Letters of Credit: 1. Explain The Various Transactions Giving Rise To A Letter of Credit

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Letters of Credit negotiating bank purchases or discounts the

drafts. Meanwhile, a confirming bank may honor
1. Explain the various transactions giving rise the letter of credit issued by another bank or
to a letter of credit. confirms that the letter of credit will be honored
by the issuing bank. A confirming bank
In simpler terms, the various transactions that essentially insures that the credit will be paid in
give rise to a letter of credit proceed as follows: accordance with the terms of the letter of
Once the seller ships the goods, he or she obtains credit.82 It therefore assumes a direct obligation
the documents required under the letter of to the seller-beneficiary. Parenthetically, when
credit. He or she shall then present these banks are involved in letters of credit
documents to the issuing bank which must then transactions, the standard of care imposed on
pay the amount identified under the letter of banks engaged in business imbued with public
credit after it ascertains that the documents are interest applies to them. Banks have the duty to
complete. The issuing bank then holds on to act with the highest degree of diligence in dealing
these documents which the buyer needs in order with clients. 84 Thus, in dealing with the parties
to claim the goods shipped. The buyer in a letter of credit, banks must also observe this
reimburses the issuing bank for its payment at degree of care. [The Hongkong & Shanghai
which point the issuing bank releases the Banking Corporation, Limited Vs. National Steel
documents to the buyer. The buyer is then able to Corporation and Citytrust Banking Corporation,
present these documents in order to claim the G.R. No. 183486. February 24, 2016]
goods. At this point, all the transactions are
completed. The seller received payment for his or 2. What rules are applicable to letters of
her performance of his obligation to deliver the credit?
goods. The issuing bank is reimbursed for the
payment it made to the seller. The buyer received Letters of credit are defined and their incidences
the goods purchased. regulated by Articles 567 to 572 of the Code of
Commerce. These provisions must be read with
Owing to the complexity of these contracts, there Article 2 of the same code which states that acts
may be a correspondent bank which facilitates of commerce are governed by their provisions, by
the ease of completing the transactions. A the usages and customs generally observed in the
correspondent bank may be a notifying bank, a particular place and, in the absence of both rules,
negotiating bank or a confirming bank depending by civil law. In addition, Article 50 also states that
on the nature of the obligations assumed. A commercial contracts shall be governed by the
notifying bank undertakes to inform the seller- Code of Commerce and special laws and in their
beneficiary that a letter of credit exists. It may absence, by general civil law. The International
also have the duty of transmitting the letter of Chamber of Commerce (ICC) drafted a set of rules
credit. As its obligation is limited to this duty, it to govern transactions involving letters of credit.
assumes no liability to pay under the letter of This set of rules is known as the Uniform
credit. A negotiating bank, on the other hand, Customs and Practice for Documentary Credits
purchases drafts at a discount from the seller- (UCP). Since its first issuance in 1933, the UCP
beneficiary and presents them to the issuing has seen several revisions, the latest of which
bank for payment. Prior to negotiation, a was in 2007, known as the UCP 600. However, for
negotiating bank has no obligation. A contractual the period relevant to this case, the prevailing
relationship between the negotiating bank and version is the 1993 revision called the UCP 400.
the seller-beneficiary arises only after the Throughout the years, the UCP has grown to

Starr Weigand 2016|Commercial Law

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become the worldwide standard in transactions receipt transaction penalized under Sec. 13 of PD
involving letters of credit. It has enjoyed near 115 in relation to Art. 315, par. 1(b) of the RPC,
universal application with an estimated 95% of as the only obligation actually agreed upon by the
worldwide letters of credit issued subject to the parties would be the return of the proceeds of the
UCP. Thus, letters of credit are governed sale transaction. This transaction becomes a
primarily by their own provisions, by laws mere loan, where the borrower is obligated to
specifically applicable to them, and by usage and pay the bank the amount spent for the purchase
custom. Consistent with our rulings in several of the goods. In this case, the dealing between
cases, usage and custom refers to UCP 400. When HTY and M Bank was not a trust receipt
the particular issues are not covered by the transaction but one of simple loan. HTY’s
provisions of the letter of credit, by laws admission––that he signed the trust receipts on
specifically applicable to them and by UCP 400, behalf of S Corp., which failed to pay the loan or
our general civil law finds suppletory application. turn over the proceeds of the sale or the goods to
[Ibid.] M Bank upon demand––does not conclusively
Trust Receipts Law prove that the transaction was, indeed, a trust
receipts transaction. In contrast to the
1. S Corp. obtained letters of credit from M nomenclature of the transaction, the parties
Bank to cover its purchase of construction really intended a contract of loan. It has been
materials. M Bank required HTY, ruled that the fact that the entruster bank knew
representative of S Corp. to sign 24 trust even before the execution of the trust receipt
receipts as security for the construction agreements that the construction materials
materials and to hold those materials or covered were never intended by the entrustee for
the proceeds of the sales in trust for M resale or for the manufacture of items to be sold
Bank to the extent of the amount stated in is sufficient to prove that the transaction was a
the trust receipts. S Corp. defaulted thus M simple loan and not a trust receipts transaction.
Bank filed a criminal action against HTY for [Hur Tin Yang v. People of the Philippines,G.R. No.
estafa. Can HTY be held liable for estafa 195117, August 14, 2013]
under the trust receipts law?
2. Spouses dela Cruz was in the business of
No. A trust receipt transaction is one where the selling fertilizers and agricultural
entrustee has the obligation to deliver to the products, for which they were granted a
entruster the price of the sale, or if the credit line by PPI, and to secure it, trust
merchandise is not sold, to return the receipts were issued covering the goods to
merchandise to the entruster. There are, be paid for by using the credit line. The
therefore, two obligations in a trust receipt trust receipts contained the following: “In
transaction: the first refers to money received the event, I/We cannot deliver/serve to the
under the obligation involving the duty to turn it farmer-participants all the inputs as
over (entregarla) to the owner of the enumerated above within 60 days, then
merchandise sold, while the second refers to the I/We agree that the undelivered inputs will
merchandise received under the obligation to be charged to my/our credit line, in which
“return” it (devolvera) to the owner. When both case, the corresponding adjustment of
parties enter into an agreement knowing fully price and interests shall be made by PPI.” Is
well that the return of the goods subject of the there a trust receipt transaction?
trust receipt is not possible even without any
fault on the part of the trustee, it is not a trust


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No. The contract, its label notwithstanding, was that D Corp. did not use the loan proceeds
not a trust receipt transaction in legal for their intended purpose. GSIS alleged
contemplation or within the purview of the Trust that D Corp., with Westmont Bank as the
Receipts Law such that its breach would render conduit, transferred the U.S. $11 Million
the Spouses criminally liable for estafa. Under loan proceeds from the Industrial Bank of
Section 4 of the Trust Receipts Law, the sale of Korea to Citibank New York account of
goods by a person in the business of selling goods Westmont Bank and from there to the
for profit who, at the outset of the transaction, Binondo Branch of Westmont Bank. The
has, as against the buyer, general property rights Banks filed a complaint before the RTC
in such goods, or who sells the goods to the buyer against D Corp. and GSIS. In the course of
on credit, retaining title or other interest as the hearing, GSIS requested for the
security for the payment of the purchase price, issuance of a subpoena duces tecum to the
does not constitute a trust receipt transaction custodian of records of Westmont Bank to
and is outside the purview and coverage of the produce several documents relating to the
law. The sale of goods, documents or instruments foreign currency deposit transactions of D
by a person in the business of selling goods, Corp. with the bank. The subpoena was
documents or instruments for profit who, at the issued by the RTC, which prompted D Corp.
outset of the transaction, has, as against the to ask for its quashal because it will violate
buyer, general property rights in such goods, the Law on Secrecy of Bank Deposits.
documents or instruments, or who sells the same Should the motion to quash be granted?
to the buyer on credit, retaining title or other
interest as security for the payment of the Yes. Republic Act No. 1405 (Bank Secrecy Law)
purchase price, does not constitute a trust receipt was enacted in 1955. Section 2 thereof was first
transaction and is outside the purview and amended by Presidential Decree No. 1792 in
coverage of this Decree. When both parties enter 1981 and further amended by Republic Act No.
into an agreement knowing that the return of the 7653 in 1993, which provides that all deposits of
goods subject of the trust receipt is not possible whatever nature with banks or banking
even without any fault on the part of the trustee, institutions in the Philippines including
it is not a trust receipt transaction penalized investments in bonds issued by the Government
under Section 13 of P.D. 115; the only obligation of the Philippines, its political subdivisions and
actually agreed upon by the parties would be the its instrumentalities, are hereby considered as of
return of the proceeds of the sale transaction. an absolutely confidential nature and may not be
This transaction becomes a mere loan, where the examined, inquired or looked into by any person,
borrower is obligated to pay the bank the amount government official, bureau or office, except upon
spent for the purchase of the goods. [Spouses Dela written permission of the depositor, or in cases
Cruz v. Planters Products, Inc., G.R. No. 158649, of impeachment, or upon order of a competent
February 18, 2013] court in cases of bribery or dereliction of duty of
public officials, or in cases where the money
Banking Law deposited or invested is the subject matter of the
litigation.
1. D Corp. obtained a surety bond from GSIS
to secure the payment of a loan from the Section 8 of Republic Act No. 6426 (Foreign
several banks. D Corp. failed to comply Currency Deposit Act), which was enacted in
with its loan obligations with the banks, 1974, and amended by Presidential Decree No.
and GSIS refused pay the banks arguing 1035 and later by Presidential Decree No. 1246,


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provides that all foreign currency deposits are 6426 was intended to encourage deposits from
declared as and considered of an absolutely foreign lenders and investors. It is a special law
confidential nature and, except upon the written designed especially for foreign currency deposits
permission of the depositor, and in no instance in the Philippines. A general law does not nullify
shall foreign currency deposits be examined, a specific or special law. Generalia specialibus non
inquired or looked into by any person, derogant. Therefore, it is beyond cavil that
government official, bureau or office whether Republic Act No. 6426 applies in this case. Thus,
judicial or administrative or legislative or any for foreign currency deposits, such as U.S. dollar
other entity whether public or private. And the deposits, the applicable law is Republic Act No.
law also provides that said foreign currency 6426, which requires that written permission
deposits shall be exempt from attachment, from the depositor must first be obtained before
garnishment, or any other order or process of the bank can be legally be compelled to disclose
any court, legislative body, government agency or deposits of its depositor, otherwise, it will
any administrative body whatsoever. expos3e itself to criminal liability. In this case,
since there is no showing that D Corp. gave
On the one hand, Republic Act No. 1405 provides written permission, its bank cannot be compelled
for four (4) exceptions when records of deposits to disclose its deposits. [Government Service
may be disclosed. These are under any of the Insurance System v. Court of Appeals, G.R. No.
following instances: a) upon written permission 189026, June 8, 2011]
of the depositor, (b) in cases of impeachment, (c)
upon order of a competent court in the case of 2. Can the account of a depositor be made the
bribery or dereliction of duty of public officials subject of a waiver of bank secrecy laws,
or, (d) when the money deposited or invested is with the waiver being a mere provision in a
the subject matter of the litigation, and e) in compromise agreement involving parties
cases of violation of the Anti-Money Laundering other than the depositor himself?
Act (AMLA), the Anti-Money Laundering Council
(AMLC) may inquire into a bank account upon No. Section 2 of R.A. No. 1405, the Law on Secrecy
order of any competent court. On the other hand, of Bank Deposits enacted in 1955, was first
the lone exception to the non-disclosure of amended by Presidential Decree No. 1792 in
foreign currency deposits, under Republic Act No. 1981 and further amended by R.A. No. 7653 in
6426, is disclosure upon the written permission 1993. It now reads:
of the depositor. These two laws both support
the confidentiality of bank deposits. There is no SEC. 2. All deposits of whatever nature with
conflict between them. Republic Act No. 1405 banks or banking institutions in the
was enacted for the purpose of giving Philippines including investments in bonds
encouragement to the people to deposit their issued by the Government of the Philippines,
money in banking institutions and to discourage its political subdivisions and its
private hoarding so that the same may be instrumentalities, are hereby considered as of
properly utilized by banks in authorized loans to an absolutely confidential nature and may not
assist in the economic development of the be examined, inquired or looked into by any
country. It covers all bank deposits in the person, government official, bureau or office,
Philippines and no distinction was made between except when the examination is made in the
domestic and foreign deposits. Thus, Republic course of a special or general examination of a
Act No. 1405 is considered a law of general bank and is specifically authorized by the
application. On the other hand, Republic Act No. Monetary Board after being satisfied that


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there is reasonable ground to believe that a must be positively demonstrated since a waiver
bank fraud or serious irregularity has been or by implication is not normally countenanced.
is being committed and that it is necessary to The norm is that a waiver must not only be
look into the deposit to establish such fraud or voluntary, but must have been made knowingly,
irregularity, or when the examination is made intelligently, and with sufficient awareness of the
by an independent auditor hired by the bank relevant circumstances and likely consequences.
to conduct its regular audit provided that the There must be persuasive evidence to show an
examination is for audit purposes only and the actual intention to relinquish the right. Mere
results thereof shall be for the exclusive use of silence on the part of the holder of the right
the bank, or upon written permission of the should not be construed as a surrender thereof;
depositor, or in cases of impeachment, or upon the courts must indulge every reasonable
order of a competent court in cases of bribery presumption against the existence and validity of
or dereliction of duty of public officials, or in such waiver. [Dona Adela International, Inc. v.
cases where the money deposited or invested Trade Investment Development Corporation, G.R.
is the subject matter of the litigation. No. 201931, February 11, 2015]

R.A. No. 1405 provides for exceptions when 3. G Corp. obtained a loan from DBP bank to
records of deposits may be disclosed. These are finance its development of a resort
under any of the following instances: (a) upon complex. To secure it, a promissory note
written permission of the depositor, (b) in cases was executed by the G Corp. and mortgages
of impeachment, (c) upon order of a competent were constituted on its properties. Also, a
court in the case of bribery or dereliction of duty cash equity was put up. The loan was
of public officials or, (d) when the money released to G Corp. in tranches, but DBP
deposited or invested is the subject matter of the eventually refused to release the balance
litigation, and (e) in cases of violation of the Anti- thereof, alleging that it failed to develop
Money Laundering Act, the Anti-Money the said resort complex. DBP then foreclose
Laundering Council may inquire into a bank the mortgages, which prompted G Corp. to
account upon order of any competent court. file an action for specific performance
against DBP. Was it proper for DBP to
In this case, the compromise agreement did not foreclose the mortgages?
involve the depositor. There was no written
consent given by the depositor or its No. Considering that it had yet to release the
representatives, that it is waiving the entire proceeds of the loan, DBP could not yet
confidentiality of its bank deposits. The provision make an effective demand for payment upon G
on the waiver of the confidentiality of bank Corp. to perform its obligation under the loan.
deposits was merely inserted in the agreement. Being a banking institution, DBP owed it to G
It is clear therefore that the depositor is not Corp. to exercise the highest degree of diligence,
bound by the said provision since it was without as well as to observe the high standards of
the express consent of the depositor who was not integrity and performance in all its transactions
a party and signatory to the said agreement. because its business was imbued with public
interest. The high standards were also necessary
Neither can the depositor be deemed to have to ensure public confidence in the banking
given its permission by failure to interpose its system. The stability of banks largely depends on
objection during the proceedings. It is an the confidence of the people in the honesty and
elementary rule that the existence of a waiver efficiency of banks. Thus, DBP had to act with


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great care in applying the stipulations of its degree of obligation to treat the accounts of its
agreement with G Corp., lest it erodes such public depositors with meticulous care, always having
confidence. Yet, DBP failed in its duty to exercise in mind the fiduciary nature of banking. The
the highest degree of diligence by prematurely banking system has become an indispensable
foreclosing the mortgages and unwarrantedly institution in the modern world and plays a vital
causing the foreclosure sale of the mortgaged role in the economic life of every civilized
properties despite G Corp. not being yet in societybanks have attained a ubiquitous
default. [Development Bank of the Philippines presence among the people, who have come to
(DBP) v. Guariña Agricultural and Realty regard them with respect and even gratitude and
Development Corporation, G.R. No. 160758. most of all, confidence, and it is for this reason,
January 15, 2014] banks should guard against injury attributable to
negligence or bad faith on its part. Since the bank
4. G was an accommodation party in three in this case is negligent, it is likewise liable to G
promissory notes covering a loan he for damages. [Gonzales v. Philippine Commercial
obtained with Sps. G, secured by a real International Bank, G.R. No. 180257, February 23,
estate mortgage. The Sps. P defaulted on 2011]
their loan. Can G be held liable?
Negotiable Instruments Law

