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CPA Review Batch 45  May 2023 CPA Licensure Examination

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REGULATORY FRAMEWORK for BUSINESS TRANSACTIONS J. DOMINGO  N. SORIANO
LAW ON OBLIGATIONS
OBLIGATIONS IN GENERAL
1. DEFINITION
An obligation is a juridical necessity to give, to do or not to do. (Art. 1156, Civil Code)
2. KINDS OF OBLIGATIONS AS TO BASIS AND ENFORCEABILITY
Civil obligations give a right of action to compel their performance.
Natural obligations, not being based on positive law but on equity and natural law, do not grant a right of action to enforce
their performance, but after voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or
rendered by reason thereof. Some natural obligations are set forth in the following articles.
EXAMPLES OF NATURAL OBLIGATIONS:

a. When without the knowledge or against the will of the debtor, a third person pays a debt which the obligor is not
legally bound to pay because the action thereon has prescribed, but the debtor later voluntarily reimburses the third
person, the obligor cannot recover what he has paid. (Art. 1425)
b. When, after an action to enforce a civil obligation has failed the defendant voluntarily performs the obligation, he
cannot demand the return of what he has delivered or the payment of the value of the service he has rendered. (Art. 1428)
c. When a testate or intestate heir voluntarily pays a debt of the decedent exceeding the value of the property which
he received by will or by the law of intestacy from the estate of the deceased, the payment is valid and cannot be rescinded
by the payer. (Art. 1429)
3. ESSENTIAL ELEMENTS OF OBLIGATION
a. Active subject (creditor/obligee) – the person in whose favor the obligation is constituted
b. Passive subject (debtor/obligor) – the person who is required to perform the obligation
c. Prestation – subject matter of the obligation – either to give, to do or not to do.
d. Vinculum Juris/Efficient Cause/Juridical Tie - the reason why the obligation exists which can be any of the 5 sources of
obligations
Transmissibility of Obligation:
General Rule: all rights acquired in virtue of an obligation are transmissible
Except:
a. When the nature of the obligation is that it is not transmissible
b. By stipulation
c. By provision of law
SOURCES OF OBLIGATIONS
1. LAW (Obligations ex lege)
Art. 1158. Obligations derived from law are not presumed. Only those expressly determined in this Code or in special laws
are demandable, and shall be regulated by the precepts of the law which establishes them; and as to what has not been
foreseen, by the provisions of [Civil Code].
2. CONTRACTS (Obligations ex contractu)
A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something
or to render some service. (Art. 1305)
Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good
faith. (Art. 1159)
3. QUASI-CONTRACTS (Obligations ex quasi-contractu)
The juridical relation resulting from lawful, voluntary and unilateral acts by virtue of which the parties become bound to
each other to the end that no one will be unjustly enriched or benefited at the expense of another.
NOMINATE QUASI-CONTRACTS:
A. NEGOTIORUM GESTIO– Whoever voluntarily takes charge of the agency or management of the business or property of
another, without any power from the latter, is obliged to continue the same until the termination of the affair and its
incidents, or to require the person concerned to substitute him, if the owner is in a position to do so. This juridical
relation does not arise in either of these instances:
1. When the property or business is not neglected or abandoned;
2. If in fact the manager has been tacitly authorized by the owner. (Art. 2144)
Here, there is created an obligation for the owner to compensate the officious manager/gestor for his services.
B. SOLUTIO INDEBITI – the juridical relation which is created when something is received when there is no right to demand
it and it was unduly delivered through mistake.
Requisites:
1. There is no right to receive the thing delivered
2. The thing was delivered through mistake
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LAW on OBLIGATIONS RFBT-01
Other example of Quasi-Contracts: When funeral expenses are borne by a third person, without the knowledge of those
relatives who were obliged to give support to the deceased, said relatives shall reimburse the third person, should the
latter claim reimbursement. (Art. 2165)
4. DELICT (Obligations ex maleficio or ex delicto)
Delict is an act or omission punishable by law which may be governed by the Revised Penal Code, other penal laws, or the Title
on Human Relations under the Civil Code.
Revised Penal Code:
Every person criminally liable for a felony is also civilly liable. (Art. 100, Revised Penal Code)
Note, also, that under the Rules of Court, whenever a criminal action is instituted, the civil action for the civil liability is impliedly
instituted therewith.
The civil liability arising from a crime includes:

1. Restitution;
2. Reparation of the damage caused;
3. Indemnification for consequential damages.
Proof necessary:
a. Criminal liability – proof beyond reasonable doubt
b. Civil liability – preponderance of evidence
Acquittal of accused:
a. Acquittal because the accused did not do the act complained of – no civil liability
b. Acquittal due to reasonable doubt – there can still be civil liability.
5. QUASI-DELICTS (Obligations ex quasi-delicto or ex quasi-maleficio)
Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done.
Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a quasi-delict and is
governed by the provisions of this Chapter. (Art. 2176)
Requisites:
a. There must be an act or omission;
b. There must be fault or negligence;
c. There must be damage caused;
d. There must be a direct relation of cause and effect between the act or omission and the damage;
Vicarious Liability: Under Art. 2180 of the Civil Code, the following are responsible for the damages caused by:
Acts done by: Who is responsible?

Minor children who live in their company The father, in case of his death or
incapacity, the mother
Minors and incapacitated persons Guardians
Employees in the service of the branches in which they are employed or on the Owners and Managers of establishment
occasion of their functions or enterprise
Employees and household helpers acting within the scope of their assigned tasks, Employers
even if the employer is not engaged in any business or industry
Special agent, except when the damage was caused by the official to whom the The State
task done properly pertains
Pupils and student or apprentices, so long as they remain in their custody Teachers or Heads of Establishments of
Arts and Trade
Defense: the responsibility shall cease when the persons above-mentioned prove they observed all the diligence of a good
father of a family to prevent damage.
For the employer, specifically, if he is able to prove due diligence in the selection and supervision of the employee.
Note that this defense is not available against the employer’s subsidiary liability arising from a delict or crime.
Multiple Sources of Obligations: a single act can be the source of multiple sources of obligations.
Double recovery not allowed: Responsibility for fault or negligence under the preceding article is entirely separate and
distinct from the civil liability arising from negligence under the Penal Code. But the plaintiff cannot recover damages twice for
the same act or omission of the defendant. (Art. 2177)
KINDS OF CIVIL OBLIGATIONS
1. AS TO PERFECTION AND EXTINGUISHMENT
PURE OBLIGATIONS: an obligation whose performance does not depend upon a future or uncertain event, or upon a past
event unknown to the parties, and is demandable at once.
CONDITIONAL OBLIGATIONS: In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of
those already acquired, shall depend upon the happening of the event which constitutes the condition. (Art. 1181)
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Conditions: are uncertain events which wields an influence on a legal relationship.
Kinds of Conditions
as to when the obligation should suspensive happening of which gives rise to the obligation
be performed resolutory happening of which extinguishes the rights already existing
potestative depends on the will of the party to the juridical relation
as to whom or where it depends casual depends on chance
mixed partly depends on will of the party or partly on chance
as to capacity to be performed divisible can be performed in parts
in parts indivisible cannot be performed in parts
as to number of obligations are conjunctive all must be performed
to be performed when there are alternative only one must be performed
several of them
positive act
as to nature
negative omission
as to how made known to the express stated
other party implied merely inferred
as to whether the obligation can possible can be fulfilled
be fulfilled impossible cannot be fulfilled either physically or legally
Potestative Condition: a condition dependent solely on the will of one of the parties.
When void: if it is dependent solely on the will of the debtor and the condition is suspensive in character. (Art. 1182) This is
so, because if it were allowed by law, there is a possibility that the obligation will never arise.
Constructive or Presumed Fulfillment: The condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfillment. (Art. 1186)
Impossible Conditions: shall annul the obligation which depends upon them. If the obligation is divisible, that part thereof
which is not affected by the impossible or unlawful condition shall be valid. (Art. 1183)
Impossibility: can either be:

1. Physically impossible – such as a condition requiring the debtor to go to the sun; or
2. Legally impossible – such as when it is contrary to law, good customs, public policy, such as a condition requiring the debtor
to kill somebody.
Effect:
1. When an impossible condition is imposed in an obligation to do, the obligation and the condition are treated as void since
the debtor knows that no fulfillment can be done and therefore is not serious about being liable.
2. In obligations not to do or if the condition is negative, the impossible condition can just be disregarded and the obligation
remains.
Effect of fulfillment of conditions:
General Rule: Once the condition has been fulfilled, it shall retroact to the day of the constitution of the obligation.
Except:
1. Fruits or interests
a. Reciprocal Obligations – the fruits are deemed mutually compensated.
b. Unilateral obligations: in unilateral obligations, the debtor as a rule, is entitled to the fruits, unless a contrary intention
appears.
2. Period of prescription – counted still from the time the condition was fulfilled.
Condition where obligation is treated as one with a period: When the debtor binds himself to pay when his means permit
him to do so, the obligation shall be deemed to be one with a period. (Art. 1180)
Suspensive conditions with a deadline: The condition that some event happen at a determinate time shall extinguish the
obligation as soon as the time expires or if it has become indubitable that the event will not take place.
Rules as to improvement, loss or deterioration: Art. 1189 provides that in case of obligations to give a specific or
determinate thing is subject to a suspensive condition, the following rules shall be observed in case of the improvement, loss
or deterioration of the thing during the pendency of the condition:
Without fault of the debtor Obligation is extinguished

LOSS
With the fault of the debtor Debtor is liable for damages
Without the fault of the debtor Impairment is borne by the creditor
With fault of the debtor Creditor can either:
DETERIORATION
1. Exact fulfillment and ask for damages
2. Ask for rescission and damages
By nature or time Improvement will inure to the benefit of the creditor
At the expense of the debtor The debtor shall have no other right than that granted to
IMPROVEMENT
a usufructuary, e.g., he may remove the improvement if
it will not cause damage to the thing
The above rules likewise apply to obligations with a period.

Effect of happening of a resolutory condition: When the conditions have for their purpose the extinguishment of an
obligation to give, the parties, upon the fulfillment of said conditions, shall return to each other what they have received

OBLIGATIONS WITH A PERIOD/TERM: A period is a certain length of time which determines the effectivity or the
extinguishment of the obligation. Unlike a condition, a period is certain to arrive or must necessarily come even though it may
not be known when.
KINDS OF TERM:
1. Definite – specific date, e.g. Dec. 31, end of the year this year, within 6 months;
2. Indefinite – period may arrive upon the fulfilment of a certain event which is certain to happen. E.g., death.
or
3. Legal – imposed or provided by law, e.g. filing of taxes; obligation to give support – within the first 5 days of the month.
4. Voluntary – agreed upon by the parties.
5. Judicial – those fixed by courts.
As to effect, a term/period may be:

1. Ex die – a period with a suspensive effect.
2. In diem – a period with a resolutory effect.
The courts can fix the period in the following circumstances:

1. Under Art. 1191, par. 3: in reciprocal obligations, when one party asked for the rescission of obligation, the court shall
decree such rescission claimed, unless there be just cause authorizing the fixing of a period.
2. Under Art. 1197:
a. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a
period was intended, the courts may fix the duration thereof.
b. The courts shall also fix the duration of the period when it depends upon the will of the debtor.
Benefit of the period: GENERAL RULE: Whenever in an obligation a period is designated, it is presumed to have been
established for the benefit of both the creditor and the debtor,
EXCEPTION: from the tenor of the obligation or other circumstances it should appear that the period has been established in
favor of one or of the other. (Art. 1196)
Consequences of general rule:

1. The debtor cannot be made to pay before the period;
2. The creditor cannot be made to accept payment before the period.
Debtor’s loss of benefit of the period: the debtor loses the right to make use of the period in the following cases:
a. When after the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or security for the debt;
b. When he does not furnish to the creditor the guaranties or securities which he has promised;
c. When by his own acts he has impaired said guaranties or securities after their establishment, and when through a fortuitous
event they disappear, unless he immediately gives new ones equally satisfactory;
d. When the debtor violates any undertaking, in consideration of which the creditor agreed to the period;
e. When the debtor attempts to abscond.
An attempt on the part of the debtor to abscond is a sign of bad faith and intention not to comply with the obligation. What
is material here is the intent of the debtor in absconding. Thus, if he merely went out of the country for a vacation, the
debtor does not lose the benefit of the period since there was no intention to defraud the creditor.
2. AS TO PLURALITY OF PRESTATION
a. CONJUNCTIVE usually use the word “and”, e.g., deliver a cow, a car AND a diamond ring. In this case, all the
prestations must be complied with in order to fulfill the obligation.
b. ALTERNATIVE usually use the word “or”, e.g., deliver a cow, a car OR a diamond ring. In this case, performance of
the one of the prestations fulfill the obligation.
1. Where several objects are due, the fulfillment of one is sufficient.

2. Right of Choice: generally, it belongs to the debtor, except:
a. When expressly granted to the creditor, i.e., it cannot be implied; or
b. When the right of choice is given to a third party.
3. The debtor’s right of choice is limited in such a way that he cannot choose any prestation which is impossible or
unlawful or that which could not have been the object of the obligation.
4. The choice, to take effect, must be communicated. The communication of the choice made is technically called
“concentration.”
5. The choice cannot be part of one and part of another.
6. When from all the choices, only one is practicable, the debtor shall lose the right of choice. Logically, the obligation
would be to deliver that which remains.
7. Effect of Loss:
Right of choice belongs to:
Fortuitous Event Extinguished

All things were lost
Fault of debtor Value of the last + Damages
DEBTOR Fortuitous Event/Fault of Debtor Deliver remaining
Some were lost Fault of creditor – debtor cannot Rescission + Damages
make a choice Perform + Damages
Fortuitous Event Extinguished

CREDITOR All things were lost
Fault of debtor Value of any + Damages

Fortuitous Event Demand from remaining
Some were lost Price of that which was lost + Damages
Fault of Debtor
Demand from Remaining + Damages
c. FACULTATIVE: When only one prestation has been agreed upon, but the obligor may render another in substitution,
the obligation is called facultative
Right to substitute: is always with the debtor. He cannot be compelled to make the substitution.
What is lost through fortuitous event The obligation

is the
Principal Extinguished
BEFORE substitution
Substitute Not extinguished
Principal Not extinguished
AFTER substitution
Substitute Extinguished
3. AS TO RIGHTS AND OBLIGATIONS OF MULTIPLE PARTIES
a. SOLIDARY OBLIGATION
A solidary obligation is one in which each debtor is liable for the entire obligation or each creditor is entitled to demand the
whole obligation.
Solidary obligation arises when the obligation:

1. Expressly so states (stipulated): Terms which may indicate solidarity: Mancomunada solidaria; Joint & several; In
solidum; Juntos o separadamente; Individually and collectively; Individually; Collectively; Separately; Distinctively;
Respectively; Severally; “I promise to pay” signed by more than one individual
2. When the law requires solidarity;
a. When two or more heirs take possession of the estate, they are solidarily liable for the loss or destruction of a thing
devised or bequeathed. (Art. 927)
b. Even when the agent has exceeded his authority, the principal is solidarily liable with the agent if the former allowed
the latter to act as though he had full powers. (Art. 1911)
c. When there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily. (Art.
1945)
d. The responsibility of two or more payees, when there has been payment of what is not due, is solidary. (Art. 2157)
e. The responsibility of two or more persons who are liable for quasi-delict is solidary. (Art. 2194)
3. When the nature of the obligation requires solidarity.
ENFORCEMENT OF SOLIDARY OBLIGATIONS:

1. The debtor may pay any one of the solidary creditors; but if any demand, judicial or extrajudicial, has been made by one
of them, payment should be made to him.
2. Novation, compensation, confusion or remission of the debt, made by any of the solidary creditors or with any of the
solidary debtors, shall extinguish the obligation:
a. The creditor who may have executed any of these acts, as well as he who collects the debt, shall be liable to the others
for the share in the obligation corresponding to them.
b. The remission made by the creditor of the share which affects one of the solidary debtors does not release the latter
from his responsibility towards the co-debtors, in case the debt had been totally paid by anyone of them before the
remission was effected.
c. The remission of the whole obligation, obtained by one of the solidary debtors, does not entitle him to reimbursement
from his co-debtors.
3. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from the nature of
the obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally
belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible.
Examples of Total Defenses:

a. Payment by another co-debtor, as to a subsequent demand of a creditor;
b. If the contract is void;
c. If the obligation has prescribed.
4. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay, the
creditor may choose which offer to accept.
5. He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for
the payment already made. If the payment is made before the debt is due, no interest for the intervening period may be
demanded.
6. When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the debtor paying the obligation,
such share shall be borne by all his co-debtors, in proportion to the debt of each.
7. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made
against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as
the debt has not been fully collected.
8. Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such payment is made after the
obligation has prescribed or become illegal.
9. Solidarity can exist even if the debtor are not bound in the same manner.
b. JOINT OBLIGATIONS:
If none of the above circumstances which would give rise to solidarity, are present, the obligation is considered joint.
A joint obligation is one in which each of the debtors is liable only for a proportionate part of the debt or each creditor is
entitled only to a proportionate part of the credit. In joint OBLIGATIONS, there are as many OBLIGATIONS as there are debtors
multiplied by the number of creditors.
Each debt/credit is considered independent of each other.

EFFECTS:
1. The demand by one creditor upon one debtor, produces the effects of default only with respect to the creditor who
demanded & the debtor on whom the demand was made, but not with respect to the others;
2. The interruption of prescription by the judicial demand of one creditor upon a debtor does not benefit the other creditors
nor interrupt the prescription as to other debtors. On the same principle, a partial payment or acknowledgement made by
one of several joint debtors does not stop the running of the statute of limitations as to the others;
3. The vices of each obligation arising from the personal defect of a particular debtor or creditor does not affect the obligation
or rights of the others;
4. The insolvency of a debtor does not increase the responsibility of his co-debtors, nor does it authorize a creditor to demand
anything from his co-creditors;
c. DISJUNCTIVE
This is not covered by New Civil Code. In this case, there are 2 or more creditors and 2 or more debtors but they are named
disjunctively as debtors and creditors in the alternative.
The rules on solidary obligations must apply because if rules on alternative obligations will be applied then the debtor will
generally be given the choice to whom shall he give payment.
4. AS TO PERFORMANCE OF PRESTATION
Indivisibility does not necessarily connote solidarity. Whenever there are multiple parties to an obligation, the rules on
solidarity and joint are still observed. Thus, if the obligation involves an indivisible prestation, the liability of multiple debtors
remain to be joint if there is no law or stipulation that requires solidarity or the nature of the obligation does not require
solidarity.
Obligations deemed indivisible:

1. Obligation to give definite things
2. Those not susceptible of partial performance
3. If capable of partial performance but the law or the intention of the parties treats it as indivisible.
Obligations deemed divisible:

1. The object of the obligation is the execution of a certain number of days of work
2. When the object is the accomplishment of work by metrical units
3. When the purpose of the obligation is to pay a certain amount in installments
4. When the object of the obligation is the accomplishment of work susceptible of partial performance.
a. Joint Indivisible:
If the division is impossible, the right of the creditors may be prejudiced only by their collective acts, and the debt can be
enforced only by proceeding against all the debtors. If one of the latter should be insolvent, the others shall not be liable for
his share.
A joint indivisible obligation gives rise to indemnity for damages from the time anyone of the debtors does not comply with his
undertaking. The debtors who may have been ready to fulfill their promises shall not contribute to the indemnity beyond the
corresponding portion of the price of the thing or of the value of the service in which the obligation consists.
b. Solidary Indivisible
Unlike in joint indivisible obligations, if the liability of the debtors is solidary, even the innocent debtor or the one ready to
comply with his part, can be made liable for damages, but he is given the right to seek reimbursement from the debtor at fault
or the one not ready to comply.
5. OBLIGATION WITH A PENAL CLAUSE
GENERAL RULE: the penalty shall substitute the indemnity for damages and payment of interests in case of non-compliance.
EXCEPTIONS:
1. If there is stipulation to the contrary;
2. If the debtor refuses to pay the penalty;
3. If the debtor is guilty of fraud in the fulfilment of the obligation.
Payment of penalty instead of fulfillment of the obligation: as a rule, the debtor cannot exempt himself from the
performance of the obligation by paying the penalty, save in the case where this right has been expressly reserved for him.
Neither can the creditor demand the fulfillment of the obligation and the satisfaction of the penalty at the same time, unless
this right has been clearly granted him.
However, if after the creditor has decided to require the fulfillment of the obligation, the performance thereof should become
impossible without his fault, the penalty may be enforced.
REDUCTION OF PENALTY: the courts can reduce the penalty whenever:

1. The principal obligation has been partly or irregularly complied with.
2. The penalty same is iniquitous or unconscionable.
6. OTHER CLASSIFICATIONS OF OBLIGATIONS
As to subject matter Real – obligation to give

Personal – obligation to do or not to do

As to affirmativeness Positive – obligation to give or to do
Negative – obligation not to do or not to give
As to persons obliged Unilateral – where only one of the parties is bound
Bilateral – where both parties are bound
NATURE AND EFFECT OF OBLIGATIONS
Concurrent Obligations in Obligations to Give a Determinate Thing: To deliver the thing, which may be either actual or
constructive.
1. To take care of it with the proper diligence of a good father of a family (bonus pater familia), unless there is stipulation or
the law requires another standard of care.
2. To deliver the fruits of the thing from the time the obligation to deliver it arises. Note, however, that the creditor will not
acquire real rights over the fruits until it is delivered to him.
Kinds of Fruits:
a. Natural – spontaneous product of the soil, young and other products of animals
b. Industrial – those derived from human intervention, cultivation or labor
c. Civil – those derived from the juridical relation of parties.
3. To deliver all accessions and accessories, even though they may not have been mentioned.
Accessories – those joined to or included with the principal for the latter’s better use, perfection or enjoyment. Example:
keys to a house.
Accessions – additions or improvements upon a thing which may include an alluvium and whatever is built, planted or sown
on a parcel of land. Example: building constructed on land.
NOTE: In an obligation to give a generic thing, no such concurrent obligations exist.
REMEDIES FOR BREACH OF OBLIGATIONS

Obligations to give:
1. Determinate thing – specific performance only if it is legally and physically possible. Substitute performance is not possible.
2. Generic thing – specific or substitute performance. The creditor can have another person to have such kind of thing be
delivered at the cost of the debtor plus damages.
Obligations to do: substitute performance only, since forcing the obligor to comply would violate the constitutional prohibition
against involuntary servitude.
Obligations not to do: and the obligor does it, the creditor may have it undone at the expense of the debtor.
RESCISSION AS A REMEDY: TWO KINDS:

1. Rescission in reciprocal obligations, which should’ve been properly termed as “resolution”, is a primary remedy where the
cause of action is substantial or fundamental breach or non-compliance.
2. Rescission under Art. 1301/1303 in rescissible contracts is a remedy of last resort where the cause would normally be
lesion or economic injury to a party.
Damages; KINDS (MENTAL):

1. Moral – for mental and physical anguish
2. Exemplary – corrective or to set an example
3. Nominal – to vindicate a right when no other kind of damages may be recovered
4. Temperate – when the exact amount of damages cannot be determined
5. Actual – actual losses incurred. This is the only type of damage that would require proof.
6. Liquidated – predetermined beforehand.
SPECIFIC CIRCUMSTANCES AFFECTING OBLIGATIONS IN GENERAL
Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any
manner contravene the tenor thereof, are liable for damages.
a. FRAUD
There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter
into a contract which, without them, he would not have agreed to. (Art. 1338)
Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future fraud is void. (Art. 1171)
Kinds of Fraud:
1. Dolo causante – or fraud in obtaining consent, is applicable only to contracts where consent is necessary and thus affects
the validity of the contract, making it voidable.
Under this kind of fraud, the party would not have entered into the contract were it not for the fraud; annulment is the
remedy of the party who’s consent was obtained through fraud.
2. Dolo incidente – or fraud in the performance of the obligation and applicable to obligations arising from any source. This
kind, however, does not affect the validity of the contract and makes the party guilty of fraud liable for damages.
Under this kind, a party would have entered the obligation with or without the fraud. Remedy is damages.
b. NEGLIGENCE

Negligence: consists in the omission of that diligence which is required by the nature of the obligation and corresponds with
the circumstances of the persons, of the time and of the place.
Degree of care required:

1. As a rule
a. That required by law: e.g., a common carrier is required to exercise extraordinary care; or
b. That agreed upon by the parties.
2. In the absence of the two above, diligence of a good father of a family.
Kinds of Negligence as to SOURCE:

1. Culpa Contractual – contractual negligence – or that which results in a breach of contract.
2. Culpa Aquiliana – civil negligence or quasi-delict
3. Culpa Criminal – criminal negligence – or that which results in the commission of a crime or a delict.
Negligence on the part of the supposed creditor:

1. If his negligence was the immediate and proximate cause of the injury, there is no recovery for damages.
2. If his negligence was only contributory – he may still recover damages, BUT the courts can mitigate or reduce the same.
c. DELAY
Kinds of Delay:
1. Mora Solvendi – delay on the part of the debtor, which may either be:
a. Mora solvendi ex re: in real obligations
b. Mora solvendi ex persona: in personal obligations
2. Mora Accipiendi – delay on the part of the creditor;
3. Compensatio Morae – delay on the part of both parties.
WHEN CONSIDERED IN DEFAULT: General Rule: upon demand, which may be judicial or extra-judicial.
Exceptions:
1. When stipulated – a due date in itself is not enough, what should be stipulated is that there is no need for demand to
consider the debtor in default
2. When the law so declares – e.g., delivery of a partner’s share in the partnership
3. When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing
is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract – e.g.,
a florist for a wedding
4. When demand would be useless – e.g., when the debtor already transferred the thing to another; or had it destroyed or
hidden.
5. In reciprocal obligations, where the respective obligations must be performed simultaneously, and one party was not
ready
d. ANY OTHER MANNER OF CONTRAVENTION (VIOLATIO)
In general, every debtor who fails in performance of his obligations is bound to indemnify for the losses and damages caused
thereby. The phrase "any manner contravene the tenor" of the obligation includes any illicit act which impairs the strict and
faithful fulfillment of the obligation or every kind or defective performance.
FORTUITOUS EVENT: is an excuse for non-performance.
Fortuitous events by definition are extraordinary events not foreseeable or avoidable. It is therefore, not enough that the
event should not have been foreseen or anticipated, as is commonly believed but it must be one impossible to foresee or to
avoid.
Elements: To constitute a fortuitous event, the following elements must concur:

a. The cause of the unforeseen and unexpected occurrence or of the failure of the debtor to comply with obligations must be
independent of human will;
b. It must be impossible to foresee the event that constitutes the caso fortuito or, if it can be foreseen, it must be impossible
to avoid;
c. The occurrence must be such as to render it impossible for the debtor to fulfill obligations in a normal manner; and,
d. The obligor must be free from any participation in the aggravation of the injury or loss.
General Rule: is that no personal shall be responsible for those events which could not be foresee, or which, though foreseen,
were inevitable.
Exceptions:
1. Declared by stipulation;
2. When the nature of the obligation requires the assumption of risk: e.g., insurance contracts.
3. Expressly specified by law: examples:
a. A possessor in bad faith. (Art. 552)
b. If the obligor is already in delay or has promised the same thing to two or more persons who do not have the same
interests. (Art. 1165)
c. The officious manager may be liable for any fortuitous event under Art. 2147.
4. When negligence, delay or fraud concurred with the fortuitous event.
MODES OF EXTINGUISHMENT OF OBLIGATIONS

Art. 1231. Obligations are extinguished:
(1) By payment or performance:
(2) By the loss of the thing due:
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations:

a. Annulment
b. Rescission
c. Fulfillment of a resolutory condition
d. Prescription
These other causes are governed elsewhere in the Civil Code.
PAYMENT OR PERFORMANCE
Payment means not only the delivery of money but also the performance, in any other manner, of an obligation.
a. Provisions as to the PAYOR
Payment made by a third person:
With consent of the Without knowledge/consent of

debtor/With interest in the the debtor
fulfillment of the obligation
Compel the creditor to accept payment Yes No
Subrogation to the rights of the creditor Yes No
Amount of reimbursement Full Reimbursement Beneficial Reimbursement
Person who has interest in the fulfillment of the obligation: include those subsidiarily liable such as guarantors and co-debtors
(including joint co-debtors), even third party-mortgagors whose properties secure the obligation.
If third party payor does not intend to be reimbursed: the payment may be treated as a donation. As such it is necessary
that the debtor accept the same for validity.
If the debtor did not consent, there would be no valid donation, and the third party-payor can seek reimbursement from the
debtor.
In any case, payment is still valid as to the creditor and the obligation is still extinguished.
Capacity and Free Disposal: the payor should have capacity to alienate and the free disposal of the thing due for payment
to be effective. Such that minors (who don’t have capacity) and those suffering the penalty of civil interdiction (no free disposal)
cannot make a valid payment.
b. Provisions as to the PAYEE
Payment may be made to:

1. Person in whose favor the obligation has been constituted – not necessarily a party to the constitution of the obligation.
2. His successor in interest – who may not be creditors at the time of constitution, but may be creditors at the time of
fulfilment.
3. Any person authorized to receive it – agents are creditors because they have the right to collect, but not in their own right.
(This is relevant as to Compensation as a mode of extinguishing obligation)
4. Third party – if it redounds to the benefit of the creditor.
The benefit to the creditor need not be proven in the following cases:
a. after the payment, the third person acquires the creditor's rights;
b. the creditor ratifies the payment to the third person;
c. by the creditor's conduct, the debtor has been led to believe that the third person had authority to receive the payment.
(Art. 1241)
d. If the third party is in possession of the credit. (Art. 1242)
Payment to an incapacitated person: is valid only if the incapacitated person kept the thing delivered or insofar as it was
beneficial to him.
c. THING to be paid or delivered
Delivery of a specific thing: The debtor of a thing cannot compel the creditor to receive a different one, although the latter
may be of the same value as, or more valuable than that which is due.
Delivery of a generic thing: whose quality and circumstances have not been stated, the creditor cannot demand a thing
of superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the obligation and other
circumstances shall be taken into consideration.
Obligations to do or not to do: an act or forbearance cannot be substituted by another act or forbearance against the
obligee's will.

LEGAL TENDER: refers to payment which the creditor can be compelled to accept. Under the New Central Bank Act, coins and
currencies issued by the BSP have legal tender power. For currency notes, there is no limit as to the amount it can be used as
legal tender. However, for coins, the following are the limits:
1. P1 coins and above - shall be legal tender in amounts not exceeding P1,000;
2. Coins below P1 – legal tender not exceeding P100.
Negotiable Instruments and Checks: are not considered legal tender and their acceptance is dependent on the creditor.
However, should the creditor accept the same, they do not produce the effect of payment, or extinguish the obligation, until:
1. At the time the check or other mercantile documents have been encashed;
2. Its value becomes impaired.
Extraordinary inflation or deflation: of the currency stipulated should supervene, the value of the currency at the time of
the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary.
d. Place of payment
1. Payment shall be made in the place designated in the obligation.

2. If there was no stipulation and the obligation consists in the delivery of a determinate thing, the payment shall be made
wherever the thing might be at the moment the obligation was constituted.
3. In any other case the place of payment shall be the domicile of the debtor.
4. If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by
him.
SPECIAL FORMS OF PAYMENT
Dation in Payment
Dation in payment is the delivery or transmission of ownership of a thing by the debtor to the creditor as an accepted
equivalent of the performance of the obligation.
It may consist not only of a thing but also of rights, i.e., usufruct or credit.
Extent of extinguishment: General rule: to the extent of the value of the thing delivered as agreed upon or as may be proved.
Exception: if the parties consider the thing as equivalent to the obligation through an express or implied agreement or by
silence.
Application of Payments
Application of Payment: is the designation of the debt which is being paid by a debtor who has several obligations of the
same kind in favor of the creditor to whom payment is made.
Requisites:
1. There is only one debtor;
2. There are several debts;
3. The debts are of the same kind;
4. There is only one and the same creditor.
Right to apply payment: generally, the debtor has the right to apply the payment at the time of making the payment, subject
to the following LIMITATIONS:
1. Creditor cannot be compelled to accept partial payment. (Art. 1248);
2. Debtor cannot apply payment to principal if interest has not been paid. (Art. 1253)
3. The debt must be liquidated, except when the parties agree otherwise;
4. Cannot be made when the period has not arrived and such period was constituted in favor of the creditor, except with the
consent of the creditor (Art. 1252);
5. When there is agreement as to which debt must be paid first.
If the debtor did not designate, to which debt shall payment apply? That which was chosen by the creditor as reflected
in the receipt which is accepted by the debtor without protest. (Art. 1252, 2nd par.)
If debtor and creditor did not designate:

1. If the debts are of different nature and burden – to that debt which is most onerous to the debtor;
2. If the debts are of the same nature and burden – applied proportionately.
Payment by Cession or Assignment
Cession is when the debtor delivers to all his creditors all his properties for the purpose of selling and applying the proceeds
to settle his obligations to them.
Kinds:
1. Voluntary – Under Art. 1255, the debtor may cede or assign his property to his creditors in payment of his debts; extent
of extinguishment is only upto the amount of the proceeds.
2. Judicial – under the Financial Rehabilitation and Insolvency Act.
Advantages of judicial cession is that the court discharges the debtor of his debts and the obligations are extinguished.
Properties exempt from Execution: are generally not covered by cession. Except if the debtor waives such exemption.

Dation in payment vs. Cession:
Dation in payment Cession or Assignment

both are substitute of performance of an obligation
Art 1245 Art 1255
Ownership of the thing is transferred to the creditor No such transfer
Obligation may be totally extinguished if agreed upon by Obligation is extinguished only insofar as the net proceeds
the parties or by their silence, consider the thing equivalent (except: otherwise stipulated)
to the obligation.
does not involve plurality of creditors involves plurality of creditors
Involves a specific thing Involves all the properties of the debtor unless exempt from
execution.
may be made even by a solvent debtor; merely involves a supposes financial difficulty on the part of the debtor
change of the object of the obligation by agreement of the
parties and at the same time fulfilling the same voluntarily
How proceeds distributed to the creditors:

1. Stipulation;
2. Preference of credit.
Tender of Payment and Consignation

Tender of Payment is the manifestation made by the debtor to the creditor of his desire to comply with his obligation, with
the offer of immediate performance. It is a PREPARATORY ACT to consignation and in itself DOES NOT extinguish the obligation.
Consignation is the deposit of the object of the obligation in a competent court in accordance with rules prescribed by law,
AFTER the tender of payment has been refused or because of circumstances which render direct payment to the creditor
impossible. It extinguishes the obligation.
Applies only to extinguish of obligation not to exercise a right: such that in a situation where a party would exercise his
right of repurchase and the buyer refused to accept. The right to redeem is a RIGHT, not an obligation, therefore, there is no
consignation required. (Immaculata vs. Navarro)
Requisites:
1. There exists a valid debt that is due;
2. There is legal cause to consign, that is there has been a valid tender of payment and the creditor unjustly refuses, or even
without tender of payment in the following cases:
a. When the creditor is absent or unknown, or does not appear at the place of payment;
b. When he is incapacitated to receive the payment at the time it is due;
c. When, without just cause, he refuses to give a receipt;
d. When two or more persons claim the same right to collect;
e. When the title of the obligation has been lost.
3. There is previous notice to consign to the persons having interest in the fulfilment of the obligation;
4. The amount or thing due is deposited in court.
Withdrawal of the Thing Deposited:
Withdrawal as a matter of right: debtor withdraws before acceptance by the creditor or before judicial declaration of propriety
of consignation. In this case, no extinguishment yet of the obligation. As such, no revival since the obligation has not been
extinguished to begin with.
Withdrawal after acceptance or declaration: only with the consent of the creditor. In this case, the obligation is revived.
As such, creditor can no longer run after the guarantor, unless the latter consented. This is because the obligation has been
extinguished. The revival will not revive the guaranty.
LOSS OF THE THING DUE OR IMPOSSIBILITY OF PERFORMANCE

Loss: means when the thing goes out of commerce, perishes or disappears in such a way that its existence is unknown or that
it cannot be recovered.
If the loss is due to fortuitous event: generally, the debtor is not liable for damages if the thing is lost due to fortuitous
event, EXCEPTIONS:
1. When the law so provides;
2. When stipulation so provides;
3. When the nature of the obligation requires the assumption of risk.
4. Obligations arising from a criminal offense, unless the creditor is in mora accipiendi.
5. Obligations to give a generic thing, except in cases of limited generic.
Partial Loss: Partial loss may be determined by the court as so important to extinguish the obligation.
In doing so, intent of the parties must necessarily be considered. E.g., A promised to deliver a cellphone with its casing. The
cellphone was stolen but A managed to save the casing. Would A still be liable to deliver the casing? Yes, if the primary
consideration of the creditor was to obtain the casing.
The test is whether the parties would not have entered into the obligation without the thing that have been lost, then the
obligation is extinguished.
Presumptions of fault: Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due
to his fault, unless there is proof to the contrary.

This presumption does not apply in case of earthquake, flood, storm, or other natural calamity.
Impossibility of Performance: Loss of the thing may likewise cover impossibility of performance, e.g., a debtor is obliged
to paint a building and the building was destroyed (physical impossibility) or a law took effect making the obligation illegal
(legal impossibility)
When: In impossibility, the law should take effect, or the impossibility happened DURING the existence of the obligation
so as to extinguish it. If the law took effect or the impossibility arose BEFORE the existence of the obligation, the obligation is
void.
Types of Impossibility:
1. As to nature: Physical (by reason of its nature); and Legal (through some subsequent law);
2. As to whom impossibility refers:
a. Objective – impossibility of the act or service itself without considering the person of the debtor;
b. Subjective - impossibility refers to the fact that the act or service can no longer be done by the debtor but may still be
performed by another person
3. As to extent: Partial or Total;
4. As to period of impossibility: Permanent or Temporary.
Difficulty of prestation: When the service has become so difficult as to be manifestly beyond the contemplation of the parties,
the obligor may also be released therefrom, in whole or in part.
Court action: when the performance of the obligation is difficult, it does not, on its own, warrant extinguishment of the
obligation. However, when it has become so difficult beyond the contemplation of the parties, the debtor may go to court to
release him from the obligation but not to modify the terms of the contract.
Right of creditor to go against third parties: The obligation having been extinguished by the loss of the thing, the creditor
shall have all the rights of action which the debtor may have against third persons by reason of the loss.
CONDONATION OR REMISSION OF THE DEBT
Condonation/Remission is an act of liberality, by virtue of which, without receiving any equivalent, the creditor renounces
the enforcement of an obligation, which is extinguished in its entirety or in that part or aspect of the same to which the remission
refers.
Gratuitous: If not gratuitous, it will be considered:

1. Dation in payment – when the creditor receives a thing different from that stipulated;
2. Novation – when the subject or principal conditions of the obligation should be changed;
3. Compromise – when the matter renounced is in litigation or dispute and in exchange of some concession which the creditor
receives.
Kinds of Condonation:
1. As to form:
a. Express – when made formally; should be in accordance with the forms of ordinary donations.
i. Movable property must comply with the form prescribed under Art. 748, i.e., if it is made orally, there must be
simultaneous delivery, or if the value exceeds more than P5,000, it must be in writing.
ii. Immovable property must comply with the form prescribed under Art. 749, i.e., it must be in a public document,
specifying the property donated.
iii. Acceptance, which must be in the same form as the donation.
b. Implied – when it can be inferred from the acts of the parties:

i. delivery of the promissory note to the debtor or the voluntary destruction or
ii. cancellation of the evidence of credit by the creditor with intent to renounce the right.
iii. As to pledge, if the thing pledged, after delivery to the creditor-pledgee, is found in the possession of the debtor,
or a third person who owns the thing.
2. As to extent
a. Total – when the whole obligation is extinguished.
b. Partial – which may be as to the amount; as to the accessory obligation; or as to a certain amount of debt (in case of
solidarity).
3. As to manner of remission
a. Inter vivos – during the lifetime of the creditor.
b. Mortis causa – will take effect upon death which must be in done through a will.
CONFUSION OR MERGER OF RIGHTS
Merger/Confusion: the meeting in one person of the qualities of the creditor and debtor with respect to the same obligation.
Requisites:
a. Must take place between the credit and the principal debtor;
b. Must involve the very same obligation;
c. Must be total.
Examples:
a. PNB is indebted to Allied. PNB and Allied Bank entered into a merger agreement. In this case, the indebtedness of PNB is
extinguished due to the merger.
b. H is indebted to his father T. When T dies and H is his only heir, the obligation becomes extinguished since H will inherit
the credit. The characters of the creditor and debtor in the said obligation are merged in his person.

Guarantors: Merger which takes place in the person of the principal debtor or creditor benefits the guarantors. Confusion which
takes place in the person of any of the latter does not extinguish the obligation. Which means, if the debt is assigned by the
creditor to the guarantor, and the latter becomes the creditor of such obligation, there is no extinguishment, because he is NOT
the principal debtor of the obligation.
COMPENSATION
Compensation: a mode of extinguishment to the concurrent amount, the obligations of those persons who in their own right,
are reciprocally creditors and debtors of each other.
Kinds of Compensation:
1. As to effects/extent:
a. Total – when the two obligations are of the same amount;
b. Partial – when the amounts are not equal. This is total as to the debt with lower amount.
2. As to origin/cause:
a. Legal – takes effect by operation of law because all the requisites are present;
b. Facultative – can be claimed by one of the parties who, however, has the right to object to it
Example: when one of the obligations has a period for the benefit of one party alone and who renounces that period
so as to make the obligation due
c. Conventional – when the parties agree to compensate their mutual obligations even if some of the requisite are lacking.
d. Judicial – decreed by the court in a case where there is a counterclaim.
Requisites:
Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also
of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated
in due time to the debtor.
Requisites:
1. Parties must be mutual principal debtors and creditors in their own right:
They must be creditors in their own right – If one of the creditors is not a creditor in his own right, that is, his right to
collect is because of a contract of agency, compensation cannot take place between the debt of such agent to a party who
is indebted to the principal.
The two obligations can be simplified as follows:

a. A (agent of P) is indebted to X
b. X is indebted to P
2. Both debts must be due– does not necessitate that both debts are due AT THE SAME TIME; one debt may have been
due earlier. The requirement is that at the time of the compensation, both debts are already due.
3. Both debts must be liquidated and demandable - Liquidated debts are those whose exact amount has already been
determined.
4. Debts must pertain to sums of money or if consumables, they must be of the same kind and quality
5. The claim must be clearly demandable, i.e., no controversy as to the claim.
Guarantors: may set up compensation as regards what the creditor may owe the principal debtor.
Rescissible or Voidable Debts: may be the subject of compensation before they are rescinded or avoided/annulled.
Assignment of credit: Even if the creditor already assigned his credit, the debtor may still invoke compensation as against
the debts due to him if:
1. He had no knowledge of or did not consent to the assignment; or
2. If with knowledge or consent, but reserved his right to the compensation.
When compensation may not be proper:

1. Depositum – as to the depositary;
2. Bail – as to the bailee;
3. Support – as to the one giving support, EXCEPT: support in arrears and those contractual in nature;
4. Civil liability arising from a penal offense.
Several debts susceptible of compensation: the rules on the application of payments shall apply to the order of
compensation.
Legal compensation: takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though
the creditors and debtors are not aware of the compensation.

