MERCANTILE LAW

UP L AW BAR REVIEWER

2012

MERCANTILE Letters of Credit Warehouse Receipts Law Trust Receipts Law Negotiable Instruments Law Insurance Code Transportation Law Corporation Law Securities Regulation Code Banking and Finance Intellectual Property Law

LAW Dean Danilo L. Concepcion Dean, UP College of Law

Prof. Concepcion L. Jardeleza Associate Dean, UP College of Law Prof. Ma. Gisella D. Reyes Secretary, UP College of Law Prof. Florin T. Hilbay Faculty Adviser, UP Law Bar Operations Commission 2012 Ramon Carlo F. Marcaida Commissioner Eleanor Balaquiao Mark Xavier Oyales Academics Committee Heads Anna Katarina Rodriguez Mickey Chatto Mercantile Law Subject Heads Graciello Timothy Reyes Layout

UP LAW BAR OPERATIONS COMMISSION

MERCANTILE LAW REVIEWER

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2012

MERCANTILE BAR OPERATIONS COMMISSION 2012 EXECUTIVE COMMITTEE Ramon Carlo Marcaida |Commissioner Raymond Velasco • Mara Kriska Chen |Deputy Commissioners Barbie Kaye Perez |Secretary Carmen Cecilia Veneracion |Treasurer Hazel Angeline Abenoja|Auditor COMMITTEE HEADS Eleanor Balaquiao • Mark Xavier Oyales | Acads Monique Morales • Katleya Kate Belderol • Kathleen Mae Tuason (D) • Rachel Miranda (D) |Special Lectures Patricia Madarang • Marinella Felizmenio |Secretariat Victoria Caranay |Publicity and Promotions Loraine Saguinsin • Ma. Luz Baldueza |Marketing Benjamin Joseph Geronimo • Jose Lacas |Logistics Angelo Bernard Ngo • Annalee Toda|HR Anne Janelle Yu • Alyssa Carmelli Castillo |Merchandise Graciello Timothy Reyes |Layout Charmaine Sto. Domingo • Katrina Maniquis |Mock Bar Krizel Malabanan • Karren de Chavez |Bar Candidates’ Welfare Karina Kirstie Paola Ayco • Ma. Ara Garcia |Events

LAW

MERCANTILE LAW TEAM 2012 Subject Heads | Anna Katarina Rodriguez • Mickey Chatto LAYOUT TEAM 2012 Layout Artists | Alyanna Apacible • Noel Luciano • RM Meneses • Jenin Velasquez • Mara Villega s • Naomi Quimpo • Leslie Octaviano • Yas Refran • Cris Bernardino Layout Head| Graciello Timothy Reyes

OPERATIONS HEADS Charles Icasiano • Katrina Rivera |Hotel Operations Marijo Alcala • Marian Salanguit |Day-Operations Jauhari Azis |Night-Operations Vivienne Villanueva • Charlaine Latorre |Food Kris Francisco Rimban • Elvin Salindo |Transpo Paula Plaza |Linkages


MERCANTILE LAW

2012 UP Law Bar Reviewer

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Copyright and all other relevant rights over this material are owned jointly by the University of the Philippines College of Law and the Student Editorial Team. The ownership of the work belongs to the University of the Philippines College of Law. No part of this book shall be reproduced or distributed without the consent of the University of the Philippines College of Law. All Rights reserved.



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Letters of Credit A. B. C. D. E.

Definition/Concept ................. 11 Governing laws ...................... 11 Nature of letter of credit .......... 11 Parties to a letter of credit ....... 12 Basic Principles of letter of credit 12

Warehouse Receipts Law A. Nature and Functions of a Warehouse Receipt ....................... 14 B. Duties of a Warehouseman ........ 15 C. Warehouseman‘s Lien .............. 16

Trust Receipts Law A. Definition/Concept of a Trust Receipt Transaction ...................... 17 B. Rights of the Entruster ............. 18 C. Obligations and Liability of the Entrustee .................................. 18 D. Remedies available ................. 18

Negotiable Instruments Law ......... 20 I. FORMS AND INTERPRETATION ......... 20 A. Requisites of Negotiability ........ 20 1. In writing and signed by the maker or drawer ....................... 20 2. Containing an unconditional promise to pay or order to pay ...... 20 3. Sum payable must be certain .. 21 4. Payable in money ................ 21 5. Payable on demand, or at a fixed or determinable future time ......... 21 6. Payable to order or to bearer .. 22 7. If bill of exchange, drawee must be named or designated with reasonable certainty .................. 22 B. Kinds of Negotiable Instrument ... 23 II.Completion and delivery ................................................. 23 A. Insertion of Date (Sec. 13) ........ 23 B. Completion of Blanks .............. 23 C. Incomplete and Undelivered Instruments (Sec. 15) .................... 24 D. Complete and Undelivered Instruments (Sec. 16) .................... 24 III.Rules of interpretation ................................................. 24

IV. ..................................... Signature ................................................. 24 A. Signing in Trade Name ............. 24 B. Signature of Agent .................. 24 C. Indorsement by Minor or Corporation ................................ 25 D. Forgery ............................... 25 V. ............................... Consideration ................................................. 27 VI.Accommodation party ................................................. 27 VII.Negotiation .............................. 27 A. Negotiation Distinguished from Assignment................................. 27 B. Modes of Negotiation ............... 27 1. By Delivery - If payable to bearer (Sec. 30) ................................. 27 2. By Indorsement completed by Delivery - If payable to order (Sec. 30) 28 3. Other Kinds of Indorsement .... 29 VIII.Rights of the Holder ................... 29 A. Holder in Due Course (HDC) ....... 29 B. Defenses against the Holder ...... 31 IX.Liabilities of Parties ................................................. 31 A. Parties Primarily Liable (Sec. 60 and 62) 31 B. Parties Secondarily Liable ......... 31 C. Warranties ........................... 32 X.Presentment for Payment ................................................. 33 A. Necessity of presentment for payment .................................... 33 B. Parties to whom presentment for payment should be made ................ 33 C. Dispensation with presentment for payment .................................... 33 D. Dishonor by non-payment.......... 33 XI.Notice of Dishonor ................................................. 33 A. Parties to be notified .............. 33 B. Parties who may give notice of dishonor .................................... 34 C. Effect of notice ..................... 34 D. Form of notice (Sec. 96) ........... 34 E. Waiver ................................ 34 F. Dispensation with notice........... 34

MERCANTILE LAW REVIEWER G.

Effect of failure to give notice ... 34

XII. Discharge of Negotiable Instrument 34 A. Discharge of negotiable instrument 34 B. Discharge of parties secondarily liable ....................................... 35 C. Right of party who discharged instrument ................................. 35 D. Renunciation by holder (Sec. 122) 35 XIII.Material alteration ................................................. 35 A. Concept .............................. 35 B. Effect of material alteration ...... 35 XIV. ................................ Acceptance ................................................. 36 A. Definition ............................ 36 B. Manner ............................... 36 C. Time for acceptance (Sec. 136) .. 36 D. Rules governing acceptance....... 36 XV. Presentment of Acceptance ......... 36 A. Time/place/manner of presentment ........................................ 37 B. Effect of failure to make presentment (Sec. 144).................. 37 C. Dishonor by non-acceptance ...... 37

V.Insurable Interest ................................................. 45 A. In Life/Health ....................... 46 B. In Property ........................... 47 C. Double Insurance and Over Insurance ................................... 48 D. Multiple or Several Interests on Same Property [Secs. 8, 9] ..................... 49 VI.Perfection of the Contract of Insurance ................................................. 49 VII. Rescission of Insurance Contracts .... 52 VIII. Claims Settlement and Subrogation . 55

Transportation Law ............59 I.Common Carriers ................................................. 60 A. Diligence Required of Common Carriers ..................................... 60 B. Liabilities of Common Carriers .... 61

III.Characteristics/Nature of Insurance Contracts ..................................... 41

II.Vigilance over goods ................................................. 61 A. Exempting Causes ................... 61 1. Requirement of Absence of Negligence .............................. 62 2. Absence of Delay ................. 62 3. Due diligence to prevent or lessen the loss .......................... 62 B. Contributory negligence ........... 62 C. Duration of liability ................. 62 1. Delivery of goods to common carrier ................................... 63 2. Actual or constructive delivery 63 3. Temporary unloading or storage 63 D. Stipulation for limitation of liability 63 1. Void stipulations ................. 63 2. Limitation of liability to fixed amount .................................. 64 3. Limitation of liability in absence of declaration of greater value ...... 64 E. Liability for baggage of passengers (asked in 97 and 98) ...................... 64 1. Checked-in baggage ............. 64 2. Baggage in possession of passengers .............................. 65

IV......................................... Classes ................................................. 42

III. Safety of Passengers ................... 65 A. Void stipulations .................... 65

XVI.Promissory Notes ................................................. 37 XVII. ..................................... Checks ................................................. 37 A. Definition ............................ 37 B. Kinds .................................. 37 C. Presentment for payment............ 38 1. Time ............................... 38 2. Effect of delay ................... 38

Insurance Code ................... 39 I.Concept of Insurance ................................................. 40 II.Elements of an Insurance Contract ................................................. 40

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MERCANTILE LAW REVIEWER B.

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Duration of liability ................ 65 1. Waiting for carrier or boarding of carrier ................................... 65 2. Arrival at destination ........... 66 C. Liability for acts of others......... 66 1. Employees ........................ 66 2. Other passengers and strangers 66 D. Extent of liability for damages ... 67

2. Exclusion of income tax as expense ................................. 75 D. Unlawful arrangements ............ 75 1. Boundary system ................. 75 2. Kabit system (Asked in 90 and 05) 76 E. Approval of sale, encumbrance or lease of property ......................... 76

IV.Bill of Lading ................................................. 67 A. Three-fold character ............... 67 B. Delivery of goods ................... 67 1. Period for delivery............... 67 2. Delivery without surrender of bill of lading ................................ 67 3. Refusal of consignee to take delivery ................................. 68 C. Period for filing claims............. 68 D. Period for filing actions ............ 68

VII.The Warsaw Convention ................................................. 77 A. Applicability ......................... 77 B. Liability of Carrier for Damages .. 77 C. Limitation of Liability .............. 77 1. Liability to passengers .......... 77 2. Liability for checked baggage .. 77 3. Liability for hand-carried baggage 77 D. Willful misconduct .................. 77

V.Maritime Commerce ................................................. 68 A. Charter Parties ...................... 68 1. Bareboat/Demise Charter ...... 68 2. Time Charter ..................... 69 3. Voyage/Trip Charter ............ 69 B. Liability of Shipowners and Shipping Agents ...................................... 69 1. Liability for acts of captain .... 69 2. Exceptions to limited liability . 69 C. Accidents and Damages in Maritime Commerce ................................. 70 1. General Average ................. 70 2. Collisions (Asked in 95 and 98 Bar Exams) .................................. 71 D. Carriage of Goods by Sea Act (Commonwealth Act No. 65) ............ 72 1. Application ....................... 72 2. Notice of Loss or Damage....... 72 3. Period of Prescription (Asked in 92, 95, 00 and 04 Bar Exams) ........ 72 4. Limitation of liability ........... 72

Corporation Law .........................79

VI.Public Service Act ................................................. 73 A. Definition of public utility (Asked in 92, 93, 95, 98 and 00) ................... 73 B. Necessity for certificate of public convenience ............................... 73 1. Requisites for issuance of CPC . 74 2. Prior operator rule .............. 74 C. Fixing of rate ........................ 75 1. Rate of return .................... 75

I.Corporation, defined ................................................. 80 II.Classification of corporations ................................................. 80 A. Stock Corporation (Asked in 01 and 04) 80 B. Non-stock Corporation (Asked in 04) 80 C. Other Classification................. 81 III.Nationality of corporations ................................................. 81 A. Control Test ......................... 81 B. The Grandfather Rule .............. 82 IV. Corporate juridical personality ...... 82 A. Doctrine of Separate Juridical Entity (Asked in 95, 96, 99 and 00) .... 82 1. Liability for torts and crimes ... 82 2. Recovery of damages ............ 82 B. Doctrine of piercing the corporate veil (Asked in 91, 01 and 04) ............ 82 1. Grounds for application of doctrine ................................. 82 2. Test in determining applicability 83 V. Capital structure ........................ 83 A. Number and Qualifications of Incorporators .............................. 83

MERCANTILE LAW REVIEWER 1. 2.

Definition ......................... 83 Requirements (Sec. 10) ......... 83 B. Minimum Capital Stock and Subscription Requirements .............. 84 C. Corporate Term ..................... 84 D. Classification of Shares ............ 84 VI. Incorporation and organization ................................................. 86 A. Promoter ............................. 86 1. Liability of Promoter ............ 86 2. Liability of Corporation for Promoter‘s Contract .................. 86 B. Subscription Contract .............. 86 C. Pre-incorporation Subscription Agreements ................................ 87 D. Consideration for Stocks ........... 87 E. Articles of Incorporation........... 87 1. Contents (Sec. 14) ............... 87 2. Non-amendable items ........... 88 F. Corporate Name – limitations on use of corporate name ....................... 89 G. Registration and Issuance of Certificate of Incorporation ............. 89 H. Election of Directors or Trustees . 89 I. Adoption of By-Laws ............... 90 VII. Corporate powers ..................... 90 A. General powers, theory of general capacity (Sec. 36) ........................ 90 B. Specific powers, theory of specific capacity .................................... 91 1. Power to extend or shorten corporate term......................... 91 2. Power to increase or decrease capital stock or incur, create, increase bonded indebtedness....... 91 3. Power to deny pre-emptive rights 91 4. Power to sell or dispose of corporate assets ....................... 91 5. Power to acquire own shares .. 91 6. Power to invest corporate funds in another corporation or business .. 91 7. Power to declare dividends .... 91 8. Power to enter into management contract ................................. 91 9. Ultra vires acts (Sec. 45) ....... 93 10. Doctrine of individuality of subscription ............................ 93 11. Doctrine of equality of shares 93 12. Trust fund doctrine ........... 94 C. How Exercised....................... 94

1. 2. 3.

By the Shareholders ............. 94 By the Board ...................... 94 By the Officers ................... 95

VIII. Stockholders and members ......... 95 A. Fundamental Rights of a Stockholder ................................ 95 B. Participation in Management...... 95 1. Proxy ............................... 95 2. Voting Trust ....................... 95 3. Cases When Stockholder‘s Action is Required .............................. 96 C. Proprietary Rights .................. 98 1. Right to Dividends ............... 98 2. Right of Appraisal ................ 99 3. Right to Inspect .................. 99 4. Preemptive Right ...............100 5. Right to Vote ....................100 D. Remedial Rights ....................100 1. Individual Suit ...................100 2. Representative Suit .............100 3. Derivative Suit ...................101 E. Obligations of a Stockholder .....101 F. Meetings .............................102 1. Regular or Special...............102 2. Who Calls the Meetings ........102 3. Quorum (Sec. 50) ...............102 4. Minutes of Meetings ............103 IX.Board of directors and trustees ............................................... 103 A. Repository of Corporate Powers .103 B. Tenure, Qualifications and Disqualifications of Directors ..........104 C. Elections (Sec. 24) .................104 D. Removal (Sec. 28) .................105 E. Filling of Vacancies (Sec.29) .....105 F. Compensation (Sec. 30) ...........105 G. Disloyalty ............................105 H. Business Judgment Rule ..........106 I. Solidary Liability for Damages ...106 J. Liability for Watered Stocks ......106 K. Personal Liabilities ................106 L. Responsibility for Crimes .........107 M. Special Facts Doctrine ............107 N. Inside Information .................107 O. Contracts ............................107 1. By self-dealing directors with the corporation ............................107 2. Between corporations with interlocking directors ................107 P. Executive Committee .............108 1. Creation ..........................108 2. Limitations on its Powers ......108

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MERCANTILE LAW REVIEWER Q.

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1. 2. 3. 4.

Meetings ............................ 108 Regular or Special .............. 108 Who Presides (Sec. 54) ......... 108 Quorum (Sec. 25) ............... 108 Rule on Abstention ............. 108

X. Capital affairs .......................... 109 A. Certificate of Stock ............... 109 1. Nature of the Certificate ...... 109 2. Uncertificated Shares .......... 109 3. Negotiability ..................... 109 4. Issuance .......................... 109 5. Stock and Transfer Book (Sec. 74, par. 4) .................................. 110 6. Lost or Destroyed Certificates (Sec. 73) ............................... 110 7. Situs of the Shares of Stock ... 110 B. Watered Stocks .................... 110 1. Definition ........................ 110 2. Liability of Directors for Watered Stocks .................................. 110 3. Trust Fund Doctrine for Liability for Watered Stocks ................... 110 C. Payment of Balance of Subscription (Sec. 66 & 67) ............................ 111 1. Call by Board of Directors ..... 111 2. Notice Requirement ............ 111 D. Sale of Delinquent Shares (Sec. 68) 111 1. Effect of Delinquency (Sec. 71) 111 2. Call by Resolution of the Board of Directors (Sec. 68).................... 111 3. Notice of Sale ................... 111 4. Auction Sale ..................... 111 E. Alienation of Shares ............... 112 1. Allowable Restrictions on the Sale of Shares ......................... 112 2. Sale of Partially Paid Shares .. 112 3. Sale of a Portion of Shares not Fully Paid .............................. 112 4. Sale of All of Shares Not Fully Paid 112 5. Sale of Fully Paid Shares ....... 112 6. Requisites of a Valid Transfer. 112 7. Involuntary Dealings ............ 113 XI. Dissolution and liquidation ......... 113 A. Modes of Dissolution .............. 113 1. Voluntary ........................ 113 2. Involuntary....................... 114 B. Methods of Liquidation ........... 114 1. By the Corporation Itself ...... 114 2. Conveyance to a Trustee within a 3-Year Period.......................... 115

3. By Management Committee or Rehabilitation Receiver ..............115 4. Liquidation after Three Years .115 XII.Other corporations ............................................... 115 A. Close Corporations (Corporation Code, Title XII) ...........................115 1. Characteristics of a Close Corporation ............................116 2. Validity of Restrictions on Transfer of Shares ....................116 3. Issuance or Transfer of Stock in Breach of Qualifying Conditions ....116 4. When Board Meeting is Unnecessary or Improperly Held ....116 5. Preemptive Right ...............117 6. Amendment of Articles of Incorporation ..........................117 7. Deadlocks ........................117 B. Non-Stock Corporations (Corporation Code, Title XI)............119 1. Definition ........................119 2. Purposes (sec. 88) ..............119 3. Treatment of Profits............119 4. Distribution of Assets Upon Dissolution .............................119 C. Religious Corporations ............119 1. Corporation Sole (Sec. 110) ...119 D. Foreign Corporations ..............120 1. Bases of Authority Over Foreign Corporations ...........................120 2. Necessity of a License to Do Business ................................120 3. Personality to Sue...............121 4. Suability of Foreign Corporations 121 5. Instances When Unlicensed Foreign Corporations May Be Allowed to Sue ...................................121 6. Grounds for Revocation of License .................................121 XIII. Merger and consolidation .......... 122 A. Definition and Concept (Corporation Code, Title IX)............................122 B. Constituent v. Consolidated Corporation ...............................122 C. Plan of Merger or Consolidation (Sec. 76) ..................................122 D. Articles of Merger or Consolidation (Sec. 78) ..................................122 E. Procedure ...........................122 F. Effectivity ...........................123 G. Limitations ..........................123

MERCANTILE LAW REVIEWER H.

Effects ............................... 123

Securities Regulation Code......... 124 I.State policy ............................................... 125 II.Powers and functions of the SEC ............................................... 125 A. Under the SRC ...................... 125 B. Under PD 902-A .................... 125 C. Under the Corporation Code ..... 126 III.Securities required to be registered ............................................... 126 IV.Procedure for registration of securities ............................................... 127 V.Prohibitions on fraud, manipulation and insider trading ....................... 128 A. Manipulation of security prices .. 128 B. Short sales .......................... 129 C. Fraudulent transactions .......... 129 D. Insider trading ..................... 129 VI.Protection of investors ............................................... 130 A. Tender offer rule .................. 130 B. Rules on proxy solicitation ....... 130 C. Disclosure rule ..................... 130 VII. Civil liability .......................... 131 A. Civil Liabilities on Account of False Registration Statement (Sec. 56) ..... 131 B. Civil Liabilities Arising in Connection With Prospectus, Communications and Reports (Sec. 57) 132 1. Liability of Sellers/Offerors ... 132 2. Liability of Makers of False Misleading Statements ............... 132 C. Civil Liability of Fraud in Connection with Securities Transactions (Sec. 58) .................................. 132 D. Civil Liability for Manipulation of Security Prices (Sec. 59)................ 132 E. Civil Liability with Respect to Commodity Futures Contracts and Preneed Plans (Sec. 60) .................... 132 F. Civil Liability on Account of Insider Trading .................................... 132 1. Liability for non-disclosure .... 132 2. Liability for communicating nonpublic information about issuer .... 133 G. Liabilities of Controlling Persons, Aider and Abettor and Other Secondary Liability ................................... 133 1. Liability of Controlling Persons 133

2. Liability of Director/Officer for Delay in the Filing of Required Documents .............................133 3. Liability of Aider/Abettor .....133

Banking and Finance .................. 138 I.The New Central Bank Act (RA 7653) ............................................... 139 A. State policies .......................139 B. Salient features of the NCBA .....139 C. Creation of the Bangko Sentral ng Pilipinas (BSP) ............................139 D. Responsibility and primary objective ..................................139 E. Monetary Board ....................139 1. Powers and Functions (Sec. 15, NCBA) ...................................139 2. Composition (Sec. 6, NCBA) ...140 3. Members (Sec. 6, NCBA) .......140 4. Qualifications (Sec. 8, NCBA) .140 5. Disqualifications (Sec. 9, NCBA) 140 6. Prohibitions on members of the MB (Sec. 9, NCBA) ....................140 7. Grounds for Removal of any member of the MB (Sec. 10, NCBA) 140 8. Vacancies, how filled (Sec. 7, NCBA) ...................................140 9. Salaries (Sec. 13, NCBA) .......140 10. Meetings (Sec. 11, NCBA) ...140 11. Civil Liability of Members of the MB (Sec. 16, NCBA) ..............141 F. How the BSP handles banks in distress ....................................141 1. Conservatorship .................141 2. Receivership .....................141 3. Liquidation / Closure ...........142 G. How the BSP handles exchange crisis .......................................142 II.Law on Secrecy of Bank Deposits (RA 1405) ........................................ 143 A. Purpose (Sec. 1) ....................143 B. Prohibited acts (Sec. 3) ...........143 C. Deposits covered (Sec. 2) .........143 D. Exceptions (Sec. 2) ................143 E. Garnishment of deposits ..........145 F. Penalties for violation (Sec. 5)...146 III.General Banking Law of 2000 (RA 8791) ........................................ 146 A. Policy ................................146

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B. Definition and classification of banks ...................................... 146 C. Distinction between banks and quasi-banks and trust entities ......... 147 D. Bank powers and liabilities ....... 147 E. Diligence required of banks ...... 149 F. Nature of bank funds and bank deposits ................................... 150 G. Stipulation on interests ........... 150 H. Grant of loans and security requirements (Prudential measures) . 150 I. Penalties for violation ............ 153 IV. Philippine Deposit Insurance Corporation Act (RA 3591, as amended) ............................................... 153 A. Basic Policy ......................... 153 B. Concept of Insured Deposits ..... 153 C. Liability of Depositors ............. 154 Chapter V. Foreign Currency Deposit Act (RA 6426) .................................. 156 A. Confidentiality ..................... 156 B. Privileges ........................... 157

Intellectual Property ................... 158 I. Intellectual Property in general A. Intellectual Property Rights ...... 159 B. Differences between copyrights, trademarks and patent ................. 159 C. Technology Transfer Arrangement 160 A. Patentable Inventions ............. 161 B. Non-patentable Inventions ....... 162 C. Ownership of a Patent ............ 162 D. Cancellation of a Patent .......... 163 E. Remedy of the True and Actual Inventor ................................... 163 F. Rights conferred by a Patent .... 164 G. Limitations on the Rights of Patentees ................................. 164 H. Patent Infringement ............... 165 I. Licensing ............................ 166 J. Assignment and Transmission of Rights...................................... 169 II. Patents A. Definitions of Marks, Collective Marks, Trade Names ................. 170

B.

Acquisition of Ownership of Marks 170 C. Acquisition of Ownership of Trade Name ......................................170 D. Non-registrable Marks .............171 E. Tests to Determine Confusing Similarity between Marks ...............171 F. Well-known Marks..................172 Determinants (need not concur)....172 Protection extended to Well-Known Marks ...................................172 G. Rights Conferred by Registration 173 H. Use by Third Parties of names, etc. similar to Registered Marks ............173 I. Cancellation of Trademark .......174 J. Infringement and Remedies ......174 K. Unfair Competition ................176 L. Trade Names and Business Names 177 M. Collective Marks....................178 N. Criminal Penalties .................178 IV. Copyright A. B. C. D. E. F. G.

Basic Principles.....................178 Copyrightable Works ..............179 Non-copyrightable Works .........179 Rights of Copyright Owner ........180 Rules on Ownership of Copyright 183 Deposit on Copyrightable Materials 184 Limitations on Copyright ..........185

V. Registration Flowcharts A. Patent Application .................190 B. Utility Model and Industrial Design 191 C. Copyright Registration and Deposit 192


Letters of Credit Letters of Credit Warehouse Receipts Law Trust Receipts Law Negotiable Instruments Law Insurance Code Transportation Law Corporation Law Securities Regulation Code Banking and Finance Intellectual Property

MERCANTILE LAW A. Definition/Concept B. Governing laws C. Nature of letter of credit D. Parties to a letter of credit E. Basic Principles of letter of credit

A. Definition/Concept A letter of credit is a written instrument whereby the writer requests or authorizes the addressee to pay money or deliver goods to a third person and assumes responsibility for payment of debt therefor to the addressee (Transfield Philippines v. Luzon Hydro, 2004). A letter of credit is an engagement by a bank or other person made at the request of a customer that the issuer shall honor drafts or other demands of payment upon compliance with the conditions specified in the credit (Prudential Bank v. Intermediate Appellate Court, 1992). Its purpose is to substitute for, and support, the agreement of the buyer-importer to pay money under a contract or other arrangement, but does not necessarily constitute as a condition for the perfection of such arrangement (Reliance Commodities, Inc. v. Daewoo Industrial Co., Ltd.)

B. Governing laws The Uniform Customs and Practice (UCP) for Documentary Credits governs transactions involving letters of credit. The provisions of the Code of Commerce on letters of credit (Art. 567-572) have been repealed. Letters of Credits have long been and are still governed by the provisions of the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce. (Metropolitan Waterworks and Sewerage System v. Daway, 2004) We have further observed that there being no specific provisions which govern the legal complexities arising from transactions involving letters of credit not only between or among banks themselves but also between banks and the seller or the buyer, as the case may be, the applicability of the U.C.P. is undeniable. (Bank of America, NT&SA v. Court of Appeals, 1993)

C. Nature of letter of credit 1. Financial device – L/Cs are developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. (Bank of America, NT&SA v. Court of Appeals, 1993) A letter of credit is one of the modes of payment, set out in Sec. 8, Central Bank Circular No. 1389, "Consolidated Foreign Exchange Rules and Regulations," dated 13 April 1993, by which commercial banks sell foreign exchange to service payments for, e.g., commodity imports (Reliance Commodities v. Daewoo, 1993). 2. Composite of three distinct contracts – An L/C transaction involves three distinct but intertwined relationships: (a) First Contract between the party applying for the L/C (buyer/ importer/ account party) and the party for whose benefit the L/C is issued (seller/ exporter/ beneficiary). (b) Second Contract between the buyer and the issuing bank. This contract is sometimes called the "Application and Agreement" or the "Reimbursement Agreement". (c) Third Contract between the issuing bank and the seller, in order to support the contract, under (a) above (Reliance Commodities v. Daewoo, 1993). Types of letters of credit 1. As to the type of the main contract a. Commercial L/C The main transaction involves a contract of sale. The credit is payable upon the presentation by the seller of documents that show he has taken affirmative steps to comply with the sales agreement. The beneficiary of a commercial credit must demonstrate by documents that he has performed his contract (Transfield Philippines v. Luzon Hydro, 2004). b. Standby L/C Used in non-sale settings. The credit is payable upon certification of a party's nonperformance of the agreement. The beneficiary of the standby credit must certify that his obligor has not performed the contract. (Transfield Philippines v. Luzon Hydro, 2004). 2. As to revocability a. Revocable L/C One which can be revoked by the issuing bank without the consent of the buyer and seller b.

Irrevocable L/C

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One which the issuing bank cannot revoke without the consent of the buyer and seller (Feati Bank and Trust Co. v. CA, 1991)

accept the draft drawn under the documentary credit (Feati Bank and Trust Co. v. CA, 1991). 5.

3. As to the obligation assumed by correspondent bank a. Unconfirmed L/C One which continues to be the obligation of the issuing bank b. Confirmed L/C One which is supported by the absolute assurance to the beneficiary that the confirming bank will undertake the issuing bank's obligation as its own according to the terms and conditions of the credit (Feati Bank and Trust Co. v. CA, 1991)

The bank assumes a direct obligation to the seller and its liability is a primary one as if the bank itself had issued the letter of credit (Feati Bank and Trust Co. v. CA, 1991). 6.

Bank of America, NT & SA v. Court of Appeals, 1993: There would be at least three parties to a letter of credit:

2.

Buyer/Exporter/Account Party – one who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of documents of title. Issuing Bank – the bank which undertakes: (1) to pay the seller upon receipt of the draft and proper documents of title; and (2) to surrender the documents to the buyer upon reimbursement. The obligation of the issuing bank to pay the seller is direct, primary, absolute, definite and solidary with the buyer, in the absence of stipulation in the letter of credit (Metropolitan Waterworks and Sewerage System v. Daway, 2004)

3.

Seller/Importer/Beneficiary– one who ships the goods to the buyer in compliance with a contract of sale and delivers the documents of title and draft to the issuing bank to recover payment.

Depending on the transaction, the number of parties to the letter of credit may be increased. Thus, the different types of correspondent banks: 4.

Advising/Notifying Bank – the bank which conveys to the seller the existence of the credit. The bank assumes no liability except to notify and/or transmit to the seller the existence of the letter of credit. A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with that of the issuing bank and not with the beneficiary to whom he assumes no liability. The bank may suggest to the seller its willingness to negotiate, but this fact alone does not imply that the notifying bank promises to

Negotiating Bank – the bank which discounts the draft presented by the seller. The bank buys or discounts a draft under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller but after negotiation, a contractual relationship will then prevail between the negotiating bank and the seller (Feati Bank and Trust Co. v. CA, 1991).

D. Parties to a letter of credit

1.

Confirming Bank – the bank which lends credence to the letter of credit issued by a lesser known issuing bank.

7.

Paying Bank – the bank which undertakes to encash the drafts drawn by the seller.

E. Basic Principles of letter of credit a. Doctrine of independence The principle of independence assures the seller or the beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract is actually accomplished or not. Under this principle, banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in the documents or superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever (Transfield Philippines v. Luzon Hydro, 2004; Bank of America, NT&SA v. Court of Appeals, 1993). Feati v. Court of Appeals, 1991: The concept of guarantee vis-a-vis the concept of an irrevocable credit are inconsistent with each other. In the first place, the guarantee theory destroys the independence of the bank's responsibility from the contract upon which it was opened. In the second place, the nature of both contracts is mutually in conflict with each other. In contracts of guarantee, the guarantor's obligation is merely collateral and it arises only upon the default of the person primarily

MERCANTILE LAW REVIEWER liable. On the other hand, in an irrevocable credit the bank undertakes a primary obligation. b. Fraud exception principle The principle that limits the application of the independence principle only to instances where it would serve the commercial function of the credit and not when fraud attends the transaction. In the case of Transfield Philippines v. Luzon Hydro, 2004, the petitioner alleged misrepresentation as constituting fraud. The Court, however, made no ruling as to whether the same indeed constitutes fraud. Transfield Philippines v. Luzon Hydro, 2004: It asserts that the "fraud exception" exists when the beneficiary, for the purpose of drawing on the credit, fraudulently presents to the confirming bank, documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. In such a situation, petitioner insists, injunction is recognized as a remedy available to it. Citing Dolan's treatise on letters of credit, petitioner argues that the independence principle is not without limits and it is important to fashion those limits in light of the principle's purpose, which is to serve the commercial function of the credit. If it does not serve those functions, application of the principle is not warranted, and the common law principles of contract should apply. c. Doctrine of strict compliance The settled rule in commercial transactions involving letters of credit which requires that the documents tendered by the seller must strictly conform to the terms of the letter of credit. Otherwise, the issuing bank or the concerned correspondent bank is not obliged to perform its undertaking under the contract. Feati v. Court of Appeals, 1991: The tender of documents by the beneficiary (seller) must include all documents required by the letter. A correspondent bank which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary.

13


Warehouse Receipts Law

14 Letters of Credit Warehouse Receipts Law Trust Receipts Law Negotiable Instruments Law Insurance Code Transportation Law Corporation Law Securities Regulation Code Banking and Finance Intellectual Property

MERCANTILE LAW A. Nature and Functions of a Warehouse Receipt B. Duties of a Warehouseman C. Warehouseman‘s Lien

a. Negotiable Receipts A receipt in which it is stated that the goods received will be delivered to the bearer or to the order of any person named in such receipt (Sec.5). Negotiation may be made either by: i. delivery (a) Where, by terms of the receipt, the warehouseman undertakes to deliver the goods to the bearer, or (b) Where, by the terms of the receipt, the warehouseman undertakes to deliver the goods to the order of a specified person, and such person or a subsequent indorsee of the receipt has indorsed it in blank or to bearer (Sec. 37)

A. Nature and Functions Warehouse Receipt

of

a

a. To whom delivered The warehouseman may deliver the goods to the following: (a)

The person lawfully entitled to the possession of the goods, or his agent;

(b)

A person who is either himself entitled to delivery by the terms of a non-negotiable receipt issued for the goods, or who has written authority from the person so entitled either indorsed upon the receipt or written upon another paper; or

(c)

b. Kinds

A person in possession of a negotiable receipt by the terms of which the goods are deliverable to him or order, or to bearer, or which has been indorsed to him or in blank by the person to whom delivery was promised by the terms of the receipt or by his mediate or immediate indorser (Sec. 9)

Where a warehouseman delivers the goods to one who is not in fact lawfully entitled to the possession of them, the warehouseman shall be liable as for conversion to all having a right of property or possession in the goods if he delivered the goods otherwise than as authorized by subdivisions (b) and (c) of the preceding section, and though he delivered the goods as authorized by said subdivisions, he shall be so liable, if prior to such delivery he had either: (a) Been requested, by or on behalf of the person lawfully entitled to a right of property or possession in the goods, not to make such deliver; or (b) Had information that the delivery about to be made was to one not lawfully entitled to the possession of the goods.

ii. indorsement A negotiable receipt may be negotiated by the indorsement of the person to whose order the goods are, by the terms of the receipt, deliverable. Such indorsement may be in blank, to bearer or to a specified person. If indorsed to a specified person, it may be again negotiated by the indorsement of such person in blank, to bearer or to another specified person. Subsequent negotiation may be made in like manner (Sec. 38) b. Non-Negotiable Receipts A receipt in which it is stated that the goods received will be delivered to the depositor or to any other specified person (Sec. 4). The indorsement of such receipt gives the transferee no additional right (Sec. 39) NOTE— No provision shall be inserted in a negotiable receipt that it is non-negotiable. Such provision, if inserted shall be void. BUT, a non-negotiable receipt shall have plainly placed upon its face by the warehouseman issuing it "non-negotiable," or "not negotiable." In case of the warehouseman's failure so to do, a holder of the receipt who purchased it for value supposing it to be negotiable, may, at his option, treat such receipt as imposing upon the warehouseman the same liabilities he would have incurred had the receipt been negotiable (Sec. 7). c. Distinction Instrument and Receipt

between a a Negotiable

Negotiable Instrument May be issued by anyone with capacity to contract Must contain all the requisites under Sec. 1

Negotiable Warehouse

Negotiable Warehouse Receipt May be issued only by a warehouseman Must contain all the essential terms under

MERCANTILE LAW REVIEWER of the NIL Subject is sum certain in money Holder has the right to demand payment The issuer has no lien on the amount represented by the instrument

Sec. 2 of the WRL Subject is goods Holder has the right to demand the delivery of the goods The issuer retains a lien on the goods

d. Rights of a holder of a negotiable warehouse receipt as against a transferee of a non-negotiable warehouse receipt Rights of Holder of a Negotiable Warehouse Receipt Acquires:

Rights of a Transferee of Non-Negotiable Warehouse Receipt Acquires:

(a) Such title to the goods as the person negotiating the receipt to him had or had ability to convey to a purchaser in good faith for value, and also such title to the goods as the depositor or person to whose order the goods were to be delivered by the terms of the receipt had or had ability to convey to a purchaser in good faith for value; and

(a) as against the transferor, the title of the goods subject to the terms of any agreement with the transferor.

(b) The direct obligation of the warehouseman to hold possession of the goods for him according to the terms of the receipt as fully as if the warehouseman and contracted directly with him (Sec. 41).

(b) the right to notify the warehouseman of the transfer to him of such receipt and thereby to acquire the direct obligation of the warehouseman to hold possession of the goods for him according to the terms of the receipt (Sec. 42) NOTE— Prior to the notification of the warehouseman by the transferor or transferee of a nonnegotiable receipt, the title of the transferee to the goods and the right to acquire the obligation of the warehouseman may be defeated by the levy of an attachment or execution upon the goods by a creditor of the transferor or by a notification to the warehouseman by the transferor or a subsequent purchaser from the transferor of a subsequent sale of the goods by the transferor. (Sec. 42)

NOTE— If the warehouse receipt is negotiable through indorsement, the transferee thereof which acquired the same through mere delivery acquires the right to

compel him to indorse the receipt unless a contrary intention appears. The negotiation shall take effect as of the time when the indorsement is actually made (Sec. 44).

B. Duties of a Warehouseman 1. Duty to deliver to the persons entitled to delivery as enumerated in Sec. 9 A warehouseman, in the absence of some lawful excuse provided by this Act, is bound to deliver the goods upon a demand made either by the holder of a receipt for the goods or by the depositor; if such demand is accompanied with: (a) An offer to satisfy the warehouseman's lien; (b) An offer to surrender the receipt, if negotiable, with such indorsements as would be necessary for the negotiation of the receipt; and (c) A readiness and willingness to sign, when the goods are delivered, an acknowledgment that they have been delivered, if such signature is requested by the warehouseman (Sec. 8) NOTE— Where a warehouseman delivers the goods to one who is not in fact lawfully entitled to the possession of them, the warehouseman shall be liable as for conversion to all having a right of property or possession in the goods if he delivered the goods otherwise than as authorized by subdivisions (b) and (c) of the preceding section, and though he delivered the goods as authorized by said subdivisions, he shall be so liable, if prior to such delivery he had either: (a) Been requested, by or on behalf of the person lawfully entitled to a right of property or possession in the goods, not to make such deliver; or (b) Had information that the delivery about to be made was to one not lawfully entitled to the possession of the goods (Sec. 10) 2. Duty to ensure the existence of goods and the accurate description thereof in the warehouse receipt – Otherwise, he shall be liable for damages to the holder of the receipt (Sec. 20) 3. Duty to exercise care over goods – A warehouseman must exercise the degree of care as a reasonably careful owner would exercise. Otherwise, he shall be liable for any loss or injury arising from failure to exercise such care. 4. Duty to keep goods of different depositors, or of same depositor when his goods are covered by separate receipts, separate. Exception: Fungible goods can be commingled with the same kind, if warehouseman is authorized by agreement or by custom. 5. Duty to cancel/mark a negotiable receipt when goods/part of goods are delivered – Otherwise, he shall be liable to anyone who purchases for value in

15


16

good faith such receipt, for failure to deliver the goods/all the goods to him, whether such purchaser acquired title to the receipt before or after the delivery of the goods by the warehouseman (Secs. 11 and 12)

C. Warehouseman‘s Lien A warehouseman shall have a lien on goods deposited or on the proceeds thereof in his hands: (a) for all lawful charges for storage and preservation of the goods; (b) for all lawful claims for money advanced, interest, insurance, transportation, labor, weighing, coopering and other charges and expenses in relation to such goods; (c) for all reasonable charges and expenses for notice, and advertisements of sale; and (d) for sale of the goods where default had been made in satisfying the warehouseman's lien (Sec. 27) NOTE— General Rule A warehouseman shall have lien only for charges for storage of goods subsequent to the date of the receipt. Exception When the receipt expressly enumerated other charges provided under Sec. 27 even though the amounts thereof are not stated in the receipt. (Sec. 30) However, whether a warehouseman has or has not a lien upon the goods, he is entitled to all remedies allowed by law to a creditor against a debtor for the collection from the depositor of all charges and advances which the depositor has expressly or impliedly contracted with the warehouseman to pay (Sec. 32). 1.

Against what property the lien may be enforced: (a) Against all goods, whenever deposited, belonging to the person who is liable as debtor for the claims in regard to which the lien is asserted, and (b) Against all goods belonging to others which have been deposited at any time by the person who is liable as debtor for the claims in regard to which the lien is asserted if such person had been so entrusted with the possession of goods that a pledge of the same by him at the time of the deposit to one who took the goods in good faith for value would have been valid (Sec. 28) 2.

Satisfaction of the Lien a. By Sale

In accordance with the terms of a notice so given, a sale of the goods by auction may be had to satisfy any valid claim of the warehouseman for which he has a lien on the goods.

From the proceeds of such sale, the warehouseman shall satisfy his lien including the reasonable charges of notice, advertisement and sale. The balance, if any, of such proceeds shall be held by the warehouseman and delivered on demand to the person to whom he would have been bound to deliver or justified in delivering goods. At any time before the goods are so sold, any person claiming a right of property or possession therein may pay the warehouseman the amount necessary to satisfy his lien and to pay the reasonable expenses and liabilities incurred in serving notices and advertising and preparing for the sale up to the time of such payment. The warehouseman shall deliver the goods to the person making payment if he is a person entitled, under the provision of this Act, to the possession of the goods on payment of charges thereon. Otherwise, the warehouseman shall retain the possession of the goods according to the terms of the original contract of deposit (Sec. 33) NOTE— Effect of the Sale The warehouseman is relieved from any liability for failure to deliver the goods to the depositor or owner of the goods or to a holder of the receipt given for the goods when they were deposited, even if such receipt be negotiable (Sec. 36) b. By other means The remedy for enforcing a lien herein provided does not: (a) preclude any other remedies allowed by law for the enforcement of a lien against personal property; nor (b) bar the right to recover so much of the warehouseman's claim as shall not be paid by the proceeds of the sale of the property (Sec. 35) 3.

How the Lien may be Lost

The Warehousman‘s Lien is possessory. The lien may be lost: (a) by surrendering possession thereof; or (b) by refusing to deliver the goods when a demand is made with which he is bound to comply under the provisions of this Act. Thus, a warehouseman having a lien valid against the person demanding the goods may refuse to deliver the goods to him until the lien is satisfied (Sec. 31)


Trust Receipts Law Letters of Credit Warehouse Receipts Law Trust Receipts Law Negotiable Instruments Law Insurance Code Transportation Law Corporation Law Securities Regulation Code Banking and Finance Intellectual Property

MERCANTILE LAW A. Definition/Concept of a Trust Receipt Transaction B. Rights of the Entruster C. Obligations and Liability of the Entrustee D. Remedies available

A. Definition/Concept of a Trust Receipt Transaction A Trust Receipt Transaction is any transaction by and between an entruster and another person as entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called a trust receipt (Sec. 4) A Trust Receipt is a written or printed document signed by the entruster wherein the entrustee binds himself: (1) to hold the designated goods, documents or instruments in trust for the entruster; and (2) to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially equivalent to those specified under Sec. 4.(Sec. 4) a. Loan/security feature A letter of credit-trust receipt arrangement is endowed with its own distinctive features and characteristics. Under that set-up, a bank extends a loan covered by the letter of credit, with the trust receipt as a security for the loan. In other words, the transaction involves a loan feature represented by the letter of credit, and a security feature which is in the covering trust receipt x x x A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security interest" in the goods (Vintola v. IBAA, 1987) A trust receipt arrangement does not involve a simple loan transaction between a creditor and debtor-importer. Apart from a loan feature, the trust receipt arrangement has a security feature that is covered by the trust receipt itself. That second feature is what provides the much needed financial assistance to our traders in the importation or

purchase of goods or merchandise through the use of those goods or merchandise as collateral for the advancements made by a bank. The title of the bank to the security is the one sought to be protected and not the loan which is a separate and distinct agreement (People v. Nitafan, 1992) b. Ownership of the goods, documents and instruments under a trust receipt Entrustee is the factual owner of the goods, documents and instruments (Prudentlal Bank v. NLRC) Entruster is the real owner documents and instruments.

of

the

goods,

―A trust receipt transaction, within the meaning of this Decree, is any transaction…whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments...‖ (Sec. 4, TRL) NOTE— "Security Interest" means a property interest in goods, documents or instruments to secure performance of some obligations of the entrustee or of some third persons to the entruster and includes title, whether or not expressed to be absolute, whenever such title is in substance taken or retained for security only. Prudential Bank v. NLRC, 1995 ―Accordingly, in order to secure that the banker shall be repaid at the critical point — that is, when the imported goods finally reach the hands of the intended vendee — the banker takes the full title to the goods at the very beginning; he takes it as soon as the goods are bought and settled for by his payments or acceptances in the foreign country, and he continues to hold that title as his indispensable security until the goods are sold‖ ―[I]n a certain manner, (trust receipt contracts) partake of the nature of a conditional sale as provided by the Chattel Mortgage Law, that is, the importer becomes absolute owner of the imported merchandise as soon as he has paid its price. The ownership of the merchandise continues to be vested in the owner thereof or in the person who has advanced payment, until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or successor in interest.‖ NOTE— In the earlier cases of Vintola v. IBAA (1987) and Abad v. Court of Appeals (1990), the Supreme Court held that the entrustee becomes the absolute owner of the goods, documents and instruments, the entruster being a mere security holder.

17


B. Rights of the Entruster

18

The entruster shall have the following rights: (1a) Right to the proceeds from the sale of the goods, documents or instruments released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt; OR (1b) Right to the return of the goods, documents or instruments in case of non-sale; AND (2) Right to the enforcement of all other rights conferred on him in the trust receipt provided such are not contrary to the provisions of the TRL. (3) Right to cancel the trust and take possession of the goods, documents or instruments subject of the trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with any of the terms and conditions of the trust receipt or any other agreement between the entruster and the entrustee. (4) Right to sell the goods, documents or instruments at public or private sale at least five days notice to the defaulting entrustee of the intention to sell. (5) Right to purchase the goods, documents or instruments at a public sale. (6) Right to recover the deficiency from the entrustee should the proceeds of the sale not be sufficient (Sec. 7) a. Validity of the security interest as against the creditors of the entrustee/innocent purchasers for value

(e) To return the goods, documents or Instruments in the event of non-sale or upon demand of the entruster; and (f) To observe all other terms and conditions of the trust receipt not contrary to the provisions of the TRL. (Sec. 9) 2. Liabilities of the Entrustee (a) Liability for Loss - The risk of loss shall be borne by the entrustee. Loss of goods, documents or instruments which are the subject of a trust receipt, pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof (Sec. 10) (b) Liability for failure to turn over proceeds of sale or to return – the failure shall constitute the crime of estafa, punishable under Art. 315 (b) of the Revised Penal Code (Sec. 13) d. Penal sanction if offender is a corporation If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense (Sec. 13)

D. Remedies available 1.

C. Obligations and Liability of the Entrustee a. Payment/Delivery of proceeds of sale or disposition of goods, documents or instruments b. Return of goods, documents or instruments in case of sale c. Liability for loss of goods, documents or instruments

The proceeds of any such sale, whether public or private, shall be applied (a) to the payment of the expenses thereof; (b) to the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the satisfaction of the entrustee's indebtedness to the entruster (Sec. 7)

1. Obligations of the Entrustee (a) To hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt; (b) To receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt; (c) To insure the goods for their total value against loss from fire, theft, pilferage or other casualties; (d) To keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster;

In case of default or failure of the entrustee to comply with the trust receipt agreement – Entruster may cancel the trust receipt agreement, take possession of the goods, documents, instruments, and sell the same at any private or public sale at least five days from notice of intention to sell to the entrustee.

2.

In case of loss of the goods, documents, instruments – Entrustee may claim damages from the entrustee (Sec.10)

3.

In case of failure to turn over proceeds of the sale of the goods, documents or instruments or to return the same in case of non-sale Entruster may file a criminal complaint for estafa (Art. 315 (b) of the Revised Penal Code) against the entrustee,


19


2012

MERCANTILE

Negotiable Instruments Law BAR OPERATIONS COMMISSION 2012 EXECUTIVE COMMITTEE Ramon Carlo Marcaida |Commissioner Raymond Velasco • Mara Kriska Chen |Deputy Commissioners Barbie Kaye Perez |Secretary Carmen Cecilia Veneracion |Treasurer Hazel Angeline Abenoja|Auditor COMMITTEE HEADS Eleanor Balaquiao • Mark Xavier Oyales | Acads Monique Morales • Katleya Kate Belderol • Kathleen Mae Tuason (D) • Rachel Miranda (D) |Special Lectures Patricia Madarang • Marinella Felizmenio |Secretariat Victoria Caranay |Publicity and Promotions Loraine Saguinsin • Ma. Luz Baldueza |Marketing Benjamin Joseph Geronimo • Jose Lacas |Logistics Angelo Bernard Ngo • Annalee Toda|HR Anne Janelle Yu • Alyssa Carmelli Castillo |Merchandise Graciello Timothy Reyes |Layout Charmaine Sto. Domingo • Katrina Maniquis |Mock Bar Krizel Malabanan • Karren de Chavez |Bar Candidates’ Welfare Karina Kirstie Paola Ayco • Ma. Ara Garcia |Events OPERATIONS HEADS Charles Icasiano • Katrina Rivera |Hotel Operations Marijo Alcala • Marian Salanguit |Day-Operations Jauhari Azis |Night-Operations Vivienne Villanueva • Charlaine Latorre |Food Kris Francisco Rimban • Elvin Salindo |Transpo Paula Plaza |Linkages


LAW MERCANTILE LAW TEAM 2012 Subject Heads | Anna Katarina Rodriguez • Mickey Chatto LAYOUT TEAM 2012 Layout Artists | Alyanna Apacible • Noel Luciano • RM Meneses • Jenin Velasquez • Mara Villegas • Naomi Quimpo • Leslie Octaviano • Yas Refran • Cris Bernardino Layout Head| Graciello Timothy Reyes

Negotiable Instruments Law Letters of Credit Warehouse Receipts Law Trust Receipts Law Negotiable Instruments Law Insurance Code Transportation Law Corporation Law Securities Regulation Code Banking and Finance Intellectual Property

MERCANTILE LAW I. Forms and Interpretation II. Completion and Delivery III. Rules of Interpretation IV. Signature V. Consideration VI. Accommodation Party VII. Negotiation VIII. Rights of a Holder IX. Liabilities of Parties X. Presentment for Payment XI. Notice of Dishonor XII. Discharge of Negotiable Instrument XIII. Material Alteration XIV. Acceptance XV. Presentment for Acceptance XVI. Promissory Notes XVII.Checks

Definition  Written contract for the payment of money, by its form and on its face, intended as substitute for money and intended to pass from hand to hand to give the holder in due course (HDC) the right to hold the same and collect the sum due.  Instruments are negotiable when they conform to all the requirements prescribed by the NIL (Act 2031, 03 February 1911).  Although considered as medium for payment of obligations, negotiable instruments are not legal tender (Sec. 60, New Central Bank Act, R.A. 7653). BPI vs. Royeca, (2008, Nachura): Q: Can the delivery of a negotiable instrument discharge an obligation? A: Settled is the rule that payment must be made in legal tender. A check is not legal tender and, therefore, cannot constitute a valid tender of payment. Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment. Mere delivery of checks does not discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until the payment by commercial document is actually realized.  Negotiable instruments shall produce the effect of payment only when they have been encashed or when through the fault of the creditor they have been impaired. (Art. 1249, Civil Code)  BUT a CHECK which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash.

I. FORMS AND INTERPRETATION A. Requisites of Negotiability Sec. 1. Form of negotiable instruments. An instrument to be negotiable must conform to the following requirements: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.

1. In writing and signed by the maker or drawer

a. b. c. d. e. f.

No person is liable on the instrument whose signature does not appear thereon. One who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name (Sec. 18). Signature of any party may be made by duly authorized agent; no particular form of appointment necessary (Sec. 19) "In writing" - includes print; written or typed Signature is binding so long as it is intended or adopted as the signature of the signer or made with his authority. It may appear on any part of the instrument. However, if the signature is so placed upon the instrument that it is not clear in what capacity the person intended to sign, he is deemed an indorser. (Sec. 17[f])

2. Containing

an unconditional promise to pay or order to pay

Sec. 3. When promise is unconditional. An unqualified order or promise to pay is unconditional within the meaning of this Act, though coupled with: (a) An indication of a particular fund out of which reimbursement is to be made, or a particular account to be debited with the amount; or (b) A statement of the transaction which gives rise to the instrument. But an order or promise to pay out of a particular fund is not unconditional. a. ―UNCONDITIONAL‖  The promise or order to pay, to be unconditional, must be unqualified.  Fact that the condition appearing on the instrument has been fulfilled will not convert it into a negotiable one (see Sec. 4) A negotiable instrument is conditional when reference to the fund clearly indicates an intention

MERCANTILE LAW REVIEWER that such fund alone should be the source of payment. (Metropolitan Bank vs. CA, 1991) b. ―ORDER OR PROMISE TO PAY‖  As to promissory note - Promise to pay should be express on the face of the instrument - Word "promise" is not absolutely necessary. Any expression equivalent to a promise is sufficient. - Mere acknowledgment of a debt is insufficient  As to bill of exchange: - Order - command or imperative direction; the instrument is, by its nature, demanding a right. - Words which are equivalent to an order are sufficient. - A mere request or authority to pay does not constitute an order. Although the mere use of polite words like "please" does not of itself deprive the instrument of its characteristics as an order, its language must clearly indicate a demand upon the drawee to pay.

3. Sum payable must be certain A sum is certain if from the face of the instrument it can be mathematically computed. Sec. 2. Certainty as to sum; What constitutes. The sum payable is a sum certain within the meaning of this Act, although it is to be paid: (a) with interest; or (b) by stated installments; or (c) by stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due; or (d) with exchange, whether at a fixed rate or at the current rate; or (e) with costs of collection or an attorney's fee, in case payment shall not be made at maturity.

4. Payable in money a. Capable of being transformed into money. b. NON-NEGOTIABLE:  An instrument which contains an order or promise to do an act in addition to the payment of money (with the exception of certain acts enumerated in Sec. 5)  Payable in personal property like merchandise, shares of stock or gold.  Maker or the person primarily liable has the option to require something to be done in lieu of payment of money. (CAMPOS) c. NEGOTIABLE: if the option to require something to be done in lieu of payment of money is with the holder.

5. Payable on demand, or at a fixed or determinable future time

a. ―ON DEMAND‖ Sec. 7. When payable on demand. An instrument is payable on demand:

(a) Where it is expressed to be payable on demand, or at sight, or on presentation; or (b) In which no time for payment is expressed. Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand. Demand instruments: Holder may call for payment any time; maker has an option to pay at any time, and the refusal of the holder to accept payment will terminate the running of interest, if any, but the obligation to pay the note remains. b.

―AT A FIXED TIME‖  Only on the stipulated date, and not before, may the holder demand its payment.  Should he fail to demand payment, the instrument becomes overdue but remains valid and negotiable. It is merely converted to a demand instrument.

c. ―AT A DETERMINABLE FUTURE TIME‖ Sec. 4. Determinable future time; what constitutes. An instrument is payable at a determinable future time, within the meaning of this Act, which is expressed to be payable: (a) At a fixed period after date or sight; or (b) On or before a fixed or determinable future time specified therein; or (c) On or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening be uncertain. An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect.  Examples: - I promise to pay Juan Cruz or order the sum of P100 30 days after date - I promise to pay Juan Cruz or order the sum of P100 on or before Dec. 1, 2000 - I promise to pay Juan Cruz or order the sum of P100 60 days after the death of Jose  Effect of acceleration provisions: - If option (absolute or conditional) to accelerate maturity is on the maker, still NEGOTIABLE. - If option to accelerate is on the holder and can be exercised only after the happening of a specified event/act over which he has no control (conditional), still NEGOTIABLE. Provisions extending time of payment  General rule Negotiability not affected. Effect is similar with that of an acceleration clause at the option of the maker.  Exception Where a note with a fixed maturity provides that the maker has the option to extend time of payment until the happening of contingency, the instrument

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MERCANTILE LAW REVIEWER is NOT negotiable. The time for payment may never come at all.

22

6. Payable to order or to bearer (Asked in 98) a.

Must contain Words of Negotiability  ―Pay to the order of Juan Cruz‖, or ―I promise to pay to the order of Juan Cruz‖  ―Pay to Juan Cruz or order‖, or ―I promise to pay Juan Cruz or order‖

b.

Negotiability determined from the face of the instrument

The negotiability or non-negotiability of an instrument is determined from the face of the instrument itself. Where words "or bearer" printed on a check are cancelled by the drawer, instrument becomes not negotiable. (Caltex vs. CA, 1992) c. ―PAYABLE TO BEARER‖ Sec. 9. When payable to bearer. The instrument is payable to bearer: (a) When it is expressed to be so payable; or (b) When it is payable to a person named therein or bearer; or (c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or (d) When the name of the payee does not purport to be the name of any person; or (e) When the only or last indorsement is an indorsement in blank.  Examples: - Expressed to be so payable "I promise to pay the bearer the sum…." - Payable to a person named therein or bearer "Pay to A or bearer." - Payable to the order of a fictitious person or non-existing person, and such fact was known to the person making it so payable “Pay to John Doe or order." - Name of payee does not purport to be the name of any person – "Pay to cash;" "Pay to sundries." - Only or last indorsement is an indorsement in blank.  Fictitious payee rule It is not necessary that the person referred to in the instrument is really non-existent or fictitious to make the instrument payable to bearer. The person to whose order the instrument is made payable may in fact be existing but he is still fictitious or nonexistent under Sec. 9(c) of the NIL if the person making it so payable does not intend to pay the specified persons. A check drawn payable to the order of cash is a check payable to bearer, and the bank may pay it to the person presenting it for payment without the drawer's indorsement. (Ang Tek Lian vs. CA, 1950)

d. ―PAYABLE TO ORDER‖ Sec. 8. When payable to order. The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of: (a) A payee who is not maker, drawer, or drawee; or (b) The drawer or maker; or (c) The drawee; or (d) Two or more payees jointly; or (e) One or some of several payees; or (f) The holder of an office for the time being. Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty. Without the words "to order" or "to the order of," the instrument is payable only to the person designated therein and is therefore non-negotiable. (Consolidated Plywood Industries vs. IFC Leasing, 1987)  For order instruments - negotiation requires delivery and indorsement of the transferor.

7. If bill of exchange, drawee must be named or designated with reasonable certainty a. b.

Applies only to bill of exchange A bill may be addressed to 2 or more drawees jointly whether they are partners or not, but not to 2 or more drawees in the alternative or in succession (Sec. 128, NIL). c. Examples:  ―To Juan Cruz and Jose Reyes‖ – negotiable  ―To Juan Cruz or Jose Reyes‖ – not negotiable; no certainty as to drawee Determination of Negotiability In determining the negotiability of an instrument, the instrument in its entirety and by what appears on its face must be considered. It must comply with the requirements of Sec. 1 of the Negotiable Instruments Law. (Caltex Phils. v. CA, 1992) The acceptance of a bill of exchange is not important in the determination of its negotiability. The nature of acceptance is important only on the determination of the kind of liabilities of the parties involved. (PBCOM vs. Aruego, 1993) Omissions and Provisions not Affecting Negotiability Omissions and Additional Provisions Provisions That Do Not Affect That Do Not Affect Negotiability Negotiability 1. Non-dating of the 1. Authorizes the sale of instrument collateral securities on 2. Non-specification of default; value given, or that 2. Authorizes confession of any value had been judgment on default; given 3. Waives the benefit of

MERCANTILE LAW REVIEWER 3. Non-specification of place where it is drawn or place where it is payable 4. Bears a seal 5. Designation of particular kind of currency in which payment is to be made. (Sec. 6)

law intended to protect the debtor; or 4. Allows the creditor the option to require something in lieu of money. (Sec. 5) NOTE: Negotiability is affected when instrument contains a promise or order to do any act in addition to the payment of money.

B. Kinds of Negotiable Instrument 1.

Promissory Note (Sec. 184) a. An unconditional promise in writing b. Made by one person to another c. Signed by the maker d. Engaging to pay on demand, or at a fixed or determinable future time e. A sum certain in money to order or to bearer f. Where a note is drawn to the maker's own order, it is not complete until indorsed by him.

2. Bill a. b. c. d.

of Exchange (Sec. 126) An unconditional order in writing Addressed by one person to another Signed by the person giving it Requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time e. A sum certain in money to order or to bearer

Check - A bill of exchange drawn on a bank payable on demand. (Sec. 185). It is the most common form of bill of exchange. Instances when a bill of exchange may be treated as a promissory note  The drawer and the drawee are the same person; or  Drawee is a fictitious person; or  Drawee does NOT have the capacity to contract (Sec. 130)  Where the bill is drawn on a person who is legally absent;  Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election. (Sec. 17[e]) (Sec. 17[e]) Promissory Note vs. Bill of Exchange Promissory note Bill of exchange Unconditional promise Unconditional order Involves 2 parties Involves 3 parties Maker is primarily liable Drawer is only secondarily liable Only one presentment: Two presentments: for for payment acceptance and for payment

Bill of Exchange vs. Check Bill of exchange Check Not necessarily It is necessary that a drawn on a deposit. check be drawn on a The drawee need not be bank deposit. Otherwise, a bank there would be fraud. Death of a drawer of a BOE, with the knowledge of the bank, does not revoke the authority of the drawee to pay. May be presented for payment within reasonable time after its last negotiation. May be payable on demand or at a fixed or determinable future time

Death of the drawer of a check, with the knowledge of the bank, revokes the authority of the banker to pay. Must be presented for payment within a reasonable time after its issue. Always payable on demand

II. Completion and delivery A. Insertion of Date (Sec. 13) Any holder may insert the true date of issue or acceptance of an instrument where: (1) the instrument is expressed to be payable at a fixed period after date is issued undated; or (2) the acceptance of an instrument payable at a fixed period after sight is undated. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date. The instrument is not invalid for the reason only that it is ante-dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery (Sec. 12).

B. Completion of Blanks  Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein.  A signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. For such instrument to be enforceable against any person who became a party thereto prior to its completion, it must be filled up strictly in

23


24

accordance with the authority given and within a reasonable time.

5.

When subsequently negotiated to an HDC, there is a presumption that such instrument is filled up strictly in accordance with the authority given and within reasonable time.

6.

C. Incomplete and Undelivered Instruments (Sec. 15) Where an incomplete instrument has not been delivered, it will not be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery if completed and negotiated without authority.  Who may be estopped from raising the real defense under Sec 15? A drawee bank whose negligent custody of the checks, after partial execution, contributed to its escape.

D. Complete and Undelivered Instruments (Sec. 16) Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. Between immediate parties and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing. When the instrument is in the hands of HDC, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. Incomplete and Delivered Instruments (Sec. 14) a. Holder has prima facie authority to fill up the instrument. b. The instrument must be filled up strictly in accordance with the authority given and within reasonable time c. HDC may enforce the instrument as if filled up according to b. above.

III. Rules of interpretation 1.

2.

3. 4.

Sum expressed in words takes precedence over sum in numbers; BUT where words are ambiguous or uncertain, reference to the figures may be made. Where interest is stipulated, without specification of the starting date, the interest runs from the date of the instrument, and if undated, from the issue thereof. An undated instrument is considered dated as of time issued. Written provisions prevail over printed provision.

7.

Where the instrument is ambiguous as to whether it is a note or a bill, the holder may treat it as either at his election When the capacity of signatory is not clear, he is to be deemed an indorser. “I promise to pay” when signed by two or more persons is deemed to be jointly and severally signed

Where two promissory notes, both employing the terms “I promise to pay”, were each signed by two or more persons, a solidary (joint and several) liability on each note is created on the part of the signors. (Evangelista vs. Mercator Finance, 2003)

IV. Signature GENERAL RULE One whose signature does not appear on the instrument shall not be liable thereon. EXCEPTIONS a. The principal who signs through an agent is liable; b. The forger is liable; c. One who indorses in a separate instrument (allonge) OR where an acceptance is written on a separate paper is liable; d. One who signs his assumed or trade name is liable; and e. A person negotiating by delivery (as in the case of a bearer instrument) is liable to his immediate indorsee.

A. Signing in Trade Name One who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name

B. Signature of Agent  Signature of any party may be made by duly authorized agent, established as in ordinary agency.  Signature per procuration operates as notice that the agent has limited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his authority. Liability  General rule Where a person adds to his signature words indicating that he signs on behalf of a principal, then he‘s not liable if he was duly authorized.  Exceptions a. Mere addition of words describing him as an agent without disclosing his principal b. Where a broker or agent negotiates an instrument without indorsement, he incurs all liabilities in Sec. 65, unless he discloses name of principal and fact that he‘s only acting as agent. (Sec. 69)


C. Indorsement Corporation

by

Minor

or

The indorsement or assignment of the instrument by a corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon (Sec. 22). REAL defense but available only to the incapacitated party (ex. minor or corporation).

D. Forgery Counterfeit making or fraudulent alteration of any writing, which may consist of: a. Signing of another‘s name with intent to defraud; or b. Alteration of an instrument in the name, amount, name of payee, etc. with intent to defraud.

 General rule When a signature is forged or made without the authority of the person, the signature (not the instrument itself and the other genuine signatures) is wholly inoperative - Effects: o No right to retain the instrument o No right to give a discharge therefor o No right to enforce payment thereof against any party thereto can be acquired through or under such signature  Exception Unless the party against whom it is sought to be enforced is precluded from setting up the forgery or want of authority as a defense (Sec. 23). Persons precluded from setting up defense of forgery 1. Those who warrant or admit the genuineness of the signature in question. This includes indorsers, persons negotiating by delivery and acceptors. 2. Those who, by their acts, silence, or negligence, are estopped from setting up the defense of forgery.

Rules on Forgery 1.

Promissory Note

Maker‘s signature forged

ORDER INSTRUMENT 1. Maker is not liable because he never became a party to the instrument. 2. Indorsers subsequent to forgery are liable because of their warranties. 3. Party who made the forgery is liable.

Payee‘s signature forged

1. Maker and payee not liable. 2. Indorsers subsequent to forgery are liable. 3. Party who made the forgery is liable.

Indorser‘s signature forged

1. Maker, payee, indorser whose signature/s was/were forged, and all indorsers preceding the forgery are not liable. 2. Indorsers subsequent to forgery are liable. (Because of their warranties) 3. Party who made the forgery is liable.

BEARER INSTRUMENT 1. Maker is not liable. 2. Indorsers may be made liable to those persons who obtain title through their indorsements. 3. Party who made the forgery is liable. 1. Maker is liable. (Why? Indorsement is not necessary to title and the maker engages to pay holder) 2. Party who made the forgery is liable 1. Maker is liable. (Indorsement is not necessary to title and the maker engages to pay the holder) 2. Indorser whose signature was forged is not liable to one who is not a HDC provided the instrument is mechanically complete before the forgery. 3. Party who made the forgery is liable.

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MERCANTILE LAW REVIEWER 2. Bill of Exchange

26

Drawer‘s signature forged

Payee‘s signature forged

Indorser‘s signature forged

ORDER INSTRUMENT 1. Drawer is not liable because he was never a party to the instrument. 2. Drawee is liable if it paid (no recourse to drawer) because he admitted the genuineness of the drawer‘s signature. Drawee cannot recover from the collecting bank because there is no privity between the collecting bank and the drawer. The latter does not give any warranty re: the drawer‘s signature. (Associated Bank vs. CA) 3. Indorsers subsequent to forgery liable (such as collecting bank or last endorser) 4. Party who made the forgery is liable 1. Drawer and payee not liable 2. Drawee is liable if it paid, but it may pass liability back through the collection chain 3. Indorsers subsequent to forgery are liable (such as collecting bank) 4. Party who made the forgery is liable 1. Drawer, payee, indorser whose signature/s was/were forged and all indorsers preceding the forgery are not liable. 2. Drawee is liable if it paid. 3. Indorsers subsequent to forgery are liable. (such as collecting bank) 4. Party who made the forgery is liable.

Acceptance and payment under mistake  A bank is bound to know the signatures of its depositors. If bank pays a forged check it must be considered as making the payment out of its own funds and cannot charge the account of the depositor whose signature was forged. (PNB vs. Quimpo, 1988)  Consequently, if a bank pays a forged check, it must be considered as paying out of its funds and cannot charge the amount so paid to the account of the depositor. A bank is liable, irrespective of its good faith, in paying a forged check. (Samsung vs. Far East Bank, 2004) Extensions of Price vs. Neal doctrine  Doctrine: As between equally innocent persons, the drawee who pays money on a check or draft the signature on which was forged CANNOT recover the money from the one who received it. The drawee is bound to know the signature of its depositor.  The bar to recovery is extended to overdrafts and stop payment orders.  Overdraft occurs when a check is issued for an amount more than what the drawer has in deposit with the drawee bank. - Rule: The drawee who pays the holder of the bill cannot recover from the holder what he paid under mistake  Stop Payment Order is one issued by the drawer of a check countermanding his first order to the drawee bank to pay the check. - Rule: The drawee bank is bound to follow the order, provided it is received prior to its certification or payment of the check.

BEARER INSTRUMENT 1. Drawer is not liable. 2. Drawee is liable if it paid. Drawee cannot recover from the collecting bank. 3. Party who made the forgery is liable.

1. Drawer and drawee are liable. 2. Payee is not liable. 3. Collecting bank is liable because of warranty. 4. Party who made the forgery is liable. 1. Drawer is liable. (indorsement not necessary to title) 2. Drawee is liable. 3. Indorser whose signature was forged is liable because indorsement is not necessary to title. 4. Party who made the forgery is liable.

Effects of Negligence of Depositor  If such negligence was the proximate cause of the loss, the drawee-bank is NOT liable - It is the duty of the depositor/drawer to carefully examine bank‘s statements, cancelled checks, his check stubs, and other pertinent records within a reasonable time and to report any errors without unreasonable delay. - If a drawer/depositor‘s negligence and delay should cause a bank to honor a forged check, drawer cannot later complain should bank refuse to recredit his account.  When drawee may recover from drawer - Where the instrument is originally a bearer instrument, because the indorsement can be disregarded as being unnecessary to the holder‘s title - Indorsement forged by an employee or agent of the drawer - If due to the drawer‘s negligence/delay, the forgery is not discovered until it is too late for the bank to recover from the holder or the forger  When drawee may not recover from holder - Where the instrument is originally a bearer instrument, because the indorsement can be disregarded as being unnecessary to the holder‘s title - If drawee fails to act promptly , if he delays in informing the holder whom he paid

MERCANTILE LAW REVIEWER  Between Drawee Bank and Collecting Bank - Collecting bank only liable for forged indorsements and not forgeries of the drawer or maker‘s signature (PNB v CA, 1968). - The collecting bank or last indorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior indorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment had done its duty to ascertain the genuineness of the indorsements (BPI v CA, 1992). - In presenting the checks for clearing, the collecting agent made an express guarantee on the validity of ―all the prior endorsements.‖ - The drawee bank is not similarly situated as the collecting bank because the former makes no warranty as to the genuineness of any indorsement. The drawee bank‘s duty is but to verify the genuineness of the drawer‘s signature and not of the indorsement because only the drawer is its client. - However, where the negligence of the drawee bank is the proximate cause of the collecting bank‘s payment of a check with a forged indorsement, the drawee bank may be held liable to the collecting bank. - When both are guilty of negligence, the degree of negligence of each will be weighed in considering the amount of loss which each should bear (BPI v CA, 1992)

V. Consideration Value Any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time. Who is a Holder for Value (HFV)? a. A holder of an instrument for which value has been given at any given time but only with respect to all parties who have become parties to the instrument prior to the time at which value has been given. b. A holder who as a lien on the instrument but only to the extent of his lien. Presumption of Consideration Sec. 24. Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value.

Effect of Want of Consideration Absence or failure of consideration is a matter of defense as against any person not a holder in due course, hence, a personal defense.

VI.Accommodation party Sec. 29. Liability of accommodation party. An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party. Liability The person to whom the instrument thus executed is subsequently negotiated has a right of recourse against the accommodation party in spite of the former‘s knowledge that no consideration passed between the accommodation and accommodated parties (Sec. 29).

Stelco Marketing Corp. vs. C.A. (1992): Liable on the instrument to a holder for value notwithstanding such holder at the time of the taking of the instrument knew him to be only an accommodation party. Hence, as regards an AP, the 4th condition, i.e., lack of notice of infirmity in the instrument or defect in the title of the persons negotiating it, has no application. Accommodation Party as Surety  Accommodation Party is generally regarded as a surety for the party accommodated; When AP makes payment to holder of the note, he has the right to sue the accommodated party for reimbursement. [Agro Conglomerates, Inc. v. CA]

VII.Negotiation A. Negotiation Distinguished from Assignment NEGOTIATION The transfer of the instrument from one person to another so as to constitute the transferee as holder thereof (Sec.30).

