Professional Documents
Culture Documents
Up Commercial Law Reviewer 2008 PDF
Up Commercial Law Reviewer 2008 PDF
COLLEGE OF LAW
Bar Operations 2008
COMMERCIAL LAW
Information Management Chino Baybay [Head] * Simoun Salinas [Deputy] * Rania Joya
Committee [Design & Lay-out] * Ludee Pulido [Documentations] * Linus
Madamba * Des Mayoralgo * Jillian De Dumo * Mike
Ocampo * Abel Maglanque * Edan Marri R. Caete * Carmie
Rome Cargo
TABLE OF CONTENTS COMMERCIAL LAW
Commercial Law
TABLE OF CONTENTS
I. Corporation Law 3
II. Negotiable Instruments Law 88
III. Insurance Code 125
IV. Transportation Law 203
V. Code of Commerce 255
VI. Banking Law 275
VII. Intellectual Property Law 327
1. a juridical person capable of having rights 4) Centralized Management all corporate powers
and obligations, w/ a personality separate are exercised by the board of directors (23)
and distinct from its members or
stockholders 1.4 Partnership vs. Corporation
2. hence, stockholders are not personally
liable for corp. obligations and cannot be 1. Extent of Liabilitypartners are personally
held liable to third persons who have claims liable for the debts of the partnership;
against the corp. beyond their agreed stockholders cannot be made to personally
contribution to the corporate capital (paid- answer to corporate creditors
up capital and unpaid subscriptions) This is 2. Creationmere agreement of the parties,
known as the doctrine of limited liability. w/c can be composed of just 2 persons,
gives rise to the juridical personality of the
partnership, whether or not registered w/
Created by operation of law: the SEC (Art. 1768, NCC); a corp., w/ a
1. mere consent of the parties to form a corp. minimum of 5 incorporators, derives its
is not sufficient: the State must give its juridical personality from the certificate
consent either through a special law (in the issued by the SEC (19)
case of a govt corp.) or a general law (for 3. ManagementIn most cases, all the
a private corp.) owners in a partnership actively participate
2. the general law under w/c a private corp. in management, w/ capacity to bind it by
may be formed or organized is the any usual contract (Art. 1818, NCC); in a
Corporation Code corp., management is centralized in the
board of directors w/c has exclusive power
to bind the corp. (23)
Has the right of succession: 4. Nature of Relationshippartnership is
1. its continued existence during the term based on mutual trust and confidence
stated in its articles of incorp. cannot be (delectus personae) so that its existence is
affected by any change in the members or precarious because of the facility w/ which
stockholders it can be dissolved (i.e. through the death
2. nor is it affected by the transfer of shares or unilateral act of a partner); a corp. has
by a stockholder to a 3rd person more stability as it enjoys the right of
succession and is not affected by the death
or insolvency of a stockholder; also,
Has the powers, attributes and properties expressly dissolution before a corp.s term requires a
authorized by law or incident to its existence: as it
2/3rds vote of the stock (Secs. 118 and detrimental to the interest of the public
119, Corp. Code), always subject to SEC and/or of the stockholders, partners or
intervention members of any corporation, partnership,
5. Powersa corporation has only such or association;
powers as are expressly granted to it and 2. Controversies arising out of intra-
such as are necessary to the exercise of the corporate, partnership, or association
powers so granted or fro the relations, between and among
accomplishment of its purpose(sec.2, 36 stockholders, members or associates; and
(11), and 45); In a partnership, as long as between, any or all of them and the
the parties have agreed to it, the corporation, partnership, or association of
partnership can perform any act as long as which they are stockholders, members or
it does not violate any law or right of associates, respectively;
others. 3. Controversies in the election or
appointment of directors, trustees,
1.5 Government Regulation of Corporations officers, or managers of corporations,
partnerships, or associations;
By the Legislature
4. Derivative suits; and
Basis: police power of the state (Northern Ry Co. v. 5. Inspection of corporate books.
State of Washington, 300 U.S. 154) and the fact
that corporations owe their existence to the state
Morato v CA (2004)
Manner: by amending or repealing the Corp. Code
or any part thereof Petitioners, stockholders of TF Ventures, Inc., filed
a petition with the SEC against private respondents
for the declaration of nullity of stockholders and
NDC v Phil Veterans Bank (1990) directors meetings and damages. They assail the
validity of the notice and stockholders meeting of
PD 1717 ordered the rehabilitation of the Agrix TF Ventures, Inc. and the organizational meeting of
Group of Companies to be administered by NDC. the members of the BOD. The petition was referred
Sec 4(1) provides that all mortgages and liens to the Securities Investigation and Clearing
presently attached be extinguished, and that all Department (SICD) of the SEC for investigation
accrued obligations shall not bear interest. Among and resolution.
those ordered extinguished was a lien in favor of Meanwhile, one of the private respondents
Phil Veterans Bank over prop in LB. NDC filed to (Matsura, Chairman of the BOD), wrote a letter to
foreclose the mortgage. the Examiners and Appraisers Dept of the SEC,
requesting for an examination of the basis for the
HELD: New Agrix was created by special decree capital increase of T.F. Ventures, Inc. from
even if 1973 Consti mandates that Batasang P10,000,000 to P100,000,000, alleging the
Pambansa, cannot, except by general law, provide commission of devices, schemes and criminal acts.
for formation, organization and regulation of The letter was forwarded by the SEC to the
private corps, unless for GOCCs. Prosecution and Enforcement Dept (PED).
NDC was only mandated to extend loan and to Petitioners contended that with the filing of the
manage company. New Agrix was entirely private letter-petition with the PED, Matsura resorted to
and should have been organized under Corp Law. forum shopping.
corresponding criminal or civil case before cease-and-desist orders to prevent fraud or injury
the Commission or the proper court or to the investing public; (g) the compulsion of the
body upon prima facie finding of violation officers of any registered corporation or association
of any laws or rules and regulations to call meetings of stockholders or members
administered and enforced by the thereof under its supervision; and, (h) the exercise
Commission; and to perform such other of such other powers as may be provided by law as
powers and functions as may be provided well as those which may be implied from, or which
by law or duly delegated to it by the are necessary or incidental to the carrying out of,
Commission. the express powers granted the Commission to
achieve the objectives and purposes of these laws.
Prosecution under this Decree or any
Act, Law, Rules and Regulations enforced However, Section 8 of P.D. No. 902-A, as
and administered by the Commission shall amended, has already been repealed, as provided
be without prejudice to any liability for for in Section 76 of RA 8799.
violation of any provision of the Revised
Penal Code. Thus, under the new law, the PED ceased to exist.
However, the SEC retains jurisdiction to continue
Under the said provision, the SEC, through the with its investigation of the letter-petition of
PED, is vested with authority to investigate, either respondent Matsuura.
motu proprio or upon complaint, any act or
omission, fraudulent schemes, devices or When RA 8799 took effect, the SEC case had not
misrepresentations in violation of any law, rules or yet been submitted for decision by the SEC.
regulations, administered and enforced by the SEC, Hence, the said case should be transferred to the
and to file and prosecute appropriate civil or RTC of Makati City, to be raffled to the appropriate
criminal cases upon a prima facie finding of branch thereof assigned to try such cases. Despite
violation of such laws, rules or regulations. The the repeal of Section 8 of P.D. No. 902-A and the
petitioners, in the SEC case, sought the nullification abolition of the PED, the SEC may continue with its
of the Notice for the Annual Stockholders Meeting, investigation of the letter-petition of respondent
the stockholders meeting and organizational Matsuura.
meeting held on September 22, 1997, on their
claim that the holding of the same was in violation
of the Corporation Code and the By-Laws of the The Sandiganbayan has jurisdiction over
petitioner corporation. In his answer to the presidents, directors or trustees, or managers
petition, the respondent asserted the validity of the of government-owned or controlled
said meeting and prayed, by way of counterclaim, corporations organized and incorporated under
for the nullification of the October 20, 1997 the Corporation Code for purposes of the
meeting of the petitioners, and for damages. In provisions of RA 3019, otherwise known as the
contrast, the respondent alleged in his letter- Anti-Graft and Corrupt Practices Act. Basis: Sec
petition in the PED case that the petitioners were 4, RA 8249 (People v Sandiganbayan, 2005)
engaged in fraudulent schemes, devices or Union Bank v. Danilo Concepcion
misrepresentations in violation of the law, and SEC GR No. 160727 June 26, 2007
rules and regulations. The complainant Matsuura EYCO Group of Companies filed a petition for
asked the PED to investigate the complaint and file suspension of payment, appointment of
the corresponding administrative, civil or criminal receiver/committee and approval of
cases before the SEC, the proper court or body, for rehabilitation plan with alternative prayer for
violation of the laws, rules or regulations liquidation and dissolution of corporations.
administered and enforced by the SEC. The fact Suspension was granted by the SEC Hearing
that the SICD has not yet resolved the SEC case Panel. Union Bank became part of the
does not constitute a bar to the resolution of the ManCom which represented the creditor
PED case. The proceedings in the said cases are banks but later on broke away without
independent and separate of each other and may notifying the group. It filed a slew of cases
thus proceed separately. with the Makati RTC and applied for
preliminary attachment. Union Bank filed a
Note that while this case was pending in the SC, RA motion to dismiss the case pending with the
8799, Securities Regulation Code, took effect on SEC, and when the SEC issued an order
August 8, 2000. Section 5.2 of the law provides appointing regular members of the ManCom,
that SECs jurisdiction over all cases under Sec 5 of Union Bank filed a petition for certiorari with
PD 902-A is transferred to the RTCs. the CA seeking the nullification of the SEC
Order and again assailing the jurisdiction of
Among the powers and functions of the SEC which
the SEC. It alleged that the jurisdiction over a
were transferred to the RTC include the following:
basic petition for suspension of payments was
(a) jurisdiction and supervision over all
with the RTC under Act No. 1956 (Insolvency
corporations, partnerships or associations who are
Law). The CA and later on the SC ruled that
the grantees of primary franchises and/or a license
the jurisdiction is with the SEC pursuant to PD
or permit issued by the Government; (b) the
902-A. The proceeding in the RTC was thus
approval, rejection, suspension, revocation or
suspended. Concepcion was later appointed as
requirement for registration statements, and
liquidator by the SEC en banc and he filed a
registration and licensing applications; (c) the
motion to intervene and set aside order of
regulation, investigation or supervision of the
attachment in the said RTC case. The SEC en
activities of persons to ensure compliance; (d) the
banc approved of the liquidation plan that
supervision, monitoring, suspension or take over
Concepcion submitted but his motion to
the activities of exchanges, clearing agencies and
intervene with the RTC was denied for lack of
other SROs; (e) the imposition of sanctions for the
standing. The RTC also declared EYCO in
violation of laws and the rules, regulations and
default in the said case, proceeded to receive
orders issued pursuant thereto; (f) the issuance of
evidence ex parte and later rendered partial case may pursue. Thus, petitioner has no right
judgment ordering EYCO to pay P400M to to be notified of the preliminary report by the
Union Bank. Concepcion appealed the decision Financial Analysis and Audit Division of the
and was sustained by the CA, which modified SEC.
the partial judgment of the RTC. Union Bank
now comes to the SC assailing the CAs order. Petitioners claim that the SECs referral of the
petition for rehabilitation to the said division
HELD: Denied. CA Order AFFIRMED. What is violated its right to due process deserves no
being assailed is the validity of the consideration. Petitioners right to
appointment of Concepcion as liquidator and administrative due process only entitles it to
his standing to intervene in the RTC case. an opportunity to be heard and to a decision
Albeit jurisdiction over a petition to declare a based on substantial evidence. No more, no
corporation in a state of insolvency strictly lies less.
with regular courts, the SEC possessed,
during the period material, ample power
under P.D. No. 902-A as amended, to declare
a corporation insolvent as an incident of and
Chapter II
in continuation of its already acquired
jurisdiction over the petition to be declared in CLASSIFICATION OF PRIVATE
the state of suspension of payments in the CORPORATIONS
two instances provided in Section 5(d)
thereof.
Said Section 5(d) vests the SEC with exclusive
1. General Classification under 3:
and original jurisdiction over petitions for
suspension of payments which may either be:
(a) a simple petition for suspension of 1.1 Stock corporation
payments based on the provisions of the
Insolvency Law, i.e., the petitioning One which has a capital stock divided into
corporation has sufficient assets to cover all shares and is authorized to distribute to the
its debts, but foresees the impossibility of holders of such shares dividends or
meeting the obligations as they fall due, or (b) allotments of the surplus profits (i.e.,
a similar petition filed by an insolvent retained earnings on the basis of the shares
corporation accompanied by a prayer for the held (3)
creation of a management committee and/or It is organized for profit.
rehabilitation receiver based on the provisions The governing body of a stock corporation
of P.D. No. 902-A, as amended by P.D. No. is usually the Board of Directors (Except in
1758. The petition of EYCO in this case was a certain instances for close corporations)
mix of both situations. EYCOs petition for
suspension for payment was, for all intents
and purposes, still pending with the SEC as of 1.2 Non-stock corporation
June 30, 2000. Accordingly, the SECs
jurisdiction thereon, by the express terms of All other corporations are non-stock
R.A. No. 8999, still subsists until [the corporations (3)
suspension of payment case and its incidents One where no part of the income is
are] finally disposed. distributable as dividends to its members,
trustees, or officers, subject to the
provisions of the Code on dissolution.
Provided that any profit which a non-stock
Viva Footwear v. SEC
corporation may obtain as an incident to its
GR No. 163235 April 27, 2007
operation shall whenever necessary or
Petitioner Viva Footwear Manufacturing
proper be used for the furtherance of the
Corporation is a domestic corporation engaged
purpose or purposes for which the
in the manufacture of rubber footwear.
corporation was organized. (87)
Respondents Philippine National Bank (PNB)
Not organized for profit.
and Philippine Bank of Communications
Its governing body is usually the Board of
(PBCom) are two of petitioners creditors. The
Trustees.
SEC, upon petition by Viva, declared the latter
to be in a state of suspension of payments.
The petition for rehabilitation was eventually CIR vs. Club Filipino, Inc de Cebu (1962)
dismissed because it was not viable to do so
as it was not financially sound. Viva now Club Filipino is a civic corporation organized to
claims that its right to due process was develop and cultivate sport of all class and
violated when the SEC referred the denomination for the healthful recreation and
rehabilitation plan to the Financial Analysis entertainment of its SH and members. Its AOI and
and Audit Division without notice to petitioner. by-laws are silent as to dividends and their
distribution but it was provided that upon its
HELD: NO MERIT. DISMISSED. In dissolution, the Clubs remaining assets after
administrative proceedings, due process paying debts shall be donated to a charitable Phil.
simply means an opportunity to seek a Institution.
reconsideration of the order complained of; it
cannot be fully equated to due process in its HELD: Club Filipino is a non-stock corporation.
strict jurisprudential sense. It is the According to Section 3 of the Corporation Code,
administrative order, not the preliminary there are two elements for a stock corporation to
report, which is the basis of any further exist: 1) capital stock divided into shares, and 2)
remedies the losing party in an administrative an authority to distribute to the holders of such
shares, dividends or allotments of the surplus 6. Eleemosynary corporation One organized for
profits on the basis of shares held. Nowhere in a charitable purpose
Club Filipinos AOI or BL could be found an 7. Domestic corporation A domestic corporation
authority for the distribution of its dividends or is one formed, organized, or existing under the
surplus profits. laws of the Philippines
8. Foreign corporation One formed, organized or
existing under any laws other than those of the
Philippines and whose law allows Filipino
2. Other kinds of corporations citizens and corporations to do business in its
own country and state. (123)
1. Public corporation - One formed or organized 9. Corporation created by special laws or charter
for the government or a particular state. Its (4)
purpose is for the general good and welfare. Corporations which are governed primarily
2. Private corporation - One formed for some by the provisions of the special law or
private purpose, benefit, aim or end charter creating them (4)
3. Close corporation (96) One whose Articles Corporation Code is suppletory in so far as
of Incorporation provide that: they are applicable (Ibid)
a) all of the corporations issued stock of all 10. Subsidiary corporation one in which control,
classes, exclusive of treasury shares, shall usually in the form of ownership of majority of
be held of record by not more that a its shares, is in another corporation (the parent
specified number of persons, not exceeding corporation)
20 11. Parent corporation its control lies in its power
b) all of the issued stock of all classes shall be to elect the subsidiarys directors thus
subject to one or more specified restrictions controlling its management policies
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
Chapter III
d) at least 2/3 of its voting stock must not be
owned or controlled by another corporation FORMATION AND ORGANIZATION OF
which is not a close CORPORATION
e) must not be a mining or oil company, stock
exchange, bank, insurance company, public 1. Who May Form a Corporation
utility, educational institution or corporation
vested with public interest 1.1 Incorporators
4. Educational corporation (106) - Those
corporations which are organized for Any number of natural persons not less than five
educational purposes. This type of corporation (5) but not more than fifteen (15), all of legal age
is governed by Section 106 of the Corporation and a majority of whom are residents of the
Code Philippines, may form a private corporation for any
lawful purpose or purposes. Each of the
incorporators of a stock corporation must own or
5. Religious sole and aggregate (110, 111 (2), be a subscriber to at least one (1) share of capital
123) stock of the corporation. (10)
A corporation sole is one formed for the
purpose of administering and managing, as 1) Natural persons
trustee, the affairs, property and Corporations and partnerships cannot be
temporalities of any religious denomination, incorporators, but may be stockholders.
sect, or church, by the chief archbishop, This prevents layering which may harbour
bishop, priest, rabbi, or other presiding elder criminals and will make the corporation a
of such religious denomination, sect or tool for defrauding the public.
church. (110) Incorporators are those stockholders or
The corporation sole is an exception to the members mentioned in the articles as
general rule that at least five (5) members originally forming and composing the
are required for a corporation to exist. corporation and who are signatories
Here, there is only one (1) incorporator. thereof.
This is applicable to religious communities Corporators are stockholders or members
the regulations of which provide that the who join the corporation after its
communitys properties are to be placed in incorporation.
the name of the head and administered by Original subscribers are persons whose
him. (111(2)) names are mentioned in the Articles, but
A corporation aggregate is a religious not as incorporators. They do not sign the
corporation incorporated by more than one Articles.
person.
2) At least five incorporators but not more than
fifteen
They must sign the articles of
incorporation.
GENUINE INTEREST: Each incorporator
must own or subscribe to at least one
share of stock of the corporation.
General rule: need not be a citizen Promoter is a person who, acting alone or
Exceptions: public utilities (Art XII, Sec 11. with others, takes initiative in founding and
Consti), schools (Art XIV, Sec 4(2), Consti), organizing the business or enterprise of the
banks (General Banking Act), retail trade issuer and receives consideration therefor.1
(RA 1180), savings and loan associations
(RA 3799), investment houses (Sec 5, PD 3.2. DRAFTING OF ARTICLES OF
129), and other areas of investment as INCORPORATION
congress may by law provide (Art XII, Sec.
10, Consti). These constitute the charter of the corporation
Even though there are no legal restrictions
as to alien ownership, where > 40% of the 1. CORPORATE NAME
outstanding capital stock will be owned and No corporate name may be allowed by
controlled by aliens, must get written the SEC if the proposed name is
authorization from BOI before it can identical or deceptively or confusingly
register with SEC. (purpose is to enable similar to that of any existing
BOI to determine whether such corporation corporation or to any other name
wherein aliens own a substantial number of already protected by law or is patently
shares would contribute to the sound and deceptive, confusing or contrary to
balanced development of the national existing laws. (18)
economy) A corporate name is essential to the
corporations acquisition of juridical
4) Incorporators must be of legal age personality
Change of corporate name shall require
the approval of the SEC. SEC will issue
2. Conditions Precedent for Incorporation amended certificate of incorporation
under the amended name (Ibid)
2.1 Consent or agreement of at least 5 natural A change in corporate name involves
persons with respect to: an amendment of the Articles, which
requires a majority vote of the board
1. Compliance with the Corp Code; and the vote or written assent of
2. Contribution/pooling of resources stockholders holding 2/3 of the
delivered to and held in trust by a outstanding capital stock (16) Note:
designated trustee; Does not include the non-voting stock.
3. Governance of: It is the sole means of identifying the
Contributions; corporation from its members or
Distribution of contributions; stockholders, and from other entities
Division of profits/sharing of and corporations
losses; Amendment in a corps AOI changing
Pursuit of purpose/objectives; its corporate name does not extinguish
Corporate combination; and the personality of the original
Transactions with third parties; corporation. The corp upon such
and change of its name, is in no sense a
4. Continuity or termination of existence. new entity, nor the successor of the
original corp. it is the same corp with a
2.2 Mandatory Requirements of the Code: different name, and its character is not
changed. Consequently, the new
1. Execution of constitutive documents corp is still liable for the debts and
(AOI, By-laws); obligations of the old corp (Republic
2. Payment/delivery of contributions Planters Bank v CA, 1992)
delivered to and held in trust by a This is essential because through it,
designated trustee; corporation can sue and be sued
3. Submission of constitutive documents SEC may allow incorporators to reserve
to SEC for review or evaluation; and the name for a particular period
4. SEC action issuance of certificate of To distinguish from partnerships and
registration. other business orgs, the law requires
corporations to append the word
Note that once contributions are made before Corporation or Inc to its chosen
incorporation, such subscriptions are irrevocable for name
a period of 6 months (general rule). A corporation should transact business
Exceptions: only through its chosen name
1. When all of the other subscribers consent
to the revocation; or Philips Export BV (PEBV) v CA (1992)
2. When the incorporation fails to materialize
(Sec. 61) PEBV is a foreign corp under the law of
Netherlands, although not engaged in business in
3. Steps in the formation of a the Phils. It is the registered owner of the Philips
corporation trademark, and owns two local companies with the
name Philips also.
3.1. PROMOTION
PEBV asked the cancellation of the word Philips
The promoter brings together persons from Standard Philips, a local manufacturer,
interested in the business enterprise and
sets in motion the machinery that leads to 1
Sec. 3.10, The Securities Regulation Code (RA 8799)
the formation of the corporation.
alleging infringement of its exclusive right to use entering is one with the general
the same. SEC and CA ruled for Std Philips, saying authority of the management
there was no confusion (unlike in Converse case). Under Sec 14(2) a corporation can
have as many purposes as it wants
Held: provided:
o AOI specify the corporations
Corps right to use its corp and trade name is a
primary and secondary purposes
property right, a right in rem.
which need not be related to each
General Rule: Corp must have a name by which it other
is to sue and be sued and do all legal acts. o Corporation for which special
provisions are made can only have
Accdg to Corp Code, no corp name may be allowed
the purpose peculiar to them
1) if complainant corp acquired a prior right o Purposes must be lawful
over name and If purpose is lawful, SEC is not
2) proposed name is authorized to inquire whether
a) identical or corporation has hidden motives and
b) deceptively or confusingly similar or mandamus will lie to compel it to issue
c) patently deceptive, confusing or certificate
contrary to existing law PD 902-A, Sec 6(h) gives SEC, after
PEBVs local companies were incorporated 26 yrs consultation with BOI, NEDA, or other
before Std Philips. appropriate government agency, the
power to refuse or deny the application
TEST OF CONFUSING SIMILARITY IN CORP NAMES: for registration of any corporation if its
Whether similarity is such as to mislead a person establishment, organization, operation
using ordinary care and discrimination will not be consistent with the declared
Philips is the dominant word. No need to prove that national economic policies
there was actual confusion, as long as probable or A corporation may not be formed for
likely to occur. Std Philips purpose, as per its the purpose of practicing a profession
articles of incorp also includes sale and
manufacture of electrical products, which is PEBVs 3. PRINCIPAL OFFICE
line of business. Even if SEC guidelines mandate Must be within the Philippines (14 (3))
that a corp could add 2 other words to proposed AOI must specify both province or city
name, only one word Std was added. Corp not or town where it is located
counted. Important in (1) determining venue in
an action by or against the corporation
Note: A prior user can consent to the use of its (2) determining the province where a
name chattel mortgage of shares should be
registered (Chua Gan v Samahang
2. PURPOSE CLAUSE Magsasaka)
Where a corporation has more than 1 The statement of the principal office
purpose, the AOI shall state which is establishes the residence of the
the primary purpose and which is corporation
secondary (14(2))
A non-stock corporation may not 4. TERM OF EXISTENCE
include those which contradict or When a corporation is organized, the
change its nature (Ibid) maximum life that can be stipulated in
SEC can reject or disapprove the AOI if the AOI is 50 years. But during the life
the stated purpose is patently of the corporation, the life or term can
unconstitutional, illegal, immoral, be extended to another 50 years at any
contrary to government rules and one instance (11)
regulations.(17 (2)) But such extension of the life a
Purpose clause confers as well as limits corporation cannot be made earlier
the powers which a corporation may than 5 years before the end of its
exercise original term. Exception: where there
A corporation only has such powers as are justifiable reasons for an earlier
are expressly granted to it by law and extension as may be determined by the
by its AOI, those which may be SEC. (Ibid)
incidental to such conferred powers Exception: Condominium corporations
(45), those reasonably necessary to can be organized for a period of 200
accomplish its purposes (Section 36 years
(11), and those which may be incident Extension involves an amendment of
to its existence (2). the AOI. Thus, the requisites under
Reasons for purpose clause: 16 must be complied with. Any
o so that a stockholder contemplating dissenting stockholder may exercise his
an investment will know what lines appraisal right (37).
of business his money is to be
risked 5. INCORPORATORS AND DIRECTORS;
o so that management will know NUMBER AND QUALIFICATIONS
what lines of business it is Directors is used for stock
authorized to act corporations, while trustees is used
o so that anyone who transacts with for stock corporations.
the corporation may ascertain GENERAL RULE: not less than 5 but
whether a transaction he is not more than 15
EXCEPTIONS:
8. TREASURERS AFFIDAVIT
The sworn statement of the Treasurer
elected by the subscribers stating at least 4. Grounds for disapproving articles of
25% of the authorized capital stock of the incorporation (17)
corporation has been subscribed and that
at least 25% of the total subscription has a) AOI does not substantially the form
been fully paid to him in actual cash and/or prescribed
property, the fair valuation of which is b) Purpose is patently unconstitutional, illegal,
equal to at least 25% of the said immoral, contrary to government rules and
subscription, such paid-up capital being not regulations
less than 5,000.00 (14) c) Treasurers Affidavit concerning the amount
of capital subscribed and or paid is false
9. OTHER MATTERS d) Percentage requirement of ownership of
Classes of shares, as well as the Filipino citizens as required by the
preferences or restrictions on any such Constitution not complied with.
class (6) After consulting with BOI, NEDA,
Denial or restriction of pre-emptive appropriate government agency, SEC may
right (39) deny registration of any corporation if its
Prohibition against transfer of stock establishment will not be consistent with
which would reduce stock ownership to declared national policies
less than the required minimum in the Certificate of authority required of the
case of a nationalized business or following:
activity (15(11)) a) Insurance Companies- Insurance
Commission
3.3. FILING OF ARTICLES AND PAYMENT OF b) Banks, Building and Loan
FEES Associations, Finance Companies-
Monetary Board
Corporations governed by special laws have c) Educational Institutions- Secretary
to submit a recommendation from the of Education
appropriate government agency to the d) Public Utilities- Board of Power,
effect that such articles are in accordance Board of Transportation, National
with law.
results to prejudice to third persons who Public Utilities - Sec. 11, Art XII, CONST.
may seek redress from the corporate entity xxx no franchise, certificate or any other
form of authorization for the operation of a
De Leon vs. NLRC (2001) public utility shall be granted except to
citizens of the Philippines or to corporations
FACTS: FISI contracted with FTC for security or associations organized under the laws of
services. Subsequently, the stockholders of FISI the Philippines at least 60% of whose
sold all their participation in the corporation to a capital is owned by such citizens.
new set of stockholders which renamed the War-time Test - If the controlling
corporation MISI. Afterwards, FTC preterminated stockholders are enemies, then the
its contract of security services with MISI causing nationality of the corporation will be base
petitioner security guards to lose their employment on the citizenship of the majority
and file ULP case against FTC, FISI and MISI. stockholders in times of war (Filipinas
HELD: There was ER-EE relationship between FTC Compania de Seguros v Christian Huenfeld,
and petitioners. It was shown that FISI was a 1951) .
mere adjunct of FTC. Records show that FISI and Investment Test - Sec. 3(a) and (b),
FTC have the same owners and business address, Foreign Investments Act of 1991 (RA7042).
and FISI provided security services only to FTC. It considers for purpose of investment a
The purported sale of the shares of the former Philippine National as a corporation
stockholders to a new set of stockholders who organized under the laws of the Philippines
changed the name of the corporation to MISI of which at least 60% of the capital stock
appears to be part of a scheme to terminate the outstanding and entitled to vote is owned
services of FISI's security guards posted at the and held by citizens of the Philippines, or a
premises of FTC and bust their newly-organized trustee of the funds for pension or other
union which was then beginning to become active employee retirement or separation
in demanding the company's compliance with Labor benefits, where the trustee is a Philippine
Standards laws. Under these circumstances, the national and at least 60% of the fund will
Court cannot allow FTC to use its separate accrue to the benefit of Philippine nationals.
corporate personality to shield itself from liability
for illegal acts committed against its employees.
3.3 Grandfather rule
Francisco vs. Mejia (2001) Used to determine the nationality of a
corporation by which the percentage of Filipino
With specific regard to corporate officers, the equity in corporations engaged in nationalized
general rule is that the officer cannot be held and/or partly nationalized areas of activities,
personally liable with the corporation, whether provided for under the constitution and other
civilly or otherwise, for the consequences of his nationalization laws, is computed, in cases
acts, if he acted for and in behalf of the where corporate shareholders are present in
corporation, within the scope of his authority and in the situation, by attributing the nationality of
good faith. In such cases, the officer's acts are the second or even subsequent tier of
properly attributed to the corporation. However, if ownership to determine the nationality of the
it is proven that the officer has used the corporate corporate stockholder. (Villanueva, 2003)
fiction to defraud a third party, or that he has acted
negligently, maliciously or in bad faith, then the
corporate veil shall be lifted and he shall be held SEC formula: SEC Letter Opinion
personally liable for the particular corporate Shares belonging to corporations or
obligation involved. partnerships at least 60% of the capital of
which is owned by Filipino citizens shall be
considered as of Philippine nationality, but
if the percentage of Filipino ownership in
the corporation or partnership is less than
3. Nationality of the Corporation 60% only the number of shares
corresponding to such percentage shall be
3.1 The place of incorporation test. considered as of Philippine nationality.
The corporation is a national of the country
under whose laws it is organized or
incorporated(123):
Domestic corporations organized and
governed under and by Philippine laws
Foreign corporations organized under
laws other than those of the Philippines an
can operate only in the territory of the
state under whose laws it was formed.
However, they may be licensed to do
business here.
corporation from commission of the ultra vires acts general management of the business
(Campos) affairs of the corporation
-Certificate of Registration may be suspended or Directors have a fiduciary duty to the
revoked by SEC corp and to the SHs
2. On immediate parties- Parties to the ultra General Rule: once elected, SHs have
vires contract, if executory on both sides, no right to interfere with the BOD.
neither party can ask for specific Exceptions: removal of director (28),
performance. Will be left as they are if the amendments of AOI (16),
contract has been fully executed on both fundamental changes (6), declaration
sides. If one party has performed his part, of stock dividends (43), entering into
the contract will be enforced provided it is management contracts (44), fixing of
not illegal consideration of no-par shares (62),
- Contract proceeding from an ultra and fixing of compensation of directors
vires act is voidable (Republic v. Acoje Mining (30)
Co., GR L-18062, Feb. 28, 1963; 7 SCRA 361) Unless otherwise provided in the Corp
) Code, the Board of Directors control
3. On the rights of stockholders- Any stockholder and exercise:
may bring either an individual or derivative suit o the corporate powers of corporation
to enjoin a threatened ultra vires act or o all business conducted,
contract. If act or contract has already been o all property of such corporation
performed, a derivative suit for damages may (23)
be filed against the directors, but their liability The board exercises almost all
will depend on whether they acted in good faith corporate powers, lays down all
and with reasonable diligence in entering into business policies and is responsible for
contracts. When based on tort, cannot set-up the efficiency of management. The
the defense of ultra vires against injured party stockholders have no right to interfere
who had no knowledge that such was ultra with the boards exercise of its powers
vires and functions except where the law
May become binding by the ratification of all expressly gives them the final say, like
stockholders unless third parties are prejudiced in cases of removal of a director,
thereby or unless the acts are illegal (Pirovano v. amendment of articles of incorporation,
de la Rama Steamship Co. 96 Phil. 335; 1954) and other major changes (Cf 6, 42,
43).
Limitations on the BODs authority or
powers:
Chapter VII 1. Action by SHs in order to elect a
CONTROL AND MANAGEMENT OF BOD
CORPORATIONS 2. Certain act of the corp that require
joint action of the SHs and BOD
Their resolutions on matters other than
the exceptions are legally not effective
1. Allocation of power and control
nor binding and may be treated as
(Campos) merely advisory or may be totally
disregarded. (Ramirez v. Orientalist Co.
3 levels of control in the corporate hierarchy: et. al., 38 Phil. 634; 1918); Wolfson v.
Manila Stock Exchange, 72 Phil. 492;
1. the Board of Directors or Trustees 1941)
- responsible for corporate policies and the Unless Otherwise Provided may
general management of the business and pertain to instances where a
affairs of the corporation management contract is entered hence
corporate powers are exercised by the
2. the Officers managing company and not the board
- in theory, execute the policies laid down by Authority of BOD can be delegated to
the board agents/ officers/ committees (AOI,
- in practice, often have wide latitude in statutes, by-laws, resolutions) (YU
determining the course of business Chuck v Kong Li Po, 46 Phil 608).
operations Delegation may be explicit, implicit, or
based on exigencies of the business (cf.
3. The stockholders or members Board of Liquidators v Kalaw)
- have residual power of fundamental The BOD may delegate its corporate
corporate changes powers to either an executive
committee or officials or contracted
NOTE: BOD can delegate its function to the officers managers. The delegation, except for
and also to committees appointed by it (Executive the executive committee, must be for
Committee, 35) specific purposes. The delegation
makes the officers agents of the
corporation. For such officers to be
2. Who Exercises Corporate Powers deemed fully clothed by the corporation
to exercise a power of the BOD, the
2.1 BOARD OF DIRECTORS latter must specially authorize them to
do so. (ABS-CBN Broadcasting Corp v
1) Authority; repository of corporate powers CA, 1999)
The board of directors or trustees are The directors or trustees shall not act
responsible for corporate policies and individually nor separately but as a
body in a lawful meeting. Contracts that to be a director, what is material is legal title
entered into without a formal board and not beneficial ownership. With the execution of
resolution does not bind the the voting trust agreement, Lee and Lacdao were
corporation except when majority of divested of their legal title to their shares hence
the board has knowledge of the can no longer be directors and are no longer
contract and the contract benefited the corporate officers. Because of this, they are not
corporation. (ratification) authorized to receive summons
Directors owe their duties to
corporation as a whole rather than to
individual shareholders of classes of Requirements/Disqualifications:
shareholders o Residence (23) - a majority of the
Business Judgment Rule directors or trustees of all
- Sec 23 embodies the essence of the corporations organized under this
business judgment rule, that unless Code must be residents of the
otherwise provided in the Code, all corp Philippines
powers and prerogatives are vested o Nationality no requirement for
directly in the BOD. Consequently, the citizenship of a director or trustee
rule has two consequences: so even an alien may be elected as
The resolution, contracts and such excepts in business activities
transactions of the BOD, cannot be totally closed to aliens
overturned or set aside by the SHs o Disqualification of directors,
or members and not even by the trustees or officers (27):
courts under the principle that the Convicted by final judgment of
business of the corp has been left an offense punishable by
to the hands of the BOD; and imprisonment for a period
Directors and duly authorized exceeding six (6) years, or
officers cannot be held personally Violation of this Code
liable for acts or contracts done committed within five (5) years
with the exercise of their business prior to the date of his election
judgment. or appointment
Exceptions: By-laws may provide for
o When the Corp Code expressly additional
provides otherwise; qualifications/disqualifications
o When the directors or officers as long as such additional
acted with fraud, gross qualifications/disqualifications
negligence or in bad faith; and shall not modify requirements
o When directors or officers act as prescribed in the corporation
against the corp in conflict-of- code or be in conflict with such
interest situation prescribed requirements
(47(5))
1) Requirements o Note: To sit on the BOD is not a
Qualifying share (23)- Every director vested right. Ownership of shares
must own at least one (1) share of the does not automatically equate to a
capital stock of the corporation of which seat in the BOD
he is a director, which share shall stand o In widely-held corporations, SEC
in his name on the books of the mandates the presence of at least 2
corporation. Any director who ceases to or 20% of its board size, whichever
be the owner of at least one (1) share is lesser, independent directors
of the capital stock of the corporation (Securities Regulation Code, 38
of which he is a director shall thereby and Guidelines on the Nomination
cease to be a director. and Election of Independent
Directors, Memo Circ No. 16, 2002)
Lee vs. CA (1992) Term: Directors shall hold office for 1
year. However, incumbent directors
Summons was served upon Lee and Lacdao, shall continue to be directors/trustees
president and vice president of ALFA. The two, until their successors have been elected
however contended that they are no longer and qualified (23)
corporate officers of the corporation because of the
voting trust agreement executed to DBP, hence, 2) How elected (24)
not authorized to receive summons. Summons Manner of election:
must be served upon DBP o There must be present in person or
by representative majority of the
HELD: outstanding capital stock / member
Execution of a voting trust creates a dichotomy o In any form; or must be by ballot
between equitable or beneficial ownership of the when requested by any voting
corporate shares of a stockholder and legal title stock holder or member
thereto. The change from the old code to the new o Voting may be in person or by
code with respect to qualifying shares of directors proxy
is the omission of the phrase in his own right At all elections of directors or trustees,
pertaining to beneficial ownership of shares. In the there must be present owners of a
new corpo code, persons may be directors if they majority of the outstanding capital
are stockholders although not in their own right stock, or if there be no capital stock, a
hence includes trustees. There is clear indication
majority of the members entitled to to time but not sine die or indefinitely
vote. if:
Every stockholder entitled to vote shall o For any reason, no election is held,
have the right to vote the number of or
shares of stock outstanding, at the time o If there are SHs not present or
fixed in the by-laws, in his own name represented by proxy at the
on the stock books of the corporation, meeting, the owners of a majority
or where the by-laws are silent, at the of the outstanding capital stock, or
time of the election if there be no capital stock, a
Time to determine voting right majority of the member entitled to
o As per share standing in ones vote.
name at the time fixed by the By- Since the provision requires presence,
Laws meeting of stockholders is required
o Where By-laws silent, at time of
election 3) How Removed (28)
Cumulative voting A system of voting Any director or trustee of a corporation
designed to increase the voting power may be removed from office by a vote
of minority stockholders in the election of the stockholders holding or
of corporate directors when more than representing 2/3 of the outstanding
one director is to be elected. capital stock, or if the corporation be a
o A stockholder shall have as many Non-stock Corporation, by a vote of 2/3
votes as he has number of shares of the members entitled to vote (with
times the number of directors up or without cause).
for election Note: Such removal shall take place
o Cumulative voting is allowed for either at a regular meeting or at a
election of members of the Board in special meeting called for the purpose
a stock corporation. Members of of removal of Directors or Trustees,
the Board in a Non-stock with previous notice of the time and
Corporation shall not be voted place of such meeting, as well as the
cumulatively unless specifically intention to propose such removal. If
provided for in the By-laws. the officers refuse to call a meeting to
o The total number of votes cast by a consider the removal of the Director, it
stockholder shall not exceed the may be called at the instance of any
number of shares owned by him as stockholder or member, but with due
shown in the books of the notice.
corporation multiplied by the whole Removal without cause may not be
number of directors to be elected used to deprive minority stockholders
o Gives the minority an opportunity or members of the right of
to elect a representative to the representation to which they may be
BOD. Cannot itself give the entitled to under Section 24
minority control of corporate affairs The board cannot remove a director or
but may affect and limit the extent trustee as member of the board
of majoritys control
o Theoretically, this allows the Roxas v Dela Rosa (1926)
minority block to dominate the
election of BOD. However, the Binalbagan Estate Inc is engaged in the mfg of raw
minority still needs the majority in sugar from canes. Possessors of majority of shares
order to constitute a quorum. formed a voting trust composed of 3 trustees.
o By-laws cannot provide against Trustees now controlled 3,000 out of 5,500 shares.
cumulative voting since this right is
mandated in 24 (mandatory in a Voting trust was able to vote BOD, without
stock corporation statutory right opposition from minority.
of SHs)
Trustees soon wanted to remove the directors they
o In determining how many shares
had elected, even if their terms had not yet
are needed to vote for the desired
expired. Voting trust caused SEC to issue notice for
# of directors (necessary when one
a special gen mtg to elect a new BOD.
campaigns for proxies), the
following formula may be followed: Held: Under the law, directors can only be removed
[ (outstanding shares) x (desired # by vote of SHs representing at least 2/3 of the
of directors) + 1 ] / [ (total # of subscribed capital stock entitled to vote. When the
directors) + 1 ] purpose is to remove directors, it must be stated in
o Unless otherwise provided in the call for meeting. But vacancies in BOD can be filled
AOI or in the by-laws, members of by mere majority vote.
corporations which have no capital
Trust does not have clear 2/3 majority. Voting trust
stock may cast as many votes as
should have stated in notice that purpose was to
there are trustees to be elected but
remove present BOD. Meeting called by trustees
may not cast more than one vote
enjoined.
for one candidate.
Candidates receiving the highest In this case, removal was sought to be done by
number of votes shall be declared replacing directors
elected.
Any meeting of the stockholders or BUT cant remove thru election of new officers bec
members called for an election may directors have fixed term of office
adjourn from day to day or from time
HELD: The boards creation of the positions of considered inherent in their office but is
Assistant Vice Presidents for Corporate Planning, derived from law, the corporate by-
Operations, Finance and Administration, and those laws or by delegation from the BOD
either expressly or impliedly by habit,
of the Special Assistants to the President and the
custom, or acquiescence in the general
Board Chairman, was in accordance with the regular
course of business
business operations of Filport as it is authorized to Gen rule: A person dealing with a
do so by the corporations by-laws, pursuant to the corporate officer is put on inquiry as to
Corporation Code. Besides, the determination of the scope of the latters authority but
the necessity for additional offices and/or positions an innocent person cannot be
in a corporation is a management prerogative prejudiced if he had the right to
which courts are not wont to review in the absence presume under the circumstances the
of any proof that such prerogative was exercised in authority of the acting officers.
bad faith or with malice.
c. What are the requirements for the No demand for payment may be
successful exercise of appraisal right? withdrawn unless the corporation
(Section 82 and 86) consents thereto.
By making a written demand on the Instances when right to payment
corporation within thirty (30) days ceases:
after the date on which the vote 1) If such demand for payment is
was taken for payment of the fair withdrawn with the consent of
value of his shares the corporation
o Failure to make the demand 2) If the proposed corporate
within such period shall be action is abandoned or
deemed a waiver of the rescinded by the corporation
appraisal right. 3) If the proposed corporate
By surrendering the certificate or action disapproved by the SEC
certificates of stock, the corporation where such approval is
shall pay the fair value thereof as necessary,
of the day prior to the date on 4) If the SEC determines that such
which the vote was taken, stockholder is not entitled to
excluding any appreciation or the appraisal right
depreciation in anticipation of such In such instances, his status as a
corporate action (provided that the stockholder shall be restored, and
proposed corp action is all dividend distributions which
implemented or affected). would have accrued on his shares
If within a period of sixty (60) days shall be paid to him.
from the date the corporate action
was approved by the stockholders, f. Who bears costs of appraisal (85)
the withdrawing stockholder and Generally, it shall be borne by the
the corporation cannot agree on the corporation
fair value of the shares, it shall be Exception: by the SH, when the fair
determined and appraised by three value ascertained by the appraisers
(3) disinterested persons is approximately the same as the
o One of whom shall be named price which the corporation may
by the stockholder, another by have offered to pay the SH,
the corporation, and the third In the case of an action to recover
by the two thus chosen such fair value, all costs and
The findings of the majority of the expenses shall be assessed against
appraisers shall be final the corporation, unless the refusal
The award shall be paid by the of the SH to receive payment was
corporation within thirty (30) days unjustified.
after such award is made
No payment shall be made to any g. Notation on certificates; rights of
dissenting stockholder unless the transferee (86)
corporation has unrestricted Within ten (10) days after
retained earnings in its books to demanding payment for his shares,
cover such payment (Cf 41). a dissenting SH shall submit the
Ratio: to protect the creditors and certificates of stock representing
the remaining SHs his shares to the corporation for
Upon payment by the corporation notation thereon that such shares
of the agreed or awarded price, the are dissenting shares.
stockholder shall forthwith transfer His failure to do so shall, at the
his shares to the corporation. option of the corporation, terminate
his rights.
d. Effect of demand and termination of Effect of transfer of certificates
right (83) bearing notation:
From the time of demand for payment 1) The rights of the transferor as a
of the fair value of a stockholder's dissenting stockholder shall
shares until either (1) the cease;
abandonment of the corporate action 2) The transferee shall have all
involved or (2) the purchase of the said the rights of a regular
shares by the corporation, all rights stockholder; and
accruing to such shares, including 3) All dividend distributions which
voting and dividend rights, shall be would have accrued on such
suspended, shares shall be paid to the
EXCEPT the right of such transferee.
stockholder to receive payment of the
fair value thereof, PROVIDED, if the Note: right to vote is lost only if stock becomes
dissenting stockholder is not paid the delinquent (71)
value of his shares within 30 days after
the award, his voting and dividend
rights shall immediately be restored. 3. Devices Affecting Control
e. When right to payment of fair value of General Rule: Extent of control is proportional to
the shares ceases (84) the number of shares owned by the SH
Exceptions: proxy device, voting trust agreements,
pooling and voting agreements, cumulative voting,
4. Remedies of stockholder in case Reason of the law for granting stockholders the
of mismanagement or abuse of right to inspect the records of the corporation: As
powers the beneficial owners of the business, the
stockholders have the right to know
Receivership 1. The financial condition of the corporation;
Injunction if the act has not been done and
Dissolution if the abuse amounts to a ground 2. How the corporate affairs are being managed
for quo warranto but the Solicitr General by their elected directors.
refuses to act
Derivative suit a complaint filed with the RTC PURPOSE:
Uichico, et al. vs. NLRC (1997) So that if they find the conditions unsatisfactory,
they may be able to take necessary measures to
The petitioners, who are officers and directors of protect their investment.
Crispa, Inc., assailed the decision of the NLRC
holding them solidarily liable with Crispa for the The right of inspection is
payment of separation pay and backwages to the
private respondents. It was the contention of the 1. Preventive to a limited extent may serve
petitioners that the award of separation pay and as a deterrent to an ill-intentioned
backwages is a corporate obligation and must management to know that its acts may be
therefore be assumed by Crispa alone. scrutinized
HELD: While the general rule is that obligations 2. Remedial a dissatisfied stockholder may
incurred by a corporation, acting through its resort to the right of inspection as a
directors, officers and employees, are its sole preliminary step to seeking more direct
liabilities, there are times when solidary liabilities remedies against abuses committed by
may be incurred such as in this case where it is management (removal of directors or a
undisputed that petitioners had a direct hand in the derivative suit).
illegal dismissal of respondent employees. They
were the ones, who as high-ranking officers and The right of inspection goes hand-in-hand with the
directors of Crispa, signed he Board resolution right to vote. Through the former, the SH can
retrenching the private respondents on the feigned gather information on how to vote.
ground of serious business losses that had no basis
apart from an unsigned and unaudited profit and
loss statement which had no evidentiary value 2. What records covered; records
whatsoever. This is indicative of bad faith on the required to be kept by corporation
part of petitioners for which they can be held (74)
jointly and severally liable with Crispa for all the
money claims of the illegally terminated respondent Books that record all business transactions of
employees. the corporation which shall include contract,
memoranda, journals, ledgers, etc;
Minute book for meetings of the SHs/members;
Tramat Mercantile, Inc. vs. CA (1994) Minute book for meetings of the
board/trustees;
Personal liability of a corporate director, trustee or Stock and transfer book.
officer along (although not necessarily) with the
corporation may so validly attach, as a rule, only Minutes of meetings without the signature of the
when: corporate secretary have no probative value (NATU
o He assents (a) to a patently unlawful act of v Sec of Labor, 1981)
the corporation, or (b) for bad faith or
gross negligence in directing its affairs, or What is a stock transfer agent?
(c) for conflict of interest, resulting in o A stock transfer agent is one engaged
damages to the corporation, its principally in the business of registering
stockholders or other persons; transfers of stocks in behalf of a stock
o He consents to the issuance of watered corporation. No stock transfer agent shall
stocks or who, having knowledge thereof, be allowed to operate in the Philippines
does not forthwith file with the corporate unless he secures a license from the SEC
secretary his written objection thereto; and pays a fee as may be fixed by the
o He agrees to hold himself personally and Commission, which shall be renewable
soidarily liable with the corporation; or annually
o He is made, by a specific provision of law, o A stock corporation is not precluded from
to personally answer for his corporate performing or making transfer of its own
action stocks, in which case all the rules and
Reiterated in Atrium Management Corp. v. CA, regulations imposed on stock transfer
2001 agents, except the payment of a license fee
herein provided, shall be applicable.
Entitles owner to equal pro-rata division of Par value is minimum issue price of such
profits after preference share in the AOI which must be stated in
the certificate
2.2 Preferred
Stocks which are given preference by the 2.4 No-par value
issuing corporation in dividends and the These are shares without a stated value.
distribution of assets of the corporation in The Corporation upon their issuance will set
case of liquidation or such other their value, which shall not be less than P5.
preferences as may be stated in the AOI Shall be deemed fully paid and non-
which are not violative of the Corporation assessable and the holders of such shares
Code. (6) shall not be liable to the corporation or to
Limitations on preferred shares: its creditors in respect thereto (6)
o Preferred shares can only be issued Entire consideration received by the
with par value corporation for its no-par value shares shall
o Preferred shares must be: be treated as capital and shall not be
a. Stated in the Articles of available for distribution as dividends (Ibid)
Incorporation and in the certificate Cannot be issued as Preferred Shares (Ibid)
of stock or AOI must state the fact that corp issues no-
b. May be fixed by the BOD where par shares and the number of shares
authorized by the AOI, provided: Three ways of determining value of no par
such terms and conditions shall be value shares (62):
effective upon filing of a certificate o By majority vote of the outstanding
thereof with the SEC. shares (issued shares) in a meeting
Entitles holder to some preferences in called for the purpose
dividends, distribution of assets upon o By BOD pursuant to authority conferred
liquidation or both: upon it by the AOI
o preference as to dividends dividends o By amendment of the AOI
are payable only when profits are Corporations which cannot issue no-par
earned and as a general rule, even if value shares (6):
there are existing profits, BOD has o Banks
discretion to declare dividends or not o Insurance Companies
a. Participating after getting their o Trust Companies
fixed dividend preference ahead of o Building and Loan Associations
CS, they share with the CS the rest o Public utilities
of the dividends
UNLESS expressly provided, they are 2.5 Founders (7)
non-participating Those shares, classified as such in the AOI,
b. Cumulative dividends in arrears which are given certain rights and
accrue, must be paid first before privileges not enjoyed by the owners of
common stock dividends are paid. other stocks. (7)
c. Non cumulative contract makes Where exclusive right to vote and be voted
dividends depend upon existence of for in the election of directors is granted,
profits for the year such right must be for a limited period not
o as to voting rights usually does not to exceed 5 years subject to approval by
have voting rights; but unless clearly SEC. 5 year period shall commence from
withheld, PS would have right to vote date of approval by SEC. (Ibid)
Note: even if deprived of voting rights,
PS holders are entitled to vote on the 2.6 Redeemable
matters enumerated under 6 Those shares, expressly so provided in the
o preference upon liquidation in the AOI, which may be purchased or taken up
absence of provision, participate pro by the corporation upon the expiration of a
rata with common stock fixed period regardless of the existence of
o not a creditor; theres no assurance unrestricted retained earnings in the books
that you will get back investments but of the corporation and upon such terms and
if the corporation profits, you conditions stated in the AOI and in the
participate in the profits certificate of stock (8)
Redemption is repurchase, a reacquisition
2.3 Par value of stock by a corporation which issued the
These are shares with a stated value set stock in exchange for property, whether or
out in the AOI. This remains the same not the acquired stock is cancelled, retired
regardless of the profitability of the or held in the treasury. Essentially, the
corporation. This gives rise to financial corporation gets back some of its stock,
stability and is the reason why banks, trust distributes cash or property to the
corporations, insurance companies and shareholder in payment for the stock, and
building and loan associations must always continues in business as before. The
be organized with par value shares. redemption of stock dividends previously
One in the certificate of stock of which issued is used as a veil for the constructive
appears an amount in pesos as the nominal distribution of cash dividends. (CIR v CA,
value of the shares 1999)
Cant be issued at less than par value. While redeemable shares may be redeemed
Otherwise, it would become a watered regardless of the existence of unrestricted
stock (65, discussed in Chapter XII) retained earnings, this is subject to the
condition that the corporation has, after
such redemption, assets in its books to
cover debts and liabilities inclusive of With floating coupon rate With guaranteed
capital stock. Redemption, therefore, may coupon rate
not be made where the corporation is
insolvent or if such redemption will cause D. Convertibles
insolvency or inability of the corporation to
E. Combo of B+C+D
meet its debts as they mature. (Republic
Planters Bank v Agana, 1997)
F. Founders shares
2.7 Treasury G. Treasury Shares
These are shares of stock which have been
issued and fully paid for, but subsequently
re-acquired by the issuing corporation by 3. Nature of Subscription Contract
purchase, redemption, donation or through
some other lawful means. Such shares
may again be disposed of for a reasonable
price fixed by the BOD. (9)
3.1 Subscription Contract
Note: delinquent stocks, which are stocks
that have not been fully paid, may become Any contract for the acquisition of unissued
treasury stocks upon bid of the corporation stock in an existing or a corporation still to
in absence of other bidders (68) be formed shall be deemed a subscription
May be sold at less than par, regarded as contract, notwithstanding the fact that the
corporate property parties may refer to it as a purchase or
In this manner, stocks can be retired some other contract. (60)
gradually, even those which arent Transfer for consideration of treasury
redeemable shares is a sale by the corporation (not
No limit as to how many shares can be subscription). A transfer of fully paid
retired shares by a stockholder to a third person is
a sale. But it seems that assignment by a
2.8 Convertible subscriber of his unpaid subscription would
require that the requisites for valid release
A type of preferred stock that the holder can from subscription must be complied with
exchange for a predetermined number of the Shareholders are not creditors of the
corporations common shares at a specified time corporation with respect to their
shareholdings thereto and the principle of
2.9 Non-voting shares (6) compensation or set-off has no application
Not necessarily required to be in writing
Shares which have, generally, no voting Once subscription contract is perfected, SH
rights; except in the following becomes the debtor of the corporation. He
circumstances: is liable to pay any unpaid portion of the
o Amendment of the AOI subscription. He can also be made
o Adoption and amendment of by-laws personally liable to the creditors of the
o Sale, lease, exchange, other disposition corporation to the extent of his unpaid
of all or substantially all of the subscription
corporate property General Rule: SH is not liable to pay
o Incurring, creating or increasing interest on his unpaid subscription.
bonded indebtedness Exception: if required by the by-laws (66)
o Increase or decrease of capital stock
o Merger and consolidation 3.2 Pre-incorporation subscription (61)
o Investment of corporate funds in Pre-incorporation subscription is a
another corporation or business subscription for shares of stock of a
o Dissolution of the corporation corporation still to be formed.
It shall be irrevocable for a period of at
CLASSES OF SHARES least six (6) months from the date of
subscription.
A. Common It can only be revoked, when:
o when all of the other subscribers
consent to the revocation, or
No-par Par o when the incorporation of the
corporation fails to materialize within
six (6) months or within a longer period
Multiple par value Single par value as my be stipulated in the contract of
subscription.
After the submission of the AOI to the SEC,
B. Preferred
no pre-incorporation subscription may be
revoked.
Liquidation Dividends
f) Outstanding shares exchanged for stocks in Failure to pay on such date shall render
the event of reclassification or conversion. the entire balance due and payable and
Prohibited consideration: Shares of stock shall shall make the stockholder liable for
not be issued in exchange for promissory notes interest at the legal rate on such
or future service (because realization is balance, unless a different rate of
uncertain) interest is provided in the by-laws,
Future service may be used as consideration computed from such date until full
provided that certificates of stock will be issued payment.
only after the performance of such services. If within thirty (30) days from the said
Same consideration applies for the issuance of date no payment is made, all stocks
bonds by the corporation. covered by said subscription shall
Fixing of issued price of no-par value shares: thereupon become delinquent and shall
The issued price of no-par value shares may be be subject to sale as hereinafter
fixed: provided, unless the BOD orders
a) in the AOI or otherwise.
b) by the BOD pursuant to authority conferred Despite the fact that the subscription is
upon it by the AOI or the by-laws, or partially paid, the entire subscription
c) in the absence thereof, by the SHs becomes delinquent
representing at least a majority of the Subscriber is not barred from paying
outstanding capital stock at a meeting duly the balance plus the expenses incurred
called for the purpose. by the corp before the date of the
The value of the consideration received must delinquency sale (68).
be equal to the issue price of the shares of
stocks which in no case shall be less than par b. Procedure for delinquency sale (68)
The BOD must make a call by
resolution demanding the payment of
2. Liability on watered stocks the balance of the subscription ("notice
of call").
Watered stock shares issued as fully paid-up The notice of call shall be served on
when in fact the consideration agreed to and each stockholder either personally or
accepted by the directors of the corporation was by registered mail. At this point, there
something known to be much less than the par is no need for publication.
value or issued value of the shares. If the stockholder does not pay the
amount on the date designated in the
Water in stock refers to the difference between the notice, the Board shall issue, by
fair market value at the time of the issuance and resolution, a "notice of delinquency."
the par or issued value of said stock. Subsequent Notice of delinquency shall be served
increase in the value of the property used in paying on the non-paying subscriber either
the stock does not do away with the water in the personally or by registered mail, PLUS
stock. The existence of such water is determined publication in a newspaper of general
at the time of issuance of the stock. circulation in the province or city where
the principal office of the corporation is
Evils: deprives corp of needed capital; dilutes located, once a week for two (2)
proportionate interest of existing and future consecutive weeks. The notice shall
SH; injures present and future creditors state the amount due on each
because it reduces value of corp assets subscription plus accrued interest, and
the date, time and place of the sale
Any director or officer of a corporation which shall not be less than 30 days
consenting to the issuance of stocks or who, nor more than 60 days from the date
having knowledge thereof, does not forthwith the stocks become delinquent.
express his objection in writing and file the The amount due in the notice must
same with the corporate secretary (65) include all expenses: publication, legal,
o for a consideration less than its par or etc.
issued value or o Note: the notices are jurisdictional.
o for a consideration in any form other than In the public auction, the highest
cash, valued in excess of its fair value, bidder is one who is willing to pay the
shall be solidarily liable with the stockholder balance of the subscription for the least
concerned to the corporation and its creditors number of shares. The corporation will
for the difference between the fair value give the highest bidder the certificate of
received at the time of issuance of the stock stock in the number of his bid; the
and the par or issued value of the same. remaining number will be issued a
certificate of stock in favor of the
subscriber as fully paid. If there are no
3. How Payment of Shares Enforced bidders, the corporation must bid for
the whole number of shares regardless
3.1 Delinquency sale of how much the SH has paid. Such
stocks will pertain to the corporation as
a. How do shares become delinquent (67) fully paid treasury stocks.
Payment of any unpaid subscription or
any percentage thereof, together with c. When sale may be questioned (69)
the interest accrued, if any, shall be
made on the date specified in the No action to recover delinquent stock
contract of subscription or on the date sold can be sustained upon the ground
stated in the call made by the board. of irregularity or defect in the notice of
the holders and bona fide purchasers would have 1.2 STOCK a distribution to the stockholders of
the right to damages for misrepresentation against the companys own stock. The corporate profits are
the corp. but cant acquire the rights of transferred to capital stock and shares of stock
stockholders. representing the increase in capitalization are
distributed.
General rule: entire subscription must be paid first
These do not represent income on the part of
before the certificates of stock can be issued.
the SH. Investment and proportional interest
Partial payments are to be applied pro rata to each
in the corp remain the same
share of stock subscribed. (Nava v Peers Mktg
Corp and Fua Cun v Summers). Lincoln Phil. Life v CA (1998)
Stock dividends are in the nature of shares of
stock, the consideration for which is the
Exception: in the Baltazar v Lingayen Gulf Electric
amount of unrestricted retained earnings
Power Co case, it was the practice of the corp to
converted into equity in the corporations
issue certificates of stock to its individual SHs for
books. A stock dividend of a corporation is a
unpaid shares of stock and to give full voting power
dividend paid in shares of stock instead of
to shares fully paid.
cash, and is properly only out of surplus
profits. So, a stock dividend is actually two
7. Lost or Destroyed Certificate (73) things: (1) a dividend: and (2) the enforced
use of the dividend money to purchase
Procedure for re-issuance in case of loss, stolen or additional shares of stock at par.
destroyed certificates:
1. The registered owner of certificates of stock or
Limitation on the issue of stock dividends:
his legal representative shall file with the
o there must be unissued shares of the
corporation an affidvit setting forth as far as
corporation. If there are none, there
possible:
must be an increase in capital stock
a) the circumstances as to how the certificates
first, which requires an amendment of
were lost, stolen or destroyed;
the AOI
b) the number of shares represented by each
o there must be unrestricted retained
certificate, the serial numbers of the
earnings
certificates;
o cannot be issued to non-stockholders
c) the name of the corp which issued the same;
even for services rendered (Nielson v.
d) such other information and evidence which he
Lepanto Consolidated Mines, 1968)
may deem necessary.
1.3 PROPERTY Although the corp. may have a
2. The corp shall publish a notice in a newspaper
big amount of earnings available for dividends,
of general circulation published in the place where
they may not all be in cash.
the corp has its principal office, once a week for 3
consecutive weeks at the expense of the owner of
the certificate of stock, which has been lost, stolen 2. Source of Dividends (43)
or destroyed.
3. After the expiration of one (1) year from the Unrestricted retained earnings (URE) (definition
date of the last publication and if no contest has by the SEC) the undistributed earnings of the corp.
been presented, the corp shall cancel in its books w/c have not been allocated for any managerial,
the certificate of stock and issue in lieu thereof new contractual or legal purposes and which are free for
certificates of stock. The right to make such contest distribution to the SHs as dividends.
shall be barred after the expiration of the one-year The only fund out of w/c dividends can be legally
period. paid.
4. Even before the one year period expires, the Should there be any capital deficit, subsequent
new certificates may be issued if the registered profits, if any, during succeeding periods must 1st
owner files a bond or other security, running for a be applied to cover the deficit, and only the profits
period of one (1) year for a sum and in such form remaining after eliminating the deficit, can be
and with such sureties as may be satisfactory to considered as URE.
the BOD. Provided, that if there is a pending
contest regarding the ownership of said certificates, Dividends can not be declared out of increase in
the issuance of new certificates shall be suspended valuation of existing assets. This is subject to
until the final decision of the court regarding the fluctuation and is not yet realized.
ownership of the certificate of stock.
o Note: Except in cases of fraud, bad faith, or 3. Declaration of Dividends
negligence on the part of the corporation and
its officers, no action may be brought against 3.1 How Dividends are declared
the corp which shall have issued certificates of
stock in lieu of those lost, stolen or destroyed Approval & voting requirement:
pursuant to the above procedure. a) Approval of BOD
b) In case of stock dividend: must be approved by
Chapter XIII SHs representing not less than two-thirds (2/3)
of the outstanding capital stock at a regular or
DIVIDENDS AND PURCHASE OF
special meeting duly called for the purpose.
CORPORATION OF ITS OWN SHARES
1.1 CASH most common form. Gen. Rule WON there should be a distribution of
dividends to the SHs in any given year & the form
of such dividends are matters addressed to the in its books to cover the shares to be
business judgment of the BOD purchased or acquired
Treasury shares are shares of stocks which
Exceptions: have been issued and fully paid for, but
1. When the decision is tainted w/ bad faith, fraud subsequently reacquired by the issuing
or gross negligence corporation by purchase, redemption, donation
2. If the court finds, upon complaint of a SH, that or through some other lawful means (9)
a surplus was unreasonably accumulated Treasury shares have no voting rights as long
(profits accumulated in excess of 100% of the as such shares remain in the treasury (57)
corps paid-in capital stock), it may order the May be issued as property dividends provided
corp. to distribute dividends that the retained earnings has not been
Exceptions to the exception (43): subsequently impaired by losses
a. when justified by definite corporate Trust Fund doctrine the requirement of
expansion projects or programs approved unrestricted retained earnings is because
by the board of directors; or subscription to the capital of a corporation
b. when the corporation is prohibited under constitute a fund to which creditors have a
any loan agreement with any financial right to look for the satisfaction of their claims
institution or creditor, whether local or (Phil. Trust Co. v. Rivera, 1923)
foreign, from declaring dividends without Legitimate purpose includes:
its/his consent, and such consent has not a) To eliminate fractional shares arising out of
yet been secured; or stock dividends;
c. when it can be clearly shown that such b) To collect or compromise an indebtedness
retention is necessary under special to the corporation, arising out of unpaid
circumstances obtaining in the corporation, subscription, in a delinquency sale, and to
such as when there is need for special purchase delinquent shares sold during said
reserve for probable contingencies. sale; and
c) To pay dissenting or withdrawing
stockholders entitled to payment for their
3.3 When Right to Dividends Vests
shares under the provisions of this Code
General rule: as soon as the same have been (appraisal right, Cf 81).
lawfully declared by the BOD, becomes a debt Improper purpose includes: raising of price of
owing to the SH. No revocation can be made stock by making it appear that it is being
Exceptions: actively traded (prohibited under Sec 24 of the
o not yet announced or communicated to the Securities Regulations Code) and preferring
public, revocable before announcement to some SHs to the prejudice of other SHs and
SHs creditors (may be viewed as early liquidation of
o when stock dividends are declared since the investment of some of the SHs)
these are not distributions but merely Remedies in case of improper purchase:
represent changes in the capital structure, a) Creditors prejudiced by the repurchase can
may be revoked prior to actual issuance go after the selling SHs to recover what
Rights of transferee to dividends Right to was paid to them
dividends vests upon declaration so whoever b) Directors who were negligent or in BF for
owns the stock at time or stockholders of approving the repurchase can also be held
record also owns the dividend. Subsequent personally responsible
transfer of stock would not carry with it right to c) Prejudiced SH can also go after BOD who
dividends UNLESS agreed upon by the parties approved purchase (when their dividends
are reduced, remaining assets cant cover
debts, etc)
3.4 Liability for Illegal Dividends A corporation must have unrestricted retained
Directors not personally liable if unintentionally earnings in acquiring own shares except:
declare illegal dividends, such as when the a) shares are acquired in the redemption of
directors, in declaring dividends: redeemable shares (8)
- rely on financial statements prepared by a b) shares are re-acquired to effect a decrease
dishonest EE whom they had no reason to in capital stock approved by the SEC (38)
suspect shares are reacquired by a close corporation
- rely on advice of legal counsel that certain pursuant to the order of the SEC acting to arbitrate
proceeds or profits are available for a deadlock (104)
dividends
and endorsement of the stock certificate be made. The shares are thus not
b) Such mode of transfer is not complied with transferable on the corporate books. (63)
in this case However, the stockholder can still transfer
c) In the books of the corporation, Chudian is his interest in the corporation by way of a
still the owner of the stocks. He was even deed of assignment.
elected member of the board which proves
that he is a stockholder Sunset View Condominium Corp v Campos
d) One who claims ownership should show
that the same was transferred to him in Sunset View Condominium corporation filed suit
accord with the valid mode of transfer. against Aguilar-Bernares Realty and Lim Siu Leng
This petitioner failed to show for collection of assessments levied on their
Endorsement is a mandatory requirement of law for respective condominium units which they bought
an effective transfer on installments and had not yet fully paid
3.1 certificates indorsed in blank where the Garcia vs. Jomouad, (2000)
stockholder indorses his certificate in blank in such
a manner as to clothe whoever may be in FACTS: Dico lost a collection case and the
possession of it with apparent authority to deal Proprietary Ownership Certificate (POC) in the Cebu
with the shares as the latters own, he will be Country Club in his name was levied on and
estopped from claiming the shares as against a scheduled for public auction. Garcia claimed
bonafide purchaser. This is called the theory of ownership over the certificate and filed the action
quasi-negotiability (Santamaria v. Hongkong & for injunction to enjoin the auction. Dico had
Shanghai Bank, 1951) executed a Deed of Transfer in favor of petitioner
which was furnished to The Club but the transfer
was not recorded in the books of the Club because The Securities and Exchange
petitioner failed to present proof of payment of the Commission shall thereupon issue the
requisite capital gains tax. certificate of dissolution. Thus, except
HELD: The transfer of the subject certificate made for the expiration of its term , no
by Dico to petitioner was not valid as to the dissolution can be effective without
judgment creditors, as the same still stood in the some act of the state (Daguhoy
name of Dico, the judgment debtor, at the time of Enterprises v. Ponce, 1954)
the levy on execution. In addition, as correctly
ruled by the CA, the entry in the minutes of the 1.3 Voluntary dissolution when creditors
meeting of the Club's board of directors noting the are affected (119)
resignation of Dico as proprietary member thereof Petition for dissolution shall be filed
does not constitute compliance with Section 63 of with the Securities and Exchange
the Corporation Code. Said provision of law strictly Commission.
requires the recording of the transfer in the books The petition shall be signed by a
of the corporation, and not elsewhere, to be valid majority of its board of directors or
as against third parties. trustees or other officers having the
management of its affairs, verified by
its president or secretary or one of its
Chapter XVI directors or trustees, and shall set forth
DISSOLUTION all claims and demands against it, and
that its dissolution was resolved upon
by the affirmative vote of the
1. Causes of Dissolution stockholders representing at least two-
thirds (2/3) of the outstanding capital
1.1 Expiration of original, extended or stock or by at least two-thirds (2/3) of
shortened term the members at a meeting of its
The term within which the corporation stockholders or members called for that
is to exist (which cannot be more than purpose.