NOVATION
Requisites:
1. Previous valid obligation – if the original obligation is void, the novation is likewise void. But if it is voidable, novation is
valid except when annulment has been claimed.
2. Agreement of all parties to a new contract
3. Extinguishment of old obligation
4. Validity of the new obligation - If the new obligation is void, the original one shall subsist, unless the parties intended that
the former relation should be extinguished in any event.
Kinds of Novation:
1. As to nature: 2. As to form: 3. As to extent:
a. Subjective/Personal a. Express a. Total
b. Objective/Real b. Implied b. Partial
c. Mixed
Subjective Novation: changing the subject:

1. Active (SUBROGATION) – if a third person is subrogated to the rights of the creditor;
a. By agreement or express – which requires the consent of the original parties and the third person to be subrogated.
b. By law or implied – Art. 1302: It is presumed that there is legal subrogation:
i. When a creditor pays another creditor who is preferred, even without the debtor's knowledge;
ii. When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor;
iii. When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays,
without prejudice to the effects of confusion as to the latter's share
Effects of subrogation: Subrogation transfers to the persons subrogated the credit with all the rights thereto appertaining,
either against the debtor or against third person, be they guarantors or possessors of mortgages, subject to stipulation in
a conventional subrogation.
Preference of original creditor: A creditor, to whom partial payment has been made, may exercise his right for the
remainder, and he shall be preferred to the person who has been subrogated in his place in virtue of the partial payment
of the same credit.
2. Passive (SUBSTITUTION) – if a third person is substituted to the person of the debtor. In this case, it should be clear to
both parties that the new debtor is in lieu of the old debtor.
KINDS OF PASSIVE NOVATION Extent of Liability of Old Debtor in case of

reimbursement INSOLVENCY of new debtor
Expromision - without knowledge or consent of Beneficial Old debtor is no longer liable
the original debtor Reimbursement
Delegacion – with consent of the original Full Old debtor may still be liable if the
debtor. insolvency was already existing and of
public knowledge, or known to the debtor.
Parties:
Delegante – the old debtor;
Delegado – the new debtor
Delegatorio – the creditor.
Creditor’s consent – in any case, the creditor’s consent is necessary for there to be a novation in the person of the debtor
as provided under Art. 1293.
Objective or Real Novation

1. Change in the object
2. Change in the principal conditions of the obligation, which may either be:
a. Express – when so expressed in unequivocal terms;
b. Implied - the old and the new obligations be on every point incompatible with each other.
Implied novation requires clear and convincing proof of complete incompatibility between the two obligations. The
law requires no specific form for an effective novation by implication.
The test is whether the two obligations can stand together. If they cannot, incompatibility arises, and the second obligation
novates the first. If they can stand together, no incompatibility results and novation does not take place. (Millar vs. CA)
Accessory obligations: General Rule: extinguished as a consequence of novation.
Exception: insofar as pour atrui is concerned and the third person for whose benefit the obligation was constituted did not give
his consent.
Conditional Obligations: If the original obligation was subject to a suspensive or resolutory condition, the new obligation shall
be under the same condition, unless it is otherwise stipulated.
1. An obligation is a juridical necessity to give, to do or not to do. This definition primarily describes:
A. Civil Obligation C. Natural Obligation
B. Moral Obligation D. All of the choices
2. D is indebted to C for P100,000. The action to enforce the obligation has already prescribed. However, X, a suitor of D paid
the same and D voluntarily reimbursed X. In this case, D can recover payment from:
A. C C. Both C and X
B. X D. Neither C nor X

3. This essential element of an obligation is the reason for the obligation’s existence. The tie that binds the parties to the
obligation:
A. Active subject C. Prestation
B. Passive subject D. Efficient Cause
4. X died, leaving the legal title to his land to his son A, while the usufruct was given to B. When B dies,
A. His rights will be transmitted to his heirs by operation of law
B. His rights will be inherited by the heirs because obligations are transmissible in general
C. His rights will be merged with the legal title of A
D. His rights will be inherited by the other heirs of X
5. The obligation to give support arises from:

A. Law C. Quasi-contract
B. Contract D. Moral conscience
6. D bought a pack of gum from a convenience store which costs P18. He paid P20 to the cashier, but the cashier gave him
P5 as change. What juridical relation is created between D and the cashier?
A. Contract C. Delict
B. Quasi-Contract D. Quasi-Delict
7. What is the required quantum of evidence or proof necessary for criminal liability to attach?
A. Preponderance of evidence C. Prima facie evidence
B. Substantial evidence D. Proof beyond reasonable doubt
8. X, a minor, through negligence, inflicted damage upon another child. X’s father was made liable by court to pay civil
damages to the other child. The liability of X’s father arises from:
A. Contract C. Delict
B. Quasi-contract D. Quasi-delict
9. The defense of due diligence in the selection and supervision of employees may be used against:
I. Vicarious liability of an employer arising from quasi-delict
II. Subsidiary liability of an employer arising from delict
A. I and II C. II only
B. I only D. Neither I nor II
10. In this type of obligation, the acquisition of rights, as well as the extinguishment or loss of those already acquired shall
depend upon the happening of the event which constitutes the condition.
A. Pure obligation C. Conditional obligation
B. Alternative obligation D. Obligation with a term
11. A potestative suspensive condition solely dependent upon the will of __________ will make the obligation void.
A. The debtor C. Both the debtor and creditor
B. The creditor D. Either the debtor or the creditor
12. “I will give to you my car if you will not draw a circle that is at the same time a square” is a
A. Valid obligation C. Alternative obligation
B. Void obligation D. Facultative obligation
13. On May 31, 2021, D promised to give C P10,000 after the latter passes the LECPA. C passed the LECPA and took oath as
a CPA on October 31, 2021. In this case, the prescriptive period to enforce the obligation will:
A. Be reckoned from May 31, 2021
B. Be reckoned from October 31, 2021
C. Be reckoned from when C makes a demand
D. Not begin to run since the condition was fulfilled
14. On June 30, 2021, D promised to give C a car on December 31, 2021. However, before the arrival of the period, the car
deteriorated without D’s fault. In this case,
A. C will suffer the impairment on the car
B. C will suffer the impairment of the car but may demand from D reimbursement for necessary repairs
C. D will be obliged to bring the car back to the intended condition
D. D will no longer be obliged to deliver the car
15. This kind of term is one that is agreed upon by the parties:
A. Legal term C. Term ex die
B. Voluntary term D. Term in diem
16. D is indebted to C for P100,000 payable on December 31, 2021. On September 30, 2021, C went to D’s house and found
that he is packing all his clothes and the house was already empty. It would show that D was already preparing to migrate
to another country, never to return. Can C make a valid demand for payment on September 30, 2021?
A. No, because an attempt on itself to abscond does not remove the debtor’s right to make use of the period
B. No, because the debt is not yet due
C. Yes, because D is about to abscond
D. Yes, because they are no longer properties which C can attach should he sue
17. In a facultative obligation, the loss of the _________ object _______ substitution extinguishes the obligation:
A. Principal; after C. Substitute; before
B. Principal; before D. None of the choices is correct
18. A, B and C are indebted to X and Y for P120,000. How much can X collect from A?
A. P 120,000 C. P 40,000
B. P 60,000 D. P 20,000

19. X went to Y to have his car repaired. Y failed to perform the obligation agreed upon. What is/are the remedy/ies of X?
A. Specific Performance C. Both A and B
B. Substitute Performance D. Neither A nor B
20. This is awarded by courts to vindicate a right that has been violated when no other kinds of damages may be recovered.
A. Actual damages C. Nominal damages
B. Temperate damages D. Liquidated damages
21. This is civil negligence or one arising from quasi-delict.

A. Culpa criminal C. Culpa aquiliana
B. Culpa contractual D. None of the choices
22. Payment made by a third party who has an interest in the fulfillment of an obligation, will:
A. Entitle him to full reimbursement of whatever amount he has paid
B. Entitle him to reimbursement to the extent the debtor was benefited
C. Entitle him to no reimbursement
D. Make the payment as a donation
23. The place of payment/performance, in an obligation to deliver a specific thing, where none is designated by the parties,
will be
A. The domicile of the debtor
B. The domicile of the creditor
C. The place where the thing might be at the moment the obligation was constituted
D. The place where the thing might be at the time of performance
24. The following limits the debtor’s choice in application of payments, except:
A. Creditor cannot be compelled to accept partial payment
B. Debtor cannot apply payment to principal if interest has not been paid
C. The debt must be liquidated
D. When the period is constituted in favor of the debtor and the same has not yet arrived
25. This kind of cession of payment extinguishes all the obligations of the debtor:
A. Conventional
B. Voluntary
C. Judicial
D. All of the choices
26. Compensation is not proper in all of the following cases, except:

A. Deposit on the part of the depositor
B. Bail as to the bailee
C. Support as to the one obliged to give support
D. Civil liability arising from a penal offense
27. A partial loss of the specific thing which is the object of the obligation,
A. Will not affect the obligation
B. Will extinguish the obligation once filed in court
C. Will extinguish the obligation if the court finds the loss so important as to extinguish the obligation
D. Will release the debtor from his obligation
28. The following are implied condonations, except:

A. Delivery of the promissory note to the debtor for the voluntary destruction
B. Cancellation of the evidence of credit by the creditor with intent to renounce the right
C. If the thing pledged, after delivery to the creditor-pledgee, is found in the possession of the debtor, or a third person
who owns the thing
D. None of the choices is an exception
29. A mode of extinguishing an obligation to the concurrent amount by which the parties are reciprocally the debtors and
creditors of each other.
A. Novation
B. Confusion/Merger
C. Compensation
D. Condonation
30. D is indebted to C for P1,000,000. X, a third party to the obligation, paid P500,000, or half of the obligation of D. Later on,
D became insolvent and only had P500,000 in remaining assets. Who shall be entitled to the remaining P500,000?
A. C
B. X
C. Both, equally
D. Either at the choice of D
1. A 7. D 13. B 19. B 25. C

2. D 8. D 14. A 20. C 26. A
3. D 9. B 15. B 21. C 27. C
4. C 10. C 16. C 22. A 28. D
5. A 11. A 17. B 23. C 29. C
6. B 12. A 18. D 24. D 30. A

RFBT-02
LAW ON CONTRACTS
DEFINITION AND ELEMENTS
DEFINITION – A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other,
to give something or to render some service. (Art. 1305)
ELEMENTS OF CONTRACTS
1. ESSENTIAL - those without which the contract cannot exist, i.e., Consent, object, consideration. In some contracts, form
and delivery is essential too.
2. NATURAL - those which exist as part of the contract even if the parties do not stipulate it because the law is deemed
written therein.
3. ACCIDENTAL - those which are agreed upon by the parties and which cannot exist without being stipulated.
STAGES IN THE LIFE OF A CONTRACT
1. NEGOTIATION (PREPARATION OR CONCEPTION OR GENERACION) – here the parties are progressing with their
negotiation, prior to the arrival on a definite agreement. Here is where the parties provide for their offers and bargain with
each other.
2. PERFECTION (OR BIRTH) – when the parties have already come to a definite agreement and all the essential elements
are present (which includes form or delivery in some).
3. CONSUMMATION (OR DEATH OR TERMINATION) – the terms of the contract have already been performed.
ESSENTIAL ELEMENTS OF CONTRACTS
1. CONSENT OF CONTRACTING PARTIES
Consent: the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract.
Offer and Acceptance:

a. The offer must be certain
b. The acceptance must be absolute.
c. A qualified acceptance constitutes a counter-offer.
d. An acceptance may be express or implied.
e. The person making the offer may fix the time, place, and manner of acceptance, all of which must be complied with.
Cognition Theory vs. Manifestation Theory:

a. Cognition Theory – follows that the acceptance takes effect from the time the offeror knew (or has knowledge) of the
acceptance of the offeree.
b. Manifestation Theory – on the other hand, follows that the acceptance will take effect once it is manifested by the
offeree.
In the Philippines, we abide by the Cognition Theory, since Art. 1319 provides that: “Acceptance made by letter or telegram
does not bind the offeror except from the time it came to his knowledge. The contract, in such a case, is presumed to have
been entered into in the place where the offer was made.”
Intervening events: An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before
acceptance is conveyed.
Option Agreement: When the offeror has allowed the offeree a certain period to accept, the offer may be withdrawn at any
time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as
something paid or promised.
Advertisements: Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere
invitations to make an offer. Advertisements for bidders are simply invitations to make proposals, and the advertiser is not
bound to accept the highest or lowest bidder, unless the contrary appears.
SITUATIONS CONCERNING CONSENT OF THE PARTIES:

a. Both parties gave consent their consent as to the essential elements of the contract – the contract is valid.
b. Simulation: when one or both the parties did not intend to be bound by the contract (absolute simulation), the same is
void. Otherwise, if the parties merely conceal their true agreement (relative simulation), they shall be bound by their real
agreement.
c. Incapacity of one of the parties:
Kinds of Capacity:
i. Juridical capacity - is the fitness to be the subject of legal relations, is inherent in every natural person and is lost only
through death.
If incapacity pertains to juridical capacity the contract is void.
ii. Capacity to act (or legal capacity) - is the power to do acts with legal effect, is acquired and may be lost.
If incapacity pertains to capacity to act or legal capacity, it can be:

LAW on CONTRACTS RFBT-02
i. Absolute Incapacity – the party cannot give consent in any contract, with anyone, in whatever capacity, over
anything.
The following cannot give consent to a contract:

a. Unemancipated minors;
b. Insane or demented persons (except if consent is given during lucid interval);
c. Deaf-mutes who do not know how to write; and
d. Drunks or hypnotized.
Here the contract would be voidable as to the party who is incapacitated.
Those who are “incompetent” under the Rules of Court who may be placed under guardianship:
a. Those suffering civil interdiction
b. Hospitalized lepers
c. Prodigals
d. Deaf and dumb who are unable to read and write
e. Those of unsound mind even though they have lucid intervals
f. Those who by reason of age, disease, weak mind, and other similar causes, cannot without outside aid, take
care of themselves and manage their property, becoming thereby an easy prey for deceit and exploitation.
Note that these people (save for those suffering the penalty of civil interdiction) can still enter into contracts if not
placed under guardianship. However, it can still be proven that intelligent consent was not given and thus, may
still render the contract voidable.
ii. Relative Incapacity – a person may be prohibited from entering specific contracts or that in a contract, he may be
prohibited in a certain capacity, e.g., prohibited to be the buyer, or to specific things, or to specific persons.
Examples:
• An alien is prohibited under the Constitution from acquiring private lands. EXCEPT: when acquired through
(1) succession; or (2) sale of residential land to a former natural born Filipino citizen.
• Husbands and wives cannot enter into a contract of sale, unless they agreed to a Separation of Property
marital property regime or they have been legally separated.
d. Both are incapacitated: the contract is unenforceable.
e. Both parties gave their consent, but such consent was vitiated:
Vices of consent: would render the contract voidable.

a. Mistake
The following mistakes will make the contract voidable:

i. If the mistake pertains to the object of the contract;
ii. If the mistake pertains to the conditions which have principally moved one or both parties to enter into the contract.
iii.Mistake as to the identity or qualifications of one of the parties when such identity or qualifications have been the
principal cause of the contract.
iv. Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may vitiate
consent.
Mistake does NOT vitiate consent:

i. Mistake or error as to motive
ii. A simple mistake of account – which shall give rise to its correction only
iii. If the party alleging it knew the doubt, contingency or risk affecting the object of the contract.
b. Violence - when in order to wrest consent, serious or irresistible force is employed.
c. Intimidation - when one of the contracting parties is compelled by a reasonable and well-grounded fear of an
imminent and grave evil upon his person or property, or upon the person or property of his spouse, descendants or
ascendants, to give his consent.
To determine the degree of intimidation, the age, sex and condition of the person shall be borne in mind.
A threat to enforce one's claim through competent authority, if the claim is just or legal, does not vitiate consent.
d. Undue Influence - when a person takes improper advantage of his power over the will of another, depriving the latter
of a reasonable freedom of choice.
The following circumstances shall be considered: the confidential, family, spiritual and other relations between the
parties, or the fact that the person alleged to have been unduly influenced was suffering from mental weakness, or
was ignorant or in financial distress.
e. Fraud - when, through insidious words or machinations of one of the contracting parties, the other is induced to enter
into a contract which, without them, he would not have agreed to.
In order that fraud may make a contract voidable, it should be serious and should not have been employed by both
contracting parties.
Incidental fraud only obliges the person employing it to pay damages.
There is NO vitiation of consent on the ground of fraud in the following instances:

i. Failure to disclose facts, when there is NO duty to reveal them. But if there is a duty to reveal them, failure to
disclose the facts constitutes fraud as when the parties are bound by confidential relations.
ii. The usual exaggerations in trade, when the other party had an opportunity to know the facts.
iii. A mere expression of an opinion does not signify fraud; UNLESS made by an expert and the other party has relied
on the former's special knowledge
iv. Misrepresentation by a third person does not vitiate consent; UNLESS such misrepresentation has created
substantial mistake and the same is mutual.
v. Misrepresentation made in good faith is not fraudulent but may constitute error.
2. OBJECT CERTAIN WHICH IS THE SUBJECT MATTER
Object (Subject Matter) of the Contract: is really to create or to end obligations, which, in turn, may involve things, rights
or services.
Requisites:
a. The thing, right or service must be within the commerce of man;
b. It must be transmissible;
c. It must not be contrary to law, morals, good customs, public order or public policy;
d. It must not be impossible;
e. It must be determinate as to its kind or determinable without the need of a new contract or agreement.
Future Inheritance: cannot be the subject matter of a valid contract. This is because the seller owns no inheritance while his
predecessor lives. Public policy demands that if you’re going to sell, you have the right to do so, but not necessarily requiring
that the seller is the owner.
3. CAUSE
Cause is the essential or impelling reason why a party assumes an obligation.
a. Onerous – for each contracting party, the prestation r promise of a thing or service by the other;
b. Gratuitous – mere liberality of the benefactor
c. Remuneratory – service or benefit already rendered.
Rules on Cause:
a. Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is unlawful if it is contrary to law,
morals, good customs, public order or public policy
b. The statement of a false cause in contracts shall render them void, if it should not be proved that they were founded upon
another cause which is true and lawful.
c. Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the
contrary.
d. As a rule, inadequacy of the price will not affect the contract. Except:
(1) When expressly provided by law, e.g., rescissible contracts;
(2) When there has been fraud, mistake or undue influence.
e. The particular motives of the parties in entering into a contract are different from the cause thereof.
Exception: if it predominates the purpose of the party to enter into a contract. E.g., sale to defraud creditors.
4. OTHER ESSENTIAL ELEMENTS:
Real Contracts: are those which are perfected by delivery, thus, delivery is an essential element to its perfection. Real
contracts include:
1. Deposit
2. Pledge
3. Commodatum
4. Simple Loan or Mutuum
Formal Contracts: where the execution of the required formality is also an essential element for perfection.
FORMS OF CONTRACT
GENERAL RULE: no form is required for the validity or perfection of a contract.
Exceptions: Formalities required for VALIDITY:

1. Donations of real property which requires a public instrument.
2. Donations of personal property which exceeds P5,000 which requires that the donation be written.
3. Stipulation to pay interests on loans or for the use of money, which must be in writing.
4. Sale or transfer of large cattle which requires that it be in a public instrument, registered and that there should be a
certificate of transfer.
5. Contribution of real property in a partnership, which requires that there be an inventory attached to a public instrument.
Formalities required for ENFORCEABILITY (STATUTE OF FRAUDS): The following are unenforceable, unless they are in
writing, or some note or memorandum and subscribed by the party charged, or by his agent:
1. An agreement that by its terms is not to be performed within a year from the making thereof;
2. A special promise to answer for the debt, default, or miscarriage of another;
3. An agreement made in consideration of marriage, other than a mutual promise to marry;
4. An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the
buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action or
pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer
in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the
purchasers and person on whose account the sale is made, it is a sufficient memorandum;
5. An agreement of the leasing for a longer period than one year, or for the sale of real property or of an interest therein;
6. A representation as to the credit of a third person.

Formalities required for CONVENIENCE: to bind third persons, the following are required to appear in a public instrument:
1. Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over
immovable property; sales of real property or of an interest therein a governed by the Statute of Frauds.
2. The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains;
3. The power to administer property, or any other power which has for its object an act appearing or which should appear in
a public document, or should prejudice a third person;
4. The cession of actions or rights proceeding from an act appearing in a public document.
Remedy to require a specific form: if the law requires a document or other special form if the contract is VALID and
ENFORCEABLE, as in the acts and contracts required to appear in a public instrument for convenience (where the requirement
that they must be in writing for validity, if applicable, is met), the contracting parties may compel each other to observe that
form, once the contract has been perfected.
REFORMATION OF INSTRUMENTS
Reformation: is the remedy by means of which a written instrument is made or construed so as to express or conform to the
true intention of the parties when some error or mistake has been committed.
Requisites:
1. There is a meeting of the minds;
2. There is a written instrument; and
3. The written instrument does not reflect the true intention of the parties.
When may reformation be had:

1. Mutual mistake of the parties. If one party was mistaken and the other acted fraudulently or inequitably in such a way that
the instrument does not show their true intention, the former may ask for the reformation of the instrument
2. When one party was mistaken and the other knew or believed that the instrument did not state their real agreement, but
concealed that fact from the former.
3. Ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument or of the clerk or typist.
4. If two parties agree upon the mortgage or pledge of real or personal property, but the instrument states that the property
is sold absolutely or with a right of repurchase.
Who can ask for reformation:

1. If the mistake was mutual, reformation may be ordered at the instance of either party or his successor in interest;
2. Otherwise, the injured party, or his heirs and assigns.
No reformation is allowed:
a. Simple donations inter vivos wherein no condition is imposed;
b. Wills;
c. When the real agreement is void.
Likewise, when one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its
reformation.
FUNDAMENTAL CHARACTERISTICS/ PRINCIPLES OF CONTRACTS
1. CONSENSUALITY OF CONTRACTS
Perfection of a contract: is generally by the meeting of the minds or consensual, save for some cases where delivery or form
is required for its perfection.
Contract entered into by an unauthorized person: is unenforceable since the rule is that no one may contract in the name
of another without being authorized by the latter, such as an agent, or unless he has by law a right to represent him, such as
a guardian.
The same is true if the person, while authorized or has legal representation, acted beyond his powers.
Unless, in both cases, the contract is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before
it is revoked by the other contracting party.
CONTRACT OF ADHESION - one where there is already a prepared form containing the stipulations desired by one party
whereby the latter only asks the other party to agree to them if he wants to enter into a contract.
Consent is necessary for there to be a contract: as such, in the case of PLDT, the SC held that the government cannot
compel PLDT to enter into an interconnection agreement with it without the latter’s consent and there is no claim under a
contract without such consent.
However, the government may exercise its sovereign power of eminent domain and compel PLDT to allow the use of its facilities
subject to just compensation. In this case, the Court treated the action as one of expropriation. (Republic vs. PLDT)
2. AUTONOMY OF CONTRACTS (FREEDOM OR LIBERTY TO CONTRACT)

The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided
they are not contrary to law, morals, good customs, public order, or public policy.
Contrary to Law: note that the law is deemed part of every contract and must thus be not contrary to the same.
a. Waiver for future fraud.
b. Partnership: Pactum Leonina – a stipulation which excludes one or more partners from any share in the profits or losses
c. Mortgage/Pledge: Pactum Commissorium – a stipulation where the creditor appropriates the things given by way of pledge
or mortgage, or dispose of them.
d. Mortgage/Pledge: Pactum de non aliendo – a stipulation forbidding the owner from alienating the immovable mortgaged.

Contrary to Public Policy:
a. Refund of tuition fees during the time a student is covered by a scholarship if such student transfers schools. Scholarships
are granted not to attract and to keep brilliant students in school for their propaganda mine but to reward merit or help
gifted students in whom society has an established interest or a first lien. (Cui vs. Arellano)
b. Prohibiting a losing candidate in a convention to run as an independent candidate is contrary to constitutionality protected
right to be elected in public office and the right of the electorate to choose. (Saura vs. Sindico)
Contrary to Morals: in a contract of loan, where the interest rate is 50%, is void (and reduced) for being contrary to morals,
the same being unconscionable, confiscatory, exorbitant, excessive or inequitable, not because of it is usurious.
3. MUTUALITY
a. The contract must bind both contracting parties;

b. its validity or compliance cannot be left to the will of one of them.
Consequences of Mutuality:
a. One party cannot revoke or renounce a contract without the consent of the other, nor have it said aside on the ground that
he had made a bad bargain.
b. Potestative suspensive conditions dependent upon the sole will of the debtor voids the obligation. If the potestative condition
is resolutory, it would not affect the validity of the contract, as such, extinguishment can be left to the will of one of the
parties.
c. The determination of the performance may be left to a third person:
(1) Whose decision shall not be binding until it has been made known both contracting parties
(2) The determination shall not be obligatory if it is evidently inequitable. In such case, the courts shall decide what is
equitable under the circumstances.
ESCALATION CLAUSE: where one increases/decreases compensation of one of the parties.
When Void: when the increase is dependent solely upon the will of one of the parties.
The unilateral determination and imposition of increased interest rates by the bank is obviously violative of the principle of
mutuality of contracts ordained in Article 1308 of the Civil Code. (Sps. Florendo vs. CA)
When Valid: when the increase/decrease is dependent on valid and reasonable standards, independent of the parties’ will.
Contract for a piece of work: where the compensation of the contractor may be increased on the basis of minimum wage or
as to materials, based on the consumer price index.
Contract of Lease: where the rental would be increased or decreased based on the movement (increase or devaluation) of
foreign exchange – valid. (Del Rosario vs. Shell)
4. OBLIGATORY FORCE OF CONTRACTS
Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good
faith. (Art. 1159)
5. RELATIVITY OF CONTRACTS
RELATIVITY (OR PRIVITY) OF CONTRACTS: means that the contract takes effect only between the parties, their assigns
and heirs which are referred to as privies.
Third Parties: as a general rule do not have a cause of action to enforce or annul a contract nor are they bound by the terms
thereof.
Exceptions:
a. Third person may be bound by the contract: In contracts creating real rights, third persons who come into possession
of the object of the contract are bound thereby, subject to the provisions of the Mortgage Law and the Land Registration
Laws
b. A creditor may initiate an action against the contracting parties
Creditors are protected in cases of contracts intended to defraud them. The following actions are allowed for creditors,
effectively interfering in contracts to which they are not parties to:
Accion Pauliana: is the action of the creditor to rescind the contract entered into by the debtor to defraud him.
Accion Directa: is the action of a creditor to sue on a contract entered into by his debtor, whenever authorized by law,
such as:
i. Those who put labor upon or furnish materials for a piece of work undertaken by the contractor have an action against
the owner up to the amount owing from the latter to the contractor at the time the claim is made.
ii. The sublessee is subsidiarily liable to the lessor for any rent due from the lessee. However, the sublessee shall not be
responsible beyond the amount of rent due him, in accordance with the terms of the sublease, at the time of the
extrajudicial demand by the lessor.
c. Third persons may be liable under a contract
Malicious interference by third persons: A third person who induces another to violate his contract shall be liable for
damages to the other contracting party. As the name implies, there should be malice or a malicious inducement by the
third person as a result of which, the debtor does not comply with his obligation under the contract, which necessarily
implies that such third person has knowledge of the existence of the contract. (Art. 1314)

d. Third persons may be benefited by a contract – 2nd paragraph of Art. 1311, otherwise known as a stipulation
pour atrui.
If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he
communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not
sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person.
Stipulation pour atrui: is a stipulation in favor of a third person conferring a clear and deliberate favor upon him, and which
stipulation is merely part of a contract entered into by the parties, neither of whom acted as agent of the third person.
Communication of acceptance to the obligor is required. No form is required. It can even be implied from the acts of the
third person.
Revocation: cannot be done by one party alone. The Supreme Court has held that if this revocation is a unilateral act of
one of the parties, it is void for violation of the principle of mutuality of contracts. For a revocation to take effect, it must
be with consent of both parties (obligor and oblige) and should be done before the communication of acceptance to the
obligor.
CLASSIFICATION OF CONTRACTS
1. ACCORDING TO DEGREE OF DEPENDENCE

a. PRINCIPAL – a contract which can stand on its own, such as a contract of sale, barter, lease, loan.
b. ACCESSORY – those which cannot stand on its own and are dependent upon other contracts for its validity. E.g.,
guaranty, suretyship, mortgage and antichresis.
c. PREPARATORY – a contract is a means to achieving an end, such as an option contract, a contract of partnership and
that of agency.
2. ACCORDING TO PERFECTION
a. CONSENSUAL – are those perfected by mere consent.
b. REAL – those which are perfected only upon delivery of the thing subject of the contract. E.g., deposit, pledge,
commodatum and mutuum.
c. FORMAL – those which require a certain form for its validity. E.g., antichresis
3. ACCORDING TO PURPOSE
a. TRANSFER OF OWNERSHIP – Donation, Sale and Barter
b. CONVEYANCE OF USE – Usufruct, Lease and Loan
c. RENDITION OF SERVICE – Lease and Agency
4. ACCORDING TO NATURE OF OBLIGATION PRODUCED

a. BILATERAL – where both parties are reciprocally obligated, e.g., lease (where the lessor is obliged to allow the use of
the thing and the lessee is obliged to pay rent) and sale (where the buyer is obliged to pay the price and the seller
obliged to deliver the thing) (ARTS. 1642, 1458)
b. UNILATERAL – only one party is obliged. E.g., guaranty and pledge. (ARTS. 2047, 2093)
5. ACCORDING TO CAUSE
a. ONEROUS – such as a contract of sale, barter, lease and simple loans or mutuum with stipulation for interest.
b. GRATUITOUS OR LUCRATIVE – such as a donation and commodatum.
c. REMUNERATORY – where one prestation is given for a benefit or service that had been rendered previously.
6. ACCORDING TO RISK
a. COMMUTATIVE – where the parties contemplate real fulfillment, therefore, equivalent values (presumably) are given,
such as sales (where the price is presumably the equivalent of the thing to be delivered) or lease (where the rental
payments is presumably the value of the use of the thing)
b. ALEATORY – where the fulfillment of the cause as to one party is dependent upon chance, such as an insurance contract
(where the payment will depend on the happening of the event insured against)
7. ACCORDING TO NAME
a. NOMINATE – those contracts for which a particular name has been designated and rules particular to them are
applicable such as sales, commodatum, partnership, agency, deposit, etc.
b. INNOMINATE – those which do not have particular designation, such as do ut des (I will give that you may give), do
ut facias (I will give that may do), facio ut des (I will do that you may give) and facio ut facias (I will do that you may
do).
INTERPRETATION OF CONTRACTS
Art. 1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal
meaning of its stipulations shall control.
If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former. (1281)
Primordial Consideration: is the intention of the parties. Such that even if the terms of the contract are clear, but does not
reflect the intention of the parties, it is the intention which would prevail.
Art. 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be
principally considered. (1282)
Contemporaneous and Subsequent Acts: may be considered to determine if the parties’ intentions are different from the
clear words of the agreement.

In a case where a Deed of Assignment was issued as payment for the obligation of the debtor in an indemnity agreement by
way of dacion en pago, the debtor thereafter made subsequent installment payments and executed a mortgage, the SC held
that clearly the subsequent acts of the debtor do not reflect his claim that the deed of assignment was by dacion en pago. The
deed of assignment was a form of security for the indemnity agreement.
Specific rules in interpretation of contracts:

1. However general the terms of a contract may be, they shall not be understood to comprehend things that are distinct and
cases that are different from those upon which the parties intended to agree.
2. If some stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which
is most adequate to render it effectual.
3. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may
result from all of them taken jointly.
4. Words which may have different significations shall be understood in that which is most in keeping with the nature and
object of the contract.
5. The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities of a contract, and shall fill
the omission of stipulations which are ordinarily established.
6. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity
When none of the above rules will apply:
When it is absolutely impossible to settle doubts by the rules established in the preceding articles, and the doubts refer to
incidental circumstances of:
1. a gratuitous contract - the least transmission of rights and interests shall prevail.
2. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests.
If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what may have been
the intention or will of the parties, the contract shall be null and void. (Art. 1378)
DEFECTIVE CONTRACTS
1. RESCISSIBLE CONTRACTS
Rescission: is a process designated to render inefficacious a contract validly entered into and normally binding, by reason of
external conditions, causing an economic prejudice to a party or his creditors.
Resolution: is the proper term for “rescission” which is a remedy under Art. 1911 in reciprocal obligations. Unlike the proper
rescission for rescissible contracts, resolution is a primary remedy which can be availed of by the parties and does not require
lesion as a ground therefor but will require non-performance or non-fulfillment of the obligation or when there is substantial
breach.
Rescissible Contracts:
Art. 1381. The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than
one-fourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them;
(4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge
and approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission. (1291a)
Lesion – is the damage or injury to the party asking for rescission, which represents the difference between the price and the
actual value of the property. Lesion, as a ground for rescission must be MORE THAN ONE-FOURHT of the value.
In fraud of creditors: which is properly termed “accion pauliana,” through which the creditor can interfere and have the
contract entered into by the debtor rescinded. This presupposes that the creditor cannot in any other manner collect the claims
due. Thus, if the debtor entered into a contract of sale with a third person in order to have enough money to pay the creditor,
the latter cannot rescind such contract of sale since the sale was precisely entered into to pay him his due.
Things under litigation: is rescissible whenever entered into without the knowledge and approval of:
e. The litigants; or
f. Competent judicial authority (such as the court under which the thing is subject to litigation).
Other contract subject to rescission under the law:

a. Rights of an unpaid seller;
b. In obligations to deliver a specific thing, where the same deteriorates with the fault of the debtor before the suspensive
condition is fulfilled (or suspensive term arrives);
c. Lesion of at least one-fourth in partition.
d. In sale of real estate for a certain price per unit of measure and the real estate delivered is deficient by more than 1/10 or
when the buyer would not have entered into the contract knowing the actual area of the real estate.
e. Payments made in a state of insolvency for obligations whose fulfillment the debtor could not be compelled at the time they
were effected.
Rescission as a remedy:
a. The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no other legal
means to obtain reparation for the same
b. Rescission shall be only to the extent necessary to cover the damages caused
c. Restitution - rescission creates the obligation to return the things which were the object of the contract, together with their
fruits, and the price with its interest.
d. It can be carried out only when he who demands rescission can return whatever he may be obliged to restore

e. Rescission shall not take place when the things which are the object of the contract are legally in the possession of third
persons who did not act in bad faith. In which case, indemnity for damages may be demanded from the person causing the
loss.
f. If the sale of the property of the ward or the absentee is approved by courts, rescission is not an available remedy.
Presumption of Fraud:
a. Alienations by gratuitous title: presumed to have been entered into in fraud of creditors, when the donor did not reserve
sufficient property to pay all debts contracted before the donation.
b. Alienations by onerous title: presumed fraudulent when made by persons against whom some judgment has been
issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party
seeking the rescission.
Whoever acquires in bad faith the things alienated in fraud of creditors shall indemnify the latter for damages suffered on
account of the alienation, whenever, due to any cause, it should be impossible for him to return them.
Prescriptive Period: the action to claim rescission must be commenced within 4 years. For persons under guardianship and
for absentees, such four year period shall begin upon termination of the ward’s incapacity or when the absentee’s domicile is
known.
Sale of land, 4 years is counted from the time of registration: When a transaction involves registered land, the four-year period
fixed in Article 1391 within winch to bring an action for annulment of the deed, shall be computed from the registration of the
conveyance.
The registration of the document is constructive notice of the conveyance to the whole world. (HSBC vs. Pauli)
2. VOIDABLE CONTRACTS
Voidable Contracts: are those which are valid until they have been annulled by proper action in court. However, they are
likewise subject to ratification to cure the defect.
The following are voidable contracts:

a. Those where one of the parties is incapable of giving consent;
b. Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.
c. Those entered into by those hypnotized or under a state of drunkenness
Prescriptive Period: shall be four years.
Ground Counted from:

Intimidation, violence or undue influence The defect of the consent ceases
Mistake or fraud Discovery
Minority or incapacity Guardianship ceases
Ratification: extinguishes the action to annul a voidable contract.

a. Ratification may be effected by the guardian of the incapacitated person
b. It does not require the conformity of the contract party who has no right to bring the action for annulment.
c. It cleanses the contract from all the defects from the moment it was constituted.
d. It may be done:
i. Expressly – either oral or written; or
ii. Tacitly (impliedly) – when the reason which renders the contract voidable has ceased, the person who has a right to
invoke annulment should execute an act which necessarily implies an intention to waive such right.
Annulment: renders the contract non-existing, as if it was never entered into.

a. Only the injured party (the victim, whether principal or subsidiary party) may ask for annulment.
b. Creditors of the injured party cannot ask for the annulment of the contract for they are not parties thereto.
c. In case of minority, and the minor misrepresents his age, and the other party was led to believe the same, there can be
no annulment, for here, the minor would be estopped.
d. Those who are capacitated cannot allege the incapacity of those with whom they contracted with nor those who exerted
intimidation, violence or undue influence, or employed fraud, or caused mistake.
e. Effects of loss of the thing:
i. The action for annulment of contracts shall be extinguished when the thing which is the object thereof is lost through
the fraud or fault of the person who has a right to institute the proceedings.
ii. If the right of action is based upon incapacity, the loss of the thing shall not be an obstacle to the success of the action,
unless said loss took place through the fraud or fault of the incapacitated person.
f. Effects of annulment:
i. Generally, the parties are obliged to restore to each other the things which have been the subject matter of the contract,
with their fruits and the price with its interest.
ii. In obligations to render service, the value thereof shall be the basis for damages.
iii. In case of incapacity, the person incapacitated is not obligated to make any restitution except insofar as he has been
benefited by the thing or price received by him.
iv. Whenever the person who is obliged to return the thing cannot do so because it has been lost through his fault, he
shall return:
1) the fruits received and
2) the value of the thing at the time of loss
3) with interest from the same date.
v. When one party does not return what is due him by virtue of the annulment, he cannot compel the other to comply
what is incumbent upon him.

3. UNENFORCEABLE CONTRACTS
Unenforceable contracts – are those which have no effect until they are ratified.
Kinds of Unenforceable Contracts:

a. Unauthorized contracts – those entered into in the name of a person by one who has been given no authority or legal
representation, or who has acted beyond his powers.ill
b. Those that do not comply with the Statute of Frauds – these are agreements that are required to be in writing in
order to avoid fraud.
Statute of Frauds: in order to be enforceable, the following must be in writing, or in some note or memorandum:
i. An agreement that by its terms is not to be performed within a year from the making thereof.
ii. A special promise to answer for the debt, default, or miscarriage of another;
iii. An agreement made in consideration of marriage, other than a mutual promise to marry;
iv. An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the
buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action
or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the
auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price,
names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum;
v. An agreement of the leasing for a longer period than one year, or for the sale of real property or of an interest therein.
vi. A representation as to the credit of a third person.
Rules Applicable to Statute of Frauds:

a. It applies only to executory contracts, and not those which have been partially or completely executed.
b. The list is exclusive, that is, it applies only to the agreements or contracts enumerated above.
c. The defense of Statute of Frauds may be waived.
d. The Statute of Frauds is a personal defense, that is, an agreement infringing it cannot be assailed by third persons.
e. If oral evidence is presented to prove the agreement, and the other does not object thereto, there is deemed a waiver
of the defense of Statute of Frauds. The same is true if the other party has already accepted the benefits of the
contract.
c. Those where both parties are incapable of giving consent.
4. VOID OR INEXISTENT
Void Contracts are those which are either inexistent (as when the required formalities are not complied with for its perfection,
which produces no legal effects), or illegal or illicit.
Art. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the principal object of the contract cannot be ascertained;
(7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.
Rules Applicable:
a. The action or defense for the declaration of the contract as inexistent does not prescribe.
b. The contract cannot be ratified.
c. The defense of illegality of contract is not available to third persons whose interests are not directly affected
Legal Effects of a Void Contract:
GENERAL RULE: It cannot give rise to valid subsequent contracts if the same are based on it. Generally, produces no effect
and no action to declare them void is needed.
EXCEPTIONS:
a. When money is paid or property delivered for an illegal purpose, the contract may be repudiated by one of the parties
before the purpose has been accomplished, or before any damage has been caused to a third person. In such case, the
courts may, if the public interest will thus be subserved, allow the party repudiating the contract to recover the money or
property.
b. Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if the interest of justice so
demands allow recovery of money or property delivered by the incapacitated person.
c. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designated for the
protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered.
d. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced.
Illegal Contracts: can either be that which involves a criminal offense or where there is no criminal offense.
a. When there is a criminal offense and both parties are at fault/guilty (in pari delicto) they shall have no shall have no action
against each other; they shall both be prosecuted; the effects of the crime shall be confiscated in favor of the government.
b. When there is no criminal offense, same rights as to recovery, except no prosecution will be involved. As such, if both are
at fault, no recovery can be made by either. But if only one party is at fault, the innocent party may demand the return of
what he has given, without any obligation to comply with his promise.

1. These are elements of a contract which are derived from the nature of the contract and ordinarily accompany the same.
A. Natural C. Special
B. Essential D. Accidental
2. It is a contract where each of the parties acquires an equivalent of his prestation and such equivalent is pecuniarily
appreciable and already determined from the moment of the celebration of the contract.
A. Aleatory C. Commutative
B. Nominate D. Innominate
3. It refers to the principle that once a contract is perfected, it shall be of obligatory force upon both of the contracting
parties.
A. Obligatory force C. Mutuality
B. Autonomy D. Relativity
4. It refers to the principle that the contracting parties are free to enter into a contract and to establish such stipulations,
clauses, terms, and conditions as they may deem convenient.
A. Obligatory force C. Mutuality
B. Autonomy D. Relativity
5. It refers to the essential equality of the contracting parties whereby the contract must bind both of them.
A. Mutuality C. Autonomy
B. Obligatory force D. Relativity
6. It refers to the principle that the contract takes effect only between the parties, their assigns and heirs.
A. Obligatory force C. Relativity
B. Autonomy D. Mutuality
7. It is a stipulation in a contract, clearly and deliberately conferred by the contracting parties as a favor upon a third
person, who must communicate his acceptance of the favor or benefit to the obligor before it could be revoked.
A. Stipulation pour autrui C. Contract of adhesion
B. Stipulation au pair D. Contra bonos mores
8. In an offer to sell, parties failed to agree on the size of the land to be sold. Is there a meeting of the minds of the parties
that would perfect a contract?
A. There is no consent that would perfect a contract as there is no agreement on the exact area to be sold.
B. There is consent because the land is still identified.
C. There is consent because there is agreement to sell and to buy.
D. The information given is insufficient to answer the question.
9. A contract of adhesion is generally:

A. Void C. Unenforceable
B. Voidable D. Valid
10. Under this theory, a contract is perfected from the moment the acceptance is declared or made.
A. Expedition Theory C. Manifestation Theory
B. Reception Theory D. Cognition Theory
11. In the Philippines, which theory on perfection of contracts is followed?

A. Cognition Theory C. Expedition Theory
B. Reception Theory D. Manifestation Theory
12. On March 5, 1956, A wrote a letter to B offering him the lease of a building. On March 6, 1956, at 1:00PM, B sent a letter
of acceptance which was received by A at 4:00PM that day. But at 2:00PM, A had already sent B a letter of withdrawal
of the offer which was received by B at 5:00PM. When was the contract perfected?
A. At 1:00PM C. At 2:00PM
B. At 4:00PM D. The contract has not been perfected.
13. What is the effect of the death, civil interdiction, insanity, or insolvency of the either the offeror or offeree before
acceptance is conveyed?
A. The offer becomes ineffective.
B. The offer is still effective.
C. As against the offeror only, the offer becomes ineffective.
D. As against the offeree only, the offer becomes ineffective.
14. A contract entered into by a minor who misrepresents his age is:
A. Void C. Voidable
B. Valid D. Unenforceable
15. A contract entered into by and between two deaf-mutes is:

A. Void C. Voidable
16. A contract entered into by and between two persons of who both insane is:
A. Valid C. Voidable
B. Void D. Unenforceable
17. If a person prohibited to enter into a contract, enters into a contract, such contract is:
A. Void C. Voidable

18. What is the difference between a mistake of fact and a mistake of law?
A. A mistake of law vitiates consent which renders a contract voidable; while a mistake of fact does not render a
contract voidable.
B. Both mistakes of fact and of law render a contract voidable.
C. Both mistakes of fact and of law do not render a contract voidable.
D. A mistake of fact vitiates consent which renders a contract voidable; while a mistake of law does not render a
contract voidable.
19. Is there any exception to the rule that a mistake of law cannot vitiate consent rendering the contract voidable?
A. Mistake as to the object of the contract (error in re)
B. Mistake as to person (error in persona)
C. Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may vitiate
consent.
D. There is no exception.
20. When is an instrument not capable of reformation?

A. Simple donations inter vivos wherein no condition is imposed
B. When a mutual mistake of the parties causes the failure of the instrument to disclose their real agreement.
C. If one party was mistaken and the other acted fraudulently or inequitably in such a way that the instrument
does not show their true intention.
D. When one party was mistaken and the other knew or believed that the instrument did not state their real
agreement, but concealed the fact from the former.
21. When is an instrument not capable of reformation?

A. When through the ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument
or of the clerk or typist, the instrument does not express the true intention of the parties.
B. Wills
C. If 2 parties agree upon the mortgage or pledge of real or personal property, but the instrument states that the
property is sold absolutely, or with a right of repurchase.
D. Where the real agreement is voidable.
22. Where shall the action for reformation of instrument be instituted?

A. Ordinary action for declaratory relief C. Ordinary action for quo warranto
B. Ordinary action for reformation of instrument D. Special civil action for declaratory relief
23. X, of age, entered into a contract with Y, a minor. X knew and the contract specifically stated the age of Y. May X
successfully demand annulment of the contract?
A. No, the party who has capacity cannot allege the incapacity of the party with whom he contracted.
B. No, the annulment will prejudice the interests of the minor.
C. Yes, since Y is a minor, the contract is voidable.
D. Yes, as long as Y joins X in asking for annulment.
24. A and B entered into a verbal contract whereby A agreed to sell to B his only parcel of land for P10,000 and B agreed
to buy at the aforementioned price. B went to the bank, withdrew the same amount and returned to A for the
consummation of the contract. A, however, had changed his mind and refused to go through with the sale. Will an
action by B against A for specific performance prosper?
A. No, A and B must seek to resolve the dispute first before going to the court.
B. Yes, because B already withdrew the money from the bank.
C. No, it is not evidenced by anything in writing properly signed by A.
D. Yes, A has already agreed with B which made the agreement binding to both parties.
25. Under this principle, when the defect of a void contract consists in the illegality of the cause or object of the contract, and
both of the parties are at fault, the law refuses them every remedy and leaves them where they are.
A. In pari delicto C. Caso fortuito
B. Contra bonos mores D. Res ipsa loquitur
26. What is an example of a natural element of a contract?

A. Warranty against eviction C. Consent
B. Form D. Consideration
27. The limitations upon the right of the contracting parties to establish such stipulations, clauses, terms, and conditions as
they may deem convenient are:
A. Law, morals, good customs, and public order only
B. Law, morals, and good customs only
C. Law, morals, and public order only
D. Law, morals, good customs, public order, and public policy
28. Under this theory, a contract is perfected from the moment the acceptance comes to the knowledge of the offeror.
A. Reception Theory C. Expedition Theory
B. Cognition Theory D. Manifestation Theory
29. A contract entered into by an incapacitated person is:

A. Void C. Valid
B. Voidable D. Unenforceable

30. It means that the object should be susceptible of appropriation and transmissible from one person to another.
A. The object is real or possible.
B. The object is licit.
C. The object is within the commerce of men.
D. The object is determinate, or at least, possible of determination, as to its kind.
31. If parties enter into a contract with respect to things outside the commerce of men, the contract is:
A. Void C. Valid
32. It refers to the doctrine that “When the true intention of the parties to a perfected and valid contract are not expressed
in the instrument purporting to embody their agreement, by reason of mistake, fraud, inequitable conduct or accident,
one of the parties may ask for the reformation of the instrument so that such true intention may be expressed.
A. Doctrine of interpretation of instruments C. Doctrine of reformation of instruments
B. Doctrine of resolution of instruments D. Doctrine of expression of instruments
33. It is a remedy granted by law to the contracting parties, and even to third persons, to secure the reparation of damages
caused to them by a contract, even if the same should be valid, by means of the restoration of things to their condition
prior to the celebration of the contract.
A. Rescission C. Reformation
B. Annulment D. Declaratory relief
34. How is rescission different from resolution?