ASSIGNMENT The transferee does not become a holder and he merely steps into the shoes of the transferor. Any defense available against the transferor is available against the transferee.

B. Modes of Negotiation 1. By Delivery - If payable to bearer (Sec. 30)

Delivery means transfer of possession of instrument by the maker or drawer, with intent to transfer title to the payee and recognize him as holder thereof.

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Issuance is the first delivery of the instrument complete in form to a person who takes it as a holder (Sec. 191).

2.

 Requisites a. Mechanical act of writing the instrument completely and in accordance with the requirements of Section 1; and b. The delivery of the complete instrument by the maker or drawer to the payee or holder with the intention of giving effect to it. Presumption of delivery a. Where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved (Sec. 16) b. if it is in the hands of a HDC, the presumption is conclusive (Sec. 16)

 As to title transferred 1. Restrictive - Such indorsement either: o Prohibits further negotiation of instrument o Constitutes indorsee as agent of indorser o Vests title in indorsee in trust for another (Sec 36) - Rights of Restrictive Indorsee: o Receive payment o Bring any action thereon that the indorser could bring. o Transfer his rights as such indorsee, but all subsequent indorsees acquire only the title of first indorsee under restrictive indorsement. (Sec 37) 2. Non-restrictive

Presumption as to date a. Date is not an essential element of negotiability b. An undated instrument is considered to be dated as of the time it was issued

2. By

Indorsement completed by Delivery - If payable to order (Sec. 30)

Indorsement  Where placed – The indorsement must be written (Sec. 31): a. On the instrument itself, or b. On a separate piece of paper attached to the instrument called ―allonge‖  Signature of the indorser, without additional words, is a sufficient indorsement (Sec. 31)  Must be of the ENTIRE instrument - CANNOT indorse a part only of the amount payable; BUT if the instrument has been paid in part, then the instrument may be indorsed as to the residue (Sec. 32) - CANNOT transfer the instrument to two or more indorsees severally (Sec. 32) - If not an indorsement of the entire instrument, the transfer remains valid, but as a mere assignment which subjects the holder to all defenses on the instrument (CAMPOS) Kinds of Indorsement  As to manner of future method of negotiation 1. Special - Specifies the person to whom/to whose order the instrument is to be payable; indorsement of such indorsee is necessary to further negotiation. - A special indorser is liable to all subsequent holders, unless the instrument is an originally bearer instrument, in which case he is liable only to those who take title through his indorsement (Sec 40). - An instrument, payable to bearer, and indorsed specially, may nevertheless be further negotiated by delivery. (Sec 40)

Blank - Specifies no indorsee, instrument so indorsed is payable to bearer, and may be negotiated by delivery - The holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement. (Sec 35) - An order instrument may be converted into a bearer instrument by means of a blank indorsement, and may be later reconverted into an order instrument by a subsequent special indorsement - But a bearer instrument remains as such whether it has been indorsed specially or in blank. It is the liability of the indorser which is affected.



As to kind of liability assumed by indorser 1. Qualified - Constitutes indorser as mere assignor of title - Made by adding the words ―without recourse‖ (Sec. 38). - But this does not mean that the transferee only has the rights of an assignee. Transfer remains a negotiation and transferee can still be a holder capable of acquiring a title free from defenses of prior parties. - Effects: o Relieves the qualified indorser of his liability to pay the instrument should the maker be unable to pay o The qualified indorser does not guarantee the solvency of the maker, but merely his legal title to the instrument o The instrument may still be further negotiated; no effect on its negotiability 2.



Non-qualified

As to presence/absence of express limitations 1. Conditional


2.

- Placed by indorser upon primary obligor‘s privileges of paying the holder - Additional condition annexed to indorser‘s liability; such condition must be expressed - Where an indorsement is conditional, a party required to pay the instrument may disregard the condition, and make payment to the indorsee or his transferee, whether condition has been fulfilled or not. - But any person to whom an instrument so indorsed is negotiated, will hold the same, or the proceeds thereof, subject to the rights of the person indorsing conditionally. (Sec. 39) Unconditional

3. Other Kinds of Indorsement 1. Absolute One by which the indorser binds himself to pay, upon no other condition than the failure of prior parties to do so, and of due notice to him of such failure 2. Joint Where instrument payable to the order of two or more payees or indorsees not partners, all must indorse, unless the one indorsing has authority to endorse for the others (Sec. 41) 3. Irregular Where a person, not otherwise a party to the instrument, places thereon his signature in blank before delivery, he is liable as indorser

VIII.Rights of the Holder Holder is a payee or indorsee of a bill or note who is in possession of it, or the bearer thereof (Sec. 191). A holder may be: (1) Holder in Due Course; or (2) a Holder NOT in Due Course. Rights of a holder (Sec. 51) 1. sue thereon in his own name  Unindorsed Instruments Sec. 49. Transfer without indorsement; effect of. Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made.

NOTE— This section applies only to an instrument payable to the order of the transferor. This cannot apply to bearer instruments.

 Cancellation of Indorsement Sec. 48. Striking out indorsement. The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the instrument.  Indorsement by Agent Sec. 20. Liability of person signing as agent, and so forth. Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal liability. 2.

payment to him in due course discharges instrument.

A. Holder in Due Course (HDC) Who are HDCs?  HDC under Sec. 52  HDC under Sec. 58: A holder who derives title to the instrument through a HDC has all the rights of the latter even though he himself satisfies none of the requirements of due course holding  HDC under Sec. 59 (presumption): Every holder is deemed prima facie to be a holder in due course. Requisites of a holder in due course Sec. 52. What constitutes a holder in due course. A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. a.

That the instrument is complete and regular upon its face  It is incomplete when it is wanting in any material particular or particular proper to be inserted in a NI without which the same will not be complete.

 Material Particulars A change in the ff. is considered a material alteration (Sec. 125): - Date

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MERCANTILE LAW REVIEWER Sum payable, either for principal or interest Time or place of payment Number or relations of the parties Medium or currency in which payment is to be made - Or which adds a place of payment where no place of payment is specified - Or any other change or addition which alters the effect of the instrument in any respect -

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b.

That he became the holder of it before it was overdue and without notice that it had been previously dishonored, if such was the fact  ―OVERDUE‖ The ff. cannot be HDCs: - A holder who became such after the date of maturity of the instrument (instrument is overdue); - In case of demand instruments, a holder who negotiates it after an unreasonable length of time after its issue (Sec. 53) - Instruments with fixed maturity but subject to acceleration: ultimate date of maturity is the date of maturity for the purpose of determining whether a purchaser is a HDC - Undated instruments: Prima facie presumption that it was negotiated before it was overdue (Sec. 45).

NOTE— An overdue instrument is still negotiable, but it is subject to the defense existing at the time of the transfer. As to what constitutes a reasonable time, regard is to be had to the nature of the instrument, the usage of trade or business with respect to such instrument, and the facts of the particular case. (Sec. 193)  An instrument is not invalid for the reason only that it is ANTE-DATED OR POSTDATED provided not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery (Sec. 12). c. That he took it in good faith AND for value  ―VALUE‖ - Any consideration sufficient to support a simple contract. An antecedent or preexisting debt constitutes value, whether the instrument is payable on demand or at a future time (Sec. 25)  ―HOLDER FOR VALUE‖ - Where value has at any time been given for the instrument, the holder is deemed a HFV in respect to all parties who become such prior to that time (Sec. 26); and - Where the holder has a lien on the instrument, he is deemed a HFV to the extent of his lien (Sec .27). Presumption: Every NI is deemed prima facie issued for valuable consideration; and every person whose signature appears thereon is deemed to have become a party thereto for value (Sec. 24).

 Such presumption cannot be overcome by the petitioner‘s bare denial of receipt of the consideration. (Bayani vs. People, 2004) - ― GOOD FAITH‖ o Holder must have taken the instrument in good faith and that at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. o NOT a Holder in GOOD FAITH: Holder acted in bad faith or holder had NOTICE OF DEFECT. - ―ACTUAL KNOWLEDGE‖ Sec 56. What constitutes notice of defect To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith. d.

That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.  ―SUSPICIOUS CIRCUMSTANCES‖ - BAD FAITH - does not require actual knowledge of the exact fraud that was practiced; knowledge that there was something wrong about the assignor‘s acquisition of title is sufficient.

State Investment House vs. IAC (1989): A check with 2 parallel lines in the upper left hand corner means that it could only be deposited and may not be converted to cash. Consequently, such circumstance should put the payee on inquiry and upon him devolves the duty to ascertain the holders‘ title to the check or the nature of his possession. Failing in this respect, the payee is declared guilty of gross negligence amounting to legal absence of good faith and as such the consensus of authority is to the effect that the holder of the check is not a holder in good faith.  ―DEFECTIVE TITLE‖ Title is NOT defective when at the time it was negotiated to him, he had NO notice of: - any infirmity in instrument - any defect in title of person negotiating Title is DEFECTIVE when (Sec. 55): - instrument / signature obtained by fraud, duress, force or fear or other unlawful means OR for an illegal consideration; or - instrument is negotiated in breach of faith, or fraudulent circumstances - NOTICE of infirmity or defect – actual knowledge of the infirmity or defect OR knowledge of such facts that his action in taking the instrument amounted to bad faith (Sec.56) - RIGHT of a transferee who receives NOTICE of any infirmity or defect BEFORE he has PAID THE FULL amount for the instrument.

MERCANTILE LAW REVIEWER He will be deemed a HDC only to the extent of the amount therefore paid by him (Sec.54) Rights of a Holder in Due Course a. To sue on the instrument in his own name (Sec. 51) b. To receive payment on the instrument– discharges the instrument (Sec. 51) c. Holds instrument free of any defect of title of prior parties (Sec. 57) d. Free from defenses available to prior parties among themselves (Sec. 57) e. May enforce payment of instrument for full amount, against all parties liable (Sec. 57)

B. Defenses against the Holder Presumption in Favor of Due Course Holding Every holder is deemed prima facie to be a holder in due course (Sec. 59). a. BURDEN SHIFTS when it is shown that the title of any person who has negotiated the instrument was defective. Holder MUST then PROVE that he or some person under whom he claims acquired the title as a holder in due course. b. But the last mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title. (Sec. 59) c. However, this presumption arises only in favor of a person who is a holder as defined in Sec. 191, meaning a “payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof.” Holder Not In Due Course a. One who became a holder of an instrument without any, some or all of the requisites under Sec. 52. b. With respect to demand instruments, if it is negotiated an unreasonable length of time after its issue, the holder is deemed not a holder in due course. (Sec. 53) c. Rights of a holder not in due course (Sec. 51, Rights of a holder): 1. To sue on the instrument under in his own name 2. To enforce the instrument Prior parties can avail against him any defense among these prior parties and prevent the said holder from collecting in whole or in part the amount stated in the instrument Chan Wan vs. Tan Kim, (1960): The only disadvantage of a holder who is not a holder in due course is that the negotiable instrument is subject to defenses as if it were nonnegotiable.

IX. Liabilities of Parties Primary liability The unconditional promise attaches the moment the maker makes the instrument while the acceptor‘s assent to the unconditional order attaches the moment he accepts the instrument. No further act is necessary in order for the liability to accrue. Presentment for payment is all that is necessary.

A. Parties Primarily (Sec. 60 and 62)

Liable

 These are persons who by the terms of the instrument are absolutely required to pay the same. 1. Maker (Sec. 60) Promises to pay according to the tenor of the promissory note 2. Acceptor (Sec. 62) Upon acceptance of the bill of exchange, engages to pay the bill according to the tenor of the acceptance.  Unconditionally liable; he is duty-bound to pay the holder at date of maturity, WON holder demands payment from him, and he is not relieved from liability even if the instrument should become overdue due to failure of holder to make such demand. NOTE— Until he accepts the bill of exchange, the drawee assumes no liability to pay the instrument. Secondary liability A party secondarily liable is not bound to pay unless the following have been fulfilled:  Due presentment or demand to the primary party  Dishonor by such party  Notice of dishonor to secondary party, and, in cases of foreign bills of exchange, protest of the bill

B. Parties Secondarily Liable 1. Drawer (Sec. 61) a. Engages that the instrument will be accepted or paid, or both, according to its tenor on due presentment; b. Engages that he will pay the amount of the instrument to the holder or to any subsequent indorser who may be compelled to pay the same if the instrument be dishonored upon due presentment and proceedings on dishonor be taken,  Limiting Liability: Drawer may insert in the instrument an express stipulation negativing/limiting his own liability to the holder.

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2. Indorsers The following indorsers assume the liability to pay the instrument: (1) General or Unqualified Indorser; and (2) Irregular Indorser. a. General or Unqualified Indorser (Sec. 66) Engages that he will pay the amount of the instrument to the holder or to any subsequent indorser who may be compelled to pay the same if the instrument be dishonored upon due presentment and proceedings on dishonor be taken. Who is a General or Unqualified Indorser? Every person who indorses WITHOUT qualification (Sec. 66.) A person placing his signature upon an instrument other than as a maker, drawer, or acceptor unless he indicates by appropriate words his intention to be bound in some other capacity (Sec. 63). A person, who places his signature on an instrument negotiable by delivery, incurs all the liabilities of an indorser (Sec. 67). NOTE— A Qualified Indorser does not assume the liability to pay the instrument since he is merely an assignor of the title to the instrument.

However, he becomes liable once he breaches a warranty. Who is a qualified indorser? One who is constituted as a mere assignor of the title to the instrument by adding to his signature the words "without recourse" or any words of similar import. b. Irregular Indorser When a person not otherwise a party to an instrument, places thereon his signature in blank before delivery, he is liable as an indorser, in accordance w/ these rules: i) Instrument payable to order of 3rd person: liable to payee and to all subsequent parties ii) Instrument payable to the order of maker/drawer, or payable to bearer: liable to all parties subsequent to maker/drawer iii) Signs for accommodation of payee: liable to all parties subsequent to payee (Sec. 64) Order of Liability among Indorsers (Sec. 68) a. Among themselves: liable prima facie in the order they indorse, but proof of another agreement admissible b. As to the Holder: Holder may sue any of the indorsers, regardless of order of indorsement c. Joint payees/indorsees deemed to indorse solidarily

C. Warranties Maker

Acceptor

1. existence of the payee; 2. his then capacity to indorse

1. the existence of the payee; 2. his then capacity to indorse; 3. existence of the drawer; 4. the genuineness of the drawer‘s signature; 5. the drawer‘s capacity and authority to draw the instrument;

Drawer 1. existence of the payee; 2. his then capacity to indorse

General/ Unqualified Indorser 1.genuineness of the instrument in all respects that it purports to be; 2. his good title to the instrument; 3. all prior parties‘ capacity to contract; 4. the instrument is valid and subsisting at the time of his indorsement.

Qualified Indorser 1.genuineness of the instrument in all respects that it purports to be; 2. his good title to the instrument; 3. all prior parties‘ capacity to contract; 4. no knowledge of any fact which would impair the validity of the instrument or render it valueless.

NOTE— No. 3 does not apply to person negotiating public or corporation securities other than bills and notes.

Person Negotiating by Delivery 1.genuineness of the instrument in all respects that it purports to be; 2. his good title to the instrument; 3. prior parties‘ capacity to contract; 4. no knowledge of any fact which would impair the validity of the instrument or render it valueless. NOTE—Warranty extends only to immediate transferee


X. Presentment for Payment Definition a. The production of a Bill of Exchange to the to the drawer or acceptor for PAYMENT; or b. The production of a PN to the party liable for payment

A. Necessity of presentment for payment B. Parties to whom presentment for payment should be made When necessary In order to charge the drawer and indorsers (Sec. 70) When NOT necessary  To charge the person primarily liable on the instrument (Sec. 70)  To charge the drawer where he has no right to expect or require that the drawee or acceptor will pay the instrument. (Sec. 79)  To charge an indorser where the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented. (Sec. 80)  When the bill of exchange has previously been dishonored by non-acceptance and has not been subsequently accepted. Under Sec. 151, an immediate right of recourse against the persons secondarily liable accrues to the holder.

C. Dispensation with presentment for payment D. Dishonor by non-payment When Excused  Where, after the exercise of reasonable diligence, presentment cannot be made;  Where the drawee is a fictitious person;  By waiver of presentment, express or implied. (Sec. 82) In case of waiver of protest, whether in the case of a foreign bill of exchange or other NI – deemed to be a waiver not only of a formal protest but also of presentment and notice of dishonor (Sec. 111) Date and time of presentment  bearing fixed maturity / not payable on demand – on the day it falls due if day of maturity falls on Sunday or a holiday, the instruments falling due or becoming payable on Saturday are to be presented for payment on the next succeeding business day (Sec. 85)  Payable on demand – within a reasonable time after its issue, iv at the option of the holder, may be presented for payment before twelve o'clock noon on Saturday when that entire day is not a holiday (Sec. 85)

 Demand bill of exchange – within a reasonable time after the last negotiation. (Sec. 71) NOTE— Although presentment was made within a reasonable time from last negotiation, it may have been made within an unreasonable time from issuance. Thus holder may still not be a holder in due course under Sec. 71.

XI. Notice of Dishonor Notice given by holder or his agent to party or parties secondarily liable that the instrument was dishonored by: (1) non-acceptance by the drawee of a bill;or (2) non-payment by the acceptor of a bill; or (3) non-payment by the maker of a note. Requisites a. Given by holder or his agent, or by any party who may be compelled by the holder to pay (Sec. 90) b. Given to secondary party or his agent (Sec. 97) c. Given within the periods provided by law (Sec. 102) d. Given at the proper place (Secs. 103 and 104)

A. Parties to be notified 1) 2)

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

NOTE— Notice must be given to persons secondarily liable. Otherwise, such parties are discharged. Notice may be given to the party himself or to his agent. When not Necessary Notice of dishonor is not required to be given to the drawer in any of the ff. cases:  Drawer and drawee are the same;  Drawee is a fictitious person or not having the capacity to contract;  Drawer is the person to whom the instrument is presented for payment;  The drawer has no right to expect or require that the drawee or acceptor swill honor the instrument;  Where the drawer has countermanded payment. (Sec. 114) Notice of dishonor is not required to be given to an indorser in the ff. cases:  Drawee is a fictitious person or does not have the capacity to contract, and indorser was aware of that fact at the time he indorsed the instrument;  Indorser is the person to whom the instrument is presented for payment;  Instrument was made or accepted for his accommodation. (Sec. 115)

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B. Parties who may give notice of dishonor

34

Sec. 90. By whom given. The notice may be given by or on behalf of the holder, or by or on behalf of any party to the instrument who might be compelled to pay it to the holder, and who, upon taking it up, would have a right to reimbursement from the party to whom the notice is given.

C. Effect of notice Notice of Dishonor is required to charge parties secondarily liable.

D. Form of notice (Sec. 96) The notice may be: (1) in writing; or (2) merely oral The notice may be given in any terms which: (1) sufficiently identify the instrument; and (2) indicate that it has been dishonored by nonacceptance or non-payment. It may in all cases be given by delivering it personally or through the mails

E. Waiver Sec. 109. Waiver of notice. Notice of dishonor may be waived either before the time of giving notice has arrived or after the omission to give due notice, and the waiver may be expressed or implied. Sec. 110. Whom affected by waiver. Where the waiver is embodied in the instrument itself, it is binding upon all parties; but, where it is written above the signature of an indorser, it binds him only.

F. Dispensation with notice a. b. c.

When party to be notified knows about the dishonor, actually or constructively (Secs. 114117) If waived (Sec. 109) When after due diligence, it cannot be given (Sec. 112).

G. Effect of failure to give notice Failure to give notice to parties secondarily liable discharges such parties. An omission to give notice of dishonor by nonacceptance does not prejudice the rights of a holder in due course subsequent to the omission. (Sec. 117)

XII. Discharge of Negotiable Instrument Discharge The release of all parties, whether primary or secondary, from the obligation on the instrument; renders the instrument non-negotiable

A. Discharge instrument

of

negotiable

Sec. 119. Instrument; how discharged. A negotiable instrument is discharged: (a) By payment in due course by or on behalf of the principal debtor; (b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation; (c) By the intentional cancellation thereof by the holder; (d) By any other act which will discharge a simple contract for the payment of money; (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right. 1) By payment in due course (Asked in 00) Sec. 88. What constitutes payment in due course. Payment is made in due course when it is made at or after the maturity of the payment to the holder thereof in good faith and without notice that his title is defective.  If payment is made before maturity and the note is negotiated to a HDC, the latter may recover on the instrument.  Payment to one of several payees or indorsees in the alternative discharges the instrument, but payment to one of several joint payees or joint indorsers is not a discharge. The party receiving payment must have been authorized by others to receive payment.  By whom made: a. payment in due course by or on behalf of principal debtor b. payment in due course by party accommodated where party is made/ accepted for accommodation 2) By intentional cancellation Sec. 123. Cancellation; unintentional; burden of proof. A cancellation made unintentionally or under a mistake or without the authority of the holder, is inoperative. But where an instrument or any signature thereon appears to have been cancelled, the burden of proof lies on the party who alleges that the cancellation was made unintentionally or under a mistake or without authority.

MERCANTILE LAW REVIEWER 3) By other acts that discharge a simple contract for payment of money Any other act which discharges a simple contract for payment of money (Art. 1231 of the Civil Code), ex. issuance of a renewal note—novation 4) By reacquisition of principal debtor in his own right Principal debtor becomes holder of instrument at or after maturity in his own right 5) By material alteration Material alteration w/o assent of all parties liable avoids instrument except as against party to alteration and subsequent indorsers (Sec. 124)

B. Discharge of parties secondarily liable Grounds under Sec. 120 Sec. 120. When persons secondarily liable on the instrument are discharged. A person secondarily liable on the instrument is discharged: (a) By any act which discharges the instrument; (b) By the intentional cancellation of his signature by the holder; (c) By the discharge of a prior party; (d) By a valid tender or payment made by a prior party; (e) By a release of the principal debtor unless the holder's right of recourse against the party secondarily liable is expressly reserved; (f) By any agreement binding upon the holder to extend the time of payment or to postpone the holder's right to enforce the instrument unless made with the assent of the party secondarily liable or unless the right of recourse against such party is expressly reserved. Other grounds a. Failure to make due presentment (Secs. 70, 144) b. Failure to give notice of dishonor c. Certification of check at instance of holder d. Reacquisition by prior party e. Where instrument negotiated back to a prior party, such party may reissue and further negotiate, but not entitled to enforce payment vs. any intervening party to whom he was personally liable f. Where instrument is paid by party secondarily liable, it‘s not discharged, but  the party so paying it is remitted to his former rights as regard to all prior parties  and he may strike out his own and all subsequent indorsements, and again negotiate instrument, except: where it‘s payable to order of 3rd party and has been paid by drawer or where it‘s made/accepted for accommodation and has been paid by party accommodated g. by taking a qualified acceptance

C. Right of party who discharged instrument The party secondarily liable who pays the instrument: (1) is remitted to his former rights as regard all prior parties; (2) may strike out his own and all subsequent indorsements; and (3) may again negotiate the instrument, except: (a) Where it is payable to the order of a third person and has been paid by the drawer; and (b) Where it was made or accepted for accommodation and has been paid by the party accommodated.

D. Renunciation by holder (Sec. 122) The holder may expressly renounce his rights against any party to the instrument before, at, or after its maturity. An absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the instrument discharges the instrument. Renunciation must be in writing unless the instrument is delivered up to the person primarily liable thereon Renunciation does not affect the rights of an HDC without notice.

XIII. Material alteration A. Concept Any change in the instrument which affects or changes the liability of the parties in any way.

B. Effect of material alteration 1) Alteration by a party – Avoids the instrument except as against the party who made, authorized, or assented to the alteration and subsequent indorsers. However, if an altered instrument is negotiated to a HDC, he may enforce payment thereof according to its original tenor regardless of whether the alteration was innocent or fraudulent. 2) Alteration by a stranger (spoliation)  the effect is the same as where the alteration was made by a party wherein a HDC can recover on the original tenor of the instrument (Sec. 124).  Changes in the following constitute material alterations (Sec. 125): 1. Date 2. Sum payable, either for principal or interest

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36

3. 4. 5. 6. 7.

Time or place of payment Number or relations of the parties Medium or currency in which payment is to be made That which adds a place of payment where no place of payment is specified Any other change or addition which alters the effect of the instrument in any respect.

XIV. Acceptance A. Definition The signification by the drawee of his assent to the order of the drawer. Kinds of Acceptance a. General -- assents without qualification to the order of the drawer b. Qualified - which in express terms varies the effect of the bill as drawn  Conditional - makes payment by the acceptor dependent on the fulfillment of a condition therein stated  Partial - an acceptance to pay part only of the amount for which the bill is drawn.  Local - an acceptance to pay only at a particular place.  Qualified as to time - the acceptance of some one or more of the drawees but not of all. (Sec. 141)

B. Manner Express Acceptance Must be in writing and signed by the drawee and must not express that the drawee will perform his promise by any other means than the payment of money. (Sec. 132) If request for a written acceptance is refused, the holder may treat the bill as dishonored (Sec. 133) Implied Acceptance  If the drawee refuses to return the instrument within 24 hours after it was delivered for acceptance.  If the drawee destroys the same.  If the drawee makes an unconditional promise in writing before the instrument is drawn, with respect to every person who, upon the faith thereof, receives the bill for value.

C. Time for acceptance (Sec. 136) The drawee is allowed twenty-four hours after presentment in which to decide whether or not he will accept the bill; The acceptance, if given, dates as of the day of presentation.

D. Rules governing acceptance FEBTC vs. Gold Palace Jewellery Co, (Nachura, 2008): Q: What is the implication of payment without acceptance by a drawee? A: Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance. This provision applies with equal force in case the drawee pays a bill without having previously accepted it. His actual payment of the amount in the check implies not only his assent to the order of the drawer and a recognition of his corresponding obligation to pay the aforementioned sum, but also, his clear compliance with that obligation. Actual payment by the drawee is greater than his acceptance, which is merely a promise in writing to pay. The payment of a check includes its acceptance.

XV. Presentment of Acceptance Requisites (a) By the holder, or by some person authorized to receive payment on his behalf; (b) At a reasonable hour on a business day; (c) At a proper place as herein defined; (d) To the person primarily liable on the instrument, or if he is absent or inaccessible, to any person found at the place where the presentment is made. When necessary Sec. 143. When presentment for acceptance must be made. Presentment for acceptance must be made: (a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or (b) Where the bill expressly stipulates that it shall be presented for acceptance; or (c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee. In no other case is presentment for acceptance necessary in order to render any party to the bill liable. When Excused Sec. 148. Where presentment is excused. Presentment for acceptance is excused and a bill may be treated as dishonored by non-acceptance in either of the following cases: (a) Where the drawee is dead, or has absconded, or is a fictitious person or a person not having capacity to contract by bill. (b) Where, after the exercise of reasonable diligence, presentment cannot be made.

MERCANTILE LAW REVIEWER (c) Where, although presentment has been irregular, acceptance has been refused on some other ground.

A. Time/place/manner of presentment When made Sec. 146. On what days presentment may be made. A bill may be presented for acceptance on any day on which negotiable instruments may be presented for payment under the provisions of Sections seventy-two and eighty-five of this Act. When Saturday is not otherwise a holiday, presentment for acceptance may be made before twelve o'clock noon on that day. How made Sec. 145. Presentment; how made. Presentment for acceptance must be made by or on behalf of the holder at a reasonable hour, on a business day and before the bill is overdue, to the drawee or some person authorized to accept or refuse acceptance on his behalf; and (a) Where a bill is addressed to two or more drawees who are not partners, presentment must be made to them all unless one has authority to accept or refuse acceptance for all, in which case presentment may be made to him only; (b) Where the drawee is dead, presentment may be made to his personal representative; (c) Where the drawee has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors, presentment may be made to him or to his trustee or assignee.

B. Effect of failure to presentment (Sec. 144)

make

Failure to make presentment discharges the drawer and all indorsers (Sec. 144).  What is reasonable time involves a consideration of the nature of the instrument, usage of trade or business with respect to the instrument, and the facts of each case.

C. Dishonor by non-acceptance Sec. 149. When dishonored by non-acceptance. A bill is dishonored by non-acceptance: (a) When it is duly presented for acceptance and such an acceptance as is prescribed by this Act is refused or cannot be obtained; or (b) When presentment for acceptance is excused and the bill is not accepted. Sec. 150. Duty of holder where bill not accepted. Where a bill is duly presented for acceptance and is not accepted within the prescribed time, the person presenting it must treat the bill as dishonored by

nonacceptance or he loses the right of recourse against the drawer and indorsers. Sec. 151. Rights of holder where bill not accepted. When a bill is dishonored by non-acceptance, an immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary.

XVI. Promissory Notes Promissory Note (Sec. 184) a. An unconditional promise in writing b. Made by one person to another c. Signed by the maker d. Engaging to pay on demand, or at a fixed or determinable future time e. A sum certain in money to order or to bearer f. Where a note is drawn to the maker's own order, it is not complete until indorsed by him.

XVII. Checks A. Definition Sec. 185. A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a check.

B. Kinds 1) Cashier‘s Check One drawn by the cashier of a bank, in the name of the bank against the bank itself payable to a third person. It is a primary obligation of the issuing bank and accepted in advance upon issuance (Tan vs. CA 1994). 2) Manager‘s Check A check drawn by the manager of a bank in the name of the bank itself payable to a third person. It is similar to the cashier‘s check as to the effect and use. 3) Memorandum Check A check given by a borrower to a lender for the amount of a short loan, with the understanding that it is not to be presented at the bank, but will be redeemed by the maker himself when the loan falls due and which understanding is evidenced by writing the word ―memorandum‖, ―memo‖ or ―mem‖ on the check. 4) Certified Check An agreement whereby the bank against whom a check is drawn undertakes to pay it at any future time when presented for payment. (Sec. 187)

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5) Crossed Check  The NIL is silent with respect to crossed checks, although the Code of Commerce makes reference to such instruments.  Article 541 of the Code of Commerce states: ―The maker or any legal holder of a check shall be entitled to indicate therein that it be paid to a certain banker or institution, which he shall do by writing across the face the name of said banker or institution, or only the words ‛and company.‖  Under usual practice, crossing a check is done by placing two parallel lines diagonally on the left top portion of the check (State Investment House vs. IAC, 1989).  The crossing may be special wherein between the two parallel lines is written the name of a bank or a business institution, in which case the drawee should pay only with the intervention of that bank or company, or crossing may be general wherein between two parallel diagonal lines are written the words "and Co." or none at all as in the case at bar, in which case the drawee should not encash the same but merely accept the same for deposit (supra). Effects Bataan Cigar vs. CA (1994): a. That the check may not be encashed; it may only be deposited with the bank; b. That the check may be negotiated only once to a person who has an account with the bank; and c. That it serves as a warning to a holder that the check has been issued for a definite purpose.

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

1. Time When to present? A check must be presented for payment within reasonable time after its issue.

2. Effect of delay Effect of delay in presentment The drawer will be discharged from liability thereon to the extent of the loss caused by the delay. (Sec. 186) Certification of Checks An agreement whereby the bank against whom a check is drawn, undertakes to pay it at any future time when presented for payment. Effects  Equivalent to acceptance (Sec. 187) and is the operative act that makes banks liable

 Assignment of the funds of the drawer in the hands of the drawee (Sec. 189)  If obtained by the holder, discharges the persons secondarily liable thereon (Sec. 188) Refusal of drawee bank to certify The holder has no action against the bank but he has a right of action against the drawer. The drawer in turn has right of action against the bank based on the original contact of deposit between them.


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2012

MERCANTILE

Insurance Code BAR OPERATIONS COMMISSION 2012 EXECUTIVE COMMITTEE Ramon Carlo Marcaida |Commissioner Raymond Velasco • Mara Kriska Chen |Deputy Commissioners Barbie Kaye Perez |Secretary Carmen Cecilia Veneracion |Treasurer Hazel Angeline Abenoja|Auditor COMMITTEE HEADS Eleanor Balaquiao • Mark Xavier Oyales | Acads Monique Morales • Katleya Kate Belderol • Kathleen Mae Tuason (D) • Rachel Miranda (D) |Special Lectures Patricia Madarang • Marinella Felizmenio |Secretariat Victoria Caranay |Publicity and Promotions Loraine Saguinsin • Ma. Luz Baldueza |Marketing Benjamin Joseph Geronimo • Jose Lacas |Logistics Angelo Bernard Ngo • Annalee Toda|HR Anne Janelle Yu • Alyssa Carmelli Castillo |Merchandise Graciello Timothy Reyes |Layout Charmaine Sto. Domingo • Katrina Maniquis |Mock Bar Krizel Malabanan • Karren de Chavez |Bar Candidates’ Welfare Karina Kirstie Paola Ayco • Ma. Ara Garcia |Events OPERATIONS HEADS Charles Icasiano • Katrina Rivera |Hotel Operations Marijo Alcala • Marian Salanguit |Day-Operations Jauhari Azis |Night-Operations Vivienne Villanueva • Charlaine Latorre |Food Kris Francisco Rimban • Elvin Salindo |Transpo Paula Plaza |Linkages


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Insurance Code


MERCANTILE LAW I. Concept of Insurance II. Elements of Insurance Contract III. Characteristics/Nature of Insurance Contracts IV. Classes V. Insurable Interest VI. Perfection of the Contract of Insurance VII. Rescission of Insurance Contracts VIII.Claims Settlement and Subrogation

I. Concept of Insurance Contract of insurance Insurance An agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event [Sec. 2, par.1] Definition:  A contract of indemnity  Wherein one undertakes for a consideration  To indemnify another against loss, damage, or liability  Arising from an unknown or contingent event. - Contingent: an event that is not certain to take place - Unknown: an event which is certain to happen, but, the time of its happening is not known - Past event may be a designated event only in cases where it has happened already but the parties do not know about it, e.g. prior loss of a ship at sea Regulation by the state through a license or certification of authority is necessary since a contract of insurance involves public interest. [White Gold Marine Services vs. Pioneer (2005)] Sec. 4b of the Pre-Need Code “Pre-need plans” are contracts, agreements, deeds or plans for the benefit of the planholders which provide for the performance of future service/s, payment of monetary considerations or delivery of other benefits at the time of actual need or agreed maturity date, as specified therein, in exchange for cash or installment amounts with or without interest or insurance coverage and includes life, pension, education, interment and other plans, instruments, contracts or deeds as may in the future be determined by the Commission.  Pre-need plans: not considered as insurance contracts because even pre-need plans can be insured, thereby implying that the two are not the same.  Not governed by the Insurance Code

Doing or transacting an insurance business GENERAL RULE An insurance business consists in undertaking, for a consideration, to indemnify another against loss, damage or liability arising from an unknown or contingent event. SUPPLEMENTARY RULE  Although the business is not formally designated as one of insurance and no profit is derived or no separate or direct consideration is received,  It is deemed to be doing an insurance business,  If it undertakes any of the following circumstances: 1. Making or proposing to make, as insurer, any insurance contract 2. Making or proposing to make, as surety, any contract of suretyship as a vocation not as a mere incident to any other legitimate business of a surety 3. Doing any insurance business, including a reinsurance business 4. Doing or proposing to do any business in substance equivalent to any of the above [Sec. 2, par. 2]. Sec. 2, Par. 2 The fact that no profit is derived from the making of insurance contracts, agreements or transactions or that no separate or direct consideration is received therefor shall not be deemed conclusive to show that the making thereof does not constitute the doing or transacting of an insurance business.

II. Elements of an Insurance Contract (PARIS) 1) Payment of Premium  The consideration of the insurance contract  The premium is a ratable consideration  Paid by the insured to a general insurance fund  For the insurer‘s assumption of risk 2)

Assumption of Risk: Designated Peril as Cause  The insurer promises to pay or indemnify such loss  In a fixed or ascertainable amount  in order to recover from the insurance contract, the cause of the damage or loss must be caused by the perils expressly indicated in the contract

3)      4)

Risk of Loss or Damage The happening of designated events, Either unknown or contingent, Past or future, Will subject such interest to some kind of loss, Whether in the form of injury, damage, or liability

Insurable Interest  The interest of the insured in a thing or a life

MERCANTILE LAW REVIEWER  Such interest is susceptible of pecuniary estimation (for non-life insurance only, does not apply to life insurance because life does not have monetary value)  Thing insured in non-life insurance must be capable of pecuniary estimation because nonlife insurance is essentially for indemnification.  Cannot be waived [Sec. 25] 5)

Risk-Distributing Scheme  This assumption of risk is part of a general scheme to distribute the loss  Among a large number of persons  Exposed to similar risks.  Losses are borne not by the insurer but proportionally by all those who paid premiums.

III. Characteristics/Nature of Insurance Contracts 1)

2)

 The obligation of the insurer to pay depends on the happening of an event which is uncertain, or though certain, is to occur at an indeterminate time [Art. 2010, Civil Code].  However, it cannot be considered as gambling, wagering, or a contract of chance because the risk is created by the contract itself.  The insurance contract is in a sense commutative since the premium paid by the insured is deemed the equivalent of the protection given by the insurer [SUNDIANG AND AQUINO, Reviewer on Commercial Law].  When the designated peril does not happen, the insured nevertheless gets the protection against such risk for the period covered by the insurance contract. 6) 

Consensual  It is perfected by the meeting of the minds of the parties.  There must be concurrence of offer and acceptance.  Unless otherwise stipulated, the policy is not essential to the existence of the contract. It merely evidences the terms and conditions thereof. (CAMPOS) Voluntary  General Rule It is not compulsory. Also, the parties are free to stipulate terms provided they are not contrary to law, morals, good customs, public order, or public policy.  Exception For motor vehicles [Sec. 373-389]; employees [Art. 168-184, Labor Code]; or as a condition to granting a license [DE LEON].

3)

Contract of Adhesion (Fine Print Rule)  The contract is presented to the insured already in its printed form by which he either ―takes it or leaves it.‖  Contracts of adhesion are valid.  Ambiguity in the insurance contract shall be interpreted liberally in favor of the insured and strictly against the insurer.

4)

Executory  Once the insured pays the premium, the contract already takes effect.  Synallagmatic and reciprocal such that even if the contingent event does not occur, the insurer has still provided protection against the risk.

5) Aleatory Art. 2010, Civil Code By an aleatory contract one of the parties or both reciprocally bind themselves to give or to do something in consideration of what the other shall give or do upon the happening of an event which is uncertain, or which is to occur at an indeterminate time.

   

Contract of Indemnity (only for non-life insurance) The insured who has insurable interest over the property is only entitled to recover the amount of actual loss sustained The burden is upon him to establish the amount of such loss. Generally applies only to property insurance except when the creditor insures the life of his debtor for the amount of the debt. Life insurance is not a contract of indemnity; it is a mere form of investment. Insurance contracts are not wagering contracts [Sec. 4].

7)

A Risk Distributing Device  By paying a pre-determined amount into a general fund out of which payment will be made for an economic loss of a defined type,  Each member contributes to a small degree toward compensation for losses suffered by any member of the group.

8)

Uberrimae Fides Contract (Principle of Utmost Good Faith)  Each party is required to disclose conditions affecting the risk of which he is aware, or any material fact which the applicant knows and those which he ought to know.  Violation of this duty gives the aggrieved party the right to rescind the contract. Where the aggrieved party is the insured, the bad faith of the insurer will preclude it from denying liability on the policy based on breach of warranty. [CAMPOS]

9)

Personal Contract  Each party takes into consideration the character, conduct and/or credit of the other and in making of the contract, each is enjoined by law to deal with the other in utmost good faith. [CAMPOS]  So, the insured cannot assign, before the happening of the loss, his rights under a property policy to others without the consent of the insurer [Sec. 20, 58, 83].

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IV. Classes 42

1.

Marine [Secs. 99–166]  Insurance against the peril of property in, or incidental to, transit  Covers not only property exposed to risks of navigation but also those which are exposed to risks not connected with navigation [CAMPOS].  Bottomry loan: a loan is obtained for the value of the vessel on a voyage and the lender is repaid only if the vessel subject of the loan arrives safely at its destination.  Respondentia loan: a loan is obtained as security for the value of the cargo to be transported and the lender is repaid only if the cargo arrives safely at its destination.  Also known as transportation insurance

Has two major divisions: a.

b.

Ocean Marine Insurance  Insurance against risk connected with navigation, to which a ship, cargo, freightage, profits or other insurable interest in movable property, may be exposed during a certain voyage or a fixed period of time Inland Marine Insurance  Covers the land or over the land transportation perils of property shipped by railroads, motor trucks, airplanes, and other means of transportation  Also covers risks of lake, river or other inland waterway transportation and other waterborne perils outside those covered by ocean marine insurance

Risks that may be insured against:  ―Perils of the sea‖- includes casualties arising from the violent action of the elements and does not cover ordinary wear and tear or other damage usually incident to the voyage.  Insurance policy may cover acts of barratry.  Barratry- the willful and intentional act on the part of the master of the crew, in pursuance of some unlawful or fraudulent purpose, without the consent of the owner, and to the prejudice of his interest (ex: burning the ship, unlawfully selling the cargo) [CAMPOS]. Liability of Marine Insurer:  Loss- total or partial Total loss- actual or constructive  Actual total loss- irretrievable loss of the thing or any damage which renders the thing valueless to the owner for the purpose for which he held it  Constructive total loss- gives the insured the right to abandon the thing insured by relinquishing to the insurer his interest in such thing, entitling the former to recover for a total loss thereof. In turn, the insurer acquires all the rights over the thing insured. [CAMPOS]

Sec. 139 A person insured by a contract of marine insurance may abandon the thing insured, or any particular portion thereof separately valued by the policy, or otherwise separately insured, and recover for a total loss thereof, when the cause of the loss is a peril insured against: (a) If more than three-fourths thereof in value is actually lost, or would have to be expended to recover it from the peril; (b) If it is injured to such an extent as to reduce its value more than three-fourths; (c) If the thing insured is a ship, and the contemplated voyage cannot be lawfully performed without incurring either an expense to the insured of more than three-fourths the value of the thing abandoned or a risk which a prudent man would not take under the circumstances; or (d) If the thing insured, being cargo or freightage, and the voyage cannot be performed, nor another ship procured by the master, within a reasonable time and with reasonable diligence, to forward the cargo, without incurring the like expense or risk mentioned in the preceding subparagraph. But freightage cannot in any case be abandoned unless the ship is also abandoned.  Insurer becomes the owner of the thing abandoned.  Abandonment must be total and absolute and made within a reasonable time so as to give the insurer the chance to promptly save, if possible, some part of the property abandoned by the insured.  If abandonment is not accepted, then the insured can claim the proceeds or bring the matter before the court. Characteristics of a valid abandonment:  Explicit notice of abandonment  Neither partial nor conditional  Irrevocable  Given reasonable time to abandon 2. Fire [Secs. 167–173]  Insurance against loss by fire, lightning, windstorm, tornado or earthquake and other allied risks, when such risks are covered by extension to fire insurance policies or under separate policies [Sec. 167].  Fire must be the proximate cause of the damage or loss [CAMPOS].  Fire must be visible heat or light. Combustion which produces heat but not visible glow is not fire [CAMPOS].  Fire must be hostile. [CAMPOS]. Risks in fire insurance Hostile vs. friendly fire HOSTILE FIRE One that escapes from the place where it was intended to burn and ought to be OR

FRIENDLY FIRE One that burns in a place where it is intended to burn and ought to be Ex: fire burning in a stove or lamp

MERCANTILE LAW REVIEWER HOSTILE FIRE One which remains completely within its proper place but because of the unsuitable materials used to light it, it becomes inherently dangerous and uncontrollable Insurer is liable

FRIENDLY FIRE

Liability insurance  Insurer assumes the obligation to pay the third party in whose favor the liability of the insured arises.  Liability of the insurer attaches as soon as the liability of the insured to the third party is established.  Insurer is liable regardless of whether or not the insured has paid the third party [CAMPOS]. Insurer is not liable

Measure of indemnity a. Open policy - only the expense necessary to replace the thing lost or injured in the condition it was at the time of the injury b. Valued policy - the parties are bound by the valuation, in the absence of fraud or mistake, just like in marine insurance However, where the face value of the policy is less than the agreed valuation, then even in case of total loss, the insured can only recover up to the policy‘s face value, which is always the maximum limit of the insurer‘s liability. 3.

Liability vs. Indemnity

Casualty [Sec. 174]  Insurance covering loss or liability arising from accident or mishap,  Not falling exclusively within the scope of other types of insurance.  Includes, but not limited to, employer‘s liability insurance, workmen‘s compensation insurance, public liability insurance, motor vehicle liability insurance, plate glass insurance, burglary and theft insurance, personal accident and health insurance as written by non-life insurance companies, and other substantially similar kinds of insurance (ex: robbery and theft insurance)  Governed by the general provisions applicable to all types of insurance + stipulations in the insurance contract

Risks in casualty or accident insurance Intentional vs. accidental Intentional – Implies the exercise of the reasoning faculties, consciousness and volition.  Where a provision of the policy excludes intentional injury, it is the intention of the person inflicting the injury that is controlling.  If the injuries suffered by the insured clearly resulted from the intentional act of the third person, the insurer is relieved from liability as stipulated [Biagtan v. the Insular Life Assurance Co. Ltd. (1972)]. Accidental – That which happens by chance or fortuitously, without intention or design, which is unexpected, unusual and unforeseen.

Indemnity insurance  NO action will lie against the insurer unless brought by the insured for loss ACTUALLY sustained and paid by him.  Liability of the insurer attaches only AFTER the insured has paid his liability to the third party [CAMPOS]. No Action Clause A requirement in a policy of liability insurance which provides that suit and final judgment be first obtained against the insured; that only thereafter can the person injured recover on the policy. [Guingon vs. Del Monte 1967] But, the no-action clause CANNOT prevail over the Rules of Court provisions which are aimed at avoiding multiplicity of suits. Parties (the insured and the insurer) may be joined as defendants in a case commenced by the third party claiming under a liability insurance, as the right to relief in respect to the same transactions is alleged to exist [see Sec. 5, Rule 2, ROC; Sec. 6, Rule 3, ROC]. 4.

Suretyship [Secs. 175–178]  An agreement whereby a surety guarantees the performance by the obligor of an obligation or undertaking in favor of the obligee.  It shall be deemed as insurance if the surety‘s main business is that of surety ship, and not where the contract is merely incidental to any other legitimate business or activity of the surety. [Secs. 175 par. 2 and 3].  A contract of surety becomes an insurance contract only when authorized to function as an insurance business.  Thus, corporations organized for the purpose of guaranteeing performance of contractual obligations or the payment of debts of others are deemed insurance corporations [Sec. 185] and are thus subject to all the requirements of the Insurance Code [CAMPOS].  What is unique to a contract of suretyship is that when the obligee accepts the bond, the bond becomes valid and enforceable whether or not the premium has been paid by the obligor [Sec. 177], unlike in an insurance contract where payment of premium is necessary for the contract to be valid [Sec. 77].  If the obligee has not yet accepted, then payment of premium is still necessary for the contract of suretyship to be valid [Sec. 177].

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Bond Necessary to Secure Performance of Obligation If the obligor does not perform the obligation, the bond is forefeited in favor of the obligee and there will be no more need to go to court. (obligee can go directly and secure performance of the obligation). [NPC v. CA (1986)] 5.

Life

Individual Life [Secs. 179-183, 227]  Insurance on human lives and insurance appertaining thereto or connected therewith [Sec. 179]  May be made payable on the death of the person, or on his surviving a specified period, or otherwise contingently on the continuation or cessation of life Group Life [Secs. 50, 228]  A blanket policy covering a number of individuals who are usually a cohesive group (ex: employees of a company)  No medical examination is required of each person insured (in contrast to individual life insurance) but a specified number of persons is usually required before the policy is issued  Based on the theory that by the law of averages, only a determinable percentage of the members of the group would die within the contemplated period  The policy need not be in printed form and may be typewritten, but the law prescribes the contents of such policy.

- Limited payment plan: insured agrees to pay premiums only for a specified number of years. If he survives such period, he stops paying any further premium, and when he dies, the insurer pays the proceeds. - Term plan: insurer‘s liability arises only upon the death of the insured within the agreed term or period. If the insured survives, the contract terminates and the insurer is not liable. - Pure endowment policy: insurer pays the insured if the insured survives a specified period. If the insured dies within the period, the insurer is released from liability and unless the contract otherwise provides, need not reimburse any part of the premiums paid. - Endowment policy: If the insured outlives the designated period, he is paid the face value of the policy. If the he dies within said period, the insurer pays the proceeds to the beneficiary. (combination of term policy and pure endowment policy)  Death of the insured must be proven by the beneficiary before the insurer can be made to pay. b.  

Industrial Life [Secs. 229-231]  It is tailored to suit the needs of the urban industrial class of blue-collar workers [J.F. DOBBYNS].  Purpose: to cover the expenses for the last sickness of the insured and those for his burial  Face amount is relatively small.  Shall not lapse for non-payment if due to the failure of the company to send its representative/agent to the insured to collect such premium.  A form of life insurance under which a. The premiums are payable either monthly or oftener; b. The face amount of insurance provided in any policy is not more than 500 times that of the current statutory minimum daily wage in the City of Manila; and c. The words "industrial policy" are printed upon the policy [Sec. 229]. Risks in life insurance a.

Death or Survival  It may be made payable on the death of the person, or on his surviving a specified period, or otherwise contingently on the continuation or cessation of life. [CAMPOS]  Various Life Insurance Plans - Ordinary or whole life policy: insurer agrees to pay the face value of the policy upon the death of the insured

 

Suicide (Asked in 95) Insurer is liable in the following cases: If committed after two years from the date of the policy‘s issue or its last reinstatement; If committed in a state of insanity regardless of the date of the commission unless suicide is an excepted peril. [Sec. 180-A] If committed after a shorter period provided in the policy. Since suicide is contrary to the laws of nature and the ordinary rules of conduct, it is never presumed. The burden of proving lies with the insurer who seeks to avoid liability under a life policy excepting it from coverage [CAMPOS]. Note: Any stipulation extending the 2-year period is null and void.

c.

d.

At the hands of the law (e.g. by legal execution)  It is one of the risks assumed by the insurer under a life insurance policy in the absence of a valid policy exception [VANCE]. Killing by the beneficiary GENERAL RULE  The interest of a beneficiary in a life insurance policy  Shall be forfeited when the beneficiary is the principal accomplice or accessory in willfully bringing about the death of the insured,  In which event, the nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified.

MERCANTILE LAW REVIEWER [Sec. 12] If there is no surviving relative of the insured, the proceeds should be delivered to the estate of the insured subject to the payment of his debts [CAMPOS]. Note: Conviction of the beneficiary is necessary before his interest in the insurance policy is forfeited in favor of the nearest relative of the insured. This is consistent with the cardinal principle of law that forfeitures are not favored, and that any construction which would result in the forfeiture of the policy benefits will be avoided if it is possible to construe the policy in a manner which would allow recovery (see page 8). Moreover, a contrary interpretation would result in the forfeiture of the beneficiary‘s interest on mere imputations of his participation in the killing of the insured. EXCEPTIONS  Accidental killing  Self defense  Insanity of the beneficiary at the time he killed the insured  Negligence (the Code only refers to a ―willful‖ act) 6. 

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Compulsory Motor Vehicle Liability Insurance A species of compulsory insurance that provides for protection coverage that will answer for legal liability for losses and damages for bodily injuries or property damage that may be sustained by another arising from the use and operation of motor vehicle by its owner. The Land Transportation Office shall NOT allow the registration or renewal of registration of any motor vehicle unless such insurance is obtained [Sec. 376, as amended by PD 1455]. To the extent that motor vehicle insurance is compulsory, it must be a LIABILITY policy [Sec. 373(f)], and the provision making it merely an indemnity insurance contract CANNOT have any effect [CAMPOS]. Insurer‘s liability is DIRECT and PRIMARY so the insurer need not wait for final judgment in the criminal case to be liable. [Shafer v. Judge, RTC, (1988)]. Purpose: To give immediate financial assistance to victims of motor vehicle accidents and/or their dependents, especially if they are poor, regardless of the financial capability of motor vehicle owners or operators responsible for the accident sustained [Shafer v. Judge, RTC, (1988)]. Claimants/victims may be a ―passenger‖ or a ―3rd party‖. The insured may be the party at fault as against claims of third parties (third party liability) or the victim of the contingent event. It applies to all vehicles whether public or private vehicles.

Note: It is the only compulsory insurance coverage under the Insurance Code.

V. Insurable Interest Insurable Interest, Defined  Interest which the law requires the policy owner to have in the person or thing insured, the absence of which renders the contract void. Definition  A person is said to have an insurable interest in the subject matter insured where he has a relation or connection with, or concern in it that he will derive pecuniary benefit or advantage from its preservation and will suffer pecuniary loss or damage from its destruction, termination, or injury by the happening of the event insured against [44 C.J.S. 870 as cited in Lalican v. Insular Life (2009)]  Insurable interest: one of the essential elements of an insurance contract so necessary for its validity, may not be waived Sec. 25 Every stipulation for the payment of loss whether the person insured has or has not any interest in the property insured, or that the policy shall be received as proof of such interest, and every policy executed by way of gaming or wagering, is void. Rationale for requiring insurable interest  To avoid constituting insurance as a wagering contract, because the insured has an interest in the preservation or protection of the subject of the insured.  To avoid a moral hazard, wherein the insured will have nothing to lose but everything to gain with the happening of the event insured against.  Limits the amount that can be recovered in indemnity insurance. Transfer of interest General Rule Sec. 58 The mere transfer of a thing insured does not transfer the policy, but suspends it until the same person becomes the owner of both the policy and the thing insured. Sec. 53 The insurance proceeds shall be applied exclusively to the proper interest of the person in whose name or for whose benefit it is made unless otherwise specified in the policy. Exceptions 1. Life, health and accident insurance [Sec. 20] 2. A change in interest in a thing insured, after the occurrence of an injury, which results in a loss [Sec. 21] 3. A change in interest in one or more of several distinct things, separately insured by one policy [Sec. 22] 4. A change in interest, by will or succession, on the death of the insured [Sec. 23] 5. Transfer of interest by one of several partners, joint owners, or owners in common, who are jointly insured, to the others [Sec. 24]

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MERCANTILE LAW REVIEWER 6.

46 7.

When a policy is so framed that it will inure to the benefit of whomsoever, during the continuance of the risk, may become the owner of the interest insured [Sec. 57] When there is an express prohibition against alienation in the policy, in which case, the insurance contract is avoided [Art. 1306, Civil Code]

No-Fault Clause Sec. 378 Any claim for death or injury to any passenger or third party pursuant to the provisions of this chapter shall be paid without the necessity of proving fault or negligence of any kind: Provided, That for the purpose of this section: (i) The total indemnity in respect of any person shall not exceed five thousand pesos; (ii) The following proofs of loss, when submitted under oath, shall be sufficient evidence to substantiate the claim: a) Police report of accident; and b) Death certificate and evidence sufficient to establish the proper payee; or c) Medical report and evidence of medical or hospital disbursement in respect of which refund is claimed; (iii) Claim may be made against one motor vehicle only. In the case of an occupant of a vehicle, claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting, or dismounting from. In any other case, claim shall lie against the insurer of the directly offending vehicle. In all cases, the right of the party paying the claim to recover against the owner of the vehicle responsible for the accident shall be maintained.  No-fault clause: for immediate compensation, only for a minimal amount so injured party can still recover the remaining balance of the damage after final judgment  Person who paid under the no-fault clause can collect from the person at fault in case he was not responsible for the accident.

A. In Life/Health Who has insurable interest over whose life? Sec. 10 Every person has an insurable interest in the life and health: (a) Of himself, of his spouse and of his children; (b) Of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest; (c) Of any person under a legal obligation to him for the payment of money, or respecting property or services, of which death or illness might delay or prevent the performance; and (d) Of any person upon whose life any estate or interest vested in him depends. Interest in one‘s own life

 Cestui que vie is the insured himself  Insured can designate anyone to be the beneficiary of the policy.  Each has unlimited interest in his own life, whether the insurance is for the benefit of himself or another.  The beneficiary designated need NOT have any interest in the life of the insured (when person takes out policy on his own life)  But if a person obtains a policy on the life of another and names himself as the beneficiary, he must have insurable interest therein (when a person takes out policy on the life of another) Interest in life of another General Rule  The insured must have pecuniary interest in the life of another.  Must be based on moral and legal grounds  No insurable interest in the life of an illegitimate spouse  Such interest exists whenever the insured has a responsible expectation of deriving benefit from the continuation of the life of the other person or of suffering detriment through its termination. Exception In Sec. 10 par. (a) (spouse and children), mere relationship is sufficient.  Sec. 10(a) does not qualify so children may be legitimate or illegitimate, minors or of legal age, married or not, dependent or not Note:  CREDITOR may take out insurance on the life of his debtor. BUT his insurable interest is only up to the amount of the debt.  When the OWNER of the policy insures the life of another (the ―cestui que vie‖) and designates a third party as BENEFICIARY, BOTH the owner and beneficiary must have an insurable interest in the life of the cestui que vie.  ASSIGNEE is not required to have insurable interest in the life of the insured, for to require such interest in him is to diminish the investment value of the contract to the owner. Note, however, that assignment is different from a change in the designated beneficiary.  When the beneficiary is the PRINCIPAL, ACCOMPLICE, or ACCESSORY in willfully bringing about the death of the insured = Interest of beneficiary in life insurance policy is FORFEITED [Sec. 12]. Interest in health The health care agreement was in the nature of nonlife insurance, which is primarily a contract of indemnity. Once the member incurs hospital, medical or any other expense arising from sickness, injury or other stipulated contingent, the health care provider must pay for the same to the extent agreed upon under the contract. [Philamcare Health Systems v. CA (2002)] Time of existence of insurable interest

MERCANTILE LAW REVIEWER General Rule Interest in the life or health of a person must exist when the insurance takes effect (at inception), but need not exist thereafter or when the loss occurs. [Sec. 19] Exceptions 1. Creditor‘s insurance taken on the life of the debtor - Insurable interest disappears once the debt has been paid. At this point, the creditor/insured can no longer recover on the policy. 2. Company‘s insurance taken on the life of an employee - insurable interest disappears once the employee leaves the company, in which case, the company can no longer recover on the policy. Transfer of policy: Interest can be transferred even without the notice to the insurer of such transfer or bequest, unless there is a stipulation to the contrary [Sec. 182]. Note: there is no right of subrogation in life insurance, because it is not a contract of indemnity.

B. In Property Sec. 13. Every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured, is an insurable interest. Forms of insurable interest 1. INTEREST in the property itself Ex: Ownership of or a lien on property. 2.

RELATION to such property Ex: Interest of a commission agent on goods he is selling.

3.

LIABILITY in respect thereof Ex: Interest of carrier on cargo which he has to carry safely to its destination, such interest being limited to the extent of his liability.

 No contract or policy of insurance on property shall be enforceable except for the benefit of some person having an insurable interest in the property insured. [Sec. 18] Sec. 14 An insurable interest in property may consist in: (a) An existing interest; (b) An inchoate interest founded on an existing interest; or (c) An expectancy, coupled with an existing interest in that out of which the expectancy arises. Sec. 16 A mere contingent or expectant interest in anything, not founded on an actual right to the

thing, nor upon any valid contract for it, is not insurable. Nature of insurable interest 1. EXISTING interest  May arise from legal title Ex: interest of a mortgagor, lessor, assignee  May also arise from equitable title Ex: purchaser of property before delivery, builder of a building under construction 2.

INCHOATE interest founded on an existing interest  Must be founded on an existing contract but not yet clearly defined or identified Ex: stockholder‘s inchoate interest in the properties of the corporation, such interest being based on his owned shares

3.

EXPECTANCY, coupled with an existing interest in that out of which the expectancy arises Ex: farmer‘s interest over his future crops grown on land owned by him at the time of the issuance of the policy

Insurable interest of specific persons 1. Stockholder/partner in a firm – has inchoate right to dividends in case the firm earns profits and to share in the assets after payment of corporate debts upon a firm's liquidation. 2. General Creditor – does not have insurable interest in a debtor's property. 3. Judgment Creditor - has insurable interest in debtor‘s property because he is given a right to levy (general lien). 4. Mortgage Creditor - has insurable interest (lien) which is recognized by the Insurance Code [Sec. 8]. Measure of insurable interest in property Sec. 15 A carrier or depository of any kind has an insurable interest in a thing held by him as such, to the extent of his liability but not to exceed the value thereof. Sec. 17 The measure of an insurable interest in property is the extent to which the insured might be damnified by loss or injury thereof. Indemnity principle: insured may not recover a greater value than his actual loss Time of existence Sec. 19 An interest in property insured must exist when the insurance takes effect, and when the loss occurs, but need not exist in the meantime; and interest in the life or health of a person insured must exist when the insurance takes effect, but need not exist thereafter or when the loss occurs. GENERAL RULE Interest must exist BOTH at inception and at time of loss, but not in the meantime. EXCEPTIONS (automatic transfer of interest)

47


48 2.

3. 4.

A change in interest over the thing insured AFTER the loss contemplated. The insured may sell the remains without prejudice to his right to recover (Sec. 21). A change of interest in one or more several distinct things, separately insured by one policy. This does not avoid the insurance as to the others (Sec. 22). A change in interest by will or succession upon the death of the insured (Sec. 23). A transfer of interest by one of several partners, joint owners, or owners in common who are jointly insured. The acquiring co-owner has the same interest; his interest merely increases upon acquiring other co-owners interest (Sec. 24).

Distinctions between Insurable Interest in Property and Insurable Interest in Life Insurable Insurable Interest in Interest in Life Property Unlimited (save in Limited to life insurance actual value of Extent effected by a the interest creditor on the life thereon of the debtor) Must exist when the insurance Time takes effect when Must exist at the and when the Insurable time the insurance loss occurs, Interest takes effect BUT need not Must Exist exist in the meantime Expectati on of Must have legal Need NOT have legal Benefit to basis basis Be Derived Need not have insurable interest over the life of the insured if the insured Must have himself secured the Beneficiar insurable policy. But if the y‘s interest over insurance was Interest the thing obtained by the insured beneficiary, the latter must have insurable interest over the life of the insured. (SUNDIANG) Note: When there is an express prohibition against alienation in the policy, in case of alienation, the contract of insurance is not merely suspended but avoided. Transfer of policy Interest cannot be transferred without the insurer‘s consent, because the insurer has approved the policy based on the personal qualifications and insurable interest of the insured.

C. Double Insurance Insurance

and

Over

Double insurance (Asked in 93, 99, 05)  It exists where the same person is insured by several insurers separately in respect to the same subject and interest [Sec. 93]  Requisites— 1) same person insured 2) two or more insurers separately insuring 3) same subject matter 4) same interest insured 5) same risk or peril insured against  The insured CANNOT recover above the value of property, for otherwise, the insurance would constitute wagering.  It is not prohibited by law but it may be prohibited by an ―other insurance clause.‖ Note: Double insurance is not applicable to life insurance because the latter is incapable of pecuniary estimation. Overinsurance (Asked in 08)  This happens when the amount of the insurance policy or policies exceed the value of the insurable interest.  Overinsurance is allowed, only that the Insurance Code regulates it. Sec. 94 Where the insured is overinsured by double insurance: (a) The insured, unless the policy otherwise provides, may claim payment from the insurers in such order as he may select, up to the amount for which the insurers are severally liable under their respective contracts; (b) Where the policy under which the insured claims is a valued policy, the insured must give credit as against the valuation for any sum received by him under any other policy without regard to the actual value of the subject matter insured; (c) Where the policy under which the insured claims is an unvalued policy he must give credit, as against the full insurable value, for any sum received by him under any policy; (d) Where the insured receives any sum in excess of the valuation in the case of valued policies, or of the insurable vale in the case of unvalued policies, he must hold such sum in trust for the insurers, according to their right of contribution among themselves; (e) Each insurer is bound, as between himself and the other insurers, to contribute ratably to the loss in proportion to the amount for which he is liable under the contract.  In case of loss, the insurer is bound to pay only up to the extent of the real value of the property lost. BUT the insured may recover the amount of the premium corresponding to the excess in value of the property.  The insured may claim payment from the insurers in such order as he may select, up to

MERCANTILE LAW REVIEWER the amount for which the insurers are severally liable under their respective contracts. Double Insurance vs. Over-insurance Double insurance Over-insurance There may be no overThe amount of the insurance as when the insurance is beyond the sum total of the amount value of the insured‘s of the policies issued insurable interest. does not exceed the insurable interest of the insured. There are always several There may be only one insurers. insurer involved. Reinsurance Sec. 97 A reinsurance is presumed to be a contract of indemnity against liability, and not merely against damage. Sec. 98 The original insured has no interest in a contract of reinsurance.  The original insurance contract is separate and distinct from the reinsurance contract. Insurance contract is independent from reinsurance contract.  Reinsurance is a contract of indemnity  No relationship between reinsurer and the insured under the insurance contract Insurance vs. Reinsurance  Insurance- indemnity against damages  Reinsurance- indemnity against liability Reinsurance treaty vs. Reinsurance policy  A reinsurance treaty is an agreement between two insurance companies whereby one agrees to cede and the other to accept reinsurance business pursuant to provisions specified in the treaty [DE LEON].  A reinsurance policy is a contract of indemnity one insurer makes with another to protect the first insurer from a risk it has already assumed.  Reinsurance treaties and reinsurance policies are not synonymous. Treaties are contracts for insurance; policies are contracts of insurance [Philamlife vs. Auditor General (1958)]. Double Insurance vs. Reinsurance (Asked in 94) Double Insurance Reinsurance Same interest Different interest Insurer becomes the Insurer remains as the insured in relation to the insurer. reinsurer. Insured is a party in The original insured is interest in the insurance not a party in the contracts. reinsurance contract. Property is the subject The original insurer's risk matter is the subject matter. Insured has to give his Insured‘s consent is not consent. necessary.

D. Multiple or Several Interests on Same Property [Secs. 8, 9]

Open mortgage or loss payable mortgage clause A mortgage that can be paid-off prior to maturity without penalty; mortgagee is the beneficiary for insurance taken by mortgagor (insurance taken by mortgagor but payable or assigned to the mortgagee).  The insurance is on the interest of the mortgagor; so, he does not cease to be a party to the contract.  His acts, prior to the loss, which would otherwise avoid the insurance, affects the mortgagee, even if the property is in the hands of the latter. [Secs. 8 and 9]  In case of loss, the mortgagee is entitled to recover up to the extent of his credit, and should the amount he recovers be equal to the amount of his credit, then the debt is extinguished. Union mortgage or standard mortgage clause  Mortgagee may perform the acts of mortgagor.  Subsequent acts of the mortgagor or owner do NOT prejudice the mortgagee's interest. - When a mortgagee insured his own interest and a loss occurs, he is entitled to recover on the insurance. However, he may no longer claim against the mortgagor, for his claim is discharged up to the amount the insurer has paid him [Palileo vs. Cosio (1955)]. - If insurance taken by mortgagor for his own benefit: he can only recover from the insurer but the mortgagee has a lien on the proceeds by virtue of the mortgage Insurance taken by mortgagee When mortgagee insures his own interest in the mortgaged property without reference to the right of the mortgagor  Mortgagee is entitled to the proceeds of the policy in case of loss to the extent of his credit  If the proceeds are more than the total amount of credit  mortgagor has no right to the balance If proceeds are equal to the credit  insurer is subrogated to the mortgagee‘s rights + mortgagee can no longer recover the mortgagor‘s indebtedness If proceeds are less than the credit  mortgagee may recover from the mortgagor the deficiency  Upon payment, the insurer is subrogated to the rights of the mortgagee against the mortgagor to the extent of the amount paid.

VI.Perfection of the Contract of Insurance a. Offer and Acceptance/Consensuality The insurance contract is consensual and is therefore perfected the moment there is a meeting of the

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MERCANTILE LAW REVIEWER minds with respect to the object and the cause or consideration.

50

Insurance contracts follow the ―cognition theory.‖

(2) Delivery of Policy  Delivery- the act of putting the insurance policy (the actual document) into the possession of the insured

Enriquez vs. Sun Life Assurance Co. of Canada (1920) The insurance contract cannot be perfected without the notice of acceptance coming to the knowledge of the applicant. Under the CC, consent is shown by the concurrence of offer and acceptance.

 Delivery of policy is important because it is: a) an evidence of the execution of the insurance contract; and b) a communication of the insurer‘s acceptance of insured‘s offer. However, delivery of policy is not essential for the validity of the contract.

An acceptance made by letter shall not bind the person making the offer except from the time it came to his knowledge, known as the ―cognition theory‖.

Modes of delivery 1. Actual – delivery to the insured 2. Constructive – delivery by mail; delivery to the insured‘s agent or some person for the benefit of the insured.

Great Pacific Life Assurance Corp. vs. CA (1999) Note that in insurance contracts, the insured is the one making the offer by submitting an application to the insurer and the latter accepts the offer by approving the application.

Delivery to the insured in person is not necessary. Delivery may be made by mail or to a constituted agent. [Lucero Vda. De Sindayen v. Insular Life (1935)]

Thus, mere submission of the application without the corresponding approval of the policy does not result in the perfection of the contract of insurance. (1) Delay in acceptance If there is delay in the acceptance by the insurer, after the insured has submitted an application and has paid the premium, there are three theories that can be applied: 1. Insurer is liable for tort, under the tort theory. ―Tort theory‖  no pre-existing contractual relation 2.

Here, there is delay in acceptance of the obligation  insurance business is imbued with public interest.

3.

The measure of damage is the face value of the policy. In life insurance, the proceeds will inure to the insured‘s estate and not to the beneficiary.

4.

Insurer is liable under the policy because its delay in formally accepting/denying the application and payment of premium is taken as an implied acceptance.

It should be noted that an application is a mere offer which requires the overt act of the insurer for it to ripen into a contract. Delay in acting on the application does not constitute acceptance even though the insured has forwarded his first premium with his application. [Perez v. Court of Appeals (2000)] Note: Offer – when the insured submits an application to the insurer Acceptance – when the insurer approves the application Effectivity – upon payment of first premium, provided there has been an approval of the application.

b.

Premium Payment

Premium, Defined The agreed price for assuming and carrying the risk, that is, the consideration paid an insurer for undertaking to indemnify the insured against the specified peril. Sec. 77 An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies. Validity of Contract upon Payment General Rule NO insurance policy issued or renewal is valid and binding until actual payment of the premium. Any agreement to the contrary is void [Sec. 77]. Exceptions 1. In case of life and industrial life whenever the grace period provision applies [Sec. 77]. 2. Where there is an acknowledgment in the contract or policy of insurance that the premium has already been paid [Sec. 78] 3. Where there is an agreement to grant the insured credit extension for the payment of the premium despite full awareness of Sec. 77 [UCPB v. Masagana Telemart (2001)] 4. Where there is an agreement allowing the insured to pay premium in installment and partial payment has been made at the time of the loss [Makati Tuscany vs. CA (1992)] 5. Where the parties are barred by estoppel [UCPB v. Masagana (2001)] Makati Tuscany v CA (1992)

MERCANTILE LAW REVIEWER The policies are valid even if the premiums due are paid in installments because the records clearly show that the two parties intended the policies to be binding and effective notwithstanding the staggered payment of the premiums. The acceptance of the installment payments over the period of 3 years speaks loudly of the intention of insurer to honor the policies it issued to Makati Tuscany. Sec. 77 merely prohibits the parties from stipulating that the policy is valid even if premiums were not paid, but it does not expressly prohibit an agreement granting credit extensions. Sec. 78 also allows the insurer to waive the condition of full payment by acknowledging in the policy that there has been receipt of premium despite the fact that premium is actually unpaid. If the Code allows a waiver when no actual payment has been made, then a waiver should also be allowed in this case where the insurer has already acknowledged receipt of partial payment. UCPB Gen. Ins. v Masagana Telemart (2001) Sec. 77 of the Insurance Code cannot be strictly applied. Exceptions to Sec. 77 are: a.) In case of a life or industrial life policy whenever the grace period applies. b.) Sec. 78: An acknowledgment in a policy or contract of insurance of the receipt of premium is conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation therein that it shall not be binding until premium is actually paid. c.) If the parties have agreed to the payment in installments of the premium and partial payment has been made at the time of the loss. d.) The insurer may grant credit extension for the payment of the premium. e.) It would be unjust and inequitable if recovery on the policy would not be permitted against UCPB, which consistently granted the 60-90 day credit term for the payment of the premiums despite its full awareness of Sec. 77. Estoppel bars it from taking refuge under the action, since Masagana relied on good faith on such a practice. Authority of agent to receive premium  Where an insurer authorizes an insurance agent or broker to deliver a policy to the insured, it is deemed to have authorized said agent to receive the premium in its behalf.  The insurer is also bound by its agent‘s acknowledgment of receipt of payment of premium [American Home Assurance Co. vs. Chua [1999)].

Effect of payment by postdated check  The payment of premium by a postdated check at a stated maturity subsequent to the loss is insufficient to put the insurance into effect.  But payment by a check bearing a date prior to the loss, assuming availability of funds, would be sufficient even if it remains unencashed at the time of the loss.  The subsequent effects of encashment would retroact to the date of the instrument and its acceptance by the creditor [VITUG, Pandect on Commercial Law]. Premiums in Suretyship Contracts Payment of premiums is also necessary to make suretyship contracts binding, but the acceptance by the obligee of the bond makes the suretyship contract binding notwithstanding non-payment of premium by the insured. Philippine Pryce Assurance Corp. vs. CA (1994) Generally, premium is also necessary in order for the contract of suretyship or bond to be binding. However, where the obligee has accepted the bond, it is binding even if the premium has not been paid, subject to the right of the insurer to recover the premium from its principal. c.

