MERCANTILE LAW REVIEW

Study Guide

I. CORPORATION CODE
1. Definition
2. Differentiate Partnership vs Corporation

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

Partnership
Created by mere agreement of the parties and governed by the Civil Code

- NDC v. Phil. Veterans Bank 1990

National Development Corporation vs Philippine Veterans Bank

192 SCRA 257 [GR No. 84132-33 December 10, 1990]

Facts: The particular enactment in question is Presidential Decree No. 1717, which ordered
the rehabilitation of the Agrix Group of Companies to be administered mainly by the National
Development Company. The law outlined the procedure for filling claims against the Agrix
Companies and created a claims committee to process these claims. Especially relevant to this
case, and noted at the outset, is section 4(1) thereof providing that “all mortgages and other
liens presently attaching to any of the assets of the dissolved corporations are hereby
extinguished.” Earlier, the Agrix Marketing Inc. had executed in favor of private respondent
Philippine Veterans Bank a real estate mortgage dated July 7, 1978 over three parcels of land
situated in Los Baños, Laguna. During the existence of the mortgage, Agrix went bankrupt. It
was the expressed purpose of salvaging this and the other Agrix companies that the
aforementioned decree was issued by President Marcos. A claim for the payment of its loan
credit was filed by PNB against herein petitioner, however the latter alleged and invoked that
the same was extinguished by PD 1717.

Issue: Whether or not Philippine Veterans Bank as creditor of Agrix is still entitled for payment
without prejudice to PD 1717.

Held: Yes. A mortgage lien is a property right derived from contract and so comes under the
protection of Bill of rights so do interests on loans, as well s penalties and charges, which are
also vested rights once they accrue. Private property cannot simply be taken by law from one
person and given to another without just compensation and any known public purpose. This
is plain arbitrariness and is not permitted under the constitution.

The court also feels that the decree impairs the obligation of the contract between Agrix and
the private respondent without justification. While it is true that the police power is superior
to the impairment clause, the principle will apply only where the contract is so related to the
public welfare that it will be considered congenitally susceptible to change by the legislature
in the interest of greater number.

Our finding in sum, is that PD 1717 is an invalid exercise of the police power, not being in
conformity with the traditional requirements of a lawful subject and a lawful method. The
extinction of the mortgage and other liens and of the interest and other charges pertaining to
 the legitimate creditors of Agrix constitutes taking without due process of law, and this is
compounded by the reduction of the secured creditors to the category of unsecured creditors
in violation of the equal protection clause. Moreover, the new corporation being neither
owned nor controlled by the government, should have been created only by general and not
special law. And in so far as the decree also interferes with purely private agreements without
any demonstrated connection with the public interest, there is likewise an impairment of the
obligation of the contract.

- Morato v. CA 2004
See Fulltext

- Unionbank v. Concepcion (G.R. No. 160727)

See Fulltext

3. Salient Changes from the Revised Corporation Code (at least 3)

- Example: elimination of the 5-incorporator minimum rule, elimination of the 50-year term
- grant of a perpetual corporate term for existing and future corporations, unless provided
otherwise in their articles of incorporation
- the formation of a one-man corporation
- the provision of an emergency board member
- the adoption of alternative dispute resolution mechanisms for intra-corporate issues.

4. Doctrine of Separate Judicial Personality

- Liability for acts or contracts – As a general rule, the obligation of the corporation is not
the liability of the stockholders, officers or directors. (Remo vs. IAC, G.R. No. L-67626,
April 18, 1989; 1992, 1996, 2010 Bar)
- A corporation may not, generally, be made to answer for acts or liabilities of its
stockholders or those of the legal entities to which it may be connected, and vice versa.
(Cease vs. CA, G.R. No. L-33172, October 18, 1979)
- It can incur obligations and its obligations are not the obligations of its stockholders,
directors, and officers. (Vasquez vs. De Borja, G.R. No. L-48930, February 23, 1994)

5. Piercing the Veil of Corporate Fiction

The doctrine of piercing the corporate veil is the doctrine that allows the State to disregard for
certain justifiable reasons the notion that a corporation has a personality separate and distinct
from the persons composing it.
6. Liability of Corporation for Promoter’s Contract

- Promoter – A person who, acting alone or with others, takes initiative in founding and
organizing the business or enterprise of the issuer and receives consideration therefor.

Specifically, a promoter is a person who brings about or cause to bring about the
formation and organization of a corporation by:

1. Bringing together the incorporators or the persons interested in the enterprise;

2. Procuring subscriptions or capital for the corporation; and
3. Setting in motion the machinery which leads to the incorporation of the corporation
itself.
 Since a corporation cannot, before its organization, have agents contract for itself, or be
contracted with, it is not liable upon any contract which a promoter attempts to make
for it prior to its organization.

XPNs:
1. The contract is expressly or impliedly adopted or ratified by the corporation after its
organization is completed; or
2. Liability is imposed by statute.

Until such assumption of liability is made by the corporation, the better rule is that the
contracts entered into by promoters “should at most be deemed suspended and
enforceable only after the incorporation and organization of the corporation.

7. General Powers of a Corporation

The general powers of a corporation also called Theory of General Capacity are the following:
(SuSuCo-ABS-PEDRO)
1. To SUe and be sued;
2. Of Succession;
3. To adopt and use of COrporate seal;
4. To amend its Articles of Incorporation;
5. To adopt its By-laws;
6. For Stock corporations: issue and sell stocks to subscribers and treasury stocks; for non-stock
corporations: admit members;
7. To Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and deal with
real and personal property, securities and bonds;
8. To Enter into merger or consolidation;
9. To make reasonable Donations for public welfare, hospital, charitable, cultural, scientific, civic
or similar purposes, provided that no donation is given to any:
a. Political party,
b. Candidate and
c. Partisan political activity.
10. To establish pension, Retirement, and other plans for the benefit of its directors, trustees,
officers and employees – basis of which is the Labor code;
11. To exercise Other powers essential or necessary to carry out its purposes (CC, Sec. 36)

8. Filling of Vacancy of the Board (Section 29)

Ways of filling up the vacancies in the board

i. Vacancies to be filled up by stockholders or members: (ERORI)
1. a. Expiration of term;
2. b. Removal;
3. c. Grounds Other than removal or expiration of term, where the
remaining directors do not constitute a quorum for the purpose of
filling the vacancy;
4. d. If the vacancy may be filled by the remaining directors or trustees
but the board Refers the matter to stockholders or members; or
5. e. Increase in the number of directors results to vacancy.
 ii. Vacancies filled up by members of the board -If still constituting a quorum, at
least a majority of the members are empowered to fill any vacancy occurring in
the board other than by removal by the stockholders or members or by
expiration of term. (CC, Sec. 29)

NOTE: The phrase “may be filled” in Sec. 29 indicates that the filling of vacancies in the board by
the remaining directors constituting a quorum is merely permissive. Corporations may choose
how vacancies in their boards may be filled up, either by the remaining directors or trustees
constituting a quorum or by all stockholders or members.

However, if the by-laws prescribe the specific mode of filling up existing vacancies, the provisions
of the by-laws should be followed. (De Leon, supra)

Duration of the term of a replacement director

A director elected to fill vacancy shall serve the unexpired term of the director he replaced. (CC,
Sec. 29)

Filling-up a vacancy caused by resignation of a director in a hold-over position

The vacancy caused by resignation of a director in a hold-over position can only be filled up by
the stockholders or members, for the cause of vacancy is not resignation but by expiration of
term because the hold-over period is not a part of the director’s original term of office, nor is it a
new term. (De Leon, supra)

9. Corporate Acts requiring Approval of Stockholders

1. Management Right:
a. To attend and vote in person or by proxy at a stockholders’ meetings
b. To elect and remove directors (CC, Secs. 24, 28);
c. To approve certain corporate acts (CC, Sec. 58);
d. To adopt and amend or repeal the by-laws of adopt new by-laws (CC, Secs. 46, 48);
e. To compel the calling of the meetings (CC, Sec. 50);
f. To enter into a voting trust agreement (CC, Sec. 59);
g. To have the corporation voluntarily dissolved. (CC, Secs. 118, 119)

2. Proprietary rights
a. To transfer stock in the corporate book (CC, Sec. 63);
b. To receive dividends when declared (CC, Sec. 43);
c. To the issuance of certificate of stock or other evidence of stock ownership;
d. To participate in the distribution of corporate assets upon dissolution ;
e. To pre-emption in the issue of shares. (CC, Sec. 39)

3. Remedial rights
a. To inspect corporate books (CC, Sec. 74);
b. To recover stock unlawfully sold for delinquent payment of subscription
c. To be furnished with most recent financial statements or reports of the corporation’s
operation (CC, Sec. 74, 75);
d. To bring suits (derivative suit, individual suit, and representative suit);
e. To demand payment in the exercise of appraisal right. (CC, Secs. 41, 81)
10. Appraisal Rights

It refers to the right of the stockholder to demand payment of the fair value of his shares, after
dissenting from a proposed corporate action involving a fundamental change in the charter or
articles of incorporation in the cases provided by law. (De Leon, 2010)

Instances where a stockholder may exercise his appraisal right

Any stockholder of a corporation shall have the right to dissent and demand payment of the fair
value of his shares in the following instances:

1. In case any amendment to the articles of incorporation has the effect of changing or restricting
the rights of any stockholder or class of shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class, or of extending or shortening the term of
corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in the Code;

3. In case of merger or consolidation (CC, Sec. 81);

4. In case the corporation decides to invest its funds in another corporation or business for any
purpose other than its primary purpose as provided in Sec. 42 of the CC;

5. Under Sec. 105, any stockholder of a close corporation may, for any reason, compel said
corporation to purchase his shares at their fair value, which shall not be less than their par or
issued value, when the corporation has sufficient assets in its books to cover its debts and
liabilities exclusive of capital stock.

Limitations on the exercise of appraisal right

1. Any of the instances provided by law for the exercise of the right by a dissenting stockholder
must be present (CC, Secs. 81, 42);

2. The dissenting stockholder must have voted against the proposed corporate action (CC, Sec.
82);

The right is not available to a stockholder who was either absent at the meeting where the
corporate action was approved, or was present at such meeting but abstained from casting his
vote;
3. A written demand on the corporation for payment of his shares must be made by him within
30 days after the date the vote was taken. (ibid.);

Failure to make the demand within such period shall be deemed a waiver of the appraisal right.
4. The price must be based on the fair value of the shares as of the day prior to the date on which
the vote was take (ibid.);

If the proposed corporate action is implemented or effected, the payment shall be made upon
surrender of the certificates of stock representing his shares.
5. Such fair value must be determined as provided in Sec. 82 (ibid);

The fair value shall exclude any appreciation or depreciation in anticipation of such corporate
action.
 6. Payment of the shares must be made only out of the unrestricted earnings of the corporation
(ibid); and

7. Upon such payment, the stockholder must transfer his shares to the corporation. (ibid.)

11. Merger & Consolidation

Common forms of corporate combinations

1. Sale of assets – One corporation sells all or substantially all of its assets to another. Such sale,
usually, though not necessarily made in the course of the dissolution of the vendor corporation.
2. Lease of assets – A corporation, without being dissolved, leases its property to another
corporation for which the lessor merely receives rental paid by the lessee. This is similar to the
sale of assets, except that under a lease,
nothing passes, except the right to use the property leased.
3. Sale of stock – The purpose of a holding corporation is to acquire a sufficient amount of the
stock of another corporation for the purpose of acquiring control. The acquiring corporation is
called the parent/ holding company. The corporation whose stocks were acquired is the
subsidiary.
4. Merger – One where a corporation absorbs another corporation and remains in existence
while others are dissolved.
5. Consolidation - One where a new corporation is created and consolidating corporations are
extinguished. (ibid)

Consolidation
Two or more corporations unite, giving rise to a new corporate body and dissolving the
constituent corporations which cease to exist as separate corporations. (De Leon, 2010)

Merger
Two or more corporations unite, one corporation which retains its corporate existence absorbing
or merging in itself the other which disappears as a separate corporation. It is the absorption of
one corporation by another which survives. (De Leon, 2010)

12. Proxy v. Voting Trust Agreement (VTA)

Directors or trustees cannot attend or vote by proxy at board meetings

Directors or trustees cannot attend or vote by proxy at board meetings. (CC, Sec. 25)

The members of the BOD are required to exercise their judgment and discretion in running the
affairs of the corporation and they cannot be substituted by others. (SEC Opinion, May 27, 1970)
The term “proxy” designates the formal written authority given by the owner or holder of the
stock, who has a right to vote it, or by a member, as principal, to another person, as agent, to
exercise the voting rights of the former.

It is also used to apply to the holder of the authority or person authorized by an absent
stockholder or member to vote for him at a stockholders’ or members’ meeting.
It also refers to the instrument which evidences the authority of the agent. (De Leon, supra)
NOTE: A proxy is a special form of agency. A proxy holder is an agent and as such a fiduciary. (De
Leon, supra)

Since a proxy acts for another, he may act as such although he himself is disqualified to vote his
shares. A proxy-stockholder disqualified to vote because his stock has been declared delinquent
may vote the stocks of his principal which is not delinquent.
Purposes of proxies
The purposes and use of proxies are as follows:
1. Assures the presence of a quorum in meetings of stockholders of large corporations;
2. Enables those who do not wish to attend a stockholders’/ members’ meeting to protect their
interest by exercising their right to vote through a representative; and
3. One of the devices in securing voting control or management control in the corporation. (ibid.)

Who may be a proxy

Any person whom the stockholder or member sees fit to represent him.
NOTE: By-laws restricting the stockholder’s or member’s right in this respect are void. (De Leon,
supra)

Further, same person may act as proxy for one or several stockholders or members.

Duration of proxy
1. Specific proxy – authority granted to the proxy holder to vote only for a particular meeting on a
specific date.
2. Continuing proxy – grants authority to a proxy to appear and vote for and in behalf of a
shareholder for a continuing period which should not be more than 5 years at any one time. By-
laws may provide for a shorter duration of a continuing proxy

Extent of authority of a proxy

1. General proxy – A general discretionary power to attend and vote at an annual meeting, with
all the powers the undersigned would possess if personally present, to vote for directors and all
ordinary matters that may properly come before a regular meeting.

NOTE: A holder of a general proxy has no authority to vote for a fundamental change in the
corporate charter or other unusual transactions such as merger or consolidation.
2. Limited proxy – Restrict the authority to vote to specified matters only and may direct the
manner in which the vote shall be cast (ibid.)

Instances when the right to vote by proxy may be exercised

1. Election of the BOD/BOT (CC, Sec. 24);

When proxies are solicited in relation to the election of corporate directors, the resulting
controversy, even if it ostensibly raised the violation of the SEC rules on proxy solicitation, should
be properly seen as an election controversy within the original and exclusive jurisdiction of the
trial courts by virtue of Section 5.2 of the SRC in relation to Section 5(c) of Presidential Decree
No. 902-A. From the language of Section 5(c) of Presidential Decree No. 902-A, it is indubitable
that controversies as to the qualification of voting shares, or the validity of votes cast in favor of
a candidate for election to the board of directors are properly cognizable and adjudicable by the
regular courts exercising original and exclusive jurisdiction over election cases. (GSIS v. Court of
Appeals, G.R. No. 183905, April 6, 2009);

2. Voting in case of joint ownership of stock (CC, Sec. 56);

3. Voting by trustee under VTA (CC, Sec. 59, last par.);

4. Voting by members in non-stock corps (CC, Sec. 89, par. 2)

In non-stock corporations the right to vote by proxy, or even the right to vote may be
 denied to members in the articles of incorporation or the by-laws as long as the denial is
not discriminatory.

5. In considering other matters:

a. Pledge or mortgage of shares (CC, par. 2, Sec. 55);

b. In all other matters as may be provided in the by-laws (CC, Sec. 47[4]);
c. In all meetings of stockholders or members. (CC, Sec. 58)

Voting trust agreement

A voting trust agreement (VTA) is an agreement whereby one or more stockholders transfer their
shares of stocks to a trustee, who thereby acquires for a period of time the voting rights (and/or
any other specific rights) over such shares; and in return, trust certificates are given to the
stockholder/s, which are transferable like stock certificates, subject, to the trust agreement.

