penal Code, as proved by Section 13 of PD 115 (Gonzale s vs. HSBC, 537 SCRA 255). A trust receipt as a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the impo

rtation or purchase of merchandise, and who may not be able to acquire credit except throug h utilization, as collateral, of the merchandise imported or purchased. (Rosario Textile Mills Corp., et al. vs. Home Ban ers Savings and Trust Co., G.R. No. 137232, 29 June 2005 citing Samo vs . People, 115 Phil. 346). Loan/security feature A trust receipt is considered a security transaction designated to provide finan cial assistance to importers and retail dealers who do not have sufficient funds or r esources to finance the importation or purchase of merchandise, and who may not be able to a cquire credit through utilization, as collateral, of the merchandise imported or purchased (Me tropolitan Ban vs. Go, 538 SCRA 337). A trust receipt is a document in which is expressed a security transaction where the lender, having no prior title to the goods on which the lien is to be constitute d, and not having possession over the same since possession thereof remains in the borrower, lends his money to the borrower on security of the goods which the borrower is privileged to sell, clear of the lien, with an agreement to pay all or part of the proceeds of the sale to the lender ( Metropolitan Ban vs. Go, 538 SCRA 337).

It is a security arrangement pursuant to which a ban acquires a security intere st in the goods. It secures a debt, and there can be no such thing as security interest th at secures no obligation (Metropolitan Ban vs. Go, 538 SCRA 337). Ownership of the goods, documents and instruments under a trust receipt

If under the trust receipt, the ban is made to appear as the owner, it was but an artificial expedient, more of legal fiction than fact, for if it were really so, it could d ispose of the goods in any manner it wants, which it cannot do, just to give consistency with purpose o f the trust receipt of giving a stronger security for the loan obtained by the importer. To consider the ban as the true owner from the inception of the transaction would be to disregard th e loan feature thereof. (Rosario Textile Mills Corp., et al. vs. Home Ban ers Savings and Trust Co., G.R. No. 137232, 29 June 2005 citing Samo vs. People, 115 Phil. 346). Rights of the entruster The entruster shall be entitled to the proceeds from the sale of the goods, docu ments or instruments released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt, or to the return of the goods, documents or instruments in case of non-sale, and to the enforcement of all other rights conf erred on him in the trust receipts, provided such are not contrary to the provisions of the docu ment (Ching vs. Secretary of Justice, 481 SCRA 602). Obligations and liability of the entrustee The entrustee is obliged to: a. hold goods, documents or instruments in trust for entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt; b. receive proceeds in trust for entruster and turn over the same to entruster t o the extent of amount owing to the entruster or as appears on the trust receipt; c. insure goods for their total value against loss from fire, theft, pilferage o r other casualties; d. eep said goods or proceeds thereof whether in money or whatever form, separa te and capable of identification as property of entruster; e. observe all other terms and conditions of trust receipt not contrary to provi sions of P.D. 115 (Ching vs. Secretary of Justice, 481 SCRA 602). f. Return the goods, etc. to the entruster in case they could not be sold or upo n demand

The entrustee owns the goods and thus bears the ris

of loss.

of the entruster (Sec. 9, PD 115).

Penal sanction if offender is a corporation The last sentence of Section 13 of the Trust Receipts Law explicitly imposes th e penalty provided therein upon directors, officers, employees or other officials or perso ns therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense of a corporation, partnership, association or other juridical entities f ound to have violated the obligation imposed under the law, the rationale being that these of ficers and employees are vested with the authority and responsibility to devise means neces sary to ensure

compliance with the law, and if they fail to do so, are held criminally accounta ble (Gonzales vs. HSBC, 537 SCRA 255). Remedies available In case of default by the entrustee on his obligation under a trust receipt agre ement, it is not absolutely necessary that the entrustor cancel the trust and ta e possession of the goods to be able to enforce his rights thereunder. We have ruled that significantly, the law uses the word may in granting to the entrustor the right to cancel the trust and ta e possession of the goods. Consequently, the entrustor has the discretion to avail of such right or see an y alternative action, such as a third party claim or a separate civil action which it deems be st to protect its rights, at anytime upon default or failure of the entrustee to comply with any o f the terms and conditions of the trust agreement (South City Homes vs. BA Finance, 371 SCRA 603 ). Trust receipts agreements being only a security for the loan agreement, the full turn-over of the goods subject of the trust receipts does not suffice to divest debtors of their obligations to repay the principal amount of their loan. Section 7 of P.D. 115 expressly provid es that the entrustee shall be liable to entrustor for any deficiency (LLandl and Company (P hils.) vs. Metropolitan Ban , 435 SCRA 639). If under trust receipt, the ban is made to appear as owner, it was but an artif icial expedient, more of legal fiction than fact, for if it were really so, it could d ispose of the goods in any manner it wants, which it cannot do, just to give consistency with the purpo se of the trust receipt of giving a stronger security for the loan obtained by the importer. Thu s, the entrusteeborrower cannot be relieved of his obligation to pay the loan simply by abandoni ng the property with the ban (Rosario Textile Mills Corp., et al. vs. Home Ban ers Sav ings and Trust Co., 462 SCRA 88). Upon the ban s payment of the letter of credit issued covering a trust receipt, t he entrustee becomes immediately liable and the ban er s advancing of money and credi t should receive protection, since the ban er then ta es full title to the goods at the v ery beginning when the trust receipt is issued. Failure of the entrustee to turn over the proceeds of the sale of the goods covered by the trust receipt constitutes the crime of estafa under Section 13 of the Trust Receipts Law (Prudential Ban vs. IAC, 216 SCRA 257).

Intellectual Property Law (RA 8293) Intellectual property rights The term "intellectual property rights" consists of:

[a] Copyright and related rights; [b] Trademar s and service mar s; [c] Geographic indications; [d] Industrial designs; [e] Patents; [f] Layout-designs (topographies) of integrated circuits; and [g] Protection of undisclosed information (n) [TRIPS] Technology transfer arrangements These are contracts or agreements involving the transfer of systematic nowledg e for the manufacture of a product, the application of a process, or rendering of a servic e including management contracts; and the transfer, assignment or licensing of all forms of intellectual property rights, including licensing of computer software except computer softwa re developed for mass mar et (Sec. 4, Intellectual Property Code). Patents Patentable inventions Any technical solution of a problem in any field of human activity which is new , involves an inventive step and is industrially applicable shall be patentable. I t may be, or may relate to, a product, or process, or an improvement of any of the foregoing (Sec . 21, IPC). Non-patentable inventions The following shall be excluded from patent protection: i. Discoveries, scientific theories and mathematical methods; ii. Schemes, rules and methods of performing mental acts, playing games or doing business, and programs for computers; iii. Methods for treatment of the human or animal body by surgery or therapy and diagnostic methods practiced on the human or animal body. This provision shall not apply to products and composition for use in any of these methods; iv. Plant varieties or animal breeds or essentially biological process for the production of plants or animals. This provision shall not apply to micro-

organisms and non-biological and microbiological processes; v. Aesthetic creations; and vi. Anything which is contrary to public order or morality (Sec. 22, IPC).

Ownership of a patent

Right to a patent The right to a patent belongs to the inventor, his heirs, or assigns. When two (2) or more persons have jointly made an invention, the right to a patent shall belong to th em jointly (Sec. 28, IPC). First-to-file rule If two (2) or more persons have made the invention separately and independently of each other, the right to the patent shall belong to the person who filed an appl ication for such invention, or where two or more applications are filed for the same invention, t o the applicant who has the earliest filing date or, the earliest priority date (Sec. 29, IPC). Inventions created pursuant to a commission

In case the employee made the invention in the course of his employment contrac t, the patent shall belong to: i. The employee, if the inventive activity is not a part of his regular duties e ven if the employee uses the time, facilities and materials of the employer. ii. The employer, if the invention is the result of the performance of his regul arlyassigned duties, unless there is an agreement, express or implied, to the contra ry (Sec. 30, IPC). Right of priority An application for patent filed by any person who has previously applied for th e same invention in another country which by treaty, convention, or law affords similar privileges to Filipino citizens, shall be considered as filed as of the date of filing the for eign application provided that: i. the local application expressly claims priority; ii. it is filed within twelve (12) months from the date the earliest foreign app lication was filed; and iii. a certified copy of the foreign application together with an English transl ation is filed within six (6) months from the date of filing in the Philippines (Sec. 31, IPC). Grounds for cancellation of a patent

The person who commissions the wor ided in the contract (Sec. 30, IPC).

shall own the patent, unless otherwise prov

Any interested person may, upon payment of the required fee, petition to cancel the patent or any claim thereof, or parts of the claim, on any of the following grou nds: i. That what is claimed as the invention is not new or patentable; ii. That the patent does not disclose the invention in a manner sufficiently cle ar and complete for it to be carried out by any person s illed in the art; or iii. That the patent is contrary to public order or morality (Sec. 61, IPC). Remedy of the true and actual inventor

If a person, who was deprived of the patent without his consent or through frau d is declared by final court order or decision to be the true and actual inventor, th e court shall order for his substitution as patentee, or at the option of the true inventor, cancel the patent, and award actual and other damages in his favor if warranted by the circumstances (S ec. 68, IPC). Rights conferred by a patent A patent shall confer on its owner the following exclusive rights: i. Where the subject matter of a patent is a product, to restrain, prohibit and prevent any unauthorized person or entity from ma ing, using, offering for sale, selling or importing that product; ii. Where the subject matter of a patent is a process, to restrain, prevent or p rohibit any unauthorized person or entity from using the process, and from manufacturing, dealing in, using, selling or offering for sale, or importing any product obtained directly or indirectly from such process; iii. Patent owners shall also have the right to assign, or transfer by successio n the patent, and to conclude licensing contracts for the same (Sec. 71, IPC). Limitations of patent rights The owner of a patent has no right to prevent third parties from performing, wi thout his authorization, the acts referred to in Section 71 in these circumstances: i. Using a patented product which has been put on the mar et in the Philippines by the owner of the product, or with his express consent, insofar as such use is performed after that product has been so put on the said mar et; ii. Where the act is done privately and on a non-commercial scale or for a noncommercial purpose provided that it does not significantly prejudice the economic interests of the owner of the patent; iii. Where the act consists of ma ing or using exclusively for the purpose of experiments that relate to the subject matter of the patented invention; iv. Where the act consists of the preparation for individual cases, in a pharmac y or by a medical professional, of a medicine in accordance with a medical prescription or acts concerning the medicine so prepared; v. Where the invention is used in any ship, vessel, aircraft, or land vehicle of any other country entering the territory of the Philippines temporarily or accidenta lly provided that such invention is used exclusively for the needs of the ship, vess el, aircraft, or land vehicle and not used for the manufacturing of anything to be sold within the Philippines (Sec. 72, IPC). Prior user

Any prior user, who, in good faith was using the invention or has underta en se rious preparations to use the invention in his enterprise or business, before the fili ng date or priority date of the application on which a patent is granted, shall have the right to co ntinue the use thereof as envisaged in such preparations within the territory where the patent produces its effect (Sec. 73, IPC). Use by the government

A government agency or third person authorized by the government may exploit th e invention even without agreement of the patent owner where: i. the public interest, in particular, national security, nutrition, health or t he development of other sectors, as determined by the appropriate agency of the government, so requires; or ii. A judicial or administrative body has determined that the manner of exploitation, by the owner of the patent or his licensee, is anti-competitive (S ec. 74, IPC). Patent infringement Patent infringement constitutes: i. ma ing, using, offering for sale, selling, or importing a patented product or a product obtained directly or indirectly from a patented process ii. use of a patented process without the authorization of the patentee (Sec. 76 , IPC). Tests in patent infringements Literal infringement In using literal infringement as a test, resort must be had, in the first insta nce, to the words of the claim; if the accused matter clearly falls within the claim, infrin gement is made out and that is the end of it (Godines vs. CA, 226 SCRA 338).

Doctrine of equivalents Doctrine of equivalents ta es place when a device appropriates a prior inventio n by incorporating its innovative concept, and although with some modification, perfo rms substantially the same function in substantially the same way to achieve substan tially the same result. In other words, the principle or mode of operation must be the same or s ubstantially the same (Smith Kline Bec man Corp. vs. CA, 409 SCRA 33). Civil and criminal action Any patentee, or anyone possessing any right, title or interest in and to the p atented invention, whose rights have been infringed, may bring a civil action before a c ourt of competent jurisdiction, to recover from the infringer such damages sustained the reby, plus attorney s fees and other expenses of litigation, and to secure an injunction for the protection of

his rights (Sec. 76, IPC). If the damages are inadequate or cannot be readily ascertained with reasonable certainty, the court may award by way of damages a sum equivalent to reasonable royalty (Sec. 76, IPC). The court may award damages in a sum above the amount found as actual damages sustained provided that the award does not exceed three (3) times the amount of such actual damages (Sec. 76, IPC).

The court may order that the infringing goods, materials and implements predominantly used in the infringement be disposed of outside the channels of co mmerce or destroyed, without compensation (Sec. 76, IPC). Anyone who actively induces the infringement of a patent or provides the infrin ger with a component of a patented product or of a product produced because of a patented process nowing it to be especially adopted for infringing the patented invention and no t suitable for substantial non-infringing use shall be liable as a contributory infringer and s hall be jointly and severally liable with the infringer (Sec. 76, IPC). Prescriptive period No damages can be recovered for acts of infringement committed more than four ( 4) years before institution of infringement action (Sec. 79, IPC). Defenses in action for infringement In an infringement action, defendant may show invalidity of the patent, or any claim thereof, on any of the grounds on which a petition for cancellation can be broug ht (Sec. 81, IPC). In an action for infringement, if the court shall find patent or any claim to b e invalid, it shall cancel the same, and Director of Legal Affairs upon receipt of the final j udgment of cancellation, shall record that fact in IPO Register and publish notice to that effect in IPO Gazette (Sec. 82, IPC). Voluntary licensing To encourage the transfer and dissemination of technology, prevent or control p ractices and conditions that may in particular cases constitute an abuse of intellectual property rights having an adverse effect on competition and trade, all technology transfer arran gements shall comply with the provisions of IPO (Sec. 85, IPC). Compulsory licensing The Director of Legal Affairs may grant a license to exploit a patented inventi on, even without the agreement of the patent owner, in favor of any person who has shown his capability to exploit the invention, under any of the following circumstances: i. National emergency or other circumstances of extreme urgency; ii. Where the public interest, in particular, national security, nutrition, heal th or the development of other vital sectors of the national economy as determined by the appropriate agency of the government, so requires; or

iii. Where a judicial or administrative body has determined that the manner of exploitation by the owner of the patent or his licensee is anti-competitive; or iv. In case of public non-commercial use of the patent by the patentee, without satisfactory reason; v. If the patented invention is not being wor ed in the Philippines on a commerc ial scale, although capable of being wor ed, without satisfactory reason provided that the importation of the patented article shall constitute wor ing or using t he patent (Sec. 93, IPC).

Assignment and transmission of rights Patents or applications for patents and invention to which they relate, shall b e protected in the same way as the rights of other property under the Civil Code (Sec. 103, IPC). Inventions and any right, title or interest in and to patents and inventions co vered thereby, may be assigned or transmitted by inheritance or bequest or may be the subject of a license contract (Sec. 103, IPC). An assignment may be of the entire right, title or interest in and to the paten t and the invention covered thereby, or of an undivided share of the entire patent and inv ention, in which event the parties become joint owners thereof. An assignment may be limited to a specified territory (Sec. 104, IPC). The assignment must be in writing, ac nowledged before a notary public or other officer authorized to administer oath or perform notarial acts, and certified under the hand and official seal of the notary or such other officer (Sec. 105, IPC). Trademar s Definition of mar s, collective mar s, trade names Mar means any visible sign capable of distinguishing the goods (trademar ) or services (service mar ) of an enterprise and shall include a stamped or mar ed container of goods (Sec. 121, IPC). Collective mar means any visible sign designated as such in the application fo r registration and capable of distinguishing the origin or any other common charac teristic, including the quality of goods or services of different enterprises which use th e sign under the control of the registered owner of the collective mar (Sec. 121, IPC). Trade name means the name or designation identifying or distinguishing an enter prise (Sec. 121, IPC).

The rights in a mar shall be acquired through registration made validly in acc ordance with the provisions of this law (Sec. 122, IPC). Non-registrable mar s A mar cannot be registered if it:

Acquisition of ownership of mar

i. Consists of: a. immoral, deceptive or scandalous matter, or matter which may disparage or falsely suggest a connection with persons, living or dead, institutions, beliefs , or national symbols, or bring them into contempt or disrepute; b. flag or coat of arms or other insignia of the Philippines or any of its polit ical subdivisions, or of any foreign nation, or any simulation thereof; c. name, portrait or signature identifying a particular living individual except by his written consent, or the name, signature, or portrait of a deceased

President of the Philippines, during the life of his widow, if any, except by written consent of the widow; d. shapes that may be necessitated by technical factors or by the nature of the goods themselves or factors that affect their intrinsic value; e. color alone, unless defined by a given form; or

ii. Consists exclusively of signs or of indication that: a. are generic for the goods or services that they see to identify; b. have become customary or usual to designate the goods or services in everyday language or in bona fide and established trade practice; c. may serve in trade to designate the ind, quality, quantity, intended purpose , value, geographical origin, time or production of the goods or rendering of the services, or other characteristics of the goods or services;

iii. identical with a registered mar belonging to a different proprietor or a m ar with an earlier filing or priority date, in respect of: a. same goods or services b. Closely related goods or services c. If it nearly resembles such a mar as to be li ely to deceive or cause confusion;

iv. Is identical with, or confusingly similar to, or constitutes a translation o f a mar which is considered: a. By Philippine competent authority, whether or not it is registered here, as being already the mar of a person other than the applicant for registration, and used for identical or similar goods or services; b. well- nown and which is registered in the Philippines with respect to goods or services which are not similar to those with respect to which registration is applied for provided that use of the mar in relation to those goods or services would indicate a connection between those goods or services, and the owner of the registered mar , and that the interests of the owner of the registered mar are li ely to be damaged by such use; v. Is li ely to mislead the public, particularly as to the nature, quality, characteristics or geographical origin of the goods or services; vi. Is contrary to public order or morality (Sec. 123, IPC). Prior use of a mar as a requirement

The present law on trademar has dispensed with the requirement of prior use at the time of registration (Shangri-La Int l Hotel Mng t vs. Developers Group of Companies , 486 SCRA 405). Tests to determine confusing similarity between mar s Dominancy test The dominancy test considers the dominant features in the competing mar s in determining whether they are confusingly similar. Under the dominancy test, cour ts give

greater weight to the similarity of the appearance of the product arising from t he adoption of the dominant features of the registered mar , disregarding minor differences. Co urts will consider more the aural and visual impressions created by the mar s in the publi c mind, giving little weight to factors li e price, quality, sales outlets and mar et segments (Mighty Corp. vs. E & J Gallo Winery, 434 SCRA 473). The dominancy test focuses on the similarity of the prevalent features of the c ompeting trademar s that might cause confusion or deception (McDonald's Corp. v. MacJoy F astfood Corp., G.R. No. 166115). Holistic test The holistic test requires that the entirety of the mar s in question be consid ered in resolving confusing similarity. Comparison of words is not the only determining factor. The trademar s in their entirety as they appear in their respective labels or hang t ags must also be considered in relation to the goods to which they are attached. The discerning e ye of the observer must focus not only on the predominant words but also on the other feat ures appearing in both labels in order that he may draw his conclusion whether one is confusingly similar to the other (Mighty Corp. vs. E and J Gallo Winery, 434 SCRA 473). The holistic test requires the court to consider the entirety of the mar s as a pplied to the products, including the labels and pac aging, in determining confusing similarit y. Under the latter test, a comparison of the words is not the only determinant factor (McDon ald's Corp. v. MacJoy Fastfood Corp., G.R. No. 166115). Well- nown mar s A well- nown mar is one identical with, or confusingly similar to, or constitu tes a translation of a mar which is considered by Philippine authority to be well- no wn internationally and in the Philippines, whether or not it is registered here, as being already the mar of a person other than the applicant for registration, and used for identic al or similar goods or services provided that in determining whether a mar is well- nown, acc ount shall be ta en of the nowledge of the relevant sector of the public, rather than of the public at large, including nowledge in the Philippines which has been obtained as a result of th e promotion of the mar (Sec. 123 [e], IPC). Rights conferred by registration

The owner of a registered mar shall have the exclusive right to prevent all th ird parties not having the owner s consent from using in the course of trade identical or simi lar signs or containers for goods or services which are identical or similar to those in resp ect of which the trademar is registered where such use would result in a li elihood of confusion . In case of the use, of an identical sign for identical goods or services, a li elihood of confu sion shall be presumed (Sec. 147, IPC).

Registration of the mar shall not confer on the registered owner the right to preclude third parties from using bona fide their names, addresses, pseudonyms, a geograp hical name, or exact indications concerning the ind, quality, quantity, destination, value, place of origin, or

Use by third parties of names, etc, similar to registered mar

time of production or of supply, of their goods or services provided that such u se is confined to the purposes of mere identification or information and cannot mislead the public as to the source of the goods or services (Sec. 148, IPC). Infringement and remedies Trademar infringement Any person who shall, without the consent of the owner of the registered mar : i. Use in commerce any reproduction, counterfeit, copy, or colorable imitation o f a registered mar or the same container or a dominant feature thereof in connection with the sale or other commercial dealings; or ii. Apply such reproduction, counterfeit, copy of colorable imitation to labels, signs, prints, pac ages, wrappers, receptacles or advertisements intended to be used in commerce upon or in connection with the sale or other commercial dealings shall be liable in a civil action for infringement by the registrant for the rem edies hereinafter set forth provided that the infringement ta es place at the moment any of the specif ied acts are committed regardless of whether there is actual sale of goods or services using the infringing material (Sec. 155, IPC). Damages The owner of a registered mar may recover damages from any person who infringe s his rights, and the measure of the damages suffered shall be either the reasonab le profit which the complaining party would have made, had the defendant not infringed his right s, or the profit which the defendant actually made out of the infringement, or in the even t such measure of damages cannot be readily ascertained with reasonable certainty, then the cou rt may award as damages a reasonable percentage based upon the amount of gross sales of the d efendant or the value of the services in connection with which the mar or trade name was us ed in the infringement of the rights of the complaining party (Sec. 156, IPC). On application of the complainant, the court may impound during the pendency of the action, sales invoices and other documents evidencing sales (Sec. 156, IPC). In cases where actual intent to mislead the public or to defraud the complainan t is shown, in the discretion of the court, the damages may be doubled (Sec. 156, IPC ). The complainant, upon proper showing, may also be granted injunction (Sec. 156,

IPC). Requirement of notice In any suit for infringement, the owner of the registered mar shall not be ent itled to recover profits or damages unless the acts have been committed with nowledge th at such imitation is li ely to cause confusion, or to cause mista e, or to deceive (Sec. 158, IPC).

Unfair competition

A person who has identified in the mind of the public the goods he manufactures or deals in, his business or services from those of others, whether or not a regist ered mar is employed, has a property right in the goodwill of the said goods, business or se rvices so identified, which will be protected in the same manner as other property rights (Sec. 168, IPC). Any person who employs deception or any other means contrary to good faith by w hich he shall pass off the goods manufactured by him or in which he deals, or his bus iness, or services for those of the one having established such goodwill, or who commits a ny acts calculated to produce said result, shall be guilty of unfair competition (Sec. 1 68, IPC). The following shall be deemed guilty of unfair competition: i. Any person, who is selling his goods and gives them the general appearance of goods of another manufacturer or dealer, either as to the goods themselves or in the wrapping of the pac ages in which they are contained, or the devices or words thereon, or in any other feature of their appearance, which would be li el y to influence purchasers to believe that the goods offered are those of a manufacturer or dealer, other than the actual manufacturer or dealer, or who otherwise clothes the goods with such appearance as shall deceive the public and defraud another of his legitimate trade, or any subsequent vendor of such goods or any agent of any vendor engaged in selling such goods with a li e purpose; ii. Any person who by any artifice, or device, or who employs any other means calculated to induce the false belief that such person is offering the services of another who has identified such services in the mind of the public; or iii. Any person who shall ma e any false statement in the course of trade or who shall commit any other act contrary to good faith of a nature calculated to discredit the goods, business or services of another (Sec. 168, IPC). Trade names or business names A name or designation may not be used as a trade name if by its nature or the u se to which such name or designation may be put, it is contrary to public order or mor als and if, in particular, it is liable to deceive trade circles or the public as to the nature of the enterprise identified by that name (Sec. 165, IPC). Notwithstanding any laws or regulations providing for any obligation to registe r trade names, such names shall be protected, even prior to or without registration, aga inst any unlawful act committed by third parties (Sec. 165, IPC).

In particular, any subsequent use of the trade name by a third party, whether a s a trade name or a mar or collective mar , or any such use of a similar trade name or ma r , li ely to mislead the public, shall be deemed unlawful (Sec. 165, IPC). The remedies provided for infringement and unfair competition shall apply mutat is mutandis (Sec. 165, IPC). Any change in the ownership of a trade name shall be made with the transfer of the enterprise or part thereof identified by that name (Sec. 165, IPC). Collective mar s

Sections 122 to 164 and 166 applies to collective mar s, except that references therein to "mar " shall be read as "collective mar " (Sec. 167, IPC). Criminal penalties for infringement, unfair competition, false designation of or igin, and false description or misrepresentation Any person who, on or in connection with any goods or services, or any containe r for goods, uses in commerce any word, term, name, symbol, or device, or any combinat ion thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which: i. is li ely to cause confusion, or to cause mista e, or to deceive as to the af filiation, connection, or association of such person with another person, or as to the orig in, sponsorship, or approval of his or her goods, services, or commercial activities by another person; or ii. in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person s goods, services, or commercial activities shall be liable to a civil action for damages and injunction (Sec. 169, IPC). Any goods mar ed or labeled in contravention of the provisions of Section 169 s hall not be imported into the Philippines or admitted entry at any customhouse of the Phi lippines. The owner, importer, or consignee of goods refused entry at any customhouse under th is section may have any recourse under the customs revenue laws or may have the remedy in c ases involving goods refused entry or seized (Sec. 169, IPC). Independent of the civil and administrative sanctions imposed by law, a crimina l penalty of imprisonment from two (2) years to five (5) years and a fine ranging from fifty thousand pesos (P50,000) to two hundred thousand pesos (P200,000), shall be impo sed on any person who is found guilty of committing any of the acts mentioned in Section 15 5, Section 168 and Subsection 169.1 (Sec. 170, IPC).

Copyrights Basic principles

Wor s are protected by the sole fact of their creation, irrespective of their m ode or form of expression, as well as of their content, quality and purpose (Sec. 172.2, IPC). No protection shall extend to: i. idea, procedure, system method or operation, concept, principle, discovery or mere data as such, even if they are expressed, explained, illustrated or embodie d in a wor ; ii. news of the day; or

iii. official text of a legislative, administrative or legal nature, as well as any official translation thereof (Sec. 175, IPC). The copyright is distinct from the property in the material object subject to i t. Consequently, the transfer or assignment of the copyright shall not itself constitute a transf er of the material object. Nor shall a transfer or assignment of the sole copy or of one or several copies of the wor imply transfer or assignment of the copyright (Sec. 181, IPC). Copyrightable wor s Original wor s Literary and artistic wor s are original intellectual creations in the literary and artistic domain protected from the moment of their creation and shall include in particul ar: i. Boo s, pamphlets, articles and other writings; ii. Periodicals and newspapers; iii. Lectures, sermons, addresses, dissertations prepared for oral delivery, whe ther or not reduced in writing or other material form; iv. Letters; v. Dramatic or dramatico-musical compositions; choreographic wor s or entertainment in dumb shows; vi. Musical compositions, with or without words; vii. Wor s of drawing, painting, architecture, sculpture, engraving, lithography or other wor s of art; models or designs for wor s of art; viii. Original ornamental designs or models for articles of manufacture, whether or not registrable as an industrial design, and other wor s of applied art; ix. Illustrations, maps, plans, s etches, charts and three-dimensional wor s rel ative to geography, topography, architecture or science; x. Drawings or plastic wor s of a scientific or technical character; xi. Photographic wor s including wor s produced by a process analogous to photography; lantern slides; xii. Audiovisual wor s and cinematographic wor s and wor s produced by a process analogous to cinematography or any process for ma ing audio-visual recordings; xiii. Pictorial illustrations and advertisements; xiv. Computer programs; and xv. Other literary, scholarly, scientific and artistic wor s (Sec. 172, IPC). Derivative wor s The following are derivative wor s: i. Dramatizations, translations, adaptations, abridgments, arrangements, and oth er alterations of literary or artistic wor s; and ii. Collections of literary, scholarly or artistic wor s, and compilations of da

ta and other materials which are original by reason of the selection or coordination or arrangement of their contents (Sec. 173, IPC). Non-copyrightable wor s

No protection shall extend to: i. idea, procedure, system method or operation, concept, principle, discovery or mere data as such, even if they are expressed, explained, illustrated or embodie d in a wor ; ii. news of the day; or iii. official text of a legislative, administrative or legal nature, as well as any official translation thereof (Sec. 175, IPC). No copyright shall subsist in any wor of the government of the Philippines (Se c. 176, IPC). However, prior approval of the government agency or office wherein the wor is created shall be necessary for exploitation of such wor for profit. Such agency or offi ce may, among other things, impose as a condition the payment of royalties (Sec. 176, IPC). No prior approval or conditions shall be required for the use of any purpose of statutes, rules and regulations, and speeches, lectures, sermons, addresses, and dissertat ions, pronounced, read or rendered in courts of justice, before administrative agencie s, in deliberative assemblies and in meetings of public character (Sec. 176, IPC). The author of speeches, lectures, sermons, addresses, and dissertations mention ed in the preceding paragraphs shall have the exclusive right of ma ing a collection of hi s wor s (Sec. 176, IPC). The government is not precluded from receiving and holding copyrights transferr ed to it by assignment, bequest or otherwise; nor shall publication or republication by the government in a public document of any wor in which copy right is subsisting be ta en to cause any abridgment or annulment of the copyright or to authorize any use or appropriatio n of such wor without the consent of the copyright owners (Sec. 176, IPC). Copyright is a mere statutory grant, the rights are limited to what the statute confers. Copyright may be obtained and enjoyed only with respect to the subjects and by t he person, and on terms and conditions specified in the statute. Accordingly, it can cover only wor s falling with the statutory enumeration or description (Pearl and Dean, Inc. vs. Shoemart, 409 SCRA 231). Rights of copyright owner Copyright or economic rights shall consist of the exclusive right to carry out,

authorize or prevent the following acts: i. Reproduction of the wor or substantial portion of the wor ; ii. Dramatization, translation, adaptation, abridgment, arrangement or other transformation of the wor ; iii. The first public distribution of the original and each copy of the wor by sale or other forms of transfer of ownership; iv. Rental of the original or a copy of an audiovisual or cinematographic wor , a wor embodied in a sound recording, a computer program, a compilation of data and other materials or a musical wor in graphic form, irrespective of the ownership of the original or the copy which is the subject of the rental;

v. Public display of the original or a copy of the wor ; vi. Public performance of the wor ; and vii. Other communication to the public of the wor (Sec. 177, IPC). The author of a wor shall, independently of the economic rights or the grant o f an assignment or license with respect to such right, have the right: i. To require that the authorship of the wor s be attributed to him, in particul ar, the right that his name, as far as practicable, be indicated in a prominent way on the copies, and in connection with the public use of his wor ; ii. To ma e any alterations of his wor prior to, or to withhold it from publica tion; iii. To object to any distortion, mutilation or other modification of, or other derogatory action in relation to, his wor which would be prejudicial to his honor or reputation; and iv. To restrain the use of his name with respect to any wor not of his own crea tion or in a distorted version of his wor (Sec. 193, IPC). Rules on ownership of copyright The following are the rules on copyright ownership: i. In original literary and artistic wor s, copyright shall belong to the author ; ii. In joint authorship, the co-authors shall be the original owners of the copy right and in the absence of agreement, their rights shall be governed by the rules on co-ownership. If, however, a wor of joint authorship consists of parts that can be used separately and the author of each part can be identified, the author of each part shall be the original owner of the copyright in the part that he has created; iii. In wor created by an author during and in the course of his employment, th e copyright shall belong to: a. The employee, if the creation of the object of copyright is not a part of his regular duties even if the employee uses the time, facilities and materials of the employer; b. The employer, if the wor is the result of the performance of his regularlyassigned duties, unless there is an agreement, express or implied, to the contrary. iv. In case of commissioned wor , the person who so commissioned the wor shall have ownership of wor , but the copyright thereto shall remain with the creator, unless there is a written stipulation to the contrary; v. In case of audiovisual wor , the copyright shall belong to the producer, the author of the scenario, the composer of the music, the film director, and the author of the wor so adapted. However, subject to contrary or other stipulation s among the creators, the producers shall exercise the copyright to an extent

required for the exhibition of the wor in any manner, except for the right to collect performing license fees for the performance of musical compositions, wit h or without words, which are incorporated into the wor ; vi. In respect of letters, the copyright shall belong to the writer subject to t he provisions of Article 723 of the Civil Code (Sec. 178, IPC).