50 years) must be stated in its AOI. If the petition is sufficient in form and
Once such period expires, the substance, the Commission shall, by an
corporation is automatically dissolved order reciting the purpose of the
without any other proceeding and it petition, fix a date on or before which
cannot thereafter be considered a de objections thereto may be filed by any
facto corporation. person, which date shall not be less
A voluntary dissolution may be effected than thirty (30) days nor more than
by amending the articles of sixty (60) days after the entry of the
incorporation to shorten the corporate order. Before such date, a copy of the
term pursuant to the provisions of the order shall be published at least once a
Code. Upon approval of the amended week for three (3) consecutive weeks
articles of incorporation or the in a newspaper of general circulation
expiration of the shortened term, as published in the municipality or city
the case may be, the corporation shall where the principal office of the
be deemed dissolved without any corporation is situated, or if there be no
further proceedings (120) such newspaper, then in a newspaper
of general circulation in the Philippines,
1.2 Voluntary dissolution when no and a similar copy shall be posted for
creditors are affected (118) three (3) consecutive weeks in three
Dissolution may be effected by majority (3) public places in such municipality or
vote of the board of directors or city.
trustees, and by a resolution duly Upon five (5) day's notice, given after
adopted by the affirmative vote of the the date on which the right to file
stockholders owning at least two-thirds objections as fixed in the order has
(2/3) of the outstanding capital stock expired, the Commission shall proceed
or of at least two-thirds (2/3) of the to hear the petition and try any issue
members. made by the objections filed; and if no
Meeting to be held upon call of the such objection is sufficient, and the
directors or trustees after publication of material allegations of the petition are
the notice of time, place and object of true, it shall render judgment
the meeting for three (3) consecutive dissolving the corporation and directing
weeks in a newspaper published in the such disposition of its assets as justice
place where the principal office of said requires, and may appoint a receiver to
corporation is located; and if no collect such assets and pay the debts of
newspaper is published in such place, the corporation
then in a newspaper of general In this method of dissolution, SEC may
circulation in the Philippines, after direct the manner in which the
sending such notice to each stockholder liquidation of the corporate assets
or member either by registered mail or should be made by assigning this task
by personal delivery at least thirty (30) to the corporation itself, or if it deems
days prior to said meeting. proper, to a receiver appointed by it
A copy of the resolution authorizing the (Campos).
dissolution shall be certified by a
majority of the board of directors or 1.4 Dissolution by minority in close
trustees and countersigned by the corporations Voluntary dissolution when
secretary of the corporation. creditors are affected (105)
respondent entered into a series of transactions o The names and addresses of the
implying a continuity of commercial dealings, the present directors and officers of the
perfection and consummation of these transactions corporation;
o A statement of its authorized
were done outside the Philippines. The series of
capital stock and the aggregate
transactions between petitioner and respondent
number of shares which the
transpired and were consummated in Hong Kong. corporation has authority to issue,
The SC found no single activity which petitioner itemized by classes, par value of
performed here in the Philippines pursuant to its shares, shares without par value,
purpose and object as a business organization. and series, if any;
Moreover, petitioners desire to do business within o A statement of its outstanding
the Philippines is not discernible from the capital stock and the aggregate
allegations of the complaint or from its number of shares which the
corporation has issued, itemized by
attachments.
classes, par value of shares, shares
Therefore, there is no basis for ruling that petitioner without par value, and series, if
is doing business in the Philippines. The SC any;
categorically stated its disagreement with the Court o A statement of the amount actually
of Appeals ruling that the proponents to the paid in; and
transaction determine whether a foreign o Such additional information as may
corporation is doing business in the Philippines, be necessary or appropriate in
regardless of the place of delivery or place where order to enable the Securities and
the transaction took place. To accede to such Exchange Commission to determine
whether such corporation is entitled
theory makes it possible to classify, for instance, a
to a license to transact business in
series of transactions between a Filipino in the the Philippines, and to determine
United States and an American company based in and assess the fees payable.
the United States as doing business in the Attached to the application for license
Philippines, even when these transactions are shall be a duly executed certificate
negotiated and consummated only within the under oath by the authorized official or
United States officials of the jurisdiction of its
incorporation, attesting to the fact that:
o The laws of the country or state of
3. Requirements for the issuance of a
the applicant allow Filipino citizens
license
and corporations to do business
therein
3.1. Documentary requirements (125) o The applicant is an existing
A foreign corporation applying for a corporation in good standing.
license to transact business in the If such certificate is in a foreign
Philippines shall submit to the SEC: language, a translation thereof in
o Copy of its articles of incorporation English under oath of the translator
and by-laws, certified in accordance shall be attached thereto.
with law The application shall likewise be
o Their translation to an official accompanied by a statement under
language of the Philippines, if oath of the president or any other
necessary. person authorized by the corporation,
The application shall be under oath showing to the satisfaction of the SEC
and, unless already stated in its articles and other governmental agency in the
of incorporation, shall specifically set proper cases that the:
forth the following: o Applicant is solvent and in sound
o The date and term of incorporation; financial condition, and
o The address, including the street o Setting forth the assets and
number, of the principal office of liabilities of the corporation as of
the corporation in the country or the date not exceeding one (1)
state of incorporation; year immediately prior to the filing
o The name and address of its of the application.
resident agent authorized to accept Foreign banking, financial and
summons and process in all legal insurance corporations shall, in addition
proceedings and, pending the to the above requirements, comply with
establishment of a local office, all the provisions of existing laws
notices affecting the corporation; applicable to them.
o The place in the Philippines where In the case of all other foreign
the corporation intends to operate; corporations, no application for license
o The specific purpose or purposes to transact business in the Philippines
which the corporation intends to shall be accepted by the SEC without
pursue in the transaction of its previous authority from the appropriate
business in the Philippines: government agency, whenever required
Provided, That said purpose or by law.
purposes are those specifically
stated in the certificate of authority 3.2 Deposit requirements (126)
issued by the appropriate Upon issuance of the license, such
government agency; foreign corporation may commence to
transact business in the Philippines and
continue to do so for as long as it
o Any other ground as would render it purposes and language of the pertinent statute or
unfit to transact business in the statutes involved and of the general principles
Philippines. (n) governing the jurisdictional authority of the state
over such corporations
11. Issuance of certificate of CAB, the CA categorized as doing business
revocation (135) petitioners participation under the Assignment
Agreement and the Deed of Assignment. This is
Upon the revocation of any such license to simply untenable. The expression doing business
transact business in the Philippines, the should not be given such a strict and literal
Securities and Exchange Commission shall construction as to make it apply to any corporate
issue a corresponding certificate of dealing. At this early stage and with petitioners
revocation, furnishing a copy thereof to the acts or transactions limited to the assignment
appropriate government agency in the contracts, it cannot be said that it had performed
proper cases. acts intended to continue the business for which it
The Securities and Exchange Commission was organized. It may not be amiss to point out
shall also mail to the corporation at its that the purpose or business for which
registered office in the Philippines a notice petitioner was organized is not discernible in the
of such revocation accompanied by a copy records. No effort was exerted by the CA to
of the certificate of revocation. establish the nexus between petitioners business
and the acts supposed to constitute doing
business. Thus, whether the assignment contracts
12. Withdrawal by a foreign
were incidental to petitioners business or were
corporation (Section 136) continuation thereof is beyond determination.
If a foreign corporation duly licensed to do
business desires to withdraw, it must file a
petition for withdrawal, and must meet the
following requirements: Chapter XIX
o All claims accrued in the Philippines
must be settled SPECIAL CORPORATIONS
o All taxes must be paid
o Petition must be published once a week
1. Close Corporations
for three (3) consecutive weeks. (136)
2. Resolution of deadlocks
The SEC, upon written petition by
any stockholder, shall have the
power to arbitrate the dispute.
In the exercise of such power, the
Commission shall have authority to
make such order as it deems
appropriate, including an order:
o Cancelling or altering any
provision contained in the
articles of incorporation, by-
There can be classification of directors into one There are no classification of board of directors
or more classes, each of whom may be voted
for and elected solely by a particular class of
stock; and
Corporate Powers devolved upon board of
The articles of incorporation of a close directors whose powers are executed by officers.
corporation may provide that the business of Cannot provide that it be managed by
the corporation shall be managed by the stockholders
stockholders of the corporation rather than by a
board of directors. So long as this provision
continues in effect:
Board of directors must be elected in a
1. No meeting of stockholders need be called stockholders meeting
to elect directors
2. Unless the context clearly requires Stockholders of a corporation are separate and
otherwise, the stockholders of the distinct from directors
corporation shall be deemed to be directors
for the purpose of applying the provisions
of this Code
3. The stockholders of the corporation shall be
subject to all liabilities of directors. Officers must be elected by the Board 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.
3. The directors are accustomed to take Express ratification may consist of a Board
informal action with the express or implied Resolution to that effect
acquiescence of all the stockholders; or
Implied ratification may consist of acceptance of
4. All the directors have express or implied benefits from said unauthorized act while having
knowledge of the action in question and knowledge of said act
none of them makes prompt objection
thereto in writing. Failure to give notice would render a meeting
voidable.
If a director's meeting is held without proper
call or notice, an action taken therein within the Attendance to a meeting despite want of notice
corporate powers is deemed ratified by a will be deemed implied waiver
director who failed to attend, unless he
promptly files his written objection with the All proceedings had and any business transacted
secretary of the corporation after having at any meeting of the stockholders or members,
knowledge thereof. 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)
The pre-emptive right of stockholders in close a. Such pre-emptive right shall not extend to
corporations shall extend to all stock to be shares to be issued in compliance with laws
issued, including reissuance of treasury shares, requiring stock offerings or minimum stock
whether for money, property or personal ownership by the public;
services, or in payment of corporate debts,
unless the articles of incorporation provide b. Not extend to shares to be issued in good faith
otherwise. 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
5. Transferability
Restrictions on the right to transfer shares Restrictions on the right to transfer not allowed
must appear in the AI 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. Withdrawal Right
1. Compositionnot less than 5 nor more than 3.2 Corporation Sole ( 110)
15 trustees, but always in multiples of five.
Unless otherwise provided in the articles of a. Who may formThe chief archbishop, bishop,
incorporation or the by-laws, the board or priest, minister, rabbi or other presiding elder of
trustees of incorporated schools, colleges, or such religious denomination, sect or church.
other institutions of learning shall: (110)
a. So classify themselves that the term
of office of one-fifth (1/5) of their b. Filling of Vacancies (114)
numbers shall expire every year.
b. Trustees thereafter elected to fill 1. The successors in office concerned shall
vacancies, occurring before the become the corporation sole on their
expiration of a particular term shall hold accession to office and shall be permitted
office only for the unexpired period to transact business as such on the filing
c. Trustees elected thereafter to fill with the Securities and Exchange
vacancies caused by expiration of term shall Commission of a copy of their
hold office for five (5) years commission, certificate of election, or
letters of appointment, duly certified by
2. QuorumMajority of the trustees any notary public.
Powers and Authority of trustees shall be defined
in the by-laws 2. During any vacancy in the office, the
person or persons authorized and
empowered by the rules, regulations or
d. Purpose of incorporation
a. Who may form a Religious Society:
For the administration of its temporalities or for
Any religious society or religious order, or any the management of its affairs, properties and
diocese, synod, or district organization of any estate.
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.
b. Internal Requirement
c. SEC Requirement
1.1 Equity Capital for the investor, the Security call or put options
stock market provides a variable return
a. Stock Market
Security eg, shares of stock Chapter II
OVERVIEW OF THE LAW
1.2 Debt Capital for the lender, the
money or bond market provides a fixed
return
1. State Policy (Sec.2)
b. Money Market for short term
debts, ie, those normally maturing The State shall establish a socially conscious,
within 1 year from date of issuance free market that regulates itself, encourages
the widest participation of ownership in
enterprises, enhances the democratization of
Security commercial paper (an wealth, promotes the development of the
unsecured IOU of a company, capital market, protect investors, ensures full
issued on a discount basis, and fair disclosure about securities, minimizes
promising to pay the holder the if not totally eliminates insider trading and
full face value thereof upon other fraudulent or manipulative devices and
redemption) practices which create distortions in the free
market.
c. Bond Market for long term debts,
ie, those normally maturing after a PSE vs. Court of Appeals (1997)
year from date of issuance
The Securities Act is designed not only to
Security junk bonds (high yield provide investors with adequate information
bonds having high interest rates upon which to base their decision to buy and
and are issued by lower credit sell securities, but also to protect legitimate
rated companies or companies business seeking o obtain capital through
with no credit rating) honest representation against competition
from crooked promoters and prevent fraud in
sale of securities.
2. Non-Capital Markets
The intended effects of the Securities Act are
The places to go if you want to hedge or chiefly the following:
mitigate the risks attached to holding capital a. Prevention of excesses and fraudulent
assets transactions, merely by requirement
that their details be revealed;
2.1 Commodity Market The instruments b. Placing the market during the early
traded in this market are not present assets stages of the offering of security a
like shares of stock, commercial papers or body of information, which operating
bonds but future contracts calling for indirectly through investment services
delivery of an asset ; for this reason, a and expert investors, will intend to
commodity market is usually referred to as a produce a more accurate appraisal of
futures market. (eg, agricultural products, a security.
metals and financial instruments)
The Code is self-executory, and failure of SEC to
Security a futures contract (one issue rules and regulations shall not in any
which entitles the holder to buy or manner affect its self-executroy nature (Sec.
sell a specific amount of the 72.1)
underlying commodity represented
by the contract in a prearranged, 2. Powers and Functions of the SEC
(Sec. 5)
3.9 Pre-need plans are contracts which The information required for registration
provide for the performance of future shall include, among others the effect of
services or the payment of future monetary the securities issue on ownership, on the
consideration at the time of actual need, for mix of ownership, especially foreign and
which planholders pay in cash or installment local ownership.
at stated prices, with or without interest or
insurance coverage and includes life, The registration statement shall be signed
pension, education, interment, and other by
plans which the Commission may from time the issuers executive officer
to time approve. principal operating officer
principal financial officer
3.10 Promoter - a person who, acting comptroller
alone or with others, takes initiative in principal accounting officer
founding and organizing the business or corporate secretary or
enterprise of the issuer and receives persons performing similar
consideration therefor. functions
3.12 Salesman - a natural person, employed as The written consent of the expert named
such or as an agent, by a dealer, issuer or as having certified any part of the
broker to buy and sell securities. registration statement or any document
used in connection therewith shall also be
3.13 Uncertified Security a security filed.
evidenced by electronic or similar records.
Where the registration statement includes
3.14 Underwriter - a person who guarantees shares to be sold by selling shareholders,
on a firm commitment and/or declared best a written certification by such selling
effort basis the distribution and sale of securities shareholders as to the accuracy of any
of any kind by another company. part of the registration statement
contributed to by such selling
4. Registration of Securities shareholders shall also be filed.
Procedure (Sec.12)
at any time after 60 days from the to the Exchange where the security is
date of the original tender offer or traded and to the Commission.
request or invitation, except as the
Commission may otherwise 7.3 Fees for Tender Offers and Certain
prescribe. Proxy Solicitations (Sec. 21)
At the time of filing with the Commission
of any statement required for any tender
Securities offered exceed offer or for proxy or consent solicitation,
required quantity the Commission may require that the
Where the securities offered exceed person making such filing pay a fee of not
that which a person or group of more than 1/10 of 1% of:
persons is bound or willing to take The proposed aggregate purchase
up and pay for, the securities that price in the case of a transaction
are subject of the tender offer shall under Sections 20 or 72.2; or
be taken up as nearly as may be pro The proposed payment in cash, and
rata, disregarding fractions, the value of any securities or property
according to the number of to be transferred in the acquisition,
securities deposited by each merger or consolidation, or the cash
depositor. and value of any securities proposed
to be received upon the sale or
The provisions of this subsection disposition of such assets in the case
shall also apply to securities of a solicitation under Section 20.
deposited within 10 days after notice
of an increase in the consideration
offered to security holders is first
published or sent or given to security
holders. 8. Regulation of Transactions of
Directors / Officers / Principal
Variations of Tender Offer Stockholders (Sec. 23)
Where any person varies the terms
of a tender offer or request or 8.1 Filing of Statement
invitation for tenders before the Every person who is directly or indirectly
expiration thereof by increasing the the beneficial owner of more than 10% of
consideration offered to holders of any class of any equity security or
such securities, such person shall who is a director or an officer of the
pay the increased consideration to issuer of such security,
each security holder whose
securities are taken up and paid for shall file, at the time either such requirement
whether or not such securities have is first satisfied or within ten days after he
been taken up by such person before becomes such a beneficial owner, director, or
the variation of the tender offer or officer, a statement with the Commission and,
request or invitation. if such security is listed for trading on an
Exchange, also with the Exchange, of the
7.2 Proxy Solicitations (Sec. 20) amount of all equity securities of such issuer
Proxies must be of which he is the beneficial owner, and within
in writing ten (10) days after the close of each calendar
signed by the stockholder or his month thereafter, if there has been a change
duly authorized representative in such ownership during such month, shall
and also file a statement indicating his ownership
filed before the scheduled at the close of the calendar month and such
meeting with the corporate changes as have occurred during such
secretary. calendar month.
No broker or dealer shall give any proxy, any profit realized by him from any
consent or authorization to a person purchase and sale, or any sale and
other than the customer, without the purchase, of any equity security of
express written authorization of such such issuer within any period of less
customer. than six (6) months,
o unless such security was acquired
A broker or dealer who holds or acquires in good faith in connection with a
the proxy for at least 10% or such debt previously contracted,
percentage as the Commission may shall inure to and be recoverable by
prescribe of the outstanding share of the the issuer, irrespective of any
issuer, shall submit a report identifying intention of holding the security
the beneficial owner within 10 days after purchased or of not repurchasing the
such acquisition, for its own account or security sold for a period exceeding 6
customer, to the issuer of the security, months.
9. Prohibitions
9.2 Insider Trading
For the purpose of preventing the o That will permit such securities to
excessive use of credit for the purchase be commingled with the securities
or carrying of securities, the of any person other than a bona
Commission, shall prescribe rules and fide customer; or
regulations with respect to the amount o That will permit such securities to
of credit that may be extended on any be pledged, mortgaged or
security. encumbered, or subjected to any
lien or claim of the pledgee, for a
For the extension of credit, such rules sum in excess of the aggregate
and regulations shall be based upon the indebtedness of such customers in
following standard: respect of such securities.
To lend or arrange for the lending of
An amount not greater than whichever is any security carried for the account of
the higher of any customer without the written
consent of such customer or in
(a) 65% of the current market price of contravention of such rules and
the security; or regulations as the Commission shall
(b) 100%)of the lowest market price prescribe.
of the security during the
preceding 36 calendar months, but 14.4 Enforcement of Margin Requirements
not more than 75% of the current and Restrictions on Borrowing (Sec. 50)
market price.
To prevent indirect violations of the
14.2 Prohibited Credit Arrangements (Sec. margin requirements, the broker or dealer
48.2) shall require the customer in non-margin
transactions to pay the price of the
No member of an Exchange or broker or security within such period as the
dealer shall, directly or indirectly, extend Commission may prescribe, which shall in
or maintain credit or arrange for the no case exceed the prescribed settlement
extension or maintenance of credit to or date.
for any customer:
Otherwise, the broker shall sell the
(a) On any security unless such credit security purchased starting on the next
is extended and maintained in trading day but not beyond 10 trading
accordance with the rules and days following the last day for the
regulations which the Commission customer to pay such purchase price,
shall prescribe; unless such sale cannot be effected within
(b) Without collateral or on any said period for justifiable reasons.
collateral other than securities,
except The sale shall be without prejudice to the
to maintain a credit initially right of the broker or dealer to recover
extended in conformity with any deficiency from the customer. To
the rules and regulations of prevent indirect violation of restrictions on
the Commission; and borrowings under Section 49, the broker
in cases where the extension shall, unless otherwise directed by the
or maintenance of credit is customer, pay the net sales price of the
not for the purpose of securities sold for a customer within the
purchasing or carrying same period as above prescribed by the
securities or of evading or Commission
circumventing the provisions
of par (a) of this subsection. Provided, That the customer shall be
required to deliver the instruments
14.3 Restrictions on Borrowings by evidencing the securities as a condition for
Members, Brokers, and Dealers (Sec. 49) such payment upon demand by the
broker.
It shall be unlawful for any registered
broker or dealer, or member of an 15. Administrative Sanctions and
Exchange, directly or indirectly: Settlement Offers
To permit in the ordinary course of 15.1 Administrative Sanctions (Sec. 54)
business his aggregate indebtedness
including customers credit balances, If, after due notice and hearing, the
to exceed such percentage of the net Commission finds that:
capital (exclusive of fixed assets and
value of Exchange membership) (a) There is a violation of this Code, its
employed in the business, but not rules, or its orders;
exceeding in any case 2,000%, as (b) Any registered broker or dealer,
the Commission may prescribe. associated person thereof has failed
To pledge, mortgage, or otherwise reasonably to supervise another
encumber any security carried for person subject to supervision, who
the account of any customer under commits any such violation;
circumstances: (c) Any registrant or other person has,
o That will permit the commingling in a registration statement or in
of his securities, without his other reports, applications,
written consent, with the accounts, records or documents
securities of any customer;
made any untrue statement of a (b) Every person who was a director or
material fact, or omitted to state a partner in the issuer at the time of
any material fact required to be the filing of the registration
stated therein or necessary to statement or any part, supplement
make the statements therein not or amendment thereof;
misleading; (c) Every person who is named in the
(d) or, in the case of an underwriter, registration statement as being or
has failed to conduct an inquiry about to become a director or a
with reasonable diligence to insure partner;
that a registration statement is (d) Every auditor or auditing firm
accurate and complete in all named as having certified any
material respects; or financial statements used in
(e) Any person has refused to permit connection with the registration
any lawful examinations into its statement or prospectus.
affairs, (e) Every person who, with his written
consent has been named as having
The imposition of administrative prepared or certified any part of the
sanctions shall be without prejudice to registration statement, or as having
the filing of criminal charges. prepared or certified any report or
valuation which is used in
15.2 Settlement Offers (Sec. 55) connection with the registration
statement.
At any time, during an investigation or (f) Every selling shareholder who
proceeding under this Code, parties contributed to and certified as to the
being investigated and/or charged may accuracy of a portion of the
propose in writing an offer of settlement registration statement.
with the Commission. (g) Every underwriter with respect to
such security.
The Commission may consider the offer
based on timing, the nature of the Possible Defense :
investigation or proceeding, and the
public interest. Such person may allege that at the time
of such acquisition he knew of no such
The Commission may only agree to a untrue statement or omission:
settlement offer based on its findings
that such settlement is in the public 16.2 On Account of Insider Trading (Sec. 61)
interest. Any agreement to settle shall
have no legal effect until publicly Who may be sued?
disclosed. Such decision may be made
without a determination of guilt on the Any insider who violates Subsection 27.1
part of the person making the offer. and any person in the case of a tender
offer who violates Subsection 27.4 (a)(i),
16. Civil Liabilities (Sec. 56) or any rule or regulation thereunder, by
purchasing or selling a security while in
16.1 On Account of False Registration possession of material information not
Statement generally available to the public, shall be
liable in a suit brought by any investor
who, contemporaneously with the
purchase or sale of securities that is the
Who may sue? subject of the violation, purchased or sold
securities of the same class unless such
insider, or such person in the case of a
Any person tender offer, proves that such investor
acquiring a security, the registration knew the information or would have
statement of which or any part purchased or sold at the same price
thereof contains on its effectivity an regardless of disclosure of the information
untrue statement of a material fact or to him.
omits to state a material fact required An insider who communicates material
to be stated therein or necessary to non-public information, shall be jointly
make such statements not and severally liable with and to the same
misleading, and extent as, the insider, or person in the
who suffers damage case of a tender offer.
securities), unless brought within 2 years In no case shall the principal stockholders,
after the violation upon which it is based. directors and other officers, recover their
contribution to the liability from the
In no event shall any such action be brought issuer. However, the right of the issuer to
to enforce a liability created under Section recover from the guilty parties the amount
56 or Subsection 57.1 (a) more than 5 years it has contributed shall not be prejudiced.
after the security was bona fide offered to
the public, or under Subsection 57.1 (b)
(sale based on false prospectus, 19. Non-waiver of Provisions
communications, reports) more than 5 years
after the sale.
Any condition, stipulation, provision binding
No action shall be maintained to enforce any any person to waive compliance with any
liability created under any other provision of provision of this Code or of any rule of an
this Code unless brought: Exchange as well as the waiver itself, shal be
void.
within 2 years after the discovery
of the facts constituting the cause of
action and
within 5 years after such cause of
action accrued. 20. Penalties
18. Damages to be Awarded (Sec. Any person who violates any of the provisions
63) of this Code or any person who, in a
registration statement makes any untrue
18.1 Amounts / Kinds of Damages statement of a material fact or omits to state
any material fact required to be stated therein
All suits to recover damages pursuant to or necessary to make the statements therein
Sections 56 (false registration not misleading, shall, upon conviction, suffer
statement), 57 (false prospectus,
communications, reports), 58 (fraud in a fine of not less than P50,000.00 nor
connection with securities transactions), more than P5,000,000.00 or
59 (manipulation of prices), 60 imprisonment of not less than 7 years
(commodity futures contracts and pre- nor more than 21 years, or
need plans) and 61 (insider trading) both in the discretion of the court.
shall be brought before the RTC, which
shall have exclusive jurisdiction to hear If the offender is a corporation, partnership or
and decide such suits. association or other juridical entity, the
penalty may be imposed upon such juridical
The Court is hereby authorized to award entity and upon the officer or officers of the
damages in an amount not exceeding corporation, partnership, association or entity
triple the amount of the transaction plus responsible for the violation. If such officer is
actual damages. an alien, he shall in addition to the penalties
prescribed, be deported.
Exemplary damages may also be
awarded in cases of bad faith, fraud,
malevolence or wantonness in the
violation of this Code, and rules and
regulations promulgated hereunder.
1.7. Parties must be designated with Certainty A. Sum expressed in words takes precedence over
a. Maker and drawer sum in numbers; BUT where words are so
Sign the instrument at the lower ambiguous or uncertain, reference to the
right-hand corner. figures should be made
b. Payee B. Where interest is stipulated, without
When negotiating, sign at the back; specification of the starting date, the interest
same with indorsers. runs from the date of the instrument, and if
a. Drawee undated, from the issue thereof
Name usually at the lower left-hand C. An undated instrument is considered dated as
corner, or across the top. of time issued.
If instrument addressed to drawee, D. Written provisions prevail over printed
he must be named or indicated with provisions
reasonable certainty. E. Where the instrument is ambiguous as to
If it is not clear in what capacity the person whether it is a note or a bill, the holder may
signed, said person is considered an treat it as either at his election
indorser F. When the capacity of signatory is not clear, he
is to be deemed an indorser
5
Suggested Mnemonic: WEJy S: Waives, gives
holder Election, confession of Judgment, Sale of
Securities
G. I promise to pay when signed by two or more When an instrument is transferred from one
persons is deemed to be jointly and severally person to another as to constitute the
signed transferee the holder thereof.
If payable to BEARER, negotiated by delivery; if
EVANGELISTA V. MERCATOR FINANCE (2003) payable to ORDER, negotiated by indorsement
of holder + delivery (Sec.30, NIL)
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) SESBREO v. CA (1993)
liability on each note is created on the part of the
signors. A NI may, instead of being negotiated, ALSO be
assigned or transferred. A non-NI may not be
negotiated; but it may be assigned or
transferred, absent an express prohibition
Chapter III. against assignment or transfer written in the face
TRANSFER of the instrument.
a. conditional additional condition annexed The transaction [in Sec. 49, NIL] is an equitable
to indorsers liability. (Sec. 39, NIL) assignment and the transferee acquires the
instrument subject to defenses and equities
o Where an indorsement is conditional, a available among prior parties. Thus, if the
party required to pay the instrument transferor had legal title, the transferee acquires
may disregard the condition, and make such title and, in addition, the right to have the
payment to the indorsee or his indorsement of the transferor and also the right, as
transferee, whether condition has been holder of the legal title, to maintain legal action
fulfilled or not against the maker or acceptor or other party liable
to the transferor. The underlying premise of this
6
suggested mnemonics: GROIN: Good faith and
value, complete and Regular, not Overdue, no notice
of Infirmity at time of Negotiation; or GROCI: Good
faith and value, Regular, not Overdue, Complete, no
Infirmity,
ii.The sum payable, either for 1. HOLDER FOR VALUE - (a) Where value
principal or interest; has at any time been given for the
iii. The time or place of payment; instrument, the holder is deemed a HFV in
iv. The number or the relations of the respect to all parties who become such
parties; prior to that time (Sec.26, NIL) and (b)
v. The medium or currency in which Where the holder has a lien on the
payment is to be made; instrument, he is deemed a HFV to the
vi. Or which adds a place of payment extent of his lien (Sec.27, NIL).
where no place of payment is a. PRESUMPTION Every NI is deemed
specified, prima facie issued for valuable
3. Rights of HDC of instrument that has been consideration; and every person whose
materially altered signature appears thereon to have
o enforce payment thereof according to become a party thereto for value (Sec.
its original tenor IF not a party to the 24, NIL)
alteration. (Sec. 124, NIL) i. In actions based upon a negotiable
instrument, it is unnecessary to
3.2. That he became the holder of it before it aver or prove consideration, for
was overdue and without notice that it had consideration is imported and
been previously dishonored, if such was the presumed from the fact that it is a
fact negotiable instrument. The
presumption exists whether the
1. OVERDUE
words "value received" appear on
a. The ff. cannot be HDCs: (Sec. 53,
the instrument or not (Ong v
NIL)
People, 2000)
i. A holder who became such after
the date of maturity of the
instrument (instrument is BAYANI VS. PEOPLE (2004)
overdue);
ii. In case of demand instruments, a
holder who negotiates it after an Under Section 28 of the Negotiable Instruments
unreasonable length of time after Law (NIL), absence or failure of consideration is a
its issue matter of defense only as against any person not a
b. Instruments with fixed maturity but holder in due course.
subject to acceleration: ultimate date of
maturity is the date of maturity for the
purpose of determining whether a Moreover, Section 24 of the NIL provides the
purchaser is a HDC presumption of consideration. Such presumption
c. Undated instruments: Prima facie cannot be overcome by the petitioners bare denial
presumption that it was negotiated of receipt of the [consideration].
before it was overdue (Sec 45)
d. NOTE: An overdue instrument is still 1) Only evidence of the clearest
negotiable, but it is subject to the and most convincing kind will
defense existing at the time of the suffice for that purpose.
transfer. (Travel-On Inc v CA, 1992)
==
3.3. That he took it in good faith AND for
value:
Bank credit as value - When the holder of a check Ocampo & Co. v.
deposits it with his bank (assuming it is not the Gatchalian)
drawee bank) and the bank credits it to his o Purchase of an
account, is the bank at this stage a HFV? instrument at a
o Majority View first money in DISCOUNT does not,
is presumed to be the first of itself, constitute bad
money paid out faith. However, if the
o Minority View as long as instrument is pruchased
the balance in the depositors at a heavy discount,
account equals or exceeds the this fact together with
amount of the instrument other facts, may be
deposited, the latter cannot be taken into account in
considered as withdrawn for the deciding the issue of
purpose of treating the bank as purchase in good faith.
a HFV. (Ham v. Meritt)
o (So far, there has been no
decision by the SC on this
issue.)
2. GOOD FAITH VICENTE R. DE OCAMPO & CO. v.
a. Holder must have taken the instrument GATCHALIAN, ET. AL. (1961)
in good faith and that at the time it was
negotiated to him he had no notice of In order to show that the defendant had knowledge
any infirmity in the instrument or of such facts that his action in taking the
defect in the title of the person instrument amounted to bad faith, it is not
negotiating it. necessary to prove that the defendant knew the
b. NOT a Holder in GOOD FAITH exact fraud that was practiced upon the plaintiff by
i. Holder acted in bad faith the defendants assignor, it being sufficient to
ii. Holder had NOTICE OF DEFECT show that the defendant had notice that there
1) ACTUAL KNOWLEDGE was something wrong about the assignors
SEC 56. WHAT acquisition of title, although he did not have
CONSTITUTES NOTICE notice of the particular wrong that was committed.
OF DEFECTTo The fact is that it acquired possession of the
constitute notice of an instrument under circumstances that should have
infirmity in the put it to inquiry as to the title of the holder who
instrument or defect in negotiated the check to it. The burden was,
the title of the person therefore, placed upon it to show that
negotiating the same, notwithstanding the suspicious circumstances, it
the person to whom it acquired the check in actual good faith.
is negotiated must have One line of cases had adopted the test of the
had actual knowledge reasonably prudent man and the other that of
of the infirmity or actual good faith. It would seem that it was the
defect, or knowledge of intent of the Negotiable Instruments Act to
such facts that his harmonize this disagreement by adopting the latter
action in taking the test. Negligence on the part of the plaintiff, or
instrument amounted suspicious circumstances sufficient to put a prudent
to bad faith. man on inquiry, will not of themselves prevent a
It is therefore sufficient recovery, but are to be considered merely as
that the buyer of a note evidence bearing on the question of bad faith.
had notice or
knowledge that the STATE INVESTMENT HOUSE v. IAC (1989)
note was in some way
tainted with fraud. It is A check with 2 parallel lines in the upper left hand
not necessary that he corner means that it could only be deposited and
should know the may not be converted to cash. Consequently, such
particulars of the fraud. circumstance should put the payee on inquiry and
2) SUSPICIOUS upon him devolves the duty to ascertain the
CIRCUMSTANCES holders title to the check or the nature of his
a. BAD FAITH - does not possession. Failing in this respect, the payee is
require actual declared guilty of gross negligence amounting to
knowledge of the exact legal absence of good faith and as such the
fraud that was consensus of authority is to the effect that the
practiced; knowledge holder of the check is not a holder in good faith.
that there was
something wrong about YANG v. CA (2003)
the assignors
acquisition of title is Where Mr. A obtained by fraud from Mr. B crossed
sufficient. checks payable to Mr. C, which Mr. C innocently
b. The burden is upon the receives from Mr. A for value, Mr. C is still a holder
defendant to show that in good faith despite the fact that the checks were
notwithstanding the crossed. The crossing of a check does not impair
SUSPICIOUS the negotiability of an instrument nor necessarily
CIRCUMSTANCES, it preclude its holder from being a holder in due
acquired the check in course. The crossing of a check only means that it
actual good faith. (De could only be deposited and may not be converted
d. RIGHT of a transferee who receives payee) is still the HDC since D (the maker)
NOTICE of any infirmity or defect believed that A may have negotiated it. Thus,
BEFORE he has PAID THE FULL to compel D to pay would expose him to pay a
amount for the instrument second time to the HDC (in case A was no
i. He will be deemed a HDC only to longer one). In short, the drawee may be
the extent of the amount therefore compelled to pay only to a HOLDER of the
paid by him (Sec.54, NIL) instrument.
7
Suggested Mnemonics: REFS: Receive and
Enforce payment, Free from any defect of title and
defenses, Sue
a check countermanding his drawer whose signature was forged, and the
first order to the drawee need arises to weigh the comparative negligence
bank to pay the check. between the drawer and the drawee to determine
RULE: The drawee bank is who should bear the burden of loss.
bound to follow the order, Still, even if the bank performed with utmost
provided it is received prior diligence, the drawer whose signature was forged
to its certification or may still recover from the bank as long as he or
payment of the check she is not precluded from setting up the defense
3) SOME EXCEPTIONS: of forgery. After all, Section 23 of the Negotiable
o If the payment to holder is Instruments Law plainly states that no right to
a legitimate debt of the enforce the payment of a check can arise out of a
drawer which the holder in forged signature. Since the drawer, Samsung
due course could have Construction, is not precluded by negligence from
recovered from the drawer setting up the forgery, the general rule should
anyway. apply.
o If the stop order comes
after the bank has certified
b. Indorsement:
or accepted the check, the
i. When it is the signature of
bank is under the legal duty
the indorser that is forged,
to pay the holder and will
the drawee and drawer CAN
not be liable to the drawer
recover vs holder
for doing so.
1) The drawee can recover the
amount paid by him in
iii. Effect Of Negligence Of cases where only an
Depositor - If proximate cause indorsement has been
of loss, the bank (drawee) is forged . This is because
not liable drawee makes no warranty
as to the genuineness of
1) It is the duty of the any indorsement.
depositor/drawer to 2) Generally, the drawee may
carefully examine banks only recover from the
statements, cancelled holder. Should he fail to do
checks, his check stubs, so(for instance due to
and other pertinent records insolvency) he cannot
within a reasonable time recoup his loss by charging
and to report any errors it to the drawers account
without unreasonable 3) Although a
delay. depositor/drawer owes a
2) If a drawer/depositors duty to his drawee bank to
negligence and delay examine his cancelled
should cause a bank to checks, he has no similar
honor a forged check, duty as to forged
drawer cannot later indorsements.
complain should bank 4) The drawer, as soon as he
refuse to recredit his comes to know of the a
account. forged indorsement should
promptly notify the drawee
ILUSORIO vs CA (2002) bank
would still be liable to the drawee bank because of provision such that sec 125 may
its indorsement. still have broad applicability.
b. Alterations of the serial numbers do
not constitute material alterations
PCIB v. CA (2001)
on the checks... [It] is not an
essential requisite for negotiability
A bank which cashes a check drawn upon
under Section 1 of the Negotiable
another bank, without requiring proof as to the
Instruments Law. The
identity of persons presenting it, or making
aforementioned alteration did not
inquiries with regard to them, cannot hold the
change the relations between the
proceeds against the drawee when the proceeds of
parties. The name of the drawer
the checks were afterwards diverted to the hands
and the drawee were not altered.
of a third party. In such cases the drawee bank
The intended payee was the same.
has a right to believe that the cashing bank (or the
The sum of money due to the
collecting bank) had, by the usual proper
payee remained the same. (PNB v
investigation, satisfied itself of the authenticity of
CA, 1996; Intl Corporate Bank v
the negotiation of the checks.
CA, 2006)
Thus, one who encashed a check which had been
c. EFFECT: an innocent alteration
forged or diverted and in turn received payment
(generally, changes on items other
thereon from the drawee, is guilty of negligence
than those required to be stated
which proximately contributed to the success of the
under Sec. 1, N. I. L.) and
fraud practiced on the drawee bank.
spoliation (alterations done by a
stranger) will not avoid the
instrument, but the holder may
enforce it only according to its
4.2. Material Alteration (Sec.124) original tenor. (PNB v CA, citing J.
1. As a DEFENSE: Vitug)
a. PERSONAL defense when used to
deny liability according to the tenor 4. EFFECT OF MATERIAL ALTERATION
of the instrument
b. REAL defense when relied on to a. General Rule: Where NI materially
deny liability according to the altered w/o the assent of all parties
altered terms. liable thereon it is AVOIDED,
2. What constitutes material alteration? except as against:
a. Statutory: Review Sec.125, NIL i. party who has himself made,
i. change date authorized or assented to
ii. sum payable, either for alteration
principal or interest ii. subsequent indorser because
iii. time or place of payment by indorsement he warrants
iv. number/relations of parties that the instrument is in all
v. medium/currency of payment, respects what it purports to be
vi. adds place of payment where and that it was valid and
none specified, subsisting at the time of his
vii. other change/addition altering indorsement (Secs. 65 and
effect of 66, NIL)
viii. instrument in any respect b. As to a HOLDER in DUE COURSE
i. When an instrument that has
b. Jurispridence been materially altered is in the
i. An alteration is said to be hands of a HDC not a party to
material if it changes the effect the alteration, HDC may
of the instrument. It means enforce payment thereof
that an unauthorized change in according to orig. tenor
an instrument that purports to ii. Alteration must NOT be
modify in any respect the apparent on the face of the
obligation of a party or an instrument for the holder then
unauthorized addition of words would not be a holder in due
or numbers or other change to course
an incomplete instrument iii. Where the interest rate is
relating to the obligation of a altered , the holder in due
party. (PNB v CA, 1996) course can recover the principal
ii. A material alteration is one sum with the original rate of
which changes the items which interest
are required to be stated under c. When alteration is of the amount or
Section 1 of the Negotiable the interest rate is altered, the
Instruments Law. (Metrobank v holder can recover the ORIGINAL
Cabilzo, 2006) AMOUNT/interest rate.
5. DRAWERS NEGLIGENCE
3. IMMATERIAL ALTERATION a. The general rule is that the drawee
a. Campos: Any other alteration cannot charge against the drawers
would be non-material and would account the amount of an altered
not affect the liability of any prior check.
party . Note that #7 is a catch-all b. BUT, the drawers negligence,
before or after the alteration, may
LIABLE on the bill unless and a. (Sec.62, NIL) Drawee is not liable
UNTIL he/it ACCEPTS (or unless he accepts the bill and in doing
certifies) the same. (Sec. 127, so, he engages to pay the bill according
NIL) to the tenor of his acceptance, and
3. Drawer admits the following:
1) Payment despite Stop Payment i. existence of drawer
Order ii. genuineness of his signature
a) Before payment or iii. his capacity and authority to draw
certification by the bank, the instrument
the drawer may iv. existence of payee and his then
countermand the order, capacity to endorse
and payment thereafter to b. Meaning of "according to the tenor
the payee by the bank is of his acceptance"
wrongful. i. Majority and prevailing view:
b) Since a check is not an Where alteration consists in raising
assignment of the drawers the amount payable, acceptor liable
fund, the bank is liable for to HDC only as to its original
paying it in disregard of the amount; if the alteration of payee's
countermand. name, paying banks cannot charge
c) Moreover, drawee can no drawer's account with the amount
longer recover what it of the check because its duty is to
voluntarily paid to the pay only according to the order of
holder of the uncertified the drawer.
and unaccepted instrument. ii. Common law rule: Acceptor of
2) Refusal to Accept altered check not liable to innocent
a) Under some circumstances, holder except for the original
the drawee who refuses to amount
accept may be made liable for
breach of contract or for
2.4. Acceptance
damages based on a tort either
to the drawer (refer to Araneta
1. IN GENERAL:
v. Bank of America) or to the
a. Definition:
holder (refer to HSBC v.
i. "Acceptance" means an acceptance
Catalan)
completed by delivery or notification
(Sec. 19, NIL)
ARANETA V. BANK OF AMERICA(1971)
ii. The signification by the drawee of his
assent to the order of the drawer (Sec
132, NIL)
This was an action by a depositor against a bank
b. REQUISITES for a valid acceptance
for damages resulting from the wrongful dishonor
(Sec 132, NIL)
of the depositor's checks. HELD: Araneta's claim for
i. It must be in writing and signed by
temperate damages is legally justified because of
the drawee;
the adverse reflection on the financial credit of a
1) Thus there is no valid or
businessman, a prized and valuable asset, w/c
implied acceptance except as
constitutes material loss.
provided by Sec. 137 relating
to constructive acceptance
ii. It must not express that the drawee
HSBC VS. CATALAN (2004) will perform his promise by any other
means than the payment of money.
iii. does not change the implied
HSBC is not being sued on the value of the check promise of acceptor to pay only in
itself but for how it acted in relation to Catalans money
claim for payment despite the repeated directives c. MANNER of acceptance
of the drawer Thomson to recognize the check the i. Campos: Usually made by writing
latter issued. the word accepted and signing
Her allegations in the complaint that the gross immediately below
inaction of HSBC on Thomsons instructions, as well 1) BUT, drawees signature alone
as its evident failure to inform Catalan of the is sufficient (Campos citing
reason for its continued inaction and non-payment Lawless v. Temple)
of the checks, smack of insouciance on its part, are ii. Sec 133, NIL: The holder of a bill
sufficient statements of clear abuse of right for presenting the same for acceptance
which it may be held liable under Article 19 of the may require that the acceptance be
Civil Code for any damages she incurred resulting written on the bill and if such
therefrom. request is denied, may treat the bill
as dishonored
HSBANKs actions, or lack thereof, prevented 1) Effect: holder may go against
Catalan from seeking further redress with Thomson the partys secondarily liable
for the recovery of her claim while the latter was the drawer and the indorsers
alive. iii. Acceptance of an INCOMPLETE bill
(Sec 138, NIL)
1) A bill may be accepted:
3. Acceptor: Liability a) before it has been signed
by the drawer, or
iii. Check must be payable credited to his account shall apply in this case x x
1) Checks cannot be certified x.
before payable
c. Liability
i. Bank which certifies 5. Surrender of Check
1) Becomes liable as an a. The surrender of the check by the
acceptor holder to the drawee bank upon its
2) REFUSAL to certify a check payment is not negotiation. By
doesnt constitute dishonor; the paying the check, the drawee bank
holder at that stage cannot exercise extinguishes it as a negotiable
his right of recourse against the instrument and converts it into a mere
drawer and the indorsers voucher.
ii. If procurement by: b. Distinction between surrender of check
1)Holder upon payment thereof and negotiation
a) The bank becomes the i. The delivery of the check by the
solidary debtor, and holder to the drawee bank upon its
b) The drawer and all payment is not negotiation. By
indorsers discharged from paying the check, the drawee bank
all liability (versus ordinary extinguishes it as a negotiable
bill of exchange not instrument and converts it into a
discharged) mere voucher.
2) Drawer ii. In the case of a deposit of a check
a) secondary parties not by the holder thereof in a bank
released other than the drawee bank, the
signature at the back of the check
ROMAN CATHOLIC BISHOP V. IAC (1990) would constitute an indorsement,
unless otherwise indicated. The
holder in negotiating the check to
A certified personal check is not legal tender nor is the depositary bank, which in turn
it the currency stipulated, and therefore cannot will collect on the check from the
constitute valid tender of payment. drawee bank, through the
clearinghouse.
9
3. Secondary Parties
SEC. 63. Legal character . Checks representing deposit
money do not have legal tender power and their acceptance in the
3.1. Liability of DRAWER
payment of debts, both public and private, is at the option of the
creditor: Provided, however, that a check which has been 1. Sec. 61, NIL
cleared and credited to the account of the creditor shall be a. Admits existence of payee and his then
equivalent to a delivery to the creditor of cash in an amount capacity to endorse
equal to the amount credited to his account.
b. Engages that on due presentment the Embassy could have been held liable for
instrument will be accepted, or paid, or the original amount of the checks
both, according to its tenor
c. That if it be dishonored + necessary 3. CRIMINAL LIABILITY FOR BOUNCING
proceedings on dishonor duly taken, CHECK
will pay the amount thereof to the a. Under BP 22
holder or to a subsequent indorser who
may be compelled to pay it PEOPLE v NITAFAN(1992)
2. Limiting Liability: drawer may insert in the
instrument an express stipulation Lim issued a memorandum check which was
negativing / limiting his own liability to subsequently dishonored for insufficiency of funds.
holder A memorandum check has the same effect as an
ordinary check and within the ambit of BP 22.
PNB v. PICORNELL (1922) What the law punishes is the issuance itself of a
bouncing check & not the purpose for which it was
Picornell obtained money from PNB Cebu to issued nor the terms & conditions relating to its
purchase tobacco to be shipped to Manila. Picornell issuance.
then drew a bill of exchange drawn against his
principal, Hyndman, Tavera & Ventura (HTV), in b. Estafa under the RPC
favor of PNB or his order. Upon presentation of the
bill, HTV accepted it. However, HTV subsequently PACHECO v CA (1999)
refused to pay the bill because some of the tobacco
shipped were damaged. The essential elements in order to sustain a
HELD: conviction under the above paragraph are:
A. Liability of Acceptor (HTV) 1. that the offender postdated or issued a check in
PNB is a holder in due course and the payment of an obligation contracted at the time the
partial want of consideration does not exist check was issued;
with respect to the bank who paid full value 2. that such postdating or issuing a check was
for the bill of exchange. done when the offender had no funds in the bank,
The want of consideration between the or his funds deposited therein were not sufficient to
acceptor and drawer does not affect the cover the amount of the check;
rights of the payee who is a remote party. 3. deceit or damage to the payee thereof.
The payee or holder gives value to the
drawer, and if he is ignorant of the equities PEOPLE v REYES (2005)
between the drawer and acceptor, his is in
the position of a bona fide indorsee. There is no estafa through bouncing checks when it
B. Liability of Drawer (Picornell) is shown that private complainant knew that the
As drawer of the bill, he warranted that it drawer did not have sufficient funds in the bank at
would be accepted upon proper the time the check was issued to him. Such
presentment & paid in due course. As it knowledge negates the element of deceit and
was not paid, he became liable to the constitutes a defense in estafa through bouncing
payment of its value to PNB. checks.
The fact that Picornell was an agent of HTV
in the purchase of the tobacco does not
necessarily make him an agent of HTV in 3.2. Liability of INDORSERS:
drawing the bill of exchange. These are 2
1. Indorser
different contracts. He cannot claim
exemption from liability by invoking the a. Sec. 63, NIL: A person placing his
existence of agency. signature upon an instrument other than as
Drawer received notice of protest in a maker, drawer, or acceptor unless he
fulfillment of the condition set by law for indicates by appropriate words his intention
his liability to arise. to be bound in some other capacity
Drawer's liability is only secondary as the
liability of the acceptor is primary. i SAPIERA vs CA (1999). It is
undisputed that the four (4) checks
BANCO ATLANTICO v AUDITOR GENERAL issued by de Guzman were signed
(1978) by petitioner at the back without
any indication as to how she should
B fraudulently altered checks payable to her drawn be bound thereby and, therefore,
by the Embassy by increasing the amounts. B she is deemed to be an indorser
negotiated these checks by indorsement to BA w/c thereof.
paid the full amount of the checks without first b. Sec. 67, NIL: A person, who places his
clearing with the drawee bank, contrary to normal signature on an instrument negotiable by
banking practice. HELD: Drawer (embassy) not delivery, incurs all the liabilities of an
liable. BA is guilty of negligence in giving B special indorser.
treatment as a privileged client, in disregard of c. Sec 64, NIL: Irregular Indorser
elementary principles of prudence that should i When a person not otherwise a
attend banking transactions. Hence, it should party to an instrument, places
suffer the loss. BA could not have been a HDC. thereon his signature in blank
before delivery, he is liable as an
NOTE: The Camposes note that the drawer indorser, in accordance w/ these
was not held liable because the decision was rules:
based on 23 on forgery instead of 124 on
material alteration. If BA had been a HDC,
1) Instrument payable to order of w/o receiving value thereof, for the purpose of
3rd person: liable to payee and lending his name to some other person
to all subsequent parties
2. Liability : Liable on the instrument to HFV
2) Instrument payable to the
even if holder knew he was only an AP
order of maker/drawer, or
payable to bearer: liable to all
parties subsequent to MAULINI v. SERRANO (1914)
maker/drawer In accommodation indorsement, the indorser
3) Signs for accommodation of makes the indorsement for the accommodation of
payee, liable to all parties the maker. Such an indorsement is generally for
subsequent to payee the purpose of better securing the payment of the
2. WARRANTIES: note, i.e. he lends his name to the maker not to
the holder. An accommodation note is one which
a. Every person negotiating an instrument
the accommodation party has put his name,
by delivery or by a qualified indorsement
without consideration, for the purpose of
warrants: (Sec. 65, NIL)
accommodation some other party who is to use it
iiInstrument genuine, in all respects and is expected to pay it.
what it purports to be Note: Campos disagrees with this ruling, referring
iii He has good title to it to the case of Goodman v Gaul where an
iv All prior parties had capacity to accommodation indorsement may be made for the
contract accommodation of the payee or holder.
v He has no knowledge of any fact
w/c would impair validity of ANG TIONG v. TING (1968)
instrument or render it valueless
vi in case of negotiation by delivery It is not a valid defense that the accommodation
only, warranty only extends in party did not receive any valuable consideration
favor of immediate transferee when he executed the instrument. Nor is it correct
b. General or Unqualified Indorser: to say that the holder for value is not a holder in
Every person who indorses without due course merely because at the time he acquired
qualification, warrants to all subsequent the instrument, he knew that the indorser was only
HDCs: (Sec. 66, NIL) an accommodation party.
The fact that the accommodation party stands only
i. instrument genuine, good title,
as a surety in relation to the maker is a matter of
capacity of prior parties
concern exclusively between accommodation
ii. instrument is at time of indorsement indorser & accommodated party. It is immaterial
valid and subsisting to the claim of a holder for value. The liability of
the accommodation party remains primary &
iii. eon due presentment, it shall be unconditional.
accepted or paid, or both, according to
tenor
iv. if it is dishonored, and necessary
proceedings on dishonor be duly taken,
he will pay the amt. To holder, or to SADAYA v. SEVILLA (1967)
any subsequent indorser who may be
compelled to pay it The solidary accommodation maker who made
payment has the right of contribution from his co-
3. Order of Liability among Indorsers (Sec. 68, accommodation maker. This right springs from an
NIL): implied promise between the accommodation
a. among themselves: liable prima facie in makers to share equally the burdens that may
the order they indorse, but proof of another ensue from their having consented to stamp their
agreement admissible signatures on the promissory note. The following
are the rules on reimbursement:
b. but holder may sue any of the indorsers, 1. A solidary accommodation maker of a note may
regardless of order of indorsement demand from the principal debtor
c. joint payees/indorsees deemed to reimbursement for the amount he paid to the
indorse jointly and severally payee; and
2. A solidary accommodation maker who pays on
the note may directly demand reimbursement
from his co-accommodation maker without first
TUAZON v RAMOS (2005)
directing his action against the principal debtor
provided that :
(a) he made the payment by virtue of a
After an instrument is dishonored by nonpayment,
judicial demand or
indorsers cease to be merely secondarily liable;
(b) the principal debtor is insolvent.
they become principal debtors whose liability
becomes identical to that of the original obligor.
TRAVEL-ON, INC. v. CA
The holder of a negotiable instrument need not
even proceed against the maker before suing the
indorser. Travel-On was entitled to the benefit of the
statutory presumption that it was a HDC, that the
checks were supported by valuable consideration.
The only evidence private respondent offered was
3.3. Accomodation Party
his own testimony that he had issued the checks to
1. Accomodation Party: one who signed Travel-On as payee to "accommodate" its General
instrument as maker/drawer/acceptor/ indorser Manager; this claim was in fact a claim that the
iv
at the option of the holder, may be sustains loss by want of such diligence, it will be
presented for payment before held to operate as actual payment of the debt or
twelve o'clock noon on Saturday obligation for which it was given.
when that entire day is not a It has, likewise, been held that if no
holiday (Sec. 85, NIL) presentment is made at all, the drawer cannot be
c. demand bill of exchange within a held liable irrespective of loss or injury unless
reasonable time after the last negotiation. presentment is otherwise excused. This is in
(Sec. 71, NIL) (NOTE: though reasonable harmony with Article 1249 of the Civil Code under
time from last negotiation, it may be which payment by way of check or other negotiable
unreasonable time from issuance thus instrument is conditioned on its being cashed,
holder may not be HDC under sec. 71) except when through the fault of the creditor, the
instrument is impaired. The payee of a check would
d. Check - must be presented for payment
be a creditor under this provision and if its non-
within reasonable time after its issue or
payment is caused by his negligence, payment will
drawer will be discharged from liability
be deemed effected and the obligation for which
thereon to extent of loss caused by delay
the check was given as conditional payment will be
i.How time computed. When discharged.
payable at a (1) fixed period after date,
(2) after sight, or (3) after that 3. Where DELAY excused - when the delay is
happening of a specified event, exclude caused by circumstances beyond the control of
day from which the time is to begin to the holder and not imputable to his default,
run, include date of payment. (Sec. misconduct, or negligence; when the cause of
86, NIL) delay ceases to operate, presentment must be
made with reasonable diligence (Sec. 81,NIL)
ii.Where the day, or the last day for
payment falls on a Sunday or on a
holiday may be done on the next
4. Manner of Presentment
succeeding secular or business day.
(Sec. 194, NIL)
a. The instrument must be exhibited; when
paid, must be delivered up to the party
PNB v. SEETO (1952)
paying it. (Sec. 74, NIL)
On 13 March, Seeto indorsed to PNB-Surigao a b. What constitutes a sufficient
bearer check dated 10 March drawn against PBC- presentment. (Sec. 72, NIL)
Cebu. PNB-Surigao mailed the check to its Cebu
i.BY WHOM: the holder, or by some
branch on 20 March & was presented to the drawee
person authorized to receive payment
bank on 09 April. The check was dishonored for
on his behalf;
insufficient funds because the delay in presentment
cause the exhaustion of the drawer's funds.
Indorser Seeto asked that the suit be deferred
while he made inquiries. He assured PNB that he CHAN WAN v. TAN KIM(1960)
would refund the value in case of dishonor.
HELD: The indorser is discharged from liability by Tan Kim drew specially crossed checks payable to
reason of the delay in the presentment for bearer. Chan Wan presented the checks for
payment, under 84. payment to the drawee bank but they were
Drawer had enough funds when he issued the dishonored due to insufficient funds. Chan Wan
check because his subsequent checks drawn seeks recovery on these checks.
against the same bank had been encashed. HELD: Checks crossed specially to China Banking
The assurances of refund by the indorser are the should have been presented for payment by that
ordinary obligation of an indorser which are bank, not by Chan Wan. Inasmuch as Chan Wan
discharged by the unreasonable delay in presented them for payment himself, there was no
presentation of the check. proper presentment & the liability did not attach to
NOTE: Camposes note that the discharge of the the drawer.
indorser should have been based on 66 & 71 on But there was due presentment as clearance
presentment as a condition to the indorser's endorsements by China Bank can be found at the
liability & presentment for payment of a demand back of the checks. However, some of the checks
bill made within a reasonable time from its last were stamped account closed.
negotiation. As Chan Wan failed to indicate how the checks
reached his hands, the court held him not to be a
PAPA v A.U. VALENCIA (1998) holder in due course who can still recover on the
checks but subject to personal defenses, such as
Granting that petitioner had never encashed lack of consideration.
the check, his failure to do so for more than ten NOTE: Camposes note that despite the addition of
(10) years undoubtedly resulted in the impairment the words "non-negotiable" on the specially crossed
of the check through his unreasonable and checks, the Court considered the checks as
unexplained delay. negotiable instruments. A check on its face
While it is true that the delivery of a check normally has all the requisites of negotiability, and
produces the effect of payment only when it is the addition of the above words should not change
cashed, the rule is otherwise if the debtor is its character as a negotiable instrument.
prejudiced by the creditors unreasonable delay in
presentment. The acceptance of a check implies ASSOCIATED BANK v. CA & REYES (1992)
an undertaking of due diligence in presenting it for
payment, and if he from whom it is received Different department stores issued crossed checks
bearing "for payee's account only" payable to
Melissa's RTW. Sayson, acting without authority, iv. TO WHOM: (1) person primarily
deposited & encashed the checks with Associated liable on the instrument, or if he is
Bank. absent or inaccessible, (2) to any
HELD: Citing State Invt House v IAC, the effects of person found at the place where
crossing a check are: the presentment is made.
1. check may not be encashed but only
deposited in the bank;
2. check may be negotiated only one -- to one
who has an account with a bank; and 5. Dishonor by Nonpayment
3. the act of crossing the check serves as a
warning to the holder that the check has a. Sec 83, NIL The instrument when:
been issued for a definite purpose so that i. duly presented for payment and
he must inquire if he has received the payment refused or cannot be
check pursuant to that purpose. obtained; or
The effects of crossing a check relate to the mode
of presentment for payment. ii. presentment is excused and the
The law imposes a duty of diligence on the instrument is overdue and unpaid.
collecting bank to scrutinize checks deposited with b. Effect:: [subject to NIL provs] an
it, for the purpose of determining their genuineness immediate right of recourse to all parties
& regularity. secondarily liable accrues to the holder.
(Sec. 84, NIL)
ii. TIME: reasonable hour on a business i. Dishonor is a condition precedent to
day; the enforcement of the liability of
1) where instrument payable at secondary parties.
bank. must be made during ii. This is conditioned upon the giving of
banking hours, UNLESS the due notice of dishonor
person to make payment has
no funds there to meet it at any iii. An indorser whose liability has
time during the day, in which become fixed by demand and notice is,
case presentment at any hour as to holder, a principal debtor.
before the bank is closed on
that day is sufficient (Sec. 75,
NIL) 5. Notice of Dishonor
iii. PLACE: proper place as herein
defined: (Sec. 73, NIL)
1) place of payment specified at 5.1.Definition
place of payment;
2) no place of payment specified 1. To bring either verbally or by writing, to the
but address of the person to knowledge of the drawer or indorser of an
make payment is given in the instrument, the fact that a specified NI,
instrument at the address upon proper proceedings taken, has not
given; been accepted or has not been paid, and
3) no place of payment and no that the party notified is expected to pay it
address is given at the usual 2. General rule: MUST be given to drawer
place of business or residence and to each indorser, and any drawer or
of the person to make indorser to whom such notice is not given
payment; is discharged
1) in any other case
wherever person to make 5.2. When necessary
payment can be (1) found, 1. Sec 89, NIL Except as herein provided,
or if presented (2) at his when a negotiable instrument has been
last known place of dishonored by non-acceptance or non-
business or residence payment, notice of dishonor must be given to
2) where principal debtor is the drawer and to each indorser
dead and no place of 2. Parties entitled to notice:
payment is specified to a. Drawer
his personal representative, b. Indorser
IF any AND IF he can be c. Accomodation Indorsers
found with the exercise of i Joint maker excluded if not an
reasonable diligence (Sec. indorser
76, NIL) 3. Acceleration Clause
3) where persons primarily a. If clause is optional on holder:
liable are partners and no i The bringing of an action against
place of payment is the maker and indorsers constitutes
specified, presentment for a valid exercise of option and a
- to any one of them, even valid notice of dishonor
though there has been a b. Clause is automatic:
dissolution of the firm. i Notice of dishonor must be givem
(Sec. 77, NIL) at once
4) joint debtors and no place ii Not sufficient to give it upon
of payment is specified - to commencement of action
them all (Sec. 78, NIL)
GULLAS v. PNB (1935)
HELD: State Investment is a holder in due course H. Protest for better security against the
& is not subject to the personal defense of lack of drawer and indorsers where the acceptor has
consideration. been adjudged a bankrupt or an insolvent or
There is no need to serve the drawer a notice has made an assignment for the benefit of
of dishonor because she was responsible for creditors before the bill matures (Sec. 158,
the dishonor of her checks. After withdrawing NIL)
her funds, she could not have expected her checks I. Delay excused
to be honored. 1. Requisites:
a. when caused by circumstances beyond
2. Where not necessary to charge indorser the control of the holder, and
(Sec. 115, NIL) b. not imputable to his default,
misconduct, or negligence.
a. drawee fictitious, incapacitated, and
2. When the cause of delay ceases to operate,
indorser aware of the fact at time of
the bill must be noted or protested with
indorsement
reasonable diligence.;
b. indorser is person to whom instrument J. When protest dispensed with - by any
presented for payment circumstances which would dispense with
notice of dishonor. (Sec. 159, NIL)
c. instrument made/accepted for his K. Waiver of protest: deemed to be a waiver not
accommodation only of a formal protest but also of
presentment and notice of dishonor. (Sec.
111, NIL)
7. Protest
TAN LEONCO v GO INQUI(1907)
A. Definition: testimony of some proper person In exchange for the abaca from Tan Leonco's
that the regular legal steps to fix the liability of plantations, Go Inqui drew a bill of exchange
drawer and indorsers have been taken against Lim Uyco. Upon presentment of the
B. When necessary: draft, it was refused payment due to a stop
1. In case of a FOREIGN BILL appearing on its order from the drawer. The bill was not
face to be such; protested.
2. protest for non-acceptance if dishonored by HELD: The action is not brought upon the bill
nonacceptance & of exchange which was used only as evidence
3. protest for nonpayment if not previously of the indebtedness. Under these conditions,
dishonored by nonpayment. protest & notice of nonpayment are
4. Effect of failure to protest: the drawer and unnecessary in order to render the drawer
indorsers are discharged. (Sec. 152, NIL) liable.
C. Form
1. annexed to the bill or must contain a copy NOTE: The ruling of the Court on protest is
thereof, and merely obiter dictum.
2. must be under the hand and seal of the
notary making it;
D. Contents 8. Acceptance or Payment for Honor
1. The time and place of presentment;
2. The fact that presentment was made and
the manner thereof; A. Acceptance
3. The cause or reason for protesting the bill; 1. Practice of accepting for honor is obsolete
4. The demand made and the answer given, if 2. When bill may be accepted for honor.
any, or the fact that the drawee or acceptor When a BE has been (1) protested for
could not be found. (Sec. 153, NIL). dishonor by non-acceptance or protested
E. By whom for better security and (2) is not overdue
1. A notary public; or any person not being a party already liable
2. any respectable resident of the place where may, with the CONSENT of the holder,
the bill is dishonored, in the presence of intervene and accept the bill supra protest
two or more credible witnesses. (Sec. 154, for the honor of any party liable thereon or
NIL) for the honor of the person for whose
F. Time account the bill is drawn.
1. on the day of its dishonor unless delay is 3. The acceptance for honor may be for part
excused; only of the sum for which the bill is drawn;
2. when duly noted, the protest may be 4. where there has been an acceptance for
subsequently extended as of the date of honor for one party, there may be a further
the noting. (Sec. 155, NIL); acceptance by a different person for the
G. Place honor of another party. (Sec. 161, NIL)
1. at the place where it is dishonored, 5. Referee in case of need person whose
2. EXCEPT bill drawn payable at the place of name is inserted by the drawer of a bill and
business or residence of person other than any indorser to whom the holder may
the drawee has been dishonored by resort in case bill is dishonored by non-
nonacceptance, acceptance or non-payment; option of the
a. it must be protested for non-payment holder to resort to the referee (Sec. 131,
at the place where it is expressed to be NIL)
payable, and B. PAYMENT FOR HONOR - any person may
b. no further presentment for payment to, intervene and pay bill protested for non-
or demand on, the drawee is payment supra protest (Sec. 171, NIL)
necessary. (Sec. 156, NIL)
person, and promises that he will repay the 5. Pertinent Code of Commerce provisions:
same to the person making the a. Art 567. Letters of credit - issued by
advancement, or accept bills drawn upon one merchant to another for the
himself for the like amount. purpose of attending to a commercial
2. must be issued in favor of a definite transaction.
person, and not to order. b. Art 568. The essential conditions of
3. under our law, a letter of credit cannot be a letter of credit shall be:
negotiable instrument because (a) it may i issued in favor of a definite person,
not contain the words of negotiability; (b) and not to order.
may be issued for an undetermined ii limited to a fixed and specified
amount. See Art 568 Code of Commerce. amount, or to one or more
4. INDEPENDENCE PRINCIPLE: Credits, by undetermined amount, but all
their nature, are separate transactions from within a maximum the limit of
the sales or other contract(s) on which they which has to be stated exactly.
may be based and banks are in no way Note: Those which do not have any of
concerned with or bound by such these last circumstances shall be
contract(s), even if any reference considered as mere letters of
whatsoever to such contract(s) is included recommendation.
in the credit. Consequently, the c. Art 569. The drawer of a letter of
undertaking of a bank to pay, accept and credit shall be liable to the person on
pay draft(s) or negotiate and/or fulfill any whom it was issued, for the amount
other obligation under the credit is not paid by virtue thereof, within the
subject to claims or defenses by the maximum fixed therein.
applicant resulting from his relationships Letters of credit may not be protested
with the issuing bank or the beneficiary. A even if not be paid; bearer cannot
beneficiary can in no case avail himself of acquire any right of action by reason of
the contractual relationships existing non-payment against the person who
between the banks or between the issued it.
applicant and the issuing bank. The person paying has right to demand
a. Thus, the engagement of the issuing the proof of the identity of the person
bank is to pay the seller or beneficiary in whose favor the letter of credit was
of the credit once the draft and the issued.
required documents are presented to d. Art 570. The drawer of a letter of
it. This principle assures the seller or credit may annul it, informing the
the beneficiary of prompt payment bearer and the person to whom it is
independent of any breach of the main addressed
contract and precludes the issuing bank e. Art 571. The bearer of a letter or
from determining whether the main credit shall pay the amount received to
contract is actually accomplished or the drawer without delay. Should he
not. Under this principle, banks not do so, an action involving execution
assume no liability or responsibility for may be brought to recover it, with legal
the form, sufficiency, accuracy, interest and the current exchange in
genuineness, falsification or legal effect the place where it is repaid.
of any documents, or for the general f. Art 572. If the bearer of a letter of
and/or particular conditions stipulated credit does not make use thereof within
in the documents or superimposed the (1) period agreed upon with the
thereon, nor do they assume any drawer, or in default of a period fixed,
liability or responsibility for the (2) within 6 months, counted from its
description, quantity, weight, quality, date, in any point in the Philippines,
condition, packing, delivery, value or and within 12 months anywhere
existence of the goods represented by outside thereof, it shall be void in fact
any documents, or for the good faith or and in law.
acts and/or omissions, solvency,
performance or standing of the BPI v. DE RENY FABRIC (1970)
consignor, the carriers, or the insurers
of the goods, or any other person The company and its officers cannot shift the
whomsoever. burden of loss to the bank because of the terms of
b. The independent nature of the letter of their Commercial Letter of Credit Agreement with
credit may be: (a) independence in toto the bank provides that latter shall not be
where the credit is independent from responsible for the any difference in character or
the justification aspect and is a condition of the property. Furthermore, the bank
separate obligation from the underlying was able to prove the existence of a custom in
agreement like for instance a typical international banking and financing circles negating
standby; or (b) independence may be any duty of the bank to verify whether what has
only as to the justification aspect like in been described in letters of credits or drafts or
a commercial letter of credit or shipping documents actually tallies with what was
repayment standby, which is identical loaded aboard ship. Banks, in providing financing
with the same obligations under the in international business transactions do not deal
underlying agreement. In both cases with the property to be exported or shipped to the
the payment may be enjoined if in the importer, but deal only with documents.
light of the purpose of the credit the
payment of the credit would constitute LEE v CA (2002)
fraudulent abuse of the credit.
