UST - Mercantile Law Preweek 2018159572700 PDF

UST LAW PRE-WEEK NOTES 2018
DOCTRINE OF STRICT COMPLIANCE v.

LETTERS OF CREDIT INDEPENDENCE PRINCIPLE
Basis Doctrine of Doctrine of

A letter of credit is any arrangement, however named or Strict Independence
described, whereby a bank acting upon the request of its Compliance
client (applicant) or on its own behalf, agrees to pay Documents Relationship of
another, against stipulated documents provided the tendered by the the buyer and
terms of the credit are complied with. seller or the bank is
beneficiary separate and
It is a financial device developed by merchants as a Principle must strictly distinct from the
convenient and relatively safe mode of dealing with conform to the relationship of
sales of goods to satisfy the seemingly irreconcilable terms of the the buyer and
interests of a seller, who refuses to part with his goods letter of credit. seller in the
before he is paid, and a buyer, who wants to have in main contract.
control of the goods before paying. The use of credits in A Assures the
commercial transactions serves to reduce the risk of correspondent seller or
nonpayment of the purchase price under the contract of bank which beneficiary of
sale of the goods and to reduce the risk of non- departs from prompt
performance of an obligation in a non-sale setting. what has been payment
(Transfield Philippines, Inc. v. Luzon Hydro Corp., GR. No. stipulated and independent of
146717, November 22, 2004) acts on its own any breach of
risk may not the main
KINDS OF LETTER OF CREDIT thereafter be contract and
able to recover. precludes the
Consequence
COMMERCIAL L/C STANDBY L/C issuing bank
of the
Involves the payment of from
Involves non-sale Doctrine
money under a contract determining
transactions. whether the
of sale.
Payable upon main contract is
certification by the actually
beneficiary of the accomplished
applicant’s non- or not.
Payable upon the
performance of the
presentation by the Banks deal with
agreement. The
seller-beneficiary of documents not
documents that
documents that show he goods.
accompany the
has taken affirmative Beneficiary The beneficiary,
beneficiary's draft must
steps to comply with the cannot draw on upon tender of
show that the applicant
sales agreement the letter of the required
has not performed the
undertaking. (Transfield credit if he did documents,
Philippines, Inc. v. Luzon not comply may draw on
Hydro Corp., supra) with its terms the LC,
and conditions. irrespective of
Payment to
THREE (3) DISTINCT BUT INTERTWINED whether the
the
CONTRACTS IN A LETTER OF CREDIT contract
Beneficiary
TRANSACTION (2002, 2008 BAR) underlying the
LC has been
1. Between the applicant/buyer/importer/account fulfilled or not.
party and the beneficiary/seller/exporter – The
applicant is the one who procures the letter of XPN: Fraud
credit and obliges himself to reimburse the issuing Exception
bank upon receipt of the documents of title while Principle.
the beneficiary is the one who in compliance with
the contract of sale ships the goods to the buyer and FRAUD EXCEPTION PRINCIPLE
delivers the documents of title and draft to the
issuing bank to recover payment for the goods. The The Exception to the Independence Principle (2010
relationship between them is governed by the law Bar)
on sales if it is a commercial L/C but if it is a stand-
by letter of credit it is governed by the law on "Fraud exception" exists when the beneficiary, for the
obligations and contract. purpose of drawing on the credit, fraudulently presents
2. Between the issuing bank and the beneficiary/ to the confirming bank, documents that contain,
seller/exporter – The issuing bank is the one that expressly or by implication, material representations of
issues the letter of credit and undertakes to pay the fact that to his knowledge are untrue.
beneficiary upon strict compliance of the latter to
the requirements set forth in the letter of credit. On The principle provides that the untruthfulness of a
the other hand, the beneficiary surrenders certificate accompanying a demand for payment under
document of title to the bank in compliance with a standby letter of credit may qualify as fraud sufficient
the terms of the L/C. Their relationship is governed to support an injunction against payment. The
by the terms of the L/C. beneficiary may be enjoined from collecting on the
3. Between the issuing bank and the applicant/ letter of credit.
buyer/importer – The applicant obliges himself to
reimburse the issuing bank upon receipt of the Injunction should not be granted unless:
documents of title. Their relationship is governed
by the terms of the application and agreement for a) There is clear proof of fraud;
the issuance of the L/C by the bank. b) The fraud constitutes fraudulent abuse of the
independent purpose of the letter of credit and
1
MERCANTILE LAW
not only fraud in the performance of the obligation issuing or

or contract supporting the letter of credit; and confirming
c) Irreparable injury might follow if injunction is not bank). If the
granted or the recovery of damages would be
party primarily
seriously damaged. (transfield v. Luzon hydro corp.,
supra) liable on the L/C
refuses to honor
KINDS OF BANK ROLE LIABILITY the draft, the
Notifying/Advisi Convey to Does not incur negotiating
ng Bank the seller any obligation bank has the
the more than just right to proceed
notifying the
existence of against the
seller/beneficia
the letter of ry of the drawer thereof.
credit. opening of the Paying Bank Undertakes
L/C after it has to encash
Warrants determined its the drafts
the apparent drawn by
apparent authority. It the exporter
authenticity does not
of the LC. guarantee the
(Bank of genuineness or TRUST RECEIPT LAWS
America NT due execution of
& SA v. CA, the L/C. It is not
G.R. No. liable for A Trust Receipt (TR) – any transaction between the
105395, damages even if
entruster and the entrustee, whereby the entruster
December the L/C turns
who owns or holds absolute title or security interest
10, 1993) out to be
over specified goods, documents or instruments (GDI)
spurious
releases the same to the possession of the entrustee,
provided the who in turn binds himself to the GDI with the obligation
spurious
to turn over the proceeds to the entruster to the extent
character is not of the entrustee’s obligation, or if unsold, to return the
apparent on the GDI to the entruster.
face of the
instrument.
LOAN/SECURITY FEATURE
Confirming Bank Lends Assumes a
credence to direct Two features of a trust receipt transaction
the L/C obligation to the
issued by a seller and its 1. Loan feature - is brought about by the fact that the
lesser- liability is a entruster financed the importation or purchase of
known primary one as the goods under TR. (Sps. Vintola v. IBAA, G.R. No.
bank. if the 73271, May 29, 1987)
correspondent 2. Security feature - property interest in the GDI to
bank itself had secure performance of some obligation of the
issued the letter entrustee or of some third persons to the entruster.
of credit. (Rosario Textile Mills Corp. v. Home Bankers Savings
Negotiating Buys or Depends on the and Trust Company, G.R. No. 137232, June 29, 2005)
Bank discounts stage of
the drafts negotiation, OWNERSHIP OF THE GOODS, DOCUMENTS, AND
contemplate INSTRUMENTS UNDER A TRUST RECEIPT
thus:
d by the
letter of Real owner of the articles subject of the Trust
credit. 1. Before
negotiation – No Receipt transaction
liability with
The real owner of the articles subject of the TR is the
respect to the entrustee who binds himself to hold the designated
seller. Merely GDI. The entruster merely holds a security interest. If
suggests its under the trust receipt, the bank is made to appear as
willingness to the owner, it was but an artificial expedient, more of
negotiate. legal fiction than fact, for if it were really so, it could
dispose of the goods in any manner it wants, which it
cannot do, just to give consistency with purpose of the
2. After
trust receipt of giving a stronger security for the loan
negotiation – A obtained by the importer. To consider the bank as the
contractual true owner from the inception of the transaction would
relationship be to disregard the loan feature thereof. (Rosario Textile
will then arise, Mills Corp. v. Home Bankers Savings and Trust Company,
making the supra)
bank liable. As
NOTE: The entrustee cannot mortgage the goods
holder, it has
because one of the requisites of a valid mortgage is that
the right to the mortgagor must be the absolute owner of the
payment from property mortgaged or must have free disposal thereof.
the bank Entrustee is not the absolute owner of the goods under
primarily liable trust receipt nor has free disposal thereof. (DBP v.
on the draft Prudential Bank, G.R. No. 143772, November 22, 2005)
(either the
2 UST BAR OPERATIONS

ACADEMICS COMMITTEE 2018
THE PRINCIPLE OF RES PERIT DOMINO TRANSACTIONS NOT CONSIDERED AS A TRUST

RECEIPT
Res perit domino is not a valid defense against an
entruster in cases of loss or destruction of the GDI 1. A sale by a person in the business of selling for
secured by a TR.For the principle of res perit domino to profit who retains general property rights in the
apply, the entruster must be the owner of the goods at GDI.
the time of the loss. A TR is a security agreement, 2. Where the seller retains title or other interest as
pursuant to which a bank acquires a ‘security interest’ security for the payment of the purchase price. (Sec.
in the goods. It secures an indebtedness and there can 4, P.D. 115)
be no such thing as security interest that secures no 3. If the entrustee is already the owner or in
obligation. If under a trust receipt transaction, the possession of the goods before delivery of the loan
entruster is made to appear as the owner, it was but an and execution of the trust receipt transaction, the
artificial expedient, more of legal fiction than fact, for if it transaction shall be considered a simple loan even
were really so, it could dispose of the goods in any manner though the parties may have denominated the
it wants. Thus, the ownership of the goods remaining agreement as one of TR. To be in the nature of TR,
with the entrustee, he cannot be relieved of the the entruster should have financed the acquisition
obligation to pay his/her loan in case of loss or or importation of the goods. The funds should have
destruction. (Rosario Textile Mills v. Home Bankers been delivered before or simultaneously with
Association, supra) delivery of the goods. (Colinares v. CA, G.R. No.
90828, September 5, 2000; Consolidated Bank and
Loss of GDI which are the subject of a TR, pending their Trust Corporation v. CA, G.R. No. 114286, April 19,
disposition, irrespective of whether or not it was due to 2001)
the fault or negligence of the entrustee, shall not 4. When both parties enter into an agreement
extinguish his obligation to the entruster for the value knowing fully well that the return of the goods
thereof.(Sec. 10, P.D. 115) subject of the trust receipt is not possible even
without any fault on the part of the trustee. The
NOTE: In case of loss, the entrustee may not be goods were never intended by the entrustee for
criminally prosecuted but the civil obligation is NOT resale or for the manufacture of items to be sold.
extinguished. (Ng v. People; Land Bank v. Perez; Hur Tin Yang v.
People; 2007 Bar)
VALIDITY OF SECURITY INTEREST AS AGAINST THE
CREDITORS OF THE ENTRUSTEE/INNOCENT WAREHOUSEMAN’S LIEN
PURCHASERS FOR VALUE
A warehouseman may refuse delivery of the subject
The entruster's security interest in goods, documents, goods because, in accordance with Section 29 of the
or instruments pursuant to the written terms of a trust Warehouse Receipts Law, the warehouseman loses his
receipt shall be valid as against all creditors of the lien upon goods by surrendering possession thereof. In
entrustee for the duration of the TR agreement. (Sec. 12, other words, the lien may be lost where the
P.D. 115) warehouseman surrenders the possession of the goods
without requiring payment of his lien, because a
To a certain extent, such interest becomes a "lien" on the warehouseman’s lien is possessory in nature.(PNB v.
goods because the entruster's advances will have to be Judge Se , G.R. No. 119231, April 18, 1996)
settled first before the entrustee can consolidate his
ownership over the goods. (Prudential Bank v. NLRC, G.R. Instances when a warehouseman may lose his lien
No. 1995)
1. By surrendering possession thereof, or
NOTE: Only a purchaser for value and in good faith can 2. Where a valid demand by the lawful holder of
defeat the security interest of the entruster. the receipts for the delivery of the goods is refused
by the warehouseman, despite the absence of a
ESTAFA IN TRUST RECEIPT TRANSACTIONS lawful excuse.
Estafa is deemed committed if the entrustee:

NEGOTIABLE INSTRUMENTS LAW
1. Fails to turn over the proceeds of the sale of the GDI
covered by the TR transaction to the extent of the
amount owing to the entruster; or
2. Fails to return the GDI if they were not sold or REQUISITES OF NEGOTIABILITY (WUPOA)
disposed of in accordance with the terms of the trust
receipt. (Sec. 13, PD 115) 1. It must be in Writing and signed by the maker or
drawer;
Note: P.D. 115 does not violate the constitutional 2. Must contain an Unconditional promise or order to
prohibition against imprisonment for non-payment of a pay a sum certain in money;
debt. What is being punished is the dishonesty and
abuse of confidence in the handling of money or goods NOTE: An indication of particular fund out of which
to the prejudice of another regardless of whether the reimbursement is to be made or a particular account
latter is the owner or not. It does not seek to enforce to be debited with the amount does not make the
payment of the loan. (People v. Nitafan, G.R. No. 81559, instrument non-negotiable. But an order or promise
April 6, 1992) to pay out of a particular fund is conditional.
Q: Is lack of intent to defraud a bar to the 3. Must be Payable on demand, or at a fixed or

prosecution of these acts or omissions? (2006 Bar) determinable future time;
4. Must be payable to Order or to bearer; and
A: NO. The mere failure to account or return gives rise 5. Where the instrument is Addressed to a drawee, he
must be named or otherwise indicated therein with
to the crime which is malum prohibitum. There is no
reasonable certainty. (NIL, Sec.1)
requirement to prove intent to defraud. (Ching v.
Secretary of Justice, G.R. No. 164317, February 6, 2006)
Rules of construction in case of ambiguities in a
Negotiable Instrument
3
MERCANTILE LAW
1. Words prevail over figures. September 26, 2008)

2. If date from which interest is to run is
unspecified, interest runs from the date of the GR: In case of controversy, the drawer is liable and the
instrument; if undated, from the issue thereof. drawee bank is absolved from liability.
3. If undated, instrument is considered dated as of
the time it was issued. XPN: When there is commercial bad faith, whereby the
4. Written provisions prevail over printed. drawee bank acts dishonestly and is a party to the
5. If there is doubt whether it is a bill or note, the fraudulent scheme. The check is deemed payable to
holder may treat it as either at his election. order, and consequently, the drawee bank bears the
6. When not clear in what capacity it was signed, loss. (Ibid)
deemed signed as an indorser.
7. When two or more persons signed a negotiable KINDS OF NEGOTIABLE INSTRUMENT
instrument stating "I promise to pay," in case of
liability, they shall be deemed to be jointly and 1. Promissory notes (PN) – An unconditional promise
severally liable. (Sec. 17, NIL) in writing made by one person to another, signed
by the maker, engaging to pay on demand, or at a
PAYMENT BY INSTALLMENT fixed or determinable future time, a sum certain in
money to order or to bearer.(NIL, Sec. 184)
Payment by installment is certain if the dates of each 2. Bill of exchange (BOE) – An unconditional order in
installment are fixed and the amount to be paid for each writing addressed by one person to another signed
installment is stated. (Sundiang Sr. & Aquino, 2009) by the person giving it, requiring the person to
whom it is addressed to pay on demand or at a fixed
NOTE: A sum is certain within the contemplation of or determinable future time a sum certain in money
Section 1(b) of the NIL if the amount that is to be to order or to bearer.(NIL, Sec. 126)
unconditionally paid by the maker or drawee can be 3. Check – A bill of exchange drawn on a bank payable
determined on the face of the instrument even if it on demand. (NIL, Sec. 185)
requires mathematical computation. (Sundiang Sr. &
Aquino, 2014) PROMISSORY NOTE v. BILL OF EXCHANGE
PAYABLE TO ORDER When can you treat a bill of exchange as a

promissory note? (2015 BAR)
The instrument is payable to order where it is drawn
payable to the order of a specified person or to him or to 1. Where in a bill the drawer and the drawee are the
his order. It may be drawn payable to the order of: same person (NIL, Sec. 130)
2. The drawee is a fictitious person (NIL, Sec. 130)
1. A Payee who is not a maker, drawer, or drawee; 3. The drawee does not have the capacity to contract
2. The Drawer or maker; (NIL, Sec. 130)
3. The Drawee; 4. Whether the instrument is so ambiguous that there
4. Two or more payees Jointly; is doubt whether it is a bill or a note, the holder may
5. One or some of Several payees; or treat it either at his election (NIL, Sec. 17[e])
6. The Holder of an office for the time being.(Sec. 8,
NIL) PARTIES TO A NEGOTIABLE INSTRUMENT
An order instrument is negotiated by indorsement Who are the parties to a negotiable instrument?
completed by delivery (Sec. 30, NIL). If an order What are their liabilities?
instrument is not indorsed, the negotiation is
incomplete and the instrument is in effect, merely In a promissory note there are two parties.
assigned. The transferee acquires the right to have the
indorsement of the transferor. It is only at the time of  The maker who makes the promise and signs the
indorsement that negotiation takes effect and the instrument and is primarily liable for the payment
transferee acquires all the rights of a holder. of the obligation;
(Dimaampao & Dumlao-Escalante, 2014)
 The payee to whom payment is originally payable.
PAYABLE TO BEARER (ENaF PaLa)
In a bill of exchange there are four parties.
1. When it is Expressed to be so payable; (e.g. I
 The drawer who issues and draws the bill and
promise to pay to bearer P10,000.00)
whose liability to pay is only secondary, except
2. When it is payable to a person Named therein or
when drawee refused to accept; can limit his
bearer; (e.g. Pay to P or bearer P10,000.00)
liability by putting “without recourse”;
3. When it is payable to the order of a Fictitious
 The drawee upon whom the bill is drawn may not
person or non-existing person, and such fact was
be held liable until he becomes acceptor;
known to the person making it so payable; (e.g. Pay
to John Doe or order)
NOTE: A bill of exchange may be addressed to two
4. When the name of the Payee does not purport to be
or more drawees jointly, whether partners or not;
the name of any person; (Pay to cash)
but not to two or more drawees in the alternative
5. When the only or the Last indorsement is an
or in succession. (Sec. 128, NIL)
indorsement in blank (NIL, Sec 9).
 The payee to whom payment is originally payable;
FICTITIOUS-PAYEE RULE
and
The fictitious-payee rule contemplates that the payee is  The acceptor who is the drawee who accepts the
fictitious or not intended to be true recipient of the bill.
proceeds. The check is considered a bearer
instrument negotiable by delivery alone. The COMPLETION AND DELIVERY
underlying theory is that the maker of the check knew
that the fictitious payee cannot indorse the instrument INCOMPLETE BUT DELIVERED (Sec. 14)
so that he must have intended for it to be negotiated by
mere delivery. (PNB v. Rodriguez, G.R. No. 170325,

Where the instrument is wanting in any material NOTE: The defense of want of delivery of a complete
particular (e.g. a signature in blank paper delivered by instrument is only a personal defense which means
the person making the signature in order that it may be that it is only available against a holder NOT in due
converted into a negotiable instrument), the person in course.
possession thereof has a prima facie authority to
complete it by filling up the blanks therein. (NIL, Sec. 14) Presumption as to delivery
In order that any such instrument when completed may If the instrument is in the possession of an HIDC, valid
be enforced against any person who became a party delivery is conclusively presumed.
thereto prior to its completion, it must be filled up
strictly in accordance with the authority given and within If the instrument is in the possession of a party other
reasonable time. than an HIDC, possession of such party constitutes only
prima facie presumption of delivery.
NOTE: Persons negotiating after its completion are
liable because of their warranties. FORGERY
If such instrument, after completion, is negotiated to a It is the counterfeit making or fraudulent alteration of
holder in due course, it is valid and effectual for all any writing. It happens when a signature is affixed by
purposes in his hands, and he may enforce it as if it had one who does not claim to act as an agent and who has
been filled up strictly in accordance with the authority no authority to bind the person whose signature he has
given and within reasonable time.(ibid) forged.
INCOMPLETE AND UNDELIVERED (Sec. 15) Forgery in a negotiable instrument does not avoid the
instrument but only the forged signature. The
Where an incomplete instrument has not been signature is wholly inoperative. In other words, rights
delivered, it will not, if completed and negotiated may still exist and be enforced by virtue of such
without authority, be a valid contract in the hands of instrument as to those signatures thereto are found to
any holder, as against any person whose signature was be genuine.
placed thereon before delivery. (NIL, Sec. 15)
Persons precluded from setting up the defense of
NOTE: Persons, whose signature was placed thereon forgery (2010 BAR)
after delivery, are liable because of their warranties.
1. Those who admit/warrant the genuineness of the
Q: PN makes a promissory note for P5, 000.00, but signature, such as indorsers, persons negotiating
leaves the name of the payee in blank because he by delivery and acceptor; (NIL, Sec 56)
wanted to verify its correct spelling first. He 2. Those who by their acts, silence, or negligence, are
mindlessly left the note on top of his desk at the end estopped from claiming forgery;
of the workday. When he returned the following 3. A holder of a bearer instrument who subsequently
morning, the note was missing. It turned up later negotiates such instrument with a prior forged
when X presented it to PN for payment. Before X, T indorsement - forged indorsement is not necessary
who turned out to have filched the note from PN’s to his title it being a bearer instrument.(NIL, Sec. 48)
office, had endorsed the note after inserting his own
name in the blank space as the payee. PN CUT-OFF PRINCIPLE
dishonored the note, contending that he did not
authorize its completion and delivery. But X said he In order instruments, parties prior to forgery are
had no participation in, or knowledge about the relieved or cut-off of liability. They cannot be held liable
pilferage and alteration of the note and therefore he by any holder, including a holder in due course.
enjoys the rights of a holder in due course under the
Negotiable Instruments Law. Who is correct and Legal consequences when a bank honors a forged
why? check:
A: The instrument is incomplete and undelivered. PN is  Drawer's signature is forged, then the drawee
correct in dishonoring the said instrument. Sec. 15 bank is liable because the bank is bound to know
provides that where an incomplete instrument has not the signature of its customers. It is also in a
been delivered, it will not, if completed and negotiated superior position to detect the forgery because it
without authority, be a valid contract in the hands of any has a specimen of the signature of the maker.
holder, as against any person whose signature was Lastly, by accepting the instrument, it becomes an
placed thereon before delivery. Thus, X contention has acceptor who admits the genuineness of the
no merit, since under this section it is a real defense that drawer’s signature.
can be interposed against any holder even a holder in
due course.  Payee’s signature is forged, then drawee bank is
liable because it owes to the drawer-depositor an
COMPLETE BUT UNDELIVERED (Sec. 16) absolute and contractual duty to pay the check only
to the person to whom it is made payable.
It is incomplete and revocable until delivery of the
instrument for the purpose of giving it effect (NIL, Sec.  Indorser’s signature is forged, drawee bank
16).Delivery is essential to the validity of any negotiable bears the loss as it is under strict liability to pay
instrument. (Sundiang Sr. & Aquino, 2009) the check to the order of the payee. Payment under
forged indorsement is not to the drawer’s order.
Where a debtor who drew two checks payable to his Hence, if the drawee bank pays a check bearing
creditor never delivered the checks to his creditor and a forged signature of indorser, it does so at its own
third party was able to collect the proceeds of the checks peril.
by forging the endorsement of the creditor as payee, the
creditor has no cause of action against anyone on the However, the drawee bank may pass the liability
basis of the checks, since the payee acquires no interest to the collecting bank who cannot interpose the
in the check until its delivery to him. (Development Bank defense of forgery. The collecting bank is an
of Rizal v. Sim Wei, G.R. No. 85419, March 9, 1993) indorser who warrants that the instrument is
genuine and in all respect what it purports to be
5
MERCANTILE LAW
(NIL, Sec. 16). The collecting bank had no right to be GR: Every holder is deemed prima facie to be an HIDC.
paid by the drawee bank since the forged
indorsement is inoperative. The collecting bank my XPN: When it is shown that the title of any person who
ultimately recover from the forger. has negotiated the instrument was defective. But this is
only as regards a party who became such after the
Q: Ofelia Camacho Cheah accommodated a friend’s acquisition of the defective title.
friend to deposit and encash a check issued by the
Bank of America. The check was deposited to SHELTER PRINCIPLE or HOLDER IN DUE COURSE BY
Ofelia’s account in PNB. A US dollar denominated SUBROGATION
check is normally subject to a 15-day clearing
period. However, 12 days after the check’s deposit, Under the "shelter principle," the HIDC, by negotiating
the bank informed Ofelia that the check was cleared the instrument, to a party not a HIDC, transfers all his
and credited to her account. Hence, Ofelia rights as such holder to the latter who acquires the right
immediately withdrew the check’s amount and the to enforce the instrument as if he was a HIDC. The
accommodated friend was able to take entire principle applies to a "sheltered" holder who is not a
amount. It was only days after said withdrawal that party to any fraud or illegality impairing the validity of
PNB was informed by its correspondent bank of the the instrument. (NIL, Sec. 58)
insufficiency of funds to which the check was drawn.
At that time, it was too late to recover the money DEFENSES AGAINST THE HOLDER
withdrawn. Is PNB liable for the money lost on the
said transaction? 1. Real or Absolute Defenses – those that are attached
to the instrument itself and are available against all
A: Yes. The payment of the amounts of checks without parties, both immediate and remote, including
previously clearing them with the drawee bank holders in due course.
especially so where the drawee bank is a foreign bank 2. Personal or Equitable Defenses – defenses which are
and the amounts involved were large is contrary to only available against a holder not in due course.
normal or ordinary banking practice. Jurisprudence Those which grow out of the agreement or conduct
provides that when the bank allowed the withdrawal of of a particular person which renders it inequitable
the value of a check prior to its clearing, before the check for him, though holding the legal title, to enforce it
shall have been cleared for deposit, the collecting bank against the party sought to be made liable.
can only ‘assume’ at its own risk that the check would be
cleared and paid out. (PNB v. Spouses Cheah, G.R. No. Real or Absolute Defenses (IM In Ultra. AFForD
170895 & 170892, April 25, 2012, Del Castillo, J.) PODIF)
ACCOMODATION PARTY 1. Incomplete and undelivered instrument

2. Minority (available only to the minor)
Requisites to be an accommodation party (SNoL) 3. Incapacity as far as incapacitated persons are
concerned
1. Accommodation party must Sign as maker, drawer, 4. Ultra–vires acts of a corporation
acceptor or indorser 5. Want of Authority, apparent and real
2. No value is received by the accommodation party 6. Fraudulent alteration
from the accommodated party 7. Forgery
3. The purpose is to Lend the name. (NIL, Sec. 29) 8. Duress amounting to Forgery
9. Prescription
An accommodation party cannot set up lack of 10. Other infirmities appearing on the face of the
consideration against any holder, even as to one who is instrument
not a holder in due course. 11. Discharge in insolvency
12. Illegal Contract
Holder for value may recover from an accommodation 13. Fraud in Factum or Esse Contractus
party notwithstanding his knowledge that the
accommodation party is only signing as such. Personal or Equitable Defenses(InnocentS2 ADD FUn
In Fraud)
NOTE: It does not mean, however, that one cannot be an
accommodation party merely because he has received 1. Innocent alteration or spoliation
some consideration for the use of his name. The phrase 2. Discharge of party Secondarily liable by discharge
“without receiving value therefor” only means that no of prior party.
value has been received “for the instrument” and not 3. Set-off between immediate parties
“for lending his name.” 4. Filling up of blanks not in accordance with the
Authority given
HOLDER IN DUE COURSE (HIDC) 5. Acquisition of instrument by Duress or force and
fear; unlawful means or for an illegal consideration
A holder in due course is a holder who has taken the 6. Discharge by payment or renunciation or release
instrument under the following conditions(COFI): before maturity
7. Failure or absence of consideration.
1. That is Complete and regular upon its face; 8. Undelivered complete instrument
2. Became the holder before it was Overdue, and 9. Insertion of a wrong date
without notice that it has been previously 10. Fraud in inducement or simple fraud
dishonored, if such was the fact;
3. Took it in good Faith and for value; and LIABILITIES OF PARTIES
4. At the time it was negotiated to him, he had no
notice of any Infirmity in the instrument or defect Parties primarily liable (MAC)
in the title of the person negotiating it. (NIL, Sec. 52)
1. Maker – of a promissory note;
A holder in due course holds the instrument free from 2. Acceptor – of a bill of exchange; and
any defect of title of prior parties and from defenses 3. Certifier of a check
available to prior parties among themselves, and may
enforce payment of the instrument for the full amount Parties secondarily liable
thereof. 1. Drawer of a bill