vii. The publishers shall be deemed to represent the authors of articles and oth er writings published without the names of the authors or under pseudonyms, unless the contrary appears, or the pseudonyms or adopted name leaves no doubts as to the author s identity, or if the author of the anonymous wor s discloses his identity (Sec. 179, IPC). Limitations on copyright Notwithstanding recognition of economic rights, the following acts shall not co nstitute infringement of copyright: i. recitation or performance of a wor , once it has been lawfully made accessibl e to the public, if done privately and free of charge or if made strictly for a chari table or religious institution or society; ii. ma ing of quotations from a published wor if they are compatible with fair use and only to the extent justified for the purpose, including quotations from newspaper articles and periodicals in the form of press summaries provided that the source and the name of the author, if appearing on the wor , are mentioned; iii. reproduction or communication to the public by mass media of articles on current political, social, economic, scientific or religious topic, lectures, ad dresses and other wor s of the same nature, which are delivered in public if such use is for information purposes and has not been expressly reserved provided that the source is clearly indicated; iv. reproduction and communication to the public of literary, scientific or arti stic wor s as part of reports of current events by means of photography, cinematography or broadcasting to the extent necessary for the purpose; v. inclusion of a wor in a publication, broadcast, or other communication to th e public, sound recording or film, if such inclusion is made by way of illustratio n for teaching purposes and is compatible with fair use provided that the source and of the name of the author, if appearing in the wor , are mentioned; vi. recording made in schools, universities, or educational institutions of a wo r included in a broadcast for the use of such schools, universities or educational institutions provided that such recording must be deleted within a reasonable period after they were first broadcast; vii. ma ing of ephemeral recordings by a broadcasting organization by means of i ts own facilities and for use in its own broadcast; viii. use made of a wor by or under the direction or control of the government, by the National Library or by educational, scientific or professional institutions where such use is in the public interest and is compatible with fair use; ix. public performance or the communication to the public of a wor , in a place where no admission fee is charged in respect of such public performance or communication, by a club or institution for charitable or educational purpose only, whose aim is not profit ma ing; x. Public display of the original or a copy of the wor not made by means of a f

ilm, slide, television image or otherwise on screen or by means of any other device o r process provided that either the wor has been published, or, that original or t he

copy displayed has been sold, given away or otherwise transferred to another person by the author or his successor in title; and xi. Any use made of a wor for the purpose of any judicial proceedings or for th e giving of professional advice by a legal practitioner (Sec. 184, IPC). Doctrine of fair use The fair use of a copyrighted wor for criticism, comment, news reporting, teac hing including multiple copies for classroom use, scholarship, research, and similar purposes is not an infringement of copyright (Sec. 185, IPC). Decompilation, which is understood here to be the reproduction of the code and translation of the forms of the computer program to achieve the inter-operability of an inde pendently created computer program with other programs may also constitute fair use (Sec. 185, IPC).

i. purpose and character of the use, including whether such use is of a commerci al nature or is for non-profit education purposes; ii. nature of the copyrighted wor ; iii. amount and substantiality of the portion used in relation to the copyrighte d wor as a whole; and iv. effect of the use upon the potential mar et for or value of the copyrighted wor (Sec. 185, IPC). The fact that a wor is unpublished shall not by itself bar a finding of fair u se if such finding is made upon consideration of all the above factors (Sec. 185, IPC). Copyright infringement Remedies Any person infringing a right protected under this law shall be liable: i. To an injunction restraining such infringement; ii. Pay to the copyright proprietor or his assigns or heirs such actual damages, including legal costs and other expenses, as he may have incurred due to the infringement as well as the profits the infringer may have made due to such infringement; iii. Deliver for impounding during the pendency of the action, sales invoices an d other documents evidencing sales, all articles and their pac aging alleged to infringe a copyright and implements for ma ing them; iv. Deliver for destruction without any compensation all infringing copies or

In determining whether the use made of a wor e, the factors to be considered shall include:

in any particular case is fair us

devices, as well as all plates, molds, or other means for ma ing such infringing copies as the court may order; v. Such other terms and conditions, including the payment of moral and exemplary damages, which the court may deem proper, wise and equitable and the destruction of infringing copies of the wor even in the event of acquittal in a criminal case;

vi. the court shall also have the power to order the seizure and impounding of a ny article which may serve as evidence (Sec. 216 , IPC).

Criminal penalties Any person infringing any right or aiding or abetting such infringement shall b e guilty of a crime punishable by: i. Imprisonment of one (1) year to three (3) years plus a fine ranging from fift y thousand pesos (P50,000) to one hundred fifty thousand pesos (P150,000) for the first offense; ii. Imprisonment of three (3) years and one (1) day to six (6) years plus a fine ranging from one hundred fifty thousand pesos (P150,000) to five hundred thousand pesos (P500,000) for the second offense; or iii. Imprisonment of six (6) years and one (1) day to nine (9) years plus a fine ranging from five hundred thousand pesos (P500,000) to one million five hundred thousand pesos (P1,500,000) for the third and subsequent offenses; and In all cases, subsidiary imprisonment in cases of insolvency (Sec. 217, IPC).

Negotiable Instruments Law

Forms and Interpretation

1. A negotiable instrument in its literal sense, is an instrument which can be transferred by negotiation. The term negotiable represents the mode by which an instrument is transferred. If the instrument has the characteristics of negotiab ility imposed by law, that instrument is thus negotiable, meaning it is transferable b y negotiation. Not every instrument is transferable by negotiation because not eve ry instrument possesses the characteristics of negotiability.

2. Instruments in general are evidences of a contractual relationship between or among persons. The word, negotiability only refers to the mode of transferring a

n instrument from one person to another and does not refer to any issue of validit y of the instrument. When an instrument complies with the legal requirements for the form of negotiability, then that instrument is said to be negotiable. This means that th e instrument can be transferred by negotiation. Remember: Only negotiable instrume nts may be negotiated. When the instrument is negotiable, the law applicable is the Negotiable Instruments Law. When the instrument is not negotiable, the Civil Code and other pertinent laws apply (GSIS vs. Court of Appeals, 170 SCRA 533).

3. A person holding a negotiable instrument has an advantage over one who ta es a non-negotiable instrument. The former is free from the defects in the title of the previous holder as long as he is a holder in due course. This is not so of a mer e assignee who inherits the defects in the title of the assignor. For example: a certificat e of

indebtedness which is not payable to order or bearer is not negotiable and the o ne who ta es it is a mere assignee. As such, he ta es the instrument subject to the def ects in the title of the assignor (Traders Royal Ban vs. Court of Appeals, 269 SCRA 15).

4. a. b. c.

The following are the functions of a negotiable instrument: It acts as substitute for money. However, it is NOT legal tender. It increases the purchasing medium in circulation. It serves as a medium of credit.

5. The delivery of promissory notes, bills of exchange or another mercantile documents produce the effect of payment only when they have been cashed or when through the fault of the creditor, they have been impaired (Art. 1249, Civil Cod e of the Philippines). Thus, a creditor cannot be compelled to accept a chec in payment of an obligation. Reason: Chec s are not legal tender.

In a case, the seller was issued a chec in payment for a parcel of land. The se ller did not encash the chec within a reasonable time. Payment should be deemed effe cted because the chec was impaired through the fault of the payee. Failure of the pa yee to encash a chec for more than ten years undoubtedly resulted in the impairment of the chec through his unreasonable and unexplained delay. The presumption is that th e chec had been encashed (Papa vs. A.U. Valencia & Co., 284 SCRA 643).

Under Sec. 60 of the New Central Ban Act, chec s representing demand deposits do not have legal tender power and their acceptance in the payment of d ebts is at the OPTION of the creditor. The same section provides that when a chec has b een cleared and credited to the account of the creditor, it shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account.

6. Legal instruments not considered negotiable under the Negotiable Instruments Law, among them are the following:

(a) Treasury warrants Not negotiable because they are payable out of a particular fund (Metropolitan Ban and Trust Company vs. Court of Appeals, 269 SCRA 15). (b) Postal money orders The numerous restrictions and limitations imposed by postal regulations are inconsistent with negotiability. A postal money order is besides, not a commercial transaction but a governmental activity for the public benefit. It can be endorsed only once (Philippine Education Co., vs. Soriano, 39 SCRA 587). (c) Certificate of stoc / stoc certificate Not negotiable because it is not payable in a sum certain in money; also because the restrictions of the Corporation Code on the certificates are inconsistent with negotiability. (d) Documents of title They are not payable in money. The documents represent goods. Examples: bill of lading, warehouse receipt, quedan or doc warrants. (e) Letters of credit not negotiable because they are payable to a specified person and not to order or bearer. They are letters from a ban in one place, addressed to another ban in another country requesting the addressee to pay money or deliver goods to a third party named therein with the letter writer promising to pay him money for the goods or to repay him.

Characteristics of a Negotiable Instrument

1. Negotiable instruments have the following features or characteristics:

(a) NEGOTIABILITY because it complies with the requisites for negotiability under the law. (b) ACCUMULATION OF SECONDARY CONTRACTS because as the instrument passes from one person to another by negotiation, each negotiation constitutes a contract. (c) Requisites of Negotiability

1. An instrument to be negotiable must conform to the requirements of Section 1 of the Negotiable Instruments Law. Such requirements are the following: a. It must be in WRITING and signed by the MAKER or DRAWER; b. It must contain an UNCONDITIONAL promise or order to pay a sum CERTAIN in MONEY; c. It must be payable on DEMAND or at a FIXED or DETERMINABLE future time; d. It must be payable to ORDER or to BEARER; e. Where the instrument is addressed to a drawee, he must be NAMED or otherwise indicated therein with reasonable certainty (Sec. 1, NIL). 2. A very important point under this requirement is to remember that if the instrument mentions a PARTICULAR FUND, you have to as yourself whether this fun d is a source of payment of the instrument or merely a source of reimbursement (Se c. 3, NIL).

If it is a source of PAYMENT it is CONDITIONAL. Why? Because the payment depends on the adequacy or sufficiency of the funds indicated. If it is merely a source of reimbursement, it is negotiable because it is not conditional. It is not conditi onal because the particular fund indicated is not the source of payment but only a source of reimbursement.

Example: Pay to the order of P P100, 000 out of my funds in your possession<.. This is conditional because the funds in the hands of the drawee may be insuffic ient to cover the amount of the instrument. Hence, it is not negotiable. On the other ha nd, the following example is negotiable: Pay to the order of P, P100,000 and reimburse yo urself out of the funds in your hands.. Here the payment does not depend on the suffici ency of

the funds in the hands of the drawee. If it cannot be reimbursed, this fact has nothing to do with the instrument. This is therefore, negotiable.

Sometimes the instrument will indicate a particular account to be debited with the amount. The promise or order is still unconditional because the payment does not depend upon the sufficiency of the particular account to be debited.

Example: I promise to pay P or order the sum of P10,000 and charge the same to my account or to my share in the profits.. The principle here is the same as t he fund being a mere source of reimbursement.

An instrument represents a contract and there are always reasons why a person enters into a contract. If the instrument contains a statement of the transactio n that gave rise to the instrument, this does not affect negotiability because it does not a ffect the unconditionality of the promise or the order.

Example: Pay to Jose or order, P100,000 as payment for the car I bought from him<.. The insertion in the instrument of the reason that gave rise to the instr ument does not affect negotiability.

3. The unconditional promise or order referred to in the law must be one TO PAY MONEY and that sum must be CERTAIN. If it must be to pay money, then the instrument cannot be payable in GOODS.

What about if the promise or order is to pay MONEY and to PERFORM an act in addition to the payment of money? This is not negotiable because the performance of an act cannot be negotiated but only assigned. So a promise to < Pay P10, 000 to the order of Jose and to deliver a horse is not negotiable because the delivery of the hors e is not subject to negotiation. (Sec. 5, NIL).

Suppose the instrument says: Pay to the order of Jose P15,000 or deliver to him an air conditioner<. Notice the conjunction or.. This obligation is now an altern ative obligation as different from the previous example with the conjunction and.. Is t his negotiable?

Answer: In analyzing an instrument with or., determine who has the option. If the instrument gives the option to the drawer or the ma er (debtors), the instru ment is not negotiable because the holder cannot compel the debtor to pay money. If the option or right of choice is given to the holder (creditor), then it is negotiable beca use the holder can require the payment in money. Payment in money is a characteristic of a nego tiable instrument.

Suppose the instrument does not mention who has the option? In this case, one has to go bac to the law on obligation and contracts. In an alternative obligat ion the right of choice is presumed to be with the DEBTOR (Art. 1200, Civil Code) who is either the drawer or the ma er. The instrument is hence, not negotiable.

It is not enough that the instrument be payable in money. The sum must be

CERTAIN. Note the following examples:

(a) I promise to pay Jose or his order, P20,000 with interest at 12% per annum.. This is negotiable because the sum is certain and can be determined by simple computation. If the rate of interest is not mentioned, the sum is still certain because you will simply use the legal rate of interest. (b) I promise to pay Jose or his order, P20,000 at 12% interest; but at 14% interest until paid when not paid on the due date.. The increase is the penalty when payment is not made on maturity. This is an obligation with a penal clause. The sum is still certain and can be determined by mere computation. This is negotiable. (c) I promise to pay Jose or his order, P20,000 in installments.. This is not negotiable because the installments are not specified. Each installment and the due date of the installments must be mentioned including the amount for each of the installments. (d) An instrument need not to be payable in Philippine currency. It may be payable in foreign currency. Nevertheless, the sum to be paid is still certain because you can always refer to the rate of exchange.

(e) An instrument that promises to pay P50,000 and such other sums. is not payable in a sum that is certain. It is not negotiable. The clause such other sums. is too vague hence, uncertain.

4. To be negotiable, an instrument need not be payable on demand. It may be payable at a FUTURE TIME. If it is payable at a future time, that future time mu st be either FIXED of DETERMINABLE.

On October 18, 2010.; On or before October 18, 2010.; These are fixed future times. Sixty days after date.; This means sixty days after the date of execution of the instrument. This is a determinable future time. Sixty days after sight.. This is also a determinable future time and means sixty days after the drawee sees the instrume nt.

Payable on the death of his father. is negotiable. The maturity date is the day the father dies. This is still determinable although one has to wait for the occ urrence of the event because this is an obligation with a period. The same is true with thir ty days after his father s death..

Payable upon his reaching the age of majority. is not negotiable. This is conditional. A minor is not sure of reaching the age of majority. He may pass aw ay before reaching that age. Payable when his father dies of aids.. This is not nego tiable because the father is not sure to pass away due to aids. He may die through some other causes li e accidentally swallowing a poisonous rattle sna e.

Payable to order

1. To be payable to order, the instrument must either be payable to: (a) the order of a specified person, or (b) to him or his order (Sec. 8, NIL).

2. An instrument is payable to order where it is drawn payable TO THE ORDER OF A SPECIFIED PERSON< Pay to Jose. does not comply with this requirement because it is payable to a specified person. This specified person is Jose. The

law says that to be payable to order, the instrument must be payable to the ORDER OF A SPECIFIED PERSON.

Pay to the order of Jose. is in accordance with the law and is payable to order. Remember< the words, to the order of. must precede the specified person in order to ma e the instrument drawn payable TO THE ORDER OF A SPECIFIED PERSON.

An instrument is also payable to order where it is drawn payable TO HIM OR HIS ORDER. Who is referred to by the words, to him.? Answer: He is the specified person. So if we paraphrase the law, it would read: An instrument is also payabl e to order where it is drawn payable to the SPECIFIED PERSON OR HIS ORDER.. This is the literal translation of this provision. An example of this provision would be : Pay to Jose or his order.. Ta e note of the words, or his order after Jose, the specifi ed person. We could also validly say, Pay to Jose or order.. The word.his. may be omitted it already being understood.

Ta e note that if you say Pay to Jose., this would not be negotiable because it i s neither payable to the order of Jose or to Jose or his order or to Jose or order .

Who is this specified person? This specified person is the payee. Now, an instrument payable to the payee alone. is payable to a specified person and is th us, not negotiable, because the payee can no longer negotiate it. No other person could be paid except the payee or the specified person. When the instrument says: Pay to Jose., only Jose could be paid. When it says: Pay to the order of Jose., or Pay to Jose or his order., other persons could be paid upon the order or authority of Jose. However, the na me of a person need not appear alone. We can say, Pay to the order of the administrator o f Jose.. Here the payee is Jose s administrator, who under the law is the holder of a n office for the time being..

The specified person may also be the drawee. So we can say: Pay to the order of yourself or Pay to yourself or your order..

That specified person may also be the ma er. So we can say: I promise to pay to the order of myself.. In a promissory note, the ma er may also say: I promise to pay to myself or my order<.

Payable to bearer

1. To be payable to bearer, it is either of the following: a. expressed to be so payable; b. payable to a person named therein or bearer; c. payable to the order of a fictitious or non existing person and such fact was nown to the person ma ing it so payable; d. the name of the payee does not purport to be the name of any person; or e. when the only or last indorsement is an indorsement in blan . (Sec. 9, NIL).

2. An instrument is payable to bearer when it is EXPRESSED TO BE SO PAYABLE. This means the instrument says: Pay to BEARER<. or I promise to pay to BEARER<. This is a bearer instrument. However, if you say: Pay to BEARER, Jose<. or Pay to the BEARER, Jose<. this is NOT negotiable because it is payable to Jose and thus , payable to a specified person. The word, BEARER here is a description of Jose. I t is as if you said: Pay to the GOOD LOOKING Jose..

An instrument is payable to bearer when it is payable to a PERSON NAMED THEREIN OR BEARER. If the instrument says: Pay to JOSE OR BEARER<. Jose is the person named therein but you must add, or bearer. after Jose. Sometimes, people u se holder. instead or bearer. There is no problem here because Section 10 does not r eally require the use of the language of the law. Other terms are sufficient provided there is an intention to follow the requirements of the law. So you may use: I agree. inst ead of saying the standard words, I promise<.

An instrument is payable to bearer when it is payable TO THE ORDER of a FICTITIOUS or NON EXISTING PERSON AND such fact was KNOWN to the person ma ing it so payable. It is essential that the drawer or ma er must now that th e payee is fictitious or non existing. Hence, he nows that the only way it could be neg otiated is by delivery just li e an instrument payable to bearer. An instrument of this nature says: Pay to the order of the Prince of Mars<. There must be the words, to the ord er., before the fictitious or non existing person. It is wrong to say: Pay to the Prin ce of Mars<. The latter is non-negotiable.

An instrument is payable to bearer when the name of the payee. DOES NOT PURPORT TO BE THE NAME OF ANY PERSON. Example: Pay to cash<. Pay to the order of cash. Pay to money<. Pay to the order of money. Pay to sundries<. Li e the fictitious person, the payee here is not capable of ma ing an indorsement so it is implied that this ind of instrument may be negotiated only by delivery.

An instrument is payable to bearer if the ONLY indorsement or the LAST indorsement is an indorsement in BLANK. An indorsement in blan does not specify the indorsee; the indorser merely signs his name. If this happens, the original inst rument payable to order is converted to a bearer instrument.

Kinds of negotiable instrument

1. The inds of negotiable instrument are the following: (a) Promissory notes; (b) Bills of exchange; and (c) Chec s.

2. A promissory note is an unconditioned promise in writing made by one person to another, signed by the ma er, engaging to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer (Sec. 184, NIL).

3. A bill of exchange is an unconditional order in writing addressed by one pers on to another, signed by the person giving it, requiring the person to whom it is a ddressed to pay on demand or at a fixed or determinable future time a sum certain in mone y to order or to bearer (SEC. 126, NIL).

4. The following are the persons found in a bill of exchange: (a) Drawer (b) Payee or bearer (c) Drawee

Liability of drawer

1. The drawer is not primarily liable. He is only secondarily liable. By drawing the bill of exchange, he does not promise to be the first person to pay the instrume nt. In other words, he does not promise to pay absolutely. By drawing a bill, it is as if he says, If you want to be paid go to the drawee. Go to him for acceptance or for payment. If he dishonors the instrument, then come to me and I will pay provided you have ta en all the steps the law requires when an instrument is dishonored. (Sec. 61, NIL).

Distinctions between the drawer and the ma er

1. The following are the distinctions between a drawer and a ma er: (a) The drawer issues a bill of exchange, while the ma er, a promissory note; (b) The drawer is only secondary liable, while the ma er is primarily liable; and (c) The drawer can negative or limit his liability, while the ma er may not do so. The ma er cannot ma e a note without recourse..If the bill is dishonored by the drawee and the holder proceeds against the drawer, may the drawer refuse to pay on the ground that the payee of the bill does not exist or is incapacitated? He cannot. Li e the ma er, the drawer,

by drawing a bill admits the existence of the payee and his capacity to indorse (Sec. 61, NIL).

Drawee

1. The drawee of a bill is the person to whom the bill is addressed. The drawer in issuing the bill promises that when presented to the drawee, it will be accepted or paid, or both accepted and paid. But this is only the drawer s promise. It does not bind the drawee. As a drawee, he is not liable on the bill. Legally, he is not even a par ty to a bill. He only becomes liable under the bill of exchange from the moment he assents to the order of the drawer by accepting the bill. When he accepts, he is now called the acceptor. It is the acceptor who is a party to the bill of exchange and not a mere drawee. Before his acceptance, he has no liability whatsoever. But when he accepts he ceases to be a drawee. He is now called an ACCEPTOR.

2. Suppose the amount written on the bill is P10, 000. 00. Will the acceptor be necessarily liable for this amount? Not necessarily. If he accepts only for P5,0 00.00 then it is this amount for which he is liable. Reason: When the drawee accepts, he is li able NOT according to the tenor of the instrument but according to the tenor of his accep tance (Sec. 62, NIL).

3. Also, when the drawee becomes an acceptor, he cannot evade liability by claiming that the drawer is fictitious or does not exist, or that the drawer s sig nature is a forgery or that the drawer is incapacitated. By accepting the instrument he admi ts the existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument. He li ewise also admits the existence of the payee and h is capacity to indorse (Sec. 62, NIL).

Chec

Cigar Factory vs. Court of Appeals, 230 SCRA 643; sec. 185, NIL).

2. The issuance of a chec does not automatically operate as an assignment by th e drawer of his funds to someone else. It is not also an assignment of the funds i n the ban to a person. The ban does not acquire any liability from the mere drawing of a chec . In fact the ban is not liable to the holder unless and until the ban ac cepts or certifies the chec (Sec. 189, NIL). Because of this rule, the drawer has the ri ght to order the drawee ban to stop payment of a chec . But if a ban pays on a chec even a fter it receives a stop payment order, it pays on its own responsibility and will not be permitted to charge the payment to the drawer s account.

3. The drawer may give a stop payment order if he has a valid defense against th e payee. Example is when the payee failed to deliver the goods he promised to give to the drawer (Bataan Cigar vs. Court of Appeals, 230 SCRA 643).

4. A negotiable instrument, such as a chec , whether a manager s chec or ordinary chec , is not legal tender (Ban of the Philippine Islands vs. Court of Appeals, 326 SCRA 641).

Distinctions between a promissory note and a bill of exchange

1. A chec

is a bill of exchange drawn against a ban , payable on demand (Bataan

Promissory Note Bill of Exchange Is a promise Is an order Persons involved are ma er and payee Persons are drawer, drawee and payee or bearer

1. The distinctions between a chec and a bill of exchange are as follows:

(a) A chec is always drawn on a ban ; A bill of exchange may or may not be drawn on a ban . (b) A chec is always payable on demand; A bill may be payable on demand or at a fixed or determinable future time. (c) A chec need not be presented for acceptance; A bill may require acceptance. (d) A chec is drawn against a deposit; A bill needs not to be drawn against a deposit. (e) A chec must be presented for payment within a reasonable time from its issue; A bill is to be presented within reasonable time from its last negotiation. (f) Death of the drawer of a chec revo es the authority of the ban to pay; Death of drawer in a bill does not revo e authority of the drawee to pay.

Completion and delivery

Insertion of date

1. Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed peri od after

Distinctions between a Chec

and a Bill of Exchange

sight is undated, any holder may insert therein the true date of issue or accept ance, and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as t o him, the date so inserted is to be regarded as the true date (Sec. 13, Negotiable Ins truments Law). This section which authorizes the holder to put a date on an instrument, refers to two cases: namely: (a) where an instrument is payable at a fixed period after date but is issued undated; and (b) where an instrument is payable at a fixed period after sight but the acceptance is undated (De Leon, The Philippine Negotiable Instruments Law and Allied Laws Annotated, 2010 Edition, p.83).

2. Sec. 13of the Negotiable Instruments Law does not apply to an instrument payable on demand although undated, for its maturity is already fixed, being due immediately. Neither does it authorize the insertion of the date of issue in an undated bill of exchange payable at a fixed period after sight (ibid).

3. The insertion a wrong date in an undated instrument by one having nowledge of the true date of issue or acceptance will avoid the instrument as to him or a ny one claiming under him but not as to a subsequent holder in due course who may enfor ce

the same notwithstanding the improper date. In the hands of a holder in due cour se, the date inserted, even if wrong, is to be regarded as the true date (ibid).

Completion of blan s

1. This refers to an instrument that has been signed either by the ma er if it i s a note or by the drawer if it is a bill. However, the instrument is not completely filled up. When it is delivered to a person with the intent that the paper be converted int o a negotiable instrument, the delivery of the paper is a prima facie authority (an implied authority) for the person to whom it is delivered to fill it up for the amount a s instructed. The party primarily liable (ma er or acceptor) is liable to the hold er in due course even if the amount filled up is not in accordance with the authority give n. What is important is that the paper was delivered in blan with the intent to have it converted into a negotiable instrument (Sec. 14, NIL). 2. If M signs a paper and delivers it to P with instruction to convert it into a negotiable instrument, P has an implied authority to fill in the amount in the i nstrument. If M tells him to write P1,000, the right thing to do is to follow the instructi ons. But assume that he disregarded the instructions and wrote P10, 000. He then negotiat es it to H who is a holder in due course and who of course has no nowledge of the actual instructions of M who is liable to H for P10, 000. If H is not a holder in due c ourse, H cannot collect P10, 000. Delivery of incomplete instruments is only a personal d efense.

Incomplete and undelivered instruments

1. If an instrument is incomplete and not intended to be delivered, and someone completed it and negotiates it, the instrument so completed and negotiated is no t a valid contract in the hands of any holder. Therefore, even a holder in due course cann ot recover.

2. Thus, if M signs a note without placing the amount or the payee s name on it, t he note is incomplete. If he merely puts the note inside a drawer, then the note is not for delivery and is undelivered. Suppose P steals the note and inserts his name as p ayee, and inserts the amount of P10,000, negotiates it to A then A to B. B is a holder in due course. May he recover from M? B cannot recover from M because, incomplete undelivered instruments is a defense even against a holder in due course (Sec. 15, NIL). Not e that this defense is a real defense.

Complete but undelivered instruments

1. Suppose M ma es a note complete in all respects and payable to bearer. He eeps the note inside his drawer. P steals it and negotiates it to A then A to B . If B collects from M, can he collect? This defense is a personal defense. Since B is presumed a holder in due course, he can recover.

2. Complete undelivered. instrument is only a personal defense. If B is not a holder in due course, he cannot recover.

Rules of interpretation

1. Where the amount is both written in words and in figures, and there is a discrepancy between the two, the sum denoted by the words is the sum payable, if the words are ambiguous, reference may be had to the figures.

In one case, the drawer of a chec had P1, 144, 760 in his ban account. He iss ued a chec for P1,200, 000 written in figures but the amount written in words was P1,000,200. He cannot be deemed to have issued a bouncing chec or be liable for estafa since the amount in words should prevail. The amount written in words is suffici ent to be paid by the amount of the deposit (People vs. Romero, 306 SCRA 90).

2. When the instrument provides for payment of interest but the date when intere st is to run is not specified, then interest will run on the date of the instrument . If the instrument is not dated then from the date of issue.

3. Where the instrument is not dated, its date will be the dated of issue.

4. Where the instrument is so ambiguous that there is a doubt as whether it is a bill or a note, the holder may treat it as either at his option. Where in a bill, the drawer and the drawee are the same person, or where the drawee is fictitious or not having capacity to contract, the holder may treat the instrument as a note.

5. Where a signature is so placed on the instrument that it is not clear in what capacity it is affixed, the person so signing shall be considered an indorser.

6. Where the instrument containing the words, I promise to pay., is signed by two or more persons, they are deemed to be jointly and severally (solidarily) liable .

Signature

Signing in trade name

1. As a general rule, only persons whose signatures appear on an instrument are liable thereon. Thus, a drawee is not liable where his signature does not appear on the bill. Neither is one bound by a promissory note executed by another because part of the consideration for which the note was given was received by him (Kal vs. Salerio , 146 Sec. 103).

2. However, one who signs in a trade name or assumed name is liable as if he signed his own name. It is necessary, however, that the party who signed intende d to be bound by his signature (De Leon, The Philippine Negotiable Instruments Law and A llied Laws Annotated, 2010 Edition, p.83).

Signature of agent

1. The signature of any party may be made by a duly authorized agent. No particular form of appointment is necessary for this purpose; and the authority of the agent may be established as in other cases of agency (Sec. 19, NIL).

2. The authority of agent may be shown, as in other cases of agency, to have bee n given orally or in writing subject to the provisions of the Statute of Frauds (F irst National Ban vs. Ban of Columbia, 5 Wheat 326).

3. In order that an agent who signs a negotiable instrument may escape personal liability, the following are the requisites:

(a) (b) is, (c)

he is duly authorized; he adds words to his signature indicating that he signs as an agent, that for or on behalf of a principal, or in a representative capacity; and he discloses his principal (Sec. 20, Negotiable Instruments Law).

4. If the agent signs a notice or bill in his own name and discloses no principa l, he is personally bound, and evidence to the contrary may not be admitted to relieve hi m from personal liability (Granada vs. Philippine National Ban , 18 SCRA 1).

5. One who signs an instrument in a representative capacity but without disclosi ng his principal will still be liable although he adds to his signature the word age nt. or trustee,. or administrator,. or guardian,. or director,. or treasurer. etc. In all t hese cases, the words added are regarded as mere description personae, i.e., describi ng the person who signed the instrument and do not of themselves ma e third persons chargeable with notice of any representative relation of the signer (De Leon, Th e Philippine Negotiable Instruments Law and Allied Laws Annotated, 2010 Edition, p .87).

6. A signature per procuration. (per procuration; per proc) is a notice that the agent signing has a limited authority. Therefore, the principal will be bound on ly when the agent acted within the actual limits of his authority. Remember, that an age nt may sign the instrument for his principal. No particular form for the appointment is necessary. When the agent signs as an agent and he wants to avoid being personal ly liable, the following must concur:

(a) He must be duly authorized; (b) He must add words indicating he is only an agent; and (c) He must disclose his principal.

Indorsement by minor or corporation

1. As a general rule, contracts entered into by a minor are voidable at his inst ance or at the instance of his guardian (Arts. 1327, 1329, 1390, Civil Code).

2. A minor is not bound by his indorsement for lac of capacity. He is, however, not incapacitated to transfer certain rights. Section 22 merely provides that th e indorsement of an infant is not void and that his incapacity is not a defense in favor of prior parties, and does not ta e away the infant s right to disaffirm his indorsem ent and recover the instrument even against an innocent indorsee or subsequent holder fo r value (Murray vs. Thompson, 188 S.W. 578).