Yes. As an accommodation party, Gonzales is
solidarily liable with the Sps. P for the loans. 1. A postdated check with the date October 9,
However, since there is no showing that the bank 2003 was issued, drawn against an account
notified G of the default, the bank was grossly of S with BPI, and presented for deposit
negligent. In business, more so for banks, the with ABank, on October 10, 2002. Upon
amounts demanded from the debtor or borrower presentment, the check was sent to the
have to be definite, clear, and without ambiguity. PCHC. It was cleared by BPI and its amount
It is not sufficient simply to be informed that one was debited from the account of S, and
must pay over a hundred thousand aggregate credited to the account of the payee. The
outstanding interest dues without clear and account of S was closed, but he asked for
certain figures. the business of banking is the return of the amount of the check,
impressed with public interest and great reliance which BPI agreed to. When BPI sent a
is made on the banks sworn profession of photocopy of the check to ABank saying it
diligence and meticulousness in giving was postdated, ABank refused to accept it.
irreproachable service. Like a common carrier After the check was sent back and forth
whose business is imbued with public interest, a between the two banks, ABank filed a
bank should exercise extraordinary diligence to complaint saying BPI should solely bear
negate its liability to the depositors. In this the loss. Is ABank correct?
instance, the bank is sorely remiss in the
diligence required in treating with its client, G. It No. ABank and BPI should both bear the loss by
may not wantonly exercise its rights without allocating the damage on a 60-40 ratio. In light of
respecting and honoring the rights of its clients. the contributory negligence of BPI, it should bear
With banks, the degree of diligence required is 40% of the loss, but ABank should bear 60%.
more than that of a good father of the family "Contributory negligence is conduct on the part
considering that the business of banking is of the injured party, contributing as a legal cause
imbued with public interest due to the nature of to the harm he has suffered, which falls below the
their function. The law imposes on banks a high standard to which he is required to conform for


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his own protection." Admittedly, ABank’s to the payee’s account covering the check. [Allied
acceptance of the subject check for deposit Banking Corporation v. Bank of the Philippine
despite the one year postdate written on its face Islands, G.R. No. 188363, 27 February 2013]
was a clear violation of established banking
regulations and practices. In such instances, 2. What is the degree of diligence required of
payment should be refused by the drawee bank banks?
and returned through the PCHC within the 24-
hour reglementary period. Abank’s failure to The law imposes a duty of diligence on the
comply with this basic policy regarding post- collecting bank to scrutinize checks deposited
dated checks was "a telling sign of its lack of due with it for the purpose of determining their
diligence in handling checks coursed through it." genuineness and regularity. The collecting
It bears stressing that "the diligence required of bank being primarily engaged in banking
banks is more than that of a Roman paterfamilias holds itself out to the public as the expert and
or a good father of a family. The highest degree of the law holds it to a high standard of
diligence is expected," considering the nature of conduct.28
the banking business that is imbued with public
interest. While it is true that respondent's As collecting banks, the E Bank and
liability for its negligent clearing of the check is intermediary Bank are both liable for the
greater, petitioner cannot take lightly its own amount of the materially altered checks.
violation of the long-standing rule against
encashment of post-dated checks and the As for C and A, the Bank cannot debit their
injurious consequences of allowing such checks savings account. A depositary/collecting bank
into the clearing system. may resist or defend against a claim for
breach of warranty if the drawer, the payee,
The antecedent negligence of the plaintiff does or either the drawee bank or depositary bank
not preclude him from recovering damages was negligent and such negligence
caused by the supervening negligence of the substantially contributed to the loss from
defendant, who had the last fair chance to alteration. In the instant case, no negligence
prevent the impending harm by the exercise of can be attributed to C and A. At the time of the
due diligence. Moreover, in situations where the sales transaction, the Bank’s branch manager
doctrine has been applied, it was defendant’s was present and even offered the Bank’s
failure to exercise such ordinary care, having the services for the processing and eventual
last clear chance to avoid loss or injury, which crediting of the checks. True to the branch
was the proximate cause of the occurrence of manager’s words, the checks were cleared
such loss or injury. If only BPI exercised ordinary three days later when deposited by
care in the clearing process, it could have easily petitioners and the entire amount of the
noticed the glaring defect upon seeing the date checks was credited to their savings account.
written on the face of the check "Oct. 9, 2003". [Areza v. Express Savings Bank, G.R. No.
BPI could have then promptly returned the check 176697, September 10, 2014]
and with the check thus dishonored, ABank
would have not credited the amount thereof to
3. R obtained a loan from the spouses C,
the payee’s account. Thus, notwithstanding the
covered by a promissory note, stipulating a
antecedent negligence of the ABank in accepting
promise to pay an amount of P120,000.00
the post-dated check for deposit, it can seek
on December 31, 1995. Failure to pay the
reimbursement from BPI in the amount credited
said amount on the said date would cause R


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to pay 5% monthly interest until the entire or determinable future time, a sum certain in
amount is paid, and in case the matter is money to order or to bearer. Where a note is
referred to a lawyer, R further promised to drawn to the maker’s own order, it is not
pay 20% of the amount due as attorney’s complete until indorsed by him.
fees, which should not be less than
P5,000.00, in addition to litigation costs. The Promissory Note in this case is made out to
About three years after the stipulated date specific persons, the spouses C, and not to order
of payment, R issued to the sps. C a check as or to bearer, or to the order of the Spouses C as
partial payment, drawn against R’s account payees.
with PC Bank. Thereafter, the spouses
received another check from R duly signed However, even if R’s Promissory Note is not a
and dated, but with no payee and amount. negotiable instrument and therefore outside the
As per understanding of the parties, the coverage of Section 70 of the NIL which provides
second check was issued in the amount of that presentment for payment is not necessary to
P133,454.00 with “cash” as payee. When charge the person liable on the instrument, R is
presented for payment, the checks were still liable under the terms of the Promissory
dishonored. Is demand (presentment for Note that he issued.
payment) still necessary to make R liable
on the checks? The Promissory Note is unequivocal about the
date when the obligation falls due and becomes
No. The subject promissory note is not a demandable—31 December 1995. As of 1
negotiable instrument and the provisions of the January 1996, R had already incurred in delay
NIL do not apply to this case. Section 1 of the NIL when he failed to pay the amount of P120,000.00
requires the concurrence of the following due to the Spouses C on 31 December 1995
elements to be a negotiable instrument: under the Promissory Note. [Rivera v. Spouses
Chua, G.R. No. 184458, January 14, 2015]
(a) It must be in writing and signed by the maker
or drawer; 4. When the payee of the check is not
(b) Must contain an unconditional promise or intended to be the true recipient of its
order to pay a sum certain in money; proceeds, is it payable to order or bearer?
(c) Must be payable on demand, or at a fixed or What is the fictitious-payee rule and who is
determinable future time; liable under it? Is there any exception?
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a As a rule, when the payee is fictitious or not
drawee, he must be named or otherwise intended to be the true recipient of the
indicated therein with reasonable certainty. proceeds, the check is considered as a bearer
instrument. A check is a bill of exchange drawn
On the other hand, Section 184 of the NIL defines on a bank payable on demand. It is either an
what negotiable promissory note is: order or a bearer instrument. The distinction
between bearer and order instruments lies in
SECTION 184. Promissory Note, Defined. – A their manner of negotiation. Under Section 30 of
negotiable promissory note within the meaning the NIL, an order instrument requires an
of this Act is an unconditional promise in writing indorsement from the payee or holder before it
made by one person to another, signed by the may be validly negotiated. A bearer instrument,
maker, engaging to pay on demand, or at a fixed on the other hand, does not require an


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indorsement to be validly negotiated. It is proceeds of the check. However, there is a
negotiable by mere delivery. A check that is commercial bad faith exception to the
payable to a specified payee is an order fictitious-payee rule. A showing of commercial
instrument. However, under Section 9(c) of the bad faith on the part of the drawee bank, or
NIL, a check payable to a specified payee may any transferee of the check for that matter, will
nevertheless be considered as a bearer work to strip it of this defense. The exception
instrument if it is payable to the order of a will cause it to bear the loss. Commercial bad
fictitious or non-existing person, and such fact is faith is present if the transferee of the check acts
known to the person making it so payable. Thus, dishonestly, and is a party to the fraudulent
checks issued to Prinsipe Abante or Si Malakas at scheme. And the fictitious-payee rule extends
si Maganda, who are well-known characters in protection even to non-bank transferees of the
Philippine mythology, are bearer instruments checks.
because the named payees are fictitious and non-
existent. A review of US jurisprudence yields that However, for the fictitious-payee rule to be
an actual, existing, and living payee may also be available as a defense, the bank must show that
fictitious if the maker of the check did not intend the makers did not intend for the named payees
for the payee to in fact receive the proceeds of to be part of the transaction involving the checks.
the check. This usually occurs when the maker At most, the banks thesis shows that the payees
places a name of an existing payee on the check did not have knowledge of the existence of the
for convenience or to cover up an illegal activity. checks. This lack of knowledge on the part of
Thus, a check made expressly payable to a non- the payees, however, was not tantamount to a
fictitious and existing person is not necessarily lack of intention on the part of respondents-
an order instrument. If the payee is not the spouses that the payees would not receive the
intended recipient of the proceeds of the checks proceeds. If there is a failure to show
check, the payee is considered a fictitious that the payees were fictitious in its broader
payee and the check is a bearer instrument. sense, the fictitious-payee rule does not apply.
Thus, the checks are to be deemed payable to
In a fictitious-payee situation, the drawee bank is order. Consequently, the drawee bank bears the
absolved from liability and the drawer bears loss if it processes the said check. [Philippine
the loss. When faced with a check payable to a National Bank v. Sps. Rodriguez, G.R. No. 170325,
fictitious payee, it is treated as a bearer September 26, 2008]
instrument that can be negotiated by delivery.
The underlying theory is that one cannot expect a 5. If a bank pays out on a forged check, is it
fictitious payee to negotiate the check by placing liable to reimburse the drawer from whose
his indorsement thereon. And since the maker account the funds were paid out?
knew this limitation, he must have intended for
the instrument to be negotiated by mere delivery. The general rule is that the drawee who has paid
Thus, in case of controversy, the drawer of the upon the forged signature bears the loss. The
check will bear the loss. This rule is justified for exception to this rule arises only when
otherwise, it will be most convenient for the negligence can be traced on the part of the
maker who desires to escape payment of the drawer whose signature was forged, and the
check to always deny the validity of the need arises to weigh the comparative negligence
indorsement. This despite the fact that the between the drawer and the drawee to
fictitious payee was purposely named without determine who should bear the burden of loss.
any intention that the payee should receive the Banks are engaged in a business impressed with


- 10 -
public interest, and it is their duty to protect in In case of life insurance at the time the
return their many clients and depositors who insurance takes effect, and it need not exist
transact business with them. They have the thereafter or when loss (the death) occurs.1 If the
obligation to treat their clients account interest does not exist at the time of loss, the
meticulously and with the highest degree of care, claim can still be made.
considering the fiduciary nature of their
relationship. The diligence required of banks, In case of property insurance, at the time the
therefore, is more than that of a good father of a insurance takes effect AND at the time of the loss,
family. Still, even if the bank performed with but it need not exist in the meantime.2
utmost diligence, the drawer whose signature
was forged may still recover from the bank as Examples:
long as he or she is not precluded from setting up 1) If a building insured by the owner against
the defense of forgery. After all, Section 23 of the fire was burned after the owner sold it, he
Negotiable Instruments Law plainly states that cannot recover for its loss.3
no right to enforce the payment of a check can 2) If a building insured against fire was
arise out of a forged signature. Since the drawer, mortgaged, the mortgage was foreclosed, and
is not precluded by negligence from setting up the period of redemption expired when it
the forgery, the general rule should apply. was burnt, the insured no longer has
Consequently, if a bank pays a forged check, it insurable interest in it, and thus, cannot
must be considered as paying out of its funds and recover.4
cannot charge the amount so paid to the account 3) If the owner of a motor vehicle insured it,
of the depositor. A bank is liable, irrespective of sold it to another, but later on bought it back
its good faith, in paying a forged check. [Samsung before being damaged in a collision, he can
Construction v. Far East Bank and Trust Company, recover on the insurance, even if he is not yet
G.R. No. 129015, August 13, 2004] registered as owner.5
4) An owner of an insured motor vehicle who
Insurance Law sold another motor vehicle but erroneously
indicated in the deed of sale that the insured

vehicle was the one sold, and the deed was
1. What is insurable interest?
cancelled, the owner retained his interest
therein. He could still recover on the
Insurable interest is one the most basic of all
insurance.6
requirements in insurance. In general, a person

is deemed to have insurable interest in the
3. What are the requisites of concealment
subject matter insured where he has a relation or
(Requisites for rescission on the ground of
connection with or concern in it that he will
concealment)?
derive pecuniary benefit or advantage from its

preservation and/or will suffer pecuniary loss or
There can be no concealment unless:
damage from its destruction, termination or

injury by the happening of the event insured
against. [Lalican v. Insular Life, G.R. No. 183526,
August 25, 2009]
1 Sec. 19, Insurance Code as amended by RA 10607.
2. When must insurable interest exist? 3 Velasco v. Phil. Guaranty.
4 Go It Bun v. Dizon.
5 Santos v. Pyramid Insurance.
6 Balisi v. Liberty Insurance.


- 11 -
1) A party knows the fact which he neglects Insurance’s investigation, then the claim cannot
to communicate or disclose to the other; be denied.
2) Such party concealing duty bound to
disclose such fact to the other, which fact Also, Section 48 of the Insurance Code will
must be material to the policy; prevent the insurer from barring the claim. The
3) Such party concealing makes no results and conclusions arrived at during the
warranty of the fact concealed;7 and investigation conducted unilaterally by petitioner
4) The other party has no means of after the claim was filed may simply be dismissed
ascertaining the fact concealed.8 as self-serving and may not form the basis of a
cause of action given the existence and
4. What is the effect of concealment? application of Section 48, which provides that if
the life insurance policy has been in force for at
As a rule, failure on the part of the insured to least two years from its date of issuance, the
disclose conditions affecting the risk of which he insurer cannot deny the claim on the ground of
is aware, whether intentionally or concealment or misrepresentation by the
unintentionally, makes the contract voidable at insured.
the insured’s option, and entitles the injured
party to rescind the contract.9 Section 48 serves a noble purpose, as it regulates
the actions of both the insurer and the insured.
5. M Insurance issued a life insurance policy Under the provision, an insurer is given two
covering the life of S, with A as beneficiary. years – from the effectivity of a life insurance
More than two years after the insurance contract and while the insured is alive – to
was issued, S died, thus, A filed a claim for discover or prove that the policy is void ab initio
the proceeds. The claim was denied or is rescindible by reason of the fraudulent
because the claim was spurious, as it concealment or misrepresentation of the insured
appeared after its investigation that S did or his agent. After the two-year period lapses, or
not actually apply for insurance coverage, when the insured dies within the period, the
was unlettered, sickly, and had no visible insurer must make good on the policy, even
source of income to pay for the insurance though the policy was obtained by fraud,
premiums; and that A was an impostor, concealment, or misrepresentation. This is not to
posing as S and fraudulently obtaining say that insurance fraud must be rewarded, but
insurance in the latter’s name without her that insurers who recklessly and indiscriminately
knowledge and consent. Can M Insurance solicit and obtain business must be penalized, for
deny the claim? such recklessness and lack of discrimination
ultimately work to the detriment of bona fide
No. "Fraudulent intent on the part of the insured takers of insurance and the public in general.
must be established to entitle the insurer to
rescind the contract." In the absence of proof of Section 48 prevents a situation where the insurer
such fraudulent intent, no right to rescind arises. knowingly continues to accept annual premium
There being no evidence that there was indeed payments on life insurance, only to later on deny
fraud, except for the self-serving result of M a claim on the policy on specious claims of
fraudulent concealment and misrepresentation,
such as what obtains in the instant case. The
7 If there was a warranty, then breach thereof is not concealment, but a
breach of a warranty. ultimate aim of Section 48 of the Insurance Code
8 Sec. 28, Insurance Code as amended by RA 10607. is to compel insurers to solicit business from or


