Memory Aid - COMML

SAN BEDA COLLEGE OF LAW, 2000-2001

MEMORY AID in COMMERCIAL LAWAny form of reproduction of this copy is strictly prohibited!!!

I. NEGOTIABLE INSTRUMENTS LAW (NIL)

NEGOTIABLE INSTRUMENT (NI)- it is a written contract for the payment of money which by its form and on its face is intended as a substitute for money and passes from hand to hand as money, so as to give the holder in due course (HDC) the right to hold the instrument free from defenses available to prior parties.

BRIEF HISTORY OF THE LAW: Act No.2031, the Negotiable Instruments Law, took effect on June 2,1911, and is patterned after the U.S Uniform Negotiable Law, which in turn is copied from the English Bill of Exchange Act of 1882.

TWO DISTINCTIVE FEATURES OR CHARACTERISTICS OF NI:

1. NEGOTIABILITY- it is that attribute or property whereby a bill or note or check may pass from hand to hand similar to money, so as to give the holder in due course the right to hold the instrument and to collect the sum payable for himself free from defenses.

2. ACCUMULATION OF SECONDARY CONTRACTS- secondary contracts are picked up and carried along with Negotiable Instruments as they are negotiated from one person to another; or in the course of negotiation of negotiable instruments, a series of juridical ties between the parties thereto arise either by law or by privity. The indorsers become secondarily liable to the holder.

DISTINCTIONS:

NEGOTIABLE NON-NEGOTIABLE

1. must contain all requisites of sec. 1

1. does not contain all requisites of sec.1

2. transferable by negotiation and assignment.

2. transferable by assignment not negotiation

3. HDC can have rights better than his transferor

3. a transferee acquires no better rights than his transferor

4. prior parties warrant payment (secondarily

4. prior parties do not warrant payment but

liability). merely the legality of his title

CLASSES OF NI:

1. PROMISSORY NOTE (PN)- unconditional promise in writing by one person to another signed by the maker engaging to pay on demand or at a fixed or determinable future time, a sum certain in money to order or to bearer. (Sec. 184, NIL)

2. BILL OF EXCHANGE (BE)- an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer (Sec. 126, NIL); and

3. CHECK- a bill of exchange drawn on a bank payable on demand (Sec. 185, NIL).

DISTINCTIONS:Negotiable

InstrumentsNegotiable

Documents of Title

1. The subject is money

1. The subject is goods

2. Is itself the property with value

2. The document is a mere evidence of title – the things of value being the goods mentioned in the documents

3. Has all the requisites of Sec 1 of NIL

3. Does not have these requisites

4. A holder of NI may run after the secondary parties for payment if dishonored by the party primarily liable

4. Intermediate parties are not secondarily liable if the document is dishonored

5. A holder, if HDC, may acquire rights over the instrument better than his predecessor

5. A holder can never acquire rights to the document better than his predecessors

DISTINCTIONS:PROMISSORY BILL OF

Commercial Law Memory Aid Committee: NICEFORO AVILA JR. (Chairperson), MA. HAZEL M. GUBATON (EDP) ,Ma. Leonora R. Tabladillo, Ma. Cecilia Taliman, Kristine Gayapa, Jaymie Parafina, Joanne Tatel, Darius Manlangit, Maricel Eschavez, Marisol Caneja, Shey Alvarez, Malou Ababa, Joeffrey Ravago, Abet Rebosa, Zharone Japson, Jinky Manguntalao, Lenie Basilio, Wilfred Babano, Alvin Carullo, Verny Camacho, Abraham Guiao, Michelle Antonio, Jil, Reina, Macky Macaldo

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NOTE EXCHANGE1. unconditional

promise1. unconditional

order2. involves 2

parties2. involves 3 parties

3. maker primarily liable

3. drawer is only secondarily liable

4. only one presentment: for payment

4. two presentments: for acceptance and for payment

DISTINCTIONS:BILL OF

EXCHANGECHECK

1. Not necessarily drawn on a deposit. It is not necessary that a drawer of a BOE should have funds in the hands of the drawee.

1. It is necessary that a check is drawn on a deposit. Otherwise, there would be fraud.

2. Death of a drawer of a BOE with the knowledge of the bank, does not revoke the author of the banker to pay.

2. Death of the drawer of a check, with the knowledge by the bank, revokes the authority of the banker to pay.

3. May be presented for payment within a reasonable time after its last negotiation because it may be further negotiated.

3. Must be presented for payment within a reasonable time after its issue.

ASSIGNMENT VS. NEGOTIATION1. Assignment pertains to contracts in general;

Negotiation pertains to negotiable instruments.

2. One who takes an instrument by assignment takes the instrument subject to the defenses obtaining among the original parties; whereas a person who takes the instrument by negotiation, who is a HDC, takes it free from personal defenses available among the parties.

OTHER FORMS OF NEGOTIABLE INSTRUMENTS:1. Certificate of deposit issued by banks,

payable to the depositor or his order, or to bearer

2. Trade acceptance3. Bonds, which are in the nature of promissory

notes4. Drafts, which are bills of exchange drawn by

one bank upon another

LEGAL TENDER that kind of money which the law compels a creditor to accept in payment of his debt when tendered by the debtor in the right amount.NOTE: A negotiable instrument although intended to be a substitute for money, is generally not legal tender. Thus, a creditor is not bound to accept commercial papers, like a check, in satisfaction of his demand, because a check, even if good when offered, does not meet the requirements of a legal tender.

INCIDENTS IN THE LIFE OF A NI:1. Issue2. Negotiation3. Presentment for acceptance in certain

kinds of BOE4. Acceptance5. Dishonor by non-acceptance6. Presentment for payment7. Dishonor by non-payment8. Notice of Dishonor9. Protest in some cases10. Discharge REQUISITES OF NEGOTIABILITY(SEC. 1):1. Must be in writing and signed by the

maker or drawer;2. Must contain an unconditional promise

or order to pay a sum certain in money;3. Must be payable on demand, or at a

fixed or determinable future time;4. Must be payable to order or to bearer;5. When the instrument is addressed to a

drawee, he must be named or otherwise indicated therein with reasonable certainty.

UNCONDITIONAL PROMISE OR ORDER- where the promise or order is made to depend on a contingent event, it is conditional, and the instrument involved is non-negotiable. The happening of the event does not cure the defect.

The unconditional nature of the promise or order is not affected by:a) An indication of a particular fund out of

which reimbursement is to be made, or a particular account to be debited with the amount; or

b) A statement of the transaction which gives rise to the instrument (Sec. 3, NIL)

But an order or promise to pay out of a particular fund is NOT unconditional.

DISTINCTIONS:


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Fund for Reimbursement

Particular Fund for Payment

1. Drawee pays the payee from his own funds; afterwards, the drawee pays himself from the particular fund indicated.

1. There is only one act- the drawee pays directly from the particular fund indicated. Payment is subject to the condition that the fund is sufficient.

2. Particular fund indicated is NOT the direct source of payment but only the source of reimburse-ment.

2. Particular fund indicated is the direct source of payment.

3. Indication in the instrument does not affect the unconditional nature of the promise or order.

3. Indication in the instrument makes the promise or order conditional.

CERTAINTY OF SUM (Sec. 2, NIL)

The instrument is still negotiable and it is payable--a) With interest; orb) By stated installments; orc) By stated installments with an acceleration

clause;ACCELERATION CLAUSE- renders whole debt due and demandable upon failure of obligor to comply with certain conditions.

d) With exchange; ore) With cost of collection or attorney’s fees.

PAYABLE IN MONEY

if some other act is required other than payment of money, the instrument is not negotiable (Sec. 5, NIL).

Exception: Gives option to creditor/holder to choose another in lieu of money.

PAYABLE ON DEMAND (Sec. 7, NIL)

an instrument is payable on demand:a) where expressed to be payable on demand,

at sight or on presentation;b) where no period of payment is stated;c) where issued, accepted, or indorsed after

maturity (only as between immediate parties).

DETERMINABLE FUTURE TIME (Sec. 4, NIL)

An instrument is payable at a determinable future time when payable:a) At a fixed period after date or sight;b) On or before a fixed or determinable

future time specified therein; orc) On or at a fixed period after the

occurrence of a specified event, which is certain to happen, though the time of happening be uncertain.

PAYABLE TO ORDER (Sec. 8, NIL)

The instrument is payable to order where it is drawn payable to the order of a specified person or to him or to his order.

PAYABLE TO BEARER (Sec. 9, NIL)

The instrument is payable to bearer:a) When it is expressed to be so payable;

orb) When it is payable to a person named

therein or to bearer; orc) When it is payable to the order of a

fictitious or non-existing person, and such fact was known to the person making it so payable; or

d) When the name of the payee does not purport to be the name of any person; or

e) When the only or last indorsement is an indorsement in blank.

NOTE: An instrument originally payable to bearer can be negotiated by mere delivery even if it is indorsed specifically. If it is originally a BEARER instrument, it will always be a BEARER instrument. As opposed to an original order instrument becoming payable to bearer, if the same is indorsed specifically, it can NO LONGER be negotiated further by mere delivery, it has to be indorsed.

REAL DEFENSE- those that attach to the instrument and are available against all holders, whether in due course or not. PERSONAL DEFENSE- or equitable defenses are available only against the holder not in due course who stands in privity with the party who is entitled to set it up or those who are not or do not have the rights of a holder in due course.

EXAMPLES OF PERSONAL DEFENSES:1. Absence or failure of consideration,

partial or total.2. Want of delivery of complete

instrument.3. Insertion of wrong date in an

instrument, where it is payable at a fixed period after date and it is issued


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undated or where it is payable at a fixed period after sight and the acceptance is undated.

4. Filling up of blank contrary to authority given or not within reasonable time, where the instrument is delivered.

5. Fraud in inducement.6. Acquisition of instrument by force,

duress, or fear.7. Acquisition of the instrument by unlawful

means.8. Acquisition of the instrument for an illegal

consideration.9. Negotiation in breach of faith.10. Negotiation under circumstances that

amount to fraud.11. Mistake.12. Intoxication according to better authority.13. Ultra vires acts of corporations where the

corporation has the power to issue negotiable paper but the issuance was not authorized for the particular purpose for which it was issued.

14. Want of authority of agent where he has apparent authority.

15. Insanity where there is no notice of insanity on the part of the one contracting with the insane person.

16. Illegality of contract where form or consideration is illegal.

EXAMPLES OF REAL DEFENSES:1. Alteration2. Want of delivery of incomplete instrument.3. Duress amounting to forgery.4. Fraud in factum or fraud in esse contractus.5. Minority6. Marriage in the case of a wife7. Insanity where the insane person has a

guardian appointed by the court.8. Ultra vires acts of a corporation, where the

corporation is absolutely prohibited by its charter or statute from issuing any commercial paper under any circumstances.

9. Want of authority of agent.10. Execution of instrument between public

enemies.11. Illegality of contract where it is the contract

or instrument itself which is expressly made illegal by statute.

12. Forgery.

EFFECTS OF DEFENSES

A. EFFECTS OF INCOMPLETE BUT DELIVERED NI (SEC. 14, NIL):

1. Holder has prima facie authority to fill up the instrument.

2. Completion within reasonable time and according to authority; and

3. HDC can enforce such despite deficiency.

MAKER DRAWER ACCEPTOR

1. engages that he will pay it according to is tenor;

1. engages that on due presentment, the instrument will be accepted, or paid, or both according to its tenor;

1.engages that he will pay according to the tenor of his accept-ance;

2.admits the existence of the payee;

2.admits the existence of the payee;

2. admits the existence of the drawer, the genuineness of his signature, and his capacity & authority to draw the instrument;

3. admits payee’s capacity to indorse

3. admits payee’s capacity to indorse

3. admits the existence of the payee and his capacity to indorse.

B. EFFECTS OF INCOMPLETE AND UNDELIVERED NI (SEC. 15, NIL):

if completed and delivered without authority, not a valid contract against a person who has signed before delivery of the contract even in the hands of HDC but subsequent indorsers are liable.

C. EFFECTS OF COMPLETE BUT UNDELIVERED NI (SEC. 16, NIL):

1. Between immediate parties and remote parties not a HDC, must be an authorized delivery.

2. As to HDC, all prior deliveries are conclusively presumed valid; and

3. If instrument is not in the hands of drawer/maker, valid and intentional delivery is presumed.


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COMPARISON OF SECTIONS 14, 15 AND 16Section 14 Section 15 Section 16

COMPLETENESSa. wanting in any material particularb. blank paper with signature

incomplete complete

DELIVERY delivered undelivered Undelivered

Note: Delivery may be made for a conditional or for a special purpose only and not for the purpose of transferring the property in the instrument

AUTHORITY OF PERSON IN POSSESSION

a. prima facie authority to complete it by filling up the blanks therein

b. signature operates as a prima facie authority to fill up it up as such for any amount

No authority to complete and / or negotiate instrument

May negotiate if delivered to him by or under the authority of the party making, indorsing, drawing or accepting , as the case may be.

WHEN ENFORCEABLE

If filled up strictly in accordance with authority given and within a reasonable time

Not enforceable When delivery is made by or under authority of the party making, indorsing, drawing or accepting , as the case may be.

KIND OF DEFENSE Personal Real Personal

RIGHTS OF HOLDER If holder in due course, he can enforce the instrument as completed against parties prior or subsequent to the completion

If not a holder in due course, he can enforce the instrument as completed only against parties subsequent to the completion but not against those prior thereto.

None in the hands of the holder. However, the invalidity of the above instrument is only with reference to parties whose signatures appear on the instrument prior to delivery because as to parties whose signatures appear on the instrument after delivery, the instrument is valid.

Can enforce the instrument.Note: Where the instrument is in the hands of a holder in due course , a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. Where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery to him is presumed until the contrary is proved.


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D. EFFECT OF ABSENCE OR FAILURE OF CONSIDERATION (SEC. 28, NIL):

Personal defense to the prejudiced party and available against any person not HDC.

E. FORGERY

counterfeit making or fraudulent alteration of any writing, which may consist of:1. signing of another name with intent to

defraud; or2. alteration of an instrument in the name,

amount, name of payee, etc. with intent to defraud.

EFFECTS OF FORGERY (SEC. 23, NIL):

signature (not instrument itself and subsequent indorsers) is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party to it, is acquired through or under such signature UNLESS the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority.

Persons precluded from setting up forgery:1. those who warrant or admit the genuineness

of the signature in question. This includes indorsers, persons negotiating by delivery and acceptors.

2. Those who by their acts, silence, or negligence, are estopped from setting up the defense of forgery.

VALUABLE CONSIDERATION

In general, it is said to consist either in some right, interest, profit or benefit, accruing to the party who makes the contract, or some forebearance, detriment, loss, responsibility, act , labor, or service on the other side.

ACCOMMODATION - legal arrangement under which a person called the accommodation party, lends his name and credit to another called the accommodated party without any consideration. REQUISITES OF ACCOMMODATION (SEC. 29, NIL):

1. accommodation party must signs as maker, drawer, acceptor, or indorser;

2. no value is received by the accommodation party from the accommodated party; and

3. purpose is to lend the name.

EFFECTS OF ACCOMMODATION (SEC. 29, NIL):

person to whom instrument thus executed is subsequently negotiated has a right of recourse

against the accommodation party inspite of the former’s knowledge that no consideration passed between the accommodation and accommodated parties.

NOTE: A corporation cannot act as an accommodation party. The issue or indorsement of negotiable instrument by a corporation without consideration and for the accommodation of another is ultra vires. (Crisologo vs. CA, 117 SCRA 594).

RIGHTS AND LEGAL POSITION OF ACCOMODATION PARTY

1. AP is generally regarded as SURETY for the party accomodated

2. When AP make payment to holder of the note, they have the right to sue the accomodated party for reimbursement

LIABILITY OF ACCOMODATION PARTY

liable on the instrument to a holder for value notwithstanding such holder at the time of the taking of the instrument knew him to be only an accomodation party

RIGHTS OF ACCOMODATION PARTY AGAINST EACH OTHER

demand from principal debtor reimbursement of the amount which he had paid on the promissory note demand contribution from his co-accomodation maker without first directing his action against the principal debtor provided:

1. he made the payment by virtue of judicial demand

2. the principal debtor is insolvent

F. MATERIAL ALTERATION

any alteration which changes the date, sum payable, time or place of payment, number or relation of parties, or medium or currency of payment, or adds a place of payment where none is specified or which alters the effect of the instrument in any respect. (PNB vs. CA)

EFFECTS OF MATERIAL ALTERATION (SECS. 124 & 125, NIL):

avoids the instrument except as against the party who made, authorized, or assented to the alteration and subsequent indorsers. HDC can enforce it accordingly to its original tenor.


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LIABILITIES OF PARTIES

1. PARTIES PRIMARILY LIABLE

a. MAKER (Sec. 60, NIL)(i) engages to pay according to the

tenor of the instrument; and(ii) admits the existence of the

payee and his capacity to indorse.b. ACCEPTOR OR DRAWEE (Sec. 62,

NIL)(i) engages to pay according to the

tenor of his acceptance;(ii) admits the existence of the

drawer, the genuineness of his signature and his capacity and authority to draw the instrument; and

(iii) admits the existence of the payee and his capacity to indorse.

2. PARTIES SECONDARILY LIABLE

a. DRAWER (Sec. 61, NIL)(i) Admits the existence of the

payee and his capacity to indorse.(ii) Engages that the instrument will

be accepted or paid by the party primarily liable; and

(iii) Engages that if the instrument is dishonored and proper proceedings are brought, he will pay to the party entitled to be paid.

b. GENERAL INDORSER (Sec. 66, NIL)(i) warrants ---

(1) genuineness of the instrument;

(2) his good title to it;(3) capacity to contract of prior

parties; and(4) instrument is valid and

subsisting.(ii) engages that the instrument will be

accepted or paid by the party primarily liable; and

(iii) engages that if the instrument is dishonored and proper proceedings are taken he will pay to the party entitled to be paid.

c. IRREGULAR INDORSER – one who affixes his signature in blank on an instrument before delivery (Sec. 64, NIL).(i) instrument payable to the order

of a 3rd person-liable to payee and subsequent parties(ii) instrument payable to maker or

drawer-liable to all parties subsequent to the maker or drawer.

(iii) irregular indorser signs for accommodation of payee.

-liable to all parties subsequent to payee.

3. PARTIES WITH LIMITED LIABILITY (Sec. 65, NIL; METROPOL FINANCING VS. SAMBOK, 120 SCRA 864).

a. QUALIFIED INDORSER- warrants that(i) instrument is genuine and in all

respects what it purports to be;(ii) he has good title to it;(iii) all prior parties had capacity to

contract;(iv) he has no knowledge of any fact

which would impair the validity of the instrument or render it valueless.

b. PERSONS NEGOTIATING BY DELIVERY

(i) warranties same as those of qualified indorsers; and

(ii) warranties extend to immediate transferee only.

INDORSEMENT - legal transaction effected by the writing of one's own name at the:

a. back of the instrumentb. upon a paper (allonge) attached

thereto with or without additional words specifying the person to whom or to whose order the instrument is to be payable whereby one not only transfers one legal title to paper transferred but likewise enters into an implied guaranty that the instrument will be duly paid (Section 31, NIL)

GENERAL RULE: Indorsement must be of the entire instrument

EXCEPTION: Where instrument has been paid in part, it may be indorsed as to the residue (Section 32, NIL).

KINDS OF INDORSEMENT

A. SPECIAL - specifies the person to whom or to whose order the instrument is to be payable (Section 34)

B. BLANK - specifies no indorsee; 1. may be negotiated by delivery2. may be converted to special

indorsement by writing over the signature of indorser in blank any contract consistent with character of indorsement (Sections 34 and 35)

C. ABSOLUTE - one by which indorser binds himself to pay:


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1. upon no other condition than failure of prior parties to do so

2. upon due notice to him of such failure

D. CONDITIONAL - indorsement subject to the happening of a contingent event (Section 39)

E. RESTRICTIVE 1. when it PROHIBITS further negotiation

of the instrument;2. when it CONSTITUTES the indorsee the

agent of the indorser3. when it VESTS the title in the indorsee

in trust for or to the use of other persons (Section 36)

F. QUALIFIED - made by adding to the indoser's signature words like "sans recourse", "without recourse", "indorser not holden", "at the indorser's own risk", etc.

G. JOINT - indorsement payable to 2 or more persons (Section 38)

H. SUCCESSIVEI. IRREGULARJ. FACULTATIVE

REQUISITES BEFORE SECONDARY LIABILITY ATTACHES:

1. presentment for payment in notes and presentment for acceptance and/or payment in bills of exchange.

2. Dishonor by non-payment in notes and dishonor by non-acceptance and/or non-payment in bills of exchange; and

3. Notice of dishonor to secondary parties.

RECOURSE- resort to a person secondarily liable after default of person primarily liable.

NEGOTIATION- transfer of instrument from one person to another to constitute the transferee as holder thereof (Sec. 30, NIL).

CONDITIONAL INDORSEMENT- right of the indorsee is made to depend on the happening of a contingent event. Party required to pay may disregard the conditions (Sec. 39, NIL).

SPECIAL INDORSEMENT- name of indorsee specifed (Sec. 34, NIL).

RESTRICTIVE INDORSEMENT- limits the right of indorsee by restricting further negotiation; giving the indorsee lesser right than those under a general indorsement when an instrument negotiable by delivery is indorsed to holder --- becomes liable as indorsee (Sec. 36-37, NIL).

An indorsement is restrictive, which either:a) prohibits further negotiation of the

instrument; or

b) constitutes the indorsee the agent of the indorser; or

c) vests the title in the indorsee in trust for or to the use of some other person. But mere absence of words implying power to negotiate does not make an indorsement restrictive.

HOLDER IN DUE COURSE (SEC. 52, NIL):

1. Instrument is complete and regular upon its face;

2. Became a holder before it was overdue and had no notice that it has been previously dishonored;

3. For value and in good faith; and4. At the time he took it, he had no notice of

any infirmity in the instrument nor defect in the title of the person negotiating it.

DISTINCTIONS:Negotiating by

Mere delivery or by Qualified Indorsement

General Indorser

1. he has good title to it;

1. he has good title to it;

2. all prior parties had capacity to contract;

2. all prior parties had capacity to contract;

3. he has no knowledge of any fact which would impair the validity of the instrument or render it valueless.

4. the instrument is, at the time of his indorsement valid and subsisting.

PRESENTMENT – the production of a bill of exchange to the drawee for his acceptance, or to the drawee or acceptor for payment or the production of a p.n. to the party liable for the payment of the same. (Section 70, NIL)

Presentment for payment consists of:1. personal demand for payment at the proper

place;2. readiness to exhibit the instrument if

required, and to receive payment and to surrender the instrument if the debtor is willing to pay.

WHEN PRESENTMENT SHOULD BE MADE (Section 71, NIL)

1. Demand instrument within reasonable time after its issue


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2. Bill of exchange payable on demand: within reasonable time after its last negotiation

3. Instrument payable on a specified date: on the date it falls due.

WHAT CONSTITUTES A SUFFICIENT PRESENTMENT1. made by the holder or any person

authorized to receive payment on his behalf;

2. at a reasonable hour on a business day;3. at a proper place;4. to the person primarily liable or if he is

absent or inaccessible, to any person found at the place where the presentment is made.

PRESENTMENT FOR PAYMENT IS MADE AT A PROPER PLACE WHERE:

1. it is presented at the place specified;2. no place is specified, and the address of the

person to make payment is given, and it is there presented;

3. no place specified, no address is given, presentment may be made at the usual place of business or residence of the person to make payment;

4. in any other case, if presented to the person to make payment wherever he can be found, or if presented at his last known place of business or residence. (Section 73, NIL)

THE PURPOSE OF EXHIBITION IS TO ENABLE THE DEBTOR TO :

1. determine the genuiness of the instrument and the right of the holder to receive payment; and

2. to enable him to reclaim possession upon payment. (Section 74, NIL)

WHEN EXHIBITION EXCUSED1. when debtor does not demand to see the

instrument but refuses payment on some other grounds, and

2. when the instrument is lost or destroyed.

Instrument payable at a bank must be made during banking hours unless there are no funds to meet it at any time during the day, presentment at any hour before the bank is closed on that day is sufficient. If the person liable is dead, presentment may be made to his personal representative.

PRESENTMENT FOR PAYMENT IS NOT REQUIRED:

1. in order to charge the drawer where he has no right to expect or require that the drawee or acceptor will pay the instrument;

2. in order to charge an indorser when the instrument was made or accepted for his

accommodation and he has no reason to expect that the instrument will be paid if presented.

WHEN DELAY IN MAKING PRESENTMENT OR OF GIVING NOTICE IS EXCUSED:

1. when caused by circumstances beyond the control of the holder; and

2. not imputable to his default, misconduct, or negligence.

WHEN PRESENTMENT FOR PAYMENT IS EXCUSED:

1. after exercise of reasonable diligence, it cannot be made;

2. drawee is a fictitious person;3. express or implied waiver

THE INSTRUMENT IS DISHONORED BY NON-PAYMENT WHEN:

1. It is duly presented for payment and payment is refused or cannot be obtained;

2. Presentment is excused and the instrument is overdue and unpaid.

When instrument is dishonored by non-payment, there is an immediate right of recourse by the holder against persons secondarily liable. However, notice of dishonor is generally required.

Every negotiable instrument is payable at the time fixed therein without grace.

REQUISITES OF PAYMENT IN DUE COURSE:

1. Payment must be made at or after maturity.2. Payment must be made to the holder.3. Payment must be made in good faith and

without notice that the holder’s title is defective.

Good faith refers to the maker or acceptor and not to the holder.

NOTICE OF DISHONOR- notice given by holder or his agent to party or parties secondarily liable that instrument was dishonored by non-acceptance by drawee of a bill, or by non-payment by acceptor of a bill or by non-payment by maker of a note. (Sec. 89, NIL).


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REQUISITES OF NOTICE OF DISHONOR:

1. given by holder or his agent, or by an party who may be compelled by the holder to pay (Sec. 90, NIL).

2. Given to secondary party or his agent (Sec. 97, NIL).

3. Given within the periods provided by law (Sec. 102, NIL); and

4. Given at the proper place (Sec. 103, 104, NIL).

WHEN NOTICE OF DISHONOR IS DISPENSED WITH:

1. when party to be notified knows about the dishonor, actually or constructively (Secs. 114-117, NIL);

2. if waived (Sec. 109, NIL); and3. when after due diligence, it cannot be given

(Sec. 112, NIL).

How given:

1. by bringing verbally or 2. by writing to the knowledge of the person liable the fact that a specified instrument, upon proper proceedings taken, has not been accepted or has not been paid, and that the party notified is expected to pay it.

To whom given:

1. Non-acceptance (bill) – to persons secondarily liable, namely, the drawer and indorsers as the case may be.2. Non-payment (both bill and note) – indorsers.

NOTE: Notice must be given to persons secondarily liable. Otherwise, such parties are discharged. Notice may be given to the party himself or to his agent.

WHERE INSTRUMENTS PAYABLE IN INSTALLMENTS:

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

2. With acceleration clause – failure to give notice as to previous installment will discharge the persons secondarily liable as to the succeeding installments.

By whom given:

1. the holder2. another on behalf of the holder3. any party to the instrument who may be

compelled to pay it to the holder, and who

would have a right to reimbursement from the party to whom the notice is given.

Notice of dishonor given by or on behalf of a holder inures to the benefit of:

1. all parties prior to the holder, who have a right of recourse against the party to whom the notice is given; and

2. all holders subsequent to the holder giving notice.

Notice of dishonor given by or on behalf of a party entitled to give notice inures to the benefit of:

1. the holder; and2. all parties subsequent to the party to

whom notice is given.

Where an instrument is dishonored in the hands of an agent, he can do either of the following:

1. directly give notice to persons secondarily liable thereon; or

2. give notice to his principal. In such case, he must give notice within the time allowed by law as if he were a holder.

A party giving notice is deemed to have given due notice where:

1.the notice of dishonor is duly addressed, and

2.deposited in the post-office, even when there is miscarriage of mail.

Notice is deemed to have been deposited in the post office when deposited in any branch post-office or in any letter box under the control of the post office department. Where a party receives notice of dishonor, he has, after the receipt of such notice, the same time for giving notice to antecedent parties that the holder has after the dishonor.

Notice may be waived either before the time of giving notice, or after the omission to give due notice. Waiver may be expressed or implied.

As to who are affected by an express waiver depends on where the waiver is written.

1. if it appears in the body or on the face of the instrument, it binds all parties; but2. if it is written above the signature of an indorser, it binds him only.

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 indorsers have been taken. Where protest is waived, presentment and notice of dishonor are also deemed waived. But


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where the notice of dishonor is waived, presentment is not waived.

Notice is dispensed with when, after the exercise of reasonable diligence, it cannot be given or does not reach the parties sought to be charged. Notice of dishonor is not required to be given to the drawer in any of the ff. cases:

1. drawer and drawee are the same;2. drawee is a fictitious person or not

having the capacity to contract;3. drawer is the person to whom the

instrument is presented for payment;4. the drawer has no right to expect or

require that the drawee or acceptor will honor the instrument;

5. where the drawer has countermanded payment.

Notice of dishonor is not required to be given to an indorser in either of the ff. cases:

1. drawee is a fictitious person or does not have the capacity to contract, and indorser was aware of that fact at the time he indorsed the instrument;

2. indorser is the person to whom the instrument is presented for payment;

3. instrument was made or accepted for his accommodation.

If an instrument is not accepted by the drawee, there is no sense presenting it again for payment, and notice of dishonor must at once be given. If there was acceptance, presentment for payment is still required and if payment is refused, there is a need for notice of dishonor.

An omission to give notice of dishonor by non-acceptance does not prejudice the rights of a holder in due course subsequent to the omission.

Protest is necessary only in case of foreign bills of exchange which have been dishonored by non-acceptance or non-payment, as the case may be. If it is not so protested, the drawer and indorsers are discharged

FOREIGN BILL OF EXCHANGE:

1. Drawn in the Philippines but payable outside the Philippines.

2. Payable in the Philippines but drawn outside the Phillipines.

DISCHARGE OF NEGOTIABLE INSTRUMENT (Section 119, NIL):

Discharge of an instrument- means a release of all parties, whether primary or secondary, from the obligations arising

thereunder. It renders the instrument without force and effect and, consequently, it can no longer be negotiated.

WHEN A NEGOTIABLE INSTRUMENT IS DISCHARGED:

1. By payment I due course by or on behalf of the principal debtor;

2. Payment by accommodated party;3. Intentional cancellation by the holder;4. By any act which will discharge a simple

contract for the payment of money;5. When the principal debtor becomes the

holder of the instrument at or after maturity in his own right.

WHEN A PERSON SECONDARILY LIABLE IS DISCHARGED (Section 120, NIL):

1. By any act which discharges the instrument;2. By the intentional cancellation of his

signature by the holder;3. By the discharge of a prior party;4. By a valid tender of payment made by a

prior party;5. By the release of the principal debtor, unless

the holder’s right of recourse against the party secondarily liable is expressly reserved;

6. By any agreement binding upon the holder to extend the time of payment or to postpone the holder’s right to enforce the instrument.

In the following cases, the agreement to extend the time of payment does not discharge a party secondarily liable:

a) where the extension of time is consented to by such party;

b) where the holder expressly reserves his right of recourse against such party.

Payment at or after maturity by a party secondarily liable does not discharge the instrument. It only cancels his own liability and that of the parties subsequent to him. (Section 121, NIL).

EFFECT OF RENUNCIATION (Section 122, NIL): 1. A renunciation in favor of a secondary party

may be made by the holder before, at or after maturity of the instrument. The effect is to discharge only such secondary party and all parties subsequent to him but the instrument itself remains in force.

2. A renunciation in favor of the principal debtor may be effected at or after maturity. The effect is to discharge the instrument and all parties thereto provided the renunciation is made unconditionally and absolutely.


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NOTE: In either case, renunciation does not affect the rights of a holder in due course without notice.

Cancellation of an instrument includes tearing, erasure, obliteration, or burning. It is not limited to writing of the word ‘cancelled”, or “paid”, or drawing of criss-cross lines across the instrument (Section 123, NIL).

MATERIAL ALTERATION - any change in the instrument which affects or changes the liability of the parties in any way.

EFFECT OF ALTERATION:

1. Alteration by a party material alteration by the holder is to discharge the instrument and all prior parties thereto who did not give their consent to such alteration.NOTE: Since no distinction is made, it does not matter whether it is favorable or unfavorable to the party making the alteration. The intent of the law is to preserve the integrity of the negotiable instruments.

2. Alteration by a stranger it is called spoliation.

3. The right of holder in due course A material alteration avoids the instrument in the hands of one who is not a holder in due course as against any prior party who has not assented to the alteration. If an altered instrument is negotiated to a HIDC, he may enforce payment thereof according to its original tenor regardless of whether the alteration was innocent or fraudulent.

CHANGES IN THE FOLLOWING CONSTITUTES MATERIAL ALTERATIONS:

1. date2. sum payable, either for principal or interest3. time or place of payment4. number or relations of the parties5. medium or currency in which payment is to

be made6. that which adds a place of payment where

no place of payment is specified7. any other change or addition which alters

the effect of the instrument in any respect.

ACCEPTANCE AND PRESENTMENT FOR ACCEPTANCE (Secs. 132-151, NIL)

Acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. It is the act by which the drawee manifests his consent to comply with the request contained in the bill of exchange directed to him and it contemplated an engagement or promise to pay.

WHEN PRESENTMENT FOR ACCEPTANCE IS REQUIRED:

1. where the bill is payable after sight, or when it is necessary in order to fix the maturity of the instrument;

2. where the bill expressly stipulates that it

shall be presented for acceptance;

3. where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.

NOTE: In all the above cases, the holder must either present the bill for acceptance or negotiate it within a reasonable time; otherwise, the drawer and all indorsers are discharged.

FORM OF PRESENTMENT FOR ACCEPTANCE:

1. must be made by or no behalf of the holder;2. at a reasonable hour or a business day;3. before the bill is overdue; and4. to the drawee or some person authorized to

accept or refuse to accept on his behalf.

WHEN PRESENTMENT EXCUSED:

1. where the drawee is dead, or has absconded, or is a fictitious person not having capacity to contract by bill.

2. after exercise of reasonable diligence, presentment cannot be made;

3. although presentment has been irregular, acceptance has been refused on some other ground.

WHERE BILL DISHONORED BY NON-ACCEPTANCE:

1. when it is duly presented for acceptance and such an acceptance is refused or cannot be obtained; or

2. when presentment for acceptance is excused, and the bill is not accepted.

If bill is duly presented for acceptance and it is not accepted within the prescribed time, the person presenting it must treat the bill as dishonored by non-acceptance or he loses the right of recourse against the drawer and indorsers.


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When a bill is dishonored by non- acceptance, an immediate right of recourse against the drawers and indorsers accrues to the holder and no presentment for payment is necessary.

There is implied acceptance if after 24 hours, the drawee fails to return the instrument. He is also deemed to have accepted the instrument when he destroys the same.

KINDS OF ACCEPTANCE:

1. GENERAL- assents without qualification to the order of the drawer.

2. QUALIFIED- which in express terms varies the effect of the bills as drawn.

a) Conditional- makes payment by the acceptor dependent on the fulfillment of a condition therein stated.

b) Partial- an acceptance to pay part only of the amount for which the bill is drawn.

c) Local- an acceptance to pay only at a particular place.

d) Qualified as to timee) The acceptance of some one or more of

the drawees but not of all.

PROTEST (Secs. 152-160)

PROTEST IS REQUIRED FOR 2 GOOD REASONS:

1. for uniformity in international transactions bec. most countries require it; and

2. it furnishes authentic and satisfactory evidence of the dishonor to the drawer, who from his residence abroad, would experience difficulty in verifying the matter and thus be compelled to rely on the representation of the holder.

PROTEST MAY BE MADE BY:

1. a notary public; or2. any respectable resident of the place where

the bill is dishonored, in the presence of 2 or more credible witnesses.

Protest for better security- is one made by the holder of a bill after it has been accepted but before it matures, against the drawer and indorsers, where the acceptor has been adjudged a bankrupt or an insolvent, or has made an assignment for the benefit of the creditors.