Principal purpose: acquire control of the corporation.

Other purposes of a VTA

1. VTA makes possible a unified control of the affairs of the corporation and a consistent policy
by binding stockholders to vote as a unit;
2. To assure continuity of policy and management especially of a new corporation desirous of
attracting investors;
3. To enable the owners of the majority of the stock of the corporation to control the
corporation;
4. To vest and retain the management of the corporation in the persons originally promoting it;
5. To prevent a rival concern from acquiring control of the corporation;
6. To carry out a proposed sale of the corporation’s assets and to facilitate its dissolution;
7. To enable two holding companies to operate jointly a corporation controlled by them;
8. To effect a plan for reorganization of a corporation in financial difficulty or in bankruptcy
proceedings; and
9. To aid a financially embarrassed corporation to obtain a loan and protect its creditors. (De
Leon, supra)

Voting trust agreement vs. Proxy

1. The agreement must be in writing and notarized and specify the terms and conditions thereof.
2. A certified copy of such agreement shall be filed with the corporation and with the SEC,
otherwise, it is ineffective and unenforceable.
3. The certificate/s of stock covered by the VTA shall be cancelled.
4. A new certificate shall be issued in the name of the trustee/s stating that they are issued
pursuant to the VTA.
5. The transfer shall be noted in the books of the corporation, that it is made pursuant to said
VTA.
6. The trustee/s shall execute and deliver to the transferors voting trust certificates, which shall
be transferable in the same manner and with the same effect as certificates of stock.
7. No VTA shall be entered into for a period exceeding 5 years at any one time (i.e., for every
voting trust) except in the case of a voting trust specifically requiring a longer period as a
condition in a loan agreement, in which case, the period may exceed 5 years but shall
automatically expire upon full payment of the loan.
8. No VTA shall be entered into for the purpose of circumventing the law against monopolies and
illegal combinations in restraint of trade.
9. The agreement must not be used for purposes of fraud. (CC, Sec. 59)
 Unless expressly renewed, all rights granted in a voting trust agreement shall automatically
expire at the end of the agreed period, and the voting trust certificates as well as the certificates
of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the name of the transferors. (CC, Sec. 59)

In case of voting trust required as a condition in a loan agreement, it shall continue until full
payment of the loan.

13. Derivative Suits

Derivative suit – one brought by one or more stockholders or members in the name and on
behalf of the corporation to redress wrongs committed against it or to protect or vindicate
corporate rights, whenever the officials of the corporation refuse to sue or are the ones to be
sued or hold control of the corporation.

14. Classification of Shares

Kinds or classifications of shares

a. Par value shares

Shares with a value fixed in the articles of incorporation and the certificates of stock.
The par value fixes the minimum issue price of the shares.

b. No par value shares

These are shares having no stated value in AOI.

c. Common shares
These are ordinarily and usually issued stocks without extraordinary rights and
privileges, and entitle the shareholder to a pro rata division of profits. It represents the
residual ownership interest in the corporation. The holders of this kind of share have
complete voting rights and they cannot be deprived of the said rights except as provided
by law.

d. Preferred shares
These entitle the shareholder to some priority on distribution of dividends and assets
over those holders of common shares. Preferred shares may be issued only with a
stated par value. (CC, Sec. 6)

e. Redeemable shares
These are shares of stocks issued by a corporation which said corporation can purchase
or take up from their holders upon expiry of the period stated in certificates of stock
representing said shares.(CC, Sec. 8)

f. Treasury shares
Shares that have been earlier issued as fully paid and have thereafter been acquired by
the corporation by purchase, donation, and redemption or through some lawful means.
(CC, Sec. 9)

g. Founder’s shares
Shares classified as such in the articles of incorporation and which may be given special
preference in voting rights and dividend payments.
 h. Voting shares
Shares with a right to vote. If the stock is originally issued as voting stock, it may not
thereafter be deprived of the right to vote without the consent of the holder.

i. Non-voting shares
Shares without right to vote. The law only authorizes the denial of voting rights in the
case of redeemable shares and preferred shares, provided that there shall always be a
class or series of shares which have complete voting rights. (CC, Sec. 6)

j. Convertible shares
Shares which are changeable by the stockholder from one class to another (such as from
preferred to common) at a certain price and within a certain period.

k. Watered stock
Shares issued below its par value or issued value.

NOTE: Watered stocks pertain only to original issuance of shares.

l. Fractional share
A fractional share is a share of equity that is less than one full share.

m. Shares in escrow
Subject to an agreement by virtue of which the share is deposited by the grantor or his
agent with a third person to be kept by the depositary until the performance of certain
condition or the happening of a certain event contained in the agreement.

n. Over-issued stock
It is a stock issued in excess of the authorized capital stock. Stocks which are issued in
this manner are null and void.

o. Street certificate
It is a stock certificate endorsed by the registered holder in blank and the transferee can
command its transfer to his name from issuing corporation.

p. Promotion share
This is a share issued to promoters or those in some way interested in the company, for
incorporating the company, or for services rendered in launching or promoting the
welfare of the company.

Who may classify shares

1. Incorporators – the classes and number of shares which a corporation shall issue are
first determined by the incorporators as stated in the articles of incorporation filed with
the SEC.

2. Board of directors and stockholders – after the corporation comes into existence,
classification of shares may be altered by the board of

15. Pre-emptive Right

Pre-emptive right

It is the preferential right of shareholders to subscribe to all issues or disposition of shares of

 any class in proportion to their present shareholdings. (CC, Sec. 39)

NOTE: The stockholder must exercise his pre-emptive right within the time fixed in the resolution
authorizing the increase of capital stock.

Purpose of pre-emptive right

To enable the shareholder to retain his proportionate control in the corporation and to retain his
equity in the surplus

Exercise of pre-emptive right

Pre-emptive right must be exercised in accordance with the Articles of Incorporation or the By-
Laws. When the Articles of Incorporation and the By-Laws are silent, the Board may fix a
reasonable time within which the stockholders may exercise the right.
Stock Transactions covered includes: (a) the re-issuance of treasury shares which would cover
the increase in the authorized capital stock; (b) opening for subscription the unissued portion of
existing capital stock; and (c) disposition of treasury shares.

Transferability of pre-emptive right

Pre-emptive right is transferable unless there is an express restriction in the AOI.

16. Watered stocks

Watered stock
Shares issued below its par value or issued value.

NOTE: Watered stocks pertain only to original issuance of shares.

17. Delinquency

If within 30 days from expiry of the date of payment or from the date stated in the call made by
the board, and no payment is made, all stocks covered by said subscription shall thereupon
become delinquent and shall be subject to delinquency sale unless the BOD orders otherwise.
(CC, Sec. 67)

Effects of stock delinquency

1. Upon the stockholder
a. Accelerates the entire amount of the unpaid subscription;
b. Subjects the shares to interest expenses and costs; and
c. Disenfranchises the shares from any right that inheres to a stockholder, except the
right to dividends (CC, Sec. 71) (but which shall be applied to any amount due on said
shares, or, in the case of stock dividends, to be withheld by the corporation until full
payment of the delinquent shares. (CC, Sec. 43)
2. Upon the director owning delinquent shares
a. If the delinquent stockholder is a director, the director shall continue to be a director
but he cannot run for re-election. (Sundiang Sr. & Aquino, 2009)
b. A delinquent stockholder seeking to be elected as director may not be a candidate
for, not be duly elected to, the board.

Status of the stockholder from delinquency date before auction sale

All the rights of the stockholder are suspended except the right to dividends.
With respect to dividends, Section 43 states that cash dividends should be
 applied against unpaid subscription while stock dividends should be withheld
until full payment of the subscription.

18. Dividends & Purchase of Corporation of its own shares

Forms of dividends
a. Cash

Cash dividends due on delinquent stock shall first be applied to the unpaid balance on
the subscription plus cost and expenses. (Sec. 43, CC)

b. Stock

Stock dividends are withheld from the delinquent stockholder until his unpaid
subscription is fully paid. (ibid)

c. Property

Stockholders are entitled to dividends PRO‐RATA based on the total number of shares
and not on the amount paid on shares.

Sources of dividends
GR: Dividends can only be declared out of actual and bona fide unrestricted retained earnings
XPN: Dividends can be declared out of capital in the following instances:
1. Dividends from investments wasting assets corporation;or
2. Liquidating dividends

Persons entitled to receive dividends

Dividends are payable to the stockholders of record as of the date of the declaration of dividends
or holders of record. (Cojuanco and Prime Holdings, Inc., v. Sandiganbayan G.R. No. 183278, April
24, 2009)

Rule on transfer of shares which is not recorded in the books of the corporation
Such transfer is valid only as between the parties (CC, Sec. 63); hence, the transferor has the right
to dividends as against the corporation without notice of the transfer but he is the trustee of the
real owner of the dividends subject to the contract between the transferor and transferee as to
who is entitled to receive the dividends. (De Leon, supra)

Rule on the receipt of dividends in case of mortgaged or pledged shares

GR: The mortgagor or the pledgor has the right to receive the dividends.

XPN: When the mortgagor or pledgor defaults and the mortgagee or pledgee acquires the
pledged stocks and the transfer is recorded in the books of the corporation, the mortgagee or
pledgee is entitled to receive the dividends.

II. SECURITIES REGULATION CODE

1. Cases given, except the SEC opinions

2. Powers and functions of SEC

Powers and Functions
The Commission shall have the powers and functions provided by the Securities Regulation Code,
Presidential Decree No. 902-A, as amended, the Corporation Code, the Investment Houses Law,
the Financing Company Act, and other existing laws.

Under Section 5 of the Securities Regulation Code, Rep. Act. 8799, the Commission shall have,
among others, the following powers and functions:

(a) Have jurisdiction and supervision over all corporations, partnerships or associations who are
the grantees of primary franchises and/or a license or permit issued by the Government;

(b) Formulate policies and recommendations on issues concerning the securities market, advise
Congress and other government agencies on all aspects of the securities market and propose
legislation and amendments thereto;

(c) Approve, reject, suspend, revoke or require amendments to registration statements, and
registration and licensing applications;

(d) Regulate, investigate or supervise the activities of persons to ensure compliance;

(e) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and
other SROs;

(f) Impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant
thereto;

(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and
provide guidance on and supervise compliance with such rules, regulations and orders;

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

(i) Issue cease and desist orders to prevent fraud or injury to the investing public;

(j) Punish for contempt of the Commission, both direct and indirect, in accordance with the
pertinent provisions of and penalties prescribed by the Rules of Court;

(k) Compel the officers of any registered corporation or association to call meetings of
stockholders or members thereof under its supervision;

(l) Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the
Commission and in appropriate cases, order the examination, search and seizure of all documents,
papers, files and records, tax returns, and books of accounts of any entity or person under
investigation as may be necessary for the proper disposition of the cases before it, subject to the
provisions of existing laws;

(m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration
of corporations, partnerships or associations, upon any of the grounds provided by law; and
 (n) Exercise such other powers as may be provided by law as well as those which may be implied
from, or which are necessary or incidental to the carrying out of, the express powers granted the
Commission to achieve the objectives and purposes of these laws.

Under Section 5.2 of the Securities Regulation Code, the Commission’s jurisdiction over all cases
enumerated under Section 5 of PD 902-A has been transferred to the Courts of general jurisdiction
or the appropriate Regional Trial Court. The Commission shall retain jurisdiction over pending
cases involving intra-corporate disputes submitted for final resolution which should be resolved
within one (1) year from the enactment of the Code. The Commission shall retain jurisdiction over
pending suspension of payments/rehabilitation cases filed as of 30 June 2000 until finally disposed.

Considering that only Sections 2, 4, and 8 of PD 902-A, as amended, have been expressly repealed
by the Securities Regulation Code, the Commission retains the powers enumerated in Section 6 of
said Decree, unless these are inconsistent with any provision of the Code.

3. Definitions: securities, dealers, brokers, investment contract, etc

Securities market professionals (persons who deal with securities)

1. Broker – A person engaged in the business of buying and selling securities for the account of
others. (SRC, Sec.3.3)
2. Dealer– Any person who buys and sells securities for his/her own account in the ordinary
course of business. (SRC, Sec. 3.4)
3. Associated person of a broker or dealer – He is an employee of a broker or dealer who
directly exercises control of supervisory authority but does not include a salesman, or an agent,
or a person, whose functions are solely clerical or ministerial. (SRC, Sec. 3.5)
4. Salesman – He is a natural person, employed as such, or as an agent, by a dealer, issuer or
broker to buy and sell securities; but for the purpose of registration, shall not include any
employee of an issuer whose compensation is not determined directly or indirectly on sales of
securities of the issuer.

Investment contract – is a contract, transaction or scheme whereby a person invests his money
in a common enterprise and is led to expect profits primarily from the efforts of others.

Howey Test
For an investment contract to exist, the following elements must concur:
a. A contract, transaction or scheme;
b. An investment of money;
c. Investment is made in a common enterprise;
d. Expectation of profits; and
e. Profits arising primarily from the effort of others

4. Pre-need plans

What Is the Difference Between "Insurance" and "Pre-need"?

INSURANCE coverage answers to the financial guarantee IF the event happens, which means it is
probable that the event WILL NOT happen.

PRE-NEED coverage, on the other hand, answers to the financial guarantee WHEN the event
happens or the time has come. It will SURELY happen. So the programs get you to (PRE)PARE for
the (NEED) so that WHEN the time comes, you are financially ready to face the situation.
 insurance companies, pre-need companies and all other persons supervised or regulated by the
Insurance Commission (IC);

5. Prohibitions (ex. Manipulation of Security Prices, Insider trading)

Acts which are considered as manipulation of security prices (2001 Bar)

The price of securities should be dictated by market forces. It cannot be pegged or stabilized. The
following acts are considered as manipulation of security prices and are therefore prohibited:
1. Transactions intended to create a false or misleading appearance of active trading in any listed
security traded in an Exchange or any other trading market:
a. Wash Sale – is a transaction in which there is no genuine change in the beneficial (or actual)
ownership of a security;
b. Matched Sale – is a change of ownership in the securities by entering an order for the
purchase or sale of a security with the knowledge that a simultaneous order of substantially the
same size, time, and price, for the sale or purchase of any such security, has or will be entered by
or for the same or different parties;
c. Similar transactions where there is no change of beneficial ownership.

2. Effecting a series of transactions that will raise or depress the price of securities to induce the
purchase or sale of securities respectively, or creating active trading to induce transactions
through manipulative devices:

a. Marking the close – buying and selling of securities at the close of the market in an
effort to alter the closing price of these securities.

b. Painting the tape – engaging in a series of transactions effected by brokers in

securities that are reported publicly to give the impression or illusion of activity or price
movement in a security, which may trick investors into trading in these securities
because of the alleged trading volume or indications of interest.

c. Squeezing the float – refers to taking advantage of a shortage of securities in the

market by controlling the demand side and exploiting market congestion during such
shortages in a way to create artificial prices. This prevents the actual market from
determining the price of these securities.

d. Hype and dump – engaging in buying activity at increasingly higher prices and then
selling securities in the market at the higher prices.

e. Boiler room operations – refers to activities that involve the use of high pressure sale
tactics such as direct mail offers or telephone follow-ups to investors to promote
purchase and sale of securities wherein there is misrepresentation in these securities.
This is a fraudulent transaction that tricks investors into trading in a fake market.

f. Daisy chain – refers to a series of purchase and sales of the same issue at successively
higher prices by the same group of people with the purpose of manipulating prices are
drawing unsuspecting investors into the market leaving them defrauded of their money
and securities.

g. Front-Running – is the prohibited practice of a broker-dealer executing its proprietary

order before the customer’s order for the same security. This violates the fiduciary
responsibility by the broker-dealer to its customer accounts as well as placing the
customer’s order first.
 h. Churning – involves the excessive trading of securities by a broker-dealer in a
customer’s discretionary account in order to generate commissions, without regard to
the customer’s investment objective.

3. Circulating or disseminating information that the price of any security listed in an Exchange will
or is likely to rise or fall because of manipulative market operations of any one or more persons
conducted for the purpose of raising or depressing the price of that security for the purpose of
inducing the purchase or sale of such security.