Non-Default Options in Life Insurance

Options of Insured under a lapsed life insurance policy [Secs. 227(f), (h), (j))] Cash Surrender Value (CSV)  Amount that the insured is entitled to receive if he surrenders the policy and releases his claims upon it  A portion of the reserve on a life insurance policy, resulting from the accumulation of premium overcharges in the early years of the policy  Right to CSV accrues only after 3 premium payments  Insured is given the right to claim the amount less than the reserve, reduced by surrender charge. Rationale: Premium is uniform throughout your lifetime, but the risk is varied (higher risk when you‘re older, low when you‘re young) thus the cost of protection is more expensive during the early years of the policy Alternatives to Obtaining the Cash Surrender Value 1. Extended Insurance/term insurance  To have the policy continued in force from date of default for a time either stated or equal to the amount of the CSV, taken as a single premium  Term insurance: pay a single premium (no further payments) to extend the policy for a fixed period of time  Failure to extend at the end of the fixed period  purchase new policy  Face value remains the same but only within the term  Reinstatement allowed if made within the term purchased, no reinstatement after the lapse of the term purchased

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52

2. Paid-up Insurance  Such amount of insurance as the CSV applied as a single premium  Effect: policy continues in force from date of default for the whole period and under the same conditions of the original contract without further payment of premiums  Same policy, same terms and conditions, different price  Insured is given the right, upon default, the option to make the policy continued for the whole period of insurance without further payment of premiums.  In case of maturity, the beneficiary will recover only the ―paid-up value‖.  No reinstatement allowed 3. Automatic Premium Loan (APL)  Upon default, insurer lends/advances to the insured without any need of application on his part, amount necessary to pay overdue premium, but not to exceed the CSV of the policy  Must be requested in writing by the insured either in the application or at any time before expiration of the period  Effect: insurance policy continues in force for a period covered by the payment. After the period, if insured still does not resume paying his premiums, policy lapses, unless CSV still remains  If there is still CSV, APL continues until CSV is exhausted.  Beneficial for the insured because it continues the contract and all its features with full force and effect d.

Reinstatement of a Lapsed Policy of Life Insurance [Sec. 227]

 Not a non-default option  Effect: does not create a new contract, merely revives the original policy so insurer cannot require a higher premium than the amount stipulated in the contract  It does not apply to group/industrial life insurance. Requisites:  Must be exercised within 3 years from date of default  Insured must present evidence of insurability satisfactory to the insurer  Pay all back premiums and all indebtedness to the insurer  CSV must not have been duly paid to insured nor the extension period expired e.

Refund of Premiums

Return of Premiums 1. If the thing insured was never exposed to the risks insured against [Sec. 79(a)] 2. When the contract is voidable due to the fraud or misrepresentation of insurer or his agent [Sec. 81] 3. When by any default of the insured other than actual fraud, the insurer never incurred any liability under the policy [Sec. 81]

4.

Contract is voidable because of the existence of facts of which the insured was ignorant without his fault [Sec. 81] 5. Where the insurance is for a definite period and the insured surrenders his policy [Sec. 79(b)]  Entitled to a portion of the premium that corresponds to the unexpired time at a pro rata rate, unless a short period rate has been agreed upon and appears on the face of the policy 6. Ratable return of the premium when there is over-insurance by several insurers [Sec. 82]  Proportioned to the amount by which the aggregate sum insured in all the policies exceeds the insurable value of the thing at risk 7. When rescission is granted due to the insurer‘s breach of contract Note: Under Nos. 1, 2, 3 and 4, the insured is entitled to a return of the entire premium paid.

VII. Rescission of Insurance Contracts 1.

Concealment (Asked in 96, 97, 01)

Concealment, Defined A neglect to communicate that which a party knows and ought to communicate [Sec. 26] Requisites 1. A party knows a fact which he neglects to communicate or disclose to the other. 2. Such party concealing is duty bound to disclose such fact to the other. 3. Such party concealing makes no warranty of the fact concealed. 4. The other party has not the means of ascertaining the fact concealed. 5. The fact concealed is material. Note: Concealment requires fraudulent intent. Effects of Concealment  It vitiates the contract and entitles the insurer to rescind, even if the death or loss is due to a cause not related to the concealed matter [Sec. 27].  The contract is VOIDABLE at the insurer‘s option. Note: Good faith is NOT a defense in concealment. Sec. 27 clearly provides that ―the concealment whether intentional or unintentional entitles the injured party to rescind the contract of insurance.‖ Test of Materiality General Rule Determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the disadvantages of the proposed contract, or in making his inquiries [Sec. 31]

MERCANTILE LAW REVIEWER It need not increase the risk or contribute to any loss or damage suffered. It is sufficient if the knowledge of it would influence the party in making the contract. Exceptions 1. Incontestability clause under Sec. 227(b) (will be incontestable after policy has been in force during lifetime of insured for two years) 2. marine insurance [Sec. 110] Concealment: Marine Insurance vs. Ordinary Insurance Concealment in Marine Concealment in Insurance Ordinary Private Insurance Stricter: state the ―exact Need not be the exact and whole truth‖ statements concealment of certain Any kind of concealment matters as provided in will not make the insurer Sec. 110 will not entirely liable. avoid the contract but will merely exonerate the insurer from losses resulting from the risk concealed - national character of the insured - liability of the thing insured to capture and detention - liability to seizure from breach of foreign laws of trade - want of necessary documents - use of false and simulated papers Non-Medical Insurance The waiver of medical examination in a non-medical insurance contract renders even more material the information required of the applicant concerning the previous conditions of health and diseases suffered. [Sunlife v. Sps. Bacani (1995)]. Philamcare Health Systems vs. CA (2002) Where matters of opinion or judgment are called for, answers made in good faith and without intent to deceive will not avoid the policy even though they are untrue.  Reason: The insurer cannot rely on those statements. He must make further inquiry. Note: Concealment must take place at the time the contract is entered into in order that the policy may be avoided. Information obtained after the perfection of the contract is no longer necessary to be disclosed by the insured, even if the policy has not been issued.

Sunlife Assurance vs. CA (1995) The fact that the matter concealed had no bearing on the cause of death is NOT important because it is

well settled that the insured need not die of the disease he had failed to disclose to the insurer. It is sufficient that his nondisclosure misled the insurer in forming his estimates of the risks of the proposed policy or in making inquiries. Matters which NEED to be disclosed 1. Matters within a party‘s knowledge 2. Which are material to the contract and 3. As to which the party with the duty to communicate makes no warranty, and 4. Which the other party does not have the means of ascertaining [Sec. 28]. Note: If the applicant is aware of the existence of some circumstance which he knows would influence the insurer in acting upon his application, good faith requires him to disclose that circumstance, though unasked [VANCE] Great Pacific Life v. CA (1979) The fact of being a “mongoloid” is a material fact that needs to be disclosed. Matters which DO NOT need to be disclosed [Secs. 30, 33-35] a. Matters already known to the insurer [Sec. 30(a)] b. Matters each party are bound to know such as public events, general information etc. [Sec. 30(b)] c. Matters of which the insurer waives communication – he is in estoppel. [Sec. 30(c)] d. Matters that concern only risks excepted, either expressly or by warranty, from the liability assumed under the policy which are NOT OTHERWISE MATERIAL. [Sec. 30(e)] e. Information of the nature or amount of the interest of one insured except if inquired upon by the insurer. [Sec. 34] f. If the interest of the insured to the property being insured is absolute then there is no necessity to disclose the extent of his interest, if not then he is required to disclose under Section 51 [Sec. 34] g. The right to information of material fact may be waived either expressly, by the terms of insurance or impliedly by neglecting to make inquiry as to the facts already communicated. [Sec. 33] h. Matters of opinion. [Sec. 35] Mere possibility of previous hypertension is not enough to establish concealment [Great Pacific Life v. CA (1999)]. Sec.32 Each party to a contract of insurance is bound to know all the general causes which are open to his inquiry, equally with that of the other, and which may affect the political or material perils contemplated; and all general usages of trade.

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54

Misrepresentation/Omissions

Representation, Defined  Factual statements made by the insured at the time of, or prior to, the issuance of the policy [Sec. 37] to give information to the insurer and induce him to enter into the insurance contract.  may be oral or written [Sec. 36] Kinds of Representations 1) Affirmative Any allegation as to the existence or non-existence of a fact when the contract begins 2) Promissory Any promise to be fulfilled after the contract has come into existence or any statement concerning what is to happen during the existence of the insurance. A promissory representation is substantially a condition or warranty. Requisites of a False Representation (Misrepresentation) 1. The insured stated a fact which is untrue. 2. Such fact was stated with knowledge that it is untrue and with intent to deceive or which he states positively as true without knowing it to be true and which has a tendency to mislead. 3. Such fact in either case is material to the risk.  There is false representation if the matter is true at the time it was made/represented but false at the time the contract takes effect. [Sec. 44]  Remedy of injured party is rescission. But the remedy is not available should the insurer accept the premium notwithstanding knowledge of the ground/s for rescission. [Sec. 45]  A representation must be presumed to refer to the date on which the contract goes into effect [Sec.42]  NO false representation if the matter is true at the time the contract takes effect although false at the time it was made/represented. Effect of Misrepresentation The injured party is entitled to rescind from the time when the representation becomes false. [Sec. 45] Representation of Opinion General Rule A representation of the expectation, belief, opinion, or judgment of the insured, although false, will NOT avoid the policy, even if such was material to the risk (DE LEON). Exception Such representation will avoid the policy if there is a CONCURRENCE OF MATERIALITY AND FRAUDULENCE OR INTENT TO DECEIVE.  However, if the representation is one of fact, the insurer need only prove the materiality of

the representation, because in such cases the intent to deceive is presumed [DE LEON]. Note: If a statement of fact, fraudulent intent is presumed. Hence, materiality of the misrepresented fact will avoid the contract.  A representation cannot qualify an express provision or an express warranty of insurance [Sec. 40]. It is not part of the contract but only a collateral inducement to it. But it may qualify as an IMPLIED WARRANTY.  A representation may be altered of withdrawn before the insurance is effected but not afterwards [Sec. 41]  There is fraud and misrepresentation when another person took the place of the insured in the medical examination [Eguaras v. Great Eastern (1916)].  The insurer is not entitled to rescission for misrepresentation of age if the birth date on the policy leads to the conclusion that the insured is beyond the age covered and yet insurer continued to accept payment and had issued the policy. Insurer deemed estopped [Edillon v. Manila Bankers Life (1982)]. Concealment vs. Misrepresentation CONCEALMENT MISREPRESENTATION Passive form Active form Insured withholds Insured makes information of material erroneous statements facts from the insurer; of facts with the intent he maintains silence of inducing the insurer when he ought to speak to enter into the insurance contract Determined by the same rules as to materiality Same effects on the part of the insured; insurer has right to rescind Injured party is entitled to rescind a contract of insurance on ground of concealment or false representation, whether intentional or not Rules on concealment and representation apply likewise to the insurer as insurance contract is one of utmost good faith 3)

Breach of Warranties

Warranty, Defined  A statement or promise by the insured  Set forth in the policy or by reference incorporated therein,  The untruth or non-fulfillment of which in any respect, and without reference to whether insurer was in fact prejudiced by such untruth or non-fulfillment,  Renders the policy voidable by the insurer [VANCE].  Must always be express Purpose To eliminate potentially increasing hazards which may either be due to the acts of the insured or to the change of the condition of the property.

MERCANTILE LAW REVIEWER Kinds of warranties 1. Express – contained in the policy or clearly incorporated therein as part thereof; warranty as a fact [Sec. 71]. 2. Implied – deemed included in the contract although not expressly mentioned; applicable in marine insurance only (ex: implied warranty of seaworthiness of the vessel.) 3. Affirmative Warranty is one which asserts the existence of a fact or condition at the time it is made [Sec. 68]. 4. Promissory Warranty or Executory Warranty is one where the insured stipulates that certain facts or conditions pertaining to the risk shall exist or that certain things with reference thereto shall be done or omitted. It is in the nature of a condition subsequent [Secs.72 & 73]. Effect of breach of warranty General Rule It gives the insurer the right to rescind [Secs.74&76]. Exceptions [Sec. 73]  loss occurs before the time of performance of the warranty  the performance becomes unlawful  performance becomes impossible Rule on immaterial provisions General Rule  Not all breach of the provisions in the policy may give the right to rescind the policy.  Breach of an immaterial provision does not avoid the policy [Sec. 75]. Exception When the parties stipulate that violation of a particular provision (though normally immaterial) shall avoid the policy.  In effect, the parties converted the immaterial provision into a material one [SUNDIANG]. A breach of warranty without fraud merely exonerates an insurer from the time it occurs [Sec. 76] Fraud is not essential to entitle the insurer to rescind a contract for breach of warranty. Falsity, not fraud, is the basis of liability in warranty. Warranties in Fire Insurance [Sec. 168] Entitles the insurer to rescission if:  Use or condition of a thing insured is limited by the policy  Insured alters the use of condition without the consent of the insurer  Alteration is by means within the control of the insured  Alteration increased the risk (increase of hazard or chance of loss).  Alteration is actual and substantial A condition in the policy which requires insured to disclose to the insurer of any insurance that, if

violated by the insured, would ipso facto avoid the contract [Pioneer v. Yap (1974)]. Insurer is barred by waiver (or estoppel) to claim violation of the so-called hydrants warranty when, despite knowing fully that only 2 fire hydrants existed (out of the 11 hydrants required), it still issued the insurance policies and received the premiums [Qua Chee Gan v. Law Union (1955)]. Warranty vs. Representation Warranty Representation Part of the contract Mere collateral inducement Written on the policy, May be written in the actually or by reference policy or may be oral. Presumed material Must be proved to be material Must be strictly complied Requires only substantial with truth and compliance  Incontestible warranties, presentation.

clause only

does not include concealment/misre-

VIII. Claims Settlement and Subrogation Liability for Loss (Asked in 96, 05, 07) Loss for which insurer is Loss for which insurer is liable NOT liable Loss the proximate cause of which is the peril insured against [Sec. 84] Loss the immediate cause of which is the peril insured against except where the proximate cause is an excepted peril; Loss through negligence of insured except where there was gross negligence amounting to willful acts; and Loss caused by efforts to rescue the thing from peril insured against; If during the course of the rescue, the thing is exposed to a peril not insured against, which permanently deprives the insured of its possession, in whole or in part [Sec. 85]

Loss by insured‘s willful act Loss due to connivance of the insured [Sec. 87]

Loss where the excepted peril is the proximate cause.

Requisites for recovery from insurance 1) The insured must have insurable interest in the subject matter; 2) That interest is covered by the policy; 3) There must be a loss; and

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MERCANTILE LAW REVIEWER 4)

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The loss must be proximately caused by the peril insured against OR the immediate cause of the loss is a peril insured against except where the proximate cause is an excepted peril. Proximate Cause Remote Cause An event that sets all An event preceding other events in motion another in a causal without any intervening chain, but separated or independent case, from it by other events without which the injury or loss would not have occurred. [Vda. De Bataclan v. Medina (1957)] a.

Notice and Proof of Loss

Notice of Loss  The formal notice given the insurer by the insured or claimant under a policy of the occurrence of the loss insured against.  Purpose: To apprise the insurance company so that it may make proper investigation and take such action as may be necessary to protect its interest.  Necessary as the insurer cannot be liable to pay a claim unless he receives notice of that claim.  In fire insurance: Insurer is exonerated if notice of loss is not given to the insurer by the insured or by the person entitled to the benefit without unnecessary delay [Sec. 88]  However, it has been held that formal notice of loss is not necessary if insurer has actual notice of loss already. Form of Notice  In the absence of any stipulation in the policy, notice may be given orally or in writing.  The notice of loss may be in the form of an informal or provisional claim containing a minimum of information as distinguished from a formal claim which contains the full details of the loss, computations of the amounts claimed, and supporting evidence, together with a demand or request for payment [DE LEON]. In fire insurance Required Failure to give notice will defeat the right of the

In other types of insurance Not required Failure to give notice will not exonerate the insurer, unless there is a stipulation in the

insured to recover.

policy requiring the insured to do so.

Proof of Loss The formal evidence given the insurance company by the insured or claimant under a policy of the occurrence of the loss, the particulars thereof and the data necessary to enable the company to determine its liability and the amount  Is not tantamount to proof or evidence under the law on evidence.  Form: Like a notice of loss, in the absence of any stipulation in the policy, proof may be given orally or in writing.  Proof of loss is intended to: - Give the insurer information by which he may determine the extent of his liability. - Afford him a means of detecting any fraud that may have been practiced upon him. - Operate as a check upon extravagant claims. b. Guidelines on Claims Settlement Sec. 241. No insurance company doing business in the Philippines shall refuse, without just cause, to pay or settle claims arising under coverages provided by its policies, nor shall any such company engage in unfair claim settlement practices. (1) Unfair Claims Settlement; Sanctions Sec. 241 (1) provides for instances of unfair claims settlement done by an insurance company: 1. Knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverages at issue; 2. Failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its policies; 3. Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under its policies; 4. Not attempting in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear; 5. Compelling policyholders to institute suits to recover amounts due under its policies by offering without justifiable reason substantially less than the amounts ultimately recovered in suits brought by them.

MERCANTILE LAW REVIEWER CLAIMS

Maturity

Delivery of Proceeds

Effect of Refusal or Failure to pay claim within time prescribed:  In case of litigation, it is the duty of the Commissioner or the Court to determine WON claim has been unreasonably denied or withheld.  Failure to pay any such claim within the time prescribed shall be considered prima facie evidence of unreasonable delay in payment.

LIFE INSURANCE  Upon death of the person insured;  Upon his surviving a specific period  Otherwise contingently on the continuance or cessation of life [Sec. 180] General Rule: Immediately upon maturity of policy. Exception: If payable in INSTALLMENTS or as an ANNUITY, when such installments or annuities become due IF MATURITY IS UPON DEATH: Within 60 days after presentation of claim and filing of proof of death of insured.  Entitles beneficiary to collect interest on the proceeds of policy for the duration of the delay at rate of twice ceiling prescribed by the monetary board (unless refusal to pay is based on ground that claim is fraudulent)  In case damages awarded, this includes attorney‘s fees and other expenses incurred due to delay (plus the interest)

(2) Prescription of Action Sec. 63 A condition, stipulation, or agreement in any policy of insurance, limiting the time for commencing an action thereunder to a period of less than one year from the time when the cause of action accrues, is void. Sec. 384 Any person having any claim upon the policy issued pursuant to this Chapter shall, without any unnecessary delay, present to the insurance company concerned a written notice of claim setting form the nature, extent and duration of the injuries sustained as certified by a duly licensed physician. Notice of claim must be filed within six months from the date of the accident, otherwise, the claim shall be deemed waived. Action or suit for recovery of damage due to loss or injury must be brought, in proper cases, with the Commissioner or the Courts within one year from the denial of the claim, otherwise, the claimant’s right of action shall prescribe. Period for presenting a written notice of claim  within 6 months from date of accident Period for action or suit for recovery of damage  within one year from the denial of the claim (denial of the claim is the time when cause of action

NON-LIFE INSURANCE  Upon happening of event insured against  Event must occur within the period specified in policy, otherwise insurer has no liability  Within 30 days after  Proof of loss is received by insurer; and  Ascertainment of loss or damage is made either by agreement between the insured and insurer or by arbitration  If ascertainment not made within 60 days after such receipt by insurer of proof of loss, loss or damage shall be paid within 90 days after such receipt.  Entitles beneficiary to collect interest on the proceeds of policy for the duration of the delay at rate of twice ceiling prescribed by the monetary board (unless refusal to pay is based on ground that claim is fraudulent)  In case damages awarded, this includes attorney‘s fees and other expenses incurred due to delay (plus the interest)

accrues, so prior to such denial, action cannot be brought) Art. 1144, Civil Code The following action must be brought within ten years from the time the right of action accrues: (1) Upon a written contract; (2) Upon an obligation created by law (3) Upon a judgment. (n) Rules: 1. In the absence of an express stipulation in the policy, it being based on a written contract, the action prescribes in 10 years. 2. However, the parties may validly agree on a shorter period provided it is not less than one year from the time the cause of action accrues.  Note: In motor vehicle insurance, action prescribes in one year. 3. The cause of action accrues from the rejection of the claim of the insured and not from the time of loss.  The period for filing claim is not merely a procedural requirement.  It is essential for the prompt settlement of claims as it demands for suits to be brought while the evidence as to the origin and cause of the loss or destruction has not yet disappeared.

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58

 It is a condition precedent to the insurer‘s liability or a resolutory cause in case the action is not filed by the insured within the stipulated period.  The Insurance Commissioner has the power to adjudicate disputes relating to an insurance company‘s liability to an insured under a policy.  A complaint or claim filed with such official is considered an ―action‖ or ―suit‖ the filing of which would have the effect of tolling the suspending the running of the prescriptive period.  A stipulation stating that the prescriptive period for filing an action is 1 year from the happening of loss is void (it should be from the time of rejection). As the stipulation is void and is upon a written contract, the time limit is 10 years from the time the cause of action accrues. Period for Payment of Claims LIFE POLICIES [Sec. NON-LIFE POLICIES 242] POLICIES [Sec. 243] Maturing upon the The proceeds shall be expiration of the term – paid within 30 days after The proceeds are the receipt by the immediately payable to insurer of proof of loss, the insured, unless they and ascertainment of the are made payable in loss or damage by installments or as agreement of the parties annuity, in which case, or by arbitration but not the installments or later than 90 days from annuities shall be paid as such receipt of proof of they become due loss whether or not ascertainment is had or made Maturing at the death of the insured, occurring prior to the expiration of the term stipulated – Proceeds are payable to the beneficiaries within 60 days after presentation and filing of proof of death (3) Subrogation  Normal incident of indemnity insurance as a legal effect of payment  Insurer steps into the shoes of insured. Note: There insurance.

is

only

subrogation

in

non-life

Definition and Scope Subrogation is the substitution of one person in the place of another with reference to a lawful claim or right, so that he who is substituted succeeds to the rights of the other in relation to a debt or claim, including its remedies or securities. The principle covers the situation under which an insurer that has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy. It contemplates full substitution such

that it places the party subrogated in the shoes of the creditor, and he may use all means which the creditor could employ to enforce payment [Lorenzo Shipping Corporation v. Chubb and Sons, Inc. (2004)]. Rights Transferred  The rights to which the subrogee succeeds are the same as, but not greater than, those of the person for whom he is substituted.  He cannot acquire any claim, security, or remedy the subrogor did not have. In other words, a subrogee cannot succeed to a right not possessed by the subrogor. A subrogree in effect steps into the shoes of insured and can recovery only if the insured likewise could have recovered Rules:  NO need of a formal assignment or an express stipulation in the policy. It is a legal effect of payment.  The insurer can only recover from the third person what the insured could have recovered. Thus, there can be no recovery if the insurer voluntarily paid even if the loss is not covered by the policy.  The insured can no longer recover from the offended party what was paid to him by the insurer but he can recover any deficiency, that is, if the damages suffered are more than what was paid. The deficiency is not covered by the right of subrogation.  The insurer must present the policy as evidence to determine the extent of its coverage [Wallen Phil. Shipping v. Prudential Guarantee (2003)]. Instances where there is no right of subrogation  Where the insured by his own act releases the wrongdoer or third party liable for the loss or damage;  Where the insurer pays the insured the value of the loss without notifying the carrier who has in good faith settled the insured‘s claim for loss;  Where the insurer pays the insured for a loss or risk not covered by the policy [Pan Malayan Insurance Company v. CA (1997)].  In life insurance  For recovery of loss in excess of insurance coverage [DE LEON]. By the act of Manila Mahogany issuing a release claim to SMC, the right of Zenith against SMC is nullified since the insurer can be subrogated to only such rights as the insured may have, should the insured, after receiving payment from the insurer, release the wrongdoer who causes the loss, the insurer loses his rights against him. But in such a case the insurer will be entitled to recover from the insured whatever it has paid, unless it was made with the consent of the insurer. [Manila Mahogany v. CA (1987)]

COMMERCIAL LAW REVIEWER

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2012

MERCANTILE

Transportation Law BAR OPERATIONS COMMISSION 2012 EXECUTIVE COMMITTEE Ramon Carlo Marcaida |Commissioner Raymond Velasco • Mara Kriska Chen |Deputy Commissioners Barbie Kaye Perez |Secretary Carmen Cecilia Veneracion |Treasurer Hazel Angeline Abenoja|Auditor COMMITTEE HEADS Eleanor Balaquiao • Mark Xavier Oyales | Acads Monique Morales • Katleya Kate Belderol • Kathleen Mae Tuason (D) • Rachel Miranda (D) |Special Lectures Patricia Madarang • Marinella Felizmenio |Secretariat Victoria Caranay |Publicity and Promotions Loraine Saguinsin • Ma. Luz Baldueza |Marketing Benjamin Joseph Geronimo • Jose Lacas |Logistics Angelo Bernard Ngo • Annalee Toda|HR Anne Janelle Yu • Alyssa Carmelli Castillo |Merchandise Graciello Timothy Reyes |Layout Charmaine Sto. Domingo • Katrina Maniquis |Mock Bar Krizel Malabanan • Karren de Chavez |Bar Candidates’ Welfare Karina Kirstie Paola Ayco • Ma. Ara Garcia |Events OPERATIONS HEADS Charles Icasiano • Katrina Rivera |Hotel Operations Marijo Alcala • Marian Salanguit |Day-Operations Jauhari Azis |Night-Operations Vivienne Villanueva • Charlaine Latorre |Food Kris Francisco Rimban • Elvin Salindo |Transpo Paula Plaza |Linkages




60

Transportation Law

narrow segment of the general population [Fabre vs. CA (1996)]

MERCANTILE LAW I. Common carriers II. Vigilance over goods III. Safety of passengers IV. Bill of lading V. Maritime commerce VI. Public Service Act VII. The Warsaw Convention

Private Carriers Those who transport or undertake to transport in a particular instance for hire or reward. [Agbayani, Commercial Laws of the Philippines]

Letters of Credit Warehouse Receipts Law Trust Receipts Law Negotiable Instruments Law Insurance Code Transportation Law Corporation Law Securities Regulation Code Banking and Finance Intellectual Property

I. Common Carriers

Availability

Binding Effect

Art. 1732 Civil Code. Common carriers are persons, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public. What are the elements of a common carrier? 1. It is engaged in the business of carrying or transporting goods for others as a public employment, or passengers, or both 2. It is for compensation or for hire 3. It is operated generally as a business and not as a casual occupation 4. It holds out to the public as ready to engage in the transportation of goods of the kind to which his business is confined [cf. First Phil. Industrial v. CA] First Phil. Industrial v. CA (1998). There is no doubt that petitioner (engaged in the business of transporting petroleum products from the Batangas refineries, via pipeline) is a common carrier. It is engaged in the business of transporting or carrying goods, i.e. petroleum products, for hire as a public employment. It undertakes to carry for all persons indifferently, that is, to all persons who choose to employ its services, and transports the goods by land and for compensation. The fact that petitioner has a limited clientele does not exclude it from the definition of a common carrier. Fabre v. CA (1996). The provision (Art. 1732) makes no distinction between one whose principal business activity is the carrying of persons or goods or both, and one who does such carrying only as an ancillary activity (in local idiom, as ―a sideline‖). Art. 1732 avoids the following distinctions: 1. Between a person or enterprise offering transportation service on a regular basis and one offering such service on occasional or unscheduled basis 2. Between one offering its services to the general public and one soliciting business only from a

Diligence Required Governing Law

Regulation

Common Carrier Holds himself out in common, that is, to all persons who choose to employ him, as ready to carry for hire Bound to carry all who offer and tender reasonable compensation for carrying them

Extraordinary diligence Principally, Civil Code provisions on common carriers A public service and is therefore subject to regulation

Private Carrier Agrees in some special case with some private individual to carry for hire Not bound to carry for any reason, such goods as it is accustomed to carry, unless it enters into a special agreement to do so Ordinary diligence Obligations and contracts Not subject to regulation as a common carrier [Agbayani, Commercial Laws of the Philippines]

A. Diligence Required of Common Carriers Art. 1733 Civil Code. Common carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them, according to all the circumstances of each case. Such extraordinary diligence in the vigilance over the goods is further expressed in Articles 1734, 1735, and 1745, Nos. 5, 6, and 7, while the extraordinary diligence for the safety of the passengers is further set forth in Articles 1755 and 1756. Nature: bound to observe extraordinary diligence Basis of liability: nature of their business and public policy [Art 1733]

MERCANTILE LAW REVIEWER Cangco v. MRR. The liability of the carrier is contractual in nature. It arises from the contract of carriage. The liability is direct and immediate, and differs from presumptive responsibility for the negligence of [Manila Railroad‘s] servants. The contract of Manila Railroad Company to transport Cangco carried with it the duty to carry him safely and provide safe means of entering and leaving its trains. That duty, being contractual, was direct and immediate, and its non-performance could not be excused by proof that the fault was morally imputable to Manila Railroad‘s servants. There was no contributory negligence on the part of Cangco.

B. Liabilities of Common Carriers Goods GENERAL RULE: Common carriers are responsible for the loss, destruction, or deterioration of the goods. This responsibility arises from contract, as the relation between a carrier and its patrons is of a contractual nature. A failure on the carrier to use extraordinary care in carrying goods or passengers safely is a breach of contract and constitutes culpa contractual. The carrier is also liable even in those cases where the cause of the loss or damage is unknown. [Agbayani, Commercial Laws of the Philippines] EXCEPTION: if due to any of the following causes only (1) Flood, storm, earthquake, lightning, or other natural disaster or calamity; (2) Act of the public enemy in war, whether international or civil; (3) Act of omission of the shipper or owner of the goods; (4) The character of the goods or defects in the packing or in the containers; (5) Order or act of competent public authority. NOTE: The presumption of negligence does not apply in these cases. Passengers Art. 1755 Civil Code. A common carrier is bound to carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances. Art. 1756 Civil Code. In case of death of or injuries to passengers, common carriers are presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence as prescribed in Arts 1733 and 1755. Common carriers are also responsible for the safety of the following persons (even though they are not passengers):  Extraordinary diligence is for the safety of passengers and crew because any lapse will

result to damage of all aboard. [PAL v. CA (1981)]  Presence of stevedores on board the barge was called for by the contract of carriage. Petitioner is liable if it knew and consented to the stevedores‘ presence. [Sulpicio v. CA (1995)]

II. Vigilance over goods A. Exempting Causes 1) Natural disaster Requisites: 1. The natural disaster must have been the proximate and only cause [Art 1739] 2. The common carrier must exercise due diligence to prevent or minimize the loss before, during and after the occurrence of the flood, storm or natural disaster [Art 1739] 3. The common carrier must not have been guilty of delay [Art 1740] 4. The shipment was at shipper‘s risk [Art 361, Code of Commerce] Martini v. Macondray (1919): The master is responsible for the safe & proper stowage of the cargo, & there is no doubt that by the general maritime law he is bound to secure the cargo safely under deck. If the master carries goods on deck w/o the consent of the shipper, he does it at his own risk. If they are damaged or lost in consequence of their being thus exposed, he cannot protect himself from responsibility by showing that they were damaged or lost by the dangers of the seas. When the shipper consents to his goods being carried on deck, he takes the risks of any damage or loss sustained as a consequence of their being so carried. Eastern Shipping Lines v. IAC (1987): Fire may not be considered a natural disaster/calamity. This must be so as it arises almost invariably from some act of man or by human means. It does not fall within the category of an act of God unless caused by lightning or boy other natural disaster/calamity. It may even be caused by the actual fault or privity of the carrier. 2) Act of public enemy Requisites: 1. The act of the public enemy must have been the proximate and only cause [Art. 1739] 2. The common carrier must exercise due diligence to prevent or minimize the loss before, during and after the act of the public enemy causing the loss, destruction or deterioration of the goods. [Art. 1739] 3) Act or omission of shipper Requisites: 1. The act or omission of the shipper must have been the proximate and only cause [Art 1741]

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62

If the shipper owner merely contributed to the loss, destruction or deterioration of the goods, the proximate cause being the negligence of the common carrier, then the common carrier shall be liable for the damages, which shall, however, be equitably reduced. [Art 1741]

4) Character of goods Requisites: 1. The character of the goods or defects in packing or containers [Art 1739] 2. The common carrier must exercise due diligence to forestall or lessen the loss [Art 1739] DAMAGE Ascertainable from package Only upon opening the package

WHEN TO CLAIM Claim for damages must be made upon receipt Claim for damages may be made within 24 hours upon receipt

After such periods OR after transportation charges have been paid, no more claims for damages will be entertained. [Art 366, Code of Commerce] Southern Lines v. CA (1962). If the fact of improper packing is known to the carrier or its servants or apparent upon ordinary observation, but [the carrier] accepts the goods notwithstanding such condition, it is not relieved of liability for loss or injury resulting therefrom.

1. Requirement

of

Absence

of

Negligence

Articles 1739 and 1741 provide that the exempting causes listed above must have been the proximate and only cause of the loss. Since the exempting cause must be the only cause of the loss, it follows that for the exempting causes to apply, the provisions also require the absence of negligence.

2. Absence of Delay Art. 1740. If the common carrier negligently incurs in delay in transporting the goods, a natural disaster shall not free such carrier from responsibility.

3. Due diligence to prevent or lessen the loss

Art. 1739 Civil Code. In order that the common carrier may be exempted from responsibility, the natural disaster must have been the proximate and only cause of the loss. However, the common carrier must exercise due diligence to prevent or minimize loss before, during and after the occurrence of flood, storm or other natural disaster in order that the common carrier may be exempted from liability for the loss, destruction, or deterioration of the goods. The same duty is incumbent upon the common carrier in case of an act of the public enemy referred to in Article 1734, No. 2.

5) Order of competent authority Requisites: 1. There must be an order or act of competent authority [Art. 1743] 2. The said public authority must have had the power to issue the order. If the officer acts without legal process, then the common carrier will be held liable [Art. 1743] Ganzon v. CA (1988) The intervention of the municipal officials was not of a character that would render impossible the fulfillment by the carrier of the obligation. The petitioner was not duty bound to obey the illegal order [of the mayor] to dump into the sea the scrap iron. There is absence of sufficient proof that the issuance of the order was attended with such force or intimidation as to completely overpower the will of petitioner‘s employees. The mere difficulty in the fulfillment of the obligation is not force majeure. Melencio-Herrera, dissent: Through the ―order or act‖ of ―competent public authority,‖ the performance of the contractual obligation was rendered impossible. Apparently, the seizure and destruction of the goods was done under legal process or authority so that petitioner should be freed from responsibility.

Art. 1742 Civil Code. Even if the loss, destruction or deterioration of the goods should be caused by the character of the goods or the faulty nature of the packing or of the containers the common carrier must exercise due diligence to forestall or lessen the loss.

B. Contributory negligence Art. 1741 Civil Code. If the shipper or owner merely contributed to the loss destruction or deterioration of the goods the proximate cause thereof being the negligence of the common carrier the latter shall be liable in damages which however shall be equitably reduced.

C. Duration of liability Duration of liability/Extraordinary diligence When does carrier‘s responsibility begin? Under Art. 1738, the extraordinary responsibility of the common carrier begins from the time the goods are delivered to the carrier. The delivery must place the goods to be transported unconditionally in the possession of the common carrier and the latter must receive them. When does carrier‘s responsibility terminate? Under Art. 1738, the extraordinary responsibility of the carrier is terminated at the time the goods are

MERCANTILE LAW REVIEWER delivered to the consignee or the person who has a right to receive them (actual or constructive delivery). [Agbayani, Commercial Laws of the Philippines]

1. Delivery of goods to common carrier

The liability and responsibility of the carrier commence on their actual delivery to, or receipt by the carrier or an authorized agent, of the goods. [Cia. Maritima v. Insurance Co., 12 SCRA 213]

2. Actual or constructive delivery Art. 1736 Civil Code. The extraordinary responsibility of the common carrier lasts from the time the goods are unconditionally placed in the possession of and received by the carrier for transportation until the same are delivered actually or constructively by the carrier to the consignee or to the person who has a right to receive them without prejudice to the provisions of Article 1738. When is the contract of transportation perfected? A contract of transportation is consensual in nature; therefore it is perfected upon the meeting of the minds of the parties. [Art. 1305 Civil Code] What if the goods are only for safekeeping? If the common carrier received the goods not for transportation but only for safekeeping, where the goods have already been purchased by the shipper and ready for transportation, then the duty of extraordinary diligence has not yet started. [in relation to Art. 1319 Civil Code] Who are these persons or entities who have ―a right to receive‖ the goods? These persons include agents, brokers, and the like. What does ―unconditionally placed‖ in Art. 1736 mean? It means that the shipper cannot get the goods back from the common carrier at will. Compania Maritima v. Insurance Company of North America (1964). The liability of the carrier as common carrier begins with the actual delivery of the goods for transportation and not merely with the formal execution of a receipt or bill of lading; the issuance of a bill of lading is not necessary to complete delivery and acceptance. Even where it is provided by statute that liability commences with the issuance of the bill of lading actual delivery and acceptance are sufficient to bind the carrier. Lu Do v. Binamira (1957): Delivery of the cargo to the customs authorities is not delivery to the consignee or ―to the person who has a right to receive them‖ contemplated in Article 1736 because in such case the goods are still in the hands of the Government and the owner cannot exercise dominion over them however the parties may agree to limit the liability of the carrier considering that

the goods still have to go through the inspection of the customs authorities before they are actually turned over to the consignee. This is a situation where we may say that the carrier losses control of the goods because of a custom regulation and it is unfair that it be made responsible for what may happen during the interregnum.

3. Temporary unloading or storage Art. 1737 Civil Code. The common carrier's duty to observe extraordinary diligence over the goods remains in full force and effect even when they are temporarily unloaded or stored in transit unless the shipper or owner has made use of the right of stoppage in transitu. GENERAL RULE: extraordinary diligence over goods even when the goods are temporarily unloaded or stored in transit EXCEPTION: shipper or owner made use of the right of stoppage in transitu [Art. 1737] What is stoppage in transitu? This is the act by which the unpaid vendor of goods stops their progress and resumes possession of them constructively while they are in the court of transit from him to the purchaser, and not yet actually delivered to the latter. The duty of the common carrier to exercise extraordinary diligence ends in the middle of the journey or transit. When the buyer of the goods becomes insolvent, the unpaid seller who has parted with the possession of the goods at any time while they are in transit, may resume the possession of the goods as he would have had if he had never parted with the possession. [Art. 1530 Civil Code] When the right of stoppage in transitu is exercised, the common carrier holds the goods in the capacity of an ordinary bailee or warehouseman upon the theory that the exercise of the right of stoppage in transitu terminates the contract of carriage. Hence, only ordinary diligence is required. [Agbayani, Commercial Laws of the Philippines]

D. Stipulation liability

for

limitation

of

1. Void stipulations Art. 1744 Civil Code. A stipulation between the common carrier and the shipper or owner limiting the liability of the former for the loss, destruction, or deterioration of the goods to a degree less than extraordinary diligence shall be valid, provided it be: (1) In writing, signed by the shipper or owner; (2) Supported by a valuable consideration other than the service rendered by the common carrier; and

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64

(3) Reasonable, just and not contrary to public policy.

circumstances and has been fairly and freely agreed upon.

Art. 1745 Civil Code. Any of the following or similar stipulations shall be considered unreasonable, unjust and contrary to public policy: (1) That the goods are transported at the risk of the owner or shipper; (2) That the common carrier will not be liable for any loss, destruction, or deterioration of the goods; (3) That the common carrier need not observe any diligence in the custody of the goods; (4) That the common carrier shall exercise a degree of diligence less than that of a good father of a family, or of a man of ordinary prudence in the vigilance over the movables transported; (5) That the common carrier shall not be responsible for the acts or omission of his or its employees; (6) That the common carrier's liability for acts committed by thieves, or of robbers who do not act with grave or irresistible threat, violence or force, is dispensed with or diminished; (7) That the common carrier is not responsible for the loss, destruction, or deterioration of goods on account of the defective condition of the car, vehicle, ship, airplane or other equipment used in the contract of carriage.

Shewaram v. PAL (1966). There are two requisites that must be fulfilled in order that the liability of PAL be limited according to the stipulations behind the ticket stub: 1. that the contract is just and reasonable under the circumstances 2. that the contract was fairly and freely agreed upon (per Art. 1750)

Art. 1751 Civil Code. The fact that the common carrier has no competitor along the line or route, or a part thereof, to which the contract refers shall be taken into consideration on the question of whether or not a stipulation limiting the common carrier's liability is reasonable, just and in consonance with public policy. Kinds of Stipulations Limiting Liability [Heacock v. Macondray, 42 Phil 205] Exempting the common carrier from VOID any and all liability for loss or damage occasioned by its own negligence Providing for an unqualified limitation VOID of such liability to an agreed stipulation Limiting the liability of the common VALID carrier to an agreed valuation unless the shipper declares a higher value and pays a higher rate of freight

2. Limitation of liability to fixed amount

Art. 1749 Civil Code. A stipulation that the common carrier's liability is limited to the value of the goods appearing in the bill of lading unless the shipper or owner declares a greater value is binding. Art. 1750 Civil Code. A contract fixing the sum that may be recovered by the owner or shipper for the loss, destruction or deterioration of the goods is valid if it is reasonable and just under the

The fact that the conditions are printed at the back of the ticket stub in letters so small that they are hard to read would not warrant the presumption that plaintiff was aware of those conditions such that he had ―fairly and freely agreed‖ to those conditions. Ong Yiu v. CA (1979). While the passenger had not signed the plane ticket, he is nevertheless bound by the provision thereof; such provisions have been held to be part of the contract of carriage and valid and binding upon the passenger regardless of the latter‘s lack of knowledge or assent to the regulation. It is what is known as a contract of adhesion wherein one party imposes a ready made form of contract on the other. The one who adheres to the contract is in reality free to reject it entirely. A contract limiting liability upon an agreed valuation does not offend against the policy of the law forbidding one from contracting against his own negligence.

3. Limitation of liability in absence of declaration of greater value

Art. 1749 Civil Code. A stipulation that the common carrier's liability is limited to the value of the goods appearing in the bill of lading unless the shipper or owner declares a greater value is binding.

E. Liability for baggage of passengers (asked in 97 and 98) What are the kinds of passenger baggage and the laws applicable to them? 1. Passenger baggage in the custody of the passenger (e.g. carry-on luggage). These are considered as necessary deposits. Articles 1998, 2000-2003 apply. 2. Passenger baggage not in the custody of the passenger (e.g. checked-in luggage). Arts. 17331753 on extraordinary diligence apply. The liability is greater for baggage that is in the custody of the carrier in contrast if such is in the possession of the passenger.

1. Checked-in baggage Art. 1754 Civil Code. The provisions of Articles 1733 to 1753 shall apply to the passenger's baggage which is not in his personal custody or in that of his employee. As to other baggage, the rules in Articles

MERCANTILE LAW REVIEWER 1998 and 2000 to 2003 concerning the responsibility of hotel-keepers shall be applicable.

2. Baggage

in

possession

of

passengers Under Art. 1998, the baggage of passengers in their personal custody or in that of their employees while being transported shall be regarded as necessary deposits. The common carrier shall be responsible for such baggage as depositaries (i.e. like hotelkeepers), provided that 1) notice was given to them or to their employees, and that 2) the passengers take the precautions which said carriers advised relative to the care and vigilance of their baggage. [Agbayani, Commercial Laws of the Philippines] When hotel-keeper liable In the following cases, the hotel-keeper is liable regardless of the amount of care exercised: 1. loss or injury is caused by his servants or employees as well as by strangers (Art 2000) provided that: a) notice has been given by the guest, and b) proper precautions taken by the guest (Art 1998) 2. loss is caused by the act of a thief or robber done without the use of arms or irresistible force (Art 2001) When hotel-keeper not liable 1. loss or injury is caused by force majeure (Art 2000), theft or robbery by a stranger (not by hotel-keeper‘s servant or employee) with the use of arms or irresistible force (Art 2001), etc unless he is guilty of fault or negligence in failing to provide against the loss or injury from his cause 2. loss is due to the acts of the guests, his family, servants, or visitors (Art 2002) 3. loss arises from the character of the things brought into the hotel (Art 2002) Art. 2003 Civil Code. The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. Any stipulation between the hotelkeeper and the guest whereby the responsibility of the former as set forth in articles 1998 to 2001 is suppressed or diminished shall be void. What is a passenger baggage? They are the things that a passenger will bring with him consistent with a temporary absence from where he lives. Passenger baggage must have a direct relationship with the passenger who is traveling. E.g. A balikbayan box or suitcase is passenger baggage. However, 10,000 cans of corned beef is not considered as passenger baggage. They are considered as goods. If you carry goods with you, you cannot bring them with you as part of your [passenger] contract of carriage. You will need to get a separate contract of carriage (―bill of lading‖) in order to transport them. These goods will then be

transported whether or not you are physically traveling with them.

III. Safety of Passengers (Asked in 97 and 01) A. Void stipulations Art. 1757 Civil Code. The responsibility of a common carrier for the safety of passengers as required in Articles 1733 and 1755 cannot be dispensed with or lessened by stipulation by the posting of notices, by statements on tickets, or otherwise. Art. 1758 Civil Code. When a passenger is carried gratuitously, a stipulation limiting the common carrier's liability for negligence is valid, but not for willful acts or gross negligence. The reduction of fare does not justify any limitation of the common carrier's liability. Carriage of Goods Passengers

Validity of Stipulations Limiting Liability VALID, subject to conditions [Art. 1749] GR: VOID E: gratuitous carriage [Arts. 1757, 1758]

B. Duration of liability 1. Waiting for carrier or boarding of carrier Does the duty of extraordinary diligence occur right at the perfection of the contract of transportation? The perfection of the contract of carriage does not necessarily coincide with the commencement of the duty of extraordinary diligence. It may occur at the same time or later. It is the duty of common carriers of passengers to stop their conveyances a reasonable length of time in order to afford passengers an opportunity to board and enter, and they are liable for injuries suffered by boarding passengers resulting from the sudden starting up or jerking of their conveyances while they are doing so. [Dangwa Transportation v. CA (1991)] Del Prado v. Manila Railroad (1929). A person boarding a moving car must be taken to assume the risk of injury from boarding the car under the conditions open to his view, but he cannot fairly be held to assume the risk that the motorman, having the situation in view, will increase the peril by accelerating the speed of the car before he is planted safely on the platform.

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2. Arrival at destination

66

When does relationship of common carrier and passenger terminate? It does not cease at the moment that the passenger alights from the common carrier‘s vehicle at a place selected by the carrier at the point of destination, but continues until the passenger has had reasonable time or a reasonable opportunity to leave the carrier‘s premises. What is a reasonable time or a reasonable delay within this rule is to be determined from all the circumstances. [La Mallorca v. CA (1966)] Aboitiz v. CA. It is of common knowledge that by the very nature of petitioner's business as a shipper, the passengers of vessels are allotted a longer period of time to disembark from the ship than other common carriers such as a passenger bus. Such vessels are capable of accommodating a bigger volume of both passenger and baggage as compared to the capacity of a regular commuter bus. Consequently, a ship passenger will need at least an hour as is the usual practice, to disembark from the vessel and claim his baggage whereas a bus passenger can easily get off the bus and retrieve his luggage in a very short period of time. Does the duty of extraordinary diligence get interrupted? No. In PAL v. CA, it was held that PAL had to continue to exercise extraordinary diligence even in the case of stranded passengers until they have reached their final destination.

C. Liability for acts of others 1. Employees Responsibility for Acts of Employees Art. 1759 Civil Code. Common carriers are liable for the death of or injuries to passengers through the negligence or willful acts of the former's employees, although such employees may have acted beyond the scope of their authority or in violation of the orders of the common carriers. This liability of the common carriers does not cease upon proof that they exercised all the diligence of a good father of a family in the selection and supervision of their employees. Art. 1760 Civil Code. The common carrier's responsibility prescribed in the preceding article cannot be eliminated or limited by stipulation, by the posting of notices, by statements on the tickets or otherwise. Maranan v. Perez (1967). It is enough that the assault happens within the course of the employee's duty. It is no defense for the carrier that the act was done in excess of authority or in disobedience of the carrier's orders. The carrier's liability here is absolute in the sense that it practically secures the passengers from assaults committed by its own employees.

Note: The employee must be on duty at the time of the act.

2. Other passengers and strangers Responsibility for Acts of Strangers and Copassengers Art. 1763 Civil Code. A common carrier is responsible for injuries suffered by a passenger on account of the willful acts or negligence of other passengers or of strangers, if the common carrier's employees through the exercise of the diligence of a good father of a family could have prevented or stopped the act or omission. Pilapil v. CA (1989). In consideration of the right granted to it by the public to engage in the business of transporting passengers and goods, a common carrier does not give its consent to become an insurer of any and all risks to passenger and goods. It merely undertakes to perform certain duties to the public as the law imposes, and holds itself liable for any breach thereof. Under Art. 1763, a tort committed by a stranger which causes injury to a passenger does not accord the latter a cause of action against the carrier. The negligence for which a common carrier is held responsible is the negligent omission by the carrier's employees to prevent the tort from being committed when the same could have been foreseen and prevented by them. Further, when the violation of the contract is due to the willful acts of strangers, as in the instant case, the degree of care essential to be exercised by the common carrier for the protection of its passenger is only that of a good father of a family. What is the common carrier‘s responsibility towards employees? The common carrier is responsible even beyond the scope of authority and in violation of orders compared to quasi-delicts under Art. 2180, which exempts the employer if it was done outside of employment. However, there must be a reasonable connection between the act and the contract of carriage. Act Done In good faith

In bad faith, fraud, malice or wanton attitude

Liability of Obligor Only natural and probable consequences of the breach, which have could have reasonably been foreseen All damages which may be reasonably attributed to breach

Culpa Contractual (quasi-delict) Art. 1759 Carrier is directly and primarily liable

Culpa Aquiliana Art. 2180 Carrier and employee are solidarily liable as joint tort-feasors

MERCANTILE LAW REVIEWER No defense of diligence in selection supervision employees

due the and of

Defense of due diligence in the selection and supervision of employees is available

What is the common carrier‘s responsibility towards strangers? Art. 1763 imposes only the duty of ordinary diligence. In Bachelor Express v. CA (1990), the Court held that the common carrier has a duty of extraordinary diligence for the act of a copassenger. However, in Pilapil v. CA (1989), the standard of diligence is only ordinary diligence, referring to the acts of strangers.

D. Extent of liability for damages Art. 1761 Civil Code. The passenger must observe the diligence of a good father of a family to avoid injury to himself. Art. 1762 Civil Code. The contributory negligence of the passenger does not bar recovery of damages for his death or injuries, if the proximate cause thereof is the negligence of the common carrier, but the amount of damages shall be equitably reduced. Art. 1764 Civil Code. Damages in cases comprised in this Section shall be awarded in accordance with Title XVIII of this Book, concerning Damages. Article 2206 shall also apply to the death of a passenger caused by the breach of contract by a common carrier. Isaac v. A. L. Ammen Transportation (1975). It is the prevailing rule that it is negligence per se for a passenger on a railroad voluntarily or inadvertently to protrude his arm, hand, elbow, or any other part of his body through the window of a moving car beyond the outer edge of the window or outer surface of the car, so as to come in contact with objects or obstacles near the track, and that no recovery can be had for an injury which but for such negligence would not have been sustained. Spouses Landingin v. PANTRANCO (1970). When a passenger dies or is injured, the presumption is that the common carrier is at fault or that it acted negligently (Article 1756). This presumption is only rebutted by proof on the carrier's part that it observed the "extraordinary diligence" required in Article 1733 and the "utmost diligence of very cautious persons" required in Article 1755 (Article 1756). Necesito v. Paras. While the carrier is not an insurer of the safety of the passengers, it should nevertheless be held answerable for the flaws of its equipment, if such flaws were discoverable. The rationale for the common carrier‘s liability for manufacturing defects is the fact that the passenger has neither choice nor control over the carrier in the

selection and use of the equipment and appliances in use by the carrier. Having no privity whatever with the manufacturer or vendor of the defective equipment, the passenger has no remedy against him.

IV. Bill of Lading Definition; subject matter It is a written acknowledgment of the receipt of goods and an agreement to transport and to deliver them at a specified place to a person named therein or on his order. It comprehends all methods of transportation. It is not indispensable for the creation of a contract of carriage. [Compania Maritima v. Insurance Company of North America, 12 SCRA 213]

A. Three-fold character a. b. c.

receipt as to the quantity and description of the goods shipped; contract to transport the goods to the consignee or other person therein designated, on the terms specified in such instrument; document of title

B. Delivery of goods 1. Period for delivery Rule Period fixed for the delivery of the goods. If no period is fixed, within a reasonable time. Effect of Non-compliance The carrier shall pay the indemnity agreed upon in the bill of lading. If no indemnity is fixed, the carrier shall be liable for the damages which may have been caused by the delay. [Art. 370, Code of Commerce] If no period is fixed, the carrier shall be under the obligation to forward the goods in the first shipment of the same or similar merchandise which he may make to the point of delivery. [Art. 358, Code of Commerce]

2. Delivery without surrender of bill of lading If in case of loss or for any other reason whatsoever, the consignee cannot return upon receiving the merchandise the bill of lading subscribed by the carrier, he shall give said carrier a receipt for the goods delivered, this receipt producing the same effects as the return of the bill of lading. [Art. 353. (2) (3), Code of Commerce]

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3. Refusal of consignee to take

68

delivery

When consignee may refuse to receive goods 1. Partial Delivery. The consignee may refuse to receive them, when he proves that he cannot make use thereof without the others. [Art. 363, Code of Commerce] 2. When the goods are rendered useless for purposes of sale or consumption in the use for which they are properly destined. [Effect: consignee may demand payment of the goods at current market prices] 3. In case part of the goods is in good condition, the consignee may refuse to receive only the damaged goods if separation is possible. [Art. 365, Code of Commerce] In case of dispute as to the condition of the goods, the same shall be examined by experts appointed by the parties, and the third one, in case of disagreement, appointed by the judicial authority. If the persons interested should not agree with the report, said judicial authority shall order the deposits of the merchandise in a safe warehouse, and the parties interested shall make use of their rights in the proper manner. (Art. 367, Code of Commerce)

C. Period for filing claims Damage Ascertainable package

from

Only upon opening the package

When to Claim Claim for damages must be made upon receipt of delivery Claim for damages may be made within 24 hours upon receipt of delivery.

After such periods OR transportation charges have been paid, no more claims for damages will be entertained. (Art. 366, Code of Commerce)  Shorter period may be stipulated by the parties because it merely affects the shipper‘s remedy and does not affect the liability of the carrier. [PHILAMGEN v. Sweetlines, Inc.]

D. Period for filing actions In any event, the carrier and the ship shall be discharged from all liability in respect of loss or damage unless suit is brought within one year after delivery of the goods or the date when the goods should have been delivered. The absence of a notice shall not affect or prejudice the right of the shipper to bring suit within one year after the delivery of the goods or the date when the goods should have been delivered. [Sec. 3 (6), Carriage of Goods by Sea Act]

Maritime Agencies & Services, Inc. v. CA. The period for filing the claim is one year, in accordance with the Carriage of Goods by Sea Act. This was adopted and embodied by our legislature in Com. Act No. 65 which, as a special law, prevails over the general provisions of the Civil Code on prescription of actions. Section 3(6) of that Act provides as follows: In any event, the carrier and the ship shall be discharged from all liability in respect of loss or damage unless suit is brought within one year after delivery of the goods or the date when the goods should have been delivered; Provided, that if a notice of loss for damage; either apparent or concealed, is not given as provided for in this section, that fact shall not effect or prejudice the right of the shipper to bring suit within one year after the delivery of the goods or the date when the goods should have been delivered.

V. Maritime Commerce A. Charter Parties A charter party is a contract by virtue of which the owner or agent of a vessel binds himself to transport merchandise or persons for a fixed price. It is a contract by which the owner or agent of the vessel leases for a certain price the whole or portion of a vessel for the transportation of the goods or persons from one port to another. Towage is not a charter party. It is a contract for the hire of services by which a vessel is engaged to tow another vessel from one port to another for consideration. Caltex v. Sulpicio Lines (1999). A contract whereby the whole or part of the ship is let by the owner to a merchant or other person for a specified time or use for the conveyance of goods, in consideration of the payment of freight.

1. Bareboat/Demise Charter Under the demise or bareboat charter of the vessel, the charterer will generally be regarded as the owner for the voyage or service stipulated. The charterer mans the vessel with his own people and becomes the owner pro hac vice (just for that one particular purpose only), subject to liability to others for damages caused by negligence. To create a demise, the owner of a vessel must completely and exclusively relinquish possession, command and navigation thereof to the charterer, anything short of such a complete transfer is a contract of affreightment (time or voyage charter party) or not a charter party at all. [Puromines v. CA] Puromines, Inc. v. Court of Appeals. Although a charter party may transform a common carrier into a private one, the same however is not true in a contract of affreightment on account of the

MERCANTILE LAW REVIEWER distinctions between a contract of affreigment and a demise or bareboat charter.

3.

Damages to vessel and to cargo due to lack of skill and negligence.

NOTE: In a bareboat or demise charter, the common carrier is converted to private carrier.

4.

Losses, fines, and confiscations imposed an account of violation of customs, police, health, and navigation laws and regulations.

5.

Those caused by the misuse of the powers.

6.

For those arising by reason of his voluntarily entering a port other than that of his destination, outside of the cases or without the formalities referred to in Article 612.

7.

For those arising by reason of non-observance of the provisions contained in the regulations on situation of lights and maneuvers for the purpose of preventing collisions. [Art. 618]

Owner Pro Hac Vice – demise charter to whom the owner of the vessel has completely and exclusively relinquished possession, command and navigation of the vessel. In this kind of charter, the charterer mans and equips the vessel and assumes all responsibility for navigation, management and operation. He thus acts as the owner of the vessel in all important aspects during the duration of the charter.

2. Time Charter Contract of affreightment* wherein the vessel is let for a fixed day or for a determined number of days or months.

3. Voyage/Trip Charter Contract of affreightment* wherein the vessel is let for a particular or single voyage. Note: A contract of affreightment is one in which the owner of the vessel leases part or all of its space to haul goods for others. It is a contract for special service to be rendered by the owner of the vessel and under such contract the general owner retains the possession, command and navigation of the ship, the charterer or freighter merely having use of the space in the vessel in return for his payment of the charter hire. [Puromines vs. CA] In a contract of affreightment, the common carrier is NOT converted into a private carrier.

B. Liability of Shipowners Shipping Agents

and

Shipowner has possession, control and management of the vessel and the consequent right to direct her navigation and receive freight earned and paid, while his possession continues. Shipagent is the person entrusted with the provisioning of a vessel, or who represents her in the port in which she happens to be.

1. Liability for acts of captain 1.

The owner of a vessel and the agent shall be civilly liable for the acts of the captain and for the obligations contracted by the latter to repair, equip, and provision the vessel. [Art. 586, Code of Commerce]

2. The agent shall also be civilly liable for the indemnities in favor of third persons which arise from the conduct of the captain in the care of the goods which the vessel carried.

Exemption: abandonment of the vessel [Art. 587, Code of Commerce] The owner or agent shall not be liable for the obligations contracted by the captain if the latter exceeds his powers and privileges. However, if the amounts claimed were made use of for the benefit of the vessel, the owner or agent shall be liable. (Art. 588, Code of Commerce)

2. Exceptions to limited liability Limited Liability The real and hypothecary nature of the liability of the shipowner or agent had its origin in the prevailing conditions of the maritime trade and sea voyages during the medieval ages, attended by innumerable hazards and perils. To offset against these adverse conditions and encourage shipbuilding and maritime commerce, it was deemed necessary to confine the liability of the owner or agent arising from the operation of a ship to the vessel, equipment, and freight, or insurance, if any, so that if the shipowner or agent abandoned the ship, equipment, and freight, his liability was extinguished. The agent shall be civilly liable for the indemnities in favor of third persons which arise from the conduct of the captain in the care of the goods which the vessel carried; but he may exempt himself therefrom by abandoning the vessel with all her equipments and the freight he may have earned during the voyage. (Art. 587, Code of Commerce) The owners of a vessel shall be civilly liable in the proportion of their contribution to the common fund, for the results of the acts of the captain, referred to in Article 587. Each part owner may exempt himself from this liability by the abandonment before a notary of the part of the vessel belonging to him. [Art. 590, Code of Commerce]

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70

In case of collision, the liability of the shipowner shall be understood as limited to the value of the vessel with all her appurtenances and all the freight earned during the voyage. [Art. 837, Code of Commerce] Liability for wages of the captain and the crew and for advances made by the ship agent if the vessel is lost by shipwreck or capture. [Art. 643, Code of Commerce] Yangco v. Laserna et al (1941). If the shipowner or agent may in any way be held civilly liable at all for injury to or death of passengers arising from the negligence of the captain in cases of collisions or shipwrecks, his liability is merely co-extensive with his interest in the vessel such that a total loss thereof results in its extinction. In arriving at this conclusion, the fact is not ignored that the ill-fated S. S. Negros, as a vessel engaged in interisland trade, is a common carrier, and that the relationship between the petitioner and the passengers who died in the mishap rests on a contract of carriage. But assuming that petitioner is liable for a breach of contract of carriage, the exclusively "real and hypothecary nature" of maritime law operates to limit such liability to the value of the vessel, or to the insurance thereon, if any. In the instant case it does not appear that the vessel was insured. Art. 587 of the Code of Commerce appears to deal only with the limited liability of shipowners or agents for damages arising from the misconduct of the captain in the care of the goods which the vessel carries, but this is a mere deficiency of language and in no way indicates the true extent of such liability. Exceptions to the Doctrine of Limited Liability a. Claims under the Workmen‘s Compensation [Abueg v. San Diego] b. Expenses for repairing, provisioning and equipping the vessel c. Injury or damage due to the fault of the shipowner d. Vessel is insured e. Vessel is not abandoned or there was no total loss.

C. Accidents and Damages Maritime Commerce

in

Averages The following shall be considered averages: 1. All extraordinary or accidental expenses incurred during the navigation for the preservation of the vessel or cargo, or both. 2. All damages or deterioration the vessel may suffer from the time she puts to sea from the port of departure until she casts anchor in the port of destination, and those suffered by the merchandise from the time it is loaded in the port of shipment until it is unloaded in the port of consignment. [Art. 806, Code of Commerce]

Kinds: 1. Particular or Simple Average 2. Gross or General Average Simple Average Particular or Simple Averages shall be all damages or expenses caused to the vessel or cargo that did not inure to the common benefit, and borne by respective owners. [Art. 809] The owner of the goods which gave rise to the expense or suffered the damage shall bear this average. [Art. 810]

1. General Average General or gross averages shall be all the damages and expenses which are deliberately caused in order to save the vessel, her cargo, or both at the same time, from a real and known risk, and particularly the following: 1. The goods or cash invested in the redemption of the vessel or cargo captured by enemies, privateers, or pirates, and the provisions, wages, and expenses of the vessel detained during the time the arrangement or redemption is taking place. 2. The goods jettisoned to lighten the vessel, whether they belong to the vessel, to the cargo, or to the crew, and the damage suffered through said act by the goods kept. 3. The cables and masts which are cut or rendered useless, the anchors and the chains which are abandoned in order to save the cargo, the vessel, or both. 4. The expenses of removing or transferring a portion of the cargo in order to lighten the vessel and place her in condition to enter a port or roadstead, and the damage resulting therefrom to the goods removed or transferred. 5. The damage suffered by the goods of the cargo through the opening made in the vessel in order to drain her and prevent her sinking. 6. The expenses caused through floating a vessel intentionally stranded for the purpose of saving her. 7. The damage caused to the vessel which it is necessary to break open, scuttle, or smash in order to save the cargo. 8. The expenses of curing and maintaining the members of the crew who may have been wounded or crippled in defending or saving the vessel. 9. The wages of any member of the crew detained as hostage by enemies, privateers, or pirates, and the necessary expenses which he may incur in his imprisonment, until he is returned to the vessel or to his domicile, should he prefer it. 10. The wages and victuals of the crew of a vessel chartered by the month during the time it should be embargoed or detained by force majeure or by order of the Government, or in order to repair the damage caused for the common good. 11. The loss suffered in the value of the goods sold at arrivals under stress in order to repair the vessel because of gross average.

MERCANTILE LAW REVIEWER 12. The expenses of the liquidation of the average. (Art. 811, Code of Commerce) 13. If in lightening a vessel on account of a storm, in order to facilitate her entry into a port or roadstead, part of her cargo should be transferred to lighters or barges and be lost, the owner of said part shall be entitled to indemnity, as if the loss has originated from a gross average (Art. 817, Code of Commerce) 14. If, as a necessary measure to extinguish a fire in a port; roadstead; creek, or bay, it should be decided to sink any vessel, this loss shall be considered gross average, to which the vessels saved shall contribute. Essential Requisites In order to recover the costs and expenses, the following are necessary: 1. Previous resolution of the captain adopted after deliberation with the sailing mate and other officers 2. Hearing of the persons interested. In case an interested person should not be heard, he shall not contribute to the gross average. [Art. 813, Code of Commerce] 3. Resolution to be entered in the log book, stating the motives and reasons therefore as well as the votes and reason for disagreement. [Art. 814, Code of Commerce] 4. Minutes to be signed by all the persons present or in urgent cases, the captain. 5. Captain shall deliver one copy of the minutes to the maritime judicial authority of the first port he may make within 24 hours and ratify it under oath. [Art. 814, Code of Commerce] Magsaysay Inc v. Agan (1955). Requisites for General Average: 1. There must be a common danger. This means, that both the ship and the cargo, after it has been loaded, are subject to the same danger, whether during the voyage, or in the port of loading or unloading, that the danger arises from the accidents of the sea, dispositions of the authority, or faults of men, provided that the circumstances producing the peril should be ascertained and imminent or may rationally be said to be certain and imminent. This last requirement excludes measures undertaken against a distant peril. 2. That for the common safety, part of the vessel or of the cargo or both is sacrificed deliberately. 3. That from the expenses or damages caused follows the successful saving of the vessel and cargo. 4. That the expenses or damages should have been incurred or inflicted after taking proper legal steps and authority.

2. Collisions (Asked in 95 and 98 Bar Exams)

Collision – the impact of two vessels both of which are moving. Allision – the striking of a moving vessel against one that is stationary.

Classes and Effects a. b.

c.

d.

e.

f.

Fortuitous Collision: Each vessel and her cargo shall be liable for their own damage [Art. 830, Code of Commerce] Vessel forced to collide with another one by a third vessel: Owner of third vessel shall indemnify for the losses and damages caused [Art. 831, Code of Commerce] By reason of fortuitous event, vessel properly anchored and moored collides with another: The injury occasioned shall be looked upon as particular average to the vessel run into. [Article 832, Code of Commerce] Culpable: The owner of the vessel at fault shall indemnify the losses and damages suffered, after an expert appraisal. [Art. 826, Code of Commerce] Both vessels may be blamed for the collision: Each one shall be liable for his own damages, and both shall be jointly responsible for the losses and damages suffered by their cargoes. [Art. 827, Code of Commerce] Inscrutable Fault (it can not be decided which of the two vessels was the cause of the collision): Each one shall be liable for his own damages, and both shall be jointly responsible for the losses and damages suffered by their cargoes. [Art. 828, Code of Commerce] Asked in 97 Bar Exams

Arrival under stress – the arrival of a vessel at the nearest and most convenient port instead of the port of destination, if during the voyage the vessel cannot continue the trip to the port of destination. It is lawful when the inability to continue voyage is due to lack of provisions, well-founded fear of seizure, privateers, pirates, or accidents of the sea disabling it to navigate. [Art. 819] It is unlawful when: 1. Lack of provisions due to negligence to carry according to usage and customs; 2. Risk of enemy not well known or manifest 3. Defect of vessel due to improper repair; and 4. Malice, negligence, lack of foresight or skill of captain. [Art. 820] Shipwreck - it denotes loss/wreck of a vessel at sea as a consequence of running against another vessel or thing at sea or on coast where the vessel is rendered incapable of navigation. If the wreck was due to malice, negligence or lack of skill of the captain, the owner of the vessel may demand indemnity from said captain. [Art. 841]

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D. Carriage of Goods by Sea Act (Commonwealth Act No. 65)

72

1. Application COGSA is a special law that governs all contracts of carriage of goods by sea between or to and from the Philippine ports. Application of laws a.

b.

c.

If the common carrier is coming to the Philippines: First: Civil Code Second: COGSA (in foreign trade) Third: Code of Commerce If the private carrier is coming to the Philippines: First: COGSA Second: Code of Commerce Third: Civil Code (excluding rules on common carriers) If the private or common carrier is from the Philippines to a foreign country:  Apply the law of the foreign country [per Art. 1753, CC] UNLESS the parties make COGSA applicable

Hierarchy of laws 1. Art. 1766, CC (COGSA as only in matters not regulated by this Code) this notwithstanding the fact that COGSA is a special law. Goods in a foreign country shipped to the Philippines are governed by the Civil Code 2. Art. 1753, CC

2. Notice of Loss or Damage Notice and the general nature of the loss or damage must be given in writing to the carrier or his agent at the port of discharge before or at the time of the removal of the goods. [Sec. 3 (6)] If damage is not patent or cannot be ascertained from the package, the shipper should file the claim with the carrier within three days from delivery. Belgian Overseas v. Philippine First Insurance (2002). First, the provision of COGSA provides that the notice of claim need not be given if the state of the goods, at the time of their receipt, has been the subject of a joint inspection or survey. Prior to unloading the cargo, an Inspection Report as to the condition of the goods was prepared and signed by representatives of both parties. Second, as stated in the same provision, a failure to file a notice of claim within three days will not bar recovery if it is nonetheless filed within one year. This one-year prescriptive period also applies to the shipper, the consignee, the insurer of the goods or any legal holder of the bill of lading. "Inasmuch as the neither the Civil Code nor the Code of Commerce states a specific prescriptive period on the matter, the

COGSA—which provides for a one-year period of limitation on claims for loss of, or damage to, cargoes sustained during transit--may be applied suppletorily to the case at bar."

3. Period of Prescription (Asked in 92, 95, 00 and 04 Bar Exams)

In any event the carrier and the ship shall be discharged from all liability in respect of loss or damage unless suit is brought within one year after delivery of the goods or the date when the goods should have been delivered. The absence of a notice shall not affect or prejudice the right of the shipper to bring suit within one year after the delivery of the goods or the date when the goods should have been delivered. [Sec. 3 (6)] Filipino Merchants Insurance, Inc. v. Alejandro (1986). Clearly, the coverage of the Act includes the insurer of the goods. Otherwise, what the Act intends to prohibit after the lapse of the one-year prescriptive period can be done indirectly by the shipper or owner of the goods by simply filing a claim against the insurer even after the lapse of one year. Maritime Agencies & Services, Inc. v. CA. The period for filing the claim is one year, in accordance with the Carriage of Goods by Sea Act. This was adopted and embodied by our legislature in Com. Act No. 65 which, as a special law, prevails over the general provisions of the Civil Code on prescription of actions. Section 3(6) of that Act provides as follows: In any event, the carrier and the ship shall be discharged from all liability in respect of loss or damage unless suit is brought within one year after delivery of the goods or the date when the goods should have been delivered; Provided, that if a notice of loss for damage; either apparent or concealed, is not given as provided for in this section, that fact shall not effect or prejudice the right of the shipper to bring suit within one year after the delivery of the goods or the date when the goods should have been delivered.

4. Limitation of liability Under Sec. 4(5), the limit is set at a maximum of $500 per package or customary freight unit. Eastern Shipping vs. IAC (150 SCRA 463). Under the Sec. 4(5), the liability limit is set at $500 per package or customary freight unit unless the nature and value of such goods is declared by the shipper. This is deemed incorporated in the bill of lading even if not mentioned in it. Belgian Overseas v. Philippine First Insurance (2002). The Civil Code does not limit the liability of the common carrier to a fixed amount per package. In all matters not regulated by the Civil Code, the right and the obligations of common carriers shall be governed by the Code of Commerce and special

MERCANTILE LAW REVIEWER laws. Thus, the COGSA, which is suppletory to the provisions of the Civil Code, supplements the latter by establishing a statutory provision limiting the carrier's liability in the absence of a shipper's declaration of a higher value in the bill of lading. In the case before us, there was no stipulation in the Bill of Lading limiting the carrier's liability. Neither did the shipper declare a higher valuation of the goods to be shipped. Petitioners' liability should be computed based on US$500 per package and not on the per metric ton price declared in the Letter of Credit.