2. Indorser of a note or a bill He has the same warranties as a qualified indorser. but
unlike a qualified indorser, a person negotiating by
Negotiable instrument should be presented for payment mere delivery is liable only to his immediate transferee.
to the party primarily liable. (NIL, Sec. 72[d]) (NIL, par. 2, Sec. 65)
PRIMARILY LIABLE SECONDARILY LIABLE NOTE: Person negotiating by mere delivery and a
Unconditionally bound Conditionally bound qualified indorser’s secondary liability is limited. They
Undertakes to pay only are only liable as to their warranties.
after the ff. conditions
have been fulfilled: DISCHARGE OF NEGOTIABLE INSTRUMENT
1. Due presentment for
payment or acceptance a. By payment in due course by or on behalf of the
Absolutely required to principal debtor;
to primary party; (NIL,
pay the instrument b. By payment in due course by the party
Sec. 143)
upon maturity accommodated, where the instrument is made or
2. Dishonor by such
party; (NIL, Sec.70) accepted for his accommodation;
3. Taking of proceedings c. By the intentional cancellation thereof by the
required by law. (NIL, holder;
Sec.152) d. By any other act which will discharge a simple
contract for the payment of money; and
WARRANTIES e. When the principal debtor becomes the holder of
the instrument at or after maturity in his own
DRAWER right.(Sec. 119, NIL)
a. The existence of payee and his then capacity to Requisites of payment in due course
indorse;
b. That the instrument will be accepted or paid upon 1. It is made at or after the date of Maturity;
due presentment by the party primarily liable 2. To the Holder thereof; and
according to its tenor; and 3. In Good faith and without notice that holder’s title
c. That if dishonored, he will pay the party entitled is defective.(NIL, Sec. 88)
to be paid. (NIL, Sec. 61)
The term “in good faith” refers to the maker or acceptor
GENERAL INDORSER and not to the holder.
a. Instrument is genunine; Reasonable time as applied to presentment

b. He had good title to it;
c. All prior parties had capacity to contract; Reasonable time is relative. Regard is to be had to the
d. Instrument, at the time of indorsement, was facts of each case, usage of business and trade, and the
valid and subsisting; and nature of the instrument. With respect to checks, current
e. On due presentment, it shall be accepted or banking practice dictates that the check becomes stale if
paid, or both according to its tenor it is not presented for payment within 6 months (180
days) from issuance.
If the instrument is dishonored and the necessary
proceedings on dishonor be duly taken, he will pay the NOTICE OF DISHONOR
holder. (NIL, Sec. 66)
It is a notice given by the holder to the parties
IRREGULAR INDORSER secondarily liable, that the instrument was dishonored
by non-payment or non-acceptance by the
He is not a party to the instrument but he places his drawee/maker.
signature in blank before delivery. He is not a party but
he becomes one because of his signature in the NOTE: Persons primarily liable need not be given
instrument. notice of dishonor because they are the ones who
dishonored the instrument.
a. In an order instrument, liable to the payee and all
subsequent parties Instances when notice of dishonor is NOT necessary
b. If bearer instrument or payable to order of maker
or drawer, liable to all parties subsequent to the 1. Waiver of notice (NIL, Sec. 109)
maker or drawer 2. Waiver of protest (NIL, Sec. 111)
c. If he signs for accommodation of the payee, liable 3. When notice is dispensed with when after exercise
to all parties subsequent to payee. (NIL, Sec. 64) of reasonable diligence, notice cannot be given or
does not reach the parties sought to be charged
NOTE: The maker, general and qualified indorser, are (NIL, Sec. 112)
absolutely liable in the instrument. 4. When notice need not be given to the drawer (NIL,
Sec. 114)
QUALIFIED INDORSER 5. When notice need not be given to the indorser (NIL,
Sec. 115)
a. Instrument is genuine; 6. Where due notice of dishonor by non-acceptance
b. He has good title to it; has been given (notice of dishonor by non-payment
c. Capacity to contract of all prior parties; and; not necessary)(NIL, Sec. 116.)
d. No knowledge of any fact which would impair the
validity of the instrument. (NIL, Sec.65) ACCEPTANCE
NOTE: He is liable to all parties who derive their title It is a signification by the drawee of his assent to the
through his indorsement. order of the drawer. (NIL, Sec. 132)
PERSONS NEGOTIATING BY DELIVERY Requisites of acceptance:
1. GR: It must be in writing
7
MERCANTILE LAW
XPN: Constructive acceptance and to a foreign bill Need not be Must be presented
payable in another state unless the other state presented for acceptance in
Presentment
requires for written acceptance. for certain cases (NIL,
for
acceptance Sec. 143)
Acceptance
2. Signed by the drawee; (NIL, Sec.
3. Must express a promise to pay money; and 185)
4. Delivered to the holder.
What is the effect of erasure or alteration on checks?
NOTE: Before delivery or notification, acceptor
may revoke or cancel his acceptance.
Pursuant to Philippine Clearing House Corporation
Memorandum Circular No. 15-460A effective January
Upon acceptance, the bill, in effect becomes a note. The
4, 2016, the following shall no longer be eligible or
drawee who thereby becomes an acceptor assumes the
acceptable for clearing:
liability of the maker (who has primary liability) and the
drawer, that of the first indorser.
a. Any check that shows or indicates on its face
erasure or alteration regardless of any signature or
Constructive acceptance
initials that appear to indicate authorization of the
alteration or erasure; or
The drawee is deemed to have accepted the instrument:
b. Does not indicate the date, payee, amount payable
1. If he destroys the same;
in figures, amount payable in words, or signature of
2. Refuses within 24 hours after delivery or within
the drawer.
such other period as the holder may allow;
3. To return the bill accepted or not accepted to the
MANAGER’S CHECK
holder. (Sec. 137)
The Supreme Court held in various decisions that a
BASIS CHECKS BOE
manager’s check is as good as cash. A manager’s check
Always May or may not be is a check drawn by the bank against itself. It is deemed
drawn on a drawn on a bank and pre-accepted by the bank from the moment of issuance.
bank or need not be drawn The check becomes the primary obligation of the bank
banker against a deposit which issues it and constitutes its written promise to
Drawee
against a pay. By issuing it, the bank in effect commits its total
previous resources, integrity and honor behind the check.
deposit of (Metrobank and Trust Company v. Chiok, GR No.
funds 172652,November 26, 2014, 2015 BAR)
Always Either payable on
payable on demand or at a fixed CROSS CHECK
Payability demand or determinable
future time (NIL, A cross check is done by writing two (2) parallel lines on
Sec.4) the left top portion of the check.
Ordinarily Intended for
intended circulation as Effects of crosschecking:
Function for instrument of credit
immediate a. That the check may not be encashed but only
payment deposited in the bank;
Must be Must be presented b. That the check may be negotiated only once - to one
presented for payment within a who has an account with a bank; and
for payment reasonable time after c. That the act of crossing the check serves as a
within a its last negotiation warning to the holder that the check has been issued
Presentment
reasonable (NIL, Sec. 171) for definite purpose so that he must inquire if he has
for Payment
time after received the check pursuant to the purpose.
its Otherwise, he is not an HIDC.(SIHI v. IAC, G.R. No.
issue(NIL, 72764, July 13, 1989)
Sec.186)
When a They remain liable
check is despite acceptance INSURANCE LAW
accepted or (NIL, Sec. 84)
certified,
the drawer
CONCEPT OF INSURANCE
& indorsers
Discharge of
are
Liability Q: What is a Contract of Insurance?
discharged
from
A: It is an agreement whereby one undertakes for a
liability
consideration to indemnify another against the loss,
thereon
damage or liability arising from an unknown or
(NIL, Sec.
contingent event (IC, Sec. 2[a]).
188)
Death of the Death of the drawer Q: May a member of the MILF or its breakaway
drawer of a of an ordinary bill group, the Abu Sayyaf, be insured with a company
check with does not revoke the
licensed to do business under the Insurance Code of
the authority of the
Effect of the the Philippines? Explain.
knowledge drawee to pay.
Death of the
of the bank A: YES. A member of the MILF or the Abu Sayyaf may be
Drawer
revokes the
insured with a company licensed to do business under
authority of
the Insurance Code of the Philippines. What is
the bank to prohibited to be insured is a public enemy. A public
pay. enemy is a citizen or national of a country with which
the Philippines is at war. Such member of the MILF or

the Abu Sayyaf is not a citizen or national of another 3. That the ship shall carry the necessary documents to
country, but of the Philippines. show nationality or neutrality and that it will not
Elements of an Insurance Contract carry document which will cast reasonable
suspicion thereon;
1. Scheme to distribute losses – Such assumption of 4. That the ship shall not carry contraband, especially
risk is part of a general scheme to distribute actual if it is making voyage through belligerent waters.
losses among a large group or substantial number
of persons bearing a similar risk. Q: A marine insurance policy on a cargo states that
2. Payment of premium – As consideration for the “the insurer shall be liable for losses incident to
insurer’s promise, the insured makes a ratable perils of the sea”. During the voyage, seawater
contribution called “premium,” to a general entered the compartment where the cargo was
insurance fund. stored due to the defective drainpipe of the ship.
3. Existence of insurable interest – The insured The insured filed an action on the policy for
possesses an interest of some kind susceptible of recovery of the damages caused to the cargo. May
pecuniary estimation, known as “insurable the insured recover damages? (1998 BAR)
interest.”
4. Assumption of Risk – The insurer assumes that risk A: NO. The proximate cause of the damage to the cargo
of loss for a consideration. insured was the defective drainpipe of the ship. This is
5. Risk of loss – The insured is subject to a risk of loss peril of the ship, and not peril of the sea. The defect in
through the destruction or impairment of that the drainpipe was the result of the ordinary use of the
interest by the happening of designated peril. ship. To recover under a marine insurance policy, the
proximate cause of the loss or damage must be peril of
PARTIES TO AN INSURANCE CONTRACT the sea.
1. Insurer – party who assumes or accepts the risk of COMPULSORY MOTOR VEHICLE LIABILITY
loss and undertakes for a consideration to INSURANCE
indemnify the insured on the happening of a
specified contingency or event. The term “insurer” No fault indemnity clause (1994 BAR)
no longer includes “individuals” under RA 10607.
It is a clause where the insurer is required to pay a third
2. Insured – person in whose favor the contract is party injured or killed in an accident without the
operative and is indemnified. necessity of proving fault or negligence on the part of
The insured is not always the person to whom the the insured. There is a stipulated maximum amount to
proceeds are paid. be recovered.
3. Assured/Beneficiary – a person designated by the Theft clause

terms of the policy to receive the proceeds of the
insurance. He may be the insured or a third party in There is theft if the vehicle is taken with intent to gain
the contract for whose benefit the policy is issued without the consent of the insured-owner. Thus, there is
and to whom the loss is payable. theft even if:
MARINE INSURANCE 1. The vehicle is returned;

2. The vehicle was stolen by the driver of the
GR: In the usual form of a marine policy, the risks insured (Alpha Insurance and Surety Company
insured against are only “perils of the sea”. v. Castor, G.R. 198174, September 2, 2013);
(2014 BAR)
XPN: When the insurance is an “all risk policy” and thus 3. The vehicle was taken to the owner of a repair
covers even “perils of the ship”. shop for the purpose of repair and in order to
attach accessories.(Paramount Insurance v.
XPN to XPN: When the risks are expressly excepted by Spouses Remondeulaz, G.R.
the “all risk policy”. No.173773,November28, 2012)
“Perils of the sea or perils of navigation” (1998 Bar) INSURABLE INTEREST
It includes only those casualties due to the (WiN): BASIS LIFE PROPERTY
1. Unusual violence or extraordinary action of WInd GR: Every
and wave, or person has an
2. Other extraordinary causes connected with unlimited
Navigation. (De Leon, 2010) insurable
interest in his
“Perils of the ship” own life
It is a loss which, in the ordinary course of events,

results from the (NON):
1. Natural and inevitable action of the sea;
2. Ordinary wear and tear of the ship; As to XPN: Where Limited to the actual
3. Negligent failure of the ship’s owner to provide the extent life insurance value of the property
vessel with proper equipment to convey the cargo is taken out by
under ordinary conditions. a creditor on
the life of the
WARRANTIES IMPLIED IN MARINE INSURANCE debtor,
(2000 BAR) insurable
interest is
1. That the ship is seaworthy to make the voyage limited to the
and/or to take in certain cargoes; amount of
2. That the ship shall not deviate from the voyage debt. (See
insured; discussion on
9
MERCANTILE LAW
Mortgagor- If the designated beneficiaries are disqualified by law to

Mortgagee) receive the proceeds, the policy remains valid and
GR: Must exist both at binding but the proceeds will be given to the estate of
the time the policy takes the insured.
Must exist at effect and the time of
When
the time the loss, but need not exist CHANGE IN BENEFICIARY
must
policy takes in the period in
insurab
effect and between.(Sec. 19) GR: The insured shall have the right to change the
le
need not exist beneficiary he designated in the policy.
interest
thereafter (IC,
exist
Sec. 19). XPN: If the insured expressly waived this right in the
said policy.
XPN: Secs. 21-24; 25
The NOTE: In the event the insured does not change the
beneficiary beneficiary during his lifetime, the designation shall be
need not have deemed irrevocable. (IC, Sec. 11)
insurable
interest over Effects of Irrevocable Designation of a Beneficiary:
the life of the
insured if the a. The beneficiary designated in a life insurance
insured contract cannot be changed without the consent of
himself the beneficiary. (Gercio v. Sun Life Assurance of
As to secured the Canada, 48 Phil. 53, 28 September 1925)
the policy. The beneficiary must b. A new beneficiary cannot be added to the
benefici However, if have insurable interest irrevocably designated beneficiary for this would
ary’s the life over the thing insured. in effect reduce the latter’s vested rights. (Go v.
interest insurance was Redfern, 72 Phil. 71, 25 April 1941)
obtained by c. The irrevocably designated beneficiary may obtain
the a policy loan to the extent stated in the schedule of
beneficiary, values attached to the policy.
the latter d. The insured cannot take the cash surrender value
must have assign or even borrow on said policy without the
insurable consent of the beneficiary.
interest over e. The insured cannot assign the policy if the
the life of the designation of the beneficiary is irrevocable. The
insured. irrevocable beneficiary has a vested right.
(Sundiang Sr. & Aquino, 2014)
INSURABLE INTEREST IN LIFE
INSURABLE INTEREST IN PROPERTY
1. Insurance upon one’s life – are those taken out by
the insured upon his own life (IC, Section 10[a]) for Every interest in property, whether real or personal, or
the benefit of himself, or of his estate, in case it any relation thereto, or liability in respect thereof, of
matures only at his death, for the benefit of third such nature that contemplated peril might directly
person who may be designated as beneficiary. damnify the insured, is insurable interest. (IC, Sec. 13)
2. Insurance upon life of another – are those taken out GR: Insurable interest must exist both at the time the
by the insured upon the life of another. Where a insurance contract takes effect and at the time of loss.
person names himself beneficiary in a policy he
takes on the life of another, he must have XPNS:
insurable interest in the life of the latter (De 1. A change in interest in a thing insured, after the
Leon, 2010). This class includes the following: occurrence of an injury which results in a loss, does not
affect the right of the insured to indemnity for the loss.
a. His spouse and of his children. (IC, Sec. 21)
b. Any person on whom he depends wholly or in 2. A change of interest in one or more several distinct
part for education or support, or in whom he things, separately insured by one policy, does not avoid
has a pecuniary interest. the insurance as to the others. (IC, Sec. 22)
c. Of any person under a legal obligation to him 3. A change on interest, by will or succession, on the
for the payment of money, or respecting death of the insured, does not avoid an insurance; and
property or services, of which death or illness his interest in the insurance passes to the person taking
might delay or prevent the performance. his interest in the thing insured. (IC, Sec. 23)
d. Of any person upon whose life any estate or 4. A transfer of interest by one of several partners, joint
interest vested in him depends (IC, Sec. 10). owners, or owners in common, who are jointly insured,
to the others, does not avoid an insurance even though
Persons prohibited from being designated as it has been agreed that the insurance shall cease upon
beneficiaries (1998 BAR) an alienation of the thing insured. (IC, Sec. 24)
1. Those made between persons who were guilty of MORTGAGOR-MORTGAGEE

adultery or concubinage at the time of designation.
Each has an insurable interest in the property
NOTE: There need not be a finding of guilt in a mortgaged and this interest is separate and distinct
criminal action. from the other. Therefore, insurance taken by one in his
name only and in his favor alone does not inure to the
2. Those made between persons found guilty of the benefit of the other. The same is not open to objection
same criminal offense, in consideration thereof. that there is double insurance (RCBC vs. CA, 289 G.R. Nos.
3. Those made to a public officer or his wife, 128833-34, 128866, April 20, 1998; IC, Sec. 8).
descendants or ascendants by reason of his office.

1. Mortgagor –As owner, has an insurable interest to In case the insured is overinsured by double insurance,
the extent of its value even though the mortgage the insured, unless the policy otherwise provides, may
debt equals such value. claim payment from the insurers in such order as he
2. Mortgagee –Has an insurable interest in the may select, up to the amount for which the insurers are
mortgaged property to the extent of the debt severally liable under their respective contracts.[IC, Sec.
secured; such interest continues until the mortgage 94 (a)]Each insurer is bound, as between himself and
debt is extinguished. (Sundiang Sr. & Aquino, 2014) the other insurers, to contribute ratably to the loss in
proportion to the amount for which he is liable under
Insurable interest on the LIFE of a debtor his contract. [IC, Sec. 94 (e)]
Section 10 (c) of the Insurance Code is specific that “OTHER INSURANCE CLAUSE”
every person has an insurable interest over the life and
health of any person under a legal obligation to him for The insurer may insert an “other insurance clause”
the payment of money. which will prohibit double insurance. The rationale is to
prevent the danger that the insured will over insure his
Q: X borrowed from CCC Bank. She mortgaged her property and thus avert the possibility of perpetration
house and lot in favor of the bank. X insured her of fraud. It is lawful and specifically allowed under Sec.
house. The bank also got the house insured. 75 of the Insurance Code which provides that “a policy
may declare that a violation or a specified provision
a. Is this double insurance? Explain your answer. thereof shall avoid it, otherwise the breach of an
b. Is this legally valid? Explain your answer. immaterial provision does not avoid it.”
c. In case of damage, can X and CCC bank
separately claim for the insurance proceeds? CO-INSURANCE and RE-INSURANCE. (1994 BAR)
(2012 BAR)
Co-insurance is the percentage in the value of the
A: insured property which the insured himself assumes or
undertakes to act as insurer to the extent of the
a. NO, there is no double insurance. Double insurance deficiency in the insurance of the insured property. In
exists where the same person is insured by several case of loss or damage, the insurer will be liable only for
insurers separately with respect to the same such proportion of the loss or damage as the amount of
subject and interest. insurance bears to the designated percentage of the full
b. YES, X and CCC Bank can both insure the house as value of the property insured.
they have different insurable interests therein. X,
the borrower-mortgagor, has an insurable interest Reinsurance is where the insurer procures a third
in the house being the owner thereof while CCC party, called the reinsurer, to insure him against liability
Bank, the lender, also has an insurable interest in by reason of such original insurance. Basically,
the house as mortgagee thereof. reinsurance is an insurance against liability which the
c. YES. If X obtained an open policy then she could original insurer may incur in favor of the original
claim an amount corresponding to the extent of the insured.
damage based on the value of the house
determined as of the date the damaged occurred, PERFECTION OF THE INSURANCE CONTRACT
but not to exceed the face value of the insurance
policy; however, if she obtained a valued policy The contract of insurance is perfected when the assent
then she could claim an amount corresponding to or consent is manifested by the meeting of the offer
the extent of the damage based on the agreed upon and the acceptance upon the thing and the cause which
valuation of the house. are to constitute the contract. Mere offer or proposal is
not contemplated (De Lim v. Sun Life Assurance Co., G.R.
As for CCC Bank, it could claim an amount No. L-15774, November 29, 1920).
corresponding to the extent of the damage but not
to exceed the amount of the loan it extended to X or Cognition Theory - acceptance made by letter shall not
so much thereof as may remain unpaid. bind the person making the offer except from the time it
came to his knowledge.
DOUBLE INSURANCE AND OVERINSURANCE
PREMIUM PAYMENT
DOUBLE INSURANCE OVER INSURANCE
“Cash and carry” rule
There may be no over
insurance as when the
When the amount of the GR: No policy or contract of insurance issued by an
sum total of the
insurance is beyond the insurance company is valid and binding unless and until
amounts of the policies
value of the insured’s the premium thereof has been paid. Any agreement to
issued does not exceed
insurable interest. the contrary is void.
the insurable interest of
the insured.
XPN: A policy is valid and binding even when there is
There may be only one non-payment of premium:
There are two or more insurer, with whom the
1. In case of life or industrial life policy whenever the
insurers insuring the insured takes insurance
grace period provision applies, or whenever under
same subject matter. beyond the value of his
the broker and agency agreements with duly
insurable interest.
licensed intermediaries, a ninety (90)-day credit
extension is given. No credit extension to a duly
Double insurance is valid. What is prohibited is for the
licensed intermediary should exceed ninety (90)
insured to recover more than his interest or value of the
days from date of issuance of the policy (IC, Sec. 77).
property pursuant to the “principle of indemnity”.
2. When there is acknowledgment in a policy of a
receipt of premium, which the law declares to be
In double insurance, the insurers are considered as co-
conclusive evidence of payment, even if there is
insurers. Each one is bound to contribute ratably to the
stipulation therein that it shall not be binding until
loss in proportion to the amount for which he is liable
the premium is actually paid. This is without
under his contract. This is known as the “principle of
contribution” or “contribution clause”
11
MERCANTILE LAW
prejudice however to right of insurer to collect 4. If contract is illegal and the parties are in pari
corresponding premium (Sec. 77, ibid). delicto.
Section 77 of the Insurance Code in effect allows CONCEALMENT

waiver by the insurer of the condition
prepayment by making an acknowledgment in the Concealment is a neglect to communicate that which a
insurance policy of receipt of premium as party knows and ought to communicate.
conclusive evidence of payment so far as to
make the policy binding despite the fact that Requisites of concealment:
premium is actually unpaid. (Makati Tuscany
Condominium Corp. vs. Court of Appeals G.R. No. 1. A party knows a fact which he neglects to
95546, November 6, 1992) communicate or disclose to the other party;
2. Such party concealing is duty bound to disclose
3. When there is an agreement allowing the insured such fact to the other;
to pay the premium in installments and partial 3. Such party concealing makes no warranty as to the
payment has been made at the time of loss (Makati fact concealed;
Tuscany Condominium Corp. v. CA, G.R. No. 95546, 4. The other party has no means of ascertaining the
Nov. 6, 1992) fact concealed; and
4. When there is an agreement to grant the insured 5. The fact must be material
credit extension for the payment of the premium.
(Art. 1306, NCC), and loss occurs before the Matters relating to the health of the insured are material
expiration of the credit term (UCPB General and relevant to the approval of the issuance of the life
Insurance v. Masagana Telemart, G.R. No. 137172, insurance policy as these definitely affect the insurer’s
Apr. 4, 20012006, 2007 Bar). action to the application. It is well-settled that the
5. When estoppel bars the insurer to invoke non- insured need not die of the disease he had failed to
recovery on the policy. disclose to the insurer, as it is sufficient that his non-
6. When the public interest so requires, as disclosure misled the insurer in forming his estimates of
determined by the Insurance Commissioner the risks of the proposed insurance policy or in making
inquiries. (Sunlife Assurance Company of Canada v. CA,
Non-payment of premium G.R. No. 105135, June 22, 1995; 2001 BAR)
Non-payment of the first premium prevents the contract If there is concealment, the remedy of the insurer is
from becoming binding notwithstanding the acceptance rescission since concealment vitiates the contract of
of the application or the issuance of the policy, unless insurance. Good faith is not a defense in concealment.
waived. Concealment, whether intentional or unintentional
entitles the injured party to rescind the contract of
With respect to subsequent premiums, non-payment insurance.(IC, Sec. 27)
does not affect the validity of the contracts unless, by
express stipulation, it is provided that the policy shall in MISREPRESENTATION
that event be suspended or shall lapse. (De Leon, 2010)
Misrepresentation is an oral or written statement of a
Payment by post-dated check fact or condition affecting the risk made by the insured
to the insurance company, tending to induce the insurer
A postdated check bearing a date prior to the loss, to assume the risk.
assuming availability of the funds thereof, would be
sufficient even if it remains unencashed at the time of Requisites of misrepresentation:
the loss, constitutes valid payment of premium. The
subsequent effects of encashment would retroact to the 1. The insured stated a fact which is untrue;
date of the instrument and its acceptance by the 2. Such fact was stated with knowledge that it is
creditor. (2007 BAR) untrue and with intent to deceive or which he
states positively as true without knowing it to be
REFUND OF PREMIUM true and which has a tendency to mislead; and
3. Such fact in either case is material to the risk.
Insured entitled to recover the whole or entire
premiums paid: (2000 Bar) TEST OF MATERIALITY (2000 BAR)
1. When no part of the thing insured has been exposed It is determined not by the event, but solely by the
to any of the perils insured against (IC, Sec. 80); probable and reasonable influence of the facts upon the
2. When the contract is voidable because of the fraud party to whom the communication is due, in forming his
or misrepresentations of the insurer or his agent estimate of the disadvantages of the proposed contract,
(IC, Sec. 82); or in making his inquiries. (IC, Sec. 31)
3. When the insurance is voidable because of the
existence of facts of which the insured was ignorant INCONTESTABILITY CLAUSE
without his fault (IC, Sec. 82);
4. When the insurer never incurred any liability After the policy of life insurance made payable on the
under the policy because of the default of the death of the insured shall have been in force during the
insured other than actual fraud (IC, Sec. 82); or lifetime of the insured for a period of two (2) years from
5. When rescission is granted due to insurer’s breach the date of its issue or its last reinstatement, the insurer
of contract (IC, Sec. 74). cannot prove that the policy is void ab initio or is
rescindible by reason of the fraudulent concealment or
Insured is not entitled to return of premiums paid misrepresentation of the insured or his agent (IC, Sec.
48).
1. If the peril insured against has existed, and the
insurer has been liable for any period, the peril Defenses not barred by incontestability clause
being entire and indivisible (IC, Sec. 81);
2. In life insurance policies (IC, Sec. 80 [b]); 1. That the person taking the insurance lacked
3. If the policy is annulled, rescinded or if a claim is insurable interest as required by law;
denied by reason of fraud(IC, Sec. 82);or