ACCEPTANCE FOR HONOR (Secs. 161-170)

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

REQUISITES OF ACCEPTANCE FOR HONOR:

1. the bill must have been protested for dishonor by non-acceptance or for better security;

2. the acceptor for honor must be a stranger and not a party already liable on the instrument;

3. bill must not be overdue;

4. acceptance for honor must be with the consent of the holder of the instrument.

FORMAL REQUISITES:

1. must be in writing;2. must indicate that it is an acceptance for

honor;3. signed by the acceptor for honor;4. must contain an express or implied promise

to pay money;5. the accepted bill for honor must be delivered

to the holder.

PAYMENT FOR HONOR (Secs.171-177)

Payment for honor- is payment made by a person, whether a party to the bill or not, after it has been protested for non-payment, for the benefit of any party liable thereon or for the benefit of the person for whose account it was drawn.

REQUISITES OF PAYMENT FOR HONOR:

1. the bill has been dishonored by non-payment;

2. it has been protested for non-payment;3. payment supra protest (another term for

payment for honor because prior protest for non-payment is required) is made by any person, even by a party thereto;

4. the payment is attested by a notarial act of honor which must be appended to the protest or form an extension of it;


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5. the notarial act must be based on the declaration made by the payee for honor or his agent of his intention to pay the bill for honor and for whose honor he pays.

NOTE: If the above formalities are no complied with, payment will operate as a mere voluntary payment and the payer will acquire no right to full reimbursement against the party for whose honor he pays.

In payment for honor, the payee cannot refuse payment. If he refuses, he cannot recover from the parties who would have been discharged had he accepted the same. In acceptance for honor, the holder’s consent is necessary.

The payer for honor is given the right to receive both the bill and the protest obviously to enable him to enforce his rights against the parties who are liable to him.

BILLS IN SET (Secs. 178-183)

BILL IN SET is one composed of several parts, each part being numbered and containing a

reference to the other parts, the whole of the parts constituting but one bill.

Purpose: Are usually availed of in cases where a bill had to be sent to a distant place through some conveyance. If each part is sent by different means of conveyances, the chance that at least one part of the set would reach its destination would be greater.

Rights of holders where parts are negotiated separately:

1. if both are HIDC, the holder whose title first accrues is considered the true owner of the bill.

2. But the person who accepts or pays in due course shall not be prejudiced.

Obligations of holder who indorses 2 or more parts of the bill in set:

1. the person shall be liable on every such part;

2. every indorser subsequent to him is liable on the part he has himself indorsed, as if such parts were separate bills.

LEGAL TENDER (R.A. 7653, NEW CENTRAL BANK ACT)

Section 52. Legal Tender. All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in the

Philippines for all debts, both public and private. PROVIDED, however, That, unless otherwise fixed by the Monetary Board, coins shall be legal tender in amounts not exceeding Fifty pesos (P50.00) for denominations of Twenty-five centavos and above, and in amounts not exceeding Twenty pesos (P20.00) for denominations of Ten centavos or less.

R.A. 8183 (Repealed R.A. 529, the Uniform Currency Act- Foreign currency as mode of payment)

SECTION 1. All monetary obligations shall be settled in the Philippine currency which is legal tender in the Philippines. However, the parties may agree that the obligation or transaction shall be settled in any other currency at the time of payment.


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II. CORPORATION CODE

CORPORATION- artificial being created by operation of law having the right of succession, and the powers, attributes and properties expressly authorized by law and incident to its existence (Sec. 2).

THEORIES ON THE FORMATION OF A CORPORATION:

1. CONCESSION THEORY – juristic principle in the creation of corporation, under which a corporation is an artificial creature without any existence until it has received the imprimatur of the state acting according to law, through the SEC.

2. THEORY OF CORPORATE ENTERPRISE OR ECONOMIC UNIT – corporation not merely an artificial being, but more as an aggrupation of persons doing business, or an underlying business unit.

3. ETHNOLOGICAL THEORY – Corporate idea is the product of no one people, and no one country but on the contrary, developed more or less independently, in varying forms among the several ethnological units.

4. IMITATIVE THEORY OF JURAL DEVELOPMENT – the formation of private corporation for certain purposes is permitted on the condition that they did not operate in violation of laws of the state.

FRANCHISES OF CORPORATION

1. PRIMARY FRANCHISE – the franchise to exist as a corporation.

2. SECONDARY FRANCHISE – right or privilege conferred upon existing corporation, such as to use the streets of a municipality to lay pipes or tracks, or operate a messenger and express delivery service.

DISTINCTIONS :

PRIMARY SECONDARY1. refers to the

franchise of being or existing as a corporation, i. e., possessing a unity and continuity of existence

1. refers to the exercise of rights as for example, the right of eminent domain or the partial appropriation of public property

2. vested in the individuals who compose the corporation and is essential to a corporation de jure.

2. It is deemed to vest in the corporation

3. it cannot be sold or transferred because it is inseparable from the corporation itself.

3. It may be sold or transferred; sue or be sued; subject to sale on execution, subject to levy provided such sale is decreed or ordered in judgment and is effective only when sale is confirmed by court often due notice.

ATTRIBUTES OF A CORPORATION:

1. It is an artificial being.2. It is created by operation of law.3. It enjoys the right of succession.4. It has the powers, attribute and properties

expressly authorized by law or incident to its existence.

CLASSES OF CORPORATION:

1. AS TO ORGANIZERSa. public – by State only; andb. private – by private persons alone or with the State.

2. AS TO FUNCTIONSa. public – governmental and other

functions; andb. private – usually for profit-making

functions3. AS TO GOVERNING LAW

a. public – Special Laws; andb. private – Law on Private Corporations

4. AS TO LEGAL STATUSa. de jure corporation – corporation

organized in accordance with requirements of law

b. de facto corporation – a corporation where there exists a flaw in its incorporation (Sec. 20). Its existence cannot be inquired collaterally. Such inquiry may be made by the Solicitor General in a quo warranto proceeding (Sec. 20).


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REQUISITES OF DE FACTO CORPORATION:

1. The existence of a valid law under which it may be incorporated;

2. An attempt in good faith to incorporate;3. Use of corporate powers; and 4. Issuance of certificate of incorporation by

the SEC as a minimum requirement of continued good faith.

c. corporation by estoppel – groups of persons which holds itself out as a corporation and enters into a contract with a 3rd person on the strength of such appearance. It cannot be permitted to deny its existence in an action under said contract (Sec. 21).

d. corporation by prescription – body that though not lawfully organized as a corporation, has been duly recognized by immemorial usage as a corporation, with rights and duties maintainable at law.

5. AS TO EXISTENCE OF SHARES OF STOCK

a. stock corporation – a corporation in which capital stock is divided into shares and is authorized to distribute to holders thereof of such shares dividends or allotments of the surplus profits on the basis of the shares held. (Sec. 3).

b. Non-stock corporation – not issue stocks and not distribute dividends to their members, for public good and welfare.

6. AS TO RELATIONSHIP OF MANAGEMENT AND CONTROL

a. holding corporation - it is one which controls another as a subsidiary by the power to elect management. It is one which holds stocks in other companies for purposes of control rather than for mere investment. It has a passive portfolio merely holding securities for control and management, as distinguished from an active investment policy which has an active portfolio buying and selling securities

TWO KINDS OF SUBSIDIARIES

1. MAJORITY OWNED SUBSIDIARY – where one corporation owns 51%-94% of the capital stock of another corporation.

2. WHOLLY OWNED SUBSIDIARY – where one corporation holds 95% to 100% of the capital stock of another corporation.

b. Affiliates – company which is subject to common control of a mother holding company and operated as part of the system.

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

directors of the parent or holding company has the prerogative to choose its nominees in the board of directors or its subsidiary.

7. AS TO PLACE OF INCORPORATION

a. Domestic corporation- corporation formed, organized or existing under laws

b. Foreign Corporation – a corporation formed , organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporation to do business in its own country or state (Section 123).

8. OTHER CORPORATIONS

a. Close Corporation b. Special Corporation

1. educational corporation 2. religious corporation

a. corporation sole b. religious societies

ACQUIRED ASSET CORPORATION –

(a) organized under general corporation law under private ownership where at least a majority of the shares of stock of which were conveyed to a government corporation in satisfaction of a debt incurred with a government financial institution, whether by foreclosure or otherwise; or (b) a subsidiary corporation of a government corporation organized exclusively to own and manage, or lease or operate specific physical assets acquired by a government financial institution in satisfaction of debts incurred therewith (PD 2029, Sec. 3 c).

RULE ON CONVERSION

1. STOCK CORPORATION TO NON-STOCK An existing stock corporation may be converted into a non-stock corporation by mere amendments of its articles of incorporation.


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2. CONVERSION OF NON-STOCK CORPORATION TO STOCK CORPORATION

Mere amendment of the articles would not suffice as it would change its very nature from non-profit to monetary gain. It is fundamental that the non-stock corporation be dissolved first. A non-stock corporation only holds its funds in trust for carrying out the objectives expressed in its charter. The conversion without dissolving it first would be tantamount to distribution of its assets or income to its members inasmuch as after its conversion, the asset of the non-stock corporation would now be treated as payment to the subscriptions of the members who will now become stockholders of the corporation. Moreover, the scheme might defraud the public

who may have given donations not for the benefit of the stockholders but for organization purposes.

ADVANTAGES OF CORPORATION AS AGAINST UNREGISTERED ASSOCIATION

1. enjoys perpetual succession under corporate name and in an artificial form

2. can take and grant property3. can contract obligations4. can sue and be sued in its corporate name

as a juridical person5. capacity to receive and enjoy common

grants of privileges and immunities 6. no personal liability beyond value of their

shares

DOCTRINE OF SEPARATE PERSONALITY

A corporation has a personality separate and distinct from that of its stockholders or members.

PIERCING DOCTRINE OF THE VEIL OF CORPORATE FICTION

Allows the state to disregard for certain justifiable reasons the fiction of juridical personality for the corporation, separate and distinct from the persons composing it.

THREE CLASSES OF PIERCING:

1. Fraud Cases – when a corporation is used as a cloak to cover fraud, or to do wrong

2. Alter Ego Cases – when the corporate entity is merely a farce since the corporation is an alter ego, business conduit or instrumentality of a person or another corporation

INSTRUMENTALITY RULE- Where one corporation is so organized and controlled and its affairs are conducted so that it is in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the “instrumentality” may be disregarded. The control necessary to invoke the rule is not mere majority or even complete stock control but such domination of finances, policies, practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is, but a conduit for its principal.3. Equity cases – when piercing the corporate fiction is necessary to achieve justice or equity

COMPONENTS OF A CORPORATION:1. incorporators;2. corporators;3. stockholders and members;4. promoter;5. board of directors;

6. executive committee; and7. officers of the corporation.

INCORPORATORS- They are those mentioned in the articles of incorporation as originally forming and composing the corporation, having signed the articles and acknowledged the same before a notary public. They have no powers beyond those vested in them by the statute.

Only natural persons can be incorporators except when otherwise allowed by law as in the case of incorporated cooperative which are allowed to be incorporators of rural banks.

NUMBER AND QUALIFICATION OF INCORPORATORS: (Sec. 10)

1. natural person;2. not less than 5 but not more than 15;3. of legal age;4. majority must be resident of the Philippines;

and5. each must own or subscribe to at least one

share.

DISTINCTIONS :

INCORPORATORS CORPORATORS

1. signatory to articles 1. stockholder of stock corporation or member of non-stock corporation

2. do not cease to be such

2. cease to be such if they are no longer stockholders


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3. number is limited t0 5-15

3. no restriction as number

4. must have contractual capacity

4. may be such through a guardian

CONTENTS OF ARTICLES OF INCORPORATION (SEC. 14):

1. name of corporation;2. purpose/s, indicating the primary and

secondary purposes;3. place of principal office;4. duration;5. names, citizenship and residences of

incorporators;6. number, names, citizenship and residences

of directors;7. if stock corporation, amount of capital stock,

number of shares and in case of par value stock corporations, the par value of each share;

8. names, residences, number of shares and amounts of subscription of subscribers which shall not be less than 25% of ACS;

9. names, residences, and amount paid by each subscriber on their subscription, which shall not be less than 25% of total subscription;

10. name of treasurer elected by subscribers; and

11. if the corporation engages in a nationalized industry, a statement that no transfer of stock will be allowed if it will reduce the stock ownership of Filipinos to a percentage below the required legal minimum.

WHAT CANNOT BE AMENDED IN THE ARTICLES OF INCORPORATION

Those matters referring to facts existing as of the date of the incorporation such as:

1. names of incorporators;2. names of original subscribers to the capital

stock of the corporation and their subscribed and paid up capital;

3. treasurer elected by the original subscribers;4. members who contributed to the initial

capital of a non-stock corporation;5. date and place of execution of the articles of

incorporation;6. witnesses to and acknowledgment of the

articles.

LIMITS ON THE USE OF CORPORATE NAME

1. Names which are identical, deceptively or confusingly similar to that of any existing corporation;

2. a name already protected by law;

3. a name which is patently deceptive, confusing or contrary to existing laws.

DISTINCTIONS :

ARTICLES OF INCORPORATION

BY-LAWS

1. It is essentially a contract between the corporation and the stockholders/ members; between the stockholders/ member inter se, and between the corporation and the State; hence must be notarized themselves;

1. It is more of a rule for the internal government of the corporation but has the force of a contract between the corporation and the stockholders/ members, and between the stockholders and members;

2. It is executed before incorporation

2. It is usually executed after the incorporation

although Sec. 46 allows simultaneous filling of the two;

3.It is a condition precedent in the acquisition of corporate existence;

3.It is a condition subsequent;

4. It is amended by a majority of the directors/ trustees and stockholders representing 2/3 of the outstanding capital stock, or 2/3 of the members in case of non-stock corporations

4. It may be amended by a majority vote of the BOD and majority vote of outstanding capital stock or a majority of the member in non-stock corporation

5. Power to amend/repeal articles cannot be delegated by the stockholders/ members to the board of directors/ trustees.

5. Power to amend or repeal by-laws or adopt new by-laws may be delegated by the 2/3 of the outstanding capital stock or 2/3 of the members in the case of non-stock corporation.


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ELEMENTS OF A VALID BY-LAWS:

1. Must not be contrary to existing law nor inconsistent with the Code, else they have no binding effect;

2. Must not be contrary to morals and public policy – State will interfere if it is so;

3. Must not impair contract obligations –Art III Sec 10,1987 Constitution

4. Must be general and uniform – they must affect all alike, and operate equally as to all persons or matters standing in equal status or circumstances and without any unreasonable discrimination as to any particular person or thing of the class;

5. Must be consistent with the charter or articles of incorporation – “charter” is used here in its broadest sense without regard to whether the statutory right to be a corporation is obtained by special act or under general statutes;

6. Must be reasonable ,not arbitrary or oppressive . Reasonableness depends upon:a. Facts and circumstances of the case

b. Nature, Purpose, Object of the corporation

c. Whether or not it is within the corporation’s power of adoption

d. The relation which the person raising the question sustains to the corporation, i.e. whether he is a stockholder or member or stranger to the corporation.-Thus a by-law may be reasonable as to the corporation and as to the third persons contracting subsequently to its adoption with the corporation, and yet be invalid as to third persons sustaining at no time of its adoption, contractual relations with the corporation- If stockholders alone are affected,

only they can attack.

BINDING EFFECTS OF BY-LAWS:

1. AS TO MEMBERS AND CORPORATION- They have the same force and effect as the

provisions of the charter and articles of incorporation. They have the force of contract between the members themselves.

They are binding only upon the corporation adopting them and on its members and those having direction, management and control of its affairs.

2. AS TO THIRD PERSONS Strangers are not bound to know the by-

laws which are merely provisions for the government of a corporation and notice to them will not be presumed.

Rationale: by-laws have no extra-corporate force and are not in the nature of legislative

enactments so far as third persons are concerned.

POWERS OF A CORPORATION

KINDS:

1. Express Powers – granted by law , Corporation Code and its Articles of Incorporation or Charter

2. Inherent / Incidental Powers – not expressly stated but are deemed to be within the capacity of corporate entities

3. Implied / Necessary – exists as a necessary consequence of the exercise of the express powers of the corporation or the pursuit of its purposes as provided for in the Charter

THEORY OF GENERAL CAPACITY – corporation is said to hold such powers as are not prohibited or withheld from it by general law (everything is allowed except when prohibited).

THEORY OF SPECIAL CAPACITY – corporation cannot exercise powers except those expressly or impliedly given (everything is prohibited except when allowed).

A. GENERAL CORPORATE POWERS AND CAPACITY (SEC. 36):

1. To sue and be sued;2. Of succession;3. To adopt and use of corporate seal;4. To amend Articles;5. To adopt by-laws;6. For stock corporations – issue and sell

stocks to subscribers and treasury stocks, for non-stock corporations – admit members;

7. Purchase;Receive } real propertyGrant } personal propertyTake } securities andDeal } bonds

8. to enter into merger or consolidation;9. to make reasonable donations for:

a. public welfare;b. hospital;c. charitable;d. cultural;e. scientific;f. civic; andg. similar purposes

Prohibitions : no donation to – i.political party;ii.candidate; and iii.partisan political activity.

10. to establish;a. pensionb. retirementc. and other plans for the benefit of


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i. directors;ii. trustees;iii. officers;iv.employees.

11. Other powers essential or necessary to

carry out its purposes

RESTRICTIONS ON THE POWER TO MAKE DONATIONS:

1. The donation must be reasonable, otherwise it would be tantamount to a conversion of corporate funds;

2. That it must not be in aid of any political party or candidate;

3. That it must not be for purposes of partisan political activity.

B. SPECIAL POWERS

1. Power to extend or shorten corporate term

2. Increase / Decrease Corporate Stock 3. Incur, Create Bonded Indebtedness4. Sell, Dispose. Lease, Encumber all or

substantially all of corporate assets 5. Purchase or acquire own shares

provided:

(i) there is an unrestricted retained earnings

(ii) for legitimate purpose 6. Invest corporate funds in another

corporation or business for other purpose other than primary purpose

7. Power to declare dividends out of unrestricted retained earnings

8. Enter into management contract.

MANAGEMENT CONTRACT – one entered into between two corporations whereby one corporation undertakes to manage all or substantially all of the business of the other corporation for certain period of time, whether such be a service contract, operating agreement or otherwise.

ULTRA VIRES ACT AND ILLEGAL ACTS

An ultra vires act is not necessary illegal although an illegal act is always ultra vires.

When the act of a corporation are spoken of as ultra vires, it is not intended that they are unlawful but merely those which are beyond the powers conferred upon the corporation by the act of its creation, and are in violation of the trust reposed in the managing board by the shareholders that the affairs of the corporation shall be managed and the funds applied solely for carrying out business objectives. An illegal act however is one which is expressly prohibited by the charter

or statute or which is immoral or against public policy.

EFFECTS OF ULTRA VIRES ACT ON:

1. executed contract – courts will not set aside or interfere with such contracts;

2. executory contracts – no enforcement even at the suit of either party (void and unenforceable);

3. part executed and part executory – principle of “no unjust enrichment at expense of another” shall apply; and

4. executory contracts apparently authorized but ultra vires – the principle of estoppel shall apply.

WASTING ASSET DOCTRINE- It permits corporations solely or principally engaged in the exploitation of “wasting assets” to distribute the net proceeds derived from exploitation of their holdings such as mines, oil wells, patents and leaseholds, without allowance or deduction for depletion.

The justification of such rule is that as the business of wasting asset corporation is to exploit and exhaust its assets, no one can expect that its capital would be kept intact. Hence that dividends cannot be paid out of the capital but only from the profits must not be applied as a rule.

NOTE: RELATION TO THE TRUST FUND DOCTRINE - Under the Doctrine, no dividends can be declared out of capital except only in two instances: (1) liquidating dividends and (2) dividends from investments in wasting asset corporation.

BOARD OF DIRECTORS REPOSITORY OF CORPORATE POWERS – unless otherwise provided by the Code, the corporate powers of all corporation shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the members of the corporation, who shall hold office for one year and until their successors are elected and qualified.

Except:1. Executive Committee; or2. The corporation enters into a management

contract.

QUALIFICATIONS OF DIRECTORS/ TRUSTEES:

1. He must own at least (1) share capital stock of the corporation in his own name, and if he ceases to own at least one share in his own name, he automatically ceases to be a


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director. For non-stock corporation, only members of the corporation can be elected to seat in the board of trustees (Sec. 23).

2. A majority of the directors/ trustees must be residents of the Philippines

(Sec. 23).3. He must not have been convicted by final

judgment of an offense punishable by imprisonment for a period exceeding six (6) years or a violation of the Corporation Code, committed within five years from the date of his election

(Sec. 27).4. He must not have a substantial interest in a

competing corporation.5. Only natural persons can be elected

directors/trustees.6. Other qualifications as may be prescribed in

the by-laws of the corporation.

“BUSINESS JUDGMENT RULE.”- The board of directors is the body usually entrusted with the general control and management of the business of the corporation having plenary power/ authority to transact all the ordinary business of the corporation within the scope of its charter power. The SEC, stockholders and the courts cannot overrule a pure business judgment.

THREE-FOLD DUTIES OF DIRECTORS;1. Duty of Obedience- they will direct the

affairs of the corporation only in

accordance with the purposes for which it was organized;2. Duty of Diligence- 3. Duty of Loyalty

SOLIDARY LIABILITY OF DIRECTORS FOR DAMAGES(SEC. 31):

1. willfully and knowingly vote for and assent to patently unlawful acts of the corporation; and

2. guilty of gross negligence or bad faith in directing the affairs of the corporation;

3. acquire any personal or pecuniary interest in conflict of duty.

REMEDIES IN CASE OF MISMANAGEMENT:

1. receivership;1. injunction, if the act has not yet been done;2. dissolution if the abuse amounts to a ground

for quo warranto but the Solicitor General refuses to act; andderivative suit or complaint filed with SEC.

SPECIAL FACT DOCTRINE – director takes advantage of an information by virtue of his office to the disadvantage of the corporation.

INHERENT POWER OF “AMOTION “- It is the power to remove directors, officer and trustees prior to the expiration of their term.

DOCTRINE OF CORPORATE OPPORTUNITY – if there is presented to a corporate officer or director a business opportunity which:1. corporation is financially able to undertake;2. from its nature, is in line with corporations

business and is of practical advantage to it; and

3. one in which the corporation has an interest or a reasonable expectancy.

By embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of his corporation, the law will not permit him to seize the opportunity.

SELF-DEALING DIRECTORS- those who personally contract with the corporation in which they are directors. It is discouraged because there can be no real bargaining where the same is acting on both sides of the trade.

REQUIREMENTS FOR THE VALIDITY OF CONTRACTS OF SELF-DEALING DIRECTORS:

1. All the requisites in Sec. 32, to wit:a) The presence of such

director/trustee in the board meeting approving the contract was not

necessary for constituting a quorum for such meeting;

b) The vote of such director/trustee in the board meeting approving the contract was not necessary for the approval of the contract;

c) The contract is fair and reasonable under the circumstances;

In the case of an officer, there was previous authorization by the board of directors.

2. Although not all said conditions are present, the corporation elects not to attack or question the validity of the contract without prejudice to the liability of the consenting director/trustee for damages under Sec. 31.

3.Where any of the first two conditions is absent, said contract must be ratified by the vote of the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in a meeting called for the purpose, provided that full disclosure of the adverse interest of the


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director/ trustee involved is made at such meeting.

INTERLOCKING DIRECTORS- They are those who sit in the boards of two or more corporations that transact business with one another or contract with each other whether on isolated or regular basis not only because one has big investments therein but also because his services may have been proven to be valuable, competent and efficient.

REQUIREMENTS FOR VALIDITY OF CONTRACTS OF INTERLOCKING DIRECTORS:

1. The contract is not fraudulent.2. The contract is fair and reasonable under

the circumstances.3. If the interlocking director’s interest in one

corporation or corporations is nominal(not exceeding 20% of the outstanding capital stock), then all the conditions prescribed in Sec. 32 on self-dealing directors must be present with respect to the corporation in which he has 20% or less interest:

a. the presence of the interlocking director in the board meeting in which the contract was approved was not necessary for the approval of the contract;

b. the vote of such director is not necessary for the approval of the contract.

LIMITATIONS ON THE POWERS OF EXECUTIVE COMMITTEE (SEC.35):

It cannot act on the following:1. matters needing stockholder approval; 2. filling up of board vacancies;

3. amendment, repeal or adoption of by-laws; 4. amendment or repeal of any resolution of

the Board which by its express terms is not amendable or repealable and

5. cash dividend declaration

CORPORATE OFFICERS (SEC. 25):

1. President – who shall be a director;2. Treasurer – who may or may not be a

director;3. Secretary – who shall be a resident and

citizen of the Philippines; and4. such other officers as may be provided in

the by-laws.

CORPORATE ACTS – see table on page 35 .

DOCTRINE OF INDIVIDUALITY OF SUBSCRIPTION- A subscription is one entire

and indivisible whole contract. It cannot be divided into portions. (Sec. 64)

VALID CONSIDERATIONS IN SUBSCRIPTION AGREEMENT: (SEC. 62)

1. Cash; 2. Property; 3. Labor or services actually rendered to the

corporation; 4. Prior corporate obligations; 5. Amounts transferred from unrestricted

retained earning to stated capital,6. Outstanding shares in exchange for stocks

in the event of reclassification or conversion.

NOTE: shares of stock shall not be issued in exchange for promissory notes or future services.

PRE-INCORPORATION SUBSCRIPTION CONTRACT – subscription of shares of stock of a corporation still to be formed shall be irrevocable for a period of at least 6 months from date of subscription, unless:1. all of the other subscribers consent to the

revocation;2. the incorporation of said corporation fails to

materialize with said period or within a longer period as may be stipulated in the contract of subscription; provided that no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the SEC (Sec.61).

CAPITAL STOCK OR LEGAL STOCK OR STATED CAPITAL – the amount fixed by the corporate charter to be subscribed and paid in cash, kind or property at the organization of the corporation or afterwards and upon which the corporation is to conduct its operation.

CAPITAL – actual property or estate of the corporation whether in money or property.

AUTHORIZED CAPITAL STOCK – total amount in the charter, which may be raised by the corporation for its operations.

WAYS OF INCREASING THE CAPITAL STOCK:

1. by increasing the number of shares and retaining the par value;

2. by changing the par value of existing shares without increasing the number of shares;

3. by increasing the number of shares and increasing the par value.

The way of increase varies according to the reason for the increase, and is left to the


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sound judgment of the board of directors, subject to ratification by the stockholders.

SHARES OF STOCK – interest or right which owner has in the management of the corporation, and its surplus profits, and, on dissolution, in all of its assets remaining after the payment of its debt.WORKING CAPITAL – excess of current assets over current liabilities.CIRCULATING CAPITAL – refers to the total amount of current assets.

DISTINCTIONS:CAPITAL STOCK SHARES OF

STOCK - the amount paid

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

- the interest or right which the stockholder has in the management of the corporation, and its surplus profits, and upon a dissolution, in all of its assets remaining after payment of corporate debts. Share of stock belongs to the individual stockholders and not to the company.

DISTINCTIONS :SHARE OF STOCK CERTIFICATE OF

STOCK1. unit of interest in a corporation

1. Evidence of the holder’s ownership of the stock and of his right as a shareholder and of his extent specified therein.

2. it is an incorporeal or intangible property

2. It is concrete and tangible

3. it may be issued by the corporation even if the subscription is not fully paid.

3. It may be issued only if thesubscription is fully paid.

4. Situs is generally the state where the corporation has its domicile

a) For purposes of taxation, situs is inconsistent with an express provision of the statute or it is unjust.b)To register the

4.The situs may be the place where it is located or at the domicile of the owner even though the domicile of the owner, except when corporation is dominated elsewhere.

chattel mortgages over the shares of stock the status is the duty/promise in which the corporation has its principal place of business.c)For purposes of execution, it is the domicile of the corporation.

UNDERWRITING AGREEMENT- It is an agreement between a corporation and a third person, termed the “underwriter”, by which the latter agrees, for a certain compensation, to take a stipulated amount of stocks or bonds, specified in the underwriting agreement, if such securities are not taken by those to whom they are first offered.

DISTINCTIONS :UNDERWRITING

AGREEMENTSTOCK

SUBSCRIPTION AGREEMENT

1. The signers obligate themselves to take the shares of stock which cannot be sold.

1. The obligation of the signer to the purchasers and to the public is absolute.

2. Underwriters are usually allowed a commission.

2. There is no commission.

3. In pure underwriting agreement, the signer can refuse to become a stockholder/ member of the company in pursuance of his contract with the promoter.

3. He becomes a stockholder of the company and is liable to pay the amount due on the stock.

MINIMUM CAPITAL STOCK REQUIRED (SEC. 12)

GENERAL RULE : NO minimum required for capital stock.

Except:1. Domestic Insurance Corporations –

P500T capital stock; 50% subscribed and the balance payable in 12 months.

2. Private Development Banks P4M for class A P2M for class B P1M for class C

3. Investment Companies – paid up at least P500T


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4. Savings and Loan Corporation – to be fixed by the Monetary Board but not less than P100T.

5. Financing Companies Paid up: P2M for Metro Manila

P1M for CitiesP500T for others

AMOUNT OF CAPITAL STOCK TO BE SUBSCRIBED AND PAID FOR PURPOSES OF CORPORATION (SEC. 13):

25% of ACS must be subscribed at time of incorporation; and

25% of total subscription must be paid upon subscription but must not be less than P5,000

CLASSIFICATION OF SHARES (SEC. 6):

1. PREFERRED SHARES – issued with par value and preference may be to (a) assets after dissolution, (b) distribution of dividends and other preferences;

2. REDEEMABLE SHARES (SEC. 8) – are those which permit the issuing corporation to redeem or purchase its own shares.

LIMITATIONS ON THE ISSUANCE OF REDEEMABLE SHARES:

1. Redeemable shares may be issued only when expressly provided for in the articles of incorporation (Sec. 8).

2. The terms and conditions affecting said shares must be stated both in the articles of incorporation and in the certificate of stock representing such share (Sec. 8).

3. Redeemable shares may be deprived of voting rights in the articles of incorporation, unless otherwise provided in the Code.

3. TREASURY SHARES (SEC. 9) - shares which have been earlier issued as fully paid and have thereafter been acquired by the corporation by purchase, donation, redemption or through some lawful means.

IF PURCHASED FROM THE STOCKHOLDERS – the transaction in effect is a return to the stockholders of the value of their investment in the company and a reversion of the shares to the corporation. The corporation must have surplus profits with which to buy the shares so that the transaction will not cause an impairment of the capital.

IF BY DONATION FROM THE STOCKHOLDERS – the act would amount to a surrender of their stock without getting

back their investments which are instead, voluntarily given to the corporation.

4. FOUNDER’S SHARE (SEC. 7);5. NON-VOTING SHARES;6. VOTING SHARES7. COMMON SHARE – is the basic class of

stock ordinarily and usually issued without extraordinary rights and privileges and the owners thereof are entitled to a pro rata share in the profits of the corporation and in its assets upon dissolution and likewise in the management of its affairs without preference or advantage whatsoever.

8. PROMOTERS SHARES – are those issued by mining corporations to owners of mines who transferred their mining rights to such corporations or they are shares issued to promoters of a corporation.

9. ESCROW STOCK – deposited with 3rd

person to be delivered to S/H or his assign after complying with certain conditions, usually payment of full subscription price;

10. OVER-ISSUED STOCK – are those issued in excess of the authorized capital stock.

11. WATERED STOCK – issued as fully paid when in fact it is not (Sec.65);

“WATER” IN THE STOCK- It represents the difference between the fair market value at the time of the issuance of the stock and the par or issued value of said stock. Both par and no-par stocks can thus be watered stocks.

12. PAR VALUE SHARES- value in fixed in the articles of incorporation

13. NO PAR VALUE SHARES- shares having no par value but have issued value stated in the articles of incorporation or to be fixed by the Board

LIMITATIONS ON THE ISSUANCE OF “NO PAR VALUE” SHARES:

1. No par value shares cannot have an issued price of less than P5.00 while the par value of a share can be as low as 1 cent.

2. The entire consideration for its issuance constitutes capital so that no part of it should be distributed as dividends.

3. They cannot be issued as preferred stocks.

4. They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loan association.

5. The articles of incorporation must state the fact that it issued no par value shares as well as the number of said shares.

6. Once issued, they are deemed fully paid and non-assessable.


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14. DEBENTURE – charged on the net earning and profit of the corporation;

15. DEFERRED SHARES – are those which are entitled to dividends after the payment of holders of common share.

16. STOCK WARRANT – security which entitle holder the right to subscribe to, or purchase from, the unissued capital stock of a corporation in the future;

17. SCRIP – applied to certificates issued by trustee in a voting trust;

18. STREET CERTIFICATE – stock certificate endorsed by the registered holder in blank and transferee can command its transfer to his name from the issuing corporation. The certificate may be transferred by mere delivery; and

19. CUMMULATIVE PREFERRED SHARES – which entitle the holder thereof to payment of current dividends as well as dividends in arrears.

20. NON-CUMMULATIVE – which entitle the holder thereof only to the payment of current and not past dividends.

21. PARTICIPATING – which entitle the holder thereof to participate with the holders of common shares after their preferred rights has been satisfied.

22. NON-PARTICIPATING – which entitle the holder to payment of the stipulated preferred dividends and no more.

23. CUMMULATIVE-PARTICIPATING – which entitle the holder thereof to payment of dividends in arrears, and also after receiving his preferred shares of dividends, to participation with the holders of common stock in the remaining profits.

MATTERS WHERE HOLDERS OF NON-VOTING SHARES MAY VOTE (SEC. 6):

1. amendment of Articles of Incorporation;

2. adoption and amendment of by-laws;3. increase or decrease of bonded

indebtedness;4. increase or decrease of capital stock;5. sale or disposition of all or substantially all of

corporate property;6. merger or consolidation of corporation;7. investments of funds in another corporation

or another business purpose; and8. corporate dissolution.

DOCTRINE OF EQUALITY OF SHARES- Where the articles of incorporation do not provide for any distinction of the shares of stock, all shares issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are also subject to the same liabilities.

TRUST FUND DOCTRINE – the subscribed

capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits. Corporation may not dissipate this and the creditors may sue stockholders directly for the unpaid subscription.

REACQUISITION BY CORPORATION OF ITS STOCK (SEC. 41):

1. to eliminate fractional shares;2. to compromise an indebtedness arising out

of unpaid subscription;3. to purchase delinquent shares; and4. to exercise its right of appraisal.

RIGHTS OF STOCKHOLDERS:

1. DIRECT OR INDIRECT PARTICIPATION IN MANAGEMENT –a. voting rights (Sec. 6); andb. right to remove directors (Sec. 28)

2. PROPRIETARY RIGHTS – a. right to dividends;b. appraisal right (Sec. 81);c. rightr to issuance of stock certificate for

fully paid shares (Sec.64);d. proportionate participation in the

distribution of assets in liquidation (Sec.118-119);

e. right to transfer of stocks in corporate books (Sec. 63);

f. preemptive right (Sec. 39);g. right to inspect books and records (Sec.

74);h. right to be furnished of the most recent

financial statement/ financial report (Sec. 74 and 75);

i. right to recover stocks unlawfully sold for delinquent payment of subscription.

3. REMEDIAL RIGHTS –a. individual suit; b. representative suit; and

c. derivative suit - suit brought by S/H, for and in behalf of the corporation and against any person he be also a S/H, director, officer or 3rd person.

REQUISITES:i. the party bringing suit should be

a shareholder as of the time of the act or transaction complained of;

ii. he has exhausted intra-corporate remedies; and

iii. the cause of action actually devolves on the corporation, the wrongdoing or harm having been caused to the corporation and not to the particular stockholder bringing the suit.


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PREEMPTIVE RIGHT OF STOCKHOLDERS – shareholders right to subscribe to all issues or dispositions of shares of any class in proportion to his present stockholdings, the purpose being to enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the surplus.