- 12 -
provide insurance coverage only to legitimate and delivered by the Insured which are
and bona fide clients, by requiring them to outstanding at the date of loss for a period
thoroughly investigate those they insure within in excess of 6 months from the date of the
two years from effectivity of the policy and while covering invoice or actual delivery of the
the insured is still alive. If they do not, they will merchandise whichever shall first occur,
be obligated to honor claims on the policies they and that the Insured shall submit to NA
issue, regardless of fraud, concealment or Insurance within 12 days after the close of
misrepresentation. The law assumes that they every calendar month all amount shown in
will do just that and not sit on their laurels, their books of accounts as unpaid and thus
indiscriminately soliciting and accepting become receivable item from their
insurance business from any Tom, Dick and customers and dealers. IMC and LSPI sell
Harry. goods to G, and the invoices covering the
sale provide that ownership of the goods is
Thus, instead of conducting at the first instance retained by IMC and LSPI merely to secure
an investigation into the circumstances payment therefor. The building of G was
surrounding the issuance of the subject consumed by fire, and part of its stocks
insurance policy which would have timely which were destroyed were stocks of
exposed the supposed flaws and irregularities ready-made clothing materials sold and
attending it as it now professes, M Insurance delivered by IMC and LSPI, which remained
appears to have turned a blind eye and opted unpaid. IMC and LSPI claimed their benefits
instead to continue collecting the premiums on from NA Insurance under their respective
the policy. For nearly three years, the insurer fire insurance policies. Because of this, NA
collected the premiums and devoted the same to Insurance filed a case against G, contending
its own profit. It cannot now deny the claim when that it has valid rights over the payments
it is called to account. Section 48 must be applied due to IMC and LSPI by virtue of
to it with full force and effect. [Manila Bankers v. subrogation. Can NA Insurance recover
Crisencia Aban, G.R. No. 175666, July 29, 2013] from G?
6. IMC, a manufacturer of Levi’s jeans, and Under the insurance policies, what were insured
LSPI, local distributor of Levi’s jeans against were the accounts of IMC and LSPI with
separately obtained from NA Insurance fire petitioner which remained unpaid 45 days after
insurance policies with book debt the loss through fire, and not the loss or
endorsements. The insurance policies destruction of the goods delivered. In this case,
provide for coverage on book debts in IMC and LSPI still had interest over the goods lost
connection with ready-made clothing during the fire. They have an insurable interest
materials which have been sold or until full payment of the value of the delivered
delivered to various customers and dealers goods. Unlike the civil law concept of res perit
of the Insured anywhere in the Philippines. domino, where ownership is the basis for
The policies defined book debts as the consideration of who bears the risk of loss, in
unpaid account still appearing in the Book property insurance, one’s interest is not
of Account of the Insured 45 days after the determined by concept of title, but whether
time of the loss covered under by the insured has substantial economic interest in the
policies. Also, the policies state that NA property. Section 13 of our Insurance Code
Insurance shall not be liable for any unpaid defines insurable interest as every interest in
account in respect of the merchandise sold property, whether real or personal, or any


- 13 -
relation thereto, or liability in respect thereof, of premium waiver and accidental death
such nature that a contemplated peril might benefits, to which he agreed by signing a
directly damnify the insured. Parenthetically, letter of acceptance effective June 22, 1999.
under Section 14 of the same Code, an insurable I Life issued an indorsement letter dated
interest in property may consist in: (a) an January 7, 2000 stating that the
existing interest; (b) an inchoate interest reinstatement of the policy has been
founded on existing interest; or (c) an approved, subject to changes in premium
expectancy, coupled with an existing interest in payment and riders on accidental health
that out of which the expectancy arises. benefit and waiver of premium disability
were deleted. K paid the annual premiums
Therefore, an insurable interest in property does for the years 2000 to 2002. K died on
not necessarily imply a property interest in, or a September 22, 2001 due to renal failure
lien upon, or possession of, the subject matter of caused by congestive heart failure brought
the insurance, and neither the title nor a about by diabetes. His heirs tried to claim
beneficial interest is requisite to the existence of the benefits of his life insurance policy
such an interest, it is sufficient that the insured is from I Life, which was denied stating that
so situated with reference to the property that he such has been rescinded due to
would be liable to loss should it be injured or concealment and misrepresentation. Is the
destroyed by the peril against which it is insured. reinstated insurance policy of K already
Anyone has an insurable interest in property incontestable at the time of his death?
who derives a benefit from its existence or would
suffer loss from its destruction. Indeed, a vendor Reinstatement of an insurance policy should be
or seller retains an insurable interest in the reckoned from the date when the same was
property sold so long as he has any interest approved by the insurer. The insurance policy
therein, in other words, so long as he would was reinstated on June 22, 1999, since any
suffer by its destruction, as where he has a ambiguity in a contract of insurance should be
vendors lien. In this case, the insurable interest of resolved strictly against the insurer upon the
IMC and LSPI pertain to the unpaid accounts principle that an insurance contract is a contract
appearing in their Books of Account 45 days after of adhesion. More than two years had lapsed
the time of the loss covered by the policies. from the time the subject insurance policy was
[Gaisano Cagayan v. Insurance Company of North reinstated on June 22, 1999 vis-a-vis K’s death on
America, G.R. No. 147839, June 8, 2006] September 22, 2001. As such, the subject
insurance policy has already become
7. K applied for life insurance with I Life, for incontestable at the time of K’s death. [The
which he answered a medical Insular Life Assurance Company v. Paz Y. Khu, G.R.
questionnaire stating that he does not have No. 195176, April 18, 2016]
any illness or adverse medical condition.
The life insurance policy was issued, but Note: To reinstate a policy means to restore the
lapsed due to non-payment of premium. K same to premium-paying status after it has been
applied for reinstatement of the policy and permitted to lapse. [Lalican v. Insular Life, G.R. No.
paid for his premium. I Life informed K that 183526, August 25, 2009]
they will only reinstate the policy if K
agreed to certain conditions such as 8. M Insurer insured PAP’s machineries and
payment of additional premium and the equipment against fire, for a period of one
cancellation of the riders pertaining to year, for the amount of 15 million pesos.


- 14 -
This was procured by PAP for its committed concealment, misrepresentation and a
mortgagee, RCBC. The insurance policy was breach of a material warranty.
renewed before the lapse of one year, on an
‘as is’ basis, and it was agreed that the Accordingly, an insurer can exercise its right to
things insured will not be moved to rescind an insurance contract when the following
another location, without the consent of M conditions are present, to wit:
insurer. The machineries and equipment
were thereafter lost in a fire, which 1) the policy limits the use or condition of the
prompted PAP to claim from M insurer. thing insured;
The claim was denied on the ground that 2) there is an alteration in said use or
the things insured were transferred to a condition;
different location from that indicated in the 3) the alteration is without the consent of the
policy. Can M insurer be held liable for the insurer;
loss? 4) the alteration is made by means within the
insured’s control; and
No. Here, by the clear and express condition in 5) the alteration increases the risk of loss.
the renewal policy, the removal of the insured
property to any building or place required the In the case at bench, all these circumstances are
consent of the insurer. Any transfer effected by present. It was clearly established that the
the insured, without the insurer’s consent, would renewal policy stipulated that the insured
free the latter from any liability. Considering that properties were located at PAP’s factory; that
the original policy was renewed on an “as is PAP removed the properties without the consent
basis,” it follows that the renewal policy carried of M insurer; and that the alteration of the
with it the same stipulations and limitations. The location increased the risk of loss. [Malayan
terms and conditions in the renewal policy Insurance Company, Inc. v. PAP co., Ltd. (Philippine
provided, among others, that the location of the Branch), G.R. No. 200784, August 7, 2013]
risk insured against is at PAP’s factory. The
subject insured properties, however, were totally 9. M Insurer insured PAP’s machineries and
burned at another factory. Although it was also equipment against fire, for a period of one
located in the same area, the other factory was year, for the amount of 15 million pesos.
not the location stipulated in the renewal policy. This was procured by PAP for its
There being an unconsented removal, the mortgagee, RCBC. The insurance policy was
transfer was at PAP’s own risk. Consequently, it renewed before the lapse of one year, on an
must suffer the consequences of the fire. Thus, ‘as is’ basis, and it was agreed that the
the Court agrees with the report of an things insured will not be moved to
international loss adjuster which investigated the another location, without the consent of M
fire incident at the other factory, which opined insurer. The machineries and equipment
that “[g]iven that the location of risk covered were thereafter lost in a fire, which
under the policy is not the location affected, the prompted PAP to claim from M insurer.
policy will, therefore, not respond to this The claim was denied on the ground that
loss/claim.” It can also be said that with the the things insured were transferred to a
transfer of the location of the subject properties, different location from that indicated in the
without notice and without M insurer’s consent, policy. Can M insurer be held liable for the
after the renewal of the policy, PAP clearly loss?


- 15 -
No. Here, by the clear and express condition in
the renewal policy, the removal of the insured In the case at bench, all these circumstances are
property to any building or place required the present. It was clearly established that the
consent of the insurer. Any transfer effected by renewal policy stipulated that the insured
the insured, without the insurer’s consent, would properties were located at PAP’s factory; that
free the latter from any liability. Considering that PAP removed the properties without the consent
the original policy was renewed on an “as is of M insurer; and that the alteration of the
basis,” it follows that the renewal policy carried location increased the risk of loss. [Malayan
with it the same stipulations and limitations. The Insurance Company, Inc. v. PAP co., Ltd. (Philippine
terms and conditions in the renewal policy Branch), G.R. No. 200784, August 7, 2013]
provided, among others, that the location of the
risk insured against is at PAP’s factory. The Corporation Law
subject insured properties, however, were totally
burned at another factory. Although it was also 1. Bank A granted loans to Corporation X,
located in the same area, the other factory was which were secured by promissory notes
not the location stipulated in the renewal policy. and mortgages over properties owned by
There being an unconsented removal, the another corporation. The transactions
transfer was at PAP’s own risk. Consequently, it were entered into by Corporation X’s
must suffer the consequences of the fire. Thus, president and General Manager. Since
the Court agrees with the report of an Corporation X defaulted in paying its loans,
international loss adjuster which investigated the then the mortgage was foreclosed and
fire incident at the other factory, which opined eventually sold. Because there was still
that “[g]iven that the location of risk covered remaining amount to be paid, an action
under the policy is not the location affected, the was filed against Corporation X, its
policy will, therefore, not respond to this President, and the latter’s wife, who signed
loss/claim.” It can also be said that with the a surety agreement in favor of the bank,
transfer of the location of the subject properties, which the lower court had declared as
without notice and without M insurer’s consent, falsified. Can the wife of the President be
after the renewal of the policy, PAP clearly held liable?
committed concealment, misrepresentation and a
breach of a material warranty. No. Basic is the rule in corporation law that a
corporation is a juridical entity which is vested
Accordingly, an insurer can exercise its right to with a legal personality separate and distinct
rescind an insurance contract when the following from those acting for and in its behalf and, in
conditions are present, to wit: general, from the people comprising it. Following
this principle, obligations incurred by the
1) the policy limits the use or condition of the corporation, acting through its directors, officers
thing insured; and employees, are its sole liabilities. A director,
2) there is an alteration in said use or officer or employee of a corporation is generally
condition; not held personally liable for obligations incurred
3) the alteration is without the consent of the by the corporation.24 Nevertheless, this legal
insurer; fiction may be disregarded if it is used as a means
4) the alteration is made by means within the to perpetrate fraud or an illegal act, or as a
insured’s control; and vehicle for the evasion of an existing obligation,
5) the alteration increases the risk of loss. the circumvention of statutes, or to confuse


- 16 -
legitimate issues. This is consistent with the d. When a director, trustee or officer is
provisions of the Corporation Code of the made, by specific provision of law,
Philippines, which states: personally liable for his corporate action.

Sec. 31. Liability of directors, Before a director or officer of a corporation can
trustees or officers. – Directors or be held personally liable for corporate
trustees who willfully and obligations, however, the following requisites
knowingly vote for or assent to must concur: (1) the complainant must allege in
patently unlawful acts of the the complaint that the director or officer
corporation or who are guilty of assented to patently unlawful acts of the
gross negligence or bad faith in corporation, or that the officer was guilty of gross
directing the affairs of the negligence or bad faith; and (2) the complainant
corporation or acquire any must clearly and convincingly prove such
personal or pecuniary interest in unlawful acts, negligence or bad faith.
conflict with their duty as such
directors or trustees shall be liable In this case, it was not proven that the wife of the
jointly and severally for all president of Corporation X committed an act of
damages resulting therefrom an officer of the said corporation that would
suffered by the corporation, its permit the piercing of the corporate veil. A
stockholders or members and reading of the complaint reveals that the Bank
other persons. did not demand that she be held liable for the
obligations of Hammer because she was a
Solidary liability will then attach to the directors, corporate officer who committed bad faith or
officers or employees of the corporation in gross negligence in the performance of her duties
certain circumstances, such as: such that the lifting of the corporate mask would
be merited. What the complaint simply stated is
a. When directors and trustees or, in that she, together with her errant husband acted
appropriate cases, the officers of a as surety, as evidenced by her signature on the
corporation: (1) vote for or assent to Surety Agreement which was later found by the
patently unlawful acts of the corporation; RTC to have been forged.
(2) act in bad faith or with gross
negligence in directing the corporate The piercing of the veil of corporate fiction is
affairs; and (3) are guilty of conflict of frowned upon and can only be done if it has been
interest to the prejudice of the clearly established that the separate and distinct
corporation, its stockholders or members, personality of the corporation is used to justify a
and other persons; wrong, protect fraud, or perpetrate a deception.
b. When a director or officer has consented Hence, any application of the doctrine of piercing
to the issuance of watered stocks or who, the corporate veil should be done with caution. A
having knowledge thereof, did not court should be mindful of the milieu where it is
forthwith file with the corporate secretary to be applied. It must be certain that the
his written objection thereto; corporate fiction was misused to such an extent
c. When a director, trustee or officer has that injustice, fraud, or crime was committed
contractually agreed or stipulated to hold against another, in disregard of its rights. The
himself personally and solidarily liable wrongdoing must be clearly and convincingly
with the corporation; or established; it cannot be presumed. Otherwise,


- 17 -
an injustice that was never unintended may Corporation X went missing, the other
result from an erroneous application. corporation ceased its operations. Based on
these, it is apparent that the said corporation was
[Heirs of Fe Tan Uy (Represented by her heir, merely an adjunct of Corporation X and, as such,
Manling Uy Lim) vs. International Exchange the legal fiction that it has a separate personality
Bank/Goldkey Development Corporation vs. from that of Hammer should be brushed aside as
International Exchange Bank, G.R. No. they are, undeniably, one and the same. [Ibid.]
166282/G.R. No. 166283, February 13, 2013.]
2. Spouses F entered into a contract to sell
In relation to Question Number 5, can the with G Corp, covering a parcel of land, in G
corporation, whose property was mortgaged Corp’s subdivision. Spouses F full paid the
to secure the loans of Corporation X, be held purchase price, but G Corp. failed to
liable for the said loans? Note that the two execute the deed of sale and deliver the
corporations are owned by the same family, title to the spouses. Thus, the spouses filed
sharing the same office space, with their an action for specific performance or
assets being co-mingled. The President of rescission against G Corp and its Board of
Corporation X is also the Chief Operating Directors. Can the Board of Directors be
Officer of the other corporation involved. held liable?