3. A minor, however, may be held bound by his signature in an instrument where he is guilty of actual fraud committed by specifically stating that he is of age when, in fact, he is not (Mercado vs. Espiritu, 37 Phil 215).

4. As regards corporations, Section 22 applies to cases where the corporation ha s committed ultra vires acts or acts beyond its powers. It has been held that a co rporation is not liable on notes in a suit thereon by an indorsee, where the corporation i s without capacity to ma e the contract in fulfillment of which they were executed (Pearce vs. Madison & I.R. Co., 21 How [US] 441).

Forgery

1. There are various ways by which this topic may be as ed in an exam.

Note the following examples:

The most common way is for the examiner to establish a fact pattern where the signature of the ma er is forged. If the ma er s signature is forged, the ma er ca n never be held liable on the instrument because as to him, the instrument is inoperativ e (Sec. 23, NIL). From the point of view of Civil Law, the ma er whose signature is forged i s not a party to the instrument. One who is not a party to a contract cannot be liable. The same analysis happens when the signatures of the drawee/acceptor or the drawer are fo rged. They cannot be held liable on the instrument.

A drawee ban should recredit the amount to the account of the drawer whose signature was forged without his fault or negligence. In this case the friend of the drawer stole a chec and forged the drawer s signature (PNB vs. Quimpo, 158 SCRA 5 82).

2. In some instances, the signatures of the ma er or the drawer are genuine and the forgery happens when the instrument falls into the hands of the forger by any il licit means.

Illustration: M ma es a note payable to the order of P. P indorses it to A. While the note is in A s possession, F obtains possession of the note illegally. F FORGES the signature of A and indorses it to himself. He then indorses and delivers the instrument to C an d C to H. Note: Remember that a holder is presumed to be a holder in due course under Sec. 59. If nothing in the problem indicates whether or not he is a holder in due course, co nsider him as a holder in due course.

(a) The person whose signature is forged is not liable on the instrument. In

the illustration, this person is A. He could not be liable to anyone under the forged signature because as to him the instrument is totally inoperative.

(b) The persons prior to A are M and P. Notice that their signatures were not forged. However, even if their signatures were not forged, the holder cannot collect from them or cannot enforce the instrument against them. Their liability on the instrument was cut-off when A s signature was forged. The rule is that parties prior to the party whose signature was forged are not liable. The reason is simple. When an indorsement was forged, prior parties cease to be parties to the instrument in relation to persons receiving the instrument after the forgery.

(c) Notice that H obtained the instrument through the indorsement of C whose signature is genuine. C is clearly an indorser. Under Sec. 65/66, NIL, indorsers warrant that the instrument is GENUINE, VALID and SUBSISTING at the time of their endorsement. This warranty exists even if C is totally innocent of the previous act of forgery. H, therefore could hold C liable on the instrument.

3. Despite the forgery of a signature in the instrument, it is not accurate to s ay that the entire instrument is totally inoperative. There may be parties precluded fro m setting up forgery as a defense li e the indorser or an acceptor who accepts the instrum ent despite the forgery of the signature of the drawer and even if he is not aware o f the forgery. Those parties who have ratified the forgery, expressly or impliedly or those

whose negligence facilitated the forgery are li ewise barred from using forgery as a defense.

4. Another way by which forgery may be as ed is through the following fact pattern: The drawer s signature was forged without negligence on his part. The for ger made it appear that the chec was made payable to his order. He then encashes th e chec . The drawee ban paid the forger. May the drawer recover from the ban the amount debited from his account? The drawer can recover from the ban . The forge ry of his signature clearly shows that he is not a party to the chec and is theref ore, totally inoperative as to him. Further, the ban is negligent. The ban is charged with nowledge of the signature of its clients and should not honor a chec with the forged signature of the drawer.

Illustration: Donato draws a chec for P1 million payable to the order of Pablo and drawn against National Ban . The chec was in payment of a car bought by Donato from P ablo. Without anyone s negligence, the chec fell into the hands of Fred who forged the indorsement of Pablo who never received the chec , ma ing it appear that it was indorsed to him. Fred deposited the chec in City Ban which indorsed the chec for clearing. Later, the amount was credited to the account of Fred when the chec w as cleared. He withdrew the amount, closed his account and disappeared.

a. May Pablo recover P100,000 from Donato? Yes, but under the contract of sale, not under the chec . Pablo has not yet been paid and thus, Donato s obligation to pay has not yet been extinguished. He cannot recover under the chec because although he is the payee, he never came into possession of the chec . He thus, never became a holder. As far as the chec is concerned, there is no privity of contract between Donato and Pablo.

Where a debtor draws a chec in favor of his creditor as payee but the latter never received the chec because it illegally fell into the hands of a third person, the creditor has no cause of action under the chec against anyone (drawer, collecting ban or drawee ban ) because not having received the chec , he is not a holder and thus, acquires no interest therein (Development Ban of Rizal vs. Sim Wei, 219 SCRA 736).

(b) If National Ban deducts the amount of the chec from the account of Donato, may the latter recover from the ban even if his signature is genuine? Yes. The drawee ban is bound by the duty to pay strictly to the payee or to anyone authorized by the payee or drawer The instructions of the drawer involves not paying the amount to anyone else. Paying to Fred is a breach of this duty and payment under a forged indorsement is not payment to the drawer s or payee s orders. Since the drawee ban did not pay a person entitled to receive payment, it has no right to see reimbursement by debiting from its client s account. Note: The drawer however, is precluded from recovery if the ban can prove the drawer s negligence.

(c) May the National Ban recover from City Ban ? Yes. City Ban has become an indorser when it indorsed the chec for clearing. As an indorser, it warrants that the instrument is genuine in all respects what it purports to be. It cannot set up the defense of forgery as against National

Ban , the drawee ban . Note: Drawee ban may not recover if it has been found to be negligent. So if before the chec is cleared, it already was notified of the forgery and did nothing, it cannot collect.

Consideration

1. Favor of the party to an instrument, such as the ma er or indorser, and it ma y consist in giving, doing, or not doing (Art. 1156, Civil Code).

2. Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value (Sec. 24, Negotiable Instruments Law).

However, the presumption is only prima facie. It may, therefore, be rebutted by evidence to the contrary (Pineda vs. De La Rama, 121 SCRA 671).

Valuable Consideration

1. Value is any consideration sufficient to support a simple contract. An antece dent or pre-existing debt constitutes value; and is deemed such whether the instrumen t is payable on demand or at a future time (Sec. 25, Negotiable Instruments Law).

2. An antecedent or pre-existing debt is a valuable consideration. The debt may be that of a third person and the discharge of such debt is a valuable consideratio n for a negotiable instrument, whether such instrument is payable on demand or at a futu re time. It must be shown that the holder has given up the pre-existing debt or the right to sue (Broo lyn City& N.R. Co. vs. National Ban of the Republic, 102 U.S. 14).

Effect of Want of Consideration

1. Absence or failure of consideration is a matter of defense as against any per son not a holder in due course; and partial failure of consideration is a defense pr o tanto, whether the failure is an ascertained and liquidated amount or otherwise (Sec. 2 8, Negotiable Instruments Law).

2. Absence of Consideration means a total lac of any valid consideration for th e contract, in consequence of which the alleged contract must fall (Klein vs. Rote man, 6 Ohio App. 145).

3. Failure of consideration means the failure or refusal of one of the parties t o do, perform or comply with the consideration agreed upon. In other words, something was agreed upon as consideration but for some cause, such agreed consideration faile d to materialize (De Leon, The Philippine Negotiable Instruments Law and Allied Laws Annotated, 2010 Edition, p.138).

Accomodation party

1. An accommodation party is one who lends his name to another called the accommodated party so the latter could borrow money. The accommodation party sig ns the instrument as ma er drawer, acceptor or indorser without receiving value or consideration.

Illustration: B is badly in need of P50, 000. However, no one is willing to lend him money because he has no credit. M has an excellent credit within the ban ing community and is a very close friend of B. M ma es and signs a note as ma er with B as payee. In signing the note, M did not receive anything from B and was done simply to help B. B is the party accommodated while M is the accommodating party. B then indorses the note to XYZ Ban which upon seeing M s signature discounts the note. The note is an accommodation note.

Liability of the accommodation party

1. An accommodation party is liable to a holder for value even if the latter no ws him to be only an accommodation party. However, he is not liable to the party accommodated.

2. If a person signs a note to lend his name to the transaction in order to help another, as when he signs as a co-ma er, and the instrument is not negotiable, t he person who lends his name cannot avail of the protection of the NIL and claim th at he is merely an accommodation party because the said law applies only to negotiable instruments. A non-negotiable note is covered by the Civil Code (Garcia vs. Llam as, 417 SCRA 292, December 8, 2003).

3. A married couple who executed a note in favor of a ban to enable a relative to borrow from the ban are accommodation parties and are liable for the payment of the loan (Town Savings and Loan, Inc. vs. CA, 223 SCRA 459).

4. A corporate officer who signs as a co-ma er with the corporation, is liable a s an accommodation party (Republic Planters Ban vs. CA, 216 SCRA 738)

One who signs a promissory note as an accommodation ma er in favor of the payees who indorsed the same to the financing company cannot raise the defense t hat he did not receive consideration because an accommodation party by essence recei ves no consideration (Caneda vs. CA, 181 SCRA 762).

5. Section 29 of the Negotiable Instruments Law defines an accommodation party as a person who has signed the instrument as ma er, drawer, acceptor, or indorser , without receiving value therefor, and for the purpose of lending his name to som e other person..

As gleaned from the text, an accommodation party is one who meets all the three requisites, viz: (1) he must be a party to the instrument, signing as ma er, dra wer, acceptor, or indorser; (2) he must not receive value therefor; and (3) he must s ign for the purpose of lending his name or credit to some other person. An accommodation par ty lends his name to enable the accommodated party to obtain credit or to raise mon ey; he receives no part of the consideration for the instrument but assumes liability t o the other party/ies thereto.

In the absence of concrete evidence it cannot just be assumed that petitioner intended to lend his name to the corporation. Hence, petitioner cannot be consid ered as an accommodation party (Claude P. Bautista v. Auto Plus Traders, Inc., G.R. No. 166405, August 6, 2008).

6. Notably, Section 29 of the NIL defines an accommodation party as a person "wh o has signed the instrument as ma er, drawer, acceptor, or indorser, without recei ving value therefor, and for the purpose of lending his name to some other person." A s gleaned from the text, an accommodation party is one who meets all the three requisites, viz: (1) he must be a party to the instrument, signing as ma er, dra wer, acceptor, or indorser; (2) he must not receive value therefor; and (3) he must s ign for the purpose of lending his name or credit to some other person. An accommodation par ty lends his name to enable the accommodated party to obtain credit or to raise mon ey; he receives no part of the consideration for the instrument but assumes liability t o the other party/ies thereto. The accommodation party is liable on the instrument to a hold er for value even though the holder, at the time of ta ing the instrument, new him or her to be merely an accommodation party, as if the contract was not for accommodation.

7. The relation between an accommodation party and the accommodated party is one of principal and surety the accommodation party being the surety. As such, h e is deemed an original promisor and debtor from the beginning; he is considered in l aw as the same party as the debtor in relation to whatever is adjudged touching the ob ligation of the latter since their liabilities are interwoven as to be inseparable. Altho ugh a contract of suretyship is in essence accessory or collateral to a valid principa l obligation, the surety's liability to the creditor is immediate, primary and absolute; he is directly and equally bound with the principal. As an equivalent of a regular party to the und erta ing, a surety becomes liable to the debt and duty of the principal obligor even witho ut possessing a direct or personal interest in the obligations nor does he receive any benefit therefrom.

Consequently, when a third person advances the face value of the note to the

accommodated party at the time of its creation, the consideration for the note a s regards its ma er is the money advanced to the accommodated party. It is enough that val ue was given for the note at the time of its creation. As in the instant case, a su m of money was received by virtue of the notes, hence, it is immaterial so far as the ban is concerned whether one of the signers, particularly petitioner, has or has not re ceived anything in payment of the use of his name.

8. Under the law, upon the maturity of the note, a surety may pay the debt, demand the collateral security, if there be any, and dispose of it to his benefi t, or, if applicable, subrogate himself in the place of the creditor with the right to enf orce the guaranty against the other signers of the note for the reimbursement of what he is entitled to recover from them.

Since the liability of an accommodation party remains not only primary but also unconditional to a holder for value, even if the accommodated party receive s an extension of the period for payment without the consent of the accommodation par ty, the latter is still liable for the whole obligation and such extension does not release him because as far as a holder for value is concerned, he is a solidary co-debtor. i t is a recognized doctrine in the matter of suretyship that with respect to the surety, the creditor is under no obligation to display any diligence in the enforcement of h is rights as a creditor (Tomas Ang v. Associated Ban , et al., G.R. No. 146511, September 5, 2007, Azcuna).

Negotiation

to exist. To ma e one a holder the negotiation must b

Distinctions between assignment and negotiation

1. The negotiation is strictly the transfer of a negotiable instrument to a hold er. While a negotiable instrument may be either negotiated or assigned, a non-negoti able instrument can only be assigned or transferred, not negotiated. The other distin ctions are: (a) negotiation refers only to negotiable instruments, while assignment refers generally to an ordinary contract; (b) in negotiation, the transferee is a holder, while in assignment, the transferee is an assignee; (c) a holder in due course is subject only to real defenses, while an assignee i s subject to both real and personal defenses; (d) a holder in due course may acquire a better title or greater rights under the instrument than those possessed by the transferor or a prior party, while generally an assignee merely steps into the shoes of the assignor; (e) a general indorser warrants the solvency of prior parties, while an assignor does not warrant the solvency of prior parties unless expressly stipulated or the insolvency is nown to him; (f) an indorser is not liable unless there be presentment and notice of dishonor, while an assignor is liable even without notice of dishonor; and (g) negotiation is governed by the Negotiable Instruments Law, while assignment is governed by Articles 1624 to 1635 (on assignment of credits) of the Civil Code (De Leon, The Philippine Negotiable Instruments Law and Allied Laws Annotated, 2010 Edition, p.152-153).

Modes of negotiation

1. There are three methods of transferring a negotiable instrument:

(a) Issue means the first delivery of the instrument, complete in form, to a

1. This is the transfer of ay as to ma e the transferee the ument is transferred to another and eree or just a mere assignee, then ransferee a HOLDER for a negotiation e in accordance with the rules.

the instrument from one person to another in such a w HOLDER of the instrument (Sec. 30, NIL). If the instr the latter does not become a holder but a mere transf there is NO negotiation. The transfer must ma e the t

person who ta es it as a holder (Sec. 191, NIL). A negotiable instrument s life does not begin until it is issued by the ma er or drawer to the first holder.

(b) Negotiation ordinarily involves indorsement (in regard to other than bearer paper so that negotiation. and indorsement are often used interchangeably. Negotiation ma es it possible for the transferee to acquire a better right to a negotiable instrument that the transferor had. Whether the holder is a holder in due course depends upon factors other than the fact of negotiation (Sec. 52, NIL).

2. The negotiation of an instrument depends on whether that instrument to be negotiated is payable to ORDER or to BEARER. If it is payable to order, the inst rument is negotiated by INDORSEMENT completed by DELIVERY. If it is payable to bearer, indorsement is not required. There is only one act required: DELIVERY (Sec. 30, NIL).

3. The correct indorsement will ma e the transferee a holder. A HOLDER is defined as the payee or the INDORSEE who is in possession of the instrument or t he BEARER thereof. He becomes an indorsee by indorsement to him and becomes in possession by delivery. He also becomes a bearer by mere delivery (Secs. 30, NIL ).

Indorsement

1. This constitutes the writing or signing by the indorser of his name in the instrument with the intent to transfer it to another. The indorsement is usually written on the bac of the instrument (Sec. 32, NIL). However, there is no rule which pr ohibits its being written on the face of the instrument. The indorsement may even be written on a separate slip of paper attached to the indorsement. This separate paper is calle d on allonge.

(a) Special Indorsement this is the indorsement which specifies the name of the indorsee aside from the signature of the indorser. The indorsement by the indorsee is necessary to negotiate this instrument (Sec. 34).

(b) Blan Indorsement this indorsement does not specify the indorsee and what appears is only the signature of the indorser. An instrument with a blan indorsement may be negotiated by MERE DELIVERY if the blan indorsement is the only or the last indorsement. This ind of indorsement transforms an originally order instrument to a bearer instrument. However, if the holder wants to retain the character of the instrument as an order instrument, the holder is allowed by law to CONVERT the blan indorsement into a special indorsement by inserting the holder s name above the indorser s signature. He cannot write some other name because this would be inconsistent with the character of the indorsement (Sec. 35, NIL).

2. The

inds of indorsement are:

i. Prohibits the further negotiation of the instrument; ii. Ma es the indorsee the agent of the indorser iii. Ma es the indorsee a mere trustee (Sec. 36, NIL).

The word restrictive. implies that the holder acquires limited rights under the instrument. Thus, while he is a holder, he may not be allowed to negotiate the instrument any further as when the indorser writes. To A only. Sgd. B.. A can no longer negotiate the instrument to someone else.

Another ind of restrictive indorsement is one where the holder is deprived to have title to the instrument because he is merely either an agent or a trustee. When the indorsement is written as: Pay to A for collection. Sgd. B., this ma es A only an agent. His duty is merely to collect and he is not the titleholder. He is also an agent if the indorsement is written as: Pay to A for deposit. Sgd. B. When the indorsement is written as : Pay to A in trust for B., A is mere trustee.

(c) Restrictive Indorsement following:

this ind of indorsement is any of the

A restrictive indorsement DOES NOT deprive the indorsee of all the rights of a holder. The indorsement merely LIMITS his rights. A restrictive indorsee also has the following rights: 1. To receive payment and to 2. To bring an action under the instrument 3. To transfer his rights as an indorsee provided it is not prohibited by the indorsement (Sec. 37, NIL). Thus, an indorsee as an agent or a trustee may indorse the instrument to another and negotiate the same. However, the subsequent indorsee also becomes either an agent or a trustee. But the indorsee can no longer negotiate the same as when the indorsement is written as Pay to A only. or to A and no other person..

(d) Qualified Indorsement this ma es the indorser a mere ASSIGNOR of the instrument because the indorsement is made by adding the words, without recourse, or other similar words li e sans recourse, or at indorsee s own ris . If this is the ind of indorsement, the indorser is not an indorser. If this is the ind of indorsement, then the indorsee cannot hold the indorser liable because an assignor cannot generally be held liable by an assignee (Sec. 38, NIL).

When the indorsement is qualified, the indorser is free from liability in case the indorsee cannot collect from the party primarily liable on the instrument. However, when the party sought to be held liable does not pay the holder/indorsee because the instrument is for example, forged, the qualified indorser may be held liable under his warranties. Under Sec. 65, every person negotiating by a qualified indorsement warrants that the instrument is genuine in all respects what it purports to be.

(e) Conditional Indorsement this indorsement is one, which imposes a condition before payment is to be made. Example: Pay to A if he passes the CPA examinations. Sgd. B.. Under this indorsement, A will not receive payment until he passes the exams. This condition attaches to the instrument if negotiated by A to D. D has to wait for the passing of A in the CPA Exams. However, the person who is to pay the instrument has the OPTION to disregard the condition and PAY the holder despite the condition and without regard as to whether the condition has been fulfilled or not (Sec. 39).

3. The indorsement may be a combination of a special indorsement on the one hand , and a restrictive, qualified and conditional on the other. So the indorsement can be s pecial restrictive; special qualified; and special conditional.

Special Indorsement of a Bearer Instrument

1. A bearer instrument does not have to be indorsed, more so through a special indorsement. If a holder negotiates it by a special indorsement, the instrument is still a bearer instrument and will not affect the original character of the instrument. Hence, it may still be negotiated by DELIVERY despite the special indorsement or any other indorsement (Sec. 40, NIL).

Other Rules On Indorsement

1. Where the instrument is payable to two or more payees or payable to two or mo re indorsees, BOTH payees or indorsees must indorse except if they are partners (si nce they are agents of each other) or if one has authority to indorse for the other (Sec. 41, NIL).

2. If the payee is the cashier of a corporation or a fiscal officer of an entity and is payable to such officer as cashier or fiscal officer, the instrument is deemed t o be payable to the entity of which the payee is an officer. Hence, it can be indorsed by the ban , corporation or entity or by cashier or fiscal officer (Sec. 42, NIL).

3. If the name of the payee or indorsee is misspelled or wrongly designated, the indorsee may payee or indorse may indorse under the wrong name but he may add if he wants his right name (Sec. 43, NIL).

4. Indorsement by a minor passes title to the instrument (passes property) even if he may incur no liability because of his minority. The same rule applies in the cas e of other incapacitated persons li e an insane person.

Effect of Transfer Without the Requisite Indorsement

1. Where the instrument is payable to order and was transferred for value withou t an indorsement, the transferee is not a holder but only an assignee because the transfer was defective. A defect in the negotiation results into a mere assignment. Effec

t: The assignee ACQUIRES ALL PREVIOUS DEFECTS OF TITLE OF PRIOR HOLDERS and may not recover on the instrument even if he is in good faith because he is not a holder. However, he has a remedy. He may require the previous holder to indorse the instrument to him. If it is indorsed, then he now becomes a holder as of the tim e the indorsement was made (Sec. 49, NIL).

Assignment

1. It is the less usual method, which may or may not involve an indorsement in t he sense of writing on the bac of the instrument. A bill or note, whether negotiab le or nonnegotiable may be transferred by assignment. Although it may be transferred by indorsement and delivery, the assignee acquired the instrument subject to the ru les applicable to non-negotiable paper (11 Am. Jur. 2d 335-336).

Rights of the Holder

1. Every holder, due course or not has two basic rights:

(a) To sue on the instrument; and (b) To receive payment on the instrument (Sec. 51, NIL).

Holder in Due Course

1. A holder in due course is one who has ta en the instrument under the conditio ns set forth in Section 52 of the NIL: (a) The instrument is complete and regular upon its face; (b) He became the holder before it is overdue; (c) He has no notice that it was dishonored if such was the fact; (d) He too it in good faith and for value; (e) At the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. 2. A holder in due course li e any other holder, due course or not may also sue on the instrument and receive payment. What distinguishes a holder in due course fr om one who is not is that he holds the instrument free from the defects of prior pa rties. In other words, he does not inherit whatever defects other holders have in their ti tles. More important is that he is FREE from PERSONAL defenses although he is not free from REAL defenses.

Defenses against the Holder

1. There are two inds of defense, which may be interposed against a holder who wants to collect. These are: (a) Personal defense; and (b) Real defenses

2. Real or legal defenses are those, which are available against any holder including a holder in due course. The defenses are real. because they attach to t he instrument or the res. regardless of the ind of holder.

3. Personal or equitable defenses, on the other hand, are available among immediate parties and available against one who is NOT a holder in due course. T hese defenses cannot defeat the claim of one who is a holder in due course. Personal defenses are not, in other words, effective against a holder in due course.

4. When confronted by a question involving a defense, the first thing to do is t o determine whether the defense interposed by the person sought to be charged is r eal or personal. If the defense used is a real defense, the holder cannot recover even

if he is a holder in due course. The only exception is in case of a material alteration, th e holder in due course may recover but only up to the original amount before its alteration. If the defense is personal, the holder may recover as long as he is a holder in due cou rse, if not, he cannot recover.

It is thus, very important to now which defenses are real and which defenses are personal.

5. Examples of real defenses:

(a) (b) (c) (d) (e) (f) (g)

Incapacity of the person who is sought to be charged li e minority Forgery of a signature; Absence of authority; Duress amounting to forgery as when one forces another to sign; Want of delivery of an incomplete instrument( incomplete undelivered) Fraudulent alteration by the holder; Prescription;

(h) Discharge in insolvency, ban ruptcy; (i) Fraud in factum or fraud in esse contractus.

6. Examples of personal defenses: (a) Filling of a Wrong Date; (b) Filling up of blan s not in accordance with authority given (Incomplete delivered) (c) Want a delivery of complete instrument (Complete undelivered) (d) Absence of failure of consideration; (e) Simple fraud or fraud in inducement; (f) Acquisition of instrument by duress; (g) Acquisition of an instrument for an illegal consideration (h) Negotiation in breach of faith.

Liabilities of Parties

1. The parties primarily liable are the following: (a) Ma er of a promissory note; (b) Acceptor of a bill of exchange; and (c) Certifier of a chec , which is a ban because certification is equivalent to acceptance

2. The parties secondarily liable are the following:

(a) Drawer of a bill; and (b) Indorser of a note or a bill

3. Before a party secondarily liable can be charged, it is necessary that the fo llowing should have been ta en:

(a) The note must have been presented for payment of the bill must have been presented for acceptance (if necessary) or presented for payment; (b) The instrument has been dishonored for non acceptance or non

payment, or both; (c) The parties secondarily liable have been given a notice of dishonor and if it is a foreign bill give a PROTEST. The purpose of a notice of dishonor is to inform the parties secondarily liable that the ma er or acceptor or drawee dishonored the instrument and that because of the dishonor, they will be held liable on the instrument instead.

4. Drawee is not liable as a general rule. He becomes liable only when he accept s in which case, he becomes an acceptor. It is the acceptor who is liable, not a mere drawee. The person primarily liable on the instrument is the person who is ABSOLUTELY required to pay the instrument without any condition. The party secondarily liab le underta es to pay the instrument only when certain conditions are fulfilled. Hen ce, the party secondarily liable is liable not absolutely but CONDITIONALLY.

Ma er

1. The MAKER engages to pay the instrument according to its tenor. He admits the existence of the payee and his capacity to indorse. This means that the ma er wi ll pay the note according to what the note says and the amount printed on the note. The ma er cannot escape liability by alleging that his agreement with the payee is for a l esser amount. He li ewise cannot deny liability by alleging that the payee is fictitio us or does not exist or that the payee is incapacitated (Sec. 60, NIL).

Drawer

1. The DRAWER also admits existence of the payee and his capacity to indorse. He engages that on due presentment the instrument will be accepted or paid, or both accepted and paid, according to its tenor, and that if it is dishonored, he will pay the amount thereof for the holder if the necessary proceedings on dishonor be ta en (Sec. 61). In short, the drawer will only pay if the instrument is dishonored by the p arty primarily liable and if he is given a notice of dishonor.

Acceptor

1. The acceptor, by accepting the instrument, engages that he will pay it accord ing to the tenor of his acceptance and admits:

(a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and (b) The existence of the payee and his then capacity to indorse (Sec. 62, NIL).

2. Furthermore, under Sec. 189 of the Negotiable Instruments Law, the drawee of a bill is not liable thereon before acceptance.

3. Drawee is not obliged to the payee or any holder to accept a bill although he may be liable to the drawer for breach of contract if he refuses without valid reaso n to accept the bill. As a general rule, a refusal by the drawee to accept a bill constitute s a dishonor of the instrument which triggers the liability of secondary parties drawer and i ndorser except those indorsing qualifiedly (Sec. 38, Negotiable Instruments Law), that i s, without guaranteeing payment. Unless the drawee accepts, he owes no duty to either the p ayee or any other holder. His only obligation is to the drawer to pay in accordance w ith the latter s orders.

4. Once the drawee accepts, he becomes an acceptor. He is in virtually the same position as the ma er of the note. The acceptor is primarily bound on the instru ment for by his acceptance, he engages to pay it according to the terms of his acceptance , subject to no condition whatsoever. His acceptance, in other words, is a promise to pay (Phil. National Ban vs. Rodriguez, 566 SCRA 513).

Indorser

1. A general indorser warrants that:

(a) (b) (c) (d)

the instrument its genuine; he has a good title to it; all prior parties had capacity to contract; that the instrument at the time of the indorsement is valid and subsisting;

(e) that on due presentment, the instrument will be accepted or paid or both accepted and paid according to its tenor, and that if it is dishonored, he will pay if the necessary proceedings for dishonor are made.

Liability of an Irregular Indorser

1. An irregular indorser is not party to the instrument but he places his signat ure in blan before delivery. He is not a party but he becomes one because of his signa ture in the instrument. Because of his signature he is considered an indorser and he is liable to the parties in the instrument.

Warranties

1. Every person negotiating an instrument by delivery or by a qualified indorsement warrants: (a) that the instrument is genuine and in all respects what it purports to be; (b) that he has a good title to it; (c) that all prior parties had capacity to contract; (d) that he has no nowledge of any fact which would impair the validity of the instrument or render it valueless.

2. But when the negotiation is by delivery only, the warranty extends in favor o f no holder other than the immediate transferee. The provisions of subdivision (c) of this section do not apply to a person negotiating public or corporation securities ot her than bills and notes (Sec. 65, Negotiable Instruments Law).

This warranty liability is unconditional, i.e., it is not conditioned upon prop er presentment and dishonor of the instrument and the giving of notice of the disho

nor. Negotiation

by delivery. under Section 65 means that indorsement is not necessary

because the instrument is payable to bearer (Consolidated Motors Co. vs. Urschel , 115 Kan. 147, 222 Pac. 745)

Presentment for Payment

1. By presentment for payment is meant the presentment of an instrument (i.e. promissory note or accepted bill of exchange) to the person primarily liable for the purpose of demanding and receiving payment.

2. The instrument must be exhibited to the person from whom payment is demanded, and when it is paid, must be delivered up to the party paying it (Sec. 74, Negotiable Instrument Law).

3. Purpose is to enable the debtor to determine the genuineness of the instrumen t and the right of the holder to receive payment and to enable him to retain posse ssion after payment (Gilpin vs. Savage [N.Y.] 94 N. E. 656).

4. If the he debtor is Demand by possible (Robinson

instrument is not exhibited, the presentment would be ineffectual as t entitled to see the instrument and demand its surrender upon payment. telephone is insufficient because exhibition of the instrument is not vs. Loncaster Co., 138 Atl. 58).

Parties to whom presentment for payment should be made

1. Presentment for payment is not necessary in order to charge the person primar ily liable on the instrument; but if the instrument is, by its terms, payable at a s pecial place, and he is able and willing to pay it there at maturity, such ability and willing ness are equivalent to a tender of payment upon his part. But except as herein otherwise provided, presentment for payment is necessary in order to charge the drawer and indorsers (Sec. 70, Negotiable Instruments Law).

2. Presentment and demand for payment are not necessary in order to charge the person primarily liable, that is, the ma er or the acceptor since his liability is absolute. In other words, the holder can sue the ma er or acceptor, although no demand has be en made on him, as soon as the date for payment has passed without the instrument b eing made. This is also true whether the instrument is payable at a special place or at an office or at a residence but not at an unspecified place, li e City of Manila (De Leon, The Philippine Negotiable Instruments Law and Allied Laws Annotated, 2010 Edition, p gs. 262263).

3. The persons secondarily liable, that is, the drawer and indorsers, stand on different footing. Since they underta e to pay only if the instrument is dishono red, it is obvious that a demand for payment must first be made upon the person primarily l iable. The demand is effected by presenting the instrument to him for payment.

4. If the instrument is not presented to the person primarily liable, the drawer and the indorsers are discharged from their secondary liability unless such presentm ent is excused (Secs. 79, 80, NIL) or dispensed with (De Leon, The Philippine Negotiabl e Instruments Law and Allied Laws Annotated, 2010 Edition, p. 264).

Dispensation with presentment for payment

1. Presentment for payment is dispensed with:

(a) Where, after the exercise of reasonable diligence, presentment, as required by this Act, cannot be made; (b) Where the drawee is a fictitious person; (c) By waiver of presentment, express or implied (Sec. 82, Negotiable Instrument Law).

2. Reasonable diligence implies active search. If practicable, the holder should ma e inquiries of the payee when neither the ma er nor his residence could be found ( Cuddy vs. Sarrandea, 161 Atl. 297).

3. If the drawee is fictitious, there is no one to whom presentment is to be mad e and, therefore, it is dispensed with (De Leon, The Philippine Negotiable Instrum ents Law and Allied Laws Annotated, 2010 Edition, p. 274).

4. The waiver may be before or after maturity (Thompson vs. Curry, 91 S.E. 801), and it may be express or implied.

(a) Presentment waived. or waiving demand and protest., written before the signature of the drawer or indorser, is an express waiver.