4. To make false or misleading statement with respect to any material fact, which he knew or had
reasonable ground to believe was so false or misleading, for the purpose of inducing the
purchase or sale of any security listed or traded in an Exchange.

5. To effect, either alone or with others, any series of transactions for the purchase and/or sale of
any security traded in an exchange for the purpose of pegging, fixing or stabilizing the price of
such security, unless otherwise allowed by the Code or by rules of the Commission.

SHORT SALES
It is the selling of shares which the seller does not actually own or possess and therefore he
cannot, himself, supply the delivery. Short selling leads to speculation of price of securities.

Short swing transaction

It is a transaction by the director, issuer or any person controlling the issuer (stockholder owning
10% of the stocks), whereby such person buys and sells securities within six (6) months.

FRAUDULENT TRANSACTIONS
The following are considered as fraudulent transactions:

1. Employment of any device, scheme or artifice to defraud investors;

2. Obtaining money or property by means of any untrue statement of a material fact or any
omission to state a material fact necessary in order to make the statement made not misleading;

3. Engaging in any act, transaction, practice or course of business, which operates as a fraud or
deceit upon any person.

NOTE: Section 5, Rule 8 of the Revised Rules of Court provides that in all averments of fraud or
mistake, the circumstances constituting fraud or mistake must be stated with particularity. These
rules find specific application to Section 5(a) of P.D. No. 902-A which speaks of corporate devices
or schemes that amount to fraud or misrepresentation detrimental to the public and/or to the
stockholders.

INSIDER TRADING
A purchase or sale made by an insider, or such insider’s spouse or his relative by affinity or
consanguinity within the second degree, legitimate or common-law, shall be presumed to be
effected while in possession of material non-public information if transacted after such
information came into existence but prior to the public dissemination of such information, and
lapse of reasonable time for the market to absorb such information. (2015 Bar)

Insider
A person who is in possession of corporate material information not generally available to the
public.
 Who may be an insider
1. The issuer;
2. A director or officer (or person performing similar functions) of, or a person controlling
the issuer;
3. A person whose relationship or former relationship to the issuer gives or gave him
access to material information about the issuer or the security that is not generally
available to the public;
4. A government employee, or director , or officer of an exchange, clearing agency and/or
self-regulatory organization who has access to material information about an issuer or a
security that is not generally available to the public; or
5. Constructive Insider – A person who learns such information by a communication from
any of the foregoing insiders. (SRC, Sec. 3.8)

Other prohibited acts in an insider trading

1. For an insider to communicate material non-public information about the issuer or the
security to any person who by virtue of the communication thereby becomes an insider,
where the original insider communicating the information knows or has reason to
believe that such person will likely buy or sell a security of the issuer while in possession
of such information;

2. When a tender offer has commenced or is about to commence, it is unlawful for any
person, other than the tender offeror, who is in possession of material non-public
information relating to such tender offer to buy or sell the securities of the issuer that
are sought or to be sought by such tender offer, if such person knows or has reason to
believe that the information is non-public and has been acquired directly or indirectly
from the tender offer, or those acting on its behalf, the issuer of the securities sought or
to be sought by such tender offer, or any insider of such issuer;

3. When a tender offer has commenced or is about to commence, it is also unlawful for
any tender offeror, or those acting on its behalf, the issuer of securities covered by such
tender offer, and any insider, to communicate material non-public information to any
person relating to the tender offer which would likely result in violation of prohibition of
the insider from trading.

Material non-public information (1995 Bar)

1. Information about the issuer or the security has not been generally disclosed to the
public and would likely affect the market price of the security after being disseminated
to the public and the lapse of a reasonable time for the market to absorb the
information; or

2. Would be considered by a reasonable person important under the circumstances in

determining his course of action whether to buy, sell or hold a security. (SRC, Sec. 27.2)

III. NEGOTIABLE INSTRUMENTS (NI)

1. Section 1

Negotiable Instrument
It is a written contract for the payment of money which is intended as a substitute for money and
passes from one person to another as money, in such a manner as to give a holder in due course
the right to hold the instrument free from defenses available to prior parties (Sundiang Sr. &
 Aquino, 2011).

2. Life of Negotiable Instruments

Incidents in the life of a negotiable instrument

1. Issue – first delivery of the instrument to the payee;
2. Negotiation – transfer from one person to another so as to constitute the transferee a holder;
3. Presentment for acceptance (in certain kinds of Bills of Exchange) (NIL., Sec. 143)
4. Acceptance – written assent of the drawee to the order;
5. Dishonor by non-acceptance – refusal to accept by the drawee;
6. Presentment for payment – the instrument is shown to the maker or drawee/ acceptor for him
to pay;
7. Dishonor by non-payment – refusal to pay by the maker or drawee/ acceptor
8. Notice of dishonor – notice to the persons secondarily liable that the maker or the drawee/
acceptor refused to pay or to accept instrument;
9. Protest
10. Discharge

3. Promissory note vs Bill of exchange

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

Bill of exchange (BOE) – An unconditional order in writing addressed by one person to another
signed by the person giving it, requiring the person to whom it is addressed to pay on demand or
at a fixed or determinable future time a sum certain in money to order or to bearer (NIL, Sec.
126).

Check– _A bill of exchange drawn on a bank payable on demand (NIL, Sec. 185).

- Michael Osmeña v. Citibank 2004

See Fulltext

4. Negotiability

Negotiability – The note may pass from hand to hand similar to money so as to give the holder in
due course (HIDC) the right to hold the instrument and collect the sum payable for himself free
from any infirmity in the instrument or defect in the title of any of the prior parties or defenses
available to them among themselves.

- Metropolitan Bank v. CA 1991

Metropolitan Bank & Trust Company vs. Court of Appeals

G.R. No. 88866 February 18, 1991
-negotiability

FACTS:
Eduardo Gomez opened an account with Golden Savings and Loan Association and deposited
over a period of two months 38 treasury warrants with a total value of
P1,755,228.37. All these warrants were subsequently indorsed by Gloria Castillo as Cashier
of Golden Savings and deposited to its savings account in the Metrobank branch in Calapan,
Mindoro. They were then sent for clearing by the branch office to the principal office of
 Metrobank, which forwarded them to the Bureau of Treasury for special clearing. Before they
were cleared, petitioner decided to allow Golden Savings to withdraw from the proceeds of
the warrants. Golden Savings in turn subsequently allowed Gomez to make withdrawals from
his own account. Subsequently, Metrobank informed Golden Savings that 32 of the warrants
had been dishonored by the Bureau of Treasury and demanded the refund by Golden Savings
of the amount it had previously withdrawn, to make up the deficit in its account. Metrobank
contends that by indorsing the warrants in general, Golden Savings assumed that they were
"genuine and in all respects what they purport to be," in accordance with Section 66 of the
Negotiable Instruments Law.

ISSUE:
Whether petitioner can hold Golden Savings liable as an indorser of the treasury warrants
based on the predication that the treasury warrants involved in this case are negotiable
instruments.

RULING:
Clearly stamped on the face of the treasury warrants is the word "non-negotiable." It is also
indicated that they are payable from a particular fund, to wit, Fund 501. The indication of
Fund 501 as the source of the payment to be made on the treasury warrants makes the order
or promise to pay "not unconditional" and the warrants themselves non-
negotiable. Petitioner cannot hold Golden Savings liable as an indorser under Section 66 of
the NIL for the simple reason that this law is not applicable to the non-negotiable treasury
warrants.

5. Kinds of Indorsement (ex. Special, Blank)

Indorsement
It is the signing of the name of the indorser on the instrument with the intent to transfer title to
the same.

GR: Indorsement must be of the entire instrument (NIL, Sec. 32).

XPN: When the instrument has been paid in part.

Indorsement to two or more indorsees severally does NOT operate as a negotiation of the
instrument.

Indorsement should be placed:

1. On the instrument itself; or
2. On a separate piece of paper attached to the instrument called “allonge” (NIL, Sec. 31)

Kinds of indorsement
1. Special (NIL, Sec. 34) – Specifies the person to whom or to whose order the instrument
is to be payable. It is also known as specific indorsement, or indorsement in full.

An instrument payable to bearer indorsed specially may nevertheless be negotiated by

delivery (once a bearer always a bearer) (NIL, Sec. 40).

2. Blank (NIL, Sec. 34) –Specifies no indorsee.

a. Instrument is payable to bearer and may be negotiated by delivery;
b. May be converted to special indorsement by writing over the signature of the
indorser in blank any contract consistent with the character of indorsement
(NIL, Sec. 35).
3. Restrictive (NIL, Sec. 36)–When the instrument:
a. Prohibits further negotiation of the instrument (it destroys the negotiability of
the instrument);
b. Constitutes the indorsee the agent of the indorser;
c. Vests the title in the indorsee in trust for or to the use of some persons.

But mere absence of words implying power to negotiate does not make an instrument
restrictive.

4. Qualified (NIL, Sec. 38) – Constitutes the indorser a mere assignor of the title to the
instrument made by adding to the indorser’s signature words like, without recourse,
sans recourse or at the indorsee’s own risk (this serves as an ordinary equitable
assignment).

5. Absolute – The indorser binds himself to pay:

a. Upon no other condition than failure of prior parties to do so;
b. Upon due notice to him of such failure

6. Conditional (NIL, Sec. 39)–Right of the indorsee is made to depend on the happening of
a contingent event. The party required to pay may disregard the conditions.

NOTE: The condition refers to the indorsement not on the instrument itself.

7. Joint (NIL, Sec. 41) – Indorsement made payable to 2 or more persons who are not
partners.

All of them must indorse unless the one indorsing has authority to indorse for the
others.

8. Irregular (NIL, Sec. 64) – A person who, not otherwise a party to an instrument, places
thereon his signature in blank before delivery.

9. Facultative –Indorser waives presentment and notice of dishonor, enlarging his liability
and his indorsement.

10. Successive – Indorsement to two persons or more in succession.

Any of them can indorse to effect negotiation of the instrument.

- BPI v. CA 2007

BPI VS CA (G.R. NO. 136202 JANUARY 25, 2007)

Bank of the Philippine Islands vs Court of Appeals
G.R. No. 136202 January 25, 2007

Facts: A.A. Salazar Construction and Engineering Services filed an action for a sum of money
with damages against herein petitioner Bank of the Philippine Islands (BPI) on December 5,
1991 before Branch 156 of the Regional Trial Court (RTC) of Pasig City. The complaint was
later amended by substituting the name of Annabelle A. Salazar as the real party in interest
in place of A.A. Salazar Construction and Engineering Services. Private respondent Salazar
prayed for the recovery of the amount of Two Hundred Sixty-Seven Thousand, Seven
Hundred Seven Pesos and Seventy Centavos (P267,707.70) debited by petitioner BPI from
her account. She likewise prayed for damages and attorney’s fees. Petitioner BPI, in its
answer, alleged that on August 31, 1991, Julio R. Templonuevo, third-party defendant and
herein also a private respondent, demanded from the former payment of the amount of
Two Hundred Sixty-Seven Thousand, Six Hundred Ninety-Two Pesos and Fifty Centavos (P
267,692.50) representing the aggregate value of three (3) checks, which were allegedly
payable to him, but which were deposited with the petitioner bank to private respondent
Salazar’s account (Account No. 0203-1187-67) without his knowledge and corresponding
endorsement. Accepting that Templonuevo’s claim was a valid one, petitioner BPI froze
Account No. 0201-0588-48 of A.A. Salazar and Construction and Engineering Services,
instead of Account No. 0203-1187-67 where the checks were deposited, since this account
was already closed by private respondent Salazar or had an insufficient balance.

Issue: Whether or not respondent is entitled to the proceeds of the checks even without
prior indorsement.

Held: No. Section 49 of the Negotiable Instruments Law contemplates a situation whereby
the payee or indorsee delivers a negotiable instrument for value without indorsing it, thus:
Transfer without indorsement; effect of– Where the holder of an instrument payable to his
order transfers it for value without indorsing it, the transfer vests in the transferee such title
as the transferor had therein, and the transferee acquires in addition, the right to have the
indorsement of the transferor. But for the purpose of determining whether the transferee is
a holder in due course, the negotiation takes effect as of the time when the indorsement is
actually made.

If instruments payable to named payees or to their order have not been indorsed in blank,
only such payees or their indorsees can be holders and entitled to receive payment in their
own right.

The presumption under Section 131(s) of the Rules of Court stating that a negotiable
instrument was given for a sufficient consideration will not inure to the benefit of Salazar
because the term “given” does not pertain merely to a transfer of physical possession of the
instrument. The phrase “given or indorsed” in the context of a negotiable instrument refers
to the manner in which such instrument may be negotiated. Negotiable instruments are
negotiated by “transfer to one person or another in such a manner as to constitute the
transferee the holder thereof. If payable to bearer it is negotiated by delivery. If payable to
order it is negotiated by the indorsement completed by delivery.” The present case involves
checks payable to order. Not being a payee or indorsee of the checks, private respondent
Salazar could not be a holder thereof.

It is an exception to the general rule for a payee of an order instrument to transfer the
instrument without indorsement. Precisely because the situation is abnormal, it is but fair to
the maker and to prior holders to require possessors to prove without the aid of an initial
presumption in their favor, that they came into possession by virtue of a legitimate
transaction with the last holder.23 Salazar failed to discharge this burden, and the return of
the check proceeds to Templonuevo was therefore warranted under the circumstances
despite the fact that Templonuevo may not have clearly demonstrated that he never
authorized Salazar to deposit the checks or to encash the same. Noteworthy also is the fact
that petitioner stamped on the back of the checks the words: “All prior endorsements
and/or lack of endorsements guaranteed,” thereby making the assurance that it had
ascertained the genuineness of all prior endorsements. Having assumed the liability of a
general indorser, petitioner’s liability to the designated payee cannot be denied.
6. What is Holder in Due Course?

To be considered as a HIDC, the requisites under Sec. 52 of the NIL must be complied with: (COFI)

1. That is Complete and regular upon its face;

2. Became the holder before it was Overdue, and without notice that it has been previously
dishonored, if such was the fact;
3. Took it in good Faith and for value;
4. At the time it was negotiated to him, he had no notice of any Infirmity in the instrument or
defect in the title of the person negotiating it. (NIL, Sec. 52)

7. Defenses (Real/Personal) & Equities (Legal/Equitable)

Defenses against the holder

The defenses available against the holder are classified as follows:

1. Real or Absolute Defenses – those that are attached to the instrument itself and are available
against all parties, both immediate and remote, including holders in due course.
2. Personal or Equitable Defenses –defenses which are only available against a holder not in
due course. Those which grow out of the agreement or conduct of a particular person which
renders it inequitable for him, though holding the legal

Real defenses available against a holder vs. Personal defenses

REAL DEFENSES PERSONAL DEFENSES
(IM In Ultra. AFForD PODIF) (InnocentS2 ADD FUn In Fraud)

1. Incomplete and undelivered instrument 1. Innocent alteration or spoliation

2. Minority (available only to the minor) 2. Discharge of party Secondarily liable by discharge
3. Incapacity as far as incapacitated persons are of prior party.
concerned 3. Set-off between immediate parties
4. Ultra –vires acts of a corporation 4. Filling up of blanks not in accordance with the
5. Want of Authority, apparent and real Authority given
6. Fraudulent alteration 5. Acquisition of instrument by Duress or force and
7. Forgery fear; unlawful means or for an illegal consideration
8. Duress amounting to Forgery 6. Discharge by payment or renunciation or release
9. Prescription before maturity
10. Other infirmities appearing on the face of the 7. Failure or absence of consideration.
instrument 8. Undelivered complete instrument
11. Discharge in insolvency 9. Insertion of a wrong date
12. Illegal Contract 10. Fraud in inducement or simple fraud
13. Fraud in Factum or Esse Contractus

NOTE: Fraud in factum exists in those cases in which
a person, without negligence, has signed an
instrument, but was deceived as to the character of
the instrument and without knowledge of it, as where
a note was signed by one under the belief that he was
signing as a witness to a deed. This kind of fraud is a
real defense because there is no contract, since the
NOTE: Fraud in inducement relates to the quality,
quantity, value or character of the consideration of
the instrument. Here, deceit is not in the character of
the instrument but in its amount or terms. This exists
when a person is induced to sign a note for the price
of a worthless stock which was fraudulently
represented by the payee as to its value. Such type of
 person did not know what he was signing (De Leon, fraud is only a personal defense because it does not
2010). prevent a contract (De Leon, 2010).