2. That the cause of the death of the insured is an transport, for a fee, 100 sacks of rice from Manila
excepted risk; to Tarlac. However, AM failed to deliver the cargo
3. That the premiums have not been paid (IC, Secs. 77, because its truck was hijacked when the driver
233[b], 236[b]); stopped in Bulacan to visit his girlfriend.
4. That the conditions of the policy relating to military
or naval service have been violated (IC, Secs. 233[b], May Reynaldo hold AM liable as a common carrier?
234[b]);
5. That the fraud is of a particularly vicious type; A: YES. The fact that AM Trucking operates only two
6. That the beneficiary failed to furnish proof of death trucks for hire on a selective basis, caters only to a few
or to comply with any condition imposed by the customers, does not make regular or scheduled trips,
policy after the loss has happened(IC, Secs. 233 [b], and does not have a certificate of public convenience
234 [b]); or are of no moment. The law does not distinguish
7. That the action was not brought within the time between one whose principal business activity is the
specified (IC, Sec. 63). carrying of persons or goods or both and anyone
who does such carrying only as an ancillary activity;
PRESCRIPTION OF ACTIONS between a person or enterprise offering
transportation service on a regular or scheduled basis
If there is no stipulation or the stipulation is void, the and one on an occasional, episodic or unscheduled
insured may bring the action within 10 years in case the basis; and between a carrier offering its services to the
contract is written. general public and one who offers services or solicits
business only from a narrow segment of the general
Parties may validly agree that an action on the policy population. (De Guzman v. CA, G.R. No. L-47822
should be brought within a limited period of time, December 27, 1988)
provided such period is not less than 1 year from the
time the cause of action accrues. If the period agreed Q: Spouses Dante and Leona Cruz lodged a
upon is less than 1 year from the time the cause of action Complaint against Sun Holidays, Inc. with the RTC
accrues, such agreement is void. (IC, Sec. 63) for damages arising from the death of their son who
perished with his wife while on board the boat M/B
a. The stipulated prescriptive period shall begin to Coco Beach III that capsized en route to Batangas
run from the date of the insurer’s rejection of the from Puerto Galera, Oriental Mindoro where the
claim filed by the insured or beneficiary and not couple had stayed at Coco Beach Island Resort
from the time of loss. owned by Sun Holidays.
b. In case the claim was denied by the insurer but the
insured filed a petition for reconsideration, the Spouses contended that as a common carrier, it was
prescriptive period should be counted from the guilty of negligence in allowing M/B Coco Beach to
date the claim was denied at the first instance sail notwithstanding storm warning bulletins issued
and not from the denial of the reconsideration.(Sun by PAGASA. Sun Holidays denied being a common
Life Office, Ltd. vs. CA, supra) carrier, alleging that its boats are not available to
the general public as they only ferry resort guests
SUBROGATION and crew members.
If the plaintiff’s property has been insured, and he has Is Sun Holidays liable as a common carrier?
received indemnity from the insurance company for the
injury or loss arising out of wrong or breach of contract A: YES. Sun Holiday’s ferry services are so intertwined
complained of, the insurance company shall be with its main business as to be properly considered
subrogated to the rights of the insured against the ancillary thereto. The constancy of respondent’s ferry
wrongdoer or the person who has violated the services in its resort operations is underscored by its
contract.(NCC, Art. 2207) having its own Coco Beach boats. And the tour packages
it offers, which include the ferry services, may be availed
The payment by the insurer to the insured operates as of by anyone who can afford to pay the same. These
an equitable assignment to the insurer of all the services are thus available to the public. (Spouses Dante
remedies that the insured may have against the third Cruz v. Sun Holidays, G.R. No. 18312, June 29, 2010)
party whose negligence or wrongful act caused the loss.
The right of subrogation is not dependent upon, nor EXTRAORDINARY DILIGENCE
does it grow out of, any privity of contract. It accrues
simply upon payment by the insurance company of the
Carriage of Goods Transport of
insurance claim. (Malayan Insurance Co., Inc., vs. Alberto, Passengers
et al., G.R. No. 194320, February 1, 2012)
Commencement
Commences from the
moment the person:
TRANSPORTATION LAW Commences from the
1. Purchases the ticket
time the goods are
from the carrier;
unconditionally placed in
2. Presents himself at
the possession of and
the proper place and in a
COMMON CARRIERS received by the carrier
proper manner to be
for transportation. (CC,
transported; and
A common carrier is a person engaged in the business Art. 1736)
3. With the intent to
of carrying or transporting passengers or goods or both, board the conveyance.
by land, water, or air, for compensation, offering Duration
services to the public. (Art. 1732, NCC) 1. GR: Continues until the 1. All persons who
goods are delivered, remain on the premises
Q: AM Trucking, a small company, operates two actually or a reasonable time after
trucks for hire on a selective basis. It caters only to constructively, by the leaving the conveyance
a few customers, and its trucks do not make carrier to the consignee are to be deemed
regular or scheduled trips. It does not have a or to the person who has passengers, and what is
certificate of public convenience. a right to receive them, a reasonable time or a
and even when they are reasonable delay within
On one occasion, Reynaldo contracted AM to temporarily unloaded or this rule is to be
13
MERCANTILE LAW
stored in transit. (CC, Art. determined from all the the other vehicle at
1737) circumstances, and fault
includes a reasonable Culpa Contractual;
XPN: The shipper or time to see after his Direct and primary
owner had made use of baggage and prepare for
the right or stoppage in his departure. (La The liability of the
transit. (Ibid.) Mallorca v. CA, G.R. No. L- common carrier and his
21486, May 14, 1966) driver as well as the
Against the common
2. Continues even during operator of the other
carrier at fault
the time the goods are 2. Carrier-passenger vehicle and his driver is
stored in a warehouse of relationship continues joint and several. (J.
the carrier at the place of until the passenger has Dimaampao, citing Tiu v.
destination until the been landed at the port Arriesgado, G.R. No.
consignee has been of destination and has 138060, September 1,
advised of the arrival of left the vessel-owner’s 2004)
the goods and has been premises. The victim’s
given a reasonable presence in a vessel VIGILANCE OVER GOODS
opportunity thereafter to after 1 hour from his
remove them or disembarkation is not GR: The common carrier is presumed to have been at
otherwise dispose of enough in order to fault or to have acted negligently when the goods
them. (CC, Art. 1738) absolve the carrier from transported are lost, destroyed, or deteriorated. (Art.
liability in his death. 1735, NCC)
(Aboitiz Shipping Corp. v.
CA, GR No. 84458, XPNs: When the same is due to any of the following
November 6, 1989) causes only: (FA2 – C O)
1. Fortuitous events (flood, storm, earthquake,

CONTINUING-OFFER RULE lightning, or other natural disaster or calamity).
Provided, the following conditions are present:
It is the duty of common carriers of passengers, a. Natural disaster was the proximate and only
including common carriers by railroad train, streetcar, cause;
or motorbus, to stop their conveyances for a reasonable b. Carrier exercised due diligence to prevent or
length of time in order to afford passengers an minimize loss before, during, and after the
opportunity to board and enter, and they are liable for occurrence of the natural disaster; and
injuries suffered by boarding passengers resulting from c. The common carrier has not negligently
the sudden starting up or jerking of their conveyances incurred delay in transporting the goods. (Art.
while they are doing so. (Dangwa v. CA, G.R. No. 95582, 1739-1740, NCC)
October 7, 1991)
2. Act of the public enemy in war, whether
CAUSES OF ACTION FOR FAILURE TO OBSERVE international or civil, provided:
DILIGENCE REQUIRED a. Act was the proximate and only cause; and
b. Carrier exercised due diligence to prevent or
PERSON WHO HAS BASIS OF CAUSE OF minimize loss before, during, and after the act.
CAUSE OF ACTION ACTION AGAINST THE (Art. 1739-1740, NCC)
COMMON CARRIER
Third person who Tort (extra-contractual 3. Act or omission of the shipper or owner of the
suffered damages negligence) goods, provided:
Breach of the contract of a. If proximate and only cause – exempting
Shipper of the goods
carriage (Culpa b. If contributory negligence – mitigating
damaged
Contractual)
Heir/s of the 4. The Character of the goods or defects in the packing
deceased or in the containers; provided, carrier exercised
Breach of the contract of
passengers or the due diligence to forestall or prevent loss. (Art 1742,
carriage (Culpa
passenger himself NCC)
Contractual)
for the injuries
sustained by him If the fact of improper packing is known to the
carrier or its servants, or apparent upon ordinary
CAUSE OF ACTION OF observation, but it accepts the goods
THE INJURED BASIS OF CAUSE OF notwithstanding such condition, it is not relieved
PASSENGER OR HIS ACTION from responsibility for loss or injury resulting
HEIRS, IF THE therefrom. (Southern Lines Inc., v. CA, GR No. L-
PASSENGER DIES: 16629, January 31, 1962)
Culpa criminal
5. Order or act of competent authority; provided, the
If the driver is convicted authority is with power to issue the order. (Art.
and it turns out that he is 1743, NCC)
insolvent, the heirs/
Against the negligent passengers may run after If the officer acts without legal process, the
driver the employer of the common carrier will be held liable. (Ganzon v. CA,
driver, pursuant to the GR No. L-48757, May 30, 1988)
employer’s subsidiary
liability under Article 103, In all cases other than those enumerated above, there is
in relation to Arts. 100 presumption of negligence even if there is an agreement
and 102, RPC. limiting the liability of the common carrier in the
Against the carrier Tort vigilance over the goods. (NCC, Art. 1752)
and driver operating
Shipper’s Load and Count

Under a "Shipper's Load and Count" arrangement, the a good father of a family in the selection and supervision
shipper is solely responsible for the loading of the of their employees. (NCC, Art. 1759)
container, while the carrier is oblivious to the contents
of the shipment. (Marina Port Services, Inc. v. American Acts of co-passengers or strangers
Home Assurance Corporation, G.R. No. 201822, August 12,
2015, Del Castillo, J.) A common carrier is responsible for injuries suffered by
a passenger on account of the WILLFUL ACTS OR
DELAY IN THE DELIVERY OF GOODS NEGLIGENCE of other passengers or of strangers, if the
carrier’s employees through the exercise of the
The carrier shall be liable for damages immediately and diligence of a good father of a family would have
proximately resulting from such neglect of duty. (Ibid; prevented or stopped the act or omission. (NCC, Art.
Art. 1170, NCC) 1763)
In the absence of a special contract, a carrier is not an Acts of criminals

insurer against delay in the transportation of goods. The
effects of delay are the following: GR: A common carrier is NOT absolved from liability
committed by thieves or robbers.
a. Excusable delay in carriage merely suspends and
generally does not terminate the contract of XPN: Where such thieves or robbers acted with grave or
carriage. irresistible threat, violence, or force.
b. The carrier shall be made liable when vessel or
vehicle is unreasonably delayed. NOTE: Hijacking is considered as force majeure where
c. Carrier remains duty bound to exercise three of the five hold-uppers were armed with firearms
extraordinary diligence. and the robbers not only took away the truck and its
d. Natural disaster shall not free the carrier from cargo but also kidnapped the driver and his helper. (De
responsibility. (Dimaampao & Dumlao-Escalante, Guzman v. CA, G.R. No. L-47822, December 22, 1988)
2014)
EXTENT OF LIABILITY FOR DAMAGES
CONTRIBUTORY NEGLIGENCE
Kinds of damages that may be recovered in case of
IN CARRIAGE OF GOODS: If the shipper or owner death of a passenger
merely contributed to the loss, destruction or
deterioration of the goods, the proximate cause thereof 1. An indemnity for the Death of the victim;
being the negligence of the common carrier, the latter 2. An indemnity for loss of Earning capacity of the
shall be liable for damages, which however, shall be deceased;
equitably reduced. (NCC, Art. 1741) 3. Moral damages;
4. Exemplary damages;
IN PASSENGERS: Contributory negligence is the failure 5. Attorney's fees and expenses of litigation;
of a person who has been exposed to injury by the fault 6. Interest in proper cases (Briñas v. People, G.R. No. L-
or negligence of another, to use such degree of care for 30309, November 25, 1983); and
his safety and protection an ordinarily prudent man 7. Hospital and funeral expenses
would use under the circumstances. (Martin, 1989,
citing Rakes v. Atlantic Gulf Co., G.R. No. 1719, January 23, In case of death of a passenger, the common carrier is
1907) liable to pay P50, 000 as indemnity for the life of a
passenger. (Victory Liner v. Gammad, G.R. No. 159636,
NOTE: Contributory negligence on the part of the November 25, 2004)
passenger does NOT justify the common carrier’s
exemption from liability. (Martin, 1989) It will only Carrier is NOT liable for exemplary damages where
mitigate the liability of the common carrier. (J. there is no proof that it acted in a wanton, fraudulent,
Dimaampao) reckless, oppressive or malevolent manner.
STIPULATIONS LIMITING LIABILITY MORAL DAMAGES
Even if there is an agreement limiting the liability of the GR: Moral damages are NOT recoverable for breach of
common carrier in the vigilance over the goods, the contract of carriage in view of Articles 2219-20 of the
common carrier is still disputably presumed to have Civil Code.
been negligent in case of its loss, destruction or
deterioration. (NCC, Art. 1752) XPNs:
A contract fixing a sum that may be recovered for the a. Where the mishap results in the death of the
loss, destruction, and deterioration is binding provided passenger; and
it is: b. Where it is proved that the common carrier was
guilty of fraud or bad faith, even if death does not
a. Just and reasonable under the circumstances; and result.
b. Has been fairly and freely agreed upon. (Darnes v. Quiñones, G.R. No. 206468, August 2, 2017,
Del Castillo, J.)
LIABILITIES OF THE COMMON CARRIER
BILL OF LADING
Acts of its employees
It is a written acknowledgment of receipt of goods and
Common carriers are liable for the death of or injuries agreement to transport them to a specific place and to a
to passengers through the NEGLIGENCE OR WILLFUL named person or to his order. (Unsworth Transport
ACTS of the former’s employees, although such International [Phils] v. CA, G.R. No. 166520, July 26, 2010;
employees may have acted beyond the scope of their 1992, 1998 Bar)
authority or in violation of the orders of the common
carriers. The liability of the common carriers does NOT Parties to a bill of lading
cease upon proof that they exercised all the diligence of
1. Shipper; and
15
MERCANTILE LAW
2. Carrier Doctrine of inscrutable fault
NOTE: A consignee, although not a signatory to the In collision of vessel, where fault is established but it
contract of carriage between the shipper and the cannot be determined which of the two vessels were at
carrier, becomes a party to the contract by reason of fault, both shall be deemed to have been at fault.
either:
Doctrine of limited liability
a) the relationship of agency between the consignee
and the shipper/ consignor; It is also called the “no vessel, no liability doctrine”, it
b) the unequivocal acceptance of the bill of lading provides that liability of ship owner is limited to ship
delivered to the consignee, with full knowledge of owner’s interest over the vessel. In case of loss, the ship
its contents; or owner’s liability is also extinguished. Limited liability
c) availment of the stipulation pour autrui, i.e., when likewise extends to ship’s appurtenances, equipment,
the consignee, a third person, demands before the freightage, and insurance proceeds. This can be availed
carrier the fulfillment of the stipulation made by only by the shipowner and the shipping agent.
the consignor/shipper in the consignee’s favor,
specifically the delivery of the goods/cargoes Instances where doctrine of limited liability shall
shipped. NOT apply
(MOF Company, Inc., v. Shin Yang Brokerage Corporation, G.R. 1. Repairs and provisioning of the vessel before the
No. 172822, December 18, 2009, Del Castillo, J.) loss of the vessel; (CC, Art. 586)
2. Insurance proceeds. If the vessel is insured, the
THREE-FOLD CHARACTER OF A BILL OF LADING proceeds will go to the persons entitled to claim
from the shipowner; (Vasquez vs. CA, G.R. No. L-
1. As a receipt, it recites the date and place of 42926, Sept. 13, 1985)
shipment, describes the goods as to quantity, 3. Claims of the crew under the Workmen’s
weight, dimensions, identification marks and Compensation Act;
condition, quality, and value. 4. When the shipowner is guilty of fault or negligence;
2. As a contract, it names the contracting parties, 5. When the vessel is not abandoned; and
which include the consignee, fixes the route, 6. When vessel is not seaworthy.
destination, and freight rate or charges, and
stipulates the rights and obligations assumed by ACCIDENTS AND DAMAGES IN MARITIME
the parties. (Phoenix Assurance Co., Ltd. v. United COMMERCE
States Lines, G.R. No. L-24033, Feb. 22, 1968)
3. As a document of title, it regulates the relations Accidents in maritime commerce (CASA)
between a carrier and a holder of the same.
1. Collision
CHARTER PARTY 2. Averages
3. Shipwreck; and
A charter party is a contract by which an entire ship, or 4. Arrival under stress
some principal part thereof, is let by the owner to
another person for a specified time or use in General average vs. Particular average
consideration of the payment of freight. (Caltex v.
Sulpicio Lines, G.R. No. 131166, September 30, 1999) GENERAL AVERAGE PARTICULAR
AVERAGE
CLASSES OF CHARTER PARTY Damages or expenses Damages or expenses
deliberately caused in caused to the vessel or
1. Bareboat or demise - The ship owner gives order to save the vessel, cargo that did not inure
possession of the entire vessel to the charterer. In turn, its cargo or both from real to the common benefit,
the charterer supplies, equips, and mans the vessel. The and known risk. and borne by respective
charterer is the owner pro hac vice. owners.
Both the ship and cargo No common danger to
Negligence of the charterer gives rise to its liability to are subject to the same both the vessel and the
others. The charterer assumes the rights and liabilities danger cargo
of the owner to third parties who deal with the vessel. There is a deliberate Expenses and damages
sacrifice of part of the are not deliberately
2. Contract of affreightment- owner of the vessel vessel, cargo, or both made
leases a part or all of its space to haul goods for others Damage or expenses Did not inure to
Charterer is not regarded as owner. Ship owner retains incurred to the vessel, its common benefit and
ownership over the vessel. Ship owner remains liable cargo, or both, redounded profit of all persons
and carrier must answer for any breach of duty. to the benefit of the interested in the vessel
respective owners. and her cargo.
It can either be:
All those who have Only the owner of the
benefited shall satisfy the goods benefiting from
a. Time charter – Vessel is chartered for a particular average. the damage shall bear
time or duration. While the ship owner still retains
the expense of average.
possession and control of the vessel, the charterer
has the right to use all vessel’s facilities and
Requisites of general average(CD-PS)
designate vessel’s destination.
b. Voyage charter – Vessel is chartered for a carriage
1. Common danger present;
of goods from one or more ports of loading to one
2. Deliberate sacrifice of part of the vessel or cargo;
or more ports of unloading. An owner who retains
3. Successful saving of vessel and/or cargo; and
possession of the ship remains liable as carrier and
4. Proper procedure and legal steps.
must answer for loss or non-delivery of the goods
received for transportation. (Cebu Salvage Corp. v.
a. Assembly to be called by captain of all the
Philippine Home Assurance Corp., G.R. No. 150403,
cargo owners and other officers of the vessel;
January 25, 2007)
b. Deliberation;

c. Resolution of the captain; The suit for loss or damage should be brought within
d. Entry of resolution in the logbook; one year from:
e. Delivery of the minutes of the meeting to the
maritime judicial authority of the first port of 1. Delivery of the goods, in case of damage; or
arrival within 24 hours from arrival; and 2. The date when the goods should have been
f. Ratification by captain under oath. delivered, in case of loss.
(Dimaampao & Dumlao-Escalante, 2014)
NOTE: The one-year period is computed from the
Persons liable for the amount of loss delivery of goods to the operator and not to the
consignee. The parties may agree to extend the one-year
In general average: All persons having an interest in the period to file a case under the COGSA. (Universal
vessel and cargo therein at the time of the occurrence of Shipping Lines, Inc. v. Intermediate Appellate Court, G.R.
the average shall contribute. (Art. 812, CC) No. 74125, July 31, 1990)
In particular average: The owner of the things which The prescriptive period for an action against a broker is
gave rise to the expenses or suffered the damage shall ten (10) years and not one year under the COGSA, since
bear the simple or particular averages. (Art. 810, CC) the broker is not a carrier, charterer or holder of the bill
of lading. (Reyma Brokerage Inc. v. Philippine Home
Rules on collision of vessels Assurance Corporation, G.R. No. 93464, October 7, 1991)
a. Collision refers to the contact of two moving Instances where there is NO liability under
vessels. If one vessel is moving while the other is COGSA(FDUD)
stationary, this is known as allision.
b. The vessel at fault shall indemnify the damages 1. If the nature or value of goods knowingly and
sustained or losses incurred. (Art. 826, Code of fraudulently misstated by shipper;
Commerce) 2. If damage resulted from Dangerous nature of
c. If both vessels are at fault, each shall be solidarily shipment loaded without consent of carrier;
liable for losses or damages to the cargoes. (Arts. 3. If Unseaworthiness not due to negligence; and
827 – 828, Code of Commerce) 4. If Deviation was to save life or property at sea.
In this situation, the common carrier operating the Procedure and prescriptive period for filing
vessel is precluded from interposing the defense of maritime claims in coastwise carriage and
due diligence in the selection and supervision of its international carriage
employees in an action against it by a shipper of the
other colliding vessel. Coastwise International
Q: Two vessels figured in a collision resulting in (within the (foreign port to

considerable loss of cargo. The damaged vessels Philippines) Philippines)
were safely conducted to a port. Kim, a passenger
and Ruby, a shipper who suffered damage to his NOTICE OF DAMAGE (FILING OF CLAIM)
cargo, did not file maritime protest. Can Kim and
Ruby successfully maintain an action to recover
losses and damages arising from the collision? Condition precedent NOT a condition precedent
(2007 BAR) before filing case in before filing
court
A: Ruby, the shipper can successfully maintain an action
to recover losses and damages arising from the collision
notwithstanding his failure to file a maritime protest When the damage is
since the filing thereof is required only on the part of When damage to apparent, the claim should
Kim, who, being a passenger of the vessel at the time of goods is apparent, the be filed immediately upon
the collision, was expected to know the circumstances shipper must discharge of the goods
of the collision. Kim's failure to file a maritime protest
immediately file his
will therefore prevent him from successfully
maintaining an action to recover his losses and claim with the carrier
damages. (CC, Art 836)
When damage is not
CARRIAGE OF GOODS BY SEA ACT (COGSA) apparent clam should be
If not apparent, the filed within 3 days from
COGSA applies in terms of loss or damage of goods shipper must file his delivery
transported: claim within 24 hours
from delivery
1. To and from Philippine ports in foreign trade; and
2. To domestic trade when there is a paramount FILING OF CASE IN COURT (FILING OF ACTION)
clause in the contract.
Within 6 years if no bill Shipper has 1 year form
COGSA applies only in case of non-delivery or damage,
and not to misdelivery or conversion of goods. (Ang v. of lading has been date of delivery (delivered
American Steamship Agencies, Inc., G.R. No. L-22491, issued; or but damaged goods), or the
January 27, 1967) date when the vessel left
port, or from the date of
Amount of the carrier’s liability under the COGSA delivery to the arrastre
Within 10 years, if a (non-delivery or loss)
1. The liability limit is set at $500 per package or bill of lading has been within to file his case in
customary freight unless the nature and value of issued
such goods is declared by the shipper. court.
2. Shipper and carrier may agree on another
maximum amount, but not more than amount of
damage actually sustained.
17
MERCANTILE LAW
NOTE: The one-year realm of Warsaw Convention. A cause of action based

prescriptive period does on tort did not bring the case outside the sphere of the
not apply to misdelivery or Warsaw Convention. (Lhuiller v. British Airways, GR No.
171092, March 15, 2010)
conversion.
Doctrine of combined or connecting services THE CORPORATION CODE