(Transfield vs. Luzon Hydro)
Modern letters of credit are usually not made thereof. A bona fide purchaser of value without
between natural persons. They involve bank to notice, will be protected in his acquisition,
bank transactions. Historically, the letter of credit although such third person has diverted the
was developed to facilitate the sale of goods certificate from the purpose for which he was
between, distant and unfamiliar buyers and sellers. entrusted therewith. (Principle of Estoppel)
It was an arrangement under which a bank, whose E. The same rule is applicable if the certificate is
credit was acceptable to the seller, would at the in bearer form.
instance of the buyer agree to pay drafts drawn on F. The rule is applicable where the certificate is
it by the seller, provided that certain documents lost or stolen while signed in blank. Even a
are presented such as bills of lading accompanied purchaser in good faith cannot acquire title as
the corresponding drafts. Expansion in the use of against the true owner. (?)
letters of credit was a natural development in G. At common law, stock certificates are given the
commercial banking. Parties to a commercial letter attributes of negotiability only where the owner
of credit include: thereof has entrusted the wrongdoer with the
(a) the buyer or the importer, possession of such certificate and clothed him
(b) the seller, also referred to as with apparent ownership thereof.
beneficiary,
(c) the opening bank which is usually the SANTAMARIA v HONGKONG & SHANGHAI
buyers bank which actually issues the BANK (1951)
letter of credit,
(d) the notifying bank which is the Plaintiff, in failing to take the necessary precaution
correspondent bank of the opening bank upon delivering the certificate of stock to her
through which it advises the beneficiary of broker, was chargeable with negligence in the
the letter of credit, transaction which resulted to her own prejudice,
(e) negotiating bank which is usually any and as such, she is estopped from asserting title to
bank in the city of the beneficiary. The it as against the defendant bank.
services of the notifying bank must always A certificate of stock, indorsed in blank, is deemed
be utilized if the letter of credit is to be quasi-negotiable, and as such the transferee
advised to the beneficiary through cable, thereof is justified in believing that it belongs to the
(f) the paying bank which buys or discounts holder and transferor.
the drafts contemplated by the letter of
credit, if such draft is to be drawn on the DE LOS SANTOS, McGRATH (1955)
opening bank or on another designated
bank not in the city of the beneficiary. As a Although a stock certificate is sometimes regarded
rule, whenever the facilities of the opening as quasi-negotiable, in the sense that it may be
bank are used, the beneficiary is supposed transferred by endorsement, coupled with delivery
to present his drafts to the notifying bank it is well settled that the instrument is non-
for negotiation and negotiable, because the holder thereof takes it
(g) the confirming bank which, upon the without prejudice to such rights or defense as the
request of the beneficiary, confirms the registered owner or credit may have under the law,
letter of credit issued by the opening bank. except in so far as such rights or defenses are
subject tot eh limitations imposed by the principles
TRANSFIELD VS. LUZON HYDRO (2004) governing estoppel.
3.6. A contract of indemnity (except life property, not on the property itself.
and accident insurance where the result It is the damage to the personal
is death) interest not the property that is
The promise of the insurer is to make good being reimbursed
only the loss of the insured Life insurance GENERALLY
Any contract that contemplates a possible ASSIGNABLE as they are in the
gain to the insured by the happening of any nature of property and do not
event upon which the liability of the insurer represent a personal agreement
becomes fixed is contrary to the nature of between insured and insurer
insurance
No person may secure insurance upon 3.9. A contract of adhesion
property in which he has no interest. Policy is presented to the insured already in
If the insured has no insurable interest, the its printed form
contract is void and unenforceable as being Take it or leave it
contrary to public policy because it affords
a temptation to the insured to wish or bring 3.10. Of highest degree of good faith
about the happening of the loss Each party is enjoined by law to deal with
each other in good faith
3.7. An investment (life insurance) Disclosure or the duty to disclose
Measure of economic security for the Violation of the duty gives the other party
insured during life, and beneficiary after the right to rescind the contract
death
Financial assistance during financial crisis 3.11. It is property in legal contemplation
Liability of insurer is face value of the policy
and not the earning capacity of the insured
at the time of death 4. Requisites of a valid contract of
insurance
3.8. A personal contract
Each party having in view the credit, A subject matter in which the insurer has
character and conduct of another an insurable interest
As a rule, the insured cannot assign, before Event or peril insured against which may
the happening of the loss, his rights under be any (future) contingent or unknown
a property policy without the consent of the event, past or future (Sec. 3), and a
insurer. The obligation of the insurer to duration for the risk thereof
pay does not attach or run with the A promise to pay or indemnify in a fixed
property whether it be real property or or ascertainable amount
personal A consideration for the promise known as
If a person whose property is a premium
insured sells it to another, the A meeting of the minds of the parties
buyer cannot be his successor in upon all of the foregoing essentials
the contract of insurance unless, of The parties must be competent to enter
course, the sale is with the consent into the contract
of the insurer or unless by express Under Sec. 226, no policy of insurance
stipulation of the parties, the shall be issued or delivered within the
contract is made to run with the Philippines unless in the form previously
property of the transferee approved by the Insurance Commissioner
Where the insurance is on account The purpose must not be contrary to law
of the owner or for whom it may or public policy
concern or where the loss is
payable to bearer, the subsequent
transferees or owners become by
the terms of the contract, the real
parties to the contract of insurance.
All insurance contracts share a common
trait of personal-ness
Personal insurance (includes life,
health, accident, and disability
insurance) applies only to a
particular individual, and it is not
possible, for example, for the
insured unilaterally declaring that
his health insurance policy shall
now be deemed to cover the health
of someone else
Liability insurance each person
purchases coverage for his own (or
a group of related persons)
potential liability to others. The
insurer prices the coverage
depending on the characteristics
and traits of the particular insured
Property insurance - the insurance
is on the insureds interest in the
b) Group life
Sec. 180-A. The insurer in a life insurance contract
shall be liable in case of suicides only when it is
committed after the policy has been in force for a Sec. 50. The policy shall be in printed form
period of two years from the date of its issue or of which may contain blank spaces; and any word,
its last reinstatement, unless the policy provides a phrase, clause, mark, sign, symbol, signature,
shorter period: Provided, however, That suicide number, or word necessary to complete the
committed in the state of insanity shall be contract of insurance shall be written on the blank
compensable regardless of the date of commission. spaces provided therein.
(As amended by Batasang Pambansa Blg. 874) Any rider, clause, warranty or endorsement
purporting to be part of the contract of insurance
and which is pasted or attached to said policy is not
Sec. 181. A policy of insurance upon life or binding on the insured, unless the descriptive title
health may pass by transfer, will or succession to or name of the rider, clause, warranty or
any person, whether he has an insurable interest or endorsement is also mentioned and written on the
not, and such person may recover upon it whatever blank spaces provided in the policy.
the insured might have recovered. Unless applied for by the insured or owner, any
rider, clause, warranty or endorsement issued after
the original policy shall be countersigned by the
Sec. 182. Notice to an insurer of a transfer or insured or owner, which countersignature shall be
bequest thereof is not necessary to preserve the taken as his agreement to the contents of such
validity of a policy of insurance upon life or health, rider, clause, warranty or endorsement.
unless thereby expressly required. Group insurance and group annuity policies,
however, may be typewritten and need not be in
printed form.
Sec. 183. Unless the interest of a person
insured is susceptible of exact pecuniary
May be typewritten and need not be in
measurement, the measure of indemnity under a
printed form
policy of insurance upon life or health is the sum
Members usually a cohesive group
fixed in the policy.
Pay a uniform premium
Usually no medical examination
Insurance on human lives and insurance Normally requires a specified number of
appertaining thereto or connected persons insured before policy is issued
therewith
Made payable on the death of a person, or
on his surviving a specified period, or
otherwise contingently on the continuance
or cessation of life
one insures ones life or that of another
against death or sickness
Effect of suicide of insured
Liability of insurer in case of suicide
c) Industrial life
a) Marine
Sec. 229. The term "industrial life insurance" Sec. 99. Marine Insurance includes:
as used in this Code shall mean that form of life (1) Insurance against loss of or damage to:
insurance under which the premiums are payable (a) Vessels, craft, aircraft, vehicles, goods,
either monthly or oftener, if the face amount of freights, cargoes, merchandise, effects,
insurance provided in any policy is not more than disbursements, profits, moneys, securities, choses
five hundred times that of the current statutory in action, evidences of debts, valuable papers,
minimum daily wage in the City of Manila, and if bottomry, and respondentia interests and all other
the words "industrial policy" are printed upon the kinds of property and interests therein, in respect
policy as part of the descriptive matter. to, appertaining to or in connection with any and all
An industrial life policy shall not lapse for non- risks or perils of navigation, transit or
payment of premium if such non-payment was due transportation, or while being assembled, packed,
to the failure of the company to send its crated, baled, compressed or similarly prepared for
representative or agent to the insured at the shipment or while awaiting shipment, or during any
residence of the insured or at some other place delays, storage, transhipment, or reshipment
indicated by him for the purpose of collecting such incident thereto, including war risks, marine
premium; Provided, That the provisions of this builder's risks, and all personal property floater
paragraph shall not apply when the premium on risks;
the policy remains unpaid for a period of three (b) Person or property in connection with or
months or twelve weeks after the grace period has appertaining to a marine, inland marine, transit or
expired. transportation insurance, including liability for loss
of or damage arising out of or in connection with
the construction, repair, operation, maintenance or
Form of life insurance under which the
use of the subject matter of such insurance (but
premiums are payable either monthly or
not including life insurance or surety bonds nor
oftener
insurance against loss by reason of bodily injury to
Face amount of insurance provided in any
any person arising out of ownership, maintenance,
policy is not more than five hundred times
or use of automobiles);
that of the current statutory minimum daily
(c) Precious stones, jewels, jewelry, precious
wage in the City of Manila
metals, whether in course of transportation or
Shall not lapse for non-payment of
otherwise;
premium if such non-payment was due to
(d) Bridges, tunnels and other instrumentalities
the failure of the company to send its
of transportation and communication (excluding
representative or agent to the insured at
buildings, their furniture and furnishings, fixed
the residence of the insured or at some
contents and supplies held in storage); piers,
other place indicated by him for the
wharves, docks and slips, and other aids to
purpose of collecting such premium
navigation and transportation, including dry docks
This shall not apply when the premium
and marine railways, dams and appurtenant
on the policy remains unpaid for a
facilities for the control of waterways.
period of three months or twelve weeks
(2) "Marine protection and indemnity
after the grace period has expired.
insurance," meaning insurance against, or against
legal liability of the insured for loss, damage, or
6.2. Non-life include policies covering risks to
expense incident to ownership, operation,
which property may be exposed, as well as those
chartering, maintenance, use, repair, or
which cover the risk of liability to third persons. It
construction of any vessel, craft or instrumentality
covers a specified period of time (not more than 1
in use of ocean or inland waterways, including
year) and has a definite period of coverage.
liability of the insured for personal injury, illness or
death or for loss of or damage to the property of
another person.
which is to insure against risk of loss, hand, causing temporary total disability due to
damage or liability on the part of the fractures o his index, middle, and fourth fingers.
insured He filed a notice of accident and claim to recover
The insurer is under the duty to make its indemnity from First National Surety $ assurance
meaning clear if it desires to limit or restrict Co. Inc., pursuant to his insurance policy which
the operation of the general provisions of provides: the loss of a hand shall mean the
its contract by special proviso, exception or loss by amputation through the bones of the
exemption wrist The insurance company rejected Tys
A policy of insurance which contains claim saying that since there was no severance
exceptions or conditions tending to work a by amputation of the hand, the disability suffered
forfeiture of the policy shall be interpreted by him was not covered under the policy.
most favorably toward those against whom Held: The insurance company is not liable to
they are intended to operate and most indemnify Ty. We cannot go beyond the clear
strictly against the insurance company or and express conditions of the insurance policies,
the party for whose benefit they are all of which define partial disability as loss of
inserted either hand by amputation through the bones of
Where restrictive provisions are open to the wrist There was no amputation in this case.
two interpretations, that which is most The agreement contained in the insurance
favorable to the insured is adopted. policies is the law between the parties. An
Limitations of liability must be construed in interpretation that would include the mere
such a way as to preclude the insurer from fracture or other temporary disability not covered
non compliance with its obligations by the policies would certainly be unwarranted.
7.2. Where Terms are Clear Misamis Lumber vs. Capital Inc.
The cardinal principle of insurance law of
interpreting insurance contracts favorably Facts: Misamis Lumber Corporation, insured its
to the insured is applicable only in cases of motor car for the amount of P14,000. The
doubt, not when the intention of the policy insured car, passed over a water whole which the
is clear or the language is sufficiently clear driver did not see because an oncoming car did
to convey the meaning of the parties not dim its lights. The car was later towed and
The court is bound to adhere to the repaired by Morosi Motors at a total cost of
insurance contract as the authentic P302.27. Capital Insurance refused to pay for
expression of the intention of the parties, the total cost of towage and repairs.
and it must be construed and enforced Held: The insurance company is not liable for
according to the sense and meaning of the the payment of the repairs in excess of P150.
terms which the parties themselves have The insurance policy stipulated in paragraph 4
used. that if the insured authorizes the repair, the
If such terms are clear and certain, they liability of the insurer is limited to P150. The
must be taken in their plain and ordinary literal meaning of this stipulation must control, it
sense being the actual contract, expressly and plainly
Obligations arising from contracts have the provided for in the policy. The policy is also drew
force of law between the contracting out not only the limits of the insurers liability but
parties and should be complied with in also the mechanics that the insured had to follow
good faith to be entitled to full indemnity of repairs. The
option to undertake the repairs is accorded to the
7.3. Literal or Strict Interpretation insurance company per paragraph 2. The said
company was deprived of the option because the
First Quezon City Insurance vs. CA insured took it upon itself to have the repairs
made, and only notified the insurer when the
Facts: Del Rosario fell off a De Dios Marikina repairs were done. As a consequence, paragraph
Transportation Co. Inc. bus. Del Rosario was 4, which limits the companys liability to P150
brought to the hospital and stayed there for 40 applies.
days. The cost for the hospitalization amounted
to P69,444 while unearned salary due to Sun Insurance vs. CA
confinement amounted to P7,500. Del Rosario
filed a complaint against DMTC and its insurance Facts: Tan took from Sun Insurance a property
company, First Quezon City Insurance Company. insurance worth 300K to insure his interest in the
Held: The insurance companys liability should electrical supply store of his brother housed in a
be limited to P12,000 only. The insurance policy building in Iloilo City. Four days after, the
clearly placed the maximum limit of First Quezon building was burned down including the insured
Citys liability for damages arising from death or store. When Tan filed a claim with the insurance
bodily at P12,000 per passenger and its company, the same was denied, after which he
maximum liability per accident at P50,000. This asked for reconsideration which was again
means that the insurers maximum liability for denied. It is stipulated in the insurance policy
any single accident will not exceed 50K that any action should be filed with the Insurance
regardless of the number of the passengers killed Commission or any court of competent
or injured. jurisdiction within 12 months after receipt by the
insured of a rejection of his claim and failure to
Ty vs. First National do so would constitute abandonment of claim and
can no longer be recoverable.
Facts: Ty was a mechanic foreman in the Held: The 12-month prescriptive period
Broadway Cotton Factory. A fire broke out which commenced upon receipt by Tan of the
totally destroyed the factory. As Ty was fighting rejection/denial of his claim by Sun Insurance
his way out of the factory, he injured his left and does not stop upon filing of the motion for
reconsideration. The words of the provisions in This rigid application of the rule of ambiguities
the insurance policy is clear and free from any has become necessary in view of current
doubt or ambiguity whatsoever and thus must be business practices.
taken and understood in its plain, ordinary and
popular sense. Malayan Ins. vs. CA
other types of damages may be awarded against properties consisting of stocks in trade Fire of
the insurer once liability is shown to have arisen. accidental origin broke out at the public market
A contract of insurance is a contract of adhesion of San Francisco, Agusan del Sur. Geagonias
and must be construed strictly against the party insured stocks-in-trade were completely
which prepared the contract. destroyed prompting him to file with CBIC a
claim under the policy. The company denied the
Qua Chee Gan vs. Law Union claim and the basis of which was the petitioner's
alleged violation of Condition 3 of the policy.
Facts: This case involved a claim on a fire Held: Geagonia is not precluded from recovering
insurance policy which contained a provision as from Country Bankers. Condition 3 of the policy
to the installation of fire hydrants the number of is a condition which is not proscribed by law. Its
which depended on the height of the external incorporation in the policy is allowed by Section
wall perimeter of the bodega that was insured. 75 of the Insurance Code which provides that
When it was determined that the bodega should "[a] policy may declare that a violation of
have eleven fire hydrants in the compund as specified provisions thereof shall avoid it,
required by the terms of the policy, instead of otherwise the breach of an immaterial provision
only two that it had, the claim under the policy does not avoid the policy." Its violation would
was resisted on that ground. thus avoid the policy. However, in order to
Held: The said deviation from the terms of the constitute a violation, the other insurance must
policy did not prevent the claim under the same. be upon the same subject matter, the same
We are in agreement with the trial Court that the interest therein, and the same risk. As to a
appellant is barred by waiver (or rather estoppel) mortgaged property, the mortgagor and the
to claim violation of the so called fire hydrants mortgagee have each an independent insurable
warranty, for the reason that knowing fully that interest therein and both interests may be
the number of hydrants demanded therein never covered by one policy, or each may take out a
existed from the very beginning, the appellant separate policy covering his interest, either at the
nevertheless issued the policies in question same or at separate times. . It is a cardinal
subject to such warranty, and received the principle of law that forfeitures are not favored
corresponding premiums. It would be perilously and that any construction which would result in
received the corresponding premiums. It would the forfeiture of the policy benefits for the person
be perilously close to conniving at fraud upon the claiming, will be avoided, if it is possible to
insured to allow the appellant to claim now as construe the policy in a manner which would
void ab initio the policies that it had issue to the permit recovery, as, for example, by finding a
plaintiff without warning of their fatal defect, of waiver for such forfeiture. Provisions, conditions
which it was informed, and after it had misled the or exceptions in policies which tend to work a
defendant into believing that the policies were forfeiture of insurance policies should be
effective. When the policy contains a condition construed most strictly against those for whose
which renders it voidable at its inception, and this benefits they are inserted, and most favorably
result is known to the insurer, it will be presumed toward those against whom they are intended to
to have intended to waive the conditions and to operate.
execute a binding contract, rather than to have
deceived the insured into thinking he is insured Sun Insurance vs. CA
when in fact he is not, and to have taken his
money without consideration. The insurance Facts: Sun Insurance issued a Personal Accident
company is liable on the insurance contract. Policy to Lim with a face value of 200K. Two
months later he was dead with a bullet wound on
Del Rosario vs. Equitable Insurance his head. Lims death was caused when he was
playing with his handgun which accidentally fired.
Facts: The insurer has bound itself under the His wife sought payment on the policy but her
policy to pay P1,000-3,000 as indemnity for the claim was rejected. The contention of Sun
death of the insured for bodily injury, the policy Insurance was that Lim willfully exposed himself
containing specific amounts that may be to needless peril and thus removed himself from
recovered. The policy, however, does not the coverage of the insurance policy. Under the
positively state any definitive amount that may exceptions clause of the policy, the insurance
be recoverable in case of death by drowning, company shall not be liable when the insured
although it is a ground for recovery apart from person attempting to commit suicide or willfully
death for bodily injury. exposing himself to needless peril except in an
Held: There is an ambiguity in this respect in attempt to save human life.
the policy, which ambiguity must be interpreted Held: The cause of Lims death was an accident
in favor of the insured and strictly against the within the limits set forth in the policy and
insurer to allow a greater indemnity, that is, therefore not exempt from the liability of the
P3,000. insurer. The definition of an accident is an event
which happens without any human agency or, if
Geagonia vs. CA happening through human agency, an event
which under the circumstances, is unusual to and
Facts: Geagonia is the owner of Norman's Mart not expected by the person to whom it
located in the public market of San Francisco, happens Contrary to the contention of Sun
Agusan del Sur. He obtained from the private Insurance, Lim did not intentionally expose
respondent, Country Bankers Insurance himself to danger, as testified by his secretary,
Corporation. The policy contained the following he removed the magazine of the gun to ensure
condition: 3. The insured shall give notice to that it would not fire and pointed it to his temple
the Company of any insurance or insurances in the belief that it is safe to do so.
already effected, or which may subsequently be
effected, covering any of the property or
In the case of a life or an industrial policy Cancellation right to rescind, abandon or cancel
whenever the grace period provision a contract of insurance, termination of policy
applies (Sec. 77) before its expiration.
Article 78 (see below) Premium referred to in 64(a) refers to payment
Agreement to grant the insured credit after effective date of the policy because Sec.
extension for the payment of the 77 ordains that insurance policy is valid and
premium binding unless and until premium has been paid.
When there is an agreement allowing the Conditions under w/c above exercised:
insured to pay premium in installment Prior notice of cancellation to insured
and partial payment has been made at Notice must be based on the occurrence,
the time of the loss (See Makati Tuscany after the effective date of the policy, of one
v CA) or more of the grounds mentioned
It must be in writing, mailed or delivered to
the named insured at the address shown in
BPI vs. Posadas, 56 Phil. 215 the policy. In this regard, proof of actual
If the premiums are paid out of the conjugal funds, receipt of the notice is necessary for it to
the proceeds are considered conjugal. If the take effect; mere proof that the insurer
beneficiary is other than the insureds estate, the mailed the notice is not sufficient to effect
source of premiums would not be relevant. the cancellation.
It must state w/c of the ground set forth is
relied upon.
Philippine Pryce Assurance Corp. vs. CA, 230 It is the duty of the insurer upon written
SCRA 164 (1994) request of the insured to furnish the facts in
Generally, premium is also necessary in order for which the cancellation is based.
the contract of suretyship or bond to be binding. If there was no premium paid at all, the action
However, where the oblige has accepted the bond, appropriate would be a declaration of nullity,
it is binding even if the premium has not been paid based on Section 77 which provides that no
subject to the right of the insurer to recover the policy or contract of insurance issued by an
premium from its principal. insurance company is valid and binding unless
and until the premium thereof has been paid
Sec. 78 An acknowledgment in a policy or contract
Tibay v CA
of insurance of receipt of premium is conclusive
evidence of its payment, so far as to make the
Facts: Fortune Life issued a fire insurance policy
policy binding, notwithstanding any stipulation
in favor of Tibay on a bldg in Makati, together w/
therein that it shall not be binding until the
all their personal effects therein. Violeta paid part
premium is actually paid
of the total premium. 2 mos. Afer, a fire
completely destroyed the bldg. 2 days after the
Effect of acknowledgment of receipt of fire, Tibay paid the balance of the premium.
premium in property Insurer cannot deny the Fortune denied Tibays claim for violation of
truth of the receipt of the premium even if it is Sec77 of Insurance Code.
unpaid. Issue: WON a fire insurance policy is already
Law established a legal fiction of payment valid, binding and enforceable upon mere partial
(prima facie evidence of payment). Thus insurer payment of premium
presumed to have waived the condition of Held: NO Sec. 77 applies. Since acceptance of
prepayment. partial payment is not mentioned among the
SC has decided that above is an exception exceptions provided in Sec 77 and 78 of the
to Sec. 77 Insurance Code, no policy of insurance can ever
pretend to be efficacious until premium has been
fully paid.
Sec. 64 No policy of insurance other than life shall
- The policy contained a condition w/c said that
be cancelled by the insurer except upon prior
The policy including any renewal thereof is not
notice thereof to the insured, and no notice of
in force until the premium has been fully paid x x
cancellation shall be effective unless it is based on
x Clearly, the Policy provides for payment of
the occurrence, after the effective date of the
premium in full.
policy, of one or more of the following:
Dissent: (IMPT) The insurance coverage should
(a) non-payment of premium;
become effective from the day that the partial
(b) conviction of a crime arising out of acts
payment is accepted by the insurer, any
increasing the hazard insured against;
stipulation in the policy to the contrary
(c) discovery of fraud or material
notwithstanding. Partial payment is enough to
misrepresentation
establish the juridical relation between the two
(d) discovery of willful or reckless acts or
parties. The law does not require a specific
omissions increasing the hazard insured
amount of premium payment in order to create
against;
the juridical tie.
(e) physical changes in the property
- If the contract is automatically cancelled upon
insured which result in the property becoming
the non-payment in full by the insured, then the
uninsurable; or
efficacy of the contract will be fully dependent on
(f) a determination by the Commissioner
his will. This violates the principle of mutuality of
that the continuation of the policy would violate
contracts.
or would place the insurer in violation of this
Code
8.3. Premium default in life insurance (Sec premium charges will be more than the
227, h & j); options; lapsed policy actual cost of the protection against the
risk in order to meet the higher cost of
risk during the latter years of the policy
Sec. 227 In the case of individual life or
when the insured is older. Reserve
endowment insurance, the policy shall contain in
Value - Surrender Charge = Cash
substance the following conditions: x x x
Surrender Value
(h) A table showing in figures cash surrender
The more premiums he has paid, the
values and paid-up options available under the
greater will be the CSV but the value is
policy each year upon default in premium
always a lesser sum than the total amt
payments, during at least twenty years of the
of premiums paid.
policy beginning with the year in which the values
CSV is the amount company holds in
and options first become available, together with a
trust for insured deliverable upon
provision that in the event of the failure of the
demand. So long as the policy remains
policy-holder to elect one of the said options within
in force, the company has practically no
the time specified in the policy, one of the said
beneficial interest in it except as its
options shall automatically take effect and no
custodian; this is the practical, though
policyholder shall ever forfeit his right to same by
not the legal, relation of the company
reason of his failure to so elect.
to this fund.
x x x x x x x x x x x x
EFFECT: Surrender policy; terminates
(j)A provision that the policy shall be entitled to
the contract of insurance
have the policy reinstated at any time within 3
Extended Insurance
years from the date of default of premium payment
EFFECT: Policy continues in force from
unless tha cash surrender value has been duly
date of default, for a period either
paid, or the extension period has expired, upon
stated or equal to the amount of the
production of evidence of insurablility satisfactory
cash surrender value, taken as a single
to the company and upon payment of all overdue
premium, will purchase; the insured is
premiums and any indebtedness to the company
given the right, upon default, after the
upon said policy, with interest rate not exceeding
payment of at least three full annual
that which would have been applicable to said
premiums to have the policy continued
premiums and indebtedness in athe policy years
in force from the date of default for a
prior to reinstatement x x x
time either stated or equal to the
amount as the net value of the policy
NON-LIFE taken as a single premium, will
(Refer to Sec.77) Seems to say that policy is in purchase Also called term insurance,
effect as soon as the thing is exposed to risk temporary insurance or paid-up
even if the premium has not been paid yet. extended insurance
Where contract covers a period of 1 year, there Depends on availability of CSV.
would normally be only one premium payment During extended period: If insured
for the period. dies, beneficiary can recover face
If parties agreed to pay in installments, and amount of policy. Insured can also
there is a failure to pay any installment when it reinstate the policy w/in this period.
falls due insurer may: Beyond extended period: If he survives
- cancel policy after due notice No benefits. He cannot even reinstate
- compel the payment of installments the policy by paying past premiums;
has to purchase new policy
LIFE Better option if insured not in good
Intended to be in force for a period longer than health or geriatric
a year; involves several periodical premium Paid-up Insurance
payments (annual, semi-annual, etc) Amount of Insurance that the CSV,
Contract not binding until first periodical applied as a single premium, can
premium payment. After first payment, insured purchase.
under no legal obligation to pay subsequent EFFECT: Policy continues in force from
premium. date of default for the whole period and
Insurance Code grants grace period within under the same conditions of the
which to pay subsequent premiums. If policy original contract w/o further payment
becomes a claim during the grace period but of premiums. However, in case of death
before overdue premium is paid, overdue may of insured, he may recover only the
be deducted from proceeds of policy paid-up value of the policy w/c is
Failure to pay w/in grace period = automatic much less than the original amount
lapse agreed upon. (In other words, na-
Exception: Insured has paid three full annual reduce yung original insurance contract
premiums. Entitled to the following Options to one with a lower value)
upon default: Better option if insured is still young
Cash Surrender Value and in good health because unlike
The amount the insured, in case of extended insurance, he may later
default, after the payment of at least 3 reinstate policy if he wishes.
full annual premiums, is entitled to Automatic Premium Loan
receive if he surrenders the policy and Upon default, insurer
releases his claims upon it. It is the lends/advances to the insured
portion of reserve on a life policy. without any need of application on his
Nature of CSV: Premium is uniform part, amount necessary to pay
throughout lifetime of policy, so during overdue premium, but not to exceed
the earlier years of the policy, the the CSV of the policy.
Only applies if requested in writing by the insured or owner, which countersignature shall
the insured either in the application or be taken as his agreement to the contents of such
at any time before the expiration of the rider, clause, warranty, or endorsement.
grace period. Group insurance and group annuity
EFFECT: Insurance continues in force policies, however, may be typewritten and need
for period covered by the payment. not be in printed form.
After period, if insured still does not
resume paying his premiums, policy
lapses, unless there remains CSV. Sec 51. A policy of insurance must specify:
If there is still CSV, auto premium loan (a) The parties between whom the contract is
continues until it is exhausted. made;
Advantageous to the insured because it (b) The amount to be insured except in the
helps to continue the contract and all cases of open or running policies;
its features in full force and effect. (c) The premium, or if the insurance is of a
Insured under no legal obligation to character where the exact premium is only
repay loan determinable upon the termination of the
Reinstatement (Sec j) contract, a statement of the basis and rates
EFFECT: Does not create a new upon which the final premium is to be
contract, merely REVIVES the old determined;
policy. Thus, insurer cannot require (d) The property or life insured;
higher premium than amount stipulated (e) The interest of the insured in property
in the contract. insured, if he is not he absolute owner thereof;
Required by Insurance Code for every (f) The risks insured against; and
individual and industrial life policy (g) The period during which the insurance is
Not required that 3 annual premiums to continue
have been paid
REQUISITES:
The Insurance Code does not require a
exercised w/in 3 years from
particular form for the validity of the
default
contract. However, the policy must contain
insured must present evidence of
the enumeration in Art. 51 (see above)
insurability satisfactory to the
The policy is different from the contract
company
itself.
pay all back premiums and all
Policy - written instrument embodying
his indebtedness to the insurance
the terms and stipulations of a contract of
company
insurance. Not essential to the validity of
CSV has not been duly paid nor
the contract as long as all the essential
the extension period expired
elements for the existence of contract are
Insurability does not mean that insured is
present. (Consent, object, consideration,
in good health. Other factors affect
competent parties)
insurability like nature of work, age, etc.
Other stipulations not required by law
Application for reinstatement must be filed
may be included as long as they are not
during the insureds lifetime.
prohibited or inconsistent with the law.
Missing provisions required does not void
Other Effect:
policy. Missing provisions will be read into
Forfeiture Absolute forfeiture of all
the policy and will substitute those w/c are
insured rights. Generally not favored. Due
in conflict w/ the law.
to liberal spirit in the conduct of life
Stipulations not in the exact terms of the
insurance, insurers instead, give the
statute, if more favorable to the insured,
insurer the benefit of the reserve value of
will be enforced.
the policy.
SIR (on oral contracts): In some
jurisdictions of the US, oral contract is
8.4. Form and contents of policy
valid, provided that all the terms are
agreed upon. In our Insurance Code,
Sec. 49 The written instrument in which a contract although written form not required for
of insurance is set forth is called a policy insurance. validity, some provisions say that a
PRINTED POLICY is best evidence of
contract. SC has not ruled categorically on
Sec. 50 The policy shall be in printed form which this matter.
may contain blank spaces; and any word, phrase, The following are required to appear in
clause, mark, sign, symbol, signature, number, or insurance policies:
word necessary to complete the contract of The policy, which must be in printed form
insurance shall be written on the blank spaces (except group insurance policies which
provided therein. may be typewritten), may contain blank
Any rider, clause, warranty, or spaces; any word, phrase, clause, mark,
endorsement purporting to be part of the contract sign, symbol, signature, number, or word
of insurance and which is pasted or attached to necessary to complete the contract of
said policy is not binding on the insured, unless the insurance shall be written on the blank
descriptive title or name of the rider, clause, spaces provided.
warranty, or endorsement is also mentioned and Any rider, clause, warranty, or
written on the black spaces provided in the policy. endorsement may only be deemed part
Unless applied for by the insured or owner, of the insurance policy if, after having
any rider, clause, warranty or endorsement issued been attached to the policy itself, its
after the original policy shall be countersigned by descriptive title or name is also
mentioned and written in the blank ii. Cover Notes or binding receipts
spaces in the policy.
Required clauses in the policy:
Sec 52. Cover notes may be issued to bind
The parties between whom the
insurance temporarily pending the issuance of the
contract is made;
policy. Within sixty days after issue of a cover note,
The amount to be insured except
a policy shall be issued in lieu thereof, including
in the cases of open or running
within its terms the identical insurance bound
policies;
under the cover note and the premium therefore.
The premium, or if the insurance
Cover notes may be extended or renewed
is of a character where the exact
beyond such sixty days with the written approval of
premium is only determinable upon
the Commissioner if he determines that such
the termination of the contract, a
extension is not contrary to and is not for the
statement of the basis and rates
purpose of violating any provisions of this Code.
upon which the final premium is to
The Commissioner may promulgate rules and
be determined;
regulations governing such violation and may be
The property or life insured;
such rules and regulations dispense with the
The interest of the insured in
requirement of written approval by him in the case
property insured, if he is not the
of extension in compliance with such rules and
absolute owner thereof;
regulations (n)
The risks insured against; and
The period during which the
insurance is to continue. Cover notes/Binders a written
Express warranties must also be contained memorandum of the most important items of a
in the policy, or in another instrument preliminary ocntract intended to give
signed by the insured and referred to in temporary protection (to insured) pending the
the policy as making a part of it. investigation of the risk by the insurer, or until
the issue of the formal policy, provided it is
i. Riders, clauses, endorsements later determined that the applicant was
If parties wish to include special insurable at the time it was given.
stipulations, may attach riders, It is a binding contract and has full force
endorsements, warranties. and effect during its duration.
Rider a printed or typed stipulation Insurer not obliged to give cover notes but
contained on a slip of paper attached to the many do so in order to gain goodwill.
policy and forming an integral part of the Usually contain only the bare essentials of
policy. an insurance contract: i.e. the name of the
To be binding: parties, risk insured against, amount of
-Must be attached/pasted to the policy insurance, premium, property/life insured.
- Descriptive title or name of the rider, Issuance of cover notes is ordinarily a
clause, warranty, or endorsement is conclusive evidence of making a contract
mentioned and written on the blank spaces The issuance and effectivity of cover notes
provided in the policy. are governed by the following rules:
Countersignature by insured 1) May be issued temporarily, pending
General Rule: Not necessary if rider issuance of policy
attached to the policy when issued. 2) Deemed a contract of insurance
Exception: Necessary when added AFTER within meaning of 1[1]
policy is issued. REASON: To prevent an insurer 3) No cover note may be issued or renewed
from adding or inserting provisions w/o the unless in the Codes previously prescribed
consent of the insured. form
In case of conflict between rider and 4) Cover notes are valid and binding for
printed stipulation, the rider prevails as a period not over 60 days from date of
being a more deliberate expression of the issuance, whether or not premium
agreement of the contracting parties. therefor has been paid, but it may only be
Warranty inserted or attached to a cancelled by either party upon at least 7
policy to eliminate specific potential days notice to other party
increases of hazard during the policy term 5) If it is not cancelled, policy shall,
owing to: 1) actions of the insured or 2) within 60 days after issuance of cover
condition of the property. note, be issued in lieu thereof. Policy will
Clause an agreement between the include within its terms the identical
insurer and the insured on certain matters insurance bond under the cover note and
relating to the liability of the insurer in case the premium therefor
of loss. 6) Cover note may be extended or
Endorsement any provision added to an renewed beyond the 60-day period
insurance contract altering its scope or with the written approval of the
application. Ex. Endorsements extending Insurance Commission, provided that
the perils covered. Most times, they are the written approval may be dispensed with
merely typewritten additions to the upon the certificate of the Pres, VP, or
contract, changing its amount, rate, or general manager of the company that the
term. risks involved, the values of such risks
and/or premiums therefor have not as yet
been determined or established and that
such extension or renewal is not contrary
to and is not for the purpose of violating
any provisions of the Insurance Code, or of
any of the rulings, instructions, circulars,
orders or decisions of the Insurance the things value at each location and for
Commissioner which cancellations the inured would be
7) Companies may impose on cover notes a charged the expensive short rate;
deposit premium equivalent to at least 3) Saves trouble of watching the
25% of the estimated premium of the insurance and danger of being
intended insurance coverage but never less underinsured in spite of care, through
than 500 pesos. oversight or mistake;
4) Rate is adjusted to 100% insurance,
iii. Open and Valued Policies (non-life) whereas valued policies requiring insurance
only up to, say 80% of value, give either a
small, if any, reduction for amounts of
Sec 59. A policy is either open, valued or running.
insurance above this figure.
Sec 60. An open policy is one in which the value of
the thing insured is not agreed upon, but is left to
be ascertained in case of loss.
9. Parties
Sec 61. A valued policy is one which expresses on Essential Requisites for a person to be a party
its face an agreement that the thing insured shall in an insurance contract:
be valued at a specified sum. Must be COMPETENT to enter (has
capacity)
Sec. 62. A running policy is one which Must possess INSURABLE INTEREST
13
contemplates successive insurances, and which Must NOT be a PUBLIC ENEMY
provides that the object of the policy may be from
time to time defined, especially as to the subjects 9.1. Insurer
of insurance, by additional statements or
indorsements. Sec. 6. Every person, partnership, association, or
corporation duly authorized to transact insurance
8.5. Kinds of insurance policies: business as elsewhere provided in this Code, may
be an insurer. (a)
Open or Unvalued Policy
- One in which a certain agree sum is written on
the face of the policy not as the value of the Sec 184 For purposes of this Code, the term
property insured, but as the maximum limit of the insurer or insurance company shall include all
insurers liability (i.e. face value) in case of individuals, partnerships, associations, or
destruction by the peril insured against. corporations, including government-owned or
- Insurer only pays the actual cash value of the controlled corporations or entities, engaged as
property as determined at the time of loss. principals in the insurance business, excepting
mutual benefit associations. Unless the context
Valued Policy otherwise requires, the term shall also include
- One in which the parties expressly agree on the professional reinsurers, defined in Section 280.
value of the subject matter of the insurance. Domestic company shall include companies
-Two values: formed, organized or existing under the laws of the
1) Face value of the policy w/c is the max amt Philippines. Foreign company when used without
insurer pays in case of loss limitation shall include companies formed,
2) Value of the thing insured organized, or existing under any laws other than
- In the absence of fraud or mistake, the agreed those in the Philippines.
value of the thing insured will be paid in case of
total loss of the property, unless the insurance is
for a lower amount Sec 185 Corporations formed or organized to save
- In case of loss, parties may claim that value of any person or persons or other corporations
insured property is more or less than agreed upon. harmless from loss, damage, or liability arising
- The liability of the insurer in a life policy is from any unknown or future or contingent event, or
measured by the face value of the policy (because to indemnify or to compensate any person or
the value of a human life cannot be measured in persons or other corporations for any such loss,
actual monetary terms). damage, or liability, or to guarantee the
performance of or compliance with contractual
Running Policy obligations or the payment of debts or others shall
- Intended to provide indemnity for property w/c be known as insurance corporations
cannot well be covered by a valued policy because The provisions of the Corporation Law (BP
of its frequent change of location and quantity, or Blg 68) shall apply to all insurance corporations
for property of such a nature as not to admit of a now or hereafter engaged in business in the
gross valuation. Also denotes insurance over a Philippines insofar as they do not conflict with the
class of property rather than any particular thing. provisions of this Chapter.
Ex. Insurance over constantly changing stock of
goods Insurer party who assumes or accepts the
- In reality, these are open policies. risk of loss and undertakes for a consideration
- Contemplates successive insurances. to indemnify the insured or to pay him a
- Advantages of a running policy certain sum on the happening of a specified
1) Neither underinsured nor contingency or event; This can be an
overinsured at any time, premium being
based on monthly values reported; 13
2) Avoids cancellations otherwise Who is a public enemy and the prohibition was
necessary to keep insurance adjusted to asked in 2002.
The right to receive the proceeds of life Insular Life Assurance Co v Ebrado
insurance policies shall follow the order of
intestate succession in the Civil Code in FACTS Ebrado took out a life insurance policy and
default of any specific designation in the named his common-law partner, Carponia, his
policy: beneficiary. Upon his death, his lawful wife also
filed a claim w/ Insular Life as the widow. RTC
a. Legitimate children; disqualified Carponia from claiming benefits
b. Father and mother, if living; under the policy
ISSUE: WON Carponia disqualified from claiming b. A change of interest in the thing
insurance proceeds because of her illicit relation insured after an injury occurs resulting in
with the insured. a loss (21);
HELD: YES. (SC applied CC) Since the Insurance c. A change of interest in one or more
Code does not contain any specific provision on of several things, separately insured by
rules respecting who may be named beneficiary, one policy (22);
the CC will apply. Art 2012 states that any d. A change of interest by will or
person forbidden from receiving donations under succession on the death of the insured
Art 739 cannot be named beneficiary of a life (23);
insurance policy Art. 739 declares void e. A transfer of interest by one of several
donations made between persons who are guilty persons, joint owners or owners in
of adultery or concubinage at the time of the common, jointly insured, to the others
donation. Hence, Carponia is disqualified from (24);
being named a beneficiary. f. When a policy will inure to the
benefit of the one who may become
Vda. de Consuegra v GSIS the new owner of the interest insured
during the continuance of the risk (57);
FACTS: Jose Consuegra contracted two and
marriages, to Diaz and Berdin. After his death, g. When there is an express prohibition
the proceeds of his life insurance w/ the GSIS against alienation in the policy, alienation
went to Berdin. However, he was also entitled to will cause the contract to be avoided, not
retirement benefits to which he did not designate suspended (Article 1306, 24, Civil Code)
any beneficiary.
ISSUE: WON Berdin should be considered the Agent or trustee -----
sole beneficiary of the retirement benefits being If an agent or trustee takes out an insurance policy
the beneficiary of the life insurance policy for the benefit of his principal or beneficiary, he
HELD: NO. Life Insurance and retirement shall state that the latter is the real party in
insurance are separate and distinct funds. Life interest by designating himself as an agent or
Insurance is paid to whoever is named the trustee in the insurance policy itself. He can also
beneficiary and may not necessarily be the heir signify his designation by some other general
of the insured. Retirement benefits on the other words in the policy.
hand, are primarily intended for the benefit of the
ee to provide for his old age, incapacity, etc. If Valenzuela vs CA (1990)
the ee reaches the age retirement, he gets the
benefits even to the exclusion of the beneficiary The general rule that the principal reserves the
named in the policy. The beneficiary of the right to terminate the agent-principal relationship
retirement insurance can only claim the proceeds at its will admits of an exception: when the agency
of the retirement insurance if the ee dies before has been given not only for the interests of the
retirement. IF there is no beneficiary designated principal but of 3rd persons or for the mutual
in the policy, benefits will accrue to the estate, interest of agent and principal. Also, an insurance
hence Diaz is also entitled to the retirement agent cant be held liable for all uncollected
benefits. premiums under his account because the remedy
for non-payment of premiums is the termination of
Del Val v Del Val any insurance policy.
FACTS: Plaintiff and Defendant are siblings. Prior Partner or co-owner -----
to their fathers death, he took out a life Insurable interest in the property of a partnership
insurance policy and made the Def the sole exists in both the partnership and the partners and
beneficiary. a partner has an insurable interest in the firm
ISSUE: WON the insurance proceeds belong property which will support the policy taken out
exclusively to the DEF who was the sole thereon for his own benefit. But a partner who
beneficiary takes out the policy in own name limits the
HELD: YES The proceeds of an insurance policy coverage to his individual share unless the terms
belong exclusively to the beneficiary and not to clearly show the policy was meant to cover all the
the estate of the person whose life was insured, shares.
and that such proceeds are the separate and
individual property of the beneficiary. Mortgagor/ mortgagee -----
General Rule: When a mortgagor takes out an
9.4. Other parties to an insurance contract insurance policy on his own name but stipulates
that the proceeds shall be payable to the
Assignee of the thing insured ----- mortgagee, or assigns the said policy to the
General Rule: If the thing insured is assigned to mortgagee, the insurance shall be deemed to be
another, the policy is not deemed transferred with upon the insurable interest of the mortgagor.
the thing. The policy is instead deemed suspended Consequently, three rules apply: (1) any act of the
until the assignee also becomes the owner of the mortgagor prior to the loss, which would otherwise
policy. The assignor, on the other hand, cannot avoid the insurance, shall have the same effect
recover on the policy after the transfer since he has even if the property insured is in the hands of the
already lost insurable interest over the thing. mortgagee (2) any act which would have to be
Exceptions: The general rule on suspension of performed by the mortgagor may be performed by
policy is not applicable in the following cases: the mortgagee, with the same effect as if it were
a. In life, health and accident insurance performed by the former (3) if an insurer assents
(20) to the transfer of an insurance from a mortgagor to
a mortgagee, and, at the time of his assent,
imposes further obligation on the assignee, making
a new contract with him, the act of the mortgagor interest may appear , may be
cannot affect the rights of said assignee. attached;
4. A standard mortgage clause
SUPPLEMENTARY RULES: containing a collateral independent
On the insurable interest of mortgagor and contract between the two parties
mortgagee: may be attached; or
5. The policy, though by its terms
a. Separate insurable interests each has payable to the mortgagor, may
his own insurable interest in the mortgaged have been procured by a mortgagor
property which is kept separate from each under a contract duty to insure for
other. The benefits of such belongs to the the mortgagees benefit, where the
insured alone and if the two insure the latter acquires an equitable line
same property or take out a policy covering upon the proceeds.
their respective interests, this is not double
insurance.
Chapter III
2. Insurable Interest in life/health
INSURABLE INTEREST14
Sec 10 Every person has an insurable interest in
the life and health:
1. Definition and Purpose
Sec 21 A change on interest in a thing insured, a) Of himself, of his spouse and of his
after the occurrence of an injury which results in a children;
loss does not affect the right of the insured to b) On any person on whom he
indemnity for the loss. depends wholly or in part for education or
support, or in whom he has a pecuniary
interest;
Sec 25 Every stipulation in a policy of insurances c) Of any person under a legal
for the payment of loss whether the person insured obligation to him for the payment of money,
has or has not any interest n the property insured, or respecting property or services of which
or that the policy shall be received as proof of such death or illness might delay or prevent the
interest, and every policy executed by way of performance, and
gaining or wagering, is void. d) Of any person upon whose life any
estate or interest vested in him depends.
Insurable interest interest which the law Person may take out insurance on own life or
requires policy owner to have in the person or thing someone elses life provided insurable interest
insured. exists.
- A person is said to have an insurable interest Cestui que vie must consent.
in the subject matter insured where he has a Sec. 10 provides the test of presence of
relation or connection with, or concern in it that he insurable interest. Said section does not require
will derive pecuniary benefit or advantage from its the consent of the person being insured for the
preservation and will suffer pecuniary loss or policy to be effective. The policy is valid as long
damage from its destruction, termination, or injury as the presence of insurable interest can be
by the happening of the event insured against. adequately shown.
Essential element of an insurance contract.
Not legally possible to waive requirement 2.1. In ones own life/health
Rationale for requiring insurable interest:
As deterrence to the insured public policy
holds wager policies invalid for being Sec 11 The insured shall have the right to change
against public interest and demoralizing in the beneficiary he designated in the policy, unless
that: he has expressly waived this right in said policy.
The insured has an interest in the
destruction rather than the
preservation of a subject matter. Sec 12 The interest of a beneficiary in a life
It tempts or induces the insured, with insurance policy shall be forfeited when the
nothing to lose and everything to gain, beneficiary is the principal, accomplice, or
to bring about the event upon the accessory in willfully bringing about the death of
happening of which the policy becomes the insured, in which event, the nearest relative of
payable. the insured shall receive the proceeds of said
As a measure of limit of recovery in insurance if not otherwise disqualified.
contracts to pay indemnity, the insurable
interest will be the measure of the upper Insured is the cestui que vie
limit of his provable loss under the As a rule, each has unlimited insurable interest
contract. The policy should not provide the in his own life, whether the insurance is for the
insured with the means of making a net benefit of himself or another
profit from the happening of the event In insuring ones own life for anothers benefit,
insured against. insurable interest is only needed as evidence of
Difference between life and non-life insurance good faith of the parties; it is contrary to
(pertaining to interest): human experience that a person will insure his
LIFE - basically a contract of INVESTMENT; own life for the benefit of another for the
can only recover face amount of the policy purpose of speculation, to take his own life to
NON-LIFE based on principle of INDEMNITY secure payment to another, or designate as a
for exact pecuniary value; can only recover on beneficiary, a person interested in the
the policy the value of the actual loss destruction, not the continuance of the
insureds life.
The nearest relative of the insured shall receive
the proceeds of said insurance if not otherwise
disqualified
GENERAL RULE: Beneficiary is the choice of
14 the insured regardless of WoN beneficiary has
This topic came out in 2002, 2001, 2000, 1997,
an insurable interest in insureds life
1996, 1994, 1984, 1983, 1982, 1980, 1979 and Assumption: Insured would not designate as
1977. Note the difference between insurable interest his beneficiary a person whom he would not
in property versus insurable interest in life insurance; trust with his own life
insurable interest in bank deposits; and existing EXCEPTIONS
interest in property insurance. Waiver
Sec 19 An interest in property insured must exist Sec 16 A mere contingent or expectant interest in
when the insurance takes effect, and when the loss anything, not founded on an actual right to the
occurs, but need not exist in the meantime and thing, nor upon any valid contract for it, is not
interest in the life or health of a person insured insurable.
must exist when the insurance takes effect, but
need not exist thereafter or when the loss occurs.
Insurable interest deemed to exist as long as
such interest, relation or liability is of such
General Rule: insurable interest must exist nature that a contemplated part might directly
only at inception damnifty the insured
Policy not indemnifying loss but rather Even without legal or equitable title as long as
giving financial security to insured or to it can be shown that the insured will be
beneficiaries benefited by propertys continued existence or
Law gives insured the right to convert will suffer pecuniary loss by its destruction.
policy into cash by selling it to a 3rd person FORMS OR INSURABLE INTEREST
who doesnt have any insurable interest in INTEREST in the
his life. property itself, whether such property be
Policy is an investment real or personal
Exceptions: (cases where interest of the ex. Ownership of or a lien on property
insured is capable of exact pecuniary benefit) any RELATION to such property
Creditor who takes insurance out on life of ex. interest of a commission agent on
debtor to secure debt goods he is selling
Once debt has been paid insurable LIABILITY in
interest disappears respect thereof
No liability to pay proceeds because ex. interest of carrier on cargo which he
there is not longer anything to ought to carry safely to destination
indemnify NATURE OF INSURABLE INTEREST
If debt already been paid should be An existing interest
denied recovery on the policy may arise from legal title (ex.
Debtor should have the right to take mortgagor of the property mortgaged;
over the policy from creditor after the lessor of the property leased; assignee
termination of relationship prevent the of property for the benefit of creditors,
premium paid from going to waste. etc.); clearly definably based on some
Company takes out insurance on life of legal title
employee may also be from equitable title (ex.
Employee leaves company Purchaser of property before delivery;
Policy is to indemnify employee for builders in the building under
losses upon death of employee not construction or upon completion of
resigning building)
Company cannot recover on life of An inchoate interest founded on an
employee who has already left/resigned existing interest
there is nothing to indemnify
MORTGAGE CREDITOR
has not the means of ascertaining, must be 4.3. Distinguished from Concealment
communicated. The EXCEPTION to this
rule is that both parties are charged with In concealment, the insured maintains
the knowledge of the general causes which silence when he ought to speak, while in
are open to his inquiry, equally with that of misrepresentation, the insured makes a
the other, and which may affect the statement of fact which is not true active
political or material perils contemplated; form of concealment.
and all general usages of trade. The
Insurance Code exempts a party from the
Sec. 37. A representation may be made at the
duty to communicate with regard to
time of, or before, issuance of the policy (a)
matters which are deemed of public
knowledge and which a prudent man
engaged in the insurance business ought to Sec. 38. The language of a representation is to
know. be interpreted by the same rules as the language
GENERALLY, the right to information of of contracts in general.
material facts may be waived, either by the
terms of the insurance or by neglect to
make inquiry as to such facts, PROVIDED 4.4. Construction of Representations:
they are distinctly implied in other facts of o Construed liberally in favor of the
which information is communicated. insured and are required to be only
Concealment must take place at the time substantially true.
the contract is entered into in order that
the policy may be avoided. Information Sec. 39. A representation as to the future is to be
obtained after the perfection of the contract deemed a promise, unless it appears that I was
is no longer necessary to be disclosed by merely a statement of belief or expectation.
the insured, even if the policy has not been
issued (**Exception is when the contract is
4.5. Kinds of Representation:
to be effective only upon the issuance of
1. Oral or Written (Sec. 36)
the policy the insured is still duty bound
2. Made at the time of issuing the policy or
to disclose to the insurer any material fact
before (Sec. 37)
which comes to his knowledge.)
3.Affirmative or promissory (Sec. 39 & 42)
The duty of disclosure ends with the
completion and effectivity of the contract.
Affirmative Representation:
Is any allegation as to the existence or
Sunlife Assurance vs CA,
non-existence of a fact when the contract
245 SCRA 268 (1995)
begins.
Insured need not die of the disease he had failed to
Promissory Representation:
disclose to the insurer. It is sufficient that his
Is any promise to be fulfilled after the
nondisclosure misled the insurer in forming his
contract has come into existence or any
estimates of the risks of the proposed policy or in
statement concerning what is to happen
making inquiries.
during the existence of the insurance. A
promise representation is substantially a
4. M I SRE PR E SE NT AT IO N condition or warranty.
4.1. Definition
4.6. When Representation Deemed a Mere
Sec. 36. A representation may be oral or written Expression of Opinion:
General Rule: a representation of the
expectation, belief, opinion, or judgment of the
4.2. Representation vs. Misrepresentation
insured, although false, will not avoid the policy,
even if such was material to the risk.
Representation:
Exception: Such representation will avoid
factual statements made by the insured at
the policy if there is a concurrence of materiality
the time of, or prior to, the issuance of the
and fraudulence or intent to deceive. However, if
policy to give information to the insurer
the representation is one of fact, the insurer need
and otherwise induce him to enter into the
only prove the materiality of the representation,
insurance contract. They may also be made
because in such cases the intent to deceive is
by the insurer but cases nearly always refer
presumed.
to representations made by the insured.
ILLUSTRATION: The statement I am an
intelligent student will produce the following
Misrepresentation:
effects:
a statement (a) as a fact of something
which is untrue; (b) which the insured
a. Even if intelligence is material, if there
stated with knowledge that it is untrue and
was no intent to deceive and the
with an intent to deceive, or which he
insured was merely relying on his own
states positively as true without knowing it
assessment of his abilities, the policy
to be true and which has a tendency to
will not be avoided.
mislead; (c) where such fact in either case
b. If intelligence is material and it was
is material to the risk
proven that there was intent on the
part of the insured to mislead the
insurer as to his intelligence, the policy
will be avoided.
a tumor was taken out). Insured died of liver insurer to rescind the contract of insurance.
cancer. The insurer denied the claim of the Insurer is relieved from liability.
beneficiary claiming misrepresentation since the
operation which the insured undertook was for Pacific Banking v CA
peptic ulcer and not removal of a tumor.
Ratio: Concealment exist where the insured had Facts: The insured, Paramount is in the business
knowledge of a fact material to the risk, and of shirt manufacturing, it took out a fire
honesty, good faith and fair dealing requires that insurance policy with Oriental Insurance for 61K.
he should communicate it to the insurer, but he Because of its indebtedness to Pacific Banking
intentionally withhold the same. The insured Corp., the policy was endorsed to Pacific as
informed the medical examiner that the tumor he mortgagee/trustor. The property insured was
was operated on was associated with ulcer of the gutted by fire. Pacific made a claim on the
stomach. In the absence of evidence that the insurance policy which was denied by Oriental
insured had sufficient medical knowledge as to because it appeared that Paramount failed to
enable him to distinguish between peptic ulcer disclose co-insurance with 3 other insurance
and tumor his statement was an expression companies (only declared 3 others) in violation of
made in good faith of his belief as to the nature Policy Condition # 3.
of his ailment and operation. If the operation Ratio: By reason of the unrevealed co-
and ailment of the insured had such an important insurances, the insured had been guilty of a
bearing on the assumption of risk by the insurer, false declaration; a clear misrepresentation and a
it should have made further inquires on the vital one because where the insured had been
matter or required copies of the hospital records asked to reveal but did not, that was deception.
before approving the application. As provided by Had the insurer known that there were many co-
Section 32 where the right to material insurers, it could have hesitated or plainly
information may be waived by neglect to make desisted from entering into such contract.
inquires as to such facts where they are distinctly Hence, the insured was guilty of clear fraud. The
implied in other facts of which information is insurance policy against fire expressly required
communicated that notice should be given by the insured of
other insurance upon the same property, the
Canilang vs. CA, 223 SCRA 443 (1993) total absence of such notices nullifies the policy.
insureds previous hospital confinements. The and several other insurance companies for which
death certificate only stated that hypertension as he also had a policy for the same stocks-in-trade.
possible cause of death. Concealment exist The plaintiff insurer refused payment claiming
where the assured had knowledge of a fact that the insured violated the policy in several
material to the risk, and honesty, good faith and instances for our purposes the violation was the
fair dealing requires that he should communicate failure of the insured to disclose co-insurance.
it to the assurer, but he intentionally withholds However, during trial, the trial court found that
the same. Fraudulent intent on the part of the although the insured failed to disclose co-
insured must be established to entitle the insurer insurance, the loss adjuster of the insurance
to rescind the contract. Misrepresentation as a company had previous knowledge of the co-
defense of the insurer to avoid liability is an insurance prior to the claim.
affirmative defense and the duty to establish Ratio: The insurer is estopped from claiming
such defense rests upon the insurer. exemption from liability due to the violation of
the policy on non-disclosure. It cannot be said
Edillon v Manila Bankers Life that petitioner was deceived by respondent by
the latters non-disclosure of the other insurance
Facts: The insured applied for a 90-day contracts when petitioner actually had prior
insurance coverage against accident and injuries. knowledge as petitioners loss adjuster had
She clearly indicated in the application form that known all along of the other existing insurance
her date of birth was July 11, 1904 (which made contracts. The loss adjuster being an employee
her almost 65 at the time of application). The of petitioner is deemed a representative of the
insurer accepted her premium payment and latter whose awareness of the other insurance
issued her a certificate of insurance. Under the contracts binds the petitioner and thus there was
insurance policy, there contained a provision no violation of the other insurance clause by
which excludes the company from any liability to the respondent and petitioner is liable to pay its
pay claims when the insured is under 16 or over share of the loss.
60. Insured died of a vehicular accident during
the effectivity of the insurance coverage. Life insurance policy wording that provides
Ratio: The insurer is deemed estopped from a time limit on the insurers right to dispute
claiming that the insured is disqualified. She did a policys validity based on material
not conceal nor misrepresent her age and the misstatements in the application.
insurance corporation has been given sufficient Incontestability means that after the
information to know that the insured is over 60 requisites are shown to exist, the insurer
years of age, yet they continued to accept the shall be estopped from contesting the
premium payment and issued her the policy. policy or setting up any defense, except as
is allowed, on the ground of public policy
New Life Enterprise v Court of Appeals
Sec. 48. Whenever a right to rescind a contract of
Facts: The insured contracted 3 insurance insurance is given to the insurer by any provision
policies from 3 different insurance companies for of this chapter, such right must be exercised
the stocks-in-trade of New Life Enterprises. It
previous to the commencement of an action on
was undisputed that the plaintiff failed to indicate
the contract.
any co-insurance in any of the three policies.
.After a policy of life insurance made payable on
When the building occupied by the insured the death of the insured shall have been in force
enterprise was gutted and the stocks-in-trade during the lifetime of the insured for a period of
insured against were burned, the plaintiff filed two years from the date of its issue or of its last
claims with the 3 insurers which were all denied.
reinstatement, the insurer cannot prove that the
The reason was that the insured violated the
policy is void ab initio or is rescindable by reason
terms of policy in relation to co-insurance.
of the fraudulent concealment or
Ratio: The terms of the contract are clear and
misrepresentation of the insured or his agent.
unambiguous. The insured is specifically required
to disclose to the insurer any other insurance and
its particulars which he may have effected on the 5. RESCISSION
same subject. The excuse of the plaintiff that the
agent of the insurance company was aware of the 5.1. Grounds
other insurers or that he failed to read the terms 1. Concealment
of the policies cannot be accepted when the 2. False representation misrepresentation
words and language of the documents are clear 3. Breach of Warranty
and plain or readily understandable by an
ordinary reader. There is absolute no room for 5.2. When Insurer Must Exercise Right to
interpretation or construction and the courts are Rescind:
not allowed to make contracts for the parties.
The parties must abide by the terms of the Non-Life Policy
contract because such terms constitute the Must be exercised prior to the
measure of the insurers liability and compliance commencement of an action on the
therewith is a condition precedent to the contract. The insurer is no longer entitled
insureds right to recovery from the insurer. to rescind a contract of insurance after the
insured has filed an action to collect the
American Home v CA amount of the insurance.
**However, it has been held that where
Facts: The insured took out a fire insurance any of the material representations is false,
policy to cover the stocks-in-trade of his business the insurers tender of the premiums and
from the plaintiff insurer. When a fire gutted the notice that the policy is cancelled before
business, he filed a claim against plaintiff insurer
Always written on the May be written in a 6.4. When Breach of Warranty does not avoid
face of the policy, totally disconnected policy:
actually or by reference paper or may be oral 1. When loss occurs before time for
performance
Must be strictly Only substantial truth is 2. When performance becomes unlawful
complied with required. 3. When performance becomes impossible
(legal & physical impossibility)
Falsity or non- Falsity of a 4. When insurer waives the warranty,
fulfillment of a warranty representation renders impliedly or expressly.
operates as a breach of the policy void on the
contract ground of fraud.
6.5. Materiality and Fraud in Warranty
Presumed material Insurer must show the
materiality of a Sec. 74. The violation of a material warranty, or
representation in order other material provision of a policy, on the part of
to defeat an action on either party thereto, entitles the other to rescind.
the policy.
If the breach of the warranty was WITH necessary or ordinarily used in the insureds
FRAUD policy is void ab initio and the business.
insured is not entitled to the return of the 3. Increase in risks brought about by the
premium paid undertaking of necessary repairs in the
premises
6.6. Warranties in Fire Insurance 4. Increase in risks due to negligent acts
temporarily endangering the property, or
temporary acts or conditions which have
Sec. 167. As used in this Code, the term fire
ceased prior to the occurrence of the loss.
insurance shall include insurance against loss by
5. Alteration made by accident or without the
fire, lightning, windstorm, tornado or earthquake
and other allied risks, when such risks are covered knowledge of the insured.
by extension to fire insurance policies or under Qualifier: However, the acts of the insureds
separate policies. (a) tenants which cause alterations are deemed
presumptively known to the insured.
Exception to the exception: Under Section
A fire insurance is a contract of indemnity 75, the breach of an immaterial provision will not
by which the insurer, for consideration, avoid the policy, but the insurer is given the right
agrees to indemnify the insured against to insert terms which, if violated, would avoid it.
loss of, or damage to, property by fire. The increase in risk brought by an alteration is
therefore irrelevant if there is already a provision in
Sec. 168. An alteration in the use or condition of the policy which stipulates that ANY alteration, of
a thing insured from that to which it is limited by whatever nature and effect, shall avoid the policy.
the policy made without the consent of the For sec. 168 to operate, entitling the
insurer, by means within the control of the insurer the right to rescind, there must
insured, and increasing the risk, entitles an be an actual increase of risk and while
insurer to rescind a contract of fire insurance. it is not necessary that the increased
risk should have cause or contributed
to the loss, it is necessary that the
Sec. 169. An alteration in the use or condition of increase be of a substantial character.
a thing insured from that to which it is limited by
the policy, which does not increase the risk, does Sec. 170. A contract of fire insurance is not
not affect a contract of fire insurance. affected by any act of the insured subsequent to
the execution of the policy, which does not violate
Requisites Alteration to Entitle Insurer to its provisions, even though it increases the risk
Rescind: and is the cause of a loss.
1. The use or condition of the thing is
specifically limited or stipulated in the If the policy does not contain any
policy. prohibition limiting the use or condition of
2. Such use or condition as limited by the the thing insured, an alteration in said use
policy is altered. or condition does not constitute a violation
3. The alteration is made without the of the policy. The contract is not affected
consent of the insurer by such alteration even though it increases
4. The alteration is made by means within the risk and is the cause of the loss.
the control of the insured
5. The alteration increases the risk.
Sec. 171. If there is no valuation in the policy,
Increase of Risk or Hazard in General the measure of indemnity in an insurance against
Increase of hazard takes place whenever fire is the expense it would be to the insured at
the insured property is put to some new the time of the commencement of the fire to
use, and the new use increases the chance replace the thing lost of injured in the condition in
of loss. which it was at the time of the injury; but if there
is a valuation in a policy of fire insurance, the
Premise: Every insurance policy is made in effect shall be the same as in a policy of marine
reference to the conditions surrounding the subject insurance.
matter of the risk and the premium is fixed with
reference thereto. There is thus an implied promise
or undertaking on the part of the insured that he Sec. 172. Whenever the insured desires to have a
will not change the premises or the character of the valuation named in his policy, insuring any
building or structure against fire, he may require
business carried there, or to be carried on there, so
such building or structure to be examined by an
as to increase the risk of loss by fire.
independent appraiser and the value of the
insureds interest therein may then be fixed as
General Rule: Insurer is not liable if there was
an increase in the risk or hazard. There is increase between the insurer and the insured. The cost of
in hazard when the new use increases the chance such examination shall be paid for by the insured.
of loss. The increase of the risk of loss must in all A clause shall be inserted in such policy stating
substantially that the value of the insureds
cases be of a substantial character.
interest in such building or structure has been
Exceptions: (Alterations which will not warrant
thus fixed. In the absence of any change
the avoidance of the policy):
1. The use of the property is changed but it did increasing the risk without the consent of the
not in any way increased the risk of loss insurer or of fraud on the part of the insured, then
2. The use of materials prohibited from being in case of a total loss under such policy, the whole
used as per the policy if such materials are amount so insured upon the insureds interest in
such building or structure, as stated in the policy
enforcement of the insurance policy, the insured applied for a loan of P5,000 in line with the loan
kept 3 boxes of fire crackers. Sometime later a clause but defendants refused citing certain
fire broke out which partially destroyed the regulations issed by the Insurance Commissioner
building but it appeared that the fire crackers on May 1946.
were not the cause of the fire as they were found Held: Defendants refusal to give the loan
in an area not burned. Upon claim insurer denied applied for by the plaintiff violated the loan
payment. clause embodied in each of the life insurance
Ratio: The terms of the contract constitute the policies. This violation of the loan clause in the
measure of the insurer's liability. If the contract policy entitled plaintiff to rescind all policies
has been terminated by a violation of its terms under Section 69 of the Insurance Act, which
on the part of the insured, there can be no provides: the violation of a material warranty, or
recovery. Compliance with the terms of the other material provision of a policy, on the part of
contract is a condition precedent to the right of either party thereto, entitles the other to
recovery. A violation of the terms of a contract of rescind. Our Insurance Law does not contain an
insurance, by either party, will constitute the express provision as to what the court should do
basis for a termination of the contractual in cases of rescission of an insurance policy under
relations, at the election of the other (in this case Section 69, the provision that should apply is that
the insurer). The right to terminate the embodied in Art. 1295 of the old civil code, as
contractual relations exist even though the postulated in Art. 16 of the same Code, which
violation was not the direct cause of the loss, provides that on matters which are not governed
since the deposit of the hazardous goods in the by special laws the provision of said Code shall
building insured was a violation of the terms of supplement its deficiency. The CA was correct in
the contract. The insurer is relieved from his ordering defendant to refund to plaintiff all
liability since the deposit of the hazardous premiums paid by him up to the filing of the
materials created a new risk not included in the action amounting to P34,644.60.
terms of the contract. The insurer had neither
been paid, nor had he entered into a contract to GROUNDS AND EXERCISE OF RIGHT OF
cover the increased risk. RESCISSION
EXCEPTIONS/& EXCLUSION
Sec. 48. Whenever a right to rescind a contract of
insurance is given to the insurer by any provision
Intends to limit the liability of the insurer of this chapter, such right must be exercised
under certain circumstances. previous to the commencement of an action on
the contract.
Musngi v West Coast Insurance Co. Inc.