OBLIGATIONS OF A STOCKHOLDER:

1. Liability to the corporation for unpaid subscription (Sec. 67-70)

2. Liability to the corporation for interest on unpaid subscription if so required by the by-laws (Sec. 66)

3. Liability to the creditors of the corporation for unpaid subscription (Sec. 60)

4. Liability for watered stock (Sec. 65)5. Liability for dividends unlawfully paid (Sec.

43)6. Liability for failure to create corporation

(Sec. 10)

UNKNOWN STOCKHOLDER- They are owners of stock who cannot be located or identified. A trust relation is created between them and the corporation and their shares shall stand in the name of the corporation as a “trustee”.

HOW IDENTIFIED: Through a publication in a newspaper of

general circulation. If this proves futile, it is nevertheless the fiduciary duty of the corporation to continuously hold such shares as trustees for the owners, unless otherwise escheated in accordance with law.

LIMITATIONS ON THE STOCKHOLDER’S RIGHT TO VOTE:a. Where the articles of incorporation provides

for classification of shares pursuant to Sec. 6, non-voting shares are not entitled to vote except as provided for in the last paragraph of Sec. 6.

b. Preferred or redeemable shares may be deprived of the right to vote unless otherwise provided in the Code (Sec. 6).

c. Fractional shares of stock cannot be voted unless they constitute at least one full share (Sec. 41).

d. Treasury shares have no voting rights as long as they remain in the treasury (Sec. 57).

e. Holders of stock declared delinquent by the board of directors for unpaid subscription are not entitled to vote or a representation at any stockholder’s meeting (Sec. 67).

f. A transferee of stock cannot vote if his transfer is not registered in the stock and transfer book of the corporation (Sec. 63).

g. Stock held in escrow cannot be voted until the performances of a certain condition or

the happening of a certain event as contained in the agreement. (opinion)

CUMULATIVE VOTING – S/H, being entitled to that number of votes that his number of shares multiplied by the number of directors to be elected will bring, may give all said votes to one candidate or he may distribute them among as many candidates as he sees fit (Sec. 24).

PROXIES – S/H and members may vote in person of by proxy in all meetings of S/H or members (Sec. 58).

FORM – in writing, signed by the S/H or member and filed before the scheduled meeting with the corporate secretary.PERIOD OF VALIDITY – unless otherwise provided in the proxy, it should be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a longer period than five years at any one time.

Proxies are also considered as corporate devise for securing voting control of the corporation.

INSTANCES WERE THE RIGHT TO VOTE BY PROXY ARE EXPLICITLY PROVIDED FOR:

1. election of the board of directors or trustees (Sec. 24).

2. voting in case of joint ownership of stock (Sec. 56).

3. voting by trustee under voting trust agreement (Sec. 59).

4. pledged or mortgaged share (Sec. 55).5. as provided for in its by-laws (Sec. 47 (4).

DISTINCTIONS:VOTING TRUSTS

PROXY

1. The trustee votes as owner rather than as mere agent

1. The proxy holder votes as agent

2. The trust may vote in person or by proxy unless the agreement provides otherwise

2. The proxy must vote in person

3. The beneficial owner ceases to be recognized as a shareholder of record and the trustee

3. The principal in a proxy does not cease to be a stockholder


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assumes practically all the rights of a stockholder

4. Trustee acquires legal title to the shares of the transferring stockholder

4.Proxy has no legal title to the shares of the principal

5. The agreement must be notarized

5. Proxy need not be notarized

6. The agreement is irrevocable

6. Revocable anytime except one with interest

7. Trustee is not limited to act at any particular meeting

7.Proxy can only act at a specified stockholder’s meeting (if not continuing)

8. A trustee can vote and exercise all the rights of the stockholder even when the latter is present

8.A proxy can only vote in the absence of the owners of the stock

9. An agreement must not exceed 5 years at any one time except when the same is made a condition of a loan.

9. A proxy is usually of shorter duration although under Sec. 58 it cannot exceed 5 years at any one time

10. The voting right is divorced from the ownership of stocks

10. The right to vote is inherent in or inseparable from the right to ownership of stock

VOTING TRUST – one or more S/H of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding 5 years at any one time. However, if the voting trust was a requirement for a loan agreement, period may exceed 5 years but shall automatically expire upon full payment of the loan (Sec. 59).

DIVIDENDS – unrestricted retained earnings set apart from the general mass of funds of the corporation and distributed among the S/H in proportion to their shares or interest in the corporation, in the form of cash, property or stocks.

APPRAISAL RIGHT – right to withdraw from the corporation and demand payment of the fair value of his shares after dissenting from certain corporate acts involving fundamental changes in corporate structure (Sec.81)

INSTANCES WHERE IT MAY BE EXERCISED:1. extension of duration of corporate term;2. change in the rights of S/H, authorize

preferences superior to those S/H, or restrict the right of any S/H;

3. S/H authorized the board to invest corporate funds in another corporation;

4. S/H authorized board to engage in a purpose other than main purposes stated in the Articles; and

5. corporation decides to sell or dispose of all or substantially all assets of corporation.

STOCK OPTION – privilege granted to a party to subscribe to a certain portion of the unissued capital stock of a corporation within a certain period and under the terms and conditions of the grant exercisable by the grantee at any time within the period granted. The grant is not covered by any provision of the Code.

METHODS FOR COLLECTION OF UNPAID SUBSCRIPTION (SEC. 68):1. call delinquency and sale at auction of

delinquent shares;2. ordinary court actions (Sec. 70); and3. collection from cash dividends and other

amounts due to S/H, if allowed by the by-laws, or agreed by him.

PROCEDURE FOR THE SALE OF DELINQUENT STOCKS:

1. Notice of call- Call by resolution demanding payment of the balance of the subscription.

However, if the contract of subscription itself prescribes the date of payment of the unpaid subscription, no call is necessary.

2. The stockholders are given notice of the board resolution by the corporate secretary, either personally or by registered mail. Publication of notice of call is not required by law.

If the stockholders concerned do not pay within (30) days from the date specified in the contract of subscription or in the call, all the stocks covered by the subscription shall be declared delinquent and shall be subject to sale under Sec. 68.

3. Notice of delinquency served on the subscribers either personally or registered mail AND publication in a newspaper of general circulation in the province or the city where principal office is located for once a week for two consecutive weeks. Notice shall state the amount due on each


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subscription plus accrued interest, and the date, time and place of the sale which shall not be less than 30 days not more than 60 days from the date the stocks become delinquent. (Sec. 67-70)

EFFECT OF DELINQUENCY: No delinquent stock shall be voted for or be entitled to vote or to representation at any stockholder’s meeting, nor shall the holder thereof be entitled to any rights of the stockholder except right to dividends. (Sec. 71)

BOOKS REQUIRED TO BE KEPT (SEC. 74):

1. Book of Minutes;a. minutes of S/H meetings; andb. minutes of board meetings.

2. Book of all business transactions; 3. Stock and transfer book

MERGER – one corporation absorbs the other and remains in existence while the other is dissolved (Sec. 76).

CONSOLIDATION – a new corporation is created, and consolidating corporations are extinguished (Sec. 76).

PROCEDURE FOR MERGER OR CONSOLIDATION:

1. Board of each corporation shall draw up a plan of merger or consolidation setting forth:

a. names of the corporation involved b. terms and mode of carrying it

c. statement of changes, if any, in the present articles of the surviving corporation or the articles of the new corporation to be formed in the case of consolidation.

2. Plan for merger or consolidation shall be approved by majority vote of each of the board of the concerned corporations at separate meetings, and approved by the majority vote of the 2/3 of the OCS or members for non-stock corporations.

3. Any amendment to the plan must be approved by the majority vote of the board members or trustees of the constituent corporations and affirmative vote of 2/3 of the OCS or members.

4. Articles of Merger or Articles of Consolidation shall be executed by EACH of the constituent corporations, signed by the President or Vice-President and certified by secretary or assistant secretary setting forth:

(i) plan of merger or consolidation

(ii) for stock corporation, the number of shares outstanding; for non-stock, the number of members;

(iii) as to each corporation, number of shares or members voting for and against such plan respectively

5. Four copies of the Articles of Merger or Consolidation shall be submitted to the SEC for approval. Banks, insurance companies, building and loan associations, trust companies, public utilities, educational institutions and other special corporations favorable recommendation of government agency concerned.

GENERAL RULE – when one corporation buys all the shares of another corporation, this will not operate to dissolve the other corporation and as the two corporations still maintaining their separate corporate entities, one will not answer for the debts of the other.

Exceptions:1. if there is an express assumption of

liabilities;2. there is a consolidation or merger;3. if the purchase was in fraud of

creditors; and4. if the purchaser becomes a

continuation of the seller.

CORPORATE TERM – 50 years which may be subject to extension for another 50 years by amendment of Articles (Sec.11).

SHORTENING OF CORPORATE TERM. HOW DONE:

It refers to the dissolution of a corporation prior to the expiration of its term as fixed in the articles of incorporation.

This is done by following the formal requirements of Sec. 16 (not mere written assent) and the procedural requirements of Sec. 37 of the Corporation Code.

EXTENSION OF CORPORATE TERM- It refers to the continuation of a corporation beyond the term originally fixed in the articles of incorporation.

REQUISITES FOR AN EXTENSION OF CORPORATE TERM:

1) The extension cannot be made earlier than five (5) days prior to the original or


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subsequent expiry date unless warranted by a justifiable reason to be determined by the SEC- for evaluation purposes.

2) There can be no more extension after the expiration of the corporate term of existence because there is no more corporate life to extend and promote in such case.

3) It should be approved by 2/3 of the outstanding capital stock.

DOCTRINE OF RELATION- Where the failure to issue a new charter before the expiration of the old one is due solely to the fault of the clerk to whom application therefore is reasonably made, the new charter, when issued will relate back, and will be treated as taking effect from the day the corporation was entitled to have the charter issued. (Also see article 1174 of the NCC on fortuitous events).

EFFECTS OF NON-USE OF CORPORATE CHARTER AND CONTINUOUS INOPERATION OF CORPORATION (SEC. 22):

1. NON-USER FOR 2 YEARS – when the corporation does not fully organize and commence the transaction of its business or the construction of its works within 2 years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. Suspension or cancellation of corporate franchise is not automatic.

2. NON-USER FOR 5 YEARS – when the corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least 5 years EXCEPT if reason for non-use

or inoperation is beyond the control of the corporation.

DISSOLUTION OF A CORPORATION – extinguishment of the franchise of a corporation and the termination of its corporate existence.

MODES OF DISSOLUTION OF A CORPORATION:

1. VOLUNTARY DISSOLUTION – a. where no creditors are affected (Sec.

118)

Procedure:1) administrative application filed with the

SEC by a majority vote of the BOD2) notice thru registered mail or delivered

30 days prior to the meeting3) Publication of the notice for 3

consecutive weeks in a newspaper of general circulation

4) Resolution approved by 2/3 of the OCS

5) Copy of Resolution Certified by majority of BOD countersigned by secretary

b. where creditors are affected (Sec 119);

Procedure:1) Petition signed by majority of

BOD/trustees/officers verified by President/ Secretary/ Director

2) Claims and demands must be stated in the petition

3) Stockholders approval representing 2/3 OCS

4) SEC order setting date for objections5) Publication of the order and Posting6) Hearing7) Appointment of Receiver (if necessary) c. by shortening corporate term

(Sec. 120).

Procedure:1) Amendment of AOI2) Publication 3) Oath undertaking by majority of SH or

officers to personally answer for obligations

4) BIR clearance of tax liability5) Listing of creditors and Consent to the

shortening of the term6) Affidavit of assumption of liability by SH7) Latest audited financial statement of

corporation

d. expiration of corporate term

2. INVOLUNTARY DISSOLUTION (Sec. 121),

Procedure:1) Verified Complaint2) Proper Notice and Hearing in SEC3) Grounds4) failure to organize and commence business

within 2 years from incorporation;(Sec 22)

5) Continuously inoperative for 5 years ( Sec 22)

6) may be dissolved by SEC – on grounds provided by existing laws, rules and regulations:

failure to file by-laws within 30 days from issue of certificate of incorporation. Continuance of business not feasible as found by Management Committee or Rehabilitation Receiver Fraud in procuring Certificate of Registration Serious Misrepresentation Failure to file required reports

SEQUESTRATION- It means taking into custody or placing under the commission’s control or possession any asset, fund or property as well as relevant records or documents, to prevent their concealment, destruction,


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impairment or dissipation pending determination of whether said asset, fund or property is ill-gotten wealth under EO’s 1 and 2.

FREEZE ORDER- It is an order intended to stop or prevent any act or transaction which may affect the title, possession, status, condition, integrity or value of the asset of property which is or which might be the object of any action or proceeding under EO’s number 1 and 2.

LIQUIDATION:

Process by which all the assets of the corporation are converted into liquid assets (cash) in order to facilitate the payment of obligations to creditors, and the remaining balance if any is to be distributed to the SH or members.

Three Modes of Liquidation:

1. By BOD / Trustee2. Conveyance to a trustee made within

three year period3. By management committee or

rehabilitation receiver

FOREIGN CORPORATION – corporation formed, organized or existing under any law other than those of the Philippines, and whose laws allow Filipino citizens and corporations to do business in its own country or state (Sec. 123).

DOING BUSINESS – implies a community of commercial dealings and arrangements, and contemplates to some extent the performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of, the purpose and object of its organization. (Continuity Test)

DOCTRINE OF ISOLATED TRANSACTIONForeign corporation can sue or be sued on a transaction or series of transaction set apart

from the common business of a foreign enterprise in the sense that there is no intention to engage in a progressive pursuit of the purpose and object of business transaction

SUABILITY OF FOREIGN CORPORATIONS:

1. Foreign corporation doing business in the Philippines – a. with license : may sue and be sued

in the Philippines;b. without license : cannot sue but may

be sued in the Philippines.

2. Foreign corporation not doing business in the Philippines, on isolated transaction – may sue and be sued.

CLOSE CORPORATIONS

REQUIREMENTS FOR CLOSE CORPORATIONS (SEC. 96):

1. number of stockholders not to exceed 20;2. restriction on the transfer ; preemption in

favor of the stockholder or the corporation;3. the stocks cannot be listed in the stock

exchange nor should they be publicly offered.

Special type of close corporation – 2/3 of the voting stocks or voting rights is owned or controlled by another corporation which is not a close corporation.

The following cannot be a close corporation:a. mining companies;b. oil companies;c. stock exchanges;d. banks;e. insurance companies;f. public utility;g. education institution;h. other corporation declared to be

vested with public interest.

RESTRICTIONS ON TRANSFERS – the restrictions in the transfer of the stocks must appear (Sec. 98):

1. in the articles;2. in the by-laws; and3. on the stock certificates.

Restriction on the transfer must not be onerous than granting the existing SH or corporation the option to purchase the shares

PREEMPTIVE RIGHT IN CLOSE CORPORATIONS – shall extend to all stocks to be issued, including re-issuance of treasury share, whether for money or property or personal services, or in payment or corporate debts, unless the articles of incorporation provide otherwise (Sec. 102).

CHARACTERISTICS OF CLOSE CORPORATIONS:

1. S/H act as directors without need of election and therefore are liable as directors;

2. Quorum may be greater than mere majority;3. Transfers of stocks to others, which would

increase the number of S/H to more than the maximum are invalid;


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4. Corporate actuations may be binding even without a formal board meeting, if the S/H had knowledge or ratified the informal action of the others;

5. Preemptive right extends to all stock issues;6. Deadlocks in board are settled by the SEC,

on the written petition by any S/H; and7. S/H may withdraw and avail of his right of

appraisal.

NON-STOCK CORPORATIONS

DEFINITION- corporation where no part of its income is distributable as dividends to (Sec. 87):

a. members;b. trustees; andc. officers.

Except – at dissolution.

DISPOSITION OF PROFITS- for furtherance of purpose or purposes of the corporation.

CONDITIONS: necessary and proper (Sec. 88)

PURPOSES:a. charitable;b. religious;c. educational;d. professional;e. cultural;f. fraternal;g. literary;h. scientific;i. social;j. civic service; andk. similar purposes, such as chambers

or combinations for –i. trade;ii. industry;iii. agricultural.

DISTRIBUTION OF ASSETS ON DISSOLUTION OF NON-STOCK CORPORATION (SEC. 94):

1. all its creditors shall be paid;2. assets held subject to return on dissolution,

shall be delivered back to their givers;3. assets held for charitable, religious, etc.,

without a condition for their return on dissolution, shall be conveyed to one or

more organizations engaged in similar activities as dissolved corporation; and4. all other assets shall be distributed to

members, as provided for in the Articles or by-laws.

RELIGIOUS CORPORATIONS

KINDS (SEC. 109):

1. CORPORATION SOLE – special form of corporation, usually associated with the clergy and consists of one person only and his successors, who are incorporated by law to give some legal capacities and advantages; and

2. RELIGIOUS SOCIETIES – non-stock corporation governed by a board but with religious purposes.

SECURITIES AND EXCHANGE COMMISSION REORGANIZATION DECREE (P.D. 902-A)

Sec. 2,4, 8 repealed by RA 8799:

ORIGINAL AND EXCLUSIVE JURISDICTION OF THE COURTS OF GENERAL JURISDICTION/ RTC (SEC. 5 PD 902-A IN RELATION TO SEC. 5.2 RA 8799):

1. fraudulent devices and schemes employed by directors detrimental to the public interest and to other firms;

2. intra-corporate dispute and with the state in relation to their franchise and right to exist as such;

3. controversies in election, appointment of directors or trustees; and

4. petition to be declared in state of suspension of payments.

-SEC HAS JURISDICTION TO PETITIONS FILED AS OF JUNE 30, 2000.

GROUNDS FOR SUSPENSION OR CANCELLATION OF CERTIFICATE OF REGISTRATION (SEC. 6 (L)):

1. fraud in procuring registration;2. serious misrepresentation as to objectives of

corporation;3. refusal to comply with lawful order of SEC;4. continuous inoperation for at least 5 years;5. failure to file by-laws within required period;

6. failure to file reports; and7. other similar grounds.

REPUBLIC ACT 8799THE SECURITIES REGULATION

CODE

PURPOSES OF SECURITIES ACT1. establish a socially conscious self-regulating

free market2. encourage the widest participation of

ownership in enterprises3. enhance democratization of wealth


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4. promote development of capital market5. protect investors6. enhance full and fair disclosure about

securities7. minimize if not totally eliminate insider

trading and other fraudulent or manipulative devices and practices

POWERS AND FUNCTIONS OF THE SEC (SEC. 5)

1. jurisdiction/supervision over corporations, partnerships, and grantees of primary franchise

2. approve, reject registration statements/licensing applications

3. Suspend, revoke, after notice and hearing primary franchise on grounds

4. regulate/supervise activities of persons to ensure compliance

5. Supervise monitor, suspend or take over, exchanges, clearing agencies and SROs

6. Recommend policies, advise, propose legislation to Congress on securities market

7. Prepare, approve, amend or repeal rules, regulations, issue opinions and provide guidance on and supervise compliance with such rules, regulations and orders

8. Enlist the aid and support of and/or deputize any and all enforcement agencies of the Government, civil or military as well as any private institution, corporation, firm, association or person in the implementation of its powers and functions under this Code.

9. Issue cease and desist orders to prevent fraud or injury to the investing public

10. Punish for contempt of the Commission, both direct and indirect, in accordance with the pertinent provisions of and penalties prescribed by the Rules of Court.

11. Compel the officers of any registered corporation or association to call meetings of

stockholders or members thereof under its supervision.

12. Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the Commission and in appropriate cases, order the examination, search and seizure of all documents, papers and files and records, tax returns, and books of accounts of any entity or person

under investigation as may be necessary for the proper disposition of the cases before it, subject to the provisions of existing laws

13. Exercise such other powers as may be provided by law as well as those which may be implied from, or which are necessary or incidental to the carrying out of, the express powers granted the Commission to achieve the objectives and purposes of these laws.

Securities shall not be sold and offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the Commission may prescribe, shall be made available to each prospective purchaser. (Sec. 8.1)

EXCEPTIONS:1. Exempt securities; and2. Exempt Transactions

EXEMPT SECURITIES (SEC. 9):

1. Any security issued or guaranteed by the Government of the Philippines, or by any political subdivision or agency thereof, or by any person controlled or supervised by and acting as an instrumentality of said Government.

2. Any security issued or guaranteed by the government of any country with which the Philippines maintains diplomatic relations, or by any state, province or political subdivision or agency thereof on the basis of reciprocity: Provided, That the Commission may require compliance with the form and content of disclosures the Commission may prescribe.

3. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body.

4. Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of the Office of the Insurance Commission, Housing and land Use Regulatory Board, or the Bureau of Internal Revenue.

5. Any security issued by a bank except its own shares of stock.

EXEMPT TRANSACTIONS (SEC. 10):

1. Judicial sale by executor, administrator, guardian/receiver in insolvency or bankruptcy.

2. Sale of pledged or foreclosed property to liquidate debts.

3. sale on isolated transactions by owner .4. Distribution of stock dividends.5. Sale of capital stock to stockholders where

no commission is paid


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

7. Issuance of security in exchange of any security from same issuer pursuant to right of conversion.

8. Broker’s transactions, executed upon customer’s orders on any registered Exchange or other trading market.

9. Pre-incorporation subscription.10. Exchange of securities by issuer with

securities holders exclusively11. Sale to less than 20 persons during any 12

month period12. Sale of securities to banks13. Sale of securities to registered investment

houses14. Sale of securities to insurance company15. Sale of securities to pension fund or

retirement plan maintained by the Government of the Philippines or any political subdivision thereof or managed by a bank or other persons authorized by the Bangko Sentral to engage in trust functions

16. Sale of securities to investment company17. Sale of securities to such other person as

the Commission may rule determine as qualified buyers

GROUNDS FOR REJECTION AND REVOCATION OF REGISTRATION (SEC. 13):

1. The issuer:a) Has been judicially declared insolventb) Has violated any of the provisions of this Code, the rules promulgated pursuant thereto, or any order of the Commission of which the issuer has notice in connection with the offering for which a registration statement has been filed.c) Has been or is engaged or is about to engage in fraudulent transactions.d) Has made any false or misleading representations of material facts in any prospectus concerning the issuer or its securitiese) Has failed to comply with any requirement that the Commission may impose as a condition for registration of the security for which registration statement has been filed

2. The registration statement is on its face incomplete or inaccurate or includes any untrue statement of a material fact or omits to state a material fact required to be stated therein.

3. The issuer or any underwriter has been convicted by a competent judicial or administrative body of an offense involving

moral turpitude and/or fraud or is enjoined by the Commission or other competent judicial or administrative body for violations of securities, commodities and other related laws

4. Any issuer who refuses to permit the examination to be made by the Commissioner.

SUSPENSION OF REGISTRATION (SEC. 15):

1. If any time, the information contained in the registration statement filed is or has become misleading, incorrect, inadequate or incomplete in any material respect; or

2. The sale or offering for sale of the security registration there under may work or tend to work a fraud;

3. Pending investigation of the security registered to ascertain whether the registration of such security should be revoked on any ground specified in this Code; and

4. Refusal to furnish information required by the Commission.

UNLAWFUL ACTS:

1. For any beneficial owner, director, or officer to sell any security if the seller or his principal does not own or does not deliver it within 20 days from sale. (Sec. 23.3)

2. Manipulation of security prices. (Sec. 24.1)3. Employment of manipulative or deceptive

device or contrivance in connection with purchase and sale of authorities. Short sale, stop loss order be effected only in accordance with rules of SEC. (Sec. 24.2)

SHORT SALE – when seller does not own or control the securities he is selling, and therefore, cannot himself supply the securities for delivery.

STOP-LOSS ORDER – an order to broker to sell or buy stock as soon as the market price reaches a designated figure.

4. For any member of Exchange directly or indirectly endorse or guarantee the performance of any put, call, straddle, option or privilege in relation to any security registered. (Sec. 25)

PUT – an option that, in consideration of premium paid, gives the purchaser the right top make the seller take from him a given number of

shares of a named stock between a given time at a stipulated price, which is usually below a prevailing market price of the stock at the time the “put” is purchased.


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CALL – an option that in consideration of premium paid entitles buyer the right to compel seller to deliver to him a certain number of share of named stock within a given time at a stipulated price which is usually higher than the prevailing market price at the time the “call” is bought.

STRADDLE – double privilege of a “put” and a “call”, and secures to holder the right to demand of seller at a certain price within a certain time a certain number of shares of specified stock, or to require him to take, at the price within the time, the same shares of stock.

WASH SALE- to effect any transaction in any security which involves no change in the beneficial ownership thereof.

SHORT SWING TRANSACTION — one where a person buys securities and sells the same within a period of six months.

5. Fraudulent transactions (Sec.26);6. insider trading (Sec. 27)

INSIDER TRADING – it shall be unlawful for an insider to sell or buy a security of the issuer, while in possession of material information with respect to the issuer or the security that is not generally available to the public unless:

(a) The insider proves that the information was not gained from such relationship, or

(b) If the other party selling to or buying from the insider (or his agent) is identified, the insider proves:(i) that he disclosed the information

to the other party, or(ii) that he had reason to believe that

the other party otherwise is also in possession of the information.

INSIDER —means:a. The issuerb. A director or officer (or person

performing similar functions) of, or a person controlling the issuer

c. A person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is not generally available to the public

d. A government employee, or director , or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public, or

e. A person who learns such information by a communication from any of the foregoing insiders. (SEC. 3.8)

7. For insider to communicate material non-

public information about issuer or security. (SEC 27.3)

MATERIAL NON-PUBLIC INFORMATION - a. If It has not been generally disclosed

to the public and would likely to affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or

b. Would be considered by a reasonable person important under the circumstances in determining his course of action to buy, sell or hold security. (SEC 27.2)

8. Unlawful Tender Offer (Sec 27.4)9. Use of Extensive Credit (Sec48.1)

MARGIN – sum of money, or its equivalent, placed in the hands of a stockbroker by principal or persons on whose account the purchase is to be made, as a security to the former against losses to which he may be exposed by a subsequent depression in the market value of the stock.

— Credit extended must not be greater than which ever is higher of

a.65% of current market price of the security

b. 100% of lowest market price of security during preceding 36 calendar months but not greater than 75% of the current market price.


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CORPORATE ACTS

CORPORATE ACT NUMBER OF VOTES FOR

BOD

NUMBER OF VOTES OF SHAREHOLDERS

PROCEDURE / OTHER REQUIREMENTS

1. Amendment of AOI (Sec 16) Majority Vote Vote or written assent of 2/3 OCS SH or Members

Non-voting can vote Appraisal right in certain cases Effective upon approval by SEC or date of filing if not acted upon within six

months Must be for a legitimate purpose

2. Election of Directors or Trustees ( Sec 24 )

Majority of OCS / members Candidates with a highest number Cumulative voting: No. of shares x No. of directors to be elected Non-voting shares cannot vote

3. Removal of Directors or Trustees (Sec 28) 2/3 of OCS Notice and stated purpose requirement Meeting called by the secretary on President’s order or on written demand of

OCS majority Non-voting shares cannot vote Removal without cause cannot be used to deprive minority stockholders of

their right of representation

4. Ratification of a contract of self – dealing directors where presence of Director necessary to constitute quorum or vote of Director necessary for approval of the contract (Sec 32)

2/3 of OCS or members The contract must be fair and reasonable under circumstances Full disclosure of adverse interest of directors or trustees involved


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5. Extension or shortening of corporate term (Sec 37 )

Majority vote 2/3 OCS or members Non-voting can vote Appraisal Right available Notice requirement Meeting for the amendment of AOI

6. Election of officers (Sec 25) Majority vote of all the members of BOD

7. Increase or decrease of capital stock ( Sec 38 ) Majority vote 2/3 OCS or members Meeting required Non-voting can vote No appraisal right Notice requirement SEC approval Treasurer’s statement No decrease of capital stock if will prejudice right of creditors

8. Incur, Create , Increase Bonded Indebtedness Majority vote 2/3 OCS or members Meeting required Non-voting can vote No appraisal right Notice requiredRegistration of bonds with SEC

9. Sale ,Lease, Exchange, Mortgage, Pledge, Dispose of all or substantially all of corporate assets (Sec 40 )

Majority Vote 2/3 OCS or members Majority can vote Non-voting can vote Appraisal right available Notice required If sale is abandoned director’s action is sufficient, no need for ratification by

stockholders


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10. Investment of Corporate Funds to another Corporation or business for any other purpose other than primary purpose (Sec 42)

Majority Vote 2/3 OCS or members Non-voting can vote Appraisal Right available Notice required Investment for secondary purpose Stockholders ratification not necessary if the investment is incidental to

primary purpose

11. Issuance of Stock Dividends ( Sec 43 ) Majority of the quorum

2/3 OCS Out of unrestricted retained earnings

12. Management Contract ( Sec 44) Majority of the vote of BOD of both managing and managed corporation

Majority of OCS / members of both managing and managed corporation and in some cases 2/3 of OCS / members

13. Adoption of By- laws (Sec 46) Majority of OCS / members Non-voting can vote

14. Amendment or repeal of By laws or Adoption of New By-Laws ( Sec 48)

Majority vote Majority of OCS Non-voting can vote

15. Delegation of the Power to Amend, Repeal or Adopt New By Laws to BOD (Sec 48 )

2/3 OCS Delegation can be revoked by majority OCSNon-voting cannot vote

16. Fixing the issued Price of No- Par Value shares (Sec 62, last paragraph)48)

Majority of Quorum of BOD if authorized by AOI

Majority of OCS if BOD not authorized by AOI


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17. Merger or Consolidation (Sec 77 ) Majority of BOD of constituent corporation

2/3 OCS / members of constituent corporation

Non-voting can vote Appraisal right available but if plan is abandoned right is extinguished

18. Dissolution of Corporation (Sec 118 and 119 ) Majority Vote 2/3 OCS / members Read Sections 117-122 Non-voting can vote

19. Adoption of plan or distribution of assets of non-stock corporation ( Sec 95 par 2)

Majority Vote of Trustees

2/3 of members having voting rights

20. Ratification of act of disloyal director 2/3 OCS

21. Vacancies in BOD if not due to removal, expiration of the term or increase in number of directors

Majority vote of remaining directors if quorum still exists

If no quorum stockholders to elect

22. Power to acquire own shares Director’s action Provided that there is unrestricted retained earnings Only for legitimate purposes

23. Denial of pre-emptive right 2/3 OCS approval Only if AOI or amendment to AOI denies pre-emptive right Applies to shares issued in good faith in exchange for property needed for

corporate purposes or in payment of previously contracted debts

24. Fixing compensation for directors Reasonable per diems By-Laws may provide for compensation May be fixed by majority OCS Limit: not more than 10% of the net income before tax


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III. INSURANCE LAW

INSURANCE – contract whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event (Sec. 2, par. 2).

REQUISITES OF INSURANCE:

1. existence of an insurable interest (Secs. 12-14);

2. risk of loss (Sec. 51, par. 9);3. assumption of risks ( Sec. 2);4. scheme to distribute losses; and5. payment of premiums (Sec. 77).

GENERAL RULE: a future event is the only event that can be covered by an insurance contract.

Exception: a past event may be covered by a marine insurance – if the loss of the vessel in the past could not have been known by ordinary means of communication.

DOING AN INSURANCE BUSINESS OR TRANSACTING AN INSURANCE BUSINESS (Sec. 2, par. 4) INCLUDES:

1. making or proposing to make as insurer, any insurance contract;

2. making or proposing to make, as surety any contract of suretyship as a vocation, not as a mere incident to any other legitimate business of a surety;

3. doing any insurance business like reinsurance and similar acts and;

4. doing or proposing to do any business equivalent to above.

PRINCIPLES:

I. CONTRACT OF ADHESION OR FINE PRINT RULE

Insurance is a contract of adhesion considering that the most of the terms of the contract do not result from mutual negotiations between the parties as they are prescribed by the insurer in printed form to which the insured may “adhere” if he chooses but which he cannot change. Hence, in case of doubt, the contract shall be interpreted strictly against the insurer and liberally in favor of the accused.

However, if the terms of the contract are clear, there is no room for interpretation and the courts are bound to adhere to the insurance contract although the contract maybe rather onerous. Courts cannot make

a new contract for the parties where they themselves have employed clear and unambiguous words.

II. UBERRIMA FIDES CONTRACT

Contract of insurance is one of perfect good faith not for the insured alone, but equally so for the insurer; in fact it is more so for the latter, since its dominant bargaining position carries with it stricter responsibility.

It requires the parties to the contract of insurance to disclose any material fact, which the applicant knows, or which he ought to know.

III. RIGHT OF SUBROGATION

Insurer who pays shall be subrogated to the rights of insured against wrongdoer or person who has violated contract.

The principle of subrogation is a normal incident of indemnity insurance as a legal effect of payment; it inures to the insurer without any formal assignment or any express stipulation to that effect in the policy. Said right is not dependent upon nor does it grow out of any private contract. Payment to the insured makes the insurer an assignee in equity (Article 2207, NCC).

However, the insurer can only recover from the third person what the insured could have recovered.

Exceptions: there can be no subrogation if:

1. The insured by his own act releases the wrongdoer/third person liable for the loss. (Manila Mahogany Manufacturing Corporation vs. CA)

2. Where the insurer pays the insured for a loss or risk not covered by the policy. (Pan Malayan Insurance Company vs. CA, 184 SCRA 54)

IV. INDEMNITY

The contract of insurance is a contract of indemnity. It is the basis of all property insurance. It simply means that the insured that 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. Any contract of property insurance that gives to the insured more than indemnity against his actual loss that may be suffered by reason of designated perils is wagering policy.

Page 40 Commercial Law Memory Aid Committee: NICEFORO AVILA JR. (Chairperson), MA. HAZEL M. GUBATON (EDP) ,Ma. Leonora R. Tabladillo, Ma. Cecilia Taliman, Kristine Gayapa, Jaymie Parafina, Joanne Tatel, Darius Manlangit, Maricel Eschavez, Marisol Caneja, Shey Alvarez, Malou Ababa, Joeffrey Ravago, Abet Rebosa, Zharone Japson, Jinky Manguntalao, Lenie Basilio, Wilfred Babano, Alvin Carullo, Verny Camacho, Abraham Guiao, Michelle Antonio, Jil, Reina, Macky Macaldo

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NOTE: Applicable only to property insurance, except creditor insuring the life of his debtor.

TYPES OF INSURANCE CONTRACTS:

1. LIFE INSURANCE;a. individual life (Secs. 179 – 183, 227);b. group life ( Sec. 50, last paragraph,

228); andc. industrial life (Secs. 229 – 231).

2. NON-LIFE INSURANCEa. Marine (Secs. 99 – 166);b. Fire (Secs. 167 – 173); andc. Casualty (Sec. 174).

3. CONTRACTS OF SURETYSHIP (Secs. 175 –178).

PARTIES TO INSURANCE CONTRACT:

1. INSURER – person who undertakes to indemnify another;

2. INSURED – person with capacity to contract and having an insurable interest in the life or property of the insured; and

3. BENEFICIARY – person designated to receive proceeds of policy when risk attaches.

i. Beneficiary of one who insures his own life – as a general rule, may designate any person as the beneficiary, whether or not the beneficiary has an insurable interest in the life of the insured.Exception: Art. 739 of the Civil Code

ii. Beneficiary of life insurance on the life of another person – person who procured the insurance on the life of another must have an insurable interest.

iii. Beneficiary of property insurance – must have an insurable interest.

EFFECTS OF IRREVOCABLE DESIGNATION OF BENEFICIARY:

Insured cannot:1. assign the policy2. take the cash surrender value of the

policy3. allow his creditors to attach or execute

on the policy;4. add new beneficiary; or5. change the irrevocable designation to

revocable, even though the change is just and reasonable.

INSURABLE INTEREST – interest which the law requires a person making a contract of insurance to have in the person or thing insured to prevent the contract from becoming a wagering contract.

INSURABLE INTEREST IN LIFE – interest which a person has in his life, or interest which he may have in the lives of other persons (Sec. 10):1. on whom he depends wholly or in part

for education or support;2. under legal obligation to him to pay

money, to deliver property, or to render service; or

3. upon whose life any estate or interest vested in him depends.

GENERAL RULE: In life insurance, there is no limit in the amount the insured can insure his life.