(BP BLG. 68)
The carrier which delivered the goods to the consignee
shall assume the obligations, rights and actions of those
who preceded him in the conveyance of the goods. Attributes of a Corporation [ALS– PAPI]
The shipper or consignee should proceed against the
one who executed the contract or against the others 1. It is an Artificial being
who received the goods without reservation. But even if 2. It is created by operation of Law
there is reservation, they are not exempted from 3. It enjoys the right of Succession
liabilities that they may have incurred by reason of their 4. It has the Powers, Attributes and Properties
own acts. (CC, Art. 373) expressly authorized by law or Incident to its
existence.
Remedy: The carrier may then file a third-party (Sec. 2, CC)
complaint against the one who is really responsible. The
carrier is an indispensable party. But the shipper or Distinguish the following classes of corporation.
consignee may sue all of them as alternative defendants.
As to existence of stocks
WARSAW CONVENTION
STOCK CORPORATION NON-STOCK
The WC applies to all international carriage of persons, CORPORATION
luggage or goods performed by aircraft for reward. It
applies equally to gratuitous carriage by aircraft It has capital stock All others are non-stock
performed by an air transport undertaking. (WC, Art. divided into shares and corporation
1[1]) is authorized to One where no part of its
distribute to the holders income is distributable
Limitations to the liability of air carriers
of such shares dividends as dividends to its
1. Carriage of persons – 250,000 francs for each or allotment of the members, trustees, or
passenger. Nevertheless, by special contract, the surplus profits on basis officers. Any profit which
carrier and the passenger may agree to a higher of the share held. (CC, it may obtain as an
limit of liability. Sec. 3) incident to operations
shall, whenever
NOTE: By special contract, the carrier and the necessary or proper, be
passenger may agree to a higher limit of liability.
used for furtherance of
(Alitalia v. IAC, G.R. No. 71929, December 4, 1990)
the purpose or purposes
2. Carriage of registered baggage and of cargo –250 for which the
francs per kilogram unless the passenger or corporation was
consignor has made, at the time when the package organized. (CC, Sec. 87)
was handed over to the carrier, a special
declaration of interest in delivery at destination
and has paid a supplementary sum if the case so As to how it is created and its function
requires.
3. Objects which the passenger takes charge himself – PRIVATE PUBLIC CORPORATION
5,000 francs per passenger. CORPORATION
Carrier is NOT entitled to the foregoing limit if the
damage is caused by willful misconduct or default on its Formed for some private Formed for the
part. (WC, Art. 25) purpose, benefit or end government of a portion
of the State for the
Where the loss of the baggage of a passenger was due to general good or welfare
the fault or recklessness of an airline company, the
limitation on the liability of airline companies under the If NOT created for If the corporation is
Warsaw Convention is not applicable. (Alitalia v. IAC, political or public created for political or
G.R. No. 71929, December 4, 1990)
purpose although whole public purpose
FILING OF CLAIM or substantially the connected with the
whole interest in the administration of
GR: Claim for damages must be brought within 2 years corporation belongs to government
reckoned from the date of arrival at the destination, or the State
from the date on which the aircraft ought to have
arrived, or from the date on which the carriage stopped,
otherwise, right to damages shall be extinguished. As to legal status
XPN: Where delaying tactics were employed by airline DE JURE DE FACTO CORPORATIO
itself to deny the passenger time to file his complaint. CORPORATION N BY
CORPORATIO
(United Airlines v. Uy, G.R. No. 127768, November 19, ESTOPPEL
N
1999)
NOTE: The allegation of willful misconduct resulting in Organized in A Corporation 1. All persons
a tort is insufficient to exclude the case from the accordance where there who assume to

with the exists a flaw in its act as a church. It may be formed by the chief archbishop,
requirements incorporation. corporation bishop, priest, minister, rabbi or other presiding elder of
of the law. knowing it to such religious denomination, sect or church.
be without
authority to do NOTEL A corporation sole does not have any nationality
so shall be but for purposes of applying nationalization laws,
Requisites: liable as nationality is determined not by the nationality of its
NOTE: If there general presiding elder but by the nationality of its members,
is substantial 1. Organized partners for all constituting the sect in the Philippines.
compliance, a under a debts,
valid Law. liabilities and NATIONALITY OF CORPORATIONS
de jure
damages
corporation 2. Attempt in
incurred or How is the nationality of a corporation determined?
results. good faith to arising as a
(Dimaampao form a result. In Philippine jurisdiction, the nationality of a
and Escalante, corporation 2. One who corporation is primarily governed by the Place of
2017) according to assumes an Incorporation Test. This means that a corporation is
the obligation to considered a national of the country where it is
requiremen an ostensible incorporated regardless of the nationality of the
corporation as controlling stockholders. (Sec. 123, CC)
ts of the law
such, cannot
(Colorable resist In certain instances, however, the nationality of the
Compliance) performance corporation is determined by the Control Test.
thereof on the Nationality of the corporation is determined by the
ground that nationality of the controlling stockholders. This test is
there was in applied during: war; for wholly or partly nationalized
NOTE: fact no activities.
Issuance of corporation
Certificate (CC, Sec. 21) Grandfather Rule
of
Incorporati Where there is This rule is used to ascertain the Filipino equity in a
no third corporation engaged in nationalized and/or partly
on by SEC is
person nationalized areas of activities as provided for under the
a minimum involved and Constitution and other nationalization laws, where
requiremen the conflict corporate shareholders are present in the situation, by
t for the arises only attributing the nationality of the second or even
formation of among those subsequent tier of ownership to determine the
the assuming the nationality of the corporate shareholder.
corporation form of a
corporation In other words, by ascertaining the nationality of the
in good
who know that controlling stockholders of the investing-corporation.
faith. the
(Sundiang corporation If the percentage of Filipino ownership in the
Sr. & Aquino, has not been corporation or partnership is less than 60%, only the
2009) registered, number of shares corresponding to such percentage
there is NO shall be counted as of Philippine nationality. Under the
corporation by Strict Rule or Grandfather Rule Proper, the combined
estoppel. totals in the Investing Corporation and the Investee
(Lozano v. Corporation must be traced (i.e., “grandfathered”) to
3. Use of Judge Delos determine the total percentage of Filipino ownership.
corporate Santos, G. R. (SEC Opinion, 27 October 2011); (Dimaampao and
Powers - No. 125221, Escalante, 2017)
The June 19, 1997)
corporation What does “capital” mean in this constitutional
must have provision,
performed
the acts “Section 11, Article XII of the Constitution: No
which are franchise, certificate, or any other form of
peculiar to a authorization for the operation of a public utility
corporation shall be granted except to citizens of the Philippines
like or to corporations or associations organized under
entering the laws of the Philippines at least sixty per centum
into a of whose capital is owned by such citizens.”?
subscriptio
n For purposes of determining compliance [with the
agreement, constitutional or statutory ownership], the required
adopting percentage of Filipino ownership shall be applied to
by-laws, BOTH (a) the total number of outstanding shares of
and electing stock entitled to vote in the election of directors; AND
directors (b) the total number of outstanding shares of stock,
(Actual whether or not entitled to vote. (Roy III v. Herbosa, G.R.
User) No. 207246, April 18, 2017, EN BANC)
Corporation Sole Illustration:
One established for the purpose of administering and 1)

managing, as trustee, the affairs, property and
temporalities of any religious denomination, sect or ABC Corporation
19
MERCANTILE LAW
(public utility)  Non-voting Preferred Shares – 100 (20%

Filipino; 80% Foreign)
XYZ Corp. Foreigner ABC Corporation is complaint. For purposes of

(60%) (40%) determining compliance, the required percentage of
Filipino ownership shall be applied to BOTH (a) the total
number of outstanding shares of stock entitled to vote in
Filipinos Foreigners the election of directors; AND (b) the total number of
(60%) (40%) outstanding shares of stock, whether or not entitled to
vote. (Roy III v. Herbosa, G.R. No. 207246, April 18, 2017,
Under the Control Test, ABC Corporation is compliant EN BANC)
with the foreign equity limitation. XYZ Corp. shall be
considered as wholly Filipino owned. Hence, both ABC and NOTE: In case of mixed shares issued by the corporation,
XYZ Corp. are considered as Philippine nationals. The it need not be 60% or more ALL THE WAY or in EVERY
application of the grandfather rule is not necessary CLASS OF SHARES issued, as long as the two
anymore. requirements mentioned above is complied with.
2) In the illustration above 80% of the voting shares and

60% of the outstanding capital stock is Filipino owned,
ABC Corporation hence compliant with the constitutional requirement.
(public utility)
DOCTRINE OF SEPARATE JURIDICAL PERSONALITY
XYZ Corp. Foreigner The doctrine of corporate juridical personality states

(60%) (40%) that a corporation is a juridical entity with legal
personality separate and distinct from those acting for
and in its behalf and, in general, from the people
Filipinos Foreigners comprising it. (Francisco v. Mallen Jr. G.R. No. 173169,
(50%) (50%) September 22, 2010)
ABC Corp. is not compliant. Since the Filipino equity in Significance of the doctrine of separate personality
the investing-corporation is less than 60%, it cannot be
considered as Philippine national. Hence, you apply the 1. Liability for acts or contracts – As a general rule, the
grandfather rule, where only the shares that obligation of the corporation is not the liability of
correspond to the percentage owned by the Filipinos the stockholders, officers or directors. (1992,
must be registered as such, and the rest are foreign 1996, 2010 Bar)
owned.
A corporation may not, generally, be made to
Only 50% of the 60%equity of the investing corporation answer for acts or liabilities of its stockholders or
shall be considered as owned by Filipino nationals. those of the legal entities to which it may be
connected, and vice versa. (Cease vs. CA, G.R. No. L-
3) Narra Nickel Case 33172, October 18, 1979)
ABC Corporation 2. Right to bring actions – may bring civil and criminal
(public utility) actions in its own name in the same manner as
natural persons. (Art. 46, Civil Code)
XYZ Corp. Foreigner NOTE: Rights belonging to the corporation cannot

(60%) (40%) be invoked by the stockholders (or directors and
officers) even if the latter owns substantial
majority of the shares of the shares in that
Filipinos Foreigners corporation and rights of the stockholders,
(60%) (40%) directors and officers cannot be invoked by the
corporation. (Stonehill vs. Diokno, G.R. 19550, June
In the case of Narra Nickel Mining v. Redmont (2014), the 19, 1967)
Filipino subscriptions were not paid by them but
allegedly financed by foreign nationals. Hence the 3. Right to acquire and possess property – property
Supreme Court applied in this case the grandfather rule, conveyed to or acquired by the corporation is in
since there is doubt as to the ownership of the shares law the property of the corporation itself as a
owned by Filipinos. distinct legal entity and not that of the stockholders
or members. (Art. 44[3], Civil Code)
Although on its face, XYZ Corp. may be considered as
Philippine national, since there is doubt as to the Filipino NOTE: The interest of the stockholders over the
equity, you apply the grandfather rule, where only the properties are merely inchoate. (Saw vs. CA, G.R. No.
shares that correspond to the percentage owned by the 90580, April 8, 1991; 1996, 2000 Bar)
Filipinos must be registered as such, and the rest are
foreign owned. 4. Acquisition of jurisdiction – service of summons
may be made only on the president, general
In the example above, only 60% of the 60% (36%) shares manager, corporate secretary, treasurer or in-
of the investing corporation shall be of Filipino equity. house counsel. (Rules of Court, Rule 14, Sec. 11)
Hence ABC Corp. is not compliant.
5. Changes in individual membership – corporation
4) ABC Corp. – 300 outstanding capital stock remains unchanged and unaffected in its identity
by changes in its individual membership or
 Common shares – 100 (100% Filipino owned) ownership of its stocks.
 Voting Preferred Shares – 100 (60% Filipino;
40% Foreign LIABILITY OF CORPORATION

As to tort. A corporation may be held accountable for fiction that these corporations are distinct entities
tort when the act was committed by the officer or agent and shall treat them as one. (Vicmar Development
under the express direction or authority from the Corp. v. Camilo Elarcosa, et al., G.R. No. 202215,
stockholders or members acting as a body or generally December 09, 2015, Del Castillo, J.)
from the directors as the governing body.
4. The Objective test where the end result in piercing
As to crime. If the crime is committed by a corporation the veil of corporate fiction is to make the
or other juridical entity, the directors, officers, stockholders liable for debts and obligations of the
employees or other officers thereof responsible for the Corporation not to make the Corporation liable for
offense shall be charged and penalized for the crime, the debts and obligations of the stockholders.
precisely because of the nature of the crime and the (Umali v CA, G.R. No. 89561, September 13, 1990)
penalty therefor. A corporation cannot be arrested and
imprisoned; hence, cannot be penalized for a crime ALTER EGO THEORY/INSTRUMENTALITY THEORY
punishable by imprisonment. However, a corporation
may be charged and prosecuted for a crime if the This theory espouses that the corporate entity is a mere
imposable penalty is fine; (forfeiture; revocation). farce as it is the alter ego, business conduit or
Even if the statute prescribes both fine and instrumentality of a person or another entity. This
imprisonment as penalty, a corporation may be contemplates of:
prosecuted and, if found guilty, may be fined. (Ching v.
Secretary of Justice, G.R. No. 164317, February 6, 2006) 1. Control, not mere majority or complete stock
control, but complete domination, not only of
RECOVERY OF MORAL DAMAGES finances but of policy and business practice in
respect to the transaction attacked so that the
GR: A juridical person is, as a general rule, not entitled corporate entity as to this transaction had at the
to moral damages because, unlike a natural person, it time no separate mind, will or existence of its own
cannot experience physical suffering or such sentiments (Instrumentality or Control test);
as wounded feelings, serious anxiety, mental anguish or 2. Such control must have been used by the defendant
moral shock to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty,
XPNs: or dishonest and unjust act in contravention of
plaintiff’s legal right; (Fraud test) and
1. Article 2219 paragraph 7 of the Civil Code 3. The aforesaid control and breach of duty must have
expressly authorizes the recovery of moral proximately caused the injury or unjust loss
damages in cases of libel, slander or any other form complained of (Harm test).(PNB v. Hydro
of defamation. This provision does not qualify Resources Contractors Corp., G.R. Nos. 167530,
whether the plaintiff is a natural or juridical person. 167561,and 167603 693 SCRA 294 March 13, 2013)
Therefore, a juridical person such as the
corporation can validly complain for libel or any CORPORATE NAME
other form of defamation and claim for moral
damages. (Filipinas Broadcasting Network, Inc. v. The SEC shall not approve the proposed corporate name
AMEC-BCCM, G.R. No. 141994, January 17, 2005) if:
2. When the corporation has a reputation that is 1. There is already a prior right over the use of such
debased, resulting in its humiliation in the business corporate name; and
realm. (Manila Electric Company v. T.E.A.M. 2. The proposed name is either:
Electronics Corporation, et. al., G.R. No. 131723,
December 13, 2007) a) identical, or
b) deceptively or confusingly similar to that of
DOCTRINE OF PIERCING THE CORPORATE VEIL any existing corporation or to any other
name already protected by law; or
The Doctrine of Piercing the Corporate Veil is the c) patently deceptive, confusing or contrary to
doctrine that allows the State to disregard for certain existing law. (Industrial Refractories
justifiable reasons the notion that a corporation has a Corporation of the Philippines v. CA, et al., G.R.
personality separate and distinct from the persons No. 122174, October 3, 2002)
composing it.
PRINCIPLE OF PRIORITY OF ADOPTION
Tests in determining the applicability of the
Doctrine of Piercing the Corporate Veil (ECAO) Priority of adoption determines the right to the
exclusive use of a corporate name with freedom from
1. When the corporation is used to defeat public infringement. Further, to determine whether a given
convenience as when the corporate fiction is used corporate name is “identical” or “confusingly or
as a vehicle for the evasion of an existing obligation; deceptively similar” with another entity’s corporate
(Equity Cases) name, the corporate names must be evaluated in their
2. In fraud cases or when the corporate entity is used entirety. (Lyceum of the Philippines v. CA, G.R. No.
to justify a wrong, protect fraud, or defend a crime; 101897, March 5, 1993)
(Control Test)
3. In Alter ego cases, where a corporation is merely a DOCTRINE OF SECONDARY MEANING
farce since it is a mere alter ego or business conduit
of a person, or where the corporation is so It is the doctrine which states that a word or phrase
organized and controlled and its affairs are so originally incapable of exclusive appropriation with
conducted as to make it merely an instrumentality, reference to an article on the market, because
agency, conduit or adjunct of another corporation. geographically or otherwise descriptive, might
(Timoteo H. Sarona v. National Labor Relations nevertheless have been used so long and so exclusively
Commission, Royale Security Agency, et al., G.R. No. by one producer with reference to his article that, in that
185280, January 18, 2012) trade and to that branch of the purchasing public, the
word or phrase has come to mean that the article was
Where it appears that business enterprises are his product. (Philippine Nut Industry, Inc. v. Standard
owned, conducted and controlled by the same Brands. Inc. G.R. No.L-23035, July 31, 1975)
parties, law and equity will disregard the legal
21
MERCANTILE LAW
BY-LAWS 3. Incur, create or increase bonded indebtedness

(Sec. 38, CC); and
Requisites for valid by-laws (CoMorO-RAG) 4. Deny pre-emptive rights (Sec. 39, CC);
5. Sell, lease, exchange, mortgage, pledge or
1. Must be consistent with the COrporation Code, otherwise dispose of all or substantially all of its
other pertinent laws and regulations; property, assets, and goodwill (Sec. 40);
2. Must not be contrary to MORals and public policy; 6. Purchase or acquire own shares (Sec. 41, CC);
3. Must not impair Obligations and contracts or 7. Invest in another corporation or business or for
property rights of stockholders; any purpose other than the primary purpose (Sec.
4. Must be Reasonable; 42, CC);
5. Must be consistent with the charter or AOI; 8. Declare dividends (Sec. 43,CC);
6. Must be of General application and not directed 9. Enter into management contract (Sec. 44, CC);
against a particular individual.
ULTRA VIRES ACTS
NOTE: Thirds persons are not bound by the provisions
of the by-laws of a corporation, unless they have An ultra vires act refers to an act outside or beyond
knowledge or notice of the by-laws at the time the express, implied and incidental corporate powers. The
contract was executed. (China Banking Corp. v. CA, G.R. concept also includes those acts that may ostensibly be
No. 117604, March 26, 1997) within such powers but are, by general or special laws,
either proscribed or declared illegal. (Rural Bank of
Effect of non-filing of the by-laws within the Milaor v. Ocefemia, G.R. No. 137686, February 8, 2000)
required period
GR: Acts which are clearly beyond the scope of the
Failure to submit the by-laws within 30 days from corporation’s authority are null and void and cannot be
incorporation does not automatically dissolve the given any effect. (Gancayco v. City Government of Quezon
corporation. It is merely a ground for suspension or City, 658 SCRA 853, October 11, 2011)
revocation of its charter after proper notice and
hearing, under Section 6(I) of PD 902-A. The XPN: Stockholders ratify the ultra vires acts. For valid
corporation is, at the very least, a de facto corporation ratification, all the stockholders must give their consent
whose existence may not be collaterally attacked. to such ratification; the rights of the State are not
(Sawadjaan v. CA, G.R. No. 142284, June 8, 2005) involved; the creditors are not prejudiced; and the act or
contracts must be wholly executed. (Dimaampao and
CORPORATE POWERS Escalante, 2017)
Express or general powers of a corporation (Theory DOCTRINE OF APPARENT AUTHORITY(2015 BAR)

of General Capacity)
If a corporation knowingly permits one of its officers, or
A corporation has no power except those expressly any other agent, to act within the scope of an apparent
conferred upon it by the Corporation Code and those authority, it holds him out to the public possessing the
that are implied or incidental to its existence. Every power to do those acts; and thus, the corporation will, as
corporation has the following general powers: against anyone who has in good faith dealt with it
through such agent, be estopped from denying the
(SuSuCo-ABS-PEDRO) agent’s authority.
1. To SUe and be sued; Apparent authority is derived not merely from practice.
2. Of Succession; Its existence may be ascertained through:
3. To adopt and use of Corporate seal;
4. To amend its Articles of Incorporation; 1. The general manner in which the corporation
5. To adopt its By-laws; holds out an officer or agent as having the power to
6. For Stock corporations: issue and sell stocks to act, or in other words, the apparent authority to act
subscribers and treasury stocks; for non-stock in general, with which it clothes him; or
corporations: admit members; 2. The acquiescence in his acts of a particular nature,
7. To Purchase, receive, take or grant, hold, convey, with actual or constructive notice thereof, within or
sell, lease, pledge, mortgage and deal with real and beyond the scope of his ordinary powers.
personal property, securities and bonds;
8. To Enter into merger or consolidation; It is not the quantity of similar acts which establishes
9. To make reasonable Donations for public welfare, apparent authority but the vesting of a corporate officer
hospital, charitable, cultural, scientific, civic or with the power to bind the corporation. (Advance Paper
similar purposes, provided that no donation is Corp. v. Arma Traders Cor.p, GR No. 176897, December
given to any: 11, 2013)
a. Political party, TRUST FUND DOCTRINE

b. Candidate and
c. Partisan political activity. The subscribed capital stock of the corporation is a trust
fund for the payment of debts of the corporation which
10. To establish pension, Retirement, and other plans the creditors have the right to look up to satisfy their
for the benefit of its directors, trustees, officers and credits, and which the corporation may not dissipate.
employees – basis of which is the Labor code; The creditors may sue the stockholders directly for the
11. To exercise Other powers essential or necessary to latter’s unpaid subscription.
carry out its purposes. (CC, Sec. 36)
Exceptions to the trust fund doctrine
Specific powers of a corporation (Theory of Specific
Capacity). The Code allows distribution of corporate capital only in
these instances:
The specific powers of a corporation are the following:
1. Amendment of the AOI to reduce authorized capital
1. Extend or shorten corporate term (Sec. 37, CC); stock;
2. Increase or decrease capital stock (Sec. 38, CC);

2. Purchase of redeemable shares by the corporation in the board should be filled up by the vote of the
regardless of existence of unrestricted retained stockholders of Greenville Corporation. Greenville
earnings; Corporation's directors defended the legality of
3. Dissolution and eventual liquidation of the their action, claiming as well that Stockholder X's
corporation; derivative suit was improper.
4. Dividends from investments in wasting asset
corporation (one solely or principally engaged in Rule on the issues raised. (2013 BAR)
the exploitation of “wasting assets,” distributing
net proceeds from exploitation of their holdings, The remaining directors of the corporation’s Board,
such as mines, oil wells, without allowance or even if still constituting a quorum, cannot elect another
deduction for depletion); director to fill in a vacancy caused by the resignation of
5. In close corporation, where there is a deadlock a hold-over director. Section 23 of the CC means that
(Sec. 104, CC) the term of the members of the board of directors shall
6. Purchase own shares of stock be only for one year; their term expires one year after
7. Payment for the fair value of the shares of election to the office. The holdover period – that time
dissenting stockholders. (Dimaampao and from the lapse of one year from a member’s election to
Escalante, 2017) the Board and until his successor’s election and
qualification – is not part of the director’s
BUSINESS JUDGMENT RULE original term of office, nor is it a new term; the holdover
period, however, constitutes part of
Contracts intra vires entered into by the board of his tenure. Corollary, when an incumbent member of
directors are binding upon the corporation beyond the the board of directors continues to serve in a holdover
interference of courts. The courts are barred from capacity, it implies that the office has a fixed term, which
intruding into business judgments of corporations, has expired, and the incumbent is holding the
when the same are made in good faith. (Ong v Tiu, G.R. succeeding term. With the expiration of term of office, a
No. 144476. April 8, 2003) vacancy resulted which, by the terms of Section 29 of the
Corporation Code, must be filled by the stockholders of
NOTE: The director/trustee or officer is personally VVCC in a regular or special meeting called for the
and solidary liable if he: purpose. His resignation as a hold-over director did not
change the nature of the vacancy; the vacancy due to the
1. Willfully and knowingly votes for or assent to expiration of the term had been created long before his
patently unlawful acts of the corporation (Sec. 31, resignation. (Valle Verde Country Club, Inc., et al., v.
CC); Africa, G.R. No. 151969, September 4, 2009)
2. Is guilty of gross negligence or bad faith in
directing the affairs of the corporation (Sec. 31, The derivative suit was improper. In a derivative suit,
CC); the corporation, not the individual stockholder, must be
3. Acquires any personal or pecuniary interest in the aggrieved party and that the stockholder is suing on
conflict with his duty as such director or trustee behalf of the corporation. What stockholder X is
(Sec. 31,CC); asserting is his individual right as a stockholder to elect
4. Acquires a business opportunity which should the two directors. The case partake more of an election
belong to the corporation, thereby obtaining contest under the rules on intra-corporate controversy.
profits to the prejudice of such (Legaspi Towers 300, Inc. v. Muer, G.R. No. 170783, June
corporation(Doctrine of Corporate 18, 2012)
Opportunity)(Sec. 34,CC);
5. Consents to the issuance of watered stocks or who, CONTRACTS
having knowledge thereof, did not forthwith file
with the corporate secretary his written objection Briefly discuss the doctrine of corporate
thereto; opportunity. (2005 BAR)
6. Contractually agrees or stipulates to hold himself
personally and solidarily liable with the Where a director, by virtue of his office, acquires for
Corporation; himself a business opportunity which should belong to
7. Is made, by specific provision of law, personally the corporation, thereby obtaining profits to the
liable for his corporate action. (MAM Realty prejudice of such corporation. (CC, Sec. 34)
Development Corp. v. NLRC, 244 SCRA 797, June 2,
1995 in Dimaampao and Escalante, 2017) However, if such act is ratified by a vote of the
stockholders representing at least 2/3 of the
BOARD OF DIRECTORS/TRUSTEES/OFFICERS outstanding capital stock, the director is excused from
remitting the profit realized. (ibid)
In the November 2010 stockholders’ meeting of
Greenville Corporation, 8 directors were elected to Chito Santos is a director of both Platinum
the board. The directors assumed their posts in Corporation (PLATINUM) and KWIK Silver
January 2011. Since no stockholders' meeting was Corporation (KWIK). He owns 1% of the outstanding
held in November 2011, the 8 directors served in a capital stock of PLATINUM and 40% of KWIK.
holdover capacity and thus continued discharging PLATINUM plans to enter into a contract with KWIK
their powers. that will make both companies earn very
substantial profits. The contract is presented at the
In June 2012, 2 of Greenville Corporation's directors respective board meetings of PLATINUM and KWIK.
– Director A and Director B – resigned from the
board. Relying on Section 29 of the Corporation 1. In order that the contract will not be voidable,
Code, the remaining 6 directors elected 2 new what conditions will have to be complied with?
directors to fill in the vacancy caused by the Explain.
resignation of Directors A and B. 2. If these conditions are not met, how may this
contract be ratified? Explain. (1995 BAR)
Stockholder X questioned the election of the new
directors, initially, through a letter-complaint 1. At the meeting of the Board of Directors of
addressed to the board, and later (when his letter- PLATINUM to approve the contract, Chito Santos
complaint went unheeded), through a derivative would have to make sure that:
suit filed with the court. He claimed that the vacancy
23
MERCANTILE LAW
a) His presence as director at the meeting is not 2. Proprietary rights

necessary to constitute a quorum for such a. To transfer stock in the corporate book (Sec.
meeting; 63);
b) His vote is not necessary for the approval of b. To receive dividends when declared (Sec. 43);
the contract; and c. To the issuance of certificate of stock or other
c) The contract is fair and reasonable under the evidence of stock ownership ( Sec. 64);
circumstances. d. To participate in the distribution of corporate
assets upon dissolution (Sec. 118, 119);
At the meeting of the Board of Directors of KWIK to e. To pre-emption in the issue of shares (Sec. 39).
approve the contract, Chito would have to make sure
that: 3. Remedial rights
a) There is no fraud involved; and a. To inspect corporate books (Sec. 74);
b) The contract is fair and reasonable under the b. To recover stock unlawfully sold for
circumstances. delinquent payment of subscription (Sec. 69);
c. To be furnished with most recent financial
2. If the conditions relating to quorum and required statements or reports of the corporation’s
number of votes are not met, the contract must be operation (Sec. 74, 75);
ratified by the vote of stockholders representing at d. To bring suits (derivative suit, individual suit,
least 2/3 of the outstanding capital stock in a and representative suit);
meeting called for the purpose. Furthermore, the e. To demand payment in the exercise of
adverse interest of Chito in the contract must be appraisal right (Secs. 41, 81).
disclosed and the contract is fair and reasonable.
VOTING TRUST AGREEMENT
Explain the contracts between corporations with
interlocking directors. A VTA is an agreement whereby one or more
stockholders transfer their shares of stocks to a trustee,
A contract between two or more corporations having who thereby acquires for a period of time the voting
interlocking directors shall not be invalidated on that rights (and/or any other specific rights) over such
ground alone. Provided that: shares; and in return, trust certificates are given to the
stockholder/s, which are transferable like stock
1. Contract is not fraudulent; certificates, subject, to the trust agreement.
2. Contract is fair and reasonable under the
circumstances; and Its principal purpose is to acquire control of the
3. If the interest of the interlocking director in one corporation.
corporation or corporations is merely nominal (not
exceeding 20% of the outstanding capital stock), he It is the trustee of the shares who acquires legal title to
shall be subject to the provisions of Sec. 32 insofar the shares under the voting trust agreement and thus
as the latter corporation or corporations are entitled to the right to vote and the right to be elected in
concerned. (CC, Sec. 33) the board of directors while the trustor-stockholder has
the beneficial title which includes the right to receive
EXECUTIVE COMMITTEE dividends. (Lee v. CA, G.R. No. 93695, February 4, 1992)
Corporate powers are exercised only by the board, RIGHT OF APPRAISAL (2007 Bar)
except when delegated to an executive committee.
What are the corporate powers that may not be It refers to the right of the stockholder to demand
delegated? payment of the fair value of his shares, after dissenting
from a proposed corporate action involving a
The executive committee by a vote of majority may fundamental change in the charter or articles of
exercise such powers as may be delegated to it. incorporation in the cases provided by law. (De Leon,
However, the following cannot be delegated: 2010)
a) Approval of any action for which shareholders’ NOTE: Upon demand, all rights pertaining to a
approval is also required; stockholder shall be deemed suspended.
b) Filling of vacancies in the board;
c) Adopt, amend or repeal by-laws; The corporation need not pay the value of the shares of
d) Amend or repeal of any resolution of the board a dissenting stockholder if at the time of the demand, the
which by its express terms is not so amendable or corporation has no unrestricted retained earnings. No
repealable; and payment shall be made to any dissenting stockholder
e) Distribution of cash dividends to the shareholders. unless the corporation has unrestricted retained
(Sec. 35, CC) earnings in its books to cover the payment. The trust
fund doctrine backstops the requirement of
STOCKHOLDERS AND MEMBERS unrestricted retained earnings to fund the payment of
the shares of stocks of the withdrawing stockholders.
Rights of a stockholder and member (1996 BAR) The fact that the Corporation subsequent to the demand
for payment and during the pendency of the collection
1. Management Right: case posted surplus profit did not cure the prematurity
a. To attend and vote in person or by proxy at a of the cause of action. (Philip Turner, et al., v. Lorenzo
stockholders’ meetings (Secs. 50, 58); Shipping Corp., G.R. No. 157479, November 24, 2010)
b. To elect and remove directors (Secs. 24, 28);
c. To approve certain corporate acts (Sec. 58); PRE-EMPTIVE RIGHT
d. To adopt and amend or repeal the by-laws or
adopt new by-laws (Secs. 46, 48); It is the preferential right of shareholders to subscribe
e. To compel the calling of the meetings (Sec. 50); to all issues or disposition of shares of any class in
f. To enter into a voting trust agreement (Sec. proportion to their present shareholdings. (CC, Sec. 39)
59);
g. To have the corporation voluntarily dissolved Its purpose is to enable the shareholder to retain his
(Secs. 118, 119). proportionate control in the corporation and to retain
his equity in the surplus.