A. In rescission, the action may be instituted not only by a party to the contract but even by third persons; whereas in
resolution, the action may be instituted only by a party to the contract.
B. In rescission, the only ground is failure of one of the parties to comply with what is incumbent upon him; whereas in
resolution, several grounds are lesion, fraud and others expressly specified by law.
C. In rescission, the law expressly declares that courts shall have the discretionary power to grant an extension for
performance provided that there is a just cause; whereas in resolution, the court has no power to grant an extension of
time for the performance of the obligation so long as there is ground for resolution.
D. In rescission, only reciprocal contracts may be rescinded; whereas in resolution, any contract, whether unilateral or
reciprocal may be resolved.
35. What is the nature of an action for rescission?

A. Primary C. Subsidiary
B. Secondary D. Ordinary
36. When should an action for rescission be filed?

A. Within 4 years C. Within 6 years
B. Within 5 years D. Within 10 years
37. What is the period of prescription for an action for annulment of a voidable contract?
A. 4 years C. 6 years
B. 5 years D. 10 years
38. It refers to the act or means by virtue of which efficacy is given to a contract which suffers from a vice of curable
nullity.
A. Resolution C. Annulment
B. Prescription D. Ratification (or confirmation)
39. Arnie, husband of Marika, sold paraphernal property in her name without her consent. The sale is:
40. A and B entered into a verbal contract whereby A agreed to sell to B his only parcel of land for P10,000 and B agreed
to buy at the aforementioned price. B went to the bank, withdrew the same amount and returned to A for the
consummation of the contract. A, however, had changed his mind and refused to go through with the sale. The
agreement to sell the land to B is:
A. Void C. Voidable
1. A 11. A 21. B 31. A

2. C 12. D 22. D 32. C
3. A 13. A 23. A 33. A
4. B 14. C 24. C 34. A
5. A 15. B 25. A 35. C
6. C 16. D 26. A 36. A
7. A 17. A 27. D 37. A
8. A 18. D 28. B 38. D
9. D 19. C 29. B 39. D
10. C 20. A 30. C 40. D

RFBT-03
LABOR LAW & SOCIAL SECURITY LAW

LABOR LAW
COVERAGE: Book III of the Labor Code on Labor Standards shall apply to employees in all establishments and
undertakings whether for profit or not, but not to the following:
1. Government employees;
2. Managerial employees;
3. Officers of the managerial staff;
4. Field personnel;
5. Persons in the personal service of another;
6. Domestic helpers;
7. Workers who are paid by results;
8. Members of the family of the employer who are dependent on him for support;
NIGHT SHIFT DIFFERENTIAL and OVERTIME PAY
NORMAL HOURS OF WORK: should not exceed 8 hours

Hours worked: Hours worked shall include
1. All time during which an employee is required to be on duty or to be at a prescribed workplace; and
2. All time during which an employee is suffered or permitted to work.
Rest periods of short duration during working hours shall be counted as hours worked.
Meal Periods Subject to such regulations as the Secretary of Labor may prescribe, it shall be the duty of every employer to give
his employees not less than sixty (60) minutes time-off for their regular meals.
Health Personnel:
1. In locality has a population of at least 1M or in a hospital or clinic with a bed capacity of at least 100: regular hours of work
is 8 hours a day for 5 days in a week;
2. Exception: when there are exigencies: the health personnel may be required to work for 6 days or 48 hours in a week, in
which case they are entitled to additional compensation of 30% of their regular wage on the 6th day.
NIGHTSHIFT DIFFERENTIAL refers to the additional compensation of not less than ten percent (10%) of an employee’s
regular wage for every hour of work done between 10:00 PM and 6:00 AM, whether or not such period is part of the
worker’s regular shift.
OVERTIME PAY: refers to the additional compensation for work performed beyond 8 hours and shall be compensated with
additional:
1. 25% when work is rendered on the regular working day of the employee or
2. 30% when work is rendered on one’s rest day or holiday
Basis: employee’s regular wage for work performed beyond eight (8) hours within the worker’s 24-hour workday.
For purposes of computing overtime and other additional remuneration as required by this Chapter, the "regular wage" of an
employee shall include the cash wage only, without deduction on account of facilities provided by the employer
Emergency overtime work: Any employee may be required by the employer to perform overtime work in any of the following
cases:
a) When the country is at war or when any other national or local emergency has been declared by the National Assembly or
the Chief Executive;
b) When it is necessary to prevent loss of life or property or in case of imminent danger to public safety due to an actual or
impending emergency in the locality caused by serious accidents, fire, flood, typhoon, earthquake, epidemic, or other
disaster or calamity;
c) When there is urgent work to be performed on machines, installations, or equipment, in order to avoid serious loss or
damage to the employer or some other cause of similar nature;
d) When the work is necessary to prevent loss or damage to perishable goods; and
e) Where the completion or continuation of the work started before the eighth hour is necessary to prevent serious obstruction
or prejudice to the business or operations of the employer.
Any employee required to render emergency overtime work shall be paid the additional compensation required.
WEEKLY REST PERIODS and HOLIDAY/REST DAY PAY
RIGHT TO WEEKLY REST DAY: It shall be the duty of every employer, whether operating for profit or not, to provide each of
his employees a rest period of not less than twenty-four (24) consecutive hours after every six (6) consecutive normal
work days.
The employer shall determine and schedule the weekly rest day of his employees subject to collective bargaining agreement
and to such rules and regulations as the Secretary of Labor and Employment may provide. However, the employer shall respect
the preference of employees as to their weekly rest day when such preference is based on religious grounds.
When employer may require work on a rest day: The employer may require his employees to work on any day:
a) In case of actual or impending emergencies caused by serious accident, fire, flood, typhoon, earthquake, epidemic or other
disaster or calamity to prevent loss of life and property, or imminent danger to public safety;
b) In cases of urgent work to be performed on the machinery, equipment, or installation, to avoid serious loss which the
employer would otherwise suffer;

LABOR LAW & SOCIAL SECURITY LAW RFBT-03
c) In the event of abnormal pressure of work due to special circumstances, where the employer cannot ordinarily be expected
to resort to other measures;
d) To prevent loss or damage to perishable goods;
e) Where the nature of the work requires continuous operations and the stoppage of work may result in irreparable injury or
loss to the employer; and
f) Under other circumstances analogous or similar to the foregoing as determined by the Secretary of Labor and Employment.
Compensation for rest day, Sunday or holiday work:

1. Where an employee is made or permitted to work on his scheduled rest day, he shall be paid an additional compensation
of at least thirty percent (30%) of his regular wage. An employee shall be entitled to such additional compensation
for work performed on Sunday only when it is his established rest day.
2. When the nature of the work of the employee is such that he has no regular workdays and no regular rest days can
be scheduled, he shall be paid an additional compensation of at least thirty percent (30%) of his regular wage
for work performed on Sundays and holidays.
3. Work performed on any special holiday shall be paid an additional compensation of at least thirty percent (30%) of
the regular wage of the employee. Where such holiday work falls on the employee’s scheduled rest day, he shall be
entitled to an additional compensation of at least fifty per cent (50%) of his regular wage.
4. Where the collective bargaining agreement or other applicable employment contract stipulates the payment of a higher
premium pay than that prescribed above, the employer shall pay such higher rate.
HOLIDAY PAY
RIGHT TO HOLIDAY PAY: Every worker shall be paid his regular daily wage during regular holidays, except in retail and
service establishments regularly employing less than ten (10) workers;
The employer may require an employee to work on any holiday but such employee shall be paid a compensation equivalent
to twice his regular rate; and
As used in herein, "holiday" includes:

1. New Year’s Day – January 1
2. Maundy Thursday
3. Good Friday
4. Araw ng Kagitingan - April 9
5. Labor Day - May 1
6. Eid’l Fitr – varies per year
7. Independence Day - June 12
8. Eid’l Adha – varies per year
9. National Heroes Day – last Monday of August
10. Bonifacio Day - November 30
11. Christmas Day - December 25
12. Rizal Day - December 30
13. The day designated by law for holding a general election.
Situations When The Employee Is Not Entitled To Holiday Pay:

1. If he was absent without pay on the day prior a regular holiday.
2. If he was absent without pay on the day prior to successive regular holidays like Maundy Thursday and Good Friday.
3. If he was absent without pay on the day prior to his rest day or a special holiday that is followed by a regular holiday.
4. If he was absent without leave on the day prior to successive regular holidays but he worked on the first holiday, he is only
entitled to holiday pay for the following day.
REGULAR VS. SPECIAL HOLIDAY
REGULAR HOLIDAY SPECIAL HOLIDAY

Compensable even if unworked Not compensable if unworked
Generally limited to the 10 enumerated in the Labor Code Not exclusive since a law or ordinance may provide for
plus the two Muslim holidays other special holidays
Observed throughout the country There may be special holidays which are observed only in
one locality
Rate is twice if worked Rate is 130%
LEAVES
RIGHT TO SERVICE INCENTIVE LEAVE: Every employee who has rendered at least one year of service shall be entitled
to a yearly service incentive leave of 5 days with pay.
Part-Time Workers Also Entitled: Part-time workers are entitled to the full benefit of the yearly five (5) days Service Incentive
Leave. The reason is that the law speaks of at least one (1) year of service without any distinction for entitlement to said
benefit.
SERVICE INCENTIVE LEAVE VS. VACATION LEAVE (VL) & SICK LEAVE (SL)
SERVICE INCENTIVE LEAVE VACATION LEAVE/SICK LEAVE
Mandatory labor standard Voluntary; it may result from employer’s discretionary policy
or CBA
intended to alleviate the economic condition of the intended to afford a laborer a chance to get a much needed
workers for it acts as replacement for regular income rest to replenish his worn out energies and acquire new
that would not be earned during such instance vitality to enable him to meet him to efficiently perform his
duties and not merely to give him additional salary
May not be waived May be impliedly waived through acquiescence
Commutable to cash Can be made not commutable to cash

PATERNITY LEAVE: every married male employee in the private and public sectors shall be entitled to a paternity leave of
seven (7) days with full pay for the first four (4) deliveries (including miscarriages) of the legitimate spouse with whom he
is cohabiting. The male employee applying for paternity leave shall notify his employer of the pregnancy of his legitimate spouse
and the expected date of such delivery. (Sec. 2, RA No. 8187 [Solo Parent’s Act])
Conditions for entitlement:

a. He is employed at the time of delivery of his child;
b. He has notified his employer of the pregnancy of his wife and her expected date of delivery (notification does not apply to
miscarriages or abortion); and
c. His wife has given birth, suffers a miscarriage or an abortion. (Sec. 3)
Availment: The paternity benefits set forth herein may be enjoyed by the qualified employee before, during or after the
delivery by his wife; provided, not later than sixty (60) days after the date of said delivery. (Sec. 5)
Benefits, coverage and non-convertibility: seven (7) working days paternity leave with pay, consisting of basic salary, all
allowances and other monetary benefits.(Sec. 6) If the same is not availed of, the same is not convertible to cash. (Sec. 7)
SOLO PARENT LEAVE: In addition to leave privileges under existing laws, parental leave of not more than seven (7) working
days every year shall be granted to any solo parent employee who has rendered service of at least one (1) year, which shall
not be cumulative. (RA No. 8972)
VAWC VICTIMS’ LEAVE: At any time during the application of any protection order, investigation, prosecution and/or trial of
the criminal case, a victim of VAWC who is employed shall be entitled to a paid leave of up to ten (10) days in
addition to other paid leaves.
The availment of the ten day-leave shall be at the option of the woman employee, which shall cover the days that she has to
attend to medical and legal concerns. Leaves not availed of are noncumulative and not convertible to cash. (Sec. 42, RA No.
9262, [VAWC])
SPECIAL LEAVE BENEFITS FOR WOMEN: A woman employee having rendered continuous aggregate employment service
of at least six (6) months for the last twelve (12) months shall be entitled to a special leave benefit of two (2) months
with full pay based on her gross monthly compensation following surgery caused by gynecological disorders. (Sec 18, RA No.
9170 [Magna Carta for Women])
MATERNITY LEAVE: Under RA No. 11210, a female worker who is a member of the SSS is entitled to the following leave
incentives:
1. 105 days with full pay
2. If qualified as a “solo parent”, with an additional 15 days
3. At the option of the female worker, she may avail of an additional 30 days, without pay
4. In case of miscarriage or emergency termination of pregnancy – 60 days leave with pay.
13th MONTH PAY
13th MONTH PAY: refers to the additional income based on wage required by P.D. 851 which is equivalent to 1/12 of the
total basic salary earned by an employee within a calendar year.
Payment: anytime not later than Dec. 24.
Entitlement: All rank-and-file employees regardless of their designation or employment status and irrespective of the method
by which their wages are paid, are entitled to this benefit, provided, that they have worked for at least one (1) month during
the calendar year.
Form: It may be in the form of Christmas bonus, midyear bonus, profit sharing payments; and other cash bonuses amounting
to not less than 1/12 of the employees’ basic salary.
Not valid substitutes: Free rice, electricity cash, stock dividends, Cost Of Living Allowances.
SOCIAL SECURITY LAW

(RA No. 1161, as amended by RA No. 8282, RA No. 11199 and RA No. 11210)
DECLARATION OF POLICY: It is the policy of the Republic of the Philippines to establish, develop, promote and perfect a
sound and viable tax-exempt social security service suitable to the needs of the people throughout the Philippines which shall
provide to covered employees and their families protection against the hazards of disability, sickness, old age and death, with
a view to promoting their well-being in the spirit of social justice.
DEFINITIONS
SSS The Social Security System created by this Act.

Commission The Social Security Commission
Employer Any person, natural or juridical, domestic or foreign, who carries on in the Philippines any trade,
business, industry, undertaking, or activity of any kind and uses the services of another person who is
under his orders as regards the employment, except the Government and any of its political subdivisions,
branches or instrumentalities, including corporations owned or controlled by the Government: Provided,
That a self-employed professional shall be both employee and employer at the same time.
Employee Any person who performs services for an employer in which either or both mental and physical efforts
are used and who receives compensation for such services, where there is an employer-employee
relationship: Provided, That a self-employed professional shall be both employee and employer at the
same time.

Dependent 1. The legal spouse entitled by law to receive support from the member;
2. The legitimate, legitimated, or legally adopted, and illegitimate child who is unmarried, not gainfully
employed and has not reached twenty-one (21) years of age, or if over twenty-one (21) years of
age, he is congenitally or while still a minor has been permanently incapacitated and incapable of
self-support, physically or mentally; and
3. The parent who is receiving regular support from the member.
Compensation All actual remuneration for employment, including the mandated cost of living allowance, as well as the
cash value of any remuneration paid in any medium other than cash except that part of the remuneration
received during the month in excess of the maximum salary credit.
Monthly salary The compensation base for contributions and benefits as indicated in the schedule for Employee’s
credit Contributions.
Monthly The period from one end of the last payroll period of the preceding month to the end of the last payroll
period of the current month if compensation is on hourly, daily or weekly basis; if on any other basis,
"monthly" shall mean a period of one month.
Contribution The amount paid to the SSS by the employee and by his employer in accordance with section eighteen
of this Act.
Employment Any service performed by an employee for his employer, except —
1. Services where there is no employer-employee relationship in accordance with existing labor laws,
rules, regulations and jurisprudence;
2. Service performed in the employ of the Philippine Government or instrumentality or agency thereof;
3. Service performed in the employ of a foreign government or international organization, or their
wholly-owned instrumentality: Provided, however, That this exemption notwithstanding, any foreign
government, international organization or their wholly-owned instrumentality employing workers in
the Philippines or employing Filipinos outside of the Philippines, may enter into an agreement with
the Philippine Government for the inclusion of such employees in the SSS except those already
covered by their respective civil service retirement systems: Provided, further, That the terms of
such agreement shall conform with the provisions of this Act on coverage and amount of payment
of contributions and benefits: Provided, finally, That the provisions of this Act shall be supplementary
to any such agreement; and
4. Such other services performed by temporary and other employees which may be excluded by
regulation of the Commission. Employees of bona fide independent contractors shall not be deemed
employees of the employer engaging the service of said contractors.
Beneficiaries The dependent spouse until he or she remarries, the dependent legitimate, legitimated or legally
adopted, and illegitimate children, who shall be the primary beneficiaries of the member.
The dependent illegitimate children shall be entitled to fifty percent (50%) of the share of the legitimate,
legitimated or legally adopted children.
In the absence of the dependent legitimate, legitimated or legally adopted children of the member,
his/her dependent illegitimate children shall be entitled to one hundred percent (100%) of the benefits.
In their absence, the dependent parents who shall be the secondary beneficiaries of the member.
In the absence of all of the foregoing, any other person designated by the member as his/her secondary
beneficiary
Contingency The retirement, death, disability, injury or sickness and maternity of the member.
Average monthly The result obtained by dividing the sum of the last sixty (60) monthly salary credits immediately
salary credit preceding the semester of contingency by sixty (60), or the result obtained by dividing the sum of all
the monthly salary credits paid prior to the semester of contingency by the number of monthly
contributions paid in the same period, whichever is greater: Provided, That the injury or sickness which
caused the disability shall be deemed as the permanent disability for the purpose of computing the
average monthly salary credit.
Average daily The result obtained by dividing the sum of the 6 highest monthly salary credits in the twelve-month
salary credit period immediately preceding the semester of contingency by 180.
Semester A period of two consecutive quarters ending in the quarter of contingency.
Quarter A period of three consecutive calendar months ending on the last day of March, June, September and
December.
Replacement The sum of twenty per cent and the quotient obtained by dividing three hundred by the sum of three
ratio hundred forty and the average monthly salary credit.
Credited years of For a member covered prior to January nineteen hundred eighty five (1985) minus the calendar year of
service coverage plus the number of calendar years in which six (6) or more contributions have been paid from
January nineteen hundred eighty five (1985) up to the calendar year containing the semester prior to
the contingency. For a member covered in or after January nineteen hundred eighty five (1985), the
number of calendar years in which six (6) or more contributions have been paid from the year of
coverage up to the calendar year containing the semester prior to the contingency: Provided, That the
Commission may provide for a different number of contributions in a calendar year for it to be considered
as a credited year of service.
Member The worker or the self-employed mandatorily covered by this Act
Self-employed Any person whose income is not derived from employment, as defined under this Act.
Net earnings Net income before income taxes plus non-cash charges such as depreciation and depletion appearing in
the regular financial statement of the issuing or assuming institution.
Fixed charges Recurring expense such as amortization of debt discount and rentals for leased properties, including
interest on funded and unfunded debt.
SCOPE AND COVERAGE

COMPULSORY COVERAGE: Coverage in the SSS shall be compulsory upon:
1. All employees not over sixty years of age; and
2. their employers;

Effect of Separation from Employment: When an employee under compulsory coverage is separated from employment, his
employer's contribution on his account and his obligation to pay contributions arising from that employment shall cease at
the end of the month of separation, but said employee shall be credited with all contributions paid on his behalf and entitled
to benefits according to the provisions of this Act. He may, however, continue to pay the total contributions to maintain his
right to full benefit.
Voluntary coverage: Spouses who devote full time to managing the household and family affairs, unless they are also engaged
in other vocation or employment which is subject to mandatory coverage, may be covered by SSS on a voluntary basis.
COMPULSORY COVERAGE OF THE SELF-EMPLOYED: Coverage in the SSS shall also be compulsory upon all self-employed
persons as may be determined by the Commission under such rules and regulations as it may prescribe, including but not
limited to the following:
1. All self-employed professionals
2. Partners and single proprietors of businesses.
3. Actors and actresses, directors, scriptwriters and news correspondents who do not fall within the definition of the term
"employee" above.
4. Professional athletes, coaches, trainers and jockeys;
5. Individual farmers and fishermen.
Unless otherwise specified herein, all provisions of the SSS Law applicable to covered employees shall also be applicable to the
covered self-employed persons.
Effect of Interruption of Business or Professional Income: If the self-employed realizes no income in any given month, he shall
not be required to pay contributions for that month. He may, however, be allowed to continue paying contributions under
the same rules and regulations applicable to separated employee member. Provided, that no retroactive payment of
contributions shall be allowed other than prescribed under a schedule as the Commission may specify.
COMPULSORY COVERAGE OF OVERSEES FILIPINO WORKERS: Under RA No. 1161, Filipinos recruited in the Philippines
by foreign-based employers for employment abroad may be covered by the SSS on a voluntary basis. However, under RA No.
11199, OFWs are mandatorily covered by the SSS, under Section 9-B thereof, which provides the following rules:
a) Coverage in the SSS shall be compulsory upon all sea-based and land-based OFWs as defined under Republic Act No.
8042, otherwise known as the Migrant Workers and Overseas Filipinos Act of 1995. as amended by Republic Act No. 10022,
who are not over sixty (60) years of age.
Retirement, death, disability, funeral, sickness and maternity benefits provided under the law, among others, shall apply
to all covered OFWs.
b) Manning agencies are agents of their principals and are considered as employers of sea-based OFWs.
Any law to the contrary notwithstanding manning agencies are jointly and severally or solidarity liable with their
principals with respect to the civil liabilities incurred for any violation of this Act.
The persons having direct control, management or direction of the manning agencies shall be held criminally liable for any
act or omission penalized under this Act.
c) Land-based OFWs are compulsory members of the SSS and considered in the same manner as self-employed persons
under such rules and regulations that the Commission shall prescribe.
d) The Department of Foreign Affairs (DFA), the Department of Labor and Employment (DOLE) and all its agencies involved
in deploying OFWs for employment abroad are mandated to negotiate bilateral labor agreements with the OFWs’
host countries to ensure that the employers of land-based OFWs, similar to the principals of sea-based OFWs, pay the
required SSS contributions, in which case these land-based OFWs shall no longer be considered in the same manner as
self-employed persons in this Act. Instead, they shall be considered as compulsorily covered employees with employer and
employee shares in contributions that shall be provided for in the bilateral labor agreements and their implementing
administrative agreements: Provided, That in countries which already extend social security coverage to OFWs, the DFA
through the Philippine embassies and the DOLE shall negotiate further agreements to serve the best interests of the OFWs.
e) The DFA, the DOLE and, the SSS shall ensure compulsory coverage of OFWs through bilateral social security and labor
agreements and other measures for enforcement.
f) Upon the termination of their employment overseas, OFWs may continue to pay contributions on a voluntary basis
to maintain their rights to full benefits.
g) Filipino permanent migrants, including Filipino immigrants, permanent residents and naturalized citizens of their host
countries may be covered by the SSS on a voluntary basis.
EFFECTIVE DATE OF COVERAGE:

1. Compulsory coverage of the employer shall take effect on the first day of his operation
2. For the employee - on the day of his employment.
3. Compulsory coverage of the self-employed person shall take effect upon his registration with the SSS.
PENSION, RETIREMENT AND OTHER BENEFITS
MONTHLY PENSION: The monthly pension shall be the highest of the following amounts:
a) The sum of the following:
i. Three hundred pesos (P300.00); plus
ii. Twenty percent (20%) of the average monthly salary credit; plus
iii. Two percent (2%) of the average monthly salary credit for each credited year of service in excess of ten (10) years;
or
b) Forty percent (40%) of the average monthly salary credit; or
c) One thousand pesos (P1,000.00).
Provided, That the monthly pension shall in no case be paid for an aggregate amount of less than sixty (60) months.
Minimum Pension: Notwithstanding the above, the minimum pension shall be:
1. Members with 10 credited years of service - P1,200.00
2. Members with 20 credited years of service – P2,400.00

Additional Benefit Allowance: Pursuant to Memorandum from the Executive Secretary dated 22 February 2017, by authority of
the President of the Republic of the Philippines, an additional monthly benefit allowance amounting to One thousand
pesos (₱1,000.00) shall be given to all retirement, death, and disability pensioners receiving monthly pensions in or after
January two thousand seventeen (2017).
The Commission may determine the grant of additional benefit allowance. Provided, That the actuarial soundness of the reserve
fund shall be guaranteed.
All other additional allowances to monthly pension subsequent to the Memorandum of the Executive Secretary dated February
22, 2017 shall be subject to the requirement of fund viability and sustainability as determined by the Commission based
on the recommendations of the Office of the Chief Actuary guaranteeing the actuarial soundness of the grant of such allowances
DEPENDENT’S PENSION: Where monthly pension is payable on account of death, permanent total disability or retirement,
dependents’ pension equivalent to ten percent (10%) of the monthly pension or Two hundred fifty pesos (P250.00),
whichever is higher, shall also be paid for each dependent child conceived on or before the date of the contingency but not
exceeding five (5), beginning with the youngest and without substitution.
Where there are legitimate and illegitimate children, the former shall be preferred.
RETIREMENT BENEFITS:
a) A member shall be entitled to the monthly pension for as long as he lives if the following conditions are met:
a) The member has paid at least one hundred twenty (120) monthly contributions prior to the semester of
retirement
b) The member either:
(1) has reached the age of sixty (60) years and is already separated from employment or has ceased to be self-
employed or
(2) has reached the age of sixty-five (65) years,
Option to advance: The member shall have the option to receive his first eighteen (18) monthly pensions in lump
sum discounted at a preferential rate of interest to be determined by the SSS.
b) A covered member who is sixty (60) years old at retirement and who does not qualify for pension benefits under paragraph
(a) above, shall be entitled to a lump sum benefit equal to the total contributions paid by him and on his behalf.
Provided, That he is separated from employment and is not continuing payment of contributions to the SSS on his own.
Option to Continue Paying Contributions: A separated member who has paid less than one hundred twenty (120) monthly
contributions has the option to continue paying his/her contributions as a voluntary-paying member to complete the
required one hundred twenty (120) monthly contributions to qualify for full pension benefit.
Re-employment: The monthly pension shall be suspended upon the reemployment or resumption of self-employment of
a retired member who is less than sixty-five (65) years old. He shall again be subject to the monthly contributions as will be
discussed below.
Death: Upon the death of the retired member, his primary beneficiaries as of the date of his retirement shall be entitled
to receive the monthly pension
If he has no primary beneficiaries and he dies within sixty (60) months from the start of his monthly pension, his secondary
beneficiaries shall be entitled to a lump sum benefit equivalent to the total monthly pensions corresponding to the balance of
the five-year guaranteed period, excluding the dependents’ pension.
Amount of pension: The monthly pension of a member who retires after reaching age sixty (60) shall be the higher of either:
(1) the monthly pension computed at the earliest time he could have retired had he been separated from employment or
ceased to be self-employed plus all adjustments thereto; or
(2) the monthly pension computed at the time when he actually retires
DEATH BENEFITS: Upon the covered employee's death,

1. And he has paid at least 36 monthly contributions prior to the semester of death, his primary beneficiaries shall be
entitled to the monthly pension and his dependents to the dependents' pension
If he has no primary beneficiaries, his secondary beneficiaries shall be entitled to a lump sum benefit equivalent to thirty-
six (36) times the monthly pension.
2. If he has not paid the required thirty-six (36) monthly contributions, his primary or secondary beneficiaries shall be
entitled to whichever is higher between:
a) The lump sum benefit equivalent to the monthly pension times the number of monthly contributions paid to the SSS
b) 12 times the monthly pension.
PERMANENT DISABILITY BENEFITS: Upon the permanent total disability of a member

1. If he has paid at least thirty-six (36) monthly contributions prior to the semester of disability, he shall be entitled to
the monthly pension
2. If he has not paid the required thirty-six (36) monthly contributions, he shall be entitled to the higher between:
a) lump sum benefit equivalent to the monthly pension times the number of monthly contributions paid to the SSS or
b) twelve (12) times the monthly pension
Re-employment: A member who has received a lump sum benefit and is re-employed or has resumed self-employment not
earlier than one (1) year from the date of his disability shall again be subject to compulsory coverage and shall be
considered a new member.
The monthly pension and dependents’ pension shall be suspended upon:

1. The reemployment or resumption of self-employment or
2. The recovery of the disabled member from his permanent total disability or
3. His failure to present himself for examination at least once a year upon notice by the SSS.

Death: Upon the death of the permanent total disability pensioner, his primary beneficiaries as of the date of disability shall be
entitled to receive the monthly pension.
If he has no primary beneficiaries and he dies within sixty (60) months from the start of his monthly pension, his secondary
beneficiaries shall be entitled to a lump sum benefit equivalent to the total monthly pensions corresponding to the balance of
the five-year guaranteed period excluding the dependents’ pension
Permanent Disability: The following disabilities shall be deemed permanent total:
1. Complete loss of sight of both eyes;
2. Loss of two limbs at or above the ankle or wrists;
3. Permanent complete paralysis of two limbs;
4. Brain injury resulting to incurable imbecility or insanity; and,
5. Such cases as determined and approved by the SSS.
Permanent Partial:
a) If the disability is permanent partial, and such disability occurs before 36 monthly contributions have been paid prior
to the semester of disability, the benefit shall be such percentage of the lump sum benefit described in the below
with due regard to the degree of disability as the Commission may determine.
b) If the disability is permanent partial and such disability occurs after 36 monthly contributions have been paid prior
to the semester of disability, the benefit shall be the monthly pension for permanent total disability payable not longer
than the period designated in the following schedule:
Complete and Permanent Loss of Use of Number of Months
One thumb 10
One index finger 8
One middle finger 6
One right finger 5
One little finger 3
One big toe 6
One hand 39
One arm 50
One foot 31
One leg 46
One ear 10
Both ears 20
Hearing of one ear 10
Hearing of both ears 20
Sight of one eye 25
Percentage Degree of Disability: is equivalent to the ratio that the designated number of months of compensability bears to
seventy-five (75), rounded to the next higher integer.
It shall not be additive for distinct, separate and unrelated permanent partial disabilities, but shall be additive for deteriorating
and related permanent partial disabilities, to a maximum of one hundred percent (100%), in which case the member shall be
deemed as permanently totally disabled.
Permanent Partial Disability: In case of permanent partial disability, the monthly pension benefit shall be given in lump sum if
it is payable for less than twelve (12) months.
Retirement or death: Should a member who is on partial disability pension retire or die, his disability pension shall cease upon
his retirement or death
FUNERAL BENEFIT: A funeral grant of P12,000 shall be paid to help defray the cost of funeral expenses upon the death of a
covered member, permanently totally disabled employee or retiree.
SICKNESS BENEFIT:
a) A covered employee who has paid at least three monthly contributions in the twelve-month period immediately
preceding the semester of sickness and is confined for more than three days in a hospital or elsewhere with the
Commission's approval, shall, for each day of compensable confinement or fraction thereof, be paid by his
employer, or the SSS, if such person is unemployed, an allowance equivalent to 90% of his average daily salary
credit, subject to the following conditions:
1. In no case shall the daily sickness benefit be paid longer than one hundred twenty (120) days in one (1)
calendar year, nor shall any unused portion of the one hundred twenty (120) days of sickness benefit granted
under this section be carried forward and added to the total number of compensable days allowable in the subsequent
year;
2. The daily sickness benefit shall not be paid for more than two hundred forty (240) days on account of the same
confinement; and
3. The employee member shall notify his employer of the fact of his sickness or injury within five (5) calendar days
after the start of his confinement unless such confinement is in a hospital or the employee became sick or was
injured while working or within the premises of the employer in which case notification to the employer is not necessary.
If the member is unemployed or self-employed, he shall directly notify the SSS of his confinement within five (5)
calendar days after the start thereof unless such confinement is in a hospital in which case notification is also not
necessary.
In cases where notification is necessary, the confinement shall be deemed to have started not earlier than the fifth
day immediately preceding the date of notification.
b) The compensable confinement shall begin on the first day of sickness, and the payment of such allowances shall be
promptly made by the employer every regular payday or on the fifteenth and last day of each month, and
similarly in the case of direct payment by the SSS, for as long as such allowances are due and payable. Provided, That such
allowance shall begin only after all sick leaves of absence with full pay to the credit of the employee member shall have
been exhausted.

c) One hundred percent (100%) of the daily benefits provided in the preceding paragraph shall be reimbursed by the
SSS to said employer upon receipt of satisfactory proof of such payment and legality thereof. Provided, That the employer
has notified the SSS of the confinement within five (5) calendar days after receipt of the notification from the employee
member.
If the notification to the SSS is made by the employer beyond five (5) calendar days after receipt of the notification from
the employee member, said employer shall be reimbursed only for each day of confinement starting from the tenth calendar
day immediately preceding the date of notification to the SSS.
The SSS shall reimburse the employer or pay the unemployed member only for confinement within the one-year period
immediately preceding the date the claim for benefit or reimbursement is received by the SSS, except confinement in a
hospital in which case the claim for benefit or reimbursement must be filed within one (1) year from the last day of
confinement.
d) Where the employee member has given the required notification but the employer fails to notify the SSS of the
confinement or to file the claim for reimbursement within the period prescribed resulting in the reduction of the benefit
or denial of the claim such employer shall have no right to recover the corresponding daily allowance he advanced
to the employee member as required in this Section.
e) The claim of reimbursement shall be adjudicated by the SSS within a period of two (2) months from receipt thereof:
Provided, That should no payment be received by the employer within one (1) month after the period prescribed herein for
adjudication the reimbursement shall thereafter earn simple interest of one percent (1%) per month until paid.
MATERNITY LEAVE BENEFIT: A covered female workers in the government and the private sector, including those in the
informal economy, regardless of civil status or the legitimacy of her child, shall be granted 105 days maternity leave with
full pay and an option to extend for an additional 30 days without pay, which can be prenatal or postnatal. Provided,
that the postnatal leave shall not be less than 60 days.
Solo Parent: if the employee qualifies as a solo parent under RA No. 8972 (Solo Parents’ Welfare Act), the worker shall be
granted an additional 15 days maternity leave with full pay.
Manner of availment: enjoyment of maternity leave cannot be deferred but should be availed of either before or after the actual
period of delivery in a continuous and uninterrupted manner, not exceeding 150 days, as the case may be.
Frequency: maternity leave shall be granted to female workers in every instance of pregnancy, miscarriage or emergency
termination of pregnancy, regardless of frequency.
Miscarriage and Emergency Termination of Pregnancy: For cases of miscarriage or emergency termination of pregnancy, 60
days maternity leave with full pay shall be granted.
Allocation of Maternity Leave: Any female worker entitled to maternity leave benefits may, at her option, allocate up to 7
days of said benefits to the child’s father, whether or not the same is married to the female worker.
In the death, absence or incapacity of the female worker, the benefit may be allocated to an alternative caregiver who may be
a relative within the 4th degree of consanguinity or the current partner of the female worker sharing the same household upon
the election of the mother taking into account the best interest of the child. Provided, that written notice thereof is provided to
the employers of the female worker and alternate caregiver.
If the female worker dies or is permanently incapacitated, the balance of her maternity leave benefits shall accrue to the father
of the child or to a qualified caregiver mentioned above.
UNEMPLOYMENT INSURANCE OR INVOLUNTARY SEPARATION BENEFITS: A member may be entitled to 50% of the
average monthly salary credit for a maximum of 2 months in the form of cash payments if immediately preceding the
involuntary unemployment or separation, the following concur:
1. The member is not over 60 years of age;
2. The member paid at least 36 months contributions, 12 months of which should be in the 18-month period immediately
preceding the unemployment.
Frequency: An employee who is involuntarily unemployed can only claim unemployment benefits once every three (3) years.
In case of concurrence of two or more compensable contingencies, only the highest benefit shall be paid, subject to the rules
and regulations that the Commission may prescribe.
EXEMPTION FROM TAX, LEGAL PROCESS AND LIEN
All laws to the contrary notwithstanding the SSS and all its assets and properties, all contributions collected and all
accruals thereto and income or investment earnings therefrom as well as all supplies, equipment, papers or
documents which may be required in connection with the operation or execution of this Act shall be exempt from
any tax, assessment, fee, charge, or customs or import duty; and
All benefit payments made by the SSS shall likewise be exempt from all kinds of taxes, fees or charges, and shall not
be liable to attachments, garnishments, levy or seizure by or under any legal or equitable process whatsoever, either
before or after receipt by the person or persons entitled thereto, except to pay any debt of the covered employee to the SSS.
No tax measure hereafter enacted shall apply to the SSS, unless it expressly revokes the declared policy of the State in
section two hereof granting tax-exemption to the SSS. Any tax assessment against, and still unpaid by the SSS shall be null
and void.

EMPLOYEE’S AND EMPLOYER’S CONTRIBUTIONS
EMPLOYEES’/EMPLOYERS’ CONTRIBUTION: Under Section 4(a)(9) of RA No. 11199, the following shall be the contributions
and monthly salary credits applicable:
Share Monthly Salary Credit
Year of Contribution
Employer Employee Minimum Maximum
Implementation Rate
2019 12% 8% 4% ₱2,000.00 ₱20,000.00
2020 12% 8% 4% ₱2,000.00 ₱20,000.00
2021 13% 8.5% 4.5% ₱3,000.00 ₱25,000.00
2022 13% 8.5% 4.5% ₱3,000.00 ₱25,000.00
2023 14% 9.5% 4.5% ₱4,000.00 ₱30,000.00
2024 14% 9.5% 4.5% ₱4,000.00 ₱30,000.00
2025 15% 10% 5% ₱5,000.00 ₱35,000.00
The above rates equally applies to self-employed, voluntary and other members.
Kasambahays: the domestic workers or "kasambahays" as defined under Republic Act No. 10361 or the Batas Kasambahay who
are receiving a monthly income lower than minimum monthly salary credit prescribed under this Act shall pay contributions
based on their actual monthly salary
Lower than minimum; Higher than maximum: members, who are subject to compulsory coverage and receiving a monthly
income lower than the minimum monthly salary credit or more than the maximum monthly salary credit, and their employers,
shall pay the SSS contributions based on the current minimum monthly salary credit or the maximum monthly salary
credit, respectively, as provided above.
CONTRIBUTIONS OF THE SELF-EMPLOYED: The contributions to the SSS of the self-employed member shall be determined
in accordance the schedule above for employees.
Basis: the monthly earnings declared by the self-employed member at the time of his registration with the SSS shall be
considered as his monthly compensation.
The monthly earnings declared by the self-employed member at the time of his registration shall remain the basis of his monthly
salary credit, unless he makes another declaration of his monthly earnings, in which case such latest declaration becomes the
new basis of his monthly salary credit.
Amount to pay: The self-employed member shall pay both the employer and employee contributions.
GOVERNMENT CONTRIBUTION: As the contribution of the Government to the operation of the SSS, the Congress shall
annually appropriate out of any funds in the National Treasury not otherwise appropriated, the necessary sum or sums to
meet the estimated expenses of the SSS for each ensuing year. In addition to this contribution, the Congress shall
appropriate from time to time such sum or sums as may be needed to assure the maintenance of an adequate working
balance of the funds of the SSS as disclosed by suitable periodic actuarial studies to be made of the operations of the SSS.
GOVERNMENT GUARANTEE: The benefits prescribed in this Act shall not be diminished and to guarantee said benefits the
Government of the Republic of the Philippines accepts general responsibility for the solvency of the SSS.
REMITTANCE OF CONTRIBUTIONS
REMITTANCE OF CONTRIBUTIONS:
a) The contribution shall be remitted to the SSS within the ten days of each calendar month following the month for
which they are applicable or within such time as the Commission may prescribe.
Every employer required to deduct and to remit such contributions shall be liable for their payment and if any
contribution is not paid to the SSS as herein prescribed, he shall pay besides the contribution a penalty thereon of
2% per month from the date the contribution falls due until paid.
If deemed expedient and advisable by the Commission, the collection and remittance of contributions shall be made
quarterly or semi-annually in advance, the contributions payable by the employees to be advanced by their respective
employers: Provided, That upon separation of an employee, any contribution so paid in advance but not due shall be
credited or refunded to his employer.
b) In cases where an employer refuses or neglects to pay the same shall be collected by the SSS in the same manner
as taxes are made collectible under the National Internal Revenue Code, as amended. Failure or refusal of the employer
to pay or remit the contributions herein prescribed shall not prejudice the right of the covered employee to the benefits of
the coverage.
Prescription of action: The right to institute the necessary action against the employer may be commenced within twenty
years from the time the delinquency is known or the assessment is made by the SSS, or from the time the benefit
accrues, as the case may be.
c) Should any person, natural or juridical, default in any payment of contributions, the Commission may also collect the
same in either of the following ways:
1. By an action in court, which shall hear and dispose of the case in preference to any other civil action, or
2. By issuing a warrant to the Sheriff of any province or city commanding him to levy upon and sell any real and personal
property of the debtor. The Sheriff's sale by virtue of said warrant shall be governed by the same procedure prescribed
for executions against property upon judgments by a court of record.
d) The last complete record of monthly contributions paid by the employer or the average of the monthly
contributions paid during the past three years as of the date of filing of the action for collection shall be presumed to
be the monthly contributions payable by and due from the employer to the SSS for each of the unpaid month, unless
contradicted and overcome by other evidence: Provided, That the SSS shall not be barred from determining and collecting
the true and correct contributions due the SSS even after full payment pursuant to this paragraph, nor shall the employer
be relieved of his liability under section twenty-eight of this Act.

REMITTANCE OF CONTRIBUTIONS OF SELF-EMPLOYED: Self-employed members shall remit their monthly contributions
quarterly on such dates and schedules, as the Commission may specify through rules and regulations.
METHOD OF COLLECTION AND PAYMENT: The SSS shall require a complete and proper collection and payment of
contributions and proper identification of the employer and the employee. Payment may be made in cash, checks,
stamp, coupons, tickets, or other reasonable devices that the Commission may adopt.
EMPLOYMENT RECORDS AND REPORTS
EMPLOYMENT RECORDS AND REPORTS

a) Each employer shall immediately report to the SSS the names, ages, civil status, occupations, salaries and
dependents of all his employees who are subject to compulsory coverage.
If an employee subject to compulsory coverage should die or become sick or disabled or reach the age of 60 without
the SSS having previously received any report or written communication about him from his employer or a
contribution paid in his name by his employer, the said employer shall pay to the SSS the damages equivalent to
the benefits to which said employee would have been entitled had his name been reported on time by the employer
to the SSS
In case of pension benefits, the employer shall be liable to pay the SSS damages equivalent to the higher between:
1. The accumulated pension due as of the date of settlement of the claim; or
2. Five year's pension, including dependents' pension.
If the contingency occurs within thirty days from the date of employment, the employer shall be relieved of his
liability for damages.
Contractor: any person or entity engaging the services of an independent contractor shall be subsidiarily liable with such
contractor for any civil liability incurred by the latter under this act. Provided, that the same person or entity engaging the
services of an independent contractor shall require such contractor to post a surety bond to guarantee the payment of the
worker’s benefits.
b) Should the employer misrepresent the true date of employment of his employees or remit to the SSS contributions
which are less than those required in this Act, resulting in a reduction of benefits, the employer shall pay to the SSS
damages to the extent of such reduction.
In addition to the liability mentioned in paragraphs (a) and (b) above, the employer shall also be liable for the payment of
the corresponding unremitted contributions and penalties thereon.
c) The records and reports duly accomplished and submitted to the SSS by the employee or the employer, as the case may
be shall be kept confidential by the SSS.
Except in compliance with a subpoena duces tecum issued by the Courts, subject to the following conditions:
1. It shall not be divulged without the consent of the SSS President or any official of the SSS duly authorized by him
2. It shall be presumed correct as to the data and other matters stated therein, unless the necessary corrections to
such records and reports have been properly made by the parties concerned before the right to the benefit being
claimed accrues, and
3. It shall be made the basis for the adjudication of the claim.
If as a result of such adjudication the SSS in good faith pays a monthly pension to a beneficiary who is inferior in
right to another beneficiary or with whom another beneficiary is entitled to share, such payments shall discharge
the SSS from liability, unless and until such other beneficiary notifies the SSS of his claim prior to the payments.
d) Every employer shall keep true and accurate work records for such period and containing such information as the
Commission may prescribe, in addition to an "Annual Register of New and Separated Employees" which shall be
secured from the SSS wherein the employer shall enter on the first day of employment or on the effective date of separation,
the names of the persons employed or separated from employment, their SSS numbers, and such other data that the
Commission may require and said annual register shall be submitted to the SSS in the month of January of each year. Such
records shall be open for inspection by the SSS or its authorized representatives quarterly or as often as the SSS may
require.
The SSS may also require each employer to submit, with respect to the persons in his employ, reports needed for the
effective administration of this Act.
e) Each employer shall require as a condition to employment, the presentation of a registration number secured by
the prospective employee from the SSS in accordance with such procedure as the SSS may adopt.
In case of employees who have earlier been assigned registration numbers by virtue of a previous employment, such
numbers originally assigned to them should be used.
The issuance of such registration numbers by the SSS shall not exempt the employer from complying with the provisions
of paragraph (a) above.
f) Notwithstanding any law to the contrary, microfilm or non-erasable optical disk and other similar archival media copies of
original SSS records and reports, duly certified by the official custodian thereof, shall have evidentiary value as the originals
and be admissible as evidence in all legal proceedings.
g) Notwithstanding any law to the contrary, local government units shall, prior to issuing any annual business license or
permit, require submission of certificate of SSS coverage and compliance with the provisions of this Act: Provided, That the
certification or clearance shall be issued by the SSS within five (5) working days from receipt of the request

REPORT AND REGISTRATION OF THE SELF-EMPLOYED: Each covered self-employed person shall, within thirty days
from the effective date of coverage, report to the SSS his name, age, civil status, and occupation, average monthly
net income and his dependents.
If after said period of thirty days, he should die or become sick, or disabled or reach the age of sixty without the SSS
having previously received such report, the SSS shall not pay him the corresponding benefit.
PENAL CLAUSES
Offense Penalty
Whoever, for the purpose of causing any payment to be made Falsification by private individuals and use of falsified
under this Act, or under an agreement thereunder, where documents (Art. 172, Revised Penal Code) – Prision
none is authorized to be paid, shall make or cause to be made Correccional in its medium and maximum periods and a
any false statement or representation as to any compensation fine of not more than P5,000.
paid or received or whoever makes or causes to be made any
false statement of a material fact in any claim for any benefit
payable under this Act, or application for loan with the SSS, or
whoever makes or causes to be made any false statement,
representation, affidavit, or document in connection with such
claim or loan
Whoever shall obtain or receive any money or check under Fine: P5,000 – P20,000; and
this Act or any agreement thereunder, without being entitled Imprisonment: 6 years and 1 day – 12 years
thereto with intent to defraud any covered employee,
employer or the SSS,
Whoever buys, sells, offers for sale, uses, transfers, takes or Fine: P5,000 – P20,000
gives in exchange, or pledges or gives in pledge, except as Imprisonment: 6 years and 1 day – 12 years,
authorized in this Act or in regulations made pursuant thereto, Or both at the discretion of the court
any stamp, coupon, ticket, book or other device, prescribed
pursuant to section twenty-three hereof by the Commission for
the collection or payment of contributions required herein
Whoever, with intent to defraud, alters, forges, makes or Fine: P5,000 – P20,000
counterfeits any stamp, coupon, ticket, book or other device Imprisonment: 6 years and 1 day – 12 years
prescribed by the Commission for the collection or payment of Or both at the discretion of the court
any contribution required herein, or uses, sells, lends, or has
in his possession any such altered, forged, or counterfeited
materials or makes, uses, sells, or has in his possession any
such altered, forged material in imitation of the material used
in the manufacture of such stamp, coupon, ticket, book, or
other device
Whoever fails or refuses to comply with the provisions of this Fine: P500 – P5,000;
Act or with the rules and regulations promulgated by the Imprisonment: 6 months to 1 year,
Commission Or both at the discretion of the court
Where the violation consists in failure or refusal to register
Fine: P5,000-P20,000 and
employees or himself, in case of the covered self-employed or
Imprisonment: 6 years and 1 day – 12 years,
to deduct contributions from employee's compensation and
remit the same to the SSS.
Juridical Persons: If the act or omission penalized by this Act be committed by an association, partnership, corporation or any
other institution, its managing head, directors or partners shall be liable to the penalties provided in this Act for the offense.
Malversation of Public Funds: Any employee of the System who receives or keeps funds or property belonging, payable or
deliverable to the System and who shall appropriate the same, or shall take or misappropriate or shall consent, or through
abandonment or negligence shall permit any other person to take such property or funds, wholly or partially, or shall otherwise
be guilty of misappropriation of such funds or property, shall suffer the penalties provided in Art. 217 of the Revised Penal Code
(Malversation of Public Funds).
Employer’s failure to remit; presumption: Any employer who after deducting the monthly contributions or loan
amortizations from his employee's compensation; fails to remit the said deductions to the SSS within thirty days from the
date they became due shall be presumed to have misappropriated such contributions or loan amortizations and shall
suffer the penalties provided in for Estafa/Swindling (Art. 315, Revised Penal Code).
1. Meal periods are mandated to be provided for employee’s regular meals which should be:
A. Not less than 30 minutes C. Not more than 30 minutes
B. Not less than 60 minutes D. Not more than 60 minutes
2. If an employee worked a shift of 9PM to 6AM with a one hour lunch break from 1AM to 2AM, receiving a P1,200 per day
regular wage. How much would be his entitlement to the night shift differential?
A. P120 C. P 105
B. P106.67 D. P 93
3. Emergency overtime work may be required by the employer in all of the following cases, except:
A. When the country is at war
B. When it is necessary to prevent loss of life or property due to an actual emergency in the locality caused by serious
accidents
C. When there is urgent work to be performed on machines in order to avoid serious loss or damage to the employer
4. If an employee did not work on a regular holiday, he shall be:

A. Not entitled to any pay C. Entitled to 130% of his regular wage
B. Entitled to 100% of his regular wage D. Entitled to 200% of his regular wage

5. The celebration of Manila Day every June 24 is considered a:
A. Regular Day C. Special Holiday
B. Regular Holiday D. None of the choices
6. If an employee rendered overtime during a special holiday that is at the same time his rest day, the pay he shall be
entitled to for such overtime is equivalent to:
A. 130% of his regular wage C. 169% of his regular wage
B. 150% of his regular wage D. 195% of his regular wage
7. Which of the following leave benefits is convertible or commutable to cash?