8. Section 15 – Incomplete Undelivered Instrument

Where an incomplete instrument has not been delivered, it will not, if completed and negotiated
without authority, be a valid contract in the hands of any holder, as against any person whose
signature was placed thereon before delivery (NIL, Sec. 15).
Non-delivery of an incomplete instrument is a real defense which may be set up even against a
holder in due course.

9. Section 28 – Lack of Consideration

Consideration
It is an inducement to a contract that is the cause, price or impelling influence, which induces a
party to enter into a contract.

NOTE: Every negotiable instrument is deemed prima facie to have been issued for a valuable
consideration (NIL, Sec. 24).

A check constitutes an evidence of indebtedness and is a veritable proof of an obligation. Thus,

based on Sec. 24 of the NIL, checks complete and delivered to a person by another are sufficient
by themselves to prove the existence of the loan obligation obtained by the latter from the
former. (Ting Ting Pua v. Spouses Tiong and Caroline Teng, G.R. No. 198660, October 23, 2013, in
Divina, 2014)

Effect of want of consideration

It becomes a matter of defense as against any person not a holder in due course, thus, a personal
defense (NIL, Sec. 28).

Partial failure of consideration

Partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and
liquidated amount or otherwise (ibid.).

Inadequacy of consideration
GR: Inadequacy of consideration does not invalidate the instrument.
XPN: There has been fraud, mistake or undue influence (NCC, Art. 1355).
NOTE: However, knowledge of inadequacy of consideration would render the holder not HIDC
liable (NIL, Sec. 53).

10. Section 23 – Forgery

It is the counterfeit making or fraudulent alteration of any writing. It happens when a signature is
affixed by one who does not claim to act as an agent and who has no authority to bind the
person whose signature he has forged (NIL, Sec. 23).

Burden of proof in proving forgery

Forgery, as any other mechanism of fraud must be proven clearly and convincingly, and the
burden of proof lies on the party alleging forgery (Chiang Yia Min v. CA, G.R. No. 137932, Mar.
28, 2001).
 - PNB v. Quimpo 1988

- PNB vs. Quimpo GR L-53194, 14 March 1988 First Division, Gancayco (J)

Facts: Francisco Gozon was a depositor of the Philippine National Bank (PNB Caloocan City
branch). Ernesto Santos, Gozon’s friend, took a check from the latter’s checkbook which was
left in the car, filled it up for the amount of P5,000, forged Gozon’s signature, and encashed
it. Gozon learned about the transaction upon receipt of the bank’s statement of account,
and requested the bank to recredit the amount to his account. The bank refused. Hence, the
present action.

Issue: Who shall bear the loss resulting from the forged check.

Held: The prime duty of a bank is to ascertain the genuineness of the signature of the drawer
or the depositor on the check being encashed. It is expected to use reasonable business
prudence in accepting and cashing a check being encashed or presented to it. Payment in
neglect of duty places upon him the result of such negligence. Still, Gozon’s act in leaving his
checkbook in the car, where his trusted friend remained in, cannot be considered negligence
sufficient to excuse the bank from its own negligence. The bank bears the loss.

11. Section 124 – Material Alteration

It is any change in the instrument which affects or changes the liability of the parties in any way.
It means an unauthorized change in an instrument that purports to modify in any respect the
obligation of a party or an unauthorized addition of words or numbers or other change to an
incomplete instrument relating to the obligation of a party.

Instances that constitute material alteration

Any alteration which changes:
1. Date
2. Sum payable, either for principal or interest
3. The time or place of payment
4. Number or the relations of the parties
5. Currency in which payment is to be made
6. Adds a place of payment where no place is specified
7. Any other change or addition which alters the effect of the instrument (NIL, Sec. 125.)

The change in the date of indorsement is not material where the date is not necessary to fix the
maturity of the instrument.

There is no material alteration when the serial number of a check had been altered. The
alteration of the serial number of a check did not change the relations between the parties nor
the effect of the instrument. Hence, the alteration on the serial number of a check is not a
material alteration (International Corporate Bank v. CA, G.R. No. 141968, February 12, 2001).

Spoliation
It refers to material alteration of an instrument done by a stranger. It has the same effect as
alteration.
 EFFECT OF MATERIAL ALTERATION
Material alteration of a negotiable instrument, without the assent of all parties liable thereon,
has the following effects:
1. Avoids the instrument except against:
a. A party who has made the alteration;
b. A party who authorized or assented to the alteration; or
c. The indorsers who indorsed subsequent to the alteration (because of their
warranties).
2. If negotiated to an HIDC, he may enforce the payment thereof according to its original
tenor against the person not a party to the alteration. He may also enforce payment
thereof against the party responsible for the alteration for the altered amount.
3. If negotiated to a holder not an HIDC, he cannot enforce payment against the person
not a party prior to the alteration. He may, however enforce payment according to the
altered tenor from the person who caused the alteration and from the indorsers (NIL,
Sec. 12).

A drawee who accepts a materially altered check cannot recover from the holder and
the drawer (2011 Bar).

A material alteration of an instrument without the assent of all parties liable thereon
results in its avoidance, except against a party who has made, authorized or assented to
the alteration and subsequent indorser. (2011 Bar)

- Hong Kong & Shanghai Bank v. People’s Bank 1970

Hongkong & Shanghai Bank vs. People’s Bank and Trust GR L-28226, 30 September 1970 First
Division, Fernando (J) Facts: The Philippine Long Distance Telephone Company (PLDT) drew a
check on the Hongkong

Shanghai Banking Corporation (HSBC) in the latter’s favor for P14,608.05, and sent it through
mail. The check fell into the hands of Florentino Changco, who was able to erase the name of
the payee and substituted his own, and deposited the altered check in his current account
with the People’s Bank and Trust Co. (PBTC). The check was cleared by HSBC, and PBTC
credited Changco the amount. The alteration was known when the cancelled check was
returned to PLDT. HSBC requested PBTC to refund the amount, but the latter refused.

Issue: Whether HSBC can claim reimbursement from PBTC.

Held: A person who presents fro payment checks guarantees the genuineness of the check,
and the drawee bank need to concern itself with nothing but the genuineness of the
signature, and the state of the account with it of the drawee. If at all, whatever remedy,
whatever remedy HSBC has would lie not against PBTC but as against the party responsible
for changing the name of the payee (i.e. Changco). Its failure to call the attention of PBTC as
to such alteration until after the lapse of 27 days would, in the light of Central Bank Circular
9 (24-hour clearing house rule), negate whatever right it might have had against PBTC. [18]

12. Liability of Parties

Parties primarily liable

1. Maker – of a promissory note;
2. Acceptor – of a bill of exchange; and
3. Certifier of a check
 Parties secondarily liable

1 Drawer of a bill; and

2. Indorser of a note or a bill

Negotiable instrument should be presented for payment to the party primarily liable (NIL, Sec.
72[d]):
PRIMARILY LIABLE
Unconditionally bound
Absolutely required to pay the
instrument upon maturity
SECONDARILY LIABLE
Conditionally bound
Undertakes to pay only after the ff.
conditions have been fulfilled:
1. Due presentment for payment or
acceptance to primary party (NIL, Sec.
143);
2. Dishonor by such party (NIL, Sec.70);
3. Taking of proceedings required by law
(NIL, Sec.152)

IV. INSURANCE CODE

1. Section 2 – Definitions

Laws governing contracts of insurance in the Philippines

1. R.A. 10607
2. New Civil Code
3. Special Laws

Contract of insurance
It is an agreement whereby one undertakes for a consideration to indemnify another against the
loss, damage or liability arising from an unknown or contingent event. (IC, Sec. 2[a])
A contract of insurance, to be binding from the date of application, must have been a completed
contract (Perez vs. CA, GR No. 112329, January 28, 2000). Thus, it must have all the essential
elements of a valid contract as enumerated in Art. 1318 of the New Civil Code:

1. Subject matter in which the insured has an insurable interest;

2. Consideration, which is the premium paid by the insured, for the insurer’s promise to
indemnify the former upon the happening of the event or peril insured against;
3. Meeting of minds of the parties.

2. Meaning of “doing an insurance business”

The term “doing an insurance business” or “transacting an insurance business” means:

1. Making or proposing to make, as Insurer, any insurance contract;
2. Making or proposing to make, as Surety, any contract of suretyship as a vocation and not as
merely incidental to any other legitimate business or activity of the surety;
3. Doing any kind of business, including a Reinsurance business, specifically recognized as
constituting the doing of an insurance business.
4. Doing or proposing to do Any business in substance equivalent to any of the foregoing in a
 manner designed to evade the provisions of the Insurance Code. (Sec. 2[b], ibid)

In the application of the provisions of the Insurance Code, the fact that no profit is derived from
the making of the insurance contracts, agreements or transactions or that no separate or direct
consideration is received therefor, shall NOT be deemed conclusive to show that the making
thereof does not constitute the doing or transacting of an insurance business.

3. Elements (insurable interest, risk/loss/damage, consideration)

ELEMENTS OF CONTRACT OF INSURANCE

SPEAR:
1. Scheme to distribute losses – Such assumption of risk is part of a general scheme to distribute
actual losses among a large group or substantial number of persons bearing a similar risk.
2. Payment of premium – As consideration for the insurer’s promise, the insured makes a ratable
contribution called “premium,” to a general insurance fund.
3. Existence of insurable interest – The insured possesses an interest of some kind susceptible of
pecuniary estimation, known as “insurable interest.”
4. Assumption of Risk – The insurer assumes that risk of loss for a consideration.
5. Risk of loss – The insured is subject to a risk of loss through the destruction or impairment of
that interest by the happening of designated peril.

NOTE: The inherent uncertainty of events is normally described in terms of risk. A contract
possessing only the last three elements enumerated above is a risk-shifting device, but NOT a
contract of insurance which is a risk-distributing device. (De Leon, 2006)
Consequently, however, the existence of insurance could have the perverse effect of increasing
the probability of loss. This is when the insured, having in mind the indemnification for loss or
damage caused by the happening of the event insured against, would have reduced incentive to
take steps to protect himself or his property, subject of insurance. This phenomenon is called
moral hazard (ibid).

4. Characteristics & Nature of Insurance Contracts

Characteristics of an insurance contract

1. Consensual – It is perfected by the meeting of the minds of the parties as to the object, cause
and consideration of the insurance contract. There should be acceptance of the application for
insurance.

2. Voluntary – The parties may incorporate such terms and conditions as they may deem
convenient: Provided they do not contravene any provision of law and are not opposed to public
policy, law, morals, good customs, or public order.

GR: The taking out of an insurance contract is not compulsory.

XPN: Liability insurance may be required by law in certain instances (E.g. compulsory motor
vehicle liability insurance, or employees under Labor Code, or as a condition to granting a license
to conduct a business or calling affecting the public safety or welfare).

3. Aleatory – The liability of the insurer depends upon some contingent event.
 An aleatory contract is a contract where one or both of the parties reciprocally bind themselves
to give or do something upon the happening of an event which is uncertain, or which is to occur
at an indeterminate time. (NCC, Art. 2010)
4. Unilateral – It imposes legal duties only on the insurer who promises to indemnify in case of
loss.

It is executed as to the insured after the payment of the premium, and executory on the part of
the insurer in the sense that it is not executed until payment for a loss.
5. Conditional – It is subject to conditions, the principal one of which is the happening of the
event insured against.

6. Contract of indemnity – Recovery is commensurate with the amount of the loss suffered.

GR: The insurer promises to make good only the loss of the insured.
XPN: The principle is not applicable to life and accident insurance where the result is death
because life is not capable of pecuniary estimation. The only situation where the principle of
indemnity is applicable to life insurance is when the interest of a person insured is capable of
exact pecuniary measurement. An example would be in a case where a creditor insures the life of
his debtor to the extent of the latter’s debt to the former.
7. Personal – Each party having in view the character, credit and conduct of the other. The law
presumes that the insurer considered the personal qualifications of the insured in approving the
insurance application. (Sundiang Sr. & Aquino, 2014)

8. Property – Since insurance is a contract, it is property in legal contemplation.

9. Risk-distributing device – Insurance serves to distribute the risk of economic loss among as
many as possible of those who are subject to the same kind of loss. By paying a pre-determined
amount into a general fund out of which payment will be made for an economic loss of a defined
type, each member contributes to a small degree toward compensation for losses suffered by
any member of the group. This broad sharing of economic risk is the principle of risk-distribution.
(Sundiang Sr. & Aquino, 2014)

10. Onerous - There is a valuable consideration called the premium.

5. Requisites for Valid Insurance Contracts

6. Contracts for Contingent Services, Pre-need plans, and similar arrangements

- Philcare Health Systems v. CA
7. Perfection of Insurance Contract
- Enriquez v. Sunlife Assurance Company
8. Kinds of Insurance Policies

1.. Life insurance

a. Individual life
b. Group life
c. Industrial life

2. Non-Life Insurance
a. Marine
 b. Fire
c. Casualty

3. Contracts of suretyship or bonding.

4. Compulsory Motor Vehicle Liability Insurance
5. Microinsurance

9. Differentiate double insurance from over-insurance

Double insurance
Double insurance exists where the same person is insured by several insurers separately, in
respect to the same subject and interest. (Sec. 95, ibid)
Requisites of double insurance (STRIP)
1. Subject matter is the same
2. Two or more insurers insuring separately
3. Risk or peril insured against is the same
4. Interest insured is the same
5. Person insured is the same

There is no double insurance even though two policies were both issued over the same subject
matter and both covered the same peril insured against if the two policies were issued to two
different entities. (Malayan Insurance Co. vs. Philippine First Insurance Co., G.R. No. 184300, July
11, 2012)

Double insurance is not prohibited by law

It is not contrary to law and hence, in case of double insurance, the insurers may still be made
liable up to the extent of the value of the thing insured but not to exceed the amount of the
policies issued. (Perez, 2006)
A provision in the policy that prohibits double insurance is valid. However, in the absence of such
prohibition, double insurance is allowed. (ibid)

Nature of the liability of the several insurers in double insurance (2005 Bar)
A: In double insurance, the insurers are considered as co-insurers. Each one is bound to
contribute ratably to the loss in proportion to the amount for which he is liable under his
contract. This is known as the “principle of contribution” or “contribution clause”. (IC, Sec. 96 [e])

Over insurance
There is over insurance whenever the insured obtains a policy in an amount exceeding the value
of his insurable interest. (Perez, 2006)

Double Insurance vs. Over Insurance

DOUBLE INSURANCE OVER INSURANCE

There may be no over insurance as when
the sum total of the amounts of the policies
issued does not exceed the insurable
interest of the insured.
There are two or more insurers insuring the
same subject matter.
When the amount of the insurance is beyond
the value of the insured’s insurable interest.
There may be only one insurer, with whom
the insured takes insurance beyond the value
of his insurable interest.
 Rules when the insured in a policy other than life is over insured by double insurance
1. The insured, unless the policy otherwise provides, may claim payment from the insurers in
such order as he may select, up to the amount which the insurers are severally liable under their
respective contracts;
2. Where the policy under which the insured claims is a valued policy, any sum received by him
under any other policy shall be deducted from the value of the policy without regard to the
actual value of the subject matter insured;
3. Where the policy under which the insured claims is an unvalued policy, any sum received by
him under any policy shall be deducted against the full insurable value, for any sum received by
him under any policy;
4. Where the insured receives any sum in excess of the valuation in the case of valued policies, or
of the insurable value in the case of unvalued policies, he must hold such sum in trust for the
insurers, according to their right of contribution among themselves.
5. Each insurer and the other insurers, to contribute ratably to the loss in proportion to the
amount for which he is liable under his contract. (Sec. 96, ibid)