REMEDIAL RIGHTS 1. The termination of the corporate existence at least

as far as the right to go on doing ordinary business
Actions that the stockholders or members can bring is concerned;
2. The winding up of its affairs, the payment of its
1. Derivative suit – suit by a shareholder to enforce a debts, and the distribution of its assets among the
corporate cause of action on behalf of the shareholders or members and other persons
corporation in order to protect or vindicate its interested. After winding up, the existence of the
rights when its officials refuse to sue, or are the corporation is terminated for all purposes.
ones to be sued, or hold control of it. (Forest Hills
Golf and Country Club, Inc. v. Fil- Estate Properties, Intra-corporate disputes remain even when the
Inc., G.R. No. 206649, July 20, 2016, Del Castillo, J.) corporation is dissolved. The dissolution of the
2. Individual suit – an action brought by a stockholder corporation simply prohibits it from continuing its
against the corporation for direct violation of his business. However, despite such dissolution, the parties
contractual rights as such individual stockholder, involved in the litigation are still corporate actors. The
such as the right to vote and be voted for, the right dissolution does not automatically convert the parties
to share in the declared dividends, the right to into total strangers or change their intra-corporate
inspect corporate books and records, and others. relationships. Neither does it change or terminate
3. Representative suit – one brought by a person in his existing causes of action, which arose because of the
own behalf and on behalf of all similarly situated. corporate ties between the parties. (Aguirre II v. FQB+7,
Inc., et al., G.R. No. 170770, January 9, 2013, Del Castillo,
Requisites for the existence of a derivative suit.(C- J.)
SENA)
How are corporations dissolved?
1. Corporate cause of action: the cause of action must
devolve upon the corporation itself; the a) Voluntarily;
wrongdoing or harm having been caused to the b) Involuntarily;
corporation and not to the particular stockholder c) By shortening corporate term; and
brining the suit (Reyes v. Hon. RTC of Makati Br. 142, d) Expiration of the term. (dimaampao and escalante,
G.R. No. 165744, August 11, 2008); 2017)
2. Stockholder: the party bringing the suit must be a
stockholder VOLUNTARY DISSOLUTION
a. At the time the acts or transactions subject of a) By the vote of the BOD/ BOT and the stockholders/
the action occurred and members where no creditors are affected (CC, Sec.
b. at the time the action was filed 118);
b) By the judgment of the SEC after hearing of petition
NOTE: if the cause of action is continuing in nature, for voluntary dissolution, where creditors are
the only requisite is that the party is a stockholder affected (CC, Sec. 119);
at the time the action was filed. (Dean Divina’s c) By amending the AOI to shorten the corporate term
Lecture, April 29, 2015) (CC, Sec. 120);
d) In case of a corporation sole, by submitting to the
3. Exhaustion of all intra-corporate remedies SEC a verified declaration of the dissolution for
available under the AOI, By-Laws, laws or rules approval (CC, Sec. 115);
governing the corporation or partnership to obtain e) Merger or consolidation
the relief he desires;
4. Not a Nuisance or Harassment suit; INVOLUNTARY DISSOLUTION
5. Appraisal right is not available(Rule 8 of the Interim
Rules of Procedure Governing Intra-Corporate a) By expiration of corporate term provided for in the
Controversies, cited in Anthony S. Yu, et al., v. Joseph AOI (CC, Sec. 11);
S. Yukayguan, et al., G.R. No. 177549, June 18, 2009) b) By legislative enactment
c) By failure to formally organize and commence the
NOTE: A derivative suit is an intra-corporate transaction of its business within 2 years from the
controversy hence under the jurisdiction of the RTC date of incorporation (CC, Sec. 22);
acting as a special commercial court. d) By order of the SEC on grounds under existing laws
(CC, Sec. 121);
WATERED STOCK e) Judicial decree on Quo Warranto Proceeding (CC,
Sec. 20).
A watered stock is a stock issued in exchange for cash,
property, share, stock dividends, or services lesser than LIQUIDATION
its par value or issued value. (CC, Sec. 65)
Process by which all the assets of the corporation are
Watered stocks can either be par or no par value shares. converted into liquid assets (cash) in order to facilitate
the payment of obligations to creditors and the
The watered stocks refer only to original issue of remaining balance if any is to be distributed to the
stocks but not to a subsequent transfer of such stocks stockholders. (Sundiang Sr. & Aquino, 2014)
by the corporation, for then it would no longer be an
“issue” but a sale thereof.(De Leon, 2010, citing Rochelle Methods of liquidation
Roofing Co. v. Burley, 115 NE 478)Hence, treasury shares
are not subject to the prohibition on the issuance of 1. By the corporation itself or its board of directors or
watered stocks. trustees (CC , Sec. 122 [1]);
2. By a trustee to whom the assets of the corporation
DISSOLUTION had been conveyed. (CC, Sec. 122[2]) (Board of
Liquidators v. Kalaw, G.R. No. L-18805, Aug. 14,
It is the extinguishment of the franchise of a corporation 1967);
and the termination of its corporate existence. 3. By a management committee or rehabilitation
(Sundiang Sr. & Aquino, 2009) receiver appointed by SEC. (CC, Sec. 119)
Two legal steps in corporate dissolution
25
MERCANTILE LAW
Corporate life does not cease to exist immediately rehabilitation of the debtor is feasible and the
upon dissolution opposition of the creditors is manifestly unreasonable.
(Sec. 23, Rule 4, Interim Rules of Procedure on Corporate
It shall continue as a body corporate for 3 years from the Rehabilitation)
time of dissolution, for the purpose of prosecuting and
defending suits by or against it and enabling it to settle This provision, which is currently incorporated in the
and close its affairs, to dispose of and convey its FRIA, is necessary to curb the majority creditors’ natural
property and to distribute its assets, but not for the tendency to dictate their own terms and conditions to
purpose of continuing the business for which it was the rehabilitation, absent due regard to the greater long-
established. (Dimaampao and Escalante, 2017) term benefit of all stakeholders. Otherwise stated, it
forces the creditors to accept the terms and conditions
CONVEYANCE TO A TRUSTEE WITHIN THE 3-YEAR of the rehabilitation plan, preferring long-term viability
PERIOD over immediate but incomplete recovery. (BPI v. Sarabia
Manor Hotel, G.R. no. 175844, July 29, 2013)
At anytime during the 3-year period for liquidation, said
corporation is authorized and empowered to convey all NON-STOCK CORPORATION
of its property to trustees for the benefit of its
stockholders, members, creditors and other persons in It is one where no part of its income is distributable as
interest. dividends to its members, trustees or officers. Any profit
which it may obtain as an incident to its operations shall
From and after any such conveyance by the corporation whenever necessary or proper, be used in furtherance
of its property in trust for the benefit of its stockholders, of the purpose or purposes for which it was organized.
members, creditors and others in interest, all interest (CC, Sec. 87)
which the corporation had in the property terminates,
the legal interest vests in the trustees, and the beneficial Characteristics of a non-stock corporation
interest in the stockholders, members, creditors or
other persons in interest. (par. [2], Sec. 122, CC) 1. It does not have capital stock divided into shares;
2. No part of its income during its existence is
Meaning of trustee distributable as dividends to its members, trustees,
or officers;
The word “trustee” as used in the law must be 3. As a general rule, it is not empowered to engage in
understood in its general concept. It has been held that business with the object of making income or
a counsel who prosecuted and defended the interest of profits directly or indirectly. However, it is not
a corporation and who in fact appeared in behalf of the prohibited to make income or profits as an incident
corporation before and after its dissolution by to its operation (CC, Sec. 87);
amendment of its articles of incorporation may be 4. There is non-transferability of membership (CC,
considered a trustee of the corporation at least with Sec. 90);
respect to the matter in litigation only. The purpose in 5. The right to vote of members may be limited,
the transfer of the assets of the corporation to a trustee broadened, or even denied in the AOI or the by-
upon its dissolution is more for the protection of its laws (CC, Sec. 89);
creditors and stockholders. The appointment of said 6. Non-stock corporations may, through their articles
counsel can be considered a substantial compliance. of incorporation or their by-laws designate their
(Gelano v. CA, G.R. No. L- 39050, February 24, 1981) governing boards by any name other than as BOT
(CC, Sec. 138);
CORPORATE REHABILITATION 7. By-laws may provide that the members may hold
their meetings at any place even outside the place
REHABILITATION where the principal office of the corporation is
located, provided that such place is within the
It refers to the restoration of the debtor to a condition of Philippines (CC, Sec. 93). A non-stock corporation is
successful operation and solvency, if it is shown that its not allowed to distribute any of its assets or any
continuance of operation is economically feasible and incidental income or profit made by the
its creditors can recover by way of the present value of corporation during its existence;
payments projected in the plan, more if the debtor 8. Non-availability of conversion into stock
continues as a going concern than if it is immediately corporation. (SEC Opinion, February 24, 1989)
liquidated.[Sec. 4(gg), FRIA]
FOREIGN CORPORATIONS
What is the nature of rehabilitation proceedings?
A foreign corporation is one, formed, organized or
Rehabilitation proceedings are summary and non- existing under any laws other than those of the
adversarial in nature, and do not contemplate Philippines and whose laws allow Filipino citizens and
adjudication of claims that must be threshed out in corporations to do business in its own country or State.
ordinary court proceedings. (CC, Sec. 123)
The jurisdiction of the rehabilitation court is over claims Discuss the underlying reason in requiring foreign
against the debtor that is under rehabilitation, not over corporation to obtain license to do business in the
claims by the debtor against its own debtors or against Philippines.
third parties. The corporation under rehabilitation must
file a separate action against its debtors/insurers to The purpose of the law is to subject the foreign
recover whatever claim it may have against them. (Steel corporation doing business in the Philippines to the
Corp. v. Mapfre Insular Insurance Corp., G.R. No. 201199, jurisdiction of the courts.
October 16, 2013, in Divina, 2014)
A foreign corporation doing business in the Philippines
CRAM-DOWN CLAUSE with a license may sue and can be sued in the
Philippines. If it is doing business without a license, it
Section 23. Approval of the Rehabilitation Plan. – The cannot sue but may be sued in the Philippines. (Sec. 133,
court may approve a rehabilitation plan over the CC)
opposition of creditors, holding a majority of the total
liabilities of the debtor if, in its judgment, the

A foreign corporation not doing business, but merely under the control and direction of the foreign
transacts in an isolated transaction or on a cause of corporation, are consummated in the Philippines.
action entirely independent of its business transaction,
need not obtain a license and may sue and be sued in our NOTE: Actual transaction of business within the
courts. Philippine territory is an essential requisite for the
Philippines to acquire jurisdiction over a foreign
If a foreign corporation does business in the Philippines corporation and thus require the foreign corporation to
without a license, a Philippine citizen or entity which secure a Philippine business license. (B. Van Zuiden
has contracted with said corporation may be estopped Bros., Ltd. v. GTVL Manufacturing Industries, Inc., G.R. No.
from challenging the foreign corporation’s corporate 147905, May 28, 2007)
personality in a suit brought before Philippine courts.
(Agilent Technologies Singapore [Pte.] Ltd. V. Integrated Test for determining if an unlicensed foreign
Silicon Technology Philippines Corporation, G.R. No. corporation is doing business in the Philippines
154618, 14 April 2004, in Dimaampao and Escalante, (2002 BAR)
2017)
The test is whether or not the unlicensed foreign
DOCTRINE OF DOING BUSINESS corporation has performed an act or acts that imply a
continuity of commercial dealings or arrangements, and
Meaning of “doing business in the Philippines” contemplate to that extent the performance of acts or
under the Foreign Investment Act of 1991 (FIA) works, or the exercise of some of the functions normally
(1998, 2016 BAR) incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the
The phrase "doing business in the Philippines" under business corporation.
the FIA include:
A foreign corporation which is not licensed to do
1. Soliciting orders, service contracts, opening business in the Philippines is not absolutely
offices, whether called "liaison" offices or incapacitated from filing a suit in local courts
branches; appointing representatives or
distributors domiciled in the Philippines; Only when that foreign corporation is “transacting” or
2. Onewho in any calendar year stay in the “doing business” in the country will a license be
country for a period or periods totalling 180 necessary before it can institute suits. It may, however,
days or more; participating in the bring suits on isolated business transactions, which is
management, supervision or control of any not prohibited under Philippine law. Thus, a foreign
domestic business, firm, entity or corporation insurance company may sue in Philippine courts upon
in the Philippines; and the marine insurance policies issued by it abroad to
3. Any other act or acts that imply a continuity of cover international-bound cargoes shipped by a
commercial dealings or arrangements, and Philippine carrier, even if it has no license to do business
contemplate to that extent the performance of in this country. It is the act of engaging in business
acts or works, or the exercise of some of the without the prescribed license which bars a foreign
functions normally incident to, and in corporation from access to our courts. (Aboitiz Shipping
progressive prosecution of, commercial gain Corp. v. Insurance Co. of North America, G.R. No. 168402,
or of the purpose and object of the business August 6, 2008, in Divina, 2010)
organization
Any foreign corporation not doing business in the
NOTE: Passive equity investment shall not be construed Philippines may maintain an action in our courts upon
as doing business. any cause of action, provided that the subject matter and
the defendant are within the jurisdiction of the court. It
XPN: The phrase "doing business: shall NOT be deemed is not the absence of the prescribed license but
to include mere investment as a shareholder by a "doing business" in the Philippines without such
foreign entity in domestic corporations duly registered license which debars the foreign corporation from
to do business, and/or the exercise of rights as such access to our courts. In other words, although a foreign
investor; nor having a nominee director or officer to corporation is without license to transact business in
represent its interests in such corporation; nor the Philippines, it does not follow that it has no capacity
appointing a representative or distributor domiciled in to bring an action. Such license is not necessary if it is
the Philippines which transacts business in its own not engaged in business in the Philippines. (Columbia
name and for its own account. (2016 Bar) Pictures v. CA, G.R. No. 110318, August 28, 1996)
Jurisdictional tests of “doing or transacting business MERGER AND CONSOLIDATION

in the Philippines” for foreign corporations
GR: Where one corporation sells or otherwise transfers
1. Twin Characterization Test all of its assets to another corporation, the latter is not
liable for the debts and liabilities of the transferor.
a. Continuity Test – Doing business implies a
continuity of commercial dealings and XPNs:
arrangements, and contemplates to some
extent the performance of acts or works or the 1. Where the purchaser expressly or impliedly agrees
exercise of some functions normally incident to assume such debts;
to and in progressive prosecution of, the 2. Where the transaction amounts to a consolidation
purpose and object of its organization. or merger of the corporations;
b. Subsequent Test – a foreign corporation is 3. Where the purchasing corporation is merely a
doing business in the country if it is continuing continuation of the selling corporation; and
the body or substance of the enterprise of 4. Where the transaction is entered into fraudulently
business for which it was organized (Sundiang to escape liability for such debts. (Edward J. Nell Co.
Sr. & Aquino, 2009) v. Pacific Farms, Inc., G.R. No. L-20850, November 29,
1965)
2. Contract Test - Whether the contracts entered into
by the foreign corporation, or by an agent acting The Nell Doctrine states the general rule that the
transfer of all the assets of a corporation to another shall
27
MERCANTILE LAW
not render the latter liable to the liabilities of the venture claims which have really no basis, and sell
transferor. If any of the above-cited exceptions are shares or interests therein to investors. The SRC also
present, then the transferee corporation shall assume serves to protect investors, promote investor
the liabilities of the transferor. confidence, and stabilize the financial markets.
The legal basis of the last in the four (4) exceptions to SECURITIES REQUIRED TO BE REGISTERED
the Nell Doctrine, where the purchasing corporation is
merely a continuation of the selling corporation, is Securities are shares, participation or interests in a
challenging to determine. Dean Cesar Villanueva corporation or in a commercial enterprise or profit-
explained that this exception contemplates the making venture and evidenced by a certificate, contract,
“business-enterprise transfer.” In such transfer, the instrument, whether written or electronic in character.
transferee corporation’s interest goes beyond the assets It includes: (DO DIET)
of the transferor’s assets and its desires to acquire the
latter’s business enterprise, including its goodwill. 1. Debt instruments – bonds, debentures, notes,
evidence of indebtedness, asset-backed securities
Section 40 suitably reflects the business-enterprise 2. Other instruments as may in the future be
transfer under the exception of the Nell Doctrine determined by the SEC.
because the purchasing or transferee corporation 3. Derivatives– options and warrants
necessarily continued the business of the selling or 4. Investments instruments – Investment contracts,
transferor corporation. Given that the transferee fractional undivided interests in oil, gas, or other
corporation acquired not only the assets but also the mineral rights
business of the transferor corporation, then the 5. Equity instruments – Shares of stock, certificates of
liabilities of the latter are inevitably assigned to the interest or participation in a profit sharing
former. Section 40 refers to the sale, lease, exchange or agreement, certificates of deposit for a future
disposition of all or substantially all of the corporation's subscription, proprietary or non-proprietary
assets, including its goodwill. The sale under this membership certificates in corporations.
provision does not contemplate an ordinary sale of all 6. Trust instruments – Certificates of assignments,
corporate assets; the transfer must be of such degree certificates of participation, trust certificates,
that the transferor corporation is rendered incapable of voting trust certificates or similar instruments.
continuing its business or its corporate purpose. (SRC, Sec. 3;1996 BAR)
The purpose of the business-enterprise transfer is to Test on determining whether or not it is a security:
protect the creditors of the business by allowing them a Does it represent a share, participation, or interest in a
remedy against the new owner of the assets and commercial enterprise or any profit making venture? If
business enterprise. Otherwise, creditors would be left yes, then, it is a security. If it is a security, then, it cannot
“holding the bag,” because they may not be able to be sold, or offered for sale or distribution within the
recover from the transferor who has “disappeared with Philippines without a registration statement duly filed
the loot,” or against the transferee who can claim that he with and approved by the SEC. (Divina, 2014)
is a purchaser in good faith and for value. Based on the
foregoing, as the exception of the Nell doctrine relates to Requirement before securities are sold or offered
the protection of the creditors of the transferor for sale or distribution within the Philippines
corporation, and does not depend on any deceit
committed by the transferee corporation, then fraud is They are required to be registered with and approved by
certainly not an element of the business enterprise the SEC. Registration also includes the disclosure to SEC
doctrine. Indeed, the transferee corporation may inherit of all material and relevant information about the issuer
the liabilities of the transferor despite the lack of fraud of the security. Prior to the sale, the information on the
due to the continuity of the latter’s business. (Y-I Leisure securities, in such form and with such substance as the
Philippines, Inc. v. Yu, G.R. No. 207161, September 18, SEC may prescribe, shall be made available to each
2015) prospective purchaser. (SRC, Sec. 8)
What is meant by a de facto merger? Discuss (2016 In Securities Law, what is a shortswing transaction?
BAR)
A shortswing is a transaction where a person buys
De facto merger means that a corporation called the securities and sells or disposes of the same within a
acquiring corporation acquired the assets and liabilities period of six months.
of another corporation in exchange for equivalent value
of shares of stock of the acquiring corporation. PROHIBITIONS ON FRAUD, MANIPULATIONS
AND INSIDER TRADING
NOTE: There is no such thing as de facto merger in the
present Corporation Code. Explain the manipulation of security prices. (2001
BAR)
A merger does not become effective upon the mere
agreement of the constituent corporations. All the The price of securities should be dictated by market
requirements specified in the law must be complied forces. It cannot be pegged or stabilized. The following
with in order for merger to take effect. Section 79 of the acts are considered as manipulation of security prices
Corporation Code further provides that the merger shall and are therefore prohibited:
be effective only upon the issuance by the SEC of a
certificate of merger.(Bank of Commerce v. Radio 1. Transactions intended to create a false or
Philippines Network Inc., G.R. No. 195615, April 21, 2014) misleading appearance of active trading in any
listed security traded in an Exchange or any other
trading market:
SECURITIES REGULATION CODE
a. Wash Sale – is a transaction in which there is
no genuine change in the beneficial (or actual)
The SRC is the law that regulates securities (its issuance, ownership of a security;
distribution and sale) and the person who deals with b. Matched Sale – is a change of ownership in the
such securities. It is enacted to protect the public from securities by entering an order for the
unscrupulous promoters, who stake business or purchase or sale of a security with the

knowledge that a simultaneous order of security traded in an exchange for the purpose of
substantially the same size, time, and price, for pegging, fixing or stabilizing the price of such
the sale or purchase of any such security, has security, unless otherwise allowed by the Code or
or will be entered by or for the same or by rules of the Commission.
different parties;
c. Similar transactions where there is no change INSIDER TRADING
of beneficial ownership.
A purchase or sale made by an insider, or such insider’s
2. Effecting a series of transactions that will raise or spouse or his relative by affinity or consanguinity within
depress the price of securities to induce the the second degree, legitimate or common-law, shall be
purchase or sale of securities respectively, or presumed to be effected while in possession of material
creating active trading to induce transactions non-public information if transacted after such
through manipulative devices: information came into existence but prior to the public
dissemination of such information, and lapse of
a. Marking the close – buying and selling of reasonable time for the market to absorb such
securities at the close of the market in an effort information. (Bar 2015)
to alter the closing price of these securities.
b. Painting the tape – engaging in a series of Material non-public information (1995 BAR)
transactions effected by brokers in securities
that are reported publicly to give the 1. Information about the issuer or the security has not
impression or illusion of activity or price been generally disclosed to the public and would
movement in a security, which may likely affect the market price of the security after
trick investors into trading in these securities being disseminated to the public and the lapse of a
because of the alleged trading volume or reasonable time for the market to absorb the
indications of interest. information; or
c. Squeezing the float – refers to taking advantage 2. Would be considered by a reasonable person
of a shortage of securities in the market by important under the circumstances in determining
controlling the demand side and exploiting his course of action whether to buy, sell or hold a
market congestion during such shortages in a security. (SRC, Sec. 27.2)
way to create artificial prices. This prevents
the actual market from determining the price Definition of “fact of special significance”, in insider
of these securities. trading (1991 BAR)
d. Hype and dump – engaging in buying activity at
increasingly higher prices and then selling It is, in addition to being material, such fact as would
securities in the market at the higher prices. likely, on being made generally available, to affect the
e. Boiler room operations – refers to activities market price of a security to a significant extent, or
that involve the use of high pressure sale which a reasonable person would consider as especially
tactics such as direct mail offers or telephone important under the circumstances in determining his
follow-ups to investors to promote purchase course of action in the light of such factors as the degree
and sale of securities wherein there is of its specificity, the extent of its difference from
misrepresentation in these securities. This is a information generally available previously, and its
fraudulent transaction that tricks investors nature and reliability. (RSA, Sec. 30 [c])
into trading in a fake market.
f. Daisy chain – refers to a series of purchase and TENDER OFFER RULE(2016, 2010, 2002 BAR)
sales of the same issue at successively higher
prices by the same group of people with the Tender offer means a publicly announced intention by a
purpose of manipulating prices are drawing person acting alone or in concert with other persons to
unsuspecting investors into the market acquire equity securities of a public company. It is also
leaving them defrauded of their money and an offer by the acquiring person to stockholders of a
securities. public company for them to tender their shares therein
g. Front-Running – is the prohibited practice of a on the terms specified in the offer. Tender offer is in
broker-dealer executing its proprietary order place to protect their minority shareholders against any
before the customer’s order for the same scheme that dilutes the share value of any investments.
security. This violates the fiduciary It gives the minority shareholders the chance to exit the
responsibility by the broker-dealer to its company under reasonable terms, giving them
customer accounts as well as placing the opportunity to sell their shares at the same price as
customer’s order first. those of the majority shareholders. (CEMCO HOLDINGS,
h. Churning – involves the excessive trading of INC. v. National Life Insurance Company, Inc. G.R. No.
securities by a broker-dealer in a customer’s 171815, August 7, 2007)
discretionary account in order to generate
commissions, without regard to the MANDATORY TENDER OFFER (2002 BAR)
customer’s investment objective.
Tender offer is required to be made when:
3. Circulating or disseminating information that the
price of any security listed in an Exchange will or is 1. Any person or group of persons acting in
likely to rise or fall because of manipulative market concert, who intends to acquire fifteen percent
operations of any one or more persons conducted (15%) of equity securities in a public company
for the purpose of raising or depressing the price of in one or more transactions within a period of
that security for the purpose of inducing the twelve (12) months.
purchase or sale of such security.
4. To make false or misleading statement with respect 2. Any person or group of persons acting in
to any material fact, which he knew or had concert, who intends to acquire thirty five
reasonable ground to believe was so false or percent (35%) of the outstanding voting
misleading, for the purpose of inducing the shares or such outstanding voting shares that
purchase or sale of any security listed or traded in are sufficient to gain control of the board in a
an Exchange. public company in one or more transactions
5. To effect, either alone or with others, any series of within a period of twelve (12) months.
transactions for the purchase and/or sale of any
29
MERCANTILE LAW
If the tender offer is oversubscribed, the c. between the corporation, partnership or