A. Service Incentive Leave C. VAWC Leave
B. Paternity Leave D. Solo Parent Leave
8. Which of the following may be cumulative?

A. Service Incentive Leave C. Solo Parent Leave
B. Paternity Leave D. None of the choices
9. To be entitled to the seven day solo parent leave, the employee must have rendered service for:
A. At least 6 months C. At least 18 months
B. At least 1 year D. At least 2 years
10. The 13th month pay is required to be given

A. Not later than October 1 C. Not later than December 1
B. Not later than November 1 D. Not later than December 24
11. Which of the following is subject to voluntary coverage of the SSS Law?
A. Employees below 60 years of age
B. Individuals engaged in the practice of profession
C. Land-based OFWs
D. Filipino immigrants
12. As a rule, land-based OFWs are considered, for purposes of the SSS Law, in the same manner as:
A. Employees C. Voluntary covered members
B. Self-employed individuals D. None of the choices
13. The effective date of coverage for self-employed persons shall be:
A. The start of operations C. Upon registration with the SSS
B. Upon registration with the DTI/SEC D. 30 days after the start of operations
C. Upon registration with the SSS
D. 30 days after the start of operations
14. If an employee’s Average Monthly Salary Credit is P20,000 and has been a member of the SSS for 30 years prior to the
semester of retirement in 2023, where all such years are considered credited, how much would be his monthly pension?
A. P8,000 C. P12,300
B. P9,000 D. P13,300
15. Who of the following would be entitled to a monthly pension upon retirement?
A. A member who is 60 years old but continued employment who made 36 monthly contributions to the SSS
B. A member who is 60 years old who is separated from employment who made 36 monthly contributions to the SSS
C. A member who is 60 years old but continued employment who made 120 monthly contributions to the SSS
D. A member who is 60 years old who is separated from employment who made 120 monthly contributions
to the SSS
16. The minimum number of months to be considered in providing lumpsum death benefits for covered members who paid
less than 36 monthly contributions:
A. 6 months C. 18 months
B. 12 months D. 36 months
17. The minimum dependent’s pension shall be:

A. P100/month C. P500/month
B. P250/month D. P1,000/month
18. A permanent total disabled pensioner is required to present himself for examination before the SSS to continue receiving
the monthly pension, at least once a:
A. Month C. Semester
B. Quarter D. Year
19. In which of the following cases, when there are no primary beneficiaries, are the secondary beneficiaries entitled to a
lumpsum benefit equivalent to the monthly pension multiplied by the number of months of actual contributions:
A. Death of a retired member who received 72 monthly pensions
B. Death of a permanent total disabled member who received 36 monthly pensions
C. Death of a member who has not yet retired nor permanent total disabled who paid at least 36 monthly
contributions
D. Death of a member who has not yet retired nor permanent total disabled who paid at least 120 monthly contributions
20. All of the following constitute permanent total disability, except:

A. Loss of sight of both eyes C. Permanent paralysis of two legs
B. Loss of both hands D. Brain injury resulting to incurable insanity

RFBT-04
INSURANCE LAW
DEFINITION: A contract of insurance is an agreement whereby one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown or contingent event.
Suretyship is a contract where a person binds himself solidarily to the creditor to fulfill the obligation of the debtor in case the
latter should fail to do so.
A contract of suretyship shall be deemed to be an insurance contract, within the meaning of the Insurance Code, only if made
by a surety who or which, as such, is doing an insurance business.
CONCEPT/CHARACTERISTICS OF INSURANCE
1. Uberrimae Fides Contract - The contract of insurance is one of perfect good faith, not for the insured alone, but equally so
for the insurer. In fact, it is more so for the latter since the insurer’s dominant bargaining position carries with it stricter
responsibility.
2. Contract of Indemnity - The insured is entitled to recover only the amount of total loss sustained, and the burden is upon
him to prove the amount of such loss.
3. Risk Distributing Device - The risk of economic loss is distributed among a large group of people bearing the same risk.
4. Aleatory - The obligation of the insurer to pay the proceeds of the insurance arises only upon the happening of an event
which is uncertain. It does not depend upon some contingent event.
5. Contract of Adhesion - An insurance contract is a ready-made form of contract, which the other party may accept or reject,
but which the latter cannot modify.
6. Personal - The law presumes that the insurer considered the personal qualification of the insured in approving the insurance
application. The insured cannot assign, before the happening of the loss, his rights under a property policy without the
consent of the insurer.
7. Voluntary - A contract of insurance is not compulsory, and the parties may incorporate such terms and conditions as they
may deem convenient. This is allowed provided that they do not contravene any provision of law and are not against public
policy.
8. Synallagmatic - Both the insured and insurer have reciprocal obligations of equal value to each other.
ELEMENTS OF AN INSURANCE CONTRACT:

1. The insurer has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons bearing a
similar risk; and
5. In consideration of the insurer’s promise, the insured pays a premium. (Vance pp. 1-2 cited in Agbayani, Commercial
Laws of the Philippines, vol. 2, 1986 ed. p. 6, cited in Philamcare Health Systems, Inc. vs. Court of Appeals and Trinos,
GR No. 125678, March 18, 2002)
CLASSES OF INSURANCE CONTRACTS UNDER THE INSURANCE CODE
LIFE INSURANCE
a. Individual Life - is insurance on human lives and insurance appertaining thereto or connected therewith.
Every contract or undertaking for the payment of annuities including contracts for the payment of lump sums under a
retirement program where a life insurance company manages or acts as a trustee for such retirement program shall be
considered a life insurance contract.
b. Group Life – is essentially a single insurance contract that provides coverage for many individuals. In its original and most
common form, group insurance provides life or health insurance coverage for the employees of one employer.
The coverage terms for group insurance are usually stated in a master agreement or policy that is issued by the insurer to
a representative of the group or to an administrator of the insurance program, such as an employer.
The employer acts as a functionary in the collection and payment of premiums and in performing related duties. Likewise
falling within the ambit of administration of a group policy is the disbursement of insurance payments by the employer to
the employees.
c. Industrial Life - shall mean that form of life insurance under which the premiums are payable either monthly or oftener,
if the face amount of insurance provided in any policy is not more than five hundred times that of the current statutory
minimum daily wage in the City of Manila, and if the words industrial policy are printed upon the policy as part of the
descriptive matter.
An industrial life policy shall not lapse for nonpayment of premium if such nonpayment was due to the failure of the company
to send its representative or agent to the insured at the residence of the insured or at some other place indicated by him
for the purpose of collecting such premium. This shall not apply when the premium on the policy remains unpaid for a
period of three (3) months or twelve (12) weeks after the grace period has expired. (Section 235, Insurance Code)
NON-LIFE INSURANCE:
a. Marine Insurance
i. Insurance against loss of or damage to:
1) Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise, effects, disbursements, profits, moneys,
securities, choses in action, instruments of debts, valuable papers, bottomry, and respondentia interests and all
other kinds of property and interests therein, in respect to, appertaining to or in connection with any and all risks
or perils of navigation, transit or transportation, or while being assembled, packed, crated, baled, compressed or
similarly prepared for shipment or while awaiting shipment, or during any delays, storage, transhipment, or
reshipment incident thereto, including war risks, marine builder’s risks, and all personal property floater risks;

INSURANCE LAW RFBT-04
2) Person or property in connection with or appertaining to a marine, inland marine, transit or transportation
insurance, including liability for loss of or damage arising out of or in connection with the construction, repair,
operation, maintenance or use of the subject matter of such insurance (but not including life insurance or surety
bonds nor insurance against loss by reason of bodily injury to any person arising out of ownership, maintenance,
or use of automobiles);
3) Precious stones, jewels, jewelry, precious metals, whether in course of transportation or otherwise; and
4) Bridges, tunnels and other instrumentalities of transportation and communication (excluding buildings, their
furniture and furnishings, fixed contents and supplies held in storage); piers, wharves, docks and slips, and other
aids to navigation and transportation, including dry docks and marine railways, dams and appurtenant facilities for
the control of waterways.
ii. Marine protection and indemnity insurance, meaning insurance against, or against legal liability of the insured for loss,
damage, or expense incident to ownership, operation, chartering, maintenance, use, repair, or construction of any
vessel, craft or instrumentality in use of ocean or inland waterways, including liability of the insured for personal injury,
illness or death or for loss of or damage to the property of another person. (Section 101, Insurance Code)
b. Fire Insurance - shall include insurance against loss by fire, lightning, windstorm, tornado or earthquake and other allied
risks, when such risks are covered by extension to fire insurance policies or under separate policies. (Section 169, Insurance
Code)
c. Casualty – is insurance covering loss or liability arising from accident or mishap, excluding certain types of loss which by
law or custom are considered as falling exclusively within the scope of other types of insurance such as fire or marine. It
includes, but is not limited to, employer’s liability insurance, motor vehicle liability insurance, plate glass insurance, burglary
and theft insurance, personal accident and health insurance as written by non-life insurance companies, and other
substantially similar kinds of insurance. (Section 176, Insurance Code of the Philippines)
CONTRACT OF SURETYSHIP – provided above
MICROINSURANCE - is a financial product or service that meets the risk protection needs of the poor where:
a. The amount of contributions, premiums, fees or charges, computed on a daily basis, does not exceed seven and a half
percent (7.5%) of the current daily minimum wage rate for nonagricultural workers in Metro Manila; and
b. The maximum sum of guaranteed benefits is not more than one thousand (1,000) times of the current daily minimum wage
rate for nonagricultural workers in Metro Manila.
VARIABLE INSURANCE - shall mean any policy or contract on either a group or on an individual basis issued by an insurance
company providing for benefits or other contractual payments or values thereunder to vary so as to reflect investment results
of any segregated portfolio of investments or of a designated separate account in which amounts received in connection with
such contracts shall have been placed and accounted for separately and apart from other investments and accounts.
This contract may also provide benefits or values incidental thereto payable in fixed or variable amounts, or both.
It shall not be deemed to be a security or securities as defined in The Securities Act, as amended, or in the Investment Company
Act, as amended, nor subject to regulations under said Acts
INSURABLE INTEREST
LIFE INSURANCE: that interest which the insurer is required to have in the person of the insured.
Every person who has an insurable interest in the life and health:
1. Of himself, of his spouse, and of his children;
2. Of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest;
3. Of any person under a legal obligation to him for the payment of money, or respecting property or services, of which death
or illness might delay or prevent the performance; and
4. Of any person upon whose life any estate or interest vested in him depends. (Sec. 10)
Measure: conditions sine qua non:

1. Positive: will you be benefited if the person does not die;
2. Negative: the amount of loss and effect of that loss, or the amount by which you will be damnified.
No Insurable Interest: Art. 2012 of the Civil Code provides that anyone who is forbidden from receiving any donation under
Art. 739 cannot be named beneficiary of a life insurance policy by a person who cannot make any donation to him
Creditor: may only insure the life of the debtor upto the amount of the debt. Such that if the debt has been paid prior to death,
the creditor can no longer recover.
However, if the debtor insures his own life for the benefit of the creditor, upon full payment of the debt, the insurance will inure
to the benefit of the debtor’s estate upon death.
Debt unenforceable or insolvency of the debtor: does not make the insurance unenforceable. The unenforceability and insolvency
of the debtor discharges only his “legal” obligation to pay, not the moral obligation to settle the debt.
Consent: of the person whose life is insured is not essential to the validity of an insurance taken by another as long as the
insured has a legal insurable interest at the inception of the policy.
PROPERTY INSURANCE: insurable interest in property is any interest therein, or liability in respect thereof, and it may consist
in:
1. An existing interest,
2. An inchoate interest founded on existing interest, or
3. Any expectancy coupled with an existing interest.
In general, a person has an insurable interest in the property, if he derives pecuniary benefit or advantage from its preservation
or would suffer pecuniary loss, damage or prejudice by its destruction whether he has or has no title in, or lien upon, or
possession of the property. Hence, pecuniary interest over the property is always necessary.

Stockholder: has an inchoate interest on the property of the corporation which is founded on his existing stock ownership.
Contractor of a Building: has an interest on the building he is required to deliver to the owner prior to such delivery, as a
requirement for collection.
INSURABLE INTEREST IN PROPERTY VS. IN LIFE
IN PROPERTY IN LIFE
Limited to the actual value of the interest thereon Unlimited (save in life insurance effected by a creditor on
the life of the debtor)
Insurable interest exists when the insurance takes effect AND Insurable interest exists at the time the policy takes effect
when the loss occurs, but need not exist in the meantime and need not exist at the time of the loss
There must be a legal basis as to the expectation of the benefit Need not have such legal basis
Beneficiary must have insurable interest over the thing insured The beneficiary need not have insurable interest of the life
of the insured if the insured himself secured the policy.
INSURABLE INTEREST ON MORTGAGED PROPERTY
Mortgagor: as owner, has an insurable interest to the extent of its value, even though the mortgage debt equals such value.
Mortgagee: has an insurable interest in the mortgaged property to the extent of the debt secured; such interest continues
until the mortgage debt is extinguished.
Loss Payable Mortgage Clause: the mortgagor secures an insurance over the property and designates the mortgagee as the
beneficiary (or assigns the policy of insurance to the mortgagee), the insurance is deemed to be upon the interest of the
mortgagor, who does not cease to be a party to the original contract and
1. any act of his, prior to the loss, which would otherwise avoid the insurance, will have the same effect, although the property
is in the hands of the mortgagee,
2. but any act which, under the contract of insurance which is to be performed by the mortgagor, may be performed by the
mortgagee. (Sec. 8, Insurance Code)
BENEFICIARY:
1. Property – must have insurable interest;
2. Life
a. If the insurance is taken by the insured on his own life, he may designate anybody as beneficiary even those without
insurable interest;
b. If the insurance is taken by a third person on the life of the insured, he must have insurable interest.
ASSIGNEE:
1. Property – must have insurable interest and the assignment must be with the consent of the insurer;
2. Life – the assignee need not have insurable interest.
EFFECT OF CHANGE OF INTEREST IN INSURED PROPERTY:
General Rule: a change of interest in any part of a thing insured unaccompanied by a corresponding change of interest in the
insurance suspends the insurance to an equivalent extent, until the interest in the thing and the interest in the insurance are
vested in the same person.
Exceptions:
1. a change of interest in the thing insured after the occurrence of an injury which results in a loss.
2. a change of interest in one or more of several distinct things, separately insured by one policy.
3. A change of interest by will or succession on the death of the insured
4. A transfer of interest by one of several partners, joint owners or owners in common, who are jointly insured, to the others.
5. When a policy is so framed that it will inure to the benefit of whomsoever, during the continuance of the risk, may become
the owner of the interest insured.
When there is an express prohibition against alienation in the policy, in case of alienation, the contract of insurance is not
merely suspended but avoided.
Consent: of the insurer is generally required, since the personal qualifications of the insured are considered by the insurer.
However, such consent is only necessary if there will be alienation of the property.
PERFECTION OF THE CONTRACT OF INSURANCE
PERFECTION: A contract of insurance is a consensual contract which is perfected by the meeting of the minds between the
insured and the insurer. Thus, the Supreme Court in one case held that “[t]here can be no contract of insurance unless the
minds of the parties have met in agreement.” (Pilar De Lim vs. Sun Life Assurance Company of Canada, GR No. L-15774, Nov.
29, 1920)
In the usual course, it is the insured who will fill-up an application to be insured subject to the insured’s approval. The mere
submission of an application without the corresponding approval, even if no memorandum or rejection as provided, does not
result in a perfected contract of insurance. (Great Pacific Life Assurance Company vs. CA, GR No. L-31845, April 30, 1979)
PREMIUMS: this is the consideration paid by the insured to the insurer for undertaking the assumption of the risk covered by
the insurance contract.
As a general rule, there can be no binding contract of insurance if there is no payment of the premium, considering that it is
one of the elements of an insurance contract.

EXCEPTIONS: (enumerated by the Supreme Court in its resolution of the Motion for Reconsideration for the case of UCPB
General Insurance Co., Inc. vs. Masagana Telemart, Inc., GR No. 137172, April 4, 2001):
1. Whenever a grace period provision applies as provided under Section 77 of the Insurance Code.
2. If there is an agreement to grant the insured credit extension of the premium due under Section 72 of the Insurance Code.
3. If the parties intended the policies to be valid despite payment of insurance premiums in installment as laid down in the
case of Makati Tuscany Condominium Corporation vs. Court of Appeals
4. If the insurer granted a credit term for the payment of the premium and loss occurs before the expiration of the term,
recovery on the policy should be allowed.
5. When the parties are barred by estoppel.
RESCISSION OF INSURANCE CONTRACTS
A NON-LIFE Insurance Policy may be CANCELLED by the insurer on the following ground:
1. Nonpayment of premium;
2. Conviction of a crime arising out of acts increasing the hazard insured against;
3. Discovery of fraud or material misrepresentation;
4. Discovery of willful or reckless acts or omissions increasing the hazard insured against;
5. Physical changes in the property insured which result in the property becoming uninsurable;
6. Discovery of other insurance coverage that makes the total insurance in excess of the value of the property insured; or
7. A determination by the Commissioner that the continuation of the policy would violate or would place the insurer in violation
of this Code.
OTHER GROUNDS FOR RESCISSION OR CANCELLATION OF THE INSURANCE CONTRACT:

1. Concealment – a neglect to communicate that which a party knows and ought to communicate. (Section 26, Insurance
Code) A concealment, whether intentional or unintentional, entitles the injured party to rescind the contract of insurance.
(Section 27)
Note that under Section 28, each party to a contract of insurance must communicate to the other, in good faith, all facts
within his knowledge which are material to the contract and as to which he makes no warranty, and which the other has
not the means of ascertaining.
An intentional and fraudulent omission, on the part of one insured, to communicate information of matters proving or
tending to prove the falsity of a warranty, entitles the insurer to rescind.
No duty to disclose: except in answer to inquiries of the other:

(a) Those which the other knows: e.g., gender if the name given is obviously that of a man or woman.
(b) Those which, in the exercise of ordinary care, the other ought to know, and of which the former has no reason to
suppose him ignorant: e.g., occupation: soldier. “do you engage in an activity which will require you to handle firearms”
and you failed to supply an answer such question.
(c) Those of which the other waives communication: e.g., “do you smoke” not answered, and the policy is still issued. If
the answer is yes, and how many packs are consumed is asked but not answered but the policy is still issued.
(d) Those which prove or tend to prove the existence of a risk excluded by a warranty, and which are not otherwise
material: e.g., body part insurance on legs and you failed to answer the question “do you smoke” – not material.
(e) Those which relate to a risk excepted from the policy and which are not otherwise material. (Section 30, Insurance
Code)
2. False Representation or Misrepresentation.
A representation may be oral or written and may be made at the time of, or before, issuance of the policy. (Section 36 and
37, Insurance Code)
If a representation is false in a material point, whether affirmative or promissory, the injured party is entitled to rescind
the contract from the time when the representation becomes false. (Section 45, Insurance Code)
3. Breach of Warranty
A warranty may either be expressed or implied, and may relate to the past, the present, the future or to any or all of these.
(Sections 67 and 68, Insurance Code)
A statement in a policy, of a matter relating to the person or thing insured, or to the risk, as fact, is an express warranty
thereof. (Section 71)
The violation of a material warranty, or other material provision of a policy, on the part of either party thereto, entitles the
other to rescind. (Section 74)
Immaterial breaches: a breach of warranty that is immaterial generally does not avoid the contract of insurance except
when the parties stipulated that its breach will avoid the policy regardless of materiality.
CLAIMS SETTLEMENT AND SUBROGATION
LIFE INSURANCE:
1. If there is a maturity – immediately upon such maturity;
2. If the policy matures upon death – within 60 days after presentation of the claim and filing of the proof of the death of the
insured.
PROPERTY INSURANCE:
1. Ascertainment of loss is either by agreement or by arbitration – within 30 days after proof of loss is received by the insurer
and ascertainment of the loss or damage is made;
2. If no ascertainment is made within 60 days after receipt of proof of loss – within 90 days after such receipt.

Delay: non-compliance with the above periods entitles the beneficiary to:
1. Interest – for the duration of the delay at a rate TWICE the legal interest;
2. Attorney’s fees and other litigation expenses;
3. Appropriate damages under the Civil Code like moral and exemplary.
PRESCRIPTION:
1. In the absence of stipulation, 10 years.
2. However, the parties may validly agree on a shorter period provided it is NOT less than 1 year from the time the cause of
action accrues.
The cause of action accrues from the time of the final rejection of the claim and not from the time of loss. If there is a motion
for reconsideration, the one year period is to be counted from the date of first denial and not on the denial of the reconsideration.
If they agreed on a period of 1 year from the time the cause of action accrues, it shall be reckoned from the initial denial of the
claim and not on the resolution of the MR.
SUBROGATION: is a normal incident of indemnity property insurance as a legal effect of payment; it inures to the insurer
without any formal assignment or any express stipulation to that effect in the policy.
Such right is not dependent upon nor does it grow out of any privity of contract. Payment to the insured makes the insurer an
assignee in equity.
The rights of the insurer are those which are available to the insured at the time of payment.
CLAIMS:
1. Notice – must be given without undue delay. Otherwise, the insurer is exonerated;
2. Proof – the insurer may give the best evidence he has. Even if there is a stipulated requirement of proof, substantial
compliance thereof would suffice.
1. It is an agreement whereby one who undertakes, for a consideration, to indemnify another against loss,
damage, or liability arising from an unknown or contingent event.
A. Contract of sale C. Contract of pledge
B. Contract of insurance D. Contract of guaranty
2. He is the person whose loss is the occasion for the payment of the insurance proceeds by the insurer. He
must have the capacity to enter into a contract and he must not be a public enemy.
A. Insured C. Beneficiary
B. Assured D. Insurer
3. He is the person who assumes the risk of loss and undertakes for a consideration to indemnify the insured
upon the happening of the designated peril.
4. He is the third person designated by the insured to receive the proceeds.

5. Which among the following is an element of an insurance contract?

A. The insured possesses insurable interest capable of pecuniary estimation
B. The insurer assumes the risk of loss
C. The insured pays a premium which is his ratable contribution to the general insurance fund
D. All of the above
6. Which among the following is an element of an insurance contract?

A. The insured is subject to a risk of loss upon the happening of the designated peril.
B. The assumption of risk is part of a general scheme to distribute actual losses among a large group or
substantial number or persons bearing similar risks.
C. Both A and B
D. None of the above
7. The contract of insurance is one of perfect good faith, not for the insured alone, but equally so for the insurer.
A. Uberrimae fides contract C. Risk distributing device
B. Contract of indemnity D. Aleatory
8. The insured is entitled to recover only the amount of total loss sustained, and the burden is upon him to prove
the amount of such loss.

9. A contract of insurance is not compulsory, and the parties may incorporate such terms and conditions as they
may deem convenient. This is allowed provided that they do not contravene any provision of law and are not
against public policy.
A. Contract of adhesion C. Voluntary
B. Personal D. Synallagmatic
10. Both the insured and insurer have reciprocal obligations of equal value to each other.
B. Personal D Synallagmatic
11. The risk of economic loss is distributed among a large group of people bearing the same risk.
12. The obligation of the insurer to pay the proceeds of the insurance arises only upon the happening of an event
which is uncertain. It does not depend upon some contingent event.
13. An insurance contract is a ready-made form of contract, which the other party may accept or reject, but which
the latter cannot modify.
14. The law presumes that the insurer considered the personal qualification of the insured in approving the
insurance application. The insured cannot assign, before the happening of the loss, his rights under a property
policy without the consent of the insurer.
15. A contract of insurance is not compulsory, and the parties may incorporate such terms and conditions as they
may deem convenient. This is allowed provided that they do not contravene any provision of law and are not
against public policy.
16. Both the insured and insurer have reciprocal obligations of equal value to each other.
17. Which among the following is not a life insurance contract?

A. Individual C. Marine
B. Group D. Industrial
18. Which among the following is not a non-life insurance contract?

A. Marine C. Fire
B. Suretyship D. Casualty
19. Actions arising from insurance contracts prescribe in __ years.

A. Two C. Ten
B. Five D. Twenty
20. In property insurance, the proceeds must be paid within ___ days after proof of loss is received by the insurer
and ascertainment of the loss or damage is made.
A. 10 C. 50
B. 30 D. 100
1. B 6. C 11. C 16. D
2. A 7. A 12. D 17. C
3. D 8. B 13. A 18. B
4. C 9. C 14. B 19. C
5. D 10. D 15. C 20. B

RFBT-05
LAW ON PARTNERSHIPS
CONTRACT OF PARTNERSHIP, IN GENERAL
PARTNERSHIP is a contract whereby two or more persons bind themselves to contribute money, property or industry to a
common fund, with the intention of dividing the profits among themselves, or in order to exercise a profession.
CHARACTERISTICS:
1. Consensual – it is perfected by mere consent or the meeting of minds between parties (Art. 1305).
2. Bilateral or Multilateral – it is entered into between two or more persons;
3. Nominate – it is designated by a specific name and there are specific rules applicable only to it;
4. Principal – its existence does not depend on the existence of another contract;
5. Onerous – certain contributions have to be made to become a partner;
6. Preparatory – in the sense that after it has been entered into, other contracts essential in the carrying out of its purposes
can be entered into.
Principles applicable: There must be Affectio Societatis – the desire to formulate an ACTIVE union with people among
whom there exist mutual confidence and trust.
In connection thereto, the principle of Delectus Personae (Personal Choices), which pertains to the right to choose who to
associate with, is also applicable.
PURPOSE: can either be for the intention of dividing the profits among themselves, or in order to exercise a profession.
Nevertheless, it is required that a partnership must have a LAWFUL object or purpose, otherwise it may be declared dissolved
by judicial decree, and the profits shall be confiscated in favor of the state. (Art. 1770)
PARTNERSHIP VS. CORPORATION
PARTNERSHIP CORPORATION
Creation Voluntary agreement of parties. Created by the state in the form of a special charter
or by a general enabling law (The Corporation Code)
Number of Two or more Not more than 15
Organizers
Existence No time limit except agreement of parties With perpetual existence
Liability of may extend to private property. Liable only upto their capital contributions
owners
Transferability All partners need to consent to the transfer of Does not need the consent of the other stockholders.
of interest interest to another.
Ability of owners Generally, partners acting on behalf of the Generally, stockholders cannot bind corporations
to bind the firm partnership are agents thereof; since its official acts are through a board of directors
Remedies in A partner can sue another partner who A stockholder cannot sue a director who
case of mismanages mismanages, it must be in the name of the
mismanagement corporation, through a derivative suit.
Nationality A partnership is a national of the country where Generally, under whose laws it was created as to
it was created, and dependent on percentage of whether domestic or foreign, and as to nationality,
ownership. on the ownership of the outstanding capital stock.
Legal from the time the contract begins Generally from issuance of COR.
Personality
Right of None. Death, retirement, insolvency, civil Yes. Such causes do not dissolve a corporation.
Succession interdiction, or insanity of a partner dissolves
the partnership.
SEPARATE JURIDICAL PERSONALITY: The partnership has a judicial personality separate and distinct from that of each of
the partners. The partnership can, in general:
1. Acquire and possess property of all kinds;
2. Incur obligations;
3. Bring civil or criminal actions;
4. Adjudged insolvent even if the individual members be each financially solvent.
RULES TO APPLY IN DETERMINING EXISTENCE OF PARTNERSHIP:

1. There is no partnership:
a. Between persons who are not partners as to each other are not partners as to third persons; except a partnership by
estoppel.
b. Co-ownership or co-possession of itself, whether such-co-owners or co-possessors do or do not share any profits made
by the use of the property;
c. The sharing of gross returns, whether or not the persons sharing them have a joint or common right or interest in any
property from which the returns are derived;
2. Presumption: the receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in
the business, but no such inference shall be drawn if such profits were received in payment:
a. As a debt by installments or otherwise;
b. As wages of an employee or rent to a landlord;
c. As an annuity to a widow or representative of a deceased partner;
d. As interest on a loan, though the amount of payment vary with the profits of the business;
e. As the consideration for the sale of a goodwill of a business or other property by installments or otherwise.

LAW on PARTNERSHIPS RFBT-05
FORMAL REQUIREMENTS:
General Rule: A partnership may be constituted in any form,
Except: A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of said property
is not made, signed by the parties, and attached to the public instrument.
Capital is P3,000 or more – the contract of partnership must appear in a public instrument, which must be recorded in the SEC.
This does not in any way affect validity of the partnership as it is intended only to affect third persons.
KINDS OF PARTNERSHIPS
According to OBJECT:
1. Universal:
ALL PROFITS VS. ALL PRESENT PROPERTY
ALL PROFITS ALL PRESENT PROPERTY

Only the USUFRUCT of the properties of the ALL the property actually belonging to the partners are contributed both
partners become common property; NAKED ownership and naked ownership.
OWNERSHIP is retained by each of the
partners.
ALL PROFITS acquired by industry or work of As a rule, aside from the contributed properties, only the PROFITS OF THE
the partners become common property CONTRIBUTED PROPERTY.
(regardless of whether or not said profits
were obtained through the usufruct Profits from other sources may become partnership property, but only if
contributed) there is a stipulation to such effect.
Properties subsequently acquired by inheritance, legacy, or donation,

cannot be included in the stipulation, BUT the fruits thereof can be included
in the stipulation.
In case of ambiguity: If the Articles of Universal Partnership does not specify the nature of the Universal Partnership, it
is deemed that what is constituted is only a universal partnership of profits.
Persons not allowed to form a universal partnership: those who cannot donate to each other, namely:
a. Husband and Wife (Art. 133)
b. Those guilty of adultery and concubinage (Art. 739);
c. Those guilty of the same criminal offense, if the partnership was entered into in consideration of the same (Art. 739);
2. Particular where the object are:

a. Determinate things, their use or fruits;
b. A specific undertaking, or
c. The exercise of a profession or occupation.
According to LIABILITY:
1. General where all the partners are general partners whose liability extends to their individual properties, after the assets
of the partnership have been exhausted;
2. Limited where at least one of the partners are liable only up to the extent of his contribution.
According to TERM:
1. Partnership with a fixed term or particular undertaking - upon arrival of the fixed term or fulfilment of a particular
undertaking, partnership is dissolved, and if continued, it will constitute a partnership at will and the rights and duties of
the partners remain the same, so far as is consistent with a partnership at will.
2. Partnership at will – when there is no fixed term or particular undertaking.
KINDS OF PARTNERS
ACCORDING TO CONTRIBUTION:
1. Capitalist Partners – contributes capital; and
2. Industrial Partners – furnishes industry or labor.
3. Capitalist-Industrial Partners – furnishes both.
AS TO LIABILITY:
1. General Partners - liable upto his personal assets.
2. Limited Partners – liable upto his capital contributions only.
OTHER KINDS OF PARTNERS:

1. Silent Partner – one who does not participate in the management of the partnership
2. Secret Partner – one who is not known to third persons as a partner
3. Dormant Partner – one who is both a silent and secret partner
4. Ostensible Partner – direct opposite of a dormant partner or one who participates in the management and is known to
third parties as a partner.
5. Managing Partner – one who undertakes the management of the partnership.
6. Liquidating Partner – one who undertakes the winding-up of partnership affairs after its dissolution.
7. Incoming Partner – one who is admitted to the partnership after it has already been constituted.

OBLIGATIONS OF A PARTNER:TO THE PARTNERSHIP AND OTHER PARTNERS
1. To give his contribution

a. Unless there is a stipulation to the contrary, the partners shall contribute equal shares to the capital of the partnership.
b. As a rule, the contribution must be provided upon perfection of the contract, except if the partners stipulate otherwise.
c. A partner who has undertaken to contribute a sum of money and fails to do so becomes a debtor for the interest and
damages from the time he should have complied with his obligation. Thus, no demand shall be necessary since the
law specifically provides for the liability in case of delay.
d. A partner is likewise liable similar to a vendor:
i. He is bound to deliver the fruits thereof from the time they should have been delivered, without need of demand
(Art. 1786).
ii. A partner must exercise due diligence in preserving the thing promised to be contributed; otherwise, he shall be
liable for loss and deterioration.
iii. Warrant the thing delivered against eviction
Risk of Loss:
LOSS BORNE BY THE PARTNER:
a. Thing contributed is specific and determinate which is NOT fungible and only their use and fruits may be for the
common benefit; and
b. There is stipulation that he shall bear the loss of the thing brought and appraised in the inventory.
LOSS BORNE BY THE PARTNERSHIP:

a. Things contributed are
i. fungible;
ii. cannot be kept without deteriorating; or
iii. they were contributed to be sold; and
b. here was appraisal in the inventory and no stipulation that partner will bear the loss.
2. To give additional contribution in case of imminent losses: In case of an imminent loss of the business of the
partnership, any partner who refuses to contribute an additional share to the capital to save the venture, shall he obliged
to sell his interest to the other partners. Except:
a. Industrial partners except if there is stipulation that he will likewise contribute
b. If there is stipulation to the contrary
3. Prohibition to engage in other businesses:

a. Industrial partners - cannot engage in business for himself except when the capitalist partners permit him to do so.
Effect of non-compliance: The capitalist partners may either

i. Exclude him from the firm or
ii. Avail themselves of the benefits which he may have obtained in violation of this provision.
b. Capitalist partners – the prohibition is limited to businesses in the same industry as that of the partnership which may
result in competition. Exceptions:
i. When it is expressly stipulated that the capitalist partner can so engage himself;
ii. When the other partners allow him to do so, whether expressly or impliedly;
iii. During the period of liquidation and winding up, when the partnership is already non-existent.
iv. When the general-capitalist partner becomes a limited partner in a competitive enterprise.
Effect of non-compliance:
i. He shall bring to the partnership all the profits illegally obtained;
ii. He is liable, personally, for all the losses;
iii. He may be ousted for loss of trust and confidence.
4. Credit to the firm the payment made by a debtor who owes both the partnership and the managing partner
MANAGING PARTNER COLLECTING FROM A COMMON DEBTOR: To prevent the managing partner from furthering his
personal interest to the detriment of the firm, if such managing partner collects a sum from a common debtor who owes
money both to said partner and to the partnership:
a. If the managing partner issued a receipt in the name of the partnership: the payment shall be applied to the partnership
credit;
b. If the managing partner issued a receipt in his name: the payment shall be applied proportionate to the amounts of
the two debts. EXCEPT: When the debt owed by the debtor to the managing partner is more onerous, the debtor may
choose to apply the payment exclusively to such
5. Other obligations of partners to the partnership and to other partners:

a. Not to convert partnership funds/ property for his own use
b. To account for and hold as trustee, unauthorized (or secret) personal profits
c. Share with other partners the share of the partnership credit which he has received from an insolvent firm debtor
d. Keep the partnership books in the principal office (except when otherwise agreed) and allow other partners to have
access, inspect and copy the same.
e. Reimburse the partnership of damages suffered by it through his fault.
i. The liability for damages is not compensable with profits and benefits earned for the partnership;
ii. Damages, however, may be decreased by courts if through the partner’s extraordinary efforts, the partnership
earned unusual profits.
f. To inform the other partners on all matters affecting the partnership or relative to partnership affairs.
g. To observe the diligence of a good father of a family in all his dealings.
h. To adhere to the partnership agreement and decisions of appointed managing partner(s)

OBLIGATIONS OF PARTNERS: TO THIRD PARTIES
1. FIRM NAME: Every partnership shall operate under a firm name, which may or may not include the name of one or more
of the partners.
Strangers who include their name in the firm are liable as partners because of estoppel but do not have the rights of
partners. – this is to protect customers from being misled.
Under Art. 1846, if a limited partner included his name in the firm name, he shall be liable as a general partner.
2. LIABILITY AFTER EXHAUSTION OF PARTNERSHIP ASSETS: All partners, including industrial ones, shall be liable pro
rata with all their property and after all the partnership assets have been exhausted, for the contracts which may be
entered into in the name and for the account of the partnership, under its signature and by a person authorized to act for
the partnership. However, any partner may enter into a separate obligation to perform a partnership contract.
Any stipulation to the contrary shall be void, except as to the partners.
3. AUTHORITY TO ACT FOR AND IN BEHALF OF THE PARTNERSHIP: Every partner is an agent of the partnership for
the purpose of its business.
The authority of the partner to act in behalf of the partnership may be:
a. Express – those expressly granted to the partner; or
b. Implied – those which may be implied from the express authority; or
c. Apparent – when he apparently carries on the usual business of the partnership and the person to whom he is dealing
has no knowledge of the fact that he has no such authority.
If the partner is not carrying on the usual business of the partnership, the act will not bind the partnership unless it is
authorized by the other partners.
Consent of ALL partners necessary to:

a. Assign the partnership property in trust for creditors or on the assignee's promise to pay the debts of the partnership;
b. Dispose of the good-will of the business;
c. Do any other act which would make it impossible to carry on the ordinary business of a partnership;
d. Confess a judgment;
e. Enter into a compromise concerning a partnership claim or liability;
f. Submit a partnership claim or liability to arbitration;
g. Renounce a claim of the partnership.
Except when authorized by the other partners or unless they have abandoned the business.
Admission of Partners: an admission made by one partner within the scope of his authority is evidence against the partnership
Notice to a Partner: operates as notice to the partnership, except in case of fraud committed by such partner.
4. EFFECTS OF CONVEYANCE OF REAL PROPERTY:

Property is in the Conveyance is in the Who conveyed the Effect
name of name of property
Partnership Partnership Partner Valid conveyance but partnership may
recover, except (no right to recover):
One or more One or more partners One or more partners a. When the transfer binds the partnership
partners b. Transferee had no knowledge of lack or
excess of authority
Partnership Partner Partner Passes only equitable interest of the
partnership if within the authority (if not,
One or more Partner/Partnership Partner apparently nothing transfers)
partners/Third
persons (in trust)
All partners All partners All partners Valid transfer
5. SOLIDARY LIABILITY FOR TORTS/QUASI-DELICT: Where, by any wrongful act or omission of any partner acting
in the ordinary course of the business of the partnership or with the authority of co-partners, loss or injury is
caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor
to the same extent as the partner so acting or omitting to act.
6. SOLIDARY LIABILITY FOR MISAPPROPRIATION: The partnership is bound to make good the loss, in two situations:
a. Pertains to partner as receiver: Where one partner acting within the scope of his apparent authority receives money
or property of a third person and misapplies it.
b. Pertains to partnership as receiver: Where the partnership in the course of its business receives money or property of
a third person and the money or property so received is misapplied by any partner while it is in the custody of the
partnership.
In both 5 and 6 above, all partners are solidarily liable with each other and the partnership.
7. PARTNER BY ESTOPPEL:
a. One who represents himself as a partner of an existing partnership with or without consent of the partnership:
i. When the partnership consented – a partnership by estoppel is created between the original members and the
deceiver. A partnership liability results.
ii. When the partnership did NOT consent – deceiver becomes a partner by estoppel where he is liable as a partner
but does not acquire the rights thereof. No partnership liability exists. Only those who consented shall be liable.

b. One who represents himself as a partner of a NON-existent partnership. Liability of parties is pro rata, since there is
no partnership liability.
This applies whenever the third person is misled by the representation.
8. LIABILITY OF NEW (or INCOMING) PARTNER:

a. Debts incurred prior to admission: liable upto his contribution (Except if there is stipulation)
b. Debts incurred after admission: liable upto his personal assets.
RIGHTS OF A PARTNER
1. Right to share in the profits

DISTRIBUTION OF PROFITS:
a. In accordance with the agreement as to the distribution of profits;
b. If there was no such agreement, in proportion to contribution and the industrial partner shall receive such share as
may be just and equitable.
DISTRIBUTION OF LOSSES:
a. In accordance with agreement as to distribution of losses;
b. If there was no agreement as to losses, same proportion as to the agreement as to profits;
c. If no agreement as to losses and profits, in proportion to contribution but the industrial partner shall not be liable for
losses.
An industrial may be made liable for losses only if there was stipulation to that effect.
Void Stipulation: A stipulation which excludes one or more partners from any share in the profits or losses is void, this is
otherwise known as Pactum Leonina.
2. Property rights (Art. 1810)
PROPERTY RIGHTS OF A PARTNER:

a. His rights in specific partnership property – a partner is a co-owner with his partners of specific partnership
property. The incidents of such co-ownership are:
i. A partner, subject to any agreement between the partners, has an equal right with his partners to possess
specific partnership property for partnership purposes; but he has no right to possess such property for any other
purpose without the consent of his partners;
ii. A partner's right in specific partnership property is not assignable except in connection with the assignment of
rights of all the partners in the same property;
iii. A partner's right in specific partnership property is not subject to attachment or execution, except on a claim
against the partnership. When partnership property is attached for a partnership debt the partners, or any of
them, or the representatives of a deceased partner, cannot claim any right under the homestead or exemption
laws;
iv. A partner's right in specific partnership property is not subject to legal support.
b. His interest in the partnership - A partner's interest in the partnership is his share of the profits and surplus.
Effect of conveyance of a partner’s whole interest:

i. Does not, in itself, dissolve the partnership. The partnership is deemed dissolved only if there is stipulation to that
effect.
ii. The conveyee does not necessarily become a partner and such has no right to
1) demand accounting and settlement;
2) interfere in the management or administration of the partnership business; or
3) demand information, accounting and inspection of the partnership books.
Rights of the assignee/conveyee:

i. To get profits the assignor-partner would have obtained;
ii. To avail of the usual remedies in case of fraud in the management;
iii. Receive assignor’s interest in the event of a dissolution.
Partner’s Interest may be subject to a charge or attachment by the court:

i. Only the interest, that is profits and surplus of the partner and not his share in the specific properties of the
partnership
ii. Priority is still given to creditors of the partnership
iii. Such interest may be redeemed prior to foreclosure with:
1) The separate property of any one or more of the partners; or
2) partnership property with the consent of ALL the other partners
Note: for limited partners, their interest may only be redeemed with the separate property of the general partners and
not with the property of the partnership.
c. His right to participate in the management.
RULES ON MANAGEMENT
i. ONE MANAGING PARTNER
MANAGING PARTNER in the ARTICLES OF PARTNERSHIP: May execute all acts of administration, in good faith, even
with opposition from the other partners;
The power to execute all acts of administration can only be revoked if (a) with just or lawful cause; and (2) by a vote of
the partners representing the controlling interest.