10. Concealment, Misrepresentations, and Breach of Warranties

Concealment
Concealment is a neglect to communicate that which a party knows and ought to communicate.
(IC, Sec. 26)
Under Section 27 of the Insurance Code, “a concealment entitles the injured party to rescind a
contract of insurance.” Moreover, under Section 168 of the Insurance Code, the insurer is
entitled to rescind the insurance contract in case of an alteration in the use or condition of the
thing insured. (Malayan Insurance Company vs. PAP Co. (Phil. Branch), G.R. No. 200784, August
7, 2013, in Divina 2014)
Requisites
1. A party knows a fact which he neglects to communicate or disclose to the other party
2. Such party concealing is duty bound to disclose such fact to the other
3. Such party concealing makes no warranty as to the fact concealed
4. The other party has no means of ascertaining the fact concealed
5. The fact must be material

Test of materiality (2000 Bar)

It is determined not by the event, but solely by the probable and reasonable influence of the
facts upon the party to whom the communication is due, in forming his estimate of the
disadvantages of the proposed contract, or in making his inquiries. (IC, Sec. 31)
NOTE: As long as the facts concealed are material, concealment, whether intentional or not,
entitles the injured party to rescind. (IC, Sec.27)
Concealment in marine insurance
Rules on concealment are stricter in marine insurance since the insurer would have to depend
almost entirely on the matters communicated by the insured. Thus, in addition to material facts,
each party must disclose all the information he possesses which are material or the information
of the belief or expectation of a third person, in reference to a material fact. But concealment in
a marine insurance in any of the following matters enumerated under Section 112 Insurance
Code does not vitiate the entire contract, but merely exonerates the insurer from a loss resulting
from the risk concealed.
Test in ascertaining the existence of concealment
If the applicant is aware of the existence of some circumstances which he knows would probably
influence the insurer in acting upon his application, good faith requires him to disclose that
circumstance, though unasked.
Matters that need not be disclosed
GR: The parties are not bound to communicate information of the following matters:
1. Those which the other knows
2. Those which, in the exercise of ordinary care, the other ought to know and of which, the
former has no reason to suppose him ignorant
3. Those of which the other waives communication
4. Those which prove or tend to prove the existence of a risk excluded by a warranty, and which
are not otherwise material
5. Those which relate to a risk excepted from the policy and which are not otherwise material;
6. The nature or amount of the interest of one insured (except if he is not the owner of the
property insured). (IC, Sec. 34)

XPNs:
1. In answer to inquiries of the other. (IC, Sec. 30)
2. Neither party is bound to communicate, even upon inquiry, information of his own judgment,
because such would add nothing to the appraisal of the application. (IC, Sec. 35)
3. The parties are bound to know all the general causes which are open to his inquiry, equally
with the other, and all general usages of trade. (IC, Sec. 32)
Matters that must be disclosed even in the absence of inquiry
1. Those material to the contract
2. Those which the other has no means of ascertaining
3. Those as to which the party with the duty to communicate makes no warranty

NOTE: Matters relating to the health of the insured are material and relevant to the approval of
the issuance of the life insurance policy as these definitely affect the insurer’s action to the
application. It is well-settled that the insured need not die of the disease he had failed to disclose
to the insurer, as it is sufficient that his non-disclosure misled the insurer in forming his estimates
of the risks of the proposed insurance policy or in making inquiries. (Sunlife Assurance Company
of Canada v. CA, G.R. No. 105135, June 22, 1995)
Information as to the nature of interest need not be disclosed except in property insurance, if the
insured is not the owner. If somebody is insuring properties of which he is not the owner, he
must disclose why he has insurable interest that would entitle him to ensure it, and the extent
thereof. (IC, Secs. 34 & 51 [e])

Evidence of insurability
Evidence of Insurability is a broader phrase than “Evidence of Good Health” and includes such
other factors as the insured’s occupation, habits, financial condition, and other risk selection
factors.

Representation
An oral or written statement of a fact or condition affecting the risk made by the insured to the
insurance company, tending to induce the insurer to assume the risk.
Representation should be made, altered or withdrawn at the time of or before the issuance of
the policy. (Sec. 37, Insurance Code). It may be altered or withdrawn before the insurance is
effected, but not afterwards. (Sec.41, ibid)

Characteristics of representation
1. Not a part of the contract but merely a collateral inducement to it
2. Oral or written
3. Made at the time of, or before issuing the policy and not after
4. Altered or withdrawn before the insurance is effected but not afterwards
 5. Must be presumed to refer to the date the contract goes into effect. (IC, Sec. 42)

Similarities of concealment and representation

1. Both refer to the same subject matter and both take place before the contract is entered.
2. Concealment or representation prior to loss or death gives rise to the same remedy; that is
rescission or cancellation.
3. The test of materiality is the same. (IC, Secs. 31, 46)
4. The rules of concealment and representation are the same with life and non-life insurance.

Concealment vs. Misrepresentation

The insured withholds The insured makes

the information of erroneous statements
material facts from the of facts with the intent
insurer of inducing the insurer
to enter into the
insurance contract

V. PDIC Act
1. Policy & Functions

Philippine Deposit Insurance System at a Glance

The Philippine Deposit Insurance Corporation (PDIC) is a government instrumentality created on 22

June 1963 by Republic Act 3591 entitled, An Act Establishing the Philippine Deposit Insurance
Corporation (PDIC), Defining Its Powers and Duties and for Other Purposes.

Public Policy Objectives

PDIC was established to promote and safeguard the interests of the depositing public by way of
providing insurance coverage on all insured deposits. PDIC also aims to strengthen the mandatory
deposit insurance coverage system to generate, preserve, and maintain faith and confidence in the
country’s banking system, and protect it from illegal schemes and machinations.

Mandates
Consistent with its public policy objectives, the PDIC has the following mandates:

I. Deposit Insurance. PDIC provides a maximum deposit insurance coverage of PhP500,000 per
depositor per bank. To pay claims on insured deposits, PDIC builds up the Deposit Insurance
Fund (DIF) primarily through assessments of banks at an annual flat rate of 1/5 of 1% of their
total deposit liabilities.
II. Receivership of Closed Banks. PDIC proceeds with the liquidation process upon order of the
Monetary Board of the Bangko Sentral ng Pilipinas (BSP). The assets of the closed bank are
managed and eventually disposed of to settle claims of creditors in accordance with the
preference and concurrence of credits as provided by the Civil Code of the Philippines.
 Membership
Membership with PDIC is mandatory for all banks licensed by the BSP to operate in the Philippines:

• Banks incorporated under Philippine laws, such as commercial banks, savings banks, mortgage
banks, stock savings and loan associations, development banks, cooperative banks, and rural
banks
• Domestic branches of foreign banks

As of 31 December 2017, there are 587 banks in the Philippine banking system. These consist of 43
commercial banks (including branches of foreign banks), 55 thrift banks (savings banks, mortgage
banks, stock savings and loan associations, and development banks), and 489 rural banks (including
cooperative banks).

Scope of Deposit Insurance Protection

PDIC provides a maximum deposit insurance coverage of PhP500,000 per depositor per bank. It
covers all types of bank deposits in banks whether denominated in local or foreign currencies. All
deposit accounts of a depositor in a closed bank maintained in the same right and capacity shall be
added together. A joint account shall be insured separately from any individually-owned deposit
account.

As of 31 December 2017, around 57.1 million accounts in 587 banks are covered by deposit
insurance. Of the total number of accounts, 96.3% are with balances not exceeding the maximum
deposit insurance coverage of PhP500,000 per depositor per bank. For the same period, total
deposits in the Philippine banking system amounted to PhP11.7 trillion, of which 20.8% is covered by
deposit insurance.

2. Calculation of Liability

VI. TRANSPORTATION LAW

1. What is Public Utility?

1. Public utility
A business or service engaged in supplying the public with some commodity or service of public
consequence, or essential to the general public (Perez, 2006, citing Albano vs. Reyes, G.R. 83551,
July 1, 1989; KMU Labor Center vs. Garcia, G.R. 115381, December 23, 1994).

Public service
Every person that may own, operate, manage, control in the Philippines, for hire/compensation,
with general/limited clientele whether permanent, occasional or accidental, and done for
general business purposes, any common carrier, with or without fixed route and whatever may
be its classification, engaged in the transportation of passengers or freight or both, canal,
irrigation system, gas, electric light, heat and power, water supply power, petroleum, sewerage
system, wire or wireless communication systems, wire or wireless broadcasting stations and
stations and other similar public services (Public Service Act, Sec. 13 [b]).

2. Public Utility v. Public Service

Define: Transportation, Common Carrier

 Requisites for an entity to be classified as a common carrier (1996, 1997, 2000, 2002 Bar)
(PBL-FP)
1. Must be a Person, corporation, firm or association
2. Engaged in the Business of carrying or transporting passengers or goods or both;
3. The carriage or transport must either be by Land, water or air;
4. The service is for a Fee;
5. The service is offered to the Public (Art. 1732, NCC).

NOTE: A pipeline operator who carries oil and other petroleum products through pipes/pipelines
is a common carrier. The law does not distinguish as to the means by which transportation is
carried out, as long as it is by land, water, or air. Neither does the law require that transportation
be through a motor vehicle (First Phil. Industrial Corp. v. CA, G.R. No. 125948, December 29,
1998).

3. Public Service Act (give at least 3 salient features)

Public Service Act (give at least 3 salient features)

1. Limitation on foreign ownership – minimum 60% owned by citizens of the Philippines, to be issued
a certificate
2. Certificates of Public convenience and certificates of public convenience and necessity shall be
issued for a period of only fifty years
3. temporary take-over and operation of public utilities during times of national emergency when
public interest so requires;
4. in the interest of national welfare or defense, establishment and operation of vital industries and
transfer to public ownership utilities and other private enterprises to be operated by the
Government upon payment of just compensation;

4. Certificate of Public Convenience (CPC), Certificate of Public Convenience and Necessity (CPCN),
and Prior Operator Rule

Certificate of Public Convenience (CPC)

It is an authorization issued for the operation of public services for which no franchise, either
municipal or legislative, is required by law, such as a common carrier.

Certificate of Public Convenience is not necessary before a carrier can be considered a common
carrier
A person or entity is a common carrier even if he did not secure CPC. Its liability as a common
carrier arises as soon as it acted as a common carrier, without regard as to whether or not such
carrier has complied with the requirements of the applicable regulatory statute and
implementing regulations and has been granted a certificate of public convenience or other
franchise (De Guzman v CA. G.R. No. L-47822, December 22, 1988).

Certificate of Public Convenience (CPC) vs. Certificate of Public Convenience and Necessity
(CPCN)
 Issued whenever the Public Service
Commission finds that the operation of
the proposed public service will promote
the public interests in a proper and
suitable manner, for which a municipal or
legislative franchise is NOT necessary
(Public Service Act, Sec. 16 [a]).
Issued upon approval of any franchise or
privilege granted by any political subdivision
of the Philippines when in the judgment of
the political subdivision of the Philippines
when in the judgment of the Commission
such franchise or privilege will properly
conserve the public interest
(Public Service Act, Sec. 16 [b]).

1. Prior operator rule - The area has already a well-established operator (Mandbusco, Inc. vs.
Francisco, G.R. L-23688, April 30, 1970). The rule allows an existing franchised operator to invoke
a preferential right within the authorized territory as long as he renders satisfactory and
economical service (Martin, 1989). The prior operator must first be given the opportunity to
extend its service in order to meet public needs in the matter of transportation (ibid).

Third Operator Rule - Where two operators are more than serving the public there is no reason
to permit a third operator to engage in competition with them. The fact that it is only one trip
and of little consequence is not sufficient reason to grant the application (Yangco v. Esteban, G.R.
No. 38586, Aug. 18, 1933).

2. Prior applicant rule- Where there are various applicants for a public utility over the same
territory, all conditions being equal, priority in
the filing of the application for CPC becomes a factor. It presupposes a situation when two
interested persons apply for a certificate to operate a public utility in the same community over
which no person has as yet granted any certificate (Martin, 1989).

3. Protection of investment rule- One of the purposes of PSA is to protect and conserve the
investments which have already been made for that purpose by public service operators
(Batangas Trans. Co. vs. Orlanes, G.R. L-28865, December 19, 1928).Objection should be made if
the grant of the application would result to a ruinous competition (Halili vs. Ice and Cold Storage
Industries, Inc., G.R. L-1871, November 18, 1949).

Mere possibility of reduction in the income of an existing operator does not, of itself, establish
that issuing a permit to another will result in ruinous competition. It should be shown that the
oppositor will not obtain sufficient profits to pay a dividend or reasonable interest upon invested
capital (Halili vs. Ice and Cold Storage Industries, Inc., supra).

4. Attack the citizenship of the applicant (Sec. 11, Art. XII of the 1987 Constitution prohibits the
granting of franchise or certificate for the operation of public utility in favor of non-Filipino
citizens); or

5. The applicant does not have the necessary financial capacity (KMU Labor Center vs. Garcia,
supra).

Exceptions to the application of Prior operator rule or Protection of investment rule

1. Where public interest would be better served by the new operator (Intestate Estate of Teofilo
Tiongson vs. Commission, G.R. L-24701, December 16, 1970).
2. Where the old operator has failed to make an offer to meet the increase in traffic (Manila
Yellow Taxicab Co., Inc. vs. Castelo, GR No. L-131910, May 30, 1960).
3. Where the CPC granted to the new operator is a maiden certificate, which does not overlap
with the entire route of the old operator but only a short portion thereof as a convergence point
 (Mandbusco, Co. vs. Francisco, supra).

4. If the application of the rule will be conducive to monopoly of the service, and contrary to the
principle that promotes healthy competition (Villa Rey Transit, Inc. vs. Pangasinan Trans. Inc.,
G.R. L-17684-85, May 30, 1962).

5. If the old operator unjustifiably abandoned his service for two or three years by not registering
the necessary equipment forfeits his right to said equipment and the service authorized to him
(Fariñas vs. Estate of Florencio Buan, GR No. 12306-7, November 29, 1961).
6. The service of the prior operator is inefficient.
7. The prior operator denies that there is a need to expand his service.
8. The prior operator has abandoned his service.
9. The prior operation is operating less units than he was authorized.
10. The prior operator was given the opportunity to expand his service and failed to do so.

5. Define: Franchise

Franchise
A franchise includes any special privilege or right affected with public interest, conferred by the
State on corporations or persons and which does not belong to the citizens of the country,
generally as a matter of common right. (De Leon, 2010, citing JRS Business Corp. v. Imperial
Insurance, Inc., G.R. No. L-19891, July 31, 1964)

PRIMARY FRANCHISE SECONDARY FRANCHISE

The franchise or authority to exist as a
corporation
GR: Granted by the Corporation Code
XPN: In GOCC’s with a special charter, a
special law grants the franchise
Cannot be transferred without the
approval of Congress. (Sundiang Sr. &
Aquino, 2011)
Special authority given to a corporation to engage
in a specialized business (e.g. banks, insurance
companies, right to use the streets of a
municipality to lay pipes of tracks, erect poles, or
string wires).
Certain rights and privileges conferred upon
existing corporations. (J.R.S. Business Corp. v.
Imperial Insurance, supra)
The franchise to exercise powers and privileges
granted to such corporation to the business for
which it was created, including those conferred for
purposes of public benefit such as the power of
eminent domain and other powers and privileges
enjoyed by public utilities. (De Leon, 2010)
Granted by a Government Agency, or a Municipal
Corporation
It may ordinarily be conveyed or mortgaged under
a general power granted to a corporation to
dispose of its property (i.e. Through board
resolution or approval of stockholders. (Villarey v.
Ferrer G.R. No. L-23893, October 29, 1968)
It can be subject to levy and sale on execution
together with corporate property. (Sundiang Sr. &
Aquino, 2011)
- Raymundo v. Luneta Motor Corp. 1993

DOMINADOR RAYMUNDO, petitioner-appellant, vs.

LUNETA MOTOR CO., et. al., respondents-appellees.