Exception: in creditor-debtor relationship where the creditor insures the debtor, the limit of insurable interest is equal to the amount of the debt.

NOTE: Insurable interest in the life of another need exist only at the time of perfection of the contract and need not exist thereafter.

INSURABLE INTEREST IN PROPERTY – every interest in property whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that the contemplated peril might directly damnify the insured (Sec. 13), which may consist in (Sec. 19):

1. an existing interest;2. any inchoate interest founded

on an existing interest; or3. any expectancy coupled with an

existing interest in that out of which the expectancy arises.

NOTE: Expectancy is not insurable unless coupled with an interest in the thing from which it shall arise.

Example: an owner of a business can insure against a contingency which may cause loss of profits resulting from the cessation or interruption of his business. (See Sec. 14, ICP)

NOTE: Insurable interest must exist in the same person both at the perfection of the contract as well as the time of loss. In between, the effect of loss of insurable interest is merely to suspend the policy. (Sec. 20, ICP)

Exceptions:1. in case of life, health and accident

insurance (Sec. 20);


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2. change in interest results after occurrence of an injury which results in a loss (Sec. 21)

3. change in interest in one or more several distinct things separately insured by one policy (Sec. 22);

4. change in interest by will or succession on death of insured (Sec. 23);

5. transfer of interest by one of several partners, joint partners, or owners in common who are jointly insured, to others (Sec. 24).

6. when a policy is so framed that it will inure to the benefit of whomsoever, during the continuance of the risk, may become the owner of the interest insured (Sec. 57);

7. when is an express prohibition against alienation in the policy, in case of alienation, the contract of insurance is not merely suspended but avoided (Art. 1306, NCC).

DISTINCTIONS:Insurable interest in

Life InsuranceInsurable Interest in

Property1. must exist only at

the time the policy is taken.

1. must exist at time policy is taken and at time of loss.

2. taken on insured’s life, his beneficiaries need not have an insurable interest on his life.

2. beneficiary must have an insurable interest in property insured.

3. no limit to the amount of insurable interest (save in life insurance effected by creditor on life of the debtor) (Sec. 10).

3. insurable interest limited to value of interest in property insured (Sec. 19).

INSURABLE INTEREST OF MORTGAGOR AND MORTGAGEE OVER MORTGAGED PROPERTY.

The mortgagor and mortgagee each have an insurable interest in the property mortgaged and this interest is separate and distinct from the other.

The mortgagor of property, as owner, has an insurable interest therein to the extent of its value, even though the mortgage debt equals such value. The mortgagee's interest is only up to the extent of the debt.

STANDARD OR UNION MORTGAGE

OPEN OR LOSS PAYABLE

CLAUSE MORTGAGE CLAUSE

- the subsequent acts of the mortgagor cannot affect the rights of the assignee

the mortgagor does not cease to be a party to the contract

acts of the mortgagor affects the mortgagee

(Sections 8 and 9 ICP).

DEVICES USED FOR ASCERTAINING AND CONTROLLING RISK AND LOSS:

1. CONCEALMENT: A neglect to communicate that which a party knows and ought to communicate (Sec. 26, ICP)2. REPRESENTATION: are factual statements made by the insured at the time of or prior to the issuance of the policy to give information to the insurer and other wise induce him to enter into the insurance contract.3. WARRANTIES: are statements or promise by the insured set forth in the policy itself or incorporated in it by proper reference, the untruth or nonfulfillment of which in any respect and without reference to whether the insurer was in fact prejudiced by such untruth or nonfulfillment. The same may be expressed, implied, affirmative or promissory.4. CONDITION: The insurer must also protect himself against fraudulent claims of loss and this he attempts to do by inserting in the policy various conditions which take the form of conditions precedent. For instance, there are conditions requiring immediate notice of loss or injury and detailed proofs of loss within a limited period.

Exceptions: It makes more definite the coverage indicated by the general description of the risk by excluding certain specified risk that otherwise would be included under the general language describing the risks assumed.

CONCEALMENT

TEST OF MATERIALITY: determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the disadvantages of the proposed contract, or in making his inquiries (Sec. 31).


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EFFECTS OF CONCEALMENT: vitiates the contract and entitles insurer to rescind, even if the death or loss is due to a cause not related to the concealed matter (Sec. 27).

REPRESENTATION – oral or written statement of a fact or condition affecting the risk, made by insured to insurer, tending to induce insurer to assume risk (Sec.36).

KINDS (Sec.39):

1. AFFIRMATIVE – affirmation of a fact when the contract begins; and2. PROMISSORY – promise to be performed after policy was issued.

TEST OF MATERIALITY: determined by the probable and reasonable influence of the facts on the party on whom communication is due, in forming his estimate of the contract, risks and premium (Sec. 31) EFFECTS OF MISREPRESENTATION: injured party entitled to rescind from the time when the representation becomes false.

WARRANTY

statement or promise set forth in the policy or by reference incorporated therein, the untruth or non-fulfillment of which in any respect, and without reference to whether insurer was in fact prejudiced by such untruth or non-fulfillment, renders the policy voidable.

KINDS (Sec. 67):

1. EXPRESS; and 2. IMPLIED – only found in marine insurance, deemed included in the contract, although not expressly mentioned.

EFFECT OF BREACH OF WARRANTY – gives insurer the right to rescind (Secs. 74-76).

DISTINCTIONS:

WARRANTY REPRESENTATION1. Part of the contract. 1. Mere collateral

inducement.2. written on the

policy, actually or by reference

2. may or may not be written in the policy.

3. conclusively presumed material.

3. must be proved to be material.

4. must be strictly complied with.

4. require only substantial truth and compliance.

INCONTESTABILITY CLAUSE - After a policy of life insurance made payable on the death of the insured shall have been in force during the lifetime of the insured for a period of two years from the date of its issue or of its last reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindible by reason of the fraudulent concealment or misrepresentation of the insured or his agent.

REQUISITES FOR INCONTESTABILITY CLAUSE:

1. It is payable on the death of the insured2. It has been in force during the lifetime of the insured for at least 2 years from its date of issue or of its last reinstatement (Sec. 48, ICP)

NOTE: The period of 2 years may be shortened but it cannot be extended by stipulation.

DEFENSES NOT BARRED BY INCONTESTABILITY CLAUSE:

1. That the person taking the insurance lacked insurable interest as required by law;

2. That the cause of the death of the insured is an excepted risk;

3. That the premiums have not been paid (Secs. 77,227[b], 228[b], 230[b].);

4. That the conditions of the policy relating to military or naval service have been violated (Secs. 227[b], 228[b].);

5. That the fraud is of a particularly vicious type;

6. That the beneficiary failed to furnish proof of death or to comply with any condition imposed by the policy after the loss has happened; or

7. That the action was not brought within the time specified.

POLICY OF INSURANCE – written instrument in which a contract of insurance is set forth (Sec. 49)

CONTENTS OF POLICY (Sec.51):

1. parties2. amount of insurance, except in open or

running policies;3. rate of premium;4. property or life insured;5. interest of the insured in the property if

he is not the absolute owner;6. risk insured against; and


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7. duration of the insurance.

BINDING RECEIPT – merely an acknowledgment on behalf of the company that their branch office had received from the applicant the insurance premium and had accepted the application subject to processing by the head office.

COVER NOTE – a concise and temporary written contract issued to the insurer through its duly authorized agent embodying the principal terms of an expected policy of insurance. It is intended to give insurance protection coverage to the applicant pending the acceptance or rejection of his application. Not exceeding 60 days unless a longer period is approved by Insurance Commissioner (Sec. 52).

GROUNDS FOR CANCELLATION OF POLICY (EXCEPT LIFE INSURANCE POLICY) (SEC. 64):

1. non-payment of premium;2. conviction of a crime out of acts increasing

the hazard insured against;3. discover of fraud or material

misrepresentation;4. discovery of willful or reckless acts of

omissions increasing the risk nsured against;

5. physical changes in property making the property uninsurable; and

6. determination by the Insurance Commissioner that the policy would violate the Insurance Code.

KINDS OF POLICIES:

1. OPEN POLICY – value of thing insured is not agreed upon, but left to be ascertained at time of loss (Sec.60);

2. VALUED POLICY – definite valuation is agreed by both parties, and written on the face of policy (Sec. 61);and

3. RUNNING POLICY – contemplates successive insurances and which provides that the subject of the policy may from time to time be defined (Sec. 62).

PREMIUM – consideration paid an insurer for undertaking to indemnify the insured against a specified peril (Sec. 77).

NOTE: Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies.

Exceptions: 1. Credit agreement2. Acknowledgement in the policy

(Sec. 78)

INSURED ENTITLED TO RETURN OF PREMIUMS PAID:

1. If thing insured was never exposed to the risks insured against (Sec. 79);

2. Contract is voidable due to the fraud or misrepresentation of insurer;

3. Insurer never incurred liability (Sec. 81);4. When the insurance is for a definite

period and the insured surrenders his policy before the termination thereof;

5. Contract is voidable because of the existence of facts of which the insured was ignorant without his fault;

6. When there is over-insurance (Sec. 82) and;

7. When rescission is granted due to the insurer’s breach of contract.

DOUBLE INSURANCE – exists where same person is insured by several insurers separately in respect to same subject and interest (Sec. 93).

REQUISITES OF DOUBLE INSURANCE:

1. The person insured is the same;2. Two or more insurers insuring

separately;3. The subject matter is the same;4. The interest insured is also the same;5. The risk or peril insured against is

likewise the same.

EFFECTS OF DOUBLE INSURANCE: where double insurance is allowed, but over insurance results, he can claim in case of loss only up to the agreed valuation or up to the full insurable value from any, some or all insurers, without prejudice to the insurers ratably apportioning the payments. Insured can also recover before or after the loss, from both insurers the excess premium he has paid (Sec. 94).

REINSURANCE – a contract by which the insurer procures a 3rd person to insure him against loss or liability by reason or such original insurance (also known as Reinsurance Cession) (Sec. 95).

In every reinsurance, the original contract of insurance and the contract of reinsurance are covered by separate policies.


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DISTINCTIONS :

DOUBLE INSURANCE

(Sec. 93)REINSURANCE

(Sec. 95)1. involves same

interest1. insurance of

different interest2. insurer remains

in such capacity2. insurer becomes

an insured in relation to reinsurer.

3. insured in the 1st contract is a party in interest in the 2nd contract

3. original insured has no interest in reinsurance contract.

4. subject of insurance is property

4. subject of insurance is the original insurer’s risk.

5. insured has to give his consent

5. consent of original insured, not necessary

LOSS - injury or damage sustained by insured from perils insured against.

PROXIMATE CAUSE – active efficient cause which sets in motion a train of events which in turn brings about a result without intervention of any force operating and working actively from a new and independent force.

LOSS FOR WHICH INSURER IS LIABLE:

1. loss the proximate cause of which is the peril insured against (Sec. 84);

2. loss the immediate cause of which is the peril insured against except where proximate cause is an excepted peril;

3. loss through negligence of insured except where there was gross negligence amounting to willful acts; and

4. loss caused by efforts to rescue the thing from peril insured against;

5. if during the course of rescue, the thing is exposed to a peril not insured against, which permanently deprives the insured of its possession, in whole or in part (Sec. 85).

LOSS FOR WHICH INSURER IS NOT LIABLE:

1. loss by insured’s willful act;2. loss due to connivance of the insured

(Sec. 87); and3. loss where the excepted peril is the

proximate cause.

MARINE INSURANCE – insurance against risks connected with navigation, to which a ship, cargo, freightage, profits or other insurable interest in movable property, may be exposed during a certain voyage or a fixed period of time (Sec. 99).

COVERAGE OF MARINE INSURANCE (SEC. 99):

1. vessels, goods, freight, cargo, merchandise, profits, money, valuable papers, bottomry and respondentia, and interest in respect to all risks or perils of navigation;

2. persons or property in connection with marine insurance;

3. precious stones, jewels, jewelry and precious metals whether in the course of transportation or otherwise; and

4. bridges, tunnels, piers, docks and other aids to navigation and transportation.

Cargo can be the subject of marine insurance, and once it is entered into, the implied warranty of seaworthiness immediately attaches to whoever is insuring the cargo, whether he be the shipowner or not. (Roque vs IAC, 139 SCRA 596).

IMPLIED WARRANTIES IN MARINE INSURANCE:

1. that the ship is seaworthy at the inception of the insurance (Sec.113,ICP)

2. that the ship will not deviate from agreed voyage unless deviation is proper (Sec. 123, 124, 125, ICP)

3. that the ship will not engage in an illegal venture

4. warranty of neutrality : that the ship will carry the requisite documents of nationality or neutrality of the ship or cargo where such nationality or neutrality is expressly warranted

5. presence of insurable interest.

INSURABLE INTEREST IN MARINE INSURANCE:

1. Shipowner – over the vessel, except that if chartered, the insurance is only up to the amount not recoverable from the charterer (Sec. 100); and if hypothecated by a bottomry loan, the insurable interest is only up to the excess of the value of the vessel over the loan (Sec. 101). He also has an insurable interest on expected freightage.


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2. Cargo owner – over the cargo and expected profits (Sec. 105).

3. Charterer – over the amount he is liable to the shipowner, if the ship is lost or damaged during t he voyage (Sec. 106).

PERILS OF THE SEA – extend only to losses caused by sea damage, or violence of the elements, and does not embrace all losses happening at sea. Include only such losses as are extraordinary in nature, or arise from overwhelming power, which cannot be guarded against by ordinary exertion of human skill and prudence (Sec. 99).

PERILS OF THE SEA VS. PERILS OF THE SHIP

Perils of the sea or “perils of navigation” includes only those casualties due to the unusual violence or extra ordinary causes connected with navigation. It has been said to include only such losses as are of extraordinary nature or arise from some overwhelming power which cannot be guarded against by the ordinary exertion of human skill or prudence, as distinguished from the ordinary wear and tear of the voyage and from injuries suffered by the vessel in consequence of her not being unseaworthy.

Perils of the ship is a loss which in the ordinary course of events, results:

1. from the natural and inevitable action of the sea

2. from the wear and tear of the ship3. from the negligent failure of the ship’s

owner to provide the vessel with proper equipment to convey the cargo under ordinary conditions.

BARRATRY – willful misconduct on the part of the master or crew in pursuance of some unlawful or fraudulent purpose without consent of owners, and to the prejudice of owner’s interest.

INSURANCE AGAINST ALL RISKS – insurance against all causes of conceivable loss or damage, except as otherwise excluded in the policy or due to fraud or intentional misconduct on the part of the insured.

The insurer can avoid coverage upon demonstrating that a specific provision excludes the loss from the coverage. (Choa Tiek Seng vs CA, 183 SCRA 223).

INCHAMAREE CLAUSE – covers loss or damage to the hull or machinery through:

1. negligence of the captain, engineers, etc.

2. explosions, breakage of shafts; and3. latent defect of machinery or hull.

MATTERS ALTHOUGH CONCEALED, WILL NOT VITIATE THE CONTRACT EXCEPT WHEN THEY CAUSED THE LOSS (SEC. 110):

1. national character of the insured;2. liability if insured thing to capture or

detention;3. liability to seizure from breach of foreign

laws;4. want of necessary documents; and5. use of false or simulated papers.

DEVIATION – departure of vessel from course of voyage, or an unreasonable delay in pursuing voyage, to the commencement of an entirely different voyage (Sec. 123).

DEVIATION IS PROPER WHEN (SEC. 124):

1. if due to circumstances outside the control of the ship captain or ship owner;

2. if done to comply with a warranty; 3. if made in good faith to avoid a peril;4. if made to save human life or another

distressed vessel.

LOSS:

1. TOTAL LOSS – that which may be:a. actual loss, involving (Sec. 130)

(i) total destruction;(ii) loss by sinking(iii) damage rendering the thing

valueless; or(iv) total deprivation of owner of

possession of thing insured.b. constructive total loss (Sec. 131, in

relation to Sec. 139), involves ---(i) actual loss of more than ¾

of the value of the object;(ii) damage reducing value by

more than ¾ of the value of the vessel and of cargo; and

(iii) expense of transhipment exceed ¾ of value of cargo.

In case of constructive total loss, insured may abandon goods or vessel to the insurer and claim for whole insured value, or he may, without abandoning vessel, claim for partial actual loss.


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1. PARTIAL LOSS – that which is not total (Sec. 128).

GENERAL AVERAGE LOSS VS. PARTICULAR AVERAGE LOSS

GENERAL AVERAGE LOSS include damages and expenses which are deliberately caused by the master of the vessel or upon his authority, in order to save the vessel, her cargo, or both at the same time from real or known risk. it must be borne equally by all of the interests concerned in the venture.

PARTICULAR AVERAGE LOSS it includes all damages and expenses caused to the vessel or to her cargo which have not inured to the common benefit and profit of all persons interested in the vessel and her cargo. It refers to those losses which occur under such circumstances as do not entitle the unfortunate owners to receive contribution from other owners concerned in the venture as where a vessel accidentally runs aground and goes to pieces after the cargo is saved.

REQUISITIES OF GENERAL AVERAGE CONTRIBUTION:

1. there must be a common danger to the vessel or cargo

2. part of the vessel or cargo was sacrificed deliberately

3. the sacrifice must be for the common safety or for the benefit of all

4. it must be made by the master or upon his authority

5. it must be not be caused by any fault of the party asking the contribution

6. it must be successful, i.e. resulted in the saving of the vessel or cargo.

7. It must be necessary

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

REQUISITES FOR VALID ABANDONMENT:

1. There must be an actual relinquishment by the person insured of his interest in the thing insured (Sec. 138);

2. There must be a constructive total loss (Sec. 139);

3. The abandonment be neither partial nor conditional (Sec. 140);

4. It must be made within a reasonable time after receipt of reliable information of the loss (Sec. 141);

5. It must be factual (Sec. 142);

6. It must be made by giving notice thereof to the insurer which may be done orally or in writing (Sec. 143); and

7. The notice of abandonment must be explicit and must specify the particular cause of the abandonment (Sec. 144).

CO-INSURANCE (Sec. 157, ICP) - A marine insurer is liable upon a partial loss, only for such proportion of the amount insured by him as the loss bears to the value of the whole interest of the insured in the property insured.

Co-Insurance in Marine

Co-insurance in Property Insurance

the only requirement is partial loss even if there is full coverage

there must be a stipulation and it must comply with the following requisites:

partial loss and underinsurance

FIRE INSURANCE – contract by which the insurer for a consideration agrees to indemnify the insured against loss of, or damage to, property by fire, but may include loss by lightning, windstorm, tornado or earthquake and other allied risks, when such risks are covered by extension to fire insurance policies or under separate policies (Sec. 167).

ALTERATION- An alteration in the use or condition of a thing insured from that to which it is limited by the policy made without the consent of the insurer, by means within the control of the insured, and increasing the risks, entitles the insurer to rescind a contract of fire insurance (Sec. 168, ICP).

WHEN ALTERATION IN THING INSURED ENTITLES INSURER TO RESCIND:

1. The use or condition of the thing is specifically limited or stipulated in the policy;

2. Such use or condition as limited by the policy is altered;

3. The alteration is made without the consent of the insurer;

4. The alteration is made by means within the control of the insured; and

5. The alteration increases the risk.

ALTERATION NOT RESULTING IN RESCISSION:

1. Alteration not increasing the risk; and


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2. Alterations increasing the risk but not violating the contract.

FALL-OF-BUILDING CLAUSE – clause in fire insurance policy that if the building or any part thereof falls, except as a result of fire, all insurance by the policy shall immediately cease.

CASUALTY INSURANCE – insurance covering loss or liability arising from accident of mishap, excluding those falling under other types of insurance as fire or marine (Sec. 174).

COMPULSORY MOTOR VEHICLE LIABILITY (Sec. 373):METHOD OF COVERAGE:

1.Insurance Policy;2.Surety Bond; and3.Cash Bond.

NON-FAULT CLAUSE – any claim for death or injury shall be paid up to PHP 5,000.00 without necessity of proving fault or negligence, provided the following proofs of loss under oath are submitted (Sec. 378):1. death certificate and evidence sufficient to

establish proper payee;2. police report; and3. medical report and evidence of medical or

hospital disbursement.

Claim is collected from insurer of vehicle where claimant is riding, mounting, or dismounting from. In any other case, claim shall lie against the insurer of the directly offending vehicle.

AUTHORIZED DRIVER CLAUSE – The clause means that it indemnifies the insured owner against loss or damage to the car but limits the use of the insured vehicle to the insured himself or any person who drives on his order or with his permission (Villacorta vs. Insurance Commissioner; Perla Compania de Seguro vs. CA)

The requirement that the person driving the insured vehicle is permitted in accordance with the licensing laws or other laws or regulations to drive the motor vehicle. It is applicable only if the person driving is other than the insured.

COOPERATION CLAUSE – clause in an automobile insurance policy which provides in essence that the insured shall give all such information and assistance as the insurer may require, usually requiring attendance at trials or hearings.

THIRD PARTY LIABILITY INSURANCE – insurance secured by the assured to protect

third parties up to the limit stated in the policy, but third party victim is not at all affected by the limitation in the “schedule of indemnity” which binds only the contracting party [Sec. 378, (iii)].

PASSENGER, (CMVLI)—any fare paying person being transported and conveyed in and by a motor vehicle for transportation of passenger for compensation, including persons expressly authorized by law or by the vehicle’s operator or his agents to ride without faire (Sec. 373{b}, CMVLI)

THIRD PARTY is any person other than the passenger as defined in 373 of CMVLI and shall also exclude a member of the household or a member of the family within the second degree of consanguinity or affinity, of a motor vehicle owner or land transportation operator, as likewise defined herein, or his employee in respect of death or bodily injury arising out of and in the course of employment (Sec. 373{c}, CMVLI).

SURETYSHIP – agreement whereby surety guarantees the performance by another of an undertaking or an obligation in favor of a 3rd party (Sec. 175). Essentially a credit accommodation.

FIDELITY BOND – contract of insurance against loss from misconduct.

FIDELITY GUARANTY INSURANCE – a contract whereby one, for a consideration, agrees to indemnify the assured against loss arising from the want of integrity, fidelity or honesty of employees or other persons holding positions of trusts.

LIFE INSURANCE – insurance on human life and insurance appertaining thereto or connected therewith which includes every contract or pledge for the payment of endowments or annuities (Sec. 179).

Effect of death of insured through suicide – the insurer in a life insurance contract shall be liable in case of suicide by the insured committed after the policy has been in force for a period of two years from the date of its issue or its last reinstatement, unless the policy provides a shorter period: provided, however, that suicide committed in a state of insanity shall make the insurer liable regardless of the date of the commission of the suicide (Sec. 180-A).

KINDS:Page 48


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1. ORDINARY LIFE, GENERAL LIFE OR OLD LINE POLICY - insurer pays a premium every year until he dies. Surrender value after 3 years.

2. LIMITED PAYMENT POLICY – insured pays premium for a limited period. If he dies within the period, his beneficiary is paid; if he outlives the period, he does not get anything.

3. ENDOWMENT POLICY – pays premium for specified period. If he outlives the period, the face value of the policy is paid to him; if not, his beneficiaries receive the benefit.

4. TERM INSURANCE – insurer pays once only, and he is insured for a specified period. If he dies within the period, his beneficiaries benefits. If he outlives the period, no person benefits from the insurance.

5. INDUSTRIAL LIFE _ life insurance entitling the insured to pay premiums weekly, or where premiums are payable monthly or oftener; and

6. VARIABLE CONTRACT – any policy or contract on either a group or individual basis issued by an insurance company providing for benefits or other contractual payments or values thereunder to vary so as to reflect investment results of any segregated portfolio of investment.

INTENTIONAL VS. ACCIDENTAL AS USED IN INSURANCE:

INTENTIONAL as used in an accident policy excepting intentional injuries inflicted by the insured or any other person implies the exercise of the reasoning faculties, consciousness and volition. Where a provision of the policy excludes intentional injury, it is the intention of the person inflicting the injury that is controlling. If the injuries suffered by the insured clearly resulted from the intentional act of the third person, the insurer is relieve from liability as stipulated (Biagtan vs. the Insular Life Assurance Co. Ltd. 44 SCRA 58, 1972)

ACCIDENTAL - The terms “accident” and “accidental” as used in insurance contract, have not acquired any technical meaning. They are construed by the courts in the ordinary and common acceptation. Thus, the terms have been taken to mean that which happens by chance or fortuitously, without intention or design, which is unexpected, unusual and unforeseen. The terms do not without qualification, exclude events resulting in damage or loss due to fault, recklessness or negligence of third parties. The concept is not necessarily synonymous with “no fault.” It maybe utilized simply to distinguish intentional or malicious acts

from negligent or careless acts (Pan Malayan Insurance Corp. vs. CA, 184 SCRA 54).

INSURANCE AS A RISK DISTRIBUTING DEVICE:

The devices of insurance serves to distribute the risk of economic loss among as many as possible of those who are subject to same kind of risk. By paying a pre-determine amount into a general fund out of which payment will be made for an economic loss of a defined type, each member contributes to a small degree toward compensation for losses suffered by any member of the group. This broad sharing of economic risk is the principle of risk-distribution. LIABILITY OF INSURER IF INSURED WAS COMMITTING A FELONY

Liabilities arising out of acts of negligence, which are also criminal, are also insurable on the ground that such acts are accidental. Thus, a motor insurance policy covering the insured’s liability for accidental injury caused by his negligence, even though gross and attended by criminal consequences such as homicide through reckless imprudence, will not be void as against public policy. But liability consequences of deliberate criminal acts are not insurable.

PRESCRIPTION PERIOD (SEC. 63, 384, ICP). In the absence of an express stipulation

in the policy it being based on a written contract, the action prescribes in 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 accrues. The cause of action accrues from the final in rejection of the claim of the insured and not from the time of loss.


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IV. TRANSPORTATION LAWS

CONTRACT OF TRANSPORTATION- contract whereby, a person, natural or juridical, obligates, to transport persons, goods or both, from one place to another by land, air or water for a price or compensation.

COMMON CARRIER- one that holds itself out as ready to engage in the transportation for hire as a public employment and not as a casual occupation.

persons, firms, corporations or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public. (Art.1732, New Civil Code)

Art. 1732 of the New Civil Code avoids any distinction between a person or enterprise offering transportation service on a regular or scheduled basis and one offering such service on an occasional, episodic or unscheduled basis.

Neither does the law distinguish between a carrier offering its services to the general public that is the general community or population and one who offers services or solicits business only from a narrow segment of the general population. (De Guzman vs. CA, September 15, 1993)

GOVERNING LAWS: (in the order mentioned)

A. Coastwise1) New Civil Code (Art. 1732-1766) –

primary law2) Code of Commerce – suppletory lawNOTE: COGSA – inapplicable even if the parties expressly provide for it

B. Foreign Ports to Philippine Ports1) New Civil Code – primary law2) Code of Commerce 3) Carriage of Goods by Sea Act

C. Philippine Ports to Foreign Ports – laws of the country to which the goods are to be transported. (Eastern Shipping vs. IAC, 150 SCRA 463, American Home Assurance vs. CA, 208 SCRA 343, NDC vs. CA, 164 SCRA 593)

CHARACTERISTICS OF A COMMOM CARRIER:

1. undertakes to carry for all people indifferently and thus, is liable for refusal without sufficient reason (Lastimoso vs. Doliente, October 20, 1961)

2. cannot lawfully decline to accept a particular class of goods for carriage to the prejudice of the traffic in these goods

3. no monopoly is favored (Batangas Trans vs. Orlanes, 52 PHIL 455)

4. provides public convenience

PRIVATE CARRIER- not engaged in business of carrying as a public employment, undertakes to deliver goods or passengers for compensation (requires only ordinary diligence) (Home Insurance Co. vs. American Steamship Agency, 23 SCRA 24)

DISTINCTIONS :

COMMON CARRIER PRIVATE CARRIER

1. holds himself out for all people indiscriminately

1. contracts with particular individuals or groups only

2. requires extraordinary diligence

2. ordinary diligence is required

3. subject to State regulation

3. not subject to State regulation

4. parties may not agree on limiting the carrier’s liability except when provided by law

4. parties may agree on limiting the carrier’s liability provided not contrary to law, morals or good customs

5. presumption of fault 5. no fault or Page 50


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or negligence applies negligence is presumed

CASO FORTUITO Requisites:

1. event independent of human will;2. occurrence makes it impossible for debtor

to fulfill the obligation in a normal manner;3. obligor must be free of participation in, or,

aggravation of, the injury to the debtor; and 4. impossible to foresee or impossible to avoid.

(Juntilla vs. Fontanar, 136 SCRA 624; Vasquez vs. CA, 138 SCRA 553)

A common carrier is held liable for the flaws of its equipment (tire blow-out, knuckle’s failure) if such defects are discoverable and such cannot be considered a caso fortuito. This is because the passenger has no privity with the manufacturer of the defective equipment and thus, has no remedy against him while the carrier has. (Necessito vs. Paras, 104 Phil 75)

Hijacking of the carrier truck does not fall among the five categories of exempting causes. The common carrier is presumed to be at fault or to have acted negligently unless there is proof of extraordinary diligence on the part of the common carrier. The duty of extraordinary diligence is reached where the goods are lost as a result of robbery attended by grave or irresistible threat, violence or force. (De Guzman vs. CA, September 15, 1993).

NOTE: In Quisumbing Sr. vs. CA, 189 SCRA 213, an action against an airline company to recover damages for the loss of certain valuables belonging to passengers after a(n) hijacking robbery was dismissed. The Court considered hijacking robbery a caso fortuito. It ruled: the mandatory use of the most sophisticated electronic detection devices, the imposition of severe penalties, the development of screening procedures, the compilation of hijacker’s behavioral profiles, the assignment of sky marshalls, and the weight of outraged world opinion may have minimized hijackings but all these proved ineffective against truly determined hijackers.

KABIT SYSTEM: VOID AND INEXISTENT UNDER ART. 1409, NEW CIVIL CODE

This is a system whereby a person who has been granted a certificate of public convenience allows other persons who own motor vehicles to operate under such license, for a fee or percentage of such earnings.

This has been identified as one of the root causes of the prevalence of graft and corruption in the government transportation offices. A certificate of public convenience is a special privilege conferred by the government. Abuse of this privilege by the grantees thereof cannot be countenanced. (LITA ENTERPRISES INC. VS CA, 129 SCRA 79)

EFFECTS OF THE SYSTEM AND LIABILITIES OF THE REGISTERED OWNER AND THE ACTUAL OWNER OF THE MOTOR VEHICLE:

1. The transfer, sale, lease or assignment of the privilege granted is valid between the contracting parties but not upon the public or third persons. (Gelisan vs. Alday, 154 SCRA 388)

2. The registered owner is primarily liable for all the consequences flowing from the operations of the carrier because to rule otherwise would be utterly subversive to the thrust of public policy herein involved. The public has the right to assume that the registered owner is the actual or lawful owner thereof. It would be very difficult and often impossible, as a practical matter, for the public to enforce their rights of action that they may have for injuries inflicted by the vehicle if they should be required who the actual owner is. It would also open the door to collusion between the registered owner and the actual owner and to shifting liability from the carrier to one without financial capability to meet the resulting damages. (Benedicto vs. IAC, 187 SCRA 547)

3. The registered owner cannot recover from the actual owner and the latter cannot obtain transfer of the vehicle to himself, both being in pari delicto. The Court will not aid either party to enforce an illegal contract, but will leave them both where it find them. Where the parties are in pari delicto, no affirmative relief of any kind will be given to one against the other. (Teja Marketing vs. IAC, 148 SCRA 347 )

4. For the better protection of the public, both the registered owner and the actual owner are jointly and severally liable with the driver. (Zamboanga Transportation Co. vs. CA)

CONTRACT OF ADHESION- one that is unilaterally drafted and printed in advance by monopolies, insurance companies, carriers and money lenders and the only


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participation of the carrier party is the signing of his signature or his “adhesion” thereto (Eastern Shipping Lines vs. Margarine, 93 SCRA 257)

NEW CIVIL CODE PROVISIONS ON COMMON CARRIERS

(ART. 1732-1766)

1. REQUIREMENT OF EXTRAORDINARY DILIGENCE

Common carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence in the vigilance over goods and for the safety of the passengers transported by them according to all the circumstances of each case (Art. 1733, in relation to Art. 1755)

Rationale: The business of common carriers is impressed with a special public duty such that the public must of necessity rely on their skill and care over the goods and/or passengers transported. Also, with the development in science and invention, transportation has become more rapid, but more complicated and hazardous, so the public is forced to trust all the more in the utmost diligence and foresight of common carriers. (Commission Report on the Proposed Civil Code)

When the officers and the crew were aware of the typhoon but decided to proceed with the voyage believing that the weather was still “good,” although, according to the weather forecast, they were already within the typhoon zone, the sinking of the vessel proves that required extraordinary diligence was not duly observed. (Vasquez cs. CA, 138 SCRA 553)

A common carrier neglects its duty to transport its passengers safely when a passenger died because the floor of its bus gave way after a tire blow out caused by overcrowding, overspeeding and weak flooring. (M. Ruiz Highway Transit, Inc. vs. CA, 11 SCRA 98)

The announcement by a train conductor of the next flag stop, three minutes ahead of time, causing the passengers to rise from their seats, and the subsequent fall by them as a consequence of the jerking, resulting in deaths and injuries to them, is negligence. (Brinas vs. People, 125 SCRA 687)

The mere fact that the bus was inspected the day before the accident is not sufficient to rebut the presumption of negligence, where the bus was overloaded in spite of the

fact that its route consisted of mountainous, circuitous and ascending roads. (Landingin vs. Pangasinan, 33 SCRA 284)

Where a vessel’s departure was delayed by repairs, and on management’s instruction, the first port of call was bypassed, the event is not fortuitous to be exempt from liability. (Sweet Lines vs. CA, 121 SCRA 769)

2. RULES ON PRESUMPTION OF NEGLIGENCE

A. In the carriage of goods. In case of loss, destruction and deterioration of the goods, common carriers are presumed to be at fault or have acted negligently, unless they prove that they exercise extraordinary diligence.

In the transport of goods, mere proof of delivery of goods in good order to a carrier and the subsequent arrival of the same goods at the place of destination in bad order makes for a prima facie case against the carrier. (Coastwise Lighterage Corp. vs. CA, 245 SCRA 796

B. In the carriage of passengers. The same presumption applies.

The courts need not make an express finding of fault or negligence of common carriers, the law imposes upon common carriers strict liability, as long as it is shown that there exists a relationship between the passenger and the common carrier and that injury or death took place during the existence of the contract.

Reason for the presumption: Because as to when and how goods were damaged in transit is a matter peculiarly within the knowledge of the carrier and its employees. (Mirasol vs. Dollar, 53 PHIL 124) Also, the contract between the passenger and the carrier imposes on the latter to transport the passenger safely, hence the burden of explaining should fall on the carrier.NOTE: The doctrine of res ipsa loquitor applies.

3. DEFENSE OF COMMON CARRIERS

Common carriers are responsible for the loss, destruction, or deterioration of the goods, unless the same is due to any of the following causes only:


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1. Flood, Storm, earthquake, lighting, or other natural disaster or calamity.

2. Act of the public enemy in war, whether international or civil

3. Act or omission of the shipper or the owner of goods

4. The character of the goods or defects in the packing or in the containers.

5. Order or act of competent authority (Art1734, NCC).

Reason for the exceptions: Because the carrier is not an insurer of the safety of its passengers and is not absolutely and at all events to carry them safely and without injury. (Santos vs. Dela Cruz, December 2, 1959)

A. NATURAL DISASTER

Requisites for the Defense:1. must be the proximate and only cause of the

loss 2. carrier must exercise due diligence to

prevent or minimize the loss before, during or after the occurrence of the disaster (Art. 1739, NCC)

3. carrier had not negligently incurred in delay in transporting the goods (Art. 1740, NCC)

B. ACTS OF PUBLIC ENEMY

Requisites for the Defense:1. the act must be the proximate and only

cause of the loss2. carrier must exercise due diligence to

prevent or minimize the loss before, during or after the act causing the loss, deterioration or destruction of the goods (Art. 1739, NCC)

C. CONTRIBUTORY NEGLIGENCE OF THE SHIPPER

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 carrier, the carrier shall still be liable for damages, but such shall be equitably reduced.