After a policy of life insurance made payable on
the death of the insured shall have been in force
Facts: The insured took out two life insurance during the lifetime of the insured for a period of
policies with defendant insurer designating as his two years from the date of its issue or of its last
beneficiaries the plaintiffs in the case. In his reinstatement, the insurer cannot prove that the
application the insured untruthfully answered policy is void ab initio or is rescindable by reason
questions regarding his health particularly about
of the fraudulent concealment or
having consulted any physician regarding an
misrepresentation of the insured or his agent.
illness or ailment. It appeared that prior to his
application for insurance, the insured had been
treated for a number of ailments including peptic Sec. 63. A condition, stipulation, or agreement, in
ulcer, TB etc. The insured died, and upon his any policy of insurance, limiting the time for
death his beneficiaries filed a claim with commencing an action thereunder to a period of
defendant insurance company who denied the less than one year from the time when the cause
claim. of action accrues is void.
Ratio: The insured is guilty of concealment and
thus relieves the insurer from paying the claim.
The insured knew that he had suffered from a When Cause of Action Accrues
number of ailment before subscribing the The right of the insured to the payment of
application, yet he concealed them and omitted his loss accrues from the happening of the
the hospital where he was confined as well as the loss.
name of his physician who treated him. The The cause of action in an insurance
concealment and false statement constituted contract does not accure UNTIL THE
fraud, since this caused the defendant insurer to INSUREDS CLAIM IS FINALLY REJECTED
accept the risk when it would have otherwise BY THE INSURER, because before such final
refused. Such concealment of the insured rejection, there is no real necessity for
rendered the policy null and void (as held also in binging suit.
Argente v West Coast). The period is to be computed not from the
time the loss actually occurs but from the
Filipinas Cia de Seguros v Nava time when the insured has a right to bring
an action against the insurer.
Facts: On February 1939, plaintiff Nava and **Cause of Action requires as essential
defendant Filipinas Life Assurance entered into 17 elements not only a legal right of the plaintiff
separate contracts of life insurance for which the and a correlative obligation of the defendant
insured issued 17 life insurance policies for which but also AN ACT OR OMISSION OF THE
the insurer issued 17 life insurance policies, one DEFENDANT IN VIOLATION OF SAID LEGAL
of said policies having a face value of P10,000 RIGHT, the cause of action in favor of the
while the rest a face value of P5,000 each, or a insured does not accrue until the insurer
total of P90K. Each and every policy contains a refuses expressly or impliedly to comply with
policy loan clause. On April 1948, plaintiff his duty to pay the amount of the loss.
Jacqueline Jiminez Vda. De Gabriel vs. CA, Sec. 170. A contract of fire insurance is not
G.R. No. 103883 (November 14, 1996) affected by any act of the insured subsequent to
Under 384 of the Insurance Code, notice of claim
the execution of the policy, which does not violate
must be filed within six months from the date of
its provisions, even though it increases the risk
accident, otherwise teh claim shall be deemed
and is the cause of a loss.
waived. Action or suit must be brought to proper
cases, with the Commission of the court within one
year from the denial of claim, otherwise, the Sec. 227 In the case of individual life or
claimants right of action shall prescribe. endowment insurance, the policy shall contain in
substance the following conditions:
Sec. 64. No policy of insurance other than life
shall be cancelled by the insurer except upon prior (b) A provision that the policy shall be
notice thereof to the insured and no notice of incontestable after it shall have been in force
cancellation shall be effective unless it is based on during the lifetime of the insured for a period of
the occurrence, after the effective date of the two years from its date of issue as shown in the
policy, of one or more of the following: policy, or date of approval of last reinstatement,
except for non-payment of premium and except
(a) non payment of premium; for violation of the conditions of the policy relating
(b) conviction of a crime arising out of acts to military or naval service in time of war.
increasing the hazard insured against
(c) discovery of fraud or material
misrepresentation; Sec. 380. No cancellation of the policy shall be
(d) discovery of willful or reckless acts or valid unless written notice thereof is given to the
omissions increasing the hazard insured land transportation operator or owner of the
against; vehicle and to the Land Transportation
(e) physical changes in the property insured Commission at least fifteen days prior to the
which results in the property becoming intended effective date thereof.
uninsurable; or Upon receipt of such notice, the Land
(f) a determination by the Commissioner that Transportation Commission, unless it receives
the continuation of the policy would evidence of a new valid insurance or guaranty in
violate or would place the insurer in cash or surety bond as prescribed in this Chapter,
violation of this Code. or an endorsement of revival of the cancelled one,
shall order the immediate confiscation of the
plates of the motor vehicle covered by such
Sec. 65. All notices of cancellation mentioned in cancelled policy. The same may be reissued only
the preceding section shall be in writing, mailed or upon presentation of a new insurance policy or
delivered to the named insured at the address that a guaranty in cash or surety bond has been
shown in the policy and shall state: made or posted with the Commissioner and which
meets the requirements of this chapter, or an
(a) which of the grounds set forth in section endorsement or revival of the cancelled one. (As
64 is relied upon; and amended by PD No. 1455)
(b) that, upon written request of the named
insured, the insurer will furnish the facts
on which the cancellation is based.
- The meaning of perils of the sea Held: NO. A loss which in the ordinary course of
varies with circumstances. FOR events, results from the natural and inevitable
EXAMPLE, a vessel designed for inland action of the sea, from the ordinary wear and
waters was insured. It was towed in the tear of the ship, or from the negligent failure of
Gulf of Mexico. The insurer was aware the ships owner to provide the vessel with
of the hazardous nature of the journey proper equipment to convey the cargo under
and charged extra premium. If any loss ordinary conditions, is not a peril of the sea, but
occurs, it will be held to be due to perils rather a peril of the ship. In such a case, the
of the sea although a sea-going vessel remedy of the insured shipper or consignee is not
would not have been damaged by the against the insurer but against the shipowner.
moderate waves encountered.
Cathay Insurance v CA
Peril of the Ship
- Loss which in the ordinary course of Facts: Remington Industrial Sales filed for the
events results from (a) the Natural recovery of losses incurred due to the rusting of
and inevitable action of the sea; (b) steel pipes it imported from Japan while it was in
ordinary Wear and Tear of the ship; transit. Cathay Insurance refused payment
(c) the negligent failure of the claiming that the rusting was not due to a peril of
ships owner to provide the vessel the sea since it was not a casualty which could
with proper equipment to convey the not be foreseen.
cargo under ordinary conditions Held: There is no question that rusting of steel
- The insurer does not undertake to pipes in the course of voyage is a peril of the
insure against perils of the ship. sea in view of the toll on the cargo by wind,
water and salt conditions. (HANGLABO! But in
Note: Everything that happens thru the inherent any case, the SC decided through construction)
vice of the thing, or by the act of the owner, We would fail to observe a cardinal rule in the
master or shipper shall not be reputed a peril if not interpretation of contracts, namely, that any
otherwise borne in the policy ambiguity therein should be construed against
the issuer/drafter, namely, the insurer.
Barratry - willful and intentional act on the
part of the master or crew, in pursuance of Malayan Insurance Corp v CA (1997)
some unlawful or fraudulent purpose,
without the consent of the owner, and to Facts TKC Marketing was the owner/consignee of
the prejudice of his interest; Neither honest soya bean meal shipped from Brazil to Manila. It
error or judgment nor mere negligence. was insured by Malayan Insurance. While the
- May be covered by policy vessel was in South Africa it was arrested and
detained due to a lawsuit questioning its
Taking at sea, arrests, restraints, and ownership and possession. As a result, TKC
detainments of all kings, princes and Marketing filed a claim with Malayan for the non-
people - extraordinary acts by a delivery of the cargo.
sovereign authority in time of war, or under Issue WoN the arrest of the vessel by the civil
other unusual international conditions like authority was a peril of the sea
blockades and embargoes. Acts done in the Held The arrest caused by ordinary judicial
course of regular proceedings not included process is deemed included among the covered
(i.e. vessel libeled and detained for non- risks. (Decision detailed the history of the Free
payment of debt) since there is nothing from Capture and Seizure clause) Although the
fortuitous about the situation. Free from Capture and Seizure clause was
- Includes not only arrests caused by originally inserted in marine policies to protect
political acts of a seizing state but also against risks of war, its interpretation in recent
by ordinary legal processes such as a years to include seizure or detention by civil
lawsuit on ownership and possession of authorities seems consistent with the general
goods. (see Malayan Insurance Corp v purposes of the clause.
CA case)
Filipino Merchants Insurance Co v CA
All other perils, losses and misfortunes
- covers risks which are of like kind with Facts A shipment of fishmeal insured by Filipino
the particular risks which are enumerated Merchants Co. was found to be damaged upon
in the preceding part of the same clause of its unloading in the Port of Manila. The
the contract owner/consignee filed action to recover the
amount represented by the damages based on
La Razon Social Go Tiaoco y Hermanos v the all risks clause of the policy but
Union Insurance Society of Canton Ltd. Fil.Merchants refused claiming that there must be
some casualty or accidental cause to which the
Facts: A drain pipe passing through the hold loss is attributable.
where the insured rice was stowed had become Held An all risks policy should be read literally
corroded in course of time, w/c created a hole in (not technically) as meaning all risks whatsoever
the pipe. An attempt was made to cement the and covering all losses by an accidental cause of
hole and cover it with a strip of iron but due to any kind. It has evolved to grant a greater
the loading of the ship, this part of the pipe was protection than that afforded by the perils
submerged in water during the trip and was clause in order to assure that no loss can happen
washed out. Water flowed into the hold and through the incident of a cause neither insured
damaged the rice. against nor creating liability in the ship. The
Issue: WON the insurer was liable insured under an all risks policy has the initial
burden of proving that the cargo was damaged
In Ship
Sec. 100. The owner of a ship has in all cases
Bottomry Loan one given on the
an insurable interest in it, even when it has been
security of the ship, on condition that the
chartered by one who covenants to pay him its
loan be repaid only if the ship arrives safely
value in case of loss: Provided, That in this case
at the port of destination; money given in
the insurer shall be liable for only that part of the
advance; if ship sinks, bottomry loan
loss which the insured cannot recover from the
extinguished and owner doesnt have to
charterer.
pay it.
Bottomry loans and marine insurance can
Owner of Vessel has insurable interest in share protection and coverage of same
the vessel even if he has mortgaged it. risks; but cannot coextend with each other.
However, if ship is chartered and charterer Where a vessel is hypothecated by way of
agrees to pay him its value in case of loss, bottomry, the owner has an insurable
it is only liable for that part of the loss interest only in the excess of the vessels
which the insured cannot recover from the value over the amount of the bottomry
charterer. loan. This is so because when the vessel
Insurable interest of insured in marine bottomed is lost, the owner need not pay
insurance the loan and is therefore benefited to the
General Rule: there can be no valid extent of the amount of the load obtained
marine insurance unless supported by an and the loss he actually suffers is only the
insurable interest in the thing insured. difference bet the actual value of the vessel
Exception: in certain cases of marine and the bottomry.
insurance, the insurer will still be held liable The lender in bottomry is entitled to receive
if he agreed to insure a ship or cargo lost a high rate of interest to compensate him
or not lost, that is, he agreed to be bound for the risk of losing his loan.
in any case, even if it would later on be
proved that the insured had nothing to
insure when the contract was made.
2. Benefit of exoneration is given only to an Delsan for any liability under its contractual
"insurer on ship or shipowner's interest." obligation as a common carrier. The fact of
payment grants the private respondent
Due diligence not a defense subrogatory right w/c enables it to exercise legal
Warranty precludes any defense that remedies that would otherwise be available to
insured had exercised due diligence to Caltex as owner of the lost cargo..
make the ship seaworthy.
SHIP MUST ACTUALLY BE SEAWORTHY b) Voyage and Deviation
Seaworthiness as to cargo
Sec. 121. When the voyage contemplated by
Ship may be seaworthy for purpose of
a marine insurance policy is described by the
insurance on the ship, but may still be
places of beginning and ending, the voyage insured
unseaworthy for purpose of insurance of
in one which conforms to the course of sailing fixed
the cargo (ex. Ship with porthole only 1
by mercantile usage between those places.
foot above waterline may be fit to travel
the sea, but not fit to carry wheat or rice
because water will go into the ship via the
Sec. 122. If the course of sailing is not fixed
porthole and damage the cargo)
by mercantile usage, the voyage insured by a
marine insurance policy is that way between the
Roque v IAC
places specified, which to a master of ordinary skill
and discretion, would mean the most natural, direct
Facts: Manila Bay Lighterage Corp, a common
and advantageous.
carrier, entered into a contract w/ Roque
whereby Manila Bay Lighterage would carry on
board its barge Roques logs from Palawan to
Sec. 123. Deviation is a departure from the
Manila. The logs were insured by Pioneer
course of the voyage insured, mentioned in the last
Insurance. However, the barge sank. It was
two sections, or an unreasonable delay in pursuing
found that the barge was not seaworthy (one of
the voyage or the commencement of an entirely
the hatches was left open, there was a leak in the
different voyage.
barge). Pioneer refused to pay damages because
of the breach of the implied warranty on
seaworthiness. Roques defense is that as a mere
Sec. 124. A deviation is proper:
shipper of cargo, they have no control of the ship
(a) When caused by circumstances over which
therefore seaworthiness has nothing to do with
neither the master nor the owner of the ship has
the matter of insurance over the logs.
any control;
Issue: WON the implied warranty of
(b) When necessary to comply with a warranty,
seaworthiness also applies to marine insurance
or to avoid a peril, whether or not the peril is
on cargo.
insured against;
Held: YES For every contract of insurance which
(c) When made in good faith, and upon
is a subject of marine insurance, a warranty is
reasonable grounds of belief in its necessity to
implied that the ship will be seaworthy. Since the
avoid a peril; or
law provides for an implied warranty of
(d) When made in good faith, for the purpose
seaworthiness in every contract of marine
of saving human life or relieving another vessel in
insurance, it becomes the obligation of a cargo
distress.
owner to look for a reliable common carrier which
keeps its vessels in seaworthy condition. The
shipper of the cargo may have no control over
Sec. 125. Every deviation not specified in the
the vessel but he has full control in the choice of
last section is improper.
the common carrier that will transport his goods.
Delsan Transport v CA
Sec. 126. An insurer is not liable for any loss
happening to the thing insured subsequent to an
Facts: Caltex entered into a contract of
improper deviation.
affreightment with Delasan Transport Lines to
transport Caltexs fuel oil from its refinery to
different parts of the country. However, the ship What Voyage Insured
to Zamboanga which was insured by American Policy What ship must do
Home Corp. sank. American Home paid Caltex Names: Vessel insured MUST follow
representing the insured value of the lost cargo. 1. Ports of course SPECIFIED
American Home, exercising its right of depature
subrogation, demanded of Delsan the same amt 2. Ports of
it paid to Caltex but Delsan refused. It was found destination
that the chief mate of the vessel was not 3. Intermediate
qualified under the Phil. Merchant Marine Rules. ports of call
Issue: WON the payment made by American Names: 1. Voyage insured is the one
Home to Caltex amounted to admission that the 1. Ports of which conforms to course
vessel was seaworthy departure of sailing fixed by
Held: NO. The payment made by American 2. Ports of mercantile usage between
Home operates as a waiver of its right to enforce destination - ports (Sec. 121)
the term of the implied warranty against Caltex Several routes 2. if not fixed by mercantile
under the insurance policy. However, the same to destination usage, course between
cannot be validly interpreted as an automatic ports specified which to a
admission of the vessels seaworthiness by master of ordinary skill
American home as to foreclose recourse against and discretion would be
most natural, direct, and port, but must be most proper port for
advantageous (Sec. 122) repair).
Once repair is made, ship must pursue new
Rule: course without deviation in shortest and
- Fixed Route most expeditious manner (otherwise, this is
- Usual Custom deviation and will absolve insurer)
- Discretionary (most
natural) Waiver of warranty against improper
deviation
Deviation (Sec. 123) Done by expressly permitting waiver in
Is any unexcused departure from the policy at a PREMIUM to be hereafter
regular course or route of the insured arranged, provided DUE NOTICE be given
voyage or any other act which substantially by insured upon recipt of advice of such
alters the risk constitutes a deviation deviation.
Departure from course of ship Requirement: EXPRESSED in policy.
Unreasonable delay in pursuing voyage PREMIUM paid, NOTICE given
Commencement of entirely different
voyage c) Other Implied Warranties
When Nationality or Neutrality of ship or
Proper and Improper Deviation cargo is expressly warranted, its implied
PROPER deviation those allowed by law ship will carry requisite documents
(Sec. 124) showing nationality or neutrality and
IMPROPER deviation all other deviation will not carry documents that will cause
not mentioned in Sec. 124; any loss reasonable suspicion
suffered by thing insured subsequent to - Nationality - doesnt mean that the ship
improper deviation exonerates insurer from was built in such country, but that the
liability, regardless of whether deviation property belongs to a subject thereof
increased risk or not - Neutrality property insured belongs to
WHY does improper deviation exonerate? neutrals; a warranty of neutrality
Because insured novated contract without imports that the property insured is
consent of insurer! neutral in fact, and in appearance and
TEST: WON deviation was proper or not conduct, that the property shall belong
(NOT WON risk was increased or to neutrals, that no act of insured or his
diminished) agent shall be done which can legally
compromise its neutrality; warranty
General Rule: when the voyage covered by extends to insured's interest in all the
the policy is described by the places of beginning property intended to be covered by the
and ending, the voyage insured is the one which policy, but not to the interest of a third
conforms to the course of sailing fixed by person not covered by the policy.
mercantile usage between the places, or in absence A warranty of national character may be
of the latter, the way between the places that to a gathered from the language of the policy
master of ordinary skill and discretion would mean although an exception has been made
the most natural, direct and advantageous route. where the fact recited could have no
The insurer is not liable for a loss after an improper relation to the risk.
deviation from the usual course or the best Implied that ship will not engage in any
course [terms in quotation mine]. venture which is illegal under the laws of
Exception: the insurer is not exonerated from the country where contract is made or
liability for loss happening after proper deviation. before whose courts question may come;
The effect is as if there was no deviation. CANNOT be waived since rule of public
policy.
When deviation is proper Implied warranty to carry requisite
No vitiation of the policy if the deviation is documents:
justified or caused by actual necessity 1) Warranty of nationality also requires
which is equal in importance to such that the vessel be conducted and
deviation. documented as of such nation, a breach of
Such compulsory deviations are risks warranty in either particular will avoid the
impliedly assumed by the underwriter. policy.
While deviation to save property is not 2) Warranty is a continuing one, change of
justified, unless it is to save another nationality is a breach of the warranty, but
vessel in distress, a deviation for the warranty is not broken by a contract for
purpose of saving life does not constitute sale and transfer to an alien at a future
a breach of warranty. Justification rests on date.
ground of humanity. 3) Proper papers must be produced when
necessary to prove ownership. Production
Deviation to repair damaged ship not excused because the papers were lost
If during voyage, vessel becomes so by the fault of the master.
damaged as to render it unsafe without
undergoing repairs, insurer is not relieved
by deviation from the ships course in order 5. LOSS
to make the nearest port for such repairs
(can fall under avoid peril) 5.1. Kinds covered, Actual and Constructive
Master must consider distance, facilities of Loss
port, quickness new material can be
procured, etc. (not necessarily nearest
Sec. 130. An actual total loss is cause by: 1) Total underwriter is liable for the whole of the
(a) A total destruction of the thing insured; amount insured
(b) The irretrievable loss of the thing by - may be actual or absolute OR constructive
sinking, or by being broken up; or technical
(c) Any damage to the thing which renders it
valueless to the owner for the purpose for which he 2) Partial (refer to gen. and part average)
held it; or TOTAL LOSS (any loss not total is partial)
(d) Any other event which effectively deprives
the owner of the possession, at the port of a. Actual Total Loss
destination, of the thing insured. 1. Total destruction thing insured
2. Irretrievable loss of thing by
sinking or by being broken up
Sec. 131. A constructive total loss is one 3. Any damage to thing which renders it
which gives to a person insured a right to abandon, valueless to owner for the purpose for which
under Section one hundred thirty-nine. the owner held it
Loss by sinking may not be irretrievable,
but theres still actual total loss if thing
Sec. 132. An actual loss may be presumed becomes valueless to owner for purpose for
from the continued absence of a ship without being which he held it
heard of. The length of time which is sufficient to TOTAL LOSS is cost of RETRIEVAL equal to
raise this presumption depends on the or more than original value
circumstances of the case. 4. Any other event which effectively deprives
owner of possession, at the port of destination
of thing insured.
Sec. 133. When a ship is prevented, at an 5. Under Section 130, the complete physical
intermediate port, from completing the voyage, by destruction of the subject matter as in the case
the perils insured against, the liability of a marine of fire is not essential to constitute an actual
insurer on the cargo continues after they are thus total loss ([b], [c], [d]). Such loss may exist
reshipped. where the form and specie of the thing is
Nothing in this section shall prevent an insurer destroyed although the materials of which it
from requiring an additional premium if the hazard consisted still exist (Pan Malayan v. CA [91]).
be increased by this extension of liability. For example, when repairs would be more
expensive than the original cost of the vessel
and effective deprivation of use and possession
Sec. 134. In addition to the liability of property.
mentioned in the last section, a marine insurer is
bound for damages, expenses of discharging, Presumed from continued absence of ship
storage, reshipment, extra freightage, and all other without being heard of (for length of time
expenses incurred in saving cargo reshipped sufficient to raise such presumption)
pursuant to the last section, up to the amount
insured. General Rule: if a vessel is not heard of at
Nothing in this or in the preceding section shall all within a reasonable time after sailing or for a
render a marine insurer liable for any amount in reasonable time after she was last seen, she will be
excess of the insured value or, if there be none, of presumed to have been lost from a peril insured
the insurable value. against.
How presumption is established:
Plaintiff must prove that vessel left the port of
Sec. 135. Upon an actual total loss, a person outfit for the voyage insured. Then, he must show
insured is entitled to payment without notice of that the vessel was not heard of at port of
abandonment. departure after sailing, without calling witnesses
from port of destination to show she never arrived
there. No rule as to the time after which missing
Sec. 136. Where it has been agreed that an vessel is presumed lostdepends on the
insurance upon a particular thing, or class of circumstances of the case.
things, shall be free from particular average, a
marine insurer is not liable for any particular Insured has ABSOLUTE right to claim whole
average loss not depriving the insured of the amount of insurance even without notice of
possession, at the port of destination, of the whole abandonment. Once he receives amount, it
of such thing, or class of things, even though it takes the place of the vessel and must be
becomes entirely worthless; but such insurer is used to pay for any damage for which it be
held liable.
ABANDONMENT
Abandonment, in marine insurance, is the
act of the insured by which, after a
constructive total loss, he declares the
relinquishment to the insurer of his interest
in the thing insured. The insured chooses to
take the proceeds in place of the remaining
parts of the thing, which is ceded to the
insurer.
Right to abandon is granted by law to the
insured if peril insured against causes a
loss of more than the thing insured, or
where its value is reduced by more than
Remember: 75% loss = Constructive Loss
which entitles recovery of the full amount
in the policy. Does not mean that recovery
is only up to 75%.
Ineffective abandonment
Abandonme Equivalent to transfer by ACCEPTANCE NO ABAN-DON-
nt can be the insured of his interest to Express or Implied MENT
sustained the insurer, with all the from conduct of Insured still
only upon chances of recovery and insurer entitled to recover
cause indemnity actual loss
specified IF proper and notice is Mere silence for
If cause is properly given, refusal to unreasonable Same rule applies
unfounded accept abandonment does length of time may where abandon-
and info not prejudice insured. be deemed ment wasnt
upon which Insured still liable for actual acceptance proper or where it
it was made total loss, minus amount any wasnt properly
proves proceeds of thing insured made
incorrect which may have come to the
Thing hands of the insured.
insured was IF insurer accepts
so far abandonment, its
restored conclusive between the
when the parties and admits the loss
abandonme and the sufficiency of the
nt was abandonment
made that Irrevocable unless grounds
there was in prove to be unfounded
fact no total
loss
whole interest of the insured in the property of the insurer shall be limited to the proportion of
insured. contribution attaching to his policy value where this
is less than the contributing value of the thing
insured.
Sec. 158. Where profits are separately
insured in a contract of marine insurance, the
insured is entitled to recover, in case of loss, a Sec. 165. When a person insured by a
proportion of such profits equivalent to the contract of marine insurance has a demand against
proportion which the value of the property lost others for contribution, he may claim the whole
bears to the value of the whole. loss from the insurer, subrogating him to his own
right to contribution. But no such claim can be
made upon the insurer after the separation of the
Sec. 159. In case of a valued policy of marine interests liable to the contribution, nor when the
insurance on freightage or cargo, if a part only of insured, having the right and opportunity to
the subject is exposed to the risk, the evaluation enforce the contribution from others, has neglected
applies only in proportion to such part. or waived the exercise of that right.
Sec. 160. When profits are valued and Sec. 166. In the case of a partial loss of ship
insured by a contract of marine insurance, a loss of or its equipment, the old materials are to be
them is conclusively presumed from a loss of the applied towards payment for the new. Unless
property out of which they are expected to arise, otherwise stipulated in the policy, a marine insurer
and the valuation fixes their amount. is liable for only two-thirds of the remaining cost of
repairs after such deduction, except that anchors
must be paid in full.
Sec. 161. In estimating a loss under an open
policy of marine insurance the following rules are to
A. Valued Policy
be observed:
Valuation fixes in advance the value of the
(a) The value of a ship is its value at the
property and thus avoids the necessity of
beginning of the risk, including all articles or
proving its actual value in case of loss
charges which add to its permanent value or which
Valuation is conclusive between the parties
are necessary to prepare it for the voyage insured;
in the adjustment of either a total or partial
(b) The value of the cargo is its actual cost to
loss.
the insured, when laden on board, or where the
Exception: If there is FRAUD on the part of
cost cannot be ascertained, its market value at the
the insured, insurer would have the right to
time and place of lading, adding the charges
RESCISSION
incurred in purchasing and placing it on board, but
The change in a vessels value after a long
without reference to any loss incurred in raising
period of voyage cannot bind the parties,
money for its purchase, or to any drawback on its
as the insured value stated in the policy is
exportation, or to the fluctuation of the market at
conclusive upon them.
the port of destination, or to expenses incurred on
Neither party can give evidence of the real
the way or on arrival;
value of the thing insured. But when the
(c) The value of freightage is the gross
thing has been hypothecated by bottomry
freightage, exclusive of primage, without reference
or respondentia before its insurance and
to the cost of earning it; and
without the knowledge of the person who
(d) The cost of insurance is in each case to be
actually procured the insurance, the insurer
added to the value thus estimated.
may show the real value but he is not
entitled to rescind the contract unless he
can prove that the valuation was in fact
fraudulent.
Sec. 162. If cargo insured against partial loss
When insured a co-insurer in marine
arrives at the port of destination in a damaged
insurance
condition, the loss of the insured is deemed to be
- In marine insurance, the insured is
the same proportion of the value which the market
expected to cover by insurance the full
price at that port, of the thing so damaged, bears
value of the property insured. If the
to the market price it would have brought if sound.
value of his interest exceeds the
amount of the insurance, he is
considered the co-insurer for an
Sec. 163. A marine insurer is liable for all the
amount determined by the difference
expenses attendant upon a loss which forces the
between the insurance taken out and
ship into port to be repaired; and where it is
the value of the property:
stipulated in the policy that the insured shall labor
for the recovery of the property, the insurer is
liable for the expense incurred thereby, such _ (partial) Loss___ Amount Amount
value of thing X of Profits = of Recovery
expense, in either case, being in addition to a total insured
loss, if that afterwards occurs.
- Section 157 applies only if (1) the loss is
partial and (2) the amount of insurance is
Sec. 164. A marine insurer is liable for a loss
less than the insured entire insurable
falling upon the insured, through a contribution in
interest in the property insured.
respect to the thing insured, required to be made
Loss of profits separately insured
by him towards a general average loss called for by
- If the profits to be realized are
a peril insured against; provided, that the liability
separately insured from the vessel or
Sec. 244. In case of any litigation for the during a sea voyage, or an aeroplane
enforcement of any policy or contact of which is missing, who has not been
insurance, it shall be the duty of the heard of for four years since the loss
Commissioner or the Court, as the case may of the vessel or aeroplane;
be, to make a finding as to whether the (2) A person in the armed forces who
payment of the claim of the insured has has taken part in war, and has been
unreasonably denied or withheld; and in the missing for four years;
affirmative case, the insurance company shall (3) A person who has been in danger
be adjudged to pay damages which shall of death under other circumstances
consist of attorneys fees and other expenses and his existence has not been known
incurred by the insured person by reasons of for four years. (n)
such unreasonable denial or withholding of
payment plus interest of twice the ceiling
prescribed by the Monetary Board of the Art. 392. If the absentee appears, or without
amount of the claim due the insured, from the appearing his existence is proved, he shall
date following the time prescribed in Section recover his property in the condition in which
two hundred forty-two or in Section two it may be found, and the price of any property
hundred forty-three, as the case may be, until that may have been alienated or the property
the claim is fully satisfied; Provided, That the acquired therewith; but he cannot claim either
failure to pay any such claim within the time fruits or rents. (194)
prescribed in said section shall be considered
prima facie evidence of unreasonable delay in Londres v National Life Insurance Co.
payment.
Facts: National Life issued a life insurance policy
2.1. Unfair Claims Settlement on the life of Jose C. Londres in the amount of
Php3,000.00 on April 14, 1943 (during the war
Sec. 241 (1) provides instances of unfair claims period). He died on Feb. 7, 1945. His beneficiary
settlement done by an insurance company: filed a claim which National denied claiming that
there was a lack of proof of death and a slew of
(a) knowingly misrepresenting to other special defenses, including the payment
claimants pertinent facts or policy should be made based on the Ballantyne scales.
provisions relating to coverages at Ratio: National must pay the beneficiary of the
issue; insured the amount of the policy (3,000.00) as the
(b) failing to acknowledge with agreement was that the obligation will be made in
reasonable promptness pertinent the currency prevailing at the end of the stipulated
communications with respect to period which in this case is the Philippine currency.
claims arising under its policies; The proof of death was substantially made by the
(c) failing to adopt and implement claimant and was not properly disproved by
reasonable standards for the prompt National.
investigation of claims arising under
its policies; Fernandez v National Life Insurance Co.
(d) not attempting in good faith to
effectuate prompt, fair and Facts: National insured the life of Juan Fernandez
equitable settlement of claims for the period of July 15, 194 to July 14, 1945.
submitted in which liability has Juan died on Nov. 2, 1944. His beneficiaries filed
become reasonably clear; or their claim 7 years after his death or on Aug. 1,
(e) compelling policyholders to institute 1952. The dispute is WON the Ballantyne scale is
suits to recover amounts due under applicable in computing the amount which should
its polices by offering without be paid to the beneficiaries. The CFI rendered
justifiable reason substantially less judgment that National should pay the proceed of
than the amounts ultimately PHp 500.00 Ballantyne scale applicable.
recovered in suites brought by Ratio: CFI correct. Ballantyne scale is applicable
them. since in life insurance, the policy matures upon the
expiration of the term set forth therein in this
case upon the death of Juan. The obligation of
National arose as of that date and not at the time
2.2. Civil Code Rules on Presumption of Death
of the claim. Since the National could have paid his
obligation at any time during the Japanese
Art. 390. After an absence of seven years, it occupation. Payment after liberation must be
being unknown whether or not the absentee adjusted in accordance with the Ballantyne
still lives, he shall be presumed dead for all schedule.
purposes except for those of succession.
The absentee shall not be presumed dead for
the purpose of opening his succession till after Tio Khe Chio v CA & Eastern Assurance
an absence of ten years. If he disappeared
after the age of seventy-five years, an Facts: Tio Khe Chio imported fishmeal. These
absence of five years shall be sufficient in were insured with Eastern Assurance. The vessel
order that his succession may be opened. (n) used to ship the fishmeal was Far Eastern Shipping
Co. When the goods reached Manila, they were
Art. 391. The following shall be presumed found to be damaged and therefore useless. The
dead for all purposes, including the division of issue is WON the interest to be paid by Eastern
the estate among the heirs: Assurance is 12% or 6%?
(1) A person on board a vessel lost
Ratio: 6% only, as Sec. 243 and 244 of the by the insured person by reason of such
Insurance Code is not applicable to the case as unreasonable denial or withholding of
these provisions apply only when the court finds an payment plus interest of twice the ceiling
unreasonable delay or refusal in the payment of prescribed by the Monetary Board of the
the claims. The applicable law according to SC is amount of claim due the insured.
Art. 2209 of the Civil Code which stipulates that in
the absence of stipulation the legal interest
applicable is 6% Noda v Cruz-Arnaldo
Effect of Refusal or Failure to pay Entitles beneficiary to collect Entitles beneficiary to collect
claim within time prescribed: interest on the proceeds of interest on the proceeds of policy
policy for the duration of the for the duration of the delay at
In case of litigation, it is delay at rate of twice ceiling rate of twice ceiling prescribed by
the duty of the prescribed by the monetary the monetary board (unless
Commissioner or the board (unless refusal to pay refusal to pay is based on ground
Court to determine WON is based on ground that that claim in fraudulent)
claim has been claim in fraudulent)
unreasonably denied of In case damages awarded, this
withheld. In case damages awarded, includes attorneys fees and other
this includes attorneys fees expenses incurred due to delay
Failure to pay any such and other expenses incurred (plus the interest)
claim within the time due to delay (plus the
prescribed shall be interest)
considered prima facie
evidence of unreasonable
delay in payment.
evidence by the Commissioner and by any through not printed therein. Finman may be held
court with the same effect as if such liable, if it is solidarily liable with Pan Pacific
stenographer were present and testified under the terms of the bond, it must follow that
to the facts so certified. (As amended by it is also liable to both Inocencio et.al and POEA.
Presidential Decree No. 1455). sorry guys I dont get how prescription figures
into this case!!!
effect except that of notifying the agent and while at the same time makes the person
serves no other purpose. It did not stop the who caused loss legally responsible.
prescription from running. The filing of a claim
within one year after rejection is a condition Loss Due to Wrongful Act or Breach of
precedent to the liability of the insurer a Contract by Third Person, NOT APPLICLABLE
resolutory cause, the purpose of which is to TO LIFE INSURANCE.
terminate all liabilities in case action is not filed Options available to insured when through
within the said period. wrongful act or breach of contract
committed by 3rd person, insured property
suffers loss:
Travellers Insurance v CA (1) Collect from insurer if insurer pays,
insurer subrogates insured under Civil
Facts: A 78 year old woman was hit by a taxi Code
cab, died. Her son (Vicente) filed a claim against o Right of subrogation exist even
the owner of the Lady Love taxi cab, the driver if no express agreement
and Travellers as the compulsory insurer recognizing it since its under
Ratio: Travellers cannot be held jointly and the CC
severally liable with the owner and driver of the o Arises only after insurer pays
Lady Love taxi cab as Vicente failed to attach a insured.
copy of the insurance contract to his complaint, (2) Demand payment from wrongdoer
there could be no basis to apprise the real nature Since Life Insurance is not
and pecuniary limits of Travellers liability. contract of INDEMNITY, subrogation
Further, he also failed to file a written notice of obviously cannot apply.
claim with Traveller, which is an indispensable
requirement thus his cause of action did not When May Liability to Subrogee be Limited:
accrue. Bill of Lading (St. Paul v Macondray)
Contributory Negligence (Tabacalera v NFS)
Sun Insurance v CA (supra)
the negligence act of CSEW, the proof of payment Firemans Fund v Jamila & Co.
made by Prudential to William Lines, Inc operated
to properly subrogate Prudential to the rights of Facts: Firestone loss some properties due to the
William Lines under Art. 2207 of the Civil Code acts of its employees and the security guards
provided by the security agency of Jamila & Co.
Firemans Fund, the insurer of Firestone paid the
Pioneer Insurance v CA loss and proceeded against Jamila and Jamilas
insurer First Quezon City Ins. Co. Both denied
Facts: Jacob Lim purchased 2 aircrafts from JDA liability, TC dismissed complaint due to no cause of
using funds from Bormaheco, the Cervantes and action.
Maglana. Insured it with Pioneer as surety. Lim Ratio: Firestone no longer has cause of action
failed to pay, Pioneer paid (Pioneer reinsured the since it has already been paid by Firemans Fund.
surety with an unnamed reinsurer) and collected Firemans Fund however has a cause of action as
from the reinsurer. Also foreclosed aircraft, sold it this falls under Art. 2207 under the doctrine of
and collected proceeds. subrogation.
Ratio: Pioneer no longer has any claim since it has
already collected the proceeds of the reinsurance
on its bond. Under the principle of Art. 2207 of the Tabacalera v North Front Shipping
CC, the reinsurer, on payment of a loss acquires
the same rights by subrogation as are acquired in Facts: Sacks of corn grain valued at over 3M were
similar cases where the original insurer pays a loss. consigned to RFM under a bill of lading and insured
with Tabacalera et al. The vessel was owned by
North Front. Prior to leaving port, the vessel was
Manila Mahogany v CA inspected and was deemed fit to carry
merchandise. When it arrived, it advised RFM who
Facts: Manila Mahogany insured its Mercedez did not immediately commence unloading without
Benz with Zenith. Car was bumped and damaged any apparent reason. When unloaded, there was
by SMC truck. Zenith paid Mahogany in amicable shortage and the rest were moldy, rancid and unfit
settlement. Zenith then demanded reimbursement for its purpose. RFM rejected cargo and demanded
from SMC, but it appeared that SMC already paid from North Front payment for damages which was
Mahogany evidenced by a Release of Claim. denied. Tabacalera et.al paid, then sued North
Ratio: By the act of Manila Mahogany issuing a Front. TC and CA dismissed case.
release claim to SMC, the right of Zenith against Ratio: North Point is liable since it is a common
SMC is nullified since the insurer can be carrier and as such is required to observe
subrogated to only such rights as the insured may extraordinary diligence in its vigilance over the
have, should the insured, after receiving payment goods it transports. When goods placed in its care
from the insurer, release the wrongdoer who are lost or damaged, the carrier is presumed to
causes the loss, the insurer loses his rights against have been at fault or to have acted negligently.
him. But in such a case the insurer will be entitled North Front has burden of proving it observed
to recover from the insured whatever it has paid, extraordinary diligence in order to avoid
unless it was made with the consent of the insurer. responsibility which it failed to do. However since
RFM was guilty of contributory negligence, they
should share at least 40% of the loss. North Point
ordered to pay Tabacalera et al 60% of the total
amount it paid to RFM.
Pan Malayan v CA & Fabie
insured to demand payment from such stipulates that if either party wishes to terminate
funds. or cancel the agreement, they must give at least
3 moths notice by registered mail to the other
Exceptions: party and the cancellation was to take effect as
Contract may expressly bind the reinsurer of the 31st of December of the year in which the
to pay directly to the original owner any notice was given. Sometime in September 1961
loss for which the original insurer may be Fieldmens gave notice to Asian which Asian did
liable. not reply to, Fieldmens gave 2 other notices.
o Insured may choose to sue either During this time, one of the reinsurance contracts
insurer, reinsurer or BOTH. GSIS property was razed by fire. Asian filed a
However, total recovery cannot be claim with Fieldmens who denied liability
more than the actual loss. pointing out that they have already terminated
o Liability of reinsurer to original the reinsurance treaty.
insured would not be affected by Ratio: The Facultative-Obligatory Reinsurance
any defense which the reinsurer Treaty Fire (part of the reinsurance
may have against the original contract/treaty) provides that in the event of
insurer. termination of this Agreement x x x, the liability
o No novation which discharges of the Fieldmens under current cessions shall
original policy original policy continue in full force and effect until their
remains in full force and original natural expiry x x x. and On the termination
insured has right to demand that all of this Agreement from any cause whatever, the
its terms and conditions be liability of the REINSURER (Fieldmens) under any
complied with. current cession including any amounts due to be
If insured agreed with insurer and reinsurer ceded under the terms of this Agreement which
that he will look only to reinsurer for are not cancelled in the ordinary course of
indemnity in case of loss business shall continue in full force until
o Novation discharged original insurer their expiry unless the COMPANY (Asian)
o Technically not a reinsurance. shall, prior to the 31st of December next
following such notice, elect to withdraw the
9. LIABILITY OF REINSURER TO existing cessions. Thus insofar as the 2
REINSURED reinsurance agreements as concerned, the
Reinsurer is entitled to avail himself of every express stipulations did not ipso facto terminate
defense which the reinsured might urge in an all reinsurance cessions. Such cessions
action by the person originally insured. Thus, the continued to be in full force until their respective
reinsurer is not liable to the reinsured for a loss dates of expiration. Since it was under one of
under an original policy if the latter is not liable to said agreements, namely, the Facultative
the original insured or for an amount more than the Obligatory Reinsurance Treaty-Fire, that the
sum actually paid to the insured. reinsurance cessions corresponding to the GSIS
policy had been made, FIELDMENS cannot avoid
liability which arouse by reason of the burning of
Philam v Auditor the insured property.
Insurance Company (Philamlife). One such client requirements are that he/she must be below 21
died one year and eight months after Eternal had years of age, not married nor gainfully employed.
submitted his application to Philamlife, which did In this case, the minor illegitimate children Ginalyn
not act on the application. Philamlife, however, and Rodelyn were born on 13 April 1996 and 20
denied Eternals insurance claim. Eternal filed the April 2000, respectively. Had the legitimate child of
case before the Makati RTC, which had ordered the deceased and Editha survived and qualified as
Philamlife to pay the proceeds of the policy. On a dependent under the SSS Law, Ginalyn and
appeal, the CA reversed the RTC, dismissing the Rodelyn would have been entitled to a share
case. equivalent to only 50% of the share of the said
legitimate child. Since the legitimate child of the
Held: The Court noted that the group life policy deceased predeceased him, Ginalyn and Rodelyn,
was ambiguous as to whether the insurance as the only qualified primary beneficiaries of the
coverage of Eternals clients became effective upon deceased, are entitled to 100% of the benefits.
contracting a loan with Eternal or upon Philamlifes
approval. Emphasizing that an insurance contract is Filipinas Life Assurance Company v. Clemente
a contract of adhesion which must be construed N. Pedroso, et al.
liberally in favor of the insured and strictly against February 4, 2008
the insurer, which was the party which prepared
and had exclusive control over the terms and Facts: The respondents were duped by an agent
phraseology of the insurance contract, the (Valle) of the petitioner into investing in a
Supreme Court interpreted the ambiguity to mean promotional investment program offering 8%
that upon a partys purchase of a memorial lot on prepaid interest a month for certain deposits made
installment from Eternal, an insurance contract on a monthly basis. Basically, the issue is whether
covering the lot purchaser is created and the same or not the insurance company should be held
is effective until terminated by Philamlifes solidarily liable, or whether it should hold only the
disapproval of the application. The Court likewise agent solely liable to the respondents.
found that Philamlifes receipt of a letter, the
contents of which state that attached thereto are
insurance forms for a list of burial lot owners Held: Filipinas Life, as the principal, is liable for
including the disputed application, is an admission obligations contracted by its agent Valle. By the
of Philamlife against its own interest, as well as an contract of agency, a person binds himself to
acknowledgement of the receipt of the letter render some service or to do something in
together with the attachments. Such receipt, the representation or on behalf of another, with the
Court said, shifted the burden of evidence to consent or authority of the latter. The general rule
Philamlife to prove that the letter did not contain is that the principal is responsible for the acts of its
the disputed application. Having failed to do so, agent done within the scope of its authority, and
Philamlife is deemed to have received the should bear the damage caused to third persons.
insurance application. The Court thus ordered When the agent exceeds his authority, the agent
Philamlife to pay Eternal PhP100,000 representing becomes personally liable for the damage. But
the proceeds of the insurance policy, in addition to even when the agent exceeds his authority, the
legal interest and attorneys fees. principal is still solidarily liable together with the
agent if the principal allowed the agent to act as
Yolanda Signey v. Social Security System though the agent had full powers. In other words,
January 28, 2008 the acts of an agent beyond the scope of his
authority do not bind the principal, unless the
Facts: The deceased in this case had 2 common- principal ratifies them, expressly or impliedly.
law wives, petitioner and Gina, and one legal wife, Filipinas Life cannot profess ignorance of Valles
Editha. Petitioner had filed a claim with the SSS acts. Even if Valles representations were beyond
alleging that she was the legal wife and that her his authority as a debit/insurance agent, Filipinas
husband had a common-law wife, Gina. Gina, Life expressly and knowingly ratified Valles acts.
however, filed the same claim with the SSS, It cannot even be denied that Filipinas Life
alleging that both she and petitioner were benefited from the investments deposited by Valle
common-law wives and that deceased had a legal in the account of Filipinas Life. In our considered
wife. The SSS had denied petitioners claim stating view, Filipinas Life had clothed Valle with apparent
that the marriage between she and the deceased authority; hence, it is now estopped to deny said
was not valid as it was executed during a prior authority. Innocent third persons should not be
existing marriage of the deceased against Editha, prejudiced if the principal failed to adopt the
that deceaseds only legitimate child had needed measures to prevent misrepresentation,
predeceased him, that deceaseds 4 children with much more so if the principal ratified his agents
petitioner were all over 21 years of age and hence acts beyond the latters authority.
cannot qualify as dependents, and declared
deceaseds 2 children with Gina as primary Blue Cross Health Care v. Neomi and Danilo
beneficiaries. Olivares
February 12, 2008
Held: Whoever claims entitlement to the benefits
provided by law should establish his or her right Facts: Neomi suffered a stroke and applied for
thereto by substantial evidence. Since petitioner is reimbursement of her medical bills from petitioner,
disqualified to be a beneficiary and because the her health care provider. Petitioner refused until a
deceased has no legitimate child, it follows that the certification could be issued that her stroke was not
dependent illegitimate minor children of the due to pre-existing conditions. Dr. Saniel, her
deceased shall be entitled to the death benefits as physician, however, was not able to issue such a
primary beneficiaries. The SSS Law is clear that for certification, stating that because the patient
a minor child to qualify as a dependent, the only invoked the doctor-patient confidentiality, such
information could not be given ot the petitioner.
The issue is whether petitioner was able to prove can have it executed as a matter of right, and the
that Neomis stroke was caused by pre-existing issuance of a writ of execution becomes a
conditions and was therefore outside the coverage ministerial duty of the court. The writ of execution
of her plan. must conform to the judgment to be executed and
Held: It is an established rule in insurance adhere strictly to the very essential particulars.
contracts that when their terms contain limitations Following this rule, PDIC should have reasonably
on liability, they should be construed strictly expected that an order directing the payment or
against the insurer. These are contracts of refund of the disallowed amount was forthcoming
adhesion the terms of which must be interpreted in accordance with the COA Rules as, in fact, a
and enforced stringently against the insurer which Final Order of Adjudication was issued. Whatever
prepared the contract. This doctrine is equally may have been the reason for the dismissal of
applicable to health care agreements. Petitioner PDICs petition, the fact remains that the decision
never presented any evidence to prove that upholding the audit disallowance had become final
respondent Neomi's stroke was due to a pre- and executory. At the risk of sounding trite, the
existing condition. It merely speculated that Dr. decision is now unalterable and immutable. It is no
Saniel's report would be adverse to Neomi, based longer subject to any revision, modification or
on her invocation of the doctor-patient privilege. appeal.
This was a disputable presumption at best. Suffice In dismissing the petition and affirming the audit
it to say that this presumption does not apply if the disallowance, this Court effectively declared that
suppression is an exercise of a privilege. Here, the payment of the BPDEE to Secretary De Ocampo
respondents' refusal to present or allow the is prohibited as it violates the rule against double
presentation of Dr. Saniel's report was justified. It compensation. This declaration necessarily also
was privileged communication between physician means that condonation of the same payment in
and patient. Furthermore, limitations of liability on favor of the same person is likewise prohibited. To
the part of the insurer or health care provider must settle the matter once and for all, the audit
be construed in such a way as to preclude it from disallowance is not subject to condonation following
evading its obligations. Accordingly, they should be the principle that what is prohibited directly is also
scrutinized by the courts with extreme jealousy prohibited indirectly. The audit disallowance
and care and with a jaundiced eye. Since cannot be circumvented and legitimized by
petitioner had the burden of proving exception to resorting to condonation. The authority of PDIC to
liability, it should have made its own assessment of condone applies only to ordinary receivables,
whether respondent Neomi had a pre-existing penalties and surcharges and must be submitted to
condition when it failed to obtain the attending the Commission before it is implemented. This
physician's report. It could not just passively wait procedure would enable the Commission to inquire
for Dr. Saniel's report to bail it out. The mere into the propriety of the condonation and to
reliance on a disputable presumption does not determine whether the same will not prejudice the
meet the strict standard required under our governments interest, consistent with COAs
jurisprudence. constitutional mandate to examine, audit and settle
all accounts of the government, its subdivisions,
agencies and instrumentalities, including
Philippine Deposit Insurance Corporation v.
government-owned and controlled corporations.
COA
Furthermore, PDICs authority to condone under its
February 22, 2008
charter is circumscribed by the phrase to protect
the interest of the Corporation. This authority does
Facts: The former Finance Secretary, Mr.
not include the power to condone a liability that
Roberto de Ocampo, in his capacity as ex-
arises from a violation of law. With greater reason,
officio Chairman of the Philippine Deposit
the condonation of a liability that arise from a
Insurance Corporation (PDIC) Board for the
violation of no less than the Constitution, as in this
years 1994-1996 received a total amount
case, is not encompassed by PDICs charter. It is
of P440,068.62 representing Business
not in the interest of PDIC to forego audit
Policy Development and Enforcement
disallowances as it is neither its mandate nor its
Expenses (BPDEE) and Christmas gift
task to perpetuate breaches of law.
checks. The Auditor thereat issued Notice
Gloria Sondayon v. P.J. Lhullier, Inc and
of Disallowance disallowing in audit the
Ricardo Diago
payment of said expenses on the ground
February 27, 2008
that it partook of the nature of additional
compensation or remuneration in violation
Facts: Petitioner had pledged her P250K watch to
of the rule on multiple positions proscribed
respondent pawnshop. The pawnshop was robbed,
under Section 13, Article VII of the
and among the items seized was petitioners watch.
Philippine Constitution and Section 2(9),
Petitioner tried to recover the watch but
Republic Act No. 3591, as amended. PDIC
respondent argued that the robbery was a
sought reconsideration of the subject
fortuitous event, hence, they were not liable.
disallowance but the same was denied by
COA. The SC affirmed with finality said COA
Held: Had respondent company insured the
decision and resolution. The Final Order of
articles pledged against burglary, petitioner would
Adjudication (FOA) was issued to PDIC for
have been compensated for the loss from the
enforcement of the decision. However,
burglary. Respondent companys failure to insure
instead of complying with the Order, PDIC
the article is, therefore, a contributory cause to
condoned the amount of P413,866.62
petitioners loss. Considering, however, that
invoking its power to condone under
petitioner agreed to a valuation of P15,000 for the
Section 8, paragraph 12 of its charter.
article pledged in case of a loss, the replacement
Held: It is a fundamental rule that when a
value for failure to insure is likewise limited to
judgment becomes final and executory it becomes
P15,000. Nevertheless, this Court, taking into
immutable and unalterable, the prevailing party
account all the circumstances of this case, deems it
fair and just to award exemplary damages against by the Corporation against such director, officer,
respondent company for its failure to comply with employee or agent.
the rule and regulation requiring it to insure the
articles pledged against fire and burglary, in the What fees / expenses are covered?
amount of Twenty Five Thousand (P25,000) Pesos. Litigation costs and expenses, including legal
This is without prejudice to appropriate proceedings fees and other expenses of external counsel, or
to recover any excess value of the article pledged providing legal assistance
from amounts that may be or have been awarded Legal assistance shall include the grant or
payable by third parties answerable for the loss advance of reasonable legal fees to enable the
arising from the robbery. employee to engage counsel of his choice.
In the event of a settlement or compromise,
indemnification shall be provided only when the
Philippine Deposit Insurance Corporation is advised by counsel that the
Corporation Act persons to be indemnified did not commit any
negligence or misconduct.
(RA 3591 as amended by RAs 6037, 7400, The costs and expenses incurred may be paid
8791 and 9302 and PDs 120, 1094, 1451 and by the Corporation in advance of the final
1935) disposition upon receipt of an undertaking by
the employee to repay the amount advanced
should it ultimately be determined by the Board
1. Basic Policy of Directors that he is not entitled to be
indemnified.
To insure the deposits of all banks which are
entitled to the benefits of insurance under this 2.3. Authority to Provide Financial
Act Assistance
To promote and safeguard the interests of the
depositing public by way of providing What entities are covered?
permanent and continuing insurance coverage
on all insured deposits. Insured banks in danger of closing
When the Corporation has determined that
an insured bank is in danger of
2. PDIC Functions closing
the continued operation of such
Can lend money to banks before closure bank is essential to provide
Insurer of deposits against bank closures adequate banking service in the
Acts as receiver for banks community maintain financial
The PDIC Act is not applicable to Offshore stability in the economy.
Banking Units
Nature of insurance function: compulsory Insured banks that have already
insurance on all bank deposits closed
The authority to extend financial assistance may
Administrative Functions: also be exercised in the case of a closed insured
bank if the Corporation finds that
2.1. Authority to Examine Banks the resumption of operations of
The PDIC has the power to conduct examination of such bank is vital to the interests of
banks with prior approval of the Monetary Board: the community, or
a severe financial climate exists
Provided, No examination can be conducted which threatens the stability of a
within 12 months from the last examination number of banks possessing
date. significant resources
of normal clearing and settlement activity. It also his name is registered as owner/holder thereof
means the likelihood of a sudden, unexpected in the books of the issuing bank.
collapse of confidence in a significant portion of the
banking or financial system with potentially large 4. Liability to Depositors
real economic effects.
4.1. Commencement of Liability
What are PDICs powers with regard to Liability commences when an insured bank is
financial assistance? closed by the Monetary Board pursuant to Sec 30
of R.A. 7653.
It is authorized to
make loans 4.2. Extent of Liability
purchase the assets Liability covers the amount due to any depositor for
assume liabilities deposits in an insured bank net of any obligation of
make deposits the depositor to the insured bank as of the date of
Provide financial assistance which may take the closure, but not to exceed P250,000.00.
form of equity or quasi-equity of the insured
bank Provided That the Corporation shall 4.3. Determination of Insured Deposits
dispose of such equity as soon as practicable. The Corporation shall commence the determination
of insured deposits upon its actual takeover of the
The Corporation, prior to the exercise of its powers, closed bank.
shall determine that actual payoff and liquidation
will be more expensive than the exercise of this In order that a claim for deposit insurance with the
power. PDIC may prosper, the law requires that a
corresponding deposit be placed in the insured
The Corporation may not use its authority to bank. A deposit as defined in Section 3(f), may be
purchase the voting or common stock of an insured constituted only if money or the equivalent of
bank but it can enter into and enforce agreements money is received by a bank:
that it determines to be necessary to protect its
financial interests. (f) The term "deposit" means the unpaid
balance of money or its equivalent received
3. Concept of Insured Deposits by a bank in the usual course of business
and for which it has given or is obliged to
The term insured deposit means the amount give credit to a commercial, checking,
due to any depositor for deposits in an insured savings, time or thrift account or which is
bank net of any obligation of the depositor to the evidenced by passbook, check and/or
insured bank as of the date of closure, but not to certificate of deposit (PDIC vs CA, 1997)
exceed P250,000.00.
The Corporation shall publish the notice once a
In determining such amount due to any depositor, week for at least 3 consecutive weeks in a
there shall be added together all deposits in the newspaper of general circulation or, when
bank maintained in the same right and capacity for appropriate, in a newspaper circulated in the
his benefit either in his own name or in the name community or communities where the closed bank
of others. or its branches are located.
4.5. Mode of Payment However, all rights of the depositor against the
Payment of the insured deposits shall be made by closed bank and its shareholders or the
the Corporation as soon as possible either receivership estate to which the Corporation may
by cash or have become subrogated, shall revert to the
by making available to each depositor a depositor.
transferred deposit in another insured.
5. Restriction on Payment of Dividends by
The term transfer deposit means a deposit in Insured Bank
an insured bank made available to a depositor by
the Corporation as payment of insured deposit of 5.1. General Rule:
such depositor in a closed bank and assumed by No insured bank shall pay any dividend on its
another insured bank. capital stock or interest on its capital notes or
debentures (if such interest is required to be paid
4.6. Conditions that may be imposed prior to only out of net profits) or distribute any of its
payment capital assets while it remains in default in the
The Corporation, in its discretion, may payment of any assessment due to the Corporation
require proof of claims to be filed before
paying the insured deposits 5.2. Exception:
Where the Corporation is not satisfied as to If such default is due to a dispute between the
the viability of a claim for an insured insured bank and the Corporation over the
deposit, it may require final determination amount of such assessment and Bank deposits
Sec. 13(b)
I. General Considerations
The term "public service" includes every person
A. Public Utilities that now or hereafter may own, operate, manage,
or control in the Philippines, for hire or
1987 Constitution, Article XII compensation, with general or limited clientele,
whether permanent, occasional or accidental, and
Section 11 done for general business purposes, any common
carrier, railroad, street railway, traction railway,
sub-way motor vehicle, either for freight or
No franchise, certificate, or any other form of
passenger, or both with or without fixed route and
authorization for the operation of a public utility
whether may be its classification, freight or carrier
shall be granted except to citizens of the
service of any class, express service, steamboat or
Philippines or to corporations or associations
steamship line, pontines, ferries, and water craft,
organized under the laws of the Philippines, at least
engaged in the transportation of passengers or
sixty per centum of whose capital is owned by such
freight or both, shipyard, marine railways, marine
citizens; nor shall such franchise, certificate, or
repair shop, [warehouse] wharf or dock, ice plant,
authorization be exclusive in character or for a
ice-refrigeration plant, canal, irrigation system,
longer period than fifty years. Neither shall any
gas, electric light, heat and power water supply and
such franchise or right be granted except under the
power, petroleum, sewerage system, wire or
condition that it shall be subject to amendment,
wireless communications system, wire or wireless
alteration, or repeal by the Congress when the
broadcasting stations and other similar public
common good so requires. The State shall
services: Provided, however, That a person
encourage equity participation in public utilities by
engaged in agriculture, not otherwise a public
the general public. The participation of foreign
service, who owns a motor vehicle and uses it
investors in the governing body of any public utility
personally and/or enters into a special contract
enterprise shall be limited to their proportionate
whereby said motor vehicle is offered for hire or
share in its capital, and all the executive and
compensation to a third party or third parties
managing officers of such corporation or
engaged in agriculture, not itself or themselves a
association must be citizens of the Philippines.
public service, for operation by the latter for a
limited time and for a specific purpose directly
Section 17 connected with the cultivation of his or their farm,
the transportation, processing, and marketing of
In times of national emergency, when the public agricultural products of such third party or third
interest so requires, the State may, during the parties shall not be considered as operating a
emergency and under reasonable terms prescribed public service for the purposes of this Act.
by it, temporarily take over or direct the operation
of any privately-owned public utility or business WHAT IS A PUBLIC UTILITY?
affected with public interest.
Kilusang Mayo Uno Labor Center v. Garcia
Agan, Jr. vs. PIATCO, 402 SCRA 612 (2003) (1994)
The Constitution envisions a situation wherein the Public utilities are privately owned and operated
exigencies of the times necessitated the businesses whose services are essential to the
government to temporarily take over or direct the general public. They are enterprises which specially
operation of any privately owned public utility or cater to the needs of the public and conduce to
business affected with public interest. Since the their comfort and convenience. As such, public
State, in this case, is merely exercising its police utility services are impressed with public interest
power, such exercise must not be unreasonably and concern. When, therefore, one devotes his
hampered nor can it be a source of obligation, in property to a use in which the public has an
the absence of damage due to arbitrariness. Also, interest, he, in effect grants to the public an
requiring, the government pay reasonable interest in that use, and must submit to the control
compensation for the reasonable use of the by the public for the common good, to the extent
property pursuant to the operation of the business of the interest he has thus created.
contravenes the Constitution.
Albano v. Reyes (1989)
Section 18 Franchises issued by Congress are not required
before each and every public utility may operate.
The State may, in the interest of national welfare A public utility is a business or service engaged in
or defense, establish and operate vital industries regularly supplying the public with some
and, upon payment of just compensation, transfer commodity or service of public consequence, such
to public ownership utilities and other private as electricity, gas, water, transportation, telephone
enterprises to be operated by the Government. or telegraph services. Apart from statutes which
define public utilities that are within the purview of
Section 19 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 State shall regulate or prohibit monopolies the term public utility implies a public use and
when the public interest so requires. No service to the public.
combinations in restraint of trade or unfair
competition shall be allowed.
WHEN IS A BUSINESS A PUBLIC UTILITY? conducted for that purpose. The object and
When it involves a commodity or service of purpose of such procedure, among other things, is
public consequence. to look out for, and protect, the interests of both
the public and the existing transport operators.
2 CONCEPTS OF PUBLIC UTILITY UNDER THE 1987
CONSTITUTION: Albano v. Reyes (1989)
1. A public utility is a partly nationalized business Franchises issued by Congress are not
endeavor required before each and every public utility may
2. It is a business affected with the public interest. operate.
(national emergency; general welfare; A public utility is a business or service
common good) engaged in regularly supplying the public with
some commodity or service of public consequence,
2 TESTS FOR DETERMINING PUBLIC UTILITY: such as electricity, gas, water, transportation,
1. Is it engaged in regularly supplying the public telephone or telegraph services. Apart from
with some commodity or service (per definition statutes which define public utilities that are within
in Albano v. Reyes below) the purview of such statutes, it would be difficult to
2. If #1 is uncertain, is it a public service as construct a definition of a public utility which would
defined in the Public Service Law under CA 146 fit every conceivable case. As its name indicates,
Sec 13(b)? If it falls under any one of the however, the term public utility implies a public use
examples given under CA 146 Sec 13(b), then it and service to the public.
is a public utility. Tatad v Garcia
What constitutes a public utility is not their
WHAT DOES REGULARLY SUPPLYING THE PUBLIC ownership but their use to serve the public.
MEAN?
The utility must hold itself out to the public as a PAL v. Civil Aeronautics Board (1997)
public utility by demand and as a matter of right, WON certificates of Public Convenience and
and not by permission. To determine what Necessity (franchise required) as used in RA 776
constitutes regularity, look at it from the to authorize the Board is different from
perspective of the public, and not the operator. Certificates of Public Convenience (no franchise
It is a service or a readiness to serve an indefinite required)? No
portion of the population subject only to the There is no authoritative basis in
limitations of the service as given by the grant such distinguishing a Certificate of Public Convenience
that [the utility] incurs a liability as a violation of and Necessity (franchise required) and a Certificate
its duty if it refuses, such that the availment of the of Public Convenience (no franchise required)
service has become, through time, a matter of based only on the use of the words convenience
right and not of mere privilege. (also in US v. Tan and necessity. The use of the word necessity in
Piaco) conjunction with public convenience in a
certificate of authorization to a public service entity
ARE ALL PUBLIC UTILITIES COMMODITIES OR SERVICE OF to operate, does not in any way modify the nature
PUBLIC CONSEQUENCE? of such certification, or the requirements for the
Yes. All public utilities have a public consequence. issuance of the same. It is the law which
But not all businesses bearing public consequence determines the requisites for the issuance of such
are public utilities. This is because almost all types certification, and not the title indicating the
of business have some form of regulation from the certificate.
State.
WHAT IS THE DIFFERENCE BETWEEN A
TO WHOM DOES PUBLIC REFER TO? IS THE WORD PUBLIC UTILITY AND A PUBLIC SERVICE?
PUBLIC IN PUBLIC UTILITY THE SAME IN PUBLIC
SERVICE? For all intents and purposes, they are the
There are three senses of the word public in same and are used interchangeably.
Transportation Law: a) public utility; b) public However, public utility is a broader concept
service; and c) definition of a common carrier that embraces public service. A public service is
under Art. 1732 of the Civil Code. necessarily a public utility, but not all public utilities
To determine a public utility, the two tests above & are public services.
the definition under Albano v. Reyes apply.
WHEN IS A PUBLIC UTILITY NOT A PUBLIC
WHAT IS A PUBLIC SERVICE? SERVICE?
Kilusang Mayo Uno Labor Center v. Garcia Jr. If it is not included in the enumeration in the
(1994) Public Service Act (CA 146 Sec. 13(b)) and Albano
In determining public need, the presumption v. Reyes.
of need for a service shall be deemed in favor of
the applicant. The burden of proving that there is HOW DO THEY DIFFER IN CONSTITUTIONAL
no need for a proposed service shall be with the RESTRICTIONS AND REQUIREMENTS?
oppositor(s).
Public convenience and necessity exists when If a business is a public utility, then it is
the proposed facility or service meets a reasonable subject to the limitations and restrictions provided
want of the public and supply a need which the for in the 1987 Constitution (Art 12 Secs.
existing facilities do not adequately supply. The 11,17,18,19) Since a public service is necessarily a
existence or nonexistence of public convenience public utility, therefore public services are subject
and necessity is therefore a question of fact that to the same Constitutional limitations and
must be established by evidence, real and/or restrictions.
testimonial; empirical data; statistics and such
other means necessary, in a public hearing
If a public utility is not a public service, it is and shall be appointed by the President of the
still subject to the same Constitutional limitations Philippines, with the consent of the Commission on
and restrictions. Appointments of the Congress of the Philippines:
Provided, however, That the present Commissioner
Therefore, public utility = Constitution and the personnel of the Commission shall continue
public service = Constitution + Public in office without the necessity of re-appointment.
Service Act The Commissioners shall have the rank and
privilege of retirement of Judges of the Courts of
B. Transportation First Instance. (As amended by Republic Act Nos.
DEFINITION 178 and 2677)
The movement of goods or persons from one
place to another, by a carrier. (Blacks Law SECTION 3
Dictionary)
A contract of transportation is one whereby a The Commissioner and Associate Commissioners
certain person or association of persons obligate shall hold office until they reach the age of seventy
themselves to transport persons, things, news from years, or until removed in accordance with the
one place to another for a fixed price. It is the procedures prescribed in section one hundred and
removal of goods or persons from one place to seventy-three of Act Numbered Twenty-seven
another. hundred and eleven, known as the Revised
Administrative Code: Provided, however, That upon
NOTE: retirement any Commissioner of Associate
Art. 1766 In all matters not regulated by this Commissioner shall be entitled to all retirement
Code, the rights and obligations of common carriers benefits and privileges for Judges of the Courts of
shall be governed by the Code of Commerce and by First Instance or under the retirement law to which
special laws. he may be entitled on the date of his retirement. In
case of the absence, for any reason, of the Public
PUBLIC NATURE Service Commissioner, the Associate Commissioner
It is for public use, which means that the with seniority of appointment shall act as
use is not confined to privileged individuals, but is Commissioner. If on account of absence, illness, or
instead open to an indefinite public. It is this incapacity of any of three Commissioners, or
indefinite or unrestricted quality that gives it its whenever by reason of temporary disability of any
public character. The true criterion by which to Commissioner or of a vacancy occurring therein,
judge the character of the use is whether the public the requisite number of Commissioners necessary
may enjoy it by right or by permission. There must to render a decision or issue an order in any case is
be, in general, a right under the law which compels not present, or in the event of a tie vote among the
the owner to give the service for the general public. Commissioners, the Secretary of Justice may
designate such number of Judges of the Courts of
PUBLIC SERVICE ACT First Instance, or such number of attorneys of the
legal division of the Commission, as may be
THE PUBLIC SERVICE LAW (CA 146) necessary to sit temporarily as Commissioners in
the Public Service Commission.
during the vacation months. (As amended by (c) The word "person" includes every individual,
Republic Act Nos. 176 and 3792) co-partnership, joint-stock company or corporation,
whether domestic or foreign, their lessees,
SECTION 11 trustees, or receivers, as well as any municipality,
province, city, government-owned or controlled
corporation, or agency of the Government of the
The Commission shall have the power to make
Philippines, and whatever other persons or entities
needful rules for its Government and other
that may own or possess or operate public
proceedings not inconsistent with this Act and shall
services. (As amended by Com. Act 454 and RA No.
adopt a common seal, and judicial notice shall be
2677)
taken for such seal. True copies of said rules and
other amendments shall be promptly furnished to
the Bureau of Printing and shall be forthwith SECTION 14
published in the Official Gazette.
The following are exempted from the provisions of
SECTION 13 the preceding section:
of public services, and to authorizations to renew observed, and followed thereafter by any public
and increase equipment and properties. service.
(a) To issue certificates which shall be known as (f) To establish reasonable rules, regulations,
certificates of public convenience, authorizing the instructions, specifications, and standards, to
operation of public service within the Philippines secure the accuracy of all meters and appliances
whenever the Commission finds that the operation for measurements.
of the public service proposed and the
authorization to do business will promote the public (g) To compel any public service to furnish safe,
interest in a proper and suitable manner. Provided, adequate, and proper service as regards the
That thereafter, certificates of public convenience manner of furnishing the same as well as the
and certificates of public convenience and necessity maintenance of the necessary material and
will be granted only to citizens of the Philippines or equipment.
of the United States or to corporations, co-
partnerships, associations or joint-stock companies (h) To require any public service to establish,
constituted and organized under the laws of the construct, maintain, and operate any reasonable
Philippines; Provided, That sixty per centum of the extension of its existing facilities, where in the
stock or paid-up capital of any such corporations, judgment of said Commission, such extension is
co-partnership, association or joint-stock company reasonable and practicable and will furnish
must belong entirely to citizens of the Philippines or sufficient business to justify the construction and
of the United States: Provided, further, That no maintenance of the same and when the financial
such certificates shall be issued for a period of condition of the said public service reasonably
more than fifty years. warrants the original expenditure required in
making and operating such extension.