Malcolm, J.NATURE: Appeal from a decision of the Public Service Commission

SUMMARY: De Guzman bought trucks on credit from Luneta Motor. The sale was backed by
a chattel mortgage on the trucks and 3 CPCs. Upon default, Luneta Motor had the CPCs
attached and were able to buy them on execution sale; but De Guzman had already sold the
CPCs to Raymundo. The two buyers of the CPCs now sought to have their sales approved by
the PSC. The PSC and the SC sided with Luneta Motor, holding that CPCs may be attached
and sold on execution.DOCTRINE: Certificates of public convenience (CPC), being a form of
limited franchise, are considered as property which may be sold even on execution. CPCs
have become valuable as they are essential to the operation of transportation businesses
and have come to be sold, mortgaged and levied upon on execution. The Court sanctions
these practices as they are not prohibited under pertinent laws.

FACTS
Nicanor DE GUZMAN, as proprietor of GUZCO Transit, bought trucks from LUNETA Motor
Company.

The purchase was made with promissory notes backed by a chattel mortgage on the trucks.
De Guzman failed to pay, hence Luneta sued him before the Manila CFI.

The Manila CFI issued a writ of attachment against the properties of Guzco, including its
rights in 3 certificates of public convenience (CPC) covering the Manila-Cardona and Manila-
Pililla routes. Nine days after the attachment, or on July 16, 1932, De Guzman sold the 3
attached CPCs plus another CPC and several trucks to Dominador Raymundo.

The attached CPCs were sold on auction, with Luneta emerging the highest bidder.
Raymundo and Luneta applied for approval of the respective sales to them of the CPCs
before the Public Service Commission (PSC). The two cases were consolidated, and the PSC
upheld the sale in favor of Luneta. Raymundo was allowed to file a new petition for the
fourth unattached CPC he bought from Guzco.

- Raymundo now appeals the PSC decision. The SC now had to choose which sale to uphold
the execution sale in favor of Luneta or the voluntary fire sale in favor of Raymundo which
was made after the property had been levied upon.
-
- ISSUE (HELD)W/N a Certificate of Public Convenience may be attached and sold on execution
(YES)RATIO The Court decided the case on this sole issue and brushed the other matters
aside, especially considering that the CFI decision with respect to the attachment had
become final.
-
- The SC also brushed aside Raymundos contention that CPCs may not be sold separately from
motor vehicles, giving respect to the policy decision of the PSC allowing sales of CPCs
without motor vehicles. Pertinent laws and decisions do not prohibit the sale of CPCs. This
may be held to extend to involuntary sales. Act 3108, as amended (the Public Service Law) is
 the legal basis for the issuance of CPCs. A CPC granted to an operator of public utility
vehicles grants a right in the nature of a limited franchise (Public Utilities Commission v.
Garviloch).

- CPCs are not included in the Code of Civil Procedure exceptions to what properties may be
attached. Moreover, under the Code, property as defined includes every species of legal
title, inchoate, complete, or even equitable.
- Reyes v. Gray The test by which to determine whether or not property can be attached and
sold upon execution is whether the judgment debtor has such a beneficial interest therein
that he can sell or otherwise dispose of it for value. While the Public Service Law and the
Code of Civil Procedure do not explicitly provide for the attachability of CPCs, Act 667, Sec.
10 and Sec. 56 of the Corporation Law expressly allow for the sale on execution of
franchises. The language of the Code of Civil Procedure is broad enough to include CPCs and
franchises as attachable property which may be sold on execution. Sec. 16 of the Public
Service Law allows the PSC to approve the sale, alienation, mortgaging, encumbering, or
leasing of property, franchises, privileges, or rights or any part thereof. If a CPC may be sold
voluntarily, then there is no reason to hold that it may be sold involuntarily through a court
process.

- CPCs have acquired considerable material value. In many cases, CPCs have become the
cornerstone for the business of bus transportation.
-
- The US SC has held that franchises are property within the protection of the 14th
Amendment of the US Constitution. If the holder of a franchise is guaranteed constitutional
rights of property, there should be no reason for such holder to assume the corresponding
responsibilities or duties of holding such property.

- In practice, the PSC has approved foreclosure sales of CPCs to 3rd parties. The Philippine
Supreme Court has approved attachment of CPCs due to chattel mortgage or court writs.
- The decision of Judge (later Justice) Anacleto Diaz upholding the attachment of the 3 CPCs
has become final, no appeal having been taken. While the sale had to be approved by the
PSC, it nevertheless respected the CFI decision as well. SC, quoting Judge Diaz: "It remains to
be determined whether, under the law, certificates of public convenience are liable to
attachment and seizure by legal process. The law is silent as to this matter. It can not be
denied that such franchises are valuable. They are subject to being sold for a consideration
as much as any other property. They are even more valuable than ordinary properties,
taking into consideration that they are not granted to every one who applies for them but
only to those who undertake to furnish satisfactory and convenient service to the public. It
may also be said that dealers in motor vehicles even extend credit to owners of such
certificates or franchises. The law permits the seizure by means of a writ of attachment not
only of chattels but also of shares and credits. While these franchises may be said to be of
intangible character, they are however of value and are considered properties which can be
seized through legal process. The result therefore, is that CPCs may be sold on execution
sale, and the PSC is authorized to approve the transfer of the CPC to the execution
creditor.DISPOSITION: Decision affirmed.

6. Contract of Carriage
 There is such contract when a person obligates himself to transport persons or property from
one place to another for a consideration. This contract may involve carriage of passengers or of
goods.

7. Bill of Lading – Definition, subject matter, parties, forms and contents

Definition – a written acknowledgment of receipt of goods and an agreement to transport them

to a specific place to a person named or to his order.
Three-fold Nature of a BoL pertains to its functions:
a. RECEIPT of cargo shipped
b. CONTRACT by which the shipper, carrier, and consignee undertake specific responsibilities
and assume obligations
c. EVIDENCE of the existence of the contract of carriage, providing for the terms and conditions
thereof.
d.
Parties
1. Shipper
2. Carrier
3. Consignee – although not a signatory, he/she becomes a party to the contract by reason
of:
a. The relationship of agency between consignee and shipper
b. The unequivocal acceptance of the BoL delivered to the consignee
c. The availment of the stipulation pour au trui (i.e. when the consignee, a third
person, demand before the carrier the fulfillment of a stipulation in the bill of lading
in his favor).

Filing claims
The consignee may refuse to take delivery of the goods and may abandon the goods in certain
cases, viz.:
1. If there was partial non-delivery and you cannot make use of the parts delivered. Like they are
components of an equipment and without the missing parts you cannot use the equipment.
2. If the goods were rendered useless for the purpose for which they were intended. E.g. you
imported a thoroughbred and the legs of the horse were broken during the shipment.
3. If there is delay thru the fault of the carrier

Now, if upon delivery of the goods, it is obvious from the external appearance of the packages that
there were damages, the consignee must immediately file a claim. If that is not apparent from the
external condition of the packages, then he has 24 hours from delivery within which to file a claim.
If the claim is not filed within this period as mentioned in the law, then that will be barred because
compliance with that is a condition precedent for a filing a case in court.

If the goods are to be transshipped, the last carrier to deliver the goods shall be liable for either
damage or loss, even if that occurred while the goods were in the custody of a previous vessel.

8. Rights and Obligations of Shipper and/or consignee (right to damages, amount of damages,
delay, right to abandon, right to change consignment, obligation to pay transportation charges)

Rights and Obligations of Shipper and/or consignee (right to damages, amount of damages,
delay, right to abandon, right to change consignment, obligation to pay transportation charges)
9. What are super cargoes?

A person who discharges administrative duties assigned to him by the ship agent or the shippers,
keeping an account and record of transactions as required in the accounting book of the captain.

10. Averages (Damages) – Specific and General

It includes:
a. All extraordinary or accidental expenses which may be incurred during the
voyage in order to preserve the vessel, the cargo, or both; and
b. Any damages or deteriorations which the vessel may suffer from the time it
puts to sea from the port of departure until it casts anchor in the port of
destination, and those suffered by the merchandise from the time they are
loaded in the port of shipment until they are unloaded in the port of their
consignment.

Classification:
1. Specific/Simple/Particular – a damage or expense caused to the vessel or cargo that did
not inure to the common benefit, and borne by respective owners.
2. General/Gross – a damage or expense which is deliberately caused in order to save the
vessel, its cargo, or both at the same time from real or known risk. The cargo jettison is a
general average.

Requisites:
a. There must be a common danger to the ship and cargo after it has been
loaded
b. A portion of the vessel or some of the cargoes or both are sacrificed
deliberately for the common safety
c. The vessel or cargo is successfully saved
d. The expenses are incurred after taking the formalities provided for in Art.
813, 814 of the Code of Commerce.

11. Charter Parties

In general, a charter party is a contract whereby an entire ship or some principal part of said ship,
is lent by the owner thereof to a merchant or other person for a specified time or use for the
conveyance of goods, in consideration of the payment of freight.

Requisites of a valid charter party:

1. Consent of contracting parties
2. Existing vessel which should be placed at the disposition of the shipper
3. Freight
4. Compliance with Art. 652 of the Code of Commerce:
-in writing
-drawn in duplicate
-signed by the parties
-containing the circumstances required to be contained in the charter party
12. Special Contracts of Maritime Commerce
- Owner Pro Hac Vice (Bareboat Charter)
- Contract of Affreightment (Voyage Charter and Time Charter)

Bareboat Charter (or Demise Charter) – a charter whereby the charterer becomes the owner pro
hac vice of the vessel. Pro Hac Vice means he mans the vessel with his own people, and becomes,
in effect, the owner thereof for the voyage or service stipulated.

Contract of Affreightment – a charter whereby the owner of the vessel leases part or all of its
space to haul goods for others. It is a contract for special service to be rendered by the owner of
the vessel. Under such contract, the ship owner retains the possession, command, and
navigation of the ship, the charterer or freighter merely having use of the space in the vessel in
return for his payment of the charter hire.

Voyage Charter – ship is leased for a single voyage

Time Charter – vessel is leased to the charterer for a fixed period of time

13. Carriage of Goods by Sea Act (COGSA) – delimits the carriage of cargoes on deck for
international travels; delimitation does not apply in domestic shipping; exception

Delimits the carriage of cargoes on deck for international travels; delimitation does not apply in
domestic shipping; exception

Applicability
The transportation must be:
1. Water/marine transportation
2. For the carriage of goods
3. Overseas/international/foreign (from foreign port to Philippine port)

Parties: Carrier and shipper

Amount of Carrier’s Liability

The liability limit is set at $500 per package or customary freight unit unless the nature and value
of such goods is declared by the shipper. This is deemed incorporated in the BoL even if it is not
mentioned in it.

Notice of damage:
1. Patent damage – shipper should file a claim with carrier immediately upon delivery
2. Latent damage – shipper should file a claim with carrier within 3 days from delivery

Loss or Damage
As per COGSA, it contemplates a situation where no delivery at all was made by the shipper of
the goods because the same had perished, gone out of commerce, or disappeared in such a way
that their existence is unknown or they cannot be recovered.
Not lost or damaged if:
a. Misdelivery/delivery to a wrong person
b. Damage arose from delay or late delivery

Action for loss or damage to the cargo should be brought within 1 year after:
a. Delivery of goods (delivered but damaged goods)
b. The date when the goods should have been delivered (non-delivery)
14. Jettison – definition; how is it done; refund for owners of cargoes thrown overboard

Definition – act of throwing cargo overboard in order to lighten the vessel

Order of goods to be cast overboard:

1. Those which are on deck, preferring the heaviest ne with the least utility and value.
2. Those which are below the upper deck, beginning with the one greatest weight and
smallest value.

In order that the jettisoned goods may be included in the gross/general average, the existence of
the cargo on board should be proven by means of the bill of lading.

15. Art. 1732-1735 – Fortuitous events: Defenses of Common carriers if there is damage/injury to
cargoes

Defenses:

1. Force Majeure/Caso Fortuito – extraordinary events which cannot be foreseen, or

which, though foreseen, were inevitable
Requisites:
a. Impossible to foresee, or if foreseen, to avoid
b. Cause of the unforeseen and unexpected occurrence, or failure of debtor to comply
with obligation, must be independent of human will
c. Occurrence must be such as to render it impossible for debtor to fulfill his
obligation in a normal manner
d. Obligor/debtor must be free from any participation in or the aggravation of the
injury resulting to the creditor

2. Acts of Public Enemy

Presupposes the existence of an actual state of war, and refers to the government of a
foreign nation at war with the country to which the carrier belongs, though not
necessarily with that to which the owner of the goods owes allegiance to.
Requisites:
a. Must be the proximate and only cause of the loss
b. Existence of an actual state of war
c. Exercise of due diligence to prevent or minimize the loss before, during or after the
act causing the loss, deterioration or destruction of the goods

3. Negligence of Shipper/Owner
When it is the sole and proximate cause: absolute defense
When it is merely contributory: partial defense
4. Character of the goods or defects in the packaging/container
Even if the damage should be caused by the inherent defect/character of the goods, the
common carrier must exercise due diligence to forestall or lessen the loss.

5. Order or Act of Public Authority

Said public authority must have the power to issue the order, or that it was lawful, or
that it was issued under legal processes of authority.
 Defense is not available if:
- Public authority had no authority
- Public authority exceeded his authority

6. Exercise of due diligence

16. WARSAW Convention

- Prescription of Action
- Liability of Carrier – generally limited to $20/kilo; when is delimitation not enjoyed
- Alitalia v. IAC 1990

Liability of Carrier (in International Air Transportation)

- Passenger
General Rule: 250,000 francs per passenger
Exception: By special contract, the carrier and the passenger may agree to a higher limit of
liability.

- Checked-in cargo or baggage

General rule: 250 francs per kilogram
Exception: In case of special declaration of value and payment of a supplementary by sum by
consignor, the carrier is liable to pay not more than the declared sum unless it proves the
sum is greater than actual value to the consignor at delivery.

- Hand-carried baggage
5,000 francs per passenger

- Goods to be shipped
General rule: $20/kilogram
Exception: In case of special declaration of value and payment of a supplementary sum by
consignor, carrier is liable to pay not more than the declared sum, unless the carrier proves
the sum is greater than the actual value.

NOTE: AN agreement relieving the carrier from liability or fixing lower limit is null and void.

The WARSAW Convention denies to the carrier availment of the provisions which exclude or
limit his liability if the damage is caused by his willful misconduct or by such default on his
part equivalent to willful misconduct, or if the subject is similarly caused by any agent of the
carrier acting within the scope of his employment.

Action for Damages

1. Notice of Claim
In case of damage, the person entitled to make the claim must deliver a written
complaint to the carrier within:
a. Baggage: 7 days from the receipt of the baggage
b. Cargo: 14 days from the receipt of goods
c. In case of delay: 21 days from date on which baggage or cargos has been placed at
his disposal
 The complaint is condition precedent. Without it, no action shall lie against the carrier,
save in the case of fraud on his part.

2. Prescription of Action
The right to damages shall be extinguished if the action is not brought within 2 years
from (SEA):
a. Date on which the carriage STOPPED
b. Date of EXPECTED arrival
c. Date of ARRIVAL at the destination

ALITALIA V IAC
FACTS: Dr. Felipa Pablo, an associate professor in the University of the Philippines and a
research grantee of the Philippine Atomic Energy Agency, was invited to take part at a
meeting of the Department of Research and Isotopes in Italy in view of her specialized
knowledge in “foreign substances in food and the agriculture environment”. She would
be the second speaker on the first day of the meeting. Dr. Pablo booked passage on
petitioner Alitalia. She arrived in Milan on the day before the meeting, but was told that
her luggage was delayed and was in a succeeding flight from Rome to Milan. The luggage
included her materials for the presentation. The succeeding flights did not carry her
luggage. Desperate, she went to Rome to try to locate the luggage herself, but to no avail.
She returned to Manila without attending the meeting. She demanded reparation for the
damages. She rejected Alitalia’s offer of free airline tickets and commenced an action for
damages. As it turned out, the luggage was actually forwarded to Ispra, but only a day
after the scheduled appearance. It was returned to her after 11 months. The trial court
ruled in favor of Dr. Pablo, and this was affirmed by the Court of Appeals.