When the shipper declared an inaccurate weight of the equipment transported causing it to fall when it is being unloaded, the carrier was still held liable for damages because such accident could have been avoided if the carrier had exercised reasonable attention in overseeing the unloading of the equipment. However, the liability was reduced as the shipper was liable for contributory negligence. (Compania Maritima vs. CA, 164 SCRA 685)

D. CHARACTER OF THE GOODS OR DEFECTS IN THE PACKING OR IN THE CONTAINER

Even if the damage should be caused by the inherent defect/character of the goods, the common carrier must exercise due diligence to forestall or lessen the loss.

The carrier, knowing the fact of improper packing of the goods upon ordinary observation, still accepts the goods notwithstanding such condition, is not relieved of liability or loss or injury resulting therefrom. (Southern Lines, Inc. vs. CA, 4 SCRA 258)

E. ORDER/ACT OF PUBLIC AUTHORITY

Said public authority must have the power to issue the order. Consequently, where the officer acts without legal process, the common carrier will be held liable.

NOTE: Diligence in the selection and supervision of employees under Articles 2180-2181, NCC, cannot be interposed by the common carrier to prevent damages because the liability of the carriers arises from the breach of the contract of carriage. The defense under said articles is applicable to negligence in quasi-delicts. (Del Prado vs. Manila Electric Co., 52 PHIL 900)

F. STIPULATIONS LIMITING LIABILITY OF COMMON CARRIERS

1. IN THE CARRIAGE OF GOODS- the common carrier and the shipper may agree on the carriers observance of diligence to a degree less than extraordinary provided it be

a) In writing, signed by the shipper or owner;

b) Supported by a valuable consideration other than the service rendered by the carriers; and

c) Reasonable, just and not contrary to public policy. (Art. 1744).

The following stipulations are considered unjust, unreasonable and contrary to public policy:

1. the goods are transported at the risk of the owner or shipper

2. the carrier will not be liable for any loss, destruction or deterioration of the goods

3. the carrier need not observe any diligence in the custody of the goods


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4. the carrier shall exercise a degree of diligence less than that of a good father of a family over the movable transported

5. the carrier shall not be responsible for the acts or omissions of his or its employees

6. the carrier’s liability for acts committed by thieves or robbers who do not act with grave or irresistible threat, violence or force is dispensed with or diminished

7. the carrier is not responsible for the loss, destruction or deterioration of the goods on account of the defective condition of the car, vehicle, ship or other equipment used in the contract of carriage.

Other Valid stipulations limiting the carrier’s liability:1. A stipulation that the common carrier’s

liability is limited to the value of the goods appearing in the bill of lading unless the shipper or owner declares a greater value (HEACOCCK VS MACONDRAY, 42 PHIL 205)

2. A contract fixing the sum to be recovered by the owner or shipper for the loss, destruction or deterioration of the goods, if it is reasonable and just under the circumstances and has been fairly and freely agreed upon (Art. 1750, NCC)

3. An agreement limiting the common carrier’s liability for delay on account of strikes or riots (Art. 1748, NCC)

2. IN THE CARRIAGE OF PASSENGERS The extraordinary responsibility of a

common carrier for the safety of passengers imposed by law cannot be dispensed with or lessened by stipulation, by posting of notices, by statements on tickets or otherwise (Art. 1757, NCC).

When a passenger is carried gratuitously, a stipulation limiting the common carrier’s liability for negligence is valid, but not for willful acts on gross negligence (Art. 1758, NCC).

NOTE: The diligence required in the carriage of the goods may be reduced by only one degree, from extraordinary to ordinary diligence or diligence of a good father of a family. (Art. 1744, Art. 1745, no.4, NCC) In the transport of passengers, the diligence

required may be reduced by two degrees from extraordinary to ordinary diligence or even to simple negligence but ot to gross negligence. (Art. 1758, NCC)

G. DURATION OF RESPONSIBILITY OF COMMON CARRIERS

1. GOODS.

The extraordinary responsibility of the common carrier lasts from the time the goods are unconditionally placed in the possession of, and received by the carrier for transportation until the same are delivered actually or constructively by the carrier to the consignee or to the person who has the right to receive them. (Art. 1736, NCC)

It remains in full force and effect even when they are temporarily unloaded or stored in transit unless the shipper or owner has made use of the right of stoppage in transitu. (Art. 1737, NCC)

It continues to be operative even during the time the goods are stored in a warehouse of the carrier at the place of destination until the consignee has bee advised of the arrival of the goods and has had reasonable opportunity thereafter to remove them or otherwise dispose of them. (Art. 1738, NCC)

2. PASSENGERS. Once created, the relationship will not ordinarily terminate until the passenger has, after reaching his destination, safely alighted from the carrier’s conveyance or had a reasonable opportunity to leave the carrier’s premises. All persons who remain on the premises within a reasonable time after leaving the conveyance are to be deemed passengers, and what is a reasonable time or a reasonable delay within this rule is to be determined from all the circumstances, and includes a reasonable time to see after his baggage and prepare for his departure. (La Mallorca vs CA, July 27 1966; Abiotiz Shipping Corporation vs CA, November 6, 1989) In case of flight diversion due to bad weather or other circumstances beyond the pilot’s control, the relation between the carrier and the passenger continues the latter has been landed at the port of destination and has left the carrier’s premises. The carrier should necessarily exercise extraordinary diligence in safeguarding the comfort, convenience and safety of its stranded passengers until they have reached their final destination. (PHILIPPINE AIRLINES VS CA, 226 SCRA 423)

H. LIABILITY OF THE CARRIER FOR ACTS OF ITS EMPLOYEES AND OTHER PASSENGERS

1. For acts of Employees Common carriers are liable for the death

of or injuries to passengers through the negligence or willful acts of the former’s


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employees, although such employees may have acted beyond the scope of their authority or in violation of the orders of the common carriers. This liability does not cease upon proof that they exercised all the diligence of a good father of a family in the selection and supervision of their employees. (1759, NCC)

The liability of the carrier for the personal violence of its employees or agents upon its passengers extends only to those acts that the carrier could foresee or avoid through the exercise of the degree of diligence required.

The carrier is not liable for acts of employee not on duty or in the line of duty. (DE GILLACO VS MRR, 97 PHIL884; MARANAN VS PEREZ, 20 SCRA 412)

2. For acts of other Passengers

A common carrier is responsible for injuries suffered by a passenger on account of the willful acts or negligence of other passengers or of strangers, if the common carrier’s employees, through the exercise of the diligence of a good father of a family could have prevented or stopped the act. (1763, NCC)

The carrier is liable when its personnel allowed a passenger to drive the vehicle causing it to collide with another vehicle resulting to the injuries suffered by the other passengers.(MRR VS BALLESTEROS, 16 SCRA 641)

I. RULES ON PASSENGERS’ BAGGAGES

As to baggage of passengers, the law makes a distinction between:

1. BAGGAGE IN THE CUSTODY OF THE PASSENGERS OR THEIR EMPLOYEE

under this, the baggage is in the personal custody of the passenger or his employee in that the baggage while in transit will be considered as necessary deposits. The common carrier shall be responsible for the baggage as depositaries, provided that notice was given to them or its employees and the passenger took the necessary precautions which the carrier has advised them relative to the care and vigilance of their baggage.

In case of loss due to the fault of the passenger, the carrier will not be liable . The act of thief will not be force majeure unless the same is committed by armed men an through irresistible force (Article 1754, NCC)

2. BAGGAGE NOT IN SUCH CUSTODY, BUT IN THAT OF THE CARRIER (Article 1733 to 1573 of the NCC)

carrier who has in his custody the baggage of a passenger to be carried like any other goods is required to observe extraordinary diligence. In case of loss or damage the carrier is presumed negligent.

8) CAUSE OF ACTION ARISING FROM THE NEGLIGENT ACT OF THE CARRIER

The injured passenger can avail of any of the three causes of action arising from the negligent act of the common carrier:

1)culpa contractual – Art.1759, NCC – only the carrier could be held liable, not the driver because the there is no privity between the driver and the passenger

2)culpa acquiliana – Art. 2180, NCC – the carrier and driver are solidarily liable as joint tortfeasors

3)culpa criminal – Art. 100, Revised Penal Code – the carrier could be held liable only if driver be convicted and declared insolvent, making him subsidiarily liable.

LIABILITY OF SUCCESSIVE AIR CARRIERS:

An airline ticket providing that carriage by successive air carriers is to be regarded as a “single operation” is to make the (issuer carrier) liable for the tortious conduct of the other carrier. A printed provision in the ticket limiting liability only to its own conduct is not enough to rebut that liability (KLM ROYAL DUTCH AIRLINES VS. CA)

BILL OF LADING- written acknowledgment of receipt of goods and agreement to transport them to a specific place to a person named or to his order. It is not indispensable for the creation of a contract of carriage (COMPANIA MARITIMA vs. INSURANCE CO. OF NORTH AMERICA, 12 SCRA 213)

ON BOARD BILL OF LADING- issued when the goods have been actually placed aboard the ship with very reasonable expectation that the shipment is as good as on its way.

FUNCTIONS OF A BILL OF LADING: (MAGELLAN, MANUFACTURING vs. CA 201 SCRA 2021)


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1. best evidence of the existence of the contract of carriage of cargo;

2. commercial document whereby, if negotiable, ownership may be transferred by negotiation; and

3. receipt of cargo.

LIMITATIONS AS TO CARRIERS LIABILITY

A stipulation in the bill of lading limiting the liability of the carrier to an agreed valuation unless the shipper declares a higher value and pays a higher rate of freight is valid (ORG. VS. CA AND PAL, 91 SCRA 223).

However, the carrier cannot limit is liability for injury to, or loss of, goods shipped where such injury or loss was caused by its own negligence (SHEWARAM VS. PAL, 17SCRA 606).

RECOVERY OF DAMAGES FROM CARRIER FOR CARRIAGE OF GOODS-

1. INTER-ISLAND- if goods arrived in damaged condition: Art 366, CODE OF COMMERCE).a. If damage is apparent, the shipper must

file a claim immediately; orb. If damage is not apparent, he should

file a claim within 4 hours from delivery

The filing of claim under either (1) or (2) is a condition precedent for recovery.

If the claim is filed, but the carrier refuses to pay: enforce carrier’s liability in court by filing a casea. within 6 year, if no bill of lading has been

issued; orb. within 10 years, if a bill of lading has

been issued.

2. OVERSEAS- where goods arrived in a damaged condition from a foreign port to a Philippine port of entry;a. upon discharge of goods, if the damage

is apparent , claim should be filled immediately; or

b. if damage is not apparent, claim should be filled within 3 days from delivery.

Filing of claim is not condition precedent, but an action must be filed against the carrier within a period of 1 year from discharge; if there is no delivery, the undelivered or lost cargo), or from delivery to the arrastre (in case of damaged cargo).

EXEMPTION FROM LIABILITY

A common carrier may be freed from liability for loss or damage if it proves any of the following circumstances:a. natural disaster;b. act of the public enemy in war;c. act or omission of the shipper;d. character of the goods and defect in

packaging;e. order of competent public authority

(MARITIME CO. VS. CA 171 SCRA 61).

DOCTRINE OF COMBINED/CONNECTING CARRIERS – Under Art. 373, Code of Commerce, the original carrier that entered into the contract of carriage shall be liable for damages caused by its connecting carriers. Such carrier is liable if connecting carriers refuse to carry passengers. (KLM VS CA, 65 SCRA 237)

MARITIME COMMERCE

MERCHANT VESSEL vessel engaged in maritime commerce,

whether foreign or otherwise. constitutes property which may be

acquired and transferred by any of the means recognized by law. They shall continue to be considered as personal property. (Art. 573, 585, Code of Commerce)

CHARACTERISTICS OF MARITIME TRANSACTION:1) Real- similar to transactions over

property with respect to effectively against third persons which is done through registration as shown by the limitation of the liability of the agents to the actual value of the vessel and the freight money; and the right to retain the cargo and embargo and detention of the vessel; and

2) Hypothecary- the liability of the owner of the value of the vessel is limited to the vessel itself (Doctrine of Limited Liability)

PREFERENCE OF CREDITS - Mortgage of a vessel properly registered becomes of preferred mortgage lien which shall have priority over all claims against the vessel in an extrajudicial foreclosure for:

a. credit in favor of the public treasury;b. judicial costs of the proceedings;c. pilotage and tonnage charges and

other sea and port charges;d. salaries of depositaries and keepers

of the vessele. captain and crew’s wages;f. general average;


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g. salvage, including contract salvage;h. maritime liens arising prior in time to the

recording of the preferred mortgage;i. damages arising out of tort; andj. preferred mortgage registered prior in

time.

DOCTRINE OF LIMITED LIABILITY- Because of real and hypothecary nature of maritime law, liability of ship owners is limited to the amount of interest in said vessel such that where vessel is entirely loss, obligation is extinguished. (LUZON STEVEDORING VS. CA AND ESCANO, 156 SCRA 169) The interest extends to vessel’s appurtenances and equipment, freightage and insurance proceeds. (CHUA VS. IAC, 166 SCRA 183)

Exceptions:1) injury or damage due to shipowner’s

fault 2) claims under Workmen’s

Compensation;3) repair on vessel before loss;4) vessels not abandoned;5) the vessel is insured.

PARTICIPANTS IN MARITIME COMMERCE

1. shipowners and ship agents2. captains and masters of the vessel3. officers and crew of the vessel4. supercargoes

A. SHIPOWNERS AND SHIP AGENTSSHIPOWNER – person who has possession, control in management of the vessel and the consequent right to direct her navigation and receive freight earned and paid, while his possession continues;SHIP AGENT – person entrusted with provisioning and representing the vessel in the port in which it may be found; also includes the shipowner;

CIVIL LIABILITIES OF THE SHIPOWNER AND THE SHIP AGENTS:

1) For acts of the captain and for the obligations contracted to repair, equip and provision the vessel

2) Indemnities in favor of third persons arising from the conduct of the captain in the care of the goods loaded in the vessel

POWERS, FUNCTIONS AND LIABILITIES OF THE SHIP AGENTS:

1) Capacity to trade2) Discharge duties of the captain, in case

of the latter’s absence

3) Contract in the name of the owners with respect to repairs, details of equipment, armament, and all that relate to the requirements of navigation

4) Order a new voyage, make a new charter or insure the vessel after obtaining authorization from the shipowners

5) Render an account of the results of each voyage

DUTY OF SHIP AGENT TO DISCHARGE THE CAPTAIN AND MEMBERS OF THE CREW:

If the seamen contract is not for a definite period or voyage, he may discharge them at his discretion. If for a definite period, he may not discharge them until after the fulfillment of their contracts, except on the following grounds:

-insubordination in serious matters

-robbery-theft-habitual drunkenness-damage caused to the

vessel or to its cargo through malice or manifest or proven negligence

B. CAPTAINS AND MASTERS OF THE VESSEL

THREE-FOLD CHARACTER OF THE CAPTAIN:

1) general agent of the shipowner;2) technical director of the vessel;3) representative of the government of

the country whose flag he navigates

QUALIFICATIONS OF THE CAPTAIN:1) Filipino citizen;2) legal capacity to contract;3) passed the required physical and

mental examinations required for licensing him as such

INHERENT POWERS OF THE CAPTAIN:

1) appoint crew in the absence of ship agent;

2) command and direct crew;3) impose correctional punishment on

those who, while on board vessel, fail to comply with his orders or are wanting in discipline;

4) make contracts for the charter of vessel in the absence of ship agent.

5) supply, equip, and provision the vessel; and


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6) order repair of vessel to enable it to continue its voyage.

SOURCES OF FUNDS TO COMPLY WITH THE INHERENT POWERS OF THE CAPTAIN:

(in successive order)1) from the consignee of the vessel2) from the consignee of the cargo3) by drawing on the ship agent4) by a loan on bottomry5) by sale of part of the cargo

DUTIES OF THE CAPTAIN:

1) bring on board the proper certificate and documents and a copy of the Code of Commerce

2) keep a Log Book, Accounting Book and Freight Book

3) examine the ship before the voyage4) stay on board during the loading and

unloading of the cargo5) be on deck while leaving or entering the

port6) protest arrivals under stress and in case

of shipwreck7) follow instructions of and render an

accounting to the ship agent8) leave the vessel last in case of wreck9) hold in custody properties left by

deceased passengers and crew members

10) comply with the requirements of customs, health, etc. at the port of arrival

LIABILITIES OF THE SHIP AGENT/SHIP OWNER FOR ACTS DONE BY THE CAPTAIN TOWARDS PASSENGERS AND CARGOES, MAKING THEM SOLIDARILY LIABLE TO THE LATTER:

1. damages to vessel and to cargo due to lack of skill and negligence

2. thefts and robberies of the crew3. losses and fines for violation of laws4. damages due to mutinies5. damages due to misuse of power6. for deviations 7. for arrivals under stress8. damages due to non-observance of marine

regulations

NO LIABILITY FOR THE FOLLOWING:

1) damages caused to the vessel or to the cargo by force majeure

2) obligations contracted for the repair, equipment, and provisioning of the vessel unless he has expressly bound himself personally or has signed a bill of exchange or promissory note in his name

GROUNDS FOR DISCHARGE OF A CAPTAIN:

1) insubordination in serious matters2) robbery3) theft4) habitual drunkenness5) damage caused to the vessel or to its

cargo through malice or manifest or proven negligence

B. OFFICERS AND CREW OF THE VESSEL

The following are the officers and crew of the vessel:

1) Sailing Mate/First Mate2) Second Mate3) Engineers4) Members of the crew

1) SAILING MATE/FIRST MATE second chief of the vessel who takes the place of the captain in case of absence, sickness, or death and shall assume all of his duties, powers and responsibilities.

QUALIFICATIONS OF THE SAILING MATE:1) have the qualifications required

by the marine or navigation laws and regulations

2) not to be disqualified in accordance therewith for the discharge of his duties

DUTIES OF THE SAILING MATE:1) provide himself with maps and

charts with astronomical tables necessary for the discharge of his duties

2) keep the Binnacle Book3) change the course of the

voyage on consultation with the captain and the officers of the boat, following the decision of the captain in case of disagreement

4) responsible for all the damages caused to the vessel and the cargo by reason of his negligence


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2) SECOND MATE

take command of the vessel in case of the inability or disqualification of the captain and the sailing mate, assuming in such case their powers and responsibilities.

DUTIES OF THE SECOND MATE:1) preserve the hull and rigging of the

vessel2) arrange well the cargo3) discipline the crew4) assign work to crew members5) inventory the rigging and equipment

of the vessel, if laid up

3) ENGINEERS

officers of the vessel but have no authority except in matters referring to the motor apparatus. When two or more are hired, one of them shall be the chief engineer.

DUTIES OF THE ENGINEERS:1) in charge of the motor apparatus,

spare parts, and other instruments pertaining to the engines

2) keep the engines and boilers in good condition

3) not to change or repair the engine without authority of the captain

4) inform the captain of any damage to the motor apparatus

5) keep an Engine Book6) supervise all personnel maintaining

the engine

4) MEMBERS OF THE CREW hired by the ship agent, where he is present and in his absence, the captain hires them, preferring Filipinos, and in their absence, he may take in foreigners, not exceeding 1/5 of the crew.

CLASSES OF SEAMAN’S CONTRACTS:1. by the voyage2. by the month; and3. by share of profits or freightage

JUST CAUSES FOR THE DISCHARGE OF SEAMAN WHILE CONTRACT SUBSISTS:

1) perpetration of a crime2) repeated insubordination, want of

discipline3) repeated incapacity and negligence4) habitual drunkenness5) physical incapacity6) desertion

CAUSES OF REVOCATION OF VOYAGE:

1) war2) blockade3) prohibition to receive cargo at

destination4) embargo5) inability of the vessel to navigate

RULES IN CASE OF DEATH OF A SEAMAN:

The seaman’s heirs are entitled to payment as follows:1) if death is natural

a) compensation up to time of death if engaged on wage

b) if by voyage-half of amount if death occurs on voyage out; and full, if on voyage in

c) if by shares-none, if before departure; full, if after departure

2) if death is due to defense of vessel, full payment

3) if captured on defense of vessel, full payment

4) if captured due to carelessness, wages up to the date of the capture

NO LIABILITY UNDER THE FOLLOWING CIRCUMSTANCES:

1) if, before beginning voyage, captain attempts to change it, or a naval war with the power to which the vessel was destined occurs

2) if disease break out and be officially declared an epidemic in the port of destination

3) if the vessel should change owner or captain

COMPLEMENT OF THE VESSEL – all persons on board, from the captain to the cabin boy, necessary for the management, maneuvers, and service, thus including the crew, the sailing mates, engineers, stokers and other employees on board not having specific designations, but shall not include the passengers or the persons whom the vessel is transporting.

D. SUPERCARGOES person who discharges administrative

duties assigned to him by ship agent or shippers, keeping an account and record of transaction as required in the accounting book of the captain.

CHARTER PARTY- contract by virtue of which owner or agent binds himself to


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transport merchandise or persons for a fixed price.

contract by which an entire ship, or some principal part thereof is let by the owner to another person for a specified time or use. (PUROMINES VS. CA 220 SCRA 281)

CLASSES OF CHARTER PARTY (PLANTERS PRODUCT Case: LITONJUA SHIPPING CO. INC. vs. NATIONAL SEAMEN’S BOARD, 176 SCRA 189)

1. BAREBOAT OR DEMISE- charterer provides crew, food and fuel, charterer is liable as if he were the owner, except when such arises from the unworthiness of the vessel.

OWNER PRO HAC VICE –a bareboat charterer, to whom full possession and control of the vessel is delivered, for a period of time; charterer is considered as owner of the vessel for the voyage or service stipulated. The master of the vessel is the agent of the charterer and not of the shipowner. The charterer, and not the general owner of the vessel is held liable for the expenses of the voyage including the wages of the seamen.

2. TIME CHARTER – vessel is chartered for a period of time or duration of voyage; owner retains possession and control of the vessel; charterer acquires the right to use the carrying capacity, facilities of the vessel and could designate destinations.

3. VOYAGE OR TRIP CHARTER- contract for hire of vessel for one or series of voyages usually for purposes of transporting goods for charterer.

4. CONTRACT OF AFREIGHTMENT- owner leases the boat or part of it for the carriage of goods.

RIGHTS AND OBLIGATIONS IN A CHARTER PARTYA. OF THE SHIP OWNER OR SHIP

AGENT1) if the vessel chartered wholly, not to

accept cargo from others2) to observe represented capacity3) to unload cargo clandestinely placed4) to substitute another vessel if load is

less than 3/5 of capacity5) to leave the port if the charterer

does not bring the cargo within the lay days and extra lay days allowed

6) to place in a vessel in a condition to navigate

7) to bring cargo to nearest neutral port in case of war or blockade

B. OF THE CHARTERER1) to pay the agreed charter price2) to pay freightage on unboarded

cargo3) to pay losses to others for

loading uncontracted cargo and illicit cargo

4) to wait if the vessel needs repair5) to pay expenses for deviation

RESCISSION OF A CHARTER PARTY

A. At Request of Charterer

1) by abandoning the charter and paying half of the freightage

2) error in tonnage or flag3) failure to place the vessel at the

charterer’s disposal4) return of the vessel due to

pirates, enemies or bad weather5) arrival at a port for repairs

B. At Ship Owner’s Request

1) if the extra lay days terminate without the cargo being placed alongside the vessel

2) sale by the owner of the vessel before loading by the charterer

PRIMAGE- bonus to be paid to the captain after the successful voyage.

DEMURRAGE – sum due, by express contract, for the detention of the vessel, in loading and unloading, beyond the time allowed in the contract of afreightment, and to any other improper detention or delay beyond the time set for loading.

SALVAGE- services one person render to the owner of a ship or goods, by his own labor, preserving the goods or the ship which the owner or those entrusted with the care of them have either abandoned in distress at sea, or are unable to protect or secure.

CONTRACT OF TOWAGE - contract whereby one vessel, usually motorized, pulls another, whether loaded or not with merchandise, form one place to another, for a compensation. It is a contract for services rather than a contract of carriage.

USUAL FORMS OF CONSUMMATING CONTRACTS:

1. C.I.F – cost, insurance and freight;


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2. F.O.B.- free on board;3. F.A.S.- free alongside ship; and4. C and F- cost and freight.

TRANSHIPMENT OF GOODS- act of taking cargo from one ship and loading it in another, if done without legal excuse, however, competent and safe the vessel into which the transfer is made is a violation of contract and infringement of right of shipper and subjects carrier to liability if freight is lost event by cause otherwise excepted (MAGELLAN MANUFACTURING vs. CA , 201 SCRA 102)

LOAN OF BOTOMMRY- loan made by shipowner or shipagent guaranteed by vessel itself and repayable upon arrival of vessel at destination.

LOANS ON RESPONDENTIA – loan, taken on security of cargo laden on a vessel, and repayable upon safe arrival of cargo at destination.

COMMON ELEMENTS OF LOANS ON BOTTOMRY AND RESPONDENTS:

1) Exposure of security to marine peril2) Obligation of the debtor conditioned only

upon safe arrival of the security at the point of destination.

FORMS OF A LOAN ON BOTTOMRY/RESPONDENTIA:

May be executed by means of:1) public instrument2) policy signed by the contracting parties

and the broker taking part therein3) private instrument

CONTENTS OF THE LOAN CONTRACT:

1) kind, name and registry of the vessel2) name, surname and domicile of the

captain3) names, surnames and domiciles of the

borrower and the lender4) amount of the loan and the premium

stipulated5) time for repayment6) goods pledged to secure repayment7) voyage during which the risk is run

WHO MAY CONTRACT:

1) Bottomry – general rule: the owner; if owner is absent; captain;

2) Respondentia – only the owner of the cargo.

DISTINCTIONS :

LOANS ON BOTTOMRY/RESPON

DENTIA

ORDINARY LOAN

1. Not subject to Usury Law

1. Subject to Usury Law

2. Liability of the borrower is contingent on the safe arrival of the vessel or cargo at destination

2. Not subject to any contingency

3. The last lender is a preferred creditor

3. The first lender is a preferred creditor

NOTE: Under existing laws, the parties to a loan, whether ordinary or maritime, may agree on any rate of interest. (CB Circular 905).

EXCEPTIONS TO THE HYPOTHECARY NATURE OF BOTTOMRY AND RESPONDENTIA:

1) loss due to inherent defect;2) loss due to the barratry on the part of the captain;

3) loss due to the fault of malice of the borrower;

4) that the vessel was engaged in contraband; and

5) that the cargo loaded on the vessel be different in form that agreed upon..

ACCIDENTS IN MARITIME COMMERCE (Averages, Arrival Under Stress, Collision, Shipwreck):

1. AVERAGES- an extra-ordinary or accidental expense incurred during the voyage in order to preserve the cargo, vessel or both; and all damages or deteriorations suffered by the vessel from departure to the port of destination, and to the cargo from the port of loading to the port consignment.

CLASSES:

a. Particular or Simple Average - expenses or damage cause to vessel or cargo not inured to common benefit and borne by respective owners.- The owner of the goods which

gave rise to the expense or suffered the damage shall bear this average.


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b. Gross or General Average- damage and expenses deliberately caused in order to save the vessel, its cargo or both from renal and known risk. - All the persons having an interest in the vessel and the cargo therein at the time of the occurrence of the average shall contribute to satisfy this average.

REQUISITES:1) common danger 2) deliberate sacrifice 3) success 4) proper formalities and legal steps

PROCEDURE FOR RECOVERY:

1) There must be a resolution of the captain, adopted after a deliberation with the other officers of the vessel and after hearing all persons interested in the cargoes. If the latter disagree, the decision of the captain should prevail but they shall register their objections.

2) The resolution must be entered in the logbook, stating the reasons and motives for the dissent, and the irresistible and urgent causes if he acted in his own accord. It must be signed, in the first case, by all persons present in the hearing. In the second case, by the captain and all the officers of the vessel.

3) The minutes must also contain a detail of all the goods jettisoned and those injuries caused to those on board.

4) The captain shall deliver it to the maritime judicial authority of the first port he may make, within 24 hours after his arrival, and to ratify it immediately under oath.

ORDER OF GOODS TO BE CAST OVERBOARD IN CASE OF JETTISON:

1) those which are on the deck, preferring the heaviest one with the least utility and value

2) those which are below the upper deck, beginning with the one with greatest weight and smallest value

2. ARRIVAL UNDER STRESS- arrival of vessel at a port of destination on account of lack of provision, well founded fear of seizure, pirates, or accidents of sea disabling navigation.

When not lawful:

a. lack of provisions due to negligence to carry according to usage and customs;

b. risk of enemy not well known or manifest

c. defect of vessel due to improper repair; and

d. malice, negligence, lack of foresight or skill of captain.

Who bears expenses:The ship owner bears all the expenses except when it is unlawful arrival, the ship owner also answers for damages to the owners of the cargo and the passengers.

3. COLLISIONS- impact of 2 vessels both of which are moving.

ZONES OF TIME IN THE COLLISSION OF VESSELS (URRUTIA AND CO. VS. BACO RIVER PLANTATION CO., 26 PHIL 632).

1. 1ST ZONE – all time up to the moment when risk of collision begins;

2. 2ND ZONE – time between moment when risk of collision begins and moment it becomes a practical certainty;

3. 3RD ZONE – time when collision is certain and time of impact.

RULES ON COLLISSION OF VESSELS (Arts. 826, 827, 828, 830, 831, and 832, Code of Commerce)

1. The collision may be due to the fault, negligence or lack of skill of the captain, sailing mate, or any other member of the complement of the vessel. The owner of the vessel at fault be liable for losses or damage (826 Code of Commerce)

2. The collision may be due to the fault of both vessels. Each vessel shall suffer its own losses, but as regards the owner of cargoes both vessels shall be jointly and severally liable. (827, CC)

3. If it cannot be determined which vessel is at fault. Each vessel shall also suffer its own losses and both shall be solidarily liable for losses o damages on the cargoes. (828, CC)

4. The vessels may collide with each other through fortuitous event or force majeure. In this case each shall bear its own damage. (830, CC).

5. Two vessels may collide with each other without their fault by reason of a


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third vessel. The third vessel will be liable for losses and damagea (831, CC)

6. A vessel which is properly anchored and moored may collide with those nearby reason of storm or other cause of force majeure. The vessel run into shall suffer its own damage and expense (832, CC)

PREQUISITE TO RECOVERY:

Protest should be made within 24 hours before the competent authority at the point of collision or at the first port of arrival, if in the Philippines and to the Philippine consul, if the collision took place abroad.

Injuries to persons and damage to cargo of owners not on board on collision time, need not be protested.

DOCTRINE OF “INSCRUTABLE FAULT”

In a collision, the vessel at fault shall indemnify the damages sustained or losses incurred (Article 826, Code of Commerce), and if both vessels were at fault, each shall suffer its own damages, and both Articles 827-828, Code of Commerce). This solidarity expressed in Article 827 of the Code of Commerce has been held to preclude a common carrier operating a vessel from interposing the defense of due diligence in the selection and supervision of its employees in an action against it by a shipper of the other colliding vessel as distinguished from the ordinary rule in liabilities for tort or culpa aquiliana. Under the “doctrine of inscrutable fault”, where fault is established but it cannot be determined which of the two vessels were at fault , both shall be deemed to have been at fault.

NOTE: The Doctrine of Limited Liability applies in case of collisions, but it shall be limited only to the value of the vessel with all its appurtenances and freightage earned during the voyage. When the latter is not sufficient to cover all the liabilities, the indemnity due by reason of the death or injury of persons shall have preference. (Art. 837,838, Code of Commerce)

ALLISION- impact between a moving vessel and a stationary one.

ERROR IN EXTREMIS- sudden movement made by a faultless vessel during the 3rd zone of collision with another vessel which is at fault during the 2nd zone. Even if such sudden movement is wrong, no responsibility will fall on said faultless vessel (URRUTIA CASE)

4. SHIPWRECK- loss of the vessel at sea as a consequence of its grounding, or running against an object in sea or on the coast.

If the wreck was due to malice,

negligence or lack of skill of the captain, the owner of the vessel may demand indemnity from said captain.

CARRIAGE OF GOODS BY SEA ACT (COM. ACT NO. 65)

COGSA is suppletory to the Civil Code and the Code of Commerce in the Carriage of goods from foreign parts to the Philippines (EASTERN SHIPPING VS. IAC, 150 SCRA 463).

PRESCRIPTIVE PERIODS – suit for loss or damage to the cargo should be brought within one year after.a. delivery of the goods; orb. the date when goods should be deliver

NOTICE OF DAMAGE If the damage is externally

apparent, it should be given on receipt of the goods; if the damage is externally visible, then within three days from receipt. Failure to give notice however, does not bar the filing of the suit if made within one year.

PUBLIC SERVICE LAW

PURPOSES1) to protect the public against

unreasonable charges and poor, insufficient service

2) to protect and secure investments in public services

3) to prevent ruinous competition

PUBLIC SERVICE -includes every person that now or hereafter may own operate, manage or control in the Philippines for hire or compensation, with general or limited clientele, whether permanent, occasional or accidental, and done for general business purposes, any common carrier or public utility, ice plants, power and water supplies communication and similar public services.


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CERTIFICATE OF PUBLIC CONVENIENCE (CPC)

an authorization issued by the PSC for the operation of public services for which no franchise, either municipal or legislative, is required by law, e.g., common carriers

CERTIFICATE OF PUBLIC CONVENIENCE AND NECESSITY- authorization issued by the PSC for the operation of PS for which a prior franchise is required by law. e.g. telephone and other services.

NOTE: A certificate of public convenience constitutes neither a franchise nor a contract, confers no property right, and is a license or a privilege. The holder of said certificate does not acquire a property right in the route covered thereby. Nor does it confer upon the holder any proprietary right or interest or franchise in the public highways. Revocation of this certificate deprives him of no vested right. New and additional burdens, alteration of the certificate, or even revocation or annulment thereof is reserved to the State. (LUQUE VS. VILLEGAS, 30 SCRA 408)

CONDITIONS THAT MUST CONCUR IN THE GRANT OF CERTIFICATE OF PUBLIC CONVENIENCE AND NECESSITY (VDA. DE LAT VS. PSC):

1) grantee must be a citizen of the Philippines or a corporation or entity 60% of the capital of which is owned by such citizens.

2) grantee must have sufficient financial capability to undertake the services

3) the service will promote public interest and convenience in a proper and suitable manner

NOTE: primordial considerations: public interest, necessity, and convenience.

GROUNDS FOR THE REVOCATION OF THE CERTIFICATE:

When the holder:1) violates or contumaciously refuses to

comply with any order, rule or regulation of the commission

2) is a mere dummy3) ceases operations by placing his buses

in storage4) abandons the service

GROUND FOR SUSPENSION: When the operator willfully or contumaciously refuses to comply with any order, rule or regulation. But such can only be suspended upon prior notice and hearing. The only exception is when it is necessary to avoid serious and irreparable

damage or inconvenience to the public or private interest, in which case, a suspension not more than 30 days may be ordered, prior to the hearing. (Soriano vs. Medina, 164 SCRA 36)

POWERS REQUIRING PRIOR NOTICE AND HEARING:

1) issuance of certificate of public convenience and certificate of public convenience and necessity

2) fixing of standards and qualifications

3) fixing of standards for measuring quantity

4) establishment of rules to secure accuracy of all meters and all measuring appliances

5) compel operators to furnish proper service

6) extension of facilities

POWERS EXERCISABLE WITHOUT PRIOR NOTICE AND HEARING:

1) investigation of public utility companies

2) require public services to pay expenses of investigation

3) valuation of properties of public utilities

4) examination and test of measuring appliances

5) grant of special permits to make extra or special trips in territories specifdied in the certificate

6) uniform accounting system and furnishing of annual reports

7) investigation of accidents8) compel compliance with the laws

and regulations

UNLAWFUL ACTS OF PUBLIC UTILITY COMPANIES:

1) engage in public service business without first securing the proper certificate

2) provide or maintain unsafe, improper or inadequate service as determined by the proper authority

3) commit any act of unreasonable and unjust preferential treatment to any particular person, corporation or entity as determined by the proper authority

4) refuse or neglect to carry public mail upon request

ACTS REQUIRING PRIOR APPROVAL:


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1) establish and maintain individual or joint rates

2) establish and operate new units3) issue free tickets4) issue any stock or stock certificates

representing an increase of capital5) capitalize any franchise in excess of the

amount actually paid to the Government6) sell, alienate, mortgage or lease

property, certificates or franchiseNOTE: Under Sec. 20g of C.A. 146, the sale, etc. may be negotiated and completed before the approval by the proper authority. Its approval is not a condition precedent to the validity of the contract. The approval is necessary only to protect public interest.