(b) Implied waiver of presentment may be manifested by an act or conduct of a party calculated to lead the holder to believe that presentment is waived or to mislead or prevent him from treating the instrument as he otherwise would li e, for instance, where the drawer promised from time to time to pay a bill, ma ing no objection on the ground that the bill had not been presented to the drawee (Simonoff vs. Granite City Nat. Ban , 116 N.E. 636). Waiver of presentment of a note by the ma er does not operate as a waiver by the indorser (Horton vs. Reid, 87 P. 2d 936).

Dishonor by non-payment

1. The instrument is dishonored by non-payment when:

(a) It is duly presented for payment and payment is refused or cannot be obtained; or (b) Presentment is excused and the instrument is overdue and unpaid (Sec. 83, Negotiable Instrument Law).

2. Under sub-section (a) there are two requisites, to wit:

(a) that the instrument is duly presented for payment to the party primarily liable thereon; and (b) that payment is either refused or cannot be obtained.

In other words, an instrument is dishonored by non-payment as long as it is not paid although the primary party may be willing to pay. Thus, there is already di shonor where on presentment, the ma er promises to pay five days later (Bredow vs. Wall , 143 Atl. 849).

3. Under subsection (b), it is necessary that:

(a) presentment is excused (Secs. 70, 80 and 82) (b) the instrument is overdue (Secs. 85, 86, and 194); and

(c) it is unpaid.

Thus if presentment is waived, the instrument is deemed dishonored if it is overdue and unpaid even if the holder did not ma e presentment (De Leon, The Philippine Negotiable Instruments Law and Allied Laws Annotated, 2010 Edition, p . 274).

The provision ma es it clear that although presentment may be excused, the indorser is still entitled to notice of dishonor of the instrument by its being overdue and unpaid. But where there has been no presentment for payment and presentment is n ot excused, the instrument is not dishonored although it is already overdue and unp aid (Carter vs. Jennings, 98 So. 687).

Notice of Dishonor

1. Notice of dishonor is bringing, either verbally or in writing, to the nowled ge of the drawer or indorser of an instrument of an instrument, the fact that a specif ied negotiable instrument, upon proper proceedings ta en, has not been accepted or h as not been paid and that the party notified is expected to pay it (Martin vs. Brown, 7 5 Ala. 442).

Parties to be notified

1. Except as herein otherwise provided, when a negotiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is n ot given is discharged (Sec. 89, Negotiable Instruments Law).

2. The purpose of giving prompt notice of dishonor is to enable the party, whom the holder wishes to charge, to preserve and enforce his rights against prior pa rties (Jones vs. Board of Eduacation of Town of Pelham, 272 N.Y. Supp.5).

3. The holder is not required to notify all the indorsers, although the law says each indorser.. He may select to hold only one or some of the indorsers and any party to whom such notice is not given is discharged. (De Leon, The Philippine Negotiable Instruments Law and Allied Laws Annotated, 2010 Edition, p. 284).

4. Notice is essential; mere nowledge by the indorser of nonpayment is insufficient (Marshall vs. Sonneman, 64 Atl. 874).

Parties who may give notice of dishonor

1. The notice may be given by or on behalf of the holder, or by or on behalf of any party to the instrument who might be compelled to pay it to the holder, and who, upon ta ing it up, would have a right to reimbursement from the party to whom the not ice is given (Sec. 90, Negotiable Instruments Law).

2. Under Section 90 of the Negotiable Instruments Law, the notice may be given:

(a) by the holder; or (b) another in behalf of the holder; or

3. Drawee who refuses to accept is not a party or chargeable on the bill, and no tice from him of non-acceptance is no degree better than from any other stranger (Sta nton vs. Blossom, 14 Mass. 116).

One who wrongfully in possession of the instrument cannot give notice without authority from the holder (Hofrichter vs. Enyeart, 99 N.W. 658).

Effect of notice

1. Where notice is given by or on behalf of the holder, it inures to the benefit of all subsequent holders and all prior parties who have a right of recourse against th e party to whom it is given (Sec. 92, Negotiable Intruments Law).

A party can charge a prior party who has received notice of dishonor although he himself has not given said prior party any notice. The reason for this is tha t a party is entitled to a notice of dishonor need to be notified only once (De Leon, The Phi lippine Negotiable Instruments Law and Allied Laws Annotated, 2010 Edition, p. 290).

(c) and the (d) .

by a party to the instrument who may be compelled to pay it to the holder who, upon ta ing it up, would have a right of reimbursement from party to whom the notice is given; or another person in behalf of such party (Sec. 90, Negotiable Instruments Law)

2. Where notice is given by or on behalf of a party entitled to give notice, it inures to the benefit of the holder and all parties subsequent to the party to whom not ice is given (Sec. 93, Negotiable Instruments Law).

Form of notice

1. A written notice need not be signed and an insufficient written notice may be supplemented and validated by verbal communication. A misdescription of the instrument does not vitiate the notice unless the party to whom the notice is gi ven is in fact misled thereby (Sec. 95, Negotiable Instruments Law).

2. The notice may be in writing or merely oral and may be given in any terms which sufficiently identify the instrument, and indicate that it has been dishon ored by non-acceptance or non-payment. It may in all cases be given by delivering it per sonally or through the mails (Sec 96, Negotiable Instruments Law).

Notice may thus be given by telephone, provided it be clearly shown that the party notified was really communicated with, that is fully identified as the par ty at the receiving end of the line (American National Ban vs. Nat. Fertilizer Co., 143 S .W. 597).

A notice which contains a copy of the instrument and declares that payment has been demanded and refused, is sufficient (Marshall vs. Sonneman, 64 Atl. 874).

But a mere statement that the instrument is due and payable is insufficient noti ce (Kelleman vs. Havas, 290 S.W. 700).

3. Whether written or oral, the notice must set forth:

(a) the identity of the instrument; (b) the facts that it has been dishonored by non-acceptance or non-payment;

and (c) a statement that the party giving notice intends to loo to the party addressed for payment (De Leon, The Philippine Negotiable Instruments Law and Allied Laws Annotated, 2010 Edition, p. 293).

not invalidate the notice. Any such insuffi oral communication (Herman Lumber Co. vs.

5. Neither does misdescription of the instrument (i.e. amount, date of maturity or names of parties) vitiates the notice unless it misleads the party to whom it is sent (Keng vs. Husley, 85 No. 525).

Waiver

1. Notice of dishonor may be waived either before the time of giving notice has arrived or after the omission to give due notice, and the waiver may be expresse d or implied (Sec. 109, Negotiable Instruments Law).

2. Waiver is express when it is made orally or in writing as when notice of dishonor waived. appears above the signature of an indorser. It is implies where it is

4. The fact that a written notice is date it. Thus, failure to state in the notice rity of a note, and the name of the payee does ciency may be supplemented and validated by Bjurstrom, 131 N.Y.S. 689).

not signed or insufficient would not invali of dishonor the date of the ma ing and matu

inferred from act or language (De Leon, The Philippine Negotiable Instruments La w and Allied Laws Annotated, 2010 Edition, p. 305).

3. As to who are affected by an express waiver depends on where the waiver is written. If the waiver is embodied in the instrument itself, that is, it appears in the body or on the face of the instrument, it binds all parties. If it is written above t he signature of an indorser, it binds him only (Sec. 110, Negotiable Instruments Law).

4. A waiver of protest, whether in the case of a foreign bill of exchange or oth er negotiable instrument, is deemed to be a waiver not only of a formal protest but also of presentment and notice of dishonor (Sec 111, Negotiable Instruments Law).

Protest is the formal instrument executed usually by a notary public certifying that the legal steps necessary to fix the liability of the drawee and the indors ers have been ta en (Sec. 152, Negotiable Instruments Law).

Dispensation with notice

1. Notice of dishonor is dispensed with when, after the exercise of reasonable diligence, it cannot be given to or does not reach the parties sought to be char ged (Sec. 112, Negotiable Instruments Law).

2. The holder should endeavor to find out the whereabouts of the party to be notified. Thus, merely examining the telephone directory for the address is not sufficient (Best vs. Bexin Co., 55 A.L.R., 670).

3. Notice of dishonor is not required to be given to the drawer in either of the following cases: (a) Where the drawer and drawee are the same person; (b) When the drawee is fictitious person or a person not having capacity to contract;

(c) When the drawer is the person to whom the instrument is presented for payment; (d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; (e) Where the drawer has countermanded payment (Sec 114, Negotiable Instruments Law).

4. Notice of dishonor is not required if the drawer has no right to expect or re quire the ban to honor the chec , or if the drawer has countermanded payment (Great A sian vs. CA, 381 SCRA 557).

5. If the drawer or ma er is an officer of a corporation, the notice of dishonor to the said corporation is not notice to the employee or officer who drew or issued the chec and in its behalf (Marigomen vs. People, 459 SCRA 169).

6. Notice of dishonor is not required to be given to an indorser in either of th e following cases: (a) When the drawee is a fictitious person or person not having capacity to contract, and the indorser was aware of that fact at the time he indorsed the instrument; (b) Where the indorser is the person to whom the instrument is presented for payment;

(c) Where the instrument was made or accepted for his accommodation (Sec. 115, Negotiable Instruments Law).

Effect of failure to give notice

1. An omission to give notice of dishonor by non-acceptance does not prejudice t he rights of a holder in due course subsequent to the omission (Sec. 117, Negotiabl e Instruments Law).

2. Any such person to whom such notice is not given is discharged. However, although the indorser to whom notice is not given is discharged, he is still lia ble for breach of warranties pertaining to the instrument (Secs. 65 and 66, Negotiable I nstruments Law).

Discharge of negotiable instrument

1. Discharge of an instrument means a release of all parties, whether primary or secondary, from the obligations arising thereunder. It renders the instrument wi thout force and effect and, consequently, it can no longer be negotiated (Young vs. Ca rr, 26 [2d] 555).

2. The word discharge. as used in Negotiable Instruments Law refers both to the instrument itself and to the parties to it (Gannon vs. Bronston, 55 S.W. 2d 358) .

3. A negotiable instrument is discharged:

(a) By payment in due course by or on behalf of the principal debtor; (b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation; (c) By the intentional cancellation thereof by the holder; (d) By any other act which will discharge a simple contract for the payment of money; (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right (Sec. 119, Negotiable Instruments Law).

4. The methods provided for the discharge of a negotiable instrument in Sec. 119 are exclusive upon the familiar rule that the express mention of one thing impli es the exclusion of another (Vanderford vs. Farmer s Ban , 105 Md. 168).

5. The general rule is that when an instrument upon which several are liable, so me primarily and some secondarily, if it is satisfied by him who is primarily liabl e, a complete discharge results. It no longer has legal existence (Comstoc vs. Buc l ey, 141 Wis. 231).

6. The term principal debtor. should be interpreted to mean exactly what it says it refers to the person ultimately bound to pay the debt and not necessarily to the person primarily liable. on the instrument (Sec. 192, Negotiable Instruments Law) .

7. As between the accommodation party and the accommodated party, the latter is the real debtor. Hence, payment by the accommodated party is actually a payment by the principal debtor and this is true whether he appears as a party to the instr ument or not (De Leon, The Philippine Negotiable Instruments Law and Allied Laws Annotate d, 2010 Edition, p. 318).

8. To effect a discharge of the instrument, the cancellation must: (a) be intentionally done; (b) by the holder thereof.

Cancellation may be done by writing the word cancelled. or paid. on the face of the instrument. There is also cancellation when the instrument is torn up, bu rned, mutilated or destroyed. The presumption is that the cancellation is intentional.

9. Obligations are extinguished:

(a) (b) (c) (d) (e) (f)

By By By By By By

payment or performance: the loss of the thing due: the condonation or remission of the debt; the confusion or merger of the rights of creditor and debtor; compensation; novation.

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in this Code (Art. 1231, New Civil Code).

In order that there will be discharge under subsection (e), the reacquisition mu st be: (a) by the principal debtor, (b) in his own right, and (c) at or after matur ity date. When the principal debtor becomes the holder of the instrument in his own right, the instrument is discharged because of the merger of his person of the characters o f creditor and debtor (Art. 1275, NCC).

Discharge of parties secondarily liable

1. A person secondarily liable on the instrument is discharged:

(a) By any act which discharges the instrument; (b) By the intentional cancellation of his signature by the holder; (c) By the discharge of a prior party; (d) By a valid tender or payment made by a prior party; (e) By a release of the principal debtor unless the holder's right of recourse against the party secondarily liable is expressly reserved; (f) By any agreement binding upon the holder to extend the time of payment or to postpone the holder's right to enforce the instrument unless made with the assent of the party secondarily liable or unless the right of recourse against such party is expressly reserved (Sec. 120, Negotiable Instruments Law).

2. A discharge of a secondary party does not affect a discharge of the instrumen t itself (De Leon, The Philippine Negotiable Instruments Law and Allied Laws Annot ated, 2010 Edition, p. 320).

3. If the holder intentionally stri es out the signature of a person secondarily liable, the effect is to discharge him from liability on the instrument as if he has nev er been a party to the same. No consideration is necessary so support such discharge (McCo rmic vs. Shea, 99 N.Y. Supp. 467).

The discharge of a party as by intentional cancellation of his signature also operates as a discharge of parties subsequent to the party discharged. The reaso n for the rule is that the discharge deprives a subsequent party of a right of recourse ag ainst the party discharged by the holder. Prior party. is not limited to prior indorsers bu t includes as well principal debtors within its meaning (Davis vs. Cutheil, 152 Pa c. 14).

4. Subsection (c) of Section 120 of the Negotiable Instruments Law applies only to discharge by the act of the holder and not to discharges by operation of law. Th us, it does not include a discharge by ban ruptcy (Silverman vs. Rubenstein, 162 N.Y. S upp. 733).

5. Tender of payment. means the act by which one produces and offers to a person holding a claim or demand against him the amount of money which he consid ers and admits to be due, in satisfaction of such claim or demand without any stipul ation or condition (Salinas vs. Ellis, 2 S.E. 121).

6. The release of the principal debtor discharges the instrument and, therefore, all the secondary parties are also discharged. Such, however, would not be the case if the holder reserved his right of recourse against the said subsequent parties, for t hen the effect of the reservation by the holder of his right is the implied reservation by the subsequent parties of their right of recourse against the principal debtor (Phoe nix vs. Nat. Ban , 166 S.W. 830).

7. The phrase agreement binding on the holder. means agreement binding on the holder made with the principal debtor. Hence, an agreement by the holder with a third party to extend the time of payment does not discharge the indorsers (Brosemer v s. Brosemer, 162 N.Y. Supp. 1067).

Right of party who discharged instrument

1. Where the instrument is paid by a party secondarily liable thereon, it is not discharged; but the party so paying it is remitted to his former rights as regar d all prior parties, and he may stri e out his own and all subsequent indorsements and again st negotiate the instrument, except:

(a) the (b) the

Where it is payable to the order of a third person and has been paid by drawer; and Where it was made or accepted for accommodation and has been paid by party accommodated (Sec. 121, Negotiable Instruments Law).

Renunciation by holder

1. The holder may expressly renounce his rights against any party to the instrument before, at, or after its maturity. An absolute and unconditional renu nciation of his rights against the principal debtor made at or after the maturity of the instrument discharges the instrument. But a renunciation does not affect the rights of a ho lder in due course without notice. A renunciation must be in writing unless the instrume nt is delivered up to the person primarily liable thereon (Sec. 122, Negotiable Instru ment Law).

2. The term renunciation describes the act of surrendering a right or claim with or without recompense. Sec 122 applies only to renunciation by a unilateral act of the holder (Hazelhurst Oil Hill vs. Booze, 130 So. 120).

3. A renunciation of a debt evidenced by a negotiable instrument must be made by a written declaration to that effect. If oral, it should be accompanied by a sur render of the instrument to the person primarily liable thereon (Sec. 122, Negotiable Inst ruments Law).

4. The mere expression of an intention or desire to renounce is not enough. Thus where the holder of a demand note being in articulo mortis instructed his nurse to write a memorandum to the effect that the note should be destroyed as soon as it could b e found, it was held that there was no renunciation under the law (In re George , 44 Ch. 627).

Material alteration

Concept

1. There is material alteration when at material element in the instrument is al tered or changed. A change in the date, the amount payable, time or place of payment, the number of the parties and their relations or an alteration in the medium of curr ency in which payment is to be made, are all material. Example: M ma es a promissory not e for P300, 000 payable to P or his order. P indorses the note to A. A alters the amount to P500,000 then indorses it to B who indorses it to C and from C to H. May H recov er from M? If so, how much? Since H is a holder in due course and is not a party to the alteration, H may recover the original tenor which is P300,000. If he is not a h older in due course, he recovers nothing (Sec. 124, 124, NIL).

Acceptance

Definition

1. The term, ACCEPTANCE refers only to a bill of exchange. A promissory note is not to be presented for acceptance. The purpose of an acceptance is to bind the DRAWEE, because the drawee does not become a party unless he accepts. Upon acceptance by the drawee, he becomes an ACCEPTOR and the bill, in effect, become s a note. The drawee assumes the liability of a ma er who is primarily liable.

2. A bill of exchange does not need to be presented for acceptance at all times. In order to now whether or not presentment for acceptance is necessary, you have t o loo at the bill. Where the bill is payable after sight or when necessary to fix the maturity date of the instrument, presentment for acceptance is necessary. It is also necessary when there is a stipulation that it be presented for acceptance or where the bill is to be paid in a place different from the residence or place of business of the drawee. So when the bill is written as Pay< at sight.< the drawee must see the bill first and he can only see the bill if it is to be presented for acceptance. Also if the bill is written as: Pay < 30 days after sight., the bill s maturity date is 30 days after the drawee sees the bill. Hence, it must be presented for acceptance. If the drawee s place of business is in Manila a nd the bill is drawn payable in Cavite, then it must be presented for acceptance.

3. If by its terms, the bill is to be presented for acceptance, then it must be presented. If the bill needs a presentment for acceptance, then it must be so pr esented. If it is not presented for acceptance, the drawer and the indorsers will be dischar ged from liability. Therefore, the holder must present it for acceptance or he negotiates the bill within a reasonable time.

Manner of acceptance

1. An acceptance is either GENERAL or QUALIFIED.

2. A general acceptance is one that fully assents to the order of the drawer and without any qualifications. If the bill is for P10, 000 payable in Manila, then the acceptance is for the same amount and place.

3. A qualified acceptance is one, which varies the tenor of the bill as when pay ment is dependent upon a condition or when the amount is less than the amount written on the bill. It is also qualified when the date of payment is changed or the place of payment is changed by the acceptance. So if a bill for P500,000 was accepted but only fo r P300,000, the acceptance is deemed to be a qualified. one because the acceptance was not in accordance with the tenor of the bill. The acceptor will then be held liable for the amount of P300,000 which is the tenor of his acceptance, not for P500,000 which is the tenor of the bill. What may the holder do under the circumstances? The holder who has bee n given a qualified acceptance, may either assent to or refuse the qualified accep tance. If he refuses, he may insist on a general acceptance. If it is not given, he may tr eat the bill as dishonored and he now must furnish the parties secondarily liable, a notice o f dishonor. If he accepts a qualified acceptance, the DRAWER AND THE INDORSERS ARE DISCHARGED unless they have assented to the qualified acceptance or have authorized the holder to agree to the qualified acceptance (Secs. 132 151, NIL).

Time for acceptance

1. The drawee is allowed twenty-four hours after presentment in which to decide whether or not he will accept the bill; the acceptance, if given, dates as of th e day of presentation (Sec. 136, Negotiable Instrument Law).

2. The drawee has 24 hours after presentment for acceptance within which to act upon the bill. However, should he decide to accept the bill, the acceptance shal l be dated as of the day presentation or the date when he first saw the bill (De Leon, The Philippine Negotiable Instruments Law and Allied Laws Annotated, 2010 Edition, p. 348).

Rules governing acceptance

1. The holder of a bill presenting the same for acceptance may require that the acceptance be written on the bill, and, if such request is refused, may treat th e bill as dishonored (Sec. 133, Negotiable Instruments Law).

2. An unconditional promise in writing to accept a bill before it is drawn is de emed an actual acceptance in favor of every person who, upon the faith thereof, recei ves the bill for value (Sec 135, Negotiable Instruments Law).

3. Where a drawee to whom a bill is delivered for acceptance destroys the same, or refuses within twenty-four hours after such delivery or within such other period as the holder may allow, to return the bill accepted or non-accepted to the holder, he will be deemed to have accepted the same (Sec. 137, Negotiable Instruments Law).

4. A bill may be accepted before it has been signed by the drawer, or while otherwise incomplete, or when it is overdue, or after it has been dishonored by a

previous refusal to accept, or by non payment. But when a bill payable after sig ht is dishonored by non-acceptance and the drawee subsequently accepts it, the holder, in the absence of any different agreement, is entitled to have the bill accepted as of the date of the first presentment (Sec. 138, Negotiable Instruments Law).

Presentment for Acceptance

1. Presentment for Acceptance is the production or exhibition of a bill of excha nge to the drawee for his acceptance or payment. The words presentment for acceptance . include presentment for payment also (De Leon, The Philippine Negotiable Instrum ents Law and Allied Laws Annotated, 2010 Edition, p. 354).

Time, place, manner of presentment

1. Presentment for acceptance must be made:

(a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or (b) Where the bill expressly stipulates that it shall be presented for acceptance; or (c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.

2. In no other case is presentment for acceptance necessary in order to render a ny party to the bill liable (Sec. 143, Negotiable Instruments Law).

3. A bill may be presented for acceptance on any day on which negotiable instruments may be presented for payment under the provisions of Sections sevent

ytwo and eighty-five of this Act. When Saturday is not otherwise a holiday, prese ntment for acceptance may be made before twelve o'cloc noon on that day (Sec. 146, Neg otiable Instruments Law).

4. Bills payable on demand or on sight and time bills or bills payable at a day certain, or at a fixed time after its date, or upon other certain event need not be presented for acceptance but only for payment in order to charge the drawer or indorsers (Phil. National Ban vs. Seato, 91 Phil 756).

5. Presentment for payment is made at the proper place: (a) Where a place of payment is specified in the instrument and it is there presented; (b) Where no place of payment is specified but the address of the person to ma e payment is given in the instrument and it is there presented; (c) Where no place of payment is specified and no address is given and the instrument is presented at the usual place of business or residence of the person to ma e payment; (d) In any other case if presented to the person to ma e payment wherever he can be found, or if presented at his last nown place of business or residence (Sec. 73, Negotiable Instruments Law).

6. Presentment for acceptance must be made by or on behalf of the holder at a reasonable hour, on a business day and before the bill is overdue, to the drawee or some person authorized to accept or refuse acceptance on his behalf; and

(a) Where a bill is addressed to two or more drawees who are not partners, presentment must be made to all of them unless one has authority to accept or refuse acceptance for all, in which case presentment may be made to him only; (b) Where the drawee is dead, presentment may be made to his personal representative; (c) Where the drawee has been adjudged a ban rupt or an insolvent or has made an assignment for the benefit of creditors, presentment may be made to him or to his trustee or assignee (Sec. 145, Negotiable Instruments Law).

Effect of failure to ma e presentment

1. Except as herein otherwise provided, the holder of a bill which is required b y the next preceding section to be presented for acceptance must either present it for acceptance or negotiate it within a reasonable time. If he fails to do so, the d rawer and all indorsers are discharged (Sec. 144, Negotiable Instruments Law).

Dishonor by non-acceptance

1. A bill is dishonored by non-acceptance:

(a) When it is duly presented for acceptance and such an acceptance as is prescribed by this Act is refused or cannot be obtained; or (b) When presentment for acceptance is excused and the bill is not accepted (Sec. 149, Negotiable Instruments Law).

2. Where a prescribed onacceptance ec 150, Negotiable

bill is duly presented for acceptance and is not accepted within the time, the person presenting it must treat the bill as dishonored by n or he loses the right of recourse against the drawer and indorsers (S Instruments Law).

Note that Section 150 does not declare that the bill dishonored by non-acceptan ce is a dishonored bill. The reason is that a holder in due course ta es the bill n ot as a dishonored bill (De Leon, The Philippine Negotiable Instruments Law and Allied L aws Annotated, 2010 Edition, p. 354).

3. When a bill is dishonored by nonacceptance, an immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for pa yment is necessary (Sec. 151, Negotiable Instruments Law).

Promissory Notes

1. A promissory note is an unconditional promise in writing made by one person t o another, signed by the ma er, engaging to pay on demand or at a fixed or determi nable future time a sum certain in money to order or to bearer (Sec. 184, NIL).

2. The following are the parties to a promissory note:

(a) Ma er (b) Payee or bearer

3. The ma er is PRIMARILY liable on the promissory note. When a person ma es a negotiable promissory note, he warrants or engages to pay the note according to its TENOR or terms (Sec. 60, NIL).

Hence, if the note is payable for P100,000, the ma er s liability is for the same amount because it is the tenor of the note. He does not only ma e the promise to the payee. This promise is made to anyone who becomes a holder and who obtains legal title to the instrument. If the holder wants the instrument to be paid, the ma e r is the first person to whom the holder should go to for payment because he is deemed to be the party primarily liable. So if the ma er issues a note to the payee and the p ayee negotiates the same note to someone called the holder, the holder must first pre sent the note to the ma er for payment upon maturity. The holder should not proceed again st the payee first because the payee is not the person primarily liable on the inst rument. If the ma er refuses to pay, he is said to have dishonored the instrument. Only the n can the holder in whose hands the instrument was dishonored proceed against the paye e who negotiated the instrument to him but ONLY after he gives him a notice of dis honor. The payee who negotiated the instrument to the holder is secondarily liable unde r the instrument, the ma er being the party primarily liable.

4. Suppose the ma er refuses to pay the holder on the ground that the payee does not exist or that the payee is a minor, insane or suffering from all the incapac ities under the law and that he further alleges that he did not now of these facts at the t ime he issued the instrument. May he escape liability? No. By ma ing a note, he admits the EXISTENCE of the payee and his CAPACITY to indorse even if in truth he does not now that payee is non existent or that the payee is incapacitated (Sec. 60, NIL ).

5. Suppose the note has the amount of P100,000, but the ma er wants to pay only

P50,000. May he pay the holder P50,000 instead of P100,000? NO! Reason: By ma in g the note, he engages to pay the note according to its TENOR or its terms. So the bas is of his liability will be what is WRITTEN on the note (Sec. 60, NIL).

6. Special types of promissory notes are the following:

(a) Certificate of Deposit A written ac nowledgement by a ban of a receipt of money engaging to pay the lawful holder upon proper indorsement. (b) Bond A long term promissory note involving public borrowing. (c) Ban Note - A promissory note of an issuing ban payable to bearer on demand and intended to circulate as money. (d) Due Bill - A note whereby a person ac nowledges his debt to another and he promises to pay to bearer or to order a sum owed certain in money.

Chec s

Definition

1. A chec is a bill of exchange drawn against a ban , payable on demand (Bataan Cigar Factory vs. Court of Appeals, 230 SCRA 643; sec. 185, NIL).

Kinds

1. Chec s may be any of the following:

2. Memorandum Chec is where the drawer absolutely promises to pay the holder. It appears to be li e an ordinary chec in form but has the word, memorandum., mem., memo. written on its face. It is in essence a promissory note.

Although it is a mere evidence of a debt, it has the same effect as an ordinary chec and cannot be a defense under BP 22. If presented for payment and is not d uly funded, liability may arise under BP 22 even if it is in the nature of a promiss ory note. The law does not distinguish between or among inds of chec s. (People vs. Nitaf an, G.R. No. 75954, October 22, 1992).

3. Cashier s chec is one drawn by the cashier of a ban on the same ban as drawee and is deemed accepted by the ban by the act of issuance.

(a) (b) (c) (d) (e) (f)

Memorandum Chec ; Cashier s Chec ; Manager s Chec ; Traveller s Chec ; Certified Chec ; or Crossed Chec .

ban manager.

5. Traveller s chec is one upon which the holder s signature appears twice, first a t the time it is issued and second in the presence of the payee before it is paid.

6. Certified Chec is one which bears upon its face an agreement by the drawee ban that the chec will be paid upon presentation.

7. Crossed Chec is one which bears two parallel lines drawn diagonally usually on the upper left hand corner. If the name of the ban appears between the lines, i t is a specially crossed chec . If no name appears, it is a generally crossed chec . A chec is crossed for security reasons. A crossed chec is not to be cashed but only to be DEPOSITED.

4. Manager s chec

is in the same respect li e a cashier s chec but is drawn by the

The crossing of a chec has an effect on the mode of its payment. A crossed chec may not be encashed. It should only be deposited. It may only be negotiated once and to the ban where the payee has an account. When a chec is crossed, it serves as a warning that the chec was issued for a definite purpose so the holder must inquire if the chec was received for that purpose.

If the crossed chec bears the notation for payee s account only., a collecting ban cannot allow an unauthorized person to deposit the chec s in his own account and to withdraw the proceeds of the chec , because the proceeds belong t o the payee. The ban may be sued by the payee (Associated Ban vs. Court of Appeals, 208 SCRA 465).

8. Stale chec is one which has not been presented for payment within a reasonab le time after its issue. It is valueless and, therefore, should not be paid. In one case, a chec was presented for payment three and a half years after the date of its maturity. The presentment was made beyond a reasonable time and thus, should not be paid (Far East Realty vs. Court of Appeals, 166 SCRA 256).

Presentment for payment

Time to present

1. A chec must be presented for payment within a reasonable time after its issu e or the drawer will be discharged from liability thereon to the extent of the loss c aused by the delay (Sec. 186, Negotiable Instruments Law).

2. A chec , unli e an ordinary bill of exchange, is supposed to be drawn against a previous deposit of funds for it is ordinarily designed for immediate payment an d not to be retained or ept by the holder for such time as he may want (Gifford vs. Hard ell, 60 N.W. 1064).

3. In determining what is a "reasonable time" regard is to be had to the nature of the instrument, the usage of trade or business with respect to such instruments, and the facts of the particular case (Sec. 193, Negotiable Instruments Law).

Effect of delay

1. Under Section 186, there are three requisites in order that the drawer may be discharged from liability:

(a) The chec is not presented within a reasonable time; (b) The drawer suffers loss; and (c) The loss suffered by the drawer is attributable to the delay (De Leon, The Philippine Negotiable Instruments Law and Allied Laws Annotated, 2010 Edition, p . 406).

MISCELLANEOUS REMINDERS 1. A negotiable instrument, such as a chec , whether a manager s chec or ordinary chec , is not legal tender (Ban of the Philippine Islands vs. Court of Appeals, 326 SCRA 641).

2. A manager s chec is li e a cashier s chec which, in the commercial world, is regarded substantially to be as good as the money it represents (Ban of the Phi lippine Islands vs. Court of Appeals, 326 SCRA 641).

3. In actions based upon a negotiable instrument, it is unnecessary to aver or p rove consideration, for consideration is presumed (Ong vs. People, 346 SCRA 117).

4. The elements of Batas Pambansa Blg. 22 are:

(a) the ma ing, drawing, and issuance of any chec s to apply for account or for value;

(b) the nowledge of the ma er, drawer, or issuer that at the time of issue he does not have sufficient funds in or credit with the drawee ban for the payment of the chec in full upon its presentment; and (c) the subsequent dishonor of the chec by the drawee ban for insufficiency of funds or credit or dishonor for the same reason had not the drawer, without any valid cause, ordered the ban to stop payment (Dico vs. Court of Appeals, G.R. 141669, February 28, 2005).

The law has made the mere act of issuing a bum chec a malum prohibitum, an act prescribed by legislature for being deemed pernicious and inimical to public wel fare thus, even if there had been payment, through compensation or some other means, there could still be prosecution for violation of Batas Pambansa Blg. 22 (Tan vs. Mend ez, Jr., 383 SCRA 202).

5. The two distinct acts punished under Batas Pambansa Blg. 22 are:

(a) the ma ing or drawing and issuance of any chec to apply on account or for value, nowing at the time of issue that the drawer does not have sufficient funds in, or credit with, the drawee ban ; and (b) the failure to eep sufficient funds or to maintain a credit to cover the fu ll amount of the chec if presented within a period of ninety days from the date appearing thereon, for which reason it is dishonored by the drawee ban .