Yes. Under a variation of the doctrine of piercing No. There is no basis to hold the members of the
the veil of corporate fiction, when two business board solidarily liable with G Corp for the
enterprises are owned, conducted and controlled payment of damages in favor of Sps. F since it
by the same parties, both law and equity will, was not shown that they acted maliciously or
when necessary to protect the rights of third dealt with the latter in bad faith. Settled 1s the
parties, disregard the legal fiction that two rule that in the absence of malice and bad faith,
corporations are distinct entities and treat them as in this case, officers of the corporation cannot
as identical or one and the same. be made personally liable for liabilities of the
corporation which, by legal fiction, has a
While the conditions for the disregard of the personality separate and distinct from its
juridical entity may vary, the following are some officers, stockholders, and members. [Gotesco
probative factors of identity that will justify the Properties, Inc. v. SpousesFajardo, G.R. No.
application of the doctrine of piercing the 201167, 27 February 2013]
corporate veil, as laid down in Concept Builders,
Inc. v NLRC: 3. M was hired by S Tech as the head and
(1) Stock ownership by one or common manager of one of its units. Subsequently, N
ownership of both corporations; was employed as her manager. M's hard
(2) Identity of directors and officers; disk crashed causing her to lose files, and
(3) The manner of keeping corporate books she informed N. M’s position was
and records, and downgraded twice and later on, she was
(4) Methods of conducting the business. informed that her position was redundant.
An action for illegal dismissal was filed by
In this case, both corporations are family M against S Tech and its HR Director. Can
corporations, who share the same office, with the the case prosper against the HR Director?
same set of officers, and their assets are co-
mingled. Likewise, when the President of


- 18 -
No. It is hornbook principle that personal liability and E, its president. Should the case
of corporate directors, trustees or officers prosper against E?
attaches only when: (a) they assent to a patently
unlawful act of the corporation, or when they No. A corporation has a personality separate and
are guilty of bad faith or gross negligence in distinct from its officers and board of directors
directing its affairs, or when there is a who may only be held personally liable for
conflict of interest resulting in damages to the damages if it is proven that they acted with
corporation, its stockholders or other persons; malice or bad faith in the dismissal of an
(b) they consent to the issuance of watered employee. Absent any evidence on record that
down stocks or when, having knowledge of such petitioner E acted maliciously or in bad faith in
issuance, do not forthwith file with the effecting the termination of respondent, plus the
corporate secretary their written objection; (c) apparent lack of allegation in the pleadings E
they agree to hold themselves personally and acted in such manner, the doctrine of corporate
solidarily liable with the corporation; or (d) they fiction dictates that only petitioner corporation
are made by specific provision of law personally should be held liable for the illegal dismissal of
answerable for their corporate action. In the case respondent. [Mirant (Philippines) Corporation, et
of M, there is no evidence to show that the al. v. Joselito A. Caro, G.R. No. 181490, April 23,
above-enumerated exceptions when a corporate 2014]
officer becomes personally liable for the
obligation of a corporation to this case. [SPI 6. A mortgaged his property to Bank A,
Technologies, Inc., et al. v. Victoria K. Mapua, G.R. predecessor of Bank B. However, A
No. 191154, April 7, 2014] defaulted in his payments, so the mortgage
was foreclosed and Bank B bought the
4. Is the presentation of a stock certificate a property. A offered to repurchase the
condition sine qua non for proving one's property, but no agreement was reached.
shareholding in a corporation? With A insisting that a purchase agreement
was reached, he sold portions of the
No. A stock certificate is prima facie evidence that property after being subdivided, and
the holder is a shareholder of the corporation, offered to pay for the entire property. Bank
but the possession of the certificate is not the B however sold the remaining portions of
sole determining factor of one’s stock ownership. the property to another person, which
To establish stock ownership, other documents prompted A to cause an annotation of his
may be presented, such as official receipts of adverse claim on the title thereof.
payments of subscription of shares, certification Thereafter, the property was sold by Bank
from the SEC stating that the company issued B to other persons, without A’s knowledge.
shares in favor of the particular stockholder. Thus, A filed an action for specific
[Insigne v. Abra Valley Colleges, Inc., G.R. No. performance against the bank. Was there a
204089, July 29, 2015] perfected repurchase agreement between
A and Bank B, even if no acceptance was
5. M Corp employed B, who was later on made by Bank B’s representatives?
dismissed from employment after having
tested positive during a random drug test No. No such agreement was reached. Section 23
conducted in the office. B thus filed an of the Corporation Code expressly provides that
action for illegal dismissal against M Corp the corporate powers of all corporations shall be
exercised by the board of directors. Just as a


- 19 -
natural person may authorize another to do directors or trustees, or any of them, must be
certain acts in his behalf, so may the board of called by the secretary on order of the president
directors of a corporation validly delegate some or on the written demand of the stockholders
of its functions to individual officers or agents representing or holding at least a majority of the
appointed by it. Thus, contracts or acts of a outstanding capital stock. In this case, the
corporation must be made either by the board of meeting was not called in accordance with the
directors or by a corporate agent duly authorized requirements of the Corporation Code. The board
by the board. Absent such valid of directors is the directing and controlling body
delegation/authorization, the rule is that the of the corporation. It is a creation of the
declarations of an individual director relating to stockholders and derives its power to control and
the affairs of the corporation, but not in the direct the affairs of the corporation from them.
course of, or connected with, the performance of The board of directors, in drawing to itself the
authorized duties of such director, are held not power of the corporation, occupies a position of
binding on the corporation. trusteeship in relation to the stockholders, in the
sense that the board should exercise not only
Thus, a corporation can only execute its powers care and diligence, but utmost good faith in the
and transact its business through its Board of management of the corporate affairs. A
Directors and through its officers and agents corporation's board of directors is understood to
when authorized by a board resolution or its by- be that body which (1) exercises all powers
laws. provided for under the Corporation Code; (2)
conducts all business of the corporation; and (3)
In the absence of conformity or acceptance by controls and holds all the property of the
properly authorized bank officers of petitioner’s corporation. Its members have been
counter-proposal, no perfected repurchase characterized as trustees or directors clothed
contract was born out of the talks or negotiations with fiduciary character. Relative to the powers
between petitioner and Bank B’s representatives. of the Board of Directors, nowhere in the
Petitioner therefore had no legal right to compel Corporation Code or in the MSC by-laws can it be
respondent bank to accept the P600,000 being gathered that the Oversight Committee is
tendered by him as payment for the supposed authorized to step in wherever there is breach of
balance of repurchase price. [Heirs of Fausto C. fiduciary duty and call a special meeting for the
Ignacio vs. Home Bankers Savings and Trust Co., et purpose of removing the existing officers and
al., G.R. No. 177783. January 23, 2013] electing their replacements even if such call was
made upon the request of shareholders. Needless
7. A special meeting was held by the to say, the MSCOC is neither · empowered by law
stockholders of MSC Corp. where several nor the MSC by-laws to· call a meeting and the
directors were removed and some new subsequent ratification made by the stockholders
directors were elected. The meeting was did not cure the substantive infirmity, the defect
called by MSC Corp.’s management having set in at the time the void act was done.
committee. Is the special meeting valid, The defect goes into the very authority of the
and can the elections held during such persons who made the call for the meeting. It is
meeting be considered as valid? apt to recall that illegal acts of a corporation
which ·contemplate the doing of an act which is
No. The Corporation Code provides that a special contrary to law, morals or public order, or
meeting of the stockholders or members of a contravenes some rules of public policy or public
corporation for the purpose of removal of duty, are, like similar transactions between


- 20 -
individuals, void. They cannot serve as basis for a liabilities and is legally responsible for payment
court action, nor acquire validity by performance, of its obligations. In other words, by virtue of the
ratification or estoppel. A distinction should be separate juridical personality of a corporation,
made between corporate acts or contracts . the corporate debt or credit is not the debt or
which are illegal and those which are merely credit of the stockholder. This protection from
ultra vires. The former contemplates the doing of liability for shareholders is the principle of
an act which are contrary to law, morals or public limited liability.
policy or public duty, and are, like similar
transactions between individuals, void: They Equally well-settled is the principle that the
cannot serve as basis of a court action nor corporate mask may be removed or the
acquire validity by performance, ratification or corporate veil pierced when the corporation is
estoppel. Mere ultra vires acts, on the other hand, just an alter ego of a person or of another
or those which are not illegal or void ab initio, corporation. For reasons of public policy and in
but are not merely within· the scope of the the interest of justice, the corporate veil will
articles of incorporation, are merely voidable and justifiably be impaled only when it becomes a
·may become binding and enforceable when shield for fraud, illegality or inequity committed
ratified by the stockholders. In this case, the against third persons.
meeting belongs to the category of the latter, that
is, it is void ab initio and cannot be validated. The However, the rule is that a court should be
elected officers are not de facto officers of the careful in assessing the milieu where the doctrine
corporation and they are without colorable of the corporate veil may be applied. Otherwise
authority to authorize corporate acts. [Bernas v. an injustice, although unintended, may result
Cinco, G.R. No. 163356-57, July 1, 2015] from its erroneous application. Thus, cutting
through the corporate cover requires an
8. DBP and PNB foreclosed mortgages on the approach characterized by due care and caution:
properties of MMIC, a corporation. As a
result, they acquired substantially all the Hence, any application of the doctrine of piercing
assets of NMIC and resumed its business the corporate veil should be done with caution. A
operations. NMIC engaged the services of H court should be mindful of the milieu where it is
Corporation for which it paid the latter. to be applied. It must be certain that the
But, NMIC still had an unpaid balance of corporate fiction was misused to such an extent
around 8 million pesos. Can DBP and PNB that injustice, fraud, or crime was committed
be held liable for such amount? against another, in disregard of its rights. The
wrongdoing must be clearly and convincingly
No. A corporation is an artificial entity created by established; it cannot be presumed.
operation of law. It possesses the right of
succession and such powers, attributes, and Sarona v. National Labor Relations Commission
properties expressly authorized by law or has defined the scope of application of the
incident to its existence. It has a personality doctrine of piercing the corporate veil:
separate and distinct from that of its
stockholders and from that of other corporations The doctrine of piercing the corporate veil
to which it may be connected. As a consequence applies only in three (3) basic areas, namely: 1)
of its status as a distinct legal entity and as a defeat of public convenience as when the
result of a conscious policy decision to promote corporate fiction is used as a vehicle for the
capital formation, a corporation incurs its own evasion of an existing obligation; 2) fraud cases


- 21 -
or when the corporate entity is used to justify a will be ignored. It seeks to establish whether the
wrong, protect fraud, or defend a crime; or 3) subsidiary corporation has no autonomy and the
alter ego cases, where a corporation is merely a parent corporation, though acting through the
farce since it is a mere alter ego or business subsidiary in form and appearance, "is operating
conduit of a person, or where the corporation is the business directly for itself."
so organized and controlled and its affairs are so
conducted as to make it merely an The second prong is the "fraud" test. This test
instrumentality, agency, conduit or adjunct of requires that the parent corporation’s conduct in
another corporation. using the subsidiary corporation be unjust,
fraudulent or wrongful. It examines the
In this connection, case law lays down a three- relationship of the plaintiff to the corporation. It
pronged test to determine the application of the recognizes that piercing is appropriate only if the
alter ego theory, which is also known as the parent corporation uses the subsidiary in a way
instrumentality theory, namely: that harms the plaintiff creditor. As such, it
requires a showing of "an element of injustice or
(1) Control, not mere majority or fundamental unfairness."
complete stock control, but complete
domination, not only of finances but of The third prong is the "harm" test. This test
policy and business practice in respect to requires the plaintiff to show that the defendant’s
the transaction attacked so that the control, exerted in a fraudulent, illegal or
corporate entity as to this transaction had otherwise unfair manner toward it, caused the
at the time no separate mind, will or harm suffered. A causal connection between the
existence of its own; fraudulent conduct committed through the
instrumentality of the subsidiary and the injury
(2) Such control must have been used by suffered or the damage incurred by the plaintiff
the defendant to commit fraud or wrong, should be established. The plaintiff must prove
to perpetuate the violation of a statutory that, unless the corporate veil is pierced, it will
or other positive legal duty, or dishonest have been treated unjustly by the defendant’s
and unjust act in contravention of exercise of control and improper use of the
plaintiff’s legal right; and corporate form and, thereby, suffer damages.
(3) The aforesaid control and breach of To summarize, piercing the corporate veil based
duty must have proximately caused the on the alter ego theory requires the concurrence
injury or unjust loss complained of. of three elements: control of the corporation by
the stockholder or parent corporation, fraud or
The first prong is the "instrumentality" or fundamental unfairness imposed on the plaintiff,
"control" test. This test requires that the and harm or damage caused to the plaintiff by the
subsidiary be completely under the control and fraudulent or unfair act of the corporation. The
domination of the parent. It examines the parent absence of any of these elements prevents
corporation’s relationship with the subsidiary. It piercing the corporate veil.
inquires whether a subsidiary corporation is so
organized and controlled and its affairs are so In applying the alter ego doctrine, the courts are
conducted as to make it a mere instrumentality concerned with reality and not form, with how
or agent of the parent corporation such that its the corporation operated and the individual
separate existence as a distinct corporate entity defendant’s relationship to that operation. With


- 22 -
respect to the control element, it refers not to business-enterprise transfer, the transferee has
paper or formal control by majority or even consequently inherited the liabilities of M Corp.
complete stock control but actual control which because they acquired all the assets of the latter
amounts to "such domination of finances, policies corporation. The continuity of M Corp.’s land
and practices that the controlled corporation has, developments is now in the hands of the Y Corp.,
so to speak, no separate mind, will or existence of with all its assets and liabilities. There is
its own, and is but a conduit for its principal." In absolutely no certainty that Y can still claim its
addition, the control must be shown to have been refund from M Corp. with the latter losing all its
exercised at the time the acts complained of took assets. To allow an assignor to transfer all its
place. business, properties and assets without the
consent of its creditors will place the assignor’s
While ownership by one corporation of all or a assets beyond the reach of its creditors. Thus, the
great majority of stocks of another corporation only way for Y to recover his money would be to
and their interlocking directorates may serve as assert his claim against the Y Corp. as transferees
indicia of control, by themselves and without of the assets. Jurisprudence has held that in a
more, however, these circumstances are business-enterprise transfer, the transferee is
insufficient to establish an alter ego relationship liable for the debts and liabilities of his transferor
or connection between DBP and PNB on the one arising from the business enterprise conveyed.
hand and NMIC on the other hand, that will Many of the application of the business-
justify the puncturing of the latter’s corporate enterprise transfer have been related by the
cover. "Mere ownership by a single stockholder Court to the application of the piercing doctrine.
or by another corporation of all or nearly all of Fraud is not an essential element for the
the capital stock of a corporation is not of itself application of the business-enterprise transfer.
sufficient ground for disregarding the separate
corporate personality." Likewise, the "existence The Nell Doctrine states the general rule that the
of interlocking directors, corporate officers and transfer of all the assets of a corporation to
shareholders is not enough justification to pierce another shall not render the latter liable to the
the veil of corporate fiction in the absence of liabilities of the transferor. If any of the above-
fraud or other public policy considerations." cited exceptions are present, then the transferee
[Phil. National Bank vs. Hydro Resources corporation shall assume the liabilities of the
Contractors Corp., G.R. Nos. 167530, 167561, transferor. The exception of the Nell doctrine,
16760311. March 13, 2013] which finds its legal basis under Section 40,
provides that the transferee corporation assumes
9. Y bought several country club shares from the debts and liabilities of the transferor
M Corp. but the latter failed to develop the corporation because it is merely a continuation of
supposed project. Y then demanded return the latter’s business. A cursory reading of the
of his payment for the shares, but M Corp. exception shows that it does not require the
could no longer do so since it had existence of fraud against the creditors before it
transferred all its assets to Y Corp. Can Y takes full force and effect. Section 40 of the
Corp. now be held liable by Y? Corporation Code refers to the sale, lease,
exchange or disposition of all or substantially all
Yes. While the Corporation Code allows the of the corporation's assets, including its goodwill.
transfer of all or substantially all of the assets of a The sale under this provision does not
corporation, the transfer should not prejudice the contemplate an ordinary sale of all corporate
creditors of the assignor corporation. Under the assets; the transfer must be of such degree that