ISSUES: W/N (1) the Warsaw Convention should be applied to limit Alitalia’s liability; (2)
Dr. Pablo is entitled to nominal damages

RULING: (1) NEGATIVE.

Under the Warsaw Convention, an air carrier is made liable for damages for:
a. The death, wounding or other bodily injury of a passenger if the accident causing
it took place on board the aircraft or I the course of its operations of embarking
or disembarking;
b. The destruction or loss of, or damage to, any registered luggage or goods, if the
occurrence causing it took place during the carriage by air; and
c. Delay in the transportation by air of passengers, luggage or goods.

The convention however denies to the carrier availment of the provisions which exclude
or limit his liability, if the damage is caused by his willful misconduct, or by such default
on his part as is considered to be equivalent to willful misconduct. The Convention does
not thus operate as an exclusive enumeration of the instances of an airline's liability, or
as an absolute limit of the extent of that liability. It should be deemed a limit of liability
only in those cases where the cause of the death or injury to person, or destruction, loss
or damage to property or delay in its transport is not attributable to or attended by any
willful misconduct, bad faith, recklessness, or otherwise improper conduct on the part of
any official or employee for which the carrier is responsible, and there is otherwise no
special or extraordinary form of resulting injury.

In the case at bar, no bad faith or otherwise improper conduct may be ascribed to the
employees of petitioner airline; and Dr. Pablo's luggage was eventually returned to her,
 belatedly, it is true, but without appreciable damage. The fact is, nevertheless, that some
species of injury was caused to Dr. Pablo because petitioner ALITALIA misplaced her
baggage and failed to deliver it to her at the time appointed - a breach of its contract of
carriage. Certainly, the compensation for the injury suffered by Dr. Pablo cannot under
the circumstances be restricted to that prescribed by the Warsaw Convention for delay in
the transport of baggage.

(2) POSITIVE.

She is not, of course, entitled to be compensated for loss or damage to her luggage. She
is however entitled to nominal damages which, as the law says, is adjudicated in order
that a right of the plaintiff, which has been violated or invaded by the defendant, may be
vindicated and recognized, and not for the purpose of indemnifying the plaintiff that for
any loss suffered and this Court agrees that the respondent Court of Appeals correctly set
the amount thereof at PhP 40,000.00.

The Court also agrees that respondent Court of Appeals correctly awarded attorney’s fees
to Dr. Pablo and the amount of PhP 5,000.00 set by it is reasonable in the premises. The
law authorizes recovery of attorney’s fees inter alia where, as here, the defendant’s act
or omission has compelled the plaintiff to litigate with third persons or to incur expenses
to protect his interest or where the court deems it just and equitable.

VII. LETTERS OF CREDIT

Letter of Credit (L/C)

It is any arrangement, however named or described, whereby the issuing bank acting at the request
and on the instructions of a customer (applicant) or on its own behalf, binds itself to: (PAN)
1. Pay to the order of, or accept and pay drafts drawn by a third party (Beneficiary), or
2. Authorize another bank to pay or to accept and pay such drafts, or
3. Authorizes another bank to Negotiate, against stipulated documents.

Provided, the terms and conditions of the credit are complied with (Uniform Customs & Practice for
Documentary Credits, Art. 2).

Independence Principle

The relationship of the buyer and the bank is separate and distinct from the relationship of the
buyer and seller in the main contract; the bank is not required to investigate if the contract
underlying the L/C has been fulfilled or not because in transactions involving L/C, banks deal only
with documents and not goods (BPI v. De Reny Fabric Industries, Inc., L-2481, October 16, 1970).
In effect, the buyer has no course of action against the issuing bank.
Two-Fold nature of the Independence Principle
1. Independence in toto where the credit is independent from the justification aspect and is a
separate obligation from the underlying agreement. This principle is illustrated by standby L/C; or
2. Independence only as to the justification aspect which is identical with the same obligations
under the underlying agreement. This principle is illustrated by a commercial L/C or repayment
standby (Transfield v. Luzon Hydro Corp., supra).

- BPI v. De Reny Fabrics 1970

 1. Kinds of Letters of Credit

COMMERCIAL L/C STANDBY L/C

Involves the payment of money under a
contract of sale.
Payable upon the presentation by the
seller-beneficiary of documents that
show he has taken affirmative steps to
comply with the sales agreement
Involves non-sale transactions.
Payable upon certification by the
beneficiary of the applicant’s non-
performance of the agreement. The
documents that accompany the
beneficiary's draft must
show that the applicant has not
performed the undertaking (Transfield
Philippines, Inc. v. Luzon Hydro Corp.,
supra).

VIII. BULK SALES LAW – purpose

It is an act to regulate the sale, transfer, mortgage or assignment of goods, wares, merchandise,
provisions or materials, in bulk, and prescribing penalties for the violation of the provisions thereof.

Purpose and General Scheme of the Bulk Sales Law

a) The Bulk Sales Act is designed to prevent the defrauding of creditors by the secret sale in bulk of
substantially all of a merchant’s stock of goods;

b) The general scheme of these statutes is to declare such bulk sales fraudulent and void as to creditors
of the vendor, or presumptively so, unless specified formalities are observed, such as the demanding
and the giving of a list of creditors, the giving of actual or constructive notice to such creditors, by
record or otherwise, and the making of an inventory.

IX. WAREHOUSE RECEIPTS – Nature and Characteristics

(a) It has been defined as a written acknowledgment by a warehouseman that he has received and
holds certain goods therein described in store for the person to whom it is issued. (Vannet v. Reilly-
Herr Automobile Co., 173 N.W. 466.)

(b) It has also been defined as a simple written contract between the owner of the goods and the
warehouseman to pay the compensation for that service. (Hale v. Milwaukee Dock Co., 29 Wis. 482,67
C.J. 463.) (2)

Nature and Characteristics

A warehouse receipt is a bilateral contract. It imports goods that are in the hands of a warehouseman
and is a symbolical representation of the property itself.
 It is not a negotiable instrument within the meaning of the Negotiable Instruments Law in the technical
sense that a bill of exchange or promissory note is negotiable, even though the Warehouse Receipts
Act declares it negotiable. Negotiability is provided for by the Act. (see 11 Am. Jur. 2d 35.)

As contracts, obligations arising from warehouse receipts have the force of law between the
contracting parties and must be complied with in good faith pursuant to Article 1159 of the Civil Code.
(Phil. National Bank vs. Se, Jr., 70 SCAD 323,256 SCRA 380 [1996].)

X. TRUST RECEIPTS LAW

1. Definition of Trust receipt

• A trust receipt is a written or printed document whereby the entrustee binds himself:

(1) to hold the designated goods, documents or instruments in trust for the entruster, and

(2) to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over
to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears
in the trust receipt or the goods, documents or instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt. [PD
115, Sec. 4]

A trust receipt transaction is any transaction by and between an entruster and the entrustee, whereby
the entruster (who owns or holds absolute title or security interests over certain specified goods,
documents or instruments) releases the same to the possession of the entrustee upon the latter's
execution and delivery to the entruster of a signed document called a “trust receipt.” [PD 115, Sec. 4]

2. Parties
• Entruster - A lender, financer or creditor. Person holding title over the GDI subject of a TR
transaction; releases possession of the goods upon execution of TR (P.D. 115, Sec. 3[c]).
• Entrustee - A borrower, buyer, importer or debtor. He is the person to whom the goods are
delivered for sale or processing in trust, with the obligation to return the proceeds of sale of
the goods or the goods to the entruster (P.D. 115, Sec. 3[b]).

3. Rights and Duties of Entrustee

OBLIGATION AND LIABILITY OF THE ENTRUSTEE

The entrustee shall have the following obligations:

(1) Hold the goods, documents or instruments in trust for the entruster and shall dispose of them
strictly in accordance with the terms and conditions of the trust receipt;

(2) Receive the proceeds in trust for the entruster and turn over the same to the entruster to the
extent of the amount owing to the entruster or as appears on the trust receipt;

(3) Insure the goods for their total value against loss from fire, theft, pilferage or other casualties;

(4) Keep said goods or proceeds thereof whether in money or whatever form, separate and capable
of identification as property of the entruster;
 (5) Return the goods, documents or instruments in the event of non-sale or upon demand of the
entruster; and

(6) Observe terms and conditions of the trust receipt not contrary to PD 115. [PD 115, Sec. 9]

4. Remedies Available
• UPON DEFAULT OR FAILURE OF THE ENTRUSTEE TO COMPLY WITH THE TERMS AND CONDITIONS
o (a) The entruster may cancel the trust and take possession of the goods, documents or instruments
subject of the trust or of the proceeds realized therefrom.
o (b) The entruster may sell the goods, documents or instruments not less than five days after serving
or sending of the requisite notice, and the entruster may become a purchaser at a public sale.
o (C) The proceeds shall be applied (a) to the payment of the expenses thereof; (b) to the payment
of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the
satisfaction of the entrustee's indebtedness to the entruster. [PD 115, Sec. 7]

• IN CASE OF FAILURE TO TURN OVER THE PROCEEDS OF THE SALE, OR FAILURE TO RETURN IN CASE
OF NON-SALE File a criminal case for estafa under RPC 315, par. 1 (b). [PD 115, Sec. 13]

XI. GENERAL BANKING LAW of 2000

1. Banks and Quasi-Banks

• "Banks" shall refer to entities engaged in the lending of funds obtained in the form of
deposits. (Sec. 3.1)
• Quasi-banks refer to entities engaged in the borrowing of funds through the issuance,
endorsement or assignment with recourse or acceptance of deposit substitutes as
defined in Section 95 of the "New Central Bank Act" for purposes of relending or
purchasing of receivables and other obligations.

2. Classification of Banks
1. Universal banks- Primarily governed by the GBL. They can exercise the powers of an investment
house and invest in non-allied enterprises and have the highest capitalization.
2. Commercial banks- Ordinary banks governed by the GBL which have a lower capitalization
requirement than universal banks and can neither exercise the powers of an investment house nor
invest in non-allied enterprises.
3. Thrift banks – These are a) Savings and mortgage banks; b) Stock savings and loan associations;
and c) Private development banks, which are primarily governed by the Thrift Banks Act (RA 7906).
4. Rural banks – These are mandated to make needed credit available and readily accessible in the
rural areas on reasonable terms and which are primarily governed by the Rural Banks Act of 1992
(RA 7353).
5. Cooperative banks – Banks whose majority shares are owned and controlled by cooperatives
primarily to provide financial and credit services to cooperatives. It shall include cooperative rural
banks. They are governed primarily by the Cooperative Code (RA 6938).
6. Islamic banks – Banks whose business dealings and activities are subject to the basic principles
and rulings of Islamic Shari’ a, such as the Al Amanah Islamic Investment Bank of the Philippines
which was created by RA 6848.
7. Other classification of banks as determined by the Monetary Board of the BSP

3. Authority of the BSP

 The State shall maintain a central monetary authority that shall function and operate as an
independent and accountable body corporate in the discharge of its mandated responsibilities
concerning money, banking and credit. [Sec. 1]

In line with this, the Bangko Sentral ng Pilipinas is:

1) A central monetary authority;
(2) An independent and accountable body;
(3) A government-owned corporation that enjoys fiscal and administrative autonomy. [Secs. 1 &
2, NCBA]

4. Single Borrower’s Limit (SBL)

Limitations imposed upon banks with respect to its loan function
1. GR: Single borrower’s limit – The total amount of loans, credit accommodations and guarantees
that the bank could grant should at no time exceed 25% of the bank’s net worth (GBL, Sec 35.1,
2002 Bar, 2015 Bar).
• XPN:
a) As the Monetary Board may otherwise prescribe for reasons of national interest
b) Deposits of rural banks with GOCC financial institutions like LBP, DBP, and PNB
2. The total amount of loans, credit accommodations and guarantees prescribed in
(A) may be increased by an additional 10% of the net worth of such bank provided that additional
liabilities are adequately secured by trust receipt, shipping documents, warehouse receipts and
other similar documents which must be fully covered by an insurance (GBL, Sec. 35.2).
3. Loans and other credit accommodations secured by REM shall not exceed 75% of the appraised
value of the real estate security plus 60% of the appraised value of the insured improvements (GBL,
Sec. 37) CM/intangible property such as patents, trademarks, etc. shall not exceed 75% of the
appraised value of the security (GBL, Sec. 38).
4. Loans being contractual, the period of payment may be subject to stipulation by the parties. In the
case of amortization, the amortization schedule has no fixed period as it depends on the project
to be financed such that if it was capable of raising revenues, it should be at least once a year with
a grace period of 3 years if the project to be financed is not that profitable which could be deferred
up to 5 years if the project was not capable of raising revenues (GBL, Sec. 44).
5. Loans granted to DOSRI:
a. Director
b. Officer
c. Stockholder, having at least 1% ownership over the bank
d. Related Interests, such as DOS’s spouses, their relatives within the first degree whether
by consanguinity or affinity, partnership whereby DOS is a partner or a corporation where
DOS owns at least 20%.

5. DOSRI
• General rule [Sec. 36, GBL]: No director or officer of any bank
o (1) Shall, directly or indirectly, for himself or as the representative or agent of others,
borrow from such bank, nor
o (2) Shall he become a guarantor, endorser or surety for loans from such bank to others,
or in any manner be an obligor or incur any contractual liability to the bank

• Exceptions [SEC. 36, GBL]:

o (1) Valid insider lending;
o (2) Loans, credit accommodations and guarantees extended by a cooperative bank to its
cooperative shareholders.
XII. NEW CENTRAL BANK ACT

1. Composition of Monetary Board

• The MB shall be composed of 7 members appointed by the President with a 6-year term.
[Sec. 6, NCBA]
o MEMBERS:
(1) The BSP Governor or his designated alternate (a deputy governor);
(2) A Cabinet member to be designated by the President or his designated
alternate (an Undersecretary in his department); and
(3) 5 members from the private sector [Sec.6, NCBA]

2. Handling of Banks in Distress

a. Illiquidity – occurs when the bank is not liquid. It means that the bank cannot meet its
current liabilities.
b. Liquidity is the ability of an asset to be converted into cash. An entity is liquid when it is
able to pay its liabilities when they fall due.

✓ Illiquidity is handled by conservatorship.

c. Insolvency – When the actual market value of assets are insufficient to pay its liabilities,
not considering capital stock and surplus which are not liabilities for such purpose. An
entity is insolvent when it is unable to meet current and long-term obligations.
✓ In contrast, a bank is solvent when current assets are more than current
liabilities, providing the ability to pay debts. It is able to meet its long term
obligations/liabilities.
✓ Insolvency is handled by receivership and/or closure.

XIII. LAW on SECRECY of BANK DEPOSITS

1. Secrecy of Bank Deposits

- Salvacion v. CA
F: Bartelli, an American tourist, was arrested for committing four counts of rape and serious illegal
detention against Salvacion. Police recovered from him several dollar checks and a dollar account in
the China Banking Corp. He was, however, able to escape from prison. In a civil case filed against him,
the trial court awarded Salvacion moral, exemplary and attorney’s fees amounting to almost
P1,000,000.00.

Salvacion tried to execute the judgment on the dollar deposit of Bartelli with the China Banking Corp.
but latter refused arguing that Section 11 of Central Bank Circular No. 960 exempts foreign currency
deposits from attachment, garnishment, or any other order or process of any court, legislative body,
government agency or any administrative body whatsoever.
I: Should Section 113 of Central Bank Circular No. 960 and Section 8 of Republic Act No. 6426, as
amended by PD 1246, otherwise known as the Foreign Currency Deposit Act be made applicable to a
Bartelli

R: NO. the application of the law depends on the extent of its justice. Eventually, if we rule that the
questioned Section 113 of Central Bank Circular No. 960 which exempts from attachment, garnishment,
or any other order or process of any court, legislative body, government agency or any administrative
body whatsoever, is applicable to a foreign transient, injustice would result especially to a citizen
aggrieved by a foreign guest like accused Greg Bartelli. This would negate Article 10 of the New Civil
Code which provides that “in case of doubt in the interpretation or application of laws, it is presumed
that the lawmaking body intended right and justice to prevail.”
 2.. Purpose
(1) To encourage the people to deposit their money in banks
(2) To discourage private hoarding, so that the funds can be used by the bank to grant loans
to assist in economic development.