VI.Public Service Act A. Definition of public utility (Asked in 92, 93, 95, 98 and 00) It is a business or service engaged in regularly supplying the public with some commodity or service of public consequence such as electricity, gas, water, transportation, telephone or telegraph service. Two tests for determining public utility: 1. Is it engaged in regularly supplying the public with some commodity or service? [per definition in Albano v. Reyes] 2. If #1 is uncertain, is it a public service as defined in the Public Service Law under CA 146 Sec. 13(b)? If it falls under any one of the examples given under CA 146 Sec 13(b), then it is a public utility. CA 146, Section 13(b). The term ―public service‖ includes every person that now or hereafter may own, operate, manage, or control in the Philippines, for hire or compensation, with general or limited clientele, whether permanent, occasional or accidental, and done for general business purposes, any common carrier, railroad, street railway, traction railway, sub-way motor vehicle, either for freight or passenger, or both with or without fixed route and whether may be its classification, freight or carrier service of any class, express service, steamboat or steamship line, pontines, ferries, and water craft, engaged in the transportation of passengers or freight or both, shipyard, marine railways, marine repair shop, [warehouse] wharf or dock, ice plant, ice-refrigeration plant, canal, irrigation system, gas, electric light, heat and power water supply and power, petroleum, sewerage system, wire or wireless communications system, wire or wireless broadcasting stations and other similar public services… Kilusang Mayo Uno v. Garcia (1994). Public utilities are privately owned and operated businesses whose services are essential to the general public. They are enterprises which specially cater to the needs of the public and conduce to their comfort and convenience. As such, public utility services are

impressed with public interest and concern. When, therefore, one devotes his property to a use in which the public has an interest, he, in effect grants to the public an interest in that use, and must submit to the control by the public for the common good, to the extent of the interest he has thus created. Albano v. Reyes (1989). A public utility is a business or service engaged in regularly supplying the public with some commodity or service of public consequence, such as electricity, gas, water, transportation, telephone or telegraph services. Apart from statutes which define public utilities that are within the purview of such statutes, it would be difficult to construct a definition of a public utility which would fit every conceivable case. As its name indicates, however, the term public utility implies a public use and service to the public. Tatad v Garcia. While a franchise is needed to operate these facilities to serve the public, they do not by themselves constitute a public utility. What constitutes a public utility is not their ownership but their use to serve the public. In law, there is a clear distinction between the "operation" and the ―ownership‖ of the facilities and equipment used to serve the public… The devotion of property to serve the public may be done by the owner or by the person in control thereof who may not necessarily be the owner thereof. What does ―regularly supplying the public…‖ mean? The utility must hold itself out to the public as a public utility by demand and as a matter of right, and not by permission. To determine regularity, look at it from the perspective of the public, and not the operator. It is a service or a readiness to serve an indefinite portion of the population subject only to the limitations of the service as given by the grant such that [the utility] incurs a liability as a violation of its duty if it refuses, such that the availment of the service has become, through time, a matter of right and not of mere privilege. [also in US v. Tan Piaco]

B. Necessity for certificate public convenience

of

What is a CPC? A CPC is any authorization to operate a public service issued by the pertinent government agency (DOTC, NTC, LTFRB, etc) for the operation of public services for which no franchise, either municipal or legislative, is required by law (e.g. motor vehicles.) It constitutes neither a franchise nor a contract; it does not confer property rights, it is a mere license or privilege [Pantranco v. PSC]. Such privilege is forfeited when the grantee fails to comply with his commitments to serve the public and public necessity.

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However, these certificates represent property rights to the extent that if the rights which any public utility is exercising pursuant to the lawful orders of the PSC (now DOTC) have been invaded by another public utility, in appropriate cases, actions may be maintained by the complainant public utility. [Cui vs. Cui (1934)] Also, it is a ―property‖ and has a considerable value and can be the subject of sale or attachment. [Cogeo-Cubao Operators and Drivers Assn. v. CA, Raymundo v. Luneta Motor Co.] The revocation of this certificate deprives the grantee of no vested right. New and additional burdens, alteration of the certificate, or even revocation or annulment thereof is reserved to the State. [Luque v. Villegas, 30 SCRA 408] Public Utilities exempted from getting a CPC Under the Public Service Law, Sec. 14, the following are exempted from getting a CPC: (a) Warehouses; (b) Animal-drawn vehicles and bancas moved by oar or sail, and tugboats and lighters; (c) Airships within the Philippines except as regards the fixing of their maximum rates on freight and passengers; (d) Radio companies except with respect to the fixing of rates; (e) Public services owned or operated by any instrumentality of the National Government or by any government-owned or controlled corporation, except with respect to the fixing of rates. [As amended by Com. Act 454, RA No. 2031 and RA No. 2677]

1. Requisites for issuance of CPC 1)

Citizenship

operator that already maintains an adequate service and is able to meet the demands of the public. The policy is not to issue a certificate to a second operator to cover the same field and in competition with a first operator who is rendering sufficient, adequate and satisfactory service. If inadequate or deficient, the prior operator must first be given an opportunity to improve its service. Rationale: the preservation of public convenience and the prevention of ruinous competition in order that the interests of the public would be conserved and preserved. [Batangas Transportation Co. v. Orlanes] Batangas Transportation Co. v. Cayetano Orlanes (1928). So long as the 1st licensee keeps and performs the terms and conditions of its license and complies with the reasonable rules and regulations of the Commission and meets the demands of the public, it should have more or less of a vested and preferential right over a person who seeks to acquire another and a later license over same route. Otherwise, the first licensee would not have protection on his investment and would be subject to ruinous competition and thus defeat the very purpose and intent for the PSC was created. COROLLARY RULES: PRIOR APPLICANT RULE: The rule presupposes a situation where two interested persons apply for a certificate to operate a public utility in the same community over which no person has as yet granted any certificate. If it turns out, after the hearing, that the circumstances between the two applicants are more or less equal, then the applicant who applied ahead of the other, will be granted the certificate. This rule is subordinated under the Prior Operator Rule.

Applicant may either be: a. a citizen of the Philippines, or b. corporation, co-partnership or association i. organized under the laws of the Philippines ii. at least 60% of the stock of paid-up capital of which must belong to citizens of the Philippines. [Sec 16a, CA 146, as amended]

PROTECTION OF INVESTMENT RULE: It means that one of the purposes of the Public Service Act is to protect and conserve investments which have already been made for that purpose by public service operators.

2) Promotion of public interests The applicant must prove that the operation of the public service proposed and the authorization to do business will promote the public interest in a proper and suitable manner. [Sec 16a CA 146 as amended]

Exception to Prior Operator Rule 1. When the subsequent CPC or CPCN covers a new route, even if it overlaps with the route of the prior operator; 2. Where the corporate existence of the prior operator has expired; 3. When regularity is at issue – regular operators are preferred over irregular operators. 4. When the CPC or CPCN already granted comprises a larger territory than that applied for; 5. Where public interest would be better served by the new operator; 6. When the application of the rule would be conducive to monopoly.

3) Financial capability The applicant must be financially capable of undertaking the proposed service and meeting the responsibilities incident to its operation.

2. Prior operator rule a. Meaning The prior operator rule is the rule which prohibits the issuance of a license to a subsequent operator for the same route in order to protect the prior

b.

Exceptions

MERCANTILE LAW REVIEWER c.

Ruinous competition

Ruinous competition exists when there is actual ruin of the business of the operator; that the existing operator will not gain enough profits if another person is allowed to enter the business; that which will result in the deprivation of sufficient gain in respect of reasonable return of investment, therefore the oppositor, alleging this, must show that he will be deprived of a reasonable return on his investment. Mere possibility of reduction in the earnings of the business or the deterioration in the income of his business is not sufficient to prove ruinous competition. It must be shown that the business would not have sufficient gains to pay a fair rate of interest on his capital investments [Manila Electric Co. vs. Pasay Transportation Co; Ice & Cold Storage Industries v. Valero]

C. Fixing of rate Rates imposed by Public Utilities are regulated by the State. A public utility submits to the regulation of government authorities and surrenders certain business prerogatives, including the amount of rates that may be charged by it. It is the imperative duty of the State to interpose its protective power whenever too much profit becomes the priority of public utilities. Three major factors to be considered by the regulating agency to determine just and reasonable rates to be charged by a public utility: a) rate of return; b) rate base and c) the return itself or the computed revenue to be earned by the public utility. [Republic v. Meralco (2003)] Hence: Rate of return x Rate base = return on the public utility for the use of its property

1. Rate of return Rates must assure reasonable rate of return. The rate of return of a public utility is not prescribed by statute but by administrative and judicial pronouncements. SC has consistently adopted a 12% rate of return for public utilities [Republic v. Meralco, 2002]. However it has also qualified that what is reasonable or unreasonable depends on a calculus of changing circumstances that ebb and flow with time. [Republic v. Meralco (2003)] Rate base It is an evaluation of the property devoted by the utility to the public service or the value of invested capital or property which the utility is entitled to a return.

2. Exclusion

of

income

tax

as

expense

In computing the return, income tax is EXCLUDED as an expense. Republic v. Meralco, 2003. Income tax payments are NOT deductible expenses for purposes of rate determination. Rate regulation calls for a careful consideration of the totality of facts and circumstances material to each application for an upward rate revision. Rate regulators should strain to strike a balance between the clashing interests of the public utility and the consuming public and the balance must assure a reasonable rate of return to public utilities without being unreasonable to the consuming public. What is reasonable or unreasonable depends on a calculus of changing circumstances that ebb and flow with time. Yesterday cannot govern today, no more than today can determine tomorrow.

D. Unlawful arrangements 1. Boundary system The boundary system is a scheme by an owner/operator engaged in transporting passengers as a common carrier to primarily govern the compensation of the driver, that is, the latter‘s daily earnings are remitted to the owner/operator less the excess of the boundary which represents the driver‘s compensation. Under this system, the owner/operator exercises control and supervision over the driver. It is different from lease of chattels because in the latter, the lessor loses complete control over the chattel and the lessee is still ultimately responsible for the consequences of its use. In the boundary system, the management of the business is still in the hands of the owner/operator, who, being the holder of the certificate of public convenience, must see to it that the driver follows the route prescribed by the franchising and regulatory authority, and the rules promulgated with regard to the business operations. [Villamaria v. Court of Appeals(2006)] Note that the boundary system is not in itself unlawful but only unlawful when used as a defense to evade true liability. The owner-operator shall remain liable to the public —Indeed to exempt from liability the owner of a public vehicle who operates it under the "boundary system" on the ground that he is a mere lessor would be not only to abet flagrant violations of the Public Service Law, but also to place the riding public at the mercy of reckless and irresponsible drivers — reckless because the measure of their earnings depends largely upon the number of trips they make and, hence, the speed at which they drive; and irresponsible because most if not all of them are in no position to pay the damages they might cause. [Sps. Hernandez v. CA (2004)]

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2. Kabit system (Asked in 90 and 05)

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A system whereby a person who has been granted a certificate of public convenience allows other persons who own motor vehicles to operate under such license, for a fee or percentage of such earnings. Although not penalized outright as a criminal offense, the "kabit system" is invariably recognized as being contrary to public policy and, therefore, void and inexistent under Art 1409 of the Civil Code. "Kabit System" has been identified as one of the root causes of graft and corruption in the government transportation offices. It is a "pernicious system" that cannot be too severely condemned. It constitutes an imposition upon the good faith of the government. It is an abuse of a certificate of public convenience, which is a special privilege granted by the government. [Teja Marketing v. IAC] Example: A, a grantee of a CPC from the LTFRB, is given the authority to operate 10 units of taxis. B, a nongrantee, wishes to operate as a common carrier and ―kabits‖ with the CPC of A who will obtain approval from the LTFRB to operate another taxi. The taxi will be registered in the name of A, who will be paid by B. Assume that A executed a deed of sale in favor of B in case B decides not to go on with the arrangement, in order to safeguard the rights of B. However, in case of injury to a passenger of the taxi actually operated by B (and previously sold to B as well) it is still A who will be liable. The illegal contract of sale between A & B cannot be used as a defense. A does not have a cause of action against B either. They are in pari delicto. Teja Marketing v. IAC (1987). Parties operated under an arrangement, commonly known as the "kabit system" whereby a person who has been granted a certificate of public convenience allows another person who owns motor vehicles to operate under such franchise for a fee. A certificate of public convenience is a special privilege conferred by the government. Although not outrightly penalized as a criminal offense, the kabit system is invariably recognized as being contrary to public policy and, therefore, void and in existent under Article 1409 of the Civil Code.

E. Approval of sale, encumbrance or lease of property CA 146, Public Service Act, section 20. Subject to established limitations and exceptions and saving provisions to the contrary, it shall be unlawful for any public service or for the owner, lessee or operator thereof, without the approval and authorization of the Commission previously had --(g) To sell, alienate, mortgage, encumber or lease its property, franchises, certificates,

privileges, or rights or any part thereof; or merge or consolidate its property, franchises privileges or rights, or any part thereof, with those of any other public service. The approval herein required shall be given, after notice to the public and hearing the persons interested at a public hearing, if it be shown that there are just and reasonable grounds for making the mortgaged or encumbrance, for liabilities of more than one year maturity, or the sale, alienation, lease, merger, or consolidation to be approved, and that the same are not detrimental to the public interest, and in case of a sale, the date on which the same is to be consummated shall be fixed in the order of approval: Provided, however, that nothing herein contained shall be construed to prevent the transaction from being negotiated or completed before its approval or to prevent the sale, alienation, or lease by any public service of any of its property in the ordinary course of its business.  In order to validly transfer its franchise/certificate such that it would bind the public, a public utility owner/operator must secure PSC approval.  However, the proviso contained in the aforequoted law, to the effect that nothing therein shall be construed "to prevent the transaction from being negotiated or complete before its approval", means that the sale, even without the required approval is still valid and binding between the parties themselves. [Montoya vs. Ignacio] Fores v. Medina (1959). A transfer contemplated by the law, if made without the requisite approval of the Public Service Commission, is not effective and binding in so far as the responsibility of the grantee under the franchise in relation to the public is concerned. The provisions of the statute are clear and prohibit the sale, alienation, lease, or encumbrance of the property, franchise, certificate, privileges or rights, or any part thereof of the owner or operator of the public service Commission. The law was designed primarily for the protection of the public interest; and until the approval of the public Service Commission is obtained the vehicle is, in contemplation of law, still under the service of the owner or operator standing in the records of the Commission which the public has a right to rely upon. Note: The approval of the sale of CPCs, CPCNs or other properties does not affect the validity (perfection) of the sale between the parties as long as all the elements of a contract are met. The approval only affects the relation of the parties to the DOTC or to 3rd parties. If there is no approval, then the sale does not bind the DOTC or 3rd parties. The controlling factor therefore is the registration.


VII.

C. Limitation of Liability

The Warsaw Convention

1. Liability to passengers

A. Applicability The Convention is applicable to: 1. International transport by air 2. Transport of persons, baggage, or goods [WC, Art. 1] International air transportation Transportation by air between points of contact of two high contracting parties, or those countries that have acceded to the Convention Two Categories Of "International Transportation By Air" Under The Convention: 1. That where the place of departure and the place of destination are situated within the territories of two High Contracting Parties regardless of whether or not there be a break in the transportation or a transshipment; and 2. That where the place of departure and the place of destination are within the territory of a single High Contracting Party if there is an agreed stopping place within a territory subject to the sovereignty, mandate or authority of another power, even though the power is not a party to the Convention. [WC, Article 1, No. 2] A carriage to be performed by several successive air carriers is deemed, for the purposes of this Convention, to be one undivided carriage, if it has been regarded by the parties as a single operation, whether it had been agreed upon under the form of a single contract or of a series of contracts. [WC, Article 1, No. 3] The Convention does not apply to carriage performed under the terms of any international postal Convention. [WC, Article 2, No. 2]

B. Liability of Carrier for Damages 1.

Death or injury of a passenger if the accident causing it took place on board the aircraft or in the course of the operations of embarking or disembarking [Art. 17];

2.

Destruction, loss, or damage to any baggage or goods, if it took place during the transportation by air [Art. 18] Transportation by Air – the period during which the baggage or goods are in the charge of the carrier whether in an airport or on board an aircraft, or in case of a landing outside an airport, in any place whatsoever. It includes any transportation by land or water outside an airport if such takes place in the performance of a contract for transportation by air, for the purpose of loading, delivery, or transshipment.

3.

Delay in the transportation of passengers, baggage, or goods [Art. 19]

General Rule: $100,000 per passenger Exception: Agreement to a higher limit [Article 22(1)]

2. Liability for checked baggage General Rule: $20 per kilogram Exception: In case of special declaration of value and payment of a supplementary sum by consignor, carrier is liable to not more than the declared sum unless it proves the sum is greater than actual value. [Article 22(2)]

3. Liability for hand-carried baggage $1000/passenger [Article 22(3)]  An agreement relieving the carrier from liability or fixing a lower limit is null and void. [Art. 23]  Carrier is not entitled to the foregoing limit if the damage is caused by willful misconduct or default on its part. [Art. 25]  The right to damages under the WC is extinguished after 2 years from the date of arrival at the destination or from the date on which the aircraft ought to have arrived, or from the date on which the carriage stopped. [Art. 29(1)] Alitalia v. CA. The WC does not operate as an exclusive enumeration of the instances of an absolute limit of the extent of liability. It does not preclude the application of the Civil Code and other pertinent local laws. It does not regulate or exclude liability for other breaches of contract by the carrier, or misconduct of its employees, or for some particular or exceptional type of damage. Philippine Airlines vs. Savillo, et al (2008). Applicability of periods of prescription in WC 29 and NCC 1146

D. Willful misconduct When can a common carrier not avail itself of this limitation? 1. Willful misconduct [Art. 25] 2.

Default amounting to willful misconduct [Art. 25]

3.

Accepting passengers without ticket [Art. 3, No. 2]

4.

Accepting goods without airway bill or baggage without baggage check

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MERCANTILE LAW REVIEWER 

78

Carrier guilty of willful misconduct cannot avail of the provisions limiting liability but may still invoke other provisions of the WC. [see Art. 25]

Lhuillier v. British Airways (2010). Tortious conduct as ground for petitioner‘s complaint is within the purview of the Warsaw Condition; venue Savellano v. Northwest Airlines (2003). Non-use of original contracted route; notice of loss


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2012

MERCANTILE

Corporation Law BAR OPERATIONS COMMISSION 2012 EXECUTIVE COMMITTEE Ramon Carlo Marcaida |Commissioner Raymond Velasco • Mara Kriska Chen |Deputy Commissioners Barbie Kaye Perez |Secretary Carmen Cecilia Veneracion |Treasurer Hazel Angeline Abenoja|Auditor COMMITTEE HEADS Eleanor Balaquiao • Mark Xavier Oyales | Acads Monique Morales • Katleya Kate Belderol • Kathleen Mae Tuason (D) • Rachel Miranda (D) |Special Lectures Patricia Madarang • Marinella Felizmenio |Secretariat Victoria Caranay |Publicity and Promotions Loraine Saguinsin • Ma. Luz Baldueza |Marketing Benjamin Joseph Geronimo • Jose Lacas |Logistics Angelo Bernard Ngo • Annalee Toda|HR Anne Janelle Yu • Alyssa Carmelli Castillo |Merchandise Graciello Timothy Reyes |Layout Charmaine Sto. Domingo • Katrina Maniquis |Mock Bar Krizel Malabanan • Karren de Chavez |Bar Candidates’ Welfare Karina Kirstie Paola Ayco • Ma. Ara Garcia |Events OPERATIONS HEADS Charles Icasiano • Katrina Rivera |Hotel Operations Marijo Alcala • Marian Salanguit |Day-Operations Jauhari Azis |Night-Operations Vivienne Villanueva • Charlaine Latorre |Food Kris Francisco Rimban • Elvin Salindo |Transpo Paula Plaza |Linkages





Corporation Law

corporations) or a general law (i.e., Corporation Code in case of private corporations).

MERCANTILE LAW I. Corporation, defined II. Classification of corporations III. Nationality of corporations IV. Corporate juridical personality V. Capital structure VI. Incorporation and organization VII. Corporate powers VIII.Stockholders and members IX. Board of directors and trustees X. Capital affairs XI. Dissolution and liquidation XII. Other corporations XIII.Merger and consolidation

A corporation comes into existence upon the issuance of the certificate of incorporation. Then and only then will it acquire juridical personality to sue and be sued, enter into contracts, hold or convey property or perform any legal act in its own name (Ladia, Corporation Code of the Philippines 2001 ed.)

I. Corporation, defined A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incident to its existence. (Sec. 2, Corporation Code) Attributes of a Corporation 1) An Artificial Being A corporation exists by fiction of law. Hence, it can act only through its directors, officers and employees.  Moral Damages – cannot be awarded in favor of corporations because they do not have feelings and mental state. They may not even claim moral damages for besmirched reputation (NAPOCOR v. Philipp Brothers Oceanic, 2001). However, a corporation can recover moral damages under Art 2219 (7) if it was the victim of defamation (Pilipinas Broadcasting Network v. Ago Medical and Educational Center 2005).  Criminal Liability – Since a corporation as a person is a mere legal fiction, it cannot be proceeded against criminally because it cannot commit a crime in which personal violence or malicious intent is required. Criminal action is limited to the corporate agents guilty of an act amounting to a crime and never against the corporation itself (West Coast Life Ins. Co. v. Hurd [1914], Time Inc. v. Reyes [1971]) NOTE – Doctrine of Separate Personality: A corporation, upon coming into existence, is invested by law with a personality separate and distinct from those persons composing it as well as from any other legal entity to which it may be related. (Yutivo Sons Hardware v. CTA 1961) 2) Created by operation of law Mere consent of the parties to form a corporation is not sufficient. The State must give its consent either through a special law (in case of government

3) Has the right of succession Its continued existence during its stated term cannot be affected by any change in the members or stockholders or by any transfer of shares by a stockholder to a 3rd person. 4)

Has the powers, attributes and properties expressly authorized by law or incident to its existence A corporation has no power except those expressly conferred on it by the Corporation Code and those that are implied or incidental to its existence. (Premium Marble Resources v. CA 1996)

II. Classification of corporations A. Stock Corporation (Asked in 01 and 04) Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of shares held (Sec 3) It is organized for profit. The governing body of a stock corporation is usually the Board of Directors (except in certain instances, e.g. close corporations).

B. Non-stock Corporation (Asked in 04) All other corporations are non-stock corporations (Sec. 3) One where no part of the income is distributable as dividends to its members, trustees, or officers, subject to the provisions of the Code on dissolution. Not organized for profit. Its governing body is usually the Board of Trustees. CIR vs. Club Filipino de Cebu (1962): There are two elements for a stock corporation to exist: 1) Capital stock divided into shares, and 2) An authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of shares held. (Test of WON a stock corporation)

MERCANTILE LAW REVIEWER Even if there is a statement of capital stock, the corporation is still NOT a stock corporation if dividends are NOT supposed to be declared, that is, there is no distribution of retained earnings. Note: Under Sec. 43 of the Corporation Code, a corporation is deemed to have the power to declare dividends. Thus, so long as the corporation has capital stock and there is no prohibition in its Articles of Incorporation or in its by-laws for it to declare dividends, such corporation is a stock corporation.

C. Other Classification a. Public corporation (Asked in 04) – One formed or organized for the government of a portion of the state. Its purpose is for the general good and welfare. b. Private corporation (Asked in 04) – One formed for some private purpose, benefit, aim or end; it may be either stock or non-stock, governmentowned or controlled or quasi-public. c. Close corporation (see Sec. 96) one that is limited to selected persons or members of a family d. Educational corporation – One organized for educational purposes (Sec. 106). e. Religious corporations Corporation sole is one formed for the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect, or church, by the chief archbishop, bishop, priest, rabbi, or other presiding elder of such religious denomination, sect or church (Sec. 110) Corporation aggregate is a religious corporation incorporated by more than one person. f.

Eleemosynary corporation – One organized for a charitable purpose

g. Domestic corporation – One formed, organized, or existing under the laws of the Philippines. h. Foreign corporation – One formed, organized or existing under any laws other than those of the Philippines and whose law allows Filipino citizens and corporations to do business in its own country and state (Sec. 123). i.

j.

Corporation created by special laws or charter - Corporations which are governed primarily by the provisions of the special law or charter creating them. Corporation Code has suppletory application. (Sec. 4) Subsidiary corporation – one in which control, usually in the form of ownership of majority of its shares, is in another corporation (the parent corporation).

k. Parent corporation – its control lies in its power, directly or indirectly, to elect the subsidiary‘s directors thus controlling its management policies.

III. Nationality of corporations A. Control Test A corporation shall be considered a Filipino corporation if the Filipino ownership of its capital stock is at least 60%, and where the 60-40 Filipinoalien equity ownership is NOT in doubt (SEC Opinion dated 6 November 1989; DOJ Opinion No. 18, s. 1989). Therefore, its shareholdings in another corporation shall be considered to be of Filipino nationality when computing the percentage of Filipino equity of that second corporation (SEC Opinion dated 23 November 1993). Control test is applied in the following:  Exploitation of natural resources - ―Only Filipino citizens or corporations whose capital stock are at least 60% owned by Filipinos can qualify to exploit natural resources.‖ (Sec. 2, Art. XII, Consti.)  Public Utilities - ―xxx no franchise, certificate or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least 60% of whose capital is owned by such citizens. ― (Sec. 11, Art. XII, Consti.) NOTE: In the recently decided case of Gamboa vs. Teves (G.R. No. 176579, June 28, 2011), the SC ruled as follows: The term "capital" in Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only to common shares, and not to the total outstanding capital stock (common and non-voting preferred shares). The 60 percent of the "capital" assumes, or should result in, "controlling interest" in the corporation. Compliance with the required Filipino ownership of a corporation shall be determined on the basis of outstanding capital stock whether fully paid or not, but only such stocks which are generally entitled to vote are considered. For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of which have been

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assigned or transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals. Individuals or juridical entities not meeting the aforementioned qualifications are considered as nonPhilippine nationals.

B. The Grandfather Rule It is a method of determining the nationality of a corporation which in turn is owned in part by another corporation by breaking down the equity structure of the shareholder corporation. It involves the computation of Filipino ownership of a corporation in which another corporation of partly Filipino and partly foreign equity owns capital stock. The percentage of shares held by the second corporation in the first is multiplied by the latter‘s own Filipino equity, and the product of these percentages is determined to be the ultimate Filipino ownership of the subsidiary corporation (SEC Opinion re; Silahis Intl Hotel May 4, 1987)

IV. Corporate juridical personality A private corporation formed or organized under this code commences to have corporate existence and juridical personality and is deemed incorporated from the date the SEC issues a certificate of incorporation under its official seal (Sec. 19)

A. Doctrine of Separate Juridical Entity (Asked in 95, 96, 99 and 00) Concept A corporation has a personality separate and distinct from that of its stockholders and members and is not affected by the personal rights, obligations, and transactions of the latter. Merely a legal fiction for purposes of convenience and to subserve the ends of justice Property SHs have no claim on corporate property as owners, but mere expectancy or inchoate right to the same upon dissolution of the corporation after all corporate creditors have been paid. Such right is limited only to their equity interest (doctrine of limited liability). Although a stockholder‘s interest in the corporation may be attached by his personal creditor, corporate property cannot be used to satisfy his claim (Wise & Co. v. Man Sun Lung, 1940).

1. Liability for torts and crimes As a separate juridical personality, a corporation can be held liable for torts committed by its officers for corporate purpose (PNB v. CA, 1978).

2. Recovery of damages GENERAL RULE A Corporation has the power to sue in its corporate name. (Sec. 36) EXCEPTION Moral Damages cannot be awarded in favor of corporations because they do not have feelings and mental state. They may not even claim moral damages for besmirched reputation (NAPOCOR v. Philipp Brothers Oceanic, 2001). HOWEVER, a corporation can recover moral damages under Art 2219 (7) if it was the victim of defamation (Pilipinas Broadcasting Network v. Ago Medical and Educational Center, 2005). Constitutional Rights Corporate entities are entitled to due process, equal protection, and protection against unreasonable searches and seizures. However, a corporation is not entitled to the privilege against selfincrimination (Bataan Shipyard & Eng‘g Co. v. PCGG, 1987)

B. Doctrine of piercing the corporate veil (Asked in 91, 01 and 04) Piercing the veil of corporate entity is merely an equitable remedy, and may be granted only in cases when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime (Yutivo Sons v CTA 1961) or where the corporation is a mere alter ego or business conduit of a person. (Koppel Phil v Yatco)

1. Grounds

for

application

of

doctrine

 If done to defraud the government of taxes due it.  If done to evade payment of civil liability.  If done by a corporation which is merely a conduit or alter ego of another corporation.  If done to evade compliance with contractual obligations.  If done to evade financial obligation to its employees. Seaoil vs Autocorp Group ( 2008, Nachura): Q: Is a corporation liable for the individual acts of its stockholders or members? Is there an exception to the general rule? A: It is settled that a corporation has a personality separate and distinct from its individual stockholders or members, and is not affected by the personal

MERCANTILE LAW REVIEWER rights, obligations and transactions of the latter. The corporation may not be held liable for the obligations of the persons composing it, and neither can its stockholders be held liable for its obligation. Of course, this Court has recognized instances when the corporation‘s separate personality may be disregarded. However, we have also held that the same may only be done in cases where the corporate vehicle is being used to defeat public convenience, justify wrong, protect fraud, or defend crime. Moreover, the wrongdoing must be clearly and convincingly established. It cannot be presumed.

2. Test in determining applicability GENERAL RULE The mere fact that a corporation owns all or substantially all of the stocks of another corporation is NOT sufficient to justify their being treated as one entity. EXCEPTION The subsidiary is a mere instrumentality of the parent corporation. Circumstances rendering subsidiary an instrumentality (PNB v. Ritratto Group, 2001):  The parent corporation owns all or most of the subsidiary‘s capital stock.  The parent and subsidiary corporations have common directors or officers.  The parent corporation finances the subsidiary.  The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation.  The subsidiary has grossly inadequate capital.  The parent corporation pays the salaries and other expenses or losses of the subsidiary.  The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation.  In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation or its business or financial responsibility is referred to as the parent corporation‘s own.  The parent corporation uses the property of the subsidiary as its own.  The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corporation in the latter‘s interest.  The formal ledger requirements of the subsidiary are not observed.

V. Capital structure A. Number and Qualifications of Incorporators 1. Definition Incorporators - are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof.

2. Requirements (Sec. 10)  Natural persons  All Of legal age  Must own or subscribe to at least one share of stock of the corporation (Genuine interest)  5-15 incorporators who must sign the articles of incorporation  Majority of the incorporators must be residents of the Philippines GENERAL RULE All incorporators/ corporators may be foreigners. EXCEPTIONS Fully or partly nationalized corporations  Where NO foreign stockholder is allowed. - Mass media except recording (Art. XVI, Sec. 11 of the Constitution; Presidential Memorandum dated 04 May 1994) - Retail trade enterprises with paid-up capital of less than US$2.5 Million (Sec. 5 of RA 8762) - Private security agencies (Sec. 4 of RA 5487) - Small-scale mining (Sec. 3 of RA 7076) - Utilization of natural resources (Art. XII, Sec. 2 of the Constitution) - Ownership, operation and management of cockpits (Sec. 5 of PD 449) - Manufacture, repair, stockpiling and/or distribution of nuclear weapons (Art. II, Sec. 8 of the Constitution) - Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiological weapons and anti-personnel mines (Various treaties to which the Philippines is a signatory and conventions supported by the Philippines) - Manufacture of firecrackers and other pyrotechnic services (Sec. 5 of RA 7183)  Only up to 20% foreign equity. - Private radio communications network (RA 3846)  Only up to 25% foreign equity. - Private recruitment, whether for local or overseas, employment (Art. 27 of PD 442) - Construction and repair of locally funded works (Sec. 1 of CA 541, LOI 630) - Construction of defense-related structures (Sec. 1 of CA 541)  Only up to 40% foreign equity.

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- Exploration, development and utilization of natural resources (Art. XII, Sec. 2 of the Constitution). - Realty companies and other corporations that own private lands (Art. XII, Sec. 7 of the Constitution; Ch. 5, Sec. 22 of CA 141; Sec. 4 of RA 9182). - Operation and management of public utilities (Art. XII, Sec. 11 of the Constitution; Sec. 16 of CA 146) - Culture, production, milling, processing, trading except retail of rice and corn and byproducts (Sec. 5 of PD 194; Sec. 15 of RA 8762). - Adjustment companies (Sec. 323 of PD 612 as amended by PD 1814). - Enterprises included in the Foreign Investment Negative List (Sec. 3(g) in relation to Sec. 8 and Sec. 15 of R.A. 7042)  Only up to 60% foreign equity. - Financing companies regulated by SEC (Sec. 6 of RA 5980 as amended by RA 8556) - Investment houses (Sec. 5 of PD 129 as amended by RA 8366) NOTE— Original subscribers - Persons whose names are mentioned in the Articles, but not as incorporators; they do not sign the Articles

B. Minimum Capital Stock and Subscription Requirements Definitions Capital Stock is an amount fixed in the AOI (where shares are with par value) and is unaffected by profits and losses. It limits the maximum amount or number of shares that may be issued without formal amendment of the articles of incorporation (See Sec. 38). Authorized Capital Stock - is synonymous with capital stock where the shares of the corporation have par value. If the shares of stock have no par value, the corporation has no ACS, but it has capital stock the amount of which is not specified in the AOI as it cannot be determined until all the shares have been issued. In this case, the two terms are not synonymous (DE LEON). Subscribed Capital Stock - It is the amount of the capital stock subscribed whether fully paid or not. It connotes an original subscription contract for the acquisition by a subscriber of unissued shares in a corporation (Secs. 60 and 61) Outstanding Capital Stock - it is the total shares of stock issued under the binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares (Sec. 137). It is broader than ―subscribed‖ capital stock. Paid-up Capital - Portion of the authorized capital stock which has been subscribed and paid (See Sec. 13).

Unissued Capital Stock - It is that portion of the capital stock that is not issued or subscribed. It does not vote and draws no dividends. Legal Capital - It is the amount equal to the aggregate par value and/or issued value of the outstanding capital stock (DE LEON).

Requirement (Sec 13, Corporation Code) At least twenty-five (25%) percent of the authorized capital stock of the corporation must be subscribed; and At least twenty-five (25%) of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least twenty-five (25%) percent of the said subscription, such paid-up capital being not less than five thousand (P5,000.00) pesos.

C. Corporate Term Maximum life of 50 years. Extendible for a period not exceeding 50 years at any one instance. No extension, however, can be made earlier than 5 years before the end of the term, unless there are justifiable reasons for an earlier extension as may be determined by the SEC (Sec. 11) Extension requires an amendment of the AOI. Any dissenting stockholder may exercise his appraisal right (Sec. 37).

D. Classification of Shares Shares of stock of stock corporations may be divided into classes or series of shares or both. Each class or series of shares may have rights, privileges or restrictions, as stated in the AOI. Classification of shares:  Common shares  Preferred shares  Par value shares  No-par value shares  Founder‘s shares  Redeemable shares  Treasury shares  Convertible shares  Non-voting shares GENERAL RULE No share may be deprived of voting rights (Sec. 6) EXCEPTIONS  Preferred or  Redeemable shares,  Provided by the Code There shall always be a class/series of shares which have a COMPLETE VOTING RIGHTS (Sec. 6)

MERCANTILE LAW REVIEWER Doctrine of Equality of Shares Each share shall be EQUAL in ALL respects to every other share, except as otherwise provided in the AOI and stated in the certificate of stock (Sec. 6) a.

Common Shares

The most common type of shares which enjoy no preference but the owners thereof are entitled to management of the corporation and to equal prorata division of profits after preference. It represents a residual ownership interest in the corporation. b.

Preferred Shares

Stocks which are given preference by the issuing corporation in dividends and the distribution of assets of the corporation in case of liquidation or such other preferences as may be stated in the AOI which do not violate the Corporation Code. Limitations:  Preferred shares can only be issued with par value.  Preferred shares must be stated in the Articles of Incorporation and in the certificate of stock.  The BOD may fix the terms and conditions only when so authorized by the AOI and such terms and conditions shall be effective upon filing a certificate thereof with the SEC. c.

Par value shares

These are shares with a stated value set out in the AOI. This remains the same regardless of the profitability of the corporation. This gives rise to financial stability and is the reason why banks, trust corporations, insurance companies and building and loan associations must always be organized with par value shares. Par value is minimum issue price of such share in the AOI which must be stated in the certificate d.

No-par value shares

These are shares without a stated value. ―A no par share does not purport to represent any stated proportionate interest in the capital stock measured by value, but only an aliquot part of the whole number of such shares of the issuing corporation‖ (AGBAYANI) Limitations:  No-par value shares cannot have an issue price of less than P5.00 per share (Sec. 6).  They shall be deemed fully paid and nonassessable and the holders of such shares shall not be liable to the corporation or to its creditors in respect thereto (Sec. 6).  Entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends (Sec. 6).

 AOI must state the fact that the corporation issues no-par shares and the number of shares.  Banks, insurance companies, trust companies, building and loan associations, and public utilities cannot issue no-par value shares (Sec. 6).  The issued price may be fixed in the AOI, or by the BOD pursuant to authority conferred upon it by the AOI, or, in the absence thereof, by majority vote of the outstanding shares in a meeting called for the purpose (Sec. 62). e.

Founder‘s Shares (Sec. 7)

These are shares, classified as such in the AOI, which are given certain rights and privileges not enjoyed by the owners of other stocks. Where exclusive right to vote and be voted for in the election of directors is granted, such right must be for a limited period not to exceed 5 years subject to approval by SEC. 5 year period shall commence from date of approval by SEC. f.

Redeemable Shares (Sec. 8)

These are shares which permit the issuing corporation to redeem or purchase its shares. Limitations:  Redeemable shares may be issued only when expressly provided for in the AOI (Sec. 8).  The terms and conditions affecting said shares must be stated both in the AOI and in the certificate (Sec. 8).  Redeemable shares may be deprived of voting rights in the AOI, unless otherwise provided in the Code.  The corporation is required to maintain sinking fund to answer for redemption price if the corporation is required to redeem.  The redeemable shares are deemed retired upon redemption unless otherwise provided in the AOI.  Unrestricted retained earnings is NOT necessary before shares can be redeemed but there must be sufficient assets to pay the creditors and to answer for operations (Republic Planters Banks v. Agana, 1997). Redemption cannot be made if such redemption will result in insolvency or inability of the corporation to meet its obligations (SEC Opinion, 24 Aug 1987). NOTE— Redeemable shares reacquired shall be considered retired and no longer issuable, unless otherwise provided in the Articles of the redeeming corporation (SEC Rules Governing Redeemable and Treasury Shares, 26 April 1982). g.

Treasury Shares (Sec. 9)

These are shares which have been issued and fully paid for, but subsequently re-acquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the BOD.

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Treasury shares are therefore issued shares, but being in the treasury, do not have the status of outstanding shares. Consequently, although a treasury share, not retired by reacquisition, may be re-issued or resold, but such share, as long as it is held by the corporation as a treasury share, participates neither in the dividends, because dividends cannot be declared by the corporation to itself nor in the meetings of the corporation as voting stock, for otherwise equal distribution of voting powers among stockholders will be effectively lost and the directors will be able to perpetuate their control of the corporation, though it still represents a paid for interest in the property of the corporation. (CIR v. Manning, 1975). NOTE— Delinquent stocks, which are stocks that have not been fully paid, may become treasury stocks upon bid of the corporation in absence of other bidders (Sec.68). h.

Convertible shares

A type of preferred stock that the holder can exchange for a predetermined number of common shares at a specified time i.

Non-voting shares (Sec. 6)

GENERAL RULE Non-Voting Shares are not entitled to vote. EXCEPTIONS  Amendment of the AOI  Adoption and amendment of by-laws  Sale, lease, exchange, other disposition of all or substantially all of the corporate property  Incurring, creating or increasing bonded indebtedness  Increase or decrease of capital stock  Merger and consolidation  Investment of corporate funds in another corporation or business  Dissolution of the corporation

VI. Incorporation and organization A. Promoter Promoters are persons who, acting alone or with others, take initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor (RA 8799, The Securities Regulation Code).

1. Liability of Promoter GENERAL RULE The promoter binds himself PERSONALLY & assumes the responsibility of looking to the proposed corporation for reimbursement.

EXCEPTIONS 1. Express or implied agreement to the contrary 2. Novation, not merely adoption or ratification of the contract

2. Liability

of Corporation Promoter‘s Contract

for

GENERAL RULE A corporation is NOT bound by the contract. A corporation, until organized, has no life and no legal existence. It could not have had an agent (the promoter) who could legally bind it. (Cagayan Fishing Development Co., Inc. v. Sandiko) EXCEPTIONS A corporation may be bound by the contract if it makes the contract its own by: 1. Adoption or ratification of the ENTIRE contract after incorporation. Note:  Power of the corporation to adopt a contract must be understood to be limited to such contracts as the corporation itself, after its organization, would be authorized to make. (Builders‘ Duntile Co. v. Dunn Mfg. Co.)  Novation or the intent to novate the original contract is required to adopt or ratify the pre-incorporation contract. (Campos, 1990) 2.

Acceptance of benefits under the contract with knowledge of the terms thereof.

3.

Performance of its obligation under the contract

B. Subscription Contract Section 60. Subscription contract. Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription contract within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract. a.

Characteristics

There can be a ―subscription‖ only with reference to ―unissued shares‖ of the Authorized Capital Stock (ACS), in the following cases: 1. The original issuance of the ACS at the time of incorporation. 2. The opening, during the life of the corporation, of the portion of the original ACS previously unissued; or 3. The increase in ACS achieved through a formal amendment of the Articles and registration thereof with the SEC. (VILLANUEVA)

MERCANTILE LAW REVIEWER b.

Status as Shareholder

A person becomes a shareholder the moment he:  Enters into a SUBSCRIPTION CONTRACT with an existing corporation (he is a stockholder upon acceptance of the corporation of his offer to subscribe whether the consideration is fully paid or not).  Purchases TREASURY SHARES from the corporation  Acquires shares from existing shareholders by SALE OR ANY OTHER CONTRACT (SUNDIANG AND AQUINO) c.

Types of subscription contracts i.

Pre-incorporation subscription (Sec. 61) It is a subscription for shares of stock of a corporation still to be formed. ii. Post-incorporation subscription It is entered into after incorporation. d.

Interest on unpaid subscription

GENERAL RULE Stockholder is NOT liable to pay interest on his unpaid subscription. EXCEPTION If so required by the by-laws RATE: that fixed in the by-laws, otherwise, the legal rate (Sec. 66) NOTES— Transfer of unissued shares = subscription. Transfer for consideration of treasury shares = sale by the corporation (not subscription). Transfer of previously issued shares by a stockholder to a third person = sale. Shareholders are NOT creditors of the corporation with respect to their shareholdings thereto and the principle of compensation or set-off has no application. Subscription contract is NOT required to be in writing.

C. Pre-incorporation Subscription Agreements It is a subscription for shares of stock of a corporation still to be formed. When subscription is IRREVOCABLE: 1. For a period of at least 6 months from the date of subscription, UNLESS (1) all of the other subscribers consent to the revocation, or (2) the incorporation fails to materialize within six (6)

2.

months or within a longer period as may be stipulated in the contract of subscription; or After the submission of the AOI to the SEC.

D. Consideration for Stocks a.

Forms of Consideration (Sec. 62) [CP-LADS]  Actual cash  Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued NOTES— - Property should NOT be encumbered. Otherwise, it would impair the consideration. - Valuation is initially determined by the incorporators or the board of directors, subject to approval by the SEC.  Labor performed for or services actually rendered to the corporation;  Previously incurred indebtedness of the corporation;  Amounts transferred from unrestricted retained earnings to stated capital (declaration of stock dividends); and  Outstanding shares exchanged for stocks in the event of reclassification or conversion. b.

Limitations on Consideration:

Stocks shall NOT be issued  for a consideration less than the par or issued price thereof  in exchange for promissory notes or future service NOTES— Promissory notes and future service may be used as consideration provided that certificates of stock will be issued ONLY AFTER actual encashment of promissory note or performance of such services. Same consideration applies for the issuance of bonds by the corporation.

E. Articles of Incorporation  constitutes the charter of the corporation  defines the contractual relationships between the State and the corporation, the stockholders and the State, and the corporation and the stockholders The Articles must be filed with the SEC for the issuance of the Certificate of Incorporation.

1. Contents (Sec. 14) i.

Corporate name (Sec. 18)

1. Must not be identical or deceptively or confusingly similar to that of any existing

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corporation or to any other name already protected by law 2. Not patently deceptive, confusing or contrary to existing laws

GENERAL RULE Not less than 5 directors/trustees

but

not

more

than

15

Required by law to include the word ―Corporation‖ or ―Inc.‖ (Campos, 1990)

EXCEPTION Non-stock corporations whose articles or by-laws may provide for more than 15 trustees (Sec. 92)

Change of corporate name requires the amendment of the AOI: majority vote of the board and the vote or written assent of stockholders holding 2/3 of the outstanding capital stock (Sec. 16).

Educational non-stock corporations:  trustees may NOT be less than 5 NOR exceed 15  number of trustees shall be in multiples of 5 (Sec. 108)

Republic Planters Bank v. CA (1992): Amendment of a corporation‘s AOI changing its corporate name does not extinguish the personality of the original corporation. It is the same corporation with a different name, and its character is not changed. Consequently, the ―new‖ corporation is still liable for the debts and obligations of the ―old‖ corporation.

Nationalized industries: Aliens may be directors but only in such number as may be proportional to their allowable ownership of shares

ii. Purpose clause  Must indicate the PRIMARY and SECONDARY purposes if there is more than one purpose, which should not contradict or change the nature of the corporation (Sec. 14(2))  Must not be patently unconstitutional, illegal, immoral, and contrary to government rules and regulations (Sec. 17 (2)).  Must not be for the purpose of practicing a profession (People v. United Medical Service, 200 N.E. 157, cited in Campos) iii. Principal office  Must be within the Philippines (Sec. 14 (3))  AOI must specify both province or city or town where it is located Important for (1) determining venue in an action by or against the corporation, and (2) determining the province where a chattel mortgage of shares should be registered (Chua Gan vs. Samahang Magsasaka, 1935). iv. Corporate Term  Maximum life of 50 years.  Extendible for a period not exceeding 50 years at any one instance. No extension, however, can be made earlier than 5 years before the end of the term. (Sec. 11) Extension requires an amendment of the subject to the exercise of appraisal right by the dissenting stockholder (Sec. 37). v.

Names, citizenship and residences of incorporators

vi. Number, names, citizenship and residences of directors/trustees. (Asked in 05 and 08) Stock corporations: DIRECTORS Non-stock corporations: TRUSTEES

vii. If STOCK corporation:  authorized capital stock in lawful money of the Philippines  the number of shares into which the ACS is divided  If with par value shares, the par value of each share (Sec. 14(8), Sec. 15(7)).  names, citizenship and residences of original subscribers  amount subscribed and paid on each subscription  fact that some or all shares are without par value viii. If NON-STOCK:  amount of capital  names, nationalities & contributors  amount contributed by each

residences

of

ix.

Amount paid by each subscriber on their subscription, which shall not be less than 25% of subscribed capital and shall not be less than P5,000 (Sec. 15 (8 & 9))

x.

Name of treasurer elected by the subscribers (Sec. 15 (10)

xi. Other matters  Classes of shares, as well as preferences or restrictions on any such class (Sec. 6).  Denial or restriction of pre-emptive right (Sec.39).  Prohibition against transfer of stock which would reduce stock ownership to less than the required minimum in the case of a nationalized business or activity (Sec. 15(11)).

2. Non-amendable items The following items state accomplished facts, therefore, cannot be amended:  The names, nationalities and residences of the incorporators (Otherwise, an amendment would go against the definition of ―incorporators‖ in Sec. 5)  First set of directors or trustees  Original stock subscriptions and paid-in capital

MERCANTILE LAW REVIEWER  Treasurer-in-trust  Place and date of execution  Witnesses (De Leon, 2010)

b.

NOTES: AOI must be accompanied by Treasurer‘s sworn statement of compliance with Sec. 13 on amount of capital to be subscribed and paid for the purposes of incorporation; otherwise, SEC shall not accept the AOI. (Sec. 14)

F. Corporate Name – limitations on use of corporate name Corporate name (Sec. 18) 1. Must not be identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law 2. Not patently deceptive, confusing or contrary to existing laws Required by law to include the word ―Corporation‖ or ―Inc.‖ (Campos, 1990) Change of corporate name requires the amendment of the AOI: majority vote of the board and the vote or written assent of stockholders holding 2/3 of the outstanding capital stock (Sec. 16). Republic Planters Bank v. CA (1992): Amendment of a corporation‘s AOI changing its corporate name does not extinguish the personality of the original corporation. It is the same corporation with a different name, and its character is not changed. Consequently, the ―new‖ corporation is still liable for the debts and obligations of the ―old‖ corporation.

G. Registration and Issuance of Certificate of Incorporation a.

Registration Incorporation

of

the

Articles

of

Documents to be filed with SEC (Asked in 02): [BATLaNG] 1. Articles of Incorporation 2. Treasurer‘s Affidavit certifying that 25% of the total authorized capital stock has been subscribed and at least 25% of such has been fully paid in cash or property. 3. Bank certificate covering the paid-up capital. 4. Letter authority authorizing the SEC to examine the bank deposit and other corporate books and records to determine the existence of paid-up capital. 5. Undertaking to change the corporate name in case there is another person or entity with same or similar name that was previously registered. 6. Certificate of authority from proper government agency whenever appropriate like BSP for banks and Insurance Commission for insurance corporations. (SUNDIANG AND AQUINO)

Issuance of Certificate of Incorporation by SEC

EFFECT: Commencement of corporate existence and juridical personality (Sec. 19) REVOCATION of certificate of incorporation: If incorporators are found guilty of fraud in procuring the same after due notice and hearing (Sec. 6(i), PD 902-A)

   

c. Grounds for disapproving AOI: (Sec. 17) [F2P2] AOI does not SUBSTANTIALLY comply with the form prescribed Purpose is patently unconstitutional, illegal, immoral, contrary to government rules and regulations Treasurer‘s Affidavit concerning the amount of capital subscribed and or paid is false Required percentage of ownership of Filipino citizens has not been complied with.

REMEDY in case of rejection of AOI - petition for review in accordance with the Rules of Court (Sec. 6, last par., PD 902-A) SEC shall give the incorporators reasonable time to correct or modify objectionable portions of the articles or amendment (Sec. 17).

H. Election of Directors or Trustees a.

Requirements

 To hold the ELECTION meeting: - owners of MAJORITY of the OCS or majority of the members entitled to vote in the meeting must be present, in person or by proxy,  Manner of elections GEN. RULE: Viva voce EXCEPTION: Election by ballot if requested  STOCKHOLDER‘S RIGHT TO VOTE and USE ANY METHOD for voting cannot be deprived in the articles of incorporation or in the by-laws  In STOCK CORP: Stockholders entitled to vote number of shares of stock standing in OWN NAME in the books of the corporationGENERAL RULE (when by-laws silent): at time of election EXCEPTION: at the time fixed in the by-laws  In NON-STOCK CORP: GENERAL RULE: One member = as many votes as there are vacancies but only one vote per candidate EXCEPTION: otherwise provided by AOI/By-laws  No delinquent stock shall be voted.

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 REQUIREMENT TO BE ELECTED: Candidates receiving the highest number of votes shall be declared elected (PLURALITY) b.

Methods of Voting (Sec. 24) i.

Straight Voting

ii. Cumulative voting for one candidate A stockholder is allowed to cumulate his votes and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal. Illustration: If there are 5 directors to be elected and Pedro, as shareholder, has 100 shares, Pedro can give 500 (5 x 100 shares) votes to just one candidate. iii. Cumulative voting by distribution A stockholder may cumulate his shares by multiplying the number of his shares by the number of directors to be elected and distribute the same among as many candidates as he shall see fit. Illustration: In the illustration above, Pedro may choose to give 100 votes to candidate 1, 100 votes to candidate 2, 100 votes to candidate 3, 150 votes to candidate 4, and 50 votes to candidate 5.

I. Adoption of By-Laws BY-LAWS  Product of agreement of the stockholders/members and establish the rules for internal government of the corporation (Campos, 1990)  Mere internal rules among stockholders and cannot affect or prejudice 3rd persons who deal with the corporation unless they have knowledge of the same (China Banking Corp v CA, 1997) a. ADOPTION OF BY-LAWS (Sec. 46)  After incorporation - within 1 month after receipt of official notice of the issuance of its certificate of incorporation by the SEC.  Prior to incorporation - approved and signed by all the incorporators & submitted to SEC together with AOI EFFECT OF FAILURE TO FILE THE BY-LAWS WITHIN THE PERIOD:  does not imply the "demise" of the corporation. By-laws may be required by law for an orderly governance and management of corporations but they are not essential to corporate birth. Therefore, failure to file them within the period required by law by no means tolls the automatic dissolution of a corporation (Loyola Grand Villas Homeowners Assn v. CA (1997)

corporation is deemed dissolved. Organization includes: the filing & approval of by-laws with the SEC and the election of directors and officers (Campos, 1990). c. REQUISITES OF VALID BY-LAWS (Sec. 46)  Must be approved by the affirmative vote of the stockholders representing MAJORITY of the outstanding capital stock or majority of members (If filed pre-incorporation: must be approved and signed by all incorporators)  Must be kept in the principal office of the corporation, subject to inspection of stockholders or members during office hours (Sec. 74) d. BINDING EFFECT (Sec. 46) ONLY from date of issuance of SEC of certification that by-laws are not inconsistent with the Code Pending approval, they CANNOT bind stockholders or corporation e. Amendments or Repeal (Sec. 48) Effected by: MAJORITY vote of the members of the BOARD and MAJORITY VOTE OF THE OWNERS of the OCS or members, in a meeting duly called for the purpose DELEGATION TO THE BOD OF POWER TO AMEND OR REPEAL BY-LAWS: by vote of stockholders representing 2/3 of the OCS or 2/3 of the members HOW DELEGATION REVOKED: by MAJORITY VOTE only of stockholders representing 2/3 of the OCS or 2/3 of the members

VII. Corporate powers A. General powers, theory general capacity (Sec. 36) 1. 2. 3. 4. 5. 6.

b.

NOTE— Section 22 on the effect of failure to formally organize within 2 years from incorporation, the corporation‘s corporate powers cease and the

7.

8. 9.

of

Sue and be sued in its corporate name; Succession; Adopt and use a corporate seal; Amend its Articles of Incorporation; Adopt by-laws; For stock corporations - issue or sell stocks to subscribers and sell treasury stocks; for nonstock corporation - admit members to the corporation; Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, pursuant to its lawful business; Enter into merger or consolidation with other corporations as provided in the Code; Make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity;

MERCANTILE LAW REVIEWER 10. Establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and 11. Exercise such other powers as may be essential or necessary to carry out its purposes NOTE— The Corporation has implied powers which are deemed to exist because of the following provisions:  ―Except such as are necessary or incidental to the exercise of the powers so conferred‖ (Sec. 45)  ―Such powers as are essential or necessary to carry out its purpose or purposes as stated in the AOI‖ – catch-all phrase (Sec. 36(11)).

B. Specific powers, specific capacity

theory

of

(BADD PIT MC)

1. Power

to extend corporate term

or

shorten

2. Power to increase or decrease capital stock or incur, create, increase bonded indebtedness

3. Power to deny pre-emptive rights 4. Power to sell or

dispose

of

corporate assets

5. Power to acquire own shares 6. Power to invest corporate funds in another corporation or business

7. Power to declare dividends 8. Power to enter into management contract

(Sec. 37-44)  Extend or shorten the corporate Term (Sec. 37) a) Must be approved by majority vote of the Board of Directors/ Board of Trustees (BOD/BOT) b) Ratified at a meeting by 2/3 of SH representing the outstanding capital stock/ 2/3 of members of non-stock corporations c) Written notice of meeting (includes proposed action, time and place of meeting) shall be addressed to each SH/member at his place of residence and deposited to the addressee in the post office, or served personally d) In case of extension of corporate term, appraisal right may be exercised by the dissenting stockholder

 Increase or decrease Capital stock (Sec. 38)  Incur, create or increase Bonded indebtedness (Sec. 38) a) Same requirements above from a-c b) A certificate in duplicate must be signed by a majority of the directors of the corporation (countersigned by the chairman and the secretary of the SH meeting), setting forth: a. That requirements of this section have been complied with b. The amount of the increase or diminution of the capital stock c. In case of increase, i. the amount of capital stock or number of shares of no-par stock actually subscribed ii. names, nationalities and residences of the persons subscribing iii. the amount of no-par stock subscribed by each iv. the amount paid by each on his subscription, or the amount of capital stock or number of shares of no-par stock allotted to each stockholder if such increase is for the purpose of making effective stock dividend d. any bonded indebtedness to be incurred, created or increased e. the actual indebtedness of the corporation on the day of the meeting f. the amount of stock represented at the meeting g. the vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness c) prior approval of SEC is required d) duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the SEC, attached in the original articles of incorporation. a. From and after approval of the SEC of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized b. SEC shall not accept for filing any certificate of increase unless accompanied by the sworn statement of the treasurer of the corporation showing: i. That at least 25% of such increased capital stock have been subscribed and ii. that at least 25% of the amount subscribed has been paid or that there has been transferred to the corporation property the value is equivalent to 25% of the subscription c. SEC shall not approve any decrease in the capital stock if its effect shall

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e)

prejudice the rights of corporate creditors Bonds issued by a corporation shall be registered with the SEC

 Deny Preemptive right (Sec. 39) All SH of a Stock Corporation have preemptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings Pre-emptive right shall not extend to: a) shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public b) shares to be issued in good faith with the approval of 2/3 of the stockholders representing outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt  Sell or Dispose of substantially all its assets (Sec. 40) a) Same requirements from a-c as Sec. 37 above b) Any dissenting SH may exercise his appraisal right c) Deemed to cover substantially all the corporate property and assets d) After authorization by the SH/ members, the BOD/ BOT may abandon such sale, lease, exchange, mortgage, pledge or other disposition, subject to the rights of third parties under any contract relating thereto, without further action or approval by the SH/ members e) Corporation is not restricted in its power to dispose assets if the same is necessary in the usual and regular course of business of the corporation or if the proceeds of the sale will be appropriated for the conduct of its remaining business  Acquire its own shares (Sec. 41) a) For a legitimate corporate purpose/s, including but not limited to the following: a. To eliminate fractional shares arising out of stock dividends b. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and c. To pay dissenting or withdrawing stockholders b) Provided there are unrestricted retained earnings in the corporate books to cover the shares purchased or acquired  Invest in another corporation or business (Sec. 42) a) Same requirements from a-c as Sec. 37 above b) Any dissenting SH shall have appraisal right c) Where the investment is reasonably necessary to accomplish the corporation‘s

primary purpose, the approval of the SH/ members is not necessary  Declare dividends (Sec. 43) a) Out of unrestricted retained earnings b) Payable in cash, in property, or in stock to all SH on the basis of outstanding stock held by them c) Any cash dividend due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses d) Stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid e) Should be approved by 2/3 of SH representing the outstanding capital stock at a regular/ special meeting called for that purpose f) Stock corporationsprohibited from retaining surplus profits in excess of 100% of their paid-in capital stock, except: a. When justified by definite corporate expansion projects or programs approved by the BOD b. When the corporation is prohibited under any load agreement with any financial institution or creditor from declaring dividends without its consent, and such consent has not yet been secured c. When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation  Enter into Management contracts (Sec. 44) a) Should be approved by the BOD and by SH owning at least the majority of the outstanding capital stock or at least a majority of the members of both the managing and the managed corporation at a meeting duly called for that purpose b) Should be approved by the 2/3 of stockholders owning outstanding capital stock/ members of the managed corporation when: a. A stockholder or stockholders representing the same interest of both the managing and managed corporations own more than 1/3 of the total outstanding capital stock entitled to vote of the managing corporation; or b. A majority of the members of the BOD of the managing corporation also constitute a majority of the BOD of the managed corporation c) No management contract shall be entered into for a period longer than 5 years for any one term d) a-c above applies to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such are called service contracts, operating agreements or otherwise e) Service contracts or operating agreements which relate to exploration, development,

MERCANTILE LAW REVIEWER exploitation or utilization of natural resources may be entered into for such periods as may be provided in the pertinent laws and regulations NOTES— 2 general restrictions on the power of the corporation to acquire and hold properties:  property must be reasonably and necessarily required by the business  that the power shall be subject to the limitations prescribed by other special laws and the constitution (corporation may not acquire more than 30% of voting stocks of a bank; corporations are restricted from acquiring public lands except by lease of not more than 1000 hectares)

9. Ultra vires acts (Sec. 45) Definition Ultra Vires acts are those acts which a corporation is not empowered to do or perform because they are not conferred by its AOI or by the Corporation Code, or not necessary or incidental to the exercise of the powers so conferred. Types of Ultra Vires Acts  Acts done beyond the powers of the corporation as provided in the law or its articles of incorporation;  Acts or contracts entered into in behalf of a corporation by persons who have no corporate authority (Note: This is technically ultra vires acts of officers and not of the corporation);  Acts or contracts, which are per se illegal as being contrary to law. (VILLANUEVA)

i. Applicability doctrine

of

ultra

vires

It is a question, therefore, in each case of the logical relation of the act to the corporate purpose expressed in the charter. If that act is one which is lawful in itself, and not otherwise prohibited, is done for the purpose of serving corporate ends, and is reasonably tributary to the promotion of those ends, in a substantial, and not in a remote and fanciful sense, it may fairly be considered within the charter powers. The test to be applied is whether the act in question is in direct and immediate furtherance of the corporation‘s business, fairly incident to the express powers and reasonably necessary to their exercise. If so, the corporation has the power to do it; otherwise, not. (Montelibano v. Bacolod-Murcia Milling Co., Inc., G.R. No. 15092, May 18, 1962)

ii. Consequences of ultra vires acts  Executed contract – courts will not set aside or interfere with such contracts;  Executory contracts – no enforcement even at the suit of either party (void and unenforceable);

 Partly executed and partly executory – principle of ―no unjust enrichment at expense of another‖ shall apply;  Executory contracts apparently authorized but ultra vires – the principle of estoppel shall apply. ULTRA VIRES ACTS Not necessarily unlawful, but outside the powers of the corporation Can be ratified Can bind the parties if wholly or partly executed

93

ILLEGAL ACTS Unlawful; against law, morals, public policy, and public order Cannot be ratified Cannot bind the parties

Seaoil vs Autocorp Group (2008, Nachura): An ultra vires act is distinguished from illegal act, the former being voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated. Remedies in Case of Ultra Vires Acts  State - Forfeiture by judgment of Court - Suspension or revocation of the certificate of registration by the SEC  Stockholders - Injunction - Derivative suit  Creditors o Nullification of contract in fraud of creditors

10. Doctrine

of

individuality

of

subscription

Section 64 of the Corporation Code implicitly sets forth the doctrine that subscription is one entire and indivisible contract. Thus, if the stockholder has not paid the full amount of his subscription, he cannot transfer part of it in view of the indivisible nature of subscription contract. It is only upon full payment of the whole subscription that a stockholder can transfer a portion of his subscription. However, the entire subscription although not yet fully paid, may be transferred to a single transferee. It is necessary, however, to secure the consent of the corporation since the transfer of subscription right contemplates a novation of contract which, under Article 1293 of the Civil Code of the Philippines, cannot be made without the consent of the creditor. Likewise, it has to be emphasized that under Section 63 of the Corporation Code, no transfer shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation. (SEC Opinion, August 7, 1991)

11. Doctrine of equality of shares Each share shall be EQUAL in ALL respects to every other share, except as otherwise provided in the AOI and stated in the certificate of stock (Sec. 6)

75


12. Trust fund doctrine

94

Boman Environmental Development Corporation v. CA (1988): Trust Fund Doctrine means that the capital stock, properties and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors. Stated simply, the trust fund doctrine states that all funds received by the corporation in payment of the shares of stock shall be held in trust for the corporate creditors and other stockholders of the corporation. Under such doctrine no fund shall be used to buy back the issued shares of stock except only in instances specifically allowed by the Corporation Code.

C. How Exercised 1. By the Shareholders a.

Corporate Acts Requiring Approval of Stockholders or Members (Voting and Non-Voting Shares)

GENERAL RULE Vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights (Sec. 6) EXCEPTIONS (Sec. 6) Voting and non-voting shares shall be entitled to vote in the following cases:  Amendment of Articles of Incorporation  Extend or Shorten Corporate Term  Increase or Decrease of Capital Stock  Incurring, Creating or Increasing Bonded Indebtedness  Sale, Lease, Mortgage or Other Disposition of Substantially all corporate assets  Investment of funds in another corporation or business or for any purpose other than the primary purpose for which it was organized Requisites (Sec. 42)(Asked in 95): - Approval of majority of the board of directors or trustees - Ratification by the stockholders representing at least 2/3 of the OCS or the members at a meeting duly called for the purpose - Written notice addressed to each stockholder or member at his place of residence as shown on the books of the corporation - Appraisal right available to dissenting stockholders or members NOTES— If it is the same purpose or incidental or related to its PRIMARY purpose, the board can invest the corporate fund WITHOUT the consent of the stockholders. No appraisal right. If the investment is in another corporation of different business or purpose BUT in pursuance of the SECONDARY purpose, the affirmative vote

of majority of the board consented stockholders/ members is required.

by

If the investment is OUTSIDE the purpose/s for which the corporation was organized, AOI must be amended first.  Adoption, Amendment and Repeal of By-Laws (Sec. 48)  Merger and Consolidation  Dissolution of the Corporation b.

Corporate Acts Requiring Approval of Stockholders or Members (Voting Shares Only)

 Declaration of Stock Dividends (Sec. 43)  Management Contracts (Sec. 44) - Any contract whereby a corporation undertakes to manage or operate ALL OR SUBSTANTIALLY ALL of the business of another corporation for a period NOT longer than 5 years - Requisites: o Approval by the BOD o Approval by SH owning at least the majority of the OCS or the members of BOTH the managing and the managed corporation (at meeting duly called) o 2/3 vote required of the managed corporation when:  Where a SH/s representing the same interest of both the managing and the managed corporations own or control more than 1/3 of the total OCS entitled to vote of the managing corporation; or  Where a majority of the members of the BOD of the managing corporation also constitute a majority of the members of the BOD of the managed corporation  Fixing the Consideration of No-Par shares (Sec. 62)  Fixing the Compensation of Directors (Sec. 30)

2. By the Board

76

Board as Repository of Corporate Powers  GENERAL RULE The corporate powers of the corporation shall be exercised, all business conducted and all property of such corporation controlled and held by the board of directors or trustees. (Sec. 23)  EXCEPTIONS - Executive Committee duly authorized in the by-laws (Sec. 35); - A contracted manager which may be an individual, a partnership, or another corporation. NOTE

MERCANTILE LAW REVIEWER In case the contracted manager is another corporation, the special rule in Sec. 44 applies.

 Convicted by final judgment of a violation of the Corporation Code committed within 5 years prior to the date of his election or appointment

- In case of close corporations, the stockholders may manage the business of the corporation instead by a board of directors, if the articles of incorporation so provide (Sec. 97)

c. Authority of Corporate Officers A person dealing with a corporate officer is put on inquiry as to the scope of the latter‘s authority but an innocent person cannot be prejudiced if he had the right to presume under the circumstances the authority of the acting officers.

Spouses Constantine Firme v. Bukal Enterprises and Development Corporation (2003): The power to purchase real property is vested in the board of directors or trustees. While a corporation may appoint agents to negotiate for the purchase of real property needed by the corporation, the final say will have to be with the board, whose approval will finalize the transaction. Requisites of a VALID Corporate Act by the Board of Directors (Sec. 25):  The Board must act as a BODY in a meeting.  There must be a VALIDLY constituted meeting.  Their act must be supported by a MAJORITY OF THE QUORUM duly assembled (Exception: Election of officers requires a vote of majority of all the members of the board)  The act must be within the powers conferred on the Board.

3. By the Officers CORPORATE OFFICER Position is provided for in the by-laws or under the Corporation Code RTC has jurisdiction in case of labor dispute

   

CORPORATE EMPLOYEE Employed by the action of the managing officer of the corporation NLRC has jurisdiction in case of labor disputes

a. Who are Corporate Officers (POST) (Sec. 25) President – must be a director; Treasurer – may or may not be a director; as a matter of sound corporate practice, must be a resident and citizen of the Phil (SEC opinion) Secretary – need not be a director unless required by the by-laws; must be a resident and citizen of the Philippines; and Other officers as may be provided in the bylaws.

NOTE— Any two (2) or more positions may be held concurrently by the same person, EXCEPT that no one shall act as president and secretary or as president and treasurer at the same time. Additional qualifications of officers may be provided for in the by-laws (Sec. 47(5)). b. Disqualifications (Sec. 27)  Convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6 years

95

Associated Bank v. Pronstroller (2008, Nachura): Q: What is the Doctrine of Apparent Authority? A: If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent‘s authority.

VIII. Stockholders and members A. Fundamental Stockholder

Rights

of

a

 Direct or indirect participation in management (Sec. 6)  Voting rights (Sec. 6)  Right to remove directors (Sec. 28)  Proprietary rights - Right to dividends (Secs. 43 and 71) - Appraisal right (Sec. 81) - Right to issuance of stock certificate for fully paid shares (Sec. 64) - Proportionate participation in the distribution of assets in liquidation (Sec. 122) - Right to transfer of stocks in corporate books (Sec. 63) - Pre-emptive right (Sec. 39)  Right to inspect books and records (Sec. 74)  Right to be furnished with the most recent financial statements/reports (Sec. 75)  Right to recover stocks unlawfully sold for delinquent payment of subscription (Sec. 69)  Right to file individual suit, representative suit and derivative suits

B. Participation in Management 7 71. Proxy Stockholders and members may vote in person or by proxy in all meetings of stockholders or members (Sec. 58).

2. Voting Trust An arrangement created by one or more stockholders for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding five (5) years at any time (Sec. 59).

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MERCANTILE LAW REVIEWER (b) Amendments to by-laws (Sec. 48)

96

PROXY Principal –agent Proxy can‘t exceed delegated authority.

Must be in writing Copy must be filed with the corporation. No transfer. Proxy exercises voting rights only for a specific meeting (unless otherwise provided) Proxy cannot be director Revocable at will in any manner, EXCEPT if coupled with an interest. Max of 5 yrs at a time

TRUSTEE Trustee-beneficiary The only limit to authority is that the act must be for the benefit of trustee. (fiduciary obligation) Must be in writing and notarized Copy must be filed with SEC and the corporation. Transfer of legal title to trustee. Trustee exercises absolute voting rights continuously, subject only to fiduciary duty. Trustee can be director Irrevocable, as long as no misconduct or fraud.

Max of 5 yrs at a time (unless coterminous with loan) SEC can pass on validity

3. Cases When Stockholder‘s Action is Required

a. By a Majority Vote (a) Power to enter into management contracts (Sec. 44) GENERAL RULE Requires approval by majority of the BOD/BOT and approval by stockholders owning at least the majority of the outstanding capital stock/majority of members of both the managing and the managed corporation EXCEPTIONS  Where a stockholder/s representing the same interest of both the managing and the managed corporations own or control more than onethird (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or  Where a majority of the members of the managing corporation‘s BOD also constitute a majority of the the managed corporation‘s BOD Requires at least 2/3 votes of the outstanding capital stock/membership of the managed corporation. BUT only majority vote is required for the managing corporation.

Requires approval by majority of the BOD/BOT and approval by stockholders owning at least the majority of the outstanding capital stock/majority of members. Since amendments to by-law is among those enumerated under Sec. 6, the basis of the majority vote includes all stockholders/members with or without voting rights. (c) Revocation of delegation to the BOD of the power to amend or repeal or adopt by-laws (Sec. 48) Requires approval by majority of the BOD/BOT and approval by stockholders owning at least the majority of the outstanding capital stock/majority of members. (d) Calling a meeting to remove directors (Sec. 28) Meeting for the removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock/majority of members. (e) Granting compensation other than per diems to directors (Sec. 30) Compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock. (f) Consideration no-par shares (Sec. 62) When the AOI or the BOD does not provide for the value of no-par shares, the value of such shares shall be determined by the stockholders representing at least a majority of the outstanding capital stock.

b. By a Two-Thirds Vote (a) Amendment of AOI (Sec. 16) Amendment of the AOI may be made by a majority vote of the BOD/BOT and the vote or written assent of the stockholders representing at least two-thirds 2/3 of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders. Since amendment of the AOI is among those enumerated under Sec. 6, the basis of the two-thirds vote includes all stockholders/members with or without voting rights. Amendment of AOI of close corporations (Sec 103): Amendment to the AOI which seeks to delete or remove any provision required to be contained in the AOI of Close Corporations or to reduce a quorum or voting requirement stated in said AOI requires the

78

MERCANTILE LAW REVIEWER affirmative vote of at least 2/3 of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may be specifically provided in the AOI at a meeting duly called. (b) Delegating the power to amend or repeal by-laws or adopt new by-laws (Sec. 48) Delegation to the BOD/BOT of the power to amend or repeal by-laws or adopt new by-laws requires approval by at least two-thirds (2/3) of the outstanding capital stock/membership. Revocation of the delegation requires only majority vote of the outstanding capital stock/membership. Extending/shortening corporate term (Sec. 37) Requires approval by a majority vote of the BOD/BOT and approval by at least two-thirds (2/3) of the outstanding capital stock/membership.

Requires approval by a majority vote of the BOD/BOT and approval by at least two-thirds (2/3) of the outstanding capital stock/membership. Since sale/disposition of all or substantially all of corporate assets is among those enumerated under Sec. 6, the basis of the two-thirds vote includes all stockholders/members with or without voting rights. NOTE— In non-stock corporations where there are NO members with voting rights, the vote of at least the majority of the BOT will be sufficient authorization for any sale or disposition of all or substantially all of corporate assets. (Sec. 40) (h) Investment of funds in another business (Sec. 42)

(c)

Since extending/shortening corporate term is among those enumerated under Sec. 6, the basis of the two-thirds vote includes all stockholders/members with or without voting rights.