- 23 -
the transferor corporation is rendered incapable activities through MPSAs, which are
of continuing its business or its corporate reserved only for Filipino citizens. Decide.
purpose. Section 40 suitably reflects the
business-enterprise transfer under the exception It is quite safe to say that petitioners M Corp, T
of the Nell Doctrine because the purchasing or Corp and N Corp are not Filipino since MBMI, a
transferee corporation necessarily continued the 100% Canadian corporation, owns 60% or more
business of the selling or transferor corporation. of their equity interests.
Given that the transferee corporation acquired
not only the assets but also the business of the Basically, there are two acknowledged tests in
transferor corporation, then the liabilities of the determining the nationality of a corporation: the
latter are inevitably assigned to the former. It control test and the grandfather rule.
must be clarified, however, that not every
transfer of the entire corporate assets would Paragraph 7 of DOJ Opinion No. 020, Series of
qualify under Section 40. It does not apply (1) if 2005, adopting the 1967 SEC Rules which
the sale of the entire property and assets is implemented the requirement of the Constitution
necessary in the usual and regular course of and other laws pertaining to the controlling
business of corporation, or (2) if the proceeds of interests in enterprises engaged in the
the sale or other disposition of such property and exploitation of natural resources owned by
assets will be appropriated for the conduct of its Filipino citizens, provides:
remaining business. Thus, the litmus test to
determine the applicability of Section 40 would Shares belonging to corporations or partnerships
be the capacity of the corporation to continue its at least 60% of the capital of which is owned by
business after the sale of all or substantially all its Filipino citizens shall be considered as of
assets. [Y-I Leisure Philippines, Inc., Yats Philippine nationality, but if the percentage of
International Ltd. and Y-I Clubs and Resorts, Inc. Filipino ownership in the corporation or
Vs. Yame Yu, G.R. No. 207161. September 8, 2015] partnership is less than 60%, only the number of
shares corresponding to such percentage shall be
10. M Corp, T Corp and N Corp applied for counted as of Philippine nationality. Thus, if
Mineral Production Sharing Agreements 100,000 shares are registered in the name of a
(MPSA) with the DENR. This was opposed corporation or partnership at least 60% of the
by R Corp because it alleged that at least capital stock or capital, respectively, of which
60% of the capital stock of the belong to Filipino citizens, all of the shares shall
corporations are owned and controlled by be recorded as owned by Filipinos. But if less
MBMI, a 100% Canadian corporation. R than 60%, or say, 50% of the capital stock or
Corp reasoned that since MBMI is a capital of the corporation or partnership,
considerable stockholder of petitioners, it respectively, belongs to Filipino citizens, only
was the driving force behind petitioners’ 50,000 shares shall be counted as owned by
filing of the MPSAs over the areas covered Filipinos and the other 50,000 shall be recorded
by applications since it knows that it can as belonging to aliens.
only participate in mining activities
through corporations which are deemed The first part of paragraph 7, DOJ Opinion No.
Filipino citizens. R Corp argued that given 020, stating "shares belonging to corporations or
that petitioners’ capital stocks were mostly partnerships at least 60% of the capital of which
owned by MBMI, they were likewise is owned by Filipino citizens shall be considered
disqualified from engaging in mining as of Philippine nationality," pertains to the


- 24 -
control test or the liberal rule. On the other hand, Paragraph 7, DOJ Opinion No. 020, Series of 2005
the second part of the DOJ Opinion which provides:
provides, "if the percentage of the Filipino
ownership in the corporation or partnership is The above-quoted SEC Rules provide for the
less than 60%, only the number of shares manner of calculating the Filipino interest in a
corresponding to such percentage shall be corporation for purposes, among others, of
counted as Philippine nationality," pertains to the determining compliance with nationality
stricter, more stringent grandfather rule. requirements (the ‘Investee Corporation’). Such
manner of computation is necessary since the
Prior to this recent change of events, petitioners shares in the Investee Corporation may be owned
were constant in advocating the application of both by individual stockholders (‘Investing
the "control test" under RA 7042, as amended by Individuals’) and by corporations and
RA 8179, otherwise known as the Foreign partnerships (‘Investing Corporation’). The said
Investments Act (FIA), rather than using the rules thus provide for the determination of
stricter grandfather rule. nationality depending on the ownership of the
Investee Corporation and, in certain instances,
"Corporate layering" is admittedly allowed by the the Investing Corporation.
FIA; but if it is used to circumvent the
Constitution and pertinent laws, then it becomes Under the above-quoted SEC Rules, there are two
illegal. cases in determining the nationality of the
Investee Corporation. The first case is the ‘liberal
Sec. 2, Article XII of the Constitution focuses on rule’, later coined by the SEC as the Control Test
the State entering into different types of in its 30 May 1990 Opinion, and pertains to the
agreements for the exploration, development, portion in said Paragraph 7 of the 1967 SEC
and utilization of natural resources with entities Rules which states, ‘(s)hares belonging to
who are deemed Filipino due to 60 percent corporations or partnerships at least 60% of the
ownership of capital is pertinent to this case, capital of which is owned by Filipino citizens
since the issues are centered on the utilization of shall be considered as of Philippine nationality.’
our country’s natural resources or specifically, Under the liberal Control Test, there is no need to
mining. Thus, there is a need to ascertain the further trace the ownership of the 60% (or more)
nationality of petitioners since, as the Filipino stockholdings of the Investing
Constitution so provides, such agreements are Corporation since a corporation which is at least
only allowed corporations or associations "at 60% Filipino-owned is considered as Filipino.
least 60 percent of such capital is owned by such
citizens." The second case is the Strict Rule or the
Grandfather Rule Proper and pertains to the
Elementary in statutory construction is when portion in said Paragraph 7 of the 1967 SEC
there is conflict between the Constitution and a Rules which states, "but if the percentage of
statute, the Constitution will prevail. In this Filipino ownership in the corporation or
instance, specifically pertaining to the provisions partnership is less than 60%, only the number of
under Art. XII of the Constitution on National shares corresponding to such percentage shall be
Economy and Patrimony, Sec. 3 of the FIA will counted as of Philippine nationality." Under the
have no place of application. As decreed by the Strict Rule or Grandfather Rule Proper, the
honorable framers of our Constitution, the combined totals in the Investing Corporation and
grandfather rule prevails and must be applied. the Investee Corporation must be traced (i.e.,


- 25 -
"grandfathered") to determine the total N.B. Primarily, it is the incorporation test which
percentage of Filipino ownership. should be applied in determining the nationality
of a corporation. "Under Philippine jurisdiction,
Moreover, the ultimate Filipino ownership of the the primary test is always the Place of
shares must first be traced to the level of the Incorporation Test since we adhere to the
Investing Corporation and added to the shares doctrine that a corporation is a creature of the
directly owned in the Investee Corporation. State whose laws it has been created. A
corporation organized under the laws of a
In other words, based on the said SEC Rule and foreign country, irrespective of the nationality of
DOJ Opinion, the Grandfather Rule or the second the persons who control it is necessarily a foreign
part of the SEC Rule applies only when the 60-40 corporation. The control test and the principal
Filipino-foreign equity ownership is in doubt (i.e., place of business test (siege social), are merely
in cases where the joint venture corporation with adjunct tests, when the place of incorporation
Filipino and foreign stockholders with less than test indicates that the subject corporation is
60% Filipino stockholdings [or 59%] invests in organized under Philippine laws.” However,
other joint venture corporation which is either based upon the foregoing, while the
60-40% Filipino-alien or the 59% less Filipino). incorporation test serves as the primary test
Stated differently, where the 60-40 Filipino- under Philippine jurisdiction, other tests such as
foreign equity ownership is not in doubt, the the control test must be used for purposes of
Grandfather Rule will not apply. compliance with the provisions of the
Constitution and of other laws on nationality
The “control test” is still the prevailing mode of requirements. Even if the corporation is a
determining whether or not a corporation is a creature of the State, there is a need to further
Filipino corporation, within the ambit of Sec. 2, safeguard/regulate certain areas of investment
Art. II of the 1987 Constitution, entitled to and activities for the protection of the interests of
undertake the exploration, development and Filipinos. For instance, the control test is used to
utilization of the natural resources of the determine the eligibility of a corporation, which
Philippines. When in the mind of the Court there has foreign equity participation in its ownership
is doubt, based on the attendant facts and structure, to engage in nationalized or partly
circumstances of the case, in the 60-40 Filipino- nationalized activities. [SEC-OGC Opinion No. 11-
equity ownership in the corporation, then it may 42, 12 October 2011; Underscoring supplied]
apply the “grandfather rule.”
Also note the following:
After a scrutiny of the evidence extant on record,
the Court finds that this case calls for the The Grandfather Rule is used as a “supplement”
application of the grandfather rule since, as ruled to the Control Test so that the intent underlying
by the POA and affirmed by the OP, doubt the averted Sec. 2, Art. XII of the Constitution be
prevails and persists in the corporate ownership given effect. The use of the Grandfather Rule as a
of petitioners. Here, doubt is present in the 60-40 “supplement” to the Control Test is not
Filipino equity ownership the corporations, since proscribed by the Constitution or the Philippine
their common investor, the 100% Canadian Mining Act of 1995. To reiterate, Sec. 2, Art. XII of
corporation––MBMI, funded them. [Narra Nickel the Constitution reserves the exploration,
Mining and Development Corp., et al. v. Redmont development, and utilization of natural resources
Consolidated Mines, G.R. No. 195580, April 21, to Filipino citizens and “corporations or
2014] associations at least sixty per centum of whose


- 26 -
capital is owned by such citizens.” Similarly, The Grandfather Rule, standing alone, should not
Section 3(aq) of the Philippine Mining Act of be used to determine the Filipino ownership and
1995 considers a “corporation x x x registered in control in a corporation, as it could result in an
accordance with law at least sixty per cent of the otherwise foreign corporation rendered qualified
capital of which is owned by citizens of the to perform nationalized or partly nationalized
Philippines” as a person qualified to undertake a activities. Hence, it is only when the Control Test
mining operation. Consistent with this objective, is first complied with that the Grandfather Rule
the Grandfather Rule was originally conceived to may be applied. Put in another manner, if the
look into the citizenship of the individuals who subject corporation’s Filipino equity falls below
ultimately own and control the shares of stock of the threshold 60%, the corporation is
a corporation for purposes of determining immediately considered foreign-owned, in which
compliance with the constitutional requirement case, the need to resort to the Grandfather Rule
of Filipino ownership. It cannot, therefore, be disappears.
denied that the framers of the Constitution have
not foreclosed the Grandfather Rule as a tool in On the other hand, a corporation that complies
verifying the nationality of corporations for with the 60-40 Filipino to foreign equity
purposes of ascertaining their right to participate requirement can be considered a Filipino
in nationalized or partly nationalized activities. corporation if there is no doubt as to who has the
“beneficial ownership” and “control” of the
Admittedly, an ongoing quandary obtains as to corporation. In that instance, there is no need for
the role of the Grandfather Rule in determining a dissection or further inquiry on the ownership
compliance with the minimum Filipino equity of the corporate shareholders in both the
requirement vis-à-vis the Control Test. This investing and investee corporation or the
confusion springs from the erroneous application of the Grandfather Rule. As a
assumption that the use of one method forecloses corollary rule, even if the 60-40 Filipino to
the use of the other. foreign equity ratio is apparently met by the
subject or investee corporation, a resort to the
As exemplified by the above rulings, opinions, Grandfather Rule is necessary if doubt exists as
decisions and this Court’s April 21, 2014 to the locus of the “beneficial ownership” and
Decision, the Control Test can be, as it has been, “control.” In this case, a further investigation as
applied jointly with the Grandfather Rule to to the nationality of the personalities with the
determine the observance of foreign ownership beneficial ownership and control of the corporate
restriction in nationalized economic activities. shareholders in both the investing and investee
The Control Test and the Grandfather Rule are corporations is necessary.
not, as it were, incompatible ownership-
determinant methods that can only be applied As explained in the April 21, 2012 Decision, the
alternative to each other. Rather, these methods “doubt” that demands the application of the
can, if appropriate, be used cumulatively in the Grandfather Rule in addition to or in tandem
determination of the ownership and control of with the Control Test is not confined to, or more
corporations engaged in fully or partly bluntly, does not refer to the fact that the
nationalized activities, as the mining operation apparent Filipino ownership of the corporation’s
involved in this case or the operation of public equity falls below the 60% threshold. Rather,
utilities as in Gamboa or Bayantel. “doubt” refers to various indicia that the
“beneficial ownership” and “control” of the
corporation do not in fact reside in Filipino


- 27 -
shareholders but in foreign stakeholders. As Development Corp. v. Redmont Consolidated, GR
provided in DOJ Opinion No. 165, Series of 1984, No. 195580, January 28, 2015]
which applied the pertinent provisions of the
Anti-Dummy Law in relation to the minimum 14. Does an unlicensed foreign corporation,
Filipino equity requirement in the Constitution, importing goods into the Philippines, have
“significant indicators of the dummy status” have legal capacity to sue before Philippine
been recognized in view of reports “that some courts
Filipino investors or businessmen are being
utilized or [are] allowing themselves to be used Yes. Under Article 123 of the Corporation Code, a
as dummies by foreign investors” specifically in foreign corporation must first obtain a license
joint ventures for national resource exploitation. and a certificate from the appropriate
These indicators are: government agency before it can transact
business in the Philippines. Where a foreign
11. That the foreign investors provide corporation does business in the Philippines
practically all the funds for the joint without the proper license, it cannot maintain
investment undertaken by these Filipino any action or proceeding before Philippine courts
businessmen and their foreign partner; as provided under Section 133 of the Corporation
12. That the foreign investors undertake to Code. The Corporation Code provides no
provide practically all the technological definition for the phrase doing business.
support for the joint venture; Nevertheless, Section 1 of Republic Act No. 5455
13. That the foreign investors, while being (RA 5455) provides that the phrase doing
minority stockholders, manage the business shall include soliciting orders,
company and prepare all economic purchases, service contracts, opening offices,
viability studies. whether called liaison offices or branches;
appointing representatives or distributors who
(However) Suffice it to say in this regard that, are domiciled in the Philippines or who in any
while the Grandfather Rule was originally calendar year stay in the Philippines for a period
intended to trace the shareholdings to the point or periods totalling one hundred eighty days or
where natural persons hold the shares, the SEC more; participating in the management,
had already set up a limit as to the number of supervision or control of any domestic business
corporate layers the attribution of the nationality firm, entity or corporation in the Philippines; and
of the corporate shareholders may be applied. any other act or acts that imply a continuity of
commercial dealings or arrangements, and
In a 1977 internal memorandum, the SEC contemplate to that extent the performance of
suggested applying the Grandfather Rule on two acts or works, or the exercise of some of the
(2) levels of corporate relations for publicly-held functions normally incident to, and in
corporations or where the shares are traded in progressive prosecution of, commercial gain or of
the stock exchanges, and to three (3) levels for the purpose and object of the business
closely held corporations or the shares of which organization. Likewise, the Foreign Investments
are not traded in the stock exchanges. These Act which repealed Articles 44-56 of Book II of
limits comply with the requirement in Palting v. the Omnibus Investments Code of 1987,
San Jose Petroleum , Inc. that the application of enumerated not only the acts or activities which
the Grandfather Rule cannot go beyond the level constitute doing business but also those activities
of what is reasonable. [Narra Nickel Mining and which are not deemed doing business. Under the
FIA, the phrase doing business shall include


- 28 -
soliciting orders, service contracts, opening 4. The publication of a general
offices, whether called liaison offices or branches; advertisement through any print or
appointing representatives or distributors broadcast media;
domiciled in the Philippines or who in any 5. Maintaining a stock of goods in the
calendar year stay in the country for a period or Philippines solely for the purpose of
periods totalling one hundred eighty (180) days having the same processed by another
or more; participating in the management, entity in the Philippines;
supervision or control of any domestic business, 6. Consignment by a foreign entity of
firm, entity or corporation in the Philippines; and equipment with a local company to be
any other act or acts that imply a continuity of used in the processing of products for
commercial dealings or arrangements, and export;
contemplate to that extent the performance of 7. Collecting information in the Philippines;
acts or works, or the exercise of some of the and
functions normally incident to, and in 8. Performing services auxiliary to an
progressive prosecution of, commercial gain or of existing isolated contract of sale which are
the purpose and object of the business not on a continuing basis, such as
organization: Provided, however, That the phrase installing in the Philippines machinery it
doing business shall not be deemed to include has manufactured or exported to the
mere investment as a shareholder by a foreign Philippines, servicing the same, training
entity in domestic corporations duly registered domestic workers to operate it, and
to do business, and/or the exercise of rights as similar incidental services.
such investor; nor having a nominee director or
officer to represent its interests in such Most of these activities do not bring any direct
corporation; nor appointing a representative or receipts or profits to the foreign corporation.
distributor domiciled in the Philippines which Thus, to constitute doing business, the activity
transacts business in its own name and for its undertaken in the Philippines should involve
own account. he determination of whether a profit-making. A foreign company that merely
foreign corporation is doing business in the imports goods from a Philippine exporter,
Philippines must be based on the facts of each without opening an office or appointing an agent
case. he Implementing Rules and Regulations of in the Philippines, is not doing business in the
RA 7042 provide under Section 1(f), Rule I, that Philippines. [Cargill, Inc. v. Intrastrata Assurance,
doing business does not include the following G.R. No. 168266, March 15, 2010]
acts:
To be doing or transacting business in the
1. Mere investment as a shareholder by a Philippines for purposes of Section 133 of the
foreign entity in domestic corporations Corporation Code, the foreign corporation
duly registered to do business, and/or the must actually transact business in the
exercise of rights as such investor; Philippines, that is, perform specific business
2. Having a nominee director or officer to transactions within the Philippine territory
represent its interests in such on a continuing basis in its own name and for
corporation; its own account. Actual transaction of
3. Appointing a representative or distributor business within the Philippine territory is an
domiciled in the Philippines which essential requisite for the Philippines to to
transacts business in the representative's acquire jurisdiction over a foreign
or distributor's own name and account; corporation and thus require the foreign