MANAGING PARTNER AFTER PARTNERSHIP HAS BEEN CONSTITUTED: The power as manager may be revoked by
a vote of the partners representing the controlling interest EVEN WITHOUT just or lawful cause.
ii. MULTIPLE MANAGING PARTNERS:
1) With stipulation that no Managing Partner may act without the consent of the others – no one can perform an act of
administration without the others’ consent.
2) With Specification of Duties – each Managing Partner can perform an act of administration within their respective
duties.
3) Without specification of their respective duties, or without a stipulation that one of them shall not act without the
consent of all the others:
a) Each managing partner may separately execute all acts of administration;
b) Should one of the managing partners oppose the act of another, the matter shall be decided by a majority of the
managing partners per head count;
c) Should there be a tie in the votes of the managing partners, the controlling interest of ALL the partners shall
prevail.
iii. NO MANAGING PARTNER; WITH STIPULATION THAT NO PARTNER CANNOT ACT WITHOUT THE SUPPORT OF
PARTNERS: the concurrence of all shall be necessary for the validity of the acts, and the absence or disability of any one
of them cannot be alleged.
Except: if there is imminent danger of grave or irreparable injury to the partnership.
iv. NO AGREEMENT AS TO MANAGEMENT OF PARTNERSHIP:
All the partners shall be considered agents and whatever any one of them may do alone shall bind the partnership,
without prejudice to the provisions of Article 1801 (on Multiple Managing Partners)
Except: None of the partners may, without the consent of the others, make any important alteration in the immovable
property of the partnership, even if it may be useful to the partnership.
Exception to the exception: if the refusal of consent by the other partners is manifestly prejudicial to the interest of
the partnership, the court's intervention may be sought.
OTHER RIGHTS OF A PARTNER:

1. To associate with another person in his share - every partner may associate another person with him in his share, but
the associate shall not be admitted into the partnership without the consent of all the other partners, even if the partner
having an associate should be a manager.
2. To inspect and copy partnership books – the partnership books shall be kept in the principal place of business unless
otherwise agreed.
3. To demand a formal account in the following cases:
a. A partner was wrongfully excluded from the partnership business or possession of its property by his co-partners;
b. When there is a stipulation granting such right
c. As to information affecting partnership affairs, such as secret profits earned by other partners;
d. Whenever just and reasonable.
4. To ask for a dissolution of the firm at the proper time and the right to return of capital and advancements –
subject to the rules of distribution of partnership assets during liquidation.
5. Right to compensation – exists only when there is an agreement or stipulation granting such right or entitlement
6. Right to reimbursement – the partnership is responsible to every partner for the amounts he may have disbursed on
behalf of the partnership and for the corresponding interest from the time the expense was made
DISSLUTION AND WINDING-UP
Dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the
carrying on as distinguished from the winding up of the business. On dissolution the partnership is not terminated, but continues
until the winding up of partnership affairs is completed.
Winding up: on the other hand, is the process of settling business affairs after dissolution.
Termination: is the point where all the partnership affairs have been wound up.
CAUSES OF DISSOLUTION:
Extrajudicial causes: without intervention of the court:
1. Without violation of the agreement between the partners:
a. By the termination of the definite term or particular undertaking specified in the agreement;
b. By the express will of any partner, who must act in good faith, when no definite term or particular is specified;
c. By the express will of all the partners who have not assigned their interests or suffered them to be charged for
their separate debts, either before or after the termination of any specified term or particular undertaking;
d. By the expulsion of any partner from the business bona fide in accordance with such a power conferred by the
agreement between the partners;
2. In contravention of the agreement between the partners, where the circumstances do not permit a dissolution under
any other provision of this article, by the express will of any partner at any time;
Note: that the partnership may be dissolved with or without contravention to the agreement of the parties, but if it is
dissolved in contravention to the agreement, the partner who causes the dissolution will be liable for damages. In Ortega
vs. CA, it was held by the SC that “neither would the presence of a period for its specific duration or the statement of a
particular purpose for its creation prevent the dissolution of any partnership by an act or will of a partner. Among
partners, mutual agency arises and the doctrine of delectus personae allows them to have the power, although
not necessarily the right, to dissolve the partnership. An unjustified dissolution by the partner can subject him to a
possible action for damages.” (GR No. 109248; July 3, 1995)

3. By operation of law:
a. By any event which makes it unlawful for the business of the partnership to be carried on or for the members to
carry it on in partnership;
b. When a specific thing which a partner had promised to contribute to the partnership, perishes before the delivery;
in any case by the loss of the thing, when the partner who contributed it having reserved the ownership thereof, has
only transferred to the partnership the use or enjoyment of the same; but the partnership shall not be dissolved by
the loss of the thing when it occurs after the partnership has acquired the ownership thereof;
c. By the death of any partner;
d. By the insolvency of any partner or of the partnership;
e. By the civil interdiction of any partner;
Judicial causes: where the dissolution of the partnership is decreed by the court:
1. A partner has been declared insane in any judicial proceeding or is shown to be of unsound mind;
2. A partner becomes in any other way incapable of performing his part of the partnership contract;
3. A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business;
4. A partner wilfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in
matters relating to the partnership business that it is not reasonably practicable to carry on the business in partnership
with him;
5. The business of the partnership can only be carried on at a loss;
6. Other circumstances render a dissolution equitable.
Note that in all the above judicial causes, a trial will be necessary to prove the facts necessary to dissolve the partnership.
EFFECTS OF DISSOLUTION:
1. The mutual agency is terminated. As a rule, the partners can no longer act to bind the partnership, subject to the following
rules:
a. If the cause of the dissolution is Acts, Insolvency or Death (AID) – NOTICE should be given by the partners to terminate
the mutual agency
b. If the cause is NOT AID – the mutual agency is terminated and the dissolution is binding even without notice.
2. The following acts are still binding even after dissolution:
a. Acts to for winding-up of the affairs of the partnership
b. Contracts with creditors who had no notice of the dissolution
3. The partners may continue the partnership after dissolution of the old partnership. Such continuation still dissolves the old
partnership and a new partnership is created. The creditors of the old partnership are also creditors of the person or
partnership continuing the business.
WINDING UP OR LIQUIDATION
This is the process of liquidating the partnership assets and the distributing the proceeds to satisfy the claims against the
partnership.
Liquidator: the liquidator shall be:

1. A party who has not wrongfully caused the dissolution;
2. The legal representative of the last surviving partner (if all are dead), if not insolvent;
3. The court, upon cause shown by a partner, his legal representative or assignee.
Distribution of Assets: will be done in the following order:

1. Those owing to creditors other than partners;
2. Those owing to partners other than for capital and profits;
3. Those owing to partners in respect of capital;
4. Those owing to partners in respect of profits.
Note: that in the distribution of a Limited Partnership’s assets, priority is given to the share of partners as to the profits over
their share as to capital.
Partner’s Liability: in case the assets of the partnership are not sufficient to cover the liabilities, the remaining claims may be
satisfied against the separate assets of the partners.
However, where a partner has become insolvent, the claims against his separate property shall be satisfied in the following
order:
1. Those owing to separate creditors;
2. Those owing to partnership creditors;
3. Those owing to partners by way of contribution.
LIMITED PARTNERSHIP
Limited Partnership: is one formed by two or more persons having as members one or more general partners and one or
more limited partners.
Limited liability: a limited partners’ liability is limited only to his capital contribution. Such that, after exhaustion of partnership
assets, he cannot be made to contribute to answer the remaining liabilities to third parties.
FORMATION: Two or more persons desiring to form a limited partnership shall:
Sign and swear to a certificate, which shall state -

a. The name of the partnership, adding thereto the word "Limited"; - absence of the word Limited or “LTD” in the firm name,
the partnership will be treated as a general partnership.
b. The character of the business;
c. The location of the principal place of business;
d. The name and place of residence of each member, general and limited partners being respectively designated;

e. The term for which the partnership is to exist;
f. The amount of cash and a description of and the agreed value of the other property contributed by each limited partner;
g. The additional contributions, if any, to be made by each limited partner and the times at which or events on the happening
of which they shall be made;
(f) and (g) are important because as to any difference (in amount stated in the certificate and actual contributions, or failure
to provide additional contributions), the limited partner will be liable as a debtor to the partnership.
h. The time, if agreed upon, when the contribution of each limited partner is to be returned;
Note, however, that the limited partner may nevertheless demand the return of his contribution:
i. After he has six months' notice in writing to all other members, if no time is specified in the certificate, either for the
return of the contribution or for the dissolution of the partnership; or
ii. On the dissolution of a partnership;
The above, however, is still subject to availability of funds after partnership debts are paid.
i. The share of the profits or the other compensation by way of income which each limited partner shall receive by reason of
his contribution;
j. The right, if given, of a limited partner to substitute an assignee as contributor in his place, and the terms and conditions
of the substitution;
However, the assignee does not necessarily become a substitute limited partner.
i. Substitute Limited Partner: A Substituted Limited Partner is a person admitted to all the rights of a limited partner who
has died or has assigned his interest in a partnership: Provided:
1) All the partners consent;
2) The assignor (Limited Partner), being thereunto empowered by the certificate, gives the assignee that right.
ii. The substitute has all the rights and powers and is subject to all the restrictions and liabilities of his assignor except
those liabilities of which he was ignorant at the time he became a limited partner and which could not be ascertained
from the certificate.
1) The substitution does not release the original limited partner from liability to the partnership.
2) If the assignee does not become an substitute, he has no right to require any information or account of the
partnership books; he is only entitled to receive the share of the profits or other compensation by way of income
or the return of his contribution to which his assignor would otherwise be entitled; The assignee is still an
OUTSIDER to the Partnership.
Limited Partners’ Interest: or his share in the profits and surplus may likewise be the subject of assignment or
attachment/execution. However, unlike the interest of a general partner, a limited partners’ interest may only be redeemed
with the general partners’ property and not with partnership property. (see Rights of a Partner)
a. The right, if given, of the partners to admit additional limited partners;
b. The right, if given, of one or more of the limited partners to priority over other limited partners, as to contributions or as
to compensation by way of income, and the nature of such priority;
c. The right, if given, of the remaining general partner or partners to continue the business on the death, retirement, civil
interdiction, insanity or insolvency of a general partner; and
d. The right, if given, of a limited partner to demand and receive property other than cash in return for his contribution.
The said certificate will be filed with the SEC and a limited partnership is formed if there has been substantial compliance in
good faith with the foregoing requirements. If such certificate is not filed, the partnership may be liable in the same manner as
a general partnership.
LIMITATIONS ON A LIMITED PARTNER:

1. A limited partner cannot be an industrial partner. His contribution must always be money or property.
2. The surname of a limited partner shall not appear in the partnership name unless:
a. It is also the surname of a general partner, or
b. Prior to the time when the limited partner became such, the business has been carried on under a name in which his
surname appeared.
3. The limited partner cannot take part in the management of the partnership.
If a limited partner contributed industry, or his name appears in the partnership name (except for the above exceptions) and/or
took part in the management of the partnership, he shall be liable as if he is a general partner.
RIGHTS OF A LIMITED PARTNER:

1. Have the partnership books kept at the principal place of business of the partnership, and at a reasonable hour to inspect
and copy any of them;
2. Have on demand true and full information of all things affecting the partnership, and a formal account of partnership affairs
whenever circumstances render it just and reasonable; and
3. Have dissolution and winding up by decree of court.
4. Receive a share of the profits or other compensation by way of income, and to the return of his contribution. However, a
limited partner shall not receive any part of his contribution until:
a. All liabilities of the partnership, except liabilities to general partners and to limited partners on account of their
contributions, have been paid or there remains property of the partnership sufficient to pay them;
b. The consent of all members is had, unless the return of the contribution may be rightfully demanded as provided in
number 5; and
c. The certificate is cancelled or so amended as to set forth the withdrawal or reduction.
5. Rightfully demand for his contribution:
a. On the dissolution of a partnership; or
b. When the date specified in the certificate for its return has arrived, or
c. After he has six months' notice in writing to all other members, if no time is specified in the certificate, either for the
return of the contribution or for the dissolution of the partnership.

6. Have his written consent or ratification be sought by the general partner/s in order to:
a. Do any act in contravention of the certificate;
b. Do any act which would make it impossible to carry on the ordinary business of the partnership;
c. Confess a judgment against the partnership;
d. Possess partnership property, or assign their rights in specific partnership property, for other than a partnership
purpose;
e. Admit a person as a general partner;
f. Admit a person as a limited partner, unless the right so to do is given in the certificate;
g. Continue the business with partnership property on the death, retirement, insanity, civil interdiction or insolvency of a
general partner, unless the right so to do is given in the certificate.
7. A limited partner may loan money and to transact other business with the partnership, subject to the following restrictions:
a. He cannot receive or hold as collateral security any partnership property;
b. He cannot receive any payment, conveyance or release from liability if at the time the assets of the partnership are
not sufficient to discharge partnership liabilities to persons not claiming as general or limited partners.
Any violation of the above restrictions would be in fraud of creditors and may thus be treated as a rescissible contract.
GENERAL-LIMIED PARTNER: A person may be a general partner and a limited partner in the same partnership, provided that
this fact is stated in the certificate.
He shall have the rights and powers and be subject to all the restrictions of a general partner. Except that, in respect of his
contribution, he shall have the rights against the other partners which he would have had if he were not also a general partner.
DISSOLUTION AND WINDING-UP
Grounds: The retirement, death, insolvency, insanity or civil interdiction of a GENERAL PARTNER dissolves the partnership.
Except: If the partnership business is continued by the remaining general partners under a right to do so as stated in the
Certificate of Limited Partnership OR with the consent of all the partners.
A limited partner may have the partnership dissolved and its affairs wound up when he rightfully but unsuccessfuly demands
the return of his contribution.
Distribution of Assets of a Limited Partnership: will be done in the following order:

1. Those owing to creditors other than partners;
2. Those owing to the limited partners, other than capital and profits;
3. Those owing to the limited partners in respect of profits;
4. Those owing to the limited partners in respect of capital;
5. Those owing to general partners other than for capital and profits;
6. Those owing to general partners in respect of profits;
7. Those owing to general partners in respect of capital.
MULTIPLE CHOICE QUESTIONS
1. What is an essential difference between a partnership and a corporation?

A. A partnership is created by voluntary agreement of the partners, whereas a corporation is always created by some
express legislative authority either in the form of a special law or of a general law.
B. Stockholders are usually liable to corporation’s creditors not only to the extent of their contribution but even with
their own private property, whereas the partners, after they have paid for their contributions, are not subject to any
further liability, unless otherwise provided by law.
C. The third person to whom a stockholder has transferred his interest does not become a stockholder without the
consent of all other stockholders, whereas the third person to whom a partner has transferred his interest becomes
automatically a partner even without the consent of the other partners.
D. The death or bankruptcy of a stockholder usually causes the dissolution of the corporation, whereas the death or
bankruptcy of a partner does not result in such dissolution.
2. First Statement: As a general rule, the partners are the agents of the partnership; hence, acts of the partners for the
account of the partnership are binding not only on the partnership but also on the partners.
Second Statement: Whatever acts the stockholders might execute for the account of the corporation, either individually
or collectively, are not binding on the corporation.
A. Only the first statement is true. C. Both statements are true.
B. Only the second statement is true. D. None of the statements is true.
3. As to object, a partnership may be:

A. General or limited C. Capitalist or industrial
B. Universal or particular D. Managing or silent
4. It refers to a partnership which comprises all that the partners may acquire by their industry or work during the existence
of the partnership.
A. Universal partnership of profits C. Partnership of all present property
B. Particular partnership of profits D. Partnership of all present profits
5. It refers to partners who can be held liable for partnership obligations even to the extent of their private property.
A. General C. Capitalist
B. Limited D. Industrial
6. It refers to partners who contribute only their skill or industry to the common fund.
A. Capitalist C. Silent
B. Managing D. Industrial

7. It refers to partners who manage or administer partnership affairs.
A. Silent C. Secret
B. Ostensible D. Managing
8. It refers to partners whose connection with the partnership is not known.

A. Secret C. Managing
B. Ostensible D. Silent
9. It refers to partners who represent themselves, or consent to another or others representing them to anyone as partners
either in an existing partnership or in one that is fictitious or apparent.
A. Partners by estoppel C. Ostensible
B. Secret D. Managing
10. First Statement: If the partnership is general, it may be constituted in any form, except where immovable property or
real rights are contributed to the common fund, in which case a public instrument, to which is attached an inventory of
said property, signed by any of the partners, shall be necessary for validity.
Second Statement: If the general partnership has a capital of P3,000 or more, it must appear in a public instrument, which
shall be recorded in the office of the SEC. However, it is not necessary for its validity.
11. First Statement: If the partnership is limited, it is required that the contracting parties, in addition to the
formalities prescribed for the organization of a general partnership, shall execute a certificate of limited
partnership which must be recorded in the office of the SEC.
Second Statement: The formalities for a limited partnership must be complied with, otherwise, the partnership is not
limited but general.
12. If there is agreement only with respect to the profits, how shall the losses be distributed?
A. Same proportion as their share in the capital C. Partners shall meet and determine the shares
B. Same proportion as their share in the profits D. No loss shall be distributed
13. If there is no agreement as to the distribution of profits and losses, how are the profits distributed to the capitalist partner?
A. Just and equitable under the circumstances
B. No entitlement
C. Profits go to the reserve fund.
D. In proportion to what he may have contributed to the common fund
14. If there is no agreement as to the distribution of profits and losses, how shall the losses be distributed to the industrial
partner?
A. In proportion to what he may have contributed to the common fund
B. Just and equitable under the circumstances
C. No liability
D. Profits go to the reserve fund.
15. What is the status of an agreement whereby one or more partners shall not share in the profits and losses?
A. Void C. Voidable
16. When can an industrial partner engage in business for himself?

A. When the partnership expressly permits him to do so.
B. When the partnership impliedly permits him to do so.
C. When the industrial partner still has available time to engage in another business.
D.When the industrial partner engages in another business with one of the capitalist partners.
17. Can a capitalist partner engage in a business similar to the kind of business in which the partnership is engaged?
A. Yes, if he has extra available capital.
B. Yes, if he brings with him another capitalist partner.
C. No, unless there is a stipulation to the contrary.
D.Never, as the prohibition is absolute.
18. Jean and John are partners in a certain business, Jean being the managing partner. Ruth owes Jean P50,000 and the
partnership P100,000, and both credits are demandable. Ruth pays Jean P30,000 and Jean issues a receipt in her name.
How much is Jean entitled to apply to her credit?
A. P10,000 C. P30,000
B. P20,000 D. Nothing
19. Jean and John are partners in a certain business, Jean being the managing partner. Ruth owes Jean P50,000 and the
partnership P100,000, and both credits are demandable. Ruth pays Jean P30,000 and Jean issues a receipt in the
partnership’s name. How much should Jean apply to the partnership’s credit?
A. Nothing C. P20,000
B. P30,000 D. P10,000

20. Jean and John are partners in a certain business, Jean being the managing partner. Ruth owes Jean P50,000 (more
onerous) and the partnership P100,000, and both credits are demandable. Ruth pays Jean P30,000 and Jean issues a
receipt in the partnership’s name. How much should Jean apply to the partnership’s credit?
A. Nothing C. P20,000
B. P30,000 D. P10,000
21. The management of the partnership may be vested (1) in the articles of the partnership and/or (2) after the partnership
had already been constituted.
A. 1 only C. Neither of 2
B. 2 only D. Either of 2
22. If there is no agreement on who will manage the partnership, it is vested in:
A. The partner with highest contribution C. All of the partners
B. The partners with majority stake D. The oldest partner
23. Ruth, Carlo, Maricel, and Dustin organized a general partnership, with Ruth and Carlo as industrial partners and Maricel,
who contributed P30,000 to the common fund, and Dustin, who contributed P10,000 to the common fund as capitalist
partners. Ruth and Carlo were both appointed managing partners without any specification of their respective duties.
When the firm commenced business operations, the 2 appointed Olive as accountant of the firm. A year later, Ruth decided
to dismiss Olive, but this was opposed by Carlo. How can the conflict between Ruth and Carlo be resolved?
A. Dustin and Maricel will decide. C. Maricel will decide
B. Ruth and Carlo will decide. D. Ruth prevails
24. Ruth, Carlo, Maricel, and Dustin organized a general partnership, with Ruth and Carlo as industrial partners and Maricel,
who contributed P30,000 to the common fund, and Dustin, who contributed P10,000 to the common fund as capitalist
partners. Nobody was appointed managing partner. When the firm commenced business operations, the Ruth and Carlo
appointed Olive as accountant of the firm. A year later, Ruth decided to dismiss Olive, but this was opposed by Carlo. How
can the conflict between Ruth and Carlo be resolved in case of a tie?
A. Majority of the partners will decide. C. Maricel will decide
B. Dustin and Maricel will decide. D. Ruth prevails
25. Gem, Mondy and Maddie formed a general partnership with the following contributions to the common fund: Gem,
P20,000; Mondy, P40,000; Maddie, P60,000. There was agreement on the division of profits and apportionment of losses
proportionate to their capital contributions. After some years of business operations, the assets of the partnership
dwindled to P30,000, so the partners agreed to stop their business. The partnership is indebted to Sansa for a loan of
P120,000. Under the circumstances, how much can Sansa collect from the partners?
A.Gem, P15,000; Mondy, P30,000; Maddie, P45,000
B.Gem, P20,000; Mondy, P40,000; Maddie, P60,000
C. Gem, P30,000; Mondy, P30,000; Maddie, P30,000
D.Gem, P40,000; Mondy, P40,000; Maddie, P40,000
26. Rosh, Juju and Anna formed a partnership under the where Rosh’s participation is 40%; Juju, 40%; and Anna, 20%.
Rosh and Juju would supply the entire capital. Anna would contribute her management expertise and be manager for
the first 5 years without compensation. They also agreed that Anna shall not liable for losses. Unfortunately, the
partnership became bankrupt. Who can remove Anna as manager?
A. Rosh C. None
B. Juju D. The partner/s with controlling interest
27. Rosh, Juju and Anna formed a partnership under the where Rosh’s participation is 40%; Juju, 40%; and Anna, 20%.
Rosh and Juju would supply the entire capital. Anna would contribute her management expertise and be manager for
the first 5 years without compensation. They also agreed that Anna shall not liable for losses. Unfortunately, the
partnership became bankrupt. What is the status of the agreement exempting Anna from losses?
28. It refers to that moment when partnership affairs are wound up.
A. Winding up C. Termination
B. Dissolution D. Liquidation
29. When does the right of a partner to demand an accounting of the partnership business prescribes?
A.4 years upon the dissolution of the partnership when the final accounting is done.
B.4 years upon the dissolution of the partnership before the final accounting is done.
C. 5 years upon the dissolution of the partnership when the final accounting is done.
D.5 years upon the dissolution of the partnership before the final accounting is done.
30. Distinguish between a general partner and a limited partner.

A. A general partner can be held personally liable for partnership obligations after all of the assets of the
partnership have been exhausted, where a limited partner cannot be held liable.
B. A general partner may not participate in the management of the partnership, whereas a limited partner may.
C. A general partner may contribute money or other property only to the common fund, whereas a limited partner may
contribute money, property, or industry.
D. The name of a general partner may not appear in the firm name, whereas that of a limited partner may.
31. First Statement: The interest of a limited partner is assignable.
Second Statement: An assignee of a limited partner has the right to become a substituted limited partner if all the
members consent thereto or if the assignor, being thereunto empowered by the certificate of limited partnership, gives
the assignee that right.
A. Only first statement is true. C. Both statements are true.
B. Only second statement is true. D. None of the statements is true.

32. If the partnership is a general partnership, the order of payment is as follows, those owing to: (1) creditors other than
partners, (2) partners other than for capital and profits, (3) partners in respect of capital, and (4) partners in respect
of profits.
A. 1, 2, 3, 4 C. 1, 3, 2, 4
B. 1, 2, 4, 3 D. 1, 3, 4, 2
33. If the partnership is a limited partnership, the order of payment is as follows, those to: (1) creditors, in the order of
priority as provided by law, except those to limited partners on account of their contributions, and to general partners,
(2) limited partners in respect to their share of the profits and other compensation by way of income on their
contributions, (3) limited partners in respect to the capital of their contributions,
(4) general partners other than for capital and profits, (5) general partners in respect to profits, and (6) general
partners in respect to capital.
A. 1, 2, 3, 4, 5, 6 C. 1, 2, 4, 3, 5, 6
B. 1, 2, 3, 4, 6, 5 D. 1, 2, 3, 5, 4, 6
34. Dissolution is caused when a specific thing, which had promised to contribute to the partnership, perishes
A. Upon the delivery C. After the delivery
B. Before the delivery D. After the partnership acquires ownership thereof
35. On application by or for a partner, the court shall decree a dissolution whenever:
A. A partner becomes in any other way capable of performing his part of the partnership contract.
B. A partner has been innocent of such conduct as tends to affect prejudicially the carrying on of the business.
C. A partner has been declared insane in any judicial proceeding or is shown to be of unsound mind.
D. A partner unwillfully or persistently commits breach of the partnership agreement, or otherwise so conducts himself
in matter relating to the partnership business that it is not reasonably practicable to carry on the business in
partnership with him.
36. First Statement: The court can decree a dissolution if the business of the partnership can only be carried on at a loss.
Second Statement: The court can decree a dissolution if the circumstances render a dissolution equitable.
A. Only first statement is true. C. Both statements are true
B. Only second statement is true. D. Both statements are false
37. On the application of the purchaser of a partner’s interest, dissolution is caused (1) at the termination of the specific
term or particular undertaking, or (2) at any time if the partnership was a partnership at will when the interest was
assigned or when the charging order was issued.
A. 1 only C. None of them
B. 2 only D. Both of them
38. The dissolution of the partnership terminates all authority of the managing partner or of any partner, as the case
may be, to act for the partnership, except (1) acts necessary to wind up partnership affairs, (2) acts necessary to
complete transactions begun but not then finished, and (3) acts or transactions which would bind the partnership if
dissolution had not taken place.
A. 1 and 2 only C. 2 and 3 only
B. 1 and 3 only D. All three
39. If the winding up or liquidation of partnership affairs is judicial, who has the right or duty to wind up or liquidate
partnership affairs?
A. Partner or legal representative or assignee designated by the partners
B. Partner or legal representative or assignee designated by the court
C. Managing partner
D.Notary public
40. When there is no managing partner, or even when there is, he dies, the right or duty to wind up or liquidate partnership
affairs devolves upon the (1) partners who have not wrongfully dissolved the partnership, or
(2) legal representative of the last surviving partner, not insolvent.
A. 1 only C. Any of the two
B. 2 only D. None of the two
1. A 11. C 21. D 31. C

2. C 12. B 22. C 32. A
3. B 13. D 23. C 33. A
4. A 14. C 24. C 34. B
5. A 15. A 25. A 35. C
6. D 16. A 26. D 36. C
7. D 17. C 27. A 37. D
8 A 18. A 28. C 38. D
9. A 19. B 29. A 39. B
10. C 20. B 30. A 40. C

RFBT-06
LAW ON CORPORATIONS
DEFINITION AND ATTRIBUTES
DEFINITION: A corporation is an artificial being created by operation of law, having the right of succession and the powers,
attributes and properties expressly authorized by law or incident to its existence.
ATTRIBUTES:
1. ARTIFICIAL BEING – it has a juridical personality, separate and distinct from the persons composing it.
CORPORATE ENTITY THEORY
As a legal entity, the corporation is possessed with a juridical personality separate and distinct from the individual
stockholders or members and is not affected by the personal rights, obligations or transactions of the latter.
PIERCING THE VEIL OF CORPORATE ENTITY: The applicability of the corporate entity theory is confined to legitimate
transactions and is subject to equitable limitations to prevent its being used as a cloak or cover for fraud or illegality, or to
work injustice.
When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, defend crime, the law
will regard the corporation as a mere association of persons, or in the case of two corporations, merge them into one, the
one being merely regarded as part or instrumentality of the other. The same is true where a corporation is a mere dummy
and serves no business purpose and is intended only as a blind, or an alter-ego or business conduit for the sole benefit of
the stockholders.
In cases where the doctrine of piercing the veil of corporate fiction, the concept of a separate juridical personality shall be
set aside.
2. CREATED BY OPERATION OF LAW – the formal requirement of the State’s consent through compliance with the
requirements imposed by law is necessary for its creation such that the mere agreement of the persons composing it or
intending to organize it does not warrant the grant of its independent existence as a juridical entity.
COMMENCEMENT OF CORPORATE EXISTENCE: is at the time of the issuance of the Certificate of Incorporation or
Registration. It is only from this time that it acquires juridical personality and legal existence, EXCEPT:
a. Corporations by Estoppel;
b. Those created by special laws;
c. Sole Corporation – which is reckoned from the filing of verified articles.
3. RIGHT OF SUCCESSION – unlike in a partnership, the death, incapacity or civil interdiction of one or more of its
stockholder does not result in its dissolution; this is otherwise referred to as the corporation’s “strong” juridical personality.
4. POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTDHORIZED BY LAW – it can exercise only such powers
and can hold only such properties as are granted to it by the enabling statutes unlike natural persons who can do anything
as they please.
Powers of a corporation:
a. Express Powers – those expressly authorized by the Corporation Code and other laws, and its Articles of Incorporation.
b. Implied Powers – Those that can be inferred from or necessary for the exercise of EXPRESS powers;
c. Incidental Powers – those that are incidental to the existence of the corporation.
Under the Corporation Code, a Corporation has power and capacity:

a. To sue and be sued in its corporate name;
b. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of
incorporation;
c. To adopt and use a corporate seal;
d. To amend its articles of incorporation in accordance with the provisions of this Code;
e. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with
this Code;
f. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury
stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock
corporation;
g. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and
personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the
corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution;
h. To enter into merger or consolidation with other corporations as provided in this Code (now, a corporation can also
enter into a partnership and joint venture);
i. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific,
civic, or similar purposes: Provided, that no corporation, domestic or foreign (now only foreign), shall give donations
in aid of any political party or candidate or for purposes of partisan political activity;
j. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and
k. Implied Powers: To exercise such other powers as may be essential or necessary to carry out its purpose or purposes
as stated in the articles of incorporation.
ULTRA VIRES ACTS are those which cannot be executed or performed by a corporation because they are not within its
express, inherent, or implied powers as defined by its Articles of Incorporation.

LAW on CORPORATIONS RFBT-06
CLASSES OF CORPORATIONS
STOCK CORPORATIONS Corporations which have capital stock divided into shares and are authorized to distribute
to the holders of such shares dividends or allotments of the surplus profits on the basis of
the shares held are stock corporations.
NON-STOCK CORPORATIONS Corporations which are not authorized to distribute surplus profits.
DOMESTIC CORPORATION are those organized or created under or by virtue of the Philippine laws, either by legislative
act or under the provisions of the General Corporation Law.
FOREIGN CORPORATION are those formed, organized or existing under any laws other than those of the Philippines
CLOSE CORPORATIONS are those whose shares of stock are held by a limited number of persons like the family or
other closely-knit group. There are no public investors and the shareholders are active in
the conduct of the corporate affairs.
OPEN CORPORATIONS are those formed to openly accept outsiders as stockholders or investors. They are
authorized and empowered to list in the stock exchange and to offer their shares to the
public such that stock ownership can widely be dispersed. In which case, they are called
PUBLICLY-LISTED CORPORATIONS.
PRIVATE CORPORATIONS those formed for some private purpose, benefit, aim or end. They are created for the
immediate benefit and advantage of the individuals or members composing it and their
franchise may be considered as privileges conferred by the State to be exercised and
enjoyed by them in the form of the corporation.
PUBLIC CORPORATIONS those formed or organized for the government of a portion of the State or any of its political
subdivisions and which have for their purpose the general good and welfare.
ECCLESIASTICAL are composed exclusively of ecclesiastics organized for spiritual purposes or for
CORPORATIONS administering properties held for religious ones. They are organized to secure public
worship or perpetuating the right of a particular religion.
LAY CORPORATIONS are those organized for purposes other than religion. They may further be classified as:
a. ELEEMOSYNARY: created for charitable and benevolent purposes such as those
organized for the purpose of maintaining hospitals and houses for the sick, aged or poor.
b. CIVIL: organized not for the purpose of public charity but for the benefit, pecuniary or
otherwise, of its members.
AGGREGATE CORPORATIONS are those composed of a number of individuals vested with corporate powers.
CORPORATION SOLE those consist of one person or individual only and who are made as bodies corporate and
politic in order to give them some legal capacity and advantage which, as natural persons,
they cannot have. Under the Code, a corporation sole may be formed by the chief
archbishop, bishop, priest, minister, rabbi, or other presiding elder or religious
denominations, sects or churches.
Classes of Corporations according to validity of formation:
Compliance with requirements for valid Separate and distinct Questioning the personality of the
incorporation personality from corporation
stockholders Direct Attack* Collateral
Attack**
De Jure Full compliance Yes No No
Corporation
De Facto Requisites for existence: Yes Yes, via quo No
Corporation 1. There exists a valid law under warranto
which it may be incorporated;
2. An attempt in good faith to
incorporate (colorable compliance)
3. Use of corporate powers
Corporation No compliance at all. The persons who None, stockholders Yes Yes
by Estoppel compose it only set themselves out as a are liable as general
corporation. partners
*Direct Attack: means the very subject of the case is the legal existence or personality of the corporation. This is allowed in a
de facto corporation via a quo warranto proceeding.
**Collateral Attack: means that the main subject of the case is other than attacking the personality of the corporation, but it is
questioned as a side subject.
ORGANIZATION AND INCORPORATION
1. PROMOTIONAL STAGE: undertaken by the organizers or promoters who bring together persons interested in the business
venture. They enter into contract either in their own names or in the name of the proposed corporation.
A promoter, although he may assume to act for and on behalf of a projected corporation and not for himself, will be held
personally liable on contracts made by him for the benefit of a corporation he intends to organize. The personal liability
continues even after the formation of the corporation unless there is novation or other agreement to release him from
liability.
2. PROCESS OF INCORPORATION: includes the drafting of the Articles of Incorporation, preparation and submission of
additional and supporting documents, filing with the SEC, and the subsequent issuance of the Certificate of Incorporation.
Contents of the Articles of Incorporation:

a. The name of the corporation;
The name of the corporation is essential to its existence since it is through it that it can act and perform all legal acts.
Each corporation should therefore, have a name by which it is to sue and be sued and do all legal acts.

Thus, the organizers must make sure that the name they intend to use as a corporate name is not similar or
confusingly similar to any other name already registered and protected by law since the SEC would refuse
registration if such be the case.
This requirement is now specifically indicated in the Revised Corporation Code.
b. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has
more than one stated purpose, the articles of incorporation shall state which is the primary purpose and
which is/are the secondary purpose or purposes: Provided, that a non-stock corporation may not include
a purpose which would change or contradict its nature as such;
The statement of the objects or purpose or powers in the charter results practically in defining the scope of authority
of the corporate enterprise or undertaking. This statement both congers and also limits the actual authority of the
corporate representatives.
The reasons for requiring a statement of the purposes or objects:

1. In order that the stockholder who contemplates on an investment in a business enterprise shall know within what
lines of business his money is to be put at risks;
2. So that the board of directors and management may know within what lines of business they are authorized to
act; and
3. So that anyone who deals with the company may ascertain whether a contract or transaction into which he
contemplates entering is one within the general authority of the management.
SECONDARY PURPOSE: Although the Corporation Code does not restrict nor limit the number of purpose or purposes
which a corporation may have, Sec. 14 thereof, requires that if it has more than one purpose, the primary purpose as
well as the secondary ones must be indicated therein.
GENERAL LIMITATIONS:
1. The purpose or purposes must be lawful;
2. The purpose must be specific or stated concisely although in broad or general terms;
3. If there is more than one purpose, the primary as well as the secondary ones must be specified; and
4. The purposes must be capable of being lawfully combined
c. The place where the principal office of the corporation is to be located, which must be within the
Philippines;
It must be located within the Philippines. The AOI must not only specify the province, but also the City or Municipality
where it is located.
The principal office serves as the residence of the corporation and is thus important in:
i. venue of actions;
ii. registration of chattel mortgage of shares;
iii. validity of meetings of stockholders in so far as venue thereof is concerned.
d. The term for which the corporation is to exist, if the corporation has not elected perpetual existence;
A corporation now generally has perpetual existence since the Revised Corporation Code removed the limitation of
50 years unless the Articles of Incorporation would provide otherwise.
This equally applies to already existing corporations, except if by majority vote of its stockholders, it notifies the SEC
to retain its specific corporate term.
Definite Term: If the corporation would opt to have a definite term for its existence, any extension thereof can be
made no earlier than 3 years (from 5 years) prior to expiry date, unless there are justifiable reasons to allow earlier
extension.
Revival: Also under Sec. 11, after the expiration of the corporate term, a corporation may file for revival of its
corporate existence. Upon approval by the Commission, the corporation shall be deemed revived and a certificate of
revival of corporate existence shall be issued, giving it perpetual existence, unless its application for revival provides
otherwise.
e. The names, nationalities and residence addresses of the incorporators;
CORPORATORS apply to all who compose the corporation at any given time and need not be among those who
executed the AOI at the start of its formation or organization.
INCORPORATORS are those mentioned in the AOI as originally forming the corporation and who are signatories in
the AOI.
An incorporator may be considered as a corporator as long as he continues to be a stockholder or a member, but not
all corporators are incorporators.
Number of Incorporators: not more than 15 (previously 5 to 15)
Qualifications:
1. Must be natural persons (now can also include a partnership, association or corporation)
2. Of Legal Age (still a requirement for natural person-incorporators under SEC MC No. 16-2019)
3. Must own or subscribe to at least 1 share.
4. Majority must be residents of the Philippines (already removed)

f. The number of directors which shall not be more than fifteen (15) or the number of trustees which may
be more than fifteen (15);
DIRECTORS compose the governing board in stock corporations which should not exceed 15.
TRUSTEES pertain to non-stock corporations which may exceed 15.
INDEPENDENT DIRECTORS: Section 22 of the RCC, the following corporations vested with public interest shall have
independent directors constituting at least 20% of such board:
1. Corporations covered by the Securities Regulations Code;
2. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service business, pre-need, trust
and insurance companies, and other financial intermediaries; and
3. Other corporations engaged in business vested with public interest similar to the above, as may be determined by
the SEC.
An independent director is a person who, apart from shareholdings and fees received from the corporation, is
independent of management and free from any business or other relationship which could, or could reasonably be
perceived to materially interfere with the exercise of independent judgment in carrying out the responsibilities as a
director
g. The names, nationalities and residences of persons who shall act as directors or trustees until the first
regular directors or trustees are duly elected and qualified in accordance with this Code;
h. If it be a stock corporation, the amount of its authorized capital stock, the number of shares into which it
is divided, the par value of each, the names, nationalities and residences of the original subscribers, and
the amount subscribed and paid by each on his subscription, and a statement that some or all of the shares
are without par value, if applicable;
This requirement that at least 25% of the authorized capital stock must be subscribed and that 25% of the subscription
must be paid-up has already been removed under the Revised Corporation Code, but still applies to increase in
authorized capital stock.
AUTHORIZED CAPITAL signifies the MAXIMUM amount fixed in the articles to be subscribed and paid-in or secured
to be paid by the subscribers. It may also refer to the maximum number of shares that a corporation can issue.
SUBSCRIBED CAPITAL STOCK is the total number of shares and its total value for which there are contracts for their
acquisition or subscription.
PAID UP CAPITAL STOCK or paid-in capital is the actual amount or value which has been actually contributed or
paid to the corporation in consideration of the subscriptions made thereon.
Considerations for stocks:

1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and
lawful purposes at a fair valuation equal to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.
AMENDMENT: Consideration for stocks under Section 61 (formerly Section 60) now includes:
1. Shares of stock in another corporation; and/or
2. Other generally accepted form of consideration.
Note:
• Stocks cannot be issued for a consideration less than the par or issue price thereof.
• Promissory notes or future service cannot be considered valid consideration for stocks.
OUTSTANDING CAPITAL STOCK: total number of shares issued, including those which are subscribed and not yet
fully paid, but excluding treasury shares.
i. If it be a non-stock corporation, the amount of its capital, the names, nationalities and residence addresses
of the contributors and the amount contributed by each; and
j. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and
convenient.
RESTRICTIONS AND PREFERENCES:
If the corporation desires to grant such options, restrictions and/or preferences, the same must be indicated in the
AOI AND in all of the stock certificates. Failure to provide the same in the AOI would not bind the purchasers in good
faith despite the fact that the said restriction and/or preference is indicated in the by-laws of the corporation.
In a close corporation, however, such restrictions and preferences must not only appear in the articles of incorporation
and in the stock certificates BUT ALSO be embodied in the by-laws of that close corporation otherwise it may not bind
purchasers in good faith.
OTHER MATTERS TO BE INDICATED IN THE ARTICLES OF INCORPORATION:

1. The name of the Treasurer duly elected by the subscribers
2. No Transfer Clause: in case a corporation is required to maintain a required minimum Filipino ownership,
committing that no transfer shall be made which shall reduce the ownership of Filipino citizens to less than the
required percentage.

3. The Execution Clause: which will contain the names and signatures of the incorporators
4. Notarial Acknowledgment
AMENDMENT: The following were specifically included as those who would be needing a favorable recommendation
from the concerned government agency:
1. Non-Stock Savings and Loans Associations; and
2. Pawnshops.
On the other hand, the following were removed from the enumeration of entities requiring favorable
recommendations:
1. Educational Institutions; and
2. Other corporations governed by special laws.
AMENDMENT OF THE ARTICLES OF INCORORPATION, IN GENERAL WOULD REQUIRE:

a. Majority approval of the members of the Board;
b. Written assent of stockholders representing 2/3 of the outstanding stocks or 2/3 of the members in case of non-stock
corporations.
c. Approval of the SEC. If the SEC did not act on the application within 6 months from the date of filing, the amended is
deemed approved.
BOARD OF DIRECTORS
The Board of Directors (or trustees or other designation allowed under Sec. 138) is the supreme authority in matter of
management of the regular and ordinary business affairs of the corporation.
However, this authority does not extend to the fundamental changes in the corporate charter such as amendments or substantial
changes thereof, which belong to the stockholders as a whole.
Classification of powers of the board members/corporate officers: The general rule is that a corporation is bound
by the acts of its corporate officers who act within the scope of the classifications of powers of corporate agents,
which are:
1. Those expressly conferred or those granted by the articles of incorporation, corporate by-laws or by the official act of
the board of directors;
2. Those that are incidental or those acts as are naturally and ordinarily done which are reasonable and necessary to carry
out the corporate purpose or purposes;
3. Those that are inherent or acts that go with the office;
4. Those that are apparent or those acts which although not actually granted, the principal knowingly allows or permits it to
be done; and
5. Powers arising out of customs, usage or emergency
QUALIFICATIONS AND DISQUALIFICATIONS: The by-laws of a corporation may provide for additional qualifications and
disqualifications of its members of the board of directors or trustees. However, it may not do away with the minimum
qualifications and disqualifications.
Qualifications of a Director/Trustee: Must own at least 1 share in their own names or a member (in the case of trustees).
A director who ceases to own at least 1 share or a trustee who ceases to be a member of the corporation shall cease to be as
such.
Residency: the requirement that majority of the directors must be residents has already been removed by the Revised
Corporation Code.
Disqualifications of a Director/Trustee: A person shall be disqualified from being a director, trustee or officer of any
corporation:
1. If, within 5 years prior to election or appointment as such, the person was Convicted by Final Judgment
a. Of an offense punishable by imprisonment for a period exceeding 6 years;
b. Violation of the Corporation Code;
c. Violation of the Securities Regulations Code
2. Found administratively liable for any offense involving fraud acts; and
3. By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct similar to the
disqualifications under the Code.
4. Such other disqualifications that may be provided in the by-laws.
ELECTION OF MEMBERS OF THE BOARD/TRUSTEES

1. Majority of the outstanding capital stock, whether in person or by written proxy must be present at the election of the
directors; or majority of members entitled to vote, in the case of a non-stock corporation. If the required quorum is not
obtaining, the meeting may be adjourned;
2. On the request of any voting stockholder or member, the election may be held by ballot otherwise viva-voce would suffice.
3. The candidates receiving the highest number of votes shall be elected
Report Requirement: Section 25 of the RCC requires a report within 30 days to be submitted to the SEC in case of non-
holding of elections, which shall include a new date for the election, which shall not be later than 60 days from the scheduled
date.
If no new date has been designated, or if the rescheduled election is likewise not held, the SEC may, upon the application of a
stockholder, member, director or trustee, summarily order that an election be held.
Should a director, trustee or officer die, resign or in any manner cease to hold office, the secretary, or the director, trustee or
officer of the corporation, or in case of death, the officer’s heirs shall, within seven (7) days from knowledge thereof, report in
writing such fact to the SEC.