Requires approval by a majority vote of the BOD/BOT and approval by at least two-thirds (2/3) of the outstanding capital stock/membership. Since the investment of funds in another business is among those enumerated under Sec. 6, the basis of the two-thirds vote includes all stockholders/members with or without voting rights. (i) Dividend declaration (Sec. 43)

(d) Increasing/decreasing stock (Sec. 38)

capital

Requires approval by a majority vote of the BOD and approval by at least two-thirds (2/3) of the outstanding capital stock. Since increasing/decreasing capital stock is among those enumerated under Sec. 6, the basis of the two-thirds vote includes all stockholders/members with or without voting rights. (e) Incurring, creating, increasing bonded indebtedness (Sec. 38) Requires approval by a majority vote of the BOD and approval by at least two-thirds (2/3) of the outstanding capital stock. Since incurring, creating and increasing indebtedness is among those enumerated under Sec. 6, the basis of the two-thirds vote includes all stockholders/ members with or without voting rights. (f) Issuance of shares not subject to pre-emptive right (Sec. 39) Shares issued in good faith in exchange for property or previously incurred indebtedness with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock are not subject to pre-emptive rights. (g) Sale/disposition substantially all assets (Sec. 40)

of of

all or corporate

No stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock. (j) Power to enter into management contracts (Sec. 44) GENERAL RULE Requires approval by majority of the BOD/BOT and approval by stockholders owning at least the majority of the outstanding capital stock/majority of members of both the managing and the managed corporation EXCEPTIONS  Where a stockholder/s representing the same interest of both the managing and the managed corporations own or control more than onethird (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or  Where a majority of the members of the managing corporation‘s BOD also constitute a majority of the the managed corporation‘s BOD Requires at least 2/3 votes of the outstanding capital stock/membership of the managed corporation. (k) Removal of directors or trustees (Sec. 28) Any director or trustee may be removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock/membership.

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98

(l) Ratifying contracts with respect to dealings with directors/ trustees (Sec. 32) A contract of the corporation with one or more of its directors is voidable, at the option of such corporation, unless all the following conditions are present:  The director‘s presence in the BOD meeting in which the contract was approved was not necessary to constitute a quorum  The vote of such director was not necessary for the approval of the contract  The contract is fair and reasonable under the circumstances  In case of an officer, the contract has been previously authorized by the BOD. Where any of the first two conditions is absent, but necessary that the contract be fair and reasonable, in the case of a contract with a director, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock. (m) Ratifying acts of disloyalty of a director (Sec. 34) GENERAL RULE Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits, he must account to the corporation for all such profits by refunding it. EXCEPTION His act may be ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. (n) Stockholders‘ approval of the plan of merger or consolidation (Sec. 77) Requires approval by majority of each of the BOD/BOT of the constituent corporations of the plan of merger or consolidation and approval by at least two-thirds (2/3) of the outstanding capital stock/membership of each corporation at separate corporate meetings duly called. Amendments to the plan of merger or consolidation also requires approval by majority vote of each of the BOD and two-thirds (2/3) vote of the outstanding capital stock/membership of each corporation voting separately. Since merger or consolidation is among those enumerated under Sec. 6, the basis of the two-thirds vote includes all stockholders/members with or without voting rights. (o) Distribution of assets in non-stock corporations (Sec. 96) The BOT shall, by majority vote, adopt a resolution recommending a plan of distribution which shall be

approved by at least two-thirds (2/3) of the members with voting rights. (p) Incorporation of a religious society (Sec. 116) Any religious society or religious order, or any diocese, synod, or district organization of any religious denomination, sect or church, unless forbidden by the constitution, rules, regulations, or discipline of the religious denomination, sect or church of which it is a part, or by competent authority, may, upon written consent and/or by an affirmative vote at a meeting called for the purpose of at least two-thirds (2/3) of its membership, incorporate for the administration of its temporalities or for the management of its affairs, properties and estate. (q) Voluntary dissolution of corporation (Sec. 118-119)

a

Requires a resolution adopted by a majority vote of the BOD/BOT, and by a resolution duly adopted by the affirmative vote of the stockholders owning at least two-thirds (2/3) of the outstanding capital stock/membership of a meeting to be held upon call for such purpose.

c. By Cumulative Voting Election of Directors or Trustees (Section 24) - A stockholder may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal, or he may distribute them on the same principle among as many candidates as he shall see fit: Provided, That the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected.

C. Proprietary Rights 1. Right to Dividends GENERAL RULE Right to Dividends vests upon lawful declaration by the BOD. From that time, dividends become a debt owing to the SH. No revocation can be made. EXCEPTIONS  Dividends are revocable if NOT yet announced or communicated to the stockholders.  Stock dividends, even if already declared, may be revoked prior to actual issuance since these are not distributions but merely represent changes in the capital structure. NOTE— Right to dividends vests upon declaration so whoever owns the stock at such time also owns the dividends. Subsequent transfer of stock would not carry with it

MERCANTILE LAW REVIEWER right to dividends UNLESS agreed upon by the parties.

2. Right of Appraisal Right to withdraw from the corporation and demand payment of the fair value of the shares after dissenting from certain corporate acts involving fundamental changes in corporate structure (Sec. 81). i. Instances of appraisal right  Extension or reduction or corporate term (Sec. 11)  Change in the rights of stockholders, authorize preferences superior to those stockholders, or restrict the right of any stockholder (Sec. 81)  Investment of corporate funds in another business or purpose (Sec. 42)  Sale or disposal of all or substantially all assets of the corporation (Sec. 81)  Merger or consolidation (Sec. 81) ii. Requirements for exercise of appraisal right (Secs. 82, 86)  Stockholder must have voted against the corporate act.  Stockholder must make a written demand on the corporation within 30 days after the vote was taken for payment of the fair value of his shares on the said date.  Stockholder must submit the certificates to the corporation for notation within ten (10) days after demand for payment. Otherwise, right to appraisal may be terminated at the option of corporation. iii. Effect of demand (Sec. 83) ALL rights accruing to such shares, including voting and dividend rights, shall be suspended EXCEPT the right of such stockholder to receive payment of the fair value thereof Immediate RESTORATION of voting and dividend rights if the dissenting stockholder is not paid the value of his shares within 30 days after the award. iv. Extinguishment of appraisal right (Sec. 84)  Withdrawal of demand by the stockholder WITH CONSENT of the corporation  Abandonment of the proposed action  Disapproval by SEC of the proposed action

3. Right to Inspect i.

Basis of Right

As the beneficial owners of the business, the stockholders have the right to know the financial condition and management of corporate affairs.

A stockholder‘s right of inspection is based on his ownership of the assets and property of the corporation. Therefore, it is an incident of ownership of the corporate property, whether this ownership or interest is termed an equitable ownership, a beneficial ownership, or quasiownership. Such right is predicated upon the necessity of self-protection. (Gokongwei Jr. v. SEC, 1979) ii.

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Records/Books to be Kept (Sec. 74)

 Books that record all business transactions of the corporation which shall include contract, memoranda, journals, ledgers, etc;  Minute book for meetings of the stockholders/members;  Minute book for meetings of the board/trustees;  Stock and transfer book. Stock transfer agent - One engaged principally in the business of registering transfers of stocks in behalf of a stock corporation (licensed by the SEC). The corporate secretary is the one duly authorized to make entries in the stock and transfer book. Torres et al v. CA (1997): It is the corporate secretary's duty and obligation to register valid transfers of stocks and if said corporate officer refuses to comply, the transferorstockholder may rightfully bring suit to compel performance. iii. Financial Statements (Sec. 75) Within 10 days from written request, the corporation shall furnish its most recent financial statement (balance sheet and profit or loss statement as of last taxable year) At a regular meeting, the Board shall present a financial report of the operations of the corporation for the preceding year, which shall include financial statements duly signed and certified by an independent CPA. iv. Requirements for the exercise of the right of inspection (Sec. 74)  It must be exercised at reasonable hours on business days and in the place where the corporation keeps all its records (i.e., principal office).  The stockholder has not improperly used any information he secured through any previous examination.  Demand is made in good faith or for a legitimate purpose. If the corporation or its officers contest such purpose or contend that there is evil motive behind the inspection, the burden of proof is with the corporation or such officer to show the same.

80


100

Gokongwei v. SEC (1979): TEST to determine whether the purpose is legitimate – A legitimate purpose is one which is germane to the interests of the stockholder as such and not contrary to the interests of the corporation v.    

Remedies when inspection is refused

Mandamus Injunction Action for damages File an action under Sec. 144 to impose a penal offense by fine and/or imprisonment

4. Preemptive Right i.

Definition and Distinguished Right of First Refusal

from

Pre-emptive right is an option privilege of an existing stockholder to subscribe to a proportionate part of shares subsequently issued by the corporation before the same can be disposed of in favor of others; this right includes all issues and disposition of shares of any class. It is a common law right and may be exercised by stockholders even without legal provision. On the other hand, a right of first refusal arises only by virtue of contract stipulations, by which the right is strictly construed against the right of person to dispose or deal with their property. Stockholders of a corporation shall enjoy preemptive right to subscribe to ALL ISSUES OR DISPOSITIONS of shares of any class, in proportion to their respective shareholdings. NOTE— The broad phrase ―all issues or disposition of shares of any class is construed to include not only new shares issued in pursuance of an increase in capital stock or from the unissued shares which form part of the ACS, but also covers ―treasury shares.‖ Treasury shares would come under the term ―disposition.‖ Likewise considering that it is not included among the exceptions enumerated therein, where preemptive right shall not extend, the intention is to include it in its application. (SEC Opinion, 14 January 1993). A pre-emptive right is a right claimed against the corporation on unissued shares of its capital stock, and likewise on treasury shares held by the corporation; while the right of first refusal is a right exercisable against another stockholder on his shares of stock. (VILLANUEVA) Basis of Preemptive Right: to preserve the existing proportional rights of the stockholders (CAMPOS) ii.

Limitations to exercise emptive right (Sec. 39):

of

pre-

 Such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public;

 It shall NOT extend to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt  It shall not take effect if denied in the AOI or an amendment thereto. iii. Remedies in case of unwarranted denial:  Injunction  Mandamus The suit should be individual and not derivative because the wrong done is to the stockholders individually  SEC can cancel shares if the third party is not innocent iv. Waiver/ Denial of Preemptive Right  Allowed by the Code provided that it is made in the articles of incorporation - Waiver made through AOI – would bind present and subsequent SH - 2/3 vote of the outstanding capital stock is necessary before waiver is binding - Result of Non-placement of waiver clause in AOI: waiver shall not bind future stockholders but only those who agreed to it  The SH must be given reasonable time within which to exercise their pre-emptive rights. Upon expiration of such period, any SH who did not exercise such will be deemed to have waived it.  May be Necessary so as to not hinder future financing plans of the corporation  Because some new investors may be willing only to invest ONLY if all the new shares will be issued to them (CAMPOS)

5. Right to Vote  Non-voting shares are not entitled to vote except as provided for in the last paragraph of Sec. 6.  Preferred or redeemable shares may be deprived of the right to vote  Fractional shares of stock cannot be voted.  Treasury shares have no voting rights as long as they remain in the treasury.  No delinquent stock shall be voted (Sec. 71)  A transferee of stock cannot vote if his transfer is not registered in the stock and transfer book of the corporation.

D. Remedial Rights 1. Individual Suit A suit brought by the shareholder in his own name against the corporation when a wrong is directly inflicted against him.

2. Representative Suit

MERCANTILE LAW REVIEWER A suit brought by the stockholder in behalf of himself and all other stockholders similarly situated when a wrong is committed against a group of stockholders.

3. Derivative Suit A suit by a shareholder to enforce a corporate cause of action. The corporation is a necessary party to the suit, and the relief which is granted is a judgment against a third person in favour of the corporation (Chua v. CA, 2004) Suits of stockholders based on wrongful or fraudulent acts of directors or other persons. Requisites of Derivative Actions 1) That the person instituting the action stockholder or member at the time the acts or transactions subject of the action occurred and the time the action was filed; 2) That the stockholder exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the AOI, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires. 3) That there is no appraisal right available for the act(s) complained of; and 4) That the suit is not a nuisance or harassment suit. (Rule 8, Interim Rules of Procedure for Intra-Corporate Controversies) Requisites based on jurisprudence 1) The cause of action actually devolves on the corporation, the wrong or harm having been, or being caused to it and not the shareholder filing the suit. (Evangelista vs. Santos, 1950; SMC v. Kahn, 1989). 2) The reliefs sought pertain to the corporation. (Symaco Trading Corp. v. Santos, 2005). Recent rulings on the matter  Status of heirs as co-owners of shares before partition of estate does not make them shareholders until there is compliance with Sec. 63 on the manner of transferring shares, thus the heirs are not automatically registered shareholders of the corporation. (Reyes v. RTC of Makati, 2008)  Stockholder may commence a derivative suit ―for mismanagement, waste or dissipation of corporate assets because of a special injury to him for which he is otherwise without redress. In effect, the suit is an action for specific performance of an obligation owed by the corporation to the stockholders to assist its right of action when the corporation is put on default by the wrongful refusal of the directors or management to make suitable measures for its protection.‖ (Yu v. Yukayguan, June 18, 2009) Bitong v. CA (1998): The power to sue and be sued in any court by a corporation even as a stockholder is lodged in the BOD that exercises its corporate powers and not in

the president or officer thereof. But where corporate directors are guilty of a breach of trust, not of mere error of judgment or abuse of discretion, and intra-corporate remedy is futile or useless, a SH may institute a derivative suit in behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholders. Jurisdiction over derivative suits lies with the RTC (Sec. 5.2, Securities Regulation Code)

E. Obligations of a Stockholder a.

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

A subscription contract is unconditional (i.e., obligation to pay must not be subject to any contingencies) and indivisible (as to the amount and transferability—Fua Cun v. Summers, 1923). Hence, if the subscriber paid 20% of his subscription, he is not entitled to the issuance of certificates corresponding to 20% of the shares. Unpaid claim refers to any unpaid subscription and not to any indebtedness which a subscriber may owe the corporation rising from any other transaction (China Banking Corp. v. CA, 1997) b.

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

GENERAL RULE Subscribers for stock are NOT liable to pay interest on his unpaid subscription EXCEPTION If so required in the by-laws at the rate fixed in the by-laws. If no rate is fixed in the by-laws, such rate shall be deemed to be the legal rate (Sec. 66) NOTES— Transfer for consideration of treasury shares is a sale by the corporation (not subscription). A transfer of previously issued shares by a stockholder to a third person is a sale. Transfer of unissued shares is subscription. Shareholders are not creditors of the corporation with respect to their shareholdings thereto and the principle of compensation or set-off has no application. Subscription contract is NOT required to be in writing. c.

Liability for watered stocks (Sec. 65) i.

Definition

These are shares issued as fully paid when in truth no consideration is paid, or the consideration

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MERCANTILE LAW REVIEWER received is known to be less than the par value or issued value of the shares. (Sec. 65)

102

These include the following:  Issued without consideration (bonus share)  Issued as fully paid when the corporation has received less sum of money than its par or issued value (discounted share)  Issued for consideration other than actual cash (i.e., property or services), the fair valuation of which is less than its par or issued value  Issue stock dividend when there are no sufficient retained earnings or surplus to justify it. NOTE— Subsequent increase in the value of the property used in paying the stock does not do away with the watered stocks. Subsequent increase in the value of the property used in paying the stock does not cure the defect in issuance. The existence of watered stocks is determined at the time of issuance of the stock. ii. Liability of directors or officers Any director or officer of a corporation consenting to the issuance of stocks or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary shall be SOLIDARILY liable with the stockholder concerned to the corporation and its creditors for the difference in value (Sec. 65). d.

Liability for dividends unlawfully paid (Sec. 31 and 43)

e.

Liability for assuming to act as a corporation knowing it to be without authority (Sec. 21)

F. Meetings GENERAL RULE Stockholders‘ or members‘ approval is expressed in a meeting duly called and held for the purpose. EXCEPTION In case of amendment of AOI, approval may be expressed by referendum or written assent of the stockholders or members (Sec. 16) Who May Attend and Vote?  Stockholders, either in person or by proxy  Pledgors or mortgagors (Sec. 55)  Pledgee or mortgagee, IF expressly given such right by the pledgor or mortgagor in writing which is recorded on the corporate books.  Executors, administrators, receivers, and other legal representatives duly appointed by the court, without need of any written proxy.  ALL joint owners of stocks, or any one of them with the consent of ALL the co-owners, unless there is a written proxy, signed by all the coowners  Any one of the joint owners of shares owned in an "and/or" capacity or a proxy thereof

1. Regular or Special a. When and Where When? (Sec. 50) Regular meetings of stockholders or members shall be held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the board of directors or trustees. Where?  Stock: City or municipality where the principal office of the corporation is located, or, if practicable, in the principal office of the corporation: Provided, Metro Manila shall be considered a city or municipality. (Sec. 51)  Non-stock: Any place even outside the place where the principal office is located, within the Philippines (Sec. 93) Notice (Sec. 50)  Regular Meeting—written notice sent to all SH or members at least 2 weeks prior to the meeting, unless a different period is required by the by-laws  Special Meeting—written notice sent at least 1 week prior to the meeting, unless otherwise provided in the by-laws.  Subject to waiver, expressly or impliedly (i.e., attendance despite no notice) Effect of Failure to Give Notice: Failure to give notice would render a meeting VOIDABLE at the instance of an absent stockholder, who was not notified of the meeting (Board v. Tan, 1959).

2. Who Calls the Meetings The president, unless the by-laws provide otherwise. (Sec. 54) Any petitioning stockholder or member upon order of the SEC when there is no person authorized to call a meeting. Such petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present have chosen one of them as presiding officer. (Sec. 50)

3. Quorum (Sec. 50) GENERAL RULE Stockholders representing majority of the OCS or majority of the members EXCEPTION The Code or the by-laws provide otherwise Where quorum is present at the start of a lawful meeting, stockholders present cannot without justifiable cause break the quorum by walking out from said meeting so as to defeat the validity of any act proposed and approved by the majority. (However, stockholders can break the quorum for justifiable causes.) (Johnston vs. Johnston, 1965 CA decision)


4. Minutes of Meetings A record of all the minutes of all meetings of stockholders or members, or of the board of directors or trustees shall be kept and preserved at the principal office of every corporation. Contents:  time and place of holding the meeting;  how the meeting was authorized;  the notice given;  whether the meeting was regular or special, if special its object;  those present and absent; and  every act done or ordered done at the meeting. Upon demand by any director/trustee or SH/member, the following shall also be noted in the minutes:  the time when any director, trustee, stockholder or member entered or left the meeting;  the yeas and nays on any motion or proposition;  the protest of any director/trustee or stockholder/member on any action or proposed action. NOTES— The minutes of any meetings shall be open to inspection by any director/trustee or stockholder/member at reasonable hours on business days. The director/trustee or stockholder/member may demand, in writing, for a copy of excerpts from said records or minutes, at his expense. Any officer or agent of the corporation refusing to allow the examination and copying of the minutes shall be: (1) liable to the director/trustee or stockholder/ member; and (2) guilty of an offense punishable under Sec. 144 (Sec. 74) HOWEVER, the officer of agent may use as a defense that: (1) the person demanding examination or copy thereof made improper use of any information secured through any prior examination of the records or minutes of such corporation or of any other corporation thereby; (2) the person demanding examination or copy acts in bad faith or has no legitimate purpose in making his demand.

IX. Board of directors and trustees

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A. Repository of Corporate Powers GENERAL RULE The corporate powers of the corporation shall be exercised, all business conducted and all property of such corporation controlled and held by the board of directors or trustees. (Sec. 23) EXCEPTIONS  In case of an Executive Committee authorized in the by-laws; (Sec. 35)

duly

 In case of a contracted manager which may be an individual, a partnership, or another corporation. Note: In case the contracted manager is another corporation, the special rule in Sec. 44 applies.  In case of close corporations, the stockholders may manage the business of the corporation instead by a board of directors, if the articles of incorporation so provide. (Sec. 97) Spouses Constantine Firme v. Bukal Enterprises and Development Corporation (2003): The power to purchase real property is vested in the board of directors or trustees. While a corporation may appoint agents to negotiate for the purchase of real property needed by the corporation, the final say will have to be with the board, whose approval will finalize the transaction. a. 1) 2) 3)

4)

Requisites of a VALID Corporate Act by the Board of Directors

The Board must act as a BODY in a meeting. There must be a VALIDLY constituted meeting. There act must be supported by a MAJORITY OF THE QUORUM duly assembled (Exception: Election of officers requires a vote of majority of all the members of the board) The act must be within the powers conferred on the Board. b.

Limitations on Powers Directors/Trustees

of

Board

of

 Limitations imposed by the Constitution, statutes, articles of incorporation or by-laws;  Certain acts of the corporation that require joint action of the stockholders and board of directors: - Removal of director (Sec. 28) - Amendments of AOI (Sec. 16) - Fundamental changes (Sec. 6) - Declaration of stock dividends (Sec. 43) - Entering into management contracts (Sec. 44) - Fixing of consideration of non-par shares (Sec. 62) - Fixing of compensation of directors (Sec. 30)

MERCANTILE LAW REVIEWER  Cannot exercise powers not possessed by the corporation.

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B. Tenure, Qualifications and Disqualifications of Directors a.

Tenure

Directors shall hold office for one (1) year until their successors are elected and qualified (Sec. 23). Term: One (1) year Tenure: The period within which the director actually holds office, including the holdover period after the end of his term. Valle Verde Country Club v. Africa, 2009: In several cases, we have defined "term" as the time during which the officer may claim to hold the office as of right, and fixes the interval after which the several incumbents shall succeed one another. The term of office is not affected by the holdover. The term is fixed by statute and it does not change simply because the office may have become vacant, nor because the incumbent holds over in office beyond the end of the term due to the fact that a successor has not been elected and has failed to qualify. Term is distinguished from tenure in that an officer‘s "tenure" represents the term during which the incumbent actually holds office. The tenure may be shorter (or, in case of holdover, longer) than the term for reasons within or beyond the power of the incumbent. Based on the above discussion, when Section 239 of the Corporation Code declares that "the board of directors…shall hold office for one (1) year until their successors are elected and qualified," we construe the provision to mean that the term of the members of the board of directors shall be only for one year; their term expires one year after election to the office. The holdover period – that time from the lapse of one year from a member‘s election to the Board and until his successor‘s election and qualification – is not part of the director‘s original term of office, nor is it a new term; the holdover period, however, constitutes part of his tenure b.

Qualifications

 If STOCK, director must own at least 1 share of the capital stock, which stock shall stand in his own name (Sec. 23). If NON-STOCK, trustee must be a member.  Majority of the directors/trustees must be residents of the Philippines.  Natural person  Of Legal Age  Other qualifications as may be prescribed in the by-laws of the corporation.

c. Disqualifications  Not have been convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6 years; or  A violation of the Corporation Code, committed within five years from the date of his election. (Sec. 27)

C. Elections (Sec. 24) a. Quorum There must be present, in person or by representative authorized to act by written proxy, the owners of majority of the OCS or majority of the members entitled to vote in the meeting. Election must be by ballot if requested. A stockholder cannot be deprived in the articles of incorporation or in the by-laws of his statutory right to use any of the methods of voting in the election of directors. No delinquent stock shall be voted. The candidates receiving the highest number of votes shall be declared elected. b.

Methods of Voting

i. Straight Voting Every stockholder may vote such number of shares for as many persons as there are directors to be elected. ii. Cumulative voting for one candidate A stockholder is allowed to concentrate his votes and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal. ILLUSTRATION— If there are 5 directors to be elected and Pedro, as shareholder, has 100 shares, Pedro can give 500 (5 x 100 shares) votes to just one candidate. iii. Cumulative voting by distribution A stockholder may cumulate his shares by multiplying the number of his shares by the number of directors to be elected and distribute the same among as many candidates as he shall see fit. ILLUSTRATION— In the illustration in (b), Pedro may choose to give 100 votes to candidate 1, 100 votes to candidate 2, 100 votes to candidate 3, 150 votes to candidate 4, and 50 votes to candidate 5.


D. Removal (Sec. 28) GENERAL RULE Removal may be with or without cause. But Removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Section 24 Other requisites:  Vote of the stockholders representing at least 2/3 of the OCS or the members entitled to vote  At a regular or special meeting after proper notice is given

E. Filling of Vacancies (Sec.29) a.

Vacancy (1) by removal; or (2) by expiration of term; or (3) when the remaining directors do not constitute a quorum

Vacancy/ies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee elected to fill a vacancy in shall be elected only for the unexpired term of his predecessor in office. b.

Vacancy by reason of increase in the number of the directors/trustees

Vacancy/ies must be filled by the stockholders:  in a regular or special meeting called for that purpose; or  in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting. c. Vacancy by other cause Vacancy/ies may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum. A director or trustee elected to fill a vacancy in shall be elected only for the unexpired term of his predecessor in office.

F. Compensation (Sec. 30) GENERAL RULE Directors are only entitled to per diems, which are reasonable. EXCEPTION When AOI, by-laws, or an advance contract provides for compensation. Compensation other than per diems may also be granted to directors by the vote of the stockholders representing at least a majority of the OCS at a regular or special stockholders‘ meeting.

The total yearly compensation of directors shall not exceed 10% of the net income before income tax of the corporation during the preceding year. Western Institute of Technology v. Salas (1997): The position of being chairman and Vice-Chairman, like that of treasurer and secretary, are not considered directorship positions but officership positions that would entitle the occupants to compensation. Likewise, the limitation placed under Sec. 30 of the Corporation Code that directors cannot receive compensation exceeding 10% of the net income of the corporation would not apply to the compensation given to such positions since it is being given in their capacity as officers of the corporation and not as board members.

G. Disloyalty Duty of Loyalty Directors and trustees should not acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees, otherwise they shall be held liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. (Sec. 31) Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock (Sec. 34) Doctrine of Corporate Opportunity Unless his act is ratified, a director shall refund to the corporation all the profits he realizes on a business opportunity which:  corporation is financially able to undertake  from its nature, is in line with corporation‘s business and is of practical advantage to it; and  one in which the corporation has an interest or a reasonable expectancy. The rule shall be applied notwithstanding the fact that the director risked his own funds in the venture. (Sec. 34) By embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of his corporation. Hence, the law does not permit him to seize the opportunity even if he will use his own funds in the venture. (SUNDIANG AND AQUINO) NOTE: Differences between Section 31 and Section 34: First, while both involve the same subject matter (business opportunity) they concern different personalities; Sec. 34 is applicable only to directors

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MERCANTILE LAW REVIEWER and not to officers, whereas Sec. 31 applies to directors, trustees and officers.

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Second. Sec. 34 allows a ratification of a transaction by a self-dealing director by vote of stockholders representing at least 2/3 of the outstanding capital stock (VILLANUEVA)

H. Business Judgment Rule GENERAL RULE Directors cannot be held liable for mistakes or errors in the exercise of their business judgment if they acted in good faith, with due care & prudence. Contracts intra vires entered into by the board of directors are binding upon the corporation & courts will not interfere. EXCEPTION If the contracts are so unconscionable & oppressive as to amount to a wanton destruction of the rights of the minority or if they violate their duties under Sections 31 & 34. Note: Dean Villanueva opined that a derivative suit may be an exception to such Rule: this occurs when it is apparent that the Board is not in a position to validly exercise its business judgment for the protection of the corporation, e.g., when the Board itself has committed an act causing damage to the corporation or when the Board is placed in a conflict of interests scenario whereby it is unlikely that it would use such business discretion to file such suit for the best interest of the corporation. CONSEQUENCES OF THE BUSINESS JUDGMENT RULE:  Resolutions and transactions entered into by the Board within the powers of the corporation cannot be reversed by the court not even on the behest of the stockholders.  Directors and officers acting within such business judgment cannot be held personally liable for such acts. (Philippine Corporate Law, Cesar Villanueva, 2009 ed. P.328)

I. Solidary Liability for Damages  Willful and knowingly voting for and assenting to patently unlawful acts of the corporation; (Sec. 31)  Gross negligence or bad faith in directing the affairs of the corporation; (Sec. 31)  Aquiring any personal or pecuniary interest in conflict of duty; (Sec. 31)  Consenting to the issuance of watered stocks, or, having knowledge thereof, failing to file objections with secretary; (Sec. 65)  Agreeing or stipulating in a contract to hold himself liable with the corporation; or  By virtue of a specific provision of law

J. Liability for Watered Stocks Watered Stocks – stocks issued for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value. Any director or officer of a corporation consenting to the issuance of watered stocks or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary shall be solidarily liable with the stockholder concerned to the corporation and its creditors for the difference in value (Sec. 65).

K. Personal Liabilities GENERAL RULE Members of the Board, who purport to act in good faith for and in behalf of the corporation within the lawful scope of their authority, are not liable for the consequences of their acts. When the acts are of such nature and done under those circumstances, they are attributed to the corporation alone and no personal liability is incurred. (Price v. Innodata Phils., Inc., 2008) The provisions on seizing corporate opportunity and disloyalty (Secs. 31 and 34) shall also apply to corporate officers NOTE— Members of the BOD who are also officers are held to a more stringent liability because they are incharge of day-to-day activities (CAMPOS) DOCTRINE OF LIMITED LIABILITY Shields the corporators from corporate liability beyond their agreed contribution to the capital or shareholding in the corporation.

DOCTRINE OF IMMUNITY Protects a person acting for and in behalf of the corporation from being himself personally liable for his authorized actions

Tramat Mercantile, Inc. vs. CA, (1994), reiterated in Atrium Management Corp. v. CA, (2001): Liability of Director, Trustee or Officer (Asked in 96 and 97) Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when:  He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons;  He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;  He agrees to hold himself personally and solidarily liable with the corporation; or

MERCANTILE LAW REVIEWER 

He is made, by a specific provision of law, to personally answer for his corporate action

L. Responsibility for Crimes Since a corporation as a person is a mere legal fiction, it cannot be proceeded against criminally because it cannot commit a crime in which personal violence or malicious intent is required. Criminal action is limited to the corporate agents guilty of an act amounting to a crime and never against the corporation itself (West Coast Life Ins. Co. v. Hurd [1914], Time Inc. v. Reyes [1971]). Since the BOD is the repository of corporate powers and acts as the agent of the corporation, the directors may be held criminally liable. The Trust Receipts Law recognizes the impossibility of imposing the penalty of imprisonment on a corporation. Hence, if the entrustee is a corporation, the law makes the officers or employees or other persons responsible for the offense liable to suffer the penalty of imprisonment. The reason is obvious: corporations, partnerships, associations and other juridical entities cannot be put to jail. Hence, the criminal liability falls on the human agent responsible for the violation of the Trust Receipts Law. (Ong v. CA, 2003)

M. Special Facts Doctrine Even though a director may not be under the obligation of a fiduciary nature to disclose to a shareholder his knowledge affecting the value of the shares, that duty may exist in special cases. (Strong v. Repide, 1909) GENERAL RULE (Majority view) Directors owe no fiduciary duty to stockholders but they may deal with each other at fair and reasonable terms, as if they were unrelated. No duty to disclose facts known to the director or officer. EXCEPTION Special Facts Doctrine: Conceding the absence of a fiduciary relationship in the ordinary case, courts nevertheless hold that where special circumstances or facts are present which make it inequitable for the director to withhold information from the stockholder, the duty to disclose arises and concealment is fraud. (Strong v. Repide, 1909)

N. Inside Information

Since loss and prejudice to the corporation is not a requirement for liability, the corporation has a cause of action as long as there is unfair use of inside information It is inside information if it is not generally available to others and is acquired because of the close relationship of the director or officer of the corporation

O. Contracts 1. By self-dealing directors with the corporation

GENERAL RULE A contract of the corporation with one or more of its directors or trustees is VOIDABLE, at the option of such corporation. (Sec. 32) EXCEPTION Such contract is VALID if all of the following conditions are present:  That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting;  That the vote of such director or trustee was not necessary for the approval of the contract;  That the contract is fair and reasonable under the circumstances; and  That in case of an officer, the contract has been previously authorized by the board of directors. Ratification In case of absence of the first two conditions above, contract may be ratified if:  Stockholders representing at least 2/3 of the outstanding capital stock or at least 2/3 of the members in a meeting called for the purpose voted to ratify the contract.  Full disclosure of the adverse interest of the directors or trustees involved is made at such meeting.  Contract is fair and reasonable under the circumstances

2. Between

corporations interlocking directors i.

1

The fiduciary position of insiders , directors, and officers prohibits them from using confidential 1

information relating to the business of the corporation to benefit themselves or any competitor corporation in which they may have a mere substantial interest.

“Insider” means: (a) the issuer; (b) a director or officer (or person performing similar functions) of, or a person controlling the issuer; (c) a person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is

with

If the interests of the interlocking director in the corporations are both

not generally available to the public; (d) a government employee, or director, or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or (e) a person who learns such information by a communication from any of the foregoing insiders (§3.8, Sec Regulations Code)

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MERCANTILE LAW REVIEWER substantial (stockholdings exceed 20% of outstanding capital stock).

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GENERAL RULE A contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone. (Sec. 32) EXCEPTION If contract is fraudulent or not fair and reasonable ii.

1)

2) 3)

If the interest of the interlocking director in one of the corporations is nominal (stockholdings 20% or less) while substantial in the other, the contract shall be VALID, if the following conditions are met:

The presence of such director or trustee in the board meeting in which the contract was approved was NOT necessary to constitute a quorum for such meeting That the vote of such director or trustee was not necessary for the approval of the contract That the contract is fair and reasonable under the circumstances.

Where (1) and (2) are absent, the contract can be ratified by the vote of the stockholders representing at least 2/3 of the outstanding capital stock or at least 2/3 of the members in a meeting called for the purpose voted to ratify the contract, provided that:  full disclosure of the adverse interest of the directors/trustees involved is made on such meeting;  the contract is fair and reasonable under the circumstances.

P. Executive Committee 1. Creation A body created by the by-laws and composed of some members of the board which, subject to the statutory limitations, has all the authority of the board to the extent provided in the board resolution or by-laws (See Sec. 35).

2. Limitations on its Powers Must be provided for in the by-laws and composed of at least 3 members of the board appointed by the board. Must act by a majority vote of all of its members. CANNOT act on the following:  Matters needing stockholder approval (Sec. 35);  Filling up of board vacancies;  Amendment, repeal or adoption of by-laws (Sec. 35);  Amendment or repeal of any resolution of the Board which by its express terms is not amendable or repealable (Sec. 35);  Cash dividend distribution (Sec. 35); and

 Acts which would render the BOD powerless and free from all responsibilities imposed on it by law (CAMPOS)

Q. Meetings 1. Regular or Special Who May Attend? The members of the Board themselves; directors in Board meetings cannot be represented or voted by proxies.

a. When and Where When? (Sec.53)  Regular meetings of directors or trustees shall be held monthly, unless the by-laws provide otherwise.  Special meetings of the board of directors or trustees may be held at any time upon the call of the president or as provided in the by-laws. Where? (Sec. 53) Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the by-laws provide otherwise.

b.

Notice (Sec. 53)

Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least one (1) day prior to the scheduled meeting, unless otherwise provided by the by-laws. Notice of meeting is subject to waiver.

2. Who Presides (Sec. 54) The president presides, unless the by-laws provide otherwise.

3. Quorum (Sec. 25) GENERAL RULE Majority of the number of directors or trustees as fixed in the articles of incorporation. EXCEPTION Unless the articles of incorporation or the by-laws provide for a greater majority, or in case of election of officers where a vote of a majority of all the members of the board is needed.

4. Rule on Abstention An abstention is counted as an affirmative vote insofar as it may be construed as an acquiescence in the action of those who vote affirmatively. This manner of counting is obviously based on what is deemed to be a presumption as to the intent of the one abstaining, namely, to acquiesce in the action of those who vote affirmatively, but which presumption, being merely prima facie, would not

MERCANTILE LAW REVIEWER hold in the face of clear evidence to the contrary. It is pertinent to inquire into the facts and circumstances which attended the voting by the members to determine whether or not such a construction would govern. (Lopez v. Ericta, G.R. No. L-32991, June 29, 1972)

X. Capital affairs A. Certificate of Stock 1. Nature of the Certificate A certificate of stock is an instrument formally issued by the corporation with the intention that the same constitute the best evidence of the rights and status of a SH (not a condition precedent to the acquisition of such rights).

2. Uncertificated Shares Uncertificated Shares/Securities Security evidenced by electronic or similar records (Sec. 3.14, Securities Regulation Code) Notwithstanding Sec. 63 of the Corporation Code (certificate of stock and transfer of shares), a corporation whose securities are registered pursuant to the SRC or listed on securities exchange may:  If so resolved by the Board of Directors and agreed by a shareholder, investor or securities intermediary, issue shares to, or record the transfer of some or all its shares into the name of such shareholders, investors or, securities intermediary in the form of uncertified securities, The use of uncertified securities in these circumstances shall be without prejudice to the rights of the securities intermediary subsequently to require the corporation to issue a certificate in respect of any shares recorded in its name; and  If so provided in its articles of incorporation and by-laws, issue all of the shares of a particular class in the form of uncertificated securities and subject to a condition that investors may not require the corporation to issue a certificate in respect of any shares recorded in their name. Transfers of uncertificated securities, how made  Valid as between parties - validly made and consummated by appropriate book-entries in the securities intermediaries, or in the stock and transfer book held by the corporation or the stock transfer agent. A transfer made pursuant to the foregoing has the effect of delivery of a security in bearer form or duly indorsed in blank representing the amount of security or right transferred,

including the unrestricted negotiability of that security by reason of such delivery.  Valid as to corporation – when the transfer is recorded in the books of the corporation so as to show the names of the parties to the transfer and the number of shares transferred (Sec. 43, Securities Regulation Code).

3. Negotiability Theory of Quasi-Negotiability Certificates indorsed in blank – where the stockholder indorses his certificate in blank in such a manner as to clothe whoever may be in possession of it with apparent authority to deal with the shares as the latter‘s own, he will be estopped from claiming the shares as against a bonafide purchaser. (Santamaria v. Hongkong & Shanghai Bank, 1951) i. Requirements for Valid Transfer of Stocks (Sec. 63) For a valid transfer of stocks, the requirements are as follows:  There must be delivery of the stock certificate;  The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer; and  To be valid against third parties, the transfer must be recorded in the books of the corporation. (Bitong v. Court of Appeals, G.R. No. 123553, July 13, 1998) No shares of stock against which the corporation holds an unpaid claim shall be transferable in the books of the corporation.

4. Issuance i.

Full Payment

GENERAL RULE No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid (Sec. 64) EXCEPTION In Baltazar v Lingayen Gulf Electric Power Company, 1965), where it was the practice of the corporation since its inception to issue certificates of stock to its individual SHs for unpaid shares of stock and to give full voting power to shares fully paid. ii.

Payment Pro-rata

Nava Peers Mktg. Corp. and Fua Cun v. Summers (1923): The entire subscription must be paid first before the certificates of stock can be issued. Partial payments are to be applied pro rata to each share of stock subscribed.

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5. Stock and Transfer Book (Sec. 74,

110

par. 4) i.

Contents

 a record of all stocks in the names of the stockholders alphabetically arranged;  the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment;  a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and  such other entries as the by-laws may prescribe. ii.

Who May Make Valid Entries

 a licensed stock transfer agent; or  the Secretary of the stock corporation provided all rules and regulations imposed on stock transfer agents shall be applicable, except payment of license fee.

6. Lost or Destroyed Certificates (Sec. 73)

Procedure for re-issuance in case of loss, stolen or destroyed certificates:  Registered owner to file an affidavit of loss with the corporation.  Publication of notice of loss in a newspaper of general circulation published in the place where the corporation has its principal office, once a week for 3 consecutive weeks at the expense of the owner of the certificate of stock  Cancellation of the certificate in the books of the corporation and issuance of new certificates, after the expiration of 1 year from the date of the last publication and there is no contest. The right to make such contest shall be barred after the expiration of the one-year period.  Issuance of new certificates before 1 year period if the registered owner files a bond and there is no pending contest regarding the ownership of said certificates. NOTE— Except in cases of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against the corporation which shall have issued certificates of stock in lieu of those lost, stolen or destroyed pursuant to the above procedure.

7. Situs of the Shares of Stock It is a general rule that for purposes of execution, attachment and garnishment, it is not the domicile of the owner of a certificate but the domicile of the corporation which is decisive. (Chua Guan v. Samahang Magsasaka, Inc., G.R. No. 42091, November 2, 1935)

B. Watered Stocks 1. Definition These are shares issued as fully paid when in truth con consideration is paid, or the consideration received is known to be less than the par value or issued value of the shares. (Sec. 65) These include the following:  Issued without consideration (bonus share)  Issued as fully paid when the corporation has received less sum of money than its par or issued value (discounted share)  Issued for consideration other than actual cash (i.e., property or services), the fair valuation of which is less than its par or issued value  Issue stock dividend when there are no sufficient retained earnings or surplus to justify it. NOTE— Subsequent increase in the value of the property used in paying the stock does not do away with the watered stocks. Subsequent increase in the value of the property used in paying the stock does not cure the defect in issuance. The existence of watered stocks is determined at the time of issuance of the stock

2. Liability of Directors for Watered Stocks Any director or officer of a corporation consenting to the issuance of stocks or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary shall be solidarily liable with the stockholder concerned to the corporation and its creditors for the difference in value (Sec. 65).

3. Trust Fund Doctrine for Liability for Watered Stocks

Where the corporation issues watered stock and thereby assumes an ostensible capitalization in excess of its real assets, the transaction necessarily involves the misleading of subsequent creditors, and whether done with that purpose actually in mind or not, is at least a constructive fraud upon creditors. Hence, it is held that recovery may be had by a creditor in such case, even though the corporation itself has no cause of action against the stockholders. Some of the earlier decisions put the right of recovery in such a case upon the so-called ―trust fund doctrine.‖ In any view of the matter, however, the creditors‘ right of action to compel the making good of the representation as to the corporation‘s capital is based on fraud, and the trust find doctrine is only another way of expressing the same underlying idea. (De Leon, 2010) Despite the view of foreign authors that the fraud theory is the prevailing view, it would seem that in the Philippine jurisdiction, the trust fund doctrine on

MERCANTILE LAW REVIEWER watered stock prevails. In Philippine Trust Corp. v. Rivera, the Supreme Court held – It is established doctrine that subscription to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner an under the conditions prescribed by the statute or the charter or the articles of incorporation. Moreover, strict compliance with the statutory regulations is necessary. (Villanueva, 2001)

C. Payment of Balance Subscription (Sec. 66 & 67)

of

1. Call by Board of Directors The board of directors of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary. Payment shall be made on the date specified in the contract of subscription or on the date stated in the call. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided for in the by-laws. If within 30 days from said date no payment is made, all stocks covered by said subscription shall become delinquent and subject to sale under Sec. 68 unless the BOD orders otherwise. There are two (2) instances when call is not necessary to make the subscriber liable for payment of the unpaid subscription:  When, under the terms of the subscription contract, subscription is payable, not upon call, but immediately, or on a specified day, or when it is payable in installments at specified times; and  If the corporation becomes insolvent, which makes the liability on the unpaid subscription due and demandable regardless of any stipulation to the contrary in the subscription agreement. (Villanueva, 2001)

2. Notice Requirement Where call is necessary, notice must be given to the stockholder concerned. A call without notice to the subscriber is practically no call at all.

The notice is regarded as a condition precedent to the right of recovery. It must, therefore, be alleged and proved to maintain an action for the call (Baltazar v. Lingayen Gulf Electric Power Co., Inc.). The right to notice of call, however, may be waived by the subscriber. (De Leon, 2010)

D. Sale of Delinquent Shares (Sec. 68) Delinquent Shares - These are shares for which the corresponding subscription or balance remains unpaid after a grace period of 30 days from the date specified in the contract of subscription or from the date stated in the call made by the BOD. (Sec 67)

1. Effect of Delinquency (Sec. 71) No delinquent stock shall be voted for or be entitled to vote or to representation at any stockholders‘ meeting The holder thereof shall NOT be entitled to any of the rights of a stockholder except the right to dividends. Such shares shall be subject to delinquency sale.

2. Call by Resolution of the Board of Directors (Sec. 68)

The board of directors may, by resolution, order the sale of delinquent stock and shall specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than 30 days nor more than 60 days from the date the stocks became delinquent.

3. Notice of Sale If the BOD resolves to proceed with the sale: 1. Notice of sale and a copy of the resolution shall be sent to every delinquent stockholder either personally or by registered mail. 2. Notice of sale shall furthermore be published once a week for two (2) consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located.

4. Auction Sale Procedure for delinquency sale (Sec. 68)  Call for payment made by the BOD.  Notice of call served on each stockholder.  Notice of delinquency issued by the BOD upon failure of the stockholder to pay within 30 days from date specified.  Service of notice of delinquency on the nonpaying subscriber, PLUS publication in a newspaper of general circulation in the province or city where the principal office of the corporation is located, once a week for two (2) consecutive weeks.

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Note: Requirements on notice and publication are mandatory. Lacking such requirements, the stockholder may question the sale as provided under Sec. 69.  Public auction - the highest bidder is one who is willing to pay the balance of the subscription for the least number of shares. If there are no bidders, the corporation must bid for the whole number of shares regardless of how much the SH has paid. Such stocks will pertain to the corporation as fully paid treasury stocks. The delinquent stockholder may stop the auction by paying to the corporation or before the date specified for the sale the balance due on his subscription, plus accrued interest, costs of advertisement and expenses of the sale. Otherwise, the public auction shall proceed and be sold to the bidder that will pay the full amount of the balance of subscription with accrued interest, costs and expenses of the sale, for the smallest number of shares or fraction of a share. The stock so purchased shall be transferred to such purchases in the books of the corporation and a certificate of such stuck shall be issued in his favor. The remaining shares, if any,shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares. Irregularities in the delinquency sale (Sec. 69)  Action to recover delinquent stock must be on the ground of irregularity or defect in the notice of sale.  Party seeking to recover must first pay or tender to the party holding the stock the sum for which the same was sold, with interest from the date of sale at the legal rate.  The action shall be commenced within six months from the date of sale.

E. Alienation of Shares 1. Allowable Restrictions on the Sale of Shares

GENERAL RULE Shares of stock so issued are personal property and may be transferred (Sec. 63). (FREE TRANSFERABILITY OF SHARES) EXCEPTION In CLOSE corporations, restrictions on the right to transfer shares may be provided in the AOI, by-laws and certificates (Sec. 98).

2. Sale of Partially Paid Shares Under Section 63 of the Corporation Code, no shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. Therefore, a corporation may

refuse to acknowledge and register a sale or assignment of shares which are not fully paid, and may continue to hold the original subscriber liable on the payment of the subscription. However, in China Banking Corp. v. CA, the court said that the above principle in section 63 cannot be utilized by the corporation to refuse to recognize ownership over pledged shares purchased at public auction. The term ―unpaid claims‖ refers to ―any unpaid claims arising from unpaid subscription, and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any other transactions. Obligations arising from unpaid monthly dues do not fall within the coverage of Section 63.‖ (Villanueva, 2001)

3. Sale of a Portion of Shares not Fully Paid

The SEC has opined on several occasions that a stockholder who has not paid the full amount of his subscription cannot transfer part of his subscription in view of the indivisible nature of a subscription contract. The reason behind the principle of disallowing transfer of not fully paid subscription to several transferee is that it would be difficult to determine whether or not the partial payments made should be applied as full payment for the corresponding number of shares which can only be covered by such payment or as proportional payment to each and all of the entire number of subscribed shares, and it would be difficult to determine the unpaid balance to be assumed by each transferee. (Villanueva, 2001)

4. Sale of All of Shares Not Fully Paid On the other hand, the SEC has opined that the entire subscription, although not yet fully paid, may be transferred to a single transferee, who as a result of the transfer must assume the unpaid balance. It is necessary, however, to secure the consent of the corporation since the transfer of subscription rights and obligations contemplates a novation of contract which under Article 1293 of the Civil code cannot be made without the consent if the creditor. (Villanueva, 2001)

5. Sale of Fully Paid Shares Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-infact or other person legally authorized to make the transfer. No transfer however shall be valid except as between the parties until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred (Sec. 63, Code)

6. Requisites of a Valid Transfer Same as requirements for valid transfer of stocks


7. Involuntary Dealings The right of a stockholder to pledge, mortgage or otherwise encumber his shares is recognized under Section 55 of the Corporation Code, which regulates the manner of voting on pledged or mortgaged shares. If the restriction on the right to pledge or mortgage shares of stock absolutely prohibits the stockholders from pledging or mortgaging their shares without the consent of the board of directors, it would be violative of the statutory right of the stockholders to encumber shares of stock as allowed in Section 55. However, when the restriction merely allows the corporation or existing stockholders to accept the offer within the option period, and thereafter, if no one accepts the offer, the stockholder is free to pledge or mortgage his shares in favor of any third party, such provision is reasonable, valid and binding. By the strict application of Section 63 of the Corporation Code to cover only the sale, assignment or absolute disposition of shares of stock, the Supreme Court has placed a bias against voluntary sales, assignments or dispositions of shares of stock vis-à-vis pledges, mortgages, attachment or levy thereof. To be valid and binding on third parties, the voluntary sale, assignment or disposition of shares requires the essential element of registration in the stock and transfer book; otherwise the sale, assignment or disposition is considered void as to third parties, even when they have actual notice. Whereas, when it comes to pledge, mortgage, encumbrance, attachment or levy of shares, registration thereof in the stock and transfer book is not essential either for validity or as a species of notifying third parties. (Villanueva, 2001)

XI. Dissolution and liquidation Dissolution of a corporation is the extinguishment of its franchise and the termination of its corporate existence or business purpose.

A. Modes of Dissolution 1. Voluntary i.

Where No Creditors are Affected (Sec. 118)

Notice of the meeting should be given to the stockholders or members by personal delivery or registered mail at least 30 days prior to the meeting. The notice of meeting should also be published for 3 consecutive weeks in a newspaper published in the place, where the principal office of said corporation is located. If no newspaper is published in such place, then in a newspaper of general circulation in the Philippines.

The resolution to dissolve must be approved by the majority of the directors/trustees and approved by the stockholders representing at least 2/3s of the OCS or 2/3 of members. A copy of the resolution shall be certified by the majority of the directors or trustees and countersigned by the secretary. The signed and countersigned copy will be filed with the SEC and the latter will issue the certificate of dissolution. NOTE— Thus, except for the expiration of its term, no dissolution can be effective without some act of the state (Daguhoy Enterprises v. Ponce, 1954) ii.

Where Creditors are Affected (Sec. 119)

A petition shall be signed by a majority of its board of directors or trustees or other officers having management of its affairs. The petition must be verified by its president, or secretary or one of its director or trustees. Approval of the stockholders representing at least 2/3 of the OCS or 2/3 of members in a meeting called for that purpose. Filing of a petition with the SEC signed by majority of directors or trustees or other officers having the management of its affairs verified by the President or Secretary or Director. Claims and demands must be stated in the petition. If the petition is sufficient in form and substance, the SEC shall issue an order fixing a hearing date for objections. A copy of the order shall be published at least once a week for 3 consecutive weeks in a newspaper of general circulation, or if there is no newspaper in the city or municipality of the principal office, posting for 3 consecutive weeks in 3 public places is sufficient. Objections must be filed no less than 30 days nor more than 60 days after the entry of the Order. After the expiration of the time to file objections, a hearing shall be conducted upon prior 5 day notice to hear the objections. Judgment shall be rendered dissolving the corporation and directing the disposition of assets. The judgment may include appointment of a receiver. iii. By Shortening of Corporate Term (Sec. 120) A voluntary dissolution may be effected by amending the AOI. Upon approval of the amended AOI or the

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expiration of the shortened term, as the case may be, the corporation shall be deemed dissolved without any further proceedings

2. Involuntary i.

By Expiration of Corporate Term

Once the period expires, the corporation is automatically dissolved without any other proceeding and it cannot thereafter be considered a de facto corporation. ii.

Failure to Organize and Commence Business within Two Years from Incorporation (Sec. 22)

Failure to formally organize and commence the transaction of its business or construction of its works within two years - its corporate powers shall cease and the corporation shall be deemed dissolved Transacting business implies a continuity of acts or dealings in the accomplishment of the purpose for which the corporation was formed (Mentholatum v. Mangaliman, 1946) Formal organization includes not only the adoption of the by-laws but also the establishment of the body which will administer the affairs of the corporation and exercise its powers Failure to operate for at least 5 consecutive years after commencement of business - ground for suspension or revocation of its corporate franchise or certificate of incorporation. NOTE— The corporation may show that the failure to commence its business or to continuously operate is due to causes beyond its control (Sec. 22). iii. Legislative Dissolution The inherent power of Congress to make laws carries with it the power to amend or repeal them. Involuntary corporate dissolution may be effected through the amendment or repeal of the Corporation Code. The limitations on the power to dissolve corporations by legislative enactment are as follows: 1. Under the Constitution, the amendment, alteration, or repeal of the corporate franchise of a public utility shall be made only ―when the common good so requires‖; 2. Under Section 145 of the Code, it is provided that: ―No right or remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof‖;

3.

While Congress may provide for the dissolution of a corporation, it cannot impair the obligation of existing contracts between the corporation and third persons, or take away the vested rights of its creditors. (De Leon, 2010) iv. Dissolution by the SEC on Grounds Under Existing Laws (Sec. 121) A corporation may be dissolved by the SEC, upon a verified complaint and after proper notice and hearing, on the following grounds (Sec. 6, par i, PD 902-A):  Fraud in procuring its certificate of registration  Serious misrepresentation as to what the corporation can or is doing to the great prejudice of or damage to the general public  Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts which would amount to a grave violation of its franchise  Continuous inoperation for a period of at least five years  Failure to file by-laws within the required period  Failure to file required reports in appropriate forms as determined by the Commission within the prescribed period  Other grounds Other grounds:  Violation by the corporation of any provision of the Corporation Code (Sec. 144 BP 68)  In case of a deadlock in a close corporation, and the SEC deems it proper to order the dissolution of the corporation as the only practical solution to the dispute (Sec. 104 BP 68)

B. Methods of Liquidation Liquidation is the process by which all the assets of the corporation are converted into liquid assets (cash) in order to facilitate the payment of obligations to creditors, and the remaining balance if any is to be distributed to the stockholders. It is a proceeding in rem.

1. By the Corporation Itself Under Section 122 of the Corporation Code, a corporation whose corporate existence is terminated in any manner continues to be a body corporate for three (3) years after its dissolution for purposes of prosecuting and defending suits by and against it and to enable it to settle and close its affairs, culminating in the disposition and distribution of its remaining assets. It may, during the three-year term, appoint a trustee or a receiver who may act beyond that period. The termination of the life of a corporate entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity. If the three-year extended life has expired without a trustee or receiver having been expressly designated by the corporation, within that period, the board of directors (or trustees) itself, may be permitted to so

MERCANTILE LAW REVIEWER continue as "trustees" by legal implication to complete the corporate liquidation. (Pepsi-Cola Products Philippines, Inc. v. Court of Appeals, G.R. No. 145855, November 24, 2004)

2. Conveyance to a Trustee within a 3-Year Period

From and after any such conveyance by the corporation of its property in trust for the benefit of its SH/members/creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest. "the trustee (of a dissolved corporation) may commence a suit which can proceed to final judgment even beyond the three-year period (of liquidation) . . . , no reason can be conceived why a suit already commenced by the corporation itself during its existence, not by a mere trustee who, by fiction, merely continues the legal personality of the dissolved corporation, should not be accorded similar treatment — to proceed to final judgment and execution thereof." (Reburiano v. Court of Appeals, G.R. No. 102965, January 21, 1999)

3. By Management Committee or Rehabilitation Receiver

However, the mere appointment of a receiver, without anything more does not result in the dissolution of the corporation nor bar it from the existence of its corporate rights (Leyte Asphalt & Mineral Oil Co. Ltd., v. Block Johnston & Breenbrawn, 1928) Upon five (5) day's notice, given after the date on which the right to file objections as fixed in the order has expired, the Commission shall proceed to hear the petition and try any issue made by the objections filed; and if no such objection is sufficient, and the material allegations of the petition are true, it shall render judgment dissolving the corporation and directing such disposition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation (Sec. 119, Code)

4. Liquidation after Three Years Phil. Veterans Bank v. Employees Union (2001): Q: What is the difference between Liquidation and Rehabilitation? A: Liquidation is the winding up of a corporation so that assets are distributed to those entitled to receive them. It is the process of reducing assets to cash, discharging liabilities and dividing surplus or loss. On the other hand, rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful

operation and solvency. Both cannot be undertaken at the same time.

XII.

Other corporations

A. Close Corporations (Corporation Code, Title XII) Section 96: Close corporations are those whose AOI provide the following: a) all of the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more that a specified number of persons, not exceeding 20 b) all of the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by the Code c) the corporation shall not list in any stock exchange or make any public offering of any of its stock of any class d) at least 2/3 of its voting stock must not be owned or controlled by another corporation which is not a close e) must not be a mining or oil company, stock exchange, bank, insurance company, public utility, educational institution or corporation vested with public interest The AOI must state that the number of stockholders shall not exceed 20. The AOI must contain restriction on the transfer of issued stocks (which must appear in the AOI, by-laws and certificate of stock) GENERAL RULE Free transferability of shares - Shares of stock so issued are personal property and may be transferred EXCEPTION In close corporations: Considering the special circumstances attending a close corporation (e.g. formed by persons who know each other well, thus they would want to choose the persons who will be allowed in their group), it is justifiable and even imperative for its stockholders to protect themselves from future conflicts by placing restrictions on the right of each one of them to transfer his shares to an outsider.  Restriction on the transfer must NOT be more onerous than granting the existing SH or corporation the option to purchase the shares. The stocks cannot be listed in the stock exchange nor be publicly offered. The corporation must NOT be mining company, stock exchange, oil company, bank, insurance company, public utility, educational institution or other corporation declared to be vested with public interest.

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At least 2/3 of its voting stock or voting rights must NOT be owned or controlled by another corporation which is not a close corporation.

1. Characteristics

of

a

Close

Corporation

The stockholders themselves can directly manage the corporation and perform the functions of directors without need of election (Sec. 97):  When they manage, stockholders are liable as directors;  There is no need to call a meeting to elect directors;  The stockholders are liable for tort.

2. Validity of Restrictions on Transfer of Shares

Validity of Restrictions (AO) (Sec. 98)  Restrictions must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the same shall not be binding on any purchaser thereof in good faith.  Restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. After expiration of said period and upon failure of the existing stockholders or the corporation to purchase said shares, the transferring stockholder may sell his shares to any third person. Presumptions (Sec. 99):  If the stock certificate CONSPICUOUSLY shows the restriction, the purchaser or transferee is CONCLUSIVELY presumed to have notice of the restriction, provided this appears in the AOI.  Where a conclusive presumption of notice arises, the corporation may, at its option, refuse to register the transfer, unless - all the stockholders have consented to the transfer, or - the AOI has been properly amended to remove the restriction.  If it appears in the certificate, but NOT CONSPICUOUSLY, then although he may be presumed to have notice of the restriction, he can prove the contrary.

3. Issuance or Transfer of Stock in Breach of Qualifying Conditions

If stock of a close corporation is issued or transferred to any person who is not entitled under any provision of the articles of incorporation to be a holder of record of its stock, and if the certificate for such stock conspicuously shows the qualifications of the persons entitled to be holders of record thereof, such person is conclusively presumed to have notice of the fact of his ineligibility to be a stockholder.

If the articles of incorporation of a close corporation states the number of persons, not exceeding twenty (20), who are entitled to be holders of record of its stock, and if the certificate for such stock conspicuously states such number, and if the issuance or transfer of stock to any person would cause the stock to be held by more than such number of persons, the person to whom such stock is issued or transferred is conclusively presumed to have notice of this fact. If a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock of the corporation, the transferee of the stock is conclusively presumed to have notice of the fact that he has acquired stock in violation of the restriction, if such acquisition violates the restriction. Whenever any person to whom stock of a close corporation has been issued or transferred has, or is conclusively presumed under this section to have, notice either (a) that he is a person not eligible to be a holder of stock of the corporation, or (b) that transfer of stock to him would cause the stock of the corporation to be held by more than the number of persons permitted by its articles of incorporation to hold stock of the corporation, or (c) that the transfer of stock is in violation of a restriction on transfer of stock, the corporation may, at its option, refuse to register the transfer of stock in the name of the transferee. The provisions of subsection (4) shall not applicable if the transfer of stock, though contrary to subsections (1), (2) of (3), has been consented to by all the stockholders of the close corporation, or if the close corporation has amended its articles of incorporation in accordance with this Title. The term "transfer", as used in this section, is not limited to a transfer for value. The provisions of this section shall not impair any right which the transferee may have to rescind the transfer or to recover under any applicable warranty, express or implied (Sec. 99)

4. When

Board Meeting is Unnecessary or Improperly Held

i. When Unnecessary – Any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if:  Before or after such action is taken, written consent thereto is signed by all the directors; or  All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or  The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or  All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing (Sec. 101)

MERCANTILE LAW REVIEWER ii.

voting rights, or of such greater proportion of shares as may be specifically provided in the AOI at a meeting duly called.

When Improperly Held

When a director‘s meeting is held without proper call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend. UNLESS he promptly files his written objection with the secretary of the corporation after having knowledge thereof (Sec. 101)

5. Preemptive Right The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, UNLESS the articles of incorporation provide otherwise (Sec. 102).

6. Amendment

of

Articles

of

Incorporation

Amendment to the AOI which seeks to:  delete or remove any provision required to be contained in the AOI of Close Corporations (under the Title on Close Corporations); or  to reduce a quorum or voting requirement stated in said AOI requires the affirmative vote of at least 2/3 of the outstanding capital stock, whether with or without

7. Deadlocks Requisites 1) The directors or stockholders are so divided respecting the management of the corporation's business and affairs 2) The votes required for any corporate action cannot be obtained that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally Powers of the SEC in case of Deadlock in Close Corporations  Cancel or alter any provision in the articles of incorporation or by-laws  Cancel, alter or enjoin any resolution of the corporation  Direct or prohibit any act of the corporation  Require the purchase at their fair value of shares of any stockholder either by any stockholder or by the corporation regardless of the availability of unrestricted retained earnings.  Appoint a provisional director  Dissolve the corporation  Granting such other relief as the circumstances may warrant.

CLOSE CORPORATIONS

REGULAR CORPORATIONS 1.

Management / Board Authority

There can be classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect: No meeting of stockholders need be called to elect directors. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code.

There are no classification of board of directors

Corporate Powers devolved upon board of directors whose powers are executed by officers. Cannot provide that it be managed by stockholders Board of directors must be elected in a stockholders meeting Stockholders of a corporation are separate and distinct from directors

The stockholders of the corporation shall be subject to all liabilities of directors. The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors. 2. Unless the by-laws provide otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if:

Officers must be elected by the Board of Directors

Meetings The directors or trustees shall not act individually nor separately but as a body in a lawful meeting. They will act only after discussion and deliberation of matters before them. Contracts entered into without a formal

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REGULAR CORPORATIONS

1.

Before or after such action is taken, written consent thereto is signed by all the directors; or

2.

All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or

3.

4.

The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing.

If a director's meeting is held without proper call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof.

board resolution does not bind the corporation except when ratified or when majority of the board has knowledge of the contract and the contract benefited the corporation. Absence of a prompt objection in writing does not ratify acts done by directors without a valid meeting. There must be express or implied ratification. Express ratification may consist of a Board Resolution to that effect Implied ratification may consist of acceptance of benefits from said unauthorized act while having knowledge of said act Failure to give notice would render a meeting voidable. Attendance to a meeting despite want of notice will be deemed implied waiver All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting. (§51)

3.

Voting / Quorum No share may be deprived of voting rights, except Preferred or Redeemable shares, unless otherwise provided by the Code

The AOI may provide for a classification of directors into one or more classes, each of which may be voted for and elected solely by a particular class of stock.

There shall always be a class/series of shares which have a COMPLETE VOTING RIGHTS EACH SHARE SHALL BE EQUAL IN ALL RESPECTS TO EVERY OTHER SHARE, except as otherwise provided in the AOI

The AOI may provide for a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. 4.

Limitations on the exercise of pre-emptive right: a. Such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; b. Not extend to shares to be issued in good faith with the approval of the stockholders representing twothirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt c. Shall not take effect if denied in the Articles of Incorporation or an amendment thereto.

Transferability

Restrictions on the right to transfer shares must appear in the AOI and in the by-laws as well as in the certificate of stock otherwise the same shall not be binding on any purchaser thereof in good faith 6.

For stockholders, the AOI can provide for a different percentage in quorum

Pre-emptive Right

The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise.

5.

For Board of directors, the by-laws or AOI can provide for a greater majority in quorum

Restrictions on the right to transfer not allowed

Withdrawal Right

MERCANTILE LAW REVIEWER CLOSE CORPORATIONS

REGULAR CORPORATIONS

Any stockholder of a close corporation may, for any reason, compel the said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock

Stockholders may require the corporation to buy-back their shares at fair value when the Corporation has unrestricted Retained Earnings: a. In case any amendment to the articles of incorporation which has the effect of: i. changing or restricting the rights of any stockholder or class of shares, or ii. authorizing preferences in any respect superior to those of outstanding shares of any class, or iii. extending or shortening the term of corporate existence b. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and c. In case of merger or consolidation d. Extension or shortening of the term of the corporation (§37) e. Diversion of funds of corporation from primary purpose to secondary purpose (§41)

Any stockholder of a close corporation may, by written petition to the SEC, compel the dissolution of such corporation whenever: a. Any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, or b. Corporate assets are being misapplied or wasted.

The corporation may buy-back shares of stockholders subject to the following limitations (Treasury shares): a. There must be unrestricted retained earnings b. Must be for a legitimate purpose

B. Non-Stock Corporations (Corporation Code, Title XI) 1. Definition One where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution. (Sec.87)

2. Purposes (sec. 88)           

Charitable Religious Educational Professional Cultural Fraternal Literary Scientific Social Civic services Similar purposes, such as chambers combinations trade, industry or agriculture

4. Distribution

of

Assets

Upon

Dissolution

Order of Distribution of Assets Upon Dissolution of Non-Stock Corporation  All its creditors shall be paid.  Assets held subject to return on dissolution shall be delivered back to the givers.  Assets held for charitable, religious purposes, etc., without a condition for their return on dissolution, shall be conveyed to one or more organizations engaged in similar activities as dissolved corporation  All other assets shall be distributed to members, as provided in the AOI or by-laws (Sec. 94)

C. Religious Corporations 1. Corporation Sole (Sec. 110)

or

3. Treatment of Profits Any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. (Sec. 87,2nd sentence)

A special form of corporation, usually associated with clergy and consists of one person only and his successors, who are incorporated by law to give some legal capacities and advantages. A registered corporation sole can acquire land if its members constitute at least 60% Filipinos (SEC Opinion, 8 August 1994). i.

Nationality

A corporation sole does not have any nationality but for purposes of applying our nationalizations laws, nationality is determined by the nationality of the members (Roman Catholic Apostolic Church v. Land Registration Commission, 1957).

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Religious Societies

Non-stock corporation formed by a religious society, group, diocese, synod, or district of any religious denomination, sect, or church after getting the approval of 2/3 of its members.

D. Foreign Corporations Foreign Corporation are those formed, organized, or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state (Sec. 123).

1. Bases of Authority Over Foreign Corporations i.

Consent

As a rule, a foreign corporation can have no legal existence or status beyond the bounds of the State or sovereignty by which it is created or incorporated and organized. It exists only in contemplation of law and by force of the law and where that law ceases to operate, the corporation can have no existence. This principle, however, does not prevent a corporation from acting in another State or country with the latter‘s express or implied consent. This is the ―consent doctrine‖ which is provided in Sections 125 and 126. But every power which a corporation exercises as such in another State depends for its validity upon the laws of the sovereignty in which it is exercised. A corporation can exercise none of the functions and privileges conferred by its charter in another State or country except by the comity and consent of such State or country. (De Leon, 2010) ii. Doctrine of ―Doing Business‖ (relate to definition under the Foreign Investments Act, RA 7042) Tests of ―Doing Business in the Philippines‖ (Asked in 98 and 02)  Twin Characterization Test - Under the Continuity Test, doing business implies a continuity of commercial dealings and arrangements, or performance of acts normally incidental to the purpose and object of the organization. - Under the Substance Test, a foreign corporation is doing business in the country if it is continuing the body or substance of the enterprise of business for which it was organized (Mentholatum v. Mangaliman, 1941)  Contract test A foreign corporation is doing business in the Philippines if the contracts entered into by the foreign corporation or by an agent acting under the control and direction of the foreign corporation are consummated in the Philippines (Pacific Vegetable Oil v. Singson, 1955).

―Doing Business‖ Under the Foreign investment Act of 1991 (RA 7042, Sec. 3(d)) (Asked in 98 and 02) Doing Business  Soliciting orders, service contracts, or opening offices;  Appointing representatives, distributors domiciled in the Philippines or who stay for a period or periods totaling 180 days or more;  Participating in the management, supervision, or control of any domestic business, firm, entity, or corporation in the Philippines;  Any act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to some extent the performance of acts or works or the exercise of some functions, normally incident to and in progressive prosecution of the purpose and object of its organization. Not Doing Business  Mere investment as shareholder and exercise of rights as investor;  Having a nominee director or officer to represent its interest in the corporation;  Appointing a representative or distributor which transacts business in its own name and for its own account. Jurisprudential Rules on ―Not Doing Business in the Philippines‖  Products manufactured off-shore and returned back to foreign corporation (Agilent Tech. Singapore Ltd. v. Integrated Silicon Tech. Phils. Corp., 2004)  Single isolated transaction (Marshall-Wells Co. v. Henry Eiser & Co, 1924). Multiple transactions are still considered a single transaction where there are constantly failed attempts in complying with the contract by one of the contracting parties (Antam Consolidated v. CA, 1986).  Trademark protection; foreign corporations not doing business are merely protecting their property rights (General Garments v. Director of Patents, 1971).  A foreign firm which does business through middlemen acting on their own names shall not be deemed doing business in the Philippines. (Le Chemise Lacoste v. Fernandez, 1984).

2. Necessity of a License to Do Business i.

Requisites for Issuance of a License

 The foreign corporation should file a copy of its articles of incorporation and by-laws, and a verified application (See Sec. 125) accompanied by the following: - Name and address of its designated resident agent who will receive summons and notices for the corporation; a special power of attorney should also be submitted for such purpose

MERCANTILE LAW REVIEWER - An agreement that if it ceases to transact business or if there is no more resident agent, summons shall then be served through the SEC - Oath of Reciprocity stating that the foreign corporation‘s country allows Filipino citizens and corporations to do business in said country  Within 60 days from issuance of license, the corporation should deposit at least P100,000 (cash, property, bond) for the benefit of creditors subject to further deposit every six months (See Sec. 126). ii.

Resident Agent

Resident Agent is an individual, who must be of good moral character and of sound financial standing, residing in the Philippines, or a domestic corporation lawfully transacting business in the Philippines, designated in a written power of attorney by a foreign corporation authorized to do business in the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against the foreign corporation (Sec. 127-128).

3. Personality to Sue A foreign corporation transacting business in the Philippines is required to secure a license to have the personality to sue before, or intervene in, any court or administrative proceeding. (Campos, rephrased; Sec. 133, Corporation Code) Agilent Technologies Singapore v. Integrated Silicon Technologies, 2004: The principles regarding the right of a foreign corporation to bring suit in Philippine courts may thus be condensed in four statements:  if a foreign corporation does business in the Philippines without a license, it cannot sue before the Philippine courts (Sec. 133, Corporation Code);  if a foreign corporation is not doing business in the Philippines, it needs no license to sue before Philippine courts on an isolated transaction or on a cause of action entirely independent of any business transaction (Eastboard Navigation, Ltd. v. Juan Ysmael & Company, Inc., 102 Phil. 1, 1957);  if a foreign corporation does business in the Philippines without a license, a Philippine citizen or entity which has contracted with said corporation may be estopped from challenging the foreign corporation‘s corporate personality in a suit brought before Philippine courts (Merrill Lynch Futures v. Court of Appeals, G.R. No. 97816, 24 July 1992, 211 SCRA 824); and  if a foreign corporation does business in the Philippines with the required license, it can sue before Philippine courts on any transaction.

4. Suability of Foreign Corporations A Foreign Corporation whether or not doing business in the Philippines may be sued for acts done against persons in the Philippines. Facilities Management Corporation v. De La Osa, 1979: Indeed if a foreign corporation, not engaged in business in the Philippines, is not barred from seeking redress from courts in the Philippines, a fortiori, that same corporation cannot claim exemption from being sued in Philippine courts for acts done against a person or persons in the Philippines

5. Instances

When Unlicensed Foreign Corporations May Be Allowed to Sue

 Isolated transactions, i.e. not ‗doing business‘ in the Philippines, (Sec. 133, Corporation Code);  Action to protect good name, goodwill, and reputation of a foreign corporation;  The subject contracts provide that Philippine courts will be the venue to controversies;  A license subsequently granted enables the foreign corporation to sue on contracts executed before the grant of the license;  Recovery of misdelivered property;  Where the unlicensed foreign corporation has a domestic corporation.  When the Philippine citizen or entity is estopped from challenging the foreign corporation‘s personality to sue (Merrill Lynch Futures v. Court of Appeals, G.R. No. 97816, 24 July 1992, 211 SCRA 824)

6. Grounds for Revocation of License i.

Under the Corporation Code

 Failure to file its annual report or pay any fees as required by this Code;  Failure to appoint and maintain a resident agent in the Philippines as required by this Title;  Failure, after change of its resident agent or of his address, to submit to the Securities and Exchange Commission a statement of such change as required by this Title;  Failure to submit to the Securities and Exchange Commission an authenticated copy of any amendment to its articles of incorporation or by laws or of any articles of merger or consolidation within the time prescribed by this Title;  A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation pursuant to this Title;  Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions;

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 Transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized under its license;  Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines; or  Any other ground as would render it unfit to transact business in the Philippines (Sec. 134) ii.