- 29 -
corporation to secure a Philippine business
license. If a foreign corporation does not The Court has recognized that a stockholder’s
transact such kind of business in the Philippines, right to institute a derivative suit is not based on
even if it exports its products to the Philippines, any express provision of the Corporation Code, or
the Philippines has no jurisdiction to require even the Securities Regulation Code, but is
such foreign corporation to secure a Philippine impliedly recognized when the said laws make
business license. [B. Van Zuiden Bros., Ltd. v. GTVL corporate directors or officers liable for damages
Marketing Industries, Inc., G.R. No. G.R. No. suffered by the corporation and its stockholders
147905, 28 May 2007] for violation of their fiduciary duties. Hence, a
stockholder may sue for mismanagement, waste
15. SMBI is a family owned and run or dissipation of corporate assets because of a
corporation. One of the family members special injury to him for which he is otherwise
agreed to loan money to SMBI and other without redress. In effect, the suit is an action for
corporations owned by the same family to specific performance of an obligation owed by
settle the corporate obligations. A check the corporation to the stockholders to assist its
was thus issued in the name of the family rights of action when the corporation has been
members. SMBI thereafter increased its put in default by the wrongful refusal of the
capital stock. Thereafter, a series of events directors or management to make suitable
transpired, which lead one of the measures for its protection. The basis of a
stockholders to file a derivative suit, stockholder’s suit is always one in equity.
claiming he has been illegally excluded However, it cannot prosper without first
from management and participation in the complying with the legal requisites for its
business of SMBI and that some of the institution.
family members refuse to settle their
obligations with the corporation. Is the Section 1, Rule 8 of the Interim Rules imposes the
complaint a derivative suit? following requirements for derivative suits:

No. A derivative suit is an action brought by a (1) The person filing the suit must be a
stockholder on behalf of the corporation to stockholder or member at the time the
enforce corporate rights against the acts or transactions subject of the action
corporation’s directors, officers or other insiders. occurred and the time the action was filed;
Under Sections 23 and 36 of the Corporation (2) He must have exerted all reasonable
Code, the directors or officers, as provided under efforts, and alleges the same with
the by-laws, have the right to decide whether or particularity in the complaint, to exhaust
not a corporation should sue. Since these all remedies available under the articles of
directors or officers will never be willing to sue incorporation, by-laws, laws or rules
themselves, or impugn their wrongful or governing the corporation or partnership
fraudulent decisions, stockholders are permitted to obtain the relief he desires;
by law to bring an action in the name of the (3) No appraisal rights are available for the
corporation to hold these directors and officers act or acts complained of; and
accountable. In derivative suits, the real party in (4) The suit is not a nuisance or harassment
interest is the corporation, while the stockholder suit.
is a mere nominal party.
Applying the foregoing, the Complaint is not a
The Court, in Yu v. Yukayguan, explained: derivative suit. The Complaint failed to show how


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the acts of some of the family members resulted directors. [Heirs of Gamboa v. Teves,
in any detriment to SMBI. The loan was not a G.R.No.176579, October 9, 2012] Thus, for
corporate obligation, but a personal debt. The purposes of determining compliance therewith,
check was issued to specific persons and not the required percentage of Filipino ownership
SMBI. The proceeds of the loan were used for shall be applied to BOTH (a) the total number of
payment of the obligations of the other outstanding shares of stock entitled to vote in the
corporations owned by the family as well as the election of directors; AND (b) the total number of
purchase of real properties for the brothers. outstanding shares of stock, whether or not
SMBI was never named as a co-debtor or entitled to vote in the election of directors. [SEC
guarantor of the loan. Both loan instruments Memorandum Circular no. 8, series of 2013]
were executed by two of the family members in
their personal capacity, and not in their capacity Both the Voting Control Test and the Beneficial
as directors or officers of SMBI. Thus, SMBI is Ownership Test must be applied to determine
under no legal obligation to satisfy the obligation. whether a corporation is a “Philippine national.”
[Heirs of Gamboa v. Teves, G.R.No.176579,
The fact that the family members attempted to October 9, 2012]
constitute a mortgage over "their" share in a
corporate asset cannot affect SMBI. The Civil 17. Is a foreign corporation required to obtain
Code provides that in order for a mortgage to be a license to transact business in the
valid, the mortgagor must be the "absolute owner Philippines if such becomes a member of a
of the thing x x x mortgaged." Corporate assets petroleum consortium, but is not the
may be mortgaged by authorized directors or operator thereof, and will hold only a
officers on behalf of the corporation as owner, minority and non-controlling interest
"as the transaction of the lawful business of the therein?
corporation may reasonably and necessarily
require." However, the wording of the Mortgage Yes, if the corporation is not a mere limited
reveals that it was signed by two of the family partner, then the subject foreign corporation still
members in their personal capacity as the needs to obtain a license to do business in the
"owners" of a pro-indiviso share in SMBI’s land Philippines under the Foreign Investments Act
and not on behalf of SMBI. [Juanito Ang, for and in (FIA) of 1991, notwithstanding the fact that it
behalf of Sunrise Marketing (Bacolod), Inc. v. Sps. holds a minority and non-controlling interest in
Roberto and Rachel Ang, G.R. No. 201675, June 19, the consortium. A consortium or joint venture is
2013] a form of partnership, governed by the laws of
partnership. Doing business is, among others, the
16. For purposes of determining compliance participation in the management, supervision, or
with ownership requirements under the control of any domestic business, firm, entity, or
Constitution and existing laws, for corporation. in order to be exempted from
corporations engaged in areas of activities obtaining a license to do business in the
or enterprises specifically reserved, wholly Philippines, the foreign corporation must prove
or partly, to Philippine Nationals, what that it merely invested as a shareholder in a
should be considered? domestic corporation. This is limited to
‘investment in a corporation’, which does not
For this purpose, ‘capital’ under Section 11, necessarily include ‘investment in a partnership’.
Article XII of the 1987 Constitution refers to There being differences between the two, the
shares of stock entitled to vote in the election of effects of such investments should be


- 31 -
differentiated. Investment in a partnership will the articles of incorporation of the surviving
only be akin to an investment in a corporation corporation, or in case of consolidation, all the
that is exempt from the doing of business rule statements required in the articles of
only when the foreign corporation is exclusively incorporation of a corporation.
a limited partner and takes no part in the
management and control of the business (2) Submission of plan to stockholders or
operation of the limited partnership. If the members of each corporation for approval. A
corporation is not a limited partner and actively meeting must be called and at least two (2)
takes part in the control of the business, then the weeks’ notice must be sent to all stockholders
corporation is doing business in the Philippines or members, personally or by registered mail.
as provided in Section 3(d) of the FIA, thus, must A summary of the plan must be attached to the
secure a license to do business in the Philippines. notice. Vote of two-thirds of the members or of
[SEC Opinion No. 14-01, 21 February 2014] stockholders representing two thirds of the
outstanding capital stock will be needed.
18. TRB sold to BOC its banking business Appraisal rights, when proper, must be
which was later on approved by the BSP respected.
monetary board. Later, as a result of
previous court litigation, TRB was order to (3) Execution of the formal agreement,
pay RPN, IBB and BBC damages, for which a referred to as the articles of merger o[r]
writ of execution was issued, which consolidation, by the corporate officers of each
included properties covered by the constituent corporation. These take the place
covered by the sale to BOC. Can BOC be of the articles of incorporation of the
held liable for the damages to be paid to consolidated corporation, or amend the
RPN, IBB and BBC? articles of incorporation of the surviving
corporation.
No. Merger is a re-organization of two or more
corporations that results in their consolidating (4) Submission of said articles of merger or
into a single corporation, which is one of the consolidation to the SEC for approval.
constituent corporations, one disappearing or
dissolving and the other surviving. To put it (5) If necessary, the SEC shall set a hearing,
another way, merger is the absorption of one or notifying all corporations concerned at least
more corporations by another existing two weeks before.
corporation, which retains its identity and takes
over the rights, privileges, franchises, properties, (6) Issuance of certificate of merger or
claims, liabilities and obligations of the absorbed consolidation.
corporation(s). The absorbing corporation
continues its existence while the life or lives of Indubitably, it is clear that no merger took place
the other corporation(s) is or are terminated. between BOC and TRB as the requirements and
procedures for a merger were absent. A merger
The Corporation Code requires the following does not become effective upon the mere
steps for merger or consolidation: agreement of the constituent corporations. All
the requirements specified in the law must be
(1) The board of each corporation draws up a complied with in order for merger to take effect.
plan of merger or consolidation. Such plan Section 79 of the Corporation Code further
must include any amendment, if necessary, to provides that the merger shall be effective only


- 32 -
upon the issuance by the Securities and Exchange in an acquisition that will result in
Commission (SEC) of a certificate of merger. ownership of more than 51% of such
corporation. The tender offer here shall be
Here, BOC and TRB remained separate made to the stockholders under the terms
corporations with distinct corporate specified in the offer by filing with the SEC
personalities. What happened is that TRB sold a declaration to this effect. If the security if
and BOC purchased identified recorded assets of over-subscribed, the sellers of the
TRB in consideration of BOC’s assumption of securities share pro-rata.12
identified recorded liabilities of TRB including
booked contingent accounts. In strict sense, no Note: This has been increased to 35% (from
merger or consolidation took place as the records 15% and 30%) by a SEC memorandum Circular
do not show any plan or articles of merger or no. 12, series of 2003 effective indefinitely until
consolidation. More importantly, the SEC did not the law is amended pursuant to its authority
issue any certificate of merger or consolidation. under sec. 72.1. So now, instead of the 15% and
[Bank of Commerce v. Radio Philippines Network, the 30% provided, it is now 35%. According to
Inc., et al., G.R. No. 195615, April 21, 2014] the SEC the lower limits of the mandatory tender
offer discourage foreign investors.
19. What is an “Issuer Tender Offer”?
21. What are Voluntary Tender Offers?
Issuer tender offer is a phrase, which means a
publicly announced intention by an issuer to These are offers made where some or all of the
acquire any of its own class of equity securities or following factors are present:
by an affiliate of such issuer to acquire such
securities. The offeror or buyer in an issue tender 1) Active and widespread solicitation of
offer transaction proposes to buy or acquire, at public shareholders for the shares of a
the stated price and given terms, its own shares public company;
of stocks held by its own stockholder who in turn 2) Solicitation made for a substantial
simply have to accept the tender to effect the percentage of the issuer’s stock;
sale.10 3) Offer to purchase is made at a premium
over the prevailing market price, at firm
20. What are Mandatory Tender Offers? rather than negotiable terms;
4) An offer is contingent on the tender of a
These are tender offers wherein any person or fixed number of shares; and/or
group of persons intends to acquire: 5) Offer is only open for a limited period of
time.13
1) 35% or more of the equity of a public
company (single acquisition); or 22. What may be done to securities deposited
2) 35% or more of the equity of such pursuant to tender offers?
corporation over a period of 12 months
(‘creeping acquisitions’), as the case may
be.11 12 SRC Rule 19.,par. 2. The rule on mandatory tender offers covers not only
direct acquisitions but also indirect acquisition or any type of acquisition.
3) Even if less than 35 % of equity is Cemco Holdings v. National Life Insurance, 529 SCRA 355 (2007). Asked in the
acquired, it is also mandatory if it results 2010 Bar Exam.
13 SRC Rule 19.1, par. 4; This reflects the 8-factor test in Wellman v. Dickinson
test (475 F.Supp. 783, 823-824 [S.D.N.Y., 1979) involving the coordinated
10 Osmena III v. SSS, 533 SCRA 313 (2007). private solicitations of 30 institutions and 9 individuals, with a premium price
11 Sec. 19.1 (a), SRC. offered and no individualized negotiations.


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These securities may be withdrawn at any time invitation for tenders, or any solicitation or
throughout the period that the tender offer security holders in opposition to or in favor of
remains open and if the securities deposited have any such offer, request or invitation.17
not been previously accepted for payment, and at
any time after 60 days form the date of original
tender offer or request or invitation.14 Transportation Law

23. What are the effects of changing the terms 1. N Corp. shipped goods to UMC from Japan
of the tender offer before its expiration? to Manila. The goods were insured by P
Insurance against all risks. When they
If a person varies the terms of tender offer or arrived in Manila, it was found that one
request or invitation for tenders before the package was in bad order. UMC declared
expiration thereof, by increasing the the damaged goods as a total loss. P
consideration offered to holders of such insurance paid UMC for the loss, and filed a
securities, then he is obliged to pay the increased complaint against N Corp. and the brokers.
consideration to each security holder, so long as The goods were delivered to UMC on May
the latter’s securities have been taken up and 12, 1995, and it filed a bad order survey on
paid for.15 that same day. The action was filed by the
insurer on January 18, 1996. Has the action
24. What happens when the securities offered prescribed?
exceed the offer made?
No. The prescriptive period for filing an action
If the securities offered exceed that which a for the loss or damage of the goods under the
person or group of persons are bound/willing to COGSA is found in paragraph (6), Section 3, thus:
take and pay for, then the securities will be taken
up as nearly as may be pro rata, disregarding (6) Unless notice of loss or damage and the
fractions, according to the number of securities general nature of such loss or damage be given in
deposited by each depositor.16 writing to the carrier or his agent at the port of
discharge before or at the time of the removal of
25. What are the unlawful or prohibited acts the goods into the custody of the person entitled
relating to tender offers? to delivery thereof under the contract of carriage,
such removal shall be prima facie evidence of the
It shall be unlawful for any person to: delivery by the carrier of the goods as described
π in the bill of lading. If the loss or damage is not
1) Make any statement of a material fact or apparent, the notice must be given within three
omit to state any material fact necessary days of the delivery.
in order to make the statements made not
misleading; Said notice of loss or damage maybe endorsed
2) Engage in any fraudulent, deceptive or upon the receipt for the goods given by the
manipulative acts or practices; person taking delivery thereof.

In connection with any tender offer or request or
14 Sec. 19.1 (c), SRC.

15 Sec. 19.1 (e), SRC.
16 Sec. 19..1 (d), SRC. 17 Sec. 19.3, SRC.


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The notice in writing need not be given if the available. Here, UMC filed a request for bad order
state of the goods has at the time of their receipt survey on May 12, 1995, even before all the
been the subject of joint survey or inspection. packages could be unloaded to its warehouse.