METHODS OF VOTING:
1. Straight Voting – every stockholder may vote such number of shares for as many persons as there are directors to be
elected. E.g., If a stockholder has 1,000 shares, he gets 1,000 votes.
2. Cumulative Voting:
a. Cumulative voting gives the stockholder entitled to vote the right to give a candidate as many votes as the number of
directors to be elected multiplied by the number of his shares shall equal (Cumulative Voting for one candidate) or he
may distribute them among the candidates as he may see fit (Cumulative voting by distribution)
b. This is granted by law to each stockholder with voting rights. However, in non-stock corporations, cumulative voting
is generally not allowed, UNLESS allowed by the AOI or by-laws.
c. PURPOSE: to allow the minority to have a rightful representation in the board of directors.
REMOVAL AND FILLING-UP OF VACANCIES

1. By-laws may provide for causes or grounds for removal of a director;
2. A director representing the minority may not be removed except for those causes;
3. A director NOT representing the minority may be removed even without a cause.
AMENDMENT: The SEC is now empowered to motu proprio (not just upon verified complaint) and after due notice and
hearing, order the removal of a director or trustee elected despite the disqualification, or whose disqualification arose
or is discovered subsequent to an election.
Requirements for a valid removal:

1. The removal should take place at a general or special meeting duly call for that purpose;
2. The removal must be by the vote of the stockholders holding or representing 2/3 of the outstanding capital stock or the
members entitled to vote in cases of non-stock corporations; and
3. There must be a previous notice to the stockholders or members of the intention to propose such removal at the meeting
either by publication or on written notice to the stockholders or members.
Vacancy:
CAUSE OF VACANCY WHO WILL FILL THE VACANCY WHEN ELECTION WILL BE HELD
Removal Stockholders Same day of the meeting authorizing the removal
Expiration of the term Stockholders No later than the day of such expiration at a
meeting called for that purpose
Other causes (death, Board of Directors – if they still No later than 45 days from the time the vacancy
resignation, abandonment) constitute a quorum; arose
Stockholders – if the Directors no

longer constitute a quorum
Increase in the number of Stockholders In a general or special meeting called for the
Directors purpose or in the same meeting authorizing the
increase in the number of directors
Replacement of Hold-Over Directors: in the event that a director, after the expiration of his term is not replace since there
was no election held, such director can continue to function in a holdover capacity. However, if he resigns, the stockholders will
be the one to replace him even if the remaining directors continue to constitute a quorum. Note that the power of the Board to
fill up the vacancy is only if the director resigns before the expiration of his term. In this instance, the term of the director
already expired, he just continued as such only in a hold-over capacity.
EMERGENCY BOARD: When the vacancy prevents the remaining directors from constituting a quorum and emergency action
is required to prevent grave, substantial, and irreparable loss or damage to the corporation, the vacancy may be temporarily
filled from among the officers of the corporation by unanimous vote of the remaining directors or trustees.
The action by the designated director or trustee shall be limited to the emergency action necessary, and the term shall cease
within a reasonable time from the termination of the emergency or upon election of the replacement director or trustee,
whichever comes earlier. The corporation must notify the SEC within 3 days from the creation of the emergency board, stating
therein the reason for its creation.
DIRECTORS’ DUTY OF LOYALTY
CORPORATE OPPORTUNITY DOCTRINE: it places a director of a corporation in the position of a fiduciary and prohibits him
from seizing a business opportunity and/or developing it at the expense and with the facilities of the corporation. He cannot
appropriate to himself opportunity which in fairness should belong to the corporation.
Ratification: if a director acquires a business opportunity which should belong to the corporation, he is bound to account for
such profits unless his act is ratified by the stockholders owing or representing at least 2/3 of the outstanding capital stock.
ACQUIRING ADVERSE INTEREST ON A MATTER REPOSED IN HIM IN CONFIDENCE: A director liable is to account for
profits if he attempts to acquire or acquires any interest adverse to the corporation in respect to any matter reposed
in him in confidence as to which equity imposes a disability upon him to deal in his own behalf. This is not subject to
ratification.
SELF-DEALING DIRECTORS: is one who deals or transacts business with his own corporation.
Generally, A contract entered into by a director with his own corporation is voidable at the latter’s option. This is because the
director might take advantage of his position to make the terms of the transaction more favorable to him to the detriment of
the corporation.

Except (in which case the transaction will be valid)
1. All of the following are present:
a. That the presence of such director or trustee in the board meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;
b. That the vote of such director or trustee was not necessary for the approval of the contract (see amendment
below);
The approval for transactions of self-dealing directors of corporations vested with public interest shall require:
• At least two-thirds (2/3) of the entire membership of the board, with
• At least a majority of the independent directors.
c. That the contract is fair and reasonable under the circumstances; and
2. Where any of the first two conditions is absent, the contract becomes voidable subject to the ratification of the
stockholders representing 2/3 of the outstanding capital stock – the requirements of which are:
a. there must be a meeting called for that purpose;
b. full disclosure of the adverse interest of the director; and
c. the contract is fair and reasonable under the circumstances.
3. If the self-dealing director owns all or substantially all of the shares of stock, thereby making ratification easily
possible, the reasonableness of the transaction shall be determined - to which there is no yardstick and remains to
be a question of fact depending on the circumstances.
Self-Dealing Officers: Generally voidable as well, except if the contract has been previously authorized by the board of
directors.
INTERLOCKING DIRECTOR: is a director in one corporation who deals or transacts with another corporation of which he is
also a director. In such case, there may effectively be a dual agency, a divided allegiance where allegiance in one corporation
may be subordinated to the other.
General Rule: The contract between corporations with interlocking director is valid provided it is reasonable under the
circumstances;
Exceptions:
1. If there is fraud; or
2. If the interest of the interlocking director in one corporation exceeds 20% (substantial) and in the other merely nominal,
the contract becomes voidable at the latter corporation’s option. In effect, the director would be treated as a self-dealing
director discussed above.
If the interest in both companies is either both substantial or both nominal, the transaction is valid.
REMEDIES AGAINST ERRING OFFICERS/DIRECTORS: In case of a wrongful or fraudulent act of a director, officer or agent,
stockholders have the following options:
1. Individual or Personal Action – for direct injury to his rights, such as denial of his right to inspect corporate books and
records or pre-emptive rights;
2. Representative or Class Suit – in which one or more members of a class sue for themselves as a class or for all to whom
the right was denied, either as an individual action or a derivative suit; and a
3. Derivative Suit – an action based on injury to the corporation – to enforce a corporate right – wherein the corporation
itself is joined as a necessary party, and recovery is in favor of and for the corporation. It is a suit granted to any stockholder
to institute a case to remedy a wrong done directly to the corporation and indirectly to stockholders.
COMMITTEES
EXECUTIVE COMMITTEE: The by-laws of a corporation may create an executive committee, composed of not less than three
members of the Board, to be appointed by the Board.
Said committee may act, by majority vote of all its members, on such specific matters within the competence of the
board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to:
1. Approval of any action for which shareholders’ approval is also required;
2. The filing of vacancies in the board;
3. The amendment or repeal of bylaws or the adoption of new by-laws;
4. The amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and
5. A distribution of cash dividends to the shareholders.
AMENDMENT: The board of directors may create special committees of temporary or permanent nature and to determine
the members’ term, composition, compensation, powers, and responsibilities.
COMPENSATION OF DIRECTORS
Compensation of Directors/Trustees: General Rule: Directors are not entitled to receive any compensation this is because
the office of a director is usually filled up by those chiefly interested in the welfare of the institution by virtue of their interest
in stock or other advantages and such interests are presumed to be the motive for executing duties of the office without
compensation. Except:
1. Reasonable per diems;
2. As provided in the by-laws
3. Upon a majority vote of the stockholders; and
4. If they are performing functions other than that of a director.
Limit: In no case shall the total yearly compensation of the directors (except number 4 above), exceed 10% of the net income
before tax of the corporation during the preceding year. (Section 30)

CORPORATE OFFICERS
ELECTION OF CORPORATE OFFICERS: Except in a close corporation where the corporate officers may be elected directly by
the stockholders, the Code requires the BOD to elect the said officers;
The officers that may be elected are the:

1. President – who must be a director;
2. Treasurer – who may or may not be a director (now required to be a resident);
3. Secretary – who should be a resident and citizen of the Philippines;
4. Such other officers as may be provided for in the by-laws.
Compliance Officer – is now a required corporate officer in corporations vested with public interest.
Any two or more positions may be held concurrently by the same person, except:
1. The president and the secretary;
2. The president and the treasurer.
AUTHORITY OF CORPORATE OFFICERS TO ACT IN BEHALF OF THE CORPORATION: a corporate officer or agent may
represent and bind the corporation in transactions with third person to the extent that authority has been conferred upon him,
and this includes powers which have been:
1. intentionally conferred, and
2. also, such powers as, in the usual course of business, are incidental thereto, or may be implied therefrom,
3. powers added by custom and usage, as usually pertaining to the particular officer or agent, and
4. such apparent powers as the corporation has caused persons dealing with the officer or agent to believe that it has
conferred
LIABILITY OF CORPORATE OFFICERS: The general rule is that unless the law specifically provides a corporate officer or
agent is not civilly or criminally liable for acts done by him as such officer or agent, or when absent bad faith or malice.
PERSONAL LIABILITY of a corporate director, trustee or officer along (although not necessarily) with the corporation may so
validly attach, as a rule, only when:
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or (c) gross negligence in directing its
affairs, or (d) conflict of interest, resulting in damages to the corporation, its stockholders or other persons;
2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate
secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation;
4. He is made, by a specific provision of law, to personally answer for his corporate action.
ELECTION OF CORPORATE OFFICERS: require the majority of ALL MEMBERS of the Board, not just the usual majority of
those present in the meeting. Meaning, if there are 15 members of the Board, and 9 are present, 8 votes would be necessary
to elect a corporate officer.
SHARES OF STOCK
Shares of Stock designate the units into which the proprietary interest in a corporation is divided. They represent the
proportionate units, the sum of which constitutes the capital stock of the corporation. It is likewise the interest or right which
the owner, called the stockholders or shareholder, has in the management of the corporation, and in the surplus profits and
in case of distribution, in all of its assets remaining after the payment of its debts.
Certificate of Stock is a document or instrument evidencing the interest of a stockholder in the corporation.
COMMON STOCKS are those which entitles its owner to an equal or pro-rata division of profits, if there are any, but without
any preference or advantage in that respect over any other stockholder or class of stockholders.
Voting Rights: A common share usually carries with it the right to vote, and frequently, the exclusive right to do so. The only
time a common stock’s right to vote may be limited is where there exists Founders’ Shares.
FOUNDER’S SHARES: are shares issued to the founders of the corporation which are granted certain right and privileges such
as the exclusive right to vote and be voted for in the election of directors, for a period not to exceed 5 years.
The period of 5 years is non-extendable because it may result in the almost perpetual disqualification of other stockholders to
elect or be elected as members of the BOD resulting to the lack of proper representation thereat.
PREFERRED STOCKS is a stock that gives the holder preference over the holder of common stocks with respect to the payment
of dividends and/or with respect to distribution of capital upon liquidation.
Limitations imposed by the Code in the issuance of preferred stocks:

1. They can be issued only with a stated par value; and
2. The preference must be stated in the AOI and in the certificate of stock otherwise each share shall be, in all respect, equal
to every other share.
Preference as to Dividends: They have the privilege of being paid dividends first before any other stockholders are paid
theirs.
Participating and Non-Participating Preferred Shares

If the preferred share is participating, they are entitled to participate in dividends with the common shareholders beyond their
stated preference. Non-participating preferred shares on the other hand are entitled to its fixed priority or preference only.

Cumulative and Non-cumulative Preference Shares
Cumulative preferred shares are those that entitle the owner thereof to payment not only of current dividends but also back
dividends not previously paid whether or not, during the past years, dividends were declared or paid. In light of the provision
of the Code stating that all shares are equal in all respects unless otherwise stated in the AOI, a preferred share to be considered
cumulative, the same must be provided for and specified in the certificate.
Non-cumulative preferred shares are those which grant the holders of such shares only to the payment of current dividends but
not back dividends, when and if dividends are paid, to the extent agreed upon before any other stockholders are paid the same.
Voting Rights of Preferred Shares: same with redeemable shares, preferred shares are usually denied voting rights – but
this right must be clearly withheld. However, even if the right to vote is withheld, they shall have the right to vote on the
following:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;
AMENDMENTS: In determining whether the sale involved covers all or substantially all the properties and assets of the
corporation, the old Section 40 only provides “if thereby the corporation would be rendered incapable of continuing the
business or accomplishing the purpose for which it was incorporated”.
Section 39, amending the above-mentioned provision now includes “The determination of whether or not the sale involves
all or substantially all of the corporation’s properties and assets must be computed based on its net asset value, as shown
in its latest financial statements.”
4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation.
Preference upon liquidation: this preference must be stated in the contract to accordingly grant such preference in the
distribution of the assets ahead of the common stockholders, including dividends in arrears in case the preferred shares are
cumulative.
PAR AND NO-PAR VALUE SHARES

Par Value Shares are those whose values are fixed in the Articles and shown on the certificate. The par value is the minimum
subscription or original issue price of the shares.
No Par Value Shares are those whose issued price are not stated in the certificate of stock but may be fixed in the AOI, or by
the BOD when so authorized the articles or the by-laws, or in the absence thereof, the stockholders themselves.
The Code allows the issuance of no par value shares, subject to the following limitations:
1. Such shares once issued, are deemed fully paid and thus, non-assessable;
2. The consideration for its issuance should not be less than P5;
3. The entire consideration constitutes capital, hence, not available for dividend declaration;
4. They cannot be issued as preferred stock; and
5. They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loans associations.
WATERED STOCKS: Watering of stocks happened when the shares are issued at less than its par value or issue price.
REDEEMABLE SHARES: are those subject to redemption, as indicated in the contract. This type of shares grants the
corporation the right to repurchase the shares at its option or at the option of the holder based on the face or issued value plus
a specified premium. The redemption may be optional or mandatory at a fixed future date.
The repurchase is not subject to the availability of unrestricted retained earnings.
TREASURY SHARES: are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing
corporation by purchase, redemption, donation or through some other lawful means. Subsequently, the corporation can re-
issue the shares of stock or sell them or declare them as property dividends.
Such shares, though paid for already, do not form part of outstanding shares and accordingly, do not have the right to vote and
receive dividends.
SUBSCRIPTION CONTRACT: Any contract for the acquisition of unissued stock in an existing corporation or a corporation still
to be formed shall be deemed a subscription, notwithstanding the fact that the parties refer to it as a purchase or some other
contract.
Pre-incorporation subscriptions: refer to subscriptions for shares of stock of a corporation still to be formed and are deemed
irrevocable:
1. For a period of at least 6 months from the date of subscription unless (a) all the subscribers consent to the revocation; or
(b) the incorporation fails to materialize within said period or within a longer period as may stipulated in the contract of
subscription; and
2. After submission of the AOI to the SEC
While post-incorporation subscriptions are those made or executed after the formation or organization of the corporation.
Issuance of certificates of stock; requisites:

1. It must be signed by the president or vice-president and countersigned by the secretary or assistant secretary;
2. It must be sealed with the corporate seal, and
3. The entire value thereof (together with the interest or expenses, if any) should have been paid.

Indivisibility: Subscription to shares of stock are deemed indivisible and no certificate of stock can be issued unless and until
the full amount of his subscription including interest and expenses, if any is paid.
Rights of a SUBSCRIBER: a subscriber, even if not yet fully paid, is entitled to exercise all the rights of a stockholder and the
corresponding liability that attach thereunder, except:
1. For the issuance of a certificate of stock;
2. If his shares are declared delinquent; or
3. When he exercises appraisal right.
Delinquent Shares of Stock: a subscription to shares of stock become delinquent if there no payment made on the balance
of all or any portion of the subscription within 30 days on the date or dates fixed in the contract of subscription without need of
call, or on the date specified by the BOD pursuant to a call.
Effect of Delinquency:
General Rule: the stockholder thereof immediately loses the right to vote and be voted upon or represented in any
stockholders meeting as well as all the rights pertaining to a stockholder
Except: the right to receive dividends:

1. Cash dividend - shall first be applied to the unpaid balance on his subscription plus cost and expenses; while
2. Stock dividends - shall be withheld until his unpaid subscription is paid in full.
Delinquent shares; enforcement of payment of subscriptions: Unpaid subscription or any percentage thereof, together
with interest if required by the by-laws or the contract of subscription, shall be paid either:
1. On the date or dates fixed in the contract or subscription;
2. On the date or dates that may be specified by the BOD pursuant to a “call” declaring any or all unpaid portion thereof to
be so payable
To enforce payment, the following remedies are available:

1. By board action; and
2. By a collection case in court.
Failure or refusal of the BOD to enforce or collect payment of unpaid subscription will not prevent the creditors or the receiver
of the corporation to institute a court action to collect the unpaid portion thereof.
Delinquency Sale:
1. Amount to be paid includes:
a. The balance due on each subscription
b. All accrued interest
c. Costs of advertisement
d. Expenses of sale
2. Bids: shall all be for the amount due above and shall differ only on the number of shares that the bidders are willing to
accept in exchange of the said amount.
3. Highest Bidder: shall be the bid made for the least number of shares in exchange for the total amount due.
4. Effect of Delinquency Sale: The stock so purchased shall be transferred to such purchaser in the books of the corporation
and a certificate for such stock shall be issued in his favor. The remaining shares, if any, shall be credited in favor of the
delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares.
5. No bidder: Should there be no bidder at the public auction, the corporation may bid for the same, and the total amount
due shall be credited as paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription
shall be vested in the corporation as treasury shares.
RIGHTS OF A STOCKHOLDER
1. Participation in the management of the corporate affairs by exercising their right to vote and be voted upon either
personally or by proxy;
Instances where the concurrence of the stockholders are necessary for the exercise of the powers of the
corporations
a. Requiring majority vote of the BOD and concurrence of the stockholders representing 2/3 of the outstanding
capital stock:
i. Increase/decrease corporate stock
ii. Incur or create bonded indebtedness;
iii. Sell, dispose, lease, encumber all or substantially all of corporate assets;
iv. Invest in another corporation other than the primary purpose;
v. Amend the articles of incorporation.
vi. Merger or consolidation
vii. Voluntary dissolution of the corporation
AMENDMENT: Voluntary dissolution now requires a majority vote only of the stockholders for instances with
NO creditors affected. For voluntary dissolutions where creditors are affected, the voting requirement remains
to be 2/3.
viii. Extend or shorten the corporate term;

ix. Deny pre-emptive right
x. Declare stock dividends
xi. Enter into a management contract - where
a. a stockholder(s) representing the same interest in the managed and the managing corporation, owns or
controls 1/3 of the capital stock of the managing corporation; or
b. where a majority of the members of the board of the managing corporation also constitute a majority of the
board of the managed corporation.

b. Majority of the BOD + majority of the outstanding capital:
i. Enter into a management contract, as a general rule (other than above);
ii. adopt, amend or repeal the by-laws
c. Without board resolution, 2/3 of the stockholders may:

i. Delegate to the board the power to amend the by-laws
ii. Remove a member of the Board of Directors – vote required
iii. Ratify a business opportunity entered into by a member of the Board (corporate opportunity doctrine)
iv. Ratification of contracts of self-dealing directors, where his presence is required to constitute a quorum and/or his
vote is required for its approval by the BOD.
d. Without board resolution, majority of the stockholders may:

i. Revoke delegated power to amend by-laws
ii. Calling a special meeting to remove directors
iii. To fix compensation of directors
iv. To fix the issue price or stated value of no-par value shares.
2. To enter into a voting trust agreement;

3. To receive DIVIDENDS and to compel their declaration if warranted;
If the dividends to be declared are stock dividends, it requires not only the majority vote of the BOD but also the approval
of stockholders owning at least 2/3 of the outstanding capital stock.
The BOD can be compelled to declare dividends if the retained earnings are in excess of 100% of the paid-up capital.
However, the BOD can still refuse, if:
a. Justified by a definite corporate expansion/projects/programs approved by the Board;
b. The corporation is prohibited under a loan agreement to declare dividends without the creditor’s consent and such
consent has not yet been secured;
c. It can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation.
If there are no retained earnings, dividends, as a rule, cannot be declared out of capital stock. EXCEPT:
a. Liquidating dividends
b. Investments in wasting assets such as mining, oil, well, etc.
4. To transfer shares of stock subject only to reasonable restrictions such as the options and preferences as may be allowed
by law inclusive of the right of the transferee to compel the registration of the transfer in the books of the corporation;
5. To be issued a certificate of stock for fully paid-up shares;
6. To exercise pre-emptive rights;
A pre-emptive right is the shareholder’s right to subscribe to all issues or disposition of shares of any class in proportion to
his present holdings, the purpose being to enable the shareholder to retain his proportionate control in the corporation and
to retain his equity in the surplus. Except in the following cases:
a. Shares to be issued to comply with the laws requiring stock offering or minimum stock ownership by the public;
b. Shares issued in good faith in exchange for property needed for corporate purposes;
c. Shares issued in payment for previously contracted debt;
d. In case the right is denied in the Articles of Incorporation;
If one shareholder does not want to exercise his pre-emptive right, the other shareholders are not entitled to purchase the
corresponding shares of the shareholder who declined. But if nobody purchased the same and later on the board re-issued
the shares, the pre-emptive right applies.
7. To exercise their appraisal right
APPRAISAL RIGHT: Right is the method of paying a shareholder for the taking of his property. It is a statutory means
whereby a stockholder can avoid the conversion of this property into another property not of his own choosing.
When may it be exercised:

a. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any
stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of
any class, or of extending or shortening the term of corporate existence;
Not all amendments: the right may only be exercised in cases of amendment which “has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to
those of outstanding shares of any class, or of extending or shortening the term of corporate existence”.
Accordingly, if the amendment is to increase or decrease the number of directors, or change the corporate name, or
change of principal office, the appraisal right is not available.
b. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the
corporate property and assets as provided in the Code;
c. In case of merger or consolidation;
d. Investment of funds in another corporation or business or for any other purpose other than its primary purpose;
e. In a close corporation, a stockholder has the unbridled right to compel the corporation “for any reason” to purchase
his shares at their fair value which shall not be less than the par or issued value, when the corporation has sufficient
assets to cover its debts and liabilities, exclusive of capital stock.
Suspension of rights: the stockholder concerned is regarded as having made an election to withdraw from the corporate
enterprise and take the value of his stock. Such a procedure suspends (for a maximum period of 30 days) certain ownership
rights associated with stockholder status, such as the right to receive dividends or distribution and the right to vote which
cannot be restored without compliance with the governing statutory conditions.

8. To institute and file a derivative suit;
9. To recover shares of stock unlawfully sold for delinquency;
10. To inspect the books of the corporation;
AMENDMENTS: Section 73 (formerly Section 74) introduced the following amendments:

a. Includes an enumeration of, and specified, the records to be kept in the principal place of business.
b. Specifies that the inspection of the books and records are bound by the Intellectual Property Law, the Data Privacy
Act, the Securities Regulations Code and the Rules of Court.
c. A requesting party who is not a stockholder or member of record, or is a competitor or otherwise represents the
interests of a competitor shall have no right to inspect or demand reproduction of corporate records.
d. Abuse of the right to inspect is punishable under Section 158.
e. If the corporation denies or does not act on a demand for inspection and/or reproduction, the aggrieved party may
report such to the SEC. Within five (5) days from receipt of such report, the SEC shall conduct a summary
investigation and issue an order directing the inspection or reproduction of the requested records.
f. the SEC may require stock corporations which transfer and/or trade stocks in secondary markets to have an
independent transfer agent.
11. To be furnished by the most recent financial statement of the corporation;
AMENDMENT: Changes introduced by Section 74 (formerly Section 75) concerning the issuance of the corporation’s
financial statements are as follows:
Section 75 (old) Section 74 (RCC)

Certification Independent CPA In accordance with the Code and the rules the SEC
may prescribe
Alternative If paid-up capital is less than P50,000, the FS may If the total assets or total liabilities of the
Certification be certified under oath by the Treasurer or any corporation is less than P600,000, or such other
responsible officer of the corporation amount as may be determined appropriate by the
Department of Finance, the financial statements
may be certified under oath by the treasurer and
the president.
12. To participate in the distribution of assets of the corporation upon dissolution;

13. In the case of a close corporation, to petition the SEC to arbitrate in the event of a deadlock;
14. Also, in the case of a close corporation, to withdraw therefrom, for any reason, and compel the corporation to
purchase his shares.
BY-LAWS
BY-LAWS are rules made by a corporation for its own government; to regulate the conduct and define the duties of the
stockholders or members towards the corporation and among themselves. They are the rules and regulations or private laws
enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholder or members
and directors and officers with relation thereto and among themselves in their relation to it.
Effectivity: After approval by the SEC.
Adoption of by-laws: may be made:

1. Prior to incorporation – it must be signed by all the incorporators without need of the majority vote of outstanding stocks
or members as long as it is submitted together with the AOI;
2. After incorporation – must be submitted within 1 month after receipt of the notice of issuance of certificate of registration
or incorporation and must be approved by majority of the outstanding capital stock or members. Failure to file within the
1 month period may be a ground for suspension or revocation of the corporate franchise.
AMENDMENT: Section 45 (amending Section 46) of the RCC removed the one-month (from receipt of the notice of
issuance of the certificate of incorporation) requirement to submit the by-laws.
Amendment of by-laws; two modes:

1. By a majority vote of the directors or trustees and the majority vote of the outstanding capital stock or members, at a
regular or special meeting called for that purpose; or
2. By the board of directors alone when delegated by stockholders owning 2/3 of the outstanding capital stock or 2/3 of the
members. This power, however, is considered revoked, when so voted by a majority of the outstanding capital stock or
members in a regular or special meeting.
AMENDMENTS: Section 46(d) of the RCC now includes “The modes by which a stockholder, member, director, or trustee
may attend meetings and cast their vote.”
It likewise includes that an arbitration agreement may be provided in the bylaws.
The submission of the amended by-laws no longer requires that it be filed with the SEC attached to the original articles of
incorporation and original bylaws.

MEETINGS
DIRECTORS STOCKHOLDERS
Quorum Majority Majority of the Outstanding Capital Stock
Date of Regular Monthly as fixed in the by-laws Annual as fixed in the by-laws. If no such date is
Meeting fixed, any date after April 15.
Date of Special At any time deemed necessary or as provided for At any time deemed necessary or as provided for in
Meeting in the by-laws the by-laws
Notice Regular/Special Meetings – 2 days prior to the Regular Meetings – 21 days (from 2 weeks)
meeting (from 1 day prior to the meeting) Special Meetings – 1 week
Place Anywhere (even outside the Philippines) The meeting shall not be at the principal office
itself, unless it is not practicable, in the city or
municipality where the principal office is located.
Moreover, Metro Cebu and Metro Davao, as well as

other Metropolitan Areas are now considered a city
or municipality.
Proxy Voting Not allowed for a director or trustee, since he was Generally allowed
supposedly elected because of his personal
qualifications and thus must personally attend
and vote on matters brought before the meeting.
Voting General Rule: Majority of those present shall be Refer to voting requirements under Rights of
Requirement valid as a corporate act. Stockholders
Exceptions:
a. Election of corporate officers: majority of all
the members of the board.
b. When the by-laws provide for higher voting
requirement.
Validity of Stockholders’ Meetings despite defect: If the voting requirement is met, any resolution passed in the meeting, even
if improperly held or called will be valid if ALL the stockholders or members are present or duly represented thereat, as provided
under the last paragraph of Sec. 51: “All proceedings had and any business transacted at any meeting of the stockholders or
members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called,
provided all the stockholders or members of the corporation are present or duly represented at the meeting.”
AMENDMENT: The meeting is still considered valid even if improperly held as long as ALL the stockholders or members are
present or duly represented, EXCEPT if the purpose of their attendance is only object to the transaction of any business because
the meeting is not lawfully called or convened.
Notice: Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member.
However, under the revised Section 49 of the RCC, general waivers of notice in the articles of incorporation or the bylaws
shall not be allowed.
The attendance at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened.
Attending the meeting in absentia: In the stockholders’ meeting for the election of directors/trustees, Section 23 of the RCC
now specifically allows the stockholders or members to vote through remote communication or in absentia, in case the by-laws
or majority of the BOD authorizes the same, or even without such authorization in case of corporations vested with public
interest.
Directors/trustees are also now allowed to attend the meeting through remote communication such as videoconferencing,
teleconferencing, or other alternative modes of communication that allow them reasonable opportunities to participate.
A stockholder or member who participates through remote communication or in absentia, shall be deemed present for
purposes of quorum.
STOCK AND TRANSFER BOOK OR MEMBERSHIP BOOK: The stock and transfer book contains a record of:
1. All stocks in the names of the stockholders alphabetically arranged;
2. The installments paid and unpaid on all stocks for which subscriptions has been made, the date of payment of any
installment;
3. A statement of every alienation, sale or transfer of stock made, the date thereof, by and to whome made;
4. Such other entries as the bylaws may prescribe
Unless the bylaws provide for a longer period, the stock and transfer book or membership book shall be closed at least 20
days for regular meetings and 7 days for special meetings before the scheduled date of the meeting
REORGANIZATION, MERGER AND CONSOLIDATION
REORGANIZATION: is generally entered into to put the company upon a sound financial basis and to enable it to take care of
its obligations thereby avoiding liquidation or bankruptcy. But in some cases, a reorganization is effected notwithstanding the
fact that the corporation is solvent.

MERGER: is a union effected by absorbing one or more existing corporations by another which survives and continues the
combined business. It is the uniting of two or more corporations by the transfer of property to one of them which continue in
existence, the other or the others being dissolved and merged therein.
CONSOLIDATION: is the uniting or amalgamation of two or more existing corporations to form a new corporation. It signifies
a union as necessarily results in the creation of a new corporation and the termination of existence of old ones. The united
concern resulting from such union is called consolidated corporation.
In effect, in a consolidation, the constituent corporations are all dissolved, while in a merger, the absorbing or surviving
corporation is not, only the absorbed.
REQUIREMENTS AND PROCEDURE TO ACCOMPLISH MERGER OR CONSOLIDATION:

1. The BOD/T of each constituent corporations shall approve a plan of merger or consolidation setting for the matters
required in Sec. 76;
2. Approval of the plan by the stockholders representing 2/3 outstanding capital stock or 2/3 of the member in
non-stock corporations of each of such corporations at separate corporate meetings called for the purpose;
3. Prior notice of such meeting, with a copy or summary of the plan of merger or consolidation shall be given to all
stockholders or members in the same manner as in regular/special meetings of stockholders (from 2 weeks, either
personally or by registered mail stating the purpose thereof);
4. Execution of the articles of merger or consolidation by each constituent corporations to be signed by the president or
vice-president and certified by the corporate secretary or assistant secretary setting forth the matters required in Sec. 78;
5. Submission of the articles of merger or consolidation in quadruplicate (AMENDMENT: the requirement to submit in
quadruplicate has been removed) to the SEC subject to the requirement of Sec. 79 that if it involve corporations under
direct supervision of any other government agency or governed by special laws the favorable recommendation of the
government agency concerned shall first be secured; and
6. Issuance of the certificate of merger or consolidation by the SEC at which time the merger or consolidation shall be
effective. If the plan, however, is believed to be contrary to law, the SEC shall set a hearing to give the corporations
concerned an opportunity to be heard upon notice and thereafter, the Commission shall proceed as provided in the Code.
EFFECTS OF MERGER OR CONSOLIDATION:

1. There will only be a single corporation - the surviving corporation or the consolidated corporation.
2. The termination of corporate existence of the constituent corporations and the absorbed corporation.
3. The surviving or consolidated corporation shall possess all the rights, privileges, immunities and franchises of the
constituent corporations, and all property and all receivables due, including subscriptions to shares and other choses in
action, and every other interest of, or belonging to or due to the constituent corporations shall be deemed transferred to
and vested in such surviving or consolidated corporation without further act or deed; and
4. The rights of creditors or any lien on the property of the constituent corporations shall not be impaired by the merger
or consolidation.
5. There would be no need to liquidate or wind-up the affairs of the absorbed or constituent corporation because
(1) there are no assets to distribute; (2) no debts and liabilities to pay – since all these are transferred to the surviving or
consolidated corporation.
NON-STOCK CORPORATIONS
A non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or
officers, except upon dissolution. Any profit which a non-stock corporation may obtain as an incident to its operations shall,
whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized.
The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations, except as may be
covered by specific provisions pertaining to non-stock corporations.
Differences:
STOCK CORPORATION NON-STOCK CORPORATION

Purpose Generally, for profit Primarily organized for charitable, religious, educational,
professional, cultural, scientific, social, civic service, or
similar purposes, like trade, industry, agricultural and like
chambers or any combination thereof
Distribution of dividend Authorized Not authorized
Term of office of the 1 year until their successor is 3 years
directors/trustees elected and qualified
Voting Cumulative Straight voting unless cumulative voting is authorized

under the by-laws or AOI
Manner of voting Either in person or by proxy By mail or other similar means as may be authorized by the
by-laws
Transferability of interest Transferable Membership is personal and non-transferable, unless the

AOI or by-laws provide otherwise
Ownership of director At least one share Member
Independent trustees are not required to be a member
CLOSE CORPORATIONS
DEFINITION: A close corporation is one whose articles of incorporation provide that:

1. All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a
specified number of persons, not exceeding twenty (20);

2. All the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by the
Title on Close Corporations in the Corporation Code; and
3. The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class.
Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting
stock or voting rights is owned or controlled by another corporation which is not a close corporation.
Business with public interest: may not be formed as close corporation. Sec. 140 of the Code lays down a similar policy
authorizing NEDA to recommend to the legislature the setting of maximum limits to family or group ownership of stock in
corporations vested with public interest, and the determination of whether or not it should be vested with public interest within
its domain. The following cannot be a close corporation:
1. Mining companies;
2. Oil companies;
3. Stock exchanges;
4. Banks;
5. Insurance companies;
6. Public utility;
7. Educational institutions
Differences with an Ordinary Stock Corporation:
CLOSE CORPORATION ORDINARY STOCK CORPORATION

The number of stockholders cannot exceed 20 No limitation as to number of shareholder
Shares of stock are subject to specified restrictions Generally no restriction on transfer of shares
Shares of stock are prohibited from being listed in the stock No prohibition
exchange or offered for sale to the public
Stockholders may take an active part in corporate management Management is lodged in the Board of Directors
by vesting management to them rather than a Board of Director
To the extent that all stockholders can be deemed directors, the Maximum number of directors is 15
number of directors can effectively be upto 20.
To the extent that directors may be classified into one or more Ordinarily, no such classification and no restrictions on
classes and to be voted solely by a particular class of stock, cumulative voting
cumulative voting may, in effect, be restricted
The articles of incorporation may provide that all officers shall be Officers are elected by the Board of Directors
elected or appointed by the stockholders
Restriction on transfer of shares should be indicated in the articles Valid and binding if indicated in the articles of
of incorporation, stock certificates and by-laws. incorporation and stock certificates
Pre-emptive right of stockholders is broader as it includes all Pre-emptive rights may be denied on certain grounds
issues without exception
Appraisal right may be exercised for any reason with the limitation Appraisal right may be exercised only on specific
only that the corporation has sufficient assets to cover its liabilities grounds.
exclusive of capital stock
ONE PERSON CORPORATION
A One Person Corporation (OPC) is one formed by a natural person, a trust or an estate, who is the sole stockholder
thereof. The provision of the new Chapter III of the Revised Corporation Code shall apply to an OPC and other provisions of the
Code shall apply suppletorily.
Corporate Name: must contain “OPC”.
Not Applicable to OPC:

1. Authorized Capital Stock
2. By-Laws
3. Minutes of the Meetings of the Board of Directors (in lieu of which shall be the resolutions recorded in a Minutes Book)
Not allowed to incorporate as an OPC:

1. Banks, quasi-banks, pre-need, trust, insurance companies
2. Public and publicly-listed companies
3. Non-chartered GOCCs
4. Natural persons for the purpose of exercising their profession.
Articles of Incorporation: shall be the same as an ordinary corporation with the following additional provisions:
1. If the single stockholder is a trust or an estate, the name, nationality, and residence of the trustee, administrator, executor,
guardian, conservator, custodian, or other person exercising fiduciary duties together with the proof of such authority to
act on behalf of the trust or estate; and
2. Name, nationality, residence of the nominee and alternate nominee, and the extent, coverage and limitation of the
authority.
Corporate Officers: The sole stockholder shall automatically be the sole director and the President. Within 15 days from the
issuance of its certificate of incorporation, an OPC shall appoint a treasurer, corporate secretary, and other officers as it may
deem necessary, and notify the SEC thereof within 5 days from appointment.
Other positions of the president/sole stockholder:

1. Corporate Secretary: not allowed
Corporate Secretary: In addition to the functions designated by the OPC, the corporate secretary shall:
a. Be responsible for maintaining the minutes book and/or records of the corporation;

b. Notify the nominee or alternate nominee of the death or incapacity of the single stockholder, which notice shall be
given no later than 5 days from such occurrence;
c. Notify the SEC of the death of the single stockholder within 5 days from such occurrence and stating in such notice the
names, residence addresses, and contact details of all known legal heirs; and
d. Call the nominee or alternate nominee and the known legal heirs to a meeting and advise the legal heirs with regard
to, among others, the election of a new director, amendment of the articles of incorporation, and other ancillary and/or
consequential matters.
2. Treasurer: allowed provided e shall give a bond to the SEC in such a sum as may be required and a written undertaking to
faithfully administer the OPC’s funds to be received as treasurer, and to disburse and invest the same according to the
Articles as approved by the SEC.
Nominee and Alternate Nominee: The single stockholder shall designate a nominee and an alternate nominee who shall, in
the event of the single stockholder’s death or incapacity, take the place of the single stockholder as director and shall
manage the corporation’s affairs.
The articles of incorporation shall state the names, residence addresses and contact details of the nominee and alternate
nominee, as well as the extent and limitations of their authority in managing the affairs of the OPC.
The written consent of the nominee and alternate nominee shall be attached to the application for incorporation. Such consent
may be withdrawn in writing any time before the death or incapacity of the single stockholder
Term of the Nominee: When the incapacity of the single stockholder is temporary, the nominee shall sit as director and
manage the affairs of the OPC until the stockholder, by self-determination, regains the capacity to assume such duties.
In case of death or permanent incapacity of the single stockholder, the nominee shall sit as director and manage the affairs
of the OPC until the legal heirs of the single stockholder have been lawfully determined, and the heirs have designated one
of them or have agreed that the estate shall be the single stockholder of the OPC.
The alternate nominee shall sit as director and manage the OPC in case of the nominee’s inability, incapacity, death, or refusal
to discharge the functions as director and manager of the corporation, and only for the same term and under the same conditions
applicable to the nominee.
Change of Nominee: The single stockholder may, at any time, change its nominee and alternate nominee by submitting to
the SEC the names of the new nominees and their corresponding written consent. For this purpose, the articles of incorporation
need not be amended.
Liability of Single Stockholder: A sole shareholder claiming limited liability has the burden of affirmatively showing that the
corporation was adequately financed.
Where the single stockholder cannot prove that the property of the OPC is independent of the stockholder’s personal property,
the stockholder shall be jointly and severally liable for the debts and other liabilities of the OPC.
The principle of piercing the corporate veil applies with equal force to OPC as with other corporations.
Conversion from Ordinary Corporation to OPC: When a single stockholder acquires all the stocks of an ordinary stock
corporation, the latter may apply for conversion into n OPC, subject to the submission of such documents as the SEC may
require.
If the application for conversion is approved, the Commission shall issue certificate of filing of amended articles of incorporation
reflecting the conversion. The OPC converted from an ordinary stock corporation shall succeed the latter and be legally
responsible for all the latter’s outstanding liabilities as of the date of conversion.
Conversion from OPC to Ordinary Corporation: An OPC may be converted into an ordinary stock corporation after due
notice to the SEC (within 60 days from occurrence) of such fact and of the circumstances leading to the conversion, and after
compliance with all other requirements for stock corporations under the RCC. If all requirements have been complied with, the
Commission shall issue an amended certificate of incorporation reflecting the conversion.
In case of death of the single stockholder, the nominee or alternate nominee shall transfer the shares to the duly designated
legal heir or estate within 7 days from receipt of either an affidavit of heirship or self-adjudication executed by a sole heir, or
any other legal document declaring the legal heirs of the single stockholder and notify the SEC of the transfer. Within 60 days
from the transfer of the shares, the legal heirs shall notify the SEC of their decision to either wind up and dissolve the OPC or
convert it into an ordinary stock corporation.
The ordinary stock corporation converted from an OPC shall succeed the latter and be legally responsible for all the latter’s
outstanding liabilities as of the date of conversion.
FOREIGN CORPORATIONS
A FOREIGN CORPORATION is one formed, organized or existing under any laws other than those of the Philippines.
Incorporation Test: is applied in determining whether a corporation is domestic or foreign. If it is incorporated under Philippine
laws, it is deemed a domestic corporation; if it is incorporated in another state, it is a foreign corporation, while if it is created,
irrespective of the nationality of its stockholders.
Control Test or Liberal Rule and the Grandfather Rule/Test: The Control Test is used to determine corporate nationality
for purposes of applying laws, e.g., prohibition to acquire lands applicable to corporations more than 40% of which is owned by
non-Filipinos.

Under the liberal Control Test, there is no need to further trace the ownership of the 60% (or more) Filipino stockholdings of
the Investing Corporation since a corporation which is at least 60% Filipino-owned is considered as Filipino.
On the other hand, the Grandfather Rule is a method of determining the nationality of a corporation which in turn is owned
by another corporation by breaking down the entity structure of the shareholders of the corporation. The true Filipino ownership
is traced all the way to the individual stockholders of the corporation (A) owning shares in another corporation (B), by multiplying
the Filipino ownership of the first corporation (A) to the corresponding ownership of the other corporation (B).
It applies to nationalized activities or those which require whole or partial Filipino ownership.
Basically, there are two acknowledged tests in determining the nationality of a corporation: the control test and the grandfather
rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented the
requirement of the Constitution and other laws pertaining to the controlling interests in enterprises engaged in the exploitation
of natural resources owned by Filipino citizens, provides:
1. Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality. (Control Test)
2. But if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality. (Grandfather Rule)
Thus, if 100,000 shares are registered in the name of a corporation or partnership at least 60% of the capital stock or
capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if
less than 60%, or say, 50% of the capital stock or capital of the corporation or partnership, respectively, belongs to Filipino
citizens, only 50,000 shares shall be counted as owned by Filipinos and the other 50,000 shall be recorded as belonging to
aliens.
In Narra Nickel Mining and Development Corporation vs. Redmont Consolidated Mines Corporation (GR No. 195580, Jan.
28, 2015), the SC held that the grandfather rule shall be applied when:
a. The Corporation’s Filipino equity falls below the threshold required; or
b. There exists “doubt” as to the Filipino or Foreign equity
This would thus require the application first of the control test. When after applying the Control Test, and it meets the
required nationality requirement but there exists a “doubt” as to the Filipino ownership of the Corporation, the grandfather
rule would be supplementally applied.
RESIDENT AGENT: As a condition precedent to the grant of license to do or transact business in the Philippines, the foreign
corporation is required to designate its resident agent on whom summons and other legal processes may be served in all actions
or legal proceedings against such corporation.
AMENDMENT: A resident agent corporation for a foreign corporation is now required that it is of sound financial standing
and must show proof that it is in good standing as certified by the SEC.
LICENSE REQUIREMENT AND DOING BUSINESS WITHOUT ONE: A foreign corporation must secure the necessary license
before it can transact or do business in the Philippines.
What constitutes “doing business”: Doing business in the Philippines may be determined using the following tests:
1. Continuity test – doing business implies a continuity of commercial dealings and arrangements and contemplates to some
extent the performance of acts or works or the exercise of some functions normally incident to and in progressive
prosecution of the purpose and object of its organization;
2. Substance test – a foreign corporation is doing business in the country if it is continuing the body or substance of the
enterprise of business for which it was organized
3. Contract test – actual performance of specific commercial acts within the territory of the Philippines
“DOING BUSINESS” under the Foreign Investment Act (Sec. 3, d), “doing business” would include:
1. Soliciting orders, service contracts;
2. Opening offices, whether called “liaison offices” or branches;
3. Appointing representatives or distributor domiciled in the Philippines or who in any calendar year stay in the country for a
period or periods totaling 180 days or more;
4. Participating in the management, supervision or control of any domestic business, firm, entity or corporation in the
Philippines;
5. Any other act that imply a continuity of commercial dealings or arrangements and contemplate to that extent the
performance of acts or works, or the exercise of functions normally incident to and in progressive prosecution of commercial
gain or of the purpose and object of the business organization.
Provided, however, that the phrase “doing business” shall not be deemed to include:
1. Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or
exercise of rights as such investor, nor
2. Having a nominee director or officer to represent its interest in such corporation; nor
3. Appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its
own account.
Doing Business without a license: a foreign corporation shall NOT be permitted to maintain or intervene in any action,
suit or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded
against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws.
“It is not the lack of required license but doing business without a license which bars a foreign corporation from
access to our courts” (Universal Shipping vs. IAC)

EXCEPTIONS:
1. Foreign corporations can sue before the Philippine Courts if the act or transaction involved is an “isolated transaction”
or the corporation is not seeking to enforce any legal or contractual rights arising from, or growing out of, any business
which it has transacted in the Philippines (Western Equipment Supply vs. Reyes)
2. Neither is a license required before a foreign corporation may sue before the forum if the purpose of the suit is to protect
its trademark, trade name, corporate name, reputation or goodwill; (Western Equipment Supply vs. Reyes)
3. Or where it is based on a violation of the Revised Penal Code (Le Chemise Lacoste, SA vs. Fernandez);
4. Or merely defending a suit filed against it (Time, Inc. vs. Reyes)
5. Or where a party is estopped to challenge the personality of the corporation by entering into a contract with it
(Communications Materials and Design, Inc. vs. CA and ITEC)
DISSOLUTION
DISSOLUTION is the extinguishment of the corporate franchise and the termination of corporate existence.
When a corporation is dissolved, it ceases to be a juridical entity and can no longer pursue the business for which it was
incorporated. It will nevertheless continue as a body corporate for another period of three years from the time it is dissolved
but only for the purpose of winding up its affairs and the liquidation of its assets.
THREE WAYS OF DISSOLUTION:

1. Expiration of its corporate term
Extension: should be made before the expiration of the original term, but not earlier than 3 years prior to such expiration,
otherwise the corporation is dissolved, ipso facto.
Dissolution by shortening the term of corporate existence: The stockholders may cause the amendment of the Articles to
shorten the term and have the corporation dissolved. This, however, requires the vote of the stockholders to be cast in a
meeting therefor, not only “written assent” as for general amendments. Moreover, this requires the approval of the SEC
and its inaction is not deemed an approval therefor.
2. Voluntary surrender of its primary franchise (voluntary dissolution); and

Formal and Procedural Requirements when no creditors are affected.
a. Majority vote of the board of directors or trustees;
b. Sending of notice of each stockholders or member either by registered mail or personal delivery at least thirty (30)
days prior (now 20 days) to the meeting (scheduled by the board for the purpose of submitting the board action to
dissolve the corporation for approval of the stockholder or members.);
c. Publication of the notice of time, place and subject of the meeting for three (3) consecutive weeks (now once) in a
newspaper published in the place where the principal office of said corporation is located or in a newspaper of general
circulation in the Philippines;
d. Resolution adopted by the affirmative vote of the stockholders owning at least 2/3 of the outstanding capital stock or
2/3 of the members (now majority) at the meeting duly called for the purpose;
e. A copy of the resolution authorizing the dissolution must be certified by a majority of the board of directors or trustees
and countersigned by the corporate secretary (now A verified request for dissolution shall be filed with the SEC
stating: (a) the reason for the dissolution; (b) the form, manner, and time when the notices were given; (c) names of
the stockholders and directors or members and trustees, who approved the dissolution; (d) the date, place, and time
of the meeting in which the vote was made; and (e) details of publication.)
Withdrawal:
i. A withdrawal of the request for dissolution shall be made in writing, duly verified by any incorporator, director,
trustee, shareholder, or member and signed by the same number of incorporators, directors, trustees,
shareholders, or members necessary to request for dissolution.
ii. The withdrawal shall be submitted no later than fifteen (15) days from receipt by the SEC of the request for
dissolution.
iii. Upon receipt of a withdrawal of request for dissolution, the SEC shall withhold action on the request for dissolution
and shall, after investigation: (a) make a pronouncement that the request for dissolution is deemed withdrawn;
(b) direct a joint meeting of the board of directors or trustees and the stockholders or members for the purpose
of ascertaining whether to proceed with dissolution; or (c) issue such other orders as it may deem appropriate.
f. Issuance of a certificate of dissolution by the SEC.
Where creditors are affected, the voting requirement remains to be 2/3 of the stockholders and what is filed with the SEC is a
petition not a request.
3. The revocation of its corporate franchise (involuntary dissolution)
Grounds:
a. Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or damage to the
general public;
b. Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts which would
amount to a grave violation of its franchise;
c. Continuous inoperation for a period of at least five (5) years;
Continuous inoperation: If a corporation has commenced its business but subsequently becomes inoperative
continuously for a period of at least 5 years, the same shall be merely a ground for suspension or revocation
of its corporate franchise or certificate of registration.
AMENDMENTS: In case of continuous non-operation for 5 years, it is no longer considered a ground for revocation, at
least not immediately. In such case, the SEC may, after due hearing and notice, place the corporation under delinquent
status and allow the corporation to resume operations within 2 years upon compliance with the requirements of the SEC;
where upon compliance, the SEC shall issue an order lifting the delinquent status.