Under Special Laws

Insurance Code The Insurance Commissioner is authorized to suspend or revoke all certificates of authority granted to an insurance company, whether domestic or foreign, when:  it is in unsound condition; or  it has failed to comply with the provisions of law or regulations obligatory upon it; or  its condition or method of business is such as to render its proceedings hazardous to the public or to its policyholders; or  its paid-up capital stock, in the case of a foreign company, is impaired or deficient, or that the margin of solvency required of such company is deficient (Sec. 247, Insurance Code) General Banking Act The Monetary Board may revoke the license to transact business in the Philippines of any foreign bank, if it finds that:  the foreign bank is insolvent; or  in imminent danger thereof; or  its continuance in business will involve probable loss to those transacting business with it.

XIII. Merger and consolidation A. Definition and Concept (Corporation Code, Title IX) Merger – a corporation absorbs the other and remains in existence while the others are dissolved.  One of the constituent corporations remains as an existing juridical person, whereas the other corporation shall cease to exist. Merger is the disappearance of one of the corporations with the other corporation acquiring all the assets, rights of action, and assuming all the liabilities of the disappearing corporation. Consolidation – a new corporation is created, and consolidating corporations are extinguished  If there is consolidation, there will be disappearance of both the constituent corporations with the emergence of a new corporate entity which shall obtain all the assets of the disappearing corporations, and likewise shall assume all their liabilities.

B. Constituent Corporation

v.

Consolidated

Constituent Corporations – the parties to a merger or consolidation Consolidated Corporation - The new corporation created through consolidation.

single

Surviving Corporation – one of the constituent corporations which remain in existence after the merger

C. Plan of Merger or Consolidation (Sec. 76) Each of the constituent corporations must draw up a Plan of Merger or Consolidation which shall set forth:  Names of the corporation involved;  Terms and mode of carrying it;  Statement of changes, if any, in the present articles of the surviving corporation to be formed in the case of merger; and with respect to the consolidated corporation in case of consolidation

D. Articles of Merger Consolidation (Sec. 78)

or

Each of the constituent corporation shall execute Articles of Merger or Consolidation signed by the president/vice-president, and certified by the secretary/assistant secretary setting forth:  Plan of merger or consolidation;  For stock corporation, the number of shares outstanding; for non-stock, the number of members;  As to each corporation, number of shares or members voting for and against such plan respectively. The Articles of Merger or Consolidation:  take the place of the Articles of Incorporation of the consolidated corporation; or  amend the Articles of Incorporation of the surviving corporation.

E. Procedure  The board of each corporation shall draw up a plan of merger or consolidation.  The plan of merger or consolidation shall be approved by majority vote of each of the board of the concerned corporations at separate meetings, and a vote of 2/3 of the members or of stockholders representing 2/3 of the outstanding capital stock. Any amendment to the plan must be approved by the majority vote of the board members or trustees of the constituent corporations and affirmative vote of 2/3 of the outstanding capital stock or members.

MERCANTILE LAW REVIEWER  Articles of Merger or Articles of Consolidation shall be executed by each of the constituent corporations.  Submission of Four (4) copies of the Articles of Merger or Articles of Consolidation to the SEC for approval.  If necessary, the SEC shall set a hearing, notifying all corporations concerned at least two (2) weeks before.  Issuance of certificate of merger or consolidation. Procedure under Sec. 77: 1. Approval by majority vote of each of the board of directors or trustees of the constituent corporations of the plan of merger or consolidation. 2. Approval by the stockholders or members of each of such corporations. The affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock of each corporation in the case of stock corporations or at least two-thirds (2/3) of the members in the case of nonstock corporations shall be necessary for the approval of such plan 3. Notice of such meetings shall be given to all stockholders or members of the respective corporations, at least two (2) weeks prior to the date of the meeting, either personally or by registered mail. Said notice shall state the purpose of the meeting and shall include a copy or a summary of the plan of merger or consolidation. 4. Any dissenting stockholder in stock corporations may exercise his appraisal right in accordance with the Code. Provided, that if after the approval by the stockholders of such plan, the board of directors decides to abandon the plan, the appraisal right shall be extinguished. 5. Amendment to the plan of merger or consolidation may be made by approved of the majority vote of the respective boards of directors or trustees of all the constituent corporations and ratified by the affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members of each of the constituent corporations. Such plan, together with any amendment, shall be considered as the agreement of merger or consolidation.

F. Effectivity Upon issuance of the certificate of merger or consolidation, such merger or consolidation shall become effective (Sec. 79). PNB v. Andrada Electric & Engr. Co., Inc. (2002): Merger or consolidation does not become effective by mere agreement of the constituent corporations. The approval of the SEC is required.

G. Limitations In the case of merger or consolidation of banks or banking institutions, building and loan associations, trust companies, insurance companies, public utilities, educational institutions and other special corporations governed by special laws, the favorable recommendation of the appropriate government agency shall first be obtained (Sec. 79, Code)

H. Effects  The constituent corporations shall become a single corporation.  The separate existence of the constituents shall cease, except that of the surviving or the consolidated corporation.  The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation.  The surviving or the consolidated corporation shall possess all rights, privileges, immunities and franchises of each constituent corporation and the properties shall be deemed transferred to and vested in the surviving or consolidated corporation without further act or deed.  All liabilities of the constituents shall pertain to the surviving or the consolidated corporation.  Any claim, action or proceeding pending by or against any of the constituent corporations may be prosecuted by or against the surviving or consolidated corporation; and  The rights of the creditors or lien upon the property of any of each constituent corporation shall not be impaired by such merger or consolidation.

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2012

MERCANTILE

LAW Securities Regulation Code BAR OPERATIONS COMMISSION 2012 EXECUTIVE COMMITTEE Ramon Carlo Marcaida |Commissioner Raymond Velasco • Mara Kriska Chen |Deputy Commissioners Barbie Kaye Perez |Secretary Carmen Cecilia Veneracion |Treasurer Hazel Angeline Abenoja|Auditor COMMITTEE HEADS Eleanor Balaquiao • Mark Xavier Oyales | Acads Monique Morales • Katleya Kate Belderol • Kathleen Mae Tuason (D) • Rachel Miranda (D) |Special Lectures Patricia Madarang • Marinella Felizmenio |Secretariat Victoria Caranay |Publicity and Promotions Loraine Saguinsin • Ma. Luz Baldueza |Marketing Benjamin Joseph Geronimo • Jose Lacas |Logistics Angelo Bernard Ngo • Annalee Toda|HR Anne Janelle Yu • Alyssa Carmelli Castillo |Merchandise Graciello Timothy Reyes |Layout Charmaine Sto. Domingo • Katrina Maniquis |Mock Bar Krizel Malabanan • Karren de Chavez |Bar Candidates’ Welfare Karina Kirstie Paola Ayco • Ma. Ara Garcia |Events OPERATIONS HEADS Charles Icasiano • Katrina Rivera |Hotel Operations Marijo Alcala • Marian Salanguit |Day-Operations Jauhari Azis |Night-Operations Vivienne Villanueva • Charlaine Latorre |Food Kris Francisco Rimban • Elvin Salindo |Transpo Paula Plaza |Linkages


MERCANTILE LAW TEAM 2012 Subject Heads Anna Katarina Rodriguez • Mickey Chatto LAYOUT TEAM 2012 Layout Artists | Alyanna Apacible • Noel Luciano • RM Meneses • Jenin Velasquez • Mara Villegas • Naomi Quimpo • Leslie Octaviano • Yas Refran • Cris Bernardino Layout Head| Graciello Timothy Reyes


Securities Regulation Code Letters of Credit Warehouse Receipts Law Trust Receipts Law Negotiable Instruments Law Insurance Code Transportation Law Corporation Law Securities Regulation Code Banking and Finance Intellectual Property

MERCANTILE LAW State policy Powers and functions of the SEC Securities required to be registered IV. Procedure for registration of securities V. Prohibitions on fraud, manipulation, and insider trading VI. Protection of investors VII. Civil liability I. II. III.

I. State policy Purpose The establishment of a socially conscious, free market that: (1) regulates itself; (2) encourage the widest participation of ownership in enterprises; (3) enhance the democratization of wealth; (4) promote the development of the capital market; (5) protect investors; (6) ensure full and fair disclosure about securities; (7) minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and practices which create distortions in the free market (Sec. 2).

II. Powers and functions of the SEC a. b.

Regulatory Adjudicative

The SEC shall have the powers and functions provided by the SRC, P.D. 902-A, the Corporation Code, the Investment Houses Law, the Financing Company Act and other existing laws.

A. Under the SRC (a) Exercise jurisdiction and supervision over all corporations, partnership or associations who are the grantees of primary franchises and/or a license or a permit issued by the Government; (b) Formulate policies and recommendations on issues concerning the securities market, advise Congress and other government agencies on all aspect of the securities market and propose legislation and amendments thereto;

(c) Approve, reject, suspend, revoke or require amendments to registration statements, and registration and licensing applications; (d) Regulate, investigate or supervise the activities of persons to ensure compliance; (e) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other SROs; (f) Impose sanctions for the violation of laws and rules, regulations and orders, and issued pursuant thereto; (g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise compliance with such rules, regulation and orders; (h) Enlist the aid and support of and/or deputize any and all enforcement agencies of the Government, civil or military as well as any private institution, corporation, firm, association or person in the implementation of its powers and function under its Code; (i) Issue cease and desist orders to prevent fraud or injury to the investing public; (j) Punish for the contempt of the Commission, both direct and indirect, in accordance with the pertinent provisions of and penalties prescribed by the Rules of Court; (k) Compel the officers of any registered corporation or association to call meetings of stockholders or members thereof under its supervision; (l) Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the Commission and in appropriate cases, order the examination, search and seizure of all documents, papers, files and records, tax returns and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases before it, subject to the provisions of existing laws; (m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration of corporations, partnership or associations, upon any of the grounds provided by law; and (n) Exercise such other powers as may be provided by law as well as those which may be implied from, or which are necessary or incidental to the carrying out of, the express powers granted the Commission to achieve the objectives and purposes of these laws (Sec. 5.1)

B. Under PD 902-A  The SEC‘s jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court (Sec. 5.2)  Sections 2, 4 and 8 of Presidential Decree 902-A as amended, are hereby repealed. (Sec. 76)  Insofar as not inconsistent with the SRC, the SEC retains its powers under Sec. 6 of P.D. 902-A:

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MERCANTILE LAW REVIEWER [List does not include those which are also enumerated under the SRC, i.e. Subsections (b), (c), (e), (f), (i) and (j)]

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(b) Any security issued or guaranteed by the government of any country with which the Philippines maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis of reciprocity: Provided, That the Commission may require compliance with the form and content for disclosures the Commission may prescribe; (c) Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body; (d) Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of the Office of the Insurance Commission, Housing and Land Use Rule Regulatory Board, or the Bureau of Internal Revenue. (e) Any security issued by a bank except its own shares of stock (Sec. 9.1)

(a) To issue preliminary or permanent injunctions, whether prohibitory or mandatory, in all cases in which it has jurisdiction, and in which cases the pertinent provisions of the Rules of Court shall apply; (d) To pass upon the validity of the issuance and use of proxies and voting trust agreements for absent stockholders or members; (g) To authorize the establishment and operation of stock exchanges, commodity exchanges and such other similar organization and to supervise and regulate the same; including the authority to determine their number, size and location, in the light of national or regional requirements for such activities with the view to promote, conserve or rationalize investment; (see Sec. 5(e), SRC) (h) To pass upon, refuse or deny, after consultation with the Board of Investments, Department of Industry, National Economic and Development Authority or any other appropriate government agency, the application for registration of any corporation, partnership or association or any form of organization falling within its jurisdiction, if their establishment, organization or operation will not be consistent with the declared national economic policies;

NOTE: The foregoing exempt securities are exempt only as a general rule (Sec. 9.1) (f) Any class of security with respect to which the SEC finds that registration is not necessary in the public interest and for the protection of investors (Sec. 9.2) NOTE: The exemption of securities by the SEC must be made through the issuance of a rule or regulation (Sec. 9.2) b.

C. Under the Corporation Code Among others,  To implement the provisions of this Code, and to promulgate rules and regulations reasonably necessary to enable it to perform its duties hereunder, particularly in the prevention of fraud and abuses on the part of the controlling stockholders, members, directors, trustees or officers (Sec. 143, Corporation Code)  To collect and receive fees as authorized by law or by rules and regulations promulgated by the Commission (Sec. 139, Corporation Code)

III. Securities required to be registered GENERAL RULE: Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the Commission (Sec. 8.1) EXCEPTIONS: a.

Exempt securities (Sec. 9) (a) Any security issued or guaranteed by the Government of the Philippines/ its political subdivision or agency/its instrumentality/ or any person controlled or supervised thereby;

Exempt transactions (a) At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy. (b) By or for the account of a pledge holder, or mortgagee or any of a pledge lien holder selling of offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding the provision of this Code, to liquidate a bonafide debt, a security pledged in good faith as security for such debt. (c) An isolated transaction in which any security is sold, offered for sale, subscription or delivery by the owner therefore, or by his representative for the owner‘s account, such sale or offer for sale or offer for sale, subscription or delivery not being made in the course of repeated and successive transaction of a like character by such owner, or on his account by such representative and such owner or representative not being the underwriter of such security. (d) The distribution by a corporation actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders as a stock dividend or other distribution out of surplus. (e) The sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock.

MERCANTILE LAW REVIEWER (f) The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, when the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale. (g) The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion entitling the holder of the security surrendered in exchange to make such conversion: Provided, That the security so surrendered has been registered under this Code or was, when sold, exempt from the provision of this Code, and that the security issued and delivered in exchange, if sold at the conversion price, would at the time of such conversion fall within the class of securities entitled to registration under this Code. Upon such conversion the par value of the security surrendered in such exchange shall be deemed the price at which the securities issued and delivered in such exchange are sold. (h) Broker‘s transaction, executed upon customer‘s orders, on any registered Exchange or other trading market. (i) Subscriptions for shares of the capitals stocks of a corporation prior to the incorporation thereof or in pursuance of an increase in its authorized capital stocks under the Corporation Code, when no expense is incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or disposition of such securities, and only when the purpose for soliciting, giving or taking of such subscription is to comply with the requirements of such law as to the percentage of the capital stock of a corporation which should be subscribed before it can be registered and duly incorporated, or its authorized, capital increase. (j) The exchange of securities by the issuer with the existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. (k) The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelve-month period. (l) The sale of securities to any number of the following qualified buyers: (i) (ii) (iii) (iv)

Bank; Registered investment house; Insurance company; Pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision thereof or manage by a bank or other persons authorized by the Bangko Sentral to engage in trust functions; (v) Investment company or; (vi) Such other person as the Commission may rule by determine as qualified

buyers, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial and business matters, or amount of assets under management. (Sec. 10.1) (m) Any transaction with respect to which the SEC finds that registration is not necessary in the public interest and protection of investors such as by the reason of the small amount involved or the limited character of the public offering (Sec. 10.2) NOTE: Application for exemption under this Section must be accompanied by: (1) notice of the exemption relied upon; (2) payment of fee equivalent to 1/10 of 1% of the maximum value aggregate price or issued value of the securities.

IV. Procedure for registration of securities 1.

Filing of a sworn registration statement with the SEC (Sec. 12.1)  Shall include any prospectus required or permitted to be delivered under Subsections 8.2, 8.3, and 8.4 (Sec. 12.1)

Chapter III, Section 8. Requirement of Registration of Securities x x x 8.2 The Commission may conditionally approve the registration statement under such terms as it may deem necessary. 8.3 The Commission may specify the terms and conditions under which any written communication, including any summary prospectus, shall be deemed not to constitute an offer for sale under this Section. 8.4. A record of the registration of securities shall be kept in Register Securities in which shall be recorded orders entered by the Commission with respect such securities. Such register and all documents or information with the respect to the securities registered therein shall be open to public inspection at reasonable hours on business days.  Shall include the effect of the securities issue on ownership, on the mix of ownership, especially foreign and local ownership (Sec. 12.3)  Shall be signed by the issuer‘s executive officer, its principal operating officer, its principal financial officer, its comptroller, its principal accounting officer, its corporate secretary, or persons performing similar functions accompanied by a duly verified resolution of the board of directors of the issuer corporation (Sec. 12.4)  Shall be accompanied by: (a) written consent of the expert named as having certified any

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2.

3.

4.

part of the registration statement or any document used in connection therewith; and (b) Where the registration statement shares to be sold by selling shareholders, a written certification by such selling shareholders as to the accuracy of any part of the registration statement contributed to by such selling shareholders (Sec. 12.4).

convicted, by a competent judicial or administrative body, upon plea of guilty, or otherwise, of an offense involving moral turpitude and /or fraud or is enjoined or restrained by the Commission or other competent or administrative body for violations of securities, commodities, and other related laws (Sec. 13.1)

Payment to the SEC a fee of not more than one-tenth (1/10) of one per centum (1%) of the maximum aggregate price at which such securities are proposed to be offered (Sec. 12.5a)

(d) If any issuer shall refuse to permit an examination to be made by the Commission (Sec. 13.3)

Publication of the notice of the filing of registration statement. The publication must be in two (2) newspapers of general circulation in the Philippines, once a week for two (2) consecutive weeks, or in such other manner as the Commission by the rule shall prescribe (Sec. 12.5b) Declaration by the SEC whether the registration statement is effective or rejected, Declaration is made within 45 days from filing of the registration statement or on such later date to which the issuer has consented unless applicant has been allowed to amend the registration statement under Sec. 14 (Sec. 12.6). NOTE: Grounds for: (1) rejection/revocation of registration statement and (2) refusal of registration/revocation of securities thereunder: (a) The issuer: (i) Has been judicially declared insolvent; (ii) Has violated any of the provision of this Code, the rules promulgate pursuant thereto, or any order of the Commission of which the issuer has notice in connection with the offering for which a registration statement has been filed (iii) Has been or is engaged or is about to engage in fraudulent transactions; (iv) Has made any false or misleading representation of material facts in any prospectus concerning the issuer or its securities; (v) Has failed to comply with any requirements that the Commission may impose as a condition for registration of the security for which the registration statement has been filed; or (b) The registration statement is on its face incomplete or inaccurate in any material respect or includes any untrue statements of a material fact required to be stated therein or necessary to make the statement therein not misleading; or (c) The issuer, any officer, director or controlling person performing similar functions, or any under writer has been

NOTE: A registration statement may be withdrawn by the issuer only with the consent of the Commission (Sec. 13.6). 5.

Statement under oath by the issuer in all prospectus that registration requirements have been met and that all information are true and correct as represented by the issuer or the one making the statement. Statement under oath must be made upon effectivity of the registration statement. (Sec. 12.7)

V. Prohibitions on fraud, manipulation and insider trading A. Manipulation of security prices It shall be unlawful for any person acting for himself or through a dealer or broker, directly or indirectly: (a) To create a false or misleading appearance of active trading in any listed security traded in an Exchange of any other trading market (hereafter referred to purposes of this Chapter as "Exchange"): (i) By effecting any transaction in such security which involves no change in the beneficial ownership thereof; (ii) By entering an order or orders for the purchase or sale of such security with the knowledge that a simultaneous order or orders of substantially the same size, time and price, for the sale or purchase of any such security, has or will be entered by or for the same or different parties; or (iii) By performing similar act where there is no change in beneficial ownership. (b) To affect, alone or with others, securities or transactions in securities that: (i) Raises their price to induce the purchase of a security, whether of the same or a different class of the same issuer or of controlling, controlled, or commonly controlled company by others; or (ii) Creates active trading to induce such a purchase or sale through manipulative devices such as marking the close, painting the tape, squeezing the float, hype and dump, boiler room operations and such other similar devices.

MERCANTILE LAW REVIEWER (c) To circulate or disseminate information that the price of any security listed in an Exchange will or is likely to rise or fall because of manipulative market operations of any one or more persons conducted for the purpose of raising or depressing the price of the security for the purpose of inducing the purpose of sale of such security. (d) To make false or misleading statement with respect to any material fact, which he knew or had reasonable ground to believe was so false or misleading, for the purpose of inducing the purchase or sale of any security listed or traded in an Exchange. (e) To effect, either alone or others, any series of transactions for the purchase and/or sale of any security traded in an Exchange for the purpose of pegging, fixing or stabilizing the price of such security; unless otherwise allowed by this Code or by rules of the Commission (Sec. 24.1)

B. Short sales (a) No person shall use or employ, in connection with the purchase or sale of any security any manipulative or deceptive device or contrivance. (b) No short sale shall be effected nor any stop-loss order be executed in connection with the purchase or sale of any security except if allowed by the SEC (Sec. 24.2) NOTE: The SEC may allow certain acts or transactions under Sec. 24 (on Manipulation of Security Prices and Short Sales), for public interest and protection of investors (Sec. 24.3)

C. Fraudulent transactions It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of any securities to: (a) Employ any device, scheme, or artifice to defraud; (Sec. 26.1) (b) Obtain money or property by means of any untrue statement of a material fact of any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading (Sec. 26.2) (c) Engage in any act, transaction, practice or course of business which operates or would operate as a fraud or deceit upon any person (Sec. 26.3)

D. Insider trading An Insider means: (a) the issuer;

(b) a director or officer (or any person performing similar functions) of, or a person controlling the issuer; gives or gave him access to material information about the issuer or the security that is not generally available to the public; (c) a government employee, director, or officer of an exchange, clearing agency and/or selfregulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or (d) a person who learns such information by a communication from any foregoing insiders (Sec. 3.8) ‗Material non-public information‘ means: (a) it has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or (b) would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security (Sec. 27.2)  It shall be unlawful for an insider: (a) to sell or buy a security of the issuer, while in possession of material information with respect to the issuer or the security that is not generally available to the public, unless: (i) The insider proves that the information was not gained from such relationship; or (ii) If the other party selling to or buying from the insider (or his agent) is identified, the insider proves: (1) that he disclosed the information to the other party, or (2) that he had reason to believe that the other party otherwise is also in possession of the information (Sec. 27.1) NOTE: Presumption that purchase or sale is effected while in possession of material non-public information arises: (1) if the purchase or sale is transacted after such information came into existence but prior to dissemination of such information to the public; and (2) the lapse of a reasonable time for market to absorb such information. Presumption may be rebutted by showing of purchaser‘s or seller‘s awareness of the material non-public information at the time of purchase or sale (Sec. 27.1) (b) to communicate material nonpublic information about the issuer or the security to any person who, by virtue of the communication, becomes an insider where the insider communicating the information knows or has reason to believe that such

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person will likely buy or sell a security of the issuer whole in possession of such information (Sec. 27.3)

VI.Protection of investors A. Tender offer rule When a tender offer has commenced or is about to commence, It shall be unlawful for: (a) Any person (except the tender offeror) who is in possession of material nonpublic information relating to such tender offer, to buy or sell the securities of the issuer that are sought or to be sought by such tender offer if: (i) such person knows or has reason to believe that the information is nonpublic and has been acquired directly or indirectly from the tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, or any insider of such issuer (b) Any tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, and any insider of such issuer to communicate material nonpublic information relating to the tender offer to any other person where such communication is likely to result in a violation of (a) (Sec. 27.4).

B. Rules on proxy solicitation  Proxies shall be: (a) issued in accordance with SEC rules and regulations; Proxy solicitations shall also be made in accordance with the said rules and regulations (Sec. 20.1) (b) in writing (Sec. 20.2) (c) signed by the stockholder or his duly authorized representatives (Sec. 20.2) (d) filed before the scheduled meeting with the corporate secretary (Sec. 20.2) (e) valid only for the meeting for which it is intended unless otherwise provided in the proxy (Sec. 20.3) NOTE: No proxy shall be valid and effective for a period longer than five (5) years at one time (Sec. 20.3)  A broker or dealer shall: (a) not give any proxy, consent or any authorization, in respect of any security carried for the account of the customer, to a person other than the customer, without written authorization of such customer (Sec. 20.4) (b) if he holds or acquires the proxy for at least ten percent (10%) or such percentage as the commission may prescribe of the outstanding share of such issuer, submit a report identifying the beneficial owner of ten days after such acquisition, for its own

account or customer, to the issuer of security, to the exchange where the security is traded and to the Commission (Sec. 20.5)

C. Disclosure rule  Disclosure by the Issuer - To the SEC Every issuer shall file with the Commission: (a) Annual Report within one hundred thirtyfive (135) days, after the end of the issuer‘s fiscal year, or such other time as the Commission may prescribe (b) Such other periodical reports for interim fiscal periods and current reports on significant developments of the issuer as the Commission may prescribe as necessary to keep current information on the operation of the business and financial condition of the issuer (Sec. 17.1) NOTE: Under this Section, ‗issuer‘ includes: (a) An issuer which has sold a class of its securities pursuant to a registration under section 12 hereof. BUT the requirement shall be suspended for any fiscal year if such issuer, as of the first day of any such fiscal year, has less than one hundred (100) holder of such class securities or such other number as the Commission shall prescribe and it notifies the Commission of such; (b) An issuer with a class of securities listed for trading on an Exchange; and (c) An issuer with assets of at least Fifty million pesos (50,000,000.00) or such other amount as the Commission shall prescribe, and having two hundred (200) or more holder each holding at least one hundred (100) share of a class of its equity securities. The obligation of such issuer to file report shall be terminate ninety (90) days after notification to the Commission by the issuer that the number of its holders holding at least one hundred (100) share reduced to less than one hundred (100) (Sec. 17.2) - To the equity holders An annual report shall be furnished by every issuer which has a class of equity securities satisfying any of the requirements in Subsection 17.2 to each holder of such equity security (Sec. 17.5)  Disclosure by Equity Holders

MERCANTILE LAW REVIEWER Any person who acquires directly or indirectly the beneficial ownership of more than five of per centum (5%) of such class or in excess of such lesser per centum as the Commission by rule may prescribe, shall, within ten (10) days after such acquisition or such reasonable time as fixed by the Commission, submit to: (1) the issuer of the securities; (2) to the Exchange where the security is traded; and (3) to the Commission, the following information: (a) The personal background, identity, residence, and citizenship of, and the nature of such beneficial ownership by, such person and all other person by whom or on whose behalf the purchases are effected; in the event the beneficial owner is a juridical person, the of business of the beneficial owner shall also be reported; (b) If the purpose of the purchases or prospective purchases is to acquire control of the business of the issuer of the securities, any plans or proposals which such persons may have that will effect a major change in its business or corporate structure; (c) The number of shares of such security which are beneficially owned, and the number of shares concerning which there is a right to acquire, directly or indirectly, by; (i) such person, and (ii) each associate of such person, giving the background, identity, residence, and citizenship of each such associate; and (d) Information as to any contracts, arrangements, or understanding with any person with respect to any securities of the issuer including but not limited to transfer, joint ventures, loan or option arrangements, puts or call guarantees or division of losses or profits, or proxies naming the persons with whom such contracts, arrangements, or understanding have been entered into, and giving the details thereof. NOTE: If it appears to the SEC that securities were acquired by person in the ordinary course of his business and were not acquired for the purpose of and do not have the effect of changing or influencing the control of the issuer nor in connection with any transaction having such purpose or effect it may permit any person to file in lieu of the statement required by subsection 17.1 hereof, a notice stating: (1) the name of such person; (2) the shares of any equity securities subject to Subsection 17.1 which are owned by him; (3) the date of their acquisition; and

(4) such other information as the commission may specify (Sec. 18.3)

131  Disclosure by Insider An insider has the duty to disclose material information with respect to the issuer or the security that is not generally available to the public (Sec. 27.1) (See definitions of ‗insider‘ and ‗material non-public information‘ at pp. 132-133)

VII. Civil liability A. Civil Liabilities on Account of False Registration Statement (Sec. 56)  Civil liabilities arise when the registration statement or any part thereof contains on its effectivity: - An untrue statement of a material fact; or - Omission to state a material fact required to be stated therein or necessary to make such statements not misleading  Who may be liable? (NUPSAID) (a) Issuer and every person who signed the registration statement; (b) Director of/partner in the issuer at the time of the filing of the registration statement or any part, supplement or amendment thereof; (c) One who is named in the registration statement as being or about to become (b); (d) Auditor/auditing firm named as having certified any financial statements used in connection with the registration statement or prospectus; (e) One who, with his written consent filed with the registration statement, has been named as having prepared or certified any part of the registration statement/any report or valuation which is used in connection with the registration statement; (f) Selling shareholder who contributed to and certified as to the accuracy of a portion of the registration statement; (g) Underwriter with respect to such security (Sec. 56.1)  Who may sue? Any person who acquires the security and who suffers damage unless it is proved that at the time of such acquisition he knew of such untrue statement or omission (Sec. 56.1) NOTE: When the security is acquired after the issuer has made generally available to its security holders an income statement covering a period of at least twelve (12) months beginning from the effective date of the registration statement, the right of recovery under this subsection shall be conditioned on proof that such person acquired the security relying upon such untrue statement in the


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registration statement or relying upon the registration statement and not knowing of such income statement (Sec. 56.2)

B. Civil Liabilities Arising in Connection With Prospectus, Communications and Reports (Sec. 57) 1. Liability of Sellers/Offerors  Who may be liable? (a) Offeror or seller of a security in violation of Chapter on Registration of Securities; (b) Offeror or seller of a security, whether or not exempted by the provisions of this Code, by means of a prospectus or other written or oral communication which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission). Defense: No knowledge of untruth or omission, despite the exercise of reasonable care (Sec. 57.1).  Who may sue? Purchaser of the security may sue to recover: (1) consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security; or (2) for damages if he no longer owns the security (Sec. 57.1).

2. Liability

of Makers Misleading Statements

of

False

 Who may be liable? Any person who shall make or cause to be made any statement in any report, or document filed pursuant to this Code or any rule or regulation thereunder, which statement as at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact, shall be liable to Defense: Good faith and lack of knowledge of the false and misleading statement (Sec. 57.2).  Who may sue? Purchaser or seller of security who purchased or sold at a price which was affected by such statement knowing that such statement was false or misleading, and relying upon such statement may sue for damages caused by such reliance (Sec. 57.2).

C. Civil Liability of Fraud in Connection with Securities Transactions (Sec. 58)  Who may be liable? Any person who engages in any act or transaction in violation of Sections 19.2, 20 or 26, or any rule or regulation of the Commission thereunder  Who may sue? Any other person who purchases or sells any security, grants or refuses to grant any proxy, consent or authorization, or accepts or declines an invitation for tender of a security who sustained damages as a result of the transaction.

D. Civil Liability for Manipulation of Security Prices (Sec. 59)  Who may be liable? Any person who willfully participates in any act or transaction in Section 24 (Manipulation of Security Prices).  Who may sue? Any person who shall purchase or sell any security at a price which was affected by such act or transaction

E. Civil Liability with Respect to Commodity Futures Contracts and Pre-need Plans (Sec. 60)  Who may be liable? Any person who engages in any act or transactions in willful violation of any rule or regulation promulgated by the Commission under Section 11 (on Commodity Future Contracts) or 16 (on Pre-Need Plans) (Sec. 60.1)  Who may sue? Any person sustaining damages as a result of such act or transaction (Sec. 60.1)

F. Civil Liability on Account of Insider Trading 1. Liability for non-disclosure  Who may be liable? - Any insider who violates Subsection 27.1; - and any person in the case of a tender offer who violates Subsection 27.4 (a)(I), or any rule or regulation thereunder, by purchasing or selling a security while in possession of material information not generally available to the public (Sec. 61.1)  Who may sue? Any investor who, contemporaneously with the purchase or sale of securities that is the subject of the violation, purchased or sold securities of the same class unless such insider, or such person in the

MERCANTILE LAW REVIEWER case of a tender offer, proves that such investor knew the information or would have purchased or sold at the same price regardless of disclosure of the information to him (Sec. 61.1)

2. Liability for communicating nonpublic information about issuer

 Who may be liable? - An insider who violates Subsection 27.3; - or any person in the case of a tender offer who violates Subsection 27.4 (a), or any rule or regulation thereunder communicating material nonpublic information shall be jointly and severally liable under Subsection 61.1 with, and to the same extent as, the insider, or person in the case of a tender offer, to whom the communication was directed and who is liable under Subsection 61.1 by reason of his purchase or sale of a security (Sec. 61.2).

G. Liabilities of Controlling Persons, Aider and Abettor and Other Secondary Liability 1. Liability of Controlling Persons  Who may be liable? Every person who controls any person liable under this Code or the rules or regulations of the Commission thereunder, shall also be liable jointly and severally with and to the same extent as such controlled persons to any person to whom such controlled person is liable (Sec. 51.1) NOTE: ‗Control‘ may be by or through stock ownership, agency, or otherwise, or in connection with an agreement or understanding with one or more other persons (Sec. 51.1) Defense: Lack of knowledge of the existence of facts by reason of which the liability of the controlled person is alleged to exist (Sec. 51.1)

2. Liability of Director/Officer for Delay in the Filing of Required Documents

It shall be unlawful for any director or officer of, or any owner of any securities issued by, any issuer required to file any document, report or other information under this Code or any rule or regulation of the Commission thereunder, without just cause, to hinder, delay or obstruct the making or filing of any such document, report, or information (Sec. 51.2)

3. Liability of Aider/Abettor It shall be unlawful for any person to aid, abet, counsel, command, induce or procure any violation

of this Code, or any rule, regulation or order of the Commission thereunder (Sec. 51.3) Every person who substantially assists the act or omission of any person primarily liable under Sections 57, 58, 59 and 60 of this Code, with knowledge or in reckless disregard that such act or omission is wrongful, shall be jointly and severally liable as an aider and abettor for damages resulting from the conduct of the person primarily liable (Sec. 51.4) BUT an aider and abettor shall be liable only to the extent of his relative contribution in causing such damages in comparison to that of the person primarily liable, or the extent to which the aider and abettor was unjustly enriched thereby, whichever is greater (Sec. 51.4) NOTE: It shall be unlawful for any person, directly, or indirectly, to do any act or thing which it would be unlawful for such person to do under the provisions of this Code or any rule or regulation thereunder (Sec. 51.2)

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Civil Liability Arising …  when the registration statement or any part thereof contains on its effectivity: o An untrue statement of a material fact; or o Omission to state a material fact required to be stated therein or necessary to make such statements not misleading

Who may be liable? (a) Issuer and every person who signed the registration statement; (b) Director of/partner in the issuer at the time of the filing of the registration statement or any part, supplement or amendment thereof; (c) One who is named in the registration statement as being or about to become (b); (d) Auditor/auditing firm named as having certified any financial statements used in connection with the registration statement or prospectus; (e) One who, with his written consent filed with the registration statement, has been named as having prepared or certified any part of the registration statement/any report or valuation which is used in connection with the registration statement; (f) Selling shareholder who contributed to and certified as to the accuracy of a portion of the registration statement; (g) Underwriter with respect to such security (Sec. 56.1)

Who may Sue? Any person who acquires the security and who suffers damage unless it is proved that at the time of such acquisition he knew of such untrue statement or omission (Sec. 56.1)

in Connection With Prospectus, Communications and Reports (Sec. 57)

(a) Offeror or seller of a security in violation of Chapter on Registration of Securities; (b) Offeror or seller of a security, whether or not exempted by the provisions of this Code, by means of a prospectus or other written or oral communication which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission).

Purchaser of the security may sue to recover: (1) consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security; or (2) for damages if he no longer owns the security (Sec. 57.1).

A.

Liability of Sellers/Offerors

Defense: No knowledge of untruth or omission, despite the exercise of reasonable care (Sec. 57.1).

NOTE: When the security is acquired after the issuer has made generally available to its security holders an income statement covering a period of at least twelve (12) months beginning from the effective date of the registration statement, the right of recovery under this subsection shall be conditioned on proof that such person acquired the security relying upon such untrue statement in the registration statement or relying upon the registration statement and not knowing of such income statement (Sec. 56.2)

MERCANTILE LAW REVIEWER Civil Liability Arising … in Connection With Prospectus, Communications and Reports (Sec. 57) B. Liability of Makers of False Misleading Statements

Who may be liable? Any person who shall make or cause to be made any statement in any report, or document filed pursuant to this Code or any rule or regulation thereunder, which statement as at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact, shall be liable to

Who may Sue? Purchaser or seller of security who purchased or sold at a price which was affected by such statement knowing that such statement was false or misleading, and relying upon such statement may sue for damages caused by such reliance (Sec. 57.2).

Defense: Good faith and lack of knowledge of the false and misleading statement (Sec. 57.2). Fraud in Connection with Securities Transactions (Sec. 58)

Any person who engages in any act or transaction in violation of Sections 19.2, 20 or 26, or any rule or regulation of the Commission thereunder

Any other person who purchases or sells any security, grants or refuses to grant any proxy, consent or authorization, or accepts or declines an invitation for tender of a security who sustained damages as a result of the transaction.

Manipulation of Security Prices (Sec. 59)

Any person who willfully participates in any act or transaction in Section 24 (Manipulation of Security Prices).

Any person who shall purchase or sell any security at a price which was affected by such act or transaction

with Respect to Commodity Futures Contracts and Preneed Plans (Sec. 60)

Any person who engages in any act or transactions in willful violation of any rule or regulation promulgated by the Commission under Section 11 (on Commodity Future Contracts) or 16 (on PreNeed Plans) (Sec. 60.1)

Any person sustaining damages as a result of such act or transaction (Sec. 60.1)

on Account of Insider Trading

(a) Any insider who violates Subsection 27.1; (b) and any person in the case of a tender offer who violates Subsection 27.4 (a)(I), or any rule or regulation thereunder, by purchasing or selling a security while in possession of material information not generally available to the public (Sec. 61.1)

Any investor who, contemporaneously with the purchase or sale of securities that is the subject of the violation, purchased or sold securities of the same class unless such insider, or such person in the case of a tender offer, proves that such investor knew the information or would have purchased or sold at the same price regardless of disclosure of the information to him (Sec. 61.1)

A. Liability for non-disclosure

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Civil Liability Arising … on Account of Insider Trading B. Liability for communicating non-public information about issuer

Who may be liable? (a) An insider who violates Subsection 27.3; OR (b) any person in the case of a tender offer who violates Subsection 27.4 (a), or any rule or regulation thereunder communicating material nonpublic information shall be jointly and severally liable under Subsection 61.1 with, and to the same extent as, the insider, or person in the case of a tender offer, to whom the communication was directed and who is liable under Subsection 61.1 by reason of his purchase or sale of a security (Sec. 61.2).

7.

Liabilities of Controlling Persons, Aider and Abettor and Other Secondary Liability

A.

Liability of Controlling Persons

Every person who controls any person liable under this Code or the rules or regulations of the Commission thereunder, shall also be liable jointly and severally with and to the same extent as such controlled persons to any person to whom such controlled person is liable (Sec. 51.1) NOTE: ‗Control‘ may be by or through stock ownership, agency, or otherwise, or in connection with an agreement or understanding with one or more other persons (Sec. 51.1) Defense: Lack of knowledge of the existence of facts by reason of which the liability of the controlled person is alleged to exist (Sec. 51.1)

7.

Liabilities of Controlling Persons, Aider and Abettor and Other Secondary Liability

B.

Liability of Director/Officer for Delay in the Filing of Required Documents

It shall be unlawful for any director or officer of, or any owner of any securities issued by, any issuer required to file any document, report or other information under this Code or any rule or regulation of the Commission thereunder, without just cause, to hinder, delay or obstruct the making or filing of any such document, report, or information (Sec. 51.2)

Who may Sue?

MERCANTILE LAW REVIEWER Civil Liability Arising … 7. Liabilities of Controlling Persons, Aider and Abettor and Other Secondary Liability C.

Liability of Aider/Abettor

Who may be liable? It shall be unlawful for any person to aid, abet, counsel, command, induce or procure any violation of this Code, or any rule, regulation or order of the Commission thereunder (Sec. 51.3) Every person who substantially assists the act or omission of any person primarily liable under Sections 57, 58, 59 and 60 of this Code, with knowledge or in reckless disregard that such act or omission is wrongful, shall be jointly and severally liable as an aider and abettor for damages resulting from the conduct of the person primarily liable (Sec. 51.4) BUT an aider and abettor shall be liable only to the extent of his relative contribution in causing such damages in comparison to that of the person primarily liable, or the extent to which the aider and abettor was unjustly enriched thereby, whichever is greater (Sec. 51.4) NOTE: It shall be unlawful for any person, directly, or indirectly, to do any act or thing which it would be unlawful for such person to do under the provisions of this Code or any rule or regulation thereunder (Sec. 51.2)

Who may Sue?

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2012

MERCANTILE

Banking and Finance BAR OPERATIONS COMMISSION 2012 EXECUTIVE COMMITTEE Ramon Carlo Marcaida |Commissioner Raymond Velasco • Mara Kriska Chen |Deputy Commissioners Barbie Kaye Perez |Secretary Carmen Cecilia Veneracion |Treasurer Hazel Angeline Abenoja|Auditor COMMITTEE HEADS Eleanor Balaquiao • Mark Xavier Oyales | Acads Monique Morales • Katleya Kate Belderol • Kathleen Mae Tuason (D) • Rachel Miranda (D) |Special Lectures Patricia Madarang • Marinella Felizmenio |Secretariat Victoria Caranay |Publicity and Promotions Loraine Saguinsin • Ma. Luz Baldueza |Marketing Benjamin Joseph Geronimo • Jose Lacas |Logistics Angelo Bernard Ngo • Annalee Toda|HR Anne Janelle Yu • Alyssa Carmelli Castillo |Merchandise Graciello Timothy Reyes |Layout Charmaine Sto. Domingo • Katrina Maniquis |Mock Bar Krizel Malabanan • Karren de Chavez |Bar Candidates’ Welfare Karina Kirstie Paola Ayco • Ma. Ara Garcia |Events OPERATIONS HEADS Charles Icasiano • Katrina Rivera |Hotel Operations Marijo Alcala • Marian Salanguit |Day-Operations Jauhari Azis |Night-Operations Vivienne Villanueva • Charlaine Latorre |Food Kris Francisco Rimban • Elvin Salindo |Transpo Paula Plaza |Linkages


LAW MERCANTILE LAW TEAM 2012 Subject Head | Karina Pulido LAYOUT TEAM 2012 Layout Artists | Alyanna Apacible • Noel Luciano • RM Meneses • Jenin Velasquez • Mara Villegas • Naomi Quimpo • Leslie Octaviano • Yas Refran • Cris Bernardino Layout Head| Graciello Timothy Reyes


C. Creation of the Bangko Sentral ng Pilipinas (BSP)

Banking and Finance Letters of Credit Warehouse Receipts Law Trust Receipts Law Negotiable Instruments Law Insurance Code Transportation Law Corporation Law Securities Regulation Code Banking and Finance Intellectual Property

MERCANTILE LAW The New Central Bank Act (RA 7653) II. Law on Secrecy of Bank Deposits (RA 1405) III. General Banking Law of 2000 (RA 8791) IV. Philippine Deposit Insurance Corporation Act (RA 3591, as amended) V. Foreign Currency Deposit Act (RA 6426) I.

I. The New Central Bank Act (RA 7653) A. State policies The State shall maintain a central monetary authority that shall function and operate as an independent and accountable body corporate in the discharge of its mandated responsibilities concerning money, banking and credit. (Sec. 1)

B. Salient features of the NCBA 1. Assurance of BSP independence by providing for the majority of the members of the Monetary Board to come from the private sector. (Sec. 6, NCBA) 2. The BSP may now concentrate on monetary policy, and will shed itself of fiscal responsibilities which in the past, had distracted it from its primary function. (Secs. 3, 129, & 130, NCBA) 3. Provides safeguards to ensure that unlike the old Central Bank which sustained huge losses, the BSP would have a positive net income position by the following provisions: a. Capitalization of P50B of which P10B will be paid upon effectivity of the Act; (Sec.2, NCBA) b. Maintenance of positive net foreign asset position; (Sec.71, NCBA) c. Charging interests on all loans and advances to banks; (Sec. 85, NCBA) d. Authority to collect interests on loans and advances to closed financial institutions; and e. BSP can‘t acquire any shares in banking enterprise, in development banking and financing (Sec. 128, NCBA)

Nature of the BSP A. A central monetary authority; B. An independent and accountable body; and C. A government-owned corporation but enjoys fiscal and administrative autonomy. (Secs. 1 & 2, NCBA) The BSP shall have a capitalization of P50B to be fully subscribed by the Government. P10B of which shall be paid upon effectivity of the NCBA and the balance payable within two (2) years from the effectivity of the NCBA (Sec. 2)

D. Responsibility objective

and

primary

1. Primary Objectives A. To maintain price stability conducive to a balanced and sustainable growth of the economy. B. To promote and maintain monetary stability and the convertibility of the peso. 2. Other Responsibilities A. B.

To provide policy directions in the areas of money, banking, and credit To supervise operations of banks (Sec. 3, NCBA)  All powers, duties and functions vested by law in the Central Bank of the Philippines not inconsistent with the NCBA shall be deemed transferred to the BSP. All references to the Central Bank of the Philippines in any law or special charters shall be deemed to refer to the BSP. (Sec. 136, NCBA)

E. Monetary Board The body through which the powers and functions of the Bangko Sentral are exercised (Sec 6, NCBA)

1. Powers and Functions (Sec. 15, NCBA)

1. Issue rules and regulations it considers necessary for the effective discharge of the responsibilities and exercise of the powers vested in it; 2. Direct the management, operations, and administration of Bangko Sentral, organize its personnel and issue such rules and regulations as it may deem necessary or desirable for this purpose; 3. Establish a human resource management system which governs the selection, hiring, appointment, transfer, promotion, or dismissal of all personnel;

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4. Adopt an annual budget for and authorize such expenditures by Bangko Sentral as are in the interest of the effective administration and operations of Bangko Sentral in accordance with applicable laws and regulations; and 5. Indemnify its members and other officials of Bangko Sentral, including personnel of the departments performing supervision and examination functions, against all costs and expenses reasonably incurred by such persons in connection with any civil or criminal action, suit or proceeding, to which any of them may be made a party by reason of the performance of his functions or duties, unless such members or other officials is found to be liable for negligence or misconduct

2. Composition (Sec. 6, NCBA)

2. 3.

7. Grounds

for Removal of any member of the MB (Sec. 10, NCBA)

1. 2.

3.

The MB shall be composed of 7 members with 6-year terms.

3. Members (Sec. 6, NCBA) 1. 2. 3.

The BSP Governor or his designated alternate (a deputy governor); A Cabinet member to be designated by the President or his designated alternate (an Undersecretary in his department); and 5 members from the private sector (Sec. 6)

 No member of the MB may be reappointed more than once.

4.

3. 4. 5. 6.

Natural-born citizens of the Philippines; At least 35 years old (the Governor must be at least 40 years old); Of good moral character; Of unquestionable integrity; Of known probity and patriotism; and With recognized competence in social and economic disciplines.

5. Disqualifications (Sec. 9, NCBA) In addition to the disqualifications under the Code of Conduct and Ethical Standards for Public Officials and Employees (RA 6713), a member of the Monetary Board is disqualified: 1. Direct connection with any multilateral banking or financial institution; or 2. Substantial interest in any private bank in the Philippines, within 1 year prior to his appointment

6. Prohibitions on members of the MB (Sec. 9, NCBA) 1.

To be a director, officer, employee, consultant, lawyer, agent or stockholder of any bank, quasibank, or any other institution which is subject to supervision or examination by the BSP;

If the member is subsequently disqualified under Sec. 8; If he is physically or mentally incapacitated that he cannot properly discharge his duties and responsibilities and such incapacity has lasted for more than 6 months; If he is guilty of acts or operations which are of fraudulent or illegal character or which are manifestly opposed to the aims and interests of the BSP; and If he no longer possesses the qualifications under Sec. 8.

8. Vacancies, how filled (Sec. 7, NCBA) Cause: death, resignation, or removal of any member Effect: a new member will be appointed to complete the unexpired period of the term of the member concerned.

4. Qualifications (Sec. 8, NCBA) 1. 2.

To hold any other public office or public employment during their tenure; and To be employed in any multilateral banking or financial institution within 2 years after the expiration of his term. Exception: when he serves as an official representative of the government to such institution.

9. Salaries (Sec. 13, NCBA) Fixed by the Phil. President at a sum commensurate to the importance and responsibility attached (Sec. 13, NCBA)

10. Meetings (Sec. 11, NCBA) 1. 2. 3.

4. 5.

held at least once a week; called by the Governor or by 2 MB members; the complete records of the proceedings and deliberations of the MB including the tapes and transcripts of stenographic notes are to be maintained and preserved; four (4) members constitute a quorum; and all decisions by the MB shall require the concurrence of four (4) of its members unless otherwise provided by the NCBA;  deputy governors may attend (Sec. 12, NCBA).  any member with personal or pecuniary interest in any matter in the agenda shall disclose his interest and shall retire from the meeting when the matter is taken up (Sec. 14, NCBA).


11. Civil Liability of Members of the MB (Sec. 16, NCBA)

Members of the MB, officials, examiners, and employees of the BSP are liable when: 1. they willfully violate the provisions of the NCBA; 2. they are guilty of negligence, abuses or acts of malfeasance or misfeasance; or 3. fail to exercise extraordinary diligence in the performance of his duties.

F. How the BSP handles banks in distress Liquidity – Ability of an asset to be converted into cash Solvency – When liabilities amount to less than total assets, providing the ability to pay debts Insolvency – When the actual market value of assets are insufficient to pay its liabilities, not considering capital stock and surplus which are not liabilities for such purpose

1. Conservatorship Applicability:  when a bank or a quasi-bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors (Sec. 29)  determination is to be made by the MB on the basis of a report submitted by the appropriate supervising or examining department (Sec. 29) Period and Termination:  Period: shall not exceed 1 year (Sec. 29)  The expenses attendant to the conservatorship shall be borne by the bank or quasi-bank concerned (Sec. 29)  Grounds for termination of conservatorship by MB: a. When it is satisfied that the institution can continue to operate on its own and the conservatorship is no longer necessary b. When, on the basis of the report of the conservator or of its own findings, the MB determines that the continuance in business of the institution would involve probable loss to its depositors or creditors (the bank or quasi-bank would then be placed under receivership) (Sec. 29) Effects of Conservatorship 1. Bank/Quasi-bank retains juridical personality 2. Not a precondition to the designation of a receiver, and; 3. Perfected transactions cannot be repudiated Qualifications of a Conservator: The conservator should be competent and knowledgeable in bank operations and management. (Sec. 29)

 The appointment of a conservator shall be vested exclusively in the MB. (Sec. 30) Powers and Duties of a Conservator: a. To take charge of the assets, liabilities, and the management thereof b. To reorganize the management c. To collect all monies and debts due said institution, and d. To exercise all powers necessary to restore its viability e. To report and be responsible to the MB f. To overrule or revoke the actions of the previous management and board of directors of the bank or quasi-bank. (Sec. 29) First Philippine International Bank v. CA, 1996: While the Central Bank law gives vast and far reaching powers to the conservator of a bank, such powers must be related to the preservation of the assets of the bank, the reorganization of the management and the restoration of viability. Such powers cannot extend to the post-facto repudiation of perfected transactions, otherwise they would infringe against the non-impairment clause of the Constitution. Remunerations:  General Rule The conservator shall receive remuneration in an amount not to exceed 2/3 of the salary of the president of the institution in 1 year, payable in 12 equal monthly payments  Exception A conservator connected with the BSP, in which case said conservator shall not be entitled to receive any remuneration or emolument. (Sec. 29, NCBA)

2. Receivership Grounds: Whenever the MB finds that a bank or quasi-bank: a. Is unable to pay its liabilities as they become due in the ordinary course of business: Provided, That this shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking community; b. Has insufficient realizable assets, as determined by the BSP, to meet its liabilities; or c. Cannot continue in business without involving probable losses to its depositors or creditors; or d. Has willfully violated a cease-and-desist order under Sec. 37 that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution Receiver: a. if a banking institution: the PDIC b. if a quasi-bank: any person of recognized competence in banking or finance The appointment of a receiver shall be vested exclusively in the MB. And the designation of a

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MERCANTILE LAW REVIEWER conservator is not a precondition to the designation of a receiver.

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Powers and Duties of a Receiver: a. Immediately gather and take charge of all the assets and liabilities of the institution b. Administer the assets for the benefit of the creditors c. Exercise the general powers of a receiver under the Revised Rules of Court d. Not to pay or commit any act that will involve the transfer or disposition of any asset of the institution, except: 1. administrative expenditures 2. receiver may deposit or place funds in nonspeculative investments e. Subject to prior approval of the MB, determine, as soon as possible, but not later than 90 days from take-over, whether the institution may be rehabilitated or otherwise placed in such a condition so that it may be permitted to resume business with safety to its depositors and creditors and the general public The assets of the institution under receivership and liquidation shall be deemed in custodia legis and shall be exempt from any order of garnishment, levy, attachment, or execution. Close Now, Hear Later Scheme Sec. 29 of the Central Bank Act does NOT contemplate prior notice and hearing before a bank may be directed to stop operations and placed under receivership. It is enough that such action is made subject of a subsequent judicial review. When the law provides for the filing of a case within 10 days after the receiver takes charge of the assets of the bank, it is unmistakable that the assailed actions should precede the filing of the case. The legislature could not have intended to authorize ―no prior notice and hearing‖ in the bank‘s closure and at the same time allow a suit to annul it on the basis of absence thereof (Central Bank vs. Cam GR No. 76118, March 30, 1993)

3. Liquidation / Closure Should the determination be that the institution cannot be rehabilitated or permitted to resume business, the MB shall notify in writing the board of directors of the institution of its findings and direct the receiver to proceed with the liquidation of the institution. Procedure: 1. The receiver shall file ex parte with the proper RTC, and without requirement of prior notice or any other action, a petition for assistance in the liquidation of the institution pursuant to the liquidation plan adopted by the PDIC (if quasibank, liquidation plan adopted by the MB) 2. Upon acquiring jurisdiction, the court shall, upon motion by the receiver after due notice, a. adjudicate disputed claims against the institution,

b.

assist the enforcement of individual liabilities of the stockholders, directors, and officers, and c. decide on other issues as may be material to implement the liquidation plan 3. The receiver shall convert the assets of the institutions to money, dispose of the same to creditors and other parties, for the purpose of paying the debts of such institution in accordance with the rules on concurrence and preference of credit under the Civil Code The assets of the institution under receivership and liquidation shall be deemed in custodia legis and shall be exempt from any order of garnishment, levy, attachment, or execution. Dispositions: In case of a liquidation of a bank or quasi-bank, after payment of the cost of proceedings, including reasonable expenses and fees of the receiver to be allowed by the court, the receiver shall pay the debts of such institution, under order of the court, in accordance with the rules on concurrence and preference of credit in the Civil Code. (Sec. 31, NCBA) All revenues and earnings realized by the receiver in winding up the affairs and administering the assets of any bank or quasi-bank shall be used to pay the costs of proceedings, salaries of such personnel whose employment is rendered necessary in the discharge of the liquidation together with other additional expenses caused thereby. The balance of revenues and earnings, after the payment of all said expenses, shall form part of the assets available to creditors. (Sec. 32, NCBA) Effects of Appointment of Receiver/Liquidation 1. Retention of juridical personality 2. Suspension of operations/ Stoppage of business 3. Assets are deemed in custodial legis, i.e., exempt from garnishment, levy or execution 4. Stay of execution of judgment to prevent depletion of bank assets 5. Bank is not liable to pay interest on deposits which accrued during the period of suspension of operation 6. Restriction of bank‘s capacity to do new business (new loans, deposits) but with obligation to collect pre-existing debts

G. How the BSP handles exchange crisis 1. Legal Tender Power (Sec. 52) All notes and coins issued by the BSP shall be fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and private. Limitation: Coins shall be legal tender in amounts not exceeding P50 for denominations of 25 centavos and above, and in amounts not exceeding P20 for

MERCANTILE LAW REVIEWER denominations of 10 centavos otherwise fixed by the MB,

or

less

The maximum amount of coins to be considered as legal tender is: [BSP Cicular 537 (2006) ] 1. P1,000.00 for denominations of 1-Piso, 5-Piso and 10-Piso coins; and 2. P100.00 for denominations of 1-sentimo, 5sentimo, 10-sentimo, and 25-sentimo coins. 2. Rate of Exchange (Sec. 74) The MB shall: 1. Determine the exchange rate policy of the country; 2. Determine the rates at which the Bangko Sentral shall buy and sell spot exchange; 3. Establish deviation limits from the effective exchange rate or rates as it may deem proper. 4. Determine the rates for other types of foreign exchange transactions by the BSP, including purchases and sales of foreign notes and coins. Limitation: The margins between the effective exchange rates and the rates established by the MB may not exceed the corresponding margins for spot exchange transactions by more than the additional costs or expenses involved in each type of transactions.

II. Law on Secrecy of Bank Deposits (RA 1405) A. Purpose (Sec. 1) 1. To give encouragement to the people to deposit their money in banking institutions and to discourage private hoarding; and 2.

So that the people‘s money may be properly utilized by banks in authorized loans to assist in the economic development of the country.

China Banking Corporation v. Ortega, 1973: The absolute confidentiality rule in R.A. No. 1405 actually aims at protection from unwarranted inquiry or investigation if the purpose of such inquiry or investigation is merely to determine the existence and nature, as well as the amount of the deposit in any given bank account.

B. Prohibited acts (Sec. 3) 1. 2.

C. Deposits covered (Sec. 2)

unless

No person, government official, bureau or office may examine, inquire into or look into such deposits; and No official or employee of any banking institution may disclose to any unauthorized person any information concerning said deposits.

All deposits of whatever nature with banks or banking institutions in the Philippines are hereby considered as of an absolutely confidential nature and may not be examined. Includes investments in bonds issued by the Philippine Government, its political subdivisions and its instrumentalities. 

Under the RA 1405, bank deposits are statutorily protected or recognized zones of privacy. (People v. Estrada, G.R. No. 164368, April 2, 2009; Marquez v. Desierto, G.R. No. 135882, June 27, 2001, 359 SCRA 772; Ople v. Torres, G.R. No. 107737. October 1, 1999, 316 SCRA 43)

Ejercito v. Sandiganbayan (Special Division), 2006: The term deposits as used in RA 1405 is to be understood broadly and not limited only to accounts which give rise to a creditor-debtor relationship between the depositor and the bank. If the money deposited under an account may be used by banks for authorized loans to third persons, then such account, regardless of whether it creates a creditor-debtor relationship between the depositor and the bank, falls under the category of accounts which the law precisely seeks to protect for the purpose of boosting the economic development of the country. Considering the use of the phrase ―of whatever nature‖ RA 1405 applies not only to money which is deposited but also to those which are invested. Thus, the protection afforded by RA 1405 extends to trust accounts.

D. Exceptions (Sec. 2) A. B. C. D.

Upon written permission of the depositor; In cases of impeachment; Upon order of a competent court in cases of: a. Bribery; b. dereliction of duty of public officials; or Where the money deposited or invested is the subject matter of the litigation.

Union Bank v. Court of Appeals, 1999: By the phrase "subject matter of the action" is meant "the physical facts, the things real or personal, the money, lands, chattels, and the like, in relation to which the suit is prosecuted, and not the delict or wrong committed by the defendant. (Mathay v. Consolidated Bank and Trust Company, 1974). We note with approval the difference between the "subject of the action" from the "cause of action." We also find petitioner's definition of the phrase "subject matter of the action" is consistent with the term "subject matter of the litigation," as the latter is used in the Bank Deposits Secrecy Act.

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Where the plaintiff is fishing for information so it can determine the culpability of private respondent and the amount of damages it can recover from the latter. It does not seek recovery of the very money contained in the deposit. The subject matter of the dispute may be the amount of P999,000.00 that petitioner seeks from private respondent as a result of the latter's alleged failure to inform the former of the discrepancy; but it is not the P999,000.00 deposited in the drawer's account. By the terms of R.A. No. 1405, the "money deposited" itself should be the subject matter of the litigation. Banco Filipino v. Purisima, 1988: The exception applies to cases of concealment of illegally acquired property in anti-graft cases. The inquiry into illegally acquired property – or property NOT "legitimately acquired" – extends to cases where such property is concealed by being held by or recorded in the name of other persons. Mellon Bank, N.A. v. Magsino, 1990: The exception even extends to cases of concealment of illegally acquired property not involving anti-graft cases as long as money deposited was the subject matter of litigation. Other exceptions: 1. upon order of a competent court in cases of unexplained wealth under Sec. 8 of RA 3019 or the Anti-Graft and Corrupt Practices Act (PNB v. Gancayco, 1965; Banco Filipino v. Purisima, 1988; Marquez v. Desierto, 2001) 2. when inquiry is conducted under the authority of the Commissioner of Internal Revenue into the bank accounts of the following: a. a decedent in order to determine his gross estate b. any taxpayer who has filed an application for compromise of his tax liability, which application shall include a written waiver of his privilege under RA 1405 or under other general or special laws  information obtained from banks and financial institutions may be furnished to a foreign tax authority pursuant to an existing convention or agreement. (Sec. 6(F), NIRC, as amended by RA 10021) 3. upon order of a competent court in cases under the Anti-Money Laundering Act of 2001 (RA 9160, hereinafter ―AMLA‖), when there is probable cause that the deposits or investments involved are in any way related to an unlawful activity or a money laundering offense, except that no court order required if: a. funds or property involved consists of investments; or b. said investments are related to: i. kidnapping for ransom ii. unlawful activities under Comprehensive Drugs Act of 2002 (RA 9165); iii. hijacking and other violations under RA 6235; and

iv.

4. 5.

6.

destructive arson and murder, including those perpetrated by terrorists against non-combatants and similar targets. BSP inquiry or examination in the course of its periodic or special examination of the bank (Sec. 11, AMLA). Disclosure of certain information about bank deposits which have been dormant for at least 10 years, to the Treasurer of the Philippine in a sworn statement, a copy of which is posted in the bank premises. (Sec. 2, Unclaimed Balances Law [Act No. 3926, as amended]) The PDIC and/or the BSP can inquire into or examine deposit accounts and all information related thereto in case there is a finding of unsafe and unsound banking practice (Sec. 8, paragraph 8, R.A. 3591, as amended by R.A. 9576).

[NOT considered as EXCEPTIONS]: a.

b.

In 1981, PD 1792 added the following grounds when the bank can be compelled to reveal the amount of a depositor: i. ―made in the course of a special or general examination of a bank and is specifically authorized by the Monetary Board after being satisfied that there is reasonable ground to believe that a bank fraud or serious irregularity has been or is being committed and that it is necessary to look into the deposit to establish such fraud or irregularity,‖ or ii. ―made by an independent auditor hired by the bank to conduct its regular audit provided that the examination is for audit purposes only and the results thereof shall be for the exclusive use of the bank.‖ However, Sec. 135 of RA 7653 or the New Central Bank Act expressly repealed PD 1792 thereby reverting RA 1405 to its version prior to the promulgation of the Decree. a)

Thus, Villanueva says that these two instances are excluded from the enumeration of exceptions to the secrecy of bank deposits (VILLANUEVA, Commercial Law Review, opinion).

b)

Morales, however, notes that with the enactment of the AMLA, exception (i) has been substantially resurrected. While there is no similar development of exception (ii), the exclusion of the BSP examiners and independent auditors from the coverage of the Secrecy of Bank Deposits Law finds basis in Opinion No. 243 (s. 1975) of then Secretary of Justice Pedro Tuason. (MORALES, The Philippine General Banking Law, opinion)

It used to be believed that the RA 1405 did not apply to the Ombudsman, on account of his authority under Sec. 15(8) of RA 6770 or the Ombudsman Act of 1989 to ―examine and have

MERCANTILE LAW REVIEWER access to bank accounts and records.‖ However, the SC in Marquez v. Desierto (G.R. No.135882, June 27, 2001) and Ombudsman v. Ibay (G.R. No. 137538, September 3, 2001) restricted the Ombudsman‘s power as follows: ―[B]efore an in camera inspection may be allowed, there must be a pending case before a court of competent jurisdiction. Further, the account must be clearly identified, the inspection limited to the subject matter of the pending case before the court of competent jurisdiction. The bank personnel and the account holder must be notified to be present during the inspection, and such inspection may cover only the account identified in the pending case.‖ (MORALES, The Philippine General Banking Law) ―Further, it is interesting to note that the Secretary of Justice in his Opinion No. 13 (s. 1987) concluded that the Presidential Commission on Good Government can compel banks to disclose or produce bank records without violating the bank secrecy laws.‖ (MORALES, The Philippine General Banking Law) ―Moreover, under Sec. 1(d) of RA 6382 (1990), which created the Davide Commission that conducted a fact finding investigation of the failed coup d‘ etat of December 1989, the commission had the power to ‗ask the Monetary board to disclose information on and/or grant authority to examine bank deposits, trust finds, or banking transactions in the name of and/or utilized by a person, natural or juridical, under investigation by the Commission, in any bank or banking institution in the Philippines, when the Commission has reasonable ground to believe that said deposits, trust or investment funds, or banking transactions have been used in support of furtherance of the objectives of the coup d‘ etat.‘‖ (MORALES, The Philippine General Banking Law) Notwithstanding the exceptions enumerated by law, the prevailing policy on the matter is to preserve the absolute confidentiality enjoyed by bank deposits. Republic v. Eugenio, 2008: Indeed, by force of statute, all bank deposits are absolutely confidential, and that nature is unaltered even by the legislated exceptions referred to above. There is disfavor towards construing these exceptions in such a manner that would authorize unlimited discretion on the part of the government or of any party seeking to enforce those exceptions and inquire into bank deposits. If there are doubts in upholding the absolutely confidential nature of bank deposits against affirming the authority to inquire into such accounts, then such doubts must be resolved in favor of the former. Such a stance would persist unless Congress passes a law reversing the general state policy of preserving the absolutely confidential nature of Philippine bank accounts.

BSB Group, Inc., v. Go, 2010: It is conceded that while the fundamental law has not bothered with the triviality of specifically addressing privacy rights relative to banking accounts, there, nevertheless, exists in our jurisdiction a legitimate expectation of privacy governing such accounts. The source of this right of expectation is statutory, and it is found in R.A. No. 1405, otherwise known as the Bank Secrecy Act of 1955. Subsequent statutory enactments have expanded the list of exceptions to this policy yet the secrecy of bank deposits still lies as the general rule, falling as it does within the legally recognized zones of privacy. There is, in fact, much disfavor to construing these primary and supplemental exceptions in a manner that would authorize unbridled discretion, whether governmental or otherwise, in utilizing these exceptions as authority for unwarranted inquiry into bank accounts. It is then perceivable that the present legal order is obliged to conserve the absolutely confidential nature of bank deposits.

E. Garnishment of deposits  General Rule The prohibition against examination of or inquiry into a bank deposit under Republic Act 1405 does not preclude its being garnished to insure satisfaction of a judgment (China Banking Corporation v. Ortega, 1973; Philippine Commercial and Industrial Bank v. Court of Appeals, 1991) China Banking Corporation v. Ortega (1973): ―…the prohibition against examination of or inquiry into a bank deposit under Republic Act 1405 does not preclude its being garnished to insure satisfaction of a judgment. Indeed there is no real inquiry in such a case, and if the existence of the deposit is disclosed the disclosure is purely incidental to the execution process. It is hard to conceive that it was ever within the intention of Congress to enable debtors to evade payment of their just debts, even if ordered by the Court, through the expedient of converting their assets into cash and depositing the same in a bank.‖  Exception - Foreign Currency Deposits. The foreign currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever. (Sec. 8, Foreign Currency Deposit Act)  Exceptions to exception 1. 2.

upon written permission of the depositor (Sec. 8, Foreign Currency Deposit Act ; Intengan vs CA ; 2002) upon order of a competent court in cases of violation of the Anti-Money Laundering Act of 2001 [as in the case of peso deposits, supra]

145


146

4. 5. 6.

during Bangko Sentral‘s periodic or special examinations [as in the case of peso deposits, supra], and disclosure of the Treasurer of the Philippines when the unclaimed balances law applies (Act 3936, as amended by PD 679) BSP/PDIC inquiry if there is a finding of unsafe and unsound banking practice (as in the case of peso deposits, supra) In Salvacion vs. CB (1997), where a Filipino child was raped by a foreigner, the SC allowed garnishment of foreign currency deposits stating: ―If we rule that the questioned Section 113 of CB Circular No. 960 which exempts from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever, is applicable to a foreign transient, injustice would result especially to a citizen aggrieved by a foreign guest.‖

F. Penalties for violation (Sec. 5) Imprisonment of not more than 5 years or a fine of not more than P20,000 or both, in the discretion of the court.

III. General Banking Law of 2000 (RA 8791) A. Policy To promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy. (Sec. 2)

B. Definition and classification of banks Banks shall refer to entities engaged in the lending of funds obtained in the form of deposits. (Sec. 3.1, GBL) Classification of Banks (Sec. 3.2) 1) Universal Banks. (UB) These used to be called expanded commercial banks and their operations are primarily governed by the GBL. They can exercise the powers of an investment house and invest in non-allied enterprises. They have the highest capitalization requirement. 2) Commercial Banks. (KB) These are ordinary or regular commercial banks, as distinguished from a universal bank. They have a lower capitalization requirement than a UB and cannot exercise the powers of an investment house and invest in non-allied enterprises. 3) Thrift Banks. These are a. savings and mortgage banks;

b. c.

stock savings and loan associations; and private development banks

NOTE— The term ‗thrift banks‘ also refers to any banking corporation organized for the following purposes: (1) Accumulating the savings of depositors and investing them, together with capital loans secured by bonds, mortgages in real estate and insured improvements thereon, chattel mortgage, bonds and other forms of security or in loans for personal or household finance, whether secured or unsecured, or in financing for homebuilding and home development; in readily marketable and debt securities; in commercial papers and accounts receivables, drafts, bills of exchange, acceptances or notes arising out of commercial transactions; and in such other investments and loans which the Monetary Board may determine as necessary in the furtherance of national economic objectives; (2) Providing short-term working capital, mediumand long-term financing, to businesses engaged in agriculture, services, industry and housing; and (3) Providing diversified financial and allied services for its chosen market and constituencies especially for small and medium enterprises and individuals. (Sec.3(a), R.A. 7906) 4) Cooperative Banks. These are banks organized primarily to make financial and credit services available to cooperative banks. NOTE— A cooperative bank is one organized by the majority shares of which is owned and controlled by cooperatives primarily to provide financial and credit services to cooperatives. The term "cooperative bank" shall include cooperative rural banks. (Sec. 100, R.A. 6938) 5) Islamic Banks These are banks the business dealings and activities of which are subject to the basic principles and rulings of Islamic Shari‘a. The Al Amanah Islamic Investment Bank of the Philippines, which was created by RA 6848, is the only Islamic bank in the country at this time. NOTE— Islamic Bank refers to the Al-Amanah Islamic Investment Bank of the Philippines, created under R.A. 6848. (See Sec. 44(1) and Sec. 2, R.A. 6848) 6) Rural Banks Mandated to make needed credit available and readily accessible in the rural areas on reasonable terms and which are primarily governed by the Rural Banks Act of 1992 (RA 7353) 7) Other classifications of banks As determined by the Monetary Board, i.e., Philippine Veterans Bank (RA 3518), Landbank of the

MERCANTILE LAW REVIEWER Philippines (RA 3844), Development Bank of the Philippines (RA 85)

c. Power to Invest in Allied enterprises (financial or nonfinancial) (Sec. 30, GBL)

C. Distinction between banks and quasi-banks and trust entities As opposed to Quasi-banks Quasi-banks (QB) refer to entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes for purposes of relending or purchasing of receivables and other obligations. (last paragraph of Sec. 4) The term ―deposit substitutes‖ is defined as an alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower's own account, for the purpose of relending or purchasing of receivables and other obligations. It includes bankers acceptances, promissory notes, participations, certificates of assignment and similar instruments with recourse, and repurchase agreements. (Sec. 95, New Central Bank Act, hereinafter “NCBA”) As opposed to Trust Entities A Trust Entity is a stock corporation or a person duly authorized by the Monetary Board to engage in trust business. (Sec. 79, GBL) A Trust Business is any activity resulting from trusteeship involving the appointment of a trustee by a trustor for the administration, holding, management of funds and/or properties of the trustor by the trustee for the use, benefit or advantage of the trustor or of beneficiaries.

D. Bank powers and liabilities Classification of Banks:  Universal Banks. (UB) These used to be called expanded commercial banks and their operations are primarily governed by the GBL. They can exercise the powers of an investment house and invest in non-allied enterprises. They have the highest capitalization requirement.  Commercial Banks. (KB) These are ordinary or regular commercial banks, as distinguished from a universal bank. They have a lower capitalization requirement than a UB and cannot exercise the powers of an investment house and invest in non-allied enterprises. Powers

KB a. Corporate Powers (Sec. 29, GBL) b. Banking and Incidental Powers (Sec. 29, GBL)

UB a. Corporate Powers (Sec. 29, GBL) b. Banking and Incidental Powers (Sec. 23, GBL)

1)

c. Power to invest in Allied (financial or non-financial) (Sec. 24, GBL) d. Power to invest in Nonallied enterprises – (Sec. 24, GBL) e. Powers of an investment house (Sec. 23, GBL)

Corporate powers

General powers incident to corporations (Sec. 36, Corporation Code) 1. To sue and be sued in its corporate name; 2. Succession by its corporate name for the period stated in the AOI and the certificate of incorporation 3. To adopt and use a corporate seal 4. To amend its AOI 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal them 6. To issue or sell stocks to subscribers and to sell treasury stocks. 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution 8. To enter into merger or consolidation 9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: provided that no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity 10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees 11. To exercise such other powers as may be essential or necessary to carry out its purposes as stated in the AOI. 2) Banking and incidental powers All such powers as may be necessary to carry on the business of commercial banking (Sec. 29) a.