(b) To approve, subject to constitutional limitations
any franchise or privilege granted under the (i) To direct any railroad, street railway or traction
provisions of Act No. Six Hundred and Sixty-seven, company to establish and maintain at any junction
as amended by Act No. One Thousand and twenty- or point of connection or intersection with any
two, by any political subdivision of the Philippines other line of said road or track, or with any other
when, in the judgment of the Commission, such line of any other railroad, street railway or traction
franchise or privilege will properly conserve the to promote, such just and reasonable connection as
public interests, and the Commission shall in so shall be necessary to promote the convenience of
approving impose such conditions as to shippers of property, or of passengers, and in like
construction, equipment, maintenance, service, or manner direct any railroad, street railway, or
operation as the public interests and convenience traction company engaged in carrying
may reasonably require, and to issue certificates of merchandise, to construct, maintain and operate,
public convenience and necessity when such is upon reasonable terms, a switch connection with
required or provided by any law or franchise. any private sidetrack which may be constructed by
any shipper to connect with the railroad, street
(c) To fix and determine individual or joint rates, railway or traction company line where, in the
tolls, charges, classifications, or schedules thereof, judgment of the Commission, such connection is
as well as commutation, mileage, kilometrage, and reasonable and practicable and can be out in with
other special rates which shall be imposed safety and will furnish sufficient business to justify
observed and followed thereafter by any public the construction and maintenance of the same.
service: Provided, That the Commission may, in its
discretion, approve rates proposed by public (j) To authorize, in its discretion, any railroad,
services provisionally and without necessity of any street railway or traction company to lay its tracks
hearing; but it shall call a hearing thereon within across the tracks of any other railroad, street
thirty days, thereafter, upon publication and notice railway or traction company or across any public
to the concerns operating in the territory affected: highway.
Provided, further, That in case the public service
equipment of an operator is used principally or
(k) To direct any railroad or street railway
secondarily for the promotion of a private business,
company to install such safety devices or about
the net profits of said private business shall be
such other reasonable measures as may in the
considered in relation with the public service of
judgment of the Commission be necessary for the
such operator for the purpose of fixing the rates.
protection of the public are passing grade crossing
of (1) public highways and railroads, (2) public
(d) To fix just and reasonable standards, highways and streets railway, or (3) railways and
classifications, regulations, practices, street railways.
measurement, or service to be furnished, imposed,
20
(l) To fix and determine proper and adequate rates
The powers of the Public Service Commission of depreciation of the property of any public service
were asked in 1993. which will be observed in a proper and adequate
reduction to less than sixty per centum of the produce the immediate cancellation of the
capital stock belonging to Philippine citizens. Such certificate without the necessity of any express
sale, alienation or transfer shall be void and of no action on the part of the Commission.
effect and shall be sufficient cause for ordering the
cancellation of the certificate. A CPC is any authorization to operate a public
service issued by the PSC (now DOTC).
Y Transit v. NLRC
The sale, alienation or other encumbrance of a
It is an authorization issued by the
public service operators properties requires the
Commission for the operation of public services for
previous approval and authorization of the
which no franchise, either municipal or
Commission.
legislative, is required by law) e.g. motor
NOTE: The Public Service Commission does not vehicles
exist anymore. It is now the Department of
Transportation and Communications. It constitutes neither a franchise nor a
contract, it does not confer property rights, and is a
THE CERTIFICATE OF PUBLIC CONVENIENCE (CPC); THE mere license or privilege. (Pantranco v. PSC) Such
CERTIFICATE OF PUBLIC CONVENIENCE & NECESSITY privilege is forfeited when the grantee fails to
(CPCN) AND THE PRIOR OPERATOR RULE comply with his commitments to serve the public
and public necessity. However, these certificates
Does the sale of a CPC, CPCN or other properties of represent property rights to the extent that if the
the public utility have to be approved before it is rights which any public utility is exercising pursuant
sold to a third person? to the lawful orders of the PSC (now DOTC) has
No. The approval of the sale of CPCs, CPCNs or been invaded by another public utility, in
other properties does not affect the validity appropriate cases, actions may be maintained by
(perfection) of the sale between the parties as long the complainant public utility.
as all the elements of a contract are met. This only
affectes the relation of the parties to the DOTC or
to 3rd parties. If there is no approval, then the sale Which public utilities are exempted from getting a
does not bind the DOTC or 3rd parties. The CPC?
controlling factor therefore is the registration.
The Public Service Law, Sec. 14
If a stockholder of a public utility transfers his
stock to the 3rd person, is there a need to obtain The following are exempted from the provisions of
the approval of the DOTC? the preceding section:
Before or after the execution of the contract. (c) Airships within the Philippines except as
regards the fixing of their maximum rates on
freight and passengers;
What if the transferree is an alien?
Is a franchise enough in order to operate? The prior operator rule is inapplicable where
the corporate existence of the prior operator has
expired.
No. All public utilities require either a CPC or
CPCN to operate. Those public utilities for which
franchises have been granted still require a CPCN Regular operators are preferred over irregular
in order to operate. Those public utilities that did operators.
not require a franchise for there creation still
require a CPC in order to operate. The Commission cannot grant a CPC or CPCN
that comprises a larger territory than that applied
Raymundo v. Luneta Motor Corporation for.
(1933)
The Public Service Law, Act No. 3108, as How do you know whether there is ruinous
amended, authorizes certificates of public competition enough for the prior operator rule to
convenience to be secured by public service take effect?
operators from the PSC. A CPC granted to the
owner or operator of public service motor vehicles Ruinous competition means that there is
grants a right in the nature of a limited franchise. actual ruin of the business of the operator; that the
The Code of Civil Procedure establishes the existing operator will not gain enough profits if
general rule that "property, both real and personal, another person is allowed to enter the business;
or any interest therein of the judgment debtor, not that which will result in the deprivation of sufficient
exempt by law, and all property and rights of gain in respect of reasonable return of investment,
property seized and held under attachment in the therefore the oppositor, alleging this, must show
action, shall be liable to execution." The statutory that he will be deprived of a reasonable return on
exemptions do not include franchises or his investment.
certificates; of public convenience. The word
"property" as used in section 450 of the Code of
The mere possibility of reduction in the
Civil Procedure comprehends every species of title,
earnings of the business or the deterioration in the
inchoate or complete, legal or equitable. The TEST
income of his business is not sufficient to prove
to determine whether or not property can be
ruinous competition. It must be shown that the
attached and sold upon execution is whether the
business would not have sufficient gains to pay a
judgment debtor has such a beneficial interest
fair rate of interest on his capital investments.
therein that he can sell or otherwise dispose of it
for value.
Now the Public Service Law permits the PSC to Does the prior operator rule create a monopoly?
approve the sale, alienation, mortgaging,
encumbering, or leasing of property, franchises, Legally speaking, there cannot be a monopoly
privileges, or rights or any part thereof (sec. 16 when a property is operated as a public utility. The
[h]), and in practice the purchase and sale of prior operator rule does not encourage a monopoly
certificates of public convenience has been because the theory is that one operator keeps the
permitted by the PSC. If the holder of a CPC can prices low.
sell it voluntarily, there is no valid reason why the
same certificate cannot be taken and sold Batangas Transportation Co. v. Cayetano
involuntarily pursuant to court process. Orlanes (1928)
CPCs secured by public service operators are liable
to execution, and the Public Service Commission is So long as the 1st licensee keeps and performs
authorized to approve the transfer of the the terms and conditions of its license and complies
certificates of public convenience to the execution with the reasonable rules and regulations of the
creditor. Commission and meets the demands of the public,
it should have more or less of a bested 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 this defeat the very Thus, The rule is established by the weight of
purpose and intent for the PSC was created. authority that the owner or operator of an
automobile owes the duty to an invited guest to
San Pablo v. Pantranco (1987) exercise reasonable care in its operation, and not
unreasonably to expose him to danger and injury
by increasing the hazard of travel. Valencia
Before private respondent may be issued a
therefore is only required to observe ordinary care,
franchise or CPC for the operation of the said
and is not in duty bound to exercise extraordinary
service as a common carrier, it must comply with
diligence as required of a common carrier by our
the usual requirements of filing an application,
law (Art. 1755 & 1756, new CC)
payment of the fees, publication, adducing
evidence at a hearing and affording the oppositors
ARISING FROM A TRANSPORTATION CONTRACT
the opportunity to be heard, among others, as
provided by law. Considering the environmental
Contract of transportation, defined;
circumstances of the case, the conveyance of
A contract of transportation is one whereby
passengers, trucks and cargo from Matnog to Allen
a certain person or association of persons obligate
is certainly not a ferry boat service but a coastwise
themselves to transport persons, things, or news
or interisland shipping service. Under no
from one to another for a fixed price.
circumstance can the sea between Matnog and
Allen be considered a continuation of the highway,
Contract of transportation, elements;
Matnog and Allen are separated by an open sea. Its
Parties to the contract:
CPC as a bus transportation cannot be merely
Shipper - one who gives rise to the contract of
amended to include this water service under the
transportation by agreeing to deliver the things or
guise that it is a mere private ferry service.
news to be transported, or to present his own
person or those of other or others in the case of
transportation of passengers
What is an example of the kabit system?21 Carrier or conductor - one who binds himself to
A, a grantee of a CPC from the LTFRB, is given transport person, things, or news, as the case may
the authority to operate 10 units of taxis. B, a non- be, or one employed in or engaged in the business
grantee, wishes to operate as a common carried of carrying good for others for hire
and kabits with the CPC of A who will obtain Consignee - the party to whom the carrier is to
approval from the LTFRB to operate another taxi. deliver the things being transported; to whom the
The taxi will be registered in the name of A, who carrier may lawfulyy make delivery in accordance
will be paid by B. with its contract of carriage. The shipper and the
Assume that A executed a deed of sale in consignee may be the same person.
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 put up as
a defense.
A does not have a cause of action against B
either. They are in pari delicto.
21
This was asked in 2005. Know the definition of the
Kabit System and the liability of the party.
D. Contract of Carriage
III. Code of Commerce Provisions on 1. BILL OF LADING
Overland Transportation
DEFINITION, SUBJECT MATTER
(unless otherwise indicated, reference is to Code of
Commerce) ARTICLE 352
Bills of lading or tickets in the case of
What does the Code of Commerce cover? transportation of passengers may be different, one
It governs over overland transporation and for persons and another for baggage, but all of
maritime admiralty. It governs only commercial them shall contain the name of the carrier, the
contracts. date of shipment, the points of departure and
arrival, the price, and with regard to baggage, the
Commercial contracts involving common carriers number and weight of the packages, with any other
refer first to the Civil Code, then to the Code of indications which may be considered necessary in
Commerce order to easily identify them.
What is overland transport? Each bill of lading is a contract in itself and the
Overland transport applies to transport on land and parties are bound by its terms. A bill of lading is
on small bodies of water, waterways, both natural also a receipt, and it is likewise a symbol of the
and artificial, including transport on rivers which goods covered by it. It is also a document of title.
are not very large. (If it is transport at sea, then it
is admiralty)
Who are the parties to a bill of lading?
ARTICLE 364
ARTICLE 369
If the effect of the damage referred to in Article
Should the consignee be not found at the domicile
361 should be only a reduction in the value of the
indicated in the bill of lading, or should refuse to
goods, the obligation of the carrier shall be reduced
pay the transportation charges and expenses, or to
to the payment of the amount of said reduction in
receive the goods, the deposit of said goods shall
value, after appraisal by experts.
be ordered by the municipal judge, where there is
no judge of first instance, to be placed at the
disposal of the shipper or sender, without prejudice
to a person having a better right, this deposit COMPLIANCE WITH ADMINISTRATIVE REGULATIONS
having all the effects of a delivery.
ARTICLE 377
Art. 1752 The carrier shall be liable for all the consequences
arising from noncompliance on his part with the
Even when there is an agreement limiting the formalities prescribed by the laws and regulations
liability of the common carrier in the vigilance over of the public administration during the entire
the goods, the common carrier is disputably course of the trip and on the arrival at the point of
presumed to have been negligent in case of their destination, except when his omission arises from
loss, destruction or deterioration. his having been induced into error by false
statements of the shipper in the declaration of the
merchandise.
WHEN TO BE MADE
If the carrier has acted in accordance with a formal
order received from the shipper or consignee of the
ARTICLE 370 merchandise both shall incur liability.
If a period has been fixed for the delivery of the
goods, it must be made within the same, and
otherwise the carrier shall pay the indemnity
agreed upon in the bill of lading, neither the F. Rights and Obligations of Shipper and/or
shipper nor consignee being entitled to anything Consignee
else.
Should no indemnity have been agreed upon and
the delay exceeds the time fixed in the bill of 1. RIGHTS TO DAMAGES
lading, the carrier shall be liable for the damages
which may have been caused by the delay. CONDITION IMPOSED ON RIGHT
ARTICLE 353
OBLIGATION TO KEEP REGISTRY The legal basis of the contract between the shipper
and the carrier shall be the bills of lading, by the
ARTICLE 378 contents of which all disputes which may arise with
Transportation agents shall be obliged to keep a regard to their execution and fulfillment shall be
special registry, with the formalities required by decided without admission of other exceptions than
Article 36, in which there shall be entered, in forgery or material errors in the drafting thereof.
progressive order of numbers and dates, all the After the contract has been complied with the bill of
goods the transportation of which is undertaken, lading issued by the carrier shall be returned to
stating the circumstances required by Articles 350 him, and by virtue of the exchange of this
et seq. for the responsive bills of lading. certificate for the article transported, the respective
obligations and actions shall be considered as
canceled, unless in the same act the claims which
the contracting parties desired to reserve are
reduced to writing, exception being made of the
provisions of Article 366.
If in case of loss or for any other reason transported on the day and at the place where the
whatsoever, the consignee can not return upon delivery was to have been made. The same
receiving the merchandise the bill of lading provision shall be observed in all cases where this
subscribed by the carrier, he shall give said carrier indemnity is due.
a receipt for the goods delivered, this receipt
producing the same effects as the return of the bill ARTICLE 360
of lading. The shipper may, without changing the place where
the delivery is to be made, change the
AMOUNT OF DAMAGES FOR LOSS consignment of the goods delivered to the carrier,
and the latter shall comply with his orders,
provided that at the time of making the change of
ARTICLE 372
the consignee the bill of lading subscribed by the
The appraisement of the goods which the carrier
carrier be returned to him, if one were issued,
must pay in case of their being lost or mislaid shall
exchanging it for another containing the novation
be fixed in accordance with what is stated in the bill
of the contract.
of lading, no proofs being allowed on the part of
The expenses arising from the change of
the shipper that there were among the goods
consignment shall be defrayed by the shipper.
declared therein articles of greater value, and
money.
ARTICLE 363
Horses, vehicles, vessels, equipment, and all the
With the exception of the cases prescribed in the
other principal and accessory means of
second paragraph of Article 361, the carrier shall
transportation, shall be especially obligated in favor
be obliged to deliver the goods transported in the
of the shipper, although with relation to railroads
same condition in which, according to the bill of
said obligation shall be subordinated to the
lading, they were at the time of their receipt,
provisions of the laws of concession with regard to
without any detriment or impairment, and should
property and to those of this Code with regard to
he not do so, he shall be obliged to pay the value
the manner and form of making attachments and
of the goods not delivered at the point where they
retentions against the said companies.
should have been and at the time the delivery
should have taken place.
Art. 1744 If part of the goods transported should be delivered
the consignee may refuse to receive them, when he
A stipulation between the common carrier and the proves that he can not make use thereof without
shipper or owner limiting the liability of the former the others.
for the loss, destruction, or deterioration of the
goods to a degree less than extraordinary diligence ARTICLE 365
shall be valid, provided it be: If, on account of the damage, the goods are
rendered useless for purposes of sale or
(1) In writing, signed by the shipper or owner; consumption in the use for which they are properly
destined the consignee shall not be bound to
receive them, and may leave them on the hands of
(2) Supported by a valuable consideration other the carrier, demanding payment therefor at current
than the service rendered by the common carrier; market prices.
and If among the goods damaged there should be some
in good condition and without any defect
(3) Reasonable, just and not contrary to public whatsoever, the foregoing provision shall be
policy. applicable with regard to the damaged ones, and
the consignee shall receive those which are sound,
AMOUNT OF DAMAGES FOR DELAY this separation being made by distinct and separate
articles, no object being divided for the purpose,
unless the consignee proves the impossibility of
ARTICLE 371(3).
conveniently making use thereof in this form.
Should the abandonment not occur the indemnity
The same provision shall be applied to merchandise
for loss and damages on account of the delays can
in bales or packages, with distinction of the
not exceed the current price of the goods
packages which appear sound.
transported on the day and at the place where the
delivery was to have been made. The same
provision shall be observed in all cases where this
3. RIGHT TO CHANGE CONSIGNMENT
indemnity is due.
ARTICLE 360
The shipper may, without changing the place where
the delivery is to be made, change the
2. RIGHT TO ABANDON
consignment of the goods delivered to the carrier,
ARTICLE 371
and the latter shall comply with his orders,
In cases of delay on account of the fault of the
provided that at the time of making the change of
carrier, referred to in the foregoing articles, the
the consignee the bill of lading subscribed by the
consignee may leave the goods transported on the
carrier be returned to him, if one were issued,
hands of the carrier, informing him thereof in
exchanging it for another containing the novation
writing before the arrival of the same at the point
of the contract.
of destination.
The expenses arising from the change of
When this abandonment occurs, the carrier shall
consignment shall be defrayed by the shipper.
satisfy the total value of the goods, as if they had
been lost or mislaid. aisadc
Should the abandonment not occur the indemnity
for loss and damages on account of the delays can
not exceed the current price of the goods
(9) Credits for transportation, upon the goods Jurisdiction in civil cases. Regional Trial Courts
carried, for the price of the contract and incidental shall exercise exclusive original jurisdiction:
expenses, until their delivery and for thirty days
thereafter;
(3) In all actions in admiralty and maritime
jurisdiction where he demand or claim exceeds One
hundred thousand pesos (P100,000.00) or , in
Metro Manila, where such demand or claim exceeds
5. OBLIGATION TO RETURN BILL OF Two hundred thousand pesos (200,000.00);
LADING
ARTICLE 353. (2) (3) Section 33. Jurisdiction of Metropolitan Trial Courts,
After the contract has been complied with the bill of Municipal Trial Courts and Municipal Circuit Trial
lading issued by the carrier shall be returned to Courts in civil cases. Metropolitan Trial Courts,
him, and by virtue of the exchange of this Municipal Trial Courts, and Municipal Circuit Trial
certificate for the article transported, the respective Courts shall exercise:
obligations and actions shall be considered as
canceled, unless in the same act the claims which
the contracting parties desired to reserve are (1) Exclusive original jurisdiction over civil actions
reduced to writing, exception being made of the and probate proceedings, testate and intestate,
provisions of Article 366. including the grant of provisional remedies in
If in case of loss or for any other reason proper cases, where the value of the personal
whatsoever, the consignee can not return upon property, estate, or amount of the demand does
receiving the merchandise the bill of lading not exceed One hundred thousand pesos
subscribed by the carrier, he shall give said carrier (P100,000.00) or, in Metro Manila where such
a receipt for the goods delivered, this receipt personal property, estate, or amount of the
producing the same effects as the return of the bill demand does not exceed Two hundred thousand
of lading. pesos (P200,000.00) exclusive of interest damages
of whatever kind, attorney's fees, litigation
expenses, and costs, the amount of which must be
G. Applicability of Provisions
specifically alleged: Provided, That where there are
ARTICLE 379 several claims or causes of action between the
The provisions contained in Articles 349 et seq. same or different parties, embodied in the same
shall also be understood as relating to persons complaint, the amount of the demand shall be the
totality of the claims in all the causes of action, D. Persons Participating in Maritime
irrespective of whether the causes of action arose Commerce
out of the same or different transactions;
fund, for the results of the acts of the captain, If the interest of the petitioners should be the
referred to in Article 587. same, and there should be a tie, the matter shall
Each part owner may exempt himself from this be decided by lot.
liability by the abandonment before a notary of the
part of the vessel belonging to him. ARTICLE 597
The agent shall select and come to an agreement
ARTICLE 591 with the captain, and shall contract in the name of
All the part owners shall be liable, in proportion to the owners, who shall be bound in all that refers to
their respective ownership, for the expenses of repairs, details of equipment, armament,
repairs to the vessel, and for other expenses which provisions, fuel, and freight of the vessel, and, in
are incurred by virtue of a resolution of the general, in all that relates to the requirements of
majority. navigation.
They shall likewise be liable in the same proportion
for the expenses of maintenance, equipment, and ARTICLE 598
provisioning of the vessel, necessary for The agent can not order a new voyage, nor make
navigation. contracts for a new charter, nor insure the vessel,
without the authority of her owner or by virtue of a
ARTICLE 592 resolution of the majority of the co-owners, unless
The resolutions of the majority with regard to the these privileges were granted him in the certificate
repair, equipment, and provisioning of the vessel in of his appointment.
the port of departure shall bind the majority unless If he should insure the vessel without authority
the partners in the minority renounce their therefor he shall be secondarily liable for the
participation therein, which must be acquired by solvency of the underwriter.
the other part owners after a judicial appraisement
of the value of the portion or portions assigned. ARTICLE 599
The resolutions of the majority relating to the The managing agent of an association, shall give
dissolution of the association and sale of the vessel his co-owners an account of the results of each
shall also be binding on the minority. voyage of the vessel, without prejudice to always
The sale of the vessel must take place at a public having the books and correspondence relating to
auction, subject to the provisions of the law of civil the vessel and to its voyages at the disposal of the
procedure unless the part owners unanimously same.
agree otherwise, the right of option to purchase
and to withdraw mentioned in Article 575 being ARTICLE 600
always reserved in favor of said part owners. After the account of the managing agent has been
approved by a relative majority, the co-owners
ARTICLE 593 shall satisfy the expenses in proportion to their
The owners of a vessel shall have preference in her interest, without prejudice to the civil or criminal
charter to other persons, offering equal conditions actions which the minority may deem fit to institute
and price. If two or more of the former should afterwards.
claim said right the one having greater interest In order to enforce the payment, the managing
shall be preferred, and should they have an equal agent shall have a right of action to secure
interest it shall be decided by lot. execution, which shall be instituted by virtue of a
resolution of the majority, and without further
ARTICLE 594 proceedings than the acknowledgment of the
The part owners shall elect the manager who is to signatures of the persons who voted the resolution.
represent them in the capacity of agent.
The appointment of director or agent shall be ARTICLE 601
revocable at the will of the members. Should there be any profits, the co-owners may
demand of the managing agent the amount due
ARTICLE 595 them, by means of an executory action without
The agent, be he at the same time an owner of a further requisites than the acknowledgment of the
vessel or a manager for an owner or for an signatures of the instrument approving the
association of co-owners, must be qualified to trade account.
and must be recorded in the merchant's registry of
the province. ARTICLE 602
The agent shall represent the ownership of the The agent shall indemnify the captain for all the
vessel, and may in his own name and in such expenses he may have incurred from his own funds
capacity take judicial and extrajudicial steps in all or from those of other persons, for the benefit of
that relates to commerce. the vessel.
ARTICLE 603
Before a vessel goes out to sea the agent shall
have at his discretion, a right to discharge the
ARTICLE 596 captain and members of the crew whose contract
The agent may discharge the duties of captain of did not state a definite period nor a definite
the vessel, subject, in every case, to the provisions voyage, paying them the salaries earned according
contained in Article 609. to their contracts, and without any indemnity
If two or more co-owners request the position of whatsoever, unless there is a special and specific
captain, the disagreement shall be decided by a agreement in respect thereto.
vote of the members; and if the vote should result
in a tie, the position shall be given to the part ARTICLE 604
owner having the larger interest in the vessel. If the captain or any other member of the crew
should be discharged during the voyage, they shall
receive their salary until the return to the place
where the contract was made, unless there are with the shippers or supercargoes who may be on
good reasons for the discharge, all in accordance board.
with Articles 636 et seq. of this Code. No exception whatsoever shall exempt him
from this obligation.
ARTICLE 605 7. For those arising by reason of his
If the contracts of the captain and members of the voluntarily entering a port other than his
crew with the agent should be for a definite period destination, with the exception of the cases or
or voyage, they can not be discharged until the without the formalities referred to in Article 612.
fulfillment of their contracts, except for reasons of 8. For those arising by reason of the non-
insubordination in serious matters, robbery, theft, observance of the provisions contained in the
habitual drunkenness, and damage caused to the regulations for lights and evolutions for the purpose
vessel or to its cargo by malice or manifest or of preventing collisions.
proven negligence.
ARTICLE 606
If the captain should be a part owner in the vessel,
Standard Oil v. Castelo (1921)
he can not be discharged without the agent
returning him the amount of his interest therein,
which, in the absence of an agreement between the In considering the question now before us it is
parties, shall be appraised by experts appointed in important to remember that the owner of the ship
the manner established in the law of civil ordinarily has vastly more capital embarked upon a
procedure. voyage than has any individual shipper of cargo.
Moreover, the owner of the ship, in the person of
ARTICLE 607 the captain, has complete and exclusive control of
If the captain who is a part owner should have the crew and of the navigation of the ship, as well
obtained the command of the vessel by virtue of a as of the disposition of the cargo at the end of the
special agreement contained in the articles of co- voyage. It is therefore proper that any person
partnership, he can not be deprived thereof except whose property may have been cast overboard by
for the reasons mentioned in Article 605. order of the captain should have a right of action
directly against the ship's owner for the breach of
ARTICLE 608 any duty which the law may have imposed on the
In case of the voluntary sale of the vessel, all captain with respect to such cargo. To adopt the
contracts between the agent and captain shall interpretation of the law for which the appellant
terminate, the right to proper indemnity being contends would place the shipowner in a position to
reserved in favor of the captain, according to the escape all responsibility for a general average of
agreements made with the agent. this character by means of the delinquency of his
They vessel sold shall remain subject to the own captain. This cannot be permitted. The evident
security of the payment of said indemnity if, after intention of the Code, taken in all of its provisions,
the action against the vendor has been instituted, is to place the primary liability upon the person
the latter should be insolvent. who has actual control over the conduct of the
voyage and who has most capital embarked in the
venture, namely, the owner of the ship, leaving
him to obtain recourse, as it is very easy to do,
from other individuals who have been drawn into
ARTICLE 618 the venture as shippers.
The captain shall be civilly liable to the agent, and
the latter to the third persons who may have made
contracts with the former
1. For all the damages suffered by the vessel
and his cargo by reason of want of skill or RESPONSIBILITIES AND LIABILITIES
negligence on his part. If a misdemeanor or crime
has been committed he shall be liable in Yu Con v. Ipil (1916)
accordance with the Penal Code. cda
2. For all the thefts committed by the crew, As to the shipowner: Estasen, makes the
reserving his right of action against the guilty following remarks: It is well and good that the
parties. shipowner be not held criminally liable for such
3. For the losses, fines, and confiscations crimes or quasi crimes; but the cannot be excused
imposed an account of violation of the laws and from liability for the damage and harm which, in
regulations of customs, police, health, and consequence of those acts, may be suffered by the
navigation. third parties who contracted with the captain, in his
4. For the losses and damages caused by double capacity of agent and subordinate of the
mutinies on board the vessel, or by reason of faults shipowner himself. In maritime commerce, the
committed by the crew in the service and defense shippers and passengers in making contracts with
of the same, if he does not prove that he made full the captain do so through the confidence they have
use of his authority to prevent or avoid them. in the shipowner who appointed him; they presume
5. For those arising by reason of an undue use that the owner made a most careful investigation
of powers and non-fulfillment of the obligations before appointing him, and, above all, they
which are his in accordance with Articles 610 and themselves are unable to make such an
612. investigation, and even though they should do so,
6. For those arising by reason of his going out they could not obtain complete security, inasmuch
of his course or taking a course which he should as the shipowner can, whenever he sees fir,
not have taken without sufficient cause, in the appoint another captain instead.
opinion of the officers of the vessel, at a meeting
DOCTRINE OF LIMITED LIABILITY AND EXCEPTIONS23 conditions and encourage shipbuilding and
maritime commerce, it was deemed necessary to
ARTICLE 587 confine the liability of the owner or agent arising
The agent shall also be civilly liable for the from the operation of a ship to the vessel,
indemnities in favor of third persons which arise equipment, and freight, or insurance, if any, so
from the conduct of the captain in the care of the that if the shipowner or agent abandoned the ship,
goods which the vessel carried; but he may exempt equipment, and freight, his liability was
himself therefrom by abandoning the vessel with all extinguished.
her equipments and the freight he may have If an accident is compensable under the Workmen's
earned during the voyage. Compensation Act, it must be compensated even
when the workman's right is not recognized by or is
ARTICLE 590 in conflict with other provisions of the Civil Code or
The owners of a vessel shall be civilly liable in the the Code of Commerce. The reason behind this
proportion of their contribution to the common principle is that the Workmen's Compensation Act
fund, for the results of the acts of the captain, was enacted by the Legislature in abrogation of the
referred to in Article 587. other existing laws.
Each part owner may exempt himself from this
liability by the abandonment before a notary of the
part of the vessel belonging to him. SPECIFIC RIGHTS AND PREROGATIVES
ARTICLE 583
If the ship being on a voyage the captain should DUTIES AND LIABILITIES
find it necessary to contract one or more of the
obligations mentioned in Nos. 8 and 9 of Article ARTICLE 635
580, he shall apply to the judge or court if he is in A sailor who has been contracted to serve on a
Spanish * territory, and otherwise to the consul of vessel can not rescind his contract nor fail to
1. A declaration of war or interdiction of attendance and cure shall be defrayed from the
commerce with the power to whose territory the common funds, in the form of a loan.
vessel was bound. If the sickness should be caused by an injury
2. The blockade of the port of destination or received in the service or defense of the vessel the
the breaking out of an epidemic after the sailor shall be attended and cured from the
agreement. common funds, there being deducted before
3. The prohibition to receive in said port the anything else from the proceeds of the freight, the
goods which make up the cargo of the vessel. cost of the attendance and cure.
4. The detention or embargo of the same by
order of the Government, or for any other reason
independent of the will of the agent.
5. The inability of the vessel to navigate. ARTICLE 645
If a sailor should die during the voyage his heir
ARTICLE 641 shall be given the wages earned and not received,
If, after a voyage has been begun, any of the first according to his engagement and the reason for his
three causes mentioned in the foregoing article death, namely
should occur, the sailors shall be paid at the port If he should have died a natural death and should
the captain may deem it advisable to make for the have been engaged on wages there shall be paid
benefit of the vessel and cargo, according to the what may have been earned up to the date of his
time they may have served thereon; but if the death.
vessel is to continue the voyage, the captain and If the engagement had been made for a fixed sum
the crew may mutually demand the enforcement of for the whole voyage there shall be paid half the
the contract. amount earned if the sailor died on the voyage out,
In case of the occurrence of the fourth cause, the and the whole amount if he died on the return
crew shall continue to be paid half wages, if the voyage.
agreement is by month but if the detention should And if the engagement had been made on shares
exceed three months, the engagement shall be and the death should have occurred after the
rescinded and the crew shall be paid what they voyage was begun, the heirs shall be paid the
should have earned, according to the contract, if entire portion due the sailor; but should the latter
the voyage had been made. And if the agreement have died before the departure of the vessel from
had been made for a fixed sum for the voyage, the the port, the heirs shall not be entitled to claim
contract must be complied within the terms agreed anything.
upon. If the death should have occurred in the defense of
In the fifth case, the crew shall not have any other the vessel, the sailor shall be considered as living,
right than be entitled to recover the wages earned; and his heirs shall be paid, at the end of the
but if the disability of the vessel should have been voyage, the full amount of wages or the full part of
caused by the negligence or lack of skill of the the profits due him as to the others of his grade.
captain, engineer, or sailing mate, they shall The sailor shall likewise be considered as present in
indemnify the crew for the loss suffered, always the event of his capture when defending the vessel,
reserving the criminal liability which may be in order to enjoy the same benefits as the rest; but
proper. should he have been captured on account of
carelessness or other accident not related to the
ARTICLE 642 service, he shall only receive the wages due up to
If the crew has been engaged to work on shares the day of his capture.
they shall not be entitled, by reason of the
revocation, delay, or greater extension of the ARTICLE 646
voyage, to anything but the proportionate part of The vessel with her engines, rigging, equipment,
the indemnity paid into the common funds of the and freights shall be liable for the wages earned by
vessel by the persons liable for said occurrences. the crew engaged per month or for the trip, the
liquidation and payment ought to take place
ARTICLE 643 between one voyage and the other.
If the vessel and her freight should be totally lost, After a new voyage has been undertaken, credits
by reason of capture or wreck, all rights of the crew such as the former shall lose their right of
to demand any wages whatsoever shall be preference.
extinguished, as well as that of the agent for the
recovery of the advances made. ARTICLE 647
If a portion of the vessel or freight should be The officers and the crew of the vessel shall be
saved, or part of either, the crew engaged on exempted from all obligations contracted, if they
wages, including the captain, shall retain their deem it proper, in the following cases:
rights on the salvage, so far as they go, on the 1. If, before the beginning of the voyage, the
remainder of the vessel as well as value of the captain attempts to change it, or there occurs a
freightage or the cargo saved; but sailors who are naval war with the power to which the vessel was
engaged on shares shall not have any right destined.
whatsoever to the salvage of the hull, but only on 2. If a disease should break out and be
the portion of the freightage saved. If they should officially declared epidemic in the port of
have worked to collect the remainder of the ship- destination.
wrecked vessel, they shall be given an award in 3. If the vessel should change owner or
proportion to the efforts made and to the risks captain.
encountered in order to accomplish the salvage.
ARTICLE 644
A sailor who falls sick shall not lose his right to
wages during the voyage, unless the sickness is the
result of his own fault. At any rate, the costs of the
(a) Defined
(b) Essential Requisites
ARTICLE 811
General or gross averages shall be, as a general ARTICLE 813
rule, all the damages and expenses which are In order to incur the expenses and cause the
deliberately caused in order to save the vessel, her damages corresponding to gross average, a
cargo, or both at the same time, from a real and previous resolution of the captain, adopted after
known risk, and particularly the following: deliberation with the sailing mate and other officers
1. The goods or cash invested in the of the vessel, and with a hearing of the persons
redemption of the vessel or cargo captured by interested in the cargo who may be present, shall
enemies, privateers, or pirates, and the provisions, be required.
wages, and expenses of the vessel detained during If the latter shall object, and the captain and
the time the arrangement or redemption is taking officers, or a majority, or the captain, if opposed to
place. the majority, should consider certain measures
2. The goods jettisoned to lighten the vessel, necessary, they may be executed under his
whether they belong to the vessel, to the cargo, or liability, without prejudice to the freighters
to the crew, and the damage suffered through said exercising their rights against the captain before
act by the goods kept. the judge or court of competent jurisdiction, if they
3. The cables and masts which are cut or can prove that he acted with malice, lack of skill, or
rendered useless, the anchors and the chains which negligence.
are abandoned in order to save the cargo, the If the persons interested in the cargo, being on the
vessel, or both. vessel, should not be heard, they shall not
4. The expenses of removing or transferring a contribute to the gross average, which contribution
portion of the cargo in order to lighten the vessel shall be paid by the captain, unless the urgency of
and place her in condition to enter a port or the case should be such that the time necessary for
roadstead, and the damage resulting therefrom to previous deliberation was lacking.
the goods removed or transferred.
5. The damage suffered by the goods of the ARTICLE 814
cargo through the opening made in the vessel in The resolution adopted to cause the damages
order to drain her and prevent her sinking. which constitute a general average must
6. The expenses caused through floating a necessarily be entered in the log book, stating the
vessel intentionally stranded for the purpose of motives and reasons therefor, the votes against it,
saving her. and the reasons for the disagreement should there
7. The damage caused to the vessel which it be any, and the irresistible and urgent causes
is necessary to break open, scuttle, or smash in which moved the captain if he acted of his own
order to save the cargo. accord.
8. The expenses of curing and maintaining the In the first case the minutes shall be signed by all
members of the crew who may have been wounded the persons present who could do so before taking
or crippled in defending or saving the vessel. action if possible, and if not at the first opportunity;
9. The wages of any member of the crew in the second case by the captain and by the
detained as hostage by enemies, privateers, or officers of the vessel.
pirates, and the necessary expenses which he may In the minutes and after the resolution there shall
incur in his imprisonment, until he is returned to be stated in detail all the goods cast away, and
the vessel or to his domicile, should he prefer it. mention shall be made of the injuries caused to
10. The wages and victuals of the crew of a those kept on board. The captain shall be obliged
vessel chartered by the month during the time it to deliver one copy of these minutes to the
should be embargoed or detained by force majeure maritime judicial authority of the first port he may
or by order of the Government, or in order to repair make within twenty-four hours after his arrival, and
the damage caused for the common good. to ratify it immediately by an oath.
11. The loss suffered in the value of the goods
sold at arrivals under stress in order to repair the ARTICLE 860
vessel because of gross average. If, notwithstanding the jettison of the merchandise,
12. The expenses of the liquidation of the breakage of masts, ropes, and equipment, the
average. vessel should be lost running said risk, no
contribution whatsoever by reason of gross
ARTICLE 817 average shall be proper.
If in lightening a vessel on account of a storm, in The owners of the goods saved shall not be liable
order to facilitate her entry into a port or for the indemnity of those jettisoned, lost, or
roadstead, part of her cargo should be transferred damaged.
to lighters or barges and be lost, the owner of said
part shall be entitled to indemnity, as if the loss MAGSAYSAY INC. vs AGAN (1955)
has originated from a gross average, the amount REQUISITES FOR GENERAL AVERAGE:
thereof being distributed between the entire vessel 1. There must be a common danger. This
and cargo which caused the same. means, that both the ship and the cargo, after it
If, on the contrary, the merchandise transferred has been loaded, are subject to the same danger,
should be saved and the vessel should be lost, no whether during the voyage, or in the port of
liability can be demanded of the salvage. loading or unloading; that the danger arises from
the accidents of the sea, dispositions of the
ARTICLE 818 authority, or faults of men, provided that the
If, as a necessary measure to extinguish a fire in a circumstances producing the peril should be
port; roadstead; creek, or bay, it should be decided ascertained and imminent or may rationally be said
to sink any vessel, this loss shall be considered to be certain and imminent. This last requirement
gross average, to which the vessels saved shall exclude measures undertaken against a distant
contribute. peril.
2. That for the common safety, part of the The persons interested in the proof and liquidation
vessel or of the cargo or both is sacrificed of averages may mutually agree and bind
deliberately. themselves at any time with regard to the liability,
3. That from the expenses or damages caused liquidation, and payment thereof. cdt
follows the successful saving of the vessel and In the absence of agreements, the following rules
cargo. shall be observed:
4. That the expenses or damages should have 1. The proof of the average shall take place in
been incurred or inflicted after taking proper legal the port where the repairs are made, should any be
steps and authority necessary, or in the port of unloading.
2. The liquidation shall take place in the port
(c) Effects of unloading should it be a Spanish * port.
3. Should the average have occurred outside
ARTICLE 812 of the waters under the jurisdiction of the
In order to satisfy the amount of the gross or Philippines or the cargo should have been sold in a
general averages, all the persons having an foreign port by reason of an arrival under stress,
interest in the vessel and cargo therein at the time the liquidations shall be made in the port of
of the occurrence of the average shall contribute. arrival.
4. If the average should have occurred near
(d) Jettison the port of destination, so that said port can be
made, the proceedings treated of in Rules 1 and 2
ARTICLE 815 shall be held there.
The captain shall supervise the jettison, and shall
order the goods cast overboard in the following ARTICLE 847
order: In case of making the liquidation of the averages
1. Those which are on deck, beginning with privately by virtue of agreement, as well as when a
those which embarrass the handling of the vessel judicial authority takes part therein at the request
or damage her, preferring, if possible, the heaviest of any of the parties interested who do not agree
ones and those of least utility and value. cda thereto, all of them shall be cited and heard, should
2. Those in the hold, always beginning with they not have renounced this right.
those of the greatest weight and smallest value, to Should they not be present or not have a legitimate
the amount and number absolutely indispensable. representative, the liquidation shall be made by the
consul in a foreign port, and where there is none,
ARTICLE 816 by the judge or court of competent jurisdiction,
In order that the goods jettisoned may be included according to the laws of the country, and for the
in the gross average and the owners thereof be account of the proper person.
entitled to indemnity, it shall be necessary in so far When the representative is a person well known in
as the cargo is concerned that their existence on the place where the liquidation takes place, his
board be proven by means of the bill of lading; and intervention shall be admitted and produce legal
with regard to those belonging to the vessel, by effects, even though he be authorized only by a
means of the inventory made up before the letter of the shipowner, freighter, or underwriter.
departure, in accordance with the first paragraph of
Article 612. ARTICLE 848
Claims for averages shall not be admitted if they do
not exceed 5 per cent of the interest which the
(e) Jason Clauses (York - Antwerp Rules, claimant may have in the vessel or cargo if it is
Rule D) gross average, and 1 per cent of the goods
damaged if particular average, deducting in both
Rights to contribution in general average shall not cases the expenses of appraisal, unless there is an
be affected, though the event which gave rise to agreement to the contrary.
the sacrifice or expenditure may have been due to
the fault of one of the parties to the adventure; but ii. Appraisal of general average
this shall not prejudice any remedies which may be
open against that party for such fault. ARTICLE 850
If by reason of one or more accidents of the sea
What are the York-Antwerp Rules and the particular and gross averages of the vessel or the
Jason Clause? cargo, or of both, should take place on the same
The York-Antwerp Rules is an international system voyage, the expenses and damages corresponding
of rules (they are not law or international treaties, to each one shall be determined separately in the
but are just widely in use) for the liquidation and port where the repairs are made or where the
payment of average to avoid the problem of cargo is discharged, or sold, or the merchandise is
characterization. benefited.
For this purpose the captains shall be obliged to
The Jason Clause is a standard provision in demand of the expert appraisers and of the
maritime contracts. It provides for uniform rules on contractors making the repairs, as well as of those
adjustment, proof and liquidation of avergaes in appraising and taking part in the unloading, repair,
maritime accidents to address various systems of sale, or the benefiting of the merchandise, that
determining the same. they separate and detail exactly in their
appraisements or estimates and accounts all the
PROOF AND LIQUIDATION OF AVERAGES expenses and damages belonging to each average,
and in those of each average those corresponding
i. Modes to the vessel and to the cargo, stating also
separately whether there are or not any damages
ARTICLE 846 proceeding from the nature of the goods, and not
by reason of a sea accident; and in case there
should be expenses common to the different shall be fixed by the purchase price, including the
averages and to the vessel and her cargo, there expenses until they are put on board, excluding the
must be calculated the amount corresponding to insurance premium.
each and stated distinctly. 3. If the merchandise should be damaged, it
shall be appraised at its true value.
SECTION II 4. If the voyage should be interrupted, the
Liquidation of Gross Averages merchandise having been sold in a foreign port and
ARTICLE 851 the average can not be estimated, there shall be
At the instance of the captain, the adjustment, taken as the contributing capital the value of the
liquidation, and distribution of gross averages shall merchandise in the port of arrival, or the net
be held privately, with the consent of all the parties proceeds obtained at the sale thereof.
in interest. 5. Merchandise lost, which should constitute
For this purpose, within forty-eight hours following the gross average, shall be appraised at the value
the arrival of the vessel at the port, the captain merchandise of its kind may have in the port of
shall call all the persons interested, in order that unloading, provided its kind and quality appears in
they may decide as to whether the adjustment or the bill of lading; and should this not be the case,
liquidation of the gross average is to be made by the invoices of the purchase issued in the port of
experts and liquidators appointed by themselves, in shipment shall be taken as a basis, adding to its
which case this shall be done should the persons value the expenses and freights subsequently
interested agree. arising. cd
Should an agreement not be possible, the captain 6. The masts cut down, the sails, cables, and
shall apply to the judge or court of competent other equipment of the vessel rendered useless for
jurisdiction, who shall be the one of the port where the purpose of saving her, shall be appraised at the
these proceedings are to be held in accordance current value, deducting one-third by reason of the
with the provisions of this Code, or to the consul of difference between new and old.
Spain, * should there be one, and otherwise to the This deduction shall not be made in regard
local authority when they are to be held in a to anchors and chains.
foreign port. cdta 7. The vessel shall be appraised at her real
value in her condition at the time.
8. The freights shall represent 50 per cent by
ARTICLE 852 way of contributing capital.
If the captain should not comply with the provisions ARTICLE 855
contained in the foregoing article, the shipowner or The merchandise loaded on the upper deck of the
agent or the freighters shall demand the vessel shall contribute to the gross average should
liquidation, without prejudice to the action they it be saved; but there shall be no right to indemnity
may bring to demand indemnity from him. if it should be lost by reason of being jettisoned for
general safety, except when the marine ordinances
ARTICLE 853 allow its shipment in this manner in coastwise
After the experts have been appointed by the navigation.
persons interested, or by the judge or court, before The same shall take place with that which is on
the acceptance, an examination of the vessel and board and is not included in the bills of lading or
of the repairs required shall be made, as well as an inventories, according to the cases.
estimate of their cost, separating these losses and In any case the shipowner and the captain shall be
damages from those arising from the natural vice liable to freighters for the loss of the jettison, if the
of the thing. storage on the upper deck took place without the
The experts shall also declare whether the repairs consent of the latter.
can be made immediately, or whether it is
necessary to unload the vessel to examine and ARTICLE 857
repair her. After the appraisement of the goods saved has
With regard to the merchandise, if the average been concluded by the experts, as well as that of
should be visible at a mere glance, the examination the goods lost which constitute the gross average,
thereof must be made before it is delivered. Should and after the repairs have been made to the
it not be visible at the time of unloading, said vessel, should any have to be made, and in such
examination may be held after the delivery case after the approval of the accounts of the same
provided it is done within forty-eight hours from by the persons interested or by the judge or court,
the unloading and without prejudice to the other the entire record shall be turned over to the
proofs which the experts may deem necessary. liquidator appointed, in order that he may proceed
with the distribution of the average.
ARTICLE 854
The appraisement of the goods which are to iii. Liquidation of general averages
contribute to the gross average, and that of those
which constitute the average, shall conform to the ARTICLE 858
following rules: In order to effect the liquidation the liquidator shall
1. The merchandise saved which is to examine the sworn statement of the captain,
contribute to the payment of the gross average comparing it, if necessary, with the log book and all
shall be valued at the current price thereof at the the contracts which may have been made between
port of unloading, deducting the freights, customs the persons interested in the average, the
duties, and charges for unloading, as may appear appraisements, expert examinations, and accounts
from a material inspection of the same, not taking of repairs made. If, as a result of this examination,
into consideration the bills of lading, unless there is he should find any defect in this procedure which
an agreement to the contrary. might injure the rights of the persons interested or
2. If the liquidation is to take place in the port affect the liability of the captain, he shall call
of sailing, the value of the merchandise loaded attention thereto in order that it be corrected, if
possible, and otherwise he shall include it in the If the captain during the navigation should believe
preliminaries of the liquidation. that the vessel can not continue the voyage to the
Immediately thereafter he shall proceed with the port of destination on account of the lack of
distribution of the amount of the average, for which provisions, well founded fear of seizure, privateers
purpose he shall fix: or pirates, or by reason of any accident of the sea
1. The contributing capital, which he shall disabling her to navigate, he shall assemble the
determine by the value of the cargo, in accordance officers and shall call the persons interested in the
with the rules established in Article 854. cargo who may be present, and who may attend
2. That of the vessel in her actual condition, the meeting without the right to vote; and if, after
according to a statement of experts. examining the circumstances of the case, the
3. The 50 per cent of the amount of the reasons should be considered well founded, it shall
freight, deducting the remaining 50 per cent for be decided to make the nearest and most
wages and maintenance of the crew. convenient port drafting and entering in the log
After the amount of the gross average has been book the proper minutes, which shall be signed by
determined in accordance with the provisions of all.
this Code, it shall be distributed pro rata among the The captain shall have the deciding vote and the
goods which are to cover the same. persons interested in the cargo may make the
objections and protests they may deem proper,
ARTICLE 865 which shall be entered in the minutes in order that
The distribution of the gross average shall not be they may make use thereof in the manner they
final until it has been agreed to, or in the absence may consider advisable.
thereof, until it has been approved by the judge or
court after an examination of the liquidation and a ARTICLE 820
hearing of the persons interested who may be The arrival under stress shall not be considered
present, or of their representatives. legal in the following cases:
1. If the lack of provisions should arise from
ARTICLE 866 the failure to take the necessary provisions for the
After the liquidation has been approved it shall be voyage, according to usage and custom, or if they
the duty of the captain to collect the amount of the should have been rendered useless or lost through
distribution, and he shall be liable to the owners of bad stowage or negligence in their care.
the goods averaged for the losses they suffer 2. If the risk of enemies, privateers, or pirates
through his delay or negligence. should not have been well known, manifest, and
based on positive and justifiable facts.
ARTICLE 867 3. If the injury to the vessel should have been
If the contributors should not pay the amount of caused by reason of her not being repaired, rigged,
the assessment within the third day after having equipped, and arranged in a convenient manner for
been requested to do so, the goods saved shall be the voyage, or by reason of some erroneous order
attached, at the request of the captain, and shall of the captain.
be sold to cover the payment. 4. Whenever malice, negligence, want of
foresight, or lack of skill on the part of the captain
ARTICLE 868 is the reason for the act causing the damage.
If the persons interested in receiving the goods
saved should not give security sufficient to answer FORMALITIES
for the amount corresponding to the gross average,
the captain may defer the delivery thereof until ARTICLE 819
payment has been made. aisadc If the captain during the navigation should believe
that the vessel can not continue the voyage to the
SECTION III port of destination on account of the lack of
Liquidation of Ordinary Averages provisions, well founded fear of seizure, privateers
or pirates, or by reason of any accident of the sea
ARTICLE 869 disabling her to navigate, he shall assemble the
The experts which the judge or court or the officers and shall call the persons interested in the
persons interested may appoint, according to the cargo who may be present, and who may attend
cases, shall proceed with the appraisement and the meeting without the right to vote; and if, after
examination of the averages in the manner examining the circumstances of the case, the
prescribed in Article 853 and in Article 854, Rules 2 reasons should be considered well founded, it shall
to 7, in so far as they are applicable. be decided to make the nearest and most
convenient port drafting and entering in the log
iv. Liquidation of particular average book the proper minutes, which shall be signed by
all.
ARTICLE 869 The captain shall have the deciding vote and the
The experts which the judge or court or the persons interested in the cargo may make the
persons interested may appoint, according to the objections and protests they may deem proper,
cases, shall proceed with the appraisement and which shall be entered in the minutes in order that
examination of the averages in the manner they may make use thereof in the manner they
prescribed in Article 853 and in Article 854, Rules 2 may consider advisable.
to 7, in so far as they are applicable.
ARTICLE 822
2. ARRIVALS UNDER STRESS If in order to make repairs to the vessel or because
there should be danger of the cargo suffering
CAUSES damage it should be necessary to unload, the
captain must request authorization of the judge or
ARTICLE 819 court of competent jurisdiction to lighten the
vessel, and do so with the knowledge of the person
EXPENSES 3. COLLISIONS
The charter parties executed with the intervention faith and mutual consent with which they have
of a broker, who certifies to the authenticity of the been made, should be a better substitute for the
signatures of the contracting parties made in his chater party than the bill of lading which is nothing
presence, shall be full evidence in court; and if said more than proof of such delivery.
signatures should not agree the ones identical with
the signatures the broker must keep in his registry, What is primage?
if kept in accordance to law, shall be final. It was formerly a small allowance or compensation
The contracts shall also be admitted as evidence, payable to the master and marines of a ship, to the
even though a broker has not taken part therein, if former for the use of his cables and ropes to
the contracting parties acknowledge the signatures discharge the goods of the merchant; to the latter
to be the same as their own. for the lading and unlading in any port of haven.
Should no broker have taken part in the charter Today, it is no longer a gratuity but is included in
party and should the signatures not have been the freight rate.
acknowledged, doubts shall be decided by what is
provided for in the bill of lading, and in the absence What is demurrage?
thereof by the proofs submitted by the parties. It is the sum fixed by the contract of carriage, or
which is allowed, as remuneration to the owner of a
ARTICLE 655 ship for the detention of his vessel beyond the
Charter parties executed by the captain in the number of days allowed by the charter party for
absence of the agent shall be valid and efficient, loading and unloading of for sailing. It is an
even though in executing them he should have extended freight or reward to the vessel in
acted in violation of the orders and instructions of compensation for the earnings she is improperly
the agent or shipowner; but the latter shall have a caused to lose.
right of action against the captain to recover
damages. What are lay days?
Lay days are days allowed to charter parties for
ARTICLE 656 loading and unloading the cargo.
If in the charter party the time in which the loading
and unloading is to take place is not stated, the RIGHTS AND OBLIGATIONS OF SHIPOWNERS
customs of the port where these acts take place
shall be observed. After the period stipulated or the 2. Rights and Obligations of Owners
customary one has passed, and should there not be ARTICLE 669
in the freight contract an express clause fixing the The owners or the captain shall observe in charter
indemnification for the delay, the captain shall be parties the capacity of the vessel or that expressly
entitled to demand demurrage for the usual and designated in the registry of the same, a difference
extra lay days which may have elapsed in loading greater than 2 per cent between that stated and
and unloading. her true capacity not being permissible.
If the owners or the captain should contract to
ARTICLE 657 carry a greater amount of cargo than the vessel
If during the voyage the vessel should be rendered can hold, in view of her tonnage, they shall
unseaworthy the captain shall be obliged to charter indemnify the freighters whose contracts they do
another one at his expense, in good condition, to not fulfill for the losses they may have caused them
take the cargo to its destination, for which purpose by reason of their default, according to the cases,
he shall be obliged to look for a vessel not only at viz:
the port of arrival but in the other ports within a If the vessel has been chartered by one freighter
distance of 150 kilometers. only, and there should appear to be an error or
If the captain should not furnish a vessel to take fraud in her capacity, and the charterer should not
the cargo to its destination, either through wish to rescind the contract, when he has a right to
indolence or malice, the freighters, after a demand do so, the charter should be reduced in proportion
of the captain to charter a vessel within an to the cargo the vessel can not receive, the person
unextendible period, may charter one and apply to from whom the vessel is chartered being
the judicial authority requesting that the charter furthermore obliged to indemnify the charterer for
party which may have been made be immediately the losses he may have caused.
approved. If, on the contrary, there should be several charter
The same authority shall judicially compel the parties, and by reason of the want of space all the
captain to confirm the charter made by the cargo contracted for can not be received, and none
shippers for his account and under his of the charterers desires to rescind the contract,
responsibility. preference shall be given to the person who has
If the captain, notwithstanding his efforts, should already loaded and arranged the freight in the
not find a vessel to charter, he shall deposit the vessel, and the rest shall take the place
cargo at the disposal of the freighters, to whom he corresponding to them in the order of the dates of
shall communicate the facts on the first opportunity their contracts.
presenting itself, the charter being regulated in Should there be no priority, the charterers may
such cases by the distance covered by the vessel, load, if they wish, pro rata of the amounts of
there being no right to any indemnification weight or space they may have engaged, and the
whatsoever. person from whom the vessel was chartered shall
be obliged to indemnify them for the loss and
Is there a valid contract if there was no damage.
charter party and bill of lading?
If we take Art. 653 literally, no. However, if we ARTICLE 670
take into account the fact that delivery of the cargo If the person from whom the vessel is chartered,
does not constitute the making of a contract but after receiving a part of the freight, should not find
rather the partial performance thereof, the mere sufficient to make up at least three-fifths of the
fact of delivery and receipt of such cargo, the good amount which the vessel can hold, at the price he
may have fixed, he may substitute for the Should the captain not receive an answer within
transportation another vessel inspected and the time necessary therefor, he shall make efforts
declared suitable for the same voyage, the to find freight; and should he not find any after the
expenses of transfer being defrayed by him, as well lay days and extra lay days have elapsed, he shall
as the increase, should there be any, in the price of make a protest and return to the port where the
the charter. Should he not be able to make this charter was made.
change, the voyage shall be undertaken at the time The charterer shall pay the freightage in full,
agreed upon; and should no time have been fixed, discounting that which may have been earned on
within fifteen days from the time of beginning to the merchandise which may have been carried on
load, should nothing to the contrary have been the voyage out or on the return trip, if carried for
stipulated. the account of third persons.
If the owner of the part of the freight already The same shall be done if a vessel, having been
loaded should procure some more at the same chartered for the round trip, should not be given
price and under similar or proportionate conditions any cargo for her return.
to those accepted for the freight received, the
person from whom the vessel is chartered or the ARTICLE 676
captain can not refuse to accept the rest of the The captain shall lose the freightage and shall
cargo; and should he do so, the freighter shall have indemnify the charterers if the latter should prove,
a right to demand that the vessel put to sea with even against the certificate of inspection, should
the cargo she may have on board. one have taken place at the port of departure, that
the vessel was not in a condition to navigate at the
ARTICLE 671 time of receiving the cargo.
After three-fifths of the vessel is loaded, the person
from whom she is chartered can not, without the ARTICLE 677
consent of the charterers or freighters substitute The charter party shall be enforced if the captain
the vessel designated in the charter party by should not have any instructions from the
another one, under the penalty of making himself charterer, and a declaration of war or a blockade
thereby liable for all the losses and damages should take place during the voyage.
occurring during the voyage to the cargo of the In such case the captain shall be obliged to make
person who did not consent to the change. the nearest safe and neutral port, and request and
await orders from the freighter; and the expenses
ARTICLE 672 incurred and salaries earned during the detention
If the vessel has been chartered in whole, the shall be paid as general average.
captain can not, without the consent of the person If, by orders of the freighter, the cargo should be
chartering her, accept freight from any other discharged at the port of arrival, the freight for the
person; and should he do so, said charterer may voyage out shall be paid in full.
oblige him to unload it and require him to
indemnify him for the losses suffered thereby. ARTICLE 678
If the time necessary, in the opinion of the judge or
ARTICLE 673 court, in which to receive orders from the freighters
The person from whom the vessel is chartered shall should have elapsed without the captain having
be liable for all the losses caused the charterer by received any instructions, the cargo shall be
reason of the voluntary delay of the captain in deposited, and it shall be liable for the payment of
putting to sea, according to the rules prescribed, the freight and expenses incurred by reason of the
provided he has been requested to put to sea at delay which shall be paid from the proceeds of the
the proper time through a notary or judicially. part first sold.
1. A declaration of war or interdiction of definite term, and pledges the ship as a security for
commerce with the power to whose ports the its repayment, with maritime or extraordinary
vessel was going to sail. interest on account of the maritime risks to be
2. A condition of blockade of the port of borne by the lender, it being stipultaed that if the
destination of said vessel, or the breaking out of an ship be lost in the course of the specific voyage or
epidemic after the contract was executed. during the limited time, by any of the perils
3. The prohibition to receive the merchandise enumerated in the contract, the lender shall also
of the vessel at the said port. lose his money.
4. An indefinite detention, by reason of an
embargo of the vessel by order of the government LOAN ON RESPONDENTIA, DEFINED
or for any other reason independent of the will of It is a contract made on the goods laden on board
the agent. the hsip, and which are to be sold or exchanged in
5. The impossibility of the vessel to navigate, the course of the voyage, the borrowers personal
without fault of the captain or agent. responsibility being deemed the principal security
The unloading shall be made for the account of the for the performance of the contract. The lender
charterer. must be paid his principal and interest, though the
ARTICLE 691 ship perishes, provided that the goods are saved.
If the vessel can not put to sea on account of the
closing of the port of departure, or any other CHARACTER OF LOAN, ART. 719
temporary cause, the charter shall be in force
without any of the contracting parties having a ARTICLE 719
right to claim damages. A loan on bottomry or respondentia shall be
The subsistence and wages of the crew shall be considered that which the repayment of the sum
considered as general average. loaned and the premium stipulated, under any
During the interruption the charterer may, at the condition whatsoever, depends on the safe arrival
proper time and for his own account, unload and in port of the goods on which it is made, or of their
load the merchandise, paying demurrage if the value in case of accident.
reloading should continue after the reason for the
detention has ceased. FORMS AND REQUISITES
3. The names, surnames, and domicile of the provision the vessel, and should not do so within
person giving and of the person receiving the loan. twenty-four hours, the interest which the parties in
4. The amount of the loan and the premium default may have in the vessel shall be liable for
stipulated. the loan in the proper proportion.
5. The time for repayment. Outside of the residence of the owners the captain
6. The goods pledged to secure repayment. may contract loans in accordance with the
7. The voyage for which the risk is run. provisions of Articles 583 and 611.
consignee or freighter; and those possessed by the increased price of passage, but his living expenses
captain or agent signed by the freighter shall be during the delay shall be for his own account.
proof against the freighter or consignee in favor of In case the departure of the vessel is delayed the
the captain or agent. passengers have a right to remain on board and to
be furnished with food for the account of the
vessel, unless the delay is due to an accidental
H. Passengers on Sea Voyage cause or to force majeure. If the delay should
exceed ten days, the passengers who request it
1. NATURE OF CONTRACT shall be entitled to the return of the passage; and if
it were due exclusively to the captain or agent they
ARTICLE 695 may furthermore demand indemnity for losses and
The right to passage, if issued to a specified damages.
person, can not be transferred without the consent A vessel which is exclusively destined to the
of the captain or of the consignee. transportation of passengers must take them
directly to the port or ports of destination, no
2. OBLIGATIONS OF PASSENGERS matter what the number of passengers may be,
making all the stops indicated in her itinerary.
ARTICLE 693
Should the passage price not have been agreed 4. RESPONSIBILITIES OF CAPTAIN
upon, the judge or court shall summarily fix it,
after a statement of experts. ARTICLE 701
The convenience or the interest of the passengers
ARTICLE 699 shall not obligate nor empower the captain to stand
After the contract has been rescinded, before or in shore or enter places which may take the vessel
after the commencement of the voyage, the out of her course, nor to remain in the ports he
captain shall have a right to claim payment for must or is under the necessity of touching for a
what he may have furnished the passengers. period longer than that required for the business of
the navigation.
ARTICLE 704
The captain, in order to collect the price of the ARTICLE 702
passage and expenses of maintenance, may retain In the absence of an agreement to the contrary, it
the goods belonging to the passenger, and in case shall be understood that the maintenance of the
of the sale of the same he shall be given preference passengers during the voyage is included in the
over the other creditors, acting in the same way as price of the passage; but should said maintenance
in the collection of freight. be for the account of the latter, the captain shall be
under the obligation, in case of necessity, to
ARTICLE 694 furnish them the victuals at a reasonable price
Should the passenger not arrive on board at the necessary for their maintenance.
time fixed, or should leave the vessel without
permission from the captain, when the latter is ARTICLE 703
ready to leave the port, the captain may continue A passenger shall be looked upon as a shipper in so
the voyage and demand the full passage price. far as the goods he carries on board are concerned,
and the captain shall not be liable for what said
ARTICLE 700 passenger may preserve under his immediate and
In all that relates to the preservation of order and special custody unless the damage arises from an
police on board the vessel the passengers shall act of the captain or of the crew.
conform to the orders given by the captain, without
any distinction whatsoever. ARTICLE 705
In case of the death of a passenger during the
3. RIGHTS OF PASSENGERS voyage the captain is authorized, with regard to
the body, to take the steps required by the
ARTICLE 697 circumstances, and shall carefully take care of the
If before beginning the voyage it should be papers and goods there may be on board belonging
suspended through the sole fault of the captain or to the passenger, observing the provisions of Case
agent, the passengers shall be entitled to have No. 10 of Article 612 with regard to members of
their passage refunded and to recover for losses the crew.
and damages; but if the suspension was due to an
accidental cause, or to force majeure, or to any ARTICLE 612
other cause beyond the control of the captain or The following obligations are inherent in the office
agent, the passengers shall only be entitled to the of captain:
return of the passage money. 1. To have on board before starting on a
voyage a detailed inventory of the hull, engines,
ARTICLE 698 rigging, tackle, stores, and other equipments of
In case a voyage already begun should be the vessel; the navigation certificate; the roll of the
interrupted the passengers shall be obliged only to persons who make up the crew of the vessel, and
pay the passage in proportion to the distance the contracts entered into with the crew; the list of
covered, and shall not be entitled to recover for passengers; the health certificate; the certificate of
losses and damages if the interruption is due to an the registry proving the ownership of the vessel,
accidental cause or to force majeure, but have a and all the obligations which encumber the same
right to indemnity if the interruption should have up to that date; the charters or authenticated
been caused by the captain exclusively. If the copies thereof; the invoices or manifest of the
interruption should be by reason of the disability of cargo, and the instrument of the expert visit or
the vessel, and the passenger should agree to inspection, should it have been made at the port of
await her repair, he can not be required to pay any departure.
2. To have a copy of this Code on board. the favorable season it takes place, he allows
3. To have three folioed and stamped books, merchandise to be carried on deck, he must hear
placing at the beginning of each one a note of the the opinion of the officers of the vessel, and have
number of folios it contains, signed by the maritime the consent of the shippers and of the agent.
official, and in his absence by the competent 6. To demand a pilot at the expense of the
authority. vessel whenever required by navigation, and
In the first book, which shall be called "log book," principally when a port, canal, or river, or a
he shall enter every day the condition of the roadstead or anchoring place is to be entered with
atmosphere, the prevailing winds, the course which neither he, the officers nor the crew are
sailed, the rigging carried, the horsepower of the acquainted.
engines, the distance covered, the maneuvers 7. To be on deck at the time of sighting land
executed, and other incidents of navigation. He and to take command on entering and leaving
shall also enter the damage suffered by the vessel ports, canals, roadsteads, and rivers, unless there
in her hull, engines, rigging, and tackle, no matter is a pilot on board discharging his duties. He shall
what is its cause, as well as the imperfections and not spend the night away from the vessel except
averages of the cargo, and the effects and for serious causes or by reason of official business.
consequence of the jettison, should there be any; cdtai
and in cases of grave resolutions which require the 8. To present himself, when making a port in
advice or a meeting of the officers of the vessel, or distress, to the maritime authority if in Spain * and
even of the passengers and crew, he shall record to the Spanish * consul if in a foreign country,
the decision adopted. For the informations before twenty-four hours have elapsed, and make
indicated he shall make use of the binnacle book, a statement of the name, registry, and port of
and of the steam or engine book kept by the departure of the vessel, of its cargo, and reason of
engineer. arrival, which declaration shall be vised by the
In the second book, called the "accounting book," authority or by the consul if after examining the
he shall enter all the amounts collected and paid same it is found to be acceptable, giving the
for the account of the vessel, entering specifically captain the proper certificate in order to show his
article by article, the sources of the collection, and arrival under stress and the reasons therefor. In
the amounts invested in provisions, repairs, the absence of marine officials or of the consul, the
acquisition of rigging or goods, fuel, outfits, wages, declaration must be made before the local
and all other expenses. He shall furthermore enter authority.
therein a list of all the members of the crew, 9. To take the steps necessary before the
stating their domiciles, their wages and salaries, competent authority in order to enter in the
and the amounts they may have received on certificate of the Commercial Registry of the vessel
account, either directly or by delivery to their the obligations which he may contract in
families. accordance with Article 583.
In the third book, called "freight book," he shall 10. To put in a safe place and keep all the
record the entry and exit of all the goods, stating papers and belongings of any members of the crew
their marks and packages, names of the shippers who might die on the vessel, drawing up a detailed
and of the consignees, ports of loading and inventory, in the presence of passengers as
unloading, and the freight earned. In the same witnesses, and, in their absence, of members of
book he shall record the names and places of the crew.
sailing of the passengers and the number of 11. To conduct himself according to the rules
packages of which their baggage consists, and the and precepts contained in the instructions of the
price of the passage. agent, being liable for all that he may do in
4. To make, before receiving the freight, with violation thereof.
the officers of the crew, and the two experts, if 12. To give an account to the agent from the
required by the shippers and passengers, an port where the vessel arrives, of the reason
examination of the vessel, in order to ascertain thereof, taking advantage of the semaphore,
whether she is watertight, and whether the rigging telegraph, mail, etc., according to the cases; notify
and engines are in good condition; and if she has him the freight he may have received, stating the
the equipment required for good navigation, name and domicile of the shippers, freight earned,
preserving a certificate of the memorandum of this and amounts borrowed on bottomry bond, advise
inspection, signed by all the persons who may have him of his departure, and give him any information
taken part therein, under their liability. and data which may be of interest.
The experts shall be appointed one by the captain 13. To observe the rules on the situation of
of the vessel and the other one by the persons who lights and evolutions to prevent collisions.
request the examination, and in case of 14. To remain on board in case of danger to
disagreement a third shall be appointed by the the vessel, until all hope to save her is lost, and
marine authority of the port. before abandoning her to hear the officers of the
5. To remain constantly on board the vessel crew, abiding by the decision of the majority; and if
with the crew during the time the freight is taken he should have to take a boat he shall take with
on board and carefully watch the stowage thereof; him, before anything else, the books and papers,
not to consent to any merchandise or goods of a and then the articles of most value, being obliged
dangerous character to be taken on, such as to prove in case of the loss of the books and papers
inflammable or explosive substances, without the that he did all he could to save them.
precautions which are recommended for their 15. In case of wreck he shall make the proper
packing, management and isolation; not to permit protest in due form at the first port reached, before
that any freight be carried on deck which by reason the competent authority or the Spanish * consul,
of its disposition, volume, or weight makes the within twenty-four hours, stating therein all the
work of the sailors difficult, and which might incidents of the wreck, in accordance with case 8 of
endanger the safety of the vessel; and if, on this article.
account of the nature of the merchandise, the
special character of the shipment, and principally
16. To comply with the obligations imposed by Be it enacted by the Senate and House of
the laws and rules of navigation, customs, health, Representatives of the United States of America in
and others. Congress assembled, That every bill of landing or
similar document of title which is evidence of a
I. Carriage of Goods by Sea Act contract for the carriage of goods by sea to or from
(Commonwealth Act No. 65; Public Act No. 65; ports of the United States, in foreign trade, shall
Public Act 521, 74th US Congress) have effect subject to the provisions of the Act.