6. The Elements of the first type of offense under Batas Pambansa Blg. 22 are:

(a) the ma ing, drawing and issuance of any chec to apply for account or for value; (b) the nowledge of the ma er, drawer, or issuer that at the time of issuance he does not have sufficient funds in or credit with the drawee ban for the payment of such chec in full upon its presentment; and (c) the subsequent dishonor of the chec by the drawee ban for insufficiency of funds or credit or dishonor for the same reason had not the drawer, without any valid cause, ordered the ban to stop payment.

7. That the chec must be deposited within ninety (90) days is simply one of the conditions for the prima facie presumption of nowledge of lac of funds to aris e, but it is not an element of the offense, and neither does it discharge the accused from hi s duty to maintain sufficient funds in the account within a reasonable time thereof. The o nly consequence of the failure to present the chec for payment within the 90-day pe riod is that there arises no prima facie presumption of nowledge of insufficiency of fu nds.

8. An accused cannot avail himself of the benefits under Administrative Circular No. 12-2000 where he manifested utter lac of good faith or wanton bad faith, su ch as when he issued the postdated chec s even though he had no more account with the drawee ban , having closed it more than four years before (Nagrampa vs. People, 386 SCRA 412).

9. Where the creditor had collected more than a sufficient amount to cover the value of the chec s, holding the debtor to answer for a criminal offense under B atas Pambansa Blg. 22 two years after said collection, is no longer tenable nor justi fied by law or equitable considerations (Griffith vs. Court of Appeals, 379 SCRA 94).

10. A chec issued as evidence of debt, though not intended to be presented for payment, has the effect of an ordinary chec . What the law punishes is the issua nce of a bouncing chec , not the purpose for which it was issued nor the terms and condit ions relating to its issuance. The mere act of issuing a worthless chec is malum pro hibitum (San Pedro vs. People, 387 SCRA 352).

The law does not ma e any distinction as to whether the chec s within its contemplation are issued in payment of an obligation or merely the said obligati on. (San Pedro vs. People, 387 SCRA 352).

(a) the chec may not be encashed but only deposited in the ban , (b) the chec may be negotiated only once to one who has an account with a ban , and, (c) the act of crossing the chec serves as a warning to the holder that the chec has been issued for a definite purpose so that he must inquire if he has received the chec pursuant to that purpose, otherwise, he is not a holder in due course (Traders Royal Ban vs. Radio Philippines Networ , Inc., 390 SCRA 608; Bataan Cigar Factory vs. Court of Appeals, 230 SCRA 643).

A collecting ban which indorses a chec bearing a forged indorsement and presents it to the drawee ban guarantees all prior indorsements, including the forged indorsement itself, and ultimately should be held liable therefor (Traders Royal Ban vs. Radio Philippines Networ , Inc., 390 SCRA 608).

A ban which did not pay the rightful holder or other person or entity entitled to receive payment has no right to reimbursement (Traders Royal Ban vs. Radio Phil ippines

The effects of a crossed chec

are that:

11. The crossing of chec should put a ban io Philippines Networ , Inc., 390 SCRA 608).

on guard (Traders Royal Ban vs. Rad

Networ , Inc., 390 SCRA 608).

12. Sec. 1 of the Negotiable Instruments provides for an instrument to become negotiable, viz: (a) It must be in writing and signed by the ma er or drawer; (b ) Must contain an unconditional promise or order to pay a sum certain in money; (c) Mus t be payable on demand, or at a fixed determinable future time; (d) Must be payable t o order or bearer; and (e) where the instrument is addressed to a drawee, he must be nam ed therein or otherwise indicated therein with reasonable certainty (Caltex Phil. I nc. vs. Court of Appeals, 212 SCRA 448).

Hence the negotiability or non-negotiability of an instrument is determined from the writing that is from the face of the instrument itself (Caltex Phil., Inc. v s. Court of Appeals, 212 SCRA 448).

13. An instrument is negotiated when it is transferred from one person to anothe r in such manner as to constitute the transferee the holder thereof and a holder may be the payee or indorsee of a bill or note who is in possession of it or the bearer the reof (Caltex Phil., Inc. vs. CA 212 SCRA 448).

14. Where the holder has a lien on the instrument arising from contract, he is deemed a holder for value to the extent of his lien (Caltex Phil., Inc. vs. CA 2 12 SCRA 448).

15. An instrument though mar ed non-negotiable, may nevertheless be assigned or transferred (Sesbreno vs. CA, 222 SCRA 466).

16. A chec is not just a written evidence of a contract right but is also a spe cies of property in itself (Development Ban of Rizal vs. Sima Wei 219 SCRA 736).

17. The payee of a negotiable instrument acquires no interest with respect there to until it is delivery to him (Development Ban of Rizal vs. Sima Wei, 219 SCRA 73 6).

18. The delivery of chec s in payment of an obligation does not constitute payme nt unless they are cashed or their value is impaired through the fault of the credi tor (Development Ban of Rizal vs. Sima Wei, 219 SCRA 736).

19. The Negotiable Instruments Law provides that where any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability (Francisco vs. CA 319 SCRA 354).

20. The mere fact that the forgery was committed by a drawer-payor s confidential employee or agent, who by virtue of his position had unusual facilities for perp etrating the fraud and imposing the forged paper upon the ban , does not entitle the ban to shift the loss to the drawer-payor, in the absence of some circumstances raising the estoppel against the drawer (Philippine Commercial and International Ban vs. CA 350 SCRA 446).

When a signature is forged or made without the authority of the person whose signature it purports to be, the chec is wholly inoperative unless the party ag ainst whom it is sought to enforce such right is precluded from setting up the forgery (Ilusorio vs. CA 393 SCRA 89).

21. An accommodation party is a person who has signed the instrument as ma er, acceptor, or endorser, without receiving value therefore, and for the purpose of lending his name to some other person and is liable on the instrument to a holder for va lue, notwithstanding such holder at the time of ta ing the instrument new (the signa tory) to be an accommodation party (Agro Conglomerates, Inc. vs. CA 348 SCRA 450).

22. The warranties of a person negotiating an instrument by delivery or by quali fied indorsement are: (a) that the instrument is genuine in all respects what it purp orts to be; (b) that he has a good title to it; and that all prior parties had capacity to c ontract (Ban of the Philippine Islands vs. CA, 326 SCRA 641).

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APPENDIX

ADMINISTRATIVE CIRCULAR NO. 12-2000

RE: PENALTY FOR VIOLATION OF B.P. BLG. 22

Section 1 of B.P. 22 (An Act Penalizing the Ma ing or Drawing and Issuance of a Chec Without Sufficient Funds for Credit and for Other Purposes) imposes the penalty of imprisonment of not less than thirty (30) days but not more than one (1) year OR a fine of not less than but not more than double the amount of the chec , which fine shall in no case exceed P 200,000, OR BOTH such fine and imprisonment at the discretion of the court. In its decision in Eduardo Vaca vs. Court of Appeals (G.R. No. 131714, 16 Novem ber 1998; 298 SCRA 656, 664) the Supreme Court (Second Division) per Mr. Justice V. Mendoza, modified the sentence imposed for violation of B.P. Blg. 22 by deleting the pena lty of imprisonment and imposing only the penalty of fine in an amount double the amoun t of the chec . In justification thereof, the court said: Petitioners are first-time offenders. They are Filipino entrepreneurs who presu mably contribute to the national economy. Apparently, they bought this appeal, believi ng in all good faith, although mista enly that they had not committed a violation of B.P. 22. O therwise they could simply have accepted the judgment of the trial court and applied for proba tion to evade a prison term. It would best serve the ends of criminal justice if in fixing the p enalty within the range of discretion allowed by Sec. 1, par. 1, the same philosophy underlying th e Indeterminate Sentence Law is observed, namely, that of redeeming valuable human material and preventing unnecessary deprivation of personal liberty and economic usefulness with due reg ard to the protection of the social order. In this case we believe that a fine in an amount equal to double the amount of the chec involved is an appropriate penalty to impose on each of the petitioners. In the recent case of Rosa Lim vs. People of the Philippines (G.R. No. 130038, 18 September 2000), the Supreme Court en banc, applying Vaca also deleted the penal ty of imprisonment and sentenced the drawer of the bounced chec to the maximum of the fine allowed by B.P. Blg. 22, i.e. P200, 000 and concluded that such would be best ser ve the ends of justice.. All courts and judges concerned should henceforth ta e note of the foregoing po licy of the Supreme Court on the matter of the imposition of penalties for violations of B.P. 22. The court administrator shall cause the immediate dissemination of this Adminis trative Circular to all courts and judges concerned.

The Administrative Circular, referred to and approved by the Supreme Court en b anc, shall ta e effect upon its issuance.

Issued this 21st day of November 2000

Hilario G. Davide, Jr. Chief Justice

CIRCULAR NO. 57-97

TO: COURT OF APPEALS, SANDIGANBAYAN, REGIONAL TRIAL COURTS, METROPOLITAN TRIAL COURTS, MUNICIPAL TRIAL COURTS, MUNICIPAL CIRCUIT TRIAL COURTS, ALL MEMBERS OF THE GOVERNMENT PROSECUTION SERVICE, AND ALL MEMBERS OF THE INTEGRATED BAR OF THE PHILIPPINES SUBJECT: RULES AND GUIDELINES IN THE FILING AND PROSECUTION OF CRIMINAL CASES UNDER BATAS PAMBANSA BLG. 22

Any provision of law or Rules of Court to the contrary notwithstanding, the foll owing rules and guidelines shall henceforth be observed in the filling and prosecution of all criminal cases under Batas Pambansa Blg. 22 which penalizes the ma ing or drawing and iss uance of a chec without funds or credit:

1. The criminal action for violation of Batas Pambansa Blg. 22 shall be deemed t o necessarily include the corresponding civil action, and no reservation to file such action s eparately shall be allowed or recognized.

2. Upon the filing of the aforesaid joint criminal and civil action, the offende d party shall pay in full the filing fees based upon the amount of the chec involved, which shall be considered as the actual damages claimed, in accordance with the schedule of fil ing fees in Section 7(a) and section 8(a), Rule 141 of the Rules of Court, as last amended b y Administrative Circular No. 11-94 effective August 1, 1994. Where the offended p arty further see s to enforce against the accused civil liability by way of liquidate d, moral, nominal, temperate or exemplary damages, he shall pay the corresponding filing f ees thereof based on the amounts thereof as alleged either in his complaint or in th e information. If not so alleged but any of these damages are subsequent awarded b y the court, the amount of such fees shall constitute a first lien on the judgment.

3. Where the civil action has heretofore been filed separately and trial thereof has not yet commenced, it may be consolidated with the criminal action upon application with the court trying the latter case. If the application is granted, the trial, of both actions shall proceed in accordance with the pertinent procedure outlined in Section 2(a) of R ule 111 governing the proceedings in the actions as thus consolidated.

4. The circular shall be published in two (2) newspaper of general circulation a nd shall ta e effect on November 1, 1997.

September 16, 1997 Andres R. Narvasa Chief Justice

Insurance Code of 1978 (PD 1460, as amended)

Concept of insurance

A contract of insurance is an agreement whereby one underta es for a considerati on to indemnify another against loss, damage or liability arising from an un nown or c ontingent event (Sec. 2, par 2, Insurance Code).

Elements of an insurance contract

In order for a contract of Insurance to exist, the following elements must be p resent:

Characteristics/nature of insurance contracts

A contract of insurance is easily recognized from other contracts because of the following characteristics:

a. b. c. d. e.

existence of an insurable interest (Secs. 12-14, ICP); ris of loss (Sec. 51, par. 9, ICP); assumption of ris s (Sec. 2, ICP); scheme to distribute losses; and payment of premiums (Sec. 77, ICP).

1. Insurance as a ris distributing device. The device of insurance serves to distribute the ris of economic loss among as many as possible of those who are subject to the same ind of ris . By paying a pre-determined amount into a general fund out which payment will be made for an economic loss of a defined type, each member contributes to a small degree toward compensation for losses suffered by any member of the group. This broad sharing of economic ris is the principle of ris -distribution. 2. Contract of adhesion or fine print rule. Insurance is a contract of adhesion considering that most of the terms of the contract do not result from mutual negotiations between the parties as they are prescribed by the insurer in printe d form to which the insured may adhere. if he chooses but which he cannot change. Hence, in case of doubt, the contract shall be interpreted strictly agai nst the insurer and liberally in favor of the insured (Rizal Surety and Insurance Co . vs. Court of Appeals, 336 SCRA 12). However, if the terms of the contract are clear, there is no room for interpreta tion and the courts are bound to adhere to the insurance contract although the contract may be rather onerous. Courts cannot ma e a new contract for the parties where they themselves have employed clear and unambiguous words. 3. An insurance contract is aleatory. The obligation of the insurer to pay the proceeds of the insurance arises only upon the happening of an event which is uncertain, or which is to occur at an indeterminate time (Art. 2010, New Civil Code). In a sense, however, the contract of insurance is commutative because there is still an exchange of equivalents the amount paid by the insured is deemed the equivalent of the protection given by the insured based on the insurance contract. 4. An insurance contract is a contract of indemnity. The contract of insurance i s a contract of indemnity. It is the basis of all property insurance. It simply mean s that the insured who has insurable interest over a property is only entitled to recover the amount of actual loss sustained and the burden is upon him to establish the amount of such loss. Note: a. Applicable only to property insurance, except when the creditor is insuring the life of his creditor. b) Life insurance is not a contract of indemn ity. There is no over insurance. There is over insurance only in property insurance. There is over insurance only in property insurance and if this is present, the insurer is only liable up to the extent of the loss. c) Insurance contracts are not wagering contracts (Sec. 4, ICP). 5. An insurance contract is an uberrimae fides contract. The contract or insuran ce is one of perfect good faith not for the insured alone, but equally so for the insurer; in fact, it is more so for the latter since its dominant bargaining pos ition carries with it stricter responsibility.

Insurance policies are traditionally contracts uberrimae fidae, contracts of utm ost good faith. It requires the parties to the contract of insurance to disclose conditions affecting the ris of which he is aware, or material fact, which the applicant nows, and those, which he ought to now. This doctrine is essential on account of the fact that the full circumstances of the subject matter of insurance are, as a rule, nown to the insured only and the insurer in deciding

whether or not to accept a ris , must rely primarily upon the information supplied to him by the applicant. 6. An insurance contract is a personal contract the law presumes that the insure r considered the personal qualifications of the insured in approving the insurance application.

Marine insurance

Marine insurance includes: 1. Insurance against loss of or damage to:

a. Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise, ef fects, disbursements, profits, moneys, securities, choses in action, evidences of debts , valuable papers, bottomry, and respondentia interests and all other inds of property and interests therein, in respect to, appertaining to or in connection with any and all ris s or perils of navigation, transit or transportation, or wh ile being assembled, pac ed, crated, baled, compressed or similarly prepared for shipment or while awaiting shipment, or during any delays, storage, transhipment, or reshipment incident thereto, including war ris s, marine builder's ris s, and all personal property floater ris s;

b. Person or property in connection with or appertaining to a marine, inland marine, transit or transportation insurance, including liability for loss of or damage arising out of or in connection with the construction, repair, operation, maintenance or use of the subject matter of such insurance (but not including li fe insurance or surety bonds nor insurance against loss by reason of bodily injury to any person arising out of ownership, maintenance, or use of automobiles);

c. Precious stones, jewels, jewelry, precious metals, whether in course of transportation or otherwise; and

d. Bridges, tunnels and other instrumentalities of transportation and communication (excluding buildings, their furniture and furnishings, fixed contents and supplies held in storage); piers, wharves, doc s and slips, and oth er aids to navigation and transportation, including dry doc s and marine railways, dams and appurtenant facilities for the control of waterways (Sec. 99, ICP).

Fire insurance

Fire insurance includes insurance against loss by fire, lightning, windstorm, to rnado or earthqua e and other allied ris s, when such ris s are covered by extension to f ire insurance policies or under separate policies (Sec. 167, ICP).

Casualty insurance

Casualty insurance is insurance covering loss or liability arising from accident or mishap, excluding certain types of loss which by law or custom are considered as falling exclusively within the scope of other types of insurance such as fire or marine. It includes , but is not limited to, employer's liability insurance, motor vehicle liability insurance, plate gla ss insurance, burglary and theft insurance, personal accident and health insurance as written by non-life insurance companies, and other substantially similar inds of insurance (Sec. 17 4, ICP).

Suretyship

A contract of suretyship is an agreement whereby a party called the surety guara ntees the performance by another called the principal or obligor of an obligation or under ta ing in favor of a third party called the obligee. It shall be deemed an insurance contract if made by a surety who or which, as such, is doing an insurance business (Sec. 175 and Sec. 2, par 3, ICP).

Individual life insurance

It is an insurance on human lives and insurance appertaining thereto or connecte d therewith (Sec. 179, ICP);

Group life insurance

It is a blan et policy covering a number of individuals. Its most common form is an insurance that provides life or health insurance coverage for the employees of a single employer (See Pineda vs. Court of Appeals, 226 SCRA 754, 45 SCAD 30). The policy need not be in printed form and may be typewritten (Sec. 50, last paragraph, ICP) but the law prescribe s the contents of such policy (Sec. 228, ICP).

Industrial life insurance

It is a form of life insurance under which the premiums are payable either month ly or oftener, if the face amount of insurance provided in any policy is not more than five hundred times that of the current statutory minimum daily wage in the City of Manila and if the words industrial. policy are printed upon the policy as part of the descriptive matter (Sec. 229, ICP).

Compulsory motor vehicle liability insurance

This is a protection coverage that will answer for legal liability for losses an d damages for bodily injuries or property damage that may be sustained by another arising from the use and operation of motor vehicle. Note that common carriers are required to secure Compulsory Motor Vehicle Liabil ity Insurance (CMVLI) coverage as provided under Sec. 374 of the Insurance Code, pre cisely for the benefit of victims of vehicular accidents and to extend them immediate relief. Compulsory Motor Vehicle Liability Insurance (Third Party Liability or TPL) is p rimarily intended to provide compensation for the death or bodily injuries suffered by in nocent third parties or passengers as a result of a negligent operation and use of motor vehi cle. The victims and/or their defendants (dependents) are assured of immediate financial assistan ce, regardless of the financial capacity of motor vehicle owners (Government Service Insurance System vs. Court Appeals, 308 SCRA 559).

Insurable interest

In life/health

Every person has an insurable interest in the life and health: 1. Of himself, of his spouse and of his children;

2. Of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest; 3. Of any person under a legal obligation to him for the payment of money, or respecting property or services, of which death or illness might delay or prevent the performance; and 4. Of any person upon whose life any estate or interest vested in him depends (Sec. 10, ICP) The general rule is in life insurance, there is no limit as to the amount of ins urable interest the insured can insure his life. The exception is in creditor-debtor relationship where the creditor insures the debtor, the limit of insurable interest is equal to the amount of the debt. The insurable interest in the life of another need exist only at the time of per fection of the contract and need not exist thereafter.

In property

Every interest in property, whether real or personal, or any relation thereto, o r liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured, is an insurable interest (Sec. 13, ICP).

Insurable interest in property consists of: 1. an existing interest; 2. an inchoate interest founded on an existing interest; or 3. an expectancy, coupled with an existing interest in that out of which the expectancy arises (Sec. 14, ICP). Insurable interest in property need not be an inchoate interest or an expectancy . However, the expectancy must be coupled with an existing interest in that out of which su ch expectancy arises.

Double insurance and over insurance

Double insurance exists where the same person is insured by several insurers sep arately in respect to the same subject and interest.

For double insurance to exist, the following elements must be present: 1. 2. 3. 4. 5. Person insured is the same; Two or more insurers insuring separately; Subject matter is the same; Interest insured is also the same; and Ris or peril insured against is li ewise the same.

Where double insurance is allowed, but over insurance results: 1. The insured can claim in case of loss only up to the agreed valuation or up t o the full insurable value from any, some or all insurers, without prejudice to the in surers ratably apportioning the payment;

2. The insured can also recover before or after the loss, from both insurers the excess premium he has paid (Sec. 94, ICP).

Over-insurance results when the insured insures the same property for an amount greater than the value of the property with the same insurance company. In case of loss: 1. The insurer is bound only to pay to the extent of the real value of the prope rty lost; 2. The insured is entitled to recover the amount of premium corresponding to the excess in value of the property. Multiple or several interests on same property

The mortgagor may insure the mortgaged property to its full value while the mor tgagee can insure it only to the extent of the debt secured (Sec. 8, ICP).

Separate insurances covering different insurable interests may be obtained by t he mortgagor and the mortgagee (Sec. 8, ICP).

Perfection of the contract of insurance

Offer and acceptance/consensuality

A contract of insurance, li e other contracts, must be assented to by both parti es either in person or by their agents. So long as an application for insurance has not been either accepted or rejected, it is merely an offer or proposal to ma e a contract. The contract, to be binding from the date of application, must have been a completed contract, one that leaves no thing to be done, nothing to be completed, nothing to be passed upon, or determined, before it shall ta e effect. There can be no contract of insurance unless the minds of the parties ha ve met in agreement (Virginia Perez vs. CA, 323 SCRA 613).

An insurance contract is a consensual contract and is perfected the moment ther e is a meeting of the minds with respect to the object and the cause or consideration ( See Arts. 1315, 1318 and 1319, Civil Code). What is being followed in insurance contracts is wha t is nown as the cognition theory.

Note that in insurance contracts, the insured is the one ma ing the offer by su bmitting an application to the insurer and the latter accepts the offer by approving the application. Thus, the mere submission of the application without the corresponding approval of the policy does not result in the perfection of the contract of insurance (Great Pacific Life As surance vs. CA, 89 SCRA 543).

In this jurisdiction, the cognition theory, as distinguished from the manifesta tion theory, is applied in contracts. Article 1319 of the Civil Code, in part, provides:

Acceptance made by letter or telegram does not bind the offerer except from the time it came to his nowledge. The contract, in such a case, is presumed to have been entered in to the place where the offer was made..

If the offerer is already dead when the acceptance reached him, there is no con tract of insurance since there is no more offer to accept. Article 1323 of the Civil Code provides:

An offer becomes ineffective upon the death, civil interdiction, insanity,, or i nsolvency of either party before acceptance is conveyed..

Once the parties consented to the consideration and the underta ing to indemnif y another against loss, damage or liability arising from an un nown or contingent event, the parties are bound thereto.

Delay in acceptance

Persons who wish to be insured may get protection before the perfection of the insurance contract notice of approval of the application by securing a cover not e. The cover note issued by the insurer shall be deemed an insurance contract as contemplated under Section 1(1) of the ICP subject to the following rules (Sec. 52, ICP).

1. The cover note shall be issued or renewed only upon prior approval of the Ins urance Commission; 2. The cover note shall be valid and binding not more than sixty (60) days from the date of its issuance; 3. No separate premium is required for the cover note (Pacific Timber Export vs. CA, 112 SCRA 199); 4. The cover note may be cancelled by either party upon prior notice to the othe r of at least seven (7) days; 5. The policy should be issued within sixty (60) days after the issuance of the cover note; 6. The sixty(60) day period may be extended upon written approval of the Insuran ce Commission; and 7. The written approval of the Insurance Commission is dispensed with upon the certification of the president, vice-president or general manager of the insurer that the ris involved, the values of such ris s and premium therefor have not as yet been determined or established and the extension or renewal is not contrary to or is not for the purpose of violating the ICP or any rule (Ins. Memo. Circ. No. 3-75).

Delivery of policy

An example of both the advantageous contracting environment created by insurers and the formalism that often attends insurance law is the occasionally stringent jud icial enforcement of insurance contract requirements related to the delivery of the written insura nce policy, a requirement for inception of coverage most usually associated with life insuranc e. In addition to requiring an application rather than contracting on the spot, ins urers may provide in either the fine print of the application for the policy (or both) tha t acceptance of the applicant s offer is communicated by delivery of the policy. In sum, however, the role of policy delivery in the rather structured insurance transaction accrues to the benefit of the insurers. In a number of cases, for ex ample, insurers have been able to avoid paying for losses that occurred after approval of the ap plication by withholding policy delivery (Jeffrey W. Stempel, Stempel on Insurance Contracts) . Premium payment

Premium is the consideration paid to an insurer for underta ing to indemnify the insured against a specified peril.

No insurance policy issued or renewed is valid and binding until actual payment of the premium. Any agreement to the contrary is void (Sec. 77, ICP). The Supreme Court observed in UCPB General Insurance Co., Inc. vs. Masagana Tele mart, Inc. (308 SCRA 259) that the parties may not agree expressly or impliedly on the extension of credit or time to pay the premium and consider the policy binding before actual payment.. However, the petitioner filed a Motion for Reconsideration and the same was gran ted by the Supreme Court. On April 4, 2001, the Court reversed its earlier Decision. The Ap ril 4, 2001 Resolution of the High Court enumerates five (5) exceptions to the general rule stated in Section 77 that the Insurance Policy is not valid and binding until actual payment of pr emium.

Non-default options in life insurance

The policyholder who has paid three annual premiums but later defaults may have the following options:

1. To secure the cash surrender value payable upon surrender of the policy; 2. Instead of receiving cash, to have it applied to a paid-up insurance for a re duced amount; or 3. Instead of receiving cash, to have it applied to an extended term insurance ( Sec. 227, ICP).

Reinstatement of a lapsed policy of life insurance

The policyholder is entitled to have his policy reinstated at any time within t hree years from the default of premium payment under certain conditions (Sec. 227, ICP).

Refund of premiums

Under the law, the instances when the insured is entitled to the return of premi

ums paid are as follows: a. If thing insured was never exposed to the ris s insured against (Sec. 79, ICP ); b. Contract is voidable due to the fraud or misrepresentation of insurer; c. Insurer never incurred liability (Sec. 81, ICP); d. When the insurance is for a definite period and the insured surrenders his po licy before the termination thereof; e. Contract is voidable because of the existence of facts which the insured was ignorant without his fault; f. When there is over-insurance (Sec. 82, ICP); and g. When rescission is granted due to the insurer s breach of contract.

Rescission of insurance contracts

Concealment

Concealment is neglect to communicate that which a party nows and ought to communicate.

There is concealment when the following elements concur: 1. Party concealing must have nowledge of the fact concealed; 2. Such party concealing is duty bound to disclose such fact to the other;

3. Party concealing ma es no warranty as to the fact concealed; 4. The other party has no means of ascertaining the fact concealed; and 5. The fact concealed must be material to the ris .

Concealment vitiates the contract and entitles the insurer to rescind, even if t he death or loss is due to a cause not related to the concealed matter. Note: Good faith is NOT a defense in concealment.

Misrepresentation/omissions

Misrepresentation is a statement: i. As a fact of something which is untrue; ii. Which the insured stated with nowledge that it is untrue and with an intent to deceive, or which he states positively as true without nowing it to be true and which he has a tendency to mislead; and iii. Where each fact in either case is material to the ris . The effect of misrepresentation is that the injured party is entitled to rescind from the time the misrepresentation becomes false. Breach of warranties

It is a statement or promise by the insured set forth in the policy itself or in corporated in it by proper reference, the untruth or non-fulfillment of which in any respect and without reference to whether the insurer was in fact prejudiced by such untruth or non-f ulfillment, renders the policy voidable by the insurer.

The purpose of warranty is to eliminate potentially increasing hazards which may either be due to the acts of the insured or to the change of condition of the property.

The effects of breach of warranty depend on the following: a. Violation of MATERIAL warranty or of a material provision of a policy will en title the other party to rescind the contract (Sec. 74, ICP).

The annotation, then, must be deemed to be a warranty that the property was not insured by any other policy. Violation thereof entitles the insurer to rescind. The materiality of non-disclosure of other insurance policies is not open to doubt (Union Manufactu ring Co., Inc. and Republic Ban vs. Philippine Guaranty Co., Inc., 47 SCRA 271). b. Violation of IMMATERIAL provision The general rule is that it will NOT avoid the policy except when the policy exp ressly provides or declares that a violation thereof will avoid it (Sec. 75, ICP). By s uch stipulation, the parties convert an immaterial warranty into a material one. c. A breach of warranty without fraud, merely exonerates an insurer from the tim e that it occurs, or where it is bro en in its inception, prevents the policy from attachi ng to the ris (Sec. 76, ICP).

Claims settlement and subrogation

Notice and proof of loss

In case of loss upon an insurance against fire, an insurer is exonerated, if not ice thereof be not given to him by an insured, or some person entitled to the benefit of the in surance, without unnecessary delay (Sec. 88, ICP).

When a preliminary proof of loss is required by a policy, the insured is not bou nd to give such proof as would be necessary in a court of justice; but it is sufficient for him to give the best evidence which he has in his power at the time (Sec. 89, ICP).

All defects in a notice of loss, or in preliminary proof thereof, which the insu red might remedy, and which the insurer omits to specify to him, without unnecessary delay , as grounds of objection, are waived (Sec. 90, ICP).

Delay in the presentation to an insurer of notice or proof of loss is waived if caused by any act of him, or if he omits to ta e objection promptly and specifically upon that ground (Sec. 91, ICP).

If the policy requires, by way of preliminary proof of loss, the certificate or testimony of a person other than the insured, it is sufficient for the insured to use reasonabl e diligence to procure it, and in case of the refusal of such person to give it, then to furnis h reasonable evidence to the insurer that such refusal was not induced by any just grounds of disbelief in the facts necessary to be certified or testified (Sec. 92, IC).

Guidelines on claims settlement

The rules in claims settlement in life insurance are: 1. The proceeds shall be paid immediately upon the maturity of the policy if the re is such a maturity date. 2. If the policy matures by the death of the insured, within sixty (60) days aft er presentation of the claim and filing of the proof of the death of the insured (S ec. 242, ICP).

The rules in claims settlement in property insurance are: 1. Proceeds shall be paid d by the insurer and ascertainment y arbitration. 2. If no ascertainment is e loss shall be paid within 90 days after within thirty (30) days after proof of loss is receive of the loss or damage is made either by agreement or b made within 60 days after receipt of proof of loss, th such receipt (Sec. 243, ICP).

Unfair claims settlement; sanctions

Any of the following acts by an insurance company, if committed without just cau se and performed with such frequency as to indicate a general business practice, shall constitute unfair claim settlement practices:

1. nowingly misrepresenting to claimants pertinent facts or policy provisions r elating to coverage at issue;

2. failing to ac nowledge with reasonable promptness pertinent communications wi th respect to claims arising under its policies;

3. failing to adopt and implement reasonable standards for the prompt investigat ion of claims arising under its policies;

4. not attempting in good faith to effectuate prompt, fair and equitable settlem ent of claims submitted in which liability has become reasonably clear; or

5. compelling policyholders to institute suits to recover amounts due under its policies by offering without justifiable reason substantially less than the amounts ultimate ly recovered in suits brought by them (Sec. 241, ICP).

Resort to unfair claims settlement may result in the suspension or revocation of certificate of authority (Sec. 241, ICP).

Prescription of action

In the absence of an express stipulation in the policy it being based on a writ ten contract, the action prescribes in ten (10) years. However, the parties may validly agree on a shorter period provided it is not less than one year from the time the cause of action a ccrues. The cause of action accrues from the final rejection of the claim of the insured and not f rom the time of loss (Secs. 63, 384, ICP).

The insurer may provide in its policies that unless the insured brings action w ithin one (1) year from the time a cause of action accrues, the action will be barred. The one (1) year period is rec oned from the date the cause of action accrues, i. e., upon denial of the claim and not upon the happening of the loss (Sec. 63, ICP).

Under Sec. 384 of the Insurance Code, the injured must file with the insurer a written notice of claim within six (6) months from the date of accident, and suit for re covery must be brought with one year. The one-year prescriptive period to bring suit against th e insurer should be counted from the time the insurer rejects the written claim filed by the insu red, beneficiary or third person interested under the policy (Travellers Insurance vs. CA, 272 SCRA

536).

Subrogation

Subrogation is essentially a process of substitution where the insurer steps int o the shoes of the insured.