In case of non-compliance, with the requirements and to resume operations, only then will the SEC cause the revocation of
the corporation’s certificate of incorporation.
Notably, the Section 21 no longer includes the exception that the provision on failure to commence and continuous non-
operation shall not apply if the failure to organize, commence the transaction of its businesses or the construction of its works,
or to continuously operate is due to causes beyond the control of the corporation as may be determined by the SEC.
COMMENCEMENT OF BUSINESS: Once the certificate of incorporation has been issued, the corporation MUST formally
organize and commence its business.
Non-Use of Corporation Charter: the failure of the corporation to organize within 2 years would result in it
automatic dissolution, unless, of course, its failure to do so is due to causes beyond its control.
AMENDMENT: The period for the automatic revocation of the corporate charter has been increase from 2 to 5 years in case
of failure to organize.
Formal Organization: refers to the process of structuring the corporation to enable it to effectively pursue the purpose for
which it was organized.
d. Failure to file by-laws within the required period;

e. Failure to file required reports in appropriate forms as determined by the Commission within the prescribed period.
Other grounds provided under the Corporation Code:

a. Violation of any provision of the Code under section 144;
b. In case of deadlock in a close corporation as provided for in section 105;
c. In a close corporation, any acts of directors, officers or those in control of the corporation which is illegal or fraudulent
or dishonest or oppressive or unfairly prejudicial to the corporation or any stockholder or whenever corporate assets
are being misapplied or wasted under section 105.
AMENDMENTS: Aside from empowering the SEC to motu proprio dissolve a corporation, the following grounds are
now specified under Section 138:
1. Non-use of corporate charter
2. Continuous inoperation of a corporation
3. Upon receipt of a lawful court order dissolving the corporation
4. Upon finding by final judgment that the corporation procured its incorporation through fraud
5. Upon finding by final judgment that the corporation:
a. Was created for the purpose of committing, concealing or aiding the commission of securities violations,
smuggling, tax evasion, money laundering, or graft and corrupt practices;
b. Committed or aided in the commission of securities violations, smuggling, tax evasion, money laundering, or
graft and corrupt practices, and its stockholders knew; and
c. Repeatedly and knowingly tolerated the commission of graft and corrupt practices or other fraudulent or illegal
acts by its directors, trustees, officers, or employees.
If the corporation is ordered dissolved by final judgment pursuant to the above grounds (a), (b) and (c) under no. 5, its
assets, after payment of its liabilities, shall, upon petition of the SEC with the appropriate court, be forfeited in favor of
the national government. Such forfeiture shall be without prejudice to the rights of innocent stockholders and employees
for services rendered, and to the application of other penalty or sanction under the RCC or other laws
EFFECTS OF DISSOLUTION: Dissolution terminates its power to enter into contracts or to continue the business as a going
concern.
Despite its dissolution, a corporation nonetheless, continues to be a body corporate for a period of 3 years for purposes of
liquidation and winding up its affairs (Sec. 122, now Sec. 139). Upon expiration of the 3-year period to wind up its affairs,
the juridical personality of the corporation ceases for all intent and purposes, and as a general rule, it can no longer sue and be
sued.
But if the liquidation is to be pursued by appointing a trustee or a receiver, the 3-year period will not apply.
LIQUIDATION AND WINDING-UP:

1. The assets are collected and sold;
2. The rights and claims of creditors are settled;
3. The remaining assets, if any, are distributed to the stockholders.
THE SECURITIES REGULATION CODE

PURPOSE: The Securities Regulations Code or RA No. 8799 aims to protect the investing public primarily through a system
of disclosure and provide punishment for fraudulent practices.
PROTECTION OF THE PUBLIC: The Securities Regulations Code protects the public as follows:
1. Requiring full disclosure of information to the public regarding the securities that are being offered and the issuers,
including the filing and approval of the registration statement and the approval of the prospectus;
2. The requirement of regularly submitting material information to the SEC;
3. Close monitoring of the securities and other circumstances that may affect the same as well as the persons involved
including brokers, issuers, the exchange itself, etc. in order to ensure compliance with pertinent laws and regulations;
4. Prohibiting and penalizing different fraudulent practices and transactions; and
5. Providing the SEC the powers and functions.

SECURITIES
Securities are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and
evidenced by a certificate, contract, instruments, whether written or electronic in character. (Section 3.1)
The main feature of a security is that a person purchases or acquires the same in the expectation of obtaining passive income
or asset appreciation, that is income or gain obtained through the effort of another person. This feature makes them attractive
and desirable and necessitates the protection of the investing public.
They include:
1. Shares of stocks, bonds, debentures, notes evidences of indebtedness, asset-backed securities;
2. Investment contracts, certificates of interest or participation in a profit sharing agreement, certifies of deposit for a future
subscription;
3. Fractional undivided interests in oil, gas or other mineral rights;
4. Derivatives like option and warrants;
5. Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments
6. Proprietary or nonproprietary membership certificates in corporations; and
7. Other instruments as may in the future be determined by the Commission.
Investment contract is a contract, transaction, or scheme whereby a person invests his money in a common enterprise and
is led to expect profits primarily from the efforts of others.
Requisites:
1. An investment of money;
2. In a common enterprise;
3. With expectation of profits;
4. Primarily from the efforts of others (this modifies the Howey Test which requires profits to be derived “solely” from the
efforts of others)
REGISTRATION AND REPORTORIAL REQUIREMENTS
REGISTRATION
The Securities Regulations Code (SRC) provides that securities shall not be sold or offered for sale or distribution within the
Philippines, without a registration statement duly filed with and approved by the SEC (Commission). Prior to such sale,
information on the securities, in such form and with such substance as the Commission may prescribe, shall be made available
to each prospective purchaser.
The Commission may audit the financial statements, assets and other information of firm applying for registration of its securities
whenever it deems the same necessary to insure full disclosure or to protect the interest of the investors and the public in
general.
Procedure:
1. Filing of SWORN REGISTRATION STATEMENT containing the information as the SEC may by rule require.
a. Signatories to registration statement: Executive officer, principal operating officer, principal financial officer,
comptroller, principal accounting officer, corporate secretary.
b. Written consent of the expert named as having certified any part of the registration statement, whenever necessary.
c. Where the registration statement includes shares to be sold by selling shareholders, a written certification by such
selling shareholders as to the accuracy of any part of the registration statement contributed to by such selling
shareholders shall also be filed.
2. PAYMENT of the filing fees which shall not exceed 1/10 of 1% of the aggregate price at which such securities are proposed
to be offered.
3. PUBLICATION of notice of the filing of the registration statement in two newspapers of general circulation once for two
consecutive weeks.
4. Within 45 days after the date of filing, or by such later date to which the issuer has consented, the SEC shall give an ORDER
declaring the registration statement effective or rejecting it.
5. PROSPECTUS under oath that all requirements satisfied and all statements in registration statement and in such prospectus
are correct.
SECURITIES exempt from registration: (GRIB)
1. Any security issued or guaranteed by the Government of the Philippines, or by any political subdivision or agency thereof,
or by any person controlled or supervised by, and acting as an instrumentality of said Government.
2. Any security issued or guaranteed by the government of any country with which the Philippines maintains diplomatic
relations, or by any state, province or political subdivision thereof on the basis of reciprocity: Provided, That the SEC may
require compliance with the form and content for disclosures the SEC may prescribe.
3. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body.
4. Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of the Office of
the Insurance Commission, Housing and Land Use Rule Regulatory Board, or the Bureau of Internal Revenue.
5. Any security issued by a bank except its own shares of stock.
TRANSACTIONS exempt from registration: (BISCEPS SMILE)

1. BROKER’S transaction, executed upon customer’s orders, on any registered Exchange or other trading market.
2. An ISOLATED transaction in which any security is sold, offered for sale, subscription or delivery by the owner thereof, or
by his representative for the owner’s account, such sale or offer for sale or offer for sale, subscription or delivery not being
made in the course of repeated and successive transaction of a like character by such owner, or on his account by such
representative and such owner or representative not being the underwriter of such security.
3. The distribution by a corporation actively engaged in the business authorized by its articles of incorporation, of securities
to its stockholders or other security holders as a STOCK dividend or other distribution out of surplus.
4. The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right of
CONVERSION entitling the holder of the security surrendered in exchange to make such conversion: Provided, That the
security so surrendered has been registered under the SRC or was, when sold, exempt from the provision of the SRC, and
that the security issued and delivered in exchange, if sold at the conversion price, would at the time of such conversion fall

within the class of securities entitled to registration under the SRC. Upon such conversion the par value of the security
surrendered in such exchange shall be deemed the price at which the securities issued and delivered in such exchange are
sold.
5. EXCLUSIVE SALE: The sale of capital stock of a corporation to its own stockholders exclusively, where no
commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock.
6. PRIVATE PLACEMENT: The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines
during any twelve-month period.
7. SUBSCRIPTIONS for shares of the capitals stocks of a corporation prior to the incorporation thereof or in pursuance
of an increase in its authorized capital stocks under the Corporation Code, when no expense is incurred, or no
commission, compensation or remuneration is paid or given in connection with the sale or disposition of such securities,
and only when the purpose for soliciting, giving or taking of such subscription is to comply with the requirements of such
law as to the percentage of the capital stock of a corporation which should be subscribed before it can be registered and
duly incorporated, or its authorized, capital increase.
8. Sale to SOPHISTICATED (Qualified) Buyers: The sale of securities to any number of the following qualified buyers:
a. Bank;
b. Registered investment house;
c. Insurance company;
d. Pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision
thereof or manage by a bank or other persons authorized by the Bangko Sentral to engage in trust functions;
e. Investment company or
f. Such other person as the SEC may rule by determine as qualified buyers, on the basis of such factors as financial
sophistication, net worth, knowledge, and experience in financial and business matters, or amount of assets under
management
9. MORTGAGE-BACKED SECURITIES: The issuance of bonds or notes secured by mortgage upon real estate or tangible
personal property, when the entire mortgage together with all the bonds or notes secured thereby are sold to a single
purchaser at a single sale.
10. At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in INSOLVENCY or bankruptcy.
11. By or for the account of a pledge holder, or mortgagee or any of a pledge lien holder selling of offering for sale or delivery
in the ordinary course of business and not for the purpose of avoiding the provision of SRC, to LIQUIDATE a bonafide debt,
a security pledged in good faith as security for such debt.
12. The EXCHANGE of securities by the issuer with the existing security holders exclusively, where no commission or
other remuneration is paid or given directly or indirectly for soliciting such exchange.
The SEC may exempt other transactions where not necessary in public interest or for protection of investors such as small
amount or limited character of public offering. However, an exemption fee of 1/10 of 1% of the maximum aggregate price or
issued value of the securities should be paid.
REPORTORIAL REQUIREMENTS
1. Annual report composed of a Balance Sheet, Profit and Loss Statement, and a Statement of Cash Flows certified by a CPA
and a management discussion and analysis of results of operation
2. Other periodical reports for interim fiscal periods and current reports on significant developments of the issuer as the SEC
may prescribe as necessary to keep current information on the operation of the business and financial condition of the
issuer.
These reportorial requirements shall apply to an issuer:

1. Which has sold a class of its securities pursuant to a registration
2. With a class of securities listed for trading in an Exchange
3. With assets of at least Fifty million pesos (50,000,000.00) or such other amount as the SEC shall prescribe, and having
two hundred (200) or more holders each holding at least one hundred (100) share of a class of its equity
securities: Provided, however, That the obligation of such issuer to file report shall be terminated ninety (90) days after
notification to the SEC by the issuer that the number of its holders holding at least one hundred (100) share reduced to
less than one hundred (100)
The issuer shall likewise furnish to each holder of such equity security an annual report in such form and containing such
information as the SEC shall prescribe.
FILING OF GENERAL INFORMATION SHEET (GIS)
All corporations shall file their GIS within 30 calendar days from:
1. Stock Corporations – date of annual stockholders’ meeting
2. Non-Stock Corporations – date of annual members’ meeting
3. Foreign Corporations – anniversary date of the issuance of SEC license
FILING OF ANNUAL FINANCIAL STATEMENTS (AFS)
1. Corporations using the calendar year: depending on the last numerical digit of their SEC registration or license number
in accordance with the schedule set by the SEC.
However, any corporations may file their AFS regardless of the last numerical digit or license number on or before the first
day stated in the coding schedule.
2. Corporations using the fiscal year:
a. General Rule: 120 calendar days from the end of the fiscal year;
b. Exceptions:
i. Broker dealers – 110 calendar days from the end of the fiscal year;
ii. Listed companies and Public Companies – 105 days from the end of the fiscal year.
The AFS, other than the consolidated financial statements, shall have the stamped “received by the Bureau of Internal Revenue
(BIR)” or its authorized banks, unless the BIR allows an alternative proof of submission for its authorized banks.

INSIDER TRADING AND OTHER FRAUDULENT TRANSACTIONS
INSIDER TRADING: is committed whenever an insider, in possession of a material non-public information, transacts on the
securities.
Material Non-Public Information: Information that will affect the price of the security or would influence a person in deciding
whether to buy, sell, or hold a security which is not available to the public.
Insider:
1. The issuer.
2. A director or officer of the issuer or a person controlling the issuer.
3. A person whose relationship or former relationship to the issuer gives or gave him access to material non-public information.
4. A government employee, or director, or officer of an exchange, clearing agency, and/or self-regulatory organization who
has access to material non-public information.
5. A person who learns such information by a communication from any of the foregoing insiders.
Exceptions: a person in possession of material non-public information can buy or sell securities:
1. When he can prove that the information was not gained from an insider;
2. If the other party is identified and that he:
a. Disclosed the information; or
b. Had reason to believe that the other party is also in possession of the information.
Presumption: a purchase or sale of a security of the issuer made by an insider or such insider’s spouse or relatives by affinity
or consanguinity within the 2nd degree, legitimate or common-law, shall be presumed to have been effected while in possession
of material non-public information if transacted:
1. After such information came into existence;
2. But prior to the dissemination of such information to the public and the lapse of a reasonable time for the market to absorb
such information.
Insider Trading vis a vis Tender Offer: the answer above (Illustration 2) will not apply if the information is relative to a
tender offer, because it is unlawful for any person (other than the tender offeror, and not just an “insiders”) who is in possession
of material nonpublic information relating to such tender offer, to buy or sell the securities of the issuer that are sought or to
be sought by such tender offer if such person knows or has reason to believe that the information is nonpublic and has been
acquired directly or indirectly from the tender offeror, those acting on its behalf, the issuer of the securities sought or to be
sought by such tender offer, or any insider of such issuer.
Liability for disclosure: It shall be unlawful for any insider to communicate material nonpublic information about the issuer
or the security to any person who, by virtue of the communication, becomes an insider, where the insider communicating the
information knows or has reason to believe that such person will likely buy or sell a security of the issuer whole in possession
of such information.
This is regardless of whether the one to whom the communication was given actually traded on the securities.
FRAUDULENT TRANSACTIONS AND OTHER MARKET MANIPULATIONS

1. Wash sale – any transaction in a security which involves no change in the beneficial ownership. A series of buy and sale
transaction may be placed by one and the same beneficial owner in the exchange which would not affect any change of
ownership of the shares transacted.
2. Matched Order – refers to an order or orders for the purchase or sale of security with the knowledge that a simultaneous
order or orders of substantially the same size, time and price for the sale or purchase of such security has, or wil be entered
by or for the same or different parties.
Wash Sale and Matched Orders are not in themselves illegal. But they are considered fraudulent whenever they are resorted to
in order to create a false or misleading appearance of active trading.
3. Marking the close – placing of purchase or sale order, at or near the close of the trading period in order to affect the
closing price likewise affecting the opening price the following day.
4. Painting the tape – akin to marking the close but the activity is made during normal trading hours which involves buying
activity among nominee accounts at increasingly higher or lower prices or causing fictitious reports to appear on the ticker
tape.
5. Squeezing the float – part or portion of the issue/security which is outstanding but intentionally held by dealers or other
person with a view of reselling them later for profit. Thereby affecting supply of the security or its availability while demand
remains the same or increases, driving the prices up.
6. Hype and Dump – involves the following steps:

a. Purchase of outstanding capital stock of a dormant public shell company for a nominal amount;
b. Merger of the shell company with the privately held company of the person or group of persons involved to gain control
of the majority of the stocks of the merged entity;
c. Reverse-split of the shares
d. Reissuance of the shares certificates in the name of the merged entity to relatives and associates;
e. Hiring a broker-dealer who would market the stocks of the newly merged entity;
f. Hiring a promoter to “hype” the virtues of the company;
g. When the market reaches the high price, they would “dump” their shareholdings and bail out.
7. Boiler Room Operations – involves an intensive selling campaign through numerous salesmen by telephone or through
direct mail offerings for securities of either a certain type or from a specific issuer. Investors are induced to purchase
through hard-sell techniques based on unfounded predictions and mailing of misleading market letters.

All 5 above (3 to 7) become illegal/unlawful if they are effected to:
a. Raise the price or induce the purchase of a security or of a controlling, controlled or commonly controlled company by
others;
b. Depresses their price to induce the sale of a security, whether of the same or of a different class, of the same issuer or of
a controlling, controlled company, or commonly controlled company by others; and
c. Creates active trading to induce such purchase or sale through said devices or schemes.
8. Circulating or Disseminating Information on Share Price Movement – involves people providing information that
the price of any security listed in the exchange will or is likely to rise or fall because of manipulative market operations of
any one or more persons conducted for the purpose of raising or depressing the price of the security and thus inducing the
purchase or sale of such security.
9. Making False or Misleading Statements – with respect to any material fact, which he knew or had some reasonable
grounds to believe was so false or misleading for the purpose of inducing the purchase or sale of any security.
10. Pegging or Fixing or Stabilizing the price of security effected either alone or with others through any series of
transactions for the purchase or sale thereof, if done for such purpose.
11. Short Sale – selling the security which the vendor does not own and borrowed only from another. This is not illegal per se
but only regulated.
MANDATORY TENDER OFFER RULE
A tender offer is an offer by a person or group of persons to the stockholders of a corporation to tender their shares for
purchase.
Purpose: The rule on mandatory tender offer seeks to protect minority shareholders and provide them with a fair price for their
share whenever a person or group of persons intends to buy a sizable number of shares in the company.
Mandatory Tender Offer: applies to any person who intends to acquire at least 35% over a period of 12 months
(previously 30, increased by the SEC pursuant to Section 72.1 of the SRC) of any class of any equity security of a:
1. Listed corporations; or
2. Corporations with:
a. Assets of at least P50M and
b. Having at least 200 shareholders who each have at least 100 shares
The rule shall likewise apply even if the acquisition is less than 35% but will result in ownership of over 50% of the total
outstanding equity securities of the public company.
The offeror would be required to accept any and all securities thus tendered.
Note that the percentage requirements likewise applies even in indirect acquisitions.
Transactions EXEMPT from the Mandatory Tender Offer Requirement:

1. Any purchase of shares from the unissued capital stock provided that the acquisition will not result to a 50% or more
ownership of shares by the purchaser;
2. Any purchase of shares from an increase in authorized capital stock.
3. Purchase in connection with foreclosure proceedings involving a duly constituted pledge or security arrangement where
the acquisition is made by the debtor or creditor.
4. Purchases in connection with privatization undertaken by the government of the Philippines.
5. Purchases in connection with corporate rehabilitation under court supervision.
6. Purchases through an open market at the prevailing market price
7. Merger or consolidation.
Process:
1. The offeror will make an announcement of his intention in a newspaper of general circulation, prior to the commencement
of the offer;
2. At least 2 business days prior to the date of the commencement of the tender offer:
a. File SEC Form 19-1 with the SEC including all exhibits thereto and pay the prescribed filing fees
b. Hand deliver a copy of such form including all exhibits to the target company at its principal executive office and to
each Exchange where such class of the target company’s securities are listed for trading.
3. Report the results of the tender offer by filing with the Commission, not later than ten (10) calendar days after the
termination of the tender offer, copies of the final amendments to the form.
INSIDER TRADING WHERE INFORMATION RELATES TO A TENDER OFFER: if the information is relative to a tender offer,
it is unlawful for any person (other than the tender offeror) who is in possession of material nonpublic information relating to
such tender offer, to buy or sell the securities of the issuer that are sought or to be sought by such tender offer if such person
knows or has reason to believe that the information is nonpublic and has been acquired directly or indirectly from the tender
offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, or any insider of such
issuer.
1. An ultra vires act is an act or a transaction of a corporation which:

A. Is considered illegal
B. Is contrary to morals, public policy, good customs
C. Not within the express, implied or incidental powers of the corporation
D. All of the above
2. Under the Revised Corporation Code, a foreign corporation has power and capacity to do all of the following, except:
A. Form joint ventures C. Give aid for political partisan activities
B. Adopt and use a corporate seal D. Acquire properties in its own name

3. Under the Revised Corporation Code, a foreign corporation has power and capacity to do all of the following, except:
A. Form joint ventures C. Give aid for political partisan activities
B. Adopt and use a corporate seal D. Acquire properties in its own name
4. Mr. X was invited by his friends to invest in XYZ Corp., a newly organized firm where he was appointed president. He
entered into a contract of sale with ABC Corp. to purchase equipment, in accordance with the primary purpose of the
corporation. Later on, however, it was discovered that the Articles of Incorporation had not been filed by his friends. He
hurriedly attended to the matter and when the SEC issued the Certificate of Registration, the corporation became bankrupt
and Mr. X is now being sued by ABC Corp. in his personal capacity. In this case,
A. Mr. X cannot be made liable since XYZ Corp. is considered a de facto corporation which has a separate personality.
B. Mr. X cannot be made liable since the de facto status of the corporation has not been attacked by the State.
C. Mr. X can be made liable upto his personal assets since he is the president of XYZ Corporation which is a corporation
by estoppel.
D. Mr. X can be made liable only upto his investment since he had no knowledge that the corporation was not validly
incorporated.
5. Mr. X invested his property in exchange for shares in ABC Corporation. Later on, the same property mortgaged as security
for the loan of ABC Corporation from M Bank. For failure to pay, the mortgage was foreclosed and proceeds were less than
the amount of the outstanding balance of the loan which M Bank sought from Mr. X contending that the property was
invested by him. Mr. X cannot be made liable under which principle:
A. Corporate Entity Theory C. Limited Liability Principle
B. Piercing the Veil of Corporate Entity D. All of the choices
6. Under the Revised Corporation Code, a corporation has:

A. A maximum of 50 years of existence
B. A maximum of 50 years of existence but renewable not earlier than 5 years prior to expiration of the term
C. A maximum of 50 years of existence but renewable not earlier than 3 years prior to expiration of the term
D. Perpetual existence
7. Which of the following is still a requirement that applies to incorporators under the Revised Corporation Code:
A. Majority must be residents of the Philippines C. Natural persons must be of legal age
B. Must be natural persons D. None of the choices
8. A, B, C, D and E is organizing a corporation whose Authorized Capital Stock is P64,000. How much is the minimum paid-
up capital requirement under the Revised Corporation Code for the corporation to incorporate?
A. P0 C. P5,000
B. P4,000 D. P16,000
9. A restriction as to transfer of shares in an ordinary stock corporation must be indicated in:

I. Articles of Incorporation III. Certificate of Stock
II. By-Laws
A. I, II and III C. I and III

B. I and II D. II and III
10. The existence of a corporation sole begins from:

A. The time the parties came to an agreement to form a corporation and contribute money or property.
B. Filing of the verified articles of incorporation.
C. Issuance of a certificate of registration.
D. First day of the year following the filing of the Articles of Incorporation
11. The following are qualifications of a director, except:

A. They must own at least 1% share.
B. They meet all the qualifications under the by-laws
C. They do not possess any of the disqualifications under the Corporation Code.
12. A, is a stockholder of Silvestre Corporation, who holds 10,000 shares thereof. A stockholders meeting was called to elect
members of a 5-man Board. How many votes can A cast in favor of B if they employ cumulative voting?
A. 10,000 votes C. 50,000 votes
B. 25,000 votes D. 100,000 votes
13. A, B, C, D and E are members of the Board of Directors. A retired and D died. In this case, who shall fill-up the vacancy?
A. Stockholders in a meeting called for the purpose, regardless if the directors still have a quorum
B. A, B and C, since they still constitute a quorum
C. A, B and C, regardless if they still constitute a quorum
D. Stockholders in a meeting called for the purpose since the directors no longer have a quorum
14. A, B, C, D, E, F, G, H, I are members of the Board of Directors. In the meeting to appoint corporate officers, only A, B, C,
D and E are present. How many votes are required to elect corporate offices?
A. 2 C. 4
B. 3 D. 5
15. A, B, C, D and E are directors of REALTY CORP., Z wanted to sell his property with a fair market value of P100M for P90M.
Z offered the property first to A, who acquired it for P90M and eventually sold the same for P100M. In this case,
A. A can keep the profits provided the sale is ratified by the stockholders.
B. A can keep the profits because it was offered to him and not to REALTY CORP.
C. The sale is not subject to ratification and A may be required to remit the profits to REALTY CORP

16. Mr. X is a Director of both XYZ Corporation and ABC Corporation. XYZ and ABC entered into a contract of sale, the contract
between XYZ and ABC, is considered valid absent fraud and provided it is reasonable under the circumstances. But it is
considered voidable if the shareholdings of Mr. X in the two corporations are:
ABC XYZ
A. 25% 25%
B. 5% 5%
C. 25% 5%
D. 3% 20%
17. Which of the following corporate officer position may be held by the same person?
A. President and Secretary C. President and Treasurer
B. Treasurer and Secretary D. None of the choices
18. Mr. X, as the president of ABC Corporation, signed the check in his official capacity. Later on, the check bounced due to
insufficiency of funds and he is now being sued for violation of BP Blg. 22. Can Mr. X be made personally liable?
A. Yes, because he acted in bad faith in allowing the issuance of a worthless check
B. No, because he merely signed in his official capacity
C. Yes, because he is made personally liable by law
D. No, because of the corporate entity theory
19. Which of the following is false with regards preferred shares?

A. Preferred share is a stock that gives the holder preference over the holder of common stocks with respect to the
payment of dividends and/or with respect to distribution of capital upon liquidation.
B. A preferred share can be issued without a par value provided it is not issued for less than P5.
C. The preference must be stated in the Articles of Incorporation and the Certificate of Stock.
D. None of the above.
20. As a general rule, preferred shares do not give the holder the right to vote. However, they shall have the right to vote on
the following, except:
A. Amendment of the Articles of Incorporation C. Sale of all or substantially all of the inventories
B. Adoption and amendment of the by-laws D. Increase or decrease of capital stock
21. X Co. has P10M Authorized Capital Stock divided into: (1) 5M shares at P1.00 par value; and (2) 1M no par value shares
with issued value at P5.00. If A acquired 100,000 no par value shares at P4.00 and the same were issued. In this case,
A. There is no issuance of watered stocks
B. A and the directors of X Co. are solidarily liable for the P1.00 per share difference.
C. Only A is liable for the P1.00 per share difference.
D. Only the directors of X Co. is liable for the P1.00 per share difference
22. Mr. A subscribed to 10,000 shares of P1 par value for P10 per share. He was able to pay 50% of the subscription price. In
this case, which of the following is not a right granted to Mr. A?
A. He can receive dividends attributable to the whole 10,000 shares
B. He has the right to vote equivalent to the 10,000 shares
C. He can demand the issuance of certificate of stock for the 5,000 shares already paid
D. None of the choices.
23. Which of the following grounds to deny pre-emptive right requires the approval of 2/3 of the outstanding capital stock?
A. Shares to be issued in order to comply with the laws requiring stock offering or minimum stock ownership by the public
B. Shares issued in good faith in exchange for property needed for corporate purposes
C. In case the right is denied in the By-Laws
D. None of the choice
24. The appraisal right of a stockholder may be exercised in the following actions of the corporation, except:
A. In case of merger or consolidation.
B. Sale of all or substantially all the assets of the corporation.
C. Investment of funds in another corporation or business or for any other purpose other than the primary purpose.
D. Amendments to the Articles of Incorporation to change the name of the corporation
25. Under the revised corporation code, which of the following is a valid requirement for the validity of the annual stockholders’
meeting?
A. If there is no date fixed in the by-laws, it can be held on any date in April
B. There must be notice 2 weeks prior to the meeting
C. It must be held in the city where the principal office is located
D. It must be called by the proper party
26. The delegation of the power to amend the by-laws would require __ vote of the stockholders, while its revocation would
require __ vote.
A. Majority; Majority C. 2/3; 2/3
B. Majority; 2/3 D. 2/3; Majority
27. A Corp. and B Corp. agreed to a business combination. In the agreement, A. Corp. will absorb all the assets and liabilities
of B Corp. and the latter will cease to exist. The business combination entered into is a:
A. Merger C. Reorganization
B. Consolidation D. Quasi-reorganization

28. The merger or consolidation is deemed effective starting:
A. On the date the parties agreed to a consolidation or merger
B. On the date the stockholders ratified the Board resolution for consolidation or merger
C. Upon submission of the articles of merger or consolidation to the SEC
D. Upon issuance of the certificate of merger or consolidation
29. As a general rule, ____ of the outstanding capital stock is required to constitute a quorum; and majority of _____________
is the voting requirement.
A. Majority; outstanding capital stock C. 2/3; outstanding capital stock
B. Majority; those present D. 2/3; those present
30. The regular meetings of _____ are to be held monthly:

A. Stockholders C. Board of Directors
B. Members D. All of the choices
31. The following does not apply to an OPC, except:

A. Articles of Incorporation C. Authorized Capital Stock
B. By-Laws D. Minutes of the Meetings of BoD
32. What will be the term of the nominee in case of temporary incapacity of the sole stockholder?
A. Until declaration of the court of the sole stockholder’s capacity to take over
B. Upon self-determination of the sole stockholder that he regained capacity
C. Until the legal heirs of the stockholder have been determined
D. Once the heirs have designated one of them to take over management
33. The place of meetings of members in a non-stock corporation:

A. Anywhere C. The principal office
B. Anywhere in the Philippines D. The city or municipality where the principal office is located
34. In order to be considered as a close corporation, the following are required to appear in the Articles of Incorporation,
except:
A. All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than
a specified number of persons, not exceeding twenty.
B. All the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this
Title.
C. The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class.
D. None of the choices is an exception.
35. Which of the following business is allowed to incorporate as a close corporation?

A. Banks and insurance companies C. Educational institutions
B. Mining companies D. Hospitals
36. To qualify as a foreign corporation, the consideration is

A. Ownership of the shares of stock C. Agreement of the parties
B. Appointment of a resident agent D. Under what country’s law it was incorporated
37. The following are effects of dissolution, except:

A. The corporate entity ceases to exist except for liquidation purposes.
B. It can no longer enter into contracts for furthering its purpose
C. It can no longer apply for a secondary franchise
D. Existing contracts are deemed terminated
38. In case a corporation has been continuously inoperative for a period of 5 years, under the Revised Corporation Code, it:
A. Is automatically dissolved C. Will be placed under delinquent status by the SEC
B. Provides for a ground to dissolve the corporation D. Shall no longer be allowed to operate
39. Under the Revised Corporation Code, any asset distributable to any creditor or stockholders or members who is unknown
or cannot be found shall be escheated in favor of:
A. The national government C. A charitable institution designated by the corporation
B. The city or municipality where the asset is located D. The other stockholders
40. A corporation doing business in the Philippines without the requisite license:
A. Can sue and be sued in Philippine courts C. Can be sued but cannot sue in Philippine courts
B. Can sue but cannot be sued in Philippine courts D. Cannot sue and be sued in Philippine courts
1. C 11. A 21. D 31. A

2. C 12. C 22. C 32. B
3. C 13. B 23. B 33. B
4. D 14. D 24. D 34. D
5. A 15. A 25. D 35. D
6. D 16. C 26. D 36. D
7. C 17. B 27. A 37. D
8 A 18. C 28. D 38. C
9. C 19. B 29. B 39. A
10. B 20. C 30. C 40. C

RFBT-07
LAW ON COOPERATIVES
COOPERATIVE: is an autonomous and duly registered association of persons, with a common bond of interest, who have
voluntarily joined together to achieve their social, economic, and cultural needs and aspirations by making equitable
contributions to the capital required, patronizing their products and services and accepting a fair share of the risks and benefits
of the undertaking in accordance with universally accepted cooperative principles.
COOPERATIVE PRINCIPLES:
ART. 4. Cooperative Principles. - Every cooperative shall conduct its affairs in accordance with Filipino culture, good values
and experience and the universally accepted principles of cooperation which include, but are not limited to, the following:
(1) Voluntary and Open Membership - Cooperatives are voluntary organizations, open to all persons able to use their
services and willing to accept the responsibilities of membership, without gender, social, racial, cultural, political or
religious discrimination;
(2) Democrative Member Control - Cooperatives are democratic organizations that are controlled by their members who
actively participate in setting their policies and making decisions. Men and women serving as elected representatives,
directors or officers are accountable to the membership. In primary cooperatives, members have equal voting rights of
one-member, one-vote. Cooperatives at other levels are organized in the same democratic manner.
(3) Member Economic Participation - Members contribute equitably to, and democratically control, the capital of their
cooperatives. At least part of that capital is the common property of the cooperative. They shall receive limited
compensation or limited interest, if any, on capital subscribed and paid as a condition of membership. Members allocate
surpluses for any or all of the following purposes: developing the cooperative by setting up reserves, part of which
should at least be indivisible; benefitting members in proportion to their patronage of the cooperative's business; and,
supporting other activities approved by the membership.
(4) Autonomy and Independence - Cooperatives are autonomous, self-help organizations controlled by their members. If
they enter into agreements with other organizations, including government, or raise capital from external sources, they
shall do so on terms that ensure democratic control of their members and maintain their cooperative autonomy.
(5) Education, Training and Information - Cooperatives shall provide education and training for their members, elected and
appointed representatives, managers, and employees, so that they can contribute effectively and efficiently to the
development of their cooperatives.
(6) Cooperation Among Cooperatives - Cooperatives serve their members most effectively and strengthen the cooperative
movement by working together through local, national, regional and international structures.
(7) Concern for Community - Cooperatives work for the sustainable development of their communities through policies
approved by their members.
CHARACTERISTICS SIMILAR TO A CORPORATION
Liability: A cooperative duly registered shall have limited liability.
Separate personality: A cooperative can be likened to a corporation with a personality separate and distinct from its owner-
members.
Right of Succession: A cooperative likewise has a right of succession in the sense that heirs may inherit share capital subject
to the requirement that they are qualified to be members and signify intent to become a member.
Term: for a period not exceeding 50 years from the date of registration; may be extended for periods not exceeding 50 years,
but no extension can be made earlier than 5 years prior to the original or subsequent expiry date/dates unless there are
justifiable reasons.
Note, however, that this is no longer a similarity since a corporation now, generally, has perpetual existence under the Revised
Corporation Code.
ORGANIZATION AND REGISTRATION
ARTICLES OF COOPERATION: filed with the Cooperative Development Authority (Authority) which shall be signed by the
organizers and acknowledged by them if natural persons, and by the chairpersons or secretaries, if juridical persons, before a
notary public.
It shall set forth:

a. The name of the cooperative which shall include the word cooperative;
b. The purpose or purposes and scope of business for which the cooperative is to be registered;
c. The term of existence of the cooperative;
d. The area of operation and the postal addresses of its principal office;
e. The names, nationality, and the postal addresses of the registrants;
f. The common bond of membership;
g. The list of names of the directors who shall manage the cooperative; and
h. The amount of its share capital, the names and residences of its contributors and a statement of whether the cooperative
is primary, secondary or tertiary
Economic survey: Every group of individuals or cooperatives intending to form a cooperative shall submit to the CDA a general
statement describing among other the structure and purposes of the proposed cooperative; provided, that the structure and
actual staffing pattern of the cooperative shall include a bookkeeper; provided further, that they shall not be allowed to operate
without the necessary personnel and shall also submit an economic survey, indicating therein:
1. Area of operation;
2. Size of membership; and
3. Other pertinent data in a format provided by the CDA.

LAW on COOPERATIVES RFBT-07
Organizing a primary cooperative: would require 15 or more natural persons who are:
1. Filipino citizens;
2. Of legal age;
3. Having a common bond of interest; and
4. Are actually residing or working in the intended area of operation,
Provided that a prospective member of a primary cooperative must have complete a Pre-Membership Education Seminar
(PMES).
Any newly organized primary cooperative may be registered as multi-purpose cooperative only after compliance with the
minimum requirements for multi-purpose cooperatives to be set by the CDA.
A single-purpose cooperative may transform into a multi-purpose or may create subsidiaries only after at least 2 years of
operations.
Under Article VI of CDA MC 2015-07, except for agriculture cooperatives and agrarian reform cooperatives, only those
cooperatives with a minimum paid-up capital of P100,000.00 or as required in the feasibility study, whichever is higher, may
be allowed to transform into a multi-purpose cooperative.
Minimum subscription: 25% of authorized share capital
Under CDA MC 2011-05, this requirement shall apply to common share capital only. Should preferred share capital be provided
in the by-laws, it shall not exceed 25% of the total authorized share capital of the cooperative. No fractional shares shall be
issued for both the common and preferred share capital.
Minimum paid-up share capital: 25% of the total subscription but not less than P15,000.00 (note that for Corporations, the
minimum paid-up capital is P5,000), except for multipurpose cooperatives which should have at least P100,000.00 or as required
by the feasibility study whichever is higher.
CDA shall periodically assess the required paid-up share capital and may increase it every 5 years when necessary upon
consultation with the cooperative sector and NEDA.
Registration: A cooperative formed and organized under The Cooperative Code acquires juridical personality from the date
the Authority issues a certificate of registration under its official seal.
Approval of applications for registration: All applications for registration shall be finally disposed of by the Authority within a
period of sixty (60) days from the filing, otherwise the application is deemed approved, unless the cause of the delay is
attributable to the applicant.
Appeal in case of denial: in case of a denial of the application for registration, an appeal can be made to the Office of the
President within ninety (90) days from receipt of notice of such denial.
Failure of the Office of the President to act on the appeal within ninety (90) days from the filing thereof shall mean approval of
said application.
Rules on Cooperative Name:

1. The word “Cooperative”, “Kooperatiba”, or “Cooperativa” shall be included in the name of the cooperative, which name
shall likewise specify the type of cooperative.
2. No cooperative name shall be allowed by the CDA if the proposed name is identical or deceptively or confusingly similar to
that of any existing cooperative, contrary to public policy, morals, and existing laws.
3. The use of the words “development” and “integrated” shall be discouraged.
4. The use of “Incorporated”, “Corporation”, “Company”, “Incorporation”, “Partnership”, or other similar connotation and
abbreviation shall not be allowed.
5. The use of the “Federation” and “Union” in the name of the proposed primary cooperative is prohibited except if it is part
of the registered name of association or institution where the members of the proposed cooperative come from.
6. Name shall not be written in all capital letters except if it is an acronym. Acronym shall be written after the full name of
cooperative.
Registration of Secondary and Tertiary Cooperatives:
The minimum number of members and minimum paid-up share capital for the Secondary Category:
Minimum number of members Minimum paid-up capital

Federation 10 primary cooperatives P500,000 (now P1,000,000)
Union 15 primary cooperatives Not applicable
For Tertiary Categories:
Minimum number of members Minimum paid-up capital

Federation 10 secondary cooperatives P5,000,000 or feasibility study requirement whichever is higher
Union 15 secondary cooperatives Not applicable
Registration Fee: to be paid by the proposed federation shall be 1/10 (or 10%) of the 1% of the authorized share capital or
the amount prescribed in the CDA schedule of fees, whichever is higher.
Certificate of registration: A certificate of registration issued by the CDA under its official seal shall be conclusive evidence
that the cooperative therein mentioned is duly registered unless it is proved that the registration thereof has been cancelled.
Amendment of articles of cooperation and by-laws: can only be made by 2/3 vote of all the members with voting rights
without prejudice to the right of the dissenting members to exercise their right to withdraw their membership

DIVISION
Division of cooperatives: Any registered cooperative may, by a resolution approved by a vote of three-fourths (3/4) of all
the members with voting rights, present and constituting a quorum, resolve to divide itself into the two (2) or more cooperatives.
The procedure for such division shall be prescribed in the regulations of the CDA: Provided, That all the requirements have been
complied with by the new cooperatives: Provided, further, That no division of a cooperative in fraud of creditors shall be valid.
MERGER AND CONSOLIDATION
Merger and Consolidation:

1. Two (2) or more cooperatives may merge into a single cooperative which shall either be one of the constituent cooperatives
or the consolidated cooperative.
2. No merger or consolidation shall be valid unless approved by a three-fourths (3/4) vote of all the members with voting
rights, present and constituting a quorum of each of the constituent cooperatives at separate general assembly meetings.
The dissenting members shall have the right to exercise their right to withdraw their membership.
3. In any case, the merger or consolidation of cooperatives. In any case, the merger or consolidation shall be effective upon
the issuance of the certificate of merger or consolidation by the CDA.
TYPES OF COOPERATIVES
With descriptive definitions:

1. Advocacy Cooperative is a primary cooperative which promotes and advocates cooperativism among its members and
the public through socially-oriented projects, education and training, research and communication, and other similar
activities to reach out to its intended beneficiaries;
2. Dairy Cooperative is one whose members are engaged in the production of fresh milk which may be processed and/or
marketed as dairy products;
3. Fishermen Cooperative is one organized by marginalized fishermen in localities whose products are marketed either as
fresh or processed products;
4. Multipurpose Cooperative is one which combines two (2) or more of the business activities of these different types of
cooperatives;
5. Workers Cooperative is one organized by workers, including the self-employed, who are at same time the members
and owners of the enterprise. Its principal purpose is to provide employment and business opportunities to its members
and manage it in accordance with cooperative principle.
Closely-related definitions
Agriculture Cooperative refers to a primary cooperative which or whose members are involved/engaged in
raising/culture of plants, animals, fungi, and other living organism for productive and economic purpose and in
related activities that lead to the reduction of cost and/or value addition of outputs (Article V(a), CDA MC 2015-07);
Agrarian Reform Cooperative is one organized by marginal farmers majority of which are agrarian reform
beneficiaries for the purpose of developing an appropriate system of land tenure, land development, land consolidation or
land management in areas covered by agrarian reform;
Consumers Cooperative is one of the primary purpose of which is to procure and distribute commodities to members
and non-members;
Marketing Cooperative is one which engages in the supply of production inputs to members and markets their
products;
Producers Cooperative is one that undertakes joint production whether agricultural or industrial. It is formed and
operated by its members to undertake the production and processing of raw materials or goods produced by its members
into finished or processed products for sale by the cooperative to its members and non-members. Any end product or its
derivative arising from the raw materials produced by its members, sold in the name and for the account of the cooperative,
shall be deemed a product of the cooperative and its members;
What they offer? Clients

Cooperative Bank A wide range of financial services Cooperatives and their members
Credit Cooperative Savings and lending services Its members
Financial Service Cooperative Savings, credit and other financial None specified in the definition
services
Service Cooperative is one which engages in medical and dental care, hospitalization, transportation, insurance, housing,
labor, electric light and power, communication, professional and other services.
Specific service-type cooperatives:

1. Electric Cooperative is one organized for the primary purpose of undertaking power generations, utilizing renewable
energy sources, including hybrid systems, acquisition and operation of subtransmission or distribution to its household
members;
2. Health Services Cooperative is one organized for the primary purpose of providing medical, dental and other health
services;
3. Housing Cooperative is one organized to assist or provide access to housing for the benefit of its regular members
who actively participate in the savings program for housing. It is co-owned and controlled by its members;
4. Insurance Cooperative is one engaged in the business of insuring life and property of cooperatives and their members;
5. Transport Cooperative is one which includes land and sea transportation, limited to small vessels, as defined or
classified under the Philippine maritime laws, organized under the provisions of this Code;
(1) to (5) above are already included in the definition of a service cooperative.