aggregate amount of securities to be acquired association and its stockholders, partners,
at the close of such tender offer shall be members or officers; and
proportionately distributed across selling d. among the stockholders, partners or associates,
shareholders with whom the acquirer may themselves.
have been in private negotiations and other
shareholders. For purposes of SRC Rule 19.2.2, The venue for actions involving intra-corporate
the last sale that meets the threshold shall not controversies is now under the jurisdiction of the RTC
be consummated until the closing and acting as a special commercial court. (Sec. 5, A.M. NO.
completion of the tender offer 01-2-04-SC)
NOTE: If the acquisition is made through the It is the RTC and not the Sandiganbayan which has
Exchange trading system tender offer is not jurisdiction over cases which do not involve a
required provided after acquisition through sequestration-related incident but an intra-corporate
the Exchange trading system, they fail to controversy. Issues regarding the propriety of the
acquire their target of thirty five percent election of a party as a Director and his authority to act
(35%) or such outstanding voting shares that in that capacity should be determined only by the RTC
is sufficient to gain control of the board. pursuant to the pertinent law on jurisdiction because
they do not concern the recovery of ill-gotten wealth.
3. Any person or group of persons acting in
concert, who intends to acquire thirty five TESTS TO DETERMINE INTRA-CORPORATE
percent (35%) of the outstanding voting CONTROVERSY
shares or such outstanding voting shares that
are sufficient to gain control of the board in a 1. Relationship Test – No doubt exists that the parties
public company directly from one or more were members of the same association, but this
stockholders. conclusion must still be supplemented by the
controversy test before it may be considered as an
The sale of shares pursuant to the private intra-corporate dispute.
transaction or block sale shall not be 2. Controversy Test – The dispute must be rooted in
completed prior to the closing and completion the existence of an intra-corporate relationship,
of the tender offer. and must refer to the enforcement of the parties’
correlative rights and obligations under the
4. Any acquisition that would result in Corporation Code, as well as the internal and intra-
ownership of over fifty percent (50%) of the corporate regulatory rules of the corporation, in
total outstanding equity securities of a public order to be an intra-corporate dispute (Gulfo v.
company. Ancheta, G.R. No. 175301, August 15, 2012).
NOTE: Tender offer shall be made at a price

supported by a fairness opinion provided by BANKING LAWS
an independent financial advisor or equivalent
third party. The acquirer in such a tender offer
shall be required to accept all securities THE NEW CENTRAL BANK ACT
tendered. (NCBA, R.A. 7653)
(2015 SRC Rules, Sec. 19.2)
BANGKO SENTRAL NG PILIPINAS
Coverage of the application of tender offer
Responsibilities (1992, 1998 BAR)
The mandatory tender offer rule covers not only direct (PSR)
acquisition but also indirect acquisition or “any type of
acquisition.” The legislative intent of Section 19 of the 1. To provide Policy directions in the areas of money,
Code is to regulate activities relating to acquisition of banking, and credit;
control of the listed company and for the purpose of 2. To Supervise bank operations; and
protecting the minority stockholders of a listed 3. To Regulate the operations of finance companies
corporation. Whatever may be the method by which and non-bank financial institutions performing
control of a public company is obtained, either through quasi-banking functions, and similar institutions.
the direct purchase of its stocks or through an indirect (NCBA, Sec. 3)
means, mandatory tender offer applies. What is decisive
is the determination of the power of control. The GROUNDS FOR CLOSURE OF A BANK
legislative intent behind the tender offer rule makes OR A QUASI-BANK
clear that the type of activity intended to be regulated is
the acquisition of control of the listed company through 1. Cash Flow test – Inability to pay liabilities as they
the purchase of shares. Control may be effected through become due in the ordinary course of business
a direct and indirect acquisition of stock, and when this (NCBA, Sec. 30 [a], 1997 Bar)
takes place, irrespective of the means, a tender offer 2. Balance sheet test – Insufficiency of realizable
must occur. (Cemco Holdings v. National Life Insurance assets to meet its liabilities (NCBA, Sec 30 [b], 1997
Company, G.R. No. 171815, August 7, 2007) Bar)
3. Inability to continue business without involving
INTRA-CORPORATE CONTROVERSIES probable losses to its depositors and creditors
(NCBA, Sec 30 [c], 1997 Bar)
An intra-corporate controversy has been regarded in its 4. Willful violation of a cease and desist order under
broad sense to pertain to disputes that involve any of the Section 37 that has become final, involving acts or
following relationships: transactions which amount to fraud or a dissipation
of the assets (NCBA, Sec 30 [d], 1997 Bar)
a. between the corporation, partnership or 5. Notification to the BSP or public announcement of
association and the public; a bank holiday (GBL, Sec 53)
b. between the corporation, partnership or 6. Suspension of payment of its deposit liabilities
association and the State in so far as its franchise, continuously for more than 30 days (GBL, Sec 53)
permit or license to operate is concerned;

7. Persisting in conducting its business in an unsafe or deprive a

unsound manner (GBL, Sec 56) corporation and its
corporate officers
CLOSE-NOW-HEAR-LATER DOCTRINE of the power to
recover its
It is to prevent unwarranted dissipation of the bank’s unlawfully
assets and as a valid exercise of police power to protect detained property.
the depositors, creditors, stockholders and the general (Umale v. ASB
public. No prior hearing is necessary in appointing a Realty Corporation,
receiver and in closing the bank. It is enough that G.R. No. 181126,
subsequent judicial review is provided for. The remedy June 15, 2011, Del
is subsequent. Injunction does not lie against BSP in the Castillo, J.)
exercise of the power and function. A receiver (and a conservator) can only
perform acts of administration and not
However, the closure and liquidation of a bank, which is acts of dominion. The receiver cannot
considered an exercise of police power may be the approve an option to purchase real
subject of judicial inquiry. The order of closure property. He has only the authority to
(receivership or conservatorship) may be assailed: administer the same for the benefit of
its creditors. (Abacus Real Estate
a. by the stockholders representing at least majority Development Center, Inc. v. Manila
of the outstanding capital stock; Banking Corp, G.R. No. 162270, April 6,
b. within ten days from receipt by the board of 2005)
directors of the order; and Conservatorship
c. through a petition for certiorari on the ground that shall not exceed
the action taken by the BSP was in excess of 1 year.
jurisdiction or with grave abuse of discretion as to
amount to lack of jurisdiction. NOTE: When
the Monetary
NOTE: It is only the BSP who can place the banks under Board is
conservatorship or receivership, courts are not vested satisfied that the
with such power. The bank may be
bank can
placed under
continue to
CONSERVATOR RECEIVER receivership for a
Duration operate on its
maximum period
Appointed if the own,
Appointed if the of 90 days from
bank is already conservatorship
bank is in the take over
insolvent which shall be
state of
means that its terminated.
illiquidity or
liabilities are Otherwise, the
the bank fails or
greater than its bank shall be
refuses to
assets. placed in
maintain a state
receivership.
of liquidity
NOTE: For banks, (Dimaampao,
adequate to
When the receiver would 2017)
protect its
appointed be the Philippine
depositors and
Deposit Insurance NOTE: Designation of conservator is not a precondition
creditors. The
Corporation; for to the designation or receiver. (Sec. 31)
bank still has
quasi-banks, it
more assets
could be any Powers of a conservator do not extend to the
than its
person of revocation of valid and perfected contracts
liabilities but its
recognized
assets are not
competence in The law merely gives the conservator power to revoke
liquid or not in
banking or finance. contracts that are deemed to be defective – void,
cash.
(NCBA, Sec. 30) voidable, unenforceable or rescissible. Hence, the
To rehabilitate the conservator merely takes the place of the bank’s board.
bank and hold and
administer its LIQUIDATION
assets for the
benefit of its Acts of liquidation are those which constitute the
creditors. conversion of the assets of the banking institution to
money or the sale, assignment or disposition of the same
Appointment of to creditors and other parties for the purpose of paying
To restore the receiver operates debts of such institution. (Banco Filipino v. Central Bank,
bank into a state to suspend the G.R. No. 70054, December 11, 1991)
of liquidity and authority of the
Powers to take charge of bank and its If the receiver determines that the institution can no
and the assets, officers over its longer be rehabilitated, the Monetary Board shall notify
Function liabilities, and properties and the board of directors and direct the receiver to proceed
the effects. with its liquidation.
management of
the bank. NOTE: Being Liquidator of a distressed bank can prosecute and
placed under defend suits against the bank
corporate
rehabilitation and Prosecution of suits, collection and the foreclosure of
having a receiver mortgages against debtors of the bank by the liquidator
appointed to carry are among the usual and ordinary transactions
out the pertaining to the administration of a bank. (Banco
rehabilitation plan Filipino v. Central Bank, ibid.)
do not ipso facto
31
MERCANTILE LAW
FILING OF THE CLAIMS AGAINST INSTANCES WHERE EXAMINATION OR DISCLOSURE

THE INSOLVENT BANK OF INFORMATION ABOUT DEPOSITS CAN BE
ALLOWED
All claims against the insolvent bank should be filed in (1990-1992, 1994, 1995, 1997, 1998, 2000, 2001,
the liquidation proceeding. It is not necessary that a 2004-2006 BAR)
claim be initially disputed in a court or agency before it
is filed with the liquidation court. (Ong v. CA, G.R. No. 1. Upon written consent of the depositor (RA 1405,
112830, February 1, 1996) Sec. 2)
2. In cases of impeachment (ibid.)
NOTE: Where it is the bank that files a claim against 3. Upon order of competent court in cases of bribery
another person or legal entity, the claim should be filed or dereliction of duty of public officials (ibid.)
in the regular courts. 4. In cases where the money deposited or invested is
the subject matter of the litigation (ibid.)
STAY ORDER
a. In an action filed by the bank to recover the
After the Monetary Board has declared that a bank is money transmitted by mistake, necessarily, an
insolvent and has ordered it to cease operations, the inquiry into the whereabouts of the amount
assets of the insolvent bank are held in trust for the extends to whatever is concealed by being held
equal benefit of all creditors. One cannot obtain an or recorded in the name of the persons other
advantage or preference over another by attachment, than the one responsible for the illegal
execution or otherwise. The final judgment against the acquisition. ( 1992 Bar)
bank should be stayed as to execute the judgment would b. In a case of plunder, itnecessarily involves an
unduly deplete the assets of the banks to the obvious inquiry into the whereabouts of the amount
prejudice of other depositors and creditors. (Lipana v. purportedly acquired illegally. (Ejercito v.
Development Bank of Rizal, G.R. No. L-73884, September Sandiganbayan, supra)
24, 1987) c. In a special proceeding to settle the estate of
deceased depositor, his bank deposits may be
RATIONALE: The reason behind the indiscriminate inquired into, since his bank deposits are
suspension or stay order in relation to the creditors’ subject matter of the case, because all of his
claim is to expedite the rehabilitation of the distressed assets are supposed to be collated. (Sy v. RTC of
corporation by enabling the management committee or Iloilo, 93 O.G. 54072)
the rehabilitation receiver to effectively exercise its/his
powers free from any judicial or extrajudicial 5. Upon order of the Commissioner of Internal
interference that might unduly hinder or prevent the Revenue:
rescue of the debtor company. It also recognizes the a. A decedent to determine his estate;
assets of a corporation under rehabilitation held under b. Any taxpayer who has filed for an application
trust for the equal benefit of all creditors under the for compromise of his tax liability; or
doctrine equality is equity, whereby all the creditors c. A specific taxpayer upon request for tax
ought to stand on equal footing, and not one of them information from a foreign tax authority
should be paid ahead of others. (2006 BAR) pursuant to an international convention or
agreement on tax matters to which the
LAW ON SECRECY OF BANK DEPOSITS Philippines is a party. (NIRC, Sec. 6 [f])
(R.A. 1405, AS AMENDED)
6. In case of dormant accounts/deposits for at least 10
PROHIBITED ACTS years under the Unclaimed Balances Act (Act No.
3936, Sec. 2)
1. Examination/inquiry/looking into all deposits of 7. Presidential Commission on Good Government
whatever nature with banks or banking institutions (PCGG) may require the production of bank records
in the Philippines (including investment in bonds material to its investigation (Opinion of the
issued by the government) by any person, Secretary of Justice, February 27, 1987)
government official or office. (RA 1405, Sec. 2) 8. The PDIC and the BSP may examine deposit
2. Disclosure by any official or employee of any accounts and all information related to them in case
banking institution to any unauthorized person of of a finding of unsafe or unsound banking practices
any information concerning said deposit. (RA 1405, (RA 3591, as amended, Sec. 8)
Sec. 3) 9. With court order:
However, non-bank official or employee is not a. In cases of unexplained wealth under Sec. 8 of
covered by the prohibition. Neither is disclosure by a the Anti-Graft and Corrupt Practices Act (PNB
bank official or employee of information about bank v. Gancayco, L-18343, September 30, 1965)
deposit in favor of a co-employee in the course of the b. The Anti-Money Laundering Council
performance of his duties covered by the prohibition. (AMLC) may inquire into any deposit with any
bank in case of violation of RA 9160 or the
NOTE: Confidentiality granted by RA 1405 does NOT AMLA if there is probable cause that it is
extend to Letters of Credit and Trust Receipts. related to an unlawful activity (RA 9160, as
amended, Sec. 11)
DEPOSITS COVERED
10. Without court order: If the AMLC determines that a
1. All deposits of whatever nature with banks or particular deposit or investment with any banking
banking institutions found in the Philippines; institution is related to the following (HK-MADS):
2. Investments in bonds issued by the Philippine
government, its branches, and institutions (R.A. a. Hijacking,
1405, Sec. 2); and b. Kidnapping,
3. Trust accounts (Ejercito v. Sandiganbayan, G.R. No. c. Murder,
157294-95, November 30, 2006) d. Destructive Arson,
e. Violation of the Dangerous Drugs Act; or
f. Acts of Terrorism or in violation of Human
Security Act.

NOTE: Ombudsman cannot inspect an account as there him. (China Banking Corp. v. CA, G.R. No. 140687,
is yet no pending litigation before any court of December 18, 2006)
competent authority. Mere investigation of Ombudsman 3. The exemption from court process of foreign
is not enough, inspection during an investigation merely currency deposits under RA 6426 cannot be
amounts to a fishing expedition. (Marquez v. Desierto, invoked by a foreign transient who raped a minor,
G.R. No. 135822, June 27, 2001) escaped and was held liable for damages to the
victim. The garnishment of his foreign currency
FOREIGN CURRENCY DEPOSIT ACT deposit should be allowed to prevent an injustice
(R.A. 6426, AS AMENDED) and for equitable grounds. The law was enacted to
encourage foreign currency deposit and not to
GR: Foreign currency deposits cannot be inquired or benefit a wrongdoer. (Salvacion v. Central Bank of
looked into. All foreign currency deposits are the Philippines, G.R. No. 94723, August 21, 1997)
absolutely confidential.(RA 6426, Sec. 8)
GARNISHMENT OF DEPOSITS,
XPNs: INCLUDING FOREIGN DEPOSITS
Based on law: The prohibition against examination or inquiry does not

preclude its being garnished for satisfaction of
1. The depositor has given his written permission judgment. The disclosure is purely incidental to the
(ibid.) execution process and it was not the intention of the
2. The Commissioner of Internal Revenue is legislature to place bank deposits beyond the reach of
authorized to inquire into bank deposits of the judgment creditor. (PCIB v. CA, G.R. No. 84526, January
following: 28, 1991)
ii.
a. A decedent to determine his estate; With respect to foreign deposits, they shall be exempt
b. Any taxpayer who has filed for an application for from attachment, garnishment, or any other order or
compromise of his tax liability; or process of any court, legislative body, government
c. A specific taxpayer upon request for tax agency or any administrative body whatsoever. (RA
information from a foreign tax authority 6426, Sec 8)
pursuant to an international convention or
agreement on tax matters to which the XPN: The garnishment of a foreign currency deposit
Philippines is a party. (NIRC, Sec. 6 [f]) should be allowed to prevent injustice and for equitable
grounds. (Salvacion v. Central Bank, supra.)
2. AMLC may inquire into any deposit with a bank or
financial institution, upon order of any competent GENERAL BANKING LAW OF 2000
court based on an ex parte application, in case of (R.A. No. 8791)
violation of RA 9160 if there is probable cause that
it is related to an unlawful activity. (RA 9160, Sec. Banks are entities engaged in the lending of funds
11) AMLC can investigate: obtained from the public in the form of deposits.
a. any property of funds related to financing Quasi-banks are entities engaged in the borrowing of
terrorism; or funds through the issuance, endorsement or assignment
b. property or funds of any person if there is with recourse or acceptance of deposit substitutes for
probable cause to believe he is committing or purposes of re-lending or purchasing of receivables and
attempting or conspiring to commit terrorism other obligations. (GBL, Sec 4)
or financing terrorism. (RA 10168, Sec. 10)
NOTE: Unlike banks, quasi-banks do not accept
3. Upon ex parte application by a law enforcer deposits. Neither are funds obtained insured with the
authorized by the Anti-Terrorism Council, the PDIC.
justices of the CA designated as special court to
handle anti-terrorism cases may authorize the Ownership of a bank
examination of deposits in a financial institution
upon finding probable cause of the commission of Individuals and non-bank corporations, whether
terrorism or conspiracy to commit terrorism.(RA foreign or Filipino, may own or control up to 40% of the
9372, Sec. 27-28) voting stock of a domestic bank.
4. PDIC and BSP may examine deposit accounts and
all information related to them in case of a finding In case of foreign individuals, the 40% requirement
of unsafe or unsound banking practices.(RA 3591, refers to the AGGREGATE shares held by foreigners in
as amended, Sec. 8) one corporation.
Based on jurisprudence: RATIONALE: The prohibition under the Constitution

applies since a bank is a “nationalized activity”.
1. Where the funds deposited in a joint foreign
currency savings account belonged exclusively to NOTE: An entire family may own an entire bank,
one of the depositors and were held in trust for him provided, not one of them own more than 40% of the
by the other depositor and the other depositor capital stock of the corporation.
unilaterally closed the joint account and
transferred the funds to her personal account, the Instances where the 40% limit does not apply to
latter cannot invoke the exemption from court corporations:
processes under RA 6426 because she is not the
owner of the deposit in the account. (Van Twest v. 1. In case of a wholly owned thrift bank
CA, G.R. No. 106253, February 10, 1994) subsidiary of universal bank
2. A father who sued his daughter for illegally 2. If the shares of the stockholder-corporation
withdrawing funds from his foreign currency are listed in the stock exchange, it can own up
deposit and transferring to another bank in the to 60% of a bank.
name of her sister, can inquire into the deposit of 3. If the stockholder-corporation is in existence
the sister, because the money deposited belongs to for at least 10 years.
33
MERCANTILE LAW
NOTE: The privilege provided in Nos. 1 & 2 can RESTRICTIONS ON BANK EXPOSURE TO DOSRI
be exercised only once. Meaning, it can have (DIRECTORS, OFFICERS, STOCKHOLDERS AND
60% ownership of ONLY ONE bank. THEIR RELATED INTERESTS) (2002 BAR)
CLASSIFICATIONS OF BANKS (2002, 2010 BAR) No director or officer of any banking institution shall,
either directly or indirectly, for himself or as the
1. Universal banks – Primarily governed by the GBL. representative or agent of other:
They can exercise the powers of an investment
house and invest in non-allied enterprises and have 1. Borrow any of the deposits of funds of such
the highest capitalization. banks;
2. Commercial banks – Ordinary banks governed by 2. Become a guarantor, indorser, or surety for
the GBL which have a lower capitalization loans from such bank to others; or
requirement than universal banks and cannot 3. In any manner be an obligor for money
exercise the powers of an investment house. It may borrowed from the bank or loaned by it. (sec.
only invest in allied enterprises. 83)
3. Thrift banks– These are a) Savings and mortgage
banks; b) Stock savings and loan associations; and The prohibition above will NOT apply if the following
c) Private development banks, which are primarily requirements are present:
governed by the Thrift Banks Act. (RA 7906)
4. Rural banks – These are mandated to make needed Approval requirement - Loan must be approved by
credit available and readily accessible in the rural the majority of all the directors not including the
areas on reasonable terms and which are primarily director concerned.
governed by the Rural Banks Act of 1992.(RA 7353)
5. Cooperative banks – Banks whose majority shares Reportorial requirements - Loan must be entered in
are owned and controlled by cooperatives the books of the corporation (GBL, Sec. 36)and Central
primarily to provide financial and credit services to Bank must be informed of prior to the transaction.
cooperatives. It shall include cooperative rural
banks. They are governed primarily by the Ceiling requirement - The amount of the loan shall
Cooperative Code.(RA 6938) not exceed the book value of the paid-in contribution
6. Islamic banks–Banks whose business dealings and and the amount of the unencumbered deposits. (Go v.
activities are subject to the basic principles and BSP, G.R. No. 178429, October 23, 2009)
rulings of Islamic Shari’ a, such as the Al Amanah
Islamic Investment Bank of the Philippines which NOTE: “Stockholder” within the purview of the DOSRI
was created by RA 6848. prohibition means one who owns at least 1% of the
7. Other classification of banks as determined by the bank, NOT at least 1 share in the bank.
Monetary Board of the BSP.
“Related Interest” – relatives of the director, officer or
DIRECTORS stockholder within the 1st degree of affinity or
consanguinity.
1. Composition: 5 to 15
2. At least 2 directors shall be independent Arms-length rule
3. Foreigners may become directors to the extent of
foreign participation in the equity of the bank It provides that any dealings of a bank with any of its
4. In case of bank merger or consolidation. Directors DOSRI shall be upon terms not less favorable to the bank
shall not exceed 21. than those offered to others.(GBL, Sec. 36 [2])
Acquisition of real estate Effect of non-compliance with the foregoing

requirement
For its own use: Total investment in real estate and
improvements, including equipment, for the own use of Violation of DOSRI is a crime and carries with it penal
the bank shall not exceed50% of combined capital sanction. It does not make the transaction void but only
account. renders the responsible officers and directors
criminally liable. (Republic v. Sandiganbayan, G.R. No.
For satisfaction of debt: Real property acquired by 166859, 169203, 180702, April 12, 2011)
bank because of a mortgage, conveyance in satisfaction
of debt, or under judgement shall be disposed within 5 A bank officer violates the DOSRI law when he acquires
years. (Sec. 52) bank funds for his personal benefit, even if such
acquisition was facilitated by a fraudulent loan
SINGLE BORROWER’S LIMIT application. DOSRI cannot be allowed to interpose the
fraudulent nature of the loan as a defense to escape
GR: Single borrower’s limit – The total amount of loans, culpability or their circumvention of the law. The
credit accommodations and guarantees that the bank prohibition under the law covers loan by a bank director
could grant to one (1) borrower should at no time or officer which are made directly, indirectly, for himself
exceed 25% of the bank’s net worth. (GBL, Sec 35.1) or as the representative or agent of others. At the same
(2002, 2015 BAR) time, he is liable for estafa through falsification of
commercial documents. The bank money which came to
XPNS: his possession as a result of the fraudulent loan
a. As the Monetary Board may otherwise prescribe application was not his. He remained bank’s fiduciary
for reasons of national interest; and with respect to that money, which makes it capable of
b. Deposits of rural banks with GOCC financial misappropriation or conversion in his hands (Soriano v.
institutions like LBP, DBP, and PNB. People of the Philippines, et al., G.R. No. 162336, February
1, 2010, Del Castillo, J.)
NOTE: An additional 10% is allowed if the loan is
secured by a trust receipt, shipping documents, Other limitations imposed upon banks with respect
warehouse receipts and other similar documents which to its loan function
must be fully covered by an insurance.
1. Loans and other credit accommodations secured by
REM shall not exceed 75% of the appraised value of

the real estate security plus 60% of the appraised the business or financial
value of the insured improvements. (GBL, Sec. 37) capacity of the client;
2. Chattel mortgage/intangible property such as 4. Taking into account all
patents, trademarks, etc. shall not exceed 75% of the
known circumstances, it
appraised value of the security. (GBL, Sec. 38)
3. Loans being contractual, the period of payment may be perceived that
may be subject to stipulation by the parties. In the the client's transaction is
case of amortization, the amortization schedule has Structured in order to
no fixed period as it depends on the project to be avoid being the subject of
financed such that if it was capable of raising reporting requirements
revenues, it should be at least once a year with a under the Act;
grace period of 3 years if the project to be financed
5. Any circumstances
is not that profitable which could be deferred up to
5 years if the project was not capable of raising relating to the
revenues. (GBL, Sec. 44) transaction which is
observed to Deviate
from the profile of the
SPECIAL LAWS client and/or the client's
past transactions with
the covered institution;
ANTI-MONEY LAUNDERING ACT 6. The transactions are in a
(R.A. 9160, AS AMENDED BY RA 9194,
way related to an
10167, 10365)
Unlawful activity or
Money laundering is committed by any person who, offense under this Act
knowing that any monetary instrument or property that is about to be, is
represents, involves, or relates to the proceeds of any being or has been
unlawful activity: committed; or
7. Any transaction that is
a. transacts said monetary instrument or property;
similar or Analogous to
b. converts, transfers, disposes of, moves, acquires,
possesses or uses said monetary instrument or any of the foregoing."
property; (RA 9160, Sec. 3[b-1])
c. conceals or disguises the true nature, source,
location, disposition, movement or ownership of or FREEZING OF MONEY INSTRUMENTOR PROPERTY
rights with respect to said monetary instrument or
property; Upon a verified ex parte petition by the AMLC and after
d. attempts or conspires to commit money laundering determination that probable cause exists that any
offenses referred to in paragraphs (a), (b) or (c); monetary instrument or property is in any way related
e. aids, abets, assists in or counsels the commission of to an unlawful activity as defined in Section 3(i) hereof,
the money laundering offenses referred to in the Court of Appeals may issue a freeze order which
paragraphs (a), (b) or (c) above; and shall be effective immediately, and which shall not
f. performs or fails to perform any act as a result of exceed six (6) months depending upon the
which he facilitates the offense of money circumstances of the case.
laundering referred to in paragraphs (a), (b) or (c)
above. If there is no case filed against a person whose account
has been frozen within the period determined by the
Money laundering is also committed by any covered court, the freeze order shall be deemed ipso
person who, knowing that a covered or suspicious facto lifted.
transaction is required under this Act to be reported to
the Anti-Money Laundering Council (AMLC), fails to do NOTE: It is solely the CA which has the authority to issue
so. (Sec. 4, RA 10365, amending Sec. 4, RA 9160) a freeze order. It also has the exclusive jurisdiction to
extend existing freeze orders previously issued by the
COVERED AND SUSPICIOUS TRANSACTIONS AMLC vis-à-vis accounts and deposits related to money-
laundering activities. (Republic v. Cabrini Green &
COVERED SUSPICIOUS Ramos, G.R. No. 154522, May 5, 2006)
'Covered 'Suspicious transaction' is a A person whose account has been frozen may file a
transaction' is a transaction with a covered motion to lift the freeze order and the court must
resolve this motion before the expiration of the freeze
transaction in cash institution, regardless of the
order.
or other equivalent amount involved, where any
monetary of the following NOTE: No court shall issue a temporary restraining
instrument circumstances exist: order or a writ of injunction against any freeze order,
involving a total except the Supreme Court. (Sec. 8, RA 10365, amending
amount in excess of (J I C S D U A) RA 9160)
Five hundred
1. There is no underlying AUTHORITY TO INQUIRE INTO BANK DEPOSITS
thousand pesos (Ph
500,000.00) within legal or trade obligation,
purpose or economic The AMLC may inquire into or examine any particular
one (1) banking day. deposit or investment, including related accounts, with
(RA 9160, Sec. 3 [b]) Justification;
any banking institution or non-bank financial institution
2. The client is not properly provided:
Identified;
3. The amount involved is 1. It is upon order of any competent court;
not Commensurate with 2. Based on an ex parte application; and
3. In cases of violations of this Act, when it has been
established that there is probable cause that the
35
MERCANTILE LAW
deposits or investments, including related accounts NOTE: No contract shall be denied validity or
involved, are related to an unlawful activity as enforceability on the sole ground that it is in the form of
defined in Section 3(i) hereof or a money an electronic data message or electronic document, or
laundering offense under Section 4 hereof. that any or all of the elements required under existing
laws for the formation of contracts is expressed,
The inquiry conducted by the AMLC is not violative of demonstrated and proved by means of electronic data
The Law on Secrecy of Bank Deposits or Ra 1405, as messages or electronic documents. (Ibid.)
amended; Foreign Currency Deposit Act or RA No. 6426,
as amended; General Banking Laws or RA 8791; and XPN: When the parties otherwise agree.
other similar laws.
Electronic transactions made through networking
The Court of Appeals shall act on the application to among banks
inquire into or examine any deposit or investment with
any banking institution or non-bank financial institution Electronic transactions made through networking
within twenty-four (24) hours from filing of the among banks, or linkages thereof with other entities or
application. networks, and vice versa, shall be deemed
consummated upon the actual dispensing of cash or the
NOTE: In case there is a pending case for forfeiture debit of one account and the corresponding credit to
pending before the Regional Trial Court, application for another. [Sec 16 (2), RA 8792]
bank inquiry order may be made on such court.
NOTE: The obligation of one bank, entity, or person
Cases where no court order shall be required in similarly situated to another arising therefrom shall be
order for the AMLC to inquire into deposit, considered absolute and shall not be subjected to the
investment or related accounts process of preference of credits. (Ibid.)
XPNs: No need of court order in cases of (KHDAM) Choice of security methods
1. Kidnapping, The parties to any electronic transaction shall be free to