PRIOR OPERATOR RULE

rule allowing an existing franchised operator to invoke a preferential right within the authorized territory as long as he renders satisfactory and economical service. It subordinates the PRIOR APPLICANT RULE which gives the first applicant priority only if things and circumstances are equal. The granting of preference to an old operator applies only when said operator has made an offer to meet the increase in traffic or demand for service and not when another operator, even a new one, has made the offer to serve the new line or increase the service on said line. The rule of preference protects only those who are vigilant, in meeting the needs of the travelling public. (TIONGSON VS. PSC, 36 SCRA 241) PRIOR APPLICANT RULE

presupposes a situation when two interested persons apply for a certificate to operate a public utility in the same community over which no person has as yet granted any certificate. If it turns out, after the hearing, that the circumstances between the two applicants are more or less equal, then the applicant who applied ahead of the other, will be granted the certificate.

V. INTELLECTUAL PROPERTY

INTRODUCTION to Intellectual Property Law (R. A. 8293 - Intellectual Property Code or IPC; effective Jan. 1, 1998)

Intellectual Property

those property rights which result from the physical manifestation of original thought. (Ballantine's Law Dictionary)

refers to the totality of all rights which the law recognizes in favor of the author, composer, painter, artist, scientist, or any other person with respect to the creations or product of his intellect, and consists of principally, in his right to;(1) authorize; or 2) refuse; the publication or production of such creations or products (De Leon; Comments and Cases on Property).

NOTE: There are no property rights protected by law in mere ideas or mental conceptions. When creations of mind are put in tangible form, however, there is appropriate subject of propertythat is protected by the law (63A Am Jur. 3d, Property, Section 5; TRIPS).

THE TERM "INTELLECTUAL PROPERTY" CONSISTS OF (SEC. 4)1. COPYRIGHT AND RELATED LAWS2. TRADEMARKS AND SERVICE MARKS3. Geographic indications4. PATENTS5. Layout - Designs (Topographies) of

Integrated Circuits; andPage 65


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6. Protection of Undisclosed Information (TRIPS)

INTERNATIONAL CONVENTION AND RECIPROCITY (SEC. 3) Any person who is a national or who is domiciled or has a real and effective industrial establishment in a country which is:

(1) A party to any convention, treaty, or agreement relating to intellectual property rights or the repression of unfair competition to which the Philippines is also a party, or;

(2) Extends reciprocal rights to nationals of the Philippines by law, shall be entitled to benefits to the extent necessary to give effect to any provision of such convention, treaty, or reciprocal law, in addition to the rights to which any owner of an intellectual property right is otherwise entitled by this act.

FUNCTIONS OF THE INTELLECTUAL PROPERTY OFFICE (IPO) (SEC. 5)

1. .Examine applications for grant of letters patent for inventions and register utility models and industrial designs;

2. Examine applications for the registration of marks, geographic indications, integrated circuits;

3. Register technology transfer arrangements and settle disputes involving technology transfer payments;

4. Promote the use of patent information as a tool for technology development;

5. Publish regularly in its own publication the patents, marks, utility models and industrial designs, issued and approved, and the technology transfer arrangements registered;

6. Administratively adjudicate contested proceedings affecting intellectual property rights; and

7. Coordinate with other government agencies and the private sector to strengthen the protection of intellectual property rights in the country;

8. Custody of all records, books, drawings, specifications, documents, and other papers and things relating to the intellectual property rights applications filed with the Office.

LAW ON COPYRIGHT

COPYRIGHT It is that system of legal protection an author enjoys in the form of expression of ideas. (World Intellectual Property Organization - WIPO) the exclusive right (or rights) of an author to the work of his authorship (1987 Constitution).

DEFINITIONS"Author" - is the natural person

who has created the work.

"Collective Work" - is a work which has been created by two (2) or more natural persons at the initiative and under the direction of another with the understanding that it will be disclosed by the latter under his own name and that contributing natural persons will not be identified.

"Joint Work" - is a work prepared by two or more authors with the intention that their contributions be merged into inseparable or interdependent parts of a unitary whole. i.e. medical textbook that is jointly authorized by two or three experts.

"Work of applied art" - is an artistic creation with utilitarian functions or incorporated in a useful article, whether made by hand or produced on an industrial scale.

"Performers" - are actors, singers, musicians, dancers, and other persons who act, sing, declaim, play in, interpret, or otherwise perform literary and artistic work.

CONSTITUTIONAL BASIS

The State shall protect and secure the exclusive rights of SCIENTISTS, INVENTORS, ARTISTS AND OTHER GIFTED CITIZENS to their intellectual property and creation, particularly when beneficial to the people, for such period as may be provided by law. (Art. XIV, Sec. 13, 1987 Constitution)

CIVIL CODE PROVISIONS

By Intellectual creation, the following persons acquire ownership:1. The author with regard to his literary,

dramatic, historical, legal, philosophical, scientific or other work;

2. The composer, as to his musical composition;


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3. The painter, sculptor, or other artist, with respect to the product of his art;

4. The scientist or technologist or any other person with regard to his discovery or invention. (Art. 721, NCC)

Letters and other private communications in writing are owned by the person to whom they are addressed and delivered, BUT they cannot be published or disseminated without the consent of the writer or his heirs. (Art. 723, NCC)

SIGNIFICANT PROVISIONS OF THE AGREEMENT ON TRADE-RELATED ASPECTS OF INTELLECTUAL PROPERTY RIGHTS (TRIPS) IN REGARD TO COPYRIGHTS:

a) Compliance with the provisions of the Paris convention (1967) is made compulsory to members.

b) Obligations under the Paris, Berne and Rome conventions remain,

c) The treatment any member-state accords its own nationals relative to intellectual property is to be accorded the nationals of all other member-states. Furthermore, any advantage, favor or privilege accorded the nationals of any other country shall be accorded the nationals of other member states. EXCLUDED from this most favored nation provision are the rights of performers, producers of phonograms and broadcasting organizations (RECIPROCITY RULE).

d) Members are to comply with the Berne Convention of 1971 and its appendix, EXCEPT the rights and obligations under Article 6bis (has to do with an author's "moral rights") - MEANING: whether or not the protection and guarantees conferred by Article 6bis (moral rights) apply or not is left with the municipal legislation of each member-state.

SUBSISTENCE OF THE RIGHTS

Conferment of rights The rights conferred by the IPC insofar as COPYRIGHT is concerned subsists from the moment of creation (Sec. 172.1). Under Philippine Law, NO FORMALITY IS REQUIRED that the author be vested with the rights of copyright.

CREATION OF A WORK:

A copyrightable work is created when the two requirements are met:1. ORIGINALITY- does not mean novelty or

ingenuity, neither uniqueness nor creativity,

it simply means that the work " owes its origin to the author".

The work is an independent creation of the author.

2. EXPRESSION-there must be "Fixation"; to be "fixed" a work must be embodied in a medium sufficiently:

a) PERMANENT; orb) STABLE;

to permit it to be perceived, reproduced, or otherwise communicated for a period of more than transitory duration.Strictly speaking there is no work for copyright purpose, unless there is something tangible. -It is fixation that defines the time from when copyright subsists. Before the time of fixation there can be no infringement.-Crucial event or act that allows the author to invoke the law:- It must be when a work of authorship is at least expressed in some determinate form, i.e. fixation.

NOTE : CONTRARY VIEW - The new Intellectual Property Code is silent on the requirement of fixation. Absent this requirement of fixation, then copyright would attach to bear ideas which is excluded by universal principles of copyright.

DURATION OF COPYRIGHT FOR VARIOUS WORKS: (CHAP. XIV, SEC. 213)

A. LITERARY ARTISTIC WORKS AND DERIVATIVE WORKS OF A SINGLE CREATOR-the rights subsist during the lifetime of the creator and for fifty (50) years after his death. (For purposes of reckoning the start of the fifty (50)-year period, the first day of January of the year following the event which gives rise to them is the starting point - Sec. 214)

b. In case of JOINT CREATION-the economic rights shall be protected during the life of the last surviving author and for fifty years after his death (the fifty-year period is counted from the death of the last surviving co-creator).

c. When an ANONYMOUS OR A PSEUDONYMOUS WORK- is published, the copyright lasts till the end of fifty years following the date of their first publication. (commencing from January 1 following the date of publication - Sec. 214)


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d. A work of APPLIED ART enjoys protection for twenty-five (25) years from the date of making.

E. PHOTOGRAPHIC WORKS- are protected for fifty (50) years from the publication of the work, or from making the same term is given to audiovisual works produced by photography or analogous processes.

F. A NEWSPAPER ARTICLE- will therefore enjoy a term of protection equal to that enjoyed by other literary works: the lifetime of the author and fifty years thereafter. Important, however, relative to newspapers and periodicals is the denial of copyright protection to "news of the day and other miscellaneous facts having the character of mere items of press information." (Sec. 175) A pure news report will no longer find protection under the new law, BUT a column or published comment will. When newspapers and periodicals include works enjoying independent copyrights, the works so included continue enjoying the rights for a duration proper to them.

THE SUBJECT OF COPYRIGHT

A. LITERARY AND ARTISTIC WORKS

1. Books, pamphlets, articles and other writings;

2. Periodicals and newspapers;3. Lectures, sermons, addresses,

dissertations prepared for oral delivery, whether or not reduced in writing or other material form;

4. Letters;5. Dramatic or dramatico-musical

compositions; choreographic works or entertainment in dumb shows;

6. Musical compositions, with or without words;

7. Works of drawing, painting, architecture, sculpture, engraving, lithography or other works of art; models or designs for works of art;

8. Original ornamental designs or models for articles of manufacture, whether or not registrable as an industrial design, and other works of applied art;

9. Illustrations, maps, plans, sketches, charts and three (3) dimensional works relative to geography, topography, architecture or science;

10. Drawings or plastic works of a scientific or technical character;

11. Photographic works including works produced by a process analogous to photography; lantern slides;

12. Audiovisual works and cinematographic works and works produced by a process analogous to cinematography or any

process for making audiovisual recordings;

13. Pictorial illustrations and advertisements;

14. Computer programs; and15. Other literary, scholarly, scientific

and artistic works. (Sec. 172)

NOTE: The author of speeches, lectures, sermons, addresses, and dissertations shall have the exclusive right of making a collection of his works. (Sec. 176.2)

B. DERIVATIVE WORKS

The following derivative works shall also be protected by copyright.1. Dramatizations, translations,

adaptations, abridgments, arrangements, and other alterations of literary or artistic works; and

2. Collections of literary, scholarly or artistic works, and compilations of data and other materials which are original by reason of the selection or coordination or arrangement of their contents (Sec. 173).

An important innovation of the new law is the distinct copyright that the publisher of a work enjoys. The code provides - "In addition to the right to publish granted by the author, his heirs, or assigns, the publisher shall have a copyright consisting merely of the right of reproduction of the typographical arrangement of the published edition of the work." (Sec. 174)

WORKS NOT PROTECTED:

1. No protection shall extend, under this law, to any idea, procedure, system, method or operation, concept, principle, discovery or mere data as such, even if they are expressed, explained, illustrated or embodied in a work; (Sec. 175)

2. News of the day and other miscellaneous facts having the character of mere items of press information; (Sec. 175) or

3. Any official text of a legislative, administrative or legal nature, as well as any official translation thereof. (Sec. 175)

4. Any work of the Government of the Philippines; However, prior approval of the government agency or office wherein


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the work is created shall be necessary for exploitation of such work for profit. Such agency or office may, among other things, impose as a condition the payment of royalties. No prior approval or conditions shall be required for the use of any purpose of statutes, rules and regulations, and speeches, lectures, sermons, addresses, and dissertations, pronounced, read or rendered in courts of justice, before administrative agencies, in deliberative assemblies and in meetings of public character. (Sec. 175)

5. Pleadings;6. Although not explicitly mentioned,

DECISIONS OF COURTS AND TRIBUNALS are likewise non-copyrightable. They may therefore be freely used or quoted.NOTE: This pertains to the "original decisions" not the SCRA PUBLISHED VOLUMES WITH ANNOTATIONS since these are protected under derivative works as "collections of literary, scholarly, or artistic works and compilations of data and other materials which are original by reason of the selection or coordination or arrangement of their contents." (Sec. 173.1 b)

THE RIGHTS OF COPYRIGHT

A. Copyright or Economic Rights

Copyright or Economic rights shall consist of the exclusive right to (a) carry out, (b) authorize or (c) prevent the following acts:

1. Reproduction of the work or substantial portion of the work;

2. Dramatization, translation, adaptation, abridgment, arrangement or other transformation of the work;

3. First public distribution of the original and each copy of the work;

4. Rental of the original or a copy of an audiovisual or cinematographic work;

5. Public display of the original or a copy of the work;

6. Public performance of the work; and7. Other communication to the public of the

work. (Sec. 177)

B. Moral Rights

The author of a work shall, independent of economic rights or the grant of an assignment or license with respect to such right, have the right:

1. Require that the authorship of the works be attributed to him, in a prominent way on the copies, and with the public use of the work;

2. Make any alterations of his work prior to, or to withhold it from publication;

3. Object to any distortion, mutilation or other modification of, or other derogatory action in relation to, his work which would be prejudicial to his honor or reputation; and

4. Restrain the use of his name with respect to any work not of his own creation or in a distorted version of his work (Sec. 193).

LIMITATIONS ON COPYRIGHT:

The following acts shall NOT constitute infringement of copyright:

1. Recitation or performance of a work -made accessible to the public-privately done- free of charge-strictly for a charitable or religious institution;

2. Making of quotations from a published work- compatible with fair use- to the extent justified for the purpose- including quotations from newspaper articles and periodicals- source and name of the author, appearing on work, must be mentioned;

3. Reproduction or communication to the public by mass media - of articles on current political, social, economic, scientific or religious topic, lectures, addresses and other works, delivered in public- use is for information purposes- not expressly reserved- source is already indicated;

4. Reproduction and communication to the public of literary, scientific or

artistic works - as part of reports of current events-by means of photography, cinematography or broadcasting- to the extent necessary for the

purpose;5. Inclusion of a work in a publication,

broadcast, or other communication to the public, sound recording or film- if made by way of illustration for teaching purposes- compatible with fair use- source and name of the author, appearing on work, must be mentioned;

6. Recording made in schools, universities, or educational institutions of a

work included in a broadcast for the use of such schools, universities or educational institutions


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- such recording must be deleted within a reasonable period- such recording may not be made from audiovisual works which are part of the general cinema repertoire of feature films EXCEPT for brief excerpts of the work;

7. Making of ephemeral recordings -by a broadcasting organization- by means of its own facilities- for use in its own broadcast;

8. Use made of a work by or under the direction or control of the Government- Government- National Library- Educational, Scientific, or professional institutions- use is in the public interest- compatible with fair use;

9. Public performance or the communication to the public of a work - in a place where no admission fee is charged by a club on institution- for charitable or educational purpose only- aim is not profit making;

10. Public display of the original or a copy of the work not made by means of a film, slide, television image or otherwise on screen or by means of any other device or process- either the work has been

a) published b) soldc) given awayd) transferred to another person by the

author or his successors in title;11. Any use made of a work for the purpose

- of any judicial proceedings; or- for the giving of professional advice by a legal practitioner.

The provisions of this section shall be interpreted in such a way as to allow the work to be used in a manner which does not conflict with the normal exploitation of the work and does not unreasonably prejudice the right holder's legitimate interests. (Sec. 184.2)

The private reproduction of a published work in a single copy, where the reproduction is made by a natural person exclusively for (1) research and (2) private study, shall be permitted, without the authorization of the owner of copyright in the work. (Sec. 187.1) HOWEVER, the permission granted under Subsection 187.1 SHALL NOT EXTEND to the reproduction of:

x x x(b) An entire book, or a substantial part thereof, or of a musical work in graphic form by reprographic means; (Sec. 187.2)

Under Article 9, paragraph 2 of the Berne - Paris Convention, individual countries may permit the reproduction of literary and artistic works "provided that such reproduction does not

conflict with a normal exploitation of the work and does not unreasonably prejudice the legitimate interests of the author." (also found in Sec. 187.2 e) The same caveat is contained in Article 14 of the GATT 94 intellectual property agreement: Limitations or exceptions to the exclusive rights shall be confined to certain special cases which do not conflict with a normal exploitation of the work and do not unreasonably prejudice the legitimate interests of the right - holder. This in-built protection of the interests of a copyright owner is now unequivocally enshrined in Sec. 187.2 e.

PERSONAL USE - generally understood as making a single reproduction, adaptation, arrangement or other transformation of another's work exclusively for one's own individual use in such cases as personal research, learning or amusement.

PRIVATE USE - generally understood in relation to a published work as making a reproduction, adaptation or other transformation of it, in a single person, as in the case of "personal use" but also for a common purpose by a specific circle of persons only.

FAIR USE OF A COPYRIGHTED WORK

Fair Use A privilege, in persons other than the owner of the copyright, to use the copyrighted material in a reasonable manner without his consent, notwithstanding the monopoly granted to the owner by the copyright.

It is meant to balance the monopolies enjoyed by the copyright owner with the interests of the public and of society.

NOTE: It only applies to copyrighted work and not to non-copyrightable material.

CRITERIA TO DETERMINE WHETHER USE IS FAIR OR NOT:

1. Purpose and the character of the use2. Nature of the copyrighted work3. Amount and substantiality of the

portions used4. Effect of the use upon the potential

market of the copyrighted work

THE "FAIR USES" OF PROTECTED MATERIAL ARE:


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1. Criticizing, commenting, and news reporting;2. Using for instructional purposes, including

producing multiple copies for classroom use, for scholarship, research and similar purposes is not an infringement of copyright. (Sec. 185)

REPROGRAPHIC REPRODUCTION BY LIBRARIES:

Any library or archive whose activities are not for profit may, without the authorization of the author of copyright owner, make a single copy of the work by reprographic reproduction, when:

1. Fragile or rare2. Isolated articles

3. Preservation (Sec. 188.1)

It shall not be permissible to produce a volume of a work published in several volumes or to produce missing tomes or pages of magazines or similar works, unless the volume, tome or part is necessary for the collection of the library and is out of stock. (Sec. 188.2)

The rights mentioned vest in libraries, public archives and museums. There is no requirement that the library be a public library, it could be private. And is limited only to literary or artistic works.

CRITERIA FOR "REPROGRAPHIC REPRODUCTION" OF LIBRARIES:

1. Photocopying only, i.e. "xerox" (not by other medium)

2. Single copy3. Consistent with the activities of the library or archive

REPRODUCTION OF COMPUTER PROGRAMS:

The reproduction of a computer program is allowed on the following conditions:1. Only one (1) copy is made;2. Lawful owner made the copy;3. Purpose for which the reproduction is made

is legal, like:a) use to which the program is made and for which it was purchased demand the reproduction of a copy; orb) loss or destruction is avoided.

(Sec. 189.1)

Importation for Personal Purposes

The importation of a copy of a work by an individual for his personal purposes shall be permitted without the authorization of the author

of, or other owner of copyright in, the work under the following circumstances: a. Copies of the work are not available in

the Philippines and:1.One (1) copy at one time is

imported, for strict individual 2.By Authority of and for the use of

the Philippine Government; or3.Religious, Charitable or

Educational Society or institution imported not more than three (3) copies per title (or kind) provided they are not for sale. (it is enough if the importation be for the sake of such society or institution)

b. Copies form parts of libraries and personal baggage belonging to persons or families arriving from foreign countries and are not intended for sale: Provided, That such copies do not exceed three (3). (Sec. 190)

THE OWNERSHIP OF COPYRIGHT

1. SINGLE CREATOR - The creator, his heirs or assigns owns copyright.

2. JOINT CREATION - The co - authors shall be the original owners of the copyright and in the absence of agreement, their rights shall be governed by the rules on co - ownership. If, however, a work 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.

3. COMMISSIONED WORK - Ownership of the work is in the person commissioning; ownership of copyright, remain with the creator, unless there is a written stipulation to the contrary.

4. CINEMATOGRAPHIC WORK - The producer exercises copyright for purposes of exhibition; for all other purposes, the producer, the author of the scenario, the composer, the film director, the photographic director and the author of the work are the creators. For purpses of showing the film, however, the producer is to be deemed copyright owner.

5. PSEUDONYMOUS AND ANONYMOUS WORKS - Unless the author is undisputably known, the publisher shall be presumed to be the representative of the author. (Sec. 178 and 179)

As regards moral rights, the joint authors are entitled to be acknowledged as authors of the work (Sec. 193.1 may apply). As regards contributions to a collective work, the law provides that unless the contributor


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expressly reserves his right (which often will not be the case precisely because he is in the employ of a putative author or commonly accepted author), it is the putative author to whom the work will be attributed. (Sec. 196) When a writer, a photographer, an artist - or any other contributor - sends in his piece to a periodical or newspaper publisher, such writer or artist retains his copyright on the piece except the right to publish once - which is deemed granted to the publisher. (Sec. 180.3)

COPYRIGHT OWNERSHIP OF FOREIGN AUTHORS

When the author, though a foreigner, has habitual residence in the Philippines, or when the headquarters of the producer of audiovisual works is in the Philippines, copyright protection is beyond doubt. Protections afforded the code are applied to works "protected by virtue of and in accordance with any international convention or other international agreement to which the Philippines is a party. (Sec. 221.2) Members shall accord the treatment provided for in this Agreement to the nationals of other Members. (Art. 1, par. 3, TRIPS; Paris - Berne Convention; GATT 94)

DEPOSIT AND NOTICE

Registration and Deposit with the National Library and the Supreme Court Library

For the purpose of completing the records of the National Library and the Supreme Court Library, within three (3) weeks, two (2) complete copies of the work shall be registered and deposited with the said libraries, by personal delivery or by registered mail. A certificate of deposit shall be issued and the prescribed fee collected for which the copyright owner shall be exempt from making additional deposit of the works with the aforementioned libraries under other laws. If, within three (3) weeks after receipt by the copyright owner of a written demand from the directors for such deposit, the required copies or reproductions are not delivered and the fee is not paid, the copyright owner shall be liable to pay a fine. (Sec. 191)

NOTICE OF COPYRIGHT

Each copy of a work published or offered for sale may contain a notice bearing the name of the copyright owner, x x x. (Sec. 192) Notice of copyright is allowed, not prescribed, for the permissive "may" is used.

INFRINGEMENT

REMEDIES of one who complains of infringement:

1. INJUNCTION to prevent infringement (Sec. 216)

2. DAMAGES assessed on the basis of the proof alleged by the plaintiff of sales made by the defendant of the infringing work minus whatever costs the defendant may be able to prove and appreciated by the court. (b)

3. DELIVERY UNDER OATH OF ALL IMPLEMENTS employed in the production of the infringing items, as well as the infringing products themselves, for impounding. (c)

4. DELIVERY under oath of all infringing copies or devises for destruction. (d)

5. PAYMENT of moral and exemplary damages in the discretion of the court. (e)

The infringer also exposes himself to criminal liability wherein the law prescribes penalties of imprisonment and fines, including subsidiary imprisonment in case of insolvency. (Sec. 218)

RELATED ISSUES

1. JURISDICTIONOriginal jurisdiction lies with the Director

General of the IPO over disputes relating to the terms of a license involving the author's right to public performance or other communication of his work. (Sec. 7 c)

Other infringement cases are not within the jurisdiction of the Director - General. In fact throughout Section 216, the term "court" is used, leaving no doubt that jurisdiction will rest with the "court" in view of the jurisdictional amount and the criminal prosecution of imposable penalties.

2. STANDING TO SUEPersons who may sue:a) Legal owner; orb) Beneficial owner; since they are "parties in interest."

3. DEFENDANTS Those who may be liable for infringement

under the copyright law:a) Infringerb) Aidsc) Abetsd) Participatese) Contributesf) Authorizesa) Benefits (deemed included in


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Sec. 217).

A corner book store and magazine store that vends pirated copies of a work is in fact violating the copyright owner's right to exclusively distribute his work. Such store would therefore be infringing. The printer who, though acting under instructions from another, sets into motion the illegal reproduction of protected material would, in fact, be infringing copyright.

4. PRESCRIPTIVE PERIOD

No damages may be recovered after four (4) years from the time the cause of action arose. (Sec. 226) This pertains only to recovery of damages. There is no such prescriptive period in petitions for injunctive relief as well as for the impounding and destruction of infringing material. The crime of infringement is subject to the general rules of prescription of crimes.

PERFORMER'S RIGHTS

1. Authorize as well as prohibit: a. The broadcasting and other

communication to the public of their performance (including telecast). (Sec. 203.1 a)

b. The fixation of their unfixed performance. (b)

(The above rights shall be maintained and exercised fifty (50) years after his death, by his heirs, and in default of heirs, the government - Sec. 204.2)

2. Direct or indirect reproduction of their performances (Sec. 203.2)

3. First Public distribution of the original and copies of their performance (Sec. 203.3).

4. Commercial rental to the public of the original and copies of their performances (Sec. 203).

5. Making available to the public of their performances fixed in sound recordings by wire or wireless means (Sec. 204.5).

MORAL RIGHTS OF PERFORMERS

1. Identified as the performer.2. Object to any distortion or mutilation of the

performance (Sec. 204).

LAW ON TRADEMARKS

TRADEMARK is anything which is adopted and used to identify the source of origin of goods, and which is capable of distinguishing them from goods emanating from a competitor.

GOODWILL is the reputation and public confidence that a business venture has earned through a period of creditable dealings.

The reason the law protects trademarks is to protect the interests of producers in their marks, and in the goodwill earned. The essence of trademark infringement is: passing off one’s goods as those of a producer of fame or note.

SERVICE MARK distinguishes the services of an enterprise from the service of other enterprises.

MARK any visible sign capable of distinguishing the goods or services of an enterprise and shall include a stamped or marked container of goods.

The term “visible” is not limited to whatever may be “perceptible by the senses”.

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

DISTINCTION :TRADEMARKS TRADE NAME

- The goods or services offered by a proprietor or an enterprise are designated by trademarks or service marks.

- The person (whether natural or juridical) who does the business and produces the goods or services is designated by a trade name.

A trademark has an existence proprietor or the juridical person doing business and producing the goods or distinct from the existence of the the services offered by such person or enterprise. Under the new law, there is no need to register trade names in order to secure protection for them (Sec. 165.2, a, IPL).

DISTINCTIONS :TRADEMARKS LABEL

- is anything which is - it names what is Page 73


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adopted and used to identify the source of origin of goods, and which is capable of distinguishing them from goods emanating from a competitor.

within the container or package.

- purpose:informative

In practice, a word, a name of a phrase, coupled with indicators of business organization, such as “Inc.”, “Corp.” or “Co.” will not be registered as trademarks or service marks.

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

Unfair competition includes the “selling of goods and giving them the general appearance of goods of another manufacturer or dealer, either as to the goods themselves or in the wrapping of the packages in which they are contained, or the devices or words thereon, or in any other feature of their appearance, which would be likely to influence purchasers to believe that the goods offered are those of a manufacturer, or dealer, or who otherwise clothes the goods with such appearance as shall deceive the public and defraud another of his legitimate trade, or any subsequent vendor of such goods or any agent of any vendor engaged in selling such goods with a like purpose”. All that is necessary is the likelihood of deception.

4 FUNCTIONS OF A MARK

According. to the World Intellectual Property Organization:1. Distinguishing or differentiating functions. It

sets apart the products or services of an enterprise from those of another.

2. Origin or source function. It refers to origin or source in terms of enterprise.

3. Quality function. The marks guarantees the same standards and controls with which it is associated.

4. Advertising function.

ACQUISITION OF RIGHT/GOODWILL THROUGH USE When a person has identified in the mind of

the public the goods he manufactures or deals in his business or services from those of others, such a person has a property right in the goodwill of the said goods, of services which will be protected in the same manner as other property rights.

Priority in registration in the Philippines of a trademark is not material in an action for unfair competition as distinguished from an action for infringement of trademark. The basis of an action for unfair competition is confusing and misleading similarity in general appearance, not similarity of trademark. (Converse Rubber World v. Jacinto Rubber, G.R. Nos. L-27425 and L- 30505, April 28, 1980)

The use of the mark must be such as to allow the same to be associated by the public with a particular producer or manufacturer. Hence, mere intention to adopt a particular mark or name without actual use gives rise to no rights at all.

DISTINCTIONS :

INFRINGEMENT OF TRADEMARK

UNFAIR COMPETITION

1. it is the unauthorized use of a trademark

2. fraudulent intent is unnecessary

3. prior registration of the trademark is a prerequisite to the action

1. is the passing off of one’s goods as those of another

2. fraudulent intent is essential

3. registration is not necessary.

ARTICLE 189 of the Revised Penal Code provides for the following punishable acts:1. Selling one’s goods, giving them the

general appearance of the goods of another manufacturer or dealer. (Unfair competition)

2. Affixing to one’s goods or using in connection with one’s services a false designation or origin, or any false description or representation.

3. Procuring fraudulently from the patent office the registration of trade name, trademark or service mark. (Fraudulent registration)

ACQUISITION THROUGH REGISTRATION

The rights to a mark are acquired through registration with the Bureau of Trademarks( BT) of the Intellectual Property Office (IPO). However, it is not necessary to use the the mark in commerce in the Philippines (or elsewhere) before filing the application with the BT. The use of a mark becomes necessary only after it has been filed.


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new law requires an applicant or the registrant to file a declaration of actual use of the mark, with evidence to that effect, within three (30 years from the filing date of the application (Sec. 124.2, IPL).

EFFECTS OF NON-USE

Circumstances arising independently of the will of the trademark owner (Sec. !52, IPL), such as military coup, or political changes that impede commerce. Registration is an administrative act declaratory of a pre-existing right that does not, of itself, perfect a trademark, for what does is actual use. Non-use is a ground for removing a mark from the register (Sec. 124.2, IPL).

THE FOLLOWING ARE NOT ELIGIBLE FOR LICENSING:

A mark cannot be registered if it:1. Consists of 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; Whether a mark is immoral, scandalous or contrary to public decency is to be ascertained from the standpoint of a substantial composite of the general public.

2. Consists of the flag or coat of arms or other insignia of the Philippines or any of its political subdivisions, or of any foreign nation, or any simulation thereof;

3. Consists of a name, portrait or signature identifying a particular living individual except by his written consent, or the name, signature, or portrait of a deceased President of the Philippines, during the life of his widow, if any, except by written consent of the widow;

4. Is identical with a registered mark belonging to a different proprietor or a mark with an earlier filing or priority date, in respect of:

(i) the same goods or services, or(ii) closely related goods or services, or(iii) if it nearly resembles such a mark as to be likely to deceive or cause confusion;

REVERSE CONFUSION -takes place when a large junior user makes use of a mark or a name confusingly similar to the mark or a name of a small senior user, occasioning the impression that the products of the senior are those of the junior, or that the senior has somehow been absorbed or merged into the junior.

The law institutes a “race for the registry office”, she who reaches and registers first gains the protection of law to the exclusion of others in regard to the same – or a confusingly similar – mark.5. Is identical with, or confusingly similar

to, or constitutes a translation of a mark which is considered by the competent authority of the Philippines (IPO) to be well-known internationally and in the Philippines., whether or not it is registered here, as being already the mark of a person other than the applicant for registration, and used for identical or similar goods or services: Provided, That in determining whether a mark is well-known, account shall be taken of the knowledge of the relevant sector of the public, rather than of the public at large, including knowledge in the Philippines. Which has been obtained as a result of the promotion of the mark;

Protects even unregistered marks and names. Deals with an applicant’s goods that are identical or similar to those under a previously registered or previously well-known mark. Where the same sign is used for identical goods, there will be presumption of the likelihood of confusion. (Sec. 147.1, IPL)

6. Is identical with, or confusingly similar to, or constitutes a translation of a mark considered well-known in accordance with the preceding paragraph, 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 mark in relation to those goods or services would indicate a connection between those goods or services, and the owner of the registered mark: Provided further, That the interests of the owner of the registered mark are likely to be damaged by such use;

This provision deals with goods or services dissimilar from those disposed of under the same mark or name.

DOCTRINE OF DILUTION -refers to copying which, while not sufficiently confusing to divert sales in the short run, will tend to divert them in the long run by weakening the instantaneous favorable associations the public makes with highly regarded products.


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TESTS OF TRADEMARK INFRINGEMENTDOMINANCY TEST HOLISTIC TEST- consists in seeking

out the main, essential or dominant features of a mark.

- takes stock of the other features of a mark, taking into consideration the entirety of the marks.

Under the Dominancy Test, if the competing trademark contains the main or essential or dominant features of another, and confusion and deception is likely to result, infringement takes place.

TRANSLATIONS There will be infringement when a translation of a well-known mark in the Philippines. or internationally is used for similar goods or products. There will like wise be infringement when a translation of a registered mark in the Philippines. is used for dissimilar goods or products.

DOCTRINE OF FOREIGN LANGUAGE EQUIVALENTS - states that "the foreign equivalent of a merely descriptive English-language word is deemed to be no more registrable than the English word itself, despite the fact that the foreign term may not be commonly known to be general public".

7. Is likely to mislead the public, particularly as to the nature, quality, characteristics or geographical origin of the goods or services;

A mark then will not be granted registration that suggests a quality, a characteristics or an origin that the good or service does not possess.

8. Consists exclusively of signs that are generic for the goods or services that they seek to identify;

9. Consists exclusively of signs or of indications that have become customary or usual to designate the goods or services in everyday language or in bona fide and established trade practice;

It must be made clear that the fact that a term is generic does not per se render it non-registrable. What the law excludes is the registration of a mark that is generic relative to the goods or products for which the mark is used.

Where a word or a term was originally the subject of a trademark, but becomes so associated in the public mind with an article to which it is applied and thereby becomes a generic indicator, it can no longer be protected.

10. Consists exclusively of signs or of indications that may serve in trade to designate the kind, quality, quantity, intended purpose, value, geographical origin, time or production of the goods or rendering of the services, or other characteristics of the goods or services;

That which may rightly be said of all can be appropriated by none.

11. Consists of shapes that may be necessitated by technical factors or by the nature of the goods themselves or factors that affect their intrinsic value;

12. Consists of color alone, unless defined by a given form; or

13. Is contrary to public order or morality (Sec. 123.1, IPL).

Sec. 123.2. As regards signs or devices mentioned in paragraphs (j), (k) and (l), nothing shall prevent the registration of any such sign or device which has become distinctive, in relation to the goods for which registration is requested as a result of the use that have been made of it in commerce in the Philippines. The Office may accept as a prima facie evidence that the mark has become distinctive, as used in connection with the applicant's goods or services in commerce, proof of substantially exclusive and continuous use thereof by the applicant in commerce in the Philippines for five (5) years before the date on which the claim of distinctiveness is made.

DOCTRINE OF SECONDARY MEANING

While a generic, indicative or descriptive mark will, as a general rule, be denied registration, there is a circumstance that will allow it to be registered, this is the doctrine of secondary meaning which has been defined as, when a mark has become distinctive of the applicant's goods in commerce and, and in the mind of the public, indicates a single source to consumers, it may be registered.

Requirements of the doctrine:1. The secondary meaning must

have arisen as a result of substantial commercial use in the Philippines.


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2. The use result in the distinctiveness of the mark insofar as the goods or the products are concerned.

3. Prima facie evidence is proof of commercial use in the Philippines 5 years before date of claim.

.RIGHTS CONFERRED

1. The right to the exclusive use of the mark for one's own goods or services.

2. The right to prevent others from the use of the same mark for identical goods or services in the course of trade.

3. The right to the exclusive use of one's already registered mark even for goods or services into which one's venture expands, if use by others for dissimilar products is likely to damage the business interests of the first venturer (Sec. 147, IPL).