In any event the carrier and the ship shall be Moreover, paragraph (6), Section 3 of the COGSA
discharged from all liability in respect of loss or clearly states that failure to comply with the
damage unless suit is brought within one year notice requirement shall not affect or prejudice
after delivery of the goods or the date when the the right of the shipper to bring suit within one
goods should have been delivered: Provided, year after delivery of the goods. The insurer, as
That if a notice of loss or damage, either apparent subrogee of UMC, filed the Complaint for
or concealed, is not given as provided for in this damages on January 18, 1996, just eight months
section, that fact shall not affect or prejudice the after all the packages were delivered to its
right of the shipper to bring suit within one year possession on May 17, 1995. Evidently, the action
after the delivery of the goods or the date when was seasonably filed. [Asian Terminals, Inc. v.
the goods should have been delivered. Philam Insurance Co., Inc. (now Chartis Philippines
Insurance Inc.)/ Philam Insurance Co., Inc. (now
A letter of credit is a financial device developed Chartis Philippines Insurance Inc.) v. Westwind
by merchants as a convenient and relatively safe Shipping Corporation and Asian Terminals, Inc./
mode of dealing with sales of goods to satisfy the Westwind Shipping Corporation v. Philam
seemingly irreconcilable interests of a seller, who Insurance Co., Inc. and Asian Terminals, Inc., G.R.
refuses to part with his goods before he is paid, Nos. 181163/181262/181319, July 24, 2013]
and a buyer, who wants to have control of his
goods before paying. However, letters of credit 2. S Corp. shipped goods on board a vessel
are employed by the parties desiring to enter into owned by E Shipping, to be delivered to the
commercial transactions, not for the benefit of consignee, C Steel. The goods were insured
the issuing bank but mainly for the benefit of the by MS Insurance. The shipment arrived in
parties to the original transaction, in these cases, Manila, but it was found that some of the
N Corp. as the seller and UMC as the buyer. goods were in bad condition. When
Hence, the latter, as the buyer of the goods, delivered to C Steel, the latter rejected the
should be regarded as the person entitled to goods being unfit for their intended
delivery of the goods. Accordingly, for purposes purpose. S Corp thereafter shipped another
of reckoning when notice of loss or damage batch of goods under similar
should be given to the carrier or its agent, the circumstances, which when they arrived in
date of delivery to UMC is controlling. Manila, were also found to be in bad order.
Again, C Steel rejected the goods. C Steel
A request for, and the result of a bad order was paid by MS Insurance for the damage
examination, done within the reglementary to the goods, and thus, MS Insurance filed
period for furnishing notice of loss or damage to an action for damages against E Shipping
the carrier or its agent, serves the purpose of a and the stevedore. Can E Shipping be held
claim. A claim is required to be filed within the liable?
reglementary period to afford the carrier or
depositary reasonable opportunity and facilities Yes. It is settled in maritime law jurisprudence
to check the validity of the claims while facts are that cargoes while being unloaded generally
still fresh in the minds of the persons who took remain under the custody of the carrier. Based
part in the transaction and documents are still evidence presented, the goods were damaged


- 35 -
even before they were turned over to the arrastre operator for the damage sustained
stevedore. Such damage was even compounded by the unloader?
by the negligent acts of E Shipping and the
Stevedore which both mishandled the goods Yes. The ship owner and the ship agent are liable
during the discharging operations. Thus, it bears to the arrastre operator on the basis of quasi-
stressing unto E Shipping that common carriers, delict, and not breach of contract, there being no
from the nature of their business and for reasons contractual relation between them. The arrastre
of public policy, are bound to observe operator’s contractual relation is not with the
extraordinary diligence in the vigilance over the ship owner and ship agent, but with the
goods transported by them. Subject to certain consignee of the goods shipped and with the
exceptions enumerated under Article 1734 of the Philippine Ports Authority (PPA). They may be
Civil Code, common carriers are responsible for held liable in view of Article 2176 of the Civil
the loss, destruction, or deterioration of the Code, which provides “[w]hoever by act or
goods. The extraordinary responsibility of the omission causes damage to another, there being
common carrier lasts from the time the goods are fault or negligence, is obliged to pay for the
unconditionally placed in the possession of, and damage done. Such fault or negligence, if there is
received by the carrier for transportation until no pre-existing contractual relation between the
the same are delivered, actually or constructively, parties, is called a quasi-delict and is governed by
by the carrier to the consignee, or to the person the provisions of this Chapter.” And, by the
who has a right to receive them. Owing to this failure of the ship owner and the ship agent to
high degree of diligence required of them, explain the circumstances that attended the
common carriers, as a general rule, are presumed accident, when knowledge of such circumstances
to have been at fault or negligent if the goods is accessible only to them, they failed to
they transported deteriorated or got lost or overcome the prima facie presumption that the
destroyed. That is, unless they prove that they accident arose from or was caused by their
exercised extraordinary diligence in transporting negligence or want of care. The res ipsa loquitur
the goods. In order to avoid responsibility for any doctrine is based in part upon the theory that the
loss or damage, therefore, they have the burden defendant in charge of the instrumentality which
of proving that they observed such high level of causes the injury either knows the cause of the
diligence. In this case, E Shipping failed to hurdle accident or has the best opportunity of
such burden. [Eastern Shipping Lines v. BPI/MS ascertaining it and that the plaintiff has no such
Insurance Corporation, G.R. No. 193986, 15 knowledge, and therefore is compelled to allege
January 2014] negligence in general terms and to rely upon the
proof of the happening of the accident in order to
3. A shipped soybean meal on board a establish negligence. The prima facie evidence of
chartered vessel M/V C to consignees in the the ship owner and ship agent’s negligence, being
Philippines. While the soybean meal was unexplained and uncontroverted, is sufficient to
being unloaded, the unloader hit a steel bar maintain the proposition affirmed. Hence, the
in the middle of the soybean, causing two of negligence of the Master of the Vessel is
the screws of the unloader to break off. The conclusively presumed to be the proximate cause
arrastre operator, owner of the unloader, of the damage sustained by the unloader.
claimed for damages from the ship owner Moreover, since the Master’s liability is
and the shipping agent, but was rejected. ultimately that of the shipowner because he is
This being the case, the claim was brought the representative of the shipowner, the
to court. Can they be held liable by the shipowner and its agents are solidarily liable to


- 36 -
pay the arrastre operator the amount of damages evidence of such terms other than the contents of
actually proved. [Unknown Owner of M/V China the written agreement.
Joy v. Asian Terminals, G.R. No. 195661, March 11,
2015] The declaration requirement does not require
that all the details must be written down on the
4. S Corp. shipped steel sheets to Manila for very bill of lading itself. It must be emphasized
CS, the consignee, on board E’s vessel. The that all the needed details are in the invoice,
steel sheets arrived in Manila, and were which “contains the itemized list of goods
turned over to the arrastre operator of safe shipped to a buyer, stating quantities, prices,
keeping, but when withdrawn, they were shipping charges,” and other details which may
found to have been damaged, prompting contain numerous sheets. Compliance can be
the consignee to reject the entire shipment. attained by incorporating the invoice, by way of
Another shipment of steel was made by S reference, to the bill of lading provided that the
Corp. for the same consignee on board former containing the description of the nature,
another vessel owned by E. but, when the value and/or payment of freight charges is as in
sheets arrived in Manila, they were this case duly admitted as evidence. [Eastern
damaged, and sustained further damage Shipping Lines v. BPI/MS Insurance Corp., G.R. No.
upon discharge from vessel. Thus, the 182864, January 12, 2015]
consignee again rejected them. The
consignee was able to recover from the 5. DBI is a local company producing
cargo insurers, who then sought to recover housewares and handicraft items for
damages from the E. E argued that as the export. A Corp., a foreign company, ordered
carrier, his liability was limited to $500.00 223 cartons of assorted wooden items from
per package, since the bills of lading DBI, worth $12,590.87. It designated ACCLI
covering the damaged goods did not state as the forwarding agent that will ship out
the value of the cargo, but only made its order from the Philippines to the US.
reference to invoices. The invoices, in turn, ACCLI is a domestic corporation acting as
specified the value of the cargoes and bore agent of ASTI, a US based corporation
the notation “Freight Prepaid” and “As engaged in carrier transport business, in
Arranged.” Is E correct? the Philippines. DBI delivered the goods to
ACCLI for sea transport from Manila for
No. Both Bills of Lading complied with the delivery to A Corp. in the US, with ACCLI
requirements provided by the COGSA. The bills of issuing a bill of lading to DBI, with a
lading represent the formal expression of the provision stating contains a provision
parties’ rights, duties and obligations. It is the stating that “if required by the Carrier this
best evidence of the intention of the parties Bill of Lading duly endorsed must be
which is to be deciphered from the language used surrendered in exchange for the Goods
in the contract, not from the unilateral post of delivery order.” The original copies of
facto assertions of one of the parties, or of third the bill of lading were kept by DBI pending
parties who are strangers to the contract. Thus, payment from A Corp. A Corp and ASTI
when the terms of an agreement have been then entered into an indemnity agreement
reduced to writing, it is deemed to contain all the whereby A Corp. obligated ASTI to deliver
terms agreed upon and there can be, between the the shipment to it or to its order “without
parties and their successors in interest, no the surrender of the relevant bill(s) of
lading due to the non-arrival or loss


- 37 -
thereof.” In exchange, A Corp. undertook to of the bill of lading shows no requirement that
indemnify and hold ASTI and its agent free the Bill of Lading must first be produced before
from any liability as a result of the release delivery to consignee. re is no obligation,
of the shipment. Thereafter, ASTI released therefore, on the part of ASTI and ACCLI to
the shipment to A Corp. without the release the goods only upon the surrender of the
knowledge of DBI, and without it receiving original bill of lading. Further, a carrier is
payment for the total cost of the shipment. allowed by law to release the goods to the
DBI then made several demands for consignee even without the latter’s surrender of
payment of the goods, but A Corp. failed to the bill of lading. general rule is that upon
pay, causing DBI to file a case against STI, receipt of the goods, the consignee surrenders
ACCLI, and ACCLI’s incorporators- the bill of lading to the carrier and their
stockholders for payment of the sum respective obligations are considered canceled.
corresponding to the value of the goods. The law, however, provides two exceptions
Can ASTI and ACCLI may be held solidarily where the goods may be released without the
liable to DBI for the value of the shipment? surrender of the bill of lading because the
consignee can no longer return it. These
Only A Corp., as the buyer of the goods, has the exceptions are when the bill of lading gets lost or
obligation to pay for their value. Under the Bill of for other cause. In either case, the consignee
Lading and the pertinent law and jurisprudence, must issue a receipt to the carrier upon the
ASTI and ACCLI are not liable to DBI. A bill of release of the goods. Such receipt shall
lading is defined as “a written acknowledgment produce the same effect as the surrender of the
of the receipt of goods and an agreement to bill of lading. Non-surrender of the original bill of
transport and to deliver them at a specified place lading does not violate the carrier’s duty of
to a person named or on his order.” It may also extraordinary diligence over the goods. Here, A
be defined as “an instrument in writing, signed Corp. could not produce the bill of lading
by a carrier or his agent, describing the freight so covering the shipment not because it was lost,
as to identify it, stating the name of the but for another cause: the bill of lading was
consignor, the terms of the contract of carriage, retained by DBI pending A Corp.’s full
and agreeing or directing that the freight be payment of the shipment. A Corp. and ASTI then
delivered to bearer, to order or to a specified entered into an Indemnity Agreement, wherein
person at a specified place. Under Article 350 of the former asked the latter to release the
the Code of Commerce, “the shipper as well as shipment even without the surrender of the bill
the carrier of the merchandise or goods may of lading. The execution of this Agreement, and
mutually demand that a bill of lading be made.” A the undisputed fact that the shipment was
bill of lading, when issued by the carrier to the released to A Corp. pursuant to it, operates as a
shipper, is the legal evidence of the contract of receipt in substantial compliance with the last
carriage between the former and the latter. It paragraph of Article 353 of the Code of
defines the rights and liabilities of the parties in Commerce. The contract between DBI and
reference to the contract of carriage. The ASTI is a contract of carriage of goods; hence,
stipulations in the bill of lading are valid and ASTI’s liability should be pursuant to that
binding unless they are contrary to law, morals, contract and the law on transportation of goods.
customs, public order or public policy. In this Not being a party to the contract of sale between
case, ACCLI issued the Bill of Lading as agent of DBI and A Corp., ASTI cannot be held liable for
ASTI, which bill governs the rights, obligations, the payment of the value of the goods sold.
and liabilities of DBI and ASTI. And, the language


- 38 -
[Designer Baskets v. Air Sea Transport, G.R. No. unrelated, and the ordinary buyer would not
184513, March 9, 2016] likely be confused thereby.

Intellectual Property Law A certificate of trademark registration confers
upon the trademark owner the exclusive right to
6. TK filed with the IPO an application for sue those who have adopted a similar mark not
trademark registration of “KOLIN” for use only in connection with the goods or services
on a combination of goods, including specified in the certificate, but also with those
colored televisions, refrigerators, window- that are related thereto.
type and split-type air conditioners,
electric fans and water dispensers. Said In resolving one of the pivotal issues in this case–
goods allegedly fall under Classes 9, 11, –whether or not the products of the parties
and 21 of the Nice Classification (NCL). The involved are related––the doctrine in Mighty
application was opposed by KE, saying that Corporation is authoritative. There, the Court
that trademark being registered by TK is held that the goods should be tested against
identical, if not confusingly similar, with its several factors before arriving at a sound
previously registered “KOLIN” mark, conclusion on the question of relatedness.
covering the following products under Among these are:
Class 9 of the NCL: automatic voltage
regulator, converter, recharger, stereo (a) the business (and its location) to which
booster, AC-DC regulated power supply, the goods belong;
step-down transformer, and PA amplified (b) the class of product to which the goods
AC-DC. Should TK be allowed to register its belong;
trademark? (c) the product’s quality, quantity, or size,
Yes. Mere uniformity in categorization, by itself, including the nature of the package,
does not automatically preclude the registration wrapper or container;
of what appears to be an identical mark, if that be (d) the nature and cost of the articles;
the case. Whether or not the products covered by (e) the descriptive properties, physical
the trademark sought to be registered by TK, on attributes or essential characteristics
the one hand, and those covered by the prior with reference to their form,
issued certificate of registration in favor of KE on composition, texture or quality;
the other, fall under the same categories in the (f) the purpose of the goods;
NCL is not the sole and decisive factor in (g) whether the article is bought for
determining a possible violation of KE’s immediate consumption, that is, day-to-
intellectual property right should TK’s day household items;
application be granted. It is a hornbook doctrine (h) the fields of manufacture;
that emphasis should be on the similarity of the (i) the conditions under which the article is
products involved and not on the arbitrary usually purchased; and
classification or general description of their (j) the channels of trade through which the
properties or characteristics. The mere fact that goods flow, how they are distributed,
one person has adopted and used a trademark on marketed, displayed and sold.
his goods would not, without more, prevent the
adoption and use of the same trademark by As mentioned, the classification of the products
others on unrelated articles of a different kind. under the NCL is merely part and parcel of the
And in case of the parties’ products, they are factors to be considered in ascertaining whether


- 39 -
the goods are related. It is not sufficient to state players, belong to audiovisiual equipment, while
that the goods involved herein are electronic that of respondent, consisting of automatic
products under Class 9 in order to establish voltage regulator, converter, recharger, stereo
relatedness between the goods, for this only booster, AC-DC regulated power supply, step-
accounts for one of many considerations down transformer, and PA amplified AC-DC,
enumerated in Mighty Corporation. In this case, generally fall under devices for controlling the
credence is accorded to TK’s assertions that: distribution and use of electricity. [Taiwan Kolin
v. Kolin Electronics, G.R. No. 209843, March 25,
a. TK’s goods are classified as home 2015]
appliances as opposed to KE’s goods
which are power supply and audio 7. Levi’s Inc. was a licensee of Levi’s, a US
equipment accessories; Corporation owner of trademarks and
b. TK’s television sets and DVD players designs of Levi’s Jeans. It received
perform distinct function and purpose information that D was selling counterfeit
from KE’s power supply and audio Levi’s jeans, and with the help of the NBI,
equipment; and had seized from D’s shop several fake
c. TK sells and distributes its various home Levi’s jeans, with the trademark “LS JEANS
appliance products on wholesale and to TAILORING”. It charged D with the crime of
accredited dealers, whereas KE’s goods trademark infringement. Is D guilty of
are sold and flow through electrical and infringement?
hardware stores.
No. The elements of the offense of trademark
Clearly then, it cannot be concluded that all infringement under the
electronic products are related and that the Intellectual Property Code are, therefore, the
coverage of one electronic product necessarily following:
precludes the registration of a similar mark over
another. In this digital age wherein electronic 1. The trademark being infringed is
products have not only diversified by leaps and registered in the Intellectual Property
bounds, and are geared towards interoperability, Office;
it is difficult to assert readily, as respondent 2. The trademark is reproduced,
simplistically did, that all devices that require counterfeited, copied, or colorably
plugging into sockets are necessarily related imitated by the infringer;
goods. 3. The infringing mark is used in connection
with the sale, offering for sale, or
It bears to stress at this point that the list of advertising of any goods, business or
products included in Class 9 can be sub- services; or the infringing mark is applied
categorized into five (5) classifications, namely: to labels, signs, prints, packages,
(1) apparatus and instruments for scientific or wrappers, receptacles or advertisements
research purposes, (2) information technology intended to be used upon or in connection
and audiovisual equipment, (3) apparatus and with such goods, business or services;
devices for controlling the distribution and use of 4. The use or application of the infringing
electricity, (4) optical apparatus and instruments, mark is likely to cause confusion or
and (5) safety equipment. From this sub- mistake or to deceive purchasers or
classification, it becomes apparent that others as to the goods or services
petitioner’s products, i.e., televisions and DVD themselves or as to the source or origin of