6. Education Cooperative is one organized for the primary purpose of owning and operating licensed educational
institutions notwithstanding the provisions of Republic Act No. 9155, otherwise known as the Governance of Basic
Education Act of 2001;
7. Water Service Cooperative is one organized to own, operate and manage waters systems for the provision and
distribution of potable water for its members and their households;
The list is not exclusive since under Article 23(1)(u) of RA 9520, CDA may determine other types of cooperative.
CATEGORIES OF COOPERATIVES:
1. In terms of membership:
a. Primary – The members of which are natural persons except electric cooperative, water service cooperative and other
cooperatives which the implementing rules and the Authority may allow;
b. Secondary – The members of which are primaries; and
c. Tertiary – The members of which are secondary cooperatives; and
2. A group of cooperatives can either be a:
a. Union – which shall refer to a cooperative the members of which are registered cooperatives and/or federations
organized purposely to represent the interest and welfare of all types of cooperatives at the provincial, city, regional
and national levels.
b. Federation – which refers to a cooperative the members of which are primary cooperatives doing the same line of
business.
3. In terms of territory, cooperatives shall be categorized according to areas of operations which may or may not coincide
with the political subdivisions of the country.
Functions of a Federation of Cooperatives:

1. To carry on any cooperative enterprise authorized under Article 6 that complements augments, or supplements but does
not conflict, complete with, nor supplant the business or economic activities of its members;
2. To carry on, encourage, and assist educational and advisory work relating to its member cooperatives;
3. To render services designed to encourage simplicity, efficiency, and economy in the conduct of the business of its member
cooperatives and to facilitate the implementation of their bookkeeping, accounting, and other systems and procedures;
4. To print, publish, and circulate any newspaper or other publication in the interest of its member cooperatives and
enterprises;
5. To coordinate and facilitate the activities of its member cooperatives;
6. To enter into joint ventures with national or international cooperatives of other countries in the manufacture and sale of
products and/or services in the Philippines and abroad; and
7. To perform such other functions as may be necessary to attain its objectives.
A federation of cooperatives may be registered by carrying out the formalities for registration of a cooperative.
Registered cooperatives may organize a federation according to the type of business activity engaged in by the cooperatives.
Cooperative Unions: Registered cooperatives and federations at the appropriate levels may organize or join cooperative
unions to represent the interest and welfare of all types of cooperatives at the provincial, city, regional, and national levels.
Cooperative unions may have the following purposes:
1. To represent its member organizations;
2. To acquire, analyze, and disseminate, economic, statistical, and other information relating to its members and to all types
of cooperatives within its area of operation;
3. To sponsor studies in the economic, legal, financial, social and other phases of cooperation, and publish the results thereof;
4. To promote the knowledge of cooperative principles and practices;
5. To develop the cooperative movement in their respective jurisdictions;
6. To advise the appropriate authorities on all questions relating to cooperatives;
7. To raise funds through membership fees, dues and contributions, donations, and subsidies from local and foreign sources
whether private or government; and
8. To do and perform such other non-business activities as may be necessary to attain the foregoing objectives.
Cooperative unions may assist the national and local governments in the latter’s development activities in their respective
jurisdictions.
LABORATORY COOPERATIVE
A cooperative organized by minors shall be considered a laboratory cooperative and must be affiliated with a registered
cooperative.
Purposes (Section 7 of CDA MC 2015-03):

1. To serve as a training ground for its members to prepare them for membership in regular cooperatives;
2. To teach the values of thrift and saving mobilization among its members;
3. To instill cooperative values, principles, financial discipline, business skills, and leadership skills among its members; or
4. To promote and advocate Filipino social and cultural values, financial education, ecological awareness and sustainable
development
Affiliation (Section 8 of CDA MC 2015-03):

1. A laboratory cooperative shall be affiliated with a duly registered cooperative, to be known as the Guardian Cooperative.
2. A laboratory cooperative primarily composed of students from a particular school may affiliate with the school’s cooperative,
if any, or select a cooperative of its choice within its area of operation.
3. If the laboratory cooperative is composed primarily of out-of-school minors, it shall be affiliated with a cooperative of its
own choice within or nearest its area of operation.
Name (Section 11 of CDA MC 2015-03): It shall include in it name the words “Laboratory Cooperative of (Name of Guardian
Cooperative)”.

Rules Applicable:
1. A certificate of registration issued to a laboratory cooperative does not bestow upon a laboratory cooperative a juridical
personality
2. The dissolution of the Guardian Cooperative shall result in the revocation of the Certificate of Recognition.
3. It is the Guardian Cooperative that shall be liable for any violations committed in the operation of the laboratory cooperative.
4. Any member who reaches the age of majority has option to join the Guardian Cooperative by signifying his/her intention
to become a member upon compliance with all the requirements for membership.
5. A Guardian Cooperative may supervise more than one laboratory cooperative.
Causes of Termination of Membership (Section 16 of CDA MC 2015-03):

1. Upon reaching the age of majority (18 years of age); and
2. Such other causes as may be provided for in the by-laws of the Guardian Cooperative and in the Manual of Operations for
the Laboratory Cooperative
MEMBERSHIP
Kinds of Membership
1. A regular member is one who has complied with all the membership requirements and entitled to all the rights and
privileges of membership.
2. An associate member is one who has no right to vote nor be voted upon and shall be entitled only to such rights and
privileges as the by-laws may provide.
Requisites to be a regular member:

a. Meets the minimum requirements of regular membership
b. Continues to patronize the cooperative for two (2) years, and
c. signifies his/her intention to remain a member.
Rules on Government Officers and Employees:

1. Any officer or employee of the CDA shall be disqualified to be elected or appointed to any position in a cooperative: Provided,
That the disqualification does not extend to a cooperative organized by the officers or employees of the CDA.
2. All elective officials of the Government shall be ineligible to become officers and directors of cooperatives: Provided, That
the disqualification does not extend to a party list representative being an officer of a cooperative he or she represents;
and
3. Any government employee or official may, in the discharge of his duties as a member in the cooperative, be allowed by the
end of office concerned to use official time for attendance at the general assembly, board and committee meetings of
cooperatives as well as cooperative seminars, conferences, workshops, technical meetings, and training courses locally or
abroad: Provided, That the operations of the office concerned are not adversely affected.
Termination of Membership
1. Withdrawal for a valid reason and giving of a sixty (60) day notice to the board of directors.
Subject to the by-laws of the cooperative, the withdrawing member shall be entitled to a refund of his share capital contribution
and all other interests in the cooperative: Provided, That such fund shall not be made if upon such payment the value of the
assets of the cooperative would be less than the aggregate amount of its debts and liabilities exclusive of his share capital
contribution.
2. The death or insanity of a member in a primary cooperative and the insolvency or dissolution of a member in a secondary
or tertiary cooperative may be considered valid grounds for termination of membership: Provided, That in case of death or
insanity of an agrarian reform beneficiary-member of a cooperative, the next-of-kin may assume the duties and
responsibilities of the original member
3. Membership in the cooperative may be terminated by a vote of the majority of all the members of the board of directors
for any of the following causes:
a. When a member has not patronized any of the services of the cooperative for an unreasonable period of time as may
be previously determined by the board of directors;
b. When a member has continuously failed to comply with his obligations;
c. When a member has acted in violation of the by-laws and the rules of the cooperative; and
d. For any act or omission injurious or prejudicial to the interest or the welfare of the cooperative.
A member whose membership the board of directors may wish to terminate shall be informed of such intended action in writing
and shall be given an opportunity to be heard before the said board makes its decision. The decision of the board shall be in
writing and shall be communicated in person or by registered mail to said member and shall be appealable within thirty (30)
days from receipt thereof to the general assembly whose decision shall be final.
The general assembly may create an appeal and grievance committee whose members shall serve for a period of one (1) year
and shall decide appeals on membership termination. The committee is given thirty (30) days from receipt thereof to decide on
the appeal. Failure to decide within the prescribed period, the appeal is deemed approved in favor of the member. Pending a
decision by the general assembly, the membership remains in force.
Refund of Interest: All sums computed in accordance with the bylaws to be due from a cooperative to a former member shall
be paid to the member whose membership has been terminated either by the cooperative or by the approved transferee, as
the case may be.
GENERAL ASSEMBLY
The General Assembly refers to the full membership of the cooperative duly assembled for the purpose of exercising the rights
and performing all the obligations pertaining to cooperatives, and is considered the highest policy-making body of the
cooperative.
Composition: all members who are entitled to vote under the articles of cooperation and by-laws.

Delegation of powers of the GA: only for purposes of prompt and intelligent decision-making, the general assembly may by
a three-fourths (3/4) vote of all its members with voting rights, present and constituting a quorum, delegate some of its powers
to a smaller body of the cooperative; these powers shall be enumerated under the by-laws of the cooperative.
Exclusive powers which cannot be delegated:

1. To determine and approve amendments to the articles of cooperation and bylaws;
2. To elect or appoint the members of the board of directors, and to remove them for cause. However, in the case of the
registered electric cooperatives, election of the members of the board shall be held in accordance with its bylaws or election
guidelines of such electric cooperative; and
3. To approve developmental plans of the cooperative.
Meetings
Regular meeting: shall be held annually on a date fixed in the by-laws, or if so not fixed, any date within 90 days after the close
of each fiscal year.
Special meeting: whenever necessary, a special meeting of the general assembly may be called at any time by a majority vote
of the board of directors or as provided for in the by-laws. A notice in writing shall be sent one (1) week prior to the meeting
to all members who are entitled to vote.
Other ways of calling a special meeting:

1. A special meeting shall be called by the board of directors after compliance with the required notice within 1 month after
receipt of a request in writing from at least ten per centum (10%) of the total members who are entitled to vote
to transact specific business covered by the call.
2. If the board fails to call a regular or a special meeting within the given period, the Authority, upon petition of ten per
centum (10%) of all the members of the cooperative who are entitled to vote, and for good cause shown, shall issue
an order to the petitioners directing them to call a meeting of the general assembly by giving proper notice as required by
the Code or in the by-laws
3. In the case of a newly approved cooperative, a special general assembly shall be called, as far as practicable, within
ninety (90) days from such approval;
4. The Authority may call a special meeting of the cooperative for the purpose of reporting to the members the result of
any examination or other investigation of the cooperative affairs;
Notice: may be done in writing, by posting or publication or through electronic means. Note, however, that notice of any meeting
may be waived, expressly or impliedly, by any member.
Quorum: consist of at least 25% of all the members entitled to vote.
Except:
1. Cooperative banks: ½ plus 1 (EXCEPT: to amend the Articles and the By-Laws, which will require ¾ [Art. 99])
2. Electric cooperatives: 5% of all members entitled to vote, unless the by-laws provides otherwise
Voting system: Each member of a primary cooperative shall have only one vote.
In case of members of secondary or tertiary cooperatives, they shall have one basic vote and as many incentive votes as
provided for in the bylaws but not to exceed 5 votes.
Delegates: the votes cast by the delegates shall be deemed as votes cast by the members thereof.
Voting by proxy may be allowed by the by-laws of a cooperative other than a primary cooperative.
BOARD OF DIRECTORS, COOPERATIVE OFFICERS and COMMITTEES
BOARD OF DIRECTORS
The direction and management of the affairs of the cooperatives shall be vested in a Board of Directors, unless the by-laws
provide otherwise.
Composition: not less than 5 but not more than 15 elected by the general assembly.
Term: 2 years (maximum term allowed as per CDA MC 2012-20)
Powers:
1. Strategic planning;
2. Direction-setting; and
3. Policy formulation
Directors: Any member of a cooperative who under the bylaws of the cooperative, has the right to vote and who possesses all
the qualifications and none of the disqualifications provided in the laws or bylaws shall be eligible for election as director.
Special director for technical knowledge: The cooperative may, by resolution of its board of directors, admit as directors, or
committee member one appointed by any financing institution from which the cooperative received financial assistance
solely to provide technical knowledge not available within its membership. Such director or committee member need not be
a member of the cooperative and shall have no powers, rights, nor responsibilities except to provide technical assistance as
required by the cooperative.
Prohibitions:
1. The members of the board of directors shall not hold any other position directly involved in the day to day operation
and management of the cooperative.
2. Any person engaged in a business similar to that of the cooperative or who in any way has a conflict of interest
with it, is disqualified from election as a director of said cooperative.

Meeting of the board and quorum requirement:
Regular meetings: In the case of primary cooperatives, regular meetings of the board of directors shall be held at least once a
month.
Special meetings of the board of directors may be held at any time upon the call of the chairperson or a majority of the members
of the board: Provided, That written notices of the meeting specifying the agenda of the special meeting shall be given to all
members of the board at least one (1) week before the said meeting.
Quorum: A majority of the members of the Board shall constitute a quorum for the conduct of business, unless the bylaws
provide otherwise.
Prohibition on proxies: Directors cannot attend or vote by proxy at board meetings.
Vacancy:
Cause of the vacancy Who will fill-up the vacancy
Expiration of the term General Assembly, in a general or special meeting called for the purpose
Other causes Board of Directors, if they still constitute a quorum
Note that for corporations, removals are filled-up only by the stockholders in the same meeting where the director was removed.
OFFICERS OF THE COOPERATIVES: Rules Applicable:

1. The board of directors shall elect from among themselves the chairperson and vice-chairperson, and elect or appoint other
officers of the cooperative from outside of the board in accordance with their by-laws.
2. All officers shall serve during good behavior and shall not be removed except for cause after due hearing.
3. Loss of confidence shall not be a valid ground for removal unless evidenced by acts or omission causing loss of confidence
in the honesty and integrity of such officer.
4. No two (2) or more persons with relationships up to the third civil degree of consanguinity or affinity nor shall any person
engaged in a business similar to that of the cooperative nor who in any other manner has interests in conflict with the
cooperative shall serve as an appointive officer.
COMMITTEES
Executive committee: may be created under the by-laws and appointed by the board of directors with such powers and duties
as may be delegated to it in the by-laws or by a majority vote of all the members of the board of directors.
Those required to be provided under the by-laws:

1. Audit
2. Election
3. Mediation and conciliation
4. Ethics
5. Such other committees as may be necessary
Committees whose members are elected by the GA:

1. Audit
2. Election
Committees whose members are appointed by the board of directors: all other committees
COMPENSATION OF DIRECTORS:
General Rule: directors are not to receive any compensation
Exceptions:
1. If there is a provision in the by-laws fixing their compensation;
2. Reasonable per diems, except
a. if in the preceding calendar year, the cooperative reported a net loss or
b. had a dividend rate less than the official inflation rate for the same year.
No additional compensation other than per diems shall be paid during the first year of existence of any cooperative.
Under Section 5 of CDA MC 2013-17, the grant of compensation other than per diem to the directors shall be made only
after the adoption of a General Assembly Resolution approving such compensation.
Under Section 6, resumption of grant of per diem after a period of suspension shall not be compounded. No recovery of
per diem during the period of suspension shall be allowed.
3. By a majority vote of the members with voting rights at a regular or special general assembly meeting specifically called
for the purpose
Compensation of Officers, Committee Members and employees: The compensation of officers of the cooperative as well
as the members of the committee as well as the members of the committees may be fixed in the by-laws.
Unless already fixed in the by-laws, the compensation of all other employees shall be determined by the board of directors.

DEALINGS OF DIRECTORS, OFFICERS, OR COMMITTEE MEMBERS WITH COOPERATIVES
SELF-DEALING DIRECTORS: A contract entered into by the cooperative with one (1) or more of its directors is voidable, at
the option of the cooperative, unless all the following conditions are present:
1. That the presence of such director in the board meeting wherein contract was approved was not necessary to constitute
a quorum for such meeting;
2. That the vote of such director was not necessary for the approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and
Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director,
such contract may be ratified by a three-fourths (3/4) vote of all the members with voting rights, present and constituting
a quorum in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors involved is
made at such meeting, and that the contract is fair and reasonable under the circumstances.
Self-Dealing Officers and Committee Members: the same rule above shall apply, except in the case of an officer or committee
member, the contract shall be valid if it has been previously authorized by the general assembly or by the board of directors.
DISLOYALTY OF A DIRECTOR: A director who, by virtue of his office, acquires for himself an opportunity which should belong
to the cooperative shall be liable for damages and must account for double the profits that otherwise would have accrued to
the cooperative by refunding the same, unless his act has been ratified by a three-fourths (3/4) vote of all the members with
voting rights, present and constituting a quorum. This provision shall be applicable, notwithstanding the fact that the director
used his own funds in the venture.
USE OF CONFIDENTIAL INFORMATION: A director or officer, or an associate of a director or officer, who, for his benefit or
advantage or that of an associate, makes use of confidential information that, if generally known, might reasonably be expected
to adversely affect the operation and viability of the cooperative, shall be held:
1. Liable to compensate the cooperative for the direct losses suffered by the cooperative as a result of the illegal use of
information; and
2. Accountable to the cooperative for any direct benefit or advantage received or yet to be received by him or his associate,
as a result of the transaction.
REMOVAL OF OFFICERS:
1. All complaints for the removal of any elected officer shall be filed with the board of directors.
2. Such officer shall be given the opportunity to be heard.
3. Majority of the board of directors may place the officer concerned under preventive suspension pending the resolution of
the investigation.
4. Upon finding of a prima facie evidence of guilt, the board shall present its recommendation for removal to the general
assembly.
5. An elected officer may be removed by three fourths (3/4) votes of the regular members present and constituting a quorum,
in a regular or special general assembly meeting called for the purpose.
6. The officer concerned shall be given an opportunity to be heard at said assembly.
OTHER OFFICERS
Accountant: The accountant or the bookkeeper of the cooperative shall be responsible for the maintenance of the
cooperative in accordance with generally accepted accounting practices. He shall also be responsible for the production of the
same at the time of audit or inspection.
Audit Committee: The audit committee shall be responsible for the continuous and periodic review of the books and records
of account to ensure that these are in accordance with generally accepted accounting practices. He shall also be responsible for
the production of the same at the time of audit or inspection.
RECORDS AND REPORTS
KEEPING OF RECORDS
Each cooperative shall maintain records of accounts such that the true and correct condition and the results of the operation
of the cooperative may be ascertained therefrom at any time. The financial statements, audited according to generally accepted
auditing standards, principles and practices, shall be published annually and shall be kept posted in a conspicuous place in the
principal office of the cooperative.
Subject to the pertinent provisions of the National Internal Revenue Code and other laws, a cooperative may dispose by way
of burning or other method of complete destruction any document, record or book pertaining to its financial and
nonfinancial operations which are already more than five (5) years old except those relating to transactions which are the
subject of civil, criminal and administrative proceedings. An inventory of the audited documents, records and books to be
disposed of shall be drawn up and certified to by the board secretary and the chairman of the audit committee and presented
to the board of directors which may thereupon approve the disposition of said records.
REPORTS
1. Every cooperative shall draw up regular reports of its program of activities, including those in pursuance of their socio-civic
undertakings, showing their progress and achievements at the end of every fiscal year.
2. The reports shall be made accessible to its members, and copies thereof shall be furnished to all its members or record.
3. These reports shall be filed with the CDA within one hundred twenty (120) days from the end of the calendar year.
4. Failure to file the required reports shall subject the accountable officer/s to fines and penalties as may be prescribed by the
CDA, and shall be a ground for the revocation of authority of the cooperative to operate as such.
5. The fiscal year of every cooperative shall be the calendar year except as may be otherwise provided in the by-laws.
6. If a cooperative fails to make, publish and file the reports required herein, or fails to include therein any matter required,
the CDA shall, within fifteen (15) days from the expiration of the prescribed period, send such cooperative a written notice,
stating its non-compliance and the commensurate fines and penalties that will be imposed until such time that the
cooperative has complied with the requirements.

ANNUAL AUDIT:
1. Cooperatives shall be subject to an annual financial, performance and social audit.
2. The financial audit shall be conducted by an external auditor who satisfies all the following qualifications:
a. He is independent of the cooperative or any of its subsidiary that he is auditing; and
b. He is a member in good standing of the Philippine Institute of Certified Public Accountants (PICPA) and is accredited
by both the Board of Accountancy and the CDA.
3. The social audit shall be conducted by an independent social auditor accredited by the CDA.
4. Performance and social audit reports which contain the findings and recommendations of the auditor shall be submitted to
the board of directors.
5. The CDA, in consultation with the cooperative sector, shall promulgate the rules and standards for the social audit of
cooperatives.
Audit Report:
1. The auditor shall submit to the board of directors and to the audit committee the financial audit report which shall be in
accordance with the generally accepted auditing standards for cooperatives as jointly promulgated by the Philippine
Institute of Certified Public Accountants (PICPA) and the CDA.
2. Thereafter, the board of directors shall present the complete audit report to the general assembly in its next meeting.
No liability for defamation: The auditor is not liable to any person in an action for defamation based on any act, done, or
any statement made by him in good faith in connection with any matter he is authorized or required to do pursuant to RA 9520.
Limitation on auditor as to familiarity: the external auditor, whether on his/her individual capacity or as partner of a firm,
may undertake the external audit of the concerned cooperative for not more than 5 consecutive years, provided that the
external auditor may be allowed to audit the same client after a gap of 2 years.
CDA MC 2014-02 further clarifies that the 5-consecutive-year limit shall apply to the accredited cooperative external auditor,
either as individual CPA or as partnership/auditing firm. For partnership/auditing firm, accreditation is an authority vested to
them as an organization per se and that all the partners and associates are part of the organization.
MEMBERS’ RIGHT TO EXAMINE:

1. A member shall have the right to examine the records required to be kept by the cooperative during reasonable hours on
business days and he may demand, in writing, for a copy of excerpts from said records without charge except the cost of
production.
2. Any officer of the cooperative who shall refuse to allow any member of the cooperative to examine and copy excerpts from
its records shall be liable to such member for damages and shall be guilty of an offense which shall be punishable under
RA 9520: Provided,
a. That if such refusal is pursuant to a resolution or order of the board of directors, the liability shall be imposed upon
the directors who voted for such refusal; and
b. That it shall be a defense to any action under this article that the member demanding to examine and copy excerpts
from the cooperative records has improperly used any information secured through any prior examination of the
records of such cooperative or was not acting in good faith or for a legitimate purpose in making his demand.
Not included in such right to examine:

1. Subsidiary ledgers and
2. Records of natural or juridical members other than their own personal records.
Safety of Records: Every cooperative shall, at its principal office, keep and carefully preserve the records required to be
prepared and maintained. It shall take all necessary precaution to prevent its loss, destruction or falsification.
TAX EXEMPTION
TAX EXEMPTION OF COOPERATIVES

1. Duly registered cooperatives which do not transact any business with non-members or the general public shall not be
subject to any taxes and fees imposed under the internal revenue laws and other tax laws.
2. Cooperatives transacting business with both members and non-members shall not be subjected to tax on their transactions
with members. In relation to this, the transactions of members with the cooperative shall not be subject to any taxes and
fees, including not limited to final taxes on members’ deposits and documentary tax.
Notwithstanding the provisions of any law or regulation to the contrary, such cooperatives dealing with non-members shall
enjoy the following tax exemptions:
a. Cooperatives with accumulated reserves and undivided net savings of not more than Ten million pesos
(P10,000,000.00) shall be exempt from all national, city, provincial, municipal or barangay taxes of whatever name
and nature.
Such cooperatives shall be exempt from customs duties, advance sales or compensating taxes on their importation of
machineries, equipment and spare parts used by them and which are not available locally a certified by the department
of trade and industry (DTI). All tax free importations shall not be sold nor the beneficial ownership thereof be
transferred to any person until after five (5) years, otherwise, the cooperative and the transferee or assignee shall be
solidarily liable to pay twice the amount of the imposed tax and / or duties.
b. Cooperatives with accumulated reserves and divided net savings of more than Ten million pesos (P10,000,000.00)
shall pay the following taxes at the full rate:
i. Income Tax - On the amount allocated for interest on capitals: Provided, That the same tax is not consequently
imposed on interest individually received by members: Provided, further, That cooperatives regardless of
classification, are exempt from income tax from the date of registration with the CDA;
ii. Value-Added Tax – On transactions with non-members: Provided, however, That cooperatives duly registered with
the Authority are exempt from the payment of value-added tax subject to exemptions under Section 109 of the
Tax Code.
iii. All other taxes; and
iv. Donations to charitable, research and educational institutions and reinvestment to socioeconomic projects within
the area of operation of the cooperative may be tax deductible.

c. All cooperatives, regardless of the amount of accumulated reserves and undivided net savings shall be exempt from
payment of local taxes and taxes on transactions with banks and insurance companies: Provided, That all sales or
services rendered for non-members shall be subject to the applicable percentage taxes sales made by producers,
marketing or service cooperatives.
CAPITAL, PROPERTY AND FUNDS
Sources of Capital
1. Member’s share capital;
2. Loans and borrowings including deposits;
3. Revolving capital which consists of the deferred payment of patronage refunds, or interest on share capital; and
4. Subsidies, donations, legacies, grants, aids and such other assistance from any local or foreign institution whether public
or private: Provided, That capital coming from such subsides, donations, legacies, grants, aids and other assistance shall
not be divided into individual share capital holdings at any time but shall instead form part of the donated capital or fund
of the cooperative.
Upon dissolution, such donated capital shall be subject to escheat.
Limitation on Share Capital Holdings:

1. No member of primary cooperative other than cooperative itself shall own or hold more than ten per centum
(10%) of the share capital (total subscribed share capital as per CDA MC 2011-05) of the cooperative.
2. Where a member of cooperative dies, his heir shall be entitled to the shares of the decedent: Provided,
a. the total shareholding of the heir does not exceed ten per centum (10%) of the share capital of the cooperative;
b. the heir qualifies and is admitted as members of the cooperative; and
c. where the heir fails to qualify as a member or where his total shareholding exceeds ten per centum (10%) of the share
capital, the share or shares in excess will revert to the cooperative upon payment to the heir of the value of such
shares.
Assignment of Share Capital Contribution or Interest: No member shall transfer his shares or interest in the cooperative
or any part thereof unless:
1. He has held such share capital contribution or interest for not less than one (1) year.
2. The assignment is made to the cooperative or to a member of the cooperative or to a person who falls within the field of
the membership of the cooperative; and
3. The board of directors has approved such assignment.
Capital Build-Up: The by-laws of every cooperative shall provide for a reasonable and realistic member capital build-up
program to allow the continuing growth of the members’ investment in their cooperative as their economic conditions continue
to improve.
Continuing Subscription: cooperatives are required
1. To adopt a policy of continuing subscription on share capital upon full payment of the initial subscription.
2. To execute subscription agreement upon admission of members and whenever additional subscription shall be made by
members upon full payment of their initial subscription.
3. Unless otherwise provided for in their bylaws, cooperatives shall issue Share Certificates at least every end of the calendar
year based on the number of shares fully paid for the said period.
a. Cooperatives are prohibited from issuing multiple types of common shares and different par value per share.
b. It is likewise prohibited for any cooperative increase/decrease the par value of the share capital by way of amending
their Articles of Cooperation and Bylaws.
Share: refers to a unit of capital in a primary cooperative the par value of which may be fixed to any figure not more than One
thousand pesos (P1,000.00). The share of capital of a cooperative is the money paid or required to be paid for the operations
of the cooperative. The method for the issuance of share certificates shall prescribed in its by-laws.
Fines: The by-laws of a cooperative may prescribe a fine on unpaid subscribed share capital. Provided, that such fine is fair
and reasonable under the circumstances.
Investment of Capital: A cooperative may invest its capital in any of the following:
1. In shares or debentures or securities of any other cooperative;
2. In any reputable bank in the locality, or any cooperative;
3. In securities issued or guaranteed by the Government;
4. In real state primarily for the use of the cooperative or its members; or
5. In any other manner authorized in the bylaws.
Revolving Capital: The General Assembly may authorize the board of directors to raise a revolving capital to strengthen its
capital structure by deferring the payment of patronage refunds and interest on share capital or by the authorized deduction of
a percentage from the proceeds of products sold or services rendered, or per unit of product or services handled. The board of
directors shall issue revolving capital certificates with serial number, name, amount, and rate of interest to be paid and shall
distinctly set forth the time of retirement of such certificates and the amounts to be returned.
NET SURPLUS AND DISTRIBUTION
NET SURPLUS:
1. Every cooperative shall determine its net surplus at the close of every fiscal year and at such other times as may be
prescribed by the bylaws.
2. It shall not be construed as profit but as an excess of payments made by the members for the loans borrowed, or the goods
and services availed by them from the cooperative or the difference of the rightful amount due to the members for their
products sold or services rendered to the cooperative including other inflows of assets resulting from its other operating
activities and which shall be deemed to have been returned to them if the same is distributed as prescribed herein.

DISTRIBUTION
The net surplus of every cooperative shall be distributed as follows:

Purpose Amount
Reserve Fund a. The reserve fund shall be used for the stability of Minimum 10% of the net surplus;
the cooperative and to meet net losses in its Provided, that in the first 5 years of
operations. The General Assembly may decrease operation after registration, it shall not
the amount allocated to the reserve fund when the be less than 50% of the net surplus.
reserve fund already exceeds the share capital.
b. Any sum recovered on items previously charged to
the reserve fund shall be credited to such fund.
c. The reserve fund shall not be utilized for
investment, other than those allowed in RA 9520.
Such sum of the reserve fund in excess of the
share capital may be used at any time for any
project that would expand the operations of the
cooperative upon the resolution of the general
assembly.
d. Upon the dissolution of the cooperative, the
reserve fund shall not be distributed among the
members. The GA may resolve:
i. To establish a usufructuary trust fund for the
benefit of any federation or union to which
the cooperative is affiliated; and
ii. To donate, contribute, or otherwise dispose
of the amount for the benefit of the
community where the cooperative operates.
If the members cannot decide upon the
disposal of the reserve fund, the same shall
go to the federation or union to which the
cooperative is affiliated.
Education and The bylaws may provide that certain fees or a portion Maximum 10% of the net surplus
Training Fund thereof be credited to such fund. The fund shall
provide for the training, development and similar other
cooperative activities geared towards the growth of
the cooperative movement:
a. Half of the amounts transferred to the education
and training fund annually shall be spent by the
cooperative for education and training purposes;
while the other half may be remitted to a union or
federation chosen by the cooperative or of which
it is a member. The said union or federation shall
submit to the CDA and to its contributing
cooperatives the following schedules:
i. List of cooperatives which have remitted their
respective Cooperative Education and
Training Funds (CETF);
ii. Business consultancy assistance to include
the nature and cost; and
iii. Other training activities undertaken
specifying therein the nature, participants
and cost of each activity.
b. Upon the dissolution of the cooperative, the
unexpended balance of the education and training
fund appertaining to the cooperative shall be
credited to the cooperative education and training
fund of the chosen union or federation.
Community The community development fund shall be used for Minimum 3% of the net surplus
Development Fund projects or activities that will benefit the community
where the cooperative operates.
Optional Fund A land and building and other necessary fund Maximum 7% of the net surplus
Remaining surplus Interest on share capital Not to exceed the normal rate of return
on investments and patronage funds.
Any amounts remaining after the
allowable interest and patronage refund
shall be credited to the reserve fund.
PATRONAGE REFUNDS: the sum allocated to “patrons” or those who availed of the goods/services of the cooperative.
Member-patrons:
1. With paid-up share capital contribution, his proportionate amount of patronage refund shall be paid to him unless he
agrees to credit the amount to his account as additional share capital contribution;
2. With unpaid share capital contribution, his proportionate amount of patronage refund shall be credited to his account until
his account until his share capital contribution has been fully paid;
Non-Member patrons:
1. In the case of a non-member patron, his proportionate amount of patronage refund shall be set aside in a general fund
for such patrons.
2. It shall be allocated to individual non-member patrons only (a) upon request and (b) presentation of evidence of
the amount of his patronage.

The amount so allocated shall be credited to such patron toward payment of the minimum capital contribution for
membership.
a. The non-member patron shall be deemed and become a member if the following concur:
i. When a sum equal to the minimum capital contribution has accumulated
ii. at any time within a period specified in the bylaws of the cooperative
iii. if he so agrees or requests and complies with the provisions of the bylaws for admission to membership;
b. The amount so accumulated or credited to the non-member patrons’ account together with any part of the general fund
for nonmember patrons shall be credited to the reserve fund or to the education and training fund of the cooperative,
at the option of the cooperative, in any of the following cases:
i. If within any period of time specified in the bylaws, any subscriber who has not fully paid his subscribed share capital
or
ii. any non-member patron who has accumulated the sum necessary for membership but who does not request nor agree
to become a member or fails to comply with the provisions of the bylaws for admission to membership.
DISSOLUTION
Dissolution is the termination of the juridical personality of the cooperative through appropriate judicial proceedings, or by an
order of the CDA, or through its own initiative.
Modes:
1. Voluntary: if initiated through the voluntary decision of the members of cooperatives
2. Involuntary: if ordered by the CDA or a competent court having jurisdiction over the cooperatives on grounds as specified
by law, and after due process
Effect: terminates the right of the cooperative to continue the business or purposes for which it was established and is bound
to wind up its affairs within the period as specified by law
Voluntary Dissolution Where no Creditors are Affected:

1. By a majority vote of the board of directors, and by a resolution duly adopted by the affirmative vote of at least three-
fourths (3/4) of all the members with voting rights, present and constituting a quorum at a meeting to be held upon call of
the directors
2. That the notice of time, place and object of the meeting shall be published for three (3) consecutive weeks in a newspaper
published in the place where the principal office of said cooperative is located, or if no newspaper is published in such place,
in a newspaper of general circulation in the Philippines
3. That the notice of such meeting is sent to each member of record either by registered mail or by personal delivery at least
thirty (30) days prior to said meeting.
4. A copy of the resolution authorizing the dissolution shall be certified to by a majority of the board of directors and
countersigned by the board secretary.
5. The CDA shall thereupon issue the certificate of dissolution.
Voluntary Dissolution Where Creditors Are Affected:

1. The petition for dissolution shall be filed with the CDA.
2. The petition shall be:
a. signed by a majority of its board of directors or other officers managing its affairs;
b. verified by its chairperson or board secretary or one of its directors; and
c. shall set forth all claims and demands against it and that its dissolution was resolved upon by the affirmative vote of
at least three-fourths (3/4) of all the members with voting rights, present and constituting a quorum at a meeting
called for that purpose.
3. If the petition is sufficient in form and substance, the CDA shall issue an order reciting the purpose of the petition and shall
fix a date which shall not be less than thirty (30) nor more than sixty (60) days after the entry of the order.
4. Before such date, a copy of the order shall be published at least once a week for three (3) consecutive weeks in a newspaper
of general circulation published in the municipality or city where the principal office of the cooperative is situated or in the
absence of such local newspaper, in a newspaper of general circulation in the Philippines, and a copy shall likewise be
posted for three (3) consecutive weeks in three (3) public places in the municipality or city where the cooperative’s office
is located.
5. Upon expiry of the five (5) day notice to file objections, the CDA shall proceed to hear the petition and try any issue raised
in the objection filed; and if the objection is sufficient and the material allegations of the petition are proven, it shall issue
an order to dissolve the cooperative and direct the disposition of its assets in accordance with existing rules and regulations.
6. The order of dissolution shall set forth therein:
a. The assets and liabilities of the cooperative;
b. The claim of any creditor;
c. The number of members; and
d. The nature and extend of the interests of the members of the cooperative.
Involuntary Dissolution by the Court: A cooperative may be dissolved by order of a competent court after due hearing on
the grounds of:
1. Violation of any law, regulation or provisions of its bylaws; or
2. Insolvency.
Upon receipt of final and executory decision of the court, the CDA shall issue an order to proceed with the winding up of the
affairs of the cooperative.
Involuntary Dissolution by Order of the CDA: The CDA may suspend or revoke, after due notice and hearing, the certificate
of registration of a cooperative on any of the following grounds:
1. Having obtained its registration by fraud;
2. Existing for an illegal purpose;
3. Willful violation, despite notice by the CDA, of the provisions of RA 9520 or its bylaws;
4. Willful failure to operate on a cooperative basis; and
5. Failure to meet the required minimum number of members in the cooperative.

Dissolution by Failure to Organize and Operate: If a cooperative:
1. has not commenced business and its operation within two (2) years after the issuance of its certificate of registration; or
2. has not carried on its business for two (2) consecutive years,
The CDA shall send a formal notice to the said cooperative to show cause as to its failure to operate. Failure of the cooperative
to promptly provide justifiable cause for its failure to operate shall warrant the CDA to delete its name from the roster of
registered cooperatives and shall be deemed dissolved.
LIQUIDATION
1. Every cooperative whose charter expires by its own limitation or whose existence is terminated by voluntary dissolution or
through an appropriate judicial proceeding shall nevertheless continue to exist for three (3) years after the time it is
dissolved; not to continue the business for which it was established but for the purpose of prosecuting and defending suits
by or against it; settlement and closure of its affairs; disposition, conveyance and distribution of its properties and assets.
2. At any time during the said three (3) years, the cooperative is authorized and empowered to convey all of its properties to
trustees for the benefit of its members, creditors and other persons in interest.
3. From and after any such conveyance, all interests which the cooperative had in the properties are terminated.
4. Upon the winding up of the cooperative affairs, any asset distributable to any creditor, shareholder or member who is
unknown or cannot be found shall be given to the federation or union to which the cooperative is affiliated with.
5. A cooperative shall only distribute its assets or properties upon lawful dissolution and after payment of all its debts and
liabilities, except in the case of decrease of share capital of the cooperative and as otherwise allowed by this Code.
1. The minimum number of natural persons required to organize a primary cooperative is:
A. 5 B. 10 C. 15 D. 20
2. What seminar must be completed by a prospective member of a primary cooperative:

A. Pre-Membership Education Seminar C. Post-Membership Education Seminar
B. Pre-Membership Election Seminar D. Post-Membership Enrichment Seminar
3. A single-purpose cooperative may transform into a multi-purpose cooperative and may create
subsidiaries only after at least:
A. 2 years of operation C. 2 years from cooperation
B. 2 years from registration D. 5 years from registration
4. A cooperative duly registered shall have:

A. Comprehensive liability C. Absolute liability
B. Limited liability D. General liability
5. A cooperative may register for a term not exceeding how many years?
A. 100 B. 50 C. 25 D. 20
6. A cooperative may apply for extension of term but such extension cannot be made earlier than __ years
prior to the original or subsequent expiry date/dates.
A. 5 B. 4 C. 3 D. 2
7. The minimum subscription of the authorized capital stock of a cooperative is:

A. 10% of the ACS C. 25% of the ACS
B. 15% of the ACS D. 30% of the ACS
8. The minimum paid-up share capital of a cooperative shall be 25% of the total subscription but not less
than:
A. 3,500 C. 10,000
B. 5,000 D. 15,000
9. CDA shall periodically assess the required paid-up share capital and may increase every __ years.
A. 5 B. 4 C. 3 D. 2
10. All applications for registration shall be finally disposed of by the CDA within a period of 60 days from
the filing thereof, otherwise the application is:
A. Deemed denied C. Considered pending until final resolution
B. Deemed approved D. Returned to the applicant
11. Should the Office of the President fail to act on the appeal within the required period from the filing
thereof, it shall mean:
A. Remand of the application back to CDA C. Approval of the application
B. Conditional approval awaiting final signature D. Denial of the application
12. A certificate of registration issued by the CDA under its official seal shall be __ evidence that the
cooperative therein mentioned is duly registered.
A. Disputable C. Prima facie
B. Presumptive D. Conclusive

13. The articles of cooperation and bylaws of the cooperative may be amended by __ vote of all members
with voting rights.
A. 2/3 B. 1/3 C. ½ D. ¼
14. Contracts executed between private persons and cooperatives prior to the registration of the
cooperative shall be __ between the parties and upon registration of the cooperative.
A. Void C. Valid
15. Any registered cooperative may resolve to divide itself into 2 or more cooperatives by a resolution
approved by a vote of __ of all the members with voting rights.
A. ¾ B. 2/3 C. ½ D. ¼
16. Any registered cooperative may resolve to merge or consolidate with another cooperative by a
resolution approved by a vote of __ of all the members with voting rights.
A. ¾ B. 2/3 C. ½ D. ¼
17. Any merger or consolidation of cooperatives shall be effective upon:

A. The filing of the articles of merger and consolidation with the CDA
B. The election of the directors of the merged and consolidated cooperatives
C. The issuance of the certificate of merger and consolidation by the CDA
D. The date indicated in the articles of merger and consolidation
18. It is a cooperative that promotes and undertakes savings and lending services among its members.
A. Consumers C. Lending
B. Credit D. Finance
19. It is a cooperative the primary purpose of which is to procure and distribute commodities to members
and non-members.
A. Producers C. Procurement
B. Credit D. Consumers
20. It is a cooperative that undertakes joint production whether agricultural or industrial.

A. Producers C. Farmers
B. Consumers D. Agro-industrial
21. It is a cooperative which is engaged in medical and dental care, hospitalization, transportation,
insurance, housing, labor, electric light and power, communication, professional and other services.
A. Service C. Labor
B. Health D. Professional
22. It is a cooperative which combines 2 or more of the business activities of the different types of
cooperatives
A. Bi-purpose C. Multipurpose
B. Tri-purpose D. Complex
23. It is a cooperative which promotes and advocates cooperativism.

A. Social C. Promotional
B. Advocacy D. NGO
24. It is a cooperative which is organized by marginal farmers majority of which are agrarian reform
beneficiaries.
A. Agrarian Reform C. Farmers
B. Agricultural D. Advocacy
25. It is a cooperative which is organized for the primary purpose of providing a wide range of financial
services to cooperatives and their members.
A. Financial C. Cooperative bank
B. Credit D. Lending
26. It is a cooperative whose members are engaged in the production of fresh milk which may be processed
and/or marketed as dairy products.
A. Dairy C. Poultry
B. Farmer D. Agricultural
27. It is a cooperative organized for the primary purpose of owning and operating licensed educational
institutions.
A. Training C. Academic
B. Vocational D. Education

28. It is a cooperative which is organized for the primary purpose of undertaking power generations, utilizing
renewable energy sources, including hybrid systems, acquisition and operation of subtransmission or
distribution to its household members.
A. Energy C. Utility
B. Electric D. Light
29. It is a cooperative which is organized for the primary purpose of engaging in savings and credit services
and other financial services.
A. Financial services C. Cooperative bank
B. Credit D. Lending
30. It is a cooperative which is organized to own, operate and manage water systems for the provision and
distribution of potable water for its members and their households.
A. Water service C. Utility
B. Aquatic D. Resource
31. A Housing Cooperative is __ by its members.

A. Co-owned only C. Co-owned and controlled
B. Controlled only D. Supervised
32. It is a cooperative the members of which are natural persons.

A. Primary C. Tertiary
B. Secondary D. Natural
33. It represents the interest and welfare of all types of cooperatives at the provincial, city, regional and
national levels.
A. Federation C. Cooperative union
B. Managing cooperative D. Association
34. The kinds of membership in a cooperative are:

A. Regular and associate C. Ordinary and extra-ordinary
B. Regular and special D. Class A and Class B
35. An associate who meets the minimum requirements of regular membership, continues to patronize the
cooperative for __ years, and signifies his/her intention to remain a member shall be considered a
regular member.
A. 1 B. 2 C. 3 D. 4
36. A cooperative organized by minors shall be considered a __ cooperative.

A. Minor C. Young
B. Youth D. Laboratory
37. What is a delegable power of the GA?

A. To approve contracts entered into by the cooperative
B. To determine and approve amendments to the articles of cooperation
C. To elect or appoint the members of the board of directors and remove them for cause
D. To approve developmental plans of the cooperative
38. Only for purposes of prompt and intelligent decision-making, the GA may by a __ vote of all its
members with voting rights, delegate some of its powers to a smaller body of the cooperative.
A. ¾ B. 2/3 C. ½ D. ¼
39. If not so fixed, the annual regular meeting of the GA must be held within how many days after the close
of each fiscal year?
A. 30 B. 90 C. 60 D. 45
40. Notice in writing calling for a special meeting of the GA must be sent __ prior to the meeting to all
members entitled to vote.
A. 5 days C. One week
B. 10 days D. One month
1. C 13. A 25. C 37. A
2. A 14. C 26. A 38. A
3. A 15. A 27. D 39. B
4. B 16. A 28. B 40. C
5. B 17. C 29. A
6. A 18. B 30. A
7. C 19. D 31. C
8 D 20. A 32. A
9. A 21. A 33. C
10. B 22. C 34. A
11. C 23. B 35. B
12. D 24. A 36. D

RFBT-08
GOVERNMENT PROCUREMENT LAW

DECLARATION OF POLICY: It is the declared policy of the State to promote the ideals of good governance in all its branches,
departments, agencies, subdivisions, and instrumentalities, including government-owned and/or -controlled corporations and
local government units.
GOVERNING PRINCIPLES: All procurement of the national government, its departments, bureaus, offices and agencies,
including state universities and colleges, government -owned and/or-controlled corporations, government financial institutions
and local government units, shall, in all cases, be governed by these principles:
a) Transparency in the procurement process and in the implementation of procurement contracts.
b) Competitiveness by extending equal opportunity to enable private contracting parties who are eligible and qualified to
participate in public bidding.
c) Streamlined procurement process that will uniformly apply to all government procurement. The procurement process
shall simple and made adaptable to advances in modern technology in order to ensure an effective and efficient method.
d) System of accountability where both the public officials directly or indirectly involved in the procurement process as well
as in the implementation of procurement contracts and the private parties that deal with government are, when warranted
by circumstances, investigated and held liable for their actions relative thereto.
e) Public monitoring of the procurement process and the implementation of awarded contracts with the end in view of
guaranteeing that these contracts are awarded pursuant to the provisions of this Act and its implementing rules and
regulations, and that all these contracts are performed strictly according to specifications.
SCOPE AND APPLICATION: This act shall apply to the:

1. Procurement of Infrastructure Projects
2. Goods and Consulting Services
Regardless of source of funds, whether local of foreign, by all branches and instrumentalities of government, its departments,
offices and agencies, including government-owned and/or-controlled corporations and local government units, subject to the
provisions of Commonwealth Act No. 138.
Any treaty or international or executive agreement affecting the subject matter of this Act to which the Philippine government
is signatory shall be observed.
DEFINITION OF TERMS
Approved Budget for refers to the budget for the contract duly approved by the Head of the Procuring Entity, as provided
the Contract (ABC) for in the General Appropriations Act and/or continuing appropriations, in the National Government
Agencies; the Corporate Budget for the contract approved by the governing Boards, pursuant to
E