The law on the matter is succinct and clear, to wit: Art. 2207. If the plaintiff s property has been insured, and he has received indem nity from the insurance company for the injury or loss arising out of the wrong or br each of contract complained of, the insurance company shall be subrogated to the rights of the in sured against the wrongdoer or the person who has violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be en titled to recover the deficiency from the person causing the loss or injury. Thus, when Prudential, after due verification of the merits and validity of the insurance claim of William Lines, Inc., paid the latter the total amount covered by its in surance policy, it was subrogated to the right of the latter to recover the insured s loss from the l iable party, CSEW (Cebu Shipyard and Engineering Wor s, Inc. vs. William Lines, 306 SCRA 762) . The right of subrogation has its roots in equity. It is designed to promote and to accomplish justice and is the mode which equity adopts to compel the ultimate pa yment of a

debt by one who in justice and good conscience ought to pay. It is not dependent upon, nor does it grow out of, any privity of contract or upon written assignment of claim. It accrues simply upon payment by the insurance company of the insurance claim. As a rule, the insurer can only recover from the third person what the insured c ould have recovered. However, there can be NO subrogation if: 1. The insured, by his own act, releases the wrongdoer/third person liable for t he loss; or, 2. Where the insurer pays the insured for a loss or ris not covered by the poli cy.

JURISPRUDENTIAL DOCTRINES IN COMMERCIAL LAW

BANKING LAWS

A. EXTRAORDINARY DILIGENCE 1. Negligence is the omission to do something which a reasonable man, guided by those considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of something which a prudent and reasonable man would not do.

2. It is well to reiterate that the degree of diligence required of ban s is mor e than that of a reasonable man or a good father of a family. In view of the fiduciary nature of their relationship with their depositors, ban s are duty-bound to treat the accounts o f their clients with the highest degree of care (Ban of the Philippine Islands v. Lifet ime Mar eting Corp., G.R. No. 176434, June 25, 2008).

3. The fiduciary relationship of ban s with its depositors means that the ban s o bligation to observe high standards of integrity and performance. is deemed written into ev ery deposit agreement between a ban and its depositor. The fiduciary nature of ban

ing requires ban s to assume a degree of diligence higher than that of a good father of a family. Article 1172 of the Civil Code states that the degree of diligence requi red of an obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a good father of a family. Section 2 of RA 8791 prescribes the stat utory diligence required from ban s that ban s must observe high standards of integrity and performance. in servicing their depositors (Central Ban of the Phils. v. Ci tytrust Ban ing Corp., G.R. No. 141835, February 4, 2009, Carpio-Morales).

4. The business of a ban is one affected with public interest, for which reason the ban should guard against loss due to negligence or bad faith. In approving the loan of an applicant, the ban concerns itself with proper [information] regarding its debt ors (Sps. E. & D. Omengan v. PNB, et al., G.R. No. 161319, January 23, 2007, Corona).

5. A ban , in suppressing the best evidence that could have bolstered its claim or confirmed its innocence, is presumed to have withheld the same for fraudulent purposes. Bad faith imports a dishonest purpose or some moral obliquity or consc ious doing of a wrong that parta es of the nature of fraud.

The business of ban ing is impressed with public interest and great reliance is made on the ban s sworn profession of diligence and meticulousness in giving irreproachab le service.

Li e a common carrier whose business is imbued with public interest, a ban ld

shou

li ewise exercise extraordinary diligence to negate its liability to its deposit ors.

The Court finds no compelling reason to disallow the application of the provisio ns of common carriers in this case if only to emphasize the fact that ban ing institut ions have the duty to exercise the highest degree of diligence when transacting with the p ublic (Solidban Corporation/ Metropolitan Ban and Trust Company, Inc., v. Tan, G.R. No. 167346, April 2, 2007). 6. Ban s are exhorted to treat the accounts of their depositors with meticulous care and utmost fidelity.

Article 2201 of the Civil Code provides that in case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which may be reasonably attributed to the non-performance of the obligation. Bad faith does no t simply connote bad judgment or negligence; it imports a dishonest purpose or som e moral obliquity and conscious doing of wrong; it parta es of the nature of fraud . We have held that it is a breach of a nown duty through some motive of interest or ill will.

In the absence of fraud or bad faith, moral damages cannot be awarded; and that the adverse result of an action does not per se ma e the action wrongful, or the par ty liable for it. One may err, but error alone is not a ground for granting such damages ( BPI Family Ban v. Amado Franco, et al., G.R. No. 123498, November 23, 2007, Nachura ). 7. Ban s are expected to be more cautious than ordinary individuals in dealing w ith lands, even registered ones, since the business of ban s is imbued with public interest . Anyone who deliberately ignores a significant that would create suspicion in an otherwi se reasonable person cannot be considered as an innocent mortgagee for value (Phili ppine National Ban vs. Corpuz, 612 SCRA 493).

8. As a general rule, if there is a judicial liquidation of an insolvent ban , a

ll claims against the ban should be filed in the liquidation proceedings; The general rule should not be applied if to order the aggrieved party to refile or relitigate its case before the litigation court would be an exercise in futility. (Cudiamat vs. Batangas Savings and Loan B an , Inc., 614 SCRA 735).

9. Negligence was committed by respondent ban in accepting for deposit the cros sed chec s without indorsement and in not verifying the authenticity of the negotiat ion of the chec s. The law imposes a duty of extraordinary diligence on the collecting ban to scrutinize chec s deposited with it, for the purpose of determining their genuin eness and regularity. As a business affected with public interest and because of the n ature of its functions, the ban s are under obligation to treat the accounts of its depos itors with meticulous care, always having in mind the fiduciary nature of the relationship. The fact that this arrangement had been practiced for three years without the other party raising any objection does not detract from the duty of the ban to exercise extraordinary diligence (Vicente Go vs. Metropolitan Ban and Trust Co., G.R. No . 168842, August 11, 2010).

10. The petitioner, being a ban ing institution, had the direct obligation to su pervise very closely the employees handling its depositors accounts, and should always be mind ful of the fiduciary nature of its relationship with the depositors. Such relationsh ip required it and its employees to record accurately every single transaction, and as promp tly as possible, considering that the depositors accounts should always reflect the amou nts of money the depositors could dispose of as they saw fit, confident that, as a ban , it would deliver the amounts to whomever they directed. If it fell short of that obligati on, it

should bear the responsibility for the consequences to the depositors, who suffe red particular embarrassment and disturbed peace of mind from the negligence in the handling of the accounts (Citytrust Ban ing Corporation vs. Carlos Romulo N. Cru z, G.R. No. 157049, August 11, 2010). B. APPARENT AUTHORITY 1. Apparent authority is derived not merely from practice. Its existence may be ascertained through: (a) the general manner in which the corporation holds out an officer or agent as having the power to act or, in other words, the apparent authority to act in general, with which it clothes him; or (b) the acquiescence in his acts of a particular nature, with actual or construc tive nowledge thereof, whether within or beyond the scope of his ordinary powers.

While it is true that rules of procedure are intended to promote rather than fru strate the ends of justice, and the swift unclogging of court doc ets is a laudable objecti ve, it nevertheless must not be met at the expense of substantial justice. Considering that there was substantial compliance, a liberal interpretation of procedural rules in this labor case is more in eeping with the constitutional mandate to secure social justice (Ame lia R. Enriquez v. Ban of the Philippine Islands, G.R. No. 172812, February 12, 2008).

C. FORECLOSURE SALE 1. The object of a notice of sale is to inform the public of the nature and cond ition of the property to be sold, and of the time, place and terms of the sale. Notices are g iven for the purpose of securing bidders and to prevent a sacrifice of the property. The goal of the notice requirement is to achieve a reasonably wide publicity. of the auction sale . This is why publication in a newspaper of general circulation is required. The Court has previously ta en judicial notice of the far-reaching effects. of publishing the n otice of sale in a newspaper of general circulation.

True, to be a newspaper of general circulation, it is enough that it is publishe d for the dissemination of local news and general information, that it has a bona fide sub scription list of paying subscribers, and that it is published at regular intervals. Over and above all these, the newspaper must be available to the public in general, and not jus t to a select few chosen by the publisher. Otherwise, the precise objective of publishi ng the notice of sale in the newspaper will not be realized.

In fact, to ensure a wide readership of the newspaper, jurisprudence suggests th at the newspaper must also be appealing to the public in general. The Court has, theref ore, held in several cases that the newspaper must not be devoted solely to the inter ests, or published for the entertainment, of a particular class, profession, trade, calli ng, race, or religious denomination. The newspaper need not have the largest circulation so l ong as it is of general circulation.

There is no distinction as to the publication requirement in extrajudicial forec losure sales conducted by a sheriff or a notary public. The ey element in both cases is stil l general circulation of the newspaper in the place where the property is located (Metropo litan Ban and Trust Company, Inc. v. Eugenio Peafiel, et al., G. R. No. 173976, Februa ry 27, 2009, Nachura).

D. CLOSURE OF BANKS 1. The ban s closure did not diminish the authority and powers of the designated liquidator to effectuate and carry on the administration of the ban . During the closure

of respondent ban , it could still function as a bonding institution, hence, cou ld continue collecting interests from petitioners (Sps. Z. & C. Bacolor v. Banco Filipino Sa vings etc., et al., G.R. No. 148491, February 8, 2007, Sandoval-Gutierrez).

2. It is a well-settled rule that the closure of a ban may be considered an exe rcise of the police power of the State. The action of the Monetary Board on this matter is de emed final and executory.

Moreover, under RA 7653, an examination is no longer required to be conducted be fore the Monetary Board can issue a closure order. This can be gleaned from the use o f the word report. instead of examination.. The purpose of the law is to ma e the closur e of a ban summary in nature and expeditious in order to protect public interest. Prior notice and hearing are no longer required before a ban can be closed (Rural Ban of San Miguel, Inc. v. Monetary Board, Bang o Sentral ng Pilipinas, G.R. No. 150886, Fe bruary 16, 2007).

E. BANK SECRECY ACT 1. While the fundamental law has not bothered with the triviality y addressing privacy rights relative to ban ing accounts, there, nevertheless, jurisdiction a legitimate expectation of privacy governing such accounts the ight of expectation is statutory, and it is found in the Ban Secrecy Act roup, Inc. vs. Go, 612 SCRA 596). of specificall exists in our source of this r of 1955 (BSB G

2. The inquiry into ban deposits allowable under Republic Act No. 1405 must be premised on the fact that the money deposited in the accounts is itself the subj ect of the action (BSB Group, Inc. vs. Go, 612 SCRA 596).

-o0oINSURANCE

A. INSURERS; JOINT AND SOLIDARY LIABILITY 1. A solidary or joint and several obligation is one in which each debtor is lia ble for the entire obligation, and each creditor is entitled to demand the whole obligation. In a joint obligation, each obligor answers only for a part of the whole liability and to e ach obligee belongs only a part of the correlative rights. Well-entrenched is the rule that solidary obligation cannot lightly be inferred. There is solidary liability only when the obligation expressly so states, when the law so provides or when the nature of the obligati on so requires.

It is settled that where the insurance contract provides for indemnity against l iability to third persons, the liability of the insurer is direct and such third persons can directly sue the insurer. The direct liability of the insurer under indemnity contracts again st third party liability does not mean, however, that the insurer can be held solidarily liable with the insured and/or the other parties found at fault, since they are being held l iable under different obligations. The liability of the insured carrier or vehicle owner is based on tort, in accordance with the provisions of the Civil Code; while that of the ins urer arises from contract, particularly, the insurance policy. The third-party liability of the insurer is only up to the extent of the insurance policy and that required by law; and i t cannot be held solidarily liable for anything beyond that amount. Any award beyond the insurance coverage would already be the sole liability of the insured and/or the other parties at fault.

Given the admission of respondent MICI that it is the insurer of the truc invol ved in the accident that illed George, and in the utter absence of proof to establish both the existence and the extent/amount of the alleged limited liability of respondent M ICI as insurer, the Court could only conclude that respondent MICI had agreed to fully indemnify third-party liabilities. Consequently, there is no more difference in the amounts of damages which petitioners can recover from Rhoda or respondent MICI; petitioners can recover the said amounts in full from either of them, thus, ma i ng their liabilities solidary or joint and several (The Heirs of George Y. Poe v. Malayan Insurance Co. Inc., G.R. No. 156302, April 7, 2009, Chico-Nazario).

B. SURETYSHIP 1. Section 175 of the Insurance Code defines a suretyship as a contract or agreem ent whereby a party, called the suretyship, guarantees the performance by another pa rty, called the principal or obligor, of an obligation or underta ing in favor of a t hird party, called the obligee. It includes official recognizances, stipulations, bonds, or underta ings issued under Act 536, as amended.. Corollarily, Article 2047 of the Civil Code p rovides that suretyship arises upon the solidary binding of a person deemed the surety w ith the principal debtor for the purpose of fulfilling an obligation (Prudential Guarant ee & Assurance Inc. v. Equinox Land Corporation, G.R. No. 152505-06, September 13, 20 07, Sandoval-Gutierrez).

-o0o-

NEGOTIABLE INSTRUMENTS LAW

A. CHECKS 1. Postdated chec s themselves serve as the evidences of the indebtedness. A dif ferent rule would open the floodgates for a similar scheme, whereby companies without p rior

license or authority from the SEC. This cannot be countenanced. Moreover, it bears pointing out that the definition of securities. set forth in S ection 2 of the Revised Securities Act includes commercial papers evidencing indebtedness of any person, financial or non-financial entity, irrespective of maturity, issued, end orsed, sold, transferred or in any manner conveyed to another.. A chec is a commercial paper evidencing indebtedness of any person, financial or non-financial entity. Since the chec s in this case were generally rolled over to augment the creditor s existing investment with ASBHI, they most definitely ta e on the attributes of traditiona l stoc s (Betty Gabionza et. al. v. Court Of Appeals et. al., G.R. No. 161057, September 12, 2008). 2. The act of crossing a chec serves as a warning to the holder that the chec has been issued for a definite purpose so that the holder thereof must inquire if he has received the chec pursuant to that purpose, otherwise, he is not a holder in due course.

In the case of a crossed chec , as in this case, the following principles must a dditionally be considered: (1) may not be encashed but only deposited in the ban ; (2) may b e negotiated only once to one who has an account with a ban ; and (3) warns the ho lder that it has been issued for a definite purpose so that the holder thereof must i nquire if he has received the chec pursuant to that purpose, otherwise, he is not a holder i n due course (Dino vs. Judal-Loot, 618 SCRA 393).

3. The crossing may be special wherein between the two parallel lines is written the name of a ban or a business institution, in which case the drawee should pay only wi th the intervention of that ban or company.

Crossing may be general wherein between two parallel diagonal lines are written the words and Co.. or none at all as in the case at bar, in which case the drawee sho uld not encash the same but merely accept the same for deposit (Ibid.).

4. The Court has ta en judicial cognizance of the practice that a chec with two parallel lines in the upper left hand corner means that it could only be deposited and no t converted into cash. The effect of crossing a chec , thus, relates to the mode o f payment, meaning that the drawer had intended the chec for deposit only by the rightful person, i.e., the payee named therein. The crossing of a chec is a warning that the che c should be deposited only in the account of the payee. Thus, it is the duty of the colle cting ban to ascertain that the chec be deposited to the payee s account only (Vicente Go v s. Metropolitan Ban and Trust Co., G.R. No. 168842, August 11, 2010).

5. Among the different types of chec s issued by a drawer is the crossed chec . The Negotiable Instruments Law is silent with respect to crossed chec s, although th e Code of Commerce ma es reference to such instruments. We have ta en judicial cognizan ce of the practice that a chec with two parallel lines in the upper left hand corn er means that it could only be deposited and could not be converted into cash. Thus, the effect of crossing a chec relates to the mode of payment, meaning that the drawer had int ended the chec for deposit only by the rightful person, i.e., the payee named therein . The change in the mode of paying the obligation was not a change in any of the objec ts or principal condition of the contract for novation to ta e place (Anamer Salazar v s. J.Y. Brothers Mar eting Corporation, G.R. No. 171998, October 20, 2010).

6. A chec is defined by law as a bill of exchange drawn on a ban payable on de mand. The Negotiable Instruments Law is silent with respect to crossed chec s. Nonetheless, this Court has ta en judicial cognizance of the practice that a che c with two parallel lines on the upper left hand corner means that it could only be dep osited and not converted into cash. The crossing of a chec with the phrase Payee s Accoun t Only. is a warning that the chec should be deposited in the account of the paye e. It is the collecting ban which is bound to scrutinize the chec and to now its depos itors before it can ma e the clearing indorsement, all prior indorsements and/or lac o f indorsement guaranteed..

As what transpired in this case, petitioner ban s accommodated Yu Kio, being a v alued client and the president of Pipe Master, and accepted the crossed chec s. They s tamped at the bac thereof that all prior indorsements and/or lac of indorsements are guaranteed.. In so doing, they became general endorsers. Under Section 66 of the Negotiable Instruments Law, an endorser warrants that the instrument is genuine a nd in all respects what it purports to be; that he has a good title to it; that all prior parties had capacity to contract; and that the instrument is at the time of his indorsem ent valid and subsisting.. Clearly, petitioner ban s, being endorsers, cannot deny liabili ty.

Evidently, petitioner ban s disregarded established ban ing rules and procedures . They were negligent in accepting the chec s and allowing the transaction to push thro ugh. In fine, it must be emphasized that the law imposes on the collecting ban the duty to diligently scrutinize the chec s deposited with it for the purpose of determinin g their genuineness and regularity. The collecting ban , being primarily engaged in ban ing, holds itself out to the public as the expert on this field, and the law thus hol ds it to a

high standard of conduct. Since petitioner ban s negligence was the direct cause of the misappropriation of the chec s, they should bear and answer for respondent Filip inas Orient s loss, without prejudice to their filing of an appropriate action against Yu Kio (Metropolitan Ban & Trust Co. v. Phil Ban of Communications, et al/Solid Ban Corp. v. Filipinas Orient Finance Corp., et al., G.R. No. 141408/G.R. No. 141429, October 18, 2007, Sandoval-Gutierrez).

7. The charge invoice is a contract of adhesion. Contracts of adhesion are as bi nding as ordinary contracts. Those who adhere to the contract are in reality free to reje ct it entirely and if they adhere, they give their consent. Clearly then, petitioners i ssuance of the pay to cash. chec is a clear violation on their part of the term or conditio n stipulated in the charge invoice.

At any rate, when petitioners realized they made a serious mista e in issuing th e pay to cash. chec to Sorolla, they readily issued a second chec payable to respondent corporation. For reason they only now, petitioners directed the drawee ban to stop its payment. Obviously, they admitted that they violated the condition in the ch arge invoice. Hence, their obligation to pay the fruit juices delivered to them is no t extinguished (Mr. Wee Sion Ben, et al v. Semexco/Zest-O Mar eting Corp. etc., G. R. No. 153898, October 18, 2007, Sandoval-Gutierrez).

B. HOLDER IN DUE COURSE 1. Section 52. What constitutes a holder in due course. A holder in due course is a holder who has ta en the instrument under the following conditions: (1) that it is comp lete and regular upon its face; (2) that he became the holder of it before it was overdue , and without notice that it had been previously dishonored, if such was the fact; (3) that he too it in good faith and for value; and (4) that at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the p erson negotiating it.

The law presumes that a holder of a negotiable instrument is a holder thereof in due course (Sps. Pedro and Florencia Violago v. BA Finance and Avelino Violago , G.R . No. 158262, July 21, 2008). 2. The Negotiable Instruments Law does not provide that a holder in due course m ay not in any case recover on the instrument. The only disadvantage of a holder not in due course is that the negotiable instrument is subject to defenses as if it were no n-negotiable (Dino vs. Judal-Loot, 618 SCRA 393).

C. ACCOMODATION PARTY 1. Section 29 of the Negotiable Instruments Law defines an accommodation party a s a person who has signed the instrument as ma er, drawer, acceptor, or indorser, wit hout receiving value therefor, and for the purpose of lending his name to some other person.. As gleaned from the text, an accommodation party is one who meets all the three requisites, viz: (1) he must be a party to the instrument, signing as ma er, dra wer, acceptor, or indorser; (2) he must not receive value therefor; and (3) he must s ign for the purpose of lending his name or credit to some other person. An accommodation par ty lends his name to enable the accommodated party to obtain credit or to raise mon ey; he receives no part of the consideration for the instrument but assumes liability t o the other party/ies thereto.

In the absence of concrete evidence, it cannot just be assumed that petitioner i ntended to lend his name to the corporation. Hence, petitioner cannot be considered as an accommodation party (Claude P. Bautista v. Auto Plus Traders, Inc., G.R. No. 166 405, August 6, 2008; Tomas Ang v. Associated Ban , et al., G.R. No. 146511, September 5, 2007, Azcuna). 2. The accommodation party is liable on the instrument to a holder for value eve n though the holder, at the time of ta ing the instrument, new him or her to be merely a n accommodation party, as if the contract was not for accommodation.

As petitioner ac nowledged it to be, the relation between an accommodation party and the accommodated party is one of principal and surety the accommodation party be ing the surety. As such, he is deemed an original promisor and debtor from the begin ning; he is considered in law as the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter since their liabilities are interwoven as to be inseparable. Although a contract of suretyship is in essence accessory or collat eral to a valid principal obligation, the surety's liability to the creditor is immediate, primary and absolute; he is directly and equally bound with the pr incipal. As an equivalent of a regular party to the underta ing, a surety becomes liable to the debt and duty of the principal obligor even without possessing a direct or personal i nterest in the obligations nor does he receive any benefit therefrom.

Consequently, in issuing the two promissory notes, petitioner as accommodating p arty warranted to the holder in due course that he would pay the same according to it s tenor. It is no defense to state on his part that he did not receive any value therefore because the phrase "without receiving value therefore" used in section 29 of the NIL means "without receiving value by virtue of the instrument" and not as it is apparently supposed to mean, "without receiving payment for lending his name." S tated differently, when a third person advances the face value of the note to the acco mmodated party at the time of its creation, the consideration for the note as regards its ma er is the money advanced to the accommodated party. It is enough that value was given for the note at the time of its creation. As in the instant case, a sum of money was rec

eived by virtue of the notes, hence, it is immaterial so far as the ban is concerned whe ther one of the signers, particularly petitioner, has or has not received anything in paymen t of the use of his name.

Under the law, upon the maturity of the note, a surety may pay the debt, demand the collateral security, if there be any, and dispose of it to his benefit, or, if a pplicable, subrogate himself in the place of the creditor with the right to enforce the gua ranty against the other signers of the note for the reimbursement of what he is entitl ed to recover from them.

Since the liability of an accommodation party remains not only primary but also unconditional to a holder for value, even if the accommodated party receive s an extension of the period for payment without the consent of the accommodation par ty, the latter is still liable for the whole obligation and such extension does not rele ase him because as far as a holder for value is concerned, he is a solidary co-debtor. i t is a recognized doctrine in the matter of suretyship that with respect to the surety, the creditor is under no obligation to display any diligence in the enforcement of h is rights as a creditor (Tomas Ang v. Associated Ban , et al., G.R. No. 146511, September 5, 2007, Azcuna).

D. FICTITIOUS PAYEE RULE

1. A chec made expressly payable to a non-fictitious and existing person is not necessarily an order instrument. If the payee is not the intended recipient of the proceeds of the chec , the payee is considered a fictitious. payee and the chec is a bearer inst rument. In a fictitious-payee situation, the drawee ban is absolved from liability and the drawer bears the loss. When faced with a chec payable to a fictitious payee, it is tre ated as a bearer instrument that can be negotiated by delivery. The underlying theory is t hat one cannot expect a fictitious payee to negotiate the chec by placing his indorseme nt thereon. And since the ma er new this limitation, he must have intended for the instrument to be negotiated by mere delivery. Thus, in case of controversy, the drawer of the chec will bear the loss. This rule is justified for otherwise; it will b e most convenient for the ma er who desires to escape payment of the chec to always de ny the validity of the indorsement. This despite the fact that the fictitious payee was purposely named without any intention that the payee should receive the proceeds of the ch ec . However, there is a commercial bad faith exception to the fictitious-payee rule. A showing of commercial bad faith on the part of the drawee ban , or any transfere e of the chec for that matter, will wor to strip it of this defense. The exception will cause it to bear the loss. Commercial bad faith is present if the transferee of the chec ac ts dishonestly, and is a party to the fraudulent scheme (Philippine National Ban v . Erlando T. Rodriguez, et. al., G.R. No. 170325, September 26, 2008). E. RIGHT TO RECEIVE PAYMENT 1. The weight of authority is that the mere possession of a negotiable instrumen t does not in itself conclusively establish either the right of the possessor to receive pa yment, or of the right of one who has made payment to be discharged from liability. Thus, som ething more than mere possession by persons who are not payees or indorsers of the instrument is necessary to authorize payment to them in the absence of any other facts from which the authority to receive payment may be inferred. If instruments paya ble to named payees or to their order have not been indorsed in blan , only such payees or their indorsees can be holders and entitled to receive payment in their own righ t.

The presumption under Section 131(s) of the Rules of Court stating that a negoti able instrument was given for a sufficient consideration will not inure to the benefi t of Salazar because the term given. does not pertain merely to a transfer of physical possession of the instrument. The phrase given or indorsed. in the context of a negotiable instrument refers to the manner in which such instrument may be negot iated. Negotiable instruments are negotiated by transfer to one person or another in suc h a manner as to constitute the transferee the holder thereof. If payable to bearer it is negotiated by delivery. If payable to order it is negotiated by the indorsement completed by delivery.. It is an exception to the general rule for a payee of an order instrument to tra nsfer the instrument without indorsement. Precisely because the situation is abnormal, it is but fair to the ma er and to prior holders to require possessors to prove without th e aid of an initial presumption in their favor, that they came into possession by virtue of a legitimate transaction with the last holder. The ta ing and collection of a chec without the proper indorsement amount to a conversion of the chec by the ban (Ban of the Philippine Islands v. CA, et al ., G.R. No. 136202, January 25, 2007, Azcuna). -o0oTRANSPORTATION LAW

A. BILL OF LADING 1. While it is true that a bill of lading may serve as the contract of carriage between the parties, it cannot prevail over the express provision of the voyage charter that the common carrier and the charterer executed (Cebu Salvage Corp. v. Phil. Home Assu rance Corp., G.R. No. 150403, January 25, 2007, Corona). 2. A bill of lading is a written ac nowledgement of the receipt of goods and an agreement to transport and to deliver them at a specified place to a person named or on hi s or her order. It operates both as a receipt and as a contract. It is a receipt for the goods shipped and a contract to transport and deliver the same as therein stipulated. As a rec eipt, it recites the date and place of shipment, describes the goods as to quantity, weig ht, dimensions, identification mar s, condition, quality, and value. As a contract, it names the contracting parties, which include the consignee; fixes the route, destinati on, and freight rate or charges; and stipulates the rights and obligations assumed by th e parties (Unsworth Transportation International-Phils., Inc. vs. Court of Appeals and Pio neer Insurance and Surety Corporation, G.R. No. 166250, July 26, 2010).

B. COMMON CARRIERS 1. From the nature of their business and for reasons of public policy, common ca rriers are bound to observe extraordinary diligence over the goods they transport according to the circumstances of each case. In the event of loss of the goods, common carriers a re responsible, unless they can prove that this was brought about by the causes spe cified in Article 1734 of the Civil Code. In all other cases, common carriers are presumed to be at fault or to have acted negligently, unless they prove that they observed extraor dinary diligence.

The fact that the common carrier did not own the vessel it decided to use to con summate the contract of carriage did not negate its character and duties as a common car rier.

The fact that the voyage charter stipulated that cargo insurance was for the cha rterer s account. This deserves scant consideration. This simply meant that the charterer would ta e care of having the goods insured. It could not exculpate the carrier from l iability for the breach of its contract of carriage. The law, in fact, prohibits it and c ondemns it as unjust and contrary to public policy (Cebu Salvage Corp. v. Phil. Home Assurance Corp., G.R. No. 150403, January 25, 2007, Corona).

2. A common carrier is obliged to exercise extraordinary diligence in transporti ng its passengers safely, and to allow to drive one who in which there is serious doubt as to whether he is physically capable of driving a bus would undoubtedly expose to da nger the lives of the passengers and the property of the company (Victory Liner, Inc. v. Race, G.R. No. 164820, March 28, 2007).

3. As in Lucena, this Court fails to see how the prohibition against the existen ce of respondents terminals can be considered a reasonable necessity to ease traffic congestion in the metropolis. On the contrary, the elimination of respondents bus terminals brings forth the distinct possibility and the equally harrowing realit y of traffic congestion in the common par ing areas, a case of transference from one site to another.

Less intrusive measures such as curbing the proliferation of colorum. buses, vans and taxis entering Metro Manila and using the streets for par ing and passenger pic -up points, as respondents suggest, might even be more effective in easing the traff ic

situation. So would the strict enforcement of traffic rules and the removal of o bstructions from major thoroughfares.

As to the alleged confiscatory character of the E.O., it need only to be stated that respondents certificates of public convenience confer no property right, and are mere licenses or privileges. As such, these must yield to legislation safeguarding th e interest of the people.

Even then, for reasons which bear reiteration, the MMDA cannot order the closure of respondents terminals not only because no authority to implement the project has been granted nor legislative or police power been delegated to it, but also because t he elimination of the terminals does not satisfy the standards of a valid police po wer measure.

Finally, an order for the closure of respondents e provisions of the Public Service Act.

terminals is not in line with th

The establishment, as well as the maintenance of vehicle par ing areas or passen ger terminals, is generally considered a necessary service to be provided by provinc ial bus operators li e respondents, hence, the investments they have poured into the acq uisition or lease of suitable terminal sites. Eliminating the terminals would thus run co unter to the provisions of the Public Service Act (MMDA, et al. v. Viron Transportation C o. Inc./ Alberto Romulo, et al. v. Mencorp Transportation System Inc., G.R. No. 170656-17 0657, August 15, 2007, Carpio-Morales). C. BUILD-OPERATE-TRANSFER AGREEMENTS 1. Generally, in the course of processing an unsolicited proposal, the original proponent is treated in much the same way as all other prospective bidders for the proposed infrastructure project. It is required to reformat and resubmit its proposal in accordance with the requirements of the TOR. It must submit a bid bond equal to the amount and in the form required of the challengers. Its qualification shall be evaluated by the

concerned agency/LGU, using evaluation criteria in accordance with Rule 5 of the IRR, and which shall be the same criteria to be used in the TOR for the challengers. These requirements ensure that the public bidding under Rule 10 of IRR on Unsolicited Proposals still remain in accord with the three principles in public bidding, wh ich are: the offer to the public, an opportunity for competition, and a basis for exact c omparison of bids.

The special rights or privileges of an original proponent thus come into play on ly when there are other proposals submitted during the public bidding of the infrastruct ure project. As can be gleaned from the plain language of the statutes and the IRR, the original proponent has: (a) the right to match the lowest or most advantageous proposal within 30 wor ing days from notice thereof, and (b) in the event that the original proponent is able to match the lowest or most advantageous proposal submitted, then it has the right to be awarded the project.

The second right or privilege is contingent upon the actual exercise by the orig inal proponent of the first right or privilege. Before the project could be awarded t o the original proponent, he must have been able to match the lowest or most advantage ous proposal within the prescribed period. Hence, when the original proponent is abl e to timely match the lowest or most advantageous proposal, with all things being equ al, it shall enjoy preference in the awarding of the infrastructure project.

As already found by this Court in the narration of facts in Agan, AEDC failed to match the more advantageous proposal submitted by PIATCO by the time the 30-day wor in g period expired on 28 November 1996; and, without exercising its right to match t he most advantageous proposal, it cannot now lay claim to the award of the project. The bidding process as to the NAIA IPT III Project was already over after the award thereof to PIATCO, even if eventually, the said award was nullified and voided. The nullifi cation of the award to PIATCO did not revive the proposal nor re-open the bidding. AEDC cannot insist that this Court turn bac the hands of time and award the NAIA IPT III Project to it, as if the bid of PIATCO never existed and the award of the projec t to PIATCO did not ta e place (Asia s Emerging Dragon Corp. v. Dept. of Transportation and Communications, et. al., G.R. No. 169914, April 18, 2008).

D. PUBLIC SERVICES/ PUBLIC UTILITIES 1. While the Rome Convention gives broadcasting organizations the right to autho rize or prohibit the rebroadcasting of its broadcast, however, this protection does not extend to cable retransmission. The retransmission of ABS-CBN s signals by PMSI which functions essentially as a cable television does not therefore constitute rebroa dcasting in violation of the former s intellectual property rights under the IP Code (ABS-C BN Broadcasting Corp. v. Philippine Multi-Media System, Inc., et. al., G.R. Nos. 17 5769-70, January 19, 2009, Nachura).