Accepting drafts

b.

Issuing letters of credit

c.

Discounting and negotiating promissory notes, drafts, bills of exchange, and other evidence of debt

d.

Accepting or creating demand deposits

147

MERCANTILE LAW REVIEWER Deposit Function: GENERAL RULE Only a Universal Bank (UB) Commercial Bank (KB) can accept or create demand deposits

148

EXCEPTION Banks other than a UB or KB with prior approval of, and subject to such conditions and rules as may be prescribed by the Monetary Board (Sec. 33, GBL) Presumption of ownership of deposits: It is presumed that money deposited in a bank account belongs to the person in whose name the deposit account is opened. Fultron Iron Works Co. v. China Banking Corporation, 1930 A depositor is presumed to be the owner of funds standing in his name in a bank deposit; and where a bank is not chargeable with notice that the money deposited in such account is the property of some other person than the depositor, the bank is justified in paying out the money to the depositor or upon his order, and cannot be liable to any other person as the true owner. BPI v. CA, 1994 A bank is under no duty or obligation to make an application or set-off against the deposit accounts of a borrower. To apply the deposit to the payment of a loan is a privilege, a right of set-off which the bank has the option to exercise, but not the obligation. CA Agro-industrial Dev. Corp. v. CA, 1983 The rent of safety deposit boxes is a special kind of deposit and cannot be characterized as an ordinary contract of lease because the full and absolute possession and control of the deposit box is not given to the renters. The prevailing rule is that the relation between the bank renting out and the renter is that of bailor and bailee the bailment being for hire and mutual benefit. e.

Receiving other types of deposits and deposit substitutes Types of Deposits: 1. Time Deposit - Interest rate stipulated depending on the number of days. During this period, the money deposited may not be withdrawn. High interest rates. 2. Savings Deposit - Bank pays an interest rate, but not as high as time deposits. 3. Demand Deposits/Current Accounts - No interest is paid by the bank because the depositor can take out his funds any time. It is called demand deposit because the depositor can withdraw the money he deposited on the very same day when he deposited it. (VILLANUEVA, Commercial Law Review, opinion)

f. Buying and selling foreign exchange and gold or silver bullion

g. Acquiring marketable bonds and other debt securities h.

Extending credit Loan Function ―Know your customer‖ rule: Before granting a loan or other credit accommodation, a bank must ascertain that the debtor is capable of fulfilling its commitments to the bank. (Sec. 40) The bank may demand from its credit applicants a statement of their assets and liabilities and of their income and expenditure and such information as may be prescribed by law or by rules and regulations of MB to enable the bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation purposes to the BIR. (Sec. 40) Credit enhancement If the borrower is less than creditworthy, third persons may enhance his credit by providing guarantees and other security devices in favor of the bank. (MORALES, The Philippine General Banking Law, opinion)

If there is material misrepresentation, the bank may: a. Terminate any loan or other credit accommodation granted on the basis of said statements; and b. Shall have the right to demand immediate repayment or liquidation of the obligation (Sec. 40) Limit on Loans, Credit Accommodations and Guarantees: Real Estate GENERAL RULE Shall not exceed 75% of the appraised value of the respective real estate security, plus 60% of the appraised value of the insured improvements, and such loans may be made to the owner of the real estate or to his assignees

Security of chattels and intangible properties (patents, trademarks, trade names, and copyrights)

EXCEPTION The Monetary Board otherwise prescribes (Sec. 37) GENERAL RULE Shall not exceed 75% of the appraised value of the security, and such loans and other credit accommodations may be made to the title-holder of the chattels and intangible properties or his assignees EXCEPTION The Monetary Board otherwise prescribes (Sec. 38)

MERCANTILE LAW REVIEWER Grant of Loans (Sec. 39) a. Only in amounts and for the periods of time essential for the effective completion of the operations to be financed; and b. Consistent with safe and sound banking practices.

v. Spouses Tan [2003]; Samsung Construction v. FEBTC [2004]; Citibank, N.A. v. Spouses Cabamongan [2006]; Philippine Savings Bank v. Chowking Food Corporation [2008]; Bank of America NT &SA v. Philippine Racing Club [2009].

Purpose of Loans Purpose must be stated in the application and in the contract between the bank and the borrower. (Sec. 39)

Simex International v. CA, 1990: As a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.

Effect of usage of loan proceeds for purposes under than those agreed upon with the bank The bank shall have the right to terminate the loan or other credit accommodation and demand immediate repayment of the obligation. (Sec. 39) Amortization on Loans and Other Credit Accommodations (Sec. 44) a. In case of loans and other credit accommodations with maturities of more than 5 years, provisions must be made for periodic amortization payments, but such payments must be made at least annually: Provided, however, That when the borrowed funds are to be used for purposes which do not initially produce revenues adequate for regular amortization payments therefrom, the bank may permit the initial amortization payment to be deferred until such time as said revenues are sufficient for such purpose, but in no case shall the initial amortization date be later than 5 years from the date on which the loan or other credit accommodation is granted. b. In case of loans and other credit accommodations to microfinance sectors, the schedule of loan amortization shall take into consideration the projected cash flow of the borrower and adopt this into the terms and conditions formulated by banks. All are subject to such rules as the Monetary Board may promulgate. (Sec. 29, GBL)

E. Diligence required of banks Banks should diligence.

observe

the

highest

degree

of

Notwithstanding the degree of diligence required, a bank is not expected to be infallible (Prudential Bank vs. CA, 2000) Fiduciary Nature of Banks  Failure on the part of the bank to satisfy the degree of diligence required of banks may warrant the award of damages.  Under Sec. 2, the degree of diligence is ―high standards of integrity and performance‖. In numerous cases, the Supreme Court has held that the highest degree of diligence and care is expected from banks (Simex International v. CA [1990]; Philippine Bank of Commerce v. CA [1997]; Westmont Bank v. Ong [2002]; Solidbank

In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a few hundred pesos or of millions. The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can dispose as he sees fit, confident that the bank will deliver it as and to whomever he directs. A blunder on the part of the bank, such as the failure to duly credit him his deposits as soon as they are made, can cause the depositor not a little embarrassment if not financial loss and perhaps even civil and criminal litigation. PCI Bank v. CA, 2001: Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees. Philippine Savings Bank v. Chowking Food Corporation, 2008: It cannot be over emphasized that the banking business is impressed with public interest. Of paramount importance is the trust and confidence of the public in general in the banking industry. Consequently, the diligence required of banks is more than that of a Roman pater familias or a good father of a family. The highest degree of diligence is expected. Bank of America NT&SA v. Philippine Racing Club, 2009: The banking business is so impressed with public interest where the trust and confidence of the public in general is of paramount importance such that the appropriate standard of diligence must be a high degree of diligence, if not the utmost diligence. Under the doctrine of last clear chance, a bank may be held liable for loss despite the negligence of a depositor. Examples of these cases are the following:  For disbursing funds to a dishonest employee despite the employee‘s failure to strictly abide with the bank‘s internal procedure. (PBC v. CA, 1997)  Allowing the execution of a mortgage on parcels of land as security for a loan not owned by the prospective borrower. (Canlas v. Court of Appeals, 2000)

149


150

 Crediting the deposit in favor of another depositor, a check where the signature of the drawer was forged. (Westmont Bank v. Ong, 2002)  Encashing pre-signed checks of the depositor which were stolen by its employee. (Bank of America NT & SA v. Philippine Racing Club, 2009) A bank is liable to a depositor when it honored and paid on a forged check against the depositor‘s account even if the bank followed its internal procedure in preventing a faulty discharge. (Samsung Construction v. FEBTC, 2004)  In Gempesaw v. Court of Appeals (1993), a bank was held liable for damages for failing to follow its internal procedures in paying on a forged check despite the gross negligence on the part of the depositor.

F. Nature of bank funds and bank deposits

then perceivable that the present legal order is obliged to conserve the absolutely confidential nature of bank deposits.

G. Stipulation on interests The Monetary Board may prescribe the maturities, as well as related terms and conditions for various types of bank loans and other credit accommodations. Any change by the Board in the maximum maturities shall apply only to loans and other credit accommodations made after the date of such action. The Monetary Board shall regulate the interest imposed on micro finance borrowers by lending investors and similar lenders such as, but not limited to, the unconscionable rates of interest collected on salary loans and similar credit accommodations (Sec. 43, GBL)

H. Grant of loans and security requirements (Prudential measures)

Confidentiality of Bank Deposits. The prevailing policy on the matter is to preserve the absolute confidentiality enjoyed by bank deposits. Republic v. Eugenio, 2008: Indeed, by force of statute, all bank deposits are absolutely confidential, and that nature is unaltered even by the legislated exceptions referred to above. There is disfavor towards construing these exceptions in such a manner that would authorize unlimited discretion on the part of the government or of any party seeking to enforce those exceptions and inquire into bank deposits. If there are doubts in upholding the absolutely confidential nature of bank deposits against affirming the authority to inquire into such accounts, then such doubts must be resolved in favor of the former. Such a stance would persist unless Congress passes a law reversing the general state policy of preserving the absolutely confidential nature of Philippine bank accounts. BSB Group, Inc., v. Go, 2010: It is conceded that while the fundamental law has not bothered with the triviality of specifically addressing privacy rights relative to banking accounts, there, nevertheless, exists in our jurisdiction a legitimate expectation of privacy governing such accounts. The source of this right of expectation is statutory, and it is found in R.A. No. 1405, otherwise known as the Bank Secrecy Act of 1955. Subsequent statutory enactments have expanded the list of exceptions to this policy yet the secrecy of bank deposits still lies as the general rule, falling as it does within the legally recognized zones of privacy. There is, in fact, much disfavor to construing these primary and supplemental exceptions in a manner that would authorize unbridled discretion, whether governmental or otherwise, in utilizing these exceptions as authority for unwarranted inquiry into bank accounts. It is

1.

Ratio of Net Worth to Total Risk Assets

Risk-based capital ratio: The minimum ratio which the net worth of a bank must bear to its total risk assets which may include contingent accounts [i.e. net worth: total risk assets] (Sec. 34, GBL)  General Rule A bank must conform to the risk-based capital ratio prescribed by the MB  Exceptions The MB may alter or suspend compliance with such ratio whenever necessary for a maximum period of 1 year. a. In case of a bank merger or consolidation; OR b. When a bank is under rehabilitation under a program approved by the BSP; (Sec. 34, GBL) Purpose: A bank must not be allowed to expand the volume of its loans and investments in a manner that is disproportionate to its net worth. (MORALES, The Philippine General Banking Law, Opinion) Effect of non-compliance (Sec. 34, GBL): 1. The MB may limit or prohibit the distribution of net profits by such bank and may require that part or all of the net profits be used to increase the capital accounts of the bank until the minimum requirement has been met. 2. The MB may restrict or prohibit the acquisition of major assets and the making of new investments by the bank, with the exception of purchases of readily marketable evidences of indebtedness of the RP and the BSP and any other evidences of indebtedness or obligations


2.

the servicing and repayment of which are fully guaranteed by the RP, until the minimum required capital ratio has been restored.

d.

Single Borrowers‘ Limit

Guidelines on the wholesale lending of government banks: a. it shall apply only to loans granted by participating financial institutions (PFIs) on a wholesale basis for on-lending to end-user borrowers; b. it shall apply only to loan programs funded by multilateral, international, or local development agencies, organizations, or institutions, especially designed for wholesale lending activities of government banks; c. the end-user borrowers of the PFIs shall be subject to the 25% SBL, not the increased ceiling of 35%; and d. government banks shall observe appropriate criteria for accrediting PFIs and for the grant/renewal of credit lines to accredited PFIs. (BSP Circular No. 425 dated Mach 25, 2004)

General Rule The total loans, credit accommodations and guarantees that may be extended by a bank to any person, partnership, association, or corporation or other entity shall at no time exceed 20% of the net worth of such bank. (Sec. 35.1,GBL) Exceptions 1. The Monetary Board otherwise prescribes for reasons of national interest. (Sec. 35.1, GBL) 2. Wholesale lending activities of government banks to participating institutions for relending to end-user borrowers: separate limit of 35% net worth. (BSP Circular No. 425 dated March 25, 2004) Increase of limit: The Monetary Board may increase the limit prescribed by an additional 10% of the net worth, when: a. The additional liabilities of any borrower are adequately secured by trust receipts, shipping documents, warehouse receipts or other similar documents transferring or securing title; b. Covering readily marketable, non-perishable goods; and c. Which must be fully covered by insurance (Sec. 35.2, GBL) Purpose: To prevent the bank from making excessive loans and other credit accommodations to a single borrower or corporate group, including guarantees for the account of such borrower or group. The bank is prohibited from… placing many eggs in the basket of one client. [It] is a damage-control mechanism [and] a device for risk amelioration. (MORALES, The Philippine General Banking Law, Opinion) Basis for determining compliance: The basis for determining compliance with the SBL is the total credit commitment of the bank to the borrower. (Sec. 35.1, GBL) Inclusions in the ceiling: a. the direct liability of the maker or acceptor of paper discounted with or sold to such bank and the liability of a general indorser, drawer or guarantor who obtains a loan or other credit accommodation from or discounts paper with or sells papers to such bank; b. in the case of an individual who owns or controls a majority interest in a corporation, partnership, association or any other entity, the liabilities of said entities to such bank; c. in the case of a corporation, all liabilities to such bank of all subsidiaries in which such corporation owns or controls a majority interest; and

in the case of a partnership, association or other entity, the liabilities of the members thereof to such bank. (Sec. 35.3, GBL)

Exclusions from the ceiling: Loans and other credit accommodations a. secured by obligations of the BSP or of the Philippine Government; b. fully guaranteed by the government as to the payment of principal and interest; c. covered by assignment of deposits maintained in the lending bank and held in the Philippines; d. under letters of credits to the extent covered by margin deposits; and e. specified by the Monetary Board as non-risk items (Sec. 35.5, GBL) Combination of liabilities: The MB may prescribe the combination of the liabilities of subsidiary corporations or members of the partnership, association, entity or such individual under certain circumstances, including but not limited to any of the following situations: a. the parent corporation, partnership, association, entity or individual guarantees the repayment of the liabilities; b. the liabilities were incurred for the accommodation of the parent corporation or another subsidiary or of the partnership or association or entity or such individual; or c. the subsidiaries though separate entities operate merely as departments or divisions of a single entity. (Sec. 35.4, GBL)  Loans and other credit accommodations, deposits maintained with, and usual guarantees by a bank to any other bank or non-bank entity, whether locally or abroad, shall be subject to the limits as herein prescribed. (Sec. 35.6, GBL) 3.

Restrictions on Bank Exposure to Directors, Officers, Stockholders and their Related Interests (DOSRI)

General Rule No director or officer of any bank

151

MERCANTILE LAW REVIEWER a.

152

b.

shall, directly or indirectly, for himself or as the representative or agent of others, borrow from such bank, nor shall he become a guarantor, endorser or surety for loans from such bank to others, or in any manner be an obligor or incur any contractual liability to the bank

Exceptions 1. valid insider lending (Sec. 36, GBL) 2. loans, credit accommodations and guarantees extended by a cooperative bank to its cooperative shareholders (Sec. 36, GBL) Requirements for valid insider lending (Sec. 36, GBL): a. in the regular course of business ; b. upon terms not less favorable to the bank than those offered to others; c. there is a written approval of the majority of all the directors of the bank, excluding the director concerned; (Except: granted to officers under a fringe benefit plan approved by the BSP; d. the required approval shall be entered upon the record of the bank and a copy of such entry shall be transmitted forthwith to the appropriate supervising and examining department of the BSP; e. limited to an amount equivalent to the DOSRI borrower‘s unencumbered deposits and book value of his paid-in capital contribution in the bank Exceptions 1. non-risk items; and 2. loans in the form of fringe benefits.  A DOSRI borrower is required to waive the secrecy of his ―deposits of whatever nature in all banks in the Philippines.‖ (Sec. 26, NCBA) Purpose: The general policy behind DOSRI rules is to level the lending field between the ―insiders‖ and the ―outsiders‖. The objective is to prevent the bank from becoming a captive source of finance for DOSRI. (MORALES, The Philippine General Banking Law, Opinion) 4.

Loan-Loss Provisioning (Sec. 49, GBL)

The following are subject to regulation by the Monetary Board: a. the amount of reserves for bad debts or doubtful accounts or other contingencies; and b. the writing off of loans, other credit accommodations, advances and other assets. Purpose: For effective banking supervision. There is a problem of mismatch when a loan becomes non-performing. The bank is paying interest on the money it borrowed from the depositors or other placers of funds, but is not recouping that interest from the loan it made. Eventually, the bank may have to write off loan losses against profits. To cushion this

eventuality, the bank is required to set aside reserved for bad debts and other doubtful accounts or contingencies. (MORALES, The Philippine General Banking Law, Opinion) 5.

Reserves

Purposes: a. To control the volume of money created by the credit operations of the banking system, the BSP requires all banks to maintain reserves against their deposit and deposit-substitute liabilities. b. As a ready source of funds that will respond to unusually large number of withdrawals or preterminations of deposits or depositsubstitutes, taking in the shape of a bank run. (MORALES, The Philippine General Banking Law, Opinion) Two types of reserves: a. Statutory legal reserve 10% for deposits and deposit substitutes (BSP Circular No. 491 dated July 12, 2005) For deposit-substitutes evidenced by repurchase agreements covering government securities: 2% (BSP Circular No. 444 dated August 18, 2004) For foreign currency deposit units: 100% (BSP Circular No. 1389 dated April 13, 1993, as amended); 30% of this cover must be in the form of liquid assets (BSP Circular-Letter dated June 6, 1997, as cited in MORALES) b.

Liquidity reserve 11% (BSP Circular No. 491). This consists of deposits placed in the Reserve Deposit Account with the BSP for at least 3 months (BSP Circular No. 539 dated August 9, 2006)

The BSP shall not pay interest on the reserves maintained with it unless the Monetary Board decides otherwise as warranted by circumstances. (Sec. 94, NCBA) 6. PDIC Insurance Banks are required to insure their deposit liabilities with the PDIC. Partial Insurance: Each depositor is a beneficiary of the insurance for a maximum amount of P500,000, or its foreign currency equivalent in the case of an FCDU deposit. (RA 9576, 2009) NOTE— PDIC only insures deposit (not deposit substitutes) liabilities of a bank or banking institution which is engaged in the business of receiving deposits, or which thereafter may engage in the business of receiving deposits (Sec.5, RA 3591, as amended) Purpose: Full insurance might encourage risky banking activities. A limited insurance of bank deposits serves to limit moral hazard.


I. Penalties for violation

(a) Fine not exceeding Thirty thousand pesos (P30,000) a day for each violation, taking into consideration the attendant circumstances, such as the nature and gravity of the violation or irregularity and the size of the bank or quasibank; or

Violation of any of the provisions of the GBL shall be subject to Sections 34, 35, 36 and 37 of the New Central Bank Act, unless otherwise provided under therein. 1. Fine, Imprisonment

(b) Suspension of rediscounting privileges or access to Bangko Sentral credit facilities;

Criminal Sanctions a. Refusal by an institution subject to examination and supervision by the Monetary Board to file the required report or permit any lawful examination into its affairs (Sec. 34, NCBA)

(c) Suspension of lending or foreign exchange operations or authority to accept new deposits or make new investments; (d) Suspension of interbank clearing privileges; and/or

Fine: Not less than Fifty thousand pesos (P50,000) nor more than One hundred thousand pesos (P100,000); or Imprisonment: Not less than one (1) year nor more than five (5) years; or Both fine and imprisonment, in the discretion of the Court. 2.

Willful making of a false or misleading statement on a material fact to the Monetary Board or to the examiners of the Bangko Sentral (Sec. 35, NCBA) Fine: Not less than One hundred thousand pesos (P100,000) nor more than One hundred thousand pesos (P200,000); or

(e) Revocation of quasi-banking license. 2. Suspension or Removal of Director If the offender is a director or officer of a bank, quasi-bank or trust entity, the Monetary Board may also suspend or remove such director or officer (Sec. 66, GBL). Resignation or termination from office shall not exempt such director or officer from administrative or criminal sanctions. (Sec. 37, NCBA) 3. Dissolution of Bank 

If the violation is committed by a corporation, such corporation may be dissolved by quo warranto proceedings instituted by the Solicitor General (Sec. 66, GBL)



Whenever a bank or quasi-bank persists in carrying on its business in an unlawful or unsafe manner, the Monetary Board may commence proceedings in liquidation. (Sec. 36, NCBA in relation to Sec. 30, NCBA)

Imprisonment: Not more than five (5) years; or Both fine and imprisonment, in the discretion of the Court. 3. Willful violation of the NCBA and other pertinent banking laws (including the GBL) being enforced or implemented by the Bangko Sentral or any order, instruction, rule or regulation issued by the Monetary Board (Sec. 36, NCBA) Fine: Not less than Fifty thousand pesos (P50,000) nor more than One hundred thousand pesos (P200,000); or Imprisonment: Not less than two (2) years nor more than ten (10) years; or Both fine and imprisonment, in the discretion of the Court. Administrative Sanctions 1. Willful violation of its charter or by-laws; willful delay in the submission of reports or publications thereof as required by law, rules and regulations; Criminal Acts in Nos. 1 to 3 above; and/or conducting business in an unsafe or unsound manner as may be determined by the Monetary Board

IV. Philippine Deposit Insurance Corporation Act (RA 3591, as amended) A.. BASIC POLICY B.. CONCEPT OF INSURED DEPOSITS C.. LIABILITY OF DEPOSITORS

A. Basic Policy Promote and safeguard the interests of the depositing public by way of providing permanent and continuing insurance coverage on all insured deposits (Sec. 1, as amended)

B. Concept of Insured Deposits Insured deposit means the amount due to any bona fide depositor for legitimate deposits in an insured bank net of any obligation of the depositor to the

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MERCANTILE LAW REVIEWER insured bank as of the date of closure, but not to exceed 500,000 (Sec. 4(g), as amended)

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by the Corporation, in consultation with the BSP, after due notice and hearing, and publication of a cease and desist order issued by the Corporation against such deposit accounts or transactions; and

C. Liability of Depositors 1.

Deposit Liabilities Required to be Insured with PDIC

(4) Deposits that are determined to be the proceeds of an unlawful activity as defined under republic act 9160, as amended.

The deposit liabilities of any bank or banking institution, which is engaged in the business of receiving deposits on the effective date of this Act, or which thereafter may engage in the business of receiving deposits, shall be insured with the Corporation (Sec. 5)

NOTE— ‗Unlawful Activity‘ refers to any act or omission or series or combination thereof involving or having direct relation to following: 1) Kidnapping for ransom under Article 267 of Act No. 3815, otherwise known as the Revised Penal Code, as amended; 2) Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16 of Republic Act No. 9165, otherwise known as the Comprehensive Dangerous Act of 2002; 3) Section 3 paragraphs B, C, E, G, H and I of republic Act No. 3019, as amended, otherwise known as the Anti-Graft and Corrupt Practices Act; 4) Plunder under Republic Act No. 7080, as amended; 5) Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and 302 of the Revised Penal Code, as amended; 6) Jueteng and Masiao punished as illegal gambling under Presidential Decree No. 1602; 7) Piracy on the high seas under the Revised Penal Code, as amended and Presidential under the Revised Penal Code, as amended and Presidential Decree No. 532; 8) Qualified theft under Article 310 of the Revised penal Code, as amended; 9) Swindling under Article 315 of the Revised Penal Code, as amended; 10) Smuggling under Republic Act Nos. 455 and 1937; 11) Violations under Republic Act No. 8792, otherwise known as the Electronic Commerce Act of 2000; 12) Hijacking and other violations under Republic Act No. 6235; destructive arson and murder, as defined under the Revised Penal Code, as amended, including those perpetrated by terrorists against noncombatant persons and similar targets; 13) Fraudulent practices and other violations under Republic Act No. 8799, otherwise known as the Securities Regulation Code of 2000; 14) (14) Felonies or offenses of a similar nature that are punishable under the penal laws of other countries (Sec. 3(i) of R.A. 9160, as amended).

NOTE— ‗Bank' and 'Banking Institution' shall include banks, commercial banks, savings bank, mortgage banks, rural banks, development banks, cooperative banks, stock savings and loan associations and branches and agencies in the Philippines of foreign banks and all other corporations authorized to perform banking functions in the Philippines (Sec. 4(b), as amended) ‗Deposit‘ means the unpaid balance of money or its equivalent received by a bank in the usual course of business and for which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift account, or issued in accordance with Bangko Sentral rules and regulations and other applicable laws, together with such other obligations of a bank, which, consistent with banking usage and practices, the Board of Directors shall determine and prescribe by regulations to be deposit liabilities of the bank (Sec. 4(f), as amended). What is not considered a deposit? Any obligation of a bank which is payable at the office of the bank located outside of the Philippines (Sec. 4(f), as amended). 2. Commencement of Liability Liability commences upon the approval of application. 3. Deposit Account not Entitled to Payment The Corporation shall not pay deposit insurance for the following accounts or transactions, whether denominated, documented, recorded or booked as deposit by the bank: (1) Investment products such as bonds and securities, trust accounts, and other similar instruments; (2) Unfunded, fictitious or fraudulent deposit accounts or transactions; (3) Deposits accounts or transactions constituting, and/or emanating from, unsafe and unsound banking practice/s, as determined

4.

Extent of Liability



Liability of the Corporation is to the extent of the insured deposit (Sec.14)

MERCANTILE LAW REVIEWER Whenever an insured bank shall have been closed by the Monetary Board pursuant to Section 30 of R.A. 7653, payment of the insured deposits on such closed bank shall be made by the Corporation as soon as possible either (1) by cash or (2) by making available to each depositor a transferred deposit in another insured bank in an amount equal to insured deposit of such depositor (Sec. 14).

b.

Joint Accounts A joint account regardless of whether the conjunction 'and,' 'or,' 'and/or' is used, shall be insured separately from any individually-owned deposit account (Sec. 4(g), as amended). i. If the account is held by two or more natural persons or two or more juridical persons

NOTE— Insured deposit shall not exceed 500,000 (Sec. 4(g), as amended)



General Rule The maximum insured deposit shall be divided into as many equal shares as there are individuals or juridical persons (Sec. 4(g), as amended).



Exception Unless a different sharing is stipulated in the document of deposit (Sec. 4(g), as amended).

5. Determination of Insured Deposit The determination of insured deposits shall commence upon the Corporation‘s actual takeover of the closed bank (Sec. 16(a), as amended). The amount of the insured deposit shall be determined according to such regulations as the Board of Directors may prescribe, In determining such amount due to any depositor, there shall be added together all deposits in the bank maintained in the same right and capacity for his benefits either in his own name or in the name of others (Sec. 4(g), as amended).

i. If the account is held by a juridical person or entity jointly with one or more natural persons The maximum insured deposits shall be presumed to belong entirely to such juridical person or entity (Sec. 4(g), as amended).

NOTE— The Corporation may require proof of claims to be filed before paying the insured deposits, and that in any case where the Corporation is not satisfied as to the viability of a claim for an insured deposit, it may require final determination of a court of competent jurisdiction before paying such claim (Sec. 14) 

Notice and Publication Requirement: (1) The Corporation shall give notice to the depositors of the closed bank of the insured deposits due them by whatever means deemed appropriate by the Board of Directors. (2) The Corporation shall publish the notice once a week for at least three (3) consecutive weeks in a newspaper of general circulation or, when appropriate, in a newspaper circulated in the community or communities where the closed bank or its branches are located (Sec. 16(a), as amended).

NOTE— The aggregate of the interest of each coowner over several joint accounts, whether owned by the same or different combinations of individuals, juridical persons or entities, shall likewise be subject to the maximum insured deposit of P500,000.00 (Sec. 4(g), as amended). c. Mode of Payment Payment of the insured deposits on such closed bank shall be made by the Corporation as soon as possible either: (1) by cash; (2) by making available to each depositor a transferred deposit in another insured bank in an amount equal to insured deposit of such depositor (Sec. 14)

6. Calculation of Liability

NOTE— ‗Transfer Deposit‘ means a deposit in an insured bank made available to a depositor by the Corporation as payment of insured deposit of such depositor in a closed bank and assumed by another insured bank (Sec. 4(h), as amended)

a.

Per depositor, per capacity rule

d. Effect of Payment of Insured Deposit

In determining the amount due to any depositor, there shall be added together all deposits in the bank maintained in the same right and capacity for his benefits either in his own name or in the name of others (Sec. 4(g), as amended)



Discharge from Liability to the Depositor The Corporation shall be discharged from liability upon payment under Sec. 14, ie: (1) Payment of an insured deposit to any person by the Corporation;

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MERCANTILE LAW REVIEWER (2) Payment of a transferred deposit to any person by the new bank or by an insured bank in which a transferred deposit has been made available (Sec.16(b), as amended)

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

(2) If he does not enforce his claim filed with the corporation within two (2) years after the two-year period to file a claim.

Subrogation to All the Rights of the Depositor The Corporation, upon payment of any depositor as provided for in Section 14 shall be subrogated to all rights of the depositor against the closed bank to the extent of such payment. Such subrogation shall include the right on the part of the Corporation to receive the same dividends and payments from the proceeds of the assets of such closed bank and recoveries on account of stockholders liability as would have been payable to the depositor on a claim for the insured deposits. BUT, the depositor shall retain his claim for any uninsured portion of his deposit (Sec. 15).

e.

(1) If he fails to claim the insured deposits within two (2) years from actual takeover of the closed bank by the receiver; or

Payments of Insured Deposits as Preferred Credit under Art. 2244 of the Civil Code All payments by the Corporation of insured deposits in closed banks partake of the nature of public funds, and as such, must be considered a preferred credit similar to taxes due to the National Government in the order of preference under Article 2244 of the New Civil Code (Sec. 15)

f. Failure to Settle Claim of Insured Depositor 



General Rule Failure to settle the claim within six (6) months from the date of filing of claim for insured deposit shall, upon conviction, subject the directors, officers or employees of the Corporation responsible for the delay to imprisonment from six (6) months to one (1) year. Exceptions  Such failure was not due to grave abuse of discretion, gross negligence, bad faith, or malice of the directors, officers or employees; or 

The validity of the claim requires the resolution of issues of facts and or law by another office, body or agency including the case mentioned in the first proviso or by Corporation together with such other office, body or agency.

g. Failure of Depositor to Claim Insured Deposits All rights of the depositor against the Corporation with respect to the insured deposit shall be barred:

BUT, all rights of the depositor against the closed bank and its shareholders or the receivership estate to which the Corporation may have become subrogated, shall thereupon revert to the depositor. Thereafter, the Corporation shall be discharged from any liability on the insured deposit (Sec. 16(e), as amended)

Chapter V. Foreign Currency Deposit Act (RA 6426) A. B. 

CONFIDENTIALITY PRIVILEGES

The FCDA allowed any person to deposit, and banks to accept deposit, any foreign currency acceptable as part of the Philippines‘ international reserve.

A. Confidentiality All foreign currency deposits are declared as and considered of an absolutely confidential nature and, except upon the written permission of the depositor, in no instance shall be examined, inquired or looked into by any person, government official, bureau or office, whether judicial or administrative, or legislative or any other entity whether public or private. (Sec. 8) The foreign currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever. (Sec. 8) Exceptions 1. upon written permission of the depositor (Sec. 8, Foreign Currency Deposit Act ; Intengan vs CA ; 2002) 2. upon order of a competent court in cases of violation of the Anti-Money Laundering Act of 2001 [as in the case of peso deposits, supra] 3. during Bangko Sentral‘s periodic or special examinations [as in the case of peso deposits, supra], and 4. disclosure of the Treasurer of the Philippines when the unclaimed balances law applies (Act 3936, as amended by PD 679) 5. BSP/PDIC inquiry if there is a finding of unsafe and unsound banking practice (as in the case of peso deposits, supra) 6. In Salvacion vs. CB (1997), where a Filipino child was raped by a foreigner, the SC allowed garnishment of foreign currency deposits stating

MERCANTILE LAW REVIEWER : If we rule that the questioned Section 113 of CB Circular No. 960 which exempts from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever, is applicable to a foreign transient, injustice would result especially to a citizen aggrieved by a foreign guest.

B. Privileges 1.

Tax exemption – the FCD, including interests and all other income or earnings of such deposits, are exempt from any and all taxes whatsoever if these deposits are made by nonresidents and irrespective of whether or not the non-residents are engaged in trade or business in the Philippines (Sec. 6 as amended). FCDs of residents are subject to 7.5% withholding tax.

2.

Exemption from attachment, garnishment or any other order or process of any court, legislative or administrative body, or government agency whatsoever (Sec. 8)

EXC: The CA, upon application ex parte by the AMLC and after determination that a probable cause exists that any monetary instrument or property is in any way related to an ―unlawful activity‖, the AMLC, may freeze the account (Sec. 10, RA9160).

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2012

MERCANTILE

Intellectual Property Law BAR OPERATIONS COMMISSION 2012 EXECUTIVE COMMITTEE Ramon Carlo Marcaida |Commissioner Raymond Velasco • Mara Kriska Chen |Deputy Commissioners Barbie Kaye Perez |Secretary Carmen Cecilia Veneracion |Treasurer Hazel Angeline Abenoja|Auditor COMMITTEE HEADS Eleanor Balaquiao • Mark Xavier Oyales | Acads Monique Morales • Katleya Kate Belderol • Kathleen Mae Tuason (D) • Rachel Miranda (D) |Special Lectures Patricia Madarang • Marinella Felizmenio |Secretariat Victoria Caranay |Publicity and Promotions Loraine Saguinsin • Ma. Luz Baldueza |Marketing Benjamin Joseph Geronimo • Jose Lacas |Logistics Angelo Bernard Ngo • Annalee Toda|HR Anne Janelle Yu • Alyssa Carmelli Castillo |Merchandise Graciello Timothy Reyes |Layout Charmaine Sto. Domingo • Katrina Maniquis |Mock Bar Krizel Malabanan • Karren de Chavez |Bar Candidates’ Welfare Karina Kirstie Paola Ayco • Ma. Ara Garcia |Events OPERATIONS HEADS Charles Icasiano • Katrina Rivera |Hotel Operations Marijo Alcala • Marian Salanguit |Day-Operations Jauhari Azis |Night-Operations Vivienne Villanueva • Charlaine Latorre |Food Kris Francisco Rimban • Elvin Salindo |Transpo Paula Plaza |Linkages




Intellectual Property Letters of Credit Warehouse Receipts Law Trust Receipts Law Negotiable Instruments Law Insurance Code Transportation Law Corporation Law Securities Regulation Code Banking and Finance Intellectual Property

I. II. III. IV. V.

MERCANTILE LAW Intellectual Property in general Patents Trademarks Copyright Registration Flowcharts

A. Intellectual property Rights B. Differences between copyrights, trademarks and patent C. Technology transfer arrangements D. International Conventions and Reciprocity

A. Intellectual Property Rights Intellectual Property State Policies

2.

3.

To protect and secure the exclusive rights of scientists, inventors, artists and other gifted citizens to their intellectual property and creations, particularly when beneficial to the people, for such periods as provided in this Act. To promote the diffusion of knowledge and information for the promotion of national development and progress and the common good. To streamline administrative procedures of registering patents, trademarks and copyright, to liberalize the registration on the transfer of technology, and to enhance the enforcement of intellectual property rights in the Philippines. [Sec. 2, RA 8293]

Intellectual Property Rights Intellectual Property Code 1. 2. 3. 4. 5. 6. 7. 8.

Patentable Inventions: refer to any technical solution of a problem in any field of human activity, which is new, involves an inventive step and is industrially applicable. It may be, or refer to, any product, process, or an improvement of any of the foregoing. [Sec. 21, RA 8293] It is vested from the issuance of letters of patent. Trademark: any visible sign capable of distinguishing the goods (trademark) or services (service mark) of an enterprise and shall include a stamped or marked container of goods. [Kho v. CA, et al. (2002)] It is vested from registration.

I. Intellectual Property in General

1.

B. Differences between copyrights, trademarks and patent

under

the

Copyright; Related Rights of copyright; Trademarks and Service Marks; Geographic Indications; Industrial Designs; Patents; Layout-Designs (Topographies) of Integrated Circuits; [Sec. 4, RA 8293] Protection of Undisclosed Information [TRIPS Agreement].

Trade Name: the name or designation identifying or distinguishing an enterprise [Sec. 121.3, RA 8293] Copyright: right granted by statute to the author or originator of literary, scholarly, scientific, or artistic productions, including computer programs. A copyright gives him the legal right to determine how the work is used and to obtain economic benefits from the work. For example, the owner of a copyright for a book or a piece of software has the exclusive rights to use, copy, distribute, and sell copies of the work, including later editions or versions of the work. If another person improperly uses material covered by a copyright, the copyright owner can obtain legal relief. [Rule 2, Copyright Safeguards and Regulations] Copyright is confined to literary and artistic works which are original intellectual creations in the literary and artistic domain protected from the moment of their creation. [Kho v. CA, et al. (2002)] It is vested from the moment of creation.

Other forms of Intellectual Property Geographic Indication One which identifies a good as originating in the territory of a TRIPS member, or a region or locality in that territory where a given quality, reputation or other characteristic of a good is essentially attributable to its geographical origin [Art. 22, TRIPS Agreement]

Industrial Design Any composition of lines or colors or any threedimensional form, whether or not associated with lines or colors: Provided, that such composition or form gives a special appearance to and can serve as pattern for an industrial product or handicraft. [Sec. 112.1, RA 8293]

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Layout Design (Topography) of an Integrated Circuit Layout Design (Topography): The three-dimensional disposition, however expressed, of the elements, at least one of which is an active element, and of some or all the interconnections of an integrated circuit, or such a three-dimensional disposition prepared for an integrated circuit intended for manufacture. [Sec. 112.3, RA 8293] Integrated Circuit: a product, in its final form, or an intermediate form, in which the elements, at least one of which is an active element and some or all of the interconnections are integrally formed and/or on a piece of material, and which is intended to perform an electronic function. [Sec. 112.2, RA 8293]

Undisclosed Information Information which: 1. Is a secret in a sense that it is not, as a body or in the precise configuration and assembly of components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question; 2. Has a commercial value because it is secret; and 3. Has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret [Art. 39, TRIPS]

C. Technology Transfer Arrangement Refers to contracts or agreements involving: 1. the transfer of systematic knowledge for the manufacture of a product 2. the application of a process, or rendering of a service including management contracts; 3. the transfer, assignment or licensing of all forms of intellectual property rights, including licensing of computer software except computer software developed for mass market. [Sec. 4.2, RA 8293]

which any owner of an intellectual property right is otherwise entitled by this Act. [Sec. 3, RA 8293] Reverse Reciprocity of Foreign Laws Any condition, restriction, limitation, diminution, requirement, penalty or any similar burden imposed by the law of a foreign country on a Philippine national seeking protection of intellectual property rights in that country, shall reciprocally be enforceable upon nationals of said country, within Philippine jurisdiction. [Sec. 231, RA 8293] Philip Morris v. Fortune Tobacco (2006). True, the Philippines’ adherence to the Paris Convention effectively obligates the country to honor and enforce its provisions as regards the protection of industrial property of foreign nationals in this country. However, any protection accorded has to be made subject to the limitations of Philippine laws. Hence, despite Article 2 of the Paris Convention which substantially provides that (1) nationals of member-countries shall have in this country rights specially provided by the Convention as are consistent with Philippine laws, and enjoy the privileges that Philippine laws now grant or may hereafter grant to its nationals, and (2) while no domicile requirement in the country where protection is claimed shall be required of persons entitled to the benefits of the Union for the enjoyment of any industrial property rights, foreign nationals must still observe and comply with the conditions imposed by Philippine law on its nationals.

Principles under the TRIPS Agreement: 1.

National Treatment: It is a principle which states that each member of the WTO must treat the nationals of every other member as favorably as its own with respect to intellectual property, i.e. no discrimination may be made against foreign nationals of members.[Art. 3, TRIPS]

2.

Most-favored Nation Treatment: It requires that each member give other members‘ nationals the same treatment as its own, but that each member should not prefer any other member‘s nationals or those of any non0member country, over the nationals of any member.[Art.4,TRIPS]

3.

Exhaustion of First Sale Doctrine: The term generally refers to doctrine that extinguish certain exclusive rights of the holder of intellectual property with respect to a particular physical item embodying the intellectual property after the item has first been sold under the holder‘s authority. The TRIPS Agreement explicitly disclaims in Article 6 an intent to impose any particular requirements regarding the issue of the exhaustion of intellectual property rights, thus, members of the WTO are free to implement exhaustion of intellectual

D. International Conventions and Reciprocity Reciprocity Rule Any person who is a national or who is domiciled or has a real and effective industrial establishment in a country which: 1. is a party to any convention, treaty or agreement relating to intellectual property rights or the repression of unfair competition, to which the Philippines is also a party, or 2. extends reciprocal rights to nationals of the Philippines by law, shall be entitled to benefits to the extent necessary to give effect to any provision of such convention, treaty or reciprocal law, in addition to the rights to

COMMERCIAL LAW REVIEWER property rights as they please. [Art.6 subject to Arts. 3 and 4, TRIPS]

in the application during the 12 months preceding the filing date or the priority date of the application shall not prejudice the applicant on the ground of lack of novelty if such disclosure was made by: 1. The inventor 2. A patent office and the information contained (1) in another application filed by the inventor and should not have been disclosed by the office, or (2) in an application filed without the knowledge or consent of the inventor by a third party which obtained the information directly or indirectly from the inventor 3. A third party which obtained the information directly or indirectly from the inventor [Sec. 25, RA 8293]

II. Patents A. Patentable Inventions B. Non-patentable Inventions C. Ownership of a Patent D. Cancellation of a Patent E. Remedy of the True and Actual Inventor F. Rights conferred by a Patent G. Limitations on Rights of Patentees H. Patent Infringement I. Licensing J. Assignment and Transmission of Rights

A. Patentable Inventions A patentable invention is any technical solution of a problem in any field of human activity which is new, involves an inventive step and is industrially applicable shall be Patentable. It may be, or may relate to, a product, or process, or an improvement of any of the foregoing. [Sec. 21, RA 8293]

b.

1. Invention Patent

Cheaper Medicines Act: In case of drugs and medicines, there is no inventive step if the invention results from the mere discovery of a new form or new property of a known substance which does not result in enhancement of the known efficacy of that substance, or the mere discovery of any new property or new use of a known substance or the mere use of a known process unless such known process results in a new product that employs at least one reactant. [Sec. 26.2, RA 8293 as amended by RA 9502]

Standards: a. Novelty - An invention shall not be considered new if it forms part of a prior art. [Sec. 23, RA 8293] Prior art shall consist of: i. Everything which has been made available to the public anywhere in the world, before the filing date or the priority date of the application claiming the invention; [Sec. 24.1, RA 8293] ii. The whole contents of an application for a patent, utility model, or industrial design registration, published in accordance with this Act, filed or effective in the Philippines, with a filing or priority date that is earlier than the filing or priority date of the application: Provided, That the application which has validly claimed the filing date of an earlier application under Section 31 of this Act, shall be prior art with effect as of the filing date of such earlier application: Provided further, That the applicant or the inventor identified in both applications are not one and the same. [Sec. 24.2, RA 8293] Non-Prejudicial Disclosures: This is an exception to the General Rule on Prior Art under Sec. 24. It provides that the disclosure of the information contained

Inventive Step - An invention involves an inventive step if, having regard to prior art, it is not obvious to a person skilled in the art at the time of the filing date or priority date of the application claiming the invention. [Sec. 26.1, RA 8293, as amended by RA 9502]

c.

Industrial Applicability - An invention that can be produced and used in any industry shall be industrially applicable. [Sec. 27, RA 8293]

2. Utility Model It is any technical solution of a problem in any field of human activity which is new and industrially applicable. Unlike an invention patent, a utility model need not be inventive. The law merely requires that it be novel and industrially applicable. [Sec. 109.1, RA 8293] A utility model registration shall expire, without any possibility of renewal, at the end of the seventh year after the date of the filing of the application. [Sec. 109.3, RA 8293]

Statutory Classes of Utility Models A Utility Model may be, or may relate to:

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a. b. c. d. e.

A useful machine; An implement or tool; A product or composition; A method or process; or An improvement of any of the foregoing. [Rule 201, Rules and Regulations on Utility Models and Industrial Designs as amended]

substance, or the mere use of a known process unless such known process results in a new product that employs at least one new reactant. Salts, esters, ethers, polymorphs, metabolites, pure form, particle size, isomers, mixtures of isomers, complexes, combinations, and other derivatives of a known substance shall be considered to be the same substance, unless they differ significantly in properties with regard to efficacy; [Sec. 22.1, RA 8293 as amended by RA 9502]

Grounds for Cancellation of Utility Models a. b. c. d.

That the claimed invention does not qualify for registration as a utility model and does not meet the requirements of registrability; That the description and the claims do not comply with the prescribed requirements; That any drawing which is necessary for the understanding of the invention has not been furnished; That the owner of the utility model registration is not the inventor or his successor in title [Sec 109.4, RA 8293]

2.

Schemes, rules and methods of performing mental acts, playing games or doing business, and programs for computers; [Sec. 22.2, RA 8293]

3.

Methods for treatment of the human or animal body by surgery or therapy and diagnostic methods practiced on the human or animal body. This provision shall not apply to products and composition for use in any of these methods; [Sec. 22.3, RA 8293]

4.

Plant varieties or animal breeds or essentially biological process for the production of plants or animals. This provision shall not apply to micro-organisms and non-biological and microbiological processes; [Sec. 22.4, RA 8293]

5.

Aesthetic creations; [Sec. 22.5, RA 8293]

6.

Anything which is contrary to public order or morality. [Sec. 22.6, RA 8293]

3. Industrial Design An industrial design is any composition of lines or colors or any three-dimensional form, whether or not associated with lines or colors: Provided that such composition or form gives a special appearance to and can serve as pattern for an industrial product or handicraft. [Sec. 112.1, RA 8293 as amended by RA 9150]

4. Lay-out Designs (Topographies) of Integrated Circuits Integrated Circuit means a product, in its final form, or an intermediate form, in which the elements, at least one of which is an active element and some or all of the interconnections are integrally formed in and/or on a piece of material, and which is intended to perform an electronic function. [Sec. 112.2, RA 8293 as amended by RA 9150] Layout-Design is synonymous with 'Topography' and means the three-dimensional disposition, however expressed, of the elements, at least one of which is an active element, and of some or all of the interconnections of an integrated circuit, or such a three-dimensional disposition prepared for an integrated circuit intended for manufacture. [Sec. 112.3, RA 8293 as amended by RA 9150]

B. Non-patentable Inventions The following shall be excluded from patent protection: 1.

Discoveries, scientific theories and mathematical methods, and in the case of drugs and medicines, the mere discovery of a new form or new property of a known substance which does not result in the enhancement of the known efficacy of that substance, or the mere discovery of any new property or new use for a known

Cheaper Medicines Act: In addition to discoveries, scientific theories and mathematical methods, the IP Code now includes, in case of drugs and medicines: 1. The mere discovery of a new form or new property of a known substance which does not result in the enhancement of the known efficacy of that substance 2. the mere discovery of any new property or new use of a known substance 3. the mere use of a known process unless such known process results in a new product that employs at least one reactant [Sec. 26.2, RA 8293 as amended by RA 9502]

C. Ownership of a Patent 1. Right to a Patent General Rule: The right to patent belongs to the inventor, his heirs, or assigns. When two (2) or more persons have jointly made an invention, the right to a patent shall belong to them jointly. [Sec.28, RA 8293] Exception: Inventions created pursuant commission (Work for Hire Doctrine)

to

a

COMMERCIAL LAW REVIEWER i.

ii.

The employer has the right to the patent if the invention is the result of the performance of the employee‘s regularly assigned duties [Sec. 30.2, RA 8293] In case of inventions created pursuant to a commission, the person who commissions the work shall own the patent [Sec. 30.1, RA 8293]

2. First-to-file Rule If two (2) or more persons have made the invention separately and independently of each other, the right to the patent shall belong to the person who filed an application for such invention, or where two or more applications are filed for the same invention, to the applicant who has the earliest filing date or, the earliest priority date. [Sec. 29, RA 8293]

3. Inventions created pursuant to a Commission Commission: Person who commissions the work shall own the patent, unless otherwise provided in the contract [Sec. 30.1, RA 8293] Employment Contract: Patent belongs to the employee if the inventive activity is not a part of his regular duties even if the employee uses the time, facilities and materials of the employer. [Sec. 30.2(a), RA 8293] Patent belongs to the employer if the invention is the result of the performance of his regularlyassigned duties, unless there is an agreement, express or implied, to the contrary. [Sec. 30.2(b), RA 8293]

4. Right of priority An application for patent filed by any person who has previously applied for the same invention in another country which by treaty, convention, or law affords similar privileges to Filipino citizens, shall be considered as filed as of the date of filing the foreign application: Provided, That: (a) the local application expressly claims priority; (b) it is filed within twelve (12) months from the date the earliest foreign application was filed; and (c) a certified copy of the foreign application together with an English translation is filed within six (6) months from the date of filing in the Philippines. [Sec. 31, RA 8293]

D. Cancellation of a Patent 1. Grounds for Cancellation of Patent Any interested person may, upon payment of the required fee, petition to cancel the patent or any claim thereof, or parts of the claim, on any of the following grounds:

a. b.

c.

That what is claimed as the invention is not new or patentable; That the patent does not disclose the invention in a manner sufficiently clear and complete for it to be carried out by any person skilled in the art; or That the patent is contrary to public order or morality. [Sec. 61.1, RA 8293]

Where the grounds for cancellation relate to some of the claims or parts of the claim, cancellation may be effected to such extent only. [Sec. 61.2, RA 8293] 2.

Requirement of the Petition

The petition for cancellation shall be in writing, verified by the petitioner or by any person in his behalf who knows the facts, specify the grounds upon which it is based, include a statement of the facts to be relied upon, and filed with the Office. Copies of printed publications or of patents of other countries, and other supporting documents mentioned in the petition shall be attached thereto, together with the translation thereof in English, if not in English language. [Sec. 62, RA 8293] 3.

Notice of Hearing

Upon filing of a petition for cancellation, the Director of Legal Affairs shall forthwith serve notice of the filing thereof upon the patentee and all persons having grants or licenses, or any other right, title or interest in and to the patent and the invention covered thereby, as appears of record in the Office, and of notice of the date of hearing thereon on such persons and the petitioner. Notice of the filing of the petition shall be published in the IPO Gazette. [Sec. 63, RA 8293] 4.

Effect of Cancellation of Patent or Claim.

The rights conferred by the patent or any specified claim or claims cancelled shall terminate. Notice of the cancellation shall be published in the IPO Gazette. Unless restrained by the Director General, the decision or order to cancel by Director of Legal Affairs shall be immediately executory even pending appeal. [Sec. 66, RA 8293]

E. Remedy of the True and Actual Inventor If a person, who was deprived of the patent without his consent or through fraud is declared by final court order or decision to be the true and actual inventor, the court shall order for his substitution as patentee, or at the option of the true inventor, cancel the patent, and award actual and other damages in his favor if warranted by the circumstances. [Sec. 68, RA 8293] Time to file action in court: The actions indicated in Sections 67 and 68 shall be filed within one (1) year from the date of publication made in accordance

163

MERCANTILE LAW REVIEWER with Sections 44 and 51, respectively. [Sec. 70, RA 8293]

164

Remedy of persons not having the right to a patent: If a person other than the applicant, is declared by final court order or decision as having the right to the patent, such person may, within three (3) months after the decision has become final: 1. Prosecute the application as his own application in place of the applicant; 2. File a new patent application in respect of the same invention; 3. Request that the application be refused; or 4. Seek cancellation of the patent, if one has already been issued. [Sec. 67, RA 8293]

after that product has been so put on the said market: Provided, That, with regard to drugs and medicines, the limitation on patent rights shall apply after a drug or medicine has been introduced in the Philippines or anywhere else in the world by the patent owner, or by any party authorized to use the invention: Provided, further, That the right to import the drugs and medicines contemplated in this section shall be available to any government agency or any private third party; [Sec. 72.1, RA 8293 as amended by RA 9502] b.

Where the act is done privately and on a non-commercial scale or for a noncommercial purpose: Provided, That it does not significantly prejudice the economic interests of the owner of the patent; [Sec. 72.2, RA 8293 as amended by RA 9502]

c.

Where the act consists of making or using exclusively for experimental use of the invention for scientific purposes or educational purposes and such other activities directly related to such scientific or educational experimental use; [Sec. 72.3, RA 8293 as amended by RA 9502]

d.

In the case of drugs and medicines, where the act includes testing, using, making or selling the invention including any data related thereto, solely for purposes reasonably related to the development and submission of information and issuance of approvals by government regulatory agencies required under any law of the Philippines or of another country that regulates the manufacture, construction, use or sale of any product: Provided, That, in order to protect the data submitted by the original patent holder from unfair commercial use provided in Article 39.3 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), the Intellectual Property Office, in consultation with the appropriate government agencies, shall issue the appropriate rules and regulations necessary therein not later than one hundred twenty (120) days after the enactment of this law; [Sec. 72.4, RA 8293 as amended by RA 9502]

e.

Where the act consists of the preparation for individual cases, in a pharmacy or by a medical professional, of a medicine in accordance with a medical shall apply after a drug or medicine has been introduced in the Philippines or anywhere else in the world by the patent owner, or by any party authorized to use the invention: Provided, further, That the right to import the drugs and medicines contemplated in this section shall be available to any government agency or any private third party; [Sec. 72.5, RA 8293 as amended by RA 9502]

F. Rights conferred by a Patent A patent shall confer on its owner the following exclusive rights: 1. Where the subject matter of a patent is a product, to restrain, prohibit and prevent any unauthorized person or entity from making, using, offering for sale, selling or importing that product. [Sec. 71.1(a), RA 8293] Where the subject matter of a patent is a process, to restrain, prevent or prohibit any unauthorized person or entity from using the process, and from manufacturing, dealing in, using, selling or offering for sale, or importing any product obtained directly or indirectly from such process. [Sec. 71.1(b), RA 8293]

2.

Patent owners shall also have the right to assign, or transfer by succession the patent, and to conclude licensing contracts for the same. ( Sec. 71.2, RA 8293]

3.

To be able to effectively and legally preclude others from copying and profiting from the invention, a patent is a primordial requirement. No patent, no protection. The ultimate goal of a patent system is to bring new designs and technologies into the public domain through disclosure. Ideas, once disclosed to the public without the protection of a valid patent, are subject to appropriation without significant restraint. [Pearl Dean, Inc. v. Shoemart, Inc.(2003)]

G. Limitations on the Rights of Patentees 1. Limitation on Patent Rights The owner of a patent has no right to prevent third parties from performing, without his authorization, the acts referred to in Section 71 hereof in the following circumstances: a.

Using a patented product which has been put on the market in the Philippines by the owner of the product, or with his express consent, insofar as such use is performed

COMMERCIAL LAW REVIEWER There shall be no infringement of trademarks or tradenames of imported or sold drugs and medicines allowed as well as imported or sold off-patent drugs and medicines: Provided, That said drugs and medicines bear the registered marks that have not been tampered, unlawfully modified, or infringed. [Sec.159.4 RA 8293 as amended by RA 9502]

2. Prior User Notwithstanding Section 72 hereof, any prior user, who, in good faith was using the invention or has undertaken serious preparations to use the invention in his enterprise or business, before the filing date or priority date of the application on which a patent is granted, shall have the right to continue the use thereof as envisaged in such preparations within the territory where the patent produces its effect. [Sec. 73.1, RA 8293] The right of the prior user may only be transferred or assigned together with his enterprise or business, or with that part of his enterprise or business in which the use or preparations for use have been made. [Sec. 73.2, RA 8293]

3. Use by the government A Government agency or third person authorized by the Government may exploit the invention even without agreement of the patent owner where: a.

b.

the public interest, in particular, national security, nutrition, health or the development of other sectors, as determined by the appropriate agency of the government, so requires; [Sec. 74.1(a), RA 8293] A judicial or administrative body has determined that the manner of exploitation, by the owner of the patent or his licensee, is anti-competitive. [Sec. 74.1(b), RA 8293]

The use by the Government, or third person authorized by the Government shall be subject, mutatis mutandis, to the conditions set forth in Sections 95 to 97 and 100 to 102 on compulsory licensing. [Sec. 74.2, RA 8293] All cases arising from the implementation of this provision shall be cognizable by courts with appropriate jurisdiction provided by law. No court except the Supreme Court of the Philippines, shall issue any temporary restraining order or preliminary injunction or such other provisional remedies that will prevent its immediate execution. [Sec. 74.3, RA 8293 as amended by RA 9502]

H. Patent Infringement It is the making, using, offering for sale, selling, or importing a patented product or a product obtained directly or indirectly from a patented process, or the use of a patented process without the authorization

of the patentee. [Sec 76.1, RA 8293 as amended by RA 9502] Contributory Infringer: One who actively induces the infringement of a patent or provides the infringer with a component of a patented product or of a product produced because of a patented process knowing it to be especially adopted for infringing and not suitable for substantial non-infringing. He is jointly and severally liable with the infringer. [Sec. 76.6, RA 8293] Doctrine of Patent Exhaustion: It espouses that the patentee who has already sold his invention and has received all the royalty and consideration for the same will be deemed to have released the invention from his monopoly. The invention thus becomes open to use of the purchaser without further restriction. [Adams v. Burke, in Notes on Selected Commercial Laws, Catindig 2003 ed.]

1. Tests in patent infringement a. Literal infringement In using literal infringement as a test, resort must be had in the first instance to the words of the claim. To determine whether the particular item falls within the literal meaning of the patent claims, the court must juxtapose the claims of the patent and the accused product within the overall context of the claims and specifications, to determine whether there is exact identity of all material elements. [Godinez v. CA (1993)]

b. Doctrine of equivalents Under the doctrine of equivalents, an infringement also occurs when a device appropriates a prior invention by incorporating its innovative concept and, albeit with some modification and change, performs substantially the same function in substantially the same way to achieve substantially the same result. [Godinez v. CA (1993)] In order to infringe a patent, a machine or device must perform the same function, or accomplish the same result by identical or substantially identical means and the principle or mode of operation must be substantially the same. [Del Rosario v. CA (1996)] The doctrine of equivalents provides that an infringement also takes place when a device appropriates a prior invention by incorporating its innovative concept and, although with some modification and change, performs substantially the same function in substantially the same way to achieve substantially the same result. The principle or mode of operation must be the same or substantially the same. The doctrine of equivalents thus requires satisfaction of the function-means-andresult test, the patentee having the burden to show that all three components of such equivalency test are met. [Smith Klein Beckman Corp. v. CA (2003)]

165

MERCANTILE LAW REVIEWER 2. Remedies against Infringement

166

a. Civil Action for damages If the damages are inadequate or cannot be readily ascertained with reasonable certainty, the court may award by way of damages a sum equivalent to reasonable royalty. [Sec. 76.3, RA 8293] The court may, according to the circumstances of the case, award damages in a sum above the amount found as actual damages sustained: Provided, that the award does not exceed three (3) times the amount of such actual damages. [Sec. 76.4, RA 8293] Civil action for infringement shall not apply to instances covered by the Limitations of Patent Rights (Sec. 72); Use of Invention by Government (Sec. 74); Compulsory Licensing (Sec. 93.6); and Procedures on Issuance of a Special Compulsory License under the TRIPS Agreement (Sec. 93-A). [Sec.76.1, RA 8293 as amended by RA 9052] Notice Requirement: Damages cannot be recovered for acts of infringement committed before the infringer had known, or had reasonable grounds to know of the patent. It is presumed that the infringer had known of the patent. [Sec. 80, RA 8293] Infringement Action by a Foreign National: Any foreign national or juridical entity who meets the requirements of Section 3 and not engaged in business in the Philippines, to which a patent has been granted or assigned under this Act, may bring an action for infringement of patent, whether or not it is licensed to do business in the Philippines under existing law. [Sec.77, RA 8293] Prescription: No damages can be recovered for acts of infringement committed more than four (4) years before the institution of the action for infringement. [Sec. 79, RA 8293]

b. Injunction Any patentee, or anyone possessing any right, title or interest in and to the patented invention, whose rights have been infringed, may bring a civil action before a court of competent jurisdiction, to recover from the infringer such damages sustained thereby, plus attorney‘s fees and other expenses of litigation, and to secure an injunction for the protection of his rights. [Sec. 76.2, RA 8293]

c. Destruction or disposal of infringing goods The court may, in its discretion, order that the infringing goods, materials and implements predominantly used in the infringement be disposed of outside the channels of commerce or destroyed, without compensation. [Sec. 76.5, RA 8293]

d. Criminal Action infringement

for

If infringement is repeated by the infringer or by anyone in connivance with him after finality of the judgment of the court against the infringer, the offenders shall, without prejudice to the institution of a civil action for damages, be criminally liable therefore and, upon conviction, shall suffer imprisonment for the period of not less than six (6) months but not more than three (3) years and/or a fine of not less than One hundred thousand pesos (P100,000) but not more than Three hundred thousand pesos (P300,000), at the discretion of the court. Prescription: The criminal action herein provided shall prescribe in three (3) years from date of the commission of the crime. [Sec 84, RA 8293] 3.

Defenses in infringement

action

for

In an action for infringement, the defendant, in addition to other defenses available to him, may show the invalidity of the patent, or any claim thereof, on any of the grounds on which a petition of cancellation can be brought under Section 61. [Sec 81, RA 8293] Patent found invalid may be cancelled: In an action for infringement, if the court shall find the patent or any claim to be invalid, it shall cancel the same, and the Director of Legal Affairs upon receipt of the final judgment of cancellation by the court, shall record that fact in the register of the Office and shall publish a notice to that effect in the IPO Gazette. [Sec 82, RA 8293] Doctrine of File Wrapper Estoppel: Patentee is precluded from claiming as part of patented product that which he had to excise or modify in order to avoid patent office rejection, and he may omit any additions he was compelled to add by patent office regulations. [Advance Transformer Co. v. Levinson 837 F.2d 1081(1988)]

I. Licensing 1. Voluntary Licensing Voluntary Licensing is the grant by the patent owner to a third person of the right to exploit the patented invention. [Sec. 85, RA 8293]

Mandatory Provisions The following provisions shall be voluntary license contracts:

included in

a.

That the laws of the Philippines shall govern the interpretation of the same and in the event of litigation, the venue shall be the proper court in the place where the licensee has its principal office; [Sec. 88.1, RA 8293]

b.

Continued access to improvements in techniques and processes related to the

repeated

COMMERCIAL LAW REVIEWER technology shall be made available during the period of the technology transfer arrangement; [Sec. 88.2, RA 8293] c.

d.

In the event the technology transfer arrangement shall provide for arbitration, the Procedure of Arbitration of the Arbitration Law of the Philippines or the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL) or the Rules of Conciliation and Arbitration of the International Chamber of Commerce (ICC) shall apply and the venue of arbitration shall be the Philippines or any neutral country; [Sec. 88.3, RA 8293] The Philippine taxes on all payments relating to the technology transfer arrangement shall be borne by the licensor. [Sec. 88.4, RA 8293]

i.

j.

Those which require payments for patents and other industrial property rights after their expiration, termination arrangement; [Sec. 87.10, RA 8293]

k.

Those which require that the technology recipient shall not contest the validity of any of the patents of the technology supplier; [Sec. 87.11, RA 8293]

l.

Those which restrict the research and development activities of the licensee designed to absorb and adapt the transferred technology to local conditions or to initiate research and development programs in connection with new products, processes or equipment; [Sec. 87.12, RA 8293]

Prohibited clauses The following provisions shall be deemed prima facie to have an adverse effect on competition and trade: a.

Those which impose upon the licensee the obligation to acquire from a specific source capital goods, intermediate products, raw materials, and other technologies, or of permanently employing personnel indicated by the licensor; [Sec. 87.1, RA 8293]

b.

Those pursuant to which the licensor reserves the right to fix the sale or resale prices of the products manufactured on the basis of the license; [Sec. 87.2, RA 8293]

c.

Those that contain restrictions regarding the volume and structure of production; [Sec. 87.3, RA 8293]

d.

Those that prohibit the use of competitive technologies in a non-exclusive technology transfer agreement; [Sec. 87.4, RA 8293]

e.

Those that establish a full or partial purchase option in favor of the licensor; [Sec. 87.5, RA 8293]

f.

Those that obligate the licensee to transfer for free to the licensor the inventions or improvements that may be obtained through the use of the licensed technology; [Sec. 87.6, RA 8293]

g.

Those that require payment of royalties to the owners of patents for patents which are not used; [Sec. 87.7, RA 8293]

h.

Those that prohibit the licensee to export the licensed product unless justified for the protection of the legitimate interest of the licensor such as exports to countries where exclusive licenses to manufacture and/or distribute the licensed product(s) have already been granted; [Sec. 87.8, RA 8293]

Those which restrict the use of the technology supplied after the expiration of the technology transfer arrangement, except in cases of early termination of the technology transfer arrangement due to reason(s) attributable to the licensee; [Sec. 87.9, RA 8293]

m. Those which prevent the licensee from adapting the imported technology to local conditions, or introducing innovation to it, as long as it does not impair the quality standards prescribed by the licensor; [Sec. 87.13, RA 8293] n.

Those which exempt the licensor for liability for non-fulfillment of his responsibilities under the technology transfer arrangement and/or liability arising from third party suits brought about by the use of the licensed product or the licensed technology; [Sec. 87.14, RA 8293]

o.

Other clauses with equivalent effects. [Sec. 87.15, RA 8293]

Effect of Non-compliance with any provisions of Secs. 87 and 88 The technology transfer arrangement shall automatically be rendered unenforceable, unless said technology transfer arrangement is approved and registered with the Documentation, Information and Technology Transfer Bureau under the provisions of Section 91 on exceptional cases. [Sec. 92, RA 8293] Right of Licensor: Unless otherwise provided in the technology transfer agreement, the licensor shall have the right to: a. Grant further licenses to third person b. Exploit the subject matter of the technology transfer agreement [Sec. 89, RA 8293]

167


168

Right of the Licensee: To exploit the subject matter of the technology transfer agreement during the whole term of the agreement. [Sec. 90, RA 8293]

Exceptional cases a.

b.

g.

If the invention protected by a patent, hereafter referred to as the "second patent," within the country cannot be worked without infringing another patent, hereafter referred to as the "first patent," granted on a prior application or benefiting from an earlier priority, a compulsory license may be granted to the owner of the second patent to the extent necessary for the working of his invention, subject to certain conditions. [Sec. 97, RA 8293]

h.

Manufacture and export of drugs and medicines to any country having insufficient or no manufacturing capacity in the pharmaceutical sector to address public health problems: Provided, That, a compulsory license has been granted by such country or such country has, by notification or otherwise, allowed importation into its jurisdiction of the patented drugs and medicines from the Philippines in compliance with the TRIPS Agreement. [Sec. 93-A.2, RA 8293 as amended by RA 9502]

In exceptional or meritorious cases where substantial benefits will accrue to the economy, such as high technology content, increase in foreign exchange earnings, employment generation, regional dispersal of industries and/or substitution with or use of local raw materials The case of BOI-registered companies with pioneer status [Sec. 91, RA 8293]

2. Compulsory Licensing Compulsory Licensing is the grant of the Director of Legal Affairs of a license to exploit a patented invention, even without the agreement of the patent owner, in favor of any person who has shown his capability to exploit the invention. [Sec. 93, Ra 8293 as amended by RA 9502]

Grounds The Director General of the Intellectual Property Office may grant a license to exploit a patented invention, even without the agreement of the patent owner, in favor of any person who has shown his capability to exploit the invention, under any of the following circumstances: a.

National emergency or other circumstances of extreme urgency; [Sec. 93.1, RA 8293 as amended by RA 9502]

b.

Where the public interest, in particular, national security, nutrition, health or the development of other vital sectors of the national economy as determined by the appropriate agency of the Government, so requires; [Sec. 93.2, RA 8293 as amended by RA 9502]

c.

extent and on reasonable terms, as determined by the Secretary of the Department of Health. [Sec. 93.6, RA 8293 as amended by RA 9502]

Where a judicial or administrative body has determined that the manner of exploitation by the owner of the patent or his licensee is anti-competitive; ; [Sec. 93.3, RA 8293 as amended by RA 9502]

d.

In case of public non-commercial use of the patent by the patentee, without satisfactory reason; [Sec. 93.4, RA 8293 as amended by RA 9502]

e.

If the patented invention is not being worked in the Philippines on a commercial scale, although capable of being worked, without satisfactory reason: Provided, That the importation of the patented article shall constitute working or using the patent; [Sec. 93.5, RA 8293 as amended by RA 9502]

f.

Where the demand for patented drugs and medicines is not being met to an adequate

Period of filing a Petition for Compulsory License: At any time after the grant of patent. However, a compulsory license may not be applied for on the ground stated in Sec. 93.5 before the expiration of a period of four (4) years from the date of filing of the application or three (3) years from the date of the patent whichever period expires last. [Sec. 94, RA 8293 as amended by RA 9502]

Requirement to Obtain a Reasonable Commercial Terms

License

on

General Rule: The license will only be granted after the petitioner has made efforts to obtain authorization from the patent owner on reasonable commercial terms and conditions but such efforts have not been successful within a reasonable period of time. [Sec. 95.1, RA 8293 as amended by RA 9502] Exceptions: The requirement of authorization shall not apply in the following cases: a. Where the petition for compulsory license seeks to remedy a practice determined after judicial or administrative process to be anti-competitive; b. In situations of national emergency or other circumstances of extreme urgency; c. In cases of public non-commercial use. d. In cases where the demand for the patented drugs and medicines in the Philippines is not being met to an adequate extent and on reasonable terms, as determined by the Secretary of the Department of Health. [Sec. 95.2, RA 8293 as amended by RA 9502]

COMMERCIAL LAW REVIEWER Terms and Conditions of Compulsory License a.

The scope and duration of such license shall be limited to the purpose for which it was authorized;[Sec. 100.1, RA 8293]

b.

The license shall be non-exclusive; [Sec. 100.2, RA 8293]

c.

The license shall be non-assignable, except with that part of the enterprise or business with which the invention is being exploited; ;[Sec. 100.3, RA 8293]

d.

Use of the subject matter of the license shall be devoted predominantly for the supply of the Philippine market: Provided, that this limitation shall not apply where the grant of the license is based on the ground that the patentee's manner of exploiting the patent is determined by judicial or administrative process, to be anti-competitive. ;[Sec. 100.4, RA 8293]

e.

The license may be terminated upon proper showing that circumstances which led to its grant have ceased to exist and are unlikely to recur: Provided, That adequate protection shall be afforded to the legitimate interest of the licensee; ;[Sec. 100.5, RA 8293]

f.

Requirements for Recording of Assignment a. b. c. d.

e.

It must be in writing and accompanied by an English translation, if it is in a language other than English of Filipino It must be notarized It must be accompanied by an appointment of a resident agent, if the assignee is not residing in the Philippines It must identify the letters patent involved by number and date and give the name of the owner of the patent and the title of the invention. In the case of an application for a patent, it should state the application number and the filing date of the application and give the name of the applicant and the title of the invention. If the assignment was executed concurrently with or subsequent to the execution of the application but before the application is filed or before its application number is ascertained, it should adequately identify the application by its date of execution, the name of the applicant, and the title of the invention. It must be accompanied by the required fees. [Sec. 105; Rules and Regulations on Inventions, Rule 1200]

Effect of non-recording of assignment with the IPO

The patentee shall be paid adequate remuneration taking into account the economic value of the grant or authorization, except that in cases where the license was granted to remedy a practice which was determined after judicial or administrative process, to be anti-competitive, the need to correct the anti-competitive practice may be taken into account in fixing the amount of remuneration. (;[Sec. 100.6, RA 8293]

The non-recording will not affect the binding agreement between the assignor and assignee. However, such registration would be necessary to bind third parties. An assignment would be void as against any subsequent purchaser or mortgagee for valuable consideration and without notice unless recorded in the IPO within 3 months from the date of the assignment or prior to the subsequent purchase or mortgage. [Sec. 106, RA 8293]

J. Assignment and Transmission of Rights

A. Definitions of Marks, Collective Marks, Trade Names B. Acquisition of Ownership of Marks C. Acquisition of Ownership of Trade Name D. Non-registrable Marks E. Tests to Determine Confusing Similarity between Marks F. Well-known Marks G. Rights conferred by Registration H. Use by Third Parties of names etc. similar to Registered Marks I. Cancellation of Trademark J. Infringement and Remedies K. Unfair Competition L. Trade Names or Business Names M. Collective Marks N. Criminal Penalties

Assignment of Rights: The assignment may be of the entire patent or a portion thereof, or be limited to a specified territory. [Sec. 104, RA 8293] Transmission of Rights: Patents or applications for patents and invention to which they relate, shall be protected in the same way as the rights of other property under the Civil Code. [Sec. 103.1, RA 8293] Inventions and any right, title or interest in and to patents and inventions covered thereby, may be assigned or transmitted by inheritance or bequest or may be the subject of a license contract. [Sec. 103.2, RA 8293]

III. Trademarks

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170

A. Definitions of Marks, Collective Marks, Trade Names Marks: Any visible sign capable of distinguishing the goods (trademark) or services (service mark) of an enterprise and shall include a stamped or marked container of goods [Sec. 121.1, RA 8293] Trademark Any visible sign which is adopted and used to identify the source of origin of goods, and which is capable of distinguishing them from goods emanating from a competitor.