An Act Relating to the Carriage of Goods by Sea. (b) Properly man, equip, and supply the ship;
(c) Make the holds, refrigerating and cooling Said notice of loss or damage maybe endorsed
chambers, and all other parts of the ship in which upon the receipt for the goods given by the person
goods are carried, fit and safe for their reception taking delivery thereof.
carriage and preservation.
The notice in writing need not be given if the state
(2) The carrier shall properly and carefully load, of the goods has at the time of their receipt been
handle, stow, carry, keep, care for, and discharge the subject of joint survey or inspection.
the goods carried.
In any event the carrier and the ship shall be
(3) After receiving the goods into his charge the discharged from all liability in respect of loss or
carrier, or the master or agent of the carrier, shall, damage unless suit is brought within one year after
on demand of the shipper, issue to the shipper a delivery of the goods or the date when the goods
bill of lading showing among other things should have been delivered: Provided, That if a
notice of loss or damage, either apparent or
(a) The leading marks necessary for identification concealed, is not given as provided for in this
of the goods as the same are furnished in writing section, that fact shall not affect or prejudice the
by the shipper before the loading of such goods right of the shipper to bring suit within one year
starts, provided such marks are stamped or after the delivery of the goods or the date when
otherwise shown clearly upon the goods if the goods should have been delivered
uncovered, or on the cases or coverings in which
such goods are contained, in such a manner as In the case of any actual or apprehended loss or
should ordinarily remain legible until the end of the damage the carrier and the receiver shall give all
voyage. reasonable facilities to each other for inspecting
and tallying the goods.
(b) Either the number of packages or pieces, or the
quantity or weight, as the case may be, as (7) After the goods are loaded the bill of lading to
furnished in writing by the shipper. be issued by the carrier, master, or agent of the
carrier to the shipper shall, if the shipper so
(c) The apparent order and condition of the goods: demands, be a "shipped" bill of lading Provided,
Provided, That no carrier, master, or agent of the That if the shipper shall have previously taken up
carrier, shall be bound to state or show in the bill of any document of title to such goods, he shall
lading any marks, number, quantity, or weight surrender the same as against the issue of the
which he has reasonable ground for suspecting not "shipped" bill of lading, but at the option of the
accurately to represent the goods actually received, carrier such document of title may be noted at the
or which he has had no reasonable means of port of shipment by the carrier, master, or agent
checking. with name or name the names of the ship or ships
upon which the goods have been shipped and the
date or dates of shipment, and when so noted the
(4) Such a bill of lading shall be prima facie
same shall for the purpose of this section be
evidence of the receipt by the carrier of the goods
deemed to constitute a "shipped" bill of lading.
as therein described in accordance with paragraphs
(3) (a), (b), and (c) of this section: Provided, That
nothing in this Act shall be construed as repealing (8) Any clause, covenant, or agreement in a
or limiting the application of any part of the Act, as contract of carriage relieving the carrier or the ship
amended, entitled "An Act relating to bills of lading from liability for loss or damage to or in connection
in interstate and foreign commerce," approved with the goods, arising from negligence, fault, or
August 29, 1916 (U. S. C. title 49, secs. 81-124), failure in the duties and obligations provided in this
commonly known as the "Pomerene Bills of Lading section, or lessening such liability otherwise than
Act." as provided in this Act, shall be null and void and of
no effect. A benefit of insurance in favor of the
carrier, or similar clause, shall be deemed to be a
(5) The shipper shall be deemed to have
clause relieving the carrier from liability.
guaranteed to the carrier the accuracy at the time
of shipment of the marks, number, quantity, and
weight, as furnished by him; and the shipper shall
indemnify the carrier against all loss damages, and
expenses arising or resulting from inaccuracies in RIGHTS AND IMMUNITIES
such particulars. The right of the carrier to such
indemnity shall in no way limit his responsibility Section 4
and liability under the contract of carriage or to any
person other than the shipper.
(1) Neither the carrier nor the ship shall be liable
for loss or damage arising or resulting from
(6) Unless notice of loss or damage and the general unseaworthiness unless caused by want of due
nature of such loss or damage be given in writing diligence on the part of the carrier to make the ship
to the carrier or his agent at the port of discharge seaworthy, and to secure that the ship is properly
before or at the time of the removal of the goods manned, equipped, and supplied, and to make to
into the custody of the person entitled to delivery the holds, refrigerating and cool chambers, and all
thereof under the contract of carriage, such other parts of the ship in which goods are carried
removal shall be prima facie evidence of the fit and safe for their reception, carriage, and
delivery by the carrier of the goods as described in preservation in accordance with the provisions of
the bill of lading. If the loss or damage is not paragraph (1) of section 3. Whenever loss or
apparent, the notice must be given within three damage has resulted from unseaworthiness, the
days of the delivery. burden of proving the exercise of due diligence
shall be on the carrier or other persons claiming (4) Any deviation in saving or attempting to save
exemption under the section. life or property at sea, or any reasonable deviation
shall not be deemed to be an infringement or
(2) Neither the carrier nor the ship shall be breach of this Act or of the contract of carriage,
responsible for loss or damage arising or resulting and the carrier shall not be liable for any loss or
from damage resulting therefrom: Provided, however,
That if the deviation is for the purpose of loading
cargo or unloading cargo or passengers it shall,
(a) Act, neglect, or default of the master, mariner,
prima facie, be regarded as unreasonable.
pilot, or the servants of the carrier in the
navigation or in the management of the ship;
(5) Neither the carrier nor the ship shall in any
event be or become liable for any loss or damage
(b) Fire, unless caused by the actual fault or privity
to or in connection with the transportation of goods
of the carrier;
in an amount exceeding $600 per package lawful
money of the United States, or in case of goods not
(c) Perils, dangers, and accidents of the sea or shipped in packages, per customary freight unit, or
other navigable waters; the equivalent of that sum in other currency,
unless the nature and value of such goods have
(d) Act of God; been declared by the shipper before shipment and
inserted in the bill of lading. This declaration, if
(e) Act of war, embodied in the bill of lading, shall be prima facie
evidence, but shall not be conclusive on the carrier.
port of the United States or its possessions, and PUBLIC ACT 521 CARRIAGE OF
any other port of the United States or its GOODS BY SEA ACT
possession: Provided, however, That any bill of
lading or similar document of title which is evidence Section 1
of a contract for the carriage of goods by sea That the provisions of Public Act No. 521 of the 7th
between such ports, containing an express Congress of the United States, approved on April
statement that it shall be subject to the provisions 16, 1936, be accepted, as it is hereby accepted to
of this Act, shall be subjected hereto as fully as if be made applicable to all contracts for the carriage
subject hereto as fully as if subject hereto by the of goods by sea to and from Philippine ports in
express provisions of this Act: Provided, further, foreign trade: Provided, that nothing in this Act
That every bill of lading or similar document of title shall be construed as repealing any existing
which is evidence of a contract for the carriage of provision of the Code of Commerce which is now in
goods by sea from ports of the United States, in force, or as limiting its application. .
foreign trade, shall contain a statement that it shall
have effect subject to the provisions of this Act. Sec. 2
This Act shall take effect upon its approval.
Section 14 (Approved October 22, 1936).
TITLE I
Upon the certification of the Secretary of
Sec. 1
Commerce that the foreign commerce of the United
When used in this Act .
States in its competition with that of foreign
(a) The term "carrier" includes the owner or
nations is prejudiced the provisions, or any of
the charterer who enters into a contract of carriage
them, of Title I of this Act, or by the laws of any
with a shipper.
foreign country or countries relating to the carriage
(b) The term "contract of carriage" applies only
of goods by sea, the President of the United States,
to contracts of carriage by covered by a bill of
may, from time to time, by proclamation, suspend
lading or any similar document of title, insofar as
any or all provisions of Title I of this Act for such
such document relates to the carriage of goods by
periods of time or indefinitely as may be
sea, including any bill of lading or any similar
designated in the proclamation. The President may
document as aforesaid issued under or pursuant to
at any time rescind such suspension of Title I
a character party from the moment at which such
hereof, and any provisions thereof which may have
bill of lading or similar document of title regulates
been suspended shall thereby be reinstated and
the relations between a carrier and a holder of the
again apply to contracts thereafter made for the
same. .
carriage of goods by sea. Any proclamation of
(c) The term "goods" includes goods, wares,
suspension or rescission of any such suspension
merchandise, and articles of every kind
shall take effect on a date named therein, which
whatsoever, except live animals and cargo which
date shall be not less than ten days from the issue
by the contract of carriage is stated as being
of the proclamation.
carried on deck and is so carried..
(d) The term "ship" means any vessel used for
Any contract for the carriage of goods by sea, the carriage of goods by sea..
subject to the provisions of this Act, effective (e) The term "carriage of goods" covers the
during any period when title I hereof, or any part period from the time when the goods are loaded to
thereof, is suspended, shall be subject to all the time when they are discharged from the ship.
provisions of law now or hereafter applicable to
that part of Title I which may have thus been RISKS
suspended. Sec. 2
Subject to the provisions of Section 6, under every
Section 15 contract of carriage of goods by sea, the carrier in
relation to the loading, handling, stowage, carriage,
This Act shall take effect ninety days after the date custody, care, and discharge of such goods shall be
of its approval; but nothing in this Act shall apply subject to the responsibilities and liabilities and
during a period not to exceed one year following its entitled to the rights and immunities hereinafter set
approval to any contract for the carriage of goods forth..
by sea, made before the date on which this Act is
approved, nor to any bill of lading or similar RESPONSIBILITIES AND LIABILITIES
document of title issued, whether before or after Sec. 3
such date of approval in pursuance of any such (1) The carrier shall be bound before and at the
contract as aforesaid. beginning of the voyage to exercise due diligence
to
(a) Make the ship seaworthy;
Section 16 (b) Properly man,equip, and supply the ship;
(c) Make the holds, refrigerating and cooling
This Act may be cited as the "Carriage of Goods by chambers, and all other parts of the ship in which
Sea Act." goods are carried, fit and safe for their reception,
carriage, and preservation.
Approved, April 16, 1936. (2) The carrier shall properly and carefully
load, handle, stow, carry, keep, care for,and
discharge the goods carried.
(3) After receiving the goods into his carrier, or
the master or agent of the carrier, shall, on
demand of the shipper, issue to the shipper a bill of
lading showing among other things .
(a) The loading marks necessary for carrier such document of title may be noted at the
identification of the goods as the same are port of shipment by the carrier, master, or agent
furnished in writing by the shipper before the with the name or names of the ship or ships upon
loading of such goods starts, provided such which the goods have been shipped and the date or
marksare stamped or otherwise shown clearly upon dates of shipment, and when so noted the same
the goods if uncovered,in such a manner as should shall for the purpose of this section be deemed to
ordinarily remain legible until the end of the constitute a "shipped" bill of lading.
voyage.. (8) Any clause, covenant, or agreement in a
(b) Either the number of packages or pieces, or contract of carriage relieving the carrier of the ship
the quantity or weight, as the casemay be, as from liability for loss or damage to or in connection
furnished in writing by the shipper. with the goods, arising from negligence, fault, or
(c) The apparent order and conditions of the failure in the duties and obligations provide in this
goods: Provided, that no carrier, master, or agent section or lessening such liability otherwise than as
of the carrier, shall be bound to state or show in provided in this Act, shall be null and void and of
the bill of lading any marks, number, quantity, or no effect. A benefit of insurance in favor of the
weight which he has reasonable ground for carrier, or similar clause, shall be deemed to be a
suspecting not accurately to represent the good clause relieving the carrier from liability.
actually received or which he has had no
reasonable means of checking.. RIGHTS AND IMMUNITIES
(4) Such a bill of lading shall be prima facie Sec. 4
evidence of the receipt by the carrier of the goods (1) Neither the carrier nor the ship shall be liable
as therein described in accordance with paragraphs for loss or damage arising or resulting from
(3) (a), (b), and (c), of this section: (The rest of unseaworthiness unless caused by want of due
the provision is not applicable to the Philippines). diligence on the part of the carrier to make the ship
(5) The shipper shall be deemed to have seaworthy and to secure that the ship is properly
guaranteed to the carrier the accuracy at the time manned, equipped, and supplied, and to make the
of shipment of the marks, number, quantity, and holds, refrigerating and cooling chambers, and all
weight, as furnished by him; and the shipper shall other parts of the ship in which goods are carried
indemnify the carrier against all loss, damages, and fit and safe for their reception, carriage, and
expenses arising or resulting from inaccuracies in preservation, in accordance with the provisions of
such particulars. The right of the carrier to such paragraph (1) of Section (3). Whenever loss or
indemnity shall in no way limit his responsibility damage has resulted from unseaworthiness, the
and liability under the contract of carriage to any burden of proving the exercise of due diligence
person other than the shipper.. shall be on the carrier or other person claiming
(6) Unless notice or loss or damage and the exemption under this section..
general nature of such loss or damage by given in (2) Neither the carrier nor the ship shall be
writing to the carrier or his agent at the port of responsible for loss or damage arising or resulting
discharge or at the time of the removal of the from
goods into the custody of the person entitled to (a) Act, neglect, or default of the master,
delivery thereof under the contract of carriage, mariner, pilot, or the servants of the carrier in the
such removal shall be prima facie evidence of the navigation or in the management of the ship;
delivery by the carrier of the goods as described in (b) Fire, unless caused by the actual fault or
the bill of lading. If the loss or damage is not privity of the carrier;.
apparent, the notice must be given within three (c) Perils, dangers, and accidents of the sea or
days of the delivery.. other navigable water;.
Said notice of loss or damage may be endorsed (d) Act of God;.
upon the receipt for the goods given by the person (e) Act of war;.
taking delivery thereof. (f) Act of public enemies;
The notice in writing need not be given if the state (g) Arrest or restraint of princes, rulers, or
of the goods has at the time of their receipt been people, or seizure under legal process;
the subject of joint survey or inspection. (h) Quarantine restrictions;.
In any event the carrier and the ship shall be (i) Act or omission of the shipper or owner of
discharged from all liability in respect of loss or the goods, his agent or representative;.
damage unless suit is brought within one year after (j) Strikes or lockouts or stoppage or restraint
delivery of the goods or the date when the goods of labor from whatever cause, whether partial or
should have been delivered: Provided, that, if a general: Provided, that nothing herein contained
notice of loss or damage, either apparent or shall be construed to relieve a carrier from
concealed, is not given as provided for in this responsibility for the carrier's own acts;.
section, that fact shall not affect or prejudice the (k) Riotsand civil commotions;.
right of the shipper to bring suit within one year (l) Saving or attempting to save life or
after the delivery of the goods or the date when property at sea;.
the goods should have been delivered. (m) Wastage in bulk or weight or any other loss
In the case of any actual or apprehended loss or or damage arising from inherent defect, quality, or
damage, the carrier and the receiver shall give all vice of the goods;
reasonable facilities to each other for inspecting (n) Insufficiency or packing;
and tallying the goods.. (o) Insufficiency or inadequacy of marks;.
(7) After the goods are loaded the bill of lading (p) Latent defects not discoverable by due
to be issued by the carrier, master, or agent of the diligence; and.
carrier to the shipper shall if the shipper so (q) Any other cause arising without the actual
demands, be a "shipped" bill of lading: Provided, fault and privity of the carrier and without the fault
that if the shipper shall have previously taken up or neglect of the agents or servants of the carrier,
any document of title to such goods, he shall but the burden of proof shall be on the person
surrender the same as against the issue of the claiming the benefit of this exception to show that
"shipped" bill of lading, but at the option of the neither the actual fault or privity of the carrier nor
weight ascertained or accepted by a third party This Act shall take effect ninety days after the date
other than the carrier or the shipper and the fact of its approval; but nothing in this Act shall apply
that the weight as ascertained or accepted is stated during a period not to exceed one year following its
in the bill of lading, then notwithstanding anything approval to any contract for the carriage of goods
in this Act, the bill of lading shall not be deemed to by sea, made before the date on which this Act is
be prima facie evidence against the carrier of the approved nor to any bill of lading or similar
receipt of goods of the weight so inserted in the document of title issued, whether before or after
bills of lading, and the accuracy thereof at the time such date of approval in pursuance of any such
of shipment shall not be deemed to have been contract as aforesaid..
guaranteed by the shipper..
Sec. 16
Sec. 12 This Act may be cited as the "Carriage of Goods by
(Not applicable to the Philippines.). Sea Act.".
and not on the per metric ton price declared V. INTERNATIONAL AIR TRANSPORT
in the Letter of Credit.
A. The Warsaw Convention
On Notice of Claim/On Prescription of Action:
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 Chapter III - Liability of the Carrier
subject of a joint inspection or survey. Prior to
unloading the cargo, an Inspection Report as to the Article 17
condition of the goods was prepared and signed by The carrier is liable for damage sustained in the
representatives of both parties. Second, as stated event of the death or wounding of a passenger or
in the same provision, a failure to file a notice of any other bodily injury suffered by a passenger, if
claim within three days will not bar recovery if it is the accident which caused the damage so sustained
nonetheless filed within one year. This one-year took place on board the aircraft or in the course of
prescriptive period also applies to the shipper, the any of the operations of embarking or
consignee, the insurer of the goods or any legal disembarking.
holder of the bill of lading. "Inasmuch as the
neither the Civil Code nor the Code of Commerce Article 18
states a specific prescriptive period on the matter, 1. The carrier is liable for damage sustained in the
the Carriage of Goods by Sea Act (COGSA)--which event of the destruction or loss of, or of damage to,
provides for a one-year period of limitation on any registered luggage or any goods, if the
claims for loss of, or damage to, cargoes sustained occurrence which caused the damage so sustained
during transit--may be applied suppletorily to the took place during the carriage by air.
case at bar." In the present case, the cargo was 2. The carriage by air within the meaning of the
discharged on July 31, 1990, while the Complaint preceding paragraph comprises the period during
was filed by respondent on July 25, 1991, within which the luggage or goods are in charge of the
the one-year prescriptive period. carrier, whether in an aerodrome or on board an
aircraft, or, in the case of a landing outside an
3. NOTICE OF LOSS OF CLAIM aerodrome, in any place whatsoever.
3. The period of the carriage by air does not extend
4. PRESCRIPTION OF ACTION to any carriage by land, by sea or by river
performed outside an aerodrome. If, however, such
a carriage takes place in the performance of a
Filipino Merchants Insurance, Inc. v. contract for carriage by air, for the purpose of
Alejandro (1986) loading, delivery or transshipment, any damage is
Clearly, the coverage of the Act includes the presumed, subject to proof to the contrary, to have
insurer of the goods. Otherwise, what the Act been the result of an event which took place during
intends to prohibit after the lapse of the one-year the carriage by air.
prescriptive period can be done indirectly by the
shipper or owner of the goods by simply filing a Article 19
claim against the insurer even after the lapse of The carrier is liable for damage occasioned by delay
one year. in the carriage by air of passengers, luggage or
goods.
Maritime Agencies & Services, Inc. v. CA
The period for filing the claim is one year, in Article 20
accordance with the Carriage of Goods by Sea Act. 1. The carrier is not liable if he proves that he and
This was adopted and embodied by our legislature his agents have taken all necessary measures to
in Com. Act No. 65 which, as a special law, prevails avoid the damage or that it was impossible for him
over the general provisions of the Civil Code on or them to take such measures.
prescription of actions. Section 3(6) of that Act 2. In the carriage of goods and luggage the carrier
provides as follows: In any event, the carrier and is not liable if he proves that the damage was
the ship shall be discharged from all liability in occasioned by negligent pilotage or negligence in
respect of loss or damage unless suit is brought the handling of the aircraft or in navigation and
within one year after delivery of the goods or the that, in all other respects, he and his agents have
date when the goods should have been delivered; taken all necessary measures to avoid the damage.
Provided, that if a notice of loss for damage; either
apparent or concealed, is not given as provided for Article 21
in this section, that fact shall not effect or prejudice If the carrier proves that the damage was caused
the right of the shipper to bring suit within one by or contributed to by the negligence of the
year after the delivery of the goods or the date injured person the Court may, in accordance with
when the goods should have been delivered. the provisions of its own law, exonerate the carrier
wholly or partly from his liability.
5. WAIVER UNDER COGSA
Article 22
1. In the carriage of passengers the liability of the
carrier for each passenger is limited to the sum of
125,000 francs. Where, in accordance with the law
of the Court seised of the case, damages may be
awarded in the form of periodical payments, the
equivalent capital value of the said payments shall
not exceed 125,000 francs. Nevertheless, by
special contract, the carrier and the passenger may
agree to a higher limit of liability.
2. In the carriage of registered luggage and of
goods, the liability of the carrier is limited to a sum In the case of the death of the person liable, an
of 250 francs per kilogram, unless the consignor action for damages lies in accordance with the
has made, at the time when the package was terms of this Convention against those legally
handed over to the carrier, a special declaration of representing his estate.
the value at delivery and has paid a supplementary
sum if the case so requires. In that case the carrier Article 28
will be liable to pay a sum not exceeding the 1. An action for damages must be brought, at the
declared sum, unless he proves that that sum is option of the plaintiff, in the territory of one of the
greater than the actual value to the consignor at High Contracting Parties, either before the Court
delivery. having jurisdiction where the carrier is ordinarily
3. As regards objects of which the passenger takes resident, or has his principal place of business, or
charge himself the liability of the carrier is limited has an establishment by which the contract has
to 5,000 francs per passenger. been made or before the Court having jurisdiction
4. The sums mentioned above shall be deemed to at the place of destination.
refer to the French franc consisting of 65 2. Questions of procedure shall be governed by the
milligrams gold of millesimal fineness 900. These law of the Court seised of the case.
sums may be converted into any national currency
in round figures. Article 29
1. The right to damages shall be extinguished if an
Article 23 action is not brought within two years, reckoned
Any provision tending to relieve the carrier of from the date of arrival at the destination, or from
liability or to fix a lower limit than that which is laid the date on which the aircraft ought to have
down in this Convention shall be null and void, but arrived, or from the date on which the carriage
the nullity of any such provision does not involve stopped.
the nullity of the whole contract, which shall remain 2. The method of calculating the period of
subject to the provisions of this Convention. limitation shall be determined by the law of the
Court seised of the case.
Article 24
1. In the cases covered by Articles 18 and 19 any Article 30
action for damages, however founded, can only be 1. In the case of carriage to be performed by
brought subject to the conditions and limits set out various successive carriers and falling within the
in this Convention. definition set out in the third paragraph of Article 1,
2. In the cases covered by Article 17 the provisions each carrier who accepts passengers, luggage or
of the preceding paragraph also apply, without goods is subjected to the rules set out in this
prejudice to the questions as to who are the Convention, and is deemed to be one of the
persons who have the right to bring suit and what contracting parties to the contract of carriage in so
are their respective rights. far as the contract deals with that part of the
carriage which is performed under his supervision.
Article 25 2. In the case of carriage of this nature, the
1. The carrier shall not be entitled to avail himself passenger or his representative can take action
of the provisions of this Convention which exclude only against the carrier who performed the carriage
or limit his liability, if the damage is caused by his during which the accident or the delay occurred,
wilful misconduct or by such default on his part as, save in the case where, by express agreement, the
in accordance with the law of the Court seised of first carrier has assumed liability for the whole
the case, is considered to be equivalent to wilful journey.
misconduct. 3. As regards luggage or goods, the passenger or
2. Similarly the carrier shall not be entitled to avail consignor will have a right of action against the
himself of the said provisions, if the damage is first carrier, and the passenger or consignee who is
caused as aforesaid by any agent of the carrier entitled to delivery will have a right of action
acting within the scope of his employment. against the last carrier, and further, each may take
action against the carrier who performed the
Article 26 carriage during which the destruction, loss, damage
1. Receipt by the person entitled to delivery of or delay took place. These carriers will be jointly
luggage or goods without complaint is prima facie and severally liable to the passenger or to the
evidence that the same have been delivered in consignor or consignee.
good condition and in accordance with the
document of carriage. B. Applicability; meaning of international
2. In the case of damage, the person entitled to transportation
delivery must complain to the carrier forthwith
after the discovery of the damage, and, at the International air transportation is
latest, within three days from the date of receipt in transportation by air between points of contact of
the case of luggage and seven days from the date two high contracting parties, or those countries
of receipt in the case of goods. In the case of delay that have acceded to the Convention.
the complaint must be made at the latest within
fourteen days from the date on which the luggage
C. Liabilities under the Convention
or goods have been placed at his disposal.
3. Every complaint must be made in writing upon
the document of carriage or by separate notice in The enumeration of causes of action in the
writing despatched within the times aforesaid. Warsaw Convention is not an exclusive list. You can
4. Failing complaint within the times aforesaid, no have a cause of action even if it is not: a) death or
action shall lie against the carrier, save in the case wounding of the passenger; b) damage or loss or
of fraud on his part. destruction of checked baggage, or c) delay in the
transportation of passengers, luggage and goods.
Article 27
Note however, that the limitations of liability in the care contributed to his death or injury, the
Convention favor the carrier. compensation shall be equitably reduced. AND
NORTHWEST AIRLINES, INC., vs. CUENCA under 1712 If a fellow worker's intentional
(1965) malicious act is the only cause of the death or
The Articles merely declare the carrier liable for injury, the employer shall not be answerable
damages in the enumerated cases, if the conditions
therein specified are present. Neither said PAL vs. CA, DR. JOSEFINO MIRANDA and
provisions nor others in the aforementioned LUISA MIRANDA (1996)
Convention regulate or exclude liability for other The appellees do not seek payment for loss of any
breaches of contract by the carrier. Under baggage. They are claiming damages arising from
petitioner's theory, an air carrier would be exempt the discriminatory off-loading of their baggage.
from any liability for damages in the event of its That cannot be limited by the printed conditions in
absolute refusal, in bad faith, to comply with a the tickets and baggage checks. Neither can the
contract of carriage, which is absurd. Warsaw Convention exclude nor regulate the
liability for other breaches of contract by air
ALITALIA vs IAC (1990) carriers. A recognition of the Warsaw Convention
Under the Warsaw Convention, an air does not preclude the operation of our Civil Code
carrier is made liable for damages for: and related laws in determining the extent of
1. the death, wounding or other bodily injury liability of common carriers in breach of contract of
of a passenger if the accident causing it took place carriage, particularly for willful misconduct of their
on board the aircraft or in the course of its employees. Said convention does not operate as an
operations of embarking/disembarking exclusive enumeration of the instances for
2. the destruction or loss of, or damage to, declaring a carrier liable for breach of contract of
any registered luggage or goods, if the occurrence carriage or as an absolute limit of the extent of that
causing it took place during the carriage by air liability. The Warsaw Convention declares the
3. delay in the transportation by air of carrier liable in the enumerated cases and under
passengers, luggage or goods. certain limitations. However, it must not be
In these cases, the Convention provides construed to preclude the operation of the Civil
that the action for damages, however founded, Code and pertinent laws. It does not regulate,
can only be brought subject to the conditions and much less exempt, the carrier from liability for
limits set out therein. damages for violating the rights of its passengers
The Warsaw Convention however denies to under the contract of carriage, especially if willful
the carrier availment of the provisions w/c exclude misconduct on the part of the carrier's employees
or limit his liability, if the damage is caused by his is found or established, which is the case before
willful misconduct or by such default on his part as, Us.
in accordance w/ the law of the court seized of the
case, is considered to be equivalent to willful
misconduct, or if the damage is similarly caused by E. When Limitations Unavailable
any agent of the carrier acting w/n the scope of his
employment. TWA v. CA and Vinluan (1988)
The Convention does not operate as an
exclusive enumeration of the instances of an
airlines liability, or as an absolute limit of the The petitioners contention that it is not liable is
extent of that liability. devoid of merit. Private respondent had a first
Moreover, it should be deemed a limit of class ticket for Flight No. 41 of petitioner from New
liability only in those cases where the cause of the York to San Francisco on April 20, 1979. It was
death or injury to person, or destruction, loss or twice confirmed and yet respondent
damage to property or delay in its transport is not unceremoniously told him that there was no first
attributable to or attended by any willful class seat available for him and that he had to be
misconduct, bad faith, recklessness, or otherwise downgraded to the economy class. As he protested,
improper conduct on the part of any official or he was arrogantly threatened by one Mr. Braam.
employee for which the carrier is responsible, and Worst still, while he was waiting for the flight, he
there is otherwise no special or extraordinary form saw that several Caucasians who arrived much
of resulting injury. later were accommodated in first class seats when
The Convention has invariably been held the other passengers did not show up. The
inapplicable, or as not restrictive of the carriers discrimination is obvious and the humiliation to
liability, where there was satisfactory evidence of which private respondent was subjected is
malice or bad faith attributable to its officers and undeniable. Consequently, the award of moral and
employees. exemplary damages by the respondent court is in
order.
Note: Liability of carrier in case of loss of luggage is
limited to a sum of $USD 20 per kilo or $USD 9.07 At the time of this unfortunate incident, the private
per pound unless a higher value is declared in respondent was a practicing lawyer, a senior
advance and additional charges are paid. partner of a big law firm in Manila. He was a
director of several companies and was active in
civic and social organizations in the Philippines.
D. Limitations on Liability Considering the circumstances of this case and the
social standing of private respondent in the
community, he is entitled to the award of moral
PAL INC. v CA and JESUS SAMSON (1981)
and exemplary damages. However, the moral
Ratio: The limitation of their liability under 1711 of
damages should be reduced to P300,000.00, and
NCC: If the mishap was due to the employee's own
the exemplary damages should be reduced to
notorious negligence, or voluntary act, or
P200,000.00. This award should be reasonably
drunkenness, the employer shall not be liable for
sufficient to indemnify private respondent for the
compensation. When the employee's lack of due
F. Conditions on Liability
HELD:
Absolute Incapacity Relative Incapacity ii. Note that receipt of the acceptance by
Extends throughout the Extends only to the the offeror is immaterial,
Philippines territory where the Theory of manifestation: in
officer is exercising his commercial transactions, since time
functions is of the essence the contract is
Effect of act is null and Effect is to subject the perfected from the moment the
void violator to disciplinary acceptance is sent, even if it has not
action or punishment yet been received by the offeror. The
offeror can no longer withdraw the
5. Acts of Commerce (Commercial offer or change the terms of his offer.
Theory of cognition: in civil law, when
Transactions) a contract is entered into by
correspondence, it will be perfected
a. Those acts contained in the Code of only upon receipt by the offeror of
Commerce the unconditional acceptance of the
b. all others of analogous character offeree.
iii. Compare with Art 1319, Civil Code:
The Code of Commerce does not attempt Perfection is only from the time the
anywhere to define what commercial offeror has actual knowledge of
transactions are. It only specifies 2 general acceptance.
classes. iv. BUT different rule when a broker or
An act need not be performed by a merchant in agent intervenes: perfection is when
order that it may be considered an act of the contracting parties shall have
commerce (Cia Agricola de Ultramar vs. Reyes, accepted his offer. (Art 55)
4 Phil 2)
6.4. Indemnification
6. Commercial Contracts i. If the penalty for indemnification is
fixed, the injured party may demand
6.1. Enforceability of Contracts through legal means the fulfillment of
i. Commercial contracts shall be valid, the contract or the penalty stipulated.
whatever the form and language, Recourse to one extinguishes the other
provided their existence is shown by any unless the contrary is stipulated. (Art
means established by the civil law. 56)
EXCEPT when the contract exceeds P300
(the equivalent of 1,500 pesetas), it 6.5. Interpretation
cannot be proved by the testimony of a i. Interpretation and compliance in good
witness alone. There must be some other faith and full enforceability of their
evidence. provisions in their plain, usual and
proper meanings (Art 57)
6.2. Efficacy of Contracts ii. In case of conflicts between copies of the
i. General Rule: Commercial contracts are contract, and an agent intervened in
consensual, so a written instrument is the negotiation, that which appears in
not necessary. the agents book shall prevail (Art 58)
Exception: in the ff cases in Art 52 iii. In case of doubt, and the rules cannot
Contracts stated in the Code33 or in resolve the conflict, issues shall be
special laws34 which must be decided in favor of the debtor (Art 59)
reduced to writing or require forms
or formalities necessary for their 6.6. Miscellaneous provisions
efficacy i. Days of grace, courtesy or others which
Contracts executed in a foreign under any name whatsoever defer the
country in which the law requires fulfillment of commercial obligations,
certain instruments, forms or shall not be recognized, except those in
formalities for their validity, which the parties may have previously
although Philippine law does not fixed in contract or which are based on
require them. a definite provision of law. (Art 61).
ii. if these contracts do not satisfy the Ratio: Time is of the essence in
circumstances respectively required, it commercial contracts, so days of grace
shall not give rise to obligations or are prohibited.
causes of action Exception: 30-day grace period in the
Insurance Code to pay premiums
6.3. Perfection of Contracts ii. Debtor is in delay when:
i. Contracts entered into by correspondence If day of performance is fixed by
shall be perfected from the moment an the parties or by law, debtor is in
answer is made accepting the offer or default on the day following the day
the conditions by which the latter may fixed (art 63)
be modified. (Art 54) If no period is fixed, 10 days from
execution of contract and on 11th
33 day, debtor in delay without need
The Code requires specific forms for charter parties of demand (Art 62)
and loans on bottomry and respondentia (Arts 267, 578,
Potestative period (when debtor
652 and 720).
34 desires), debtor is in delay from
Negotiable Instruments Law requires negotiable
demand
instruments to be in writing. Insurance Code requires
payment of premium for a fire insurance contract to exist.
iii. Art. 50. Commercial contracts. They
are governed by:
b.
4. How it works:
Letters of Credit
(Articles 567-572)
2. Purpose
Seller ships goods to the buyer and delivers
To satisfy the seemingly irreconcilable interests
documents of title and draft to the issuing (or
of a seller, who refuses to part with his goods negotiating) bank to recover payment
before he is paid, and a buyer, who wants to
have control of the goods before paying. (Bank
of America vs. CA, 1993)
The primary purpose of the LoC is to substitute 5. Perfection of the LoC
for and support the agreement of the
buyer/importer to pay money under a contract From the time the correspondent bank makes
or other arrangement. It creates in the payment to persons in whose favor the LoC has
seller/exporter a secure expectation of been opened (Belman Inc. vs. Central Bank,
payment. 1958)
Take note: The opening of a LoC is only a mode
3. Nature of payment, which is not an essential requisite
of a contract (Johannes Schuback & Sons vs.
The buyer may be required to contract a bank to CA, 1993). A contract can still be perfected,
issue a letter of credit in favor of the seller so even without the perfection of a LoC.
that the issuing bank can authorize the seller to
draw drafts and engage to pay them upon their 6. Rules on LoC
presentment simultaneously with the tender of
documents required by the letter of credit. The Bank of America vs. CA (1993)
seller gets paid only if he delivers the documents
of title over the goods, while the buyer gets the If there is no provision in the Code of
goods only after reimbursing the bank. Commerce, follow Uniform Customs and
Basic principle: bank deals with documents only. Practice or generally observed usages and
As such, they are not qualified to deal with customs
goods. They will act on the basis of documents Rule of Strict Conformity/Compliance:
only. Documents tendered must strictly conform to
3 distinct and separate contracts in the LoC: the terms of the LoC. The tender of documents
One links the party applying for the LoC by the beneficiary (seller) must include all
(buyer) and the party for whose benefit the documents required by the letter. A
LoC is issued (seller). correspondent bank which departs from what
Between the account party (buyer) and the has been stipulated under the letter of credit,
issuing bank. Under this contract, as when it accepts a faulty tender, acts on its
(sometimes called the "Application and own risks and it may not thereafter be able to
Agreement" or the "Reimbursement recover from the buyer or the issuing bank, as
Agreement"), the account party applies to the case may be, the money thus paid to the
the issuing bank for a specified LoC and beneficiary
agrees to reimburse the bank for amounts
paid by that bank Feati Bank vs CA (1991)
Between the issuing bank and the
beneficiary (seller), in order to support the An advising or notifying bank does not incur
contract. It is the LoC proper in which the any obligation by the notification. Its only
bank promises to pay the seller pursuant to obligation is to check the apparent authenticity
the terms and conditions stated therein of the LoC
Independent contracts involved in a LoC: Negotiating bank has a right of recourse
contract of sale between buyer and seller against the issuer bank. Until the negotiating
contract of the issuing bank
LoC
11. Sight Drafts the fixtures and equipment used in and about
the business (Sec 2)
No presentment required before
acceptance. Exempt Transactions:
Sale or mortgage is made in the ordinary
course of business
12. Margin Fee When accompanied with a written waiver
by all the seller/mortgagors creditors (Sec.
Tax on sale of foreign exchange. Since the 2)
contract of sale is consensual, it falls due Sale by virtue of a judicial order (Sec. 8)
as soon as the local bank opens the LoC Sale by assignee in insolvency or those
(Pacific Oxygen Company vs. Central Bank, beyond the reach of creditors
1968). Sale of properties exempt from attachment
or execution (Rule 39, Sec. 13, Rules of
Court)
In the course of trade or business The term (fixtures) refers to such articles of
Sale, transfer, mortgage or assignment of all, merchandise usually possessed and annexed to the
or substantially all, of the business or trade premises occupied by merchants to enable them
conducted or of all, or substantially all, of better to store, handle, and display their wares
although removable without material injury to the
35
This topic came out in 2007, 2006, 2005, 2001, 2000, premises at or before the end of tenancy.
1997, 1995, 1994, 1993, 1988. Specific questions were
asked of sec. 2 and sec. 5. In 1982 questions on the Comments ad Cases on Sales De Leon, 2000 ed.
rights and liabilities of parties were asked, these are
covered in sections 3, 4, 5 and 9. Lands and buildings are not goods, merchandise
and fixtures therefore not covered by the BSL.
Vendor / mortgagor must, at least ten days To regulate the status, rights and liabilities of
before the sale, transfer or execution of a the parties in a warehousing contract
mortgage To protect those who, in good faith and for
value, acquire negotiable warehouse receipts
i. make a full detailed inventory by negotiation
ii. preserve the same showing the To render the title to, and the right of
quantity and, so far as is possible possession of, property stored in warehouses
with the exercise of reasonable more easily convertible
diligence, the cost price to the To facilitate the use of warehouse receipts as
vendor, transferor, mortgagor or documents of title
assignor of each article to be
Except: Where a negotiable warehouse The date of issue appearing in the receipt
receipt is indorsed and delivered to a indicates prima facie the date when the
creditor as a collateral for a loan contract of deposit is perfected and when the
storage charges shall begin to run against the
If commodity covered by receipt is lost through depositor.
a fortuitous event, the debtor will bear loss
The mere fact that the goods deposited are
incorrectly described does not make ineffective
Martinez vs PNB (1953) the receipt when the identity of the goods is
fully established by evidence. Thus, its
endorsement and delivery shall constitute a
36 sufficient transfer of the title of the goods
The negotiation and transfer of receipts was ask in
(American Foreign Banking Corp. vs Herridge,
2007, 2005, 1993 and 1979.
49 Phil 975).
Non-Negotiable Negotiable
with him Note: Negotiable Warehouse Receipt is different
Negotiation defeats from a Negotiable Instrument
the lien of the seller
of the goods (sec. 9) Note: Negotiation takes effect as of the time when
Goods represented can be Goods represented the indorsement is actually made.
subject to attachment or cannot be subject to
levy by execution (Sec. 42) attachment or levy Negotiable Negotiable Warehouse
by execution, unless Instruments Receipts
in proper Allow negotiation
circumstances (Sec. If deliberately altered, If altered, it is still valid,
38
25) it becomes null and but can be enforced only
void accdg to its original tenor
Deliver to X this is non-negotiable. To
sell the goods, the warehouse receipt Subject is money Subject is merchandise
must be assigned
Sec 3. A warehouseman may insert in a receipt 1. the person lawfully entitled to the
issued by him any other terms and conditions possession of the goods, or his agent;
provided that such terms and conditions shall 2. a person who is either himself entitled
not: to delivery by the terms of a non-
xxx negotiable receipt issued for the goods,
a) in any wise impair his obligation to exercise or who has written authority from the
that degree of care which a reasonably person so entitled either indorsed upon
careful man would exercise in regard to the receipt or written upon another
similar goods of his own paper; or
3. a person in possession of a negotiable
General Rule: Warehouseman is required receipt by the terms of which the goods
to exercise such degree of care which a are deliverable to him or order, or to
reasonable careful owner would exercise bearer, or which has been indorsed to
over similar goods of his own. He shall be him or in blank by the person to whom
liable for any loss or injury to the goods delivery was promised by the terms of
caused by his failure to exercise such care. the receipt or by his mediate or
immediate indorser.
Exception: He shall not be liable for any
loss or injury which could not have been Sec. 10. When a warehouseman delivers the
avoided by the exercise of such care. goods to one who is not in fact lawfully entitled
to the possession of them, the warehouseman
Exception to the exception: He may limit shall be liable as for conversion to all having a
his liability to an agreed value of the right of property or possession in the goods if
property received in case of loss. He he delivered the goods otherwise than as
cannot stipulate that he will not be authorized by (b) and (c) of Sec 9
responsible for any loss caused by his
negligence. Though he delivered the goods as authorized
by said subdivisions he shall be so liable, if
To be paid prior to such delivery he had either:
reasonable time to ascertain the validity of circumstances as if the goods had been
the various claims; he is not excused from kept separate.
liability in case he makes a mistake
(Comments and Cases on Credit To insure the goods in proper
Transactions De Leon, 2002 ed.) circumstances
Original action or counterclaim for Where the law provides
interpleader, whichever is appropriate. In Where it was an inducement for the
such case, the warehouseman will be depositor to enter into the contract
relieved from liability in delivering the Established practice
goods to the person found by the court to Where the warehouse receipt
have a better right (Comments and Cases contains a representation to that
on Credit Transactions De Leon, 2002 effect
ed.)
Other instances when the warehouseman To mark a non-negotiable warehouse
may refuse to deliver: receipt as such
when the holder of the receipt does
not satisfy the conditions To mark as such the duplicates of a
prescribed in Sec. 8 negotiable warehouse receipt
when the warehouseman has legal
title in himself on the goods, such To give the proper notice in case of
title or right being derived directly sale of the goods as provided in the law
or indirectly from the transfer made
by the depositor at the time or To take up and cancel the warehouse
subsequent to the deposit for receipt when the goods are delivered
storage, or from the
warehousemans lien (Sec. 16) Other Duties
If warehouseman fails to cancel receipt
General rule: The warehouseman cannot when he delivers goods, he is liable if
refuse to deliver on the ground that he owns receipt should turn up again (Sec 11)
the goods (bailee cannot assert title to the Warehouseman should record partial
goods entrusted to him). delivery on receipt, or else he is liable
Exceptions: In the 2 cases mentioned above on entire receipt (Sec 12)
If alteration is authorized,
Where the goods have already been warehouseman is liable as altered. If
lawfully sold to third persons to not authorized, warehouseman is liable
satisfy the warehousemans lien or as originally issued (Sec 13)
disposed of because of their
perishable nature (Sec. 36) Effects of alteration:
In the valid exercise of the
warehousemans lien (Sec. 31) Alteration immaterial (WON fraudulent; WON
The warehouseman will not be (tenor of receipt not authorized)
required to deliver the goods if such changed) warehouseman is liable
had been lost. But this is without on the altered receipt
prejudice to liabilities which may be accdg to its original
incurred by him due to such loss. tenor
Alteration material but Warehouseman is liable
On commingling of Goods authorized accdg to its terms as
altered
General Rule : Material alteration Liable accdg to its
Sec. 22 A warehouseman shall keep the goods so innocently made original tenor
far separate from Material alteration Liable accdg to the
1. the goods of other depositors and fraudulently made original tenor to a
2. from other goods of the same purchaser of receipt for
depositor for which a separate value without notice and
receipt has been issued even to the alterer and
as to permit at all times the identification and subsequent purchasers
redelivery of the goods deposited. with notice (except that
liability is limited only to
Exception: delivery as he is
Sec. 23. excused from any
1. If authorized by agreement or custom and liability)
2. Goods are fungible
the warehouseman may mingle with other goods of A fraudulent alteration cannot divest
the same kind and grade. the title of the owner of the stored
goods and the warehouseman is liable
The various depositors shall own the entire mass to return them to the owner
and each shall be entitled to such portion as the A bona fide holder acquires no right to
amount deposited by him bears to the whole. the goods under a lost or stolen
negotiable receipt or to which the
The warehouseman shall be severally indorsemant of the depositor has been
liable to each depositor for the care and forged
redelivery of his share of such mass to
the same extent and under the same
Warehouseman is liable for issuing receipt Sec. 31. A warehouseman having a valid lien
for non-existing goods or misdescribed against the person demanding the goods may
goods (Sec. 20) refuse to deliver the goods until the lien is satisfied.
Warehouseman Receipts Law, said provisions No person shall engage in the business of receiving
are not mandatory. Under Section 1 of the commodities for storage without first securing a
Warehouse Receipts Act, the issuance of a license therefore from the Director of the Bureau of
warehouse receipt in the form provided by it is Commerce and Industry. Said license shall be
merely permissive and directory and not annual and shall expire on the thirty-first day of
obligatory. December.
The evidence for PNB fails to establish that the 8. Purchaser in Good Faith
vehicles sold to the Francos were among those
covered by the trust receipts. Neither the trust Acquisition by purchaser of goods in good
receipts covering the units imported nor the faith
corresponding bills of lading contain the chassis Sec 11. Any purchaser of goods from an entrustee
and engine numbers of the vehicles in question. with right to sell, or of documents or instruments
through their customary form of transfer, who buys
7. Rights/Duties of the Entrustee such for value and in good faith from the entrustee,
acquires said goods, documents or instruments free
from the entruster's security interest.
7.1. Rights of Entrustee
IBAA did not become the real owner of the goods Lee vs Rodil (1989)
; it was merely the holder of a security title for
Acts involving the violation of trust receipt Here, BPI chose not to file a separate civil action to
agreements occurring after 29 Jan 1973 would recover payment under the trust receipts. Instead,
make the accused criminally liable for estafa under respondent bank sought to recover payment in
par1(b), Art 315 of the RPC, pursuant to the Criminal Case Nos. 8848 and 8849. Although the
explicit provision in Sec. 13 of P.D. 115. trial court acquitted petitioner Jose Tupaz, his
acquittal did NOT extinguish his civil liability. His
Allied vs. Ordoez liability arose not from the criminal act of which he
was acquitted (ex delicto) but from the trust
The penal provisions of PD 115 encompasses any receipt contract (ex contractu) of 30 September
act violative of the obligation covered by the trust 1981. Petitioner Jose Tupaz signed the trust
receipt. It is not limited to transactions in goods receipt of 30 September 1981 in his personal
which are to be sold, reshipped or stored, but also capacity. Acquittal in a criminal case for estafa
applies to goods processed as a component of a does not extinguish civil liability arising from
product ultimately sold to the general public. breach of trust receipt contract.
Entrustor can:
o cancel trust and take possession of the
goods
o file a 3rd party claim or separate civil action
at any time upon default or failure of
entrustee to comply with terms and
conditions of the trust agreement
Note: Sec 71: [1] For puposes of prescribing the 1.05. QUASI-BANKS, DEFINED
minimum ratio which the net worth of a thrift bank
must bear to its total risk assets, the provisions of
Section 33 [should be Sec. 34] of the GBL shall Quasi-banks" (QB) refer to entities engaged in
govern. [2] Although Sec. 71 provides that Islamic the borrowing of funds through the issuance,
endorsement or assignment with recourse or
banks shall be governed by special laws. It does
acceptance of deposit substitutes (as defined in
not include Thrift Banks in the enumeration of
Sec. 95 RA 7653, the New Central Bank Act)
Banks to which the GBL has application.
for purposes of relending or purchasing of
receivables and other obligations. (last par of
3. The entry of foreign banks in the Phil.
through the establishment of branches shall Sec. 4)
be governed by the provisions of the This is an inherent power of UBs and KBs. Thus
they do not require separate licensing or
Foreign Banks Liberalization Act. The
authorization for this purpose. Thus, they can
conduct of offshore banking business in the
take deposit substitutes for re-lending.
Phil. shall be governed by PD 1034, the
(Morales)
"Offshore Banking System Decree." (Sec.
72)
1.06. DEPOSIT SUBSTITUTES
* The BSP shall also have supervision over 1. all requirements of existing laws and
QBs, trust entities and other financial regulations to engage in the business for
institutions which under special laws are which the applicant is proposed to be
subject to BSP supervision. (Sec. 4) incorporated have been complied with;
2. the public interest and economic
conditions, both general and local, justify
The BSP shall, when examining a bank, have
the authorization; and
the authority to examine an enterprise which is
3. the amount of capital, the financing,
wholly or majority-owned or controlled by the
organization, direction and administration,
bank. (Sec. 7)
as well as the integrity and responsibility of
the organizers and administrators
reasonably assure the safety of deposits
B. Policy Direction
and the public interest. (Sec. 14)
The BSP shall provide policy direction in the areas
of money, banking and credit. For this purpose, the
2.03. PSE-LISTED BANKING CORPORATION
MB may prescribe ratios, ceilings, limitations, or
SUBJECT TO SEC REPORTORIAL RULES
other forms of regulation on the different types of
accounts and practices of banks and QBs which
A commercial banking corporation listed in the PSE
shall, to the extent feasible, conform to
must adhere not only to the banking and other
internationally accepted standards, including those
allied special laws, but also to the rules
of the Bank for International Settlements (BIS).
promulgated by the SEC, the government entity
The Monetary Board may exempt particular
tasked not only with the enforcement of the
categories of transactions from such ratios, ceilings
Revised Securities Act, but also the supervision of
and limitations, but not limited to exceptional cases
all corporations, partnerships or associations which
or to enable a bank or quasi-bank under
are grantees of government-issued primary
rehabilitation or during a merger or consolidation to
franchises and/or licenses or permits to operate in
continue in business with safety to its creditors,
the Phils.. That such banking institution is under
depositors and the general public. (Sec. 5)
the supervision of BSP and PSE, does not exempt it
from complying with the continuing discluse
requirements embodied in the RSA Rules. The
C. Authority of BSP over Building and Home
bank is primarily subject to the control of BSP; and
Associations
as a corporation trading its securities in the stock
market, it is under the supervision of SEC. There is
Within a period of 3 years from the effectivity of
no over-supervision here; each regulating authority
the GBL, the BSP shall phase out and transfer its
operates within the sphere of its powers; the
supervising and regulatory powers over
stringent requirement imposed are understandable,
building and loan associations to the Home
considering the paramount importance given to the
Insurance and Guaranty Corporation which shall
interests of the investing public. (Union Bank of the
assume the same. (Sec. 94)
Phils. v SEC, 2001)
Section 3 Board of Directors and Officers meetings, both regular and special, of the
board of directors during their
3.01. COMPOSITION OF THE BOARD OF incumbency, or any 12 month period
DIRECTORS during said incumbency. This
disqualification applies for purposes of
The provisions of the Corporation Code to the the succeeding election;
contrary notwithstanding, there shall be at Persons who are delinquent in the
least 5, and a maximum of 15 members of the payment of their obligations.
board of directors of bank, 2 of whom shall be Delinquency in the payment of
independent directors. An "independent obligations means that an obligation of a
director" shall mean a person other than an person with a bank/quasi bank/trust
officer or employee of the bank, its subsidiaries entity where he/she is a director or
or affiliates or related interests. (Sec. 15) officer, or at least two obligations with
In the case of a bank merger or consolidation, other banks/financial institution, under
the number of directors shall not exceed 21. different credit lines or loan contracts,
(Sec. 17) are past due. This disqualification shall
Non-Filipino citizens may become members of be in effect as long as the delinquency
the board of directors of a bank to the extent of persists.
the foreign participation in the equity of said Persons convicted for offenses involving
bank. (Sec. 15 with Sec. 7, RA 7721) dishonesty, breach of trust or violation of
banking laws but whose conviction has
not yet become final and executory;
3.02. QUALIFICATIONS / Directors and officers of closed
DISQUALIFICATIONS OF DIRECTORS (BSP banks/quasi-banks/trust entities pending
CIRCULAR 296 ; 2001) their clearance by the MB;
Directors disqualified for failure to
A director shall have the following minimum observe/discharge their duties and
qualifications: responsibilities prescribed under existing
At least 25 years of age at the time of regulations. This disqualification applies
his election or appointment; until the lapse of the specific period of
At least a college graduate or have at disqualification or upon approval by the
least 5 years experience in business; MB;Directors who failed to attend the
Must have attended a special seminar special seminar for board of directors
for board of directors conducted or required;
accredited by the BSP: Persons dismissed/terminated from
Must be fit and proper for the position employment for cause. This
of a director of the bank/quasi- disqualification shall be in effect until
bank/trust entity. In determining they have cleared themselves of
whether a person is fit and proper for involvement in the alleged irregularity;
the position of a director, the following Those under preventive suspension; or
matters must be considered: Persons with derogatory records with the
- integrity/probity; NBI, court, police, interpol and monetary
- competence; authority (central bank) of other
- education; countries (for foreign directors and
- diligence; and officers) involving violation of any law,
- experience/training. rule or regulation of the Government or
any of its instrumentalities adversely
The following are Permanently disqualified from affecting the integrity and/or ability to
being directors : discharge the duties of a bank/quasi
Directors/officers/employees permanently bank/trust entity director/officer. This
disqualified by the MB; disqualification applies until they have
Persons who have been convicted by final cleared themselves of involvement in the
judgement for offenses involving alleged irregularity.
dishonesty or breach of trust;
Persons who have been convicted by final
judgement for violation of banking laws; 3.03.
Persons who have been judicially QUALIFICATIONS/DISQUALIFICATIONS
declared insolvent, spendthrift or OF OFFICERS (BSP CIRCULAR 296 ; 2001)
incapacitated to contract; or An officer shall have the following minimum
Directors, officers or employees of closed qualifications:
banks/quasi-banks/trust entities who At least 21 years of age;
were responsible for such institutions At least a college graduate, or have at
closure. least 5 years experience in banking or
trust operations or related activities or in
The following are Temporarily disqualified: a field related to his position and
Directors/officers/employees disqualified responsibilities, or have undergone
by the MB training in banking or trust operations
.Persons who refuse to fully disclose the acceptable to the appropriate supervising
extent of their business interest. This and examining department of the BSP:
disqualification shall be in effect as long Provided, however, That trust officers
as the refusal persists; shall have at least 2 years of actual
Directors who have been absent or who experience or training in trust operations
have not participated for whatever or fund management or other related
reasons in more than 50% of all fields; and
Must be fit and proper for the position he hearing, and until such time that the officers
is being proposed/appointed to. In have proved their innocence, they may be
determining whether a person is fit and preventively suspended from holding office so
proper for a particular position, the as not to influence the conduct of investigation,
following matters must be considered: and to prevent the commission of further
- integrity/probity; irregularities. (Busego v CA, 1999)
- competence;
- education; As a general rule, a banking corporation is
- diligence; and liable for the wrongful or tortuous acts and
- experience/training. declarations of its officers or agents within the
The disqualifications for directors course and scope of their employment. A bank
mentioned for shall likewise apply to will be held liable for the negligence of its
officers, except that stated in Items b.2 officers or agents when acting within the course
(persons who refuse to fully disclose the and scope of their employment. It may be
extent of their business interest ) and b.7 liable for the tortuous acts of its officers even
(directors disqualified for failure to as regards that species of tort of which malice
observe/discharge their duties and is an essential element. A bank holding out its
responsibilities). officers and agents as worthy of confidence will
Except as may be authorized, the spouse or not be permitted to profit by the frauds these
a relative within the 2nd degree of officers or agents were enabled to perpetrate in
consanguinity or affinity of any person the apparent course of their employment; nor
holding the position of Chairman, will it be permitted to shirk its responsibility for
President, Executive Vice President or such frauds, even though no benefit may
any position of equivalent rank, General accrue to the bank therefrom. If an officer or
Manager, Treasurer, Chief Cashier or official of a bank in his official capacity receives
Chief Accountant is disqualified from money to satisfy an evidence of indebtedness
holding or being elected or appointed to lodged for his bank collection, the bank is liable
any of said positions in the same for his misappropriation of such sum. (PCI Bank
bank/quasi-bank; and the spouse or v CA, 2001)
relative within the second degree of
consanguinity or affinity of any person 3.05. GOOD GOVERNANCE (BSP CIRCULAR
holding the position of Manager, Cashier, 283; 2001)
or Accountant of a branch or office of a The position of a bank/quasi-bank/trust entity
bank/quasi-bank/trust entity is director is a position of trust. A director assumes
disqualified from holding or being certain responsibilities to different constituencies or
appointed to any of said positions in the stakeholders These constituencies or stakeholders
same branch or office. have the right to expect that the institution is being
In the case of UBs, CBs, and TBs, any run in a prudent and sound manner.
appointive or elective officials whether
full time or part time, except in cases The board of directors is primarily responsible for
where such service is incident to financial the corporate governance of the bank/quasi-
assistance provided by the government bank/trust entity. To ensure good governance of
or government-owned or controlled the bank/quasi-bank/trust entity, the board of
corporations or in cases allowed under directors should establish strategic objectives,
existing law. policies and procedures that will guide and direct
In the case of Cooperative Banks, any the activities of the bank/quasi-bank/ trust entity
officer or employee of the Cooperative and the means to attain the same as well as the
Development Authority or any elective mechanism for monitoring managements
public official, except a barangay official. performance.
Except as may otherwise be allowed under
The Anti-Dummy Law, as amended, 3.06. REGULATION OF THE COMPENSATION
foreigners cannot be officers or AND OTHER BENEFITS OF DIRECTORS AND
employees of banks. OFFICERS
To protect the funds of depositors and
3.04. FIT AND PROPER RULE creditors, the MB may regulate the payment by
To maintain the quality of bank management the bank to its directors and officers of
and afford better protection to depositors and compensation, allowance, fees, bonuses, stock
the public in general, the MB shall prescribe, options, profit sharing and fringe benefits only
pass upon and review the qualifications and in exceptional cases and when the
disqualifications of individuals elected or circumstances warrant, such as but not limited
appointed bank directors or officers and to the following instances when a bank is
disqualify those found unfit. After due notice to 1. under comptrollership or conservatorship;
the board of directors of the bank, the MB may or
disqualify, suspend or remove any bank 2. found by the MB to be conducting business
director or officer who commits or omits an act in an unsafe or unsound manner;
which render him unfit for the position. In 3. found by the MB to be in an unsatisfactory
determining whether an individual is fit and financial condition. (Sec. 18)
proper to hold the position of a director or
officer of a bank, regard shall be given to his
integrity, experience, education, training, and
competence. (Sec. 16) 3.07. PROHIBITION AGAINST PUBLIC
OFFICIALS
The suspension of bank officers which is only
preventive in nature would require no notice or
No appointive or elective public official, intervene and assume jurisdiction over such
whether full-time or part-time shall at the same labor dispute in order to settle or terminate the
time serve as officer of any private bank, save same. (Sec.22)
in cases where
1. such service is incident to financial
assistance provided by the government or
Section 4 Deposits
a GOCC to the bank or
2. unless otherwise provided in the Rural
Banks Act, 4.01. ACCEPTANCE OF DEMAND DEPOSITS
3. unless otherwise provided under existing
laws. (Sec. 19) A bank other than a UB or KB cannot accept or
create demand deposits except upon prior approval
of, and subject to such conditions and rules as may
3.08. CONDUCT OF BOARD OF DIRECTORS be prescribed by the Monetary Board. (Sec. 33)
MEETINGS
The meetings of the board of directors may be 4.02. TYPES OF DEPOSITS
conducted through modern technologies such 1. Time Deposit Interest rate stipulated
depending on the number of days. During this
as, but not limited to, teleconferencing and
period, the money deposited cannot be
video-conferencing. (Sec. 15)
withdrawn. High interest rates.
2. Savings Deposit Under the fine print, if you
3.09. BANK BRANCHES
deposit today, you cannot withdraw the amount
until 60 days later. Bank pays an interest rate,
Universal or commercial banks may open but not as high as time deposits.
branches or other offices within or outside the 3. Demand Deposits / Current Accounts No
Phils. upon prior approval of the BSP. interest is paid by the bank because the
Branching by all other banks shall be governed depositor can take out his funds any time. It is
by pertinent laws. (Sec. 20) called demand deposit because the depositor
can withdraw the money he deposited on the
A bank authorized to establish branches or very same day when he deposited it.
other offices shall be responsible for all (Villanueva)
business conducted in such branches and
offices to the same extent and in the same 4.03. MAY ALL BANKS ACCEPT DEMAND
manner as though such business had all been DEPOSITS?
conducted in the head office. A bank and its
branches and offices shall be treated as one
unit. (Sec. 20) GR: A bank cannot accept or create demand
deposits except upon prior approval of, and subject
A bank may, subject to prior approval of the to such conditions and rules as may be prescribed
by the MB. (Sec. 33)
MB, use any or all of its branches as outlets for
Exc: UBs and KBs
the presentation and/or sale of the financial
products of its allied undertaking or of its
investment house units. (Sec. 20)
4.04. BANKS AS DEBTORS
3.10. BANKING DAYS AND HOURS
Unless otherwise authorized by the BSP in the As per Art. 1980 of the Civil Code, loans from the
interest of the banking public, all banks depositor (creditor) to a bank (debtor) may be in
the form of savings deposits, demand/current
including their branches and offices shall
deposits (all those liabilities of the BSP and of
transact business on all working days for at
least 6 hours a day. (Sec. 21) other banks which are denominated in Phil currency
and are subject to payment in legal tender upon
Working days shall mean Mondays to Fridays, demand by the presentation of checks as per Sec.
except if such days are holidays. (Sec. 21) 58 of NCBA) and time/fixed deposits. For this
reason, San Carlos Milling Co., Ltd v. BPI, 1933)
declared that banks are run for gain, and they
Banks or any of their branches or offices may
solicit deposits in order that they can use the
open for business on Saturdays, Sundays or
holidays for at least 3 hours a day. Banks money for that very purpose. For the same
which opt to open on days other than working reason, it has been held that a bank has a right of
days shall report to the BSP the additional days set off of the deposits in its hands for the payment
during which they or their branches or offices of any indebtedness to it on the part of a
depositor. (Gullas v. PNB, 1935) Conversely, the
shall transact business. (Sec. 21)
depositor has every right to apply his deposit in a
bank against his loan from such bank. (RP v. CA,
3.11. STRIKES AND LOCKOUTS
1975) (Morales; Villanueva cites Serrano v. CB,
The banking industry is hereby declared as 1980; Ppl v. Ong, 1991)
indispensable to the national interest. (Sec. 22)
Notwithstanding the provisions of any law to 4.05. PRESUMPTION OF OWNERSHIP OF
the contrary, any strike or lockout involving DEPOSITS
banks, if unsettled after 7 calendar days shall
It is presumed that money deposited in a bank
be reported by the BSP to the Secretary of
account belongs to the person in whose name
Labor who may assume jurisdiction over the
dispute, decide it, or certify the same to the the deposit account is opened. A bank is
NLRC for compulsory arbitration. However, the justified in paying out the money to the
President of the Philippines may at any time depositor or upon his order, and cannot be
liable to any other person who turned out to he
the true owner of the funds deposited. Thus, it and prudence in handling their clients money. It find no
was held in Fulton Iron Works Co v China compelling reason to disallow the application of the
Banking Corp (1930), The specialized function provisions on common carriers to this case if only to
of a bank is to serve as a place of deposit for emphasize the fact that banking institutions (like
money, to keep it safely while on deposit, and
petitioner) have the duty to exercise the highest degree
to pay it out, upon demand, to the person who
effected the deposit or upon his order. A bank of diligence when transacting with the public. By the
is not a guardian of trust funds deposited w/ it nature of their business, they are required to observe the
in the sense that it must see to their proper highest standards of integrity and performance, and
application, not is it its business to pry into the utmost assiduousness as well.
uses to which money on deposit in its vault are
being put; and so long as it serves its function 4.07. OPTION TO EXERCISE SET-OFF ON
and pays the money out in good faith to the DEPOSIT FOR OUTSTANDING LOAN
person who deposited it, or upon his order, A bank is under no duty or obligation to make an
w/out knowledge or notice that it is in fact application or set-off against the deposit accounts
assisting in the misappropriation of the fund, of a borrower. To apply the deposit to the
the bank will be protected. As is well said it payment of a loan is a privilege, a right of set-off
would seriously interfere w/ commercial which the bank has the option to exercise, but not
transactions to charge banks w/ the duty of the obligation. (BPI v. CA, 1994)
supervising the administration of trust funds,
when, in due course of business, they receive
checks and drafts in proper form drawn upon 4.08. NOTE ON SAFETY DEPOSIT BOXES
such funds in their custody. The law imposes In the case of rent of safety deposit box. The
no such duty upon them. Note however that contract is a special kind of deposit and cannot be
there is a limitation in this regard as per characterized as an ordinary contract of lease
survivorship agreements. (Morales) 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
4.06. OBLIGATION OF BANKS TO DEPOSITORS between the bank renting out and the renter is that
of bailer and bailee the bailment being for hire and
The bank is under the obligation to treat mutual benefiit. (CA Agro-industrial Dev. Corp. v.
deposit accounts of it depositors with CA, 1983; reiterated in Sia v. CA, 1993, according
meticulous care. It must bear the blame for 43
to Villanueva)
failing to discover the mistake of its employees
despite the established procedure requiring 4.09. MB ORDER OF CLOSURE
bank papers to pass through bank personnel In case a bank or QB notifies the BSP or publicly
whose duty it is to check and countercheck announces a bank holiday, or in any manner
them for possible errors. (Metropolitan Bank suspends the payment of its deposit liabilities
and Trust Co. v. CA, 1994 and Firestone Tire v continuously for more than 30 days, the MB may
CA, 2001) summarily and without need for prior hearing close
such banking institution and place it under
As a business affected with public interest and receivership of the Phil. Deposit Insurance Corp.
because of the nature of its functions, a bank is (PDIC). (Sec. 53)
under obligation to treat the accounts of its
depositors with meticulous case, always having
in mind the fiduciary nature of their
relationship. (PCI Bank v. CA, 1997)
Section 5 Loans
Solidbank Corporation/ Metropolitan Bank and Trust Co. 5.01. RISK-BASED CAPITAL RATIO
v. Sps. Tan The MB shall prescribe the minimum ratio which
GR No. 167346 the net worth of a bank must bear to its total risk
April 2, 2007 assets which may include contingent accounts [i.e.
net worth : total risk assets] (Sec. 33)
10 checks were deposited by representative of Sps. Tan
and upon checking their passbook, it was discovered that
one check was not posted. The bank proffered the 5.02. BSP CIRCULAR 280 (2001)
duplicate deposit slip which indicated that the said check The risk-based capital ratio of a bank, expressed as
was not deposited but it was discovered that it had been a percentage of qualifying capital to risk-weighted
cleared in another bank by another person. Sps. Tan filed assets, shall not be less than 10% for both solo
a collection case against the bank and was able to get basis (head office plus branches) and consolidated
favorable judgment from RTC and CA. basis (parent bank plus subsidiary financial allied
undertakings, but excluding insurance
HELD: Bank was negligent and so Sps. Tan entitled to
companies). The ratio shall be maintained daily.
damages. Failure to present original deposit slip, which
could have proven its claim that it did not receive
respondents missing check was a suppression of the best
evidence that could have bolstered its claim and 5.03. POWER OF THE MB IN THIS REGARD
confirmed its innocence, the presumption now arises that The MB may
it withheld the same for fraudulent purposes. Citing the - require that such ratio be determined on
case of Canlas v. Asian Savings Bank (2000), the Court the basis of the net worth and risk assets of
held that the degree of diligence required of banks is
more than that of a good father of a family in keeping 43
This topic was asked in 2004. Note the liability of back
with their responsibility to exercise the necessary care in case of loss.
a bank and its subsidiaries, financial or goods which must be fully covered by
otherwise; insurance. (Sec. 35.2)
- prescribe the composition and the manner Inclusions. The above prescribed ceilings shall
of determining the net worth and total risk include:
assets of banks and their subsidiaries. a. the direct liability of the maker or acceptor
Provided, that of paper discounted with or sold to such
- in the exercise of this authority, the MB bank and the liability of a general indorser,
shall, to the extent feasible, conform to drawer or guarantor who obtains a loan or
internationally accepted standards, other credit accommodation from or
including those of the Bank for discounts paper with or sells papers to such
International Settlements (BIS), bank;
relating to risk-based capital b. in the case of an individual who owns or
requirements; controls a majority interest in a
- the MB may alter or suspend corporation, partnership, association or any
compliance with such ratio whenever other entity, the liabilities of said entities to
necessary for a maximum period of 1 such bank;
year; and, c. in the case of a corporation, all liabilities to
- such ratio shall be applied uniformly to such bank of all subsidiaries in which such
banks of the same category. (Sec. 33) corporation owns or controls a majority
interest; and
d. in the case of a partnership, association or
In case of a bank merger or consolidation, or
other entity, the liabilities of the members
when a bank is under rehabilitation under a
thereof to such bank. (35.3)
program approved by the BSP, the MB may
temporarily relieve the surviving bank,
* Even if a parent corporation, partnership,
consolidated bank, or constituent bank or
association, entity or an individual who
corporations under rehabilitation from full
owns or controls a majority interest in such
compliance with the required capital ratio under
entities has no liability to the bank, the MB
such conditions as it may prescribe. (Sec. 33)
may prescribe the combination of the
liabilities of subsidiary corporations or
members of the partnership, association,
entity or such individual under certain
5.04. EFFECT OF NON-COMPLIANCE circumstances, including but not limited to
any of the following situations:
The MB may limit or prohibit the distribution of
net profits by such bank and may require that a. the parent corporation, partnership,
part or all of the net profits be used to increase association, entity or individual
the capital accounts of the bank until the guarantees the repayment of the
minimum requirement has been met. liabilities;
The MB may, furthermore, restrict or prohibit b. the liabilities were incurred for the
the acquisition of major assets and the making accommodation of the parent
of new investments by the bank, with the corporation or another subsidiary or of
exception of purchases of readily marketable the partnership or association or entity
evidences of indebtedness of the RP and the or such individual; or
BSP and any other evidences of indebtedness c. the subsidiaries though separate
or obligations the servicing and repayment of entities operate merely as departments
which are fully guaranteed by the RP, until the or divisions of a single entity. (35.4)
minimum required capital ratio has been
restored. (Sec. 33) ** Certain types of contingent accounts
of borrowers may be included among
those subject to these prescribed limits
as may be determined by the MB.