2. The stipulation in the service contract between Meralco and Victoria stipulat es that in the event of the stoppage or the failure by any meter to register the full amoun t of energy consumed, the customer shall be billed for such period on an estimated consumption based upon his use of energy in a similar period of li e use or the registration of a chec meter,. is valid and binding. Its rationale is to allow Meralco or any electric company a measure of self-preservation and protection in situations where the highly technical machinery, equipment and devices it utilizes in the operati on of its business brea down or become worn out that they fail to register the correct le vel of electric consumption and prevent the proper billing of their users.

However, the right of Meralco to collect on differential billings is not without limitation. Before it may exercise such right, Meralco must establish the factual basis for differential billing. Specifically, in this case, it must prove: (1) that the meter was defec tive; (2) that, being defective, the meter failed to register the actual electric consumption of the customer; and (3) that Meralco was not negligent in the inspection and repair of said electric meter (Manila Electric Co. v. Ma. V. Jose., G.R. No. 152769, February 1 4, 2007, Austria-Martinez).

3. The term franchise. has been construed broadly so as to include, not only authorizations issuing directly from Congress in the form of statute, but also t hose granted by administrative agencies to which the power to grant franchises has be en delegated by Congress. It has been held that the privileges conferred by grant o f local authorities as agents for the state constitute as much a legislative franchise a s though the grant had been made by an act of the legislature.

Water districts fall under the term public utility. a business or service engaged in regular supplying the public with some commodity or service of public consequenc e such as electricity, gas, water, transportation, telephone or telegraph service (Metropolitan Cebu Water District (MCWD) v. Adala, G.R. No. 168914, July 4, 2007 ).

E. CERTIFICATE OF PUBLIC CONVENIENCE

1. The NTC has no power to revo e vested rights and this is borne not simply fro m the statutory language of EO 546 or the respective stipulations in private responden ts franchises, but more so, from the application of the strict scrutiny standard wh ich, despite its weight towards free speech, still involves the analysis of the compe ting interests of the regulator and the regulated.

Since legislative franchises are extended through statutes, they should receive recognition as the ultimate expression of state policy. What the legislative fra nchises of respondents express is that the Congress, after due debate and deliberation, dec lares it as State policy that respondents should have the right to operate broadcast stat ions. The President of the Philippines, by affixing his signature to the law, concurs in s uch state policy.

Allowing the NTC to countermand state policy by revo ing respondent s vested legal right to operate broadcast stations unduly gives to a mere administrative agency veto power over the implementation of the law and the enforcement of especially veste d legal rights. That concern would not arise if Congress had similarly empowered the NTC with the power to revo e a franchisee s right to operate broadcast stations. But as ear lier stated, there is no such expression in the law, and by presuming such right the Court will be acting contrary to the stated state interest as expressed in respondents legislative franchises.

With the legislated state policy strongly favoring the unimpeded operation of t he franchisee s stations, it becomes even more difficult to discern what compelling s tate interest may be fulfilled in ceding to the NTC the general power to cancel the franchisee s CPC s or licenses absent explicit statutory authorization (Santiago C. Divinagracia v. Consolidated Broadcasting System, Inc., et al., G.R. No. 162272, April 7, 2009, Tinga).

F. CARRIAGE OF GOODS BY SEA ACT 1. In the performance of its obligations, an arrastre operator should observe th

e same degree of diligence as that required of a common carrier and a warehouseman.

In a claim for loss filed by the consignee (or the insurer), the burden of proof to show compliance with the obligation to deliver the goods to the appropriate party dev olves upon the arrastre operator. It must prove that the losses were not due to its ne gligence or to that of its employees (Asian Terminals, Inc. vs. Daehan Fire and marine In surance Co., Ltd., 611 SCRA 555).

2. The limitation in the management contract does not apply if the value of the cargo shipment is communicated to the arrastre operator before the discharge of the ca rgoes. However, the arrastre operator is liable for the full value of the merchandise a fter the consignee has paid the arrastre charges only on a basis much lower than the true value of goods (Ibid.).

3. It is to be noted that the Civil Code does not limit the liability of the com mon carrier to a fixed amount per pac age. In all matters not regulated by the Civil Code, the ri ghts and obligations of common carriers are governed by the Code of Commerce and special laws. Thus, the COGSA supplements the Civil Code by establishing a provision lim iting the carrier s liability in the absence of a shipper s declaration of a higher value in the bill of lading (Unsworth Transportation International-Phils., Inc. vs. Court of Appea ls and Pioneer Insurance and Surety Corporation, G.R. No. 166250, July 26, 2010).

4. Under Section 3 (6) of the COGSA, notice of loss or damages must be filed wit hin three days of delivery. Admittedly, respondent did not comply with this provision.

Under the same provision, however, a failure to file a notice of claim within th ree days will not bar recovery if a suit is nonetheless filed within one year from delive ry of the goods or from the date when the goods should have been delivered.

Inasmuch as neither the Civil Code nor the Code of Commerce states a specific prescriptive period on the matter, the COGSA which provides for a one-year perio d of limitation on claims for loss of, or damage to, cargoes sustained during tran sit may be applied suppletorily to the case at bar (Wallem Philippines Shipping, Inc. vs . S.R. Farms, Inc., G.R. No. 161849, July 9, 2010).

G. WARSAW CONVENTION 1. The Warsaw Convention is a treaty commitment voluntarily assumed by the Phili ppine government and, as such, has the force and effect of law in this country.

For the purposes of this Convention the expression "international carriage" mean s any carriage in which, according to the contract made by the parties, the place of d eparture and the place of destination, whether or not there be a brea in the carriage or a transhipment, are situated either within the territories of two High Contracting Parties, or within the territory of a single High Contracting Party, if there is an agree d stopping place within a territory subject to the sovereignty, suzerainty, mandate or auth ority of another Power, even though that Power is not a party to this Convention. A carri age without such an agreed stopping place between territories subject to the soverei gnty, suzerainty, mandate or authority of the same High Contracting Party is not deeme d to be international for the purposes of this Convention.

Thus, when the place of departure and the place of destination in a contract of carriage

are situated within the territories of two High Contracting Parties, said carria ge is deemed an "international carriage" (Lhuiller vs. British Airways, 615 SCRA 380).

2. Under Article 28(1) of the Warsaw Convention, the plaintiff may bring the act ion for damages before (1) the court where the carrier is domiciled; (2) the court where the carrier has its principal place of business; (3) the court where the carrier has an establishment by which the contract has been made; or (4) the court of the place of destination (ibid.).

H. FREIGHT FORWARDER 1. The term freight forwarder. refers to a firm holding itself out to the general public (other than as a pipeline, rail, motor, or water carrier) to provide transportat ion of property for compensation and, in the ordinary course of its business, (1) to as semble and consolidate, or to provide for assembling and consolidating, shipments, and to perform or provide for brea -bul and distribution operations of the shipments; (2) to assume responsibility for the transportation of goods from the place of receipt to the place of destination; and (3) to use for any part of the transportation a carrie r subject to the federal law pertaining to common carriers (Unsworth Transportation Internati onalPhils., Inc. vs. Court of Appeals and Pioneer Insurance and Surety Corporation, G.R. No. 166250, July 26, 2010).

2. A freight forwarder s liability is limited to damages arising from its own negl igence, including negligence in choosing the carrier; however, where the forwarder contr acts to

deliver goods to their destination instead of merely arranging for their transpo rtation, it becomes liable as a common carrier for loss or damage to goods. A freight forwar der assumes the responsibility of a carrier, which actually executes the transport, even though the forwarder does not carry the merchandise itself (ibid.).

-o0oCORPORATION LAW

A. INTRA-CORPORATE DISPUTE 1. The Court then combined the two tests and declared that jurisdiction should b e determined by considering not only the status or relationship of the parties, bu t also the nature of the question under controversy. This two-tier test was adopted in the recent case of Speed Distribution, Inc. v. Court of Appeals:

To determine whether a case involves an intra-corporate controversy, and is to be heard and decided by the branches of the RTC specifically designated by the Court to try and decide such cases, two elements must concur: (a) the status or relationship of the parties; and (2) the nature of the question that i s the subject of their controversy..

The first element requires that the controversy must arise out of intra-corporat e or partnership relations between any or all of the parties and the corporation, par tnership, or association of which they are stoc holders, members or associates; between an y or all of them and the corporation, partnership, or association of which they are stoc holders, members, or associates, respectively; and between such corporation, partnership, or association and the State insofar as it concerns their individual franchises. Th e second element requires that the dispute among the parties be intrinsically connected w ith the regulation of the corporation. If the nature of the controversy involves matters that are purely civil in character, necessarily, the case does not involve an intra-corpo

rate controversy (Oscar C. Reyes v. RTC of Ma ati, Zenith Insurance Corporation, and Rodrigo C. Reyes, G.R. No. 165744, August 11, 2008).

2. An intra-corporate dispute is understood as a suit arising from intra-corpora te relations or between or among stoc holders or between any or all of them and the corporati on. Applying what has come to be nown as the relationship test, it has been held th at the types of actions embraced by the definition include the following suits:

(a) between the corporation, partnership or association and the public; (b) between the corporation, partnership or association and its stoc holders, partners, members, or officers; (c) between the corporation, partnership or association and the State insofar as its franchise, permit or license to operate is concerned; and, (d) among the stoc holders, partners or associates themselves.

As the definition is broad enough to cover all inds of controversies between stoc holders and corporations, the traditional interpretation was to the effect that the relationship test broo ed no distinction, qualification or any exemption whatsoe ver.

Under the nature of the controversy test, the dispute must not only be rooted in the existence of an intra-corporate relationship, but must also refer to the enforce ment of the parties correlative rights and obligations under the Corporation Code as well as the

internal and intra-corporate regulatory rules of the corporation. The combined application of the relationship test and the nature of the controversy test has, consequently, become the norm in determining whether a case is an intra-corporat e controversy or is purely civil in character (Strategic Alliance Development Corp oration vs. Star Infrastructure Development Corporation Corporation, BEDE S. Tabalingcos, et al., G.R. No. 187872, November 17, 2010).

B. INVESTMENTS 1. An investment contract is defined in the Amended Implementing Rules and Regul ations of RA 8799 as a contract, transaction or scheme (collectively contract ) whereby a person invests his money in a common enterprise and is led to expect profits pri marily from the efforts of others..

Our definition of an investment contract traces its roots from the 1946 United S tates (US) case of SEC v. W.J. Howey Co. In this case, the US Supreme Court was confronted with the issue of whether the Howey transaction constituted an investment contract. un der the Securities Act s definition of security.. The US Supreme Court, recognizing tha t the term investment contract. was not defined by the Act or illumined by any legislat ive report, held that Congress was using a term whose meaning had been crystallized. under the state s blue s y. laws in existence prior to the adoption of the Securiti es Act. Thus, it ruled that the use of the catch-all term investment contract. indicated a congressional intent to cover a wide range of investment transactions. It establ ished a test to determine whether a transaction falls within the scope of an investment contract..

Known as the Howey Test, it requires a transaction, contract, or scheme whereby a person (1) ma es an investment of money, (2) in a common enterprise, (3) with th e expectation of profits, and (4) to be derived solely from the efforts of others.

Although the proponents must establish all four elements, the US Supreme Court stressed that the Howey Test embodies a flexible rather than a static principle,

one that is capable of adaptation to meet the countless and variable schemes devised by t hose who see the use of the money of others on the promise of profits.. Needless to state, any investment contract covered by the Howey Test must be registered under the Securities Act, regardless of whether its issuer was engaged in fraudulent pract ices (Power Homes Unlimited Corp. v. Securities And Exchange Commission, February 26, 2008).

C. DOCTRINE OF SEPARATE PERSONALITY/ CORPORATE ENTITY THEORY/ CORPORATE FICTION 1. Where the Presidential Commission on Good Government (PCGG) was only after a stoc holder s shares of stoc in a corporation, it was improper to sequester the corporation itself (Presidential Commission on Good Government vs. H.E. Heacoc , Inc., 617 SCRA 150).

2. Elementary is the rule that a corporation is invested by law with a personali ty separate and distinct from those of the persons composing it and from that of any other l egal entity to which it may be related. Mere ownership by a single stoc holder or by another corporation of all or nearly all of the capital stoc of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.

In labor cases, corporate directors and officers may be held solidarily liable w ith the corporation for the termination of employment only if done with malice or in bad faith.

Bad faith does not connote bad judgment or negligence; it imports a dishonest pu rpose or some moral obliquity and conscious doing of wrong; it means breach of a nown duty through some motive or interest or ill will; it parta es of the nature of f raud (Wensha Spa Center, Inc. and/or Xu Zhi Jie vs. Loreta T. Yung, G.R. No. 185122, August 16, 2010).

3. The fact that a corporation owns all of the stoc s of another corporation, ta en alone, is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiary s separate existence shall be respected, and the liability of the parent corporation, as well as the subsidiary shall be confined to those arising in their respective business. A corporation has a separate personality distinct from its stoc holders and from other corporations to which it may be conducted. This sepa rate and distinct personality of a corporation is a fiction created by law for conven ience and to prevent injustice (Nisce v. Equitable PCI Ban , Inc., G.R. No. 1674345, Febru ary 19, 2007).

D. AUTHORITY; PIERCING THE VEIL OF CORPORATE FICTION 1. Under the Corporation Law, unless otherwise provided, corporate powers are ex ercised by the board of directors.

While the veil of separate corporate personality may be pierced when the corpora tion is merely an adjunct, a business conduit, or alter ego of a person, the mere owners hip by a single stoc holder of even all or nearly all of the capital stoc s of a corporat ion is not by itself a sufficient ground to disregard the separate corporate personality.

The elements determinative of the applicability of the doctrine of piercing the veil of corporate fiction follow:

(a) Control, not mere majority or complete stoc control, but complete domination, not only of finances but of policy and business practice in

respect to the transaction attac ed so that the corporate entity as to this transaction had, at the time, no separate mind, will or existence of its own; (b) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of the plaintiff s legal rights; and (c) The control and breach of duty must proximately cause the injury or unjust loss complained of.

The absence of any one of these elements prevents piercing the corporate veil.. I n applying the instrumentality or alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defen dant s relationship to that operation.

In relation to the second element, to disregard the separate juridical personali ty of a corporation, the wrongdoing or unjust act in contravention of a plaintiff s legal rights must be clearly and convincingly established; it cannot be presumed. Without a demonstration that any of the evils sought to be prevented by the doctrine is pr esent, it does not apply (Ryuichi Yamamoto v. Nishino Leather Industries Inc., G.R. No. 15 0283, April 16, 2008).

2. The general rule remains that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. If a corporation, however,

consciously lets one of its officers, or any other agent, to act within the scop e of an apparent authority, it will be estopped from denying such officer s authority (Wes tmont Ban , et al. v. Inland Construction and Dev t Corp. & Westmont Ban , et. al. v. Co urt of Appeals et al., G.R. No. 123650/ G.R. No. 123822, March 23, 2009, Carpio-Morales ).

3. If the supposed authority of petitioner is found to be defective, it is as if no demand was ever made, hence, the prosecution for estafa cannot prosper (Vincent E. Omictin v. Court of Appeals, et al., G.R. No. 148004, January 22, 2007, Azcuna).

4. While a corporation may exist for any lawful purpose, the law will regard it as an association of persons or, in case of two corporations, merge them into one, whe n its corporate legal entity is used as a cloa for fraud or illegality. This is the d octrine of piercing the veil of corporate fiction. The doctrine applies only when such corp orate fiction is used to defeat public convenience, justify wrong, protect fraud, or d efend crime, or when it is made as a shield to confuse the legitimate issues, or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as t o ma e it merely an instrumentality, agency, conduit or adjunct of another corporation.

To reiterate, a corporation is a juridical entity with legal personality separat e and distinct from those acting for and in its behalf and, in general, from the peopl e comprising it. The rule is that obligations incurred by the corporation, acting through its directors, officers, and employees, are its sole liabilities.

The rule is still that the doctrine of piercing the corporate veil applies only when the

corporate fiction is used to defeat public convenience, justify wrong, protect f raud, or defend crime. In the absence of malice, bad faith, or a specific provision of la w ma ing a corporate officer liable, such corporate officer cannot be made personally lia ble for corporate liabilities (J. F. McLeod vs. NLRC, et al., G.R. No. 146667, January 2 3, 2007, Carpio). 5. Doctrine dictates that a corporation is invested by law with a personality se parate and distinct from those of the persons composing it, such that, save for certain exc eptions, corporate officers who entered into contracts in behalf of the corporation canno t be held personally liable for the liabilities of the latter. Personal liability of a cor porate director, trustee, or officer, along (although not necessarily) with the corporation, may validly attach, as a rule, only when (a) he assents to a patently unlawful act of the corporation, or when he is guil ty of bad faith or gross negligence in directing its affairs, or when there is a confl ict of interest resulting in damages to the corporation, its stoc holders, or other persons; (b) he consents to the issuance of watered down stoc s or who, having nowledge thereof, does not forthwith file with the corporate secretary his written object ion thereto; (c) he agrees to hold himself personally and solidarily liable with the corporat ion; or (d) he is made by a specific provision of law personally answerable for his corp orate action (Queensland-To yo Commodities, Inc., et al. vs. Thomas George, G.R. No. 172727, September 8, 2010). 6. A corporation is an artificial being vested by law with a personality distinc t and separate from those of the persons composing it as well as from that of any other entity to which it may be related. The first consequence of the doctrine of legal entity of the separate personality of the corporation is that a corporation may not be made to answer f or acts

and liabilities of its stoc holders or those of legal entities to which it may b e connected or vice versa.

The notion of separate personality, however, may be disregarded under the doctri ne piercing the veil of corporate fiction. as in fact the court will often loo at t he corporation as a mere collection of individuals or an aggregation of persons und erta ing business as a group, disregarding the separate juridical personality of the corp oration unifying the group. Another formulation of this doctrine is that when two (2) bu siness enterprises are owned, conducted and controlled by the same parties, both law an d equity will, when necessary to protect the rights of third parties, disregard th e legal fiction that two corporations are distinct entities and treat them as identical or one and the same.

Whether the separate personality of the corporation should be pierced hinges on obtaining facts, appropriately pleaded or proved. However, any piercing of the corporate veil has to be done with caution, albeit the Court will not hesitate t o disregard the corporate veil when it is misused or when necessary in the interest of justi ce. After all, the concept of corporate entity was not meant to promote unfair objectives (General Credit Corp. v. Alsons Devt. & Investment Corp., et al., G.R. No. 154975, Januar y 29, 2007, Garcia).

7. The legal fiction that a corporation has a personality separate and distinct from the stoc holders and members may be disregarded if it is used as a means to perpetua te fraud or an illegal act or as a vehicle for the evasion of an existing obligatio n, the circumvention of statutes, or to confuse legitimate issues.

Absent any proof of fraud or double dealing, the doctrine of piercing the veil o f corporate fiction would not apply (Aratea v. Suico, G.R. No. 170284, March 16, 2 007).

8. The rule is that a director is not personally liable for the debts of the cor poration, which has a separate legal personality of its own. Section 31 of the Corporation Code ma es a director personally liable for corporate debts if he willfully and nowingly vot es for or assents to patently unlawful acts of the corporation, or if he is guilty of gros s negligence or bad faith in directing the affairs of the corporation.

In order to thus pierce the veil of be established on, G.R. No. 147590,

hold a director personally liable for debts of the corporation, and corporate fiction, the bad faith or wrongdoing of the director must clearly and convincingly (Carag v. National Labor Relations Commissi April 2, 2007).

9. The doctrine of piercing the corporate veil applies only in three (3) basic i nstances, namely: (a) when the separate and distinct corporate personality defeats public convenie nce, as when the corporate fiction is used as a vehicle for the evasion of an existin g obligation; (b) in fraud cases, or when the corporate entity is used to justify a wrong, or defend a crime; or (c) is used in alter ego cases. In the absence of malice, bad faith, or a specific provision of law ma ing a cor porate officer liable, such corporate officer cannot be made personally liable for corp orate liabilities (Prisma Construction & Development Corporation vs. Menchavez, 614 SC RA 590).

E. CERTIFICATES OF STOCK; STOCK DIVIDENDS

1. A certificate of stoc is the evidence of a holder s interest and status in a c orporation. It is a written instrument signed by the proper officer of a corporation stating or ac nowledging that the person named in the document is the owner of a designated number of shares of its stoc . It is prima facie evidence that the holder is a s hareholder of a corporation.

Absent a written document, petitioners must prove, at the very least, possession of the certificates of shares in the name of the alleged seller.

The mere inclusion as shareholder of petitioners in the General Information Shee t of PFSC is insufficient proof that they are shareholders of the company. The Genera l Information Sheet alone does not conclusively prove that they are shareholders o f PFSC. The information in the document will still have to be correlated with the corpor ate boo s of PFSC. As between the General Information Sheet and the corporate boo s, it is the latter that is controlling (David C. Lao v. Dionisio C. Lao, G.R. No. 170585 , October 6, 2008). 2. By their very nature, shares of common stoc , while giving the stoc holder th e right to vote, do not guarantee that the vote of the stoc holder will prevail. That is no n sequitur (Philippine Coconut Producers Federation, Inc. vs. Republic, 612 SCRA 255).

3. The right of a transferee to have stoc s transferred to its name is an inhere nt right flowing from its ownership of the stoc s. The certificate is not a stoc in the corporation but is merely evidence of the holder s interest and status in the corporation, his ownership of the share represented thereby it is not in law the equivalent of su ch ownership, and while it expresses the contract between the corporation and the stoc holder, but is not essential to the existence of a share of stoc or the na ture of the relation of shareholder to the corporation (Ma ati Sports Club, Inc. vs. Cheng, 621 SCRA

103).

4. Section 40 (e) of the Public Service Act (PSA), as amended on March 15, 1984, pursuant to Batas Pambansa Blg. 325, authorized the NTC to collect from public telecommunications companies Supervision and Regulation Fees (SRF) of PhP0.50 fo r every PhP100 or a fraction of the capital and stoc subscribed or paid for of a stoc corporation, partnership or single proprietorship of the capital invested, or of the property and equipment, whichever is higher.

Dividends, regardless of the form these are declared, that is, cash, property or stoc s, are valued at the amount of the declared dividend ta en from the unrestricted retain ed earnings of a corporation. The value of the declaration in the case of a stoc d ividend is the actual value of the original issuance of said stoc s. It is the distribution of current or accumulated earnings to the shareholders of a corporation pro rata based on the number of shares owned.. Such distribution in whatever form is valued at the declared a mount or monetary equivalent. Thus, it cannot be said that no consideration is involved in the issuance of sto c dividends. In fact, the declaration of stoc dividends is a in to a forced purch ase of stoc s. By declaring stoc dividends, a corporation ploughs bac a portion or it s entire unrestricted retained earnings either to its wor ing capital or for capital asse t acquisition or investments. It is simplistic to say that the corporation did not receive any actual payment for these. When the dividend is distributed, it ceases to be a property of the corporation as the entire or portion of its unrestricted retained earnings is di stributed pro rata to corporate shareholders.

When stoc dividends are distributed, the amount declared ceases to belong to th e corporation but is distributed among the shareholders. Consequently, the unrestr icted retained earnings of the corporation are diminished by the amount of the declare d dividend while the stoc holders equity is increased. Furthermore, the actual paym ent is the cash value from the unrestricted retained earnings that each shareholder foregoes for additional stoc s/shares which he would otherwise receive as required by the Corporation Code to be given to the stoc holders subject to the availability and conditioned on a certain level of retained earnings. Elsewise put, where the unrestricted retained earnings of a corporation are more than 100% of the paid-in capital stoc , the corporate board of directors is mandated to declare dividends which the shareholders will receive in cash unless otherwise declared as property or stoc dividends, which in the latter case the stoc holders are force d to forego cash in lieu of property or stoc s.

In essence, therefore, the stoc holders by receiving stoc dividends are forced to exchange the monetary value of their dividend for capital stoc , and the monetar y value they forego is considered the actual payment for the original issuance of the st oc s given as dividends. Therefore, stoc dividends acquired by shareholders for the moneta ry value they forego are under the coverage of the SRF and the basis for the latter is such monetary value as declared by the board of directors. Moreover, the Trust Fund. doctrine bolsters the correctness of the assessments ma de by the NTC. As a fund in trust for creditors in case of liquidation, the actual value of the subscriptions and the value of stoc dividends distributed may not be decreased or increased by the fluctuating mar et value of the stoc s. Thus, absent any showin g by PLDT of the actual payment it received for the original issuance of its capital stoc , the assessments made by the NTC, based on the schedule of outstanding capital stoc of PLDT recorded at historical value payments made, is deemed correct (PLDT vs. Nat ional Telecommunications Comm. et al., G.R. No. 152685, December 4, 2007, Velasco, Jr. ).

F. CORPORATE EXISTENCE 1. Domestic corporations owe their corporate existence and their privilege to do business to the government; it is therefore fair for the government to require them to ma e a reasonable contribution to the public expenses (Chamber of Real Estate and Build ers Associations, Inc. vs. Romulo, 614 SCRA 605).

G. BOARD OF DIRECTORS/ TRUSTEES 1. Under section 30 of the Corporation Code, the directors of a corporation shal l not receive any compensation for being members of the board of directors, except for reasona ble per diems. The two instances where the directors are to be entitled to compensation shall be when it is fixed by the corporation s by-laws or when the stoc holders, representi ng at least a majority of the outstanding capital stoc , vote to grant the same at a r egular or special stoc holder s meeting, subject to the qualification that, in any of the tw o situations, the total yearly compensation of directors, as such directors, shall in no case exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year (Gabriel C. Singson, et al. vs. Commission on Audit, G.R. No. 159355, August 9, 2010).

2. Corporate directors and officers are only solidarily liable with the corporat ion for termination of employment of corporate employees if effected with malice or in b ad faith. Bad faith does not connote bad judgment or negligence; it imports dishone st

purpose or some moral obliquity and conscious doing of wrong; it means breach of un nown duty through some motive or interest or ill will; it parta es of the nat ure of fraud. To sustain such a finding, there should be evidence on record that an off icer or director acted maliciously or in bad faith in terminating the employee (SHS Perf orated Materials, Inc., et al. vs. Manuel F. Diaz, G.R. No. 185814, October 13, 2010).

3. Under section 25 of the Corporation Code, the corporate officers are the pres ident, secretary, treasurer and such other officers as may be provided in the by-laws ( WPP Mar eting Communications, Inc. vs. Galera, 616 SCRA 422).

4. Conformably with Section 25 of the Corporation Code, a position must be expre ssly mentioned in the by-laws in order to be considered as a corporate office. Thus, the creation of an office pursuant to or under a by-law enabling provision is not en ough to ma e a position a corporate office. Guerrea v. Lezama, the first ruling on the m atter, held that the only officers of a corporation were those given that character either b y the Corporation Code or by the by-laws; the rest of the corporate officers could be considered only as employees or subordinate officials.

This interpretation is the correct application of section 25 of the Corporation Code, which plainly states that the corporate officers are the president, secretary, t reasurer and such other officers as may be provided for in the by-laws. Accordingly, the corp orate officers in the context of PD 902-A are exclusively those who are given that cha racter either by the Corporation Code or by the corporation s by-laws.

Board of directors could not validly delegate the power to create a corporate of fice to the

President, in light of section 25 of the Corporation Code requiring the board of directors itself to elect the corporate officers. Verily, the power to elect the corporate officers was a discretionary power that the law exclusively vested in the board of directors, a nd could not be delegated to subordinate officers or agents. The decision in Nacpil v. Intercontinental Broadcasting Corporation should no longer be controlling (Matli ng Industrial and Commercial Corp., et al. vs. Ricardo R. Coros, G.R. No. 157802, O ctober 13, 2010).

H. POWER TO SUE 1. The power of the corporation to sue and be sued in any court is lodged with t he board of directors that exercises its corporate powers (Republic vs. Coalbrine Internatio nal Philippines, Inc., 617 SCRA 491).

2. Only individuals vested with authority by a valid board resolution may sign t he certificate of non-forum shopping on behalf of a corporation. Failure to provide a certificate of non-forum shopping or to accompany with proof of the signatory s authority are sufficient grounds to dismiss the petition (Republic vs. Coalbrine International Philippines, Inc., 617 SCRA 491).

3. When the petitioner is a corporation, the certification of non-forum shopping should obviously be executed by a natural person to whom the power to execute such has been validly conferred by the board of directors and/or duly authorized officers and agents (Mediserv, Inc. vs. Court of Appeals, 617 SCRA 284).

I. JURISDICTION

1. The power to sequester ill-gotten wealth is one of the powers granted to PCGG . A conservator of sequestered shares has the duty to ensure that the sequestered pr operties are not dissipated under its watch. PCGG s act of questioning the resulting diluti on of the sequestered Domsat shares brought about by the management contract between Domsat and Investa properly lies within the jurisdiction of the Sandiganbayan (R epublic of the Philippines v. Investa Corporation et. al. G.R. No. 135466, May 7, 2008).

J. DISSOLUTION 1. Under Section 122 of the Corporation Code, a dissolved corporation shall neve rtheless continue as a body corporate for three (3) years for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs , to dispose and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. Within those three (3) years, the cor poration may appoint a trustee or receiver who shall carry out the said purposes beyond t he three (3)-year winding-up period. Thus, a trustee of a dissolved corporation may comme nce a suit which can proceed to final judgment even beyond the three (3)-year period o f liquidation.

The board retains its authority to act on behalf of its members, albeit, in a li mited capacity. It may commence suits on behalf of its members but not continue managi ng the fund for purposes of maximizing profits (Metropolitan Ban & trust Company, Inc. vs. Board of Trustees of Riverside Mills Corp. Provident and Retirement Fund, et al. , G.R. No. 176959, September 8, 2010).

K. LIQUIDATION/ RECEIVERSHIP/ REHABILITATION 1. Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful opera tion and solvency.

The fact that there is a pending case for the annulment of the foreclosure proce edings and auction sales is of no moment. Until a court of competent jurisdiction annul s the foreclosure sale of the properties involved, petitioner is bereft of a valid tit le over the properties. In fact, it is the trial court s ministerial duty to grant a possessor y writ over the properties.

Consequently, the CA was correct in upholding the RTC s dismissal of the petition for rehabilitation in view of the fact that the titles to petitioner s properties have already passed on to respondent ban and petitioner has no more assets to spea of, spec ially since petitioner does not dispute the fact that the properties which were forecl osed by respondent ban comprise the bul , if not the entirety, of its assets.

It should be stressed that the Interim Rules was enacted to provide for a summar y and non-adversarial rehabilitation proceedings. This is in consonance with the comme rcial nature of a rehabilitation case, which is aimed to be resolved expeditiously for the benefit of all the parties concerned and the economy in general (New Frontier Su gar Corp. v. RTC, etc., et al., G.R. No. 165001, January 31, 2007, Austria-Martinez).

2. The approval of the rehabilitation plan and the appointment of a rehabilitati on receiver merely suspend the actions and claims against the corporation. A mortgagee s prefe rred status over the unsecured creditors relative to the mortgage liens is retained, but the enforcement of such preference is suspended.

The purpose of rehabilitation proceedings is to enable the company to gain new l ease of life and thereby allows creditors to be paid their claims from its earnings (Met ropolitan Ban and Trust Company v. ASB Holdings, Inc., G.R. No. 166917, February 27, 2007 ).

3. Where the liquidators of a corporation placed on receivership illegally withd rew the certificates of stoc from the custodian ban without the nowledge and consent of the owner and authority of the Securities and Exchange Commission, adding the procee ds of the sale to the assets of the corporation, the owner became a creditor of sai d corporation (Cordova v. Reyes Daway Lim Bernardo Lindo Rosales Law Offices, G.R. No. 146555, July 3, 2007). 4. Corporate rehabilitation connotes the restoration of the debtor to a position of successful operation and solvency, if it is shown that its continued operation is economica lly feasible and its creditors can recover by way of the present value of payments p rojected in the rehabilitation plan, more if the corporation continues as a going concern than if it is immediately liquidated.

The governing law concerning rehabilitation and suspension of actions for claims against corporations is PD 902-A, as amended.