2. Hijacking, determine the type of level of electronic data message
3. Drugs- violation of Dangerous Drugs Act, and electronic document security needed, and to select
4. Arson, and use or implement appropriate technological
5. Murder. (Sec. 11 R.A. 9160, as amended) methods that will suit their need. Sec. 24, RA 8792)
SAFE HARBOR PROVISION FINANCIAL REHABILITATION AND INSOLVENCY

ACT (R.A. 10142)
No administrative, criminal or civil proceedings, shall lie
against any person for having made a COVERED REHABILITATION
transaction report or a SUSPICIOUS transaction report
in the regular performance of his duties and in good Rehabilitation refers to the restoration of the debtor to
faith, whether or not such reporting results in any a condition of successful operation and solvency, if it is
criminal prosecution under this Act or any other shown that its continuance of operation is economically
Philippine law.(Sec. 9[c], R.A. 9160, as amended; Rule IX, feasible and its creditors can recover by way of the
2016 Revised Implementing Rules and Regulations of present value of payments projected in the plan, more if
Republic Act No. 9160, as amended) the debtor continues as a going concern than if its
immediately liquidated. (Dimaampao, 2017)
ELECTRONIC COMMERCE ACT OF 2000 (R.A. NO.
8792) AND A.M. NO. 01-7-01-SC OR THE RULES ON Q: Can a distressed corporation file a petition for
ELECTRONIC EVIDENCE corporate rehabilitation after the dismissal of its
earlier petition for liquidation? Explain.
Electronic document
A: YES. The dismissal of a petition for liquidation does
This refers to information or the representation of not preclude the distressed corporation from filing a
information, data, figures, symbols or other modes of petition for corporate rehabilitation. The dismissal of
written expression, described or however represented, the petition for liquidation implies that corporation may
by which a right is established or an obligation still be restored to successful operation and solvency.
extinguished, or by which a fact may be proved and (Dimaampao, 2017)
affirmed, which is received, recorded, transmitted,
stored, processed, retrieved or produced electronically. Q: Can the corporation file a petition for
[Sec. 5(f), RA 8792] rehabilitation first, and after it is dismissed, file a
petition for liquidation?
It includes digitally signed documents and any print-out
or output, readable by sight or other means, which A: YES. The dismissal of a petition for rehabilitation
accurately reflects the electronic data message or connotes that the corporation can no longer be restored.
electronic document. [Sec. 1(h), Rule 2, A.M. No. 01-7-01- Ergo, it can file a petition for liquidation. (Dimaampao,
SC] 2017)
NOTE: For purposes of the Rules on Electronic Q: Explain the phrase “equality is equity” in
Evidence, the term "electronic document" may be used corporate rehabilitation proceedings.
interchangeably with "electronic data message."
A: “Equality is Equity” means that once the corporation
FORMATION OF VALIDITY OF is taken over by a receiver, all the creditors stand on
ELECTRONIC CONTRACTS equal footing and no one may be paid ahead of the
others. This is consistent with the “pari passu” principle
GR: The elements required under existing laws for the in that all assets of a corporation under rehabilitation
formation of contracts, i.e. offer and acceptance, may be receivership are held in trust for the benefit of all
expressed in, demonstrated and proved by means of creditors, precluding one from obtaining an advantage
electronic data messages or electronic documents. [Sec or preference over another by the expediency of
16 (1), RA 8792] attachment, execution or otherwise. (Dimaampao, 2017)

LIQUIDATION 2. Utility Model – An invention qualifies for

registration as a utility model if it is new and
In a broad sense, it is equivalent to winding up, that is, industrially applicable. (Sec. 109, IPC)
the comprehensive process of settling accounts, 3. Industrial Design – any composition of lines or
ascertaining and adjusting debts, collecting assets and colors or any three-dimensional form, whether or
paying off claims. It is a declaration by the trial court of not associated with lines or colors, provided that
the corporation’s insolvency so that its creditors may be such composition or form gives a special
able to file their claims in the settlement of corporation’s appearance to and can serve as pattern for an
debts and obligations. (Pacific Banking Corporation industrial product or handicraft. It must be new or
Employees Organization v. CA, G.R. No. 109373, March 20, ornamental. (Sec. 112, 113 IPC)
1995)
An industrial design is not considered new if it
differs from prior designs only in minor respects
INTELECTUAL PROPERTY LAW that can be mistaken as such prior designs by an
ordinary observer. (World Intellectual Property
Organization, 2004)
Coverage of intellectual property rights
DOCTRINE OF EXHAUSTION
1. Copyright and Related Rights;
Also known as the doctrine of first sale, provides that the
2. Trademarks and Service Marks;
3. Geographic indications; patent holder has control of the first sale of his
invention. He has the opportunity to receive the full
4. Industrial designs;
consideration for his invention from his sale. Hence, he
5. Patents;
exhausts his rights in the future control of his invention.
6. Layout designs (Topographies) of Integrated
It espouses that the patentee who has already sold his
Circuits;
invention and has received all the royalty and
7. Protection of Undisclosed Information (TRIPS).
consideration for the same will be deemed to have
released the invention from his monopoly. The
Distinctions among trademark, patent, and
copyright invention thus becomes open to the use of the purchaser
without further restriction (Adams v. Burke, 84 U.S. 17,
1873).
INTELLECTUAL
DEFINITION GR: Patent rights are exhausted by first sale in the
PROPERTIES
Philippines (Domestic exhaustion).
Any visible sign capable of
distinguishing the goods XPN: On drugs and medicines: first sale in any
Trademarks and (trademark) or services jurisdiction exhausts the rights of the owner thereof
Service Marks (service mark) of an enterprise (International exhaustion). (R.A. 9502)
and shall include a stamped or
marked container of goods. NON-PATENTABLE INVENTIONS
Any technical solution of a
problem in any field of human 1. Plant varieties or animal breeds or essentially
activity which is new, involves biological process for the production of plants or
an inventive step and is animals. This provision shall not apply to micro-
Patents organisms and non-biological and microbiological
industrially applicable. It may
be, or may relate to, a product, processes
or process, or an improvement 2. Aesthetic creations
of any of the foregoing. 3. Discoveries, scientific theories and mathematical
Axists over original and methods
derivative intellectual creations 4. Schemes, rules and methods of performing mental
Copyright and acts, playing games or doing business, and
in the literary and artistic
Related Rights programs for computers
domain protected from the
moment of their creation. 5. Anything which is contrary to public order or
morality (IPC as amended by R.A. 9502, Sec. 22).
PATENTS 6. Methods for treatment of the human or animal
body
Improvement – enhancement or modification of any of 7. In the case of drugs and medicines, mere discovery
the foregoing subject to patentability criteria. of a new form or new property of a known
substance which does not result in the
Criteria for Patentability: enhancement of the efficacy of that substance
8. Computer programs are not patentable but are
1. Novelty – An invention shall not be considered new copyrightable. However, they can be patentable if
if it forms part of a prior art.(Sec. 23, IPC) they are part of a process (e.g. business process
2. Inventive Step–if, having regard to prior art, it is with a step involving the use of a computer
not obvious to a person skilled in the art at the time program).
of the filing date or priority date of the application
claiming the invention. OWNERSHIP OF PATENT
3. Industrially Applicable – An invention that can be
produced and used in any industry. (IPC, Sec. 27) 1. Inventor, his heirs, or assigns (IPC, Sec 28);
2. Joint invention – Jointly by the inventors (IPC, Sec.
Coverage of patents: 28);
3. Two or more persons invented separately and
1. Invention – any technical solution of a problem in independently of each other – To the person who
any field of human activity which is new, involves an filed an application;
inventive step and is industrially applicable. It may 4. Two or more applications are filed – the applicant
be, or may relate to, a product, or process, or an who has the earliest filing date or, the earliest
improvement of any of the foregoing. (Sec. 21, IPC) priority date. (First-to-file rule)(IPC, Sec. 29).
37
MERCANTILE LAW
5. If made pursuant to a commission – person who 3. If the demand for the patented article in the
commissions the work shall own the patent, unless Philippines is not being met to an adequate extent
otherwise provided in the contract. and on reasonable terms as determined by the
6. If made pursuant to an employment – In case the Secretary of Health, the right holder shall be
employee made the invention in the course of his informed promptly;
employment contract, the patent shall belong to: 4. The scope and duration of such use shall be limited
to the purpose for which it was authorized;
a. The employee, if the inventive activity is not a 5. Such use shall be non-exclusive;
part of his regular duties even if the employee 6. The right holder shall be paid adequate
uses the time, facilities and materials of the remuneration in the circumstances of each case,
employer; taking into account the economic value of the
b. The employer, if the inventive activity is the authorization; and
result of the performance of his regularly- 7. The existence of a national emergency or other
assigned duties, unless there is an agreement, circumstances of extreme urgency, in the case of
express or implied, to the contrary (IPC, Sec. drugs and medicines shall be subject to the
30). determination of the President of the Philippines
for the purpose of determining the need for such
LIMITATIONS OF PATENT RIGHTS use or other exploitation, which shall be
immediately executory.
1. Parallel imporation – In case of drugs and
medicine, the owner of a patent has NO RIGHT to PATENT INFRINGEMENT
prevent third parties from making, using, offering
for sale, importing a patented product, when it has Literal Infringement - Resort must be had, in the first
been introduced in the Philippines or anywhere instance, to the words of the claim. If accused matter
else in the world by the patent owner, or by any clearly falls within the claim, infringement is made out
party authorized to use the invention. and that is the end of it. To determine whether the
2. Prior user - Person other than the applicant, who particular item falls within the literal meaning of the
in good faith, started using the invention in the patent claims, the Court must juxtapose the claims of the
Philippines, or undertaken serious preparations to patent and the accused product within the overall
use the same, before the filing date or priority date context of the claims and specifications, to determine
of the application shall have the right to continue whether there is exactly identity of all material
the use thereof, but this right shall only be elements (Godines v. The Honorable Court of Appeals, G.R.
transferred or assigned further with his enterprise No. 97343, September 13, 1993).
or business.
3. Where the act is done privately and on a non- Doctrine of Equivalents – There is infringement when
commercial scale or for a non-commercial a device appropriates a prior invention by incorporating
purpose(IPC, Sec. 72.2). its innovative concept and, despite some modification
4. Exclusively for experimental use of the invention for and change, performs substantially the same function in
scientific purposes or educational purposes. (IPC, substantially the same way to achieve substantially the
Sec. 72.3). same result. (Ibid.).
5. Use by Government – a Government agency or
third person authorized by the Government may The doctrine of equivalents thus requires satisfaction of
exploit the invention even without agreement of the function-means-and-result test, the patentee having
the patent owner where: the burden to show that all three components of such
equivalency test are met (Smithkline Beckman
a. The public interest, in particular, national Corporation v. CA, G.R. No. 126627, August 14, 2003).
security, nutrition, health or the
development of other sectors, as determined Meaning of “equivalent device”: It is such as a
by the appropriate agency of the mechanic of ordinary skill in construction of similar
government, so requires; or machinery, having the forms, specifications and
b. A judicial or administrative body has machine before him, could substitute in the place of the
determined that the manner of exploitation, mechanism described without the exercise of the
by the owner of the patent or his licensee, is inventive faculty.
anti- competitive; or
c. In the case of drugs and medicines, there is a Doctrine of file wrapper estoppel: It balances the
national emergency or other circumstance of doctrine of equivalents. Patentee is precluded from
extreme urgency requiring the use of the claiming as part of patented product that which he had
invention; or to excise or modify in order to avoid patent office
d. In the case of drugs and medicines, there is a rejection, and he may omit any additions that he was
public non-commercial use of the patent by compelled to add by patent office regulations.
the patentee, without satisfactory reason; or Contributory Infringement
e. In the case of drugs and medicines, the
demand for the patented article in the Anyone who actively induces the infringement of a
Philippines is not being met to an adequate patent or provides the infringer with a component of a
extent and on reasonable terms, as patented product or of a product produced because of a
determined by the Secretary of the patented process knowing it to be especially adopted for
Department of Health. infringing the patented invention and not suitable for
substantial non-infringing use shall be liable as a
The use by the Government, or third person authorized contributory infringer and shall be jointly and severally
by the Government, shall be subject, where applicable, liable with the infringer (Sec. 76.6, IPC).
to the following provisions:
DEFENSES IN ACTION FOR INFRINGMENT
1. In situations of national emergency or other
circumstances of extreme urgency, the right holder 1. Invalidity of the patent (IPC, Sec. 81);
shall be notified as soon as reasonably practicable; 2. Any of the grounds for cancellation of patents:
2. In the case of public non-commercial use of the
patent by the patentee, without satisfactory reason, a. That what is claimed as the invention is not
the right holder shall be informed promptly; new or patentable

b. That the patent does not disclose the invention 4. Identical with a registered mark belonging to a
in a manner sufficiently clear and complete for different proprietor or a mark with an earlier filing
it to be carried out by any person skilled in the or priority date, in respect of:
art; or
c. That the patent is contrary to public order or a. The same goods or services, or
morality (IPC, Sec. 61). b. Closely related goods or services, or
c. If it nearly resembles such a mark as to be likely
3. Prescription to deceive or cause confusion;
TRADEMARK The law does not prohibit or enjoin every

similarity. The similarity must be such that the
Mark means any visible sign capable of distinguishing ordinary purchaser will be deceived into the belief
the goods (trademark) or services (service mark) of an that the goods are those of another
enterprise and shall include a stamped or marked
container of goods. 5. Is identical with an internationally well-known
mark, whether or not it is registered here, used for
Collective mark means any visible sign designated as identical or similar goods or services;
such in the application for registration and capable of 6. Is identical with an internationally well-known
distinguishing the origin or any other common mark which is registered in the Philippines with
characteristic, including the quality of goods or services respect to non-similar goods or services. Provided,
of different enterprises which use the sign under the that the interests of the owner of the registered
control of the registered owner of the collective mark. mark are likely to be damaged by such use;
7. Is likely to mislead the public as to the nature,
Trade name means the name or designation identifying quality, characteristics or geographical origin of the
or distinguishing an enterprise (IPC, Sec. 121.1, 121.2, goods or services;
121.3). 8. Consists exclusively of signs that are generic for the
goods or services that they seek to identify;
ACQUISITION OF OWNERSHIP OF A MARK 9. Consists exclusively of signs that have become
customary or usual to designate the goods or
The rights in a mark shall be acquired through services in everyday language and established
registration made validly in accordance with the trade practice;
provisions of the IP Code. Actual prior use in commerce 10. Consists exclusively that may serve in trade to
in the Philippines has been abolished as a condition for designate the kind, quality, quantity, intended
the registration of trademark. purpose, value, geographical origin, time or
production of the goods or rendering of the
Only the owner of the trademark, trade name or service services, or other characteristics of the goods or
mark used to distinguish his goods, business or service services;
from the goods, business or service of others is entitled 11. Consists of shapes that may be necessitated by
to register the same. An exclusive distributor does not technical factors or by the nature of the goods
acquire any proprietary interest in the principal's themselves or factors that affect their intrinsic
trademark and cannot register it in his own name unless value;
it is has been validly assigned to him.(Superior 12. Consists of color alone, unless defined by a given
Commercial Enterprises, Inc. v. Kunnan Enterprises, G.R. form; or
No. 169974, April 20, 2010) 13. Is contrary to public order or morality (IPC, Sec. 123).
ACQUISITION OF TRADE NAME WELL-KNOWN MARKS
Ownership of a mark or trade name may be acquired not A mark cannot be registered if it is identical with, or
necessarily by registration but by adoption and use in confusingly similar to, or constitutes a translation of a
trade or commerce. As between actual use of a mark mark which is considered by the competent authority of
without registration, and registration of the mark the Philippines to be well-known internationally and in
without actual use thereof, the former prevails over the the Philippines, whether or not it is registered here, as
latter. (Shangri-la Hotel Management Ltd. v. Developers being already the mark of a person other than the
Group of companies, March 31, 2006 G.R. No. 159938). A applicant for registration, and used for identical or
trade name need not be registered with the IPO before similar goods or services: Provided, That in
an infringement suit may be filed by its owner against determining whether a mark is well-known, account
the owner of an infringing trademark. All that is shall be taken of the knowledge of the relevant sector of
required is that the trade name is previously used in the public, rather than of the public at large, including
trade or commerce in the Philippines. (Coffee Partners, knowledge in the Philippines which has been obtained
Inc. v. San Francisco Coffee & Roastery, Inc., G.R. No. as a result of the promotion of the mark;
169504, March 3, 2010).
A mark cannot be registered if it is identical with, or
NON-REGISTRABLE MARKS confusingly similar to, or constitutes a translation of a
mark considered well-known in accordance with the
1. Consists of immoral, deceptive or scandalous matter preceding paragraph, which is registered in the
or falsely suggest a connection with persons, Philippines with respect to goods or services which
institutions, beliefs, or national symbols; are NOT similar to those with respect to which
2. Consists of the flag or coat of arms or other insignia registration is applied for: Provided,
of the Philippines or any of its political subdivisions,
or of any foreign nation; 1. That use of the mark in relation to those goods or
3. Consists of a name, portrait or signature identifying services would indicate a connection between
a particular living individual except by his written those goods or services, and the owner of the
consent, or the name, signature, or portrait of a registered mark: and
deceased President of the Philippines, during the life 2. That the interests of the owner of the registered
of his widow except by written consent of the mark are likely to be damaged by such use (Sec.
widow; 123.IPC).
39
MERCANTILE LAW
REGISTRATION OF A MARK The passing off of

Unauthorized use of a
one’s goods as those
trademark.
A certificate of registration of a mark shall be prima facie of another.
evidence of the validity of the registration, the Fraudulent intent is Fraudulent intent is
registrant’s ownership of the mark, and of the unnecessary. essential.
registrant’s exclusive right to use the same in GR: Prior registration of the Registration is not
connection with the goods or services and those that are trademark is a prerequisite necessary(Del
related thereto specified in the certificate (IPC, Sec. 138). to the action. Monte Corp. v. CA,
G.R. No. 78325,
A certificate of registration shall remain in force for ten XPN: Well-known marks January 23, 1990).
(10) years, provided that the registrant shall file a
declaration of actual use and evidence to that effect, or SIMILARITY BETWEEN THE TWO: The similarity lies
shall show valid reasons based on the existence of in both their ability to disrupt fair competition amongst
obstacles to such use, as prescribed by the Regulations, business enterprises and other businesses. They can
within one (1) year from the fifth anniversary of the date also create confusion, mistake, and deception as to the
of the registration of the mark. Otherwise, the mark minds of the consumers with regard to the source or
shall be removed from the Register by the Office. (IPC, identity of their products or services due to its similarity
Sec. 145) in appearance or packaging.
TESTS TO DETERMINE CONFUSING SIMILARITY COPYRIGHT

BETWEEN MARKS
A right over literary and artistic works which are
DOMINANCY TEST – it focuses on the similarity of the original intellectual creations in the literary and artistic
prevalent features of the competing marks. If the domain protected from the moment of creation (IPC, Sec.
competing trademark contains the main or essential or 171.1).
dominant features of another, and confusion and
deception are likely to result, infringement takes place. Principle of automatic protection: Works are
Duplication or imitation is not necessary; nor is it protected by the sole fact of their creation irrespective
necessary that the infringing label should suggest an of their content, quality or purpose. Such rights are
effort to imitate. The question is whether the use of conferred from the moment of creation. (IPC, Sec. 172.2)
marks involved is likely to cause of confusion or mistake
in the mind of the public or deceive purchasers. (2012 Elements of copyrightability
BAR)
1. Originality – Must have been created by the
HOLISTIC TEST – Confusing similarity is to be author’s own skill, labor, and judgment without
determined on the basis of visual, aural, connotative directly copying or evasively imitating the work of
comparisons and overall impressions engendered by the another
marks in controversy as they are encountered in the 2. Expression – Must be embodied in a medium
marketplace. The trademarks in their entirety as they sufficiently permanent or stable to permit it to be
appear in their respective labels are considered in perceived, reproduced or communicated for a
relation to the goods to which they are attached. period more than a transitory duration.
The dominancy test only relies on visual comparisons COPYRIGHTABLE WORKS

between two trademarks whereas the totality or holistic
test relies not only on the visual but also on the aural 1. Literary and Artistic Works
and connotative comparisons and overall impressions
between the two trademarks (Societe Des Produits Nestl, a. Books, pamphlets, articles and other writings
S.A. v. CA, G.R. No. 112012, Apr. 4, 2001). b. Lectures, sermons, addresses, dissertations
prepared for Oral delivery, whether or not
TRADEMARK INFRINGEMENT AND REMEDIES reduced in writing or other material form
c. Letters
Elements of trademark infringement: d. Dramatic, choreographic works
e. Musical compositions
a. The trademark or trade name is reproduced, f. Works of Art
counterfeited, copied, or colorably imitated by the g. Periodicals and Newspapers
infringer; h. Works relative to Geography, topography,
b. The infringing mark or trade name is used in architecture or science
connection with the sale, offering for sale, or i. Works of Applied art
advertising of any goods, business or services; or j. Works of a Scientific or technical character
the infringing mark or trade name is applied to k. Photographic works
labels, signs, prints, packages, wrappers, l. Audiovisual works and cinematographic
receptacles or advertisements intended to be used works
upon or in connection with such goods, business or m. Pictorial illustrations and advertisements
services; n. Computer programs; and
c. The use or application of the infringing mark or o. Other literary, scholarly, scientific and artistic
trade name is likely to cause confusion or mistake works (IPC, Sec. 172.1).
or to deceive purchasers or others as to the goods
or services themselves or as to the source or origin 2. Derivative Works
of such goods or services or the identity of such
business; and a. Dramatizations, translations, adaptations,
d. It is without the consent of the trademark or trade abridgements, arrangements, and other
name owner or the assignee thereof alterations of literary or artistic works;
b. Collections of literary, scholarly, or artistic
TRADEMARK INFRINGEMENT vs. works and compilations of data and other
UNFAIR COMPETITION materials which are original by reason of the
selection or coordination or arrangement of
TRADEMARK UNFAIR their contents (IPC, Sec. 173).
INFRINGEMENT COMPETITION

Derivative works shall be protected as new works, 1996, also cited in Copyright Law of the Philippines
provided that such new work shall not affect the force of by D. Funa).
any subsisting copyright upon the original works
employed or any part thereof, or be construed to imply In every sale or lease of an original work of painting
any right to such use of the original works, or to secure or sculpture or of the original manuscript of a
or extend copyright in such original works (IPC, Sec. writer or composer, subsequent to the first
173.2). disposition thereof by the author, the author or his
heirs shall have an inalienable right to participate
NON-COPYRIGHTABLE WORKS in the gross proceeds of the sale or lease to the
extent of five percent (5%) (Sec. 200, IPC).
1. Idea, procedure, system, method or operation,
concept, principle, discovery or mere data as such Must carry rule
2. News of the day and other items of press
information It is limitation on copyright which obligates operators to
3. Any official text of a legislative, administrative or carry the signals of local channels within their
legal nature, as well as any official translation respective systems. This is to give the people wider
thereof access to more sources of news, information, education,
4. Pleadings sports event and entertainment programs other than
5. Decisions of courts and tribunals – this refers to those provided for by mass media and afforded
original decisions and not to annotated decisions television programs to attain a well informed, well-
such as the SCRA or SCAD as these already fall versed and culturally refined citizenry and enhance
under the classification of derivative works, hence their socio-economic growth (ABS-CBN Broadcasting
copyrightable Corporation v. Philippine Multimedia System, G.R. No.
6. Any work of the government of the Philippines 175769-70, Jan. 19, 2009).
7. TV programs, format of TV programs (Joaquin v.
Drilon, G.R. No. 108946, Jan. 28, 1999) The rule mandates that the local television (TV)
8. Systems of bookkeeping; and broadcast signals of an authorized TV broadcast station,
9. Statutes. such as the GMA Network, Inc., should be carried in full
by the cable antenna television (CATV) operator,
RIGHTS OF COPYRIGHT OWNER without alteration or deletion. In this case, the Central
CATV, Inc. was found not to have violated the must-
1. Economic rights – The right to carry out, authorize carry rule when it solicited and showed advertisements
or prevent the following acts: in its cable television system. Such solicitation and
showing of advertisements did not constitute an
a. Reproduction of the work or substantial infringement of the “television and broadcast markets”
portion thereof under Section 2 of E.O. No. 205 (GMA Network, Inc. v.
b. Carry-out derivative work (dramatization, Central CATV, Inc., G.R No. 176694, July 18, 2014).
translation, adaptation, abridgement,
arrangement or other transformation of the OWNERSHIP OF COPYRIGHT
work)
c. First distribution of the original and each copy 1. Original and literary artistic works – author
of the work by sale or other forms of transfer 2. Joint authorship – co-authors, but if work of joint
of ownership authorship consists of parts that can be used
d. Rental right separately, then the author of each part shall be the
e. Public display original owner of the copyright in the part that he
f. Public performance has created (IPC, Sec. 178.2).
g. Other communications to the public. 3. Audiovisual work – Producer, the author of the
scenario, the composer of the music, the film
2. Moral rights – For reasons of professionalism and director, and the author of the work so adapted
propriety, the author has the right: 4. Anonymous and Pseudonymous works – publishers
shall be deemed to represent the authors of articles
a. To require that the authorship of the works be and other writings published without the names of
attributed to him (attribution right) the authors or under pseudonyms, unless the
b. To make any alterations of his work prior to, contrary appears, or the pseudonyms or adopted
or to withhold it from publication name leaves no doubt as to the author's identity, or
c. To preserve integrity of work, object to any if the author of the anonymous works discloses his
distortion, mutilation or other modification identity (IPC, Sec. 179).
which would be prejudicial to his honor or 5. Commissioned work – The person who
reputation; and commissioned the work shall own the work but the
d. To restrain the use of his name with respect to copyright thereto shall remain with the creator,
any work not of his own creation or in a unless there is a written stipulation to the contrary
distorted version of his work (IPC, Sec.193). (IPC, Sec. 178.4).
6. Collective works – When an author contributes to a
NATURE AND TERM OF MORAL RIGHTS: These are collective work, his right to have his contribution
personal rights independent from the economic rights. attributed to him is deemed waived unless he
Being a personal right, it can only be given to a natural expressly reserves it. (IPC, Sec. 196).
person. Hence, even if he has licensed or assigned his 7. In the course of employment –
economic rights, he continues to enjoy the above-
mentioned moral rights (Amador, 2007). The rights of an a. The employee, if not a part of his regular
author shall last during the lifetime of the author and IN duties even if the employee uses the time,
PERPETUITY after his death. facilities and materials of the employer.
b. The employer, if the work is the result of the
3. Droit de suite or “art proceeds right” is the artist’s performance of his regularly-assigned duties,
resale right, which requires that a percentage of the unless there is an agreement, express or
resale price of an artistic work is paid to the author. implied, to the contrary. (IPC, Sec. 178.3).
The right is exercisable even after the author’s
death, provided the work is still in copyright (David 8. Letters – the writer subject to the provisions of
Bainbridge, Intellectual Property, 3rd Ed., p. 220 Article 723 of the Civil Code. (IPC, Sec. 178.6).
41
MERCANTILE LAW
LIMITATIONS ON COPYRIGHT
DOCTRINE OF FAIR USE
“Fair use” permits a secondary use that “serves the

copyright objective of stimulating productive thought
and public instruction without excessively diminishing
the incentives for creativity”. The fair use of a
copyrighted work for criticism, comment, news
reporting, teaching including limited number of copies
for classroom use, scholarship, research, and similar
purposes is not an infringement of copyright.
NOTE: The fact that a work is unpublished shall not by

itself bar a finding of fair use if such finding is made
upon consideration of several factors (IPC, Sec. 182.2). If
you copy to the extent that you reduce the marketability
of the book, it is no longer fair use.
Substantial reproduction: It is not necessarily

required that the entire copyrighted work, or even a
large portion of it, be copied. If so much is taken that the
value of the original work is substantially diminished,
there is an infringement of copyright and to an injurious
extent, the work is appropriated. It is no defense that the
pirate did not know whether or not he was infringing
any copyright; he at least knew that what he was
copying was not his, and he copied at his peril. In cases
of infringement, copying alone is not what is prohibited.
The copying must produce an “injurious effect” (Habana
v. Robles, G.R. No. 131522, July 19, 1999).
COPYRIGHT INFRIGEMENT
Q: In an action for damages on account of an

infringement of a copyright, the defendant (the
alleged pirate) raised the defense that he was
unaware that what he had copied was a copyright
material. Would this defense be valid? (1997 BAR)
A:NO. In copyright infringement, intent is irrelevant. A

person may consciously or unconsciously copy or
infringe a copyrighted material and still be held liable
for such act.
A person infringes a right protected under this Act when

one:
a. Directly commits an infringement;

b. Benefits from the infringing activity of another
person who commits an infringement if the person
benefiting has been given notice of the infringing
activity and has the right and ability to control the
activities of the other person;
c. With knowledge of infringing activity, induces,
causes or materially contributes to the infringing
conduct of another (IPC,Sec. 216, as amended by R.A.
No. 10372).

MERCANTILE LAW RECENT CASES
NEGOTIABLE INSTRUMENTS LAW delivered in good condition, the consignee may reject
those in damaged condition and accept merely those
COMPLETION AND DELIVERY which are in good condition. But if the consignee is able
to prove that it is impossible to use those goods which
 Evangelista v. Screenex Inc., G.R. No. 211564, were delivered in good condition without the others,
November 20, 2017 then the entire shipment may be rejected. To reiterate,
the nature of damage must be such that the goods are
While it is true that the delivery of a check produces the rendered useless for sale, consumption or intended
effect of payment only when it is cashed, pursuant to Art. purpose for the consignee to be able to validly reject
1249 of the Civil Code, the rule is otherwise if the debtor them.
is prejudiced by the creditor's unreasonable delay in
presentment. The acceptance of a check implies an If the effect of damage on the goods consisted merely of
undertaking of due diligence in presenting it for diminution in value, the carrier is bound to pay only the
payment, and if he from whom it is received sustains difference between its price on that day and its
loss by want of such diligence, it will be held to operate depreciated value.
as actual payment of the debt or obligation for which it
was given. Hence, the delivery of the checks, despite the  Sanico and Castro v. Colipano, G.R. No. 209969,
subsequent failure to encash them within a period of 10 September 27, 2017
years or more, had the effect of payment. Debtor is
considered discharged from his obligation to pay and Q: In an action for damages for breach of contract of
can no longer be pronounced civilly liable for the carriage, may the driver and the owner/operator
amounts indicated thereon. both be held liable for damages?
LIABILITY OF BANKS A: NO. Only the operator (or the carrier) breached the
contract of carriage. It is only the carrier which was the
 BDO v. Engr. Lao, G.R. No. 227005, June 19, 2017 party to the contract of carriage and since the cause of
action is based on a breach of a contract of carriage, the
In cases of unauthorized payment of checks to a person liability of carrier is direct as the contract is between
other than the payee named therein, the drawee bank him and the passenger. The driver cannot be made liable
may be held liable to the drawer. The drawer in turn as he is not a party to the contract of carriage.
may seek reimbursement from the collecting bank.
CORPORATION LAW
Although the rule on the sequence of recovery of a
forged or lacking endorsement check has been deeply PIERCING THE VEIL
engrained in jurisprudence, exceptional circumstances
would justify it simplification. In this case, drawer was  Dutch Movers Inc. and Lee et. al v. Lequin et. al,
allowed to collect directly from collecting bank even if G.R. No. 210032, April, 25, 2017
there was no privity of contract between them (instead
from the drawee bank with whom it has a contractual Piercing the veil of corporate fiction is allowed, and
relationship) since drawee bank was not made a party responsible persons may be impleaded, and be held
to the appeal. solidarily liable even after final judgment and on
execution, provided that such persons deliberately used
INSURANCE LAW the corporate vehicle to unjustly evade the judgment
obligation, or resorted to fraud, bad faith, or malice in
 Oriental Assurance Corp. v. Ong, G.R. No. 189524, evading their obligation. In this case, petitioners were
October 11, 2017 impleaded from the inception of this case. They had
ample opportunity to debunk the claim that they
The fact that insurer is not a party to the shipment illegally dismissed respondents, and that they should be
contract does not mean that it cannot be bound by their held personally liable for having controlled DMI and
provisions. The insurer is subrogated to the rights of the actively participated in its management, and for having
consignee simply upon its payment of the insurance used it to evade legal obligations to respondents.
claim. As subrogee, petitioner merely stepped into the
shoes of the consignee and may only exercise those  I/AME Litton and Co. Inc. v. Litton and Co., G.R. No.
rights that the consignee may have against the 191525, December 13, 2017
wrongdoer who caused the damage. And since the right
of action of the consignee is subject to a precedent  The piercing of the corporate veil is premised on the
condition, such as the 15-day period filing of claim to the fact that the corporation concerned must have been
shipper, necessarily a suit by the insurer is subject to the properly served with summons or properly
same precedent condition. subjected to the jurisdiction of the court a quo.
Corollary thereto, it cannot be subjected to a writ of
execution meant for another in violation of its right
TRANSPORTATION LAW
to due process.
 Loadstar Shipping Co. v. Malayan Insurance Co., There exists, however, an exception to this rule: if
G.R. No. 185565, April 26, 2017 it is shown "by clear and convincing proof that the
separate and distinct personality of the corporation
In domestic shipments,if the goods are delivered but was purposefully employed to evade a legitimate
arrived at the destination in damaged condition, the and binding commitment and perpetuate a fraud or
remedies to be pursued by the consignee depend on the like wrongdoings.”
extent of damage on the goods.
The resistance of the Court to offend the right to due
If the goods are rendered useless for sale, consumption process of a corporation that is a non-party in a main
or for the intended purpose, the consignee may reject case, may disintegrate not only when its director,
the goods and demand the payment of such goods at officer, shareholder, trustee or member is a party to
their market price on that day. In case the damaged the main case, but when it finds facts which show
portion of the goods can be segregated from those
43
MERCANTILE LAW
that piercing of the corporate veil is merited. Thus,  Ient and Schulze v. Tullet Prebon (Phils.) Inc., G.R.
as the Court has already ruled, a party whose No. 189518, January 11, 2017
corporation is vulnerable to piercing of its corporate
veil cannot argue violation of due process. Q: Are violations of Sec. 31 and 34 of the Corporation
Code carry with it criminal liability?
 The mere fact that the corporation involved is a non-
profit corporation does not by itself preclude a A: NO. A scrutiny of the provisions of the code providing
court from applying the equitable remedy of specific liability for its violation bolsters this answer.
piercing the corporate veil. The equitable character
of the remedy permits a court to look to the Giving a broad and flexible interpretation to the term
substance of the organization, and its decision is not "penalized" in Section 144 only has utility if there are
controlled by the statutory framework under which provisions in the Corporation Code that specify
the corporation was formed and operated. While it consequences other than "penal" or "criminal" for
may appear to be impossible for a person to exercise violation of, or non-compliance with, the tenets of the
ownership control over a non-stock, not-for-profit Code. Section 22 imposes the penalty of involuntary
corporation, a person can be held personally liable dissolution for non-use of corporate charter. Sections
under the alter ego theory if the evidence shows that 22, 31, 34, 65, 66, and 67, provide for civil or pecuniary
the person controlling the corporation did in fact liabilities for the acts covered therein but what is
exercise control, even though there was no stock significant is the fact that, of all these provisions that
ownership. provide for consequences other than penal, only Section
74 expressly states that a violation thereof is likewise
 Reverse Piercing of the Corporate Veil - in a considered an offense under Section 144. If indeed
traditional veil-piercing action, a court disregards Section 144 automatically imposes penal sanctions on
the existence of the corporate entity so a claimant violations of provisions for which no criminal penalty
can reach the assets of a corporate insider. In a was imposed, then such language in Section 74 defining
reverse piercing action, however, the plaintiff seeks a violation thereof as an offense would have been
to reach the assets of a corporation and make the superfluous. There would be no need for legislators to
corporation liable for the debt of the shareholders. clarify that, aside from civil liability, violators of Section
It has two (2) types: outsider reverse piercing and 7 4 are exposed to criminal liability as well. The lack of
insider reverse piercing. Outsider reverse piercing specific language imposing criminal liability in Sections
occurs when a party with a claim against an 31 and 34 shows legislative intent to limit the
individual or corporation attempts to be repaid with consequences of their violation to the civil liabilities
assets of a corporation owned or substantially mentioned therein. Had it been the intention of the
controlled by the defendant. In contrast, in insider drafters of the law to define Sections 31 and 34 as
reverse piercing, the controlling members will offenses, they could have easily included similar
attempt to ignore the corporate fiction in order to language as that found in Section 74.
take advantage of a benefit available to the
corporation, such as an interest in a lawsuit or Moreover, The Corporation Code was intended as a
protection of personal assets. regulatory measure, not primarily as a penal statute.
Sections 31 to 34 in particular were intended to impose
PROPIETARY RIGHTS OF A STOCKHOLDER exacting standards of fidelity on corporate officers and
directors but without unduly impeding them in the
RIGHT TO INSPECT discharge of their work with concerns of litigation.
Considering the object and policy of the Corporation
 Roque v. People, G.R. No. 211108, June 7, 2017 Code to encourage the use of the corporate entity as a
vehicle for economic growth, we cannot espouse a strict
In any case, the revocation of a corporation's Certificate construction of Sections 31 and 34 as penal offenses in
of Registration does not automatically warrant the relation to Section 144 in the absence of unambiguous
extinction of the corporation itself such that its rights and statutory language and legislative intent to that effect.
liabilities are likewise altogether extinguished. The
termination of the life of a juridical entity does not, by OTHER CORPORATIONS
itself, cause the extinction or diminution of the rights
and liabilities of such entity nor those of its owners and  Lim v. Moldex Land Inc., G.R. No. 206038, January
creditors. Thus, the revocation of BMTODA's 25, 2017
registration does not automatically strip off Ongjoco of
his right to examine pertinent documents and records For stock corporations, the quorum is based on the
relating to such association. number of outstanding voting stocks while for non-
stock corporations, only those who are actual, living
MEETINGS members with voting rights shall be counted in
determining the existence of a quorum.
Q: King sought to annul the stockholder’s meeting
wherein a new set of Board of Director were duly The basis in determining the presence of quorum in
elected. His ground, among others, is that the notice non-stock corporations is the numerical equivalent of
of meeting failed to state the object and purpose all members who are entitled to vote, unless some
thereof as required by its corporate by-laws. Is other basis is provided by the By-Laws of the
King’s contention correct? corporation. The qualification "with voting rights"
simply recognizes the power of a non-stock corporation
A: NO. Under the corporate by laws, a notice for special to limit or deny the right to vote of any of its members.
meeting shall state the object and purpose thereof. When the by-laws declare that quorum shall constitute
However, the meeting being assailed is not a special majority of the “members in good standing”, it is a mere
meeting but an annual regular meeting. The agenda for qualification as to which members shall be counted for
the meeting which includes the election of new board of quorum purposes. Delinquent members, are stripped of
directors was the standard order of business in a regular voting rights.
annual meeting of stockholders of the corporation. (Lao
v. Lim, G.R. No. 201306, Aug. 9, 2017) Likewise, quorum may be different from voting rights
depending on the by-laws of the non-stock corporation.
PENAL PROVISIONS For example, if there are 100 members in a non-stock
corporation, 60 of which are members in good standing,

then the presence of 50% plus 1 of those members in

good standing will constitute a quorum. Thus, 31 Nothing in Section 30 of RA 7653 requires the BSP,
members in good standing will suffice in order to through the Monetary Board, to make an independent
consider a meeting valid as regards the presence of determination of whether a bank may still be
quorum. The 31 members will naturally have to exercise rehabilitated or not. As expressly stated in the afore-
their voting rights. It is in this instance when the number cited provision, once the receiver determines that
of voting rights each member is entitled to becomes rehabilitation is no longer feasible, the MB is simply
significant. If 29 out of the 31 members are entitled to 1 obligated to: (a) notify in writing the bank's board of
vote each, another member (known as A) is entitled to directors of the same; and (b) direct the PDIC to proceed
20 votes and the remaining member (known as B) is with liquidation.
entitled to 15 votes, then the total number of voting
rights of all 31 members is 64. Thus, majority of the 64 SPECIAL LAWS
total voting rights, which is 33 (50% plus 1), is
necessary to pass a valid act. Assuming that only A and ANTI-MONEY LAUNDERING ACT
B concurred in approving a specific undertaking, then
their 35 combined votes are more than sufficient to  Republic v. Bolante, G.R. No. 186717, April 17,
authorize such act. 2017
SECURITIES REGULATION CODE The court receiving the application for inquiry order
cannot simply take the AMLC's word that probable
JURISDICTION cause exists that the deposits or investments are related
to an unlawful activity. It will have to exercise its own
 Dy Teban Trading Inc. v. Dy, G.R. No. 185647, determinative function in order to be convinced of
July 26, 2017 such fact. For the trial court to issue a bank inquiry
order, it is necessary for the AMLC to be able to show
Q: After finding that the action filed before the RTC specific facts and circumstances that provide a link
acting as Special Commercial Court is not an intra- between an unlawful activity or a money laundering
corporate dispute but a civil action for injunction, is offense, on the one hand, and the account or monetary
the RTC divested of jurisdiction? instrument or property sought to be examined on the
other hand.
A: NO. The fact that a particular branch which has been
designated as a Special Commercial Court does not shed FINANCIAL REHABILITATION AND INSOLVENCY
the RTC's general jurisdiction over ordinary civil cases ACT
under the imprimatur of statutory law, (BP) 129. To
restate, the designation of Special Commercial Courts  Metrobank v. Liberty Corrugated, G.R. No.
was merely intended as a procedural tool to expedite 184317, January 25, 2017
the resolution of commercial cases in line with the
court's exercise of jurisdiction. The RTC'sgeneral The phrase “any debtor who foresees the impossibility
jurisdiction over ordinary civil cases is therefore not of meeting its debts” in the law must not be applied in
abdicated by an internal rule streamlining court its literal sense, such that debtors whose debt has
procedure. matured cannot anymore file a petition for
rehabilitation.
 Oca v. Custodio, G.R. No. 199825, July 26, 2017
A corporation that may seek corporate rehabilitation is
In intra-corporate controversies, all orders of the trial characterized not by its debt but by its capacity to pay
court are immediately executory: “Section 4. Executory this debt. The condition that triggers rehabilitation
nature of decisions and orders - All decisions and orders proceedings is not the maturation of a corporation's
issued under these Rules shall immediately be debts but the inability of the debtor to pay these.
executory except the awards for moral damages,
exemplary damages and attorney's fees, if any. No  BIR v. Lepanto Ceramics, Inc., G.R. No. 224764,
appeal or petition taken therefrom shall stay the April 24, 2017
enforcement or implementation of the decision or
order, unless restrained by an appellate court. Under Sec. 16 of FRIA, one of the claims suspended upon
Interlocutory orders shall not be subject to appeal.” the issuance of Commencement Order are (deemed to
include a Stay or Suspension Order), “claims of the
Questioning the trial court orders does not stay its government, whether national or local, including taxes,
enforcement or implementation. There is no showing tariffs and customs duties”.
that the trial court orders were restrained by the
appellate court. Hence failure to comply with such The acts of sending a notice of informal conference and
orders may render a person liable for contempt of court. a Formal Letter of Demand are part and parcel of the
entire process for the assessment and collection of
BANKING LAWS deficiency taxes from a delinquent taxpayer- an action
or proceeding for the enforcement of a claim which
NEW CENTRAL BANK ACT should have been suspended pursuant to the
Commencement Order. Unmistakably, foregoing acts of
 Cu v. Small Business Guarantee and Finance BIR are in clear defiance of the Commencement Order.
Corp., G.R. No. 211222, August 7, 2017
 People v. Mateo, G.R. No. 210612, October 9, 2017
Criminal case for BP 22 against the bank officers should
be dismissed due to the order for receivership. The prosecution of the officers of the corporation has no
The closure of the bank, placing it under receivership bearing on the pending rehabilitation of the
per Monetary Board Orders and the filing of the petition corporation, especially since they are charged in their
for assistance in the liquidation proceedings effectively individual capacities. Such being the case, the purpose
suspended the demandabililty of the loan, thus the BP of the law for the issuance of the stay order is not
22 case cannot proceed and was properly dismissed. compromised, since the appointed rehabilitation
 Apex Bancrights Holdings Inc. v. BSP and PDIC , receiver can still fully discharge his functions as
G.R. No. 214866, October 2, 2017 mandated by law. It bears to stress that the
rehabilitation receiver is not charged to defend the
45
MERCANTILE LAW
officers of the corporation. If there is anything that the and which are Puregold's products. While both "-MATE"
rehabilitation receiver might be remotely interested in and "MATCH" contain the same first three letters, the
is whether the court rules for the civil liability. Such a last two letters in Puregold's mark, "C" and "H,"
scenario, however, is not a reason to suspend the rendered a visual and aural character that made it easily
criminal proceedings, because should the court distinguishable from Nestle's mark. Also, the
prosecuting the officers of the corporation find that an distinctiveness of Puregold's mark with two separate
award or indemnification is warranted, such award words with capital letters "C" and "M" made it
would fall under the category of claims, the execution of distinguishable from Nestle's mark which is one word
which would be subject to the stay order issued by the with a hyphenated small letter "-m" in its mark. In
rehabilitation court. addition, there is a phonetic difference in pronunciation
between Nestle's "-MATE" and Puregold's "MATCH." As
INTELLECTUAL PROPERTY LAW a result, the eyes and ears of the consumer would not
mistake Nestle's product for Puregold's product.
 Juan v. Juan, G.R. No. 221372, August 23, 2017
Q: Roberto Juan filed a complaint for unfair

competition against his brother before the RTC. He
claims that he has been using the mark “Lavandera
Ko” since 1994 in his laundry business and that
registered the same as business name from the DTI.
The RTC dismissed the complaint on the ground that
neither of the parties had the right to the exclusive
use or appropriation of the mark “Lavandera Ko”
because the same was already used as a mark in a
musical composition of another person back in
1942. Is the RTC correct?
A: NO. The RTC erred in denying the parties the proper

determination as to who has the ultimate right to use the
said trade name by ruling that neither of them has the
right or a cause of action, since "Lavandera Ko" is
protected by a copyright, and not a trade name.By their
very definitions, copyright and trade or service name
are different. Copyright is the right of literary property
as recognized and sanctioned by positive law. Trade
name, on the other hand, is any designation which is
adopted and used by person to denominate goods which
he markets, or services which he renders, or business
which he conducts, or has come to be so used by other,
and through its association with such goods, services or
business, has acquired a special significance as the name
thereof.
As such, "Lavandera Ko," being a musical composition

with words is protected under the copyright law and not
under the trademarks, service marks and trade names
law.
 Societes Des Produits, Nestle, S.A. v. Puregold

Price Club Inc., G.R. No. 217194, September 6,
2017
Q: Puregold filed with the IPO registration of the

trademark "COFFEE MATCH" for use on coffee, tea,
cocoa, sugar, artificial coffee, etc. Nestle filed an
opposition against Puregold's application for
registration. Nestle alleged that it is the exclusive
owner of the "COFFEE-MATE" trademark and that
there is confusing similarity between the "COFFEE-
MATE" trademark and Puregold's "COFFEE MATCH"
application. Is Nestle’s contention correct?
A: NO. Puregold's mark may be registered.The word

"COFFEE" is the common dominant feature between
Nestle's mark "COFFEE-MATE" and Puregold's mark
"COFFEE MATCH." However, following Section 123,
paragraph (h) of RA 8293 which prohibits exclusive
registration of generic marks, the word "COFFEE"
cannot be exclusively appropriated by either Nestle or
Puregold since it is generic or descriptive of the goods
they seek to identify. Consequently, consideration on
the word or words paired with the generic or
descriptive word must be made, in this particular case
"-MATE" for Nestle's mark and "MATCH" for Puregold's
mark, to determine the distinctiveness and
registrability of Puregold's mark "COFFEE MATCH."
The distinctive features of both marks are sufficient to
warn the purchasing public which are Nestle's products


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UST LAW PRE-WEEK NOTES 2018

DOCTRINE OF STRICT COMPLIANCE v.

Basis Doctrine of Doctrine of

not only fraud in the performance of the obligation issuing or

2 UST BAR OPERATIONS

THE PRINCIPLE OF RES PERIT DOMINO TRANSACTIONS NOT CONSIDERED AS A TRUST

Estafa is deemed committed if the entrustee:

Q: Is lack of intent to defraud a bar to the 3. Must be Payable on demand, or at a fixed or

1. Words prevail over figures. September 26, 2008)

PAYABLE TO ORDER When can you treat a bill of exchange as a

4 UST BAR OPERATIONS

ACCOMODATION PARTY 1. Incomplete and undelivered instrument

6 UST BAR OPERATIONS

a. Instrument is genunine; Reasonable time as applied to presentment

PERSONS NEGOTIATING BY DELIVERY Requisites of acceptance:

1. GR: It must be in writing

8 UST BAR OPERATIONS

3. Assured/Beneficiary – a person designated by the Theft clause

MARINE INSURANCE 1. The vehicle is returned;

“Perils of the sea or perils of navigation” (1998 Bar) INSURABLE INTEREST

It is a loss which, in the ordinary course of events,

Mortgagor- If the designated beneficiaries are disqualified by law to

1. Those made between persons who were guilty of MORTGAGOR-MORTGAGEE

10 UST BAR OPERATIONS

Section 77 of the Insurance Code in effect allows CONCEALMENT

12 UST BAR OPERATIONS

1. Fortuitous events (flood, storm, earthquake,

14 UST BAR OPERATIONS

In the absence of a special contract, a carrier is not an Acts of criminals

STIPULATIONS LIMITING LIABILITY MORAL DAMAGES

2. Carrier Doctrine of inscrutable fault

16 UST BAR OPERATIONS

Q: Two vessels figured in a collision resulting in (within the (foreign port to

NOTE: The one-year realm of Warsaw Convention. A cause of action based

Doctrine of combined or connecting services THE CORPORATION CODE

18 UST BAR OPERATIONS

Corporation Sole Illustration:

One established for the purpose of administering and 1)

(public utility)  Non-voting Preferred Shares – 100 (20%

XYZ Corp. Foreigner ABC Corporation is complaint. For purposes of

2) In the illustration above 80% of the voting shares and

XYZ Corp. Foreigner The doctrine of corporate juridical personality states

XYZ Corp. Foreigner NOTE: Rights belonging to the corporation cannot

20 UST BAR OPERATIONS

BY-LAWS 3. Incur, create or increase bonded indebtedness

Express or general powers of a corporation (Theory DOCTRINE OF APPARENT AUTHORITY(2015 BAR)

a. Political party, TRUST FUND DOCTRINE

22 UST BAR OPERATIONS

a) His presence as director at the meeting is not 2. Proprietary rights

24 UST BAR OPERATIONS

REMEDIAL RIGHTS 1. The termination of the corporate existence at least

Two legal steps in corporate dissolution

26 UST BAR OPERATIONS

Jurisdictional tests of “doing or transacting business MERGER AND CONSOLIDATION

28 UST BAR OPERATIONS

If the tender offer is oversubscribed, the c. between the corporation, partnership or

NOTE: Tender offer shall be made at a price

30 UST BAR OPERATIONS

7. Persisting in conducting its business in an unsafe or deprive a