5.05. SINGLE BORROWERS LIMIT (SBL) (35.7)
Except as the MB may otherwise prescribe for
reasons of national interest, the total amount
of loans, credit accommodations and *** Loans and other credit
guarantees as may be defined by the MB that accommodations, deposits maintained
may be extended by a bank to any person, with, and usual guaranteed by a bank
partnership, association, corporation or other to any other bank or non-bank entity,
entity shall at no time exceed 20% of the net whether locally or abroad, shall be
worth of such bank. (Sec. 35.1) subject to the limits as herein
The basis for determining compliance with SBL prescribed. (35.6)
is the total credit commitment of the bank to
the borrower. (Sec. 35.1) Exclusions. For purposes of this Section, loans,
Unless the MB prescribes otherwise, the total other credit accommodations and guarantees
amount of loans, credit accommodations and shall exclude:
guarantees prescribed in the preceding
paragraph may be increased by an additional a. loans and other credit accommodations
10% of the net worth of such bank provided secured by obligations of the BSP or of the
the additional liabilities of any borrower are Phil. Govt;
adequately secured by trust receipts, shipping b. loans and other credit accommodations
documents, warehouse receipts or other similar fully guaranteed by the govt as to the
documents transferring or securing title payment of principal and interest;
covering readily marketable, non-perishable
c. loans and other credit accommodations a bank to its DOSRI, as well as investments
covered by assignment of deposits of such bank in enterprises owned or
maintained in the lending bank and held in controlled by said directors, officers,
the Phils.; stockholders and their related interests.
d. loans, credit accommodations and
acceptances under letters of credit to the * The outstanding loans, credit
extent covered by margin deposits; and accommodations and guarantees which a
e. other loans or credit accommodations bank may extend to each of its DOSRI,
which the MB may from time to time, shall be limited to an amount equivalent to
specify as non-risk items. (35.5) their respective unencumbered deposits
and book value of their paid-in capital
5.06. RESTRICTION ON BANK EXPOSURE TO contribution in the bank.
44
DOSRI
** The loans, credit accommodations and
DOSRI = Directors, Officers, Stockholders and their guarantees secured by assets considered
Related Interests; as non-risk by the MB shall be excluded
from such limit.
NOTE: The MB shall define the term "related
interests." (Sec. 36 par. 5) *** The loans, credit accommodations and
advances to officers in the form of fringe
GR: A director or officer of any bank shall benefits granted in accordance with rules
neither, as may be prescribed by the Monetary
1. directly or indirectly, for himself or as Board shall not be subject to the individual
the representative or agent of others, limit. (Sec. 36 par. 4)
borrow from such bank; nor
2. become a guarantor, indorser or surety 5.07. LIMITS ON LOANS AND OTHER CREDIT
for loans from such bank to others, or ACCOMMODATIONS ON
in any manner be an obligor or incur
any contractual liability to the bank. Loans and other credit accommodations
EXC. Except with the written approval of against
the majority of all the directors of the real estate shall not exceed 75%
bank, excluding the director of the appraised value
concerned. The required approval of the respective real
shall be entered upon the records of estate security, plus
the bank and a copy of such entry 60% of the appraised
shall be transmitted forthwith to the value of the insured
appropriate supervising and improvements, and
examining department of the BSP. such loans may be
made to the owner of
* Such written approval shall not be the real estate or to his
required for loans, other credit assignees. (Sec. 37)
accommodations and advances security of shall not exceed 75%
granted to officers under a fringe chattels of the appraised value
benefit plan approved by the BSP. and of the security, and
(Sec. 36 par. 1) intangible such loans and other
properties credit accommodations
** The limit on loans, credit (such as, may be made to the
accommodations and guarantees but not title-holder of the
prescribed herein shall not apply to limited to, chattels and intangible
loans, credit accommodations and patents, properties or his
guarantees extended by a trademarks, assignees. (Sec. 38)
cooperative bank to its cooperative trade
shareholders. (Sec. 36 par. 6) names, and
copyrights)
Principles Involved.
Exception. In both cases, the MB may prescribe
- Dealings of a bank with any of its directors, otherwise. (Sec. 37-38)
officers or stockholders and their related
interests shall be upon terms not less
favorable to the bank than those offered to 5.08. FORECLOSURE OF REAL ESTATE
others. (Sec. 36 par. 2) MORTGAGE
- After due notice to the board of directors of
In the event of foreclosure, whether judicially
the bank, the office of any bank director or
or extrajudicially, of any mortgage on real
officer who violates the provisions of this
estate which is security for any loan or other
Section may be declared vacant and the
credit accommodation granted, the mortgagor
director or officer shall be subject to the
or debtor whose real property has been sold for
penal provisions of the NCBA. (Sec. 36 par.
the full or partial payment of his obligation
3)
shall have the right within one year after the
- The MB may regulate the amount of loans,
sale of the real estate, to redeem the property
credit accommodations and guarantees that
by paying the amount due under the mortgage
may be extended, directly or indirectly, by
deed, with interest thereon at the rate specified
44
in the mortgage, and all the costs and
This topic was asked in 2006 specifically on requisites expenses incurred by the bank or institution
before a bank can lend to DOSRI.
from the sale and custody of said property less to the BIR. Should such statements prove
the income derived therefrom. However, the to be false or incorrect in any material
purchaser at the auction sale concerned detail, the bank may terminate any loan or
whether in a judicial or extrajudicial foreclosure other credit accommodation granted on the
shall have the right to enter upon and take basis of said statements and shall have the
possession of such property immediately after right to demand immediate repayment or
the date of the confirmation of the auction sale liquidation of the obligation. (Sec. 40)
and administer the same in accordance with
law. Any petition in court to enjoin or restrain 5.10. AMMORTIZATION
the conduct of foreclosure proceedings Amortization on Loans and Other Credit
instituted pursuant to this provision shall be Accommodations. The amortization schedule
given due course only upon the filing by the of bank loans and other credit accommodations
petitioner of a bond in an amount fixed by the shall be adapted to the nature of the operations
court conditioned that he will pay all the to be financed.
damages which the bank may suffer by the
enjoining or the restraint of the foreclosure - In case of loans and other credit
proceeding. accommodations with maturities of more
than 5 years, provisions must be made for
Juridical Mortgagor. Notwithstanding Act 3135, periodic amortization payments, but such
juridical persons whose property is being sold payments must be made at least annually:
pursuant to an extrajudicial foreclosure, shall Provided, however, That when the
have the right to redeem the property in borrowed funds are to be used for purposes
accordance with this provision until, but not which do not initially produce revenues
after, the registration of the certificate of adequate for regular amortization
foreclosure sale with the applicable Register of payments therefrom, the bank may permit
Deeds which in no case shall be more than 3 the initial amortization payment to be
months after foreclosure, whichever is earlier. deferred until such time as said revenues
Owners of property that has been sold in a are sufficient for such purpose, but in no
foreclosure sale prior to the effectivity of the case shall the initial amortization date be
GBL shall retain their redemption rights until later than 5 years from the date on which
their expiration. (Sec. 47) the loan or other credit accommodation is
granted.
- In case of loans and other credit
5.09. OTHER SECURITY REQUIREMENTS OF accommodations to microfinance sectors,
BANKS the schedule of loan amortization shall take
into consideration the projected cash flow
Grant and Purpose of Loans and Other Credit of the borrower and adopt this into the
Accommodations terms and conditions formulated by banks.
A bank shall grant loans and other credit (Sec. 44)
accommodations only in amounts and for
the periods of time essential for the
effective completion of the operations to be 5.11. PREPAYMENT OF LOANS AND OTHER
financed. (Sec. 39) CREDIT ACCOMMODATIONS
Such grant of loans and other credit A borrower may at any time prior to the agreed
accommodations shall be consistent with maturity date prepay, in whole or in part, the
safe and sound banking practices. (Sec. unpaid balance of any bank loan and other
39) credit accommodation, subject to such
The purpose of all loans and other credit reasonable terms and conditions as may be
accommodations shall be stated in the agreed upon between the bank and its
application and in the contract between the borrower. (Sec. 45)
bank and the borrower. If the bank finds
that the proceeds of the loan or other credit
accommodation have been employed, 5.12. SOME OF MBS POWERS RELATED TO
without its approval, for purposes other LOANS AND CREDIT ACCOMMODATIONS
than those agreed upon with the bank, it
shall have the right to terminate the loan or The MB is hereby authorized to issue such
other credit accommodation and demand regulations as it may deem necessary with
immediate repayment of the obligation. respect to unsecured loans or other credit
(Sec. 39) accommodations that may be granted by
banks. (Sec. 41)
Debtor is Capable
Before granting a loan or other credit The MB may, by regulation, prescribe further
accommodation, a bank must ascertain security requirements to which the various
that the debtor is capable of fulfilling his types of bank credits shall be subject, and, in
commitments to the bank. Toward this end, accordance with the authority granted to it in
a bank may demand from its credit Sec. 106 of the NCBA, the Board may by
applicants a statement of their assets and regulation, reduce the maximum ratios
liabilities and of their income and established in Secs. 36 and 37 [should be Secs.
expenditures and such information as may 37 and 38] of this Act, or, in special cases,
be prescribed by law or by rules and increase the maximum ratios established
regulations of MB to enable the bank to therein. (Sec. 42)
properly evaluate the credit application
which includes the corresponding financial The MB may, in accordance with the authority
statements submitted for taxation purposes granted to it in Sec. 106 of the NCBA, and
taking into account the requirements of the Notwithstanding the limitations just mentioned,
economy for the effective utilization of long- a bank may acquire, hold or convey real
term funds, prescribe the maturities, as well as property under the following circumstances:
related terms and conditions for various types
of bank loans and other credit 1. Such as shall be mortgaged to it in good
accommodations. Any change by the MB in the faith by way of security for debts;
maximum maturities shall apply only to loans 2. Such as shall be conveyed to it in
and other credit accommodations made after satisfaction of debts previously contracted
the date of such action. (Sec. 43) in the course of its dealings; or
3. Such as it shall purchase at sales under
The Monetary Board shall regulate the interest judgments, decrees, mortgages, or trust
imposed on microfinance borrowers by lending deeds held by it and such as it shall
investors and similar lenders, such as, but not purchase to secure debts due it. (Sec. 52)
limited to, the unconscionable rates of interest
collected on salary loans and similar credit Any real property acquired or held under these
accommodations. (Sec. 43) circumstances shall be disposed of by the bank
within a period of 5 years or as may be
Development Assistance Incentives. The BSP prescribed by the MB. The bank may, after said
shall provide incentives to banks which, without period, continue to hold the property for its
government guarantee, extend loans to finance own use, subject to the limitation that the total
educational institutions, cooperatives, hospitals investment in real estate and improvements
and other medical services, socialized or low- thereof, including bank equipment, shall not
cost housing, local government units and other exceed 50% of combined capital accounts.
activities with social content. (Sec. 46) (Sec. 52)
Every bank, QB or trust entity shall submit to No branch of any foreign bank doing business
the appropriate supervising and examining in the Phils. shall in any way announce the
department of the BSP financial statements in amount of the capital and surplus of its head
such form and frequency as may be prescribed office, or of the bank in its entirety without
by the BSP. (Sec. 60) indicating at the same time and with equal
EXTENDING CREDIT,
6.14. OTHER RELATED PROVISIONS OF THE
GBL
SUBJECT TO SUCH RULES AS THE MB
MAY PROMULGATE. THESE RULES MAY
The Bangko Sentral may charge equitable INCLUDE THE DETERMINATION OF
rates, commissions or fees, as may be BONDS AND OTHER DEBT SECURITIES
prescribed by the Monetary Board for ELIGIBLE FOR INVESTMENT, THE
supervision, examination and other services MATURITIES AND AGGREGATE AMOUNT
which it renders under this Act. (Sec. 65) OF SUCH INVESTMENT. (SEC. 29)
Unless otherwise provided, the violation of any BSP Circular 271 (2002)
of the provisions of this Act shall be subject to (1) invest in the equities of
Secs 34, 35, 36 and 37 of the NCBA. If the allied enterprises;
offender is a director or officer of a bank, (2) purchase, hold and
quasi-bank or trust entity, the MB may also convey real estate;
suspend or remove such director or officer. If (3) receive in custody
the violation is committed by a corporation, funds, documents and
such corporation may be dissolved by quo valuable objects;
warranto proceedings instituted by the (4) act as financial agent;
Sol.Gen.. (Sec. 66) (5) make collections and
payments for the account
The provisions of any law to the contrary of others;
notwithstanding, the BSP shall be consulted by (6) act as managing agent,
other government agencies or instrumentalities adviser, consultant or
in actions or proceedings initiated by or administrator of
brought before them involving controversies in investment
banks, QBs or trust entities arising out of and management/advisory/-
involving relations between and among their consultancy accounts;
directors, officers or stockholders, as well as (7) rent out safety deposit
disputes between any or all of them and the boxes; and
bank, QBs or trust entity of which they are (8) engage in quasi-banking
directors, officers or stockholders. (Sec. 63) functions.
The conduct of offshore banking business in the of summons and processes in legal
Philippines shall be governed by Offshore proceedings against the bank and of
Banking System Decree (PD 1034) (Sec. 72) notices affecting the bank may be made,
and to file with the SEC a duly
7.02. ACQUISITION OF VOTING STOCK IN A authenticated nomination of such agent.
DOMESTIC BANK (Sec. 76)
In the exercise of this authority, the MB shall The said Deputy Governor shall register
adopt measures as may be necessary to ensure and transmit by mail to the president or the
that at all times the control of 70% of the secretary of the bank at its head or
resources or assets of the entire banking principal office a copy, duly certified by
system is held by banks which are at least him, of the summons, process, or notice.
majority-owned by Filipinos. The sending of such copy of the summons,
process, or notice shall be a necessary part
Any such right, privilege or incentive granted to of the services and shall complete the
a foreign bank shall be equally enjoyed by and service.
extended under the same conditions to banks
organized under Philippine laws. (Sec. 73) The registry receipt of mailing shall be
prima facie evidence of the transmission of
the summons, process or notice.
7.03. HEAD OFFICE GUARANTEE
All costs necessarily incurred by the said
In order to provide effective protection of the Deputy Governor for the making and
interests of the depositors and other creditors mailing and sending of a copy of the
of Phil. branches of a foreign bank, the head summons, process, or notice to the
office of such branches shall fully guarantee the president or the secretary of the bank at its
prompt payment of all liabilities of its Phil. head or principal office shall be paid in
branch. advance by the party at whose instance the
service is made. (Sec. 76)
Residents and citizens of the Phils. who are
creditors of a branch in the Phils. of a foreign 7.05. REVOCATION OF LICENSE
bank shall have preferential rights to the assets
of such branch in accordance with existing The MB may revoke the license to transact
laws. (Sec. 75) business in the Phils. of any foreign bank, if it
finds that the foreign bank is insolvent or in
7.04. SUMMONS AND LEGAL PROCESS imminent danger thereof or that its
continuance in business will involve probable
Upon the Phil. Agent or Head of the Foreign loss to those transacting business with it.
Bank Designated to Accept Service
After the revocation of its license, it shall be
Summons and legal process served upon unlawful for any such foreign bank to transact
the Phil. agent or head of any foreign bank business in the Phils. unless its license is
designated to accept service thereof shall renewed or reissued. The BSP shall take the
give jurisdiction to the courts over such necessary action to protect the creditors of
bank, and service of notices on such agent such foreign bank and the public.
or head shall be as binding upon the bank
which he represents as if made upon the The provisions of the NCBA on sanctions and
bank itself. penalties shall likewise be applicable. (Sec. 78)
For the protection of the public xxx, there is 8.07. MINIMUM CAPITALIZATION
need for writing into the law provisions
intended to ensure that trust managers shall
handle trust accounts along the prudent man A trust entity, before it can engage in trust or
concept of managing funds in trust, since other fiduciary business, shall comply with the
trustors usually entrust their funds xxx in full minimum paid-in capital requirement which will
confidence, secure in the belief that the trustee be determined by the MB. (Sec. 82)
will manage his funds as a prudent man would.
This means it must have combined capital
There is need therefore to put in safeguards in accounts of P250M. Combined capital
the law so as to ensure that the expected accounts refers to the the total capital stock,
prudence in management shall indeed be the retained earnings and profit and loss summary,
norm, Such safeguards or guidelines may take net of (1) such unbooked valuation reserves
the form of prohibition form purchasing or and other capital adjustments as may be
acquiring property for the trust or for account required by the BSP and (2) total outstanding
of the trustor or beneficiary of the trust from unsecured credit accommodations, both direct
the bank proper or any of its depts or and indirect, to DOSRI When applicant is a
directors, officers or employees, unless domestic bank, the combined capital accounts
specifically authorized by the trustor. must not be less that the minimum capital
prescribed by the MB for such bank but in no
It has been said that the essence of case less than P250M; and when applicant is a
trusteeship is that the trustee would not be branch of a foreign bank, it must comply with /
the capital requirement applicable to such local - any activity of a trust licensed bank
bank. (Morales citing various provisions of the resulting from a contract or agreement
Manual of Regulations for Non-Bank Financial whereby the bank binds itself to render
Institutions and the Manual of Regulation for services or to act in a representative
Banks) capacity such as in an agency,
guardianship, Administratorship of
8.08. POWERS OF A TRUST ENTITY wills, properties and estates,
A trust entity, in addition to the general powers executorship, receivership, and other
incident to corporations, shall have the power to: similar services which do not create or
result in a trusteeship.
1. Act as trustee on any mortgage or bond - It shall exclude collecting or paying
issued by any municipality, corporation, or agency arrangements and similar
any body politic and to accept and execute fiduciary services which are inherent in
any trust consistent with law; the use of the facilities of the other
2. Act under the order or appointment of any depts of said bank. Investment
court as guardian, receiver, trustee, or management activities, which are
depositary of the estate of any minor or considered as among other fiduciary
other incompetent person, and as receiver business, shall be separately defined in
and depositary of any moneys paid into the succeeding item to highlights its
court by parties to any legal proceedings being a major source of fiduciary
and of property of any kind which may be business.
brought under the jurisdiction of the court; - Does not act as a trustee but renders
3. Act as the executor of any will when it is services to its counterparty in a
named the executor thereof; representative capacity. In particular,
4. Act as administrator of the estate of any the trust entity acts as agent, adviser,
deceased person, with the will annexed, or consultant or administrator, in respect
as administrator of the estate of any of an investment management account.
deceased person when there is no will; - Art 1060 Civil Code. A corporation or
5. Accept and execute any trust for the association authorized to conduct the
holding, management, and administration business of a trust company in the Phils
of any estate, real or personal, and the may be appointed as an executor,
rents, issues and profits thereof; and administrator, guardian of an estate, or
6. Establish and manage common trust funds, trustee, in like manner as an individual;
subject to such rules and regulations as but it shall not be appointed guardian
may be prescribed by the MB. (Sec. 83) of the person of a ward.
Historical Note. It used to be that a trust No assets held by a trust entity in its capacity
company, particularly in the US could own as trustee shall be subject to any claims other
anything. In fact, many national banks were than those of the parties interested in the
then subsidiaries of trust companies. When specific trusts. (Sec. 92)
monopolies were being made in the 19th and
20th centuries, the devise used was the trust, Rationale. The creditors of the trustee will not
as it could hold the stock of all companies w/in be able to attach, garnish or otherwise claim
the group. Accordingly, then the US Congress the trust assets, because the trustee is not the
was breaking up monopolies, what were passed beneficial owner thereof. Only the :parties
were anti-trust laws. (Morales) interested in the specific trust (normally, the
beneficiaries of the trust) can claim those
assets. This is further reinforced by the
8.13. LOANS OR INVESTMENTS PRESCRIBED following: Art 2240 Civil Code. Property held
BY MB by the insolvent debtor as a trustee of an
express or implied trust, shall be excluded from
Unless otherwise specifically enumerated in the the insolvency proceedings. (Morales)
agreement or indenture and directed in writing by
the client, court of competent jurisdiction or other
competent authority, loans and investments of the
[trust or other fiduciary] fund shall be limited to:
1. (a) evidences of indebtedness of the RP
and BSP, and
(b) any other evidences of indebtedness or
obligations the servicing and repayment of
which are fully guaranteed by the RP or
(c) loans against such government
securities;
2. loans fully guaranteed by the RP as to the
payment of principal and interest;
3. loans fully secured by [a] a hold-out on, [b]
assignment or [c] pledge of deposits
maintained either w/ the bank or other
banks, or of deposit substitutes of the
bank, or of [d] chattel mortgage bonds
issued by the trustee or fiduciary; and
4. loans fully secured by real estate or
chattels (Morales referring to Subsec
X409.2 Ibid; similar rule in Subsec 4409Q.2
Manual o Regulations for Non-Bank
Financial Institutions)
Section 9 Conservatorship and Cessation II. The New Central Bank Act (RA
of Banking Business 7653)
2. Mandate to Organize
5. CORPORATE POWERS
The BSP shall be organized by the MB by
1. To adopt, alter, and use a corporate seal which adopting, if it so desires, an entirely new
shall be judicially noticed; staffing pattern on organizational structure to
2. To enter into contracts; suit the operations of the BSP. No preferential
3. To lease or own real and personal property, or priority right shall be given to or enjoyed by
and to sell or otherwise dispose of the same; any personnel for appointment to any position
4. To sue and be sued; and in the new staffing pattern, nor shall any
5. To acquire and hold such assets and incur such personnel be considered as having prior or
liabilities in connection with its operations vested rights with respect to retention in the
authorized by the provisions of the NCBA, or as BSP or in any position which may be created in
are essential to the proper conduct of such the new staffing pattern, even if he should be
operations; the incumbent of a similar position prior to
6. To compromise, condone or release, in whole organization. The formulation of the program
or in part, any claim of or settled liability to the of organization shall be completed within 6
BSP, regardless of the amount involved, under months after the effectivity of this Act, and
such terms and conditions as may be shall be fully implemented within a period of 6
prescribed by the MB to protect the interests of months thereafter. Personnel who may not be
the BSP; retained are deemed separated from the
7. To do and perform any and all things that may service. (Sec. 133)
be necessary or proper to carry out the
purposes of the NCBA (Sec. 5)
3. Separation Benefits
NOTE
The powers and functions of the BSP shall be Pursuant to Sec. 15 of this Act, the MB is
exercised by the BSP MB. (Sec. 6) authorized to provide separation incentives,
and all those who shall retire or be separated
from the service on account of reorganization
under the preceding section shall be entitled to
such incentives, which shall be in addition to all
6. CREATION: FROM CB TO BSP gratuities and benefits to which they may be
entitled under existing laws. (Sec. 134)
3. EXERCISE OF AUTHORITY
4. MEETINGS
In the exercise of its authority, the MB shall:
1. Issue rules and regulations it considers NOTES
necessary for the effective discharge of the
responsibilities and exercise of the powers vested 1. The MB shall meet at least once a week. (Sec.
upon the MB and the BSP. The rules and 11)
regulations issued shall be reported to the 2. The MB may be called to a meeting by the
President and the Congress within 15 days from Governor or by 2 other members of the MB.
the date of their issuance; (Sec. 11)
3. The presence of 4 members shall constitute a
2.Direct the management, operations, and quorum: Provided, That in all cases the
administration of the BSP, reorganize its Governor or his duly designated alternate shall
personnel, and issue such rules and regulations be among the 4 (Sec. 11)
as it may deem necessary or convenient for this 4. Unless otherwise provided in this Act, all
purpose. The legal units of the BSP shall be decisions of the MB shall require the
under the exclusive supervision and control of the concurrence of at least 4 members. (Sec. 11)
MB; 5. The BSP shall maintain and preserve a
complete record of the proceedings and
3.Establish a human resource management system deliberations of the MB, including the tapes and
which shall govern the selection, hiring, transcripts of the stenographic notes, either in
appointment, transfer, promotion, or dismissal of their original form or in microfilm. (Sec. 11)
all personnel. Such system shall aim to establish 6. The Deputy Governors may attend the
professionalism and excellence at all levels of the meetings of the MB with the right to be heard.
BSP in accordance with sound principles of (Sec. 12)
management.47 7. In case of emergencies where time is
insufficient to call a meeting of the MB, the
4.Adopt an annual budget for and authorize such Governor of the BSP, with the concurrence of 2
expenditures by the BSP as are in the interest of other members of the MB, may decide any
the effective administration and operations of the matter or take any action within the authority
BSP in accordance with applicable laws and of the Board. The Governor shall submit a
regulations; and report to the President and Congress within 72
hours after the action has been taken. At the
5. Indemnify its members and other officials of the soonest possible time, the Governor shall call a
BSP, including personnel of the departments meeting of the MB to submit his action for
performing supervision and examination ratification. (Sec. 19)
functions against all costs and expenses
reasonably incurred by such persons in
connection with any civil or criminal action, suit 5. SANCTIONS
or proceedings to which he may be, or is, made a
party by reason of the performance of his NOTES
functions or duties, unless he is finally adjudged
in such action or proceeding to be liable for 1. Members of the MB, officials, examiners, and
negligence or misconduct.48 (Sec. 15) employees of the BSP who willfully violate this
Act or who are guilty of negligence, abuses or
acts of malfeasance or misfeasance or fail to
47
A compensation structure, based on job evaluation exercise extraordinary diligence in the
studies and wage surveys and subject to the MB's approval, performance of his duties shall be held liable
shall be instituted as an integral component of the BSP's for any loss or injury suffered by the BSP or
human resource development program: Provided, That the other banking institutions as a result of such
MB shall make its own system conform as closely as possible
with the principles provided for under RA 6758
violation, negligence, abuse, malfeasance,
(Compensation and Position Classification Act of 1989): misfeasance or failure to exercise extraordinary
Provided, however, That compensation and wage structure of diligence. (Sec. 16)
employees whose positions fall under salary grade 19 and
below shall be in accordance with the rates prescribed under 2. Similar responsibility shall apply to members,
RA 6758.
On the recommendation of the Governor, appoint, fix
officers, and employees of the BSP for:
the remunerations and other emoluments, and remove
personnel of the BSP, subject to pertinent civil service laws: a.the disclosure of any information of a
Provided, That the MB shall have exclusive and final authority confidential nature, or any information on the
to promote, transfer, assign, or reassign personnel of the BSP discussions or resolutions of the MB, or about
and these personnel actions are deemed made in the interest
of the service and not disciplinary: Provided, further, That the
the confidential operations of the BSP, unless
MB may delegate such authority to the Governor under such the disclosure is in connection with the
guidelines as it may determine. (Sec. 15) performance of official functions with the
48
In the event of a settlement or compromise, BSP, or is with prior authorization of the MB
indemnification shall be provided only in connection with such or the Governor; or
matters covered by the settlement as to which the BSP is
advised by external counsel that the person to be indemnified
did not commit any negligence or misconduct. b.the use of such information for personal gain
The costs and expenses incurred in defending the or to the detriment of the Government, the
aforementioned action, suit or proceeding may be paid by the BSP or third parties: Provided, however, That
BSP in advance of the final disposition of such action, suit or any data or information required to be
proceeding upon receipt of an undertaking by or on behalf of
the member, officer, or employee to repay the amount
submitted to the President and/or the
advanced should it ultimately be determined by the MB that Congress, or to be published under the
he is not entitled to be indemnified as provided in this provisions of this Act shall not be considered
subsection. (Sec. 15) confidential. (Sec. 16)
under the doctrine of implied authority - the 2. Related Provisions in RA 8791 (General Banking
conservator cannot do either. Ineluctably, his Law of 2000)
power is not unilateral and he cannot simply
repudiate valid obligations of the Bank. His
authority would be only to bring court actions In case a bank or quasi-bank notifies the BSP
to assail such contracts. (First Philippine or publicly announces a bank holiday, or in any
International Bank vs CA ; 1996) manner suspends the payment of its deposit
liabilities continuously for more than 30 days,
The conservator should be competent and the MB may summarily and without need for
knowledgeable in bank operations and prior hearing close such banking institution and
management. (Sec. 29) place it under receivership of the Philippine
Deposit Insurance Corporation. (Sec 53)
The conservator shall receive remuneration to
be fixed by the MB in an amount not to exceed Whenever a bank, quasi-bank or trust entity
2/3 of the salary of the president of the persists in conducting its business in an unsafe
institution in 1 year, payable in 12 equal or unsound manner, the MB may take action
monthly payments: Provided, That, if at any under Sec 30. Conducting business in an
time within one-year period, the unsafe or unsound manner means:
conservatorship is terminated on the ground
that the institution can operate on its own, the - The act or omission has resulted or
conservator shall receive the balance of the may result in material loss or
remuneration which he would have received up damage, or abnormal risk or danger
to the end of the year; but if the to safety, stability, liquidity or
conservatorship is terminated on other solvency or
grounds, the conservator shall not be entitled - to the institution's depositors,
to such remaining balance. The MB may creditors, investors, stockholders or
appoint a conservator connected with the BSP, to the Bangko Sentral or to the public
in which case he shall not be entitled to receive in general or
any remuneration or emolument from the BSP - The act or omission has caused any
during the conservatorship. The expenses undue injury, or has given any
attendant to the conservatorship shall be borne unwarranted benefits, advantage or
by the bank or quasi-bank concerned. (Sec. 29) preference to the bank or any party
in the discharge by the director or
2. Closure officer of his duties and
responsibilities through manifest
partiality, evident bad faith or gross
1. When closure is ordered inexcusable negligence or
- The act or omission involves entering
Whenever, upon report of the head of the into any contract or transaction
supervising or examining department, the MB finds manifestly and grossly
that a bank or quasi-bank: disadvantageous to the bank, quasi-
bank or trust entity, whether or not
the director or officer profited or will
is unable to pay its liabilities as they profit thereby (Sec. 56)
become due in the ordinary course of
business: Provided, That this shall 3. Receivership
not include inability to pay caused by
extraordinary demands induced by 1. When Receiver is Designated
financial panic in the banking
community; Whenever, upon report of the head of the
has insufficient realizable assets, as supervising or examining department, the MB finds
determined by the BSP, to meet its that a bank or quasi-bank:
liabilities; or
cannot continue in business without
involving probable losses to its is unable to pay its liabilities as they
depositors or creditors; or become due in the ordinary course of
has willfully violated a cease and business: Provided, That this shall
desist order under Sec. 37 that has not include inability to pay caused by
become final, involving acts or extraordinary demands induced by
transactions which amount to fraud financial panic in the banking
or a dissipation of the assets of the community;
institution; has insufficient realizable assets, as
determined by the BSP, to meet its
in which cases, the MB may summarily and without liabilities; or
need for prior hearing forbid the institution from cannot continue in business without
doing business in the Philippines (Sec. 30) involving probable losses to its
depositors or creditors; or
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;
in which cases, the MB may summarily of said bank shall be subject to the penal provisions
and without need for prior hearing forbid of the New Central Bank Act. (Sec 70)
the institution from doing business in the
Philippines and designate the Philippine
Deposit Insurance Corporation (PDIC) as 4. Liquidation
receiver of the banking institution. For a
quasi-bank, any person of recognized If the receiver determines that the institution
competence in banking or finance may be cannot be rehabilitated or permitted to resume
designed as receiver. (Sec. 30) business in accordance with the next preceding
paragraph, the MB shall notify in writing the board
There is no requirement whether of directors of its findings and direct the receiver to
express or implied, that a hearing be proceed with the liquidation of the institution.
first conducted before a banking
institution may be placed under
receivership. The law is explicit as to 1. Receivers Acts
the conditions prerequisite to the
action of the MB to forbid the 1. file ex parte with the proper RTC, and
institution to do business in the without requirement of prior notice or any
Philippines and to appoint a receiver other action, a petition for assistance in the
to immediately take charge of the liquidation of the institution pursuant to a
bank's assets and liabilities. They liquidation plan adopted by the Philippine
are: (a) an examination made by the Deposit Insurance Corporation for general
examining department of the CB; (b) application to all closed banks. In case of
report by said department to the MB; quasi-banks, the liquidation plan shall be
and (c) prima facie showing that the adopted by the MB.
bank is in a condition of insolvency or 2. upon acquiring jurisdiction, the court shall,
so situated that its continuance in upon motion by the receiver after due
business would involve probable loss notice, adjudicate disputed claims against
to its depositors or creditors. (Rural the institution, assist the enforcement of
Bank of Buhi vs CA ; 1988) individual liabilities of the stockholders,
directors and officers, and decide on other
issues as may be material to implement the
2. Functions and Obligations of the Receiver liquidation plan adopted. The receiver shall
pay the cost of the proceedings from the
The receiver shall immediately gather and take assets of the institution.
charge of all the assets and liabilities of the
institution, administer the same for the benefit of The exclusive jurisdiction of the
its creditors, and exercise the general powers of a liquidation court pertains only to the
receiver under the Revised Rules of Court but shall adjudication of claims against the
not, with the exception of administrative bank. It does not cover the reverse
expenditures, pay or commit any act that will situation where it is the bank which
involve the transfer or disposition of any asset files a claim against another person or
of the institution: Provided, That the receiver may legal entity. (Manalo vs CA ; 2001)
deposit or place the funds of the institution in
non-speculative investments. 3. convert the assets of the institutions to
money, dispose of the same to creditors
The receiver shall determine as soon as possible, and other parties, for the purpose of paying
but not later than 90 days from take over, whether the debts of such institution in accordance
the institution may be rehabilitated or otherwise with the rules on concurrence and
placed in such a condition so that it may be preference of credit under the Civil Code
permitted to resume business with safety to its and
depositors and creditors and the general public: 4. he may, in the name of the institution, and
Provided, That any determination for the with the assistance of counsel as he may
resumption of business of the institution shall be retain, institute such actions as may be
subject to prior approval of the MB. (Sec. 30) necessary to collect and recover accounts
and assets of, or defend any action against,
the institution. (Sec. 30)
3. Related Provisions in RA 8791 (General Banking 5. In case of liquidation of a bank or quasi-
Law of 2000) bank, after payment of the cost of
proceedings, including reasonable expenses
The petitioner or plaintiff must file with the clerk or and fees of the receiver to be allowed by
judge of the court in which the action is the court, the receiver shall pay the debts
pending a bond, executed in favor of the BSP, of such institution, under order of the
in an amount to be fixed by the court. (Sec 69) court, in accordance with the rules on
concurrence and preference of credit as
Any director or officer of any bank placed under provided in the Civil Code. (Sec. 31)
receivership who refuses to turn over the banks 6. All revenues and earnings realized by the
records and assets to designated receivers, receiver in winding up the affairs and
tampers with records, appropriates or destroys or administering the assets of any bank or
causes the misappropriation and destruction of the quasi-bank within the purview of this Act
banks assets, receives or permits or causes to be shall be used to pay the costs, fees and
received in said bank any deposit, collection of expenses mentioned in no. 5, salaries of
loans and/or receivables, pays out or permits or such personnel whose employment is
causes to be transferred any securities or property rendered necessary in the discharge of the
liquidation together with other additional The BSP shall have the authority to request
expenses caused thereby. The balance of from government offices and instrumentalities,
revenues and earnings, after the payment or GOCCs, any data which it may require for
of all said expenses, shall form part of the the proper discharge of its functions and
assets available for payment to creditors. responsibilities. The BSP through the Governor
(Sec. 32) or in his absence, a duly authorized
representative shall have the power to issue a
The assets of an institution under subpoena for the production of the books and
receivership or liquidation shall be deemed records for the aforesaid purpose. Those who
in custodia legis in the hands of the refuse the subpoena without justifiable cause,
receiver and shall, from the moment the or who refuse to supply the bank with data
institution was placed under such requested or required, shall be subject to
receivership or liquidation, be exempt from punishment for contempt in accordance with
any order of garnishment, levy, the provisions of the Rules of Court. (Sec. 23)
attachment, or execution. (Sec. 30) Data on individual firms, other than banks,
The BSP may, if public interest so requires, gathered by the Department of Economic
award to an institution, upon such terms Research and other departments or units of the
and conditions as the MB may approve, the BSP shall not be made available to any person
banking franchise of a bank under or entity outside of the BSP whether public or
liquidation to operate in the area where private except under order of the court or
said bank or its branches were previously under such conditions as may be prescribed by
operating: Provided, That whatever the MB: Provided, however, That the collective
proceeds may be realized from such award data on firms may be released to interested
shall be subject to the appropriate persons or entities: Provided, finally, That in
exclusive disposition of the MB. (Sec. 33) the case of data on banks, the provisions of
Sec. 27 of this Act (infra) shall apply. (Sec. 23)
2. Related Provisions in RA 8791 (General Banking
Law of 2000) 2. Training of Technical Personnel
The petitioner or plaintiff must file with the The BSP shall promote and sponsor the training
clerk or judge of the court in which the action of technical personnel in the field of money and
is pending a bond, executed in favor of the banking. (Sec. 23)53
BSP, in an amount to be fixed by the court.
(Sec 69) 3. Operating Departments
within 90 days after the end of the year, Profits or losses arising from any revaluation of
the preceding year's budget and profit and the BSP's net assets or liabilities in gold or
loss statement of the BSP showing in foreign currencies with respect to the Philippine
reasonable detail the result of its peso shall not be included in the computation
operations; of the annual profits and losses of the BSP.
120 days after the end of each semester, a Any profits or losses arising in this manner
review of the state of the financial system; shall be offset by any amounts which, as a
and consequence of such revaluations, are owed by
as soon as practicable, abnormal the Philippines to any international or regional
movements in monetary aggregates and intergovernmental financial institution of which
the general price level, and, not later than the Philippines is a member or are owed by
72 hours after they are taken, remedial these institutions to the Philippines. Any
measures in response to such abnormal remaining profit or loss shall be carried in a
movements. (Sec. 39) special frozen account which shall be named
"Revaluation of International Reserve" and the
5. Annual Report net balance of which shall appear either among
the liabilities or among the assets of the BSP,
Before the end of March of each year, the BSP depending on whether the revaluations have
shall publish and submit to the President and produced net profits or net losses. The
the Congress an annual report on the condition Revaluation of International Reserve account
of the BSP including a review of the policies shall be neither credited nor debited for any
and measures adopted by the MB during the purposes other than those specifically
past year and an analysis of the economic and authorized in this section. (Sec. 45)57
financial circumstances which gave rise to said
policies and measures. The annual report shall 7. n.b. Auditor
also include a statement of the financial
condition of the BSP and a statistical The Chairman of the COA shall act as the ex
appendix.54 (Sec. 40) officio auditor of the BSP and, as such, he is
The BSP shall publish another version of the empowered and authorized to appoint a
annual report in terms understandable to the representative who shall be the auditor of the
layman. (Sec. 40)55 BSP and, in accordance with law, fix his salary,
and to appoint and fix salaries and number of
6. Profits, Losses and Special Accounts personnel to assist said representative in his
work. The salaries and other emoluments shall
Within the 30 days following the end of each be paid by the COA. The auditor of the BSP
fiscal year56, the BSP shall determine its net and personnel under him may be removed only
profits or losses. In the calculation of net by the Chairman of the COA. (Sec. 47)
profits, the BSP shall make adequate allowance The representative of the Chairman of the COA
or establish adequate reserves for bad and must be a CPA with at least 10 years
doubtful accounts. (Sec. 43) experience as such. No relative of any member
Within the first 60 days following the end of of the MB or the Chairman of the COA within
each fiscal year, the MB shall determine and the 6th degree of consanguinity or affinity shall
carry out the distribution of the net profits, in be appointed such representative. (Sec. 47)
accordance with the following rule: 50% of the
net profits shall be carried to surplus and the
remaining 50% shall revert back to the 3. PROHIBITIONS ON BSP PERSONNEL
National Treasury, except as otherwise
provided in the transitory provisions of this Act. In addition to the prohibitions found in RA 3019
(Sec. 44) (Anti-Graft and Corrupt Practices Act) and 6713
(Code of Conduct and Ethical Standards for Public
54
The statistical appendix shall present, as a minimum, Officials and Employees), personnel of the BSP are
the following data: (a) the monthly movement of monetary hereby prohibited from:
aggregates and their components; (b) the monthly movement
of purchases and sales of foreign exchange and of the 1. being an officer, director, lawyer or agent,
international reserves of the BSP; (c) the balance of
payments of the Philippines; (d) monthly indices of consumer
employee, consultant or stockholder, directly or
prices and of import and export prices; (e) the monthly indirectly, of any institution subject to
movement, in summary form, of exports and imports, by supervision or examination by the BSP,
volume and value; (f) the monthly movement of the accounts EXC:
of the BSP and of other banks; (g) the principal data on a. non-stock savings and loan associations
government receipts and expenditures and on the status of
the public debt, both domestic and foreign; and (h) the texts
and provident funds organized
of the major legal and administrative measures adopted by exclusively for employees of the BSP,
the Government and the MB during the year which relate to and
the functions or operations of the BSP or of the financial
system. (Sec. 40) 57
55
Failure to comply with the reportorial requirements Sections 43 and 43-A of RA 265, as amended,
pursuant to this article without justifiable reason as may be creating the Monetary Adjustment Account (MAA) and the
determined by the MB shall cause the withholding of the Exchange Stabilization Adjustment Account (ESAA),
salary of the personnel concerned until the requirements are respectively, are hereby repealed. Amounts outstanding as of
complied with. (Sec. 40) the effective date of this Act based on these accounts shall
The balance sheets and other financial statements of continue to be for the account of the CB and shall be
the BSP shall be signed by the officers responsible for their governed by the transitory provisions of this Act. The
preparation, by the Governor, and by the auditor of the BSP. Revaluation of International Reserve (RIR) account as of the
(Sec. 41) effective date of this Act of the CB shall continue to be for the
56
The fiscal year of the BSP shall begin on January first account of the same entity and shall be governed by the
and end on December thirty-first of each year. (Sec. 42) provisions of Sec. 44 of RA 265, as amended, until otherwise
provided for in accordance with the transitory provisions of
this Act. (Sec. 46)
b. as otherwise provided in the NCBA in imprisonment of not less than 2 years nor more
this Act; than 10 years, or both, at the discretion of the
court.
2. directly or indirectly requesting or receiving any
gift, present or pecuniary or material benefit Whenever a bank or QB persists in carrying on its
for himself or another, from any institution business in an unlawful or unsafe manner, the
subject to supervision or examination by the Board may, without prejudice to the penalties
BSP; provided in the preceding paragraph of this section
and the administrative sanctions provided in Sec.
3. revealing in any manner, except under orders 37, take action under Sec. 30. (Sec. 36)
of the court, the Congress or any government
office or agency authorized by law, or under
such conditions as may be prescribed by the 4. Administrative Sanctions on Banks and
MB, information relating to the condition or QBs
business of any institution. This prohibition
shall not be held to apply to the giving of Without prejudice to the criminal sanctions against
information to the MB or the Governor of the the culpable persons provided in Secs. 34-36, the
BSP, or to any person authorized by either of MB may, at its discretion, impose upon any bank or
them, in writing, to receive such information; QB, their directors and/or officers, for any
and
1. willful violation of its charter or by-laws,
4. borrowing from any institution subject to 2. willful delay in the submission of reports or
supervision or examination by the BSP shall be publications thereof as required by law,
prohibited unless said borrowings are rules and regulations;
adequately secured, fully disclosed to the MB, 3. any refusal to permit examination into the
and shall be subject to such further rules and affairs of the institution;
regulations as the MB may prescribe: Provided, 4. any willful making of a false or misleading
however, That personnel of the supervising and statement to the Board or the appropriate
examining departments are prohibited from supervising and examining department or
borrowing from a bank under their supervision its examiners;
or examination. (Sec. 27) 5. any willful failure or refusal to comply with,
or violation of, any banking law or any
order, instruction or regulation issued by
the MB, or any order, instruction or ruling
4. SANCTIONS by the Governor; or
6. any commission of irregularities, and/or
1. Refusal to Make Reports or Permit conducting business in an unsafe or
Examination unsound manner as may be determined by
the MB,
Any officer, owner, agent, manager, director or OIC
of any institution subject to the supervision or the following administrative sanctions (which
examination by the BSP within the purview of this need not be applied in the order of their severity),
Act who, being required in writing by the MB or by whenever applicable:
the head of the supervising and examining
department willfully refuses to file the required 2. fines in amounts as may be determined by
report or permit any lawful examination into the the MB to be appropriate, but in no case to
affairs of such institution shall be punished by a exceed P30,000 a day for each violation,
fine of not less than P50,000 nor more than taking into consideration the attendant
P100,000 or by imprisonment of not less than 1 circumstances, such as the nature and
year nor more than 5 years, or both, in the gravity of the violation or irregularity and
discretion of the court. (Sec. 34) the size of the bank or quasi-bank;
3. suspension of rediscounting privileges or
2. False Statement access to BSP credit facilities;
4. suspension of lending or foreign exchange
The willful making of a false or misleading operations or authority to accept new
statement on a material fact to the MB or to the deposits or make new investments;
examiners of the BSP shall be punished by a fine of 5. suspension of interbank clearing privileges;
not less than P100,000 nor more than P200,000, or and/or
by imprisonment of not more 5 years, or both, at 6. revocation of quasi-banking license.
the discretion of the court. (Sec. 35)
Resignation or termination from office shall
not exempt such director or officer from
3. Violation of This Act and Other Banking administrative or criminal sanctions. (Sec.
Laws, Rules, Regulations, Orders or 37)
Instructions
5. Preventive Suspension
Whenever a bank or QB, or whenever any person
or entity willfully violates this Act or other pertinent The MB may, whenever warranted by
banking laws being enforced or implemented by the circumstances, preventively suspend any director
BSP or any order, instruction, rule or regulation or officer of a bank or quasi-bank pending an
issued by the MB, the person or persons investigation: Provided, That should the case be
responsible for such violation shall unless otherwise not finally decided by the BSP within a period of
provided in this Act be punished by a fine of not 120 days after the date of suspension, said director
less than P50,000 nor more than P200,000 or by or officer shall be reinstated in his position:
Provided, further, That when the delay in the and of the Governor of the BSP. Similarly, the
disposition of the case is due to the fault, MB, with the approval of the President of the
negligence or petition of the director or officer, the Philippines, shall prescribe the weight, fineness,
period of delay shall not be counted in computing designs, denominations and other
the period of suspension herein provided. (Sec. 37) characteristics of the coins issued by the BSP.
In the minting of coins, the MB shall give full
6. Cease and Desist Order consideration to the availability of suitable
metals and to their relative prices and cost of
WON there is an administrative proceeding, if the minting. (Sec. 53)
institution and/or the directors and/or officers The MB shall prescribe the amounts of notes
concerned continue with or otherwise persist in the and coins to be printed and minted,
commission of the indicated practice or violation, respectively, and the conditions to which the
the MB may issue an order requiring the institution printing of notes and the minting of coins shall
and/or the directors and/or officers concerned to be subject. The MB shall have the authority to
cease and desist from the indicated practice or contract institutions, mints or firms for such
violation, and may further order that immediate operations. All expenses incurred in the
action be taken to correct the conditions resulting printing of notes and the minting of coins shall
from such practice or violation. The cease and be for the account of the BSP. (Sec. 54)
desist order shall be immediately effective upon The BSP shall exchange, on demand and
service on the respondents. without charge, Philippine currency of any
denomination for Philippine notes and coins of
The respondents shall be afforded an opportunity any other denomination requested. If for any
to defend their action in a hearing before the MB or reason the BSP is temporarily unable to provide
any committee chaired by any MB member created notes or coins of the denominations requested,
for the purpose, upon request made by the it shall meet its obligations by delivering notes
respondents within 5 days from their receipt of the and coins of the denominations which most
order. If no such hearing is requested within said nearly approximate those requested. (Sec. 55)
period, the order shall be final. If a hearing is The BSP shall withdraw from circulation and
conducted, all issues shall be determined on the shall demonetize all notes and coins which for
basis of records, after which the MB may either any reason whatsoever are unfit for circulation
reconsider or make final its order. (Sec. 37) and shall replace them by adequate notes and
coins: Provided, however, That the BSP shall
7. Daily Fines not replace notes and coins the identification of
which is impossible, coins which show signs of
The Governor is hereby authorized, at his filing, clipping or perforation, and notes which
discretion, to impose upon banking institutions, for have lost more than 2/5 of their surface or all
any failure to comply with the requirements of law, of the signatures inscribed thereon. Notes and
MB regulations and policies, and/or instructions coins in such mutilated conditions shall be
issued by the MB or by the Governor, fines not in withdrawn from circulation and demonetized
excess of P10,000 a day for each violation, the without compensation to the bearer. (Sec. 56)
imposition of which shall be final and executory The BSP may call in for replacement notes of
until reversed, modified or lifted by the MB on any series or denomination which are more
appeal. (Sec. 37) than 5 years old and coins which are more 10
years old. Notes and coins called in for
replacement in accordance with this provision
D. Peso, Currency, Legal Tender, and Bank shall remain legal tender for a period of 1 year
from the date of call. After this period, they
Deposit Accounts
shall cease to be legal tender but during the
following year, or for such longer period as the
1. PESO
MB may determine, they may be exchanged at
par and without charge in the BSP and by
The unit of monetary value in the Philippines is the
agents duly authorized by the BSP for this
"peso," which is represented by the sign "P." The
purpose. After the expiration of this latter
peso is divided into 100 equal parts called
period, the notes and coins which have not
"centavos," which are represented by the sign "c."
been exchanged shall cease to be a liability of
(Sec. 48)
the BSP and shall be demonetized. The BSP
shall also demonetize all notes and coins which
2. CURRENCY
have been called in and replaced. (Sec. 57)
The word "currency" is hereby defined, for
3. EXCLUSIVE ISSUE POWER
purposes of this Act, as meaning all Philippine
notes and coins issued or circulating in
accordance with the provisions of this Act.
The BSP shall have the sole power and
(Sec. 49)
authority to issue currency, within the territory
The MB, with the approval of the President of
of the Philippines. No other person or entity,
the Philippines, shall prescribe the
public or private, may put into circulation
denominations, dimensions, designs,
notes, coins or any other object or document
inscriptions and other characteristics of notes
which, in the opinion of the MB, might circulate
issued by the BSP: Provided, however, That
as currency, nor reproduce or imitate the
said notes shall state that they are liabilities of
facsimiles of BSP notes without prior authority
the BSP and are fully guaranteed by the
from the BSP. The MB may issue such
Government of the Republic of the Philippines.
regulations as it may deem advisable in order
Said notes shall bear the signatures, in
to prevent the circulation of foreign currency or
facsimile, of the President of the Philippines
of currency substitutes as well as to prevent
59
For purposes of this article and of this Act, the MB
58
This topic on Legal Tender was asked in 2000. shall formulate definitions of monetary aggregates, credit and
prices and shall make public such definitions and any changes
thereof. (Sec. 62)
demanded, by such institution, provided that by the BSP for the purpose, at the effective
the foreign currencies so offered or demanded exchange rate or rates: Provided, however,
are freely convertible into gold or United States That foreign currency deposits made under RA
dollars. This requirement shall not apply to 6426 (FCDU Law) shall be exempt from these
demands for foreign notes and coins. (Sec. 70) requirements. (Sec. 72)
The BSP shall effect its exchange transactions 4. Operations with Foreign Entities
between foreign currencies and the Philippine
peso at the rates determined in accordance The MB may authorize the BSP to grant
with the provisions of Section 74 of this Act.60 loans to and receive loans from foreign
(Sec. 70) banks and other foreign or international
entities, both public and private, and may
The BSP shall endeavor to maintain at all times engage in such other operations with these
a net positive foreign asset position so that its entities as are in the national interest and
gross foreign exchange assets will always are appropriate to its character as a central
exceed its gross foreign liabilities. In the event bank. The BSP may also act as agent or
that the equivalent amount in pesos of the correspondent for such entities. Upon
foreign exchange liabilities of the BSP exceed authority of the MB, the BSP may pledge
twice the equivalent amount in pesos of the any gold or other assets which it possesses
foreign exchange assets of the bank, the BSP as security against loans which it receives
shall, within 60 days from the date the limit is from foreign or international entities. (Sec.
exceeded, submit a report to the Congress 75)
stating the origin of these liabilities, and the
manner in which they will be paid. (Sec. 71) 4. REGULATION OF FOREIGN EXCHANGE
OPERATIONS OF THE BANKS
The BSP shall avoid the acquisition and holding
of currencies which are not freely convertible, In order that the BSP may at all times have
and may acquire such currencies in an amount foreign exchange resources sufficient to enable
exceeding the minimum balance necessary to it to maintain the international stability and
cover current demands for said currencies only convertibility of the peso, or in order to
when, and to the extent that, such acquisition promote the domestic investment of bank
is considered by the MB to be in the national resources, the MB may require the banks to sell
interest. The MB shall determine the to the BSP or to other banks all or part of their
procedures which shall apply to the acquisition surplus holdings of foreign exchange. Such
and disposition by the BSP of foreign exchange transfers may be required for all foreign
which is not freely utilizable in the international currencies or for only certain of such
market. (Sec. 73) currencies, according to the decision of the MB.
The transfers shall be made at the rates
established under the provisions of Sec. 74 of
3. Emergency Restrictions on Exchange this Act. (Sec. 76)
Operations
The MB may, whenever warranted, determine
In order to achieve the primary objective of the the net assets and net liabilities of banks and
BSP as set forth in Sec. 3 of this Act, or protect shall, in making such a determination, take into
the international reserves of the BSP in the account the bank's networth, outstanding
imminence of, or during an exchange crisis, or liabilities, actual and contingent, or such other
in time of national emergency and to give the financial or performance ratios as may be
MB and the Government time in which to take appropriate under the circumstances. Any such
constructive measures to forestall, combat, or determination of net assets and net liabilities
overcome such a crisis or emergency, the MB, shall be applied in all banks uniformly and
with the concurrence of at least 5 of its without discrimination. (Sec. 76)
members and with the approval of the
President of the Philippines, may temporarily The MB may require the banks to maintain a
suspend or restrict sales of exchange by the balanced position between their assets and
BSP, and may subject all transactions in gold liabilities in Philippine pesos or in any other
and foreign exchange to license by the BSP, currency or currencies in which they operate.
and may require that any foreign exchange The banks shall be granted a reasonable period
thereafter obtained by any person residing or of time in which to adjust their currency
entity operating in the Philippines be delivered positions to any such requirement. (Sec. 77)61
to the BSP or to any bank or agent designated
In order to restrain the banks from taking
60
Sec 74. Exchange Rates. The MB shall determine speculative positions with respect to future
the exchange rate policy of the country. fluctuations in foreign exchange rates, the MB
The MB shall determine the rates at which the BSP shall may issue such regulations governing bank
buy and sell spot exchange, and shall establish deviation purchases and sales of non-spot exchange as it
limits from the effective exchange rate or rates as it may
deem proper. The BSP shall not collect any additional
may consider necessary for said purpose. (Sec.
commissions or charges of any sort, other than actual 78)
telegraphic or cable costs incurred by it.
The MB shall similarly determine the rates for other
types of foreign exchange transactions by the BSP, including 61
purchases and sales of foreign notes and coins, but the The powers granted under this section shall be
margins between the effective exchange rates and the rates exercised only when special circumstances make such action
thus established may not exceed the corresponding margins necessary, in the opinion of the MB, and shall be applied to all
for spot exchange transactions by more than the additional banks alike and without discrimination. (Sec. 77)
costs or expenses involved in each type of transactions.
The banks shall bear the risks of non- 2. Production credits. The BSP may
compliance with the terms of the foreign rediscount, discount, buy and sell
exchange documents and instruments which bills, acceptances, promissory notes
they buy and sell, and shall also bear any other and other credit instruments having
typically commercial or banking risks, including maturities of not more than 360
exchange risks not assumed by the BSP under days from the date of their
the provisions of the preceding section. (Sec. rediscount, discount or acquisition
79) by the BSP and resulting from
transactions related to the
The banks shall report to the BSP the volume production or processing of
and composition of their purchases and sales of agricultural, animal, mineral, or
gold and foreign exchange each day, and must industrial products. Documents or
furnish such additional information as the BSP instruments acquired in accordance
may request with reference to the movements with this subsection shall be
in their accounts in foreign currencies. The MB secured by a pledge of the
may also require other persons and entities to respective crops or products:
report to it currently all transactions or Provided, however, That the crops
operations in gold, in any shape or form, and in or products need not be pledged to
foreign exchange whether entered into or secure the documents if the original
undertaken by them directly or through agents, loan granted by the BSP is secured
or to submit such data as may be required on by a lien or mortgage on real estate
operations or activities giving rise to or in property 70% of the appraised
connection with or relating to a gold or foreign value of which equals or exceeds
exchange transaction. The MB shall prescribe the amount of the loan granted.
the forms on which such declarations must be
made. The accuracy of the declarations may 3. Other credits. Special credit
be verified by the BSP by whatever inspection it instruments not otherwise
may deem necessary. (Sec. 80) rediscountable under the
immediately preceding subsections
5. LOANS TO BANKING AND OTHER (a) and (b) may be eligible for
FINANCIAL INSTITUTIONS rediscounting in accordance with
rules and regulations which the BSP
shall prescribe. Whenever
Guiding Principles. The rediscounts, discounts, necessary, the BSP shall provide
loans and advances which the BSP is funds from non-inflationary
authorized to extend to banking institutions sources: Provided, however, That
under the provisions of the present article of the MB shall prescribe additional
this Act shall be used to influence the volume safeguards for disbursing these
of credit consistent with the objective of price funds.
stability. (Sec. 81)
4. Advances. The BSP may grant
1. Normal Credit Operations advances against the following
kinds of collaterals for fixed periods
which, with the exception of
Authorized Types of Operations. Subject to the advances against collateral named
principle stated in the preceding section of this in clause (4) of the present
Act, the BSP may normally and regularly carry subsection, shall not exceed 180
on the following credit operations with banking days:
institutions operating in the Philippines: a. gold coins or bullion;
b. securities representing
1. Commercial credits. The BSP obligations of the BSP or of
may rediscount, discount, buy and other domestic institutions of
sell bills, acceptances, promissory recognized solvency;
notes and other credit instruments c. the credit instruments to which
with maturities of not more than reference is made in subsection
180 days from the date of their (a) of this section;
rediscount, discount or acquisition d. the credit instruments to which
by the BSP and resulting from reference is made in subsection
transactions related to: (b) of this section, for periods
which shall not exceed 360
the importation, exportation, days;
purchase or sale of readily e. utilized portions of advances in
saleable goods and products, or current amount covered by
their transportation within the regular overdraft agreements
Philippines; related to operations included
the storing of non-perishable under subsections (a) and (b)
goods & products w/c are duly of this section, and certified as
insured & deposited, under to amount and liquidity by the
conditions assuring their institution soliciting the
preservation, in authorized advance;
bonded warehouses or in other f. negotiable treasury bills,
places approved by the MB. certificates of indebtedness,
notes and other negotiable
obligations of the Government
3. Emergency Credit Operation The BSP shall collect interest and other
appropriate charges on all loans and advances
In periods of national and/or local emergency it extends, the closure, receivership or
or of imminent financial panic which directly liquidations of the debtor-institution
threaten monetary and banking stability, the notwithstanding. This provision shall apply
MB may, by a vote of at least 5 of its members, prospectively. (Sec. 85)
authorize the BSP to grant extraordinary loans
or advances to banking institutions secured by The MB shall fix the interest and rediscount
assets as defined hereunder: Provided, That rates to be charged by the BSP on its credit
while such loans or advances are outstanding, operations in accordance with the character
the debtor institution shall not, except upon and term of the operation, but after due
prior authorization by the MB, expand the total consideration has been given to the credit
volume of its loans or investments.62 needs of the market, the composition of the
BSP's portfolio, and the general requirements
62
The amount of any emergency loan or advance shall of the national monetary policy. Interest and
not exceed the sum of 50% of total deposits and deposit rediscount rates shall be applied to all banks of
substitutes of the banking institution and shall be disbursed in the same category uniformly and without
2 or more tranches. The amount of the first tranche shall be discrimination. (Sec. 85)
limited to 25% of the total deposit and deposit substitutes of
the institution and shall be secured by government securities
to the extent of their applicable loan values and other The documents rediscounted, discounted,
unencumbered first class collaterals which the MB may bought or accepted as collateral by the BSP in
approve: Provided, That if as determined by the MB, the the course of the credit operations authorized
circumstances surrounding the emergency warrant a loan or in this article shall bear the endorsement of the
advance greater than the amount provided hereinabove, the
amount of the first tranche may exceed 25% of the bank's
institution from which they are received. (Sec.
total deposit and deposit substitutes if the same is adequately 86)
secured by applicable loan values of government securities
and unencumbered first class collaterals approved by the MB, Documents rediscounted, discounted or
and the principal stockholders of the institution furnish an accepted as collateral by the BSP must be
acceptable undertaking to indemnify and hold harmless from
suit a conservator whose appointment the MB may find
withdrawn by the borrowing institution on the
necessary at any time. Prior to the release of the first dates of their maturities, or upon liquidation of
tranche, the banking institution shall submit to the BSP a the obligations which they represent or to
resolution of its board of directors authorizing the BSP to which they relate whenever said obligations
evaluate other assets of the banking institution certified by its have been liquidated prior to their dates of
external auditor to be good and available for collateral
purposes should the release of the subsequent tranche be
maturity. Banks shall have the right at any
thereafter applied for. The MB may, by a vote of at least 5 of time to withdraw any documents which they
its members, authorize the release of a subsequent tranche have presented to the BSP as collateral, upon
on condition that the principal stockholders of the institution:
(a) furnish an acceptable undertaking to indemnify and hold
harmless from suit a conservator whose appointment the MB to supplement, where necessary, the assets tendered by the
may find necessary at any time; and (b) provide acceptable banking institution to collateralize the subsequent tranche.
security which, in the judgment of the MB, would be adequate (Sec. 84)
payment in full of the corresponding debt to The MB shall determine the interest rates,
the BSP, including interest charges. (Sec. 87) maturities and other characteristics of said
obligations of the BSP, and may, if it deems it
The MB may prescribe, within the general advisable, denominate the obligations in gold or
powers granted to it under this Act, foreign currencies.
additional conditions which borrowing
institutions must satisfy in order to have The evidences of indebtedness of the BSP to which
access to the credit of the BSP. These this section refers may be acquired by the BSP
conditions may refer to the rates of interest before their maturity, either through purchases in
charged by the banks, to the purposes for the open market or through redemptions at par
which their loans in general are destined, and by lot if the BSP has reserved the right to
and to any other clearly definable aspect of make such redemptions. The evidences of
the credit policy of the bank. (Sec. 88) indebtedness acquired or redeemed by the BSP
shall not be included among its assets, and shall be
The BSP may make direct provisional immediately retired and cancelled. (Sec. 92)
advances with or without interest to the
National Government to finance
expenditures authorized in its annual 7. BSP PORTFOLIO
appropriation: Provided, That said
advances shall be repaid before the end of VI
3 months extendible by another 3 months BSP PORTFOLIO
as the MB may allow following the date the
National Government received such
provisional advances and shall not, in their At least once every month the MB shall review
aggregate, exceed 20% of the average the portfolio of the BSP in relation to its future
annual income of the borrower for the last credit policy. In reviewing the BSP's portfolio,
3 preceding fiscal years. (Sec. 89) the MB shall especially consider whether a
sufficiently large part of the portfolio consists of
assets with early maturities, in order that a
contraction in BSP credit may be effected
6. OPEN MARKET OPERATIONS promptly whenever the national monetary
policy so requires. (Sec. 93)
Principles. The open market purchases and sales of
securities by the BSP shall be made exclusively in
accordance with its primary objective of achieving 8. BANK RESERVES
price stability. (Sec. 90)
1. Reserve Requirements
1. Purchases and Sales of Government
Securities In order to control the volume of money created by
the credit operations of the banking system, all
The BSP may buy and sell in the open market for banks operating in the Philippines shall be required
its own account: (a) evidences of indebtedness to maintain reserves against their deposit
issued directly by the Government of the liabilities: Provided, That the MB may, at its
Philippines or by its political subdivisions; and (b) discretion, also require all banks and/or quasi-
evidences of indebtedness issued by government banks to maintain reserves against funds held in
instrumentalities and fully guaranteed by the trust and liabilities for deposit substitutes as
Government. defined in this Act.
The evidences of indebtedness acquired under the The required reserves of each bank shall be
provisions of this section must be freely negotiable proportional to the volume of its deposit liabilities
and regularly serviced and must be available to the and shall ordinarily take the form of a deposit in
general public through banking institutions and the BSP. Reserve requirements shall be applied to
local government treasuries in denominations of a all banks of the same category uniformly and
thousand pesos or more. (Sec. 91) without discrimination.
such action against the bank as may be warranted security, plus 60% of the appraised value of the
under this Act. (Sec. 102) insured improvements, and such loans may be
made to the owner of the real estate or to his
assignees. (Sec 37)
8. Exemption from Attachment and Other
Purposes Except as the MB may otherwise prescribe,
loans and other credit accommodations on
Deposits maintained by banks with the BSP as part security of chattels and intangible properties
of their reserve requirements shall be exempt from such as patents, trademarks, trade names, and
attachment, garnishments, or any other order or copyrights shall not exceed 75% of the
process of any court, government agency or any appraised value of the security, an such loans
other administrative body issued to satisfy the and other credit accommodation may be made
claim of a party other than the Government, or its to the title-holder of the chattels and intangible
political subdivisions or instrumentalities. (Sec. properties or his assignees.
103)
The MB may prescribe the maturities, as well
as related terms and conditions for various
9. SELECTIVE REGULATION OF BANK types of bank loans and other credit
OPERATIONS accommodations. (Sec 43)
Guiding Principle. The MB shall use the powers 10. COORDINATION OF CREDIT POLICIES BY
granted to it to ensure that the supply, GOVERNMENT INSTITUTIONS
availability and cost of money are in accord
with the needs of the Philippine economy and Coordination of Credit Policies. GOCCs which
that bank credit is not granted for speculative perform banking or credit functions shall
purposes prejudicial to the national interests. coordinate their general credit policies with
Regulations on bank operations shall be applied those of the MB. Toward this end, the MB may,
to all banks of the same category uniformly and whenever it deems it expedient, make
without discrimination. (Sec. 104) suggestions or recommendations to such
Margin Requirements Against Letters of Credit. corporations for the more effective coordination
The MB may at any time prescribe minimum of their policies with those of the BSP. (Sec.
cash margins for the opening of letters of 109)
credit, and may relate the size of the required
margin to the nature of the transaction to be
financed. (Sec. 105) F. BSPS Functions as Banker and
Required Security Against Bank Loans. In order
Financial Advisor of the Govt
to promote liquidity and solvency of the
banking system, the MB may issue such
1. FUNCTION AS BANKER OF THE GOVT
regulations as it may deem necessary with
respect to the maximum permissible maturities
of the loans and investments which the banks
I
may make, and the kind and amount of
FUNCTION AS BANKER
security to be required against the various
OF THE GOVT
types of credit operations of the banks. (Sec.