Section 6(c) of PD 902-A mandates that, upon appointment of a management committee, rehabilitation receiver, board, or body, all actions for claims again st corporations, partnerships or associations under management or receivership pend ing before any court, tribunal, board, or body shall be suspended. The automatic sus pension of an action for claims against a corporation under a rehabilitation receiver or management committee embraces all phases of the suit, that is, the entire procee dings of an action or suit and not just the payment of claims.

As long as the corporation is under a management committee or a rehabilitation receiver, all actions for claims against it, whether for money or otherwise, mus t yield to the greater imperative of corporate revival, excepting only claims for payment o f

obligations incurred by the corporation in the ordinary course of business.

The actions that were suspended cover all claims against a distressed corporatio n whether for damages founded on a breach of contract of carriage, labor cases, co llection suits or any other claims of a pecuniary nature. More importantly, the new rules on corporate rehabilitation, as well as the interim rules, provide an all-encompass ing definition of the term and, thus, include all claims or demands of whatever natu re or character against a debtor or its property, whether for money or otherwise. Ther e is no doubt that petitioner s claim in this case, arising as it does from his alleged il legal dismissal, is a claim covered by the suspension order issued by the SEC, as it i s one for pecuniary consideration. The reason behind the imperative nature of a suspension or stay order in relatio n to the creditors claims cannot be downplayed, for indeed the indiscriminate suspension o f actions for claims intends to expedite the rehabilitation of the distressed corp oration by enabling the management committee or the rehabilitation receiver to effectively exercise its/his powers free from any judicial or extrajudicial interference that might u nduly hinder or prevent the rescue of the debtor company. To allow such other actions to continue would only add to the burden of the management committee or rehabilitat ion receiver, whose time, effort and resources would be wasted in defending claims a gainst the corporation, instead of being directed toward its restructuring and rehabili tation (Castillo vs. Uniwide Warehouse Club, Inc., 619 SCRA 641).

G. FOREIGN CORPORATIONS 1. An unlicensed foreign corporation doing business in the Philippines cannot su e before Philippine courts. An unlicensed foreign corporation not doing business in the Philippines can sue before the Philippine courts.

An essential condition to be considered as doing business. in the Philippines is the actual performance of specific commercial acts within the territory of the Phili ppines, which has no jurisdiction over commercial acts performed in foreign territories (B. Van Zuiden Bros., Ltd. v. GTVL Manufacturing Industries, Inc., G.R. No. 147905, May 28, 2007).

2. Where a foreign corporation does business in the Philippines without the prop er license, it cannot maintain any action or proceeding before Philippine courts as provided under section 133 of the Corporation Code. The determination of whether a foreign corporation is doing business in the Phil ippines must be based on the facts of each case. Court gives emphasis to the importance of the element of continuity of commercial activities to constitute doing business in t he Philippines.

The Implementing Rules and Regulations of RA 7042 (Foreign Investments Act of 19 91) provide under Section 1(f), Rule I, that doing business does not include the fol lowing acts: (a) Mere investment as a shareholder by a foreign entity in domestic corporation s duly registered to do business, and/or the exercise of rights as such investor; (b) Having a nominee director or officer to represent its interests in such corporation; (c) Appointing a representative or distributor domiciled in the Philippines whic h transacts business in the representative s or distributor s own name and account; (d) The publication of a general advertisement through any print or broadcast media; (e) Maintaining a stoc of goods in the Philippines solely for the purpose of ha ving the same processed by another entity in the Philippines;

(f) Consignment by a foreign entity of equipment with a local company to be used in the processing of products for export; (g) Collecting information in the Philippines; and (h) Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis, such as installing in the Philippines machinery it ha s manufactured or exported to the Philippines, servicing the same, training domestic wor ers to operate it, and similar incidental services. To constitute doing business, the activity underta en in the Philippines should involve profit-ma ing. Besides, under Section 3(d) of RA 7042, soliciting purchases has been deleted from the enumeration of acts or activities which constitute doing busine ss.

An exporter in one country may export its products to many foreign importing cou ntries without performing in the importing countries specific commercial acts that woul d constitute doing business in the importing countries. The mere act of exporting from one s own country, without doing any specific commercial act within the territory of the importing country, or without opening an office or appointing an agent cannot be deemed as doing business in the Philippines (Cargill, Inc. vs. Intra Strata Assu rance Corp., 615 SCRA 304).

-o0o-

CODE OF COMMERCE

A. CLAIMS FOR DAMAGES; NOTICE OF CLAIM 1. Under the Code of Commerce, the notice of claim must be made within twenty-fo ur (24) hours from receipt of the cargo if the damage is not apparent from the outside o f the pac age. For damages that are visible from the outside of the pac age, the claim must be made immediately. The periods above, as well as the manner of giving notice m ay be modified in the terms of the bill of lading, which is the contract between the p arties.

Provisions specifying a time to give notice of damage to common carriers are ord inarily to be given a reasonable and practical, rather than a strict construction. We gi ve due consideration to the fact that the final destination of the damaged cargo was a school institution where authorities are bound by rules and regulations governing their actions. Understandably, when the goods were delivered, the necessary clearance had to be made before the pac age was opened. Upon opening and discovery of the damaged condition of the goods, a report to this effect had to pass through the proper c hannels before it could be finalized and endorsed by the institution to the claims depar tment of the shipping company.

The call to petitioner was made two days from delivery, a reasonable period cons idering that the goods could not have corroded instantly overnight such that it could on ly have sustained the damage during transit. Moreover, petitioner was able to immediatel y inspect the damage while the matter was still fresh. In so doing, the main objec tive of the prescribed time period was fulfilled. Thus, there was substantial compliance with the notice requirement in this case (Aboitiz Shipping Corporation v. Court of Ap peals, et al., G.R. No. 121833/G.R. No. 130752, October 17, 2008).

2. Article 366 of the Code of Commerce clearly requires that the claim for damag e or

average must be made within 24 hours from receipt of the merchandise if, as in t his case, damage cannot be ascertained merely from the outside pac aging of the cargo.

The requirement to give notice of loss or damage to the goods is not an empty formalism. The fundamental reason or purpose of such a stipulation is not to rel ieve the carrier from just liability, but reasonably to inform it that the shipment has b een damaged and that it is charged with liability therefor, and to give it an opport unity to examine the nature and extent of the injury. This protects the carrier by afford ing it an opportunity to ma e an investigation of a claim while the matter is still fresh and easily investigated so as to safeguard itself from false and fraudulent claims.

We have construed the 24-hour claim requirement as a condition precedent to the accrual of a right of action against a carrier for loss of, or damage to, the go ods. The shipper or consignee must allege and prove the fulfillment of the condition. Oth erwise, no right of action against the carrier can accrue in favor of the former (UCPB I nsurance Co. Inc. v. Aboitiz Shipping Corp., et al., G.R. No. 168433, February 10, 2009, Tinga).

-o0oSECURITIES REGULATION CODE

A. REGISTRATION OF SECURITIES

1. The Revised Securities Act was approved on 23 February 1982. The fact that th e Full Disclosure Rules were promulgated by the SEC only on 24 July 1996 does not rende r ineffective in the meantime Section 36 of the Revised Securities Act. It is alre ady unequivocal that the Revised Securities Act requires full disclosure and the Ful l Disclosure Rules were issued to ma e the enforcement of the law more consistent, efficient and effective. The effectivity of a statute which imposes reportorial requirements cannot be suspended by the issuance of specified forms, especially where complia nce therewith may be made even without such forms. The forms merely made more effici ent the processing of requirements already identified by the statute.

For the same reason, the Court of Appeals made an evident mista e when it ruled that no civil, criminal or administrative actions can possibly be had against the respon dents in connection with Sections 8, 30 and 36 of the Revised Securities Act due to the a bsence of implementing rules. These provisions are sufficiently clear and complete by them selves. Their requirements are specifically set out, and the acts which are enjoined are determinable. In particular, Section 8 of the Revised Securities Act is a straig htforward enumeration of the procedure for the registration of securities and the particul ar matters which need to be reported in the registration statement thereof. The lac of implementing rules cannot suspend the effectivity of these provisions (Securitie s and Exchange Commission v. Interport Resources Corp. G.R. No. 135808, October 6, 200 8).

B. COMMODITY FUTURES TRADING 1. Before a futures commodity merchant can be held liable under Section 20 of th e Revised Rules and Regulations on Commodity Futures Trading, there must be proof that it nowingly. permitted an unlicensed person to commit the prohibited acts. The law, therefore, prescribed an additional element to the offense (Queensland-To yo Com modities, Inc., et al. v. M. Matsuda, G.R. No. 159008, January 23, 2007).

C. SUSPENSION OF ACTIONS FOR CLAIMS 1. Given the factual milieu obtaining in this case, it cannot be said that the d ecision of the Labor Arbiter, or the decision/dismissal order and writ of execution issu ed by the NLRC, could ever attain final and executory status. The Labor Arbiter comple tely disregarded and violated Section 6(c) of Presidential Decree 902-A, as amended, which categorically mandates the suspension of all actions for claims against a corpor ation placed under a management committee by the SEC. Thus, the proceedings before the Labor Arbiter and the order and writ subsequently issued by the NLRC are all nul l and void for having been underta en or issued in violation of the SEC suspension Ord er dated December 28, 1994. As such, the Labor Arbiter s decision, including the dism issal by the NLRC of Rubberworld s appeal, could not have achieved a final and executory status.

A bond is only mandatory from an appeal of the decision itself on the merits of the laborers' money claims to ensure payment thereof.

The applicability of the provisions of Section 5 (d) and Section 6 (c) of PD 902 -A, as amended, reorganizing the SEC, vesting it with additional powers and placing it under the Office of the President had already been resolved by this Court in its earli er decisions in Rubberworld (Phils.), Inc., or Julie Yap Ong v. NLRC, Marilyn F. Ar ellano, et. al. and Rubberworld (Phils.), Inc. and Julie Y. Ong v. NLRC, Aquino, Magsalin, et. a l. (Ling od Manggagawa sa Rubberworld, et al. v. Rubberworld Inc., et al., G.R. No. 153882, January 29, 2007, Garcia).

D. JURISDICTION

1. Upon the enactment of RA 8799, otherwise nown as The Securities Regulation Co de. which too effect on August 8, 2000, the jurisdiction of the SEC over intra-corp orate controversies and other cases enumerated in Section 5 of PD 902-A has been trans ferred to the courts of general jurisdiction, or the appropriate RTC.

Concomitant to said power is the authority to issue orders necessary or incident al to the carrying out of the powers expressly granted to it. Thus, the RTC may, in approp riate cases, order the holding of a special meeting of stoc holders or members of a corporation involving an intra-corporate dispute under its supervision.

Under Section 3, Rule 6 of the Interim Rules of Procedure Governing Intra-Corpor ate Controversies under RA 8799, an election contest must be filed within 15 days fro m the date of the election. (A. Z. Yujuico, et al. v. C. T. Quiambao, et al., G.R. No. 168639, January 29, 2007, Sandoval-Gutierrez).

2. A criminal charge for violation of the Securities Regulation Code is a specia lized dispute. Hence, it must first be referred to an administrative agency of special competence, i.e., the SEC. Under the doctrine of primary jurisdiction, courts wi ll not determine a controversy involving a question within the jurisdiction of the administrative tribunal, where the question demands the exercise of sound administrative discretion requiring the specialized nowledge and expertise of s aid administrative tribunal to determine technical and intricate matters of fact. Th e Securities Regulation Code is a special law. Its enforcement is particularly ves ted in the SEC. Hence, all complaints for any violation of the Code and its implementing ru les and regulations should be filed with the SEC. Where the complaint is criminal in nat ure, the SEC shall indorse the complaint to the DOJ for preliminary investigation and prosecution as provided in Section 53.1 of the Securities Regulation Code (M. V. Baviera v. E. Paglinawan, et al./M. V. Baviera v. Standard Chartered Ban , et al., G.R. No 168380/ G.R. No 170602. February 8, 2007, Sandoval-Gutierrez).

3. Rule 19(13) of the Amended Implementing Rules and Regulations of the Securiti es Regulation Code, to wit:

If there shall be violation of this Rule by pursuing a purchase of equity shares of a public company at threshold amounts without the required tender offer, the Commission, upon complaint, may nullify the said acquisition and direct the holding of a tender offer. This shall be without prejudice to the imposition of other sanctions under the Code..

The rule emanates from the SEC s power and authority to regulate, investigate or supervise the activities of persons to ensure compliance with the SRC, more spec ifically the provision on mandatory tender offer under Section 19.

Section 5.1(n) of the same statute bestows upon the SEC the general adjudicative power which is implied from the express powers of the Commission or which is incidenta l to, or reasonably necessary to carry out, the performance of the administrative duti es entrusted to it. As a regulatory agency, it has the incidental power to conduct hearings and render decisions fixing the rights and obligations of the parties. In fact, to deprive the SEC of this power would render the agency inutile, because it would become powerless to regulate and implement the law.

The power conferred upon the SEC to promulgate rules and regulations is a legisl ative recognition of the complexity and the constantly-fluctuating nature of the mar e t and

the impossibility of foreseeing all the possible contingencies that cannot be ad dressed in advance (Cemco Holdings, Inc. vs. National Life Insurance Co. of the Phil. Inc., G.R. No. 171815, August 7, 2007).

4. To countenance petitioner s posturing would be to unduly delimit the broad powe rs granted to the SEC under PD 902-A, specifically the all-encompassing provision i n Section 3 that the SEC has absolute jurisdiction, supervision and control. over a ll corporations who are the grantees of primary franchises and/or license or permit issued by the government to operate in the Philippines. There is no gainsaying, therefo re, that the SEC is authorized to determine the fees of receivers and liquidators not onl y when there is failure of agreement. between the parties but also in the absence thereo f. A contrary ruling would give license to corporations under liquidation or receiver ship to refuse to participate in negotiations for the fixing of the compensation of thei r liquidators or receivers so as to evade their obligation to pay the same. Petitioner may not have been given the chance to meet face to face with responde nt for the purpose of determining the latter s fee. But this fact alone should not invali date the amount fixed by the SEC. What matters is the reasonableness of the fee in light of the services rendered by the liquidator. It is the policy of the SEC to provide unif orm/fair and reasonable compensation or fees for the comparable services rendered by the duly designated members of the Management Committee (MANCOM), rehabilitation receivers and liquidators in corporations or partnerships placed under MANCOM/receivership or liquidation, pursuant to Section 6(d) of PD 902-A, the SEC Rules on Corporate Recovery, the Corporation Code of the Philippines, the Securities Regulation Code, and other related laws enforced by the SEC (Catmon S ales International Corporation vs. Atty. Manuel D. Yngson, Jr., G.R. No. 179761, Janu ary 15, 2010).

-o0oSPECIAL COMMERCIAL LAWS

A. TRUST RECEIPT LAW

1. A trust receipt is considered a security transaction designed to provide fina ncial assistance to importers and retail dealers who do not have sufficient funds or r esources to finance the importation or purchase of merchandise, and who may not be able t o acquire credit except through utilization, as collateral, of the merchandise imp orted or purchased. It is a document in which is expressed a security transaction where t he lender, having no prior title to the goods on which the lien is to be constitute d, and not having possession over the same since possession thereof remains in the borrower , lends his money to the borrower on security of the goods which the borrower is privile ged to sell, clear of the lien, with an agreement to pay all or part of the proceeds of the sale to the lender. It is a security agreement pursuant to which a ban acquires a securi ty interest. in the goods. It secures a debt, and there can be no such thing as sec urity interest that secures no obligation.

The subject trust receipts, being contracts of adhesion, are not per se invalid and inefficacious. But should there be ambiguities therein, such ambiguities are to be strictly construed against Metroban , the party that prepared them.

There is no doubt as to the obligation of Jimmy and Benjamin Go to turn over the proceeds of the sale of the goods or to return the unsold goods. However, an amb iguity exists as to when this obligation arises, whether upon maturity of the trust rec eipts or upon demand by Metroban . A strict construction of the provisions of the contrac ts of

adhesion dictates that the rec oning point should be the demand made by Metroban

2. There are two obligations in a trust receipt transaction: the first refers to money received under the obligation involving the duty to turn it over (entregarla) to the owne r of the merchandise sold, while the second refers to the merchandise received under the obligation to return. it (devolvera) to the owner. A violation of these underta i ngs constitutes estafa.

The true nature of a trust receipt transaction can be found in the whereas. claus e of PD 115 which states that a trust receipt is to be utilized as a convenient business device to assist importers and merchants solve their financing problems.. A trust receipt is considered a security transaction intended to aid in financin g importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credi t except through utilization, as collateral, of the merchandise imported or purcha sed (Ng vs. People, 619 SCRA 291).

B. INSOLVENCY 1. The mere fact that the ASB Group averred that it has sufficient assets to cov er its obligations does not ma e it solvent. enough to prevent it from filing a petition for rehabilitation. A corporation may have considerable assets but if it foresees th e impossibility of meeting its obligations for more than one year, it is considere d as technically insolvent. Thus, at the first instance, a corporation may file a pet ition for rehabilitation a remedy provided under section 4-1.

(Metropolitan Ban 2007).

and Trust Company v. Jimmy Go, G.R. No. 155647, November 23,

The period mentioned under sections 3-12, longer than one year from the filing of the petition,. does not refer to a year-long waiting period when the SEC can finally say that the ailing corporation is technically insolvent to qualify for rehabilitation. T he period referred to the corporation s inability to pay its obligations; when such inabilit y extends beyond one year, the corporation is considered technically insolvent. Said inabi lity may be established from the start by way of a petition for rehabilitation, or it may be proved during the proceedings for suspension of payments, if the latter was the first r emedy chosen by the ailing corporation. If the corporation opts for a direct petition for rehabilitation on the ground of technical insolvency, it should show in its peti tion and later prove during the proceedings that it will not be able to meet its obligati ons for longer than one year from the filing of the petition (Philippine National Ban e t. al. v. Court of Appeals, et. al., G.R. No. 165571, January 20, 2009, Velasco).

2. The pertinent law concerning the suspension of actions for claims against cor porations is PD 902-A. The suspension of action for claims against a corporation under a rehabilitation receiver or management committee embraces all phases of the suit, be it before the trial court or before any tribunal.

The transfer, effected by RA 8799, to the Regional Trial Court of SEC s jurisdicti on defined under Section 5(d) of PD 902-A did not divest the SEC of its jurisdictio n over a petition for suspension of payment, given that the SEC had already issued, as ea rly as September 19, 1998, the suspension order after it found the petition for suspens ion filed on September 16, 1988 to be in sufficient form and substance (Philippine Airline s Inc. (PAL) v. Philippine Airlines Employees Association (PALEA), G.R. No. 142399, Jun e 19, 2007).

3. Albeit jurisdiction over a petition to declare a corporation in a state of in solvency strictly lies with the regular courts, the SEC possessed, during the period material, amp

le power

under PD 902-A, as amended, to declare a corporation insolvent as an incident of and in continuation of its already acquired jurisdiction over the petition to be declar ed in the state of suspension of payments in the two instances provided in Section 5(d) th ereof (Union Ban of the Philippines v. Concepcion, G.R. No. 160727, June 26, 2007).

C. INTELLECTUAL PROPERTY

Trade names and trademar s 1. A trade name need not be registered with the Intellectual Property Office (IP O) before an infringement suit may be filed by its owner against the owner of an infringin g trademar . All that is required is that the trade name is previously used in tra de or commerce in the Philippines (Coffee Partners, Inc. vs. San Francisco Coffee & Ro astery, Inc., 614 SCRA 113).

2. Trade names shall be protected even prior to or without registration with the IPO. RA 8293, which too effect on 1 January 1998, has dispensed with the registration requirement. Section 165.2 of RA 8293 categorically states that trade names shal l be protected, even prior to or without registration with the IPO, against any unlaw ful act including any subsequent use of the trade name by a third party, whether as a tr ade name or a trademar li ely to mislead the public (ibid).

3. It is the li elihood of confusion that is the gravamen of infringement. But t here is no absolute standard for li elihood of confusion. Only the particular, and sometime s peculiar, circumstances of each case can determine its existence. The li elihood of confusion is higher in cases where the business of one corporation is the same o r substantially the same as that of another corporation (ibid).

4. To establish trademar infringement, the following elements must be proven: ( 1) the validity of plaintiff s mar ; (2) the plaintiff s ownership of the mar ; and (3) the use of the mar or its colorable imitation by the alleged infringer results in "li elih ood of confusion. (Superior Commercial Enterprises, Inc. vs. Kunnan Enterprises Ltd., 6 18 SCRA 531).

5. A trademar is any distinctive word, name, symbol, emblem, sign, or device, o r any combination thereof, adopted and used by a manufacturer or merchant on his goods to identify and distinguish them from those manufactured, sold, or dealt by others. Inarguably, it is an intellectual property deserving protection by law. In trade mar controversies, each case must be scrutinized according to its peculiar circumsta nces, such that jurisprudential precedents should only be made to apply if they are specifically in point.

A registered trademar owner has the right under Section 147 of RA 8293 to preve nt third parties from using a trademar , or similar signs or containers for goods o r services, without its consent, identical or similar to its registered trademar , where suc h use would result in a li elihood of confusion (Dermaline, Inc. vs. Myra Phamaceutica ls, Inc., G.R. No. 190065, August 16, 2010).

6. In Sterling Products International, Inc. v. Farbenfabri en Bayer A tiengesell schaft, the Court distinguished the two types of confusion:

The first is the confusion of goods in which event the ordinarily prudent purchas er would be induced to purchase one product in the belief that he was purchasing th e other.. In which case, defendant s goods are then bought as the plaintiff s, and the

poorer quality of the former reflects adversely on the plaintiff s reputation.. Th e other is the confusion of business: Here though the goods of the parties are different, th e defendant s product is such as might reasonably be assumed to originate with the plaintiff, and the public would then be deceived either into that belief or into the belief that there is some connection between the plaintiff and defendant which, in fact , does not exist. (Soceite Des Produits Nestle, S.A. vs. Martin T. Dy, Jr., G.R. No. 17 2276, August 8, 2010).

7. There are two tests to determine li elihood of confusion: the dominancy test and holistic test. The dominancy test focuses on the similarity of the main, prevalent or ess ential features of the competing trademar s that might cause confusion. Infringement ta es place when the competing trademar contains the essential features of another. Imitation or an effort to imitate is unnecessary. The question is whether the us e of the mar s is li ely to cause confusion or deceive purchasers.

8. According to Section 123.1(d) of RA 8293, a mar cannot be registered if it i s identical with a registered mar belonging to a different proprietor with an earlier filin g or priority date, with respect to: (1) the same goods or services; (2) closely rela ted goods or services; or (3) near resemblance of such mar as to li ely deceive or cause con fusion (Berris Agricultural Co., Inc. vs. Norvy Abyadang, G.R. No. 183404, October 13, 2010).

9. The ownership of a trademar is acquired by its registration and its actual u se by the manufacturer or distributor of the goods made available to the purchasing public . Section 122 of RA 8293 provides that the rights in a mar shall be acquired by m eans of its valid registration with the IPO. A certificate of registration of a mar , on ce issued, constitutes prima facie evidence of the validity of the registration, of the reg istrant s

The holistic test considers the entirety of the mar s, including labels and pac aging, in determining confusing similarity. The focus is not only on the predominant words but also on the other features appearing on the labels (Ibid.).

ownership of the mar , and of the registrant s exclusive right to use the same in connection with the goods or services and those that are related thereto specifi ed in the certificate. RA 8293, however, requires the applicant for registration or the re gistrant to file a declaration of actual use (DAU) of the mar , with evidence to that effect , within three (3) years from the filing of the application for registration; otherwise, the application shall be refused or the mar shall be removed from the register. In other words, the prima facie presumption brought about by the registration of a mar m ay be challenged and overcome, in an appropriate action, by proof of the nullity of th e registration or of non-use of the mar , except when excused. Moreover, the presumption may li ewise be defeated by evidence of prior use by another person, i.e., it will controvert a claim of legal appropriation or of ownership based on registra tion by a subsequent user. This is because a trademar is a creation of use and belongs to one who first used it in trade or commerce.

The determination of priority of use of a mar is a question of fact. Adoption o f the mar alone does not suffice. One may ma e advertisements, issue circulars, distr ibute price lists on certain goods, but these alone will not inure to the claim of own ership of the mar until the goods bearing the mar are sold to the public in the mar et. Accordingly, receipts, sales invoices, and testimonies of witnesses as customers , or orders of buyers, best prove the actual use of a mar in trade and commerce duri ng a certain period of time (Berris Agricultural Co., Inc. vs. Norvy Abyadang, G.R. N o. 183404, October 13, 2010).

10. Under Section 123(d) of RA 8293, the registration of a mar is prevented wit h the filing of an earlier application for registration. This must not, however, be interpret ed to mean that ownership should be based upon an earlier filing date. While RA 8293 remove d the previous requirement of proof of actual use prior to the filing of an applicatio n for registration of a mar , proof of prior and continuous use is necessary to establ ish ownership of a mar . Such ownership constitutes sufficient evidence to oppose th e registration of a mar .

Section 134 of the IP Code provides that

any person who believes that he would be

damaged by the registration of a mar x x x. may file an opposition to the appli cation. The term any person. encompasses the true owner of the mar the prior and continuous user.

Notably, the Court has ruled that the prior and continuous use of a mar may eve n overcome the presumptive ownership of the registrant and be held as the owner of the mar (E.Y. Industrial Sales, Inc. and Engracio Yap vs. Shen Dar Electricity Mach inery Co., Ltd., G.R. No. 184850, October 20, 2010).

11. Where there is no allegation that the design and/or mar of a particular bra nd of playing cards is a reproduction, counterfeit, copy or colorable imitation of another reg istered mar legally owned by another, there is no crime of trademar infringement that appears to have been committed or perpetrated to warrant the inference that said playing cards are subject of the offense. as contemplated by Section 4 of the Rul es of Court (Summerville General Merchandising Co. v. Court of Appeals, G.R. No. 15876 7, June 28, 2007).

12. Respondent has the legal capacity to sue for the protection of its trademar s, albeit it is not doing business in the Philippines. Section 160 in relation to Section 3 of R A 8293, provides that any foreign national or juridical person who meets the requirement s of Section 3 and does not engage in business in the Philippines may bring a civil o

r administrative action for opposition, cancellation, infringement, unfair competi tion, or false designation of origin and false description, whether or not it is licensed to do business in the Philippines under existing laws.

Article 6 of the Paris Convention, which governs the protection of well- nown trademar s, is a self-executing provision and does not require legislative enact ment to give it effect in the member country. It may be applied directly by the tribunal s and officials of each member country by the mere publication or proclamation of the convention, after its ratification according to the public law of each state and the order for its execution. The essential requirement under this article is that the trad emar to be protected must be "well- nown" in the country where protection is sought. The po wer to determine whether a trademar is well- nown lies in the competent authority of the country of registration or use.. This competent authority would be either the re gistering authority if it has the power to decide this, or the courts of the country in qu estion if the issue comes before a court.

The question of whether or not respondent s trademar s are considered well- nown. i s factual in nature, involving as it does the appreciation of evidence adduced bef ore the BLA-IPO. The settled rule is that the factual findings of quasi-judicial agencie s, li e the IPO, which have acquired expertise because their jurisdiction is confined to spe cific matters, are generally accorded not only respect, but, at times, even finality i f such findings are supported by substantial evidence.

The fact that respondent s mar s are neither registered nor used in the Philippine s is of no moment. The scope of protection initially afforded by Article 6 of the Paris Convention has been expanded in the 1999 Joint Recommendation Concerning Provisi ons on the Protection of Well-Known Mar s, wherein the World Intellectual Property Orga nization (WIPO) General Assembly and the Paris Union agreed to a nonbinding recommendatio n that a well- nown mar should be protected in a country even if the mar is neit her registered nor used in that country.

Aside from the specific provisions of RA 8293, the Paris Convention and the WIPO Joint Recommendation have the force and effect of law, for under Section 2, Article II of the Constitution, the Philippines adopts the generally accepted principles of intern ational law as part of the law of the land. To rule otherwise would be to defeat the equ itable consideration that no one other than the owner of the well- nown mar shall reap the fruits of an honestly established goodwill (Sehwani Inc. et al. v. In-N-Out Burg er Inc., G.R. No. 171053, October 15, 2007). Patent 1. It is clear from section 37 of RA 165 that the exclusive right of a patentee to ma e, use and sell a patented product, article or process exists only during the term of t he patent. Once admitted and there is no evidence to show that their admission was made thr ough palpable mista e, there is no longer any need to present evidence on the issue o f expiration of respondents patent (Phil Pharmawealth, Inc. vs. Pfizer, Inc and Pfi zer (Phil.) Inc., G.R. No. 167715, November 17, 2010).

Unfair competition 1. From jurisprudence, unfair competition has been defined as the passing off (o r palming off) or attempting to pass off upon the public of the goods or business of one p erson as the goods or business of another with the end and probable effect of deceiving t he public. The essential elements of unfair competition are (1) confusing similarit y in the general appearance of the goods; and (2) intent to deceive the public and defrau d a competitor. Jurisprudence also formulated the following true test. of unfair

competition: whether the acts of the defendant have the intent of deceiving or a re calculated to deceive the ordinary buyer ma ing his purchases under the ordinary conditions of the particular trade to which the controversy relates. One of the essential requisites in an action to restrain unfair competition is proof of fraud; the in tent to deceive, actual or probable must be shown before the right to recover can exist (Superior Commercial Enterprises, Inc. vs. Kunnan Enterprises Ltd., 618 SCRA 531).

2. There can be trademar infringement without unfair competition (Superior Comm ercial Enterprises, Inc. vs. Kunnan Enterprises Ltd., 618 SCRA 531). D. TRUTH IN LENDING ACT 1. The interest rate provisions in the case at bar are illegal not only because of the provisions of the Civil Code on mutuality of contracts, but also because they vi olate the Truth in Lending Act. Not disclosing the true finance charges in connection with the extensions of credit is, furthermore, a form of deception which we cannot countenance. It is against the policy of the state as stated in the Truth in Len ding Act:

Sec. 2. Declaration of Policy. It is hereby declared to be the policy of the Sta te to protect its citizens from a lac of awareness of the true cost of credit to t he user by assuring a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy.

Moreover, while the spouses in this case indeed agreed to renew the credit line, the offending provisions are found in the promissory notes themselves, not in the cr edit line. In fixing the interest rates in the promissory notes to cover the renewed credit line, UCPB still reserved to itself the same two options (1) a rate indicative of the DBD retail rate; or (2) a rate as determined by the branch head.

Section 4 of the Truth in Lending Act clearly provides that the disclosure state ment must be furnished prior to the consummation of the transaction:

SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Board, the following information: a) the cash price or delivered price of the property or service to be acquired; b) the amounts, if any, to be credited as down payment and/or tradein; c) the difference between the amounts set forth under clauses (1) and (2); d) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit; e) the total amount to be financed; f) the finance charge expressed in terms of pesos and centavos; and g) the percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation.

The rationale of this provision is to protect users of credit from a lac of awa reness of the true cost thereof, proceeding from the experience that ban s are able to conceal such true cost by hidden charges, uncertainty of interest rates, deduction of interests fr om the loaned amount, and the li e. The law thereby see s to protect debtors by permitt ing them to fully appreciate the true cost of their loan, to enable them to give ful l consent to the contract, and to properly evaluate their options in arriving at business decisions. Upholding UCPB s claim of substantial compliance would defeat these purposes of the Truth in Lending Act. The belated discovery of the true cost of credit will too often not be able to reverse the ill effects of an already consummated business

decision (UCPB v. Sps. Samuel & Odette Beluso, G.R. No. 159912, August 17, 2007, ChicoNazario).

2. The Court has affirmed that financial charges are amply disclosed if stated i n the promissory note in the case of Development Ban of the Philippines v. Arcilla, J r. The Court there said, Under Circular 158 of the Central Ban , the lender is required to inc lude the information required by RA 3765 in the contract covering the credit transaction or any other document to be ac nowledged and signed by the borrower. In addition, the contract or document shall specify additional charges, if any, which will be col lected in case certain stipulations in the contract are not met by the debtor. (Ban of th e Philippines Islands, Inc. vs. Sps. Norman and Angelina Yu, et al., G.R. No. 184122, January 20, 2010).

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