- 40 -
such goods or services or the identity of IPI, alleging that the latter engaged in
such business; and infringement of trademark. Upon
5. The use or application of the infringing implementation of the warrant, it was
mark is without the consent of the found that there were more than 6,000
trademark owner or the assignee thereof. pairs of shoes bearing S Corp’s registered
trademark (stylized S with an oval design).
The gravamen of the offense is he likelihood of Was there infringement?
confusion. There are two tests to determine
likelihood of confusion, namely: the dominancy Yes. There is colorable imitation between the
test, and the holistic test. The holistic test is shoes of IPI and S Corp. The essential element of
applicable here considering that the herein infringement under R.A. No. 8293 is that the
criminal cases also involved trademark infringing mark is likely to cause confusion. In
infringement in relation to jeans products. determining similarity and likelihood of
Accordingly, the jeans trademarks of Levi’s and D confusion, jurisprudence has developed tests: the
must be considered as a whole in determining Dominancy Test and the Holistic or Totality Test.
the likelihood of confusion between them. The
jeans made and sold by Levi’s, were very popular The Dominancy Test focuses on the similarity of
in the Philippines. The consuming public knew the prevalent or dominant features of the
that the original Levi’s jeans were under a foreign competing trademarks that might cause
brand and quite expensive. Such jeans could be confusion, mistake, and deception in the mind of
purchased only in malls or boutiques as ready-to- the purchasing public. Duplication or imitation is
wear items, and were not available in tailoring not necessary; neither is it required that the
shops like those of D’s as well as not acquired on mark sought to be registered suggests an effort to
a “made-to-order” basis. Under the imitate. Given more consideration are the aural
circumstances, the consuming public could easily and visual impressions created by the marks on
discern if the jeans were original or fake Levi’s the buyers of goods, giving little weight to factors
jeans, or were manufactured by other brands of like prices, quality, sales outlets, and market
jeans. D used the trademark “LS JEANS segments.
TAILORING” for the jeans he produced and sold
in his tailoring shops. His trademark was visually In contrast, the Holistic or Totality Test
and aurally different from the trademark “LEVI necessitates a consideration of the entirety of the
STRAUSS & CO” appearing on the patch of marks as applied to the products, including the
original jeans under the trademark LEVI’S. The labels and packaging, in determining confusing
word “LS” could not be confused as a derivative similarity. The discerning eye of the observer
from “LEVI STRAUSS” by virtue of the “LS” being must focus not only on the predominant words,
connected to the word “TAILORING”, thereby but also on the other features appearing on both
openly suggesting that the jeans bearing the labels so that the observer may draw conclusion
trademark “LS JEANS TAILORING” came or were on whether one is confusingly similar to the
bought from the tailoring shops of D, not from other.
the malls or boutiques selling original Levi’s
jeans to the consuming public. [Diaz v. People, Relative to the question on confusion of marks
G.R. No. 180677, 18 February 2013] and trade names, jurisprudence has noted two
(2) types of confusion, viz.: (1) confusion of
8. S Corp. filed an application for the issuance goods (product confusion), where the ordinarily
of search warrant to search a warehouse of prudent purchaser would be induced to purchase


- 41 -
one product in the belief that he was purchasing EYIS must be considered as the prior and
the other; and (2) confusion of business (source continuous user of the mark "VESPA" and its true
or origin confusion), where, although the goods owner. Hence, EYIS is entitled to the registration
of the parties are different, the product, the mark of the mark in its name. the registration of a mark
of which registration is applied for by one party, is prevented with the filing of an earlier
is such as might reasonably be assumed to application for registration. This must not,
originate with the registrant of an earlier however, be interpreted to mean that ownership
product, and the public would then be deceived should be based upon an earlier filing date. While
either into that belief or into the belief that there RA 8293 removed the previous requirement of
is some connection between the two parties, proof of actual use prior to the filing of an
though inexistent. application for registration of a mark, proof of
prior and continuous use is necessary to
Applying the Dominancy Test to the case at bar, establish ownership of a mark. Such ownership
this Court finds that the use of the stylized "S" by constitutes sufficient evidence to oppose the
IPI in its shoes infringes on the mark already registration of a mark. Sec. 134 of the IP Code
registered by S Corp. with the IPO. While it is provides that "any person who believes that he
undisputed that S Corp.’s stylized "S" is within an would be damaged by the registration of a mark x
oval design, to this Court's mind, the dominant x x" may file an opposition to the application. The
feature of the trademark is the stylized "S," as it is term "any person" encompasses the true owner
precisely the stylized "S" which catches the eye of of the mark the prior and continuous user.
the purchaser. Thus, even if IPI did not use an Notably, the Court has ruled that the prior and
oval design, the mere fact that it used the same continuous use of a mark may even overcome the
stylized "S", the same being the dominant feature presumptive ownership of the registrant and be
of S Copr.'s trademark, already constitutes held as the owner of the mark. By itself,
infringement under the Dominancy Test. registration is not a mode of acquiring
[Sketchers USA v. Inter Pacific Industrial, G.R. No. ownership. When the applicant is not the owner
164321, March 23, 2011] of the trademark being applied for, he has no
right to apply for registration of the same.
9. EYIS corp., a Philippine company, Registration merely creates a prima facie
distributes air conditioners and other presumption of the validity of the registration, of
industrial tools and equipment. SD corp., the registrants ownership of the trademark and
on the other hand, is a Taiwanese company of the exclusive right to the use thereof. Such
engaged in the manufacture of air presumption, just like the presumptive regularity
compressors. Both claimed to have the in the performance of official functions, is
right to register the trademark "VESPA" for rebuttable and must give way to evidence to the
air compressors. EYIS buys air contrary. In the instant case, EYIS is the prior
compressors from SD, but the documents user of the mark, and is thus the true owner
do not show that the said goods were thereof. [E.Y. Industrial Sales v. Shen Dar
marked as “VESPA”. EYIS was able to Electricity and Machinery Co. Ltd., G.R. No.
register the mark “VESPA” with the IPO. A 184850, 20 October 2010]
month later, SD was also granted
registration. SD filed a petition to cancel Prior use is no longer a condition for filing.
EYIS’ registration. Who is the true owner of However, the applicant or registrant shall file a
the mark? declaration of actual use of the mark, with
evidence to that effect, within 3 years from the


- 42 -
filing date of the application; otherwise the
application shall be refused or the mark shall be The present law on trademarks, Republic Act No.
removed from the Register.18 The present law on 8293, otherwise known as the Intellectual
trademark (IPC) has dispensed with the Property Code of the Philippines, as amended,
requirement of prior use at the time of the has already dispensed with the requirement of
registration.19 prior actual use at the time of registration. Thus,
there is more reason to allow the registration of
10. A French partnership filed with the IPO a the subject mark under the name of the French
trademark application for the mark "LE partnership as its true and lawful owner.
CORDON BLEU & DEVICE". This was
opposed by Ecole alleging that it was the The function of a trademark is to point out
owner of the mark "LE CORDON BLEU, distinctly the origin or ownership of the goods
ECOLE DE CUISINE MANILLE," which it has (or services) to which it is affixed; to secure to
been using since 1948 in cooking and other him, who has been instrumental in bringing into
culinary activities, including in its the market a superior article of merchandise, the
restaurant business, it has earned fruit of his industry and skill; to assure the public
immense and invaluable goodwill such that that they are procuring the genuine article; to
Cointreau’s use of the subject mark will prevent fraud and imposition; and to protect the
actually create confusion, mistake, and manufacturer against substitution and sale of an
deception to the buying public as to the inferior and different article as his product. As
origin and sponsorship of the goods, and such, courts will protect trade names or marks,
cause great and irreparable injury and although not registered or properly selected as
damage to Ecole’s business reputation and trademarks, on the broad ground of enforcing
goodwill as a senior user of the same. Can justice and protecting one in the fruits of his toil.
the said mark of the French partnership be [Ecole De Cuisine Manille (Cordon Bleu of the
registered? Philippines), Inc. v. Renaud Cointreau & CIE and Le
Condron Bleu Int’l., B.V., G.R. No. 185830, June 5,
Yes. Foreign marks which are not registered are 2013]
still accorded protection against infringement
and/or unfair competition. Under the Paris 11. What is the First-to-File rule for patents?
Convention, the Philippines is obligated to assure
nationals of the signatory-countries that they are The first to file rule provides that when 2 or more
afforded an effective protection against violation persons have made the invention separately and
of their intellectual property rights in the independently of each other, the right to patent
belongs to:
Philippines in the same way that their own

countries are obligated to accord similar 1) The person who first filed the application for
protection to Philippine nationals. “Thus, under such invention;
Philippine law, a trade name of a national of a 2) Where 2/more applications are filed for the same
State that is a party to the Paris Convention, invention, to the applicant who has the earliest
whether or not the trade name forms part of a filing date or the earliest priority date.20
trademark, is protected “without the obligation
of filing or registration.’” If the applications are filed on the same day, then the
patent is owned jointly.
18 Sec. 124.2, IPC
19 Shangri-la int’l Hotel v. developers Group of Companies, 486 SCRA 405 20 Sec. 29, IPC. This rule basically follows the legal principle of “first in time,
(2006). first in right.”


- 43 -
prima facie proof that the registrant is the owner
12. What is the first-to-file rule for of the registered mark or trade name. Evidence of
trademarks? prior and continuous use of the mark or trade
name by another can overcome the presumptive
RA 8293 espouses the "first-to-file" rule as stated ownership of the registrant and may very well
under Sec. 123.1(d) states that a mark cannot be entitle the former to be declared owner in an
registered if it is identical with a registered mark appropriate case.
belonging to a different proprietor or a mark
with an earlier filing or priority date, in respect Ownership of a mark or trade name may be
of: acquired not necessarily by registration but by
(i) The same goods or services, or adoption and use in trade or commerce. As
(ii) Closely related goods or services, or between actual use of a mark without
(iii) If it nearly resembles such a mark as to be registration, and registration of the mark without
likely to deceive or cause confusion. actual use thereof, the former prevails over the
latter. For a rule widely accepted and firmly
Under this provision, the registration of a mark is entrenched, because it has come down through
prevented with the filing of an earlier application the years, is that actual use in commerce or
for registration. This must not, however, be business is a pre-requisite to the acquisition of
interpreted to mean that ownership should be the right of ownership.
based upon an earlier filing date. While RA 8293
removed the previous requirement of proof of x x x x
actual use prior to the filing of an application for
registration of a mark, proof of prior and By itself, registration is not a mode of acquiring
continuous use is necessary to establish ownership. When the applicant is not the owner
ownership of a mark. Such ownership constitutes of the trademark being applied for, he has no
sufficient evidence to oppose the registration of a right to apply for registration of the same.
mark. Registration merely creates a prima facie
presumption of the validity of the registration, of
Sec. 134 of the IP Code provides that "any person the registrant’s ownership of the trademark and
who believes that he would be damaged by the of the exclusive right to the use thereof. Such
registration of a mark x x x" may file an presumption, just like the presumptive regularity
opposition to the application. The term "any in the performance of official functions, is
person" encompasses the true owner of the rebuttable and must give way to evidence to the
mark¾the prior and continuous user. contrary. [Shangri-la International Hotel
Management, Ltd. v. Developers Group of
Notably, the Court has ruled that the prior and Companies, Inc., G.R. No. 159938, March 31, 2006]
continuous use of a mark may even overcome the
presumptive ownership of the registrant and be 13. P Corp and S Corp supply and produce LPG
held as the owner of the mark. [E.Y. Industrial in the Philippines. P Corp is the registered
Sales v. Shen Dar Electricity and Machinery Co. owner of the trademarks “Gasul” and Gasul
Ltd., G.R. No. 184850, 20 October 2010] cylinders, while S Corp was the authorized
user of “Shellane” and Shellane cylinders in
Registration, without more, does not confer upon the Philippines. With the help of the NBI, it
the registrant an absolute right to the registered was found that R Corp was engaged in the
mark. The certificate of registration is merely a refilling and sale of LPG cylinders bearing


- 44 -
the registered marks of the P Corp and S by giving them the general appearance of goods
Corp without authority from the latter. Can of another manufacturer. There is a showing that
R Corp be held liable for infringement of the consumers may be misled into believing that
trademark and unfair competition? the LPGs contained in the cylinders bearing the
marks "GASUL" and "SHELLANE" are those goods
Yes. The mere unauthorized use of a container or products of the P Corp and S Corps when, in
bearing a registered trademark in connection fact, they are not. Obviously, the mere use of
with the sale, distribution or advertising of goods those LPG cylinders bearing the trademarks
or services which is likely to cause confusion, "GASUL" and "SHELLANE" will give the LPGs sold
mistake or deception among the buyers or by R Corp the general appearance of the products
consumers can be considered as trademark of the P Corp and S Corp. [Republic Gas
infringement. In the instant case, R Corp Corporation v. Petron Corporation and Plipinas
committed trademark infringement when they Shell, G.R. No. 194062, June 17, 2013]
refilled, without the consent of P Corp and S
Corp, the LPG containers bearing the latter’s 14. K Inc. had the trademarks, trading styles,
registered marks. R Corp’s acts will inevitably company names and business names
confuse the consuming public, since they have no "KENNEX", "KENNEX & DEVICE", "PRO
way of knowing that the gas contained in the LPG KENNEX" and "PRO-KENNEX", in its name. S
tanks bearing the marks of P Corp and S Corp is Corp. filed an action against K Inc. alleging
in reality not the latter’s LPG product after the trademark infringement, saying that K Inc.
same had been illegally refilled. The public will is a mere distributor of the goods covered
then be led to believe that R Corp are authorized by the marks and it is the actual owner of
refillers and distributors of the LPG products, the marks. However, S Corp.’s registration
considering that they are accepting empty of the marks was cancelled by in a
containers P Corp and S Corp, and refilling them registration cancellation case. Can the
for resale. action prosper? Was there unfair
competition?
Unfair competition has been defined as the
passing off (or palming off) or attempting to pass No. By operation of law, specifically Section 19 of
off upon the public of the goods or business of RA 166, the trademark infringement aspect of S
one person as the goods or business of another Corp.'s case has been rendered moot and
with the end and probable effect of deceiving the academic in view of the finality of the decision in
public. Passing off (or palming off) takes place the Registration Cancellation Case. In short, S
where the defendant, by imitative devices on the Corp. is left without any cause of action for
general appearance of the goods, misleads trademark infringement since the cancellation of
prospective purchasers into buying his registration of a trademark deprived it of
merchandise under the impression that they are protection from infringement from the moment
buying that of his competitors. Thus, the judgment or order of cancellation became final.
defendant gives his goods the general To be sure, in a trademark infringement, title to
appearance of the goods of his competitor with the trademark is indispensable to a valid cause of
the intention of deceiving the public that the action and such title is shown by its certificate of
goods are those of his competitor. In the present registration. With its certificates of registration
case, P Corp and S Corp pertinently observed that over the disputed trademarks effectively
by refilling and selling LPG cylinders bearing cancelled with finality, S Corp.'s case for
their registered marks, R Corp was selling goods trademark infringement lost its legal basis and no


- 45 -
longer presented a valid cause of action. confusing similarity in the general appearance of
the goods; and (2) intent to deceive the public
Likewise, there can be no infringement and defraud a competitor. In the instant case,
committed by K Inc. who was adjudged with there is no evidence exists showing that K Inc.
finality to be the rightful owner of the disputed ever attempted to pass off the goods it sold (i.e.
trademarks in the Registration Cancellation Case. sportswear, sporting goods and equipment) as
Even prior to the cancellation of the registration those of S Corp. In addition, there is no evidence
of the disputed trademarks, S Corp. - as a mere of bad faith or fraud imputable to K Inc. in using
distributor and not the owner – cannot assert any the disputed trademarks. [Superior Commercial
protection from trademark infringement as it had Enterprises v. Kunnan Enterprises., G.R. No.
no right in the first place to the registration of the 169974, April 20, 2010]
disputed trademarks. In fact, jurisprudence holds
that in the absence of any inequitable conduct on ---ooOoo---
the part of the manufacturer, an exclusive
distributor who employs the trademark of the
manufacturer does not acquire proprietary rights
of the manufacturer, and a registration of the
trademark by the distributor as such belongs to
the manufacturer, provided the fiduciary
relationship does not terminate before
application for registration is filed.

To establish trademark infringement, the
following elements must be proven: (1) the
validity of plaintiff's mark; (2) the plaintiff's
ownership of the mark; and (3) the use of the
mark or its colorable imitation by the alleged
infringer results in "likelihood of confusion."
Based on these elements, it is immediately
obvious that the second element – the plaintiff's
ownership of the mark - was what the
Registration Cancellation Case decided with
finality. On this element depended the validity of
the registrations that, on their own, only gave
rise to the presumption of, but was not
conclusive on, the issue of ownership.

Likewise, there is also no unfair competition in
the instant case. From jurisprudence, unfair
competition has been defined as 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. The
essential elements of unfair competition are (1)


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Negotiable Instruments Law

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14 Sec. 19.1 (c), SRC.

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