The absolute confidentiality rule in R.A. No. 1405 actually aims at protection from
unwarranted inquiry or investigation if the purpose of such inquiry or investigation is merely
to determine the existence and nature, as well as the amount of the deposit in any given bank
account.[China Banking Corporation v. Ortega, G.R. No. L-34964 (1973)]

3. Prohibited Acts
(1) Examination, inquiry, or looking into deposits by persons, government officials, bureaus,
or offices; [Sec. 2, RA 1405]
(2) Disclosure by banking institutions' officials or employees to unauthorized persons
regarding information about covered accounts. [Sec. 3, RA 1405]

4. Exceptions
Deposits:
(1) Upon written permission of the depositor
(2) In cases of impeachment
(3) Upon order of competent court in cases of bribery and dereliction of duty.
(4) In cases where the money deposited or invested is the subject matter of litigations
XIV. ANTI-MONEY LAUNDERING ACT

1. Suspicious Transactions & Covered Institutions

• Suspicious transaction
o Transactions with covered institutions, regardless of the amounts involved,
where any of the following circumstances exist:
▪ (1) There is no underlying legal or trade obligation, purpose or
economic justification;
▪ (2) The client is not properly identified;
▪ (3) The amount involved is not commensurate with the business or
financial capacity of the client;
▪ (4) Taking into account all known circumstances, it may be perceived
that the client’s transaction is structured in order to avoid being the
subject of reporting requirements under the Act;
▪ (5) Any circumstance relating to the transaction which is observed to
deviate from the profile of the client and/or the
▪ client’s past transactions with the covered institution;
▪ (6) The transaction is in anyway related to an unlawful activity or
offense under this Act that is about to be, is being or has been
committed; or
▪ (7) Any transaction that is similar or analogous to any of the foregoing
(Sec. 3 [b-1], added by Sec. 2 of RA 9194)

• NOTE: Covered “Institutions” was changed to Covered “Persons”

a. Covered persons, natural or juridical, refer to:
1. banks, non-banks, quasi-banks, trust entities, foreign exchange dealers, pawnshops,
money changers, remittance and transfer companies and other similar entities and all
otherpersons and their subsidiaries and affiliates supervised or regulated by the Bangko
Sentral ng Pilipinas (BSP);
 2. insurance companies, pre-need companies and all other personssupervised or
regulated by the Insurance Commission (IC);

3. (i) securities dealers, brokers, salesmen, investment houses and other similar persons
managing securities or rendering services as investment agent, advisor, or consultant,
(ii) mutual funds, close-end investment companies, common trust funds, and other
similar persons, and
(iii) other entities administering or otherwise dealing in currency, commodities or
financial derivatives based thereon, valuable objects, cash substitutes and other similar
monetary instruments or property supervised or regulated by theSecurities and Exchange
Commission (SEC);

4. jewelry dealers in precious metals, who, as a business, trade in precious metals, for
transactions in excess of One million pesos (P1,000,000.00);

5. jewelry dealers in precious stones, who, as a business, trade in precious stones, for
transactions in excess of One million pesos (P1,000,000.00);

6. company service providers which, as a business, provide any of the following services
to third parties:

7. acting as a formation agent of juridical persons; acting as (or arranging for another
person to act as) a director or corporate secretary of a company, partner of a partnership,
or a similar position in relation to other juridical persons; providing a registered office,
business address or accommodation, correspondence or administrative address for a
company, a partnership or any other legal person or arrangement; and acting as (or
arranging for another person to act as) a nominee shareholder for another person; and

8. persons who Provide any Of the following services:

i. managing of client money, securities or other assets;

ii. management of bank, savings or securities accounts;
iii. organization of contributions for the creation, operation or management of
companies; and
iv. creation, operation or management of juridical persons or arrangements, and
buying and selling business entities.

Exclusions: The term ‘covered persons’ shall exclude lawyers and accountants

Requisites for exclusion

1. Acting as independent legal professionals
2. In relation to information concerning their clients or
3. Where disclosure of information wouldcompromise client confidences or the attorney-
client relationship. (RA 10365, Sec. 1, amending RA 9160, Sec. 3[a]).

2. Unlawful Activities
i) ‘Unlawful activity’ refers to any act or omission or series or combination thereof involving
or having direct relation to the following:

"(1) Kidnapping for ransom,

"(2) Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16 of Republic Act No. 9165, otherwise
known as the Comprehensive Dangerous Drugs Act of 2002;
 "(3) Section 3 paragraphs B, C, E, G, H and I of Republic Act No. 3019, as amended, otherwise
known as the Anti-Graft and Corrupt Practices Act;
"(4) Plunder
"(5) Robbery and extortion
"(6) Jueteng and Masiao punished as illegal gambling;
"(7) Piracy on the high seas
"(8) Qualified theft
"(9) Swindling
"(10) Smuggling;
"(11) Violations of Republic Act No. 8792, otherwise known as the Electronic Commerce Act
of 2000;
"(12) Hijacking; destructive arson and murder;
"(13) Terrorism and conspiracy to commit terrorism
"(14) Financing of terrorism
"(15) Bribery
"(16) Frauds and Illegal Exactions and Transactions
"(17) Malversation of Public Funds and Property
"(18) Forgeries and Counterfeiting
"(19) Violations ofthe Anti-Trafficking
"(20) Violations of Revised Forestry Code of the Philippines, as amended;
"(21) Violations of the Philippine Fisheries Code of 1998
"(22) Violations of Philippine Mining Act of 1995;
"(23) Violations of Wildlife Resources Conservation and Protection Act;
"(24) Violation of National Caves and Cave Resources Management Protection Act;
"(25) Violation of Anti-Carnapping Act
"(26) Violations of Laws on Illegal/Unlawful Possession, Manufacture, Dealing In, Acquisition
or Disposition of Firearms, Ammunition or Explosives;
"(27) Violation of Anti-Fencing Law;
"(28) Violation of Migrant Workers and Overseas Filipinos Act of 1995,"(29) Violation of
Intellectual Property Code of the Philippines;
"(30) Violation of Anti-Photo and Video Voyeurism Act of 2009;
"(31) Violation of Anti-Child Pornography Act of 2009;
"(32) Violation of the Special Protection of Children Against Abuse, Exploitation and
Discrimination;
"(33) Fraudulent practices and other violations under Securities Regulation Code of 2000;
and
"(34) Felonies or offenses of a similar nature that are punishable under the penal laws of
other countries."

XV. INTELLECTUAL PROPERTY CODE (IP Code)

Sec. 4.1 – What does the term IP Rights consist of?

Rationale behind the Intellectual Property Code
The Intellectual Property Code (IPC, for brevity) breathes life to Sec. 13, Art. XIV of the Constitution
which mandates that the State shall protect and secure the exclusive rights of scientists, investors,
artists and other gifted citizens to their intellectual property and creations, particularly when
beneficial to the people, for such period as may be provided by law.
The State recognizes that an effective intellectual and industrial property system is vital to the
development of domestic and creative activity, facilitates transfers of technology and attracts foreign
investments and ensures market access for our products. (IPC, Sec. 2)
Coverage of intellectual property rights
1. Copyright and Related Rights;
2. Trademarks and Service Marks;
3. Geographic indications;
4. Industrial designs;
5. Patents;
6. Layout designs (Topographies) of Integrated Circuits;
7. Protection of Undisclosed Information (TRIPS).

Basic principles
National Treatment - A Member country shall accord to the nationals of other Member countries
treatment no less favorable than it accords to its own national with regard to the protection of
intellectual property.
1. Most Favored Nation - Any advantage, favor, privilege or immunity granted by a
Member to the nationals of any other country shall be accorded immediately and
unconditionally to the nationals of all other Members.

2. What are patentable?

Patentable inventions
Any technical solution of a problem in any field of human activity which is:
a. new;
b. involves an inventive step;
c. and is industrially applicable.

It may be, or may relate to, a product, or process, or an improvement of any of the foregoing (IPC,
Sec. 21).
Criteria for Patentability
1. Novelty – An invention shall not be considered new if it forms part of a prior art (Sec. 23, IPC).

2. Inventive Step –if, having regard to prior art, it is not obvious to a person skilled in the art at
the time of the filing date or priority date of the application claiming the invention.

3. Industrially Applicable – An invention that can be produced and used in any industry (IPC, Sec.
27).

The burden of proving want of novelty of an invention is on the person who avers it and the
burden is a heavy one which is met only by clear and satisfactory proof which overcomes every
reasonable doubt (Manzano v. CA, G.R. No. 113388, Sept. 5, 1997).

3. Sec. 22 – Exclusions from Patent Protection

4. Sec. 29 – First to file rule

1. If two (2) or more persons have made the invention separately and independently of each
other, the right to the patent shall belong to the person who filed an application for such
invention, or
2. Where two or more applications are filed for the same invention, to the applicant which has
the earliest filing date (IPC, Sec. 29).

5. Sec. 31 – Right of Priority

Priority date
An application for patent filed by any person who has previously applied for the same invention
in another country which by treaty, convention, or law affords similar privileges to Filipino
 citizens, shall be considered as filed as of the date of filing the foreign application(IPC, Sec. 31).

Filing Date is accorded only when all the requirements provided under Section 40 are present.
Priority Date comes into play when there is

6. Sec. 76 – Patent Infringement

Civil Infringement
The making, using, offering for sale, selling, or importing a patented product or a product
obtained directly or indirectly from a patented process, or the use of a patented process without
the authorization of the patentee constitutes patent infringement.
Exemptions:
a. Parallel importation for patented drugs and medicines;

Parallel importer is one who imports, distributes, and sells genuine products in the market,
independently of an exclusive distributorship or agency agreement with the manufacturer;
b. In the case of drugs and medicines, where the act includes testing, using, making or selling the
invention including any data related thereto, solely for purposes reasonably related to the
development and submission of information and issuance of approvals by government regulatory
agencies required under any law of the Philippines or of another country that regulates the
manufacture, construction, use or sale of any product;

c. Use of Invention by Government;

d. Compulsory licensing; and
e. Procedures on Issuance of a Special Compulsory License under the TRIPS Agreement for
patented drugs and medicines.

Contributory Infringement
Anyone who actively induces the infringement of a patent or provides the infringer with a
component of a patented product or of a product produced because of a patented process
knowing it to be especially adopted for infringing the patented invention and not suitable for
substantial non-infringing use shall be liable as a contributory infringer and shall be jointly and
severally liable with the infringer. (Sec. 76.6, IPC)
Criminal Infringement

If infringement is repeated by the infringer or by anyone in connivance with him after finality of
the judgment of the court against the infringer, the offenders shall, without prejudice to the
institution of a civil action for damages, be criminally liable. (IPC, Sec. 84)

The criminal liability will arise only if the infringement is repeated, even if after the finality of
judgment of the court in the civil action against the infringer or anyone in connivance with him,

7. Is there a criminal action for infringement of a patent? When does it happen?

Criminal Infringement
If infringement is repeated by the infringer or by anyone in connivance with him after finality of
the judgment of the court against the infringer, the

- Sony Computer v. Super Green Inc. 2007

8. Trademarks

DEFINITION OF MARKS, COLLECTIVE MARKS, TRADE NAMES

Trademark means any visible sign capable of distinguishing the goods (trademark) or services
(service mark) of an enterprise and shall include a stamped or marked container of goods.

Collective mark means any visible sign designated as such in the application for registration and
capable of distinguishing the origin or any other common characteristic, including the quality of
goods or services of different enterprises which use the sign under the control of the registered
owner of the collective mark.

Trade name means the name or designation identifying or distinguishing an enterprise. (IPC, Sec.
121.1, 121.2, 121.3)

- Mcdonald’s corp. v. LC Big Mak Burger Inc., et al. 437 SCRA 10 (2004)
9. Unfair competition

Employing deception or any other means contrary to good faith by which a person passes off his
goods or business or services for those of one who has already established goodwill thereto. (IPC,
Sec. 168.2)

It is the passing off (or palming off) or attempting to pass off upon the public of the goods or
business of one person as the goods or business of another with the end and probable effect of
deceiving the public. Passing off (or palming off) takes place where the defendant, by imitative
devices on the general appearance of the goods, misleads prospective purchasers into buying his
merchandise under the impression that they are buying that of his competitors. Thus, the
defendant gives his goods the general appearance of the goods of his competitor with the
intention of deceiving the public that the goods are those of his competitor. (Republic Gas
Corporation v. Petron Corporation, G. R. No. 194062, June 17, 2013)

INFRINGEMENT OF UNFAIR
TRADEMARK COMPETITION
Unauthorized use of a trademark. The passing off of one’s goods as those of
another.
Fraudulent intent is unnecessary. Fraudulent intent is essential.
GR: Prior registration of the trademark is Registration is not necessary. (Del Monte
a prerequisite to the action. Corp. v. CA, G.R. No. 78325, January 23,
XPN: Well-known marks 1990)

- Del Monte Corp., et al, v. CA 181 SCRA 410

10. Copyright

Copyright
A right over literary and artistic works which are original intellectual creations in the literary and
artistic domain protected from the moment of creation (IPC, Sec. 171.1).

Copyrightable works

1. Literary and Artistic Works

a. Books, pamphlets, articles and other writings
b. Lectures, sermons, addresses, dissertations prepared for Oral delivery, whether or not reduced
in writing or other material form
c. Letters
d. Dramatic, choreographic works
e. Musical compositions
f. Works of Art
g. Periodicals and Newspapers
h. Works relative to Geography, topography, architecture or science
i. Works of Applied art
j. Works of a Scientific or technical character
k. Photographic works
l. Audiovisual works and cinematographic works
m. Pictorial illustrations and advertisements
n. Computer programs; and
o. Other literary, scholarly, scientific and artistic works (IPC, Sec. 172.1).

2. Derivative Works

a. Dramatizations, translations, adaptations, abridgements, arrangements, and other alterations

of literary or artistic works;

b. Collections of literary, scholarly, or artistic works and compilations of data and other materials
which are original by reason of the selection or coordination or arrangement of their contents
(IPC, Sec. 173).

Derivative works shall be protected as new works, provided that such new work shall not affect
the force of any subsisting copyright upon the original works employed or any part thereof, or be
construed to imply any right to such use of the original works, or to secure or extend copyright in
such original works (IPC, Sec. 173.2).

Non-copyrightable works
1. Idea, procedure, system, method or operation, concept, principle, discovery or mere data as
such
2. News of the day and other items of press information
3. Any official text of a legislative, administrative or legal nature, as well as any official translation
thereof
4. Pleadings
5. Decisions of courts and tribunals – this refers to original decisions and not to annotated
decisions such as the SCRA or SCAD as these already fall under the classification of derivative
works, hence copyrightable
6. Any work of the government of the Philippines

GR: Conditions imposed prior the approval of the government agency or office wherein the work
is created shall be necessary for exploitation of such work for profit. Such agency or office, may,
among other things, impose as condition the payment of royalties.
XPN: No prior approval or conditions shall be required for the use of any purpose of statutes,
rules and regulations, and speeches, lectures, sermons, addresses, and dissertations,
pronounced, read, or rendered in courts of justice, before administration agencies, in
deliberative assemblies and in meetings of public character (IPC, Sec. 176).
7. TV programs, format of TV programs (Joaquin v. Drilon, G.R. No. 108946, Jan. 28, 1999)
8. Systems of bookkeeping; and
 9. Statutes.

11. Fair use doctrine

“Fair use” permits a secondary use that “serves thecopyright objective of stimulating productive
thought and public instruction without excessively diminishing the incentives for creativity”.

The fair use of a copyrighted work for criticism, comment, news reporting, teaching including
limited number of copies for classroom use, scholarship, research, and similar purposes is not an
infringement of copyright.

Decompilation may be considered fair use Decompilation, which is the reproduction of the code
and translation of the forms of the computer program to achieve the inter-operability of an
independently created computer program with other programs, may also constitute fair use
under the criteria established Sec. 185, to the extent that
such decompilation is done for the purpose of obtaining the information necessary to achieve
such interoperability (IPC, Sec. 185).