The rights, by Sec. 145, lasts for ten (10) years subject to indefinite renewal for periods of ten years each. The right to the use of a registered trademark may be licensed to another person, natural or juridical, enabling such a party to produce, market, distribute and advertise goods or services by the trade or service mark of the licensor. Sec. 150.1 however requires that a licensor effectively control the quality of the goods or services of the licensee.

STANDING TO SUE AND JURISDICTION

The right to the use of the corporate or trade name is a property right, a right in rem, which it may assert and protect in any of the courts of the world even in jurisdiction where it does not transact business just the same as it may protect its tangible property, real or personal against trespass or conversion. Sec. 160 leaves no doubt that a foreign national or juridical person who is a national of a country that is party to a relevant convention to which the Philippines. is also a party may bring a civil or an administrative action for opposition, cancellation, infringement, unfair competition or false designation of origin and false description, regardless of its status (or lack of it) in the Philippines., and even if such an entity does not do business in the Philippines.

ELEMENTS OF THE CRIME OF TRADEMARK INFRINGEMENT:

1. The deceitful act of giving one’s goods the general appearance of the goods of another manufacturer or dealer.

2. The deceptive similarity is either in the goods themselves, in the trade dress, in the

words or devices, or in any other feature of appearance.

3. The offender offers to sell or sells the goods, or gives others the opportunity to do the same.

4. An actual intent to deceive the public or defraud the competitor.

PATENT

Is a document, issued, upon application, by a government office, which describes an invention and creates a legal situation in which the patented invention can normally only be exploited (manufactured, used, sold, imported) with the authorization of the owner of the patent

is an exclusive right acquired over an invention, to sell, use and make the same whether for commerce or industry.

DISTINCTIONS :

PATENT COPYRIGHT– When a person, by

independent research arrives at the same product or that already patented, he is restrained by the arm of the law from exploiting such an invention by reason of the patent granted the earlier discoverer.

- It may be vested in a work closely similar or even identical to an earlier, already patented work, provided that the former is truly original, ie., it owes its existence to its creator.

It will be remembered that what is not patentable may nevertheless be protected under copyright law.

PATENTABILITY

To be patentable, a product must be:a. a technical solution of a problem

in any field of human activityb. novelc. an inventiond. industrially applicable

These criteria may apply to:a. productsb. processesc. improvements of either products

or processes

PROCESS- consists of an act, operation, or steps or a series thereof, performed upon a


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specified subject matter to produce physical result. where the patent is for a process, the law forbids others from using the process, and also from manufacturing, dealing in , or importing any product obtained directly or indirectly from such process.

PRODUCT-is broad enough a term to include every output of human ingenuity, every tangible result of craftsmanship or partnership. It is to be noted that not all products are patentable because not all process the requirements of patentability.

IMPROVEMENTS- to be patentable, the improvement should be non-obvious to one skilled in the art of the original invention and is truly novel. If it is merely a consequence of technical configuration of the original invention and is thus “suggested” by the invention itself, the improvement is still within the dominion of the original invention.

EXCLUDED FROM PATENT PROTECTION:

1. discoveries, scientific theories and mathematical method

2. schemes, rules and methods of performing mental acts, playing games, or doing business, and programs for computer

3. methods for treatment of the human body or animal body by surgery or therapy and diagnostic methods practiced on the human or animal body.

4. Plant varieties or animal breeds of essentially biological process for the production of plants or animals

5. Aesthetic creations6. Anything which is contrary to public order or

morality (Sec. 22).

REQUIREMENTS FOR PATENT:

1. NOVELTY- that which does not form part of the prior art (Sec. 23).“Prior art” is specified under Sec. 24, to wit:

a. that which has been made available to the public anywhere in the world before the filing date or the priority date of application

b. that which forms part of an application whether for patent, utility model or industrial designed, effective in the Philippines, provided that:b.1. the inventor or applicants are not the sameb.2. the contents of the application are published in accordance with the requirements of patent application rules

b.3. the filing date of prior art Is earlier

thus prior art is synonymous with prejudicial disclosure Sec. 25 RA 8293 embodies the exception to prior art under the heading “non-prejudicial disclosure” any disclosure of the invention made within twelve (12) months before the filing date does not prejudice the application if the disclosure is made by:

a. inventor himself (or by anyone who has the right to patent, Sec. 25, 2)

b. patent office- when the information of the latter office comes another application filed by the inventor that should not have been disclosed by the office

c. third person’s application when such persons information directly indirectly comes from the inventor himself without the inventor’s permission, or from any third persons who obtained his information from the inventor.

2. INVENTIVENESS

an invention involves an inventive step if, having regard to prior act, it is not obvious to a person skilled in the art at the time of the filing date or priority date of the application claiming the invention (Sec. 26, RA 8293).

It is suggested that the test of non-obviousness be pursued in four steps:1. the scope and

content of the prior art are determined

2. the differences between the prior art and the claims at issue are ascertained

3. the level of ordinaryskill in the pertinent art is resolved

4. against this background, the obviousness or non-obviousness of the subject matter is ascertained (60 AM JUR 2d, Patents, Sec. 144).

3. CAPABLE OF INDUSTRIAL APPLICATION

(TRIPS, Sec. 5 Art. 27, par. 1)Two requirements of industrial applicability shall be fulfilled: a. it can be produced b. can be used in industry (Sec. 27)


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The application shall disclose the invention in a manner sufficiently clear and complete for it to be carried out by a person skilled in the art.

according to TRIPS, it is synonymous with “useful” (Sec. 5 Art. 29 year 1, TRIPS) “an applicant for a patent shall disclose the invention in a manner sufficiently clear and complete for the invention to be carried out by a person skilled in the art and may require the applicant to indicate the best mode for carrying out the invention known to the inventor at the filing date”

FIRST TO FILE RULE Under Sec. 29 R.A. 8293, if two or more person have made the invention separately and independently of each other the right to the patent shall belong to the person who first filed an application for such invention.

OWNERSHIP OF PATENT RIGHTS:

The right to a patent belongs to:a. inventor, his heirs, or assignsb. when two (2) or more persons have

jointly made an invention – to them jointly

c. if two (2) or more persons have the invention separately and independent of each other – to the person who filed an application for such invention

d. where 2 or more application are filed for the same invention – to the applicant who has the earliest filing date or the earliest priority date (Sec. 28)

TERM OF A PATENT The term of a patent shall be twenty (20) years from the filing date of application(Sec. 54 ).

INFRINGEMENT- the making, using, offering for sale , selling or importing a patented product or a product obtained directly or indirectly from a patented process, or the use of a patented process without the authorization of the patentee (Sec. 76.1).

TESTS OF PATENT INFRINGEMENT

1. Literal infringement- resort is had to the ”words “ of the claim.

2. Doctrine of equivalents- if two devices do the same work in substantially the same way, the same result, and produce substantially same result, they are the same eventhough they differ in name, form or shape.

Sec. 78 warns that where the product is identical, it shall be presumed to have been obtained thru the use of the patented process. Thus there has evolved the doctrine of equivalents which protects a patented invention from circumvention by minor changes or deviations.

THE RIGHTS OF A PATENTEE ( SEC. 71)

1. In came of a product, the patentee shall have the exclusive right to make, use, offer for sale, sell or import the product.

2. In case of a process, the patentee shall have the exclusive right to use the process, and to manufacture, deal in, use, sell or offer for sale or import any product obtained directly or indirectly from such process.

The government or a third person authorized by the government may use the patent without the authority of a patent owner, provided:

1. on public interest grounds, in particular, national security, nutrition, health or the development of other sectors, as determined by the appropriate agency of the government so requires; i.e. importation of medicines under the Generics Act by the Department of Health.

2. The manner of exploitation by the owner of the patent or his licensee, is anti-competitive (Sec. 74.1).

Under Sec. 46 R.A. 8293, After the publication of the patent application, the applicant, event while his application is still pending, is already accorded the rights of a patentee granted under the law as against any person unlawfully exercising patent rights, provided the ff. conditions concur

1. the latter has actual knowledge that the invention he was using was the subject matter of a patent

2. he has written notice of such fact3. the action may be filed only after the

grant of the patent and within four (4) years from the commission of the acts complained of.

UTILITY MODELS - are models of implement or tools of any industrial product even if not possessed of the quality of invention but which is of “practical utility.”

Sec. 108.1 treats patents and utility models similarly what distinguishes a utility model however from a patentable invention


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is set forth in Sec. 109.1: An invention qualifies for registration as a utility model if it is “new” and “industrially applicable.”That is why it is said that the degree of inventiveness necessary for the grant of protection to utility model is lower in degree than that required of a patentable invention.

MANDATORY PROVISIONSThe law requires that certain mandatory provisions be incorporated in the technology transfer agreement (TTA)

a. Philippine Law should govern the interpretation of contracts and that in case of litigation, the venue shall be the peace where the licensee has its principal office.

b. The licensee shall have continued access to improvements in techniques and processes related to the technology for the duration of the TTA.

c. In cases of arbitration, the arbitration laws of the Philippines or of the UN Commission or International trade law or of the International Chamber of Commerce shall apply and the venue shall be the Philippine or any neutral country, and

d. Payment of Philippine Taxes relating to the TTA shall be borne by the licensor.

VI. BANKING LAWS

R.A. 337 (GENERAL BANKING ACT)

VOTING STOCK OF A BANK THAT MUST BE OWNED BY FILIPINO CITIZENS:

At least 70% - must be owned by Filipinos. 30% - can be owned by Foreigners.

EXCEPTIONS:a) The Monetary Board may, with the

approval of the President, increase the percentage of foreign voting stock in any domestic bank from 30% to 40% (Sec. 12 and 12-A, RA 337).

b) Where a new bank is established as a result of 1) local incorporation of the existing branches of foreign banks pursuant to Sec. 68 of RA 337 or 2) merger or consolidation of existing banks in any of which there are foreign owned voting

stocks at the time of consolidation (Secs. 12 and 12-A, RA 337).

c) When MB authorizes foreign banks to operate through any of the following: 1) by acquiring, purchasing or owning up to 60% of the voting stock of an existing bank; 2) by investing in up to 60% of the voting stock of a new banking subsidiary incorporated under laws of Philippines; 3) by establishing branches with full banking authority, provided: a) foreign bank may avail itself of only one mode of entry and b) foreign bank or Philippine corporation may own up to 60% of the voting stock of only one domestic bank or new banking subsidiary (Sec. 2,RA. 7721).

d) Foreign banks or certain Philippine corporations may own up to 60% of voting stock of a domestic bank (RA 7721).

e) Foreigners or any foreign corporation may own up to 60% of the voting stock in thrift banks established after approval of RA No. 7906.

f) Generally, the capital stock of rural banks shall be fully owned by Filipinos and corporations, associations or cooperatives qualified to own such stock.

STOCK OWNERSHIP PERCENTAGE OF LIMITATIONS IN BANKS OF:

a. Natural persons and their relatives within 3rd degree of consanguinity or affinity – 20% of voting stock.

b. Corporation (cooperative, association, partnership)

- 30% of voting stock.1. If 2 or more corporations are

owned or controlled by the same group of persons, the aggregate voting stocks which said corporations may own in any single bank shall not exceed 30% of voting stock of the bank.

2. If said corporations are owned or controlled by one person or group of persons related within the 3rd degree of consanguinity or affinity, the aggregate voting stocks which such corporations may own in any bank shall not exceed 20% of voting stock of


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the bank (Secs. 12-B-12-D, RA 337).

DISCLOSURE REQUIREMENT- Banks shall report to the Central Bank any sale or other forms of transfer of ownership of their shares of stock by and between corporations or individuals and corporations, for purposes of determining compliance with the limitations on bank equity holdings of corporations.

NOTE: The Monetary Board may exempt voting stockholdings of corporations and of any person/s related to each other within the third degree of consanguinity or affinity from the prescribed ceilings in exceptional cases and when circumstances warrant, such as but not limited to PURCHASES IN THE EQUITY OF DISTRESSED BANKS FOR PURPOSES OF REHABILITATION.

BOARD OF DIRECTORS IN A BANK (Section 13, RA 337)

At least 2/3 of the members of the board of directors of any bank shall be citizens of the Philippines.

The limitation on the number of directors in a corporation under Sec. 14 of Corporation Code shall not be applied in case of a BANK MERGER OR CONSOLIDATION, so that membership in the new board may include up to the total number of directors provided for in the respective articles of incorporation of the merging or consolidating banks.

No appointive or elective public officials, whether full-time or part-time, shall at the same time serve as OFFICER of any private bank, EXCEPT in cases where such service is incident to financial assistance provided by the government-owned or controlled corporation to the bank.

Elective and appointive public officials can serve as directors but not as officers of the bank.

COMMERCIAL BANK – is a corporation organized to carry on the business of commercial banking by:

1) discounting and negotiating promissory notes, drafts, bills of exchange and other evidences of debts;

2) accepting drafts and issuing letters of credit ;

3) receiving deposits;4) buying and selling foreign exchange

and gold or silver bullion;5) lending money against personal security

or against securities consisting of personal property of mortgages on improved real estate and the insured improvements thereon (Section 20, RA 337).

ALLIED UNDERTAKINGS OF COMMERCIAL BANKS INCLUDING GOVERNMENT BANKS AND FOREIGN BANKS WITH EXISTING LOCAL BRANCHES:

a. warehousing companiesb. leasing companiesc. storage companiesd. safe deposit box companiese. companies engaged in the management

of mutual funds but not in the mutual funds themselvesPROVIDED:1. the total investment in equities shall

not exceed 25% of the net worth of the bank;

2. the equity investment in any one enterprise shall not exceed 15% of the net worth of the bank;

3. the total equity investment of the bank in any single enterprise shall remain a minority holding in that enterprise. EXCEPT when the enterprise is a non-financial allied undertaking and when a commercial bank owns more than 30% of the voting stock of thrift bank or rural bank up to a majority thereof;

4. the equity investment in other banks shall be deducted from the investing bank’s net worth for purposes of computing the prescribed ratio of net worth to risk assets. EQUITY INVESTMENTS SHALL NOT BE PERMITTED IN NON-RELATED ACTIVITIES (Sec. 21-A, RA 337).

EXPANDED COMMERCIAL BANKING AUTHORITY

Whenever it is necessary to further national development objectives or support national priority projects, the Monetary Board may authorize a commercial bank, bank authorized to provide commercial banking services as well as government-owned and controlled bank to operate under an expanded commercial bank authority and by virtue thereof:

a. exercise the powers of an Investment House under PD 129;


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b. invest in the equity of non-allied undertaking;

c. own majority or all of the equity in a financial intermediary other than a commercial bank or bank authorized to provide banking services.PROVIDED:1. the total investment in equities shall

not exceed 50% of the net worth of the bank;

2. the equity investment in any enterprise whether allied or non-allied shall not exceed 15% of the net worth of the bank;

3. the equity investment of the bank or of its wholly-or majority owned subsidiary, in a single non-allied undertaking shall not exceed 35% of the total equity in the enterprise nor shall it exceed 35% of the voting stock in the enterprise;

4. the equity investment in other banks shall be deducted from the investing bank’s net worth for purposes of computing the prescribed ratio of net worth to risk assets (Section 21-B, RA 337)

COMMERCIAL BANKS MAY OWN VOTING STOCKS OF A THRIFT BANK OR RURAL BANK

Commercial Banks may own more than 30% of voting stock of thrift bank or rural bank up to a majority or all of equity thereof,

PROVIDED:1. acquisition of such equity is approved

by the Monetary Board;2. the equity ownership of any individual,

related group or corporation in the investing bank is in accordance with Sections 12, 12-A,12-B,12-D of RA 337;

3. the equity investment in other banks shall be deducted from the investing bank’s net worth for purposes of computing the prescribed ratio of net worth to risk assets (Section 21-C, RA 337)

Section 22 - prescribed that a bank’s capital should be at least 10% of its total loan portfolio minus non-risk assets. For example, if a bank’s net worth or capital is P10 billion, its total loan portfolio, net of risk assets, should not exceed P100 billion.

Section 23- SINGLE BORROWER’S LIMIT OR SBL- 25% of unimpaired capital and surplus of the bank under present BSP regulations.

EXCLUDED FROM THE SBL ARE THE FOLLOWING. NON-RISK ASSETS:

1. loans secured by obligations of the Central Bank or Philippine Government;

2. loans fully guaranteed by the government as to the payment of principal and interest;

3. loans to the extent covered by hold-out on, or assignment of, deposits maintained in the lending bank and held in the Philippines;

4. loans and acceptances under letters of credit to the extent covered by margin deposits;

5. other loans or credits which the Monetary Board may from time to time, specify as non-risk assets;

An additional 15% may be granted to the borrower if the additional liabilities are secured by shipping documents, warehouse receipts or other documents transferring or securing title covering readily marketable, non-perishable staples, which staples must be fully covered by insurance and must have a market value equal to at least 125% of such additional liabilities.

“LIABILITIES” - includes the direct liability of the maker, acceptor, endorser, drawer or guarantor; in case of a partnership, the liabilities of the members; and in case of a corporation, all the liabilities of all subsidiaries thereof in which such corporation owns or controls a majority interest.

The Monetary Board prescribe the combination of the liabilities of the subsidiary corporations or members of the partnership EVEN IF THE CORPORATION/PARTNERSHIP HAS NO LIABILITY TO THE BANK in the following cases:

1) the parent corporation or partnership guarantees the repayment of the liabilities;

2) the liabilities were incurred for the accommodation of the parent corporation or another subsidiary or of the partnership;

3) the subsidiaries through separate entities operate merely as divisions or departments of a single entity

Section 24 - No commercial bank shall make any loan or discount on the security of shares of its own capital stock, nor be the purchaser of any such shares,

UNLESS:1. such security or purchase is

necessary to prevent loss upon


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a debt previously contracted in good faith and

2. the stock so purchased or acquired for any other reason in the course of its operations, shall within 6 months from the time of its purchase or acquisitions, be sold or disposed of at public or private sale; or

3. in default thereof, a receiver shall be appointed to close up the business of the bank in accordance with law.

In FILIPINAS MILLS, INC. vs. DAYRIT (192 SCRA 177) under Section 24 of RA 337, there is a SPECIFIC EXCEPTION, “xxx unless such security or purchase be necessary to prevent loss upon a debt previously contracted in good faith xxx” and a GENERAL EXCEPTION “xxx or purchased or acquired for any other reason in the course of its operations xxx”. Thus, if and when the bank decides to purchase those shares of stocks in the public auction sale, this circumstance will not result in violation of Section 24, RA 337, as it is allowed under the GENERAL EXCEPTION.

Section 25 allows a commercial bank to purchase, hold and convey real estate for the following purposes:

A 1) when it is necessary for its immediate accommodation in the transaction of its business;

M 2) when mortgaged to it in good faith by way of security for debts;

C 3) when conveyed to it in satisfaction of debts previously contracted in the course of its dealings;

P 4) when purchased at sales under judgments, decrees, mortgages or trust deeds held by it and such as it shall purchase to secure debts due to it.

CODE: A M C P

In the case of REGISTER OF DEEDS OF MANILA vs. CHINA BANKING CORPORATION (4 SCRA 1146), “debts” referred to in Section 24 are only those resulting from previous loans and other similar transactions made or entered into by the commercial bank in the ordinary course of its business as such. Thus, an alien-owned commercial bank cannot acquire ownership of real estate by virtue of a deed of transfer executed by its former employee in satisfaction of a civil liability arising from a criminal offense of a qualified theft.

Section 25 - But no such bank shall hold the possession of any real estate under mortgage or trust deed, or title and possession of any real estate purchased to secure any debt due to it, for a longer period than 5 years.

TRUST CORPORATION - any corporation formed or organized for the purpose of acting as trustee or administering any trust or holding property in trust or on deposit for the use, benefit or behalf of others (Section 56, RA 337).

Section 57 A trust company may, with the approval of the Monetary Board, do a commercial banking business but such business must be kept separate and distinct from its trust business. All relevant provisions governing the business of commercial banking corporations shall be held to apply to the commercial banking activities of a trust company. Any banking corporation may, with the approval of the Monetary Board, be authorized to engage in the business of a trust company, but shall be subject to provisions as regards its trust business.

Section 58- POWERS OF TRUST CORPORATION :

1. to act as trustee on any mortgage or bond issued by any municipality, corporation, or any body politic and to accept and execute any other municipal or corporate trust not inconsistent with law;

2. to act under the order or appointment of any court of record as guardian, receiver, trustee or depository or the estate of any minor, insane person, idiot, habitual drunkard or other incompetent or irresponsible person and as receiver and depository of any moneys paid into court by parties to any legal proceedings and/or property of any kind which may be brought under the jurisdiction of the court by proper legal proceedings;

3. to act as the executor of any last will or testament when it is named in the last will as executor;

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deceased person, with the will annexed, or as administrator of the estate of any deceased person when there’s no will and when in either case, there’s no person qualified, competent willing, able and entitled to accept such administration.

5. to accept and execute any legal trust confided to it by any court of record or by any person or corporation for the holding, management and administration of any estate, real or personal, and the rents, issues and profits thereof;

6. to establish and manage common trust funds.

Section 64 Real estate acquired by a trust company shall be governed by Section 25, RA 337.

Section 72 - OTHER SERVICES PERFORMED BY BANKING INSTITUTIONS: R F M A

1. Receive in custody funds, documents and valuable objects and rent safety deposit boxes for the safeguarding of such effects.

2. Act as financial agent and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and all types of securities.

3. Make collections and payments for the accounts of others and perform such other services for the customers as are not incompatible with banking business.

4. Act as managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts with approval of Monetary Board.

Banks shall perform services under 1, 2, 3 as depositories or as agents.

Section 74 – COMMON BANKING PRACTICES:

1. borrowing of money by banking institution through the rediscounting of receivables;

2. acceptance of drafts or bills of exchange;3. certification of checks;4. transactions involving the release of

documents attached to items received for collection;

5. letters of credit transaction, includingstand-by arrangements;

6. repurchase agreements;7. shipside bonds;8. ordinary guarantees or indorsements in

favor of foreign creditors where the principal obligation involves loans and credits extended directly by foreign firms or

persons to domestic borrowers for capital investment purposes;

9. other transactions which Monetary Board may define or specify as not covered by the prohibition.

PROHIBITIONS:

Section 73 - Banking institutions shall not engage in insurance business as the insurer.

Section 74 - No bank shall enter directly or indirectly into any contract of guaranty or suretyship or shall guarantee the interest or principal of any obligation of any person, co-partnership, association, corporation, or other entity. However, this provision shall not apply to common banking practices.

Section 78LOAN AGAINST REAL ESTATE SECURITY

shall not exceed 70% of appraised value of real estate plus 70% of appraised value of insured improvements; title to real estate shall be in the mortgagor; in the event of foreclosure, whether

judicially or extrajudicially, the mortgagor or debtor shall have the right within 1 year after the sale to redeem the property by paying the amount fixed by the court in the order or execution or the amount due under the mortgage deed with interest at rate specified in the mortgage, costs, judicial expenses less income of property;

The purchaser of the auction sale concerned in a judicial foreclosure shall have the right to enter upon and take possession of the property immediately after the date of confirmation of auction sale by court.

In JOVEN VS. CA (212 SCRA 700), to give effect to his right of possession, the purchaser must invoke the aid of courts and ask for a writ of possession. He cannot simply take the law into his own hands and enter the property without judicial authorization. He need not bring a separate and independent suit for this purpose. Nevertheless, it is essential that he ask for and be granted a writ of possession in order that he may be legally installed in the property he has bought.

As a general rule, there is no right of redemption from a judicial foreclosure sale after confirmation of the sale. However,


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foreclosure of mortgages to banking institutions shall be subject to legal redemption even after confirmation (LIMPIN VS. IAC, GR No. 70987, GSIS VS. CFI, 175 SCRA 19).

LOANS ON SECURITY OF CHATTELS shall not exceed 50% of the appraised value of the security; title to the chattels shall be free from all encumbrances; title to the chattels shall be in the name of mortgagor.

Shares of stock can be mortgaged under the Chattel Mortgage Law.

RECTO LAW applies only to foreclosure of personal property sold should the vendee fail to pay 2 or more installments. The foreclosure pursuant to RECTO LAW shall not apply in case of personal property held as security for a loan.

Section 82 - Banks shall not advertise the amount of their authorized or subscribed capital stock without indicating the amount of their capital actually paid-up.

No branch of any foreign bank doing business in the Philippines shall in any way announce the amount of the capital and surplus of its head office or of the bank in its entirety without indicating the amount of the capital assigned to such branch. In case no capital has been definitely assigned to such branch, such fact shall be stated and shall form part of advertisement.

Section 83 - LOANS TO DIRECTORS, OFFICERS, STOCKHOLDERS AND THEIR RELATED INTEREST (DOSRI)

No Director or officer of any bank shall borrow any of the deposits of funds of such banks, EXCEPT, with written approval of majority of the directors of the bank, excluding the director concerned. The approval shall be entered upon the records of the bank and a copy of such entry shall be transmitted to the appropriate supervising department of BSP.

The credit accommodation which may be extended by a bank to each of its stockholders owning 2% or more of the subscribed capital stock, its directors or officers shall be limited to an amount equivalent to the respective outstanding deposits and book value of paid in capital contribution in the bank.

Loans and advances to officers, in the form of fringe benefits granted in accordance with rules prescribed by Monetary Board shall not be

subject to the limitation that the loanable amount shall not exceed the outstanding deposits and book value of the paid-in capital contribution to the bank of the borrower-officer concerned.

Section 87-A, as amended, penalizes an officer, employee or agent of a bank, who, without order of a court of competent jurisdiction, shall disclose to any unauthorized person any information relative to the funds or properties in the custody of the bank belonging to a private person, whether natural or juridical.

R.A. 1405 SECRECY OF BANK DEPOSITS LAW

PURPOSES:a.) To encourage people to deposit money

in banks;b.) To discourage private hoarding so that

these deposits may be properly utilized by banks in authorized loans to assist in the economic development of the country.

DEPOSITS COVERED BY LAW: (Section 2) All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities.

These deposits are considered as of an ABSOLUTELY CONFIDENTIAL NATURE AND MAY NOT BE EXAMINED and may not be examined, inquired or looked into by any person, government al, bureau, or office. EXCEPT IN THE offici FOLLOWING CASES:

1) Where the depositor consents in writing;

2) Impeachment cases;3) By court order in bribery or

dereliction of duty cases against public officials;

4) Deposit is subject of litigation;5) If authorized by Monetary Board

if it has reasonable ground to believe that such account is used to defraud the bank;

6) When made by an independent auditor hired by the bank for the exclusive use of the bank (Sec. 2, RA 1405);

7) Anti-graft cases (Added by analogy in PNB VS. GANCAYCO, 15 SCRA 91);


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8) Inquiry of Commissioner of BIR into bank deposits of:

a) a decedent to determine his gross estate

b) a taxpayer who has filed an application for compromise of his tax liability (Sec. 6 (F) NIRC).

In PNB VS. GANCAYCO (15 SCRA 91), the court held that a bank can be compelled to disclose the records of accounts of a depositor who is under investigation for unexplained wealth. Section 2 of RA 1405 provides that bank deposits are “absolutely confidential xxx and therefore may not be examined, inquired or looked into”, except in cases mentioned therein. Meanwhile, Sec. 8 of RA 3019 (Anti-Graft Law) directs that bank deposits “shall be taken into consideration in the enforcement of this section, notwithstanding any provision of law to the contrary.” The only conclusion possible is that Sec. 8 of Anti-Graft Law is intended to amend Sec. 2 of RA 1405 by providing an additional exception to the rule disclosure of bank deposits. (Ibid. p. 92).

In CHINA BANKING CORPORATION VS. ORTEGA (49 SCRA 355), the Court held that garnishment of bank deposit of judgment debtor does not violate RA 1405. The lower court did not order an examination of or inquiry into the bank deposit of the defendant, as contemplated in the law. It merely required the cashier of the bank to inform the court whether or not the defendant had a deposit in said bank only for purposes of garnishment issued by it. So that the bank would hold the same intact and not allow any withdrawal until further order.

In BANCO FILIPINO SAVINGS AND MORTGAGE BANK VS. PURISIMA (161 SCRA 576), the Supreme Court reiterated its ruling in PNB VS. GANCAYCO, supra and expanded the coverage of persons excluded from the prohibition against disclosures in RA 1405. Under RA 3019, illegally acquired property extends to cases where property is concealed by being held by or recorded in the name of respondent’s spouse, ascendants, descendants, relatives, or any other persons. Bank records of transactions by or in the names of the wife, children and friends of a person charged with violation of Anti-Graft Law may be the proper subject of subpoena duces tecum.

In MELLON BANK VS. MAGSINO (190 SCRA 633), private respondents sought to disallow testimony on the bank accounts of the third parties for violating RA 1405. The court ruled that an inquiry into the whereabouts of the

illegally acquired amount extends to whatever is concealed by being held or recorded in the name of persons other than the one responsible for the illegal acquisition. Since the action was aimed at recovering the amount converted by respondents for their own benefit such inquiry therefore involved deposited money which was the subject matter of litigation to be exempted from the prohibition.

Safe deposit boxes are not strictly deposits since the relationship between the bank is that of lessor and lessee. However, any information regarding the existence of the safe deposit box in the name of the renter is considered confidential in view of Sec. 87-A of RA 337 as amended.

Section 26, RA 7653

Any director, officer, stockholder who, together with his related interests, contracts a loan or any form of financial accommodation from his bank / from a bank which is:

a) a subsidiary of a bank holding company of which both his bank and the lending bank are subsidiaries; or

b) in which a controlling proportion of the shares is owned by the same interest that owns a controlling proportion of the shares of his bank in excess of 5% of the capital and surplus of the bank or in the maximum amount permitted by law, whichever is lower, shall be required by the lending bank to WAIVE THE SECRECY OF HIS DEPOSITS OF WHATEVER NATURE IN ALL BANKS IN THE PHILIPPINES.

Any information obtained form an examination of his deposits shall be held strictly confidential and may be used by the examiners only in connection with their supervisory and examination responsibility or by the Bangko Sentral in an appropriate legal action it has initiated involving the deposit account.

PENALTIES Violation of the secrecy of bank

deposits will subject the offender upon conviction to imprisonment of not more than five (5) years or a fine not more than Php 20,000 or both , in the discretion of the court.


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PHILIPPINE DEPOSIT INSURANCE CORPORATION ACT

Created the Philippine Deposit Insurance Corporation (PDIC), a government corporation, financed completely by the Central Bank where banks are mandatorily required to insure their deposits with, and pay premium to;

Purpose of the law to insure the deposit liability of banks in an account up to P100,000.00 for every single depositor of each bank irrespective of the number of accounts therewith.DEFINITONS

1. Deposit — means the unpaid balance of money or its equivalent received by a bank in the usual course of business and for which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift account or which is evidenced by passbook, check and/or certificate of deposit, printed, issued in accordance with Central Bank rules and regulations and other applicable laws, together with such other obligations of a bank which, consistent with banking usage and practices, the Board of Directors shall determine and prescribe by regulations to be deposit liabilities of the Bank: Provided, That any obligation of a bank which is payable at the office of the bank located outside of the Philippines shall not be a deposit for any of the purposes of this Act or included as part of the total deposit or of the insured deposit: Provided, further, That subject to the approval of the Board of Directors, any insured bank which is incorporated under the laws of the Philippines which maintains a branch outside the Philippines may elect to include for insurance its deposit obligation payable only at such branch.

2. Insured Deposits — means the net amount due to any depositor for deposits in an insured bank (after deducting offsets) less any part thereof which is in excess of Php100,000.00.

TYPES OF DEPOSIT INSURED:

1. Savings Deposits2. Time Deposits3. Current or Demand Deposits

By virtue of Presidential Decree No. 1974, approved on June 27, 1984, TRUST FUNDS were deleted from the scope of “insured deposits”. Hence, effective said date, trust funds were no longer insured with PDIC.

PRIMARY OBJECTIVE OF PDIC

To enhance public confidence in the banking system through the provision of insurance protection to bank depositors and the effective regulation of banks.

MAIN FUNCTIONS OF PDIC:

1. Risk Management — The insurance and examination function of the PDIC deals with the insurance assessment and premium collection from member banks. PDIC monitors the health of member banks, examines and identifies “risk” areas in banks, or their weaknesses. It also institutes corrective measures to prevent closures thru bank rehabilitation. Further, it provides financial assistance to distressed banks and assists in the reopening of closed banks, provided all PDIC requirements are met.

2. Claims, Receivership and Liquidation — Claims refers to the settlement of claims for insured deposits; Receivership deals with the takeover and control of all assets, liabilities and affairs of closed banks; Liquidation covers the conversion of loans, disposal of fixed assets into cash deposits, and the implementation of final settlement with creditors.

What specific risks to a bank does PDIC Cover?

Only the risk of bank closures. Thus losses due to a bank theft is not covered by PDIC.

When is an insured bank deemed closed?An insured bank shall be deemed

closed on account of insolvency upon the order of closure by the Monetary Board of the Bangko Sentral ng Pilipinas under Section 29 of R.A. 265 as amended by the New Central Bank Act.

Insolvency refers to a situation wherein a bank’s liabilities exceed its total


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assets resulting in the bank’s inability to repay its creditors.

Section 4, RA 3591 - The deposit liabilities of any bank or banking institution which is engaged in the business of receiving deposits as herein defined on the effective date of this Act or which thereafter may engage in the business of receiving deposits, shall be insured by the corporation.

If a bank is insolvent, every depositor is compulsorily insured for a maximum amount of P100,000.00.

If the total valid deposits (as determined by PDIC) exceeds the amount of Php 100,000.00, the excess amount can still be claimed from PDIC upon the final liquidation of the remaining assets of the closed bank.

The schedule of payment beyond the Php 100,000.oo maximum insurance shall be based on priorities set by law.

Under the law, claims for deposit in excess of the insured Php100,000.00 will be settled together with other ordinary claims, after preferred claims like government, taxe, labor claims are settled.

TWO (2) TYPES OF CLAIM SETTLEMENT1. Direct Claims Settlement2. Transfer Deposit Settlement

RECOVERABLE CEILING IN CASE SEVERAL ACCOUNTS ARE MAINTAINED BY THE SAME DEPOSITOR:

a. If a single depositor maintains several accounts with one bank of several branches of the same bank totaling more than P100,00.00, the amount insured is only P100,000.00, although the depositor is maintaining his deposits in different accounts;

b. If three accounts are maintained in the same bank in the individual capacity of each of the depositors and in an and/or capacity or jointly by the depositors, the three accounts are insured up to P100,000.00 each because the depositors are maintaining the accounts in different capacities and rights.

c. If two bank accounts (savings and current) are held jointly by two persons, the said accounts are not deemed insured separately but are added together and covered on up to a total of P100,000.00 because the amounts are maintained in the same capacity and right by the two depositors.

PDIC is given priority to be appointed as receiver of any banking institution.

PDIC is subrogated to all rights of depositor against a closed bank to the extent of the payment made by the PDIC.

Provided that in the event a depositor in a closed bank fails to file a claim for his insured deposit within 18 months after the Monetary Bank shall have ordered the closure of said bank, all rights of depositor against the Corporation with respect to the insured deposit shall be barred.

REPUBLIC vs. COURT OF APPEALS (65 SCRA 186) the Supreme Court ruled that since the relation between the depositor and the bank is that of creditor and debtor, a depositor has every right to apply his credit with the bank against his loans. When all the elements necessary for set-off are present, compensation takes place ipso-jure, without need of any conscious intent on the part of the parties.

THRIFT BANKS ACT, RA No. 7906

THRIFT BANKS – shall include savings and mortgage banks, private development banks, and stock savings and loans associations organized under existing laws, and any banking corporations that may be organized for the following purposes:

1. Accumulating the savings of depositors and investing them, together with capital loans secured by bonds, mortgages in real estate and insured improvements thereon, chattel mortgage, bonds and other forms of security or in loans for personal or household finance, whether secured or unsecured or in financing for homebuilding and home development, in readily marketable and debt securities; in commercial papers and accounts receivables, drafts, bills of exchange, acceptances or notes arising out of commercial transactions; and in such other investments and loans which the Monetary Board may determine as necessary in the furtherance of national economic objectives.