Service Mark Any visible sign capable of distinguishing the services of an enterprise from the service of other enterprises.

For the requirement of ―actual use in commerce in the Philippines‖ before one may register a trademark, trade name and service mark under the law pertains to the territorial jurisdiction of the Philippines and is not only confined to a certain region, province, city or barangay. [McDonald’s Corporation v. MacJoy Fastfood(2007)] Trademark is a creation of use and, therefore, actual use is a pre-requisite to exclusive ownership; registration is only an administrative confirmation of the existence of the right of ownership of the mark, but does not perfect such right; actual use thereof is the perfecting ingredient. [Shangri-La International Hotel v. DCC (2006)]

Non-use of mark when excused

Collective Marks: Any visible sign designated as such in the application for registration and capable of distinguishing the origin or any other common characteristic, including the quality of goods or services of different enterprises which use the sign under the control of the registered owner of the collective mark. [Sec. 121.2, RA 8293]

1.

Trade Name: The name or designation identifying or distinguishing an enterprise [Sec. 121.3, RA 8293].

3.

Any individual name or surname, firm name, device or word used by manufacturers, industrialists, merchants, and others to identify their businesses, vocations or occupations. [Converse Rubber Corp. v. Universal Rubber Products, Inc. (1980)]

Functions of a Trademark 1. 2.

3. 4. 5.

To point out distinctly the origin or ownership of the goods and to which it is affixed; To secure him, who has been instrumental in bringing into the market a superior article of merchandise, the fruit of his industry and skill; To assure the public that they are producing the genuine article; To prevent fraud and imposition; and To protect the manufacturer against substitution and sale of an inferior and different article as its product [Mirpuri v. CA (1998)]

2.

4. 5.

If caused by circumstances arising independently of the will of the trademark owner. Lack of funds shall not excuse nonuse of a mark; [Sec. 152.1, RA 8293] A use which does not alter its distinctive character thought he use is different from the form in which it is registered. [Sec. 152.2, RA 8293] Use of a mark in connection with one or more of the goods/services belonging to the class in which the mark is registered. [Sec. 152.3, RA 8293] The use of mark by a company related to the applicant or registrant The use of mark by a person controlled by the registrant. [Sec. 152.4, RA 8293]

The use of a mark by a company related with the registrant or applicant shall inure to the latter's benefit, and such use shall not affect the validity of such mark or of its registration: Provided, that such mark is not used in such manner as to deceive the public. [Sec.152.4, Ra 8293] A certificate of registration shall remain in force for 10 years [Sec. 145, RA 8293] and may be renewed for periods of 10 years at its expiration upon payment of the prescribed fee and upon filing of a request. [Sec 146, RA 8293]

C. Acquisition of Ownership of Trade Name

The rights to a mark shall be acquired through registration made validly in accordance with law. [Sec. 122, RA 8293]

Notwithstanding any laws or regulations providing for any obligation to register trade names, such names shall be protected, even prior to or without registration, against any unlawful act committed by third parties. [Sec. 165.2 (a), RA 8293] The ownership of a trade name is acquired through adoption and use.

Use of mark as a requirement: The applicant or the registrant shall file a declaration of actual use of the mark with evidence to that effect, as prescribed by the Regulations within three (3) years from the filing date of the application. Otherwise, the application shall be refused or the mark shall be removed from the Register by the Director. [Sec. 124.2, RA 8293]

A name or designation may not be used as a trade name if by its nature or the use to which such name or designation may be put, it is contrary to public order or morals and if, in particular, it is liable to deceive trade circles or the public as to the nature of the enterprise identified by that name. [Sec. 165.1, RA 8293]

B. Acquisition of Ownership of Marks

COMMERCIAL LAW REVIEWER Any change in the ownership of a trade name shall be made with the transfer of the enterprise or part thereof identified by that name. [Sec. 165.4, RA 8293]

D. Non-registrable Marks A mark cannot be registered if it: 1.

2.

Consists of immoral, deceptive or scandalous matter, or matter which may disparage or falsely suggest a connection with persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt or disrepute; [Sec 123.1(a), RA 8293] Consists of flags, coat of arms or other insignia of the Philippines or any foreign country; [Sec 123.1(b), RA 8293]

3.

Consists of a name, portrait or signature identifying a particular living individual except by his written consent, or of a deceased President of the Philippines, during the life of his widow, except by written consent of the widow; [Sec 123.1(c), RA 8293]

4.

Is identical with a registered mark of another or a mark with an earlier filing or priority date, in respect of: a. The same goods or services, or b. Closely related goods or services, or c. If it nearly resembles such a mark as to be likely to deceive or cause confusion; [Sec 123.1(d), RA 8293]

5.

Is identical with, or confusingly similar to, or constitutes a translation of a well-known mark, whether or not registered in the Philippines, and used for identical or similar goods or services; [Sec 123.1(e), RA 8293]

6.

Is identical with, or confusingly similar to, or constitutes a translation of a well-known mark which is registered in the Philippines, and used for goods or services which are not similar; [Sec 123.1(f), RA 8293]

7.

Likely to mislead the public, particularly as to the nature, quality, characteristics or geographical origin of the goods or services; [Sec 123.1(g), RA 8293]

8.

Consists exclusively of signs that are generic for the goods or services that they seek to identify; [Sec 123.1(h), RA 8293]

9.

Consists exclusively of signs or of indications that have become customary or usual to designate the goods or services in everyday language or in a bona fide and established trade practice; [Sec 123.1(i), RA 8293]

10. Consists exclusively of signs or of indications that may serve in trade to designate the kind, quality, quantity, intended purpose, value, geographical origin, time or production of the goods or rendering of the services, or other characteristics of the goods or services; [Sec 123.1(j), RA 8293] 11. Consists of shapes that may be necessitated by technical factors or by the nature of the goods themselves or factors that affect their intrinsic value; [Sec 123.1(k), RA 8293] 12. Consists of color alone, unless defined by a given form; [Sec 123.1(l), RA 8293] 13. Is contrary to public order or morality. [Sec 123.1(m), RA 8293] Doctrine of Secondary Meaning: When the marks referred to in nos. 10, 11 and 12 has become distinctive, because of its long, continuous and exclusive use for 5 years, as used in connection with the applicant‘s goods or services in commerce and in the mind of the public indicates a single source to consumers, it may be registered. The Office may accept as prima facie evidence that the mark has become distinctive, as used in connection with the applicant's goods or services in commerce, proof of substantially exclusive and continuous use thereof by the applicant in commerce in the Philippines for five (5) years before the date on which the claim of distinctiveness is made. [Sec 123.2, RA 8293] The nature of the goods to which the mark is applied will not constitute an obstacle to registration. [Sec 123.3, RA 8293]

E. Tests to Determine Confusing Similarity between Marks 1. Colorable Imitation Colorable imitation denotes such a close or ingenious imitation as to be calculated to deceive ordinary persons, or such a resemblance to the original as to deceive an ordinary purchaser giving such attention as a purchaser usually gives, as to cause him to purchase the one supposing it to be the other. In ascertaining whether one mark is confusingly similar to or is a colorable imitation of another, no set rules can be deduced. Each case must be decided on its own merits. The complexities attendant to an accurate assessment of likelihood of confusion requires that the entire panoply of elements constituting the relevant factual landscape be comprehensively examined. [Societe des Produits Nestlé, S.A. v. CA (2001)]

2. Dominancy test Infringement is determined by the test of ―dominancy‖ rather than by differences or variations

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172

in the details of one trademark and of another. Similarity in size, form and color, while relevant is not conclusive. If the competing trademark contains the main or essential or dominant features of another, and confusion is likely to result, infringement takes place. [Asia Brewery v. CA and San Miguel (1993)]

Determinants (need not concur) a. b.

3. Holistic test To determine whether a trademark has been infringed, we must consider the mark as a whole and not as dissected. If the buyer is deceived, it is attributable to the marks as a totality, not usually to any part of it. The court therefore should be guided by its first impression, for the buyer acts quickly and is governed by a casual glance, the value of which may be dissipated as soon as the court assumed to analyze carefully the respective features of the mark. [Del Monte Corporation, et al. v. CA (1990)] The dominancy test considers the dominant features in the competing marks in determining whether they are confusingly similar. Under the dominancy test, courts give greater weight to the similarity of the appearance of the product arising from the adoption of the dominant features of the registered mark, disregarding minor differences. Courts will consider more the aural and visual impressions created by the marks in the public mind, giving little weight to factors like prices, quality, sales outlets and market segments. [McDonald’s Corporation v. L.C. Big Mak Burger, Inc., et al. (2004)] As to the goods or services in connection with which the marks are used (Doctrine of Related Goods/Services): 1.

2. 3.

Goods are related when they belong to the same class or have the same descriptive properties or physical attributes, or they serve the same purpose or flow through the same channel of trade. The use of identical marks on noncompeting but related goods may likely cause confusion. Corollarily, the use of identical marks on non-competing and unrelated goods is not likely to cause confusion. [UP 2011 Bar Reviewer]

F. Well-known Marks A mark which a competent authority of the Philippines has designated to be well-known internationally and in the Philippines. In determining whether a mark is well-known, account shall be taken of the knowledge of the relevant sector of the public, rather than the public at large, including knowledge in the Philippines which has been obtained as a result of the promotion of the mark. [Sec 123.1(e), RA 8293]

c. d. e. f. g. h. i. j. k. l.

The duration, extent and geographical area of any use of the mark; The market share in the Philippines and other countries of the goods/services to which the mark applies; The degree of the inherent or acquired distinction of the mark; The quality-image or reputation acquired by the mark; The extent to which the mark has been registered in the world; The exclusivity of the registration attained by the mark in the world; The extent of use of the mark in the world; The exclusivity of use in the world; The commercial value attributed to the mark in the world; The record of successful protection of the rights in the mark; The outcome of litigations dealing with the issue of whether the mar is well-known; and The presence or absence of identical or similar testmarks validly registered or used on other similar goods [Rule 102, Rule on Trademarks]

Protection extended to Well-Known Marks a. If not registered in the Philippines A mark cannot be registered if it is identical with or confusingly similar to, or constitutes a translation of a mark which is considered by the competent authority of the Philippines to be well-known internationally and in the Philippines, whether or not it is registered here, as being already the mark of a person other than the applicant for registration and used for identical goods or services. ([Sec 123.1(e), RA 8293] b. If registered in the Philippines A mark cannot be registered if it is identical with or confusingly similar to, or constitutes a translation of a mark considered well-known in accordance with the Sec. 123.1 (e), which is registered in the Philippines with respect to goods or services which are not similar to those with respect to which registration is applied for. [Sec 123.1(f), RA 8293] Priority Right: An application for registration of a mark filed in the Philippines by a person referred to in Section 3, and who previously duly filed an application for registration of the same mark in one of those countries, shall be considered as filed as of the day the application was first filed in the foreign country. [Sec. 131.1, RA 8293] No registration of a mark in the Philippines by a person described in this section shall be granted until such mark has been registered in the country of origin of the applicant. [Sec. 131.2, RA 8293] Significance of Priority Right: A Philippine application filed by another applicant after the

COMMERCIAL LAW REVIEWER priority date but earlier than the foreign applicant‘s actual filing may be refused registration if it is identical to the mark with a priority date. [The Law on Trademark, Infringement and Unfair Competition, Agpalo (2000)]

1.

2.

Rights Conferred by a Well-Known Mark 1. 2.

Right to be protected whether or not it is registered in the Philippines; If registered under Sec 123.1(e), extension of protection to goods and services which are not similar to those in respect of which the mark is registered, provided that: a. The use of the mark in relation to unrelated or dissimilar goods or services would indicate a connection between those goods or services and the owner of the mark; and b. The interests of the owner of the registered mark are likely to be damaged by such use. [Sec. 147.2, RA 8293]

3.

4.

G. Rights Conferred by Registration Except in cases of importation of drugs and medicines allowed under Section 72.1 of this Act and of off-patent drugs and medicines, the owner of a registered mark shall have the exclusive right to prevent all third parties not having the owner's consent from using in the course of trade identical or similar signs or containers for goods or services which are identical or similar to those in respect of which the trademark is registered where such use would result in a likelihood of confusion. In case of the use of an identical sign for identical goods or services, a likelihood of confusion shall be presumed. [Sec. 147.1, RA 8293 as amended by RA 9502]

Limitations on such rights 1.

2.

Duration (except that, inasmuch as the registration of a trademark could be renewed every 10 years, a trademark could conceivably remain registered forever); Territorial (except well-known marks).

Registration of the mark shall not confer on the registered owner the right to preclude third parties from using bona fide their names, addresses, pseudonyms, a geographical name, or exact indications concerning the kind, quality, quantity, destination, value, place of origin, or time of production or of supply, of their goods or services: Provided, That such use is confined to the purposes of mere identification or information and cannot mislead the public as to the source of the goods or services. [Sec. 148, RA 8293]

Assignment and Transfer of Application and Registration

5.

An application for registration of a mark, or its registration, may be assigned or transferred with or without the transfer of the business using the mark. [Sec. 149.1, RA 8293] Such assignment or transfer shall, however, be null and void if it is liable to mislead the public, particularly as regards the nature, source, manufacturing process, characteristics, or suitability for their purpose, of the goods or services to which the mark is applied. [Sec. 149.2, RA 8293] The assignment of the application for registration of a mark, or of its registration, shall be in writing and require the signatures of the contracting parties. Transfers by mergers or other forms of succession may be made by any document supporting such transfer. [Sec. 149.3, RA 8293] Assignments and transfers of registrations of marks shall be recorded at the Office on payment of the prescribed fee; assignment and transfers of applications for registration shall, on payment of the same fee, be provisionally recorded, and the mark, when registered, shall be in the name of the assignee or transferee. [Sec. 149.4, RA 8293] Assignments and transfers shall have no effect against third parties until they are recorded at the Office. [Sec. 149.5, RA 8293]

Any license contract concerning the registration of a mark, or an application therefor, shall provide for effective control by the licensor of the quality of the goods or services of the licensee in connection with which the mark is used. If the license contract does not provide for such quality control, or if such quality control is not effectively carried out, the license contract shall not be valid. [Sec. 150.1, RA 8293]

Protection limited to goods specified in registration certificate The certificate of registration can confer upon the petitioner the exclusive right to use its own symbol only to those goods specified in the certificate, subject to any conditions a limitations stated therein. One who has adopted and used a trademark on his goods does not prevent the adoption and use of the same trademark by others for products which are of a different description. [Faberge, Inc. v. IAC and Co Beng Kay (1992)]

H. Use by Third Parties of names, etc. similar to Registered Marks The IPC deems unlawful any subsequent use of the trade name by a third party, whether as a trade name or a mark or collective mark, or any such use of a similar trade name or mark, likely to mislead the public. [Sec. 165.2(b), RA 8293]

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I. Cancellation of Trademark

174

Upon petition, with due process and hearing, based on the following grounds: 1. 2.

Within 5 years from registration: Belief that the registered mark has damaged or will damage the petitioner At any time a. Becomes the generic name for the goods or services for which it has registered; or b. Has been abandoned; or c. The registration was obtained fraudulently or contrary to the provisions of the IPC; or d. Is being used by, or with the permission of the registrant so as to misrepresent the source of the goods or services in connection with which the mark is used e. If the registered owner of the mark, without legitimate reason, fails to use the mark within the Philippines, or to cause it to be used in the Philippines by virtue of a license, for an uninterrupted period of at least 3 years. [Sec. 151, RA 8293]

The use of the mark in a form different from the form in which it is registered, which does not alter its distinctive character, shall not be ground for cancellation or removal of the mark and shall not diminish the protection granted to the mark. [Sec. 152.2, RA 8293] The use of a mark in connection with one or more of the goods or services belonging to the class in respect of which the mark is registered shall prevent its cancellation or removal in respect of all other goods or services of the same class. [Sec. 152.3, RA 8293]

J. Infringement and Remedies 1. Trademark infringement Any person who shall, without the consent of the owner of the registered mark: 1.

2.

Use in commerce any reproduction, counterfeit, copy, or colorable imitation of a registered mark or the same container or a dominant feature thereof in connection with the sale, offering for sale, distribution, advertising of any goods or services including other preparatory steps necessary to carry out the sale of any goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive; [Sec. 155.1, RA 8293] Reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant feature thereof and apply such reproduction, counterfeit, copy or colorable imitation to labels, signs, prints, packages,

wrappers, receptacles or advertisements intended to be used in commerce upon or in connection with the sale, offering for sale, distribution, or advertising of goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive. [Sec. 155.2, RA 8293] Mighty Corporation v. E. & J. Gallo Winery (2004). A crucial issue in any trademark infringement case is the likelihood of confusion, mistake or deceit as to the identity, source or origin of the goods or identity of the business as a consequence of using a certain mark. Likelihood of confusion is admittedly a relative term, to be determined rigidly according to the particular (and sometimes peculiar) circumstances of each case. In determining likelihood of confusion, the court must consider: (a) the resemblance between the trademarks; (b) the similarity of the goods to which the trademarks are attached; (c) the likely effect on the purchaser; and (d) the registrant‘s express or implied consent and other fair and equitable considerations. McDonald’s Corporation v. L.C. Big Mak Burger, Inc., et al., (2004). To establish trademark infringement, the following elements must be shown: (1) the validity of the mark; (2) the plaintiff‘s ownership of the mark; and (3) the use of the mark or its colorable imitation by the alleged infringer results in ―likelihood of confusion.‖ Of these, it is the element of likelihood of confusion that is the gravamen of trademark infringement. Two types of confusion arise from the use of similar or colorable imitation marks, namely, confusion of goods (product confusion) and confusion of business (―source or origin confusion‖). While there is confusion of goods when the products are competing, confusion of business exists when the products are non-competing but related enough to produce confusion or affiliation. In order to bring a civil action for infringement, it is not required that there is an actual sale of the goods or services using the infringing material. [Sec. 155.2, RA 8293] Infringement takes place upon the mere use or reproduction of the registered mark. No article of imported merchandise which shall copy or simulate the name of any domestic product, or manufacturer, or dealer, or which shall copy or simulate a mark registered in accordance with the provisions of this Act, or shall bear a mark or trade name calculated to induce the public to believe that the article is manufactured in the Philippines, or that it is manufactured in any foreign country or locality other than the country or locality where it is in fact manufactured, shall be admitted to entry at any customhouse of the Philippines. [Sec. 166, RA 8293] A mere distributor and not the owner cannot assert any protection from trademark infringement as it had no right in the first place to the registration of

COMMERCIAL LAW REVIEWER the disputed trademarks. [Superior Commercial Enterprises v. Kunnan Enterprises (2010)]

False Designations of Origin; Description or Representation

False

Any person who, on or in connection with any goods or services, or any container for goods, uses in commerce any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which: a.

b.

Is likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection, or association of such person with another person, or as to the origin, sponsorship, or approval of his or her goods, services, or commercial activities by another person;[Sec. 169.1(a), RA 8293] In commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person's goods, services, or commercial activities, shall be liable to a civil action for damages and injunction [Sec. 169.1(b), RA 8293]

Any goods marked or labeled in contravention of the provisions of this Section shall not be imported into the Philippines or admitted entry at any customhouse of the Philippines. The owner, importer, or consignee of goods refused entry at any customhouse under this section may have any recourse under the customs revenue laws or may have the remedy given by this Act in cases involving goods refused entry or seized. [Sec. 169.2, RA 8293]

Infringement of Name and Ownership Stamp on Containers

Marks

of

General Rule: It is unlawful for any person, without the consent of the manufacturer, bottler or seller who has registered the mark of ownership to fill such bottles, boxes, kegs, barrels or other containers so marked and stamped, for the purpose of sale, dispose of, or wantonly destroy the same, whether filled or not, to use the same for drinking vessels or drain pipes, foundation pipes, for any other purpose than that registered. [Sec. 2, RA 623 as amended by RA 5700] The use of the same without apparent permission from the trademark owners thereof, shall be prima facie presumption that such possession or use is unlawful. [Sec. 3, RA 623 as amended by RA 5700] Exceptions: 1. Use of the bottles as containers for sisi, bagoong, patis, and similar native products [Sec. 6 RA 623 as amended by RA 5700] 2. Persons in whose favor the containers were sold [Distelleria Washington v. LA Tondena Distillers (1997)]

2. Actions, Damages for Infringement

and Injunction

The owner of a registered mark may recover damages from any person who infringes his rights, and the measure of the damages suffered shall be either the reasonable profit which the complaining party would have made, had the defendant not infringed his rights, or the profit which the defendant actually made out of the infringement, or in the event such measure of damages cannot be readily ascertained with reasonable certainty, then the court may award as damages a reasonable percentage based upon the amount of gross sales of the defendant or the value of the services in connection with which the mark or trade name was used in the infringement of the rights of the complaining party. [Sec. 156.1, RA 8293] The owner of the registered mark shall not be entitled to recover profits or damages unless the acts have been committed with knowledge that such imitation is likely to cause confusion, or to cause mistake, or to deceive. Such knowledge is presumed if the registrant gives notice that his mark is registered by displaying with the mark the words '"Registered Mark" or the letter R within a circle or if the defendant had otherwise actual notice of the registration. [Sec. 158, RA 8293] Should damages be recoverable, the measure of the damages suffered shall be either: a. the reasonable profit which the complaining party would have made, had the defendant not infringed his rights; or b. the profit which the defendant actually made out of the infringement; or c. a reasonable percentage based upon the amount of gross sales of the defendant or the value of the services in connection with which the mark or trade name was used in the infringement of the rights of the complaining party if such measure of damages cannot be readily ascertained with reasonable certainty. [Sec. 156.1, RA 8293]

3. Other remedies available: 1. 2. 3. 4. 5. 6.

Injunction (Sec. 156.4); Impounding of sales invoices and other documents (Sec. 156.2); Double damages in case of actual intent to defraud or to mislead (Sec. 156.3); Court order for the disposal or destruction of the infringing goods (Sec. 157); Criminal Action; Administration sanctions

Any foreign national who qualifies under the principle on reciprocity and does not engage in business in the Philippines, whether or not it is licensed to do business in the Philippines, may bring civil or administrative action for: 1. Opposition 2. Cancellation 3. Infringement

175

MERCANTILE LAW REVIEWER 4. 5.

176

Unfair Competition False designation of origin description [Sec. 160. RA 8293]

or

Notice of registration of trademark is necessary for an owner of a trademark to recover damages in an action for infringement since knowledge that such imitation is likely to cause confusion, or to cause mistake, or to deceive is an element of infringement. Requirement of notice may be complied by displaying with the mark the words '"Registered Mark" or the letter R within a circle. [Sec. 158, RA 8293]

4. Limitations to infringement

actions

communication is customarily conducted in accordance with the sound business practice, and not due to any method or device adopted to evade this section or to prevent or delay the issuance of an injunction or restraining order with respect to such infringing matter. [Sec. 159.3, RA 8293]

false

d.

for

The remedies given to the owner of a right infringed shall be limited as follows: a.

registered mark shall have no effect against any person who, in good faith, before the filing date or the priority date, was using the mark for the purposes of his business or enterprise: Provided, That his right may only be transferred or assigned together with his enterprise or business or with that part of his enterprise or business in which the mark is used. [Sec. 159.1, RA 8293]

b.

Where an infringer who is engaged solely in the business of printing the mark or other infringing materials for others is an innocent infringer, the owner of the right infringed shall be entitled as against such infringer only to an injunction against future printing. [Sec. 159.2, RA 8293]

c.

Where the infringement complained of is contained in or is part of paid advertisement in a newspaper, magazine, or other similar periodical or in an electronic communication, the remedies of the owner of the right infringed as against the publisher or distributor of such newspaper, magazine, or other similar periodical or electronic communication shall be limited to an injunction against the presentation of such advertising matter in future issues of such newspapers, magazines, or other similar periodicals or in future transmissions of such electronic communications. The limitations shall apply only to innocent infringers: Provided, That such injunctive relief shall not be available to the owner of the right infringed with respect to an issue of a newspaper, magazine, or other similar periodical or an electronic communication containing infringing matter where restraining the dissemination of such infringing matter in any particular issue of such periodical or in an electronic communication would delay the delivery of such issue or transmission of such electronic

There shall be no infringement of trademarks or tradenames of imported or sold drugs and medicines allowed under Section 72.1 as well as imported or sold offpatent drugs and medicines: Provided, That said drugs and medicines bear the registered marks that have not been tampered, unlawfully modified, or infringed upon as defined under Section 155. [Sec. 159.4 RA 8293 as amended by RA 9502]

K. Unfair Competition A person who has identified in the mind of the public the goods he manufactures or deals in, his business or services from those of others, whether or not a registered mark is employed, has a property right in the goodwill of the said goods, business or services so identified, which will be protected in the same manner as other property rights. [Sec. 168.1, RA 8293] Any person who shall employ deception or any other means contrary to good faith by which he shall pass off the goods manufactured by him or in which he deals, or his business, or services for those of the one having established such goodwill, or who shall commit any acts calculated to produce said result, shall be guilty of unfair competition, and shall be subject to an action therefor. [Sec. 168.2, RA 8293] The following shall be deemed guilty of unfair competition: a.

Any person, who is selling his goods and gives them the general appearance of goods of another manufacturer or dealer, either as to the goods themselves or in the wrapping of the packages in which they are contained, or the devices or words thereon, or in any other feature of their appearance, which would be likely to influence purchasers to believe that the goods offered are those of a manufacturer or dealer, other than the actual manufacturer or dealer, or who otherwise clothes the goods with such appearance as shall deceive the public and defraud another of his legitimate trade, or any subsequent vendor of such goods or any agent of any vendor engaged in selling such goods with a like purpose;[Sec. 168.3(a), RA 8293]

b.

Any person who by any artifice, or device, or who employs any other means calculated to induce the false belief that such person is offering the services of another who has

COMMERCIAL LAW REVIEWER identified such services in the mind of the public; [Sec. 168.3(b), RA 8293] c.

Any person who shall make any false statement in the course of trade or who shall commit any other act contrary to good faith of a nature calculated to discredit the goods, business or services of another. [Sec. 168.3(c), RA 8293]

McDonald’s Corporation v. L.G. Big Mak Burger, Inc., et al. (2004). The elements of an action for unfair competition are: [1] confusing similarity in the general appearance of the goods, and [2] intent to deceive the public and defraud a competitor. The confusing similarity may or may not result from similarity in the marks, but may result from other external factors in the packaging or presentation of the goods. The intent to deceive and defraud may be inferred from the similarity in appearance of the goods as offered for sale to the public. Actual fraudulent intent need not be shown. An action for unfair competition is based on the proposition that no dealer in merchandise should be allowed to dress his goods in simulation of the goods of another dealer, so that purchasers desiring to buy the goods of the latter would be induced to buy the goods of the former. The most usual devices employed in committing this crime are the simulation of labels and the reproduction of form, color and general appearance of the package used by the pioneer manufacturer or dealer. [Caterpillar, Inc v. Samson (2006)] Articles 168.1 and 168.2 provide the concept and general rule on the definition of unfair competition. The law does not thereby cover every unfair act committed in the course of business; it covers only acts characterized by ―deception or any other means contrary to good faith‖ in the passing off of goods and services as those of another who has established goodwill in relation with these goods or services, or any other act calculated to produce the same result. What unfair competition is, is further particularized under Section 168.3 when it provides specifics of what unfair competition is ―without in any way limiting the scope of protection against unfair competition.‖ Part of these particulars is provided under Section 168.3(c) which provides the general ―catch-all‖ phrase that the petitioner cites. Under this phrase, a person shall be guilty of unfair competition ―who shall commit any other act contrary to good faith of a nature calculated to discredit the goods, business or services of another.‖ From jurisprudence, unfair competition has been defined as the passing off (or palming off) or attempting to pass off upon the public the goods or business of one person as the goods or business of another with the end and probable effect of deceiving the public. It formulated the ―true test‖ of unfair competition: whether the acts of defendant are such as are calculated to deceive the ordinary buyer making his purchases under the ordinary conditions which prevail in the particular trade to

which the controversy relates. One of the essential requisites in an action to restrain unfair competition is proof of fraud; the intent to deceive must be shown before the right to recover can exist. The advent of the IP Code has not significantly changed these rulings as they are fully in accord with what Section 168 of the Code in its entirety provides. Deception, passing off and fraud upon the public are still the key elements that must be present for unfair competition to exist. [Coca-Cola v. Gomez (2008)] Infringement of Trademark Unauthorized use of a trademark

Unfair Competition passing off of one‘s goods as those of another Fraudulent intent is essential registration is not necessary

Fraudulent intent is unnecessary prior registration of the trademark is a prerequisite to the action [Del Monte Corporation, et al. v. CA (1990)]

The law on unfair competition is broader and more inclusive than the law on trademark infringement. The latter is more limited but it recognizes a more exclusive right derived from the trademark adoption and registration by the person whose goods or business is first associated with it. Hence, even if one fails to establish his exclusive property right to a trademark, he may still obtain relief on the ground of his competitor‘s unfairness or fraud. Conduct constitutes unfair competition if the effect is to pass off on the public the goods of one man as the goods of another. [Mighty Corporation v. E. & J. Gallo Winery (2004)]

L. Trade Names Names

and

Business

It is the name or designation identifying or distinguishing an enterprise. [Sec. 121.3, RA 8293] Any individual name or surname, firm name, device or word used by manufacturers, industrialists, merchants, and others to identify their businesses, vocations or occupations [Converse Rubber Corp. v. Universal Rubber Products, Inc. (1980)]

What may NOT be used as trade name 1. 2. 3.

If by its nature or the use to which the name or designation may be put, it is contrary to public order or morals. If it is liable to deceive trade circles or the public as to the nature of the enterprise identified by the name If the trade name is similar to a mark or a trade name owned by another person and its use would likely mislead the public. [Sec.165.1, RA 8293]

177


178

Acquisition of ownership: Trade names are protected even prior to or without registration. The ownership of a trade name is acquired through adoption and use. Right of owner: The IPC deems unlawful any subsequent use of the trade name by a third party, whether as a trade name or a mark or collective mark, or any such use of a similar trade name or mark, likely to mislead the public. [Sec. 165.2(b), RA 8293] Trade names, unlike trademarks, need not be registered with the IPO before an infringement suit may be filed by its owner against the owner of an infringing trademark. All that is required is that the trade name is previously used in trade or commerce in the Philippines. [Prosource International v. Horphag Research Management (2009)]

M. Collective Marks Any visible sign designated as such in the application for registration and capable of distinguishing the origin or any other common characteristic, including the quality of goods or services of different enterprises which use the sign under the control of the registered owner of the collective mark [Sec. 121.2, RA 8293] An application for registration of a collective mark shall designate the mark as a collective mark and shall be accompanied by a copy of the agreement, if any, governing the use of the collective mark. [Sec. 167.2, Ra 8293]

Grounds for Cancellation In addition to the grounds under Section 149, the Court shall cancel the registration of a collective mark if the person requesting the cancellation proves: 1. 2. 3.

that only the registered owner uses the mark; or that he uses or permits its use in contravention of the agreements referred to in Subsection 166.2; or that he uses or permits its use in a manner liable to deceive trade circles or the public as to the origin or any other common characteristics of the goods or services concerned. [Sec. 167.3, RA 8293]

The registration of a collective mark, or an application therefor shall not be the subject of a license contract. [Sec. 167.4, RA 8293]

N. Criminal Penalties Independent of the civil and administrative sanctions imposed by law, a criminal penalty of imprisonment from two (2) years to five (5) years and a fine ranging from Fifty thousand pesos (P50,000) to Two hundred thousand pesos (P200,000), shall be

imposed on any person who is found guilty. [Sec. 170, RA 8293]

IV. Copyright A. Basic Principles B. Copyrightable Works C. Non-copyrightable Works D. Rights of Copyright Owner E. Rules on Ownership of Copyright F. Deposit of Copyrightable Materials G. Limitations on Copyright

A. Basic Principles 1. Works are protected by the sole fact of their creation Principle of Automatic Protection: Copyright is vested from the very moment of creation. [Sec. 172.2, RA 8293] The enjoyment and exercise of copyright, including moral rights, shall not be the subject of any formality; such enjoyment and such exercise shall be independent of the existence of protection in the country of origin of the work. [Article 5(2), Berne Convention for the Protection of Literary and Artistic Works] The Denicola Test in intellectual property law states that if design elements of an article reflect a merger of aesthetic and functional considerations, the artistic aspects of the work cannot be conceptually separable from the utilitarian aspects; thus, the article cannot be copyrighted. [UP 2011 Bar Reviewer]

2. Protection extends only to the expression of an idea, not the idea itself. No protection shall extend, under this law, to any idea, procedure, system method or operation, concept, principle, discovery or mere data as such, even if they are expressed, explained, illustrated or embodied in a work. [Sec 175, RA 8293]

3. The copyright is distinct from the property in the material object subject to it. [Sec 181, RA 8293] 4. Copyright is a statutory right. Copyright, in the strict sense of the term is purely a statutory right. Being a mere statutory grant, the rights are limited to what the statute confers. It may be obtained and enjoyed only with respect to the subjects and by the persons, and on terms and conditions specified in the statute. Accordingly, it can cover only the works falling within the statutory enumeration or description. [Pearl and Dean vs. Shoemart (2003)]


B. Copyrightable Works 1. Original Literary and Artistic Works Sec. 172.1, RA 8293. Literary and artistic works, hereinafter referred to as "works", are original intellectual creations in the literary and artistic domain protected from the moment of their creation and shall include in particular: a.

Books, pamphlets, articles and other writings; b. Periodicals and newspapers; c. Lectures, sermons, addresses, dissertations prepared for oral delivery, whether or not reduced in writing or other material form; d. Letters; e. Dramatic or dramatico-musical compositions; choreographic works or entertainment in dumb shows; f. Musical compositions, with or without words; g. Works of drawing, painting, architecture, sculpture, engraving, lithography or other works of art; models or designs for works of art; h. Original ornamental designs or models for articles of manufacture, whether or not registrable as an industrial design, and other works of applied art; i. Illustrations, maps, plans, sketches, charts and three-dimensional works relative to geography, topography, architecture or science; j. Drawings or plastic works of a scientific or technical character; k. Photographic works including works produced by a process analogous to photography; lantern slides; l. Audiovisual works and cinematographic works and works produced by a process analogous to cinematography or any process for making audio-visual recordings; m. Pictorial illustrations and advertisements; n. Computer programs; and o. Other literary, scholarly, scientific and artistic works. When a work is considered original: 1. the work is an independent creation of the author; and 2. it must not be copied from the work of another. A person to be entitled to a copyright must be the original creator of the work. He must have created it by his own skill, labor and judgment without directly copying or evasively imitating the work of another. [Ching Kian Chuan vs. CA (2001)] By originality is meant that the material was not copied, and evidences at least minimal creativity; that it was independently created by the author and that it possesses at least some minimal degree of creativity. Copying is shown by proof of access to

copyrighted material and substantial similarity between the two works. The applicant must thus demonstrate the existence and validity of copyright because in the absence of copyright protection, even the original creation may be freely copied. [Ching v. Salinas (2005)] Originality is not determined by novelty, aesthetic merit or ingenuity but that it is an independent creation. [2011 UP Bar Reviewer] The requirement in US Law that the expression should be fixed in a tangible medium is not applicable here since our law expressly provides that works are protected irrespective of their mode or form of expression. [Sec. 172.2, RA 8293]

2. Derivative Works The following derivative works shall also be protected by copyright: a. Dramatizations, translations, adaptations, abridgments, arrangements, and other alterations of literary or artistic works; and b. Collections of literary, scholarly or artistic works, and compilations of data and other materials which are original by reason of the selection or coordination or arrangement of their contents. [Sec. 173.1, RA 8293] Derivative works are protected as new works provided they shall not: a. affect the force of any subsisting copyright upon the original works employed or any part thereof; or b. be construed to imply any right to such use of the original works, or to secure or extend copyright in such original works. [Sec. 173.2, RA 8293]

C. Non-copyrightable Works 1. Unprotected Subject matter a.

Any idea, procedure, system method or operation, concept, principle, discovery or mere data as such, even if they are expressed, explained, illustrated or embodied in a work.

b. News of the day and other miscellaneous facts having the character of mere items of press information;

c.

Any official text of a legislative, administrative or legal nature, as well as any official translation thereof;

d.

Pleadings;

e.

Original decisions of courts and tribunals (This pertains to the “original decisions” not the SCRA published volumes since these

179

MERCANTILE LAW REVIEWER are protected under derivative works under Sec 173.1) [Sec. 175, RA 8293]

180

The format or mechanics of a TV show is not copyrightable as copyright does not extend to ideas, procedures, processes, systems, methods of operation, concepts, principles or discoveries regardless of the form in which they are described, explained, illustrated or embodied. [Joaquin Jr. et al vs. Drilon, et al (1999)] No one may claim originality as to facts as these do not owe their origin to an act of authorship. The first person to find and report a particular fact has not created the same; he has merely discovered its existence. [Feist Publication v Rural Telephone Services (1991)]

2. Works of the Government of the Philippines Work of the Government of the Philippines: is a work created by an officer or employee of the Philippine Government or any of its subdivisions and instrumentalities, including government-owned or controlled corporations as a part of his regularly prescribed official duties. [Sec. 171.11, RA 8293]

not actionable but is merely a case of sloppy writing. Clearly, there is no legal obligation, by a judge or by any person, to make an attribution when copying Works of the Government. However, misquoting or twisting, with or without attribution, any judicial decision, statute, regulation or other Works of the Government in judicial writing, if done to mislead the parties or the public, is actionable. [J. Carpio Dissenting Opinion, In The Matter Of the Charges of Plagiarism, Etc., Against Assoc. Justice Mariano Del Castillo, A.M. 10-7-17-SC (2011)]

3.

Works of the Public domain

These include works whose term of copyright has expired. [2011 UP Bar Reviewer]

4.

Useful articles

Useful Article Doctrine: Works whose sole purpose is utilitarian have no separate artistic value. This can be distinguished from a work of applied art, which has utilitarian functions but there is an identifiable artistic work or creation incorporated thereto. [2011 UP Bar Reviewer]

D. Rights of Copyright Owner 1. Copyright or Economic Rights

General Rule: Government cannot own copyright Exceptions: 1. When copyright is assigned or bequested in favor of the government (Sec 176.3); 2. Author of speeches, lectures, sermons, addresses and dissertations shall have exclusive right of making a collection of his work. However, prior approval of the government agency or the office wherein the work is created shall be necessary for the exploitation of such work for profit. (Sec. 176.1) Notwithstanding the foregoing provisions, the Government is not precluded from receiving and holding copyrights transferred to it by assignment, bequest or otherwise; nor shall publication or republication by the Government in a public document of any work in which copyright is subsisting be taken to cause any abridgment or annulment of the copyright or to authorize any use or appropriation of such work without the consent of the copyright owner. [Sec. 176.3, RA 8293] In writing judicial decisions, a judge should make the proper attribution in copying passages from any judicial decision, statute, regulation, or other Works of the Government. However, the failure to make such attribution does not violate the Law on Copyright. The law expressly provides that Works of the Government are not subject to copyright. This means that there is neither a legal right by anyone to demand attribution, nor any legal obligation from anyone to make an attribution, when Works of the Government are copied. The failure to make the proper attribution of a Work of the Government is

Copyright or economic rights shall consist of the exclusive right to carry out, authorize or prevent the following acts: a.

Reproduction of the work or substantial portion of the work; [Sec. 177.1, RA 8293]

b.

Dramatization, translation, adaptation, abridgment, arrangement or other transformation of the work; [Sec. 177.2, RA 8293]

c.

The first public distribution of the original and each copy of the work by sale or other forms of transfer of ownership; [Sec. 177.3, RA 8293]

d.

Rental of the original or a copy of an audiovisual or cinematographic work, a work embodied in a sound recording, a computer program, a compilation of data and other materials or a musical work in graphic form, irrespective of the ownership of the original or the copy which is the subject of the rental; [Sec. 177.4, RA 8293]

e.

Public display of the original or a copy of the work; [Sec. 177.5, RA 8293]

f.

Public performance of the work; [Sec. 177.6, RA 8293]

g.

Other communication to the public of the work [Sec. 177.7, RA 8293]

Economic rights also give the author the right to assign the copyright and/or the material object in

COMMERCIAL LAW REVIEWER whole or in part, and they allow the owner to derive financial reward from the use of his works by others. [Sec. 180.1, RA 8293] Copyright in a work of architecture shall include the right to control the erection of any building which reproduces the whole or a substantial part of the work either in its original form or in any form recognizably derived from the original: Provided, That the copyright in any such work shall not include the right to control the reconstruction or rehabilitation in the same style as the original of a building to which that copyright relates. [Sec. 186, RA 8293] Communication to the Public of Copyrighted Works: includes point-to-point transmission of a work, including video on demand, and providing access to an electronic retrieval system, such as computer databases, servers, or similar electronic storage devices. Broadcasting, rebroadcasting, retransmission by cable, and broadcast and retransmission by satellite are all acts of ―communication to the public‖ within the meaning of the IPC. [Rule 11, Copyright Safeguards and Regulations] First Public Distribution of Work: An exclusive right of first distribution of work includes all acts involving distribution, specifically including the first importation of an original and each copy of the work into the jurisdiction of the Republic of the Philippines. [Rule 12, Copyright Safeguards and Regulations]

Civil Code Provisions Intellectual Creation:

on

Ownership

of

Article 721. By intellectual creation, the following persons acquire ownership: (1) The author with regard to his literary, dramatic, historical, legal, philosophical, scientific or other work; (2) The composer; as to his musical composition; (3) The painter, sculptor, or other artist, with respect to the product of his art; (4) The scientist or technologist or any other person with regard to his discovery or invention. Article 722. The author and the composer, mentioned in Nos. 1 and 2 of the preceding article, shall have the ownership of their creations even before the publication of the same. Once their works are published, their rights are governed by the Copyright laws. The painter, sculptor or other artist shall have dominion over the product of his art even before it is copyrighted. The scientist or technologist has the ownership of his discovery or invention even before it is patented. Article 723. Letters and other private communications in writing are owned by the person to whom they are addressed and delivered, but they

cannot be published or disseminated without the consent of the writer or his heirs. However, the court may authorize their publication or dissemination if the public good or the interest of justice so requires.

2. Moral Rights (Sec. 193) The author of a work shall, independently of the economic rights in Section 177 or the grant of an assignment or license with respect to such right, have the right:

a. To require that the authorship of the works

be attributed to him, in particular, the right that his name, as far as practicable, be indicated in a prominent way on the copies, and in connection with the public use of his work; [Sec. 193.1, RA 8293]

b. To make any alterations of his work prior to, or to withhold it from publication; [Sec. 193.2, RA 8293]

c. To object to any distortion, mutilation or other modification of, or other derogatory action in relation to, his work which would be prejudicial to his honor or reputation; [Sec. 193.3, RA 8293]

d. To restrain the use of his name with respect to any work not of his own creation or in a distorted version of his work. [Sec. 193.4, RA 8293] In addition to the right to publish granted by the author, his heirs, or assigns, the publisher shall have a copyright consisting merely of the right of reproduction of the typographical arrangement of the published edition of the work. [Sec.174, RA 8293] The author of speeches, lectures, sermons, addresses, and dissertations mentioned in the preceding paragraphs shall have the exclusive right of making a collection of his works. [Sec. 176.2, Ra 8293]

Waiver of Moral Rights General Rule: Moral rights can be waived in writing, expressly stating such waiver [Sec. 195, RA 8293] or by contribution to a collective work unless such is expressly reserved [Sec. 196, RA 8293]. Exceptions: Even if made in writing, waiver is still not valid if: a. use of the name of the author, title of his work, or his reputation with respect to any version or adaptation of his work, which because of alterations substantially tends to injure the literary or artistic reputation of another author; [Sec. 195.1, RA 8293]

181

MERCANTILE LAW REVIEWER b.

182

it uses the name of the author in a work that he did not create. [Sec. 195.1, RA 8293]

4.

The right of authorizing the commercial rental to the public of the original and copies of their performances fixed in sound recordings, even after distribution of them by, or pursuant to the authorization by the performer; [Sec. 203.4, RA 8293]

5.

The right of authorizing the making available to the public of their performances fixed in sound recordings, by wire or wireless means, in such a way that members of the public may access them from a place and time individually chosen by them. [Sec. 203.5, RA 8293]

6.

Independently of a performer's economic rights, the performer, shall, as regards his live aural performances or performances fixed in sound recordings, have the right to claim to be identified as the performer of his performances, except where the omission is dictated by the manner of the use of the performance, and to object to any distortion, mutilation or other modification of his performances that would be prejudicial to his reputation. [Sec. 204.1, RA 8293]

7.

Unless otherwise provided in the contract, in every communication to the public or broadcast of a performance subsequent to the first communication or broadcast thereof by the broadcasting organization, the performer shall be entitled to an additional remuneration equivalent to at least five percent (5%) of the original compensation he or she received for the first communication or broadcast. [Sec. 206, RA 8293]

Moral rights are not assignable or subject to license. [Sec. 198, RA 8293]

3. Rights to Proceeds in Subsequent Transfers (Droit de Suite or Follow Up Rights) In every sale or lease of an original work of painting or sculpture or of the original manuscript of a writer or composer, subsequent to the first disposition thereof by the author, the author or his heirs shall have an inalienable right to participate in the gross proceeds of the sale or lease to the extent of five percent (5%). This right shall exist during the lifetime of the author and for fifty (50) years after his death. [Sec. 200, RA 8293] Works not Covered: Prints, etchings, engravings, works of applied art, or works of similar kind wherein the author primarily derives gain from the proceeds of reproductions. [Sec. 201, RA 8293] First Sale Doctrine: After the first sale of the lawfully made copy of the copyrighted work, anyone who is the owner of that copy can sell or dispose of that copy in any way without any liability for copyright infringement. The first sale of an authorized copy of the work exhausts the author‘s right to control distribution of copies. [US Jurisprudence; UP Law 2011 Reviewer]

4. Neighboring Rights Performer‘s Rights 1.

As regards their performances, the right of authorizing: a. The broadcasting and other communication to the public of their performance; and b. The fixation of their unfixed performance. [Sec. 203.1, RA 8293]

1.

The right to authorize the direct or indirect reproduction of their sound recordings, in any manner or form; the placing of these reproductions in the market and the right of rental or lending; [Sec. 208.1, RA 8293]

2.

The right of authorizing the direct or indirect reproduction of their performances fixed in sound recordings, in any manner or form; [Sec. 203.2, RA 8293]

The right to authorize the first public distribution of the original and copies of their sound recordings through sale or rental or other forms of transferring ownership; [Sec. 208.2, RA 8293]

3.

Subject to the provisions of Section 206, the right of authorizing the first public distribution of the original and copies of their performance fixed in the sound recording through sale or rental or other forms of transfer of ownership; [Sec. 203.3, RA 8293]

The right to authorize the commercial rental to the public of the original and copies of their sound recordings, even after distribution by them by or pursuant to authorization by the producer. [Sec. 208.3, RA 8293]

4.

If a sound recording published for commercial purposes, or a reproduction of such sound recording, is used directly for broadcasting or for other communication to the public, or is publicly performed with the intention of making and enhancing

Such right shall be maintained and exercised fifty (50) years after his death, by his heirs, and in default of heirs, the government, where protection is claimed. [Sec. 204.2, RA 8293] 2.

3.

Rights of Producers of Sound Recording

COMMERCIAL LAW REVIEWER profit, a single equitable remuneration for the performer or performers, and the producer of the sound recording shall be paid by the user to both the performers and the producer, who, in the absence of any agreement shall share equally. [Sec. 209, RA 8293]

Rights of Broadcasting Organizations 1.

The rebroadcasting of their broadcasts; [Sec. 211.1, RA 8293]

2.

The recording in any manner, including the making of films or the use of video tape, of their broadcasts for the purpose of communication to the public of television broadcasts of the same; [Sec. 211.2, RA 8293]

3.

E. Rules on Copyright

Ownership

Single Creator of an Original Work

Belongs to the author of the work [Sec. 178.1, RA 8293] Belongs of the co-authors; in the absence of agreement, their rights shall be governed by the rules on co-ownership. However, if the work consists of parts that can be used separately and identified, the author of each part owns the copyright of the part he has created. [Sec. 178.2, RA 8293;BAR Question (1995, 2004)] Belongs to the employee if the creation is not a part of his regular duties, even if he used the time, facilities and materials of the employer. However, belongs to the employer if the work is in the performance of the employee‘s regular duties unless there is an agreement to the contrary. [Sec. 178.3, RA 8293; BAR Question (2008)] The person who commissioned the work holds ownership of the work per se, but copyright remains with the creator unless there was a stipulation to the contrary. [Sec. 178.4, RA 8293; BAR Question (1995, 2004)] Belongs to the producer, author of the scenario, composer of the music, film director, and author of the adapted work. However, subject to stipulations, the producers shall exercise the copyright as may be required for the exhibition of the work, except for the right to collect license fees for the performance of musical compositions in the work. [Sec. 178.5, RA 8293] Belongs to the writer, but the court may authorize their publication or dissemination of the public good or interest of justice requires, pursuant to Art. 723, New Civil Code. [Sec. 178.6, RA 8293 Publishers are deemed to represent the authors, unless

Works of Authorship

Joint

Work created during the course of employment

Work commissioned by a person other than the employer

Term of Protection Works For performances incorporated recordings

not in

For sound or image and sound recordings and for performances incorporated therein Broadcasts

Term fifty (50) years from the end of the year in which the performance took place [Sec. 215.1(a), RA 8293] fifty (50) years from the end of the year in which the recording took place. [Sec. 215.1(b), RA 8293] twenty (20) years from the date the broadcast took place[Sec. 215.2, RA 8293]

183

Work

Limitations on Protection Sections 203, 208 and 209 shall not apply where the acts referred to in those Sections are related to: 1. The use by a natural person exclusively for his own personal purposes; 2. Using short excerpts for reporting current events; 3. Use solely for the purpose of teaching or for scientific research; and 4. Fair use of the broadcast subject to certain conditions. [Sec. 212, RA 8293]

of

1. Ownership of Copyright

The use of such records for fresh transmissions or for fresh recording. [Sec. 211.3, RA 8293]

Must-Carry Rule: prevents cable television companies from excluding broadcasting organization especially in those places not reached by signal. Also, the rule prevents cable television companies from depriving viewers in far-flung areas the enjoyment of programs available to city viewers. [ABS-CBN Broadcasting vs. Philippine Multi-Media System (2009)]

Ownership

Audio visual works

Letters

Anonymous and pseudonymous works


184

Collective works

2.

the contrary appears, the pseudonyms or adopted names leave no doubt as to the author‘s identity or if the author discloses his identity. [Sec. 179, RA 8293] A contributor is deemed to have waived his right unless he expressly reserves it. [Sec. 196, RA 8293]

Duration of Copyright

Works Original Literary and Artistic Works including Posthumous Works Derivative Works including Posthumous Works Joint Authorship

Anonymous Pseudonymous Works

or

Applied Art Published Works

Photographic

Unpublished Photographic Works Published Audio-visual Works Unpublished Audio-visual Works

Term Lifetime of author and for fifty (50) years after his death [Sec 213.1, RA 8293] Lifetime of author and for fifty (50) years after his death [Sec 213.1, RA 8293] Lifetime of the last surviving author and for fifty (50) years after his death [Sec 213.2, RA 8293] Fifty (50) years from date of first lawful publication [Sec. 213.3, RA 8293] Twenty-five (25) years from date of making [Sec. 213.4, RA 8293] Fifty (50) years from publication [Sec. 213.5, RA 8293] Fifty (50) years from the making [Sec. 213.5, RA 8293] Fifty (50) years from publication [Sec. 213.6, RA 8293] Fifty (50) years from the making [Sec. 213.6, RA 8293]

3. Presumption of Authorship The natural person whose name is indicated on a work in the usual manner as the author shall, in the absence of proof to the contrary, be presumed to be the author of the work. This provision shall be applicable even if the name is a pseudonym, where the pseudonym leaves no doubt as to the identity of the author. The person or body, corporate whose name appears on an audio-visual work in the usual manner shall, in the absence of proof to the contrary, be presumed to be the maker of said work. [Sec. 219, RA 8293] The term of protection subsequent to the death of the author shall run from the date of his death or of publication, but such terms shall always be deemed

to begin on the first day of January of the year following the event which gave rise to them. [Sec. 214, RA 8293]

4. Transfer or Assignment of Copyright The copyright may be assigned in whole or in part. Within the scope of the assignment, the assignee is entitled to all the rights and remedies which the assignor had with respect to the copyright. [180.1, RA 8293] The copyright is not deemed assigned inter vivos in whole or in part unless there is a written indication of such intention. [180.2, RA 8293] The submission of a literary, photographic or artistic work to a newspaper, magazine or periodical for publication shall constitute only a license to make a single publication unless a greater right is expressly granted. If two (2) or more persons jointly own a copyright or any part thereof, neither of the owners shall be entitled to grant licenses without the prior written consent of the other owner or owners. [180.3, RA 8293] The transfer or assignment of copyright shall not itself constitute a transfer of the materials object. A transfer or assignment of the copyright of the sole copy or one of the several copies of the work shall not imply transfer or assignment of copyright [Sec.181, RA 8293] The copyright owners or their heirs may designate a society of artists, writers or composers to enforce their economic rights and moral rights on their behalf. [Sec. 183, RA 8293]

F. Deposit Materials

on

Copyrightable

Rule 5, Copyright Safeguards and Regulations SECTION 4. Works That Shall Be Registered and Deposited. — Two (2) copies or reproductions of the following classes of works, and transfers and assignments related thereto, shall be registered and deposited with TNL Copyright Division and another two (2) copies with the SCL: a. Books, pamphlets, articles and other writings; b. Periodicals and newspapers; c. Lectures, sermons, addresses, dissertations prepared for oral delivery whether or not reduced in writing or other material form; d. Letters; e. Musical compositions with or without words SECTION 5. Replicas and Pictures. — For practical purposes, only replicas and pictures of the following classes of works, shall be registered and deposited with The National Library Copyright Division: a.

Works of drawing, painting, architecture, sculpture, engraving, lithography or other works of art, models or designs for works of

COMMERCIAL LAW REVIEWER art; Original ornamental designs or models for articles of manufacture, whether or not registerable as an industrial design, and other works of applied art; Illustrations, maps, plans, sketches, charts and three-dimensional works relative to geography, topography, architecture or science; Drawings or plastic works of a scientific or technical character.

Library shall become the property Government [Sec. 227, RA 8293]

SECTION 6. Works that May be Registered and Deposited. The following works may be registered and deposited: a. Dramatic or dramatic-musical compositions, choreographic works or entertainment in shows; b. Photographic works including works produced by a process analogous to photography, lantern slides; c. Audiovisual works and cinematographic works and works produced by a process analogous to cinematography or any process for making audio-visual recordings; d. Pictorial illustrations and advertisements; e. Computer programs; f. Other literary, scholarly, scientific and artistic works; g. Sound recordings; e. Broadcast recording [Sec. 6, Rule 5, Copyright Safeguards and Regulations

G. Limitations on Copyright

b.

c.

d.

Registration and Deposit with the National Library and the Supreme Court Library After the first public dissemination of performance by authority of the copyright owner of a work there shall, for the purpose of completing the records of the National Library and the Supreme Court Library, within three (3) weeks, be registered and deposited with it, by personal delivery or by registered mail two (2) complete copies or reproductions of the work in such form as the directors of said libraries may prescribe. A certificate of deposit shall be issued for which the prescribed fee shall be collected and the copyright owner shall be exempt from making additional deposit of the works with the National Library and the Supreme Court Library under other laws. If, within three (3) weeks after receipt by the copyright owner of a written demand from the directors for such deposit, the required copies or reproductions are not delivered and the fee is not paid, the copyright owner shall be liable to pay a fine equivalent to the required fee per month of delay and to pay to the National Library and the Supreme Court Library the amount of the retail price of the best edition of the work. Only the above mentioned classes of work shall be accepted for deposit by the National Library and the Supreme Court Library. [Sec. 191, RA 8293} All copies deposited and instruments in writing filed with the National Library and the Supreme Court

of

the

185

Notice of Copyright Each copy of a work published or offered for may contain a notice bearing the name of copyright owner, and the year of its publication, and, in copies produced after creator's death, the year of such death. [Sec. RA 8293]

sale the first the 192,

1. Doctrine of Fair Use The fair use of copyrighted work for criticism, news reporting, teaching (including multiple copies for classroom use), research and similar purposes is not an infringement of copyright. A privilege, in persons other than the owner of the copyright, to use the copyrighted material in a reasonable manner without his consent, notwithstanding the monopoly granted to the owner by the copyright. It is meant to balance the monopolies enjoyed by the copyright owner with the interests of the public and of society. Decompilation: Refers to the reproduction of the code and translation of the forms of the computer program to achieve the inter-operability of an independently created computer program with other programs. This may also constitute fair use [Sec. 185.1, RA 8293]. The fact that a work is unpublished shall not by itself bar a finding of fair use if such finding is made upon consideration of all the above factors. [Sec 185.2, RA 8293]

Factors to consider in determining Fair Use 1.

2. 3. 4.

The purpose and character of the use, including whether such use is of a commercial nature or is for non-profit educational purposes; The nature of the copyrighted work; The amount and substantiality of the portion used in relation to the copyrighted work as a whole; and The effect of the use upon the potential market for or value of the copyrighted work [Sec. 185.1, RA 8293; [Harper & Row v. Nation Enterprise, 471 US 539, 105 S.Ct. 2218, 85 L.Ed.2d 588]

2. Copyright infringement Infringement of Copyright and Related Rights means any violation of the rights under the Intellectual Property Code and/or the applicable Intellectual Property Law, including the act of any person who at the time when copyright subsists in a work has in his possession an article which he known, or ought to

MERCANTILE LAW REVIEWER know, to be an infringing copy of the work f or the purpose of:

186

a. b.

c.

Selling, letting for hire, or by way of trade offering or exposing for sale, or hire, the article Distributing the article for purpose of trade, or for any other purpose to an extent that will prejudice the rights of the copyright owner in the work; or Trade exhibit of the article in public. [Sec. 1(l), Rule 1, Rules and Regulations on Administrative Complaints for Violation of Laws involving Intellectual Property Rights]

Habana et al vs. Robles et al. (1999). Infringement consists in the doing by any person, without the consent of the owner of the copyright, of anything the sole right to do which is conferred by statute on the owner of the copyright. For there to be substantial reproduction of a book, it does not necessarily require 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 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 am ―injurious effect.‖

b.

Making of quotations from a published work: (i) compatible with fair use, (ii) extent is justified by the purpose, (iii) source and name of the author, appearing on work, must be mentioned; [Sec. 184.1(b), RA 8293]

c.

Reproduction or communication to the public by mass media of articles on current political, social, economic, scientific or religious topic, lectures, addresses and other works, delivered in public: (i) for information purposes, (ii) not expressly reserved, and (iii) source is already indicated; [Sec. 184.1(c), RA 8293]

d.

Reproduction and communication to the public of literary, scientific or artistic works as part of reports of current events by means of photography, cinematography or broadcasting to the extent necessary for the purpose; [Sec. 184.1(d), RA 8293]

e.

Inclusion of a work in a publication, broadcast or other communication to the public, sound recording or film if made by way of illustration for teaching purposes compatible with fair use and the source and the name of the author appearing on work, must be mentioned; [Sec. 184.1(e), RA 8293]

f.

Recording made in schools, universities, or educational institutions of a work included in a broadcast for the use of schools, universities or educational institutions. Such recording must be deleted within a reasonable period; such recording may not be made from audio-visual works which are part of the general cinema, repertoire of feature films except of brief excerpts of the work; [Sec. 184.1(f), RA 8293]

g.

Making of ephemeral recordings; (i) by a broadcasting organization, (ii) by means of its work or facilities, (iii) for use in its own broadcast; [Sec. 184.1(g), RA 8293]

h.

Use made of a work by or under the direction or control of the government for public interest compatible with fair use; [Sec. 184.1(h), RA 8293]

i.

Public performance or the communication to the public of a work in a place where no admission fee is charged by a club on institution for charitable or educational purpose only and the aim is not profitmaking; [Sec. 184.1(i), RA 8293]

j.

Public display of the original or a copy of the work not made by means of a film, slide, television, image or otherwise on screen or by means of any other device or process either the work has been published, sold, given away, or transferred to another

Copyright infringement and unfair competition are not limited to the act of selling counterfeit goods. They cover a whole range of acts from copying, assembling, packaging to marketing, including the mere offering for sale of counterfeit goods. [Microsoft Corp vs. Maxicorp Inc.(2004)] Columbia Pictures v. CA (1996). A copy of a piracy is an infringement of the original, and it is no defense that the pirate, in such cases, did not know what works he was indirectly copying, or 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 determining the question of infringement, the amount of matter copied from the copyrighted work is an important consideration. To constitute infringement, it is not necessary that the whole or even a large portion of the work shall have been copied. If so much is taken that the value of the original is sensibly diminished, or the labors of the original author are substantially and to an injurious extent appropriated by another, that is sufficient in point of law to constitute a piracy.

The following shall NOT constitute infringement of copyright: a.

Recitation or performance of a work once it has been made accessible to the public if (1) privately done AND free of charge OR (2) strictly for a charitable or religious institution; [Sec. 184.1(a), RA 8293]

COMMERCIAL LAW REVIEWER person by the author or his successor in title; [Sec. 184.1(j), RA 8293] k.

Use made of a work for the purpose of any judicial proceedings or for the giving of professional advice by a legal practitioner. [Sec. 184.1(k), RA 8293]

Reproduction of Published Work General Rule: The private reproduction of a published work in a single copy, where the reproduction is made by a natural person exclusively for research and private study, shall be permitted, without the authorization of the owner of copyright in the work. [Sec. 187.1, RA 8293] Exceptions: Such permission shall not extend to: a. A work of architecture in the form of building or other construction; b. An entire book, or a substantial part thereof, or of a musical work in graphic form by reprographic means; c. A compilation of data and other materials; d. A computer program except as provided in Section 189; and e. Any work in cases where reproduction would unreasonably conflict with a normal exploitation of the work or would otherwise unreasonably prejudice the legitimate interests of the author. [187.2, RA 8293]

entitled to receive copies of a printed work, shall be entitled, when special reasons so require, to reproduce a copy of a published work which is considered necessary for the collection of the library but which is out of stock. [Sec.188.2, RA 8293]

Reproduction of Computer Program The reproduction in one (1) back-up copy or adaptation of a computer program shall be permitted, without the authorization of the author of, or other owner of copyright in, a computer program, by the lawful owner of that computer program: Provided, That the copy or adaptation is necessary for: a. The use of the computer program in conjunction with a computer for the purpose, and to the extent, for which the computer program has been obtained; and b. Archival purposes, and, for the replacement of the lawfully owned copy of the computer program in the event that the lawfully obtained copy of the computer program is lost, destroyed or rendered unusable. [189.1, RA 8293] No copy or adaptation mentioned in this Section shall be used for any purpose other than the ones determined in this Section, and any such copy or adaptation shall be destroyed in the event that continued possession of the copy of the computer program ceases to be lawful. [189.2, RA 8293]

Reprographic Reproduction by Libraries

Importation for Personal Purposes

Any library or archive whose activities are not for profit may, without the authorization of the author of copyright owner, make a single copy of the work by reprographic reproduction: a. Where the work by reason of its fragile character or rarity cannot be lent to user in its original form; b. Where the works are isolated articles contained in composite works or brief portions of other published works and the reproduction is necessary to supply them, when this is considered expedient, to persons requesting their loan for purposes of research or study instead of lending the volumes or booklets which contain them; and c. Where the making of such a copy is in order to preserve and, if necessary in the event that it is lost, destroyed or rendered unusable, replace a copy, or to replace, in the permanent collection of another similar library or archive, a copy which has been lost, destroyed or rendered unusable and copies are not available with the publisher. [Sec. 188.1, RA 8293]

The importation of a copy of a work by an individual for his personal purposes shall be permitted without the authorization of the author of, or other owner of copyright in, the work under the following circumstances: a. When copies of the work are not available in the Philippines and: i. Not more than one (1) copy at one time is imported for strictly individual use only; or ii. The importation is by authority of and for the use of the Philippine Government; or iii. The importation, consisting of not more than three (3) such copies or likenesses in any one invoice, is not for sale but for the use only of any religious, charitable, or educational society or institution duly incorporated or registered, or is for the encouragement of the fine arts, or for any state school, college, university, or free public library in the Philippines. b. When such copies form parts of libraries and personal baggage belonging to persons or families arriving from foreign countries and are not intended for sale: Provided, That such copies do not exceed three (3). [Sec. 190.1, RA 8293]

It shall not be permissible to produce a volume of a work published in several volumes or to produce missing tomes or pages of magazines or similar works, unless the volume, tome or part is out of stock: Provided, That every library which, by law, is

187


188

Copies imported as allowed by this Section may not lawfully be used in any way to violate the rights of owner the copyright or annul or limit the protection secured by this Act, and such unlawful use shall be deemed an infringement and shall be punishable as such without prejudice to the proprietor's right of action. [Sec. 190.2, RA 8293]

Rule on Search and Seizure in Civil Actions for Infringement of Intellectual Property Rights (A.M. No. 02-1-06-SC) Application for Search and Seizure [Sec. 3]

a. Remedies Nature

Civil

Criminal

Administrative

Remedy Injunction,; Actual, Moral and Exemplary Damages; Impounding of documents evidencing sales, articles and packaging that infringe copyright and implements for making them; Destruction without compensation of infringing copies and devices and the means of making infringing copies. [Sec. 216, RA 8293] Imprisonment and finedepending on the value of the infringing materials produced and the damage the copyright owner has suffered by reason of the infringement. [Sec. 217, RA 8293] Administrative action; Cease and Desist Orders; Forfeiture of the paraphernalia used in committing the offense; Administrative fines [Sec. 10, RA 8293]

General Rule: Mere possession of infringing goods is not punishable Exception: Unless one can prove that the possessor knows or ought to know that the goods in his possession are infringing copies of the work and are held for the purpose of: 1. Selling, letting for hire or by way of trade, offering or exposing the article for sale or hire; 2. Distributing the article for trade or for any other purpose to an extent that will prejudice the rights of the copyright owner; 3. Trade exhibit of the article [Sec. 217.3, RA 8293] No damages may be recovered under this Act after four (4) years from the time the cause of action arose. [Sec. 226, RA 8293]

Examination of Applicant and Witnesses [Sec. 5]

Issuance of Writ [Sec. 7]

Search conducted in the presence of defendant, his representative or witnesses [Sec. 13]

Verified Return filed by Sheriff to the court w/in 3 days from enforcement [Sec. 17]

Judge shall ascertain WON writ was served or return made w/in 5 days

Trial/Hearing

Judgment [Sec. 22] Contents of Application a. Ground upon which application is based b. Specific description and location of documents c. Articles to be searched, inspected copied or seized d. Names of applicant, representative, witness and counsel e. Other information necessary for identification of articles [Sec. 4] Grounds for Issuance of Writ a. Applicant is the right holder or his duly authorized representative b. There is probable cause to believe that the applicant‘s right is being infringed c. Damage likely to be caused is irreparable d. Demonstrable risk of evidence that the alleged defendant may destroy, hide or remove the document e. Documents and articles to be seized constitute evidence of the alleged defendant‘s infringing activity or that they infringe or are used or intended to be used as means of infringing the applicant‘s intellectual property right [Sec. 6] Contents of Writ a. An order to the alleged defendant to permit


b. c. d. e.

persons named in the writ to enter into the premises for purpose of searching, inspecting, copying or removing from the premises the documents and articles subject to the control of the court An order to the alleged defendant to disclose to the sheriff the location of the documents and articles subject of the writ Period when writ shall be enforced (w/in 10 days from issuance) Names of applicants or his agent and the Commissioner who will supervise the enforcement of writ Other terms and conditions that will ensure proper execution of the writ [Sec. 8]

Discharge of Writ a. Writ was improperly or irregularly issued or excessively enforced b. Bond was insufficient c. Safeguards in the writ was violated by the applicant or the sheriff f. Documents and articles seized are not infringing copies or means for making the materials alleged to infringe the applicant‘s intellectual property right [Sec. 18] Failure to file the complaint – the writ, upon motion, shall be set aside [Sec. 20] Alleged defendant may claim for damages a. Writ was discharged b. Finding or no infringement or threat of infringement of an intellectual property right [Sec. 21] Judgment a. Finding of Infringement – Court shall order the destruction of goods or donation to charitable, educational institution with prohibition against bringing the same into channels of commerce b. Finding of no infringement – Seized materials shall be immediately returned to defendant [Sec. 22]

b. Criminal penalties Any person infringing any right secured by provisions of Part IV of this Act or aiding or abetting such infringement shall be guilty of a crime punishable by: First Offense: Imprisonment of one (1) year to three (3) years plus a fine ranging from Fifty thousand pesos (P50,000) to One hundred fifty thousand pesos (P150,000). [Sec. 217.1(a), RA 8293] Second Offense: Imprisonment of three (3) years and one (1) day to six (6) years plus a fine ranging from One hundred fifty thousand pesos (P150,000) to Five hundred thousand pesos (P500,000) for the second offense. [Sec. 217.1(b), RA 8293]

Third and Subsequent Offenses: Imprisonment of six (6) years and one (1) day to nine (9) years plus a fine ranging from five hundred thousand pesos (P500,000) to One million five hundred thousand pesos (P1,500,000). ). [Sec. 217.1 (c), RA 8293] In all cases, subsidiary imprisonment in cases of insolvency. [Sec. 217.1(d), RA 8293] In determining the number of years of imprisonment and the amount of fine, the court shall consider the value of the infringing materials that the defendant has produced or manufactured and the damage that the copyright owner has suffered by reason of the infringement. [Sec. 217.2, RA 8293]

189


190

V. Registration Flowcharts A. Patent Application B. Utility Model and Industrial Design C. Copyright Registration and Deposit D. Trademark

A. Patent Application

[Source: http://ipophil.gov.ph; Secs. 32-39, RA 8293] Application

Formality Examination Classification and Search

Requirements to get a filing date [Sec. 40, RA 8293] 1. Request for Philippine Patent 2. Description of Invention 3. Drawings necessary 4. Claim(s) 5. Abstract 6. Identification of Inventor (NRA shall appoint an agent in the Philippines)

Publication of Unexamined Application in the IPO Gazette after 18 months from filing or priority date Request for Substantive Exam (w/in 6 months from date of publication) Substantive Examination Applicant is notified of reasons for refusal

Opinion and/or Amendment

Decision to Grant Patent Publication of Patent in the IPO Gazette Issuance of Patent Certification

Final Refusal by Examiner

Appeal to Director of Patents

Final Refusal by Director Appeal to Director General

Final Refusal

Court of Appeals Refusal Appeal to Supreme Court

Refusal


B. Utility Model and Industrial Design [Source: http://ipophil.gov.ph]

191 Application is Received

Application is not Formal Applicant‘s Request

Application is Received

Application is subjected to Formality Examination

Applicant is Notified of the Result of Examination

Application is Formal

With Response

Application is recommended for Publication

Application Deemed Withdrawn

Opposition Filed

Director‘s Request

No Response

Petition for Revival

Application is published BOP Director No Opposition Filed BOP Director

Application is confirmed for Registration Application Revived

Decision Application is Refused

Application is Affirmed for Registration Appeal on the Decision of the Director Director General

Decision Application is Refused

Application is Affirmed for Registration

Third Party‘s Request Request Issuance of Certificate

Registrability Report


192

C. Copyright Registration and Deposit [Source: IPOPHL Office Order No. 93 Series of 2011]

Submission of Registration and Deposit Form (RDF) with IP Satellite Office (IPSO)

IPSO Field Specialist shall review entries and documents

Statement of Account (SOA) is issued to Applicant

Payment of Filing Fee to Landbank

IPSO Field Specialist received RDF and RDF Number and date of filing upon showing of validated deposit slip

IPSO Field Specialist issues Acknowledgment Receipt (AR) pending release of Official Receipt (OR)

IPSO Field Specialist encodes bibliographic entry in data base and scan documents including AR, SOA and deposit slip IPSO Field Specialist transmit scanned documents to IP Field Operations Unit (IPFOU) to verity completeness of documents

IPFOU transmit documents to IP Office Philippines (IPOPHL) Cashier for preparation of Official Receipt (OR)

Notification by IPOPHL Cashier of the release of OR

Copyright Support Services (CSS) shall print the Certificate of Registration and Deposit

Certificate released to applicant after 5 working days from filing


D. Trademark [Source: http://ipophil.gov.ph]

193

Filing of Application Requirements [Sec. 124, RA 8293] According of Filing or Priority Search and Examination

1. Request for Registration 2. Applicant‘s Name and address 3. Nationality or Domicile and Place of Business 4. Reproduction of Marks 5. Translation or marks 6. Names of goods or services for w/c registration is sought 7. Signature of Applicant 8. Juridical Entity: law under w/c organized 9. NRA: appointment of agent 10. Claims of Priority Right 11. Claims of color as distinctive feature of mark 12. 3D mark, statement to that effect

Actions and Responses Allowance for Publication Certificate of Registration [Sec. 138, RA 8293] Prima Facie evidence of: 1. Validity of registration 2. Registrant‘s ownership of the mark 3. Registrant‘s exclusive right to use the same in connection with the goods or services and those that are related thereto

Publication

YES

NO Issuance of Certificate of Registration

Is there an opposition?

Opposition

Decision Publication

YES

Favorable to Applicant

NO Motion for Reconsideration or Appeal to the Director General

MERCANTILE LAW

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