106)
Portfolio Ceilings. Whenever the MB considers it
The BSP shall act as a banker of the
advisable to prevent or check an expansion of
Government, its political subdivisions and
bank credit, it may place an upper limit on the
instrumentalities. (Sec. 110)
amount of loans and investments which the
banks may hold, or may place a limit on the
rate of increase of such assets within specified
A. Representing the Government
periods of time. The MB may apply such limits
to the loans and investments of each bank or to
With the International Monetary Fund
specific categories thereof. In no case shall the
(IMF). The BSP shall represent the
MB establish limits which are below the value of
Government in all dealings, negotiations
the loans or investments of the banks on the
and transactions with the IMF and shall
date on which they are notified of such
carry such accounts as may result from
restrictions. The restrictions shall be applied to
Philippine membership in, or operations
all banks uniformly and without discrimination.
with, the IMF. (Sec. 111)
(Sec. 107)
Minimum Capital Ratios. The MB may prescribe
With Other Financial Institutions. The
minimum ratios which the capital and surplus
BSP may be authorized by the Government
of the banks must bear to the volume of their
to represent it in dealings, negotiations or
assets, or to specific categories thereof, and
transactions with the International Bank for
may alter said ratios whenever it deems
Reconstruction and Development and with
necessary. (Sec. 108)
other foreign or international financial
institutions or agencies. The President
RELATED PROVISIONS IN RA 8791 (GENERAL
may, however, designate any of his other
BANKING ACT OF 2000)
financial advisors to jointly represent the
Government in such dealings, negotiations
Except as the MB may otherwise prescribe,
or transactions. (Sec. 112)
loans and other credit accommodations against
real estate shall not exceed 75% of the
appraised value of the respective real estate
B. Official Depositary
Provided:That the BSP shall not guarantee the
The BSP shall be the official depository of placement of said securities, and shall not
the Government, its political subdivisions subscribe to their issue except to replace its
and instrumentalities as well as of maturing holdings of securities with the same type
government-owned or controlled as the maturing securities. (Sec. 117)
corporations and, as a general policy, their
cash balances should be deposited with the Methods of Placing Government Securities. The BSP
BSP, with only minimum working balances may place the securities through direct sale to
to be held by government-owned banks financial institutions and the public. The BSP shall
and such other banks incorporated in the not be a member of any stock exchange or
Philippines as the MB may designate, syndicate, but may intervene therein for the sole
subject to such rules and regulations as the purpose of regulating their operations in the
Board may prescribe: Provided, That such placing of government securities. (Sec. 118)
banks may hold deposits of the political
subdivisions and instrumentalities of the The Government, or its political subdivisions or
Government beyond their minimum instrumentalities, shall reimburse the BSP for the
working balances whenever such expenses incurred in the placing of the aforesaid
subdivisions or instrumentalities have securities. (Sec. 118)
outstanding loans with said banks. The BSP
may pay interest on deposits of the Servicing and Redemption of the Public Debt. The
Government or of its political subdivisions servicing and redemption of the public debt shall
and instrumentalities, as well as on also be effected through the BSP. (Sec. 119)
deposits of banks with the BSP. (Sec. 113)
Financial Advice on Official Credit Operations. be made only according to the CSL and
Before undertaking any credit operation regulations: Provided, That no qualification
abroad, the Government, through the requirements for positions in the BSP shall be
Secretary of Finance, shall request the opinion, imposed other than those set by the MB:
in writing, of the MB on the monetary Provided, further, That, the MB or Governor, in
implications of the contemplated action. Such accordance with Secs. 15(c)64 and 17(d)65 of
opinions must similarly be requested by all this Act, respectively, may without need of
political subdivisions and instrumentalities of obtaining prior approval from any other
the Government before any credit operation government agency, appoint personnel in the
abroad is undertaken by them. The opinion of BSP whose services are deemed necessary in
the MB shall be based on the gold and foreign order not to unduly disrupt the operations of
exchange resources and obligations of the the BSP. Officers and employees of the BSP,
nation and on the effects of the proposed including all members of the MB, shall not
operation on the balance of payments and on engage directly or indirectly in partisan
monetary aggregates. (Sec. 123) activities or take part in any election except to
vote. (Sec. 127)
Whenever the Government, or any of its
political subdivisions or instrumentalities, 2. PROHIBITIONS
contemplates borrowing within the Philippines,
the prior opinion of the MB shall likewise be The BSP shall not acquire shares of any kind or
requested in order that the Board may render accept them as collateral, and shall not participate
an opinion on the probable effects of the in the ownership or management of any enterprise,
proposed operation on monetary aggregates, either directly or indirectly.
the price level, and the balance of payments.
(Sec. 123) The BSP shall not engage in development banking
or financing: Provided, however, That outstanding
Representation on the National Economic and loans obtained or extended for development
Development Authority (NEDA). In order to financing shall not be affected by the prohibition of
assure effective coordination between the this section. (Sec. 128)
economic, financial and fiscal policies of the
Government and the monetary, credit and
exchange policies of the BSP, the Deputy
Governor designated by the Governor of the
BSP shall be an ex officio member of the NEDA
Board. (Sec. 124)
1. Privileges
b. any taxpayer who has filed an application together with his Related Interest, contracts a
for compromise of his tax liability, which loan or any form of financial accommodation
application shall include a written waiver of from:
his privilege under RA 1405 or under other
general or special laws. (Sec. 6(F) RA 8424 a. his bank; or
or the National Internal Revenue Code of
1997) b. from a bank
3. in the following cases under the Anti-Money i. which is a subsidiary of a bank holding
Laundering Lact of 2001 (RA 9160): company of which both his bank and
the lending bank are subsidiaries or
a. when a banking and other covered ii. in which a controlling proportion of the
institutions are required to report to the shares is owned by the same interest
Anti-Money Laundering Council (AMLC) any that owns a controlling proportion of
single, series or combination of transations the shares of his bank, in excess of 5%
involving a total amount in excess of P4.0 of the capital and surplus of the bank,
Million (or an equivalent in foreign or in the maximum amount permitted
currency) within 5 working days from by law, whichever is lower.
occurrence thereof, unless the Supervising
Authority concerned prescribes a longer Any information obtained from an examination
period not to exceed 19 working days. of his deposits shall be held strictly confidential
(Sec. 9(c) RA 9160) and may be used by the examiners only in
connection with their supervisory and
b. when the AMLC inquires into or examines examination responsibility or by the Bangko
any particular deposit or investment upon Sentral in an appropriate legal action it has
order of any competent court, when it has initiated involving the deposit account.
been established that there is probable
cause that deposits or investments involved 6. Disclosure of certain information about bank
are in any way related to money laundering deposits which have been dormant for at least
offense, except that no court order is ten years, to the Treasurer of the Philippine in
required in the following cases: a sworn statement, a copy of which is posted in
the bank premises. (Sec. 2, Unclaimed
i. kidnapping for ransom Balances Law (Act No. 3926, as amended))
ii. unlawful activities under Sections 4, 5,
6, 8, 9, 10, 12, 13, 14, 15, and 16 of [not included in the above enumeration for
the Comprehensive Dangersous Drugs reasons that shall be soon be provided]
Act of 2002
iii. hijacking and other violations under TA a. In 1981, PD 1792 added the following
6235, and grounds when the bank can be compelled
iv. destructive arson and murder including to reveal the amount of a depositor:
those perpetrated by terrorists against
non-combatants and similar targets. i. made in the course of a special or
(Sec. 11 RA 9160) general examination of a bank and is
specifically authorized by the Monetary
c. Bangko Sentrals inquiry into or Board after being satisfied that there is
examination of deposits or investments reasonable ground to believe that a
with any bank, when the inquiry or bank fraud or serious irregularity has
examination is made in the course of the been or is being committed and that it
Bangko Sentrals periodic or special is necessary to look into the deposit to
examination of such bank (Sec. 11 RA establish such fraud or irregularity, or
9160)
ii. made by an independent auditor hired
4. In the following cases under the NIRC: by the bank to conduct its regular audit
provided that the examination is for
a. Inquiry by the Commissioner of Internal audit purposes only and the results
Revenue into the deposits of a decedent for thereof shall be for the exclusive use of
the purpose of determining the gross estate the bank. However, Sec. 135 of RA
of such decedent. (Sec. 6(F), NIRC) 7653 or the New Central Bank Act
reverted RA 1405 to its version prior to
b. In case a taxpayer offers to compromise his the promulgation of the decree.
tax liabilities on the ground of financial
incapacity, he must waive, in writing the a) Thus Villanueva says that these two
secrecy of his bank deposits in favor of the instances as excluded from the
Commissioner of Internal Revenue (Sec. enumeration of exceptions to the
6(F), NIRC) secrecy of bank deposits
(Villanueva, Commercial Law
Review, 2004).
b) Morales however notes that With
5. under Sec. 26 of RA 7653 or the New Central the Amendment of the Anti-Money
Bank Act of 1993, when the examination is Laudering Act of 2001, exception
conducted pursuant to the required waiver of (1) has been substantially
the secrecy of deposits (of whatever nature in resurrected. While there is no
all banks in the Philippines) made by any similar development of exception
DOSRI (Director, Officer or Stockholder who, (2), the exclusion of the Bangko
6. OBLIGATIONS OF COVERED
4. SUSPICIOUS TRANSACTIONS 67
INSTITUTIONS
stored for five years from the date of legitimate sources. It is committed by the
transactions. following:
with respect to closed accounts, the records
on customer identification, account files 1. transacting or attempting to transacts with
and business correspondence, shall be monetary instrument or property, knowing
preserved and safety stored for at least five such to represent, involve, or relate to the
years from the dates when they were proceeds of any unlawful activity;
closed. (Sec. 9(b)) 2. facilitating the offense of money laundering
referred to in (1) by knowingly performing
3. Reporting of Covered and Suspicious or failing to perform any act; or
Transactions 3. knowingly failing to disclose and file a
report with the AMLC of any monetary
report to the Anti-Money Laundering instrument or property as required. (Sec.
Council (AMLC) all covered transactions and 4)
suspicious transactions within 5 working
days from occurrences thereof, unless the
Supervising Authority prescribes a longer 8. UNLAWFUL ACTIVITIES
period not exceeding 10 working days.
when reporting covered or suspicious Unlawful activity refers to any act or omission or
transactions, covered institutions and their series or combination thereof involving or having
officers and employees shall not be deemed direct relation to following:
to have violated the Secrecy of Bank
Deposits Act (RA 1405), the Foreign 1. Kidnapping for ransom (Art 267 RPC)
Currency Deposits Act (RA 6426) and the 2. Drug Trafficking (Sections. 4-6, 8-10, 12-
General Banking Law of 2000 (RA 8791) 16 Comprehensive Dangerous Act of
and other similar laws, but they are 2002);
prohibited from communicating, directly or 3. Graft and Corrupt Practices (Sec. 3 par B,
indirectly, in any manner or by an means, C, E, G, H, I of the Anti-Graft and Corrupt
to any person, the fact that a covered or Practices Act);
suspicious transaction report was made, 4. Plunder (RA 7080);
the contents thereof, or any other 5. Robbery and extortion (Articles 294-96,
information in relation thereto. In case of 299-302 RPC);
violation thereof, the concerned officer and 6. Jueteng and Masiao (PD 1602);
employee of the covered institution shall be 7. Piracy on the high seas (RPC and PD 532);
criminally liable. However, no 8. Qualified theft (Art. 310 RPC);
administrative, criminal or civil 9. Swindling (Art. 315 RPC);
proceedings, shall lie against any person 10. Smuggling (RA 455 and 1937);
for having made a covered or suspicious 11. Violations of the E-Commerce Act of 2000;
transaction report in the regular 12. Hijacking (RA 6235); destructive arson and
performance of his duties in good faith, murder, including those perpetrated by
whether or not such reporting results in terrorists against non-combatant persons
any criminal prosecution under this Act of and similar targets (RPC);
any other law. 13. Fraudulent practices and other violations
under Securities Regulation Code of 2000;
when reporting covered or suspicious 14. Felonies or offenses of a similar nature that
transactions to the AMLC, covered are punishable under the penal laws of
instituting and their officers and employees other countries."(Sec. 3(i))
are prohibited from communicating directly
or indirectly, in any manner or by any
means, to any person or entity, the media, NOTE
the fact that a covered or suspicious Any person may be charged with and convicted
transaction report was made, the contents of both the offense of money laundering and
thereof, or any other information in relation the unlawful activity. Any proceeding relating
thereto. Neither may such reporting be to the unlawful activity shall be given
published or aired in any manner or form precedence over the prosecution of any offense
by the mass media, electronic mail, or or violation under RA 9160, as amended,
other similar devices. In case of violation without prejudice to freezing and other
thereof, the concerned officer and remedies provided RA 9160. (Sec. 6)
employee of the covered institution and
media shall be held criminally liable. (Sec.
9(c)) 9. FREEZING OF MONETARY INSTRUMENT OF
PROPERTY
7. WHEN IS MONEY LAUNDERING The Court of Appeals may issue a freeze order
68 which shall be effective immediately
COMMITTED?
1. upon application ex parte by the AMLC and
Money laundering is a crime whereby the proceeds 2. after determination that probable cause
of an unlawful activity are transacted, thereby exists that any monetary instrument or
making them appear to have originated from property is in any way related to an
unlawful activity,
68 The freeze order shall be for a period of twenty
This topic was asked in 2007 and 2006. Note the days unless extended by the court. (Sec. 10)
predicate crimes to money laundering and that prior
conviction for the predicate crimes is necessary.
1. Civil Forfeiture
NOTE
When there is a covered transaction Restitution for any aggrieved party shall be
report made, and the court has, in a governed by the Civil Code. (Sec. 17)
petition filed for the purpose ordered
seizure of any monetary instrument or
property, in whole or in part, directly or 12. ANTI-MONEY LAUNDERING COUNCIL
indirectly, related to said report, the (AMLC)
Revised Rules of Court on civil
forfeiture shall apply. Composition: Three Members
1. Governor of the BSP (chairman),
2. Claim on Forfeited Assets 2. Commissioner of the Insurance Commission
3. Chairman of the SEC.
Where the court has issued an order of
forfeiture of the monetary instrument
or property in a criminal prosecution for Functions
any money laundering offense, the The AMLC shall shall act unanimously in the
offender or any other person claiming discharge of its functions which are as follows:
an interest therein may apply, by
verified petition, to require and receive covered or
for a declaration that the same suspicious transaction reports from covered
legitimately belongs to him and institutions;
for segregation or exclusion of the to issue orders addressed to the
monetary instrument or property appropriate Supervising Authority or the
corresponding thereto. covered institutions or to request for
The verified petition shall be filed with assistance from a foreign State to
the court which rendered the judgment determine the true identity of the owner of
6. Authentication of Documents.
1. State Policies
Chapter II.
Sec. 2. Declaration of State Policy. - The State PATENTS
recognizes that an effective intellectual and
industrial property system is vital to the
development of domestic and creative activity, 1. What are Patentable
facilitates transfer of technology, attracts foreign
investments, and ensures market access for our 1.1. Inventions
products. It shall protect and secure the exclusive
rights of scientists, inventors, artists and other Sec. 21. Patentable Inventions. - Any technical
gifted citizens to their intellectual property and solution of a problem in any field of human
creations, particularly when beneficial to the activity which is new, involves an inventive
people, for such periods as provided in this Act. step and is industrially applicable shall be
The use of intellectual property bears a social patentable. It may be, or may relate to, a
function. To this end, the State shall promote the product, or process, or an improvement of any
diffusion of knowledge and information for the of the foregoing. (Sec. 7, RA 165a)
promotion of national development and progress
and the common good. Sec. 23. Novelty. - An invention shall not be
It is also the policy of the State to streamline considered new if it forms part of a prior art.
administrative procedures of registering patents, (Sec. 9, RA 165a)
trademarks and copyright, to liberalize the
registration on the transfer of technology, and to Sec. 24. Prior Art. - Prior art shall consist of:
enhance the enforcement of intellectual property
rights in the Philippines. 24.1. 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
2. Intellectual Property Rights invention; and
Sec. 4.1 The term "intellectual property rights" 24.2. The whole contents of an application
consists of: for a patent, utility model, or industrial
1. Copyright and Related Rights; design registration, published in accordance
2. Trademarks and Service Marks; with this Act, filed or effective in the
3. Geographic Indications; Philippines, with a filing or priority date that
4. Industrial Designs; is earlier than the filing or priority date of
5. Patents; the application: Provided, That the
6. Layout-Designs (Topographies) of application which has validly claimed the
Integrated Circuits; and filing date of an earlier application under
7. Protection of Undisclosed Information Section 31 of this Act, shall be prior art
[TRIPS]. with effect as of the filing date of such
earlier application: Provided further, That
Kho v. CA, et al., 379 SCRA 410 [2002] the applicant or the inventor identified in
both applications are not one and the
Trademark, copyright and patents are different same. (Sec. 9, RA 165a)
intellectual property rights that cannot be
interchanged with one another. A trademark is any Sec. 26. Inventive Step. - An invention
visible sign capable of distinguishing the goods involves an inventive step if, having regard to
(trademark) or services (service mark) of an prior art, it is not obvious to a person skilled in
enterprise and shall include a stamped or marked the art at the time of the filing date or priority
container of goods. date of the application claiming the invention.
In relation thereto, a trade name means the name Sec. 27. Industrial Applicability. - An invention
or designation identifying or distinguishing an that can be produced and used in any industry
enterprise. Meanwhile, the scope of a copyright is shall be industrially applicable.
confined to literary and artistic works which are
original intellectual creations in the literary and 1.2. Utility Model
artistic domain protected from the moment of their
creation. Patentable inventions, on the other hand, Sec. 109.1 (a) An invention qualifies for
refer to any technical solution of a problem in any registration as a utility model if it is new and
field of human activity which is new, involves an industrially applicable.
inventive step and is industrially applicable. (b) Section 21, "Patentable Inventions", shall
apply except the reference to inventive step as
3. Reverse Reciprocity a condition of protection.
1.3. Industrial Designs Sec. 29. First to File Rule. - If two (2) or more
persons have made the invention separately
Sec. 112.1 An Industrial Design is any and independently of each other, the right to
composition of lines or colors or any three- the patent shall belong to the person who filed
dimensional form, whether or not associated an application for such invention, or where two
with lines or colors: Provided, That such or more applications are filed for the same
composition or form gives a special appearance invention, to the applicant who has the earliest
to and can serve as pattern for an industrial filing date or, the earliest priority date. (3rd
product or handicraft; Sentence, Sec. 10, RA 165a.)
36.1. The application shall contain one (1) or final action by the examiner. (Sec. 16, RA
more claims which shall define the matter for 165a)
which protection is sought. Each claim shall be
clear and concise, and shall be supported by 6.2. Classification and Search
the description.
Sec. 43. Classification and Search. - An
36.2. The Regulations shall prescribe the application that has complied with the formal
manner of the presentation of claims. requirement shall be classified and a search
conducted to determine the prior art.
Sec. 37. The Abstract. - The abstract shall consist
of a concise summary of the disclosure of the 6.3. Publication
invention as contained in the description, claims
and drawings in preferably not more than one Sec. 44. Publication of Patent Application. -
hundred fifty (150) words. It must be drafted in a
way which allows the clear understanding of the 44.1. The patent application shall be
technical problem, the gist of the solution of that published in the IPO Gazette together with
problem through the invention, and the principal a search document established by or on
use or uses of the invention. The abstract shall behalf of the Office citing any documents
merely serve for technical information. that reflect prior art, after the expiration of
eighteen (18) months from the filing date
6. Procedure for Grant of Patent or priority date.
40.2. If any of these elements is not Sec. 44.2. After publication of a patent
submitted within the period set by the application, any interested party may inspect
Regulations, the application shall be the application documents filed with the Office.
considered withdrawn.
Sec. 47. Observation by Third Parties. -
Sec. 41. According a Filing Date. - The Office Following the publication of the patent
shall examine whether the patent application application, any person may present
satisfies the requirements for the grant of date observations in writing concerning the
of filing as provided in Section 40 hereof. If the patentability of the invention. Such
date of filing cannot be accorded, the applicant observations shall be communicated to the
shall be given an opportunity to correct the applicant who may comment on them. The
deficiencies in accordance with the Office shall acknowledge and put such
implementing Regulations. If the application observations and comment in the file of the
does not contain all the elements indicated in application to which it relates.
Section 40, the filing date should be that date
when all the elements are received. If the 6.5. Request for Substantive Examination
deficiencies are not remedied within the
prescribed time limit, the application shall be Sec. 48. Request for Substantive Examination.
considered withdrawn. -
1. Formality Examination
48.1. The application shall be deemed
Sec. 42. Formality Examination. - withdrawn unless within six (6) months
from the date of publication under Section
42.1. After the patent application has been 41, a written request to determine whether
accorded a filing date and the required fees a patent application meets the
have been paid on time in accordance with requirements of Sections 21 to 27 and
the Regulations, the applicant shall comply Sections 32 to 39 and the fees have been
with the formal requirements specified by paid on time.
Section 32 and the Regulations within the
prescribed period, otherwise the application 48.2. Withdrawal of the request for
shall be considered withdrawn. examination shall be irrevocable and shall
not authorize the refund of any fee.
42.2. The Regulations shall determine the
procedure for the re-examination and SEC. 49. Amendment of Application. - An
revival of an application as well as the applicant may amend the patent application
appeal to the Director of Patents from any during examination: Provided, That such
amendment shall not include new matter the patent, and to conclude licensing
outside the scope of the disclosure contained in contracts for the same. (Sec. 37, RA 165a)
the application as filed.
Pearl and Dean, Inc v. Shoemart Inc (2003)
6.6. Grant or Refusal of Application
To be able to effectively and legally preclude others
Sec. 50. Grant of Patent. - from copying and profiting from the invention, a
patent is a primordial requirement. No patent, no
50.1. If the application meets the protection. The ultimate goal of a patent system is
requirements of this Act, the Office shall to bring new designs and technologies into the
grant the patent: Provided, That all the public domain through disclosure. Ideas, once
fees are paid on time. disclosed to the public without the protection of a
50.2. If the required fees for grant and valid patent, are subject to appropriation without
printing are not paid in due time, the significant restraint.
application shall be deemed to be
withdrawn. 8. Term
50.3. A patent shall take effect on the date Sec. 54. Term of Patent. - The term of a patent
of the publication of the grant of the patent shall be twenty (20) years from the filing date of
in the IPO Gazette. (Sec. 18, RA 165a) the application. (Sec. 21, RA 165a)
Sec. 51. Refusal of the Application. - Sec. 109.3. A utility model registration shall
expire, without any possibility of renewal, at the
51.1. The final order of refusal of the end of the seventh year after the date of the filing
examiner to grant the patent shall be of the application.
appealable to the Director in accordance
with this Act. Sec. 118. The Term of Industrial Design or Layout-
Design Registration. - 118.1. The registration of an
51.2. The Regulations shall provide for the industrial design shall be for a period of five (5)
procedure by which an appeal from the years from the filing date of the application.
order of refusal from the Director shall be
undertaken. 118.2. The registration of an industrial design
may be renewed for not more than two (2)
6.7. Publication of the Grant of Patent consecutive periods of five (5) years each, by
paying the renewal fee. xxx xxx xxx
Sec. 52. Publication Upon Grant of Patent. -
118.5. Registration of a layout-design shall be
52.1. The grant of the patent together with valid for a period often (10) years, without
other related information shall be published renewal, and such validity to be counted from
in the IPO Gazette within the time the date of commencement of the protection
prescribed by the Regulations. accorded to the layout-design. The protection
of a layout-design under this Act shall
52.2. Any interested party may inspect the commence:
complete description, claims, and drawings
of the patent on file with the Office. (Sec. a) on the date of the first commercial
18, RA 165a) exploitation, anywhere in the world, of
the layout-design by or with the
7. Rights Conferred by Patent consent of the right holder: Provided,
That an application for registration is
Sec. 71. Rights Conferred by Patent. - filed with the Intellectual Property
Office within two (2) years from such
71.1. date of first commercial exploitation;
A patent shall confer on its owner the following or
exclusive rights: b) on the filing date accorded to the
application for the registration of the
(a) Where the subject matter of a patent layout-design if the layout-design has
is a product, to restrain, prohibit and not been previously exploited
prevent any unauthorized person or commercially anywhere in the world.
entity from making, using, offering for
sale, selling or importing that 9. Limitations on Rights of Patentees
product;
(b) Where the subject matter of a patent Sec. 72. Limitations of Patent Rights. - The owner
is a process, to restrain, prevent or of a patent has no right to prevent third parties
prohibit any unauthorized person or from performing, without his authorization, the acts
entity from using the process, and referred to in Section 71 hereof in the following
from manufacturing, dealing in, circumstances:
using, selling or offering for sale, or
importing any product obtained 72.1. Using a patented product which has been
directly or indirectly from such put on the market in the Philippines by the
process. owner of the product, or with his express
consent, insofar as such use is performed after
71.2. Patent owners shall also have the that product has been so put on the said
right to assign, or transfer by succession market;
72.4. Where the act consists of the preparation 11. Patent Infringement
for individual cases, in a pharmacy or by a
medical professional, of a medicine in 11.1. Civil Action
accordance with a medical prescription or acts
concerning the medicine so prepared; Sec. 76. Civil Action for Infringement. -
72.5. Where the invention is used in any ship, 76.1. The making, using, offering for sale,
vessel, aircraft, or land vehicle of any other selling, or importing a patented product or
country entering the territory of the Philippines a product obtained directly or indirectly
temporarily or accidentally: Provided, That such from a patented process, or the use of a
invention is used exclusively for the needs of patented process without the authorization
the ship, vessel, aircraft, or land vehicle and of the patentee constitutes patent
not used for the manufacturing of anything to infringement.
be sold within the Philippines. (Secs. 38 and
39, RA 165a) 76.2. Any patentee, or anyone possessing
any right, title or interest in and to the
Sec. 73. Prior User. - patented invention, whose rights have been
infringed, may bring a civil action before a
73.1. Notwithstanding Section 72 hereof, any court of competent jurisdiction, to recover
prior user, who, in good faith was using the from the infringer such damages sustained
invention or has undertaken serious thereby, plus attorneys fees and other
preparations to use the invention in his expenses of litigation, and to secure an
enterprise or business, before the filing date or injunction for the protection of his rights.
priority date of the application on which a
patent is granted, shall have the right to 76.3. If the damages are inadequate or
continue the use thereof as envisaged in such cannot be readily ascertained with
preparations within the territory where the reasonable certainty, the court may award
patent produces its effect. by way of damages a sum equivalent to
reasonable royalty.
73.2. The right of the prior user may only be
transferred or assigned together with his 76.4. The court may, according to the
enterprise or business, or with that part of his circumstances of the case, award damages
enterprise or business in which the use or in a sum above the amount found as actual
preparations for use have been made. (Sec. 40, damages sustained: Provided, That the
RA 165a) award does not exceed three (3) times the
amount of such actual damages.
Sec. 74. Use of Invention by Government. -
76.5. The court may, in its discretion,
74.1. A Government agency or third person order that the infringing goods, materials
authorized by the Government may exploit the and implements predominantly used in the
invention even without agreement of the patent infringement be disposed of outside the
owner where: channels of commerce or destroyed,
without compensation.
(a) the public interest, in particular,
national security, nutrition, health or 76.6. Anyone who actively induces the
the development of other sectors, as infringement of a patent or provides the
determined by the appropriate agency infringer with a component of a patented
of the government, so requires; or product or of a product produced because
(b) A judicial or administrative body has of a patented process knowing it to be
determined that the manner of especially adopted for infringing the
exploitation, by the owner of the patented invention and not suitable for
patent or his licensee, is anti- substantial non-infringing use shall be
competitive. liable as a contributory infringer and shall
be jointly and severally liable with the
74.2. The use by the Government, or third infringer. (Sec. 42, RA 165a)
person authorized by the Government shall be
subject, mutatis mutandis, to the conditions set
forth in Sections 95 to 97 and 100 to 102.
(Sec. 41, RA 165a)
11.2. Criminal Action
10. Notice Requirement
Sec. 84. Criminal Action for Repetition of substantially identical means and the principle or
Infringement. - If infringement is repeated by mode of operation must be substantially the same.
the infringer or by anyone in connivance with
him after finality of the judgment of the court Creser Precision Systems, Inc. v. CA, et al.,
against the infringer, the offenders shall, 286 SCRA 13 [1998]
without prejudice to the institution of a civil
action for damages, be criminally liable therefor Only the patentee or his successor-in-interest may
and, upon conviction, shall suffer imprisonment file an action for infringement. Moreover, there can
for the period of not less than six (6) months be no infringement of a patent until a patent has
but not more than three (3) years and/or a fine been issued, since whatever right one has to the
of not less than One hundred thousand pesos invention covered by the patent arises alone from
(P100,000) but not more than Three hundred the grant of patent. In short, a person or entity
thousand pesos (P300,000), at the discretion of who has not been granted letter of patent over an
the court. The criminal action herein provided invention and has not acquired any rights or title
shall prescribe in three (3) years from date of thereto either as an assignee or a licensee, has no
the commission of the crime. (Sec. 48, RA cause of action for infringement because the right
165a) to maintain an infringement suit depends upon the
existence of a patent.
Sony Computer v Supergreen, Inc. (2007)
SMITH KLINE BECKMAN CORPORATION v
Supergreen is engaged in reproduction and CA (2003)
distribution of counterfeit PlayStation game
software, consoles and accessories, violative of The doctrine of equivalents provides that an
Sonys intellectual property rights. NBI served infringement also takes place when a device
search warrants on subject premises [Cavite] and appropriates a prior invention by incorporating its
seized a replicating machine and several units of innovative concept and, although with some
counterfeit PlayStation consoles, joy pads, modification and change, performs substantially the
housing, labels and game software. Respondent filed same function in substantially the same way to
Motion to Quash which was granted by RTC achieve substantially the same result The
alleging impropriety of venue/lack of jurisdiction. principle or mode of operation must be the
SC: The alleged acts constitute a transitory or same or substantially the same.
continuing offense under Section 168, IPC [RA The doctrine of equivalents thus requires
8293] in relation to Art. 189(1) RPC on unfair satisfaction of the function-means-and-result test,
competition. Respondents imitation of the general the patentee having the burden to show that all
appearance of petitioners goods was done three components of such equivalency test are
allegedly in Cavite, but sold such in Mandaluyong met.
City, Metro Manila.
14. Voluntary Licensing
12. Tests of infringement
Sec. 85. Voluntary License Contract. - To
Godines v. CA, 226 SCRA 576 [1993] encourage the transfer and dissemination of
technology, prevent or control practices and
Tests have been established to determine conditions that may in particular cases constitute
infringement. These are [a] literal infringement; an abuse of intellectual property rights having an
and [b] the doctrine of equivalents. In using literal adverse effect on competition and trade, all
infringement as a test, resort must be had in the technology transfer arrangements shall comply
first instance to the words of the claim. To with the provisions of this Chapter.
determine whether the particular item falls within
the literal meaning of the patent claims, the court Sec. 88. Mandatory Provisions. - The following
must juxtapose the claims of the patent and the provisions shall be included in voluntary license
accused product within the overall context of the contracts:
claims and specifications, to determine whether
there is exact identity of all material elements. On 88.1. That the laws of the Philippines shall
the other hand, under the doctrine of equivalents, govern the interpretation of the same and in
an infringement also occurs when a device the event of litigation, the venue shall be the
appropriates a prior invention by incorporating its proper court in the place where the licensee
innovative concept and, albeit with some has its principal office;
modification and change, performs substantially the
same function in substantially the same way to 88.2. Continued access to improvements in
achieve substantially the same result. techniques and processes related to the
technology shall be made available during the
13. Patent infringement period of the technology transfer arrangement;
88.4. The Philippine taxes on all payments conditions, or introducing innovation to it, as
relating to the technology transfer arrangement long as it does not impair the quality standards
shall be borne by the licensor. prescribed by the licensor;
Sec. 87. Prohibited Clauses. - Except in cases 87.14. Those which exempt the licensor for
under Section 91, the following provisions shall be liability for non-fulfillment of his responsibilities
deemed prima facie to have an adverse on under the technology transfer arrangement
competition and trade: and/or liability arising from third party suits
brought about by the use of the licensed
87.1. Those which impose upon the licensee product or the licensed technology; and
the obligation to acquire from a specific source
capital goods, intermediate products, raw 87.15. Other clauses with equivalent effects.
materials, and other technologies, or of (Sec. 33-C[2], RA 165a)
permanently employing personnel indicated by
the licensor; 15. Compulsory Licensing
87.2. Those pursuant to which the licensor Sec. 93. Grounds for Compulsory Licensing. - The
reserves the right to fix the sale or resale Director of Legal Affairs may grant a license to
prices of the products manufactured on the exploit a patented invention, even without the
basis of the license; agreement of the patent owner, in favor of any
person who has shown his capability to exploit the
87.3. Those that contain restrictions regarding invention, under any of the following
the volume and structure of production; circumstances:
87.4. Those that prohibit the use of 93.1. National emergency or other
competitive technologies in a non-exclusive circumstances of extreme urgency;
technology transfer agreement;
93.2. Where the public interest, in particular,
87.5. Those that establish a full or partial national security, nutrition, health or the
purchase option in favor of the licensor; development of other vital sectors of the
national economy as determined by the
87.6. Those that obligate the licensee to appropriate agency of the Government, so
transfer for free to the licensor the inventions requires; or
or improvements that may be obtained through
the use of the licensed technology; 93.3. Where a judicial or administrative body
has determined that the manner of exploitation
87.7. Those that require payment of royalties by the owner of the patent or his licensee is
to the owners of patents for patents which are anti-competitive; or
not used;
93.4. In case of public non-commercial use of
87.8. Those that prohibit the licensee to export the patent by the patentee, without satisfactory
the licensed product unless justified for the reason;
protection of the legitimate interest of the
licensor such as exports to countries where 93.5. If the patented invention is not being
exclusive licenses to manufacture and/or worked in the Philippines on a commercial
distribute the licensed product(s) have already scale, although capable of being worked,
been granted; without satisfactory reason: Provided, That the
importation of the patented article shall
87.9. Those which restrict the use of the constitute working or using the patent. (Secs.
technology supplied after the expiration of the 34, 34-A, and 34-B, RA 165a)
technology transfer arrangement, except in
cases of early termination of the technology Sec. 97. Compulsory License Based on
transfer arrangement due to reason(s) Interdependence of Patents. - If the invention
attributable to the licensee; protected by a patent, hereafter referred to as the
"second patent," within the country cannot be
87.10. Those which require payments for worked without infringing another patent, hereafter
patents and other industrial property rights referred to as the "first patent," granted on a prior
after their expiration, termination application or benefiting from an earlier priority, a
arrangement; compulsory license may be granted to the owner of
the second patent to the extent necessary for the
87.11. Those which require that the working of his invention, subject to the following
technology recipient shall not contest the conditions:
validity of any of the patents of the technology
supplier; 97.1. The invention claimed in the second
patent involves an important technical advance
87.12. Those which restrict the research and of considerable economic significance in
development activities of the licensee designed relation to the first patent;
to absorb and adapt the transferred technology
to local conditions or to initiate research and 97.2. The owner of the first patent shall be
development programs in connection with new entitled to a cross-license on reasonable terms
products, processes or equipment; to use the invention claimed in the second
patent;
87.13. Those which prevent the licensee from
adapting the imported technology to local
97.3. The use authorized in respect of the first 61.2. Where the grounds for cancellation relate
patent shall be non-assignable except with the to some of the claims or parts of the claim,
assignment of the second patent; and cancellation may be effected to such extent
only. (Secs. 28 and 29, RA 165a)
97.4. The terms and conditions of Sections 95,
96 and 98 to 100 of this Act. (Sec. 34-C, RA Sec. 62. Requirement of the Petition. - The petition
165a) for cancellation shall be in writing, verified by the
petitioner or by any person in his behalf who knows
16. Assignment and Transfer of Patent the facts, specify the grounds upon which it is
based, include a statement of the facts to be relied
Sec. 104. Assignment of Inventions. - An upon, and filed with the Office. Copies of printed
assignment may be of the entire right, title or publications or of patents of other countries, and
interest in and to the patent and the invention other supporting documents mentioned in the
covered thereby, or of an undivided share of the petition shall be attached thereto, together with the
entire patent and invention, in which event the translation thereof in English, if not in English
parties become joint owners thereof. An language. (Sec. 30, RA 165)
assignment may be limited to a specified territory.
(Sec. 51, RA 165) Sec. 63. Notice of Hearing. - Upon filing of a
petition for cancellation, the Director of Legal
Sec. 105. Form of Assignment. - The assignment Affairs shall forthwith serve notice of the filing
must be in writing, acknowledged before a notary thereof upon the patentee and all persons having
public or other officer authorized to administer oath grants or licenses, or any other right, title or
or perform notarial acts, and certified under the interest in and to the patent and the invention
hand and official seal of the notary or such other covered thereby, as appears of record in the Office,
officer. (Sec. 52, RA 165) and of notice of the date of hearing thereon on
such persons and the petitioner. Notice of the filing
Sec. 106. Recording. - of the petition shall be published in the IPO
Gazette. (Sec. 31, RA 165a)
106.1. The Office shall record assignments,
licenses and other instruments relating to the Sec. 66. Effect of Cancellation of Patent or Claim. -
transmission of any right, title or interest in The rights conferred by the patent or any specified
and to inventions, and patents or application claim or claims cancelled shall terminate. Notice of
for patents or inventions to which they relate, the cancellation shall be published in the IPO
which are presented in due form to the Office Gazette. Unless restrained by the Director General,
for registration, in books and records kept for the decision or order to cancel by Director of Legal
the purpose. The original documents together Affairs shall be immediately executory even
with a signed duplicate thereof shall be filed, pending appeal. (Sec. 32, RA 165a)
and the contents thereof should be kept
confidential. If the original is not available, an
authenticated copy thereof in duplicate may be Chapter III.
filed. Upon recording, the Office shall retain the
duplicate, return the original or the INDUSTRIAL DESIGNSAND LAY-OUT
authenticated copy to the party who filed the DESIGNS (TOPOGRAPHIES) OF
same and notice of the recording shall be
published in the IPO Gazette.
INTEGRATED CIRCUITS
1.1. Rights Conferred on Registered Owner of Director of Legal Affairs to cancel the industrial
Lay-out Design design on any of the following grounds:
Sec. 119.4. Rights Conferred to the Owner of a (a) If the subject matter of the industrial
Layout-Design Registration. - The owner of a design is not registerable within the
layout-design registration shall enjoy the following terms of Sections 112 and 113;
rights: (b) If the subject matter is not new; or
(c) If the subject matter of the industrial
(1) to reproduce, whether by incorporation in design extends beyond the content of
an integrated circuit or otherwise, the the application as originally filed.
registered layout-design in its entirety or
any part thereof, except the act of 120.2. Where the grounds for cancellation
reproducing any part that does not relate to a part of the industrial design,
comply with the requirement of cancellation may be effected to such extent
originality; and only. The restriction may be effected in the
(2) to sell or otherwise distribute for form of an alteration of the effected features of
commercial purposes the registered the design.
layout design, an article or an integrated
circuit in which the registered layout- 120.3. Grounds for Cancellation of Layout-
design is incorporated. Design of Integrated Circuits.- Any interested
person may petition that the registration of a
Sec. 119.5. Limitations of Layout Rights. - The layout-design be canceled on the ground that:
owner of a layout design has no right to prevent
third parties from reproducing, selling or otherwise (a) the layout-design is not protectable
distributing for commercial purposes the registered under this Act;
layout-design in the following circumstances: (b) the right holder is not entitled to
protection under this Act; or
(1) Reproduction of the registered layout- (c) where the application for registration
design for private purposes or for the of the layout-design, was not filed
sole purpose of evaluation, analysis, within two (2) years from its first
research or teaching; commercial exploitation anywhere in
(3) Where the act is performed in respect of a the world.
layout-design created on the basis of such
analysis or evaluation and which is itself Where the grounds for cancellation are
original in the meaning as provided established with respect only to a part of the
herein; layout-design, only the corresponding part of
(4) Where the act is performed in respect of a the registration shall be canceled.
registered lay-out-design, or in respect of Any canceled layout-design registration or part
an integrated circuit in which such a thereof, shall be regarded as null and void from
layout-design is incorporated, that has the beginning and may be expunged from the
been put on the market by or with the records of the Intellectual Property Office.
consent of the right holder; Reference to all canceled layout-design
(5) In respect of an integrated circuit where registration shall be published in the IPO
the person performing or ordering such Gazette.
an act did not know and had no
reasonable ground to know when
acquiring the integrated circuit or the
article incorporating such an integrated Chapter IV.
circuit, that it incorporated an unlawfully TRADEMARKS
reproduced layout-design: Provided,
however, That after the time that such
person has received sufficient notice that 1. Marks and Names
the layout-design was unlawfully
reproduced, that person may perform any Sec. 121. Definitions. - As used in Part III, the
of the said acts only with respect to the following terms have the following meanings:
stock on hand or ordered before such
time and shall be liable to pay to the right 121.1. "Mark" means any visible sign capable
holder a sum equivalent to at least 5% of of distinguishing the goods (trademark) or
net sales or such other reasonable royalty services (service mark) of an enterprise and
as would be payable under a freely shall include a stamped or marked container of
negotiated license in respect of such goods; (Sec. 38, RA 166a)
layout-design; or
(6) Where the act is performed in respect of 121.2. "Collective mark" means any visible
an identical layout-design which is original sign designated as such in the application for
and has been created independently by a registration and capable of distinguishing the
third party. origin or any other common characteristic,
including the quality of goods or services of
1.2. Grounds for Cancellation of Registration different enterprises which use the sign under
the control of the registered owner of the
Sec. 120. Cancellation of Design Registration. collective mark; (Sec. 40, RA 166a)
120.1. At any time during the term of the 121.3. "Trade name" means the name or
industrial design registration, any person upon designation identifying or distinguishing an
payment of the required fee, may petition the enterprise; (Sec. 38, RA 166a)
(k) Consists of shapes that may be determined on the basis of visual, aural,
necessitated by technical factors or by the connotative comparisons and overall impressions
nature of the goods themselves or factors engendered by the marks in controversy as they
that affect their intrinsic value; are encountered in the marketplace. The totality or
(l) Consists of color alone, unless defined by holistic test only relies on visual comparisons
a given form; or between two trademarks whereas the dominancy
(m) Is contrary to public order or morality. test relies not only on the visual but also on the
aural and connotative comparisons and overall
A mark is valid if it is distinctive and hence not impressions between the two trademarks.
barred from registration under the Trademark
Law. However, once registered, not only the McDonalds Corporation v. L.C. Big Mak
marks validity but also the registrants ownership Burger, Inc., et al., 437 SCRA 10 [2004]
thereof is prima facie presumed.
This Court, xxx, has relied on the dominancy test
5. Tests to Determine Confusing Similarity rather than the holistic test. The dominancy test
considers the dominant features in the competing
Between Marks
marks in determining whether they are confusingly
similar. Under the dominancy test, courts give
5.1. Colorable imitation greater weight to the similarity of the appearance
of the product arising from the adoption of the
Societe des Produits Nestl, S.A. v. CA, 356 dominant features of the registered mark,
SCRA 207 [2001] disregarding minor differences. Courts will
consider more the aural and visual impressions
Colorable imitation denotes such a close or created by the marks in the public mind, giving
ingenious imitation as to be calculated to deceive little weight to factors like prices, quality, sales
ordinary persons, or such a resemblance to the outlets and market segments.
original as to deceive an ordinary purchaser giving
such attention as a purchaser usually gives, as to McDonalds Corp v MACJOY Fastfood Corp
cause him to purchase the one supposing it to be (2007)
the other. In ascertaining whether one mark is
confusingly similar to or is a colorable imitation of Applying the dominancy test to the instant case,
another, no set rules can be deduced. Each case the Court finds that herein petitioners
must be decided on its own merits. The MCDONALDS and respondents MACJOY marks
complexities attendant to an accurate assessment are confusingly similar with each other such that an
of likelihood of confusion require that the entire ordinary purchaser can conclude an association or
panoply of elements constituting the relevant relation between the marks.
factual landscape be comprehensively examined. To begin with, both marks use the corporate M
design logo and the prefixes Mc and/or Mac as
dominant features. The first letter M in both
5.2. Holistic test marks puts emphasis on the prefixes Mc and/or
Mac by the similar way in which they are depicted
Del Monte Corporation, et al. v. CA, 181 SCRA i.e. in an arch-like, capitalized and stylized manner.
410 [1990] For sure, it is the prefix Mc, an abbreviation of
Mac, which visually and aurally catches the
To determine whether a trademark has been attention of the consuming public. Verily, the word
infringed, we must consider the mark as a whole MACJOY attracts attention the same way as did
and not as dissected. If the buyer is deceived, it is McDonalds, MacFries, McSpaghetti, McDo,
attributable to the marks as a totality, not usually Big Mac and the rest of the MCDONALDS marks
to any part of it. The court therefore should be which all use the prefixes Mc and/or Mac.
guided by its first impression, for the buyer acts Besides and most importantly, both trademarks are
quickly and is governed by a casual glance, the used in the sale of fastfood products. Indisputably,
value of which may be dissipated as soon as the the respondents trademark application for the
court assumed to analyze carefully the respective MACJOY & DEVICE trademark covers goods under
features of the mark. Classes 29 and 30 of the International
Classification of Goods, namely, fried chicken,
chicken barbeque, burgers, fries, spaghetti, etc.
5.3. Test of dominancy Likewise, the petitioners trademark registration for
the MCDONALDS marks in the Philippines covers
Asia Brewery v. CA and San Miguel, 224 SCRA goods which are similar if not identical to those
437 [1993] covered by the respondents application.
Infringement is determined by the test of
dominancy rather than by differences or
variations in the details of one trademark and of 6. Well-known Marks
another. Similarity in size, form and color, while
relevant, is not conclusive. If the competing Sec. 123.1. (e) Is identical with, or confusingly
trademark contains the main or essential or similar to, or constitutes a translation of a mark
dominant features of another, and confusion is which is considered by the competent authority of
likely to result, infringement takes place. the Philippines to be well-known internationally and
in the Philippines, whether or not it is registered
Societe Des Produits Nestle, S.A. v. CA (2001) here, as being already the mark of a person other
than the applicant for registration, and used for
The totality or holistic test is contrary to the identical or similar goods or services: Provided,
elementary postulate of the law on trademarks and That in determining whether a mark is well-known,
unfair competition that confusing similarity is to be account shall be taken of the knowledge of the
relevant sector of the public, rather than of the principal parts of the mark which
public at large, including knowledge in the are in that color;
Philippines which has been obtained as a result of (h) Where the mark is a three-
the promotion of the mark; dimensional mark, a statement to
(f) Is identical with, or confusingly similar to, or that effect;
constitutes a translation of a mark considered well- (i) One or more reproductions of the
known in accordance with the preceding paragraph, mark, as prescribed in the
which is registered in the Philippines with respect Regulations;
to goods or services which are not similar to those (j) A transliteration or translation of the
with respect to which registration is applied for: mark or of some parts of the mark,
Provided, That use of the mark in relation to those as prescribed in the Regulations;
goods or services would indicate a connection (k) The names of the goods or services
between those goods or services, and the owner of for which the registration is sought,
the registered mark: Provided further, That the grouped according to the classes of
interests of the owner of the registered mark are the Nice Classification, together with
likely to be damaged by such use; the number of the class of the said
Classification to which each group of
Sec. 147.2. The exclusive right of the owner of a goods or services belongs; and
well-known mark defined in Subsection 123.1(e) (l) A signature by, or other self-
which is registered in the Philippines, shall extend identification of, the applicant or his
to goods and services which are not similar to representative.
those in respect of which the mark is registered:
Provided, That use of that mark in relation to those 124.2. The applicant or the registrant shall
goods or services would indicate a connection file a declaration of actual use of the mark
between those goods or services and the owner of with evidence to that effect, as prescribed
the registered mark: Provided, further, That the by the Regulations within three (3) years
interests of the owner of the registered mark are from the filing date of the application.
likely to be damaged by such use. Otherwise, the application shall be refused
or the mark shall be removed from the
7. Registration Register by the Director.
7.1. Requirements for Registration 124.3. One (1) application may relate to
several goods and/or services, whether
Sec. 124. Requirements of Application. - they belong to one (1) class or to several
classes of the Nice Classification.
124.1. The application for the registra
(a) A request for registration; 124.4. If during the examination of the
tion of the mark shall be in Filipino or in English application, the Office finds factual basis to
and shall contain the following: reasonably doubt the veracity of any
(b) The name and address of the indication or element in the application, it
applicant; may require the applicant to submit
(c) The name of a State of which the sufficient evidence to remove the doubt.
applicant is a national or where he (Sec. 5, RA 166a)
has domicile; and the name of a
State in which the applicant has a
real and effective industrial or 7.2. Priority Right
commercial establishment, if any;
(d) Where the applicant is a juridical Sec. 131. Priority Right. -
entity, the law under which it is
organized and existing; 131.1. An application for registration of a mark
(e) The appointment of an agent or filed in the Philippines by a person referred to
representative, if the applicant is in Section 3, and who previously duly filed an
not domiciled in the Philippines; application for registration of the same mark in
(f) Where the applicant claims the one of those countries, shall be considered as
priority of an earlier application, an filed as of the day the application was first filed
indication of: in the foreign country.
1) The name of the State with
whose national office the earlier 131.2. No registration of a mark in the
application was filed or it filed Philippines by a person described in this section
with an office other than a shall be granted until such mark has been
national office, the name of registered in the country of origin of the
that office, applicant.
2) The date on which the earlier
application was filed, and 131.3. Nothing in this section shall entitle the
3) Where available, the application owner of a registration granted under this
number of the earlier section to sue for acts committed prior to the
application; date on which his mark was registered in this
(g) Where the applicant claims color as country: Provided, That, notwithstanding the
a distinctive feature of the mark, a foregoing, the owner of a well-known mark as
statement to that effect as well as defined in Section 123.1(e) of this Act, that is
the name or names of the color or not registered in the Philippines, may, against
colors claimed and an indication, in an identical or confusingly similar mark, oppose
respect of each color, of the its registration, or petition the cancellation of
its registration or sue for unfair competition,
without prejudice to availing himself of other fulfilled, it shall, upon payment of the
remedies provided for under the law. prescribed fee. Forthwith cause the application,
as filed, to be published in the prescribed
131.4. In like manner and subject to the same manner.
conditions and requirements, the right provided
in this section may be based upon a 133.3. If after the examination, the applicant
subsequent regularly filed application in the is not entitled to registration for any reason,
same foreign country: Provided, That any the Office shall advise the applicant thereof and
foreign application filed prior to such the reasons therefor. The applicant shall have a
subsequent application has been withdrawn, period of four (4) months in which to reply or
abandoned, or otherwise disposed of, without amend his application, which shall then be re-
having been laid open to public inspection and examined. The Regulations shall determine the
without leaving any rights outstanding, and has procedure for the re-examination or revival of
not served, nor thereafter shall serve, as a an application as well as the appeal to the
basis for claiming a right of priority. (Sec. 37, Director of Trademarks from any final action by
RA 166a) the Examiner.
infringement takes place at the moment any of pesos (P50,000) to Two hundred thousand pesos
the acts stated in Subsection (P200,000), shall be imposed on any person who is
found guilty of committing any of the acts
155.1. or this subsection are committed mentioned in Section 155, Section 168 and
regardless of whether there is actual sale of Subsection 169.1. (Arts. 188 and 189, Revised
goods or services using the infringing material. Penal Code)
(Sec. 22, RA No 166a)
Sec. 159. Limitations to Actions for Infringement. -
Sec. 156. Actions, and Damages and Injunction for Notwithstanding any other provision of this Act, the
Infringement. - remedies given to the owner of a right infringed
under this Act shall be limited as follows:
156.1. The owner of a registered mark may
recover damages from any person who 159.1. Notwithstanding the provisions of
infringes his rights, and the measure of the Section 155 hereof, a registered mark shall
damages suffered shall be either the have no effect against any person who, in good
reasonable profit which the complaining party faith, before the filing date or the priority date,
would have made, had the defendant not was using the mark for the purposes of his
infringed his rights, or the profit which the business or enterprise: Provided, That his right
defendant actually made out of the may only be transferred or assigned together
infringement, or in the event such measure of with his enterprise or business or with that part
damages cannot be readily ascertained with of his enterprise or business in which the mark
reasonable certainty, then the court may award is used.
as damages a reasonable percentage based
upon the amount of gross sales of the 159.2. Where an infringer who is engaged
defendant or the value of the services in solely in the business of printing the mark or
connection with which the mark or trade name other infringing materials for others is an
was used in the infringement of the rights of innocent infringer, the owner of the right
the complaining party. (Sec. 23, First Par., RA infringed shall be entitled as against such
166a) infringer only to an injunction against future
printing.
156.2. On application of the complainant, the
court may impound during the pendency of the 159.3. Where the infringement complained of
action, sales invoices and other documents is contained in or is part of paid advertisement
evidencing sales. in a newspaper, magazine, or other similar
156.3. In cases where actual intent to mislead periodical or in an electronic communication,
the public or to defraud the complainant is the remedies of the owner of the right infringed
shown, in the discretion of the court, the as against the publisher or distributor of such
damages may be doubled. (Sec. 23, First Par., newspaper, magazine, or other similar
RA 166) periodical or electronic communication shall be
limited to an injunction against the
156.4. The complainant, upon proper showing, presentation of such advertising matter in
may also be granted injunction. (Sec. 23, future issues of such newspapers, magazines,
Second Par., RA 166a) or other similar periodicals or in future
transmissions of such electronic
Sec. 157. Power of Court to Order Infringing communications. The limitations of this
Material Destroyed. - subparagraph shall apply only to innocent
infringers: Provided, That such injunctive relief
157.1. In any action arising under this Act, in shall not be available to the owner of the right
which a violation of any right of the owner of infringed with respect to an issue of a
the registered mark is established, the court newspaper, magazine, or other similar
may order that goods found to be infringing be, periodical or an electronic communication
without compensation of any sort, disposed of containing infringing matter where restraining
outside the channels of commerce in such a the dissemination of such infringing matter in
manner as to avoid any harm caused to the any particular issue of such periodical or in an
right holder, or destroyed; and all labels, signs, electronic communication would delay the
prints, packages, wrappers, receptacles and delivery of such issue or transmission of such
advertisements in the possession of the electronic communication is customarily
defendant, bearing the registered mark or conducted in accordance with the sound
trade name or any reproduction, counterfeit, business practice, and not due to any method
copy or colorable imitation thereof, all plates, or device adopted to evade this section or to
molds, matrices and other means of making prevent or delay the issuance of an injunction
the same, shall be delivered up and destroyed. or restraining order with respect to such
infringing matter.
157.2. In regard to counterfeit goods, the
simple removal of the trademark affixed shall
not be sufficient other than in exceptional cases Mighty Corporation v. E. & J. Gallo Winery,
which shall be determined by the Regulations, 434 SCRA 473 [2004]
to permit the release of the goods into the
channels of commerce. (Sec. 24, RA 166a). A crucial issue in any trademark infringement case
is the likelihood of confusion, mistake or deceit as
Sec. 170. Penalties. - Independent of the civil and to the identity, source or origin of the goods or
administrative sanctions imposed by law, a criminal identity of the business as a consequence of using
penalty of imprisonment from two (2) years to five a certain mark. Likelihood of confusion is
(5) years and a fine ranging from Fifty thousand admittedly a relative term, to be determined rigidly
according to the particular (and sometimes by displaying with the mark the words "Registered
peculiar) circumstances of each case. In Mark" or the letter R within a circle or if the
determining likelihood of confusion, the court must defendant had otherwise actual notice of the
consider: [a] the resemblance between the registration. (Sec. 21, RA 166a)
trademarks; [b] the similarity of the goods to
which the trademarks are attached; [c] the likely 9. Unfair Competition
effect on the purchaser; and [d] the registrants
express or implied consent and other fair and Sec. 168. Unfair Competition, Rights, Regulation
equitable considerations. and Remedies. -
McDonalds Corporation v. L.C. Big Mak 168.1. A person who has identified in the mind
Burger, Inc., et al., 437 SCRA 10 [2004] of the public the goods he manufactures or
deals in, his business or services from those of
To establish trademark infringement, the following others, whether or not a registered mark is
elements must be shown: [1] the validity of the employed, has a property right in the goodwill
mark; [2] the plaintiffs ownership of the mark; of the said goods, business or services so
and [3] the use of the mark or its colorable identified, which will be protected in the same
imitation by the alleged infringer results in manner as other property rights.
likelihood of confusion. Of these, it is the element
of likelihood of confusion that is the gravamen of 168.2. Any person who shall employ deception
trademark infringement. Two types of confusion or any other means contrary to good faith by
arise from the use of similar or colorable imitation which he shall pass off the goods manufactured
marks, namely, confusion of goods (product by him or in which he deals, or his business, or
confusion) and confusion of business (source or services for those of the one having established
origin confusion). While there is confusion of goods such goodwill, or who shall commit any acts
when the products are competing, confusion of calculated to produce said result, shall be guilty
business exists when the products are non- of unfair competition, and shall be subject to an
competing but related enough to produce confusion action therefor.
of affiliation.
168.3. In particular, and without in any way
Canon Kabushiki Kaisha v. CA, et al., 336 limiting the scope of protection against unfair
SCRA 266 [2000] competition, the following shall be deemed
guilty of unfair competition:
The likelihood of confusion of goods or business is a
relative concept, to be determined according to the (a) Any person, who is selling his goods
particular, and sometimes peculiar, circumstances and gives them the general
of each case. In cases of confusion of business or appearance of goods of another
origin, the question that usually arises is whether manufacturer or dealer, either as to
the respective goods or services of the senior user the goods themselves or in the
and the junior user are so related as to likely cause wrapping of the packages in which
confusion of business or origin, and thereby render they are contained, or the devices or
the trademark or tradenames confusingly similar. words thereon, or in any other feature
Goods are related when they belong to the same of their appearance, which would be
class or have the same descriptive properties; likely to influence purchasers to
when they possess the same physical attributes or believe that the goods offered are
essential characteristics with reference to their those of a manufacturer or dealer,
form, composition, texture or quality. They may other than the actual manufacturer or
also be related because they serve the same dealer, or who otherwise clothes the
purpose or are sold through the same channels of goods with such appearance as shall
distribution. deceive the public and defraud
another of his legitimate trade, or any
Samson v. Daway, 434 SCRA 612 [2004] subsequent vendor of such goods or
any agent of any vendor engaged in
R.A. No. 8293 and R.A. No. 166 are special laws selling such goods with a like purpose;
conferring jurisdiction over violations of intellectual (b) Any person who by any artifice, or
property rights to the Regional Trial Court. They device, or who employs any other
should therefore prevail over R.A. No. 7691, which means calculated to induce the false
is a general law. Hence, jurisdiction is properly belief that such person is offering the
lodged with the Regional Trial Court even if the services of another who has identified
penalty therefore is imprisonment of less than six such services in the mind of the
years, or from 2 to 5 years and a fine ranging from public; or
P50,000 to P200,000. (c) Any person who shall make any false
statement in the course of trade or
who shall commit any other act
8.1. Notice Requirement contrary to good faith of a nature
calculated to discredit the goods,
Sec. 158. Damages; Requirement of Notice. - In business or services of another.
any suit for infringement, the owner of the
registered mark shall not be entitled to recover 168.4. The remedies provided by Sections
profits or damages unless the acts have been 156, 157 and 161 shall apply mutatis
committed with knowledge that such imitation is mutandis. (Sec. 29, RA 166a)
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
Joaquin, Jr., et al. v. Drilon, et al., 302 SCRA Ching Kian Chuan v. Court of Appeals, 363
225 [1999] SCRA 142 [2001]
A person to be entitled to a copyright must be the similar kind wherein the author primarily derives
original creator of the work. He must have created gain from the proceeds of reproductions. (Sec. 33,
it by his own skill, labor, and judgment without PD No. 49)
directly copying or evasively imitating the work of
another. 8. Moral Rights
Ching v Salinas (2005) Sec. 193. Scope of Moral Rights. - The author of a
work shall, independently of the economic rights in
Ownership of copyrighted material is shown by Section 177 or the grant of an assignment or
proof of originality and copyrightability. By license with respect to such right, have the right:
originality is meant that the material was not
copied, and evidences at least minimal creativity; 193.1. To require that the authorship of the
that it was independently created by the author works be attributed to him, in particular, the
and that it possesses at least same minimal degree right that his name, as far as practicable, be
of creativity. Copying is shown by proof of access indicated in a prominent way on the copies,
to copyrighted material and substantial similarity and in connection with the public use of his
between the two works. The applicant must thus work;
demonstrate the existence and the validity of his
copyright because in the absence of copyright 193.2. To make any alterations of his work
protection, even original creation may be freely prior to, or to withhold it from publication;
copied.
193.3. To object to any distortion, mutilation
6. Economic Rights or other modification of, or other derogatory
action in relation to, his work which would be
Sec. 177. Copy or Economic Rights. - Subject to prejudicial to his honor or reputation; and
the provisions of Chapter VIII, copyright or
economic rights shall consist of the exclusive right 193.4. To restrain the use of his name with
to carry out, authorize or prevent the following respect to any work not of his own creation or
acts: in a distorted version of his work. (Sec. 34, PD
No. 49)
177.1. Reproduction of the work or substantial
portion of the work; 9. Ownership of Copyright
177.2. Dramatization, translation, adaptation, Sec. 178. Rules on Copyright Ownership. -
abridgment, arrangement or other Copyright ownership shall be governed by the
transformation of the work; following rules:
177.3. The first public distribution of the 178.1. Subject to the provisions of this
original and each copy of the work by sale or section, in the case of original literary and
other forms of transfer of ownership; artistic works, copyright shall belong to the
author of the work;
177.4. Rental of the original or a copy of an
audiovisual or cinematographic work, a work 178.2. In the case of works of joint authorship,
embodied in a sound recording, a computer the co-authors shall be the original owners of
program, a compilation of data and other the copyright and in the absence of agreement,
materials or a musical work in graphic form, their rights shall be governed by the rules on
irrespective of the ownership of the original or co-ownership. If, however, a work of joint
the copy which is the subject of the rental; authorship consists of parts that can be used
separately and the author of each part can be
177.5. Public display of the original or a copy identified, the author of each part shall be the
of the work; original owner of the copyright in the part that
he has created;
177.6. Public performance of the work; and
178.3. In the case of work created by an
177.7. Other communication to the public of author during and in the course of his
the work (Sec. 5, PD No. 49a) employment, the copyright shall belong to:
190.2. Copies imported as allowed by this applies to posthumous works. (Sec. 21, First
Section may not lawfully be used in any way to Sentence, PD No. 49a)
violate the rights of owner the copyright or
annul or limit the protection secured by this 213.2. In case of works of joint authorship, the
Act, and such unlawful use shall be deemed an economic rights shall be protected during the
infringement and shall be punishable as such life of the last surviving author and for fifty
without prejudice to the proprietors right of (50) years after his death. (Sec. 21, Second
action. Sentence, PD No. 49)
Sec. 192. Notice of Copyright. - Each copy of a 180.2. The copyright is not deemed assigned
work published or offered for sale may contain a inter vivos in whole or in part unless there is a
notice bearing the name of the copyright owner, written indication of such intention.
and the year of its first publication, and, in copies
produced after the creators death, the year of such 180.3. The submission of a literary,
death. (Sec. 27, PD No. 49a) photographic or artistic work to a newspaper,
magazine or periodical for publication shall
constitute only a license to make a single
13. Duration of Copyright publication unless a greater right is expressly
granted. If two (2) or more persons jointly own
Sec. 213. Term of Protection. - 213.1. Subject to a copyright or any part thereof, neither of the
the provisions of Subsections 213.2 to 213.5, the owners shall be entitled to grant licenses
copyright in works under Sections 172 and 173 without the prior written consent of the other
shall be protected during the life of the author and owner or owners. (Sec. 15, PD No. 49a)
for fifty (50 years after his death. This rule also
Sec. 181. Copyright and Material Object. - The in any manner or form; the placing of these
copyright is distinct from the property in the reproductions in the market and the right of
material object subject to it. Consequently, the rental or lending;
transfer or assignment of the copyright shall not
itself constitute a transfer of the material object. 208.2. The right to authorize the first public
Nor shall a transfer or assignment of the sole copy distribution of the original and copies of their
or of one or several copies of the work imply sound recordings through sale or rental or
transfer or assignment of the copyright. (Sec. 16, other forms of transferring ownership; and
PD No. 49)
208.3. The right to authorize the commercial
Sec. 182. Filing of Assignment of License. - An rental to the public of the original and copies of
assignment or exclusive license may be filed in their sound recordings, even after distribution
duplicate with the National Library upon payment by them by or pursuant to authorization by the
of the prescribed fee for registration in books and producer. (Sec. 46, PD No. 49a)
records kept for the purpose. Upon recording, a
copy of the instrument shall be, returned to the Sec. 211. Scope of Right. - Subject to the
sender with a notation of the fact of record. Notice provisions of Section 212, broadcasting
of the record shall be published in the IPO Gazette. organizations shall enjoy the exclusive right to
(Sec. 19, PD No. 49a) carry out, authorize or prevent any of the following
acts:
Sec. 183. Designation of Society. - The copyright
owners or their heirs may designate a society of 211.1. The rebroadcasting of their broadcasts;
artists, writers or composers to enforce their
economic rights and moral rights on their behalf. 211.2. The recording in any manner, including
(Sec. 32, PD No. 49a) the making of films or the use of video tape, of
their broadcasts for the purpose of
15. Neighboring Rights communication to the public of television
broadcasts of the same; and
Sec. 203. Scope of Performers' Rights. - Subject to
the provisions of Section 212, performers shall 211.3. The use of such records for fresh
enjoy the following exclusive rights: transmissions or for fresh recording. (Sec. 52,
PD No. 49)
203.1. As regards their performances, the
right of authorizing: Sec. 215. Term of Protection for Performers,
Producers and Broadcasting Organizations.-
(a) The broadcasting and other
communication to the public of their 215.1. The rights granted to performers and
performance; and producers of sound recordings under this law
(b) The fixation of their unfixed shall expire:
performance.
(a) For performances not incorporated in
203.2. The right of authorizing the direct or recordings, fifty (50) years from the
indirect reproduction of their performances end of the year in which the
fixed in sound recordings, in any manner or performance took place; and
form; (b) For sound or image and sound
recordings and for performances
203.3. Subject to the provisions of Section incorporated therein, fifty (50) years
206, the right of authorizing the first public from the end of the year in which the
distribution of the original and copies of their recording took place.
performance fixed in the sound recording
through sale or rental or other forms of transfer 215.2. In case of broadcasts, the term shall be
of ownership; twenty (20) years from the date the broadcast
took place. The extended term shall be applied
203.4. The right of authorizing the commercial only to old works with subsisting protection
rental to the public of the original and copies of under the prior law. (Sec. 55, PD 49a)
their performances fixed in sound recordings,
even after distribution of them by, or pursuant 16. Infringement
to the authorization by the performer; and
Habana, et al., v. Robles, et al., 310 SCRA 511
203.5. The right of authorizing the making [1999]
available to the public of their performances
fixed in sound recordings, by wire or wireless Infringement consists in the doing by any person,
means, in such a way that members of the without the consent of the owner of the copyright,
public may access them from a place and time of anything the sole right to do which is conferred
individually chosen by them. (Sec. 42, PD No. by statute on the owner of the copyright. The act of
49a) lifting from anothers book substantial portions of
discussions and examples and the failure to
Sec. 208. Scope of Right. - Subject to the acknowledge the same is an infringement of
provisions of Section 212, producers of sound copyright. For there to be substantial reproduction
recordings shall enjoy the following exclusive of a book it does not necessarily require that the
rights: entire copyrighted work, or even a large portion of
it, be copied. If so much is taken that the value of
208.1. The right to authorize the direct or the original work is substantially diminished, there
indirect reproduction of their sound recordings, is an infringement of copyright and to an injurious
extent, the work is appropriated. It is no defense and conditions as the court may
that the pirate did not know whether or not he was prescribe, sales invoices and
infringing any copyright; he at least knew that other documents evidencing
what he was copying was not his, and he copied at sales, all articles and their
his peril. In cases of infringement, copying alone is packaging alleged to infringe a
not what is prohibited. The copying must produce copyright and implements for
an injurious effect. making them.
(d) Deliver under oath for
Columbia Picture Entertainment, Inc v CA destruction without any
compensation all infringing
It is evidently incorrect to suggest, as the ruling in copies or devices, as well as all
20th Century Fox may appear to do, that in plates, molds, or other means for
copyright infringement cases, the presentation of making such infringing copies as
master tapes of the copyrighted films is always the court may order.
necessary to meet the requirement of probable (e) Such other terms and conditions,
cause and that, in the absence thereof, there can including the payment of moral
be no finding of probable cause for the issuance of and exemplary damages, which
a search warrant. It is true that such master tapes the court may deem proper, wise
are object evidence, with the merit that in this and equitable and the destruction
class of evidence the ascertainment of the of infringing copies of the work
controverted fact is made through demonstrations even in the event of acquittal in a
involving the direct use of the senses of the criminal case.
presiding magistrate. (City of Manila v. Cabangis,
10 Phil. 151 [1908]; Kabase v. State, 31 Ala. App. 216. 2. In an infringement action, the
77, 12 So. 2ND, 758, 764). Such auxiliary court shall also have the power to order the
procedure, however, does not rule out the use of seizure and impounding of any article which
testimonial or documentary evidence, depositions, may serve as evidence in the court
admissions, or other classes of evidence tending to proceedings. (Sec. 28, PD 49a)
prove the factum probandum (See Phil. Movie
Workers Association v. Premiere Productions, Inc.,
92 Phil. 843 [1953]) especially where the 17.2. Criminal Action
production in court of object evidence would result
in delay, inconvenience or expenses out of Sec. 217. Criminal Penalties. -
proportion to its evidentiary value.
217. 1. Any person infringing any right
17. Remedies for Infringement secured by provisions of Part IV of this Act
or aiding or abetting such infringement
17.1. Civil Action shall be guilty of a crime punishable by:
Sec. 216. Remedies for Infringement. - (a) Imprisonment of one (1) year to
three (3) years plus a fine ranging
216.1. Any person infringing a right from Fifty thousand pesos
protected under this law shall be liable: (P50,000) to One hundred fifty
thousand pesos (P150,000) for the
(a) To an injunction restraining such first offense.
infringement. The court may also (b) Imprisonment of three (3) years
order the defendant to desist and one (1) day to six (6) years
from an infringement, among plus a fine ranging from One
others, to prevent the entry into hundred fifty thousand pesos
the channels of commerce of (P150,000) to Five hundred
imported goods that involve an thousand pesos (P500,000) for the
infringement, immediately after second offense.
customs clearance of such goods. (c) Imprisonment of six (6) years and
(b) Pay to the copyright proprietor or one (1) day to nine (9) years plus a
his assigns or heirs such actual fine ranging from Five hundred
damages, including legal costs thousand pesos (P500,000) to One
and other expenses, as he may million five hundred thousand
have incurred due to the pesos (P1,500,000) for the third
infringement as well as the and subsequent offenses.
profits the infringer may have (d) In all cases, subsidiary
made due to such infringement, imprisonment in cases of
and in proving profits the plaintiff insolvency.
shall be required to prove sales
only and the defendant shall be 217. 2. In determining the number of
required to prove every element years of imprisonment and the amount of
of cost which he claims, or, in fine, the court shall consider the value of
lieu of actual damages and the infringing materials that the defendant
profits, such damages which to has produced or manufactured and the
the court shall appear to be just damage that the copyright owner has
and shall not be regarded as suffered by reason of the infringement.
penalty.
(c) Deliver under oath, for 217. 3. Any person who at the time when
impounding during the pendency copyright subsists in a work has in his
of the action, upon such terms possession an article which he knows, or