2. Providing short-term working capital, medium- and long-term financing, to businesses engaged in agriculture, services, industry and housing.

3. Providing diversified financial and allied services for its chosen market and constituencies especially for small and medium enterprises and individuals (Section 3).

POWERS: (Section 10)

1. Accept savings and time deposits;


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2. Open current or checking accounts, provided, that the thrift bank has net assets of at least P20 M and it shall be allowed to directly clear its demand deposit operations with the Bangko Sentral and PCHC;

3. Act as correspondents for other financial institutions;

4. Act as collection agent for government entities, including but not limited to BIR, SSS, Bureau of Customs;

5. Act as official depository of national agencies and of municipal, city or provincial funds in the municipality, city or province where the thrift bank is located;

6. Rediscount paper with PNB, Land Bank, DBP, and other GOCC;

7. Issue mortgage and chattel mortgage certificates buy and sell them for its own account or for the account of others, or accept and receive them in payment or as amortization or its loan;

8. Purchase, hold, convey real estate under the same conditions as those governing commercial banks under Section 25, RA 337;

9. Engage in quasi-banking and money market operations;

10. Open domestic letters of credit;11. Extend credit facilities to private and

government employees;12. Extend credit against the security of jewelry,

precious stones and articles of similar nature;

13. Offer banking services as provided under Sec. 72 of RA 337 and RA 6426 as amended.

RA 7353 RURAL BANKS ACT

Rural banks shall be organized in the form of stock corporations.

Cooperatives and corporations primarily organized to hold equities in rural banks may organize a rural bank and/or subscribe to the shares of stock of any rural bank.

The capital stock of any rural bank 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 land EXCEPT shareholdings of corporations organized primarily to hold equities in rural banks under Sec. 12-C of RA 337.

Nothing in this Act shall be construed as prohibiting any appointive or elective public official form serving as director, officer, consultant or in any capacity in the bank.

Loans extended shall be primarily for the purpose of meeting the normal credit needs of

farmers, fishermen or farm families owning or cultivating land dedicated to agricultural production as well as normal credit needs of cooperatives and merchants with the land as security.

Rural bank may devote a portion of their loanable funds to meeting the normal credit needs of small business enterprises and of essential enterprises and industries provided loans shall not exceed 15% of net worth of rural bank or amount prescribed by Monetary Board may be warranted by prevailing economic conditions.

With the approval of Monetary Board, any rural bank may act as trustees over estates or properties of farmers and merchants or perform services authorized for savings and mortgage banks or for commercial banks under RA 337 or operating under an expanded banking authority.

RA 6938 COOPERATIVE BANKS

Cooperative Bank is one organized the majority shares of which is owned and controlled by cooperatives primarily to provided financial and credit services to cooperatives. It shall include cooperative rural banks;

Membership of a cooperative bank shall include only cooperatives and federations of cooperatives.

MBR No. 115, as amended

Only one cooperative bank shall be established in each province which must be located in a place accessible to the public.

Capital contributions in a cooperative bank shall be as widely dispersed as possible. No cooperative members shall own or control more than 30% of the total capital contributions of a cooperative bank. This limitation shall also apply to cooperatives purchasing government-held preferred shares of cooperative banks converted into common stock.

Any officer or employee of Cooperative Development Authority and elective officials of the Government EXCEPT BARANGAY OFFICIALS, shall be disqualified to be elected or appointed to any position in a cooperative bank.


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RA 3936 UNCLAIMED BALANCES LAW

UNCLAIMED BALANCES include credits or deposits of money, bullion, security or other evidence of indebtedness of any kind and interest thereon with banks, buildings and loan associations and trust corporations in favor of any person known to be dead or who has not make further deposits or withdrawals during the preceding 10 years or more.

ELEMENTS OF UNCLAIMED BALANCES:

1. There must be a claim or deposit of:a. money,b. bullion,c. security, ord. other evidence of

indebtedeness2. The credit or deposit must be with a

bank, building and loan association, or trust corporation; and

3. The credit or deposit is in favor of a person:

a. who is dead, orb. who has not made further

depsotis or withdrawals during the preceding ten years or more.

Builidings and Loan Association — are corporations whose capital stock is required or is permitted to be paid in by the stockholders in regular, equal, periodical payments and whose purpose is to accumulate the savings of its stockholders, to repay to said stockholders their accumulated savings and profits upon their surrender of their shares.

The Solicitor General, when informed of such unclaimed balances, shall commence an action in the name of People of Republic of Philippines in the RTC of the province where the bank is located. Bank and depositors shall be made defendants.

Summons shall be issued directed to all persons, OTHER THAN THOSE NAMED AS DEFENDANTS, claiming any interest in any unclaimed balance requiring them to appear within 60 days after publication of such summons and show cause why it shall not be deposited with the Treasurer.

Upon trial, if the court determines that such deposits are unclaimed, judgment shall be rendered declaring that said unclaimed balances be escheated in favor of the government and commending said bank to deposit it with the Treasurer of the Philippines.

Any bank which shall make any deposit with the Treasurer shall not be liable to any person which the latter may bring against the bank.

RA 6426 FOREIGN CURRENCY DEPOSIT ACT

Foreign Currency Deposit Unit — shall refer to that unit of a local bank or of a local branch of a foreign bank authorized by the Central Bank to engage in foreign currency-denominated transactions.

All foreign currency deposits under RA 6426 and PD 1034 are absolutely confidential in nature and may not be examined EXCEPT UPON WRITTEN PERMISSION OF DEPOSITOR.

Foreign currency deposits are exempt from garnishment, attachment or any court process.

However in SALVACION, et al. VS. CBP, et al. 278 SCRA 27, the court allowed garnishment of such deposits since to hold otherwise would result to injustice to a citizen perpetrated by a foreigner.

RA 7721 AN ACT LIBERALIZING THE ENTRY AND SCOPE OF OPERATIONS OF FOREIGN BANKS IN THE PHILIPPINES

When MB authorizes foreign banks to operate through any of the following:

1) by acquiring, purchasing or owning up to 60% of the voting stock of an existing bank;

2) 2) by investing in up to 60% of the voting stock of a new banking subsidiary incorporated under laws of Philippines;

3) by establishing branches with full banking authority, provided: a) foreign bank may avail itself of only one mode of entry and b) foreign bank or Philippine corporation may own up to 60% of the voting stock only one domestic bank or new banking subsidiary (Sec. 2,RA. 7721).

Only those among the top150 foreign banks in the world or the top 5 banks in their country of origin as of the date of application shall be allowed entry in allowance with Sections 2 , numbers 2 and 3 (Sec. 3). In the exercise of this authority, the MB shall adopt such measures as may be necessary to:


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1. ensure that at all times the control of seventy percent (70%) of the resources or assets of the entire banking system is held by domestic banks which are at least majority-owned by Filipinos:

2. prevent a dominant market position by one bank or the concentration of economic power in one or more financial institutions, or in corporations, partnerships, groups and individuals with related interests; and

3. secure the listing in the Philippine Stock Exchange of the shares of stocks of banking corporations established under Section 2, numbers 1 and 2. Provided, that said banking corporations shall establish stock option plans for their officers and employees as the resources or assets of these corporations may allow in the best business judgment of their respective boards of directors, pursuant to the Corporation Code of the Philippines ( Sec. 3).

PD 1034 OFFSHORE BANKING SYSTEM

OFFSHORE BANKING – shall refer to the conduct of banking transactions in foreign currencies involving receipt of funds from external sources and the utilization of such funds.

BASIS FOR THE ISSUANCE OF CERTIFICATE OF AUTHORITY TO OPERATE AN OFFSHORE BANKING UNIT

Only banks organized under any law other than those of Republic of Philippines shall be qualified to operate offshore banking units in the Philippines.

However, LOCAL BRANCHES of foreign banks already authorized to accept foreign currency deposits under RA 6426 may opt to apply for authority to operate an offshore banking unit provided that upon their receipt of certificate of authority to operate as an offshore banking unit, the license to transact business under RA 6426 shall be deemed automatically withdrawn.

RA 8183 REPEALING ACT NO. 529 OR UNIFORM CURRENCY ACT

Section 1. All monetary obligations shall be settled in the Philippine currency which is legal tender in the Philippines. However, the parties may agree that the obligation or

transaction shall be settled in any other currency at the time of payment.

Art 1249, 1st paragraph of Civil CodeThe payment of debts in money

shall be made in the currency stipulated and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines.

LEGAL TENDER – all notes and coins issued by the BSP fully guaranteed by the Republic of Philippines for all debts, public or private.

Not exceeding P50.00 – 25 centavos or above

Not exceeding P20.00 - 10 centavos or less.

VII. SPECIAL LAWS

BULK SALES LAW

WHEN IS A SALE CONSIDERED A SALE IN BULK?

a. when a sale, transfer or disposition is other than in the ordinary course;

b. the sale is of all or substantially all of the business;

c. when the sale is of all or substantially all of the fixtures and equipment.

PURPOSE

To prevent the defrauding of creditors by the secret sale or disposal in bulk of all or substantially all of a merchant’s stock of goods.

EXCEPTIONS:

a. sale is made in the ordinary course of business;

b. there is a waiver from all the creditors and must be written;

c. sale is by virtue of a judicial order;d. those sold by assignee or those beyond

the right of creditors.

FORMALITIES REQUIRED BY LAW

a. the sale in bulk to be accompanied by sworn statement of the vendor/mortgagor listing the names and addresses of, and amounts owing to, creditors (to be furnished to the buyer);


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b. the seller to prepare an inventory of stock to be sold and notify the creditors of projected sale at least n10 days before such sale (Sec. 3-4).

EFFECTS OF SALE IN VIOLATION OF BSL –

VALID between the parties, VOID as to affected creditors.

a. sale in bulk is void;b. purchaser holds property in trust for seller

(whether in good faith or bad faith);c. purchaser is liable to seller’s creditors for

properties forming part of bulk and already disposed by him.

DISTINCTION BETWEEN FRAUDULENT CONVEYANCE UNDER THE BULK SALES LAW FROM THE TRANSFER IN FRAUD OF CREDIORS UNDER THE CIVIL CODE

A conveyance or transfer fraudulently made in violation of the Bulk Sales Law is null and void while a conveyance or transfer in fraud of creditors under Article 1381-1389 of the New Civil Code is rescissible and is valid until set aside by a competent court.

CHATTEL MORTGAGE LAW

CHATTEL MORTGAGE contract by virtue of which personal property is recorded in the Chattel Mortgage Register as security for the performance of an obligation. No longer considered a conditional sale.

SUBJECT MATTER OF CHATTEL MORTGAGE

personal or movable property.

1. Shares of stock; 2. Interest in business;3. Machinery treated by the parties as personal

property subsequently installed on leased land; (Davao Sawmill vs. Castillo)

4. Vessels recorded in the office of the Philippine Coast Guard to be effective as to 3rd persons; not necessary to be recorded in the Office of the Registry of Deeds;

5. Motor Vehicles mortgage registered in LTO (for vehicles used for public services);

6. House of mixed materials;7. House intended to be demolished;8. House built on rented land,

GENERAL RULE: still immovable property; EXCEPTION: by estoppel;

9. House of strong materials- personal property for purposes of executing a chattel mortgage

as the parties to the contract so agree and NO innocent 3rd party will be prejudiced.

The rule that the chattel mortgage shall be deemed to cover only the property described therein and not like on substituted property does not apply to stores open to the public. (sec. 7, par. 4 CML).

AFFIDAVIT OF GOOD FAITH — It is an oath in contract of chattel mortgage wherein the parties “severally swear that the mortgage is made for the purpose of securing the obligation specified in conditions thereof, and for no other purpose and that the same is just and valid obligation and one not entered into for the purpose of fraud.

EFFECT OF ABSENCE OF AFFIDAVIT OF GOOD FAITH:

a. Valid between the parties;b. Does not affect 3rd persons without

notice like creditors and subsequent encumbrances.

NOTE: A house of is a real property regardless of ownership, however the parties may treat the same as personal property and by estoppel be binding between them. However, third persons are not bound.

RIGHT OF REDEMPTION

The following may redeem:a. the mortgagor;b. a person holding a subsequent

mortgage; orc. a subsequent attaching creditor.

RECTO LAW

a. applies only to sale of personal property in installments;

b. remedies are alternative, not cumulative;

c. foreclosure of chattel mortgage on the things sold shall ban recovery of any deficiency. Thus, seller cannot recover from guarantor;

d. if seller-mortgagee opts to exercise remedy number one, he shall be deemed to have waived his right as a mortgagee but may still levy on the mortgage property.

DISTINCTION :CHATTEL PLEDGE


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MORTGAGE

1. the delivery of the personal property to the mortgagee is not necessary

1. delivery is necessary

2. the registration of the same in Chattel Mortgage Register is necessary for its validity

2. the registration in the Registry of Property is not necessary

3. the procedure for the sale of the thing given as security is different, the procedure is found in Sec. 14 of Act no. 1508

3. procedure is found in Art. 2112 of the Civil Code

4. if the property is foreclosed, the excess over the amount due goes to the debtor

4. the debtor is not entitled to the excess unless it is otherwise agreed or except in the case of a legal pledge

5.if there is a deficiency, the creditor is entitled to recover the deficiency from the debtor

5. the creditor is not entitled to recover the deficiency notwithstanding any stipulation to the contrary

CHATTEL MORTGAGE

PACTO DE RETRO

1. It is an accessory contract to secure the fulfillment of the performance of an obligation.

1. It is a principal contract.

2. Title to the thing mortgaged is not transferred

2. the title to the subject matter of the contract is transferred to the vendee a retro but subject to the redemption by the vendor.

3. One of the formalities required is the execution of affidavit in good faith

3. It is not required.

CHATTEL MORTGAGE

REAL MORTGAGE

1. The thing mortgaged must be personal or movable property

1. The thing mortgaged must be real or immovable property.

2. Affidavit of good faith executed by the mortgagor is required.

2. Affidavit of good faith is not required.

3. The mortgagor cannot alienate the thing mortgaged without the written consent of the mortgagee annotated at the back of the mortgage

3. The mortgagor can alienate the thing mortgaged without the consent of the mortgagee and any stipulation prohibiting such is void

4. Redemption of the thing mortgaged may be made only before the sale thereof.

4. The thing mortgaged may be redeemed after it is judicially sold but before judicial confirmation of the sale or if extrajudicially sold, within one year from and after the date of sale.

EXTENT OF CHATTEL MORTGAGE

Section 7, paragraph 4 of Act No. 158, provides :

"A chattel mortgage shall be deemed to cover only the property described therein and not like or substituted property therafter acquired by the mortgagor and placed in the same depository as the property originally mortgaged anything in the mortgage to the contrary notwithstanding." The provision does not apply to stores open to public for retail business where the goods are constantly sold and substituted with new stock. (Torres vs Limjap, 56 Phil 141).

CHATTEL MORTGAGE COVERS ONLY EXISTING OBLIGATIONS.

While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts are accurately described, a chattel mortgage can only cover obligations existing at the time the mortgage is constituted. Promise expressed in a chattel mortgage to cover debts yet to be contracted may be binding but security itself arise only after amending the old contract conformably with the form prescribed by the Chattel Mortgage Law. (Acme Shoe Rubber and Plastic Corp. vs. CA) . CODE OF COMMERCE


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PROVISIONS OF THE CODE OF COMMERCE WHICH ARE STILL IN FORCE—1. Merchants, Book of Merchants, Commercial

contracts2. Joint Account3. Transfers of Non-negotiable credits4. Commercial Contracts of Overland

Transportation5. letters of credit6. Maritime Commerce

LAWS WHICH REPEALED EITHER EXPRESSLY OR IMPLIEDLY CERTAIN PORTIONS OF THE CODE OF COMMERCE:

1. The Corporation Law which repealed principally the provisions on Sociedad Anonimas;

2. The Negotiable Instruments Law, which repealed the provisions on Promissory Notes and Bills of Exchange also in Book Two;

3. The Insolvency law, which repealed the provisions on Suspension of Payments and Bankruptcy in Book Four;

4. The Insurance Law, which repealed the provisions on Fire and Marine Insurance;

5. The Securities Act, which repealed the provisions on Commercial Houses;

6. The New Civil Code, which repealed the provisions on Partnership, Agency, Sales, Loan, Deposit and Guaranty;

7. Commerce- branch of human activity, purpose of which is to bring products to community by means of exchanges or operations which tend to supply and extend to him, habitually, with intent to gain at the proper time and place and in good quality and quantity.

MERCHANTS ARE:1. those who having capacity to engage in

commerce, habitually devote themselves to it.

2. The commercial or industrial companies which may be created in accordance with existing legislation. (Art. 1)

QUALIFICATIONS:1. having completed the age of 18 years;

and2. having the free disposition of his

property.

LEGAL PRESUMPTION OF HABITUALITY- exists from the moment a person who intends to engage in commerce announces through circulars, newspapers, handbills, posters exhibited to the public, or in any other manner whatsoever, an establishment which has for its object some commercial acts.

“Habituality” in the practice of commerce presupposes the repetition and continuation of commercial acts in such manner that they are related to each other by reason of the commercial purpose or end which they tend to have, which is the exchange or circulation of products. However, it may be shown by a single act of commerce, if it manifests the intention to engage habitually in commerce.

ACTS OF COMMERCE

Those acts contained in this Code of Commerce and all other acts of analogous character. An act need not be performed by a merchant in order that it may be considered an act of commerce. Hence, an act performed by one who is not a merchant would, nevertheless, be an act of commerce if it is contained in the Code or is one of analogous character.

DISQUALIFICATION TO ENGAGE IN COMMERCE

a) ABSOLUTE DISQUALIFICATIONS

1. Those serving the penalty of civil interdiction;

2. Those judicially declared insolvent until they would have obtained a discharge;

3. Those who are absolutely disqualified under special laws. (Art. 13, Code of Commerce)

b) RELATIVE DISQUALIFICATIONS

(in specified territories such as in places where they exercise their functions, or under certain circumstances)1. certain government officials, such as

judicial officers, prosecutors, department heads, collectors, and custodian of government funds;

2. money and commercial brokers3. those who are under relative

disqualification under special laws (Art. 14, Code of Commerce)

DISTINCTIONS :

ABSOLUTE RELATIVE


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INCAPACITY INCAPACITY1. extends through

out the Philippines.

1. extends only to the province or town where the officer incapacitated is exercising his functions.

2. act is null and void if incapacity is absolute and apparent.

2. the effect is merely to subject the person violating Art. 14 to such disciplinary action or punishment as may be imposed by the special laws.

INDIVIDUAL MERCHANTS- not required to register however cannot enjoy the benefits of registration.

JURIDICAL MERCHANTS- mandated to register with the SEC.

Disqualification of certain constitutional officials:

1. Art. VI, Sec. 14 - No Member of Congress “shall directly or indirectly, be interested financially in any contract with, or in any franchise or special privilege granted by the Government during his term of office. He shall not intervene in any matter before any office of the Government for his pecuniary benefit or where he may be called upon to act on account of his office.”

2. Art. VII, Sec. 13 - “The President, Vice-President, Members of the cabinet, and their deputies or assistants shall not, during said tenure, practice any profession, participate in any business, be financially interested in any contract or franchise granted by the Government. They shall avoid conflict of interest in the conduct of their office.”

3. Art. IX, Sec. 2 - “No member of the Constitutional Commission shall engage in the practice of any profession or active management of any business which may be affected by the functions of his office, nor shall he be financially interested with any contract or franchise with the Government.”

4. Art. XI, Sec. 16 - “No loan, guaranty, or other form of financial accommodation for any business purpose may be granted by any government owned or controlled bank to the President, Vice-President, Members of the Cabinet, Congress, Supreme Court and

the Constitutional Commission, Ombudsman during their tenure.”

APPLICABILITY OF LAWS TO COMMERCIAL TRANSACTIONS:

1. First, the Code of Commerce;2. In the absence of the foregoing, the

commercial customs; and3. Civil Code (in the absence of the first

two).

GENERAL RULE: Commercial contracts shall be valid and give rise to obligations and causes of action in suits, whatever the form and language in which they may be executed, provided their existence is shown by means established by civil law.

EXCEPTIONS:1. when the Code of Commerce or

other special laws require that it must be reduced in writing, require forms or formalities necessary for efficacy (for validity);

2. when executed in a foreign country whose laws require certain instruments, forms or formalities for their validity, although Philippine Law does not require them ( for validity); and

3. Commercial contract exceeding PHP 300.00 cannot be proved by parol evidence (for enforceability).

Illicit arrangements do not give rise to obligations or causes of actions even should they refer to commercial transactions.

Contracts entered into by correspondence shall be perfected from the moment an answer is made accepting the offer or the conditions by which the latter may be modified. (This is the Manifestation Theory as distinguished from the Cognition theory followed under the Civil Code).

When an agent or a broker intervenes in a commercial contract, the same is perfected only when the contracting party shall have accepted his offer.

RULES IN INTERPRETATION OF COMMERCIAL CONTRACTS:

1. interpretation and compliance in good faith and full enforceability of their provisions in their plain, usual and proper meanings;


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2. in case of conflicts between copies of the contract, and an agent should have intervened in its negotiation, that which appears in the agent’s book shall prevail; and

3. in case of doubt, and the rules enunciated cannot resolve the conflict, issues shall be decided in favor of the debtor.

LETTER OF CREDIT- those issued by one merchant to another for the purpose of attending to a commercial transaction.

KINDS OF LETTERS OF CREDIT:

1. COMMERCIAL LETTER OF CREDIT - an instrument by which a bank, for the account of a buyer of merchandise, gives formal evidence to a merchandise seller, of its willingness to permit him (the seller), to draw bills against it, on certain terms, and stipulates in legal form that all such bills will be honored.

2. TRAVELER’S LETTER OF CREDIT- is a letter from a bank addressed to one or more of its correspondents stating that drafts up to a certain sum drawn by the beneficiary will be honored by the bank.

ESSENTIAL CONDITIONS OF LETTERS OF CREDIT:

1. to be issued in favor of a definite person and not to order.

2. to be limited to a fixed and specified amount, or to one or more undetermined amounts, but within a maximum limits of which have to be stated exactly.

3. Those which do not have any of these last circumstances shall be considered as mere letters of recommendation.

TERM/ DURATION OF A LETTER OF CREDIT:

1. upon the period fixed by the parties2. in its absence, within 6 months from its

date in any point in the Philippines and within 12 months outside thereof

INSOLVENCY LAW

PURPOSE OF THE LAW:

1. to effect an equitable distribution of assets of an insolvent debtor among his creditors;

2. to benefit the debtor in discharging him from his liabilities and enabling him to start anew with the property set apart to him as exempt.

REMEDIES OF A DEBTOR:

1. apply for suspension of payment;2. apply for voluntary insolvency;3. creditor may file for an involuntary

insolvency.

DOUBLE MAJORITY

At least 2/3 of the creditors representing at least 3/5 of the total liabilities of the debtor.

CANNOT PARTICIPATE

1. claims of laborers;2. funeral;3. contractual mortgages or pledges.

NOTE: In case of corporation and partnerships, SEC has jurisdiction.

ACTS OF INSOLVENCY:

1. intention to depart or departure from the Philippines to defraud creditors;

2. absence from the Philippines to defraud creditors;

3. concealment of debtor to avoid legal processes;

4. concealment or removal of his property to avoid legal processes;

5. confession of judgment in favor of any creditor to defraud other creditors;

6. allowing default judgment in favor of a creditor to defraud other creditors;

7. allowing his property to be taken under legal process in preference of a particular creditor to defraud other creditors;

8. making conveyance, assignment or transfer of his property to defraud his creditors;

9. making conveyance, assignment or transfer of his property in contemplation of insolvency;

10. default of a merchant or tradesman to pay his current obligations for a period of thirty days after demand;

11. failure to pay money on deposit or received in a fiduciary capacity for a period of thirty (30) days;

12. insufficiency of property to satisfy an execution issued against him. (Sec. 20, Insolvency Law)

SUSPENSION OF PAYMENTS

is the postponement, by court order, of payment of debts of one who, while possessing sufficient property to cover his


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debts, foresees the impossibility of meeting them when they respectively fall due.

DISTINCTIONS :SUSPENSION OF

PAYMENTINSOLVENCY

1. The debtor has sufficient property but he foresees the impossibility of meeting his debts as they fall due.

1. The debtor does not have sufficient property to pay his debts.

2. The purpose is to suspend or delay the payment of debts.

2. The purpose is to discharge the debtor from the payment of certain debts.

3. The amount of indebtedness is not affected.

3. Some of the creditors may receive less than their credits.

4. The number of creditors is immaterial.

4. In case of involuntary insolvency, 3 or more creditors are required.

DISTINCTIONS :VOLUNTARY INSOLVENCY

INVOLUNTARY INSOLVENCY

1. One creditor is sufficient.

1. Three or more creditors are required.

2. Filed by the debtor.

2. Filed by three or more qualified creditors.

3. No need for the commission of acts of insolvency.

3. Debtors must have committed one or more acts of insolvency.

4. Amount of indebtedness must exceed one thousand pesos (P1,000.00).

4. Indebtedness must not be less than one thousand pesos (P1,000.00).

5. Bond is not required.

5. Petition must be accompanied by a bond.

EFFECTS OF FILING OF PETITION OF SUSPENSION OF PAYMENTS:

a. No disposition in any manner of his property may be made by the petitioner except insofar as concerns the ordinary operations

of commerce or of industry in which he is engaged;

b. No payments may be made by the petitioner except in the ordinary course of his business or his industry, and;

c. Upon request to the court, all pending executions of the debtor shall be suspended except execution against property especially mortgaged.

EFFECTS OF ADJUDICATION OF INSOLVENCY:

The adjudication or declaration of insolvency by the court after hearing or default shall have the following effects:a. forbid the payment to the debtor of any

debt due to him and the delivery to him of any property belonging to him;

b. forbid the transfer of any property to him;

c. stay of all pending civil proceedings against the insolvent. (Secs. 18 and 24 of Act 1956)

Unpaid claims of wages are subordinate to legal and contractual claims.

JURISDICTION:

Note: The provisions of the Insolvency Law still governs the procedure when a corporate debtor seeks to pursue voluntary insolvency proceedings (the word “debtor” includes partnerships, corporations and sociedades anonimas).

VOLUNTARY INSOLVENCY

Sec. 14 An insolvent debtor, owing debts exceeding in amount the sum of P1,000, may apply to be discharged from his debts and liabilities by petition to the Regional Trial Court of the province or city in which he has resided for six months next preceding the filing of such petition.

INVOLUNTARY INSOLVENCY

Sec. 20 An adjudication of insolvency may be made on the petition of three or more creditors, residents of the Philippines whose credits or demand accrued in the Philippines, and the amount of which credits or demand are in the aggregate not less than P1,000: PROVIDED, that none of his creditors has become a creditor by assignment, however made, within 30 days prior to the filing of said petition. Such petition must be filed in the Regional Trial Court of the province or city in which the debtor resides or has his principal place of


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business, and must be verified by at least three of the petitioners.

SUSPENSION OF PAYMENTS

A) INDIVIDUAL DEBTOR

Sec. 2 The debtor who, possessing sufficient property to cover all his debts foresees the impossibility of meeting them when they respectively fall due, may petition that he be declared in the state of suspension of payments by the court, or the judge thereof in vacation, of the province or city in which he has resided for six months next preceding the filing of his petition.

B) DEBTOR CORPORATION

Sec. 5[d]. P.D. 902-A: Petitions of Corporations to be declared in a state of suspension of payments in cases where the corporation possess sufficient property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation has no sufficient assets to cover its liabilities but is under management of a Rehabilitation Receiver or Management Committee.

TRUST RECEIPT LAW

TRUST RECEIPT trust receipt is a security transaction intended to aid in financing importers or dealers in merchandise by allowing them to obtain delivery of the goods under certain covenants.

OBLIGATION OF:

(A) ENTRUSTERAn entruster releases the title and

possession of goods (over which he holds absolute title or security interest) to an entrustee upon the latter’s execution of the trust receipt.

(B) ENTRUSTEE(See Sec. 9 of P.D. 115 TRL)

1. holds the goods, documents or instruments in trust;

2. receives the proceeds in trust;3. insures the goods for their total value

against loss;

4. keeps said goods or proceeds thereof;5. binds himself to hold the goods in trust

for the entruster and to sell or otherwise dispose the same and to turn over to the entruster the amount still owing;

6. returns the goods, documents or instruments if unsold or upon demand of entruster;

7. observes all other terms and conditions of the trust receipt.

IN CASE OF LOSS: (Sec 10) The risk of loss shall be borne by the entrustee. Loss of goods, documents or instruments which are the subject of the trust receipt, pending disposition, irrespective of whether or not it is due to the default or negligence of the entrustee shall not extinguish his obligation to the entruster for the value thereof.

It is assumed that the title and possession is turned over to the entrustee. The law does not cover sales on credit with the title or other interest being retained by the seller as security thereof. NO AGENCY RELATIONSHIP IS ESTABLISHED.

No agency relationship is established; an entrustee’s breach of trust, however, subjects him to criminal and civil liability to estafa. As held by the Supreme Court in People vs. Cuervo (104 SCRA 312), the enactment of P.D. 115 with its penal sanction is, in reality, merely confirmatory of existing jurisprudence on situations covered by Article 315 of the Revised Penal Code. Thus, the court ruled, an entrustee in a trust receipt who failed to account for the proceeds of the goods sold or to return the goods, as the case maybe, is guilty of estafa even where the offense was committed before the promulgation of P.D. 115 on June 29, 1973. But unlike the old rule, P.D. 115 now expresses a criminal liability on the part of responsible officers of corporation and judicial entities.

NOTE: The borrower continues to be the owner of the goods and may not exempt himself from liability by offering the goods to the bank.

TRUTH IN LENDING ACT

SCHEME OF THE LAW The law requires the creditor to make a full disclosure of the credit cost to the person to whom the credit is extended, otherwise, the debtor may recover any interest payment made by him but the validity of the


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contract/transaction itself is NOT adversely affected.

PURPOSE OF THE LAWa. to protect a debtor from the effects of

misrepresentation or concealment;b. to permit him to fully appreciate and

evaluate the real cost of his borrowing;c. to avoid circumvention of usury laws.

NOTE: Non-compliance with the law would authorize the debtor to recover any interest payment made and subject the creditor to penal sanction for double finance charges plus attorney’s fees. The transaction, however, is valid.

WAREHOUSE RECEIPTS LAW WAREHOUSE RECEIPTa. It is a written acknowledgement by a

warehouse that he has received and holds certain goods therein described in store for the person to whom it is issued.

b. It is a simple written contract between the owner of the goods and the warehouseman to pay the compensation for that service.

c. It is a bilateral contract. It imports that goods are in the hands of a warehouseman and is a symbolical representation of the property itself.

If goods are stolen and deposited by the thief with a warehouseman, the warehouseman shall not be liable to the holder of the receipt even if he delivers the goods to the real owners without the receipt being surrendered to him. (Secs. 11 and 141, WRL)

MEANING OF NEGOTIABLE UNDER THE ACT

It indicates that in the passage of warehouse receipts through the channels of commerce, the law regards the property which they describe as following them and gives to their regular transfer by indorsement the effect of manual delivery of the things specified in them.

DISTINCTION between the right of a person to whom a receipt has been negotiated and rights of a person to whom a receipt has been transferred.

a. Rights of a person to whom a receipt has been negotiated (Sec. 41):1. the title of the person negotiating the

receipt over the goods covered by the receipt;

2. the title of the person (depositor or owner) to whose order by the terms of

the receipt the goods were to be delivered over such goods; and

3. the direct obligation of the warehouseman to hold possession of the goods for him, as if the warehouseman directly contracted with him.

b. Rights of a person to whom receipt has been transferred (Sec. 42): may be defeated by levy and execution1. The title of the goods as against the

transferor with respect to a negotiable warehouse receipt not duly negotiated (merely steps into the shoes);

2. If the receipt is non-negotiable, such person also acquires the right to notify the warehouseman of the transfer thereof; and

3. The rights, thereafter, to acquire the obligation of the warehouseman to hold the goods for him.

An unpaid seller’s lien or right of stoppage in transitu cannot defeat the right of the holder in good faith of NWR.

Sec. 25 of Warehouse Receipt Law

If goods are delivered to a warehouse man by the owner or by a person whose act in conveying the title to them to a purchaser in good faith for value would bind the owner, and the negotiable receipts is issued for them.

While in possession of such warehouseman, the goods cannot be attached or levied upon under execution UNLESS:1. The document be first surrendered; or2. Its negotiation is enjoined; or1. The document is impounded by the

court.

Reason: the law protects an innocent purchaser for value in the negotiation of NWR.

Goods covered by NWR cannot be attached or levied upon unless receipt is surrendered.

WAREHOUSEMAN A person lawfully engaged in the business of storing goods for compensation for such service.

TO WHOM DELIVERED upon demand made by the holder of receipt or depositor provided such demand is accompanied by :

a. an offer to satisfy the WM’s lien;


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b. an offer to surrender the receipt, if negotiable, with such endorsement as would be necessary for the negotiation of the receipt; and

c. a readiness and a willingness to sign, when the goods are delivered, if such signature is requested by the warehouseman.

WARRANTIES ON SALE OF RECEIPT: (Sec. 44)

a. that the receipt is genuine; b. that he has legal right to negotiate or

transfer it;c. that he has knowledge of no fact which

would impair the validity or worth of the receipt; and

d. that he has a right to transfer the title to the goods and that the goods are merchantable or fit for a particular purpose whenever such warranties would have been implied, if the contract of the parties had been to transfer without a receipt the goods represented thereby.

RETAIL TRADE LIBERALIZATION ACT OF 2000 (RA 8762)

PURPOSE

It is the policy of the State: to promote consumer welfare in attracting, promoting and welcoming productive investments that will bring down prices for the Filipino consumer, create more jobs, promote tourism, assist small manufacturers, stimulate economic growth and enable Philippine goods and services to

become globally competitive through the liberalization of the retail trade sector.

ELEMENTS WHICH MUST CONCUR TO CONSIDER IT AS RETAIL:

a. the seller must be habitually engaged in selling;

b. the sale must be direct to the general public;c. the object of the sale is limited to

merchandise, commodities or goods for consumption (Marsman and Co. vs. First Coconut).

FOREIGN EQUITY PARTICIPATIONCONSUMER GOODS

Category A – Enterprises with paid – up capital of the equivalent in Philippine Peso of less than Two million five hundred thousand US

dollars ( US $2, 500,000.00) shall be reserved exclusively for Filipino citizens and corporations wholly owned by Filipino citizens.

Category B – Enterprises with a minimum paid – up capitail of the equivalent in Philippine Pesos of Two million five hundred thousand US dollars ( US$2, 500,000.00) but less than Seven million five hundred thousand US dollars (US$7,500,000.00) may be wholly owned by foreigners except for the first two (2) years after the effectivity of this Act wherein foreign participation shall be limited to not more than sixty percent (60%) of total equity.

Category C – Enterprises with a paid – up capital of the equivalent in Philippine Pesos of Seven million five hundred thousand US dollars (US$7, 500,000.00) or more may be wholly owned by foreigners : Provided, however, That in no case shall the investments for establishing a store in Categories B and C be less than the equivalent in Philippine Pesos of Eight hundred thirty thousand US dollars. (US$830,000.00) Category D – Enterprises specializing in high-end or luxury products with a paid-up capital of the equivalent in Philippine Pesos of Two hundred fifty thousand US dollars (US$250,000.00) per store may be wholly owned by foreigners.

END-USE DOCTRINE This means that a person who buys the goods acquires them for his own use and not for resale, in that case the transaction is retail.

ANTI-DUMMY LAW (CA 108 As Amended)

The law punishes the evasion of nationalization laws (by the use of dummies) and prohibit them from intervening in the management, operation, administration or control of any nationalized industries.

ALIENS MAY BE EMPLOYED IN THE FOLLOWING CASES:


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1. Employment in technical personnel approved by the president upon endorsement of the department head concerned (i.e. the Secretary of Justice or under special laws, by the entity or office concerned, such as the Bureau of Industries, the Director of Mines and Geo-sciences.

2. Election of alien directors to the extent allowable and actual foreign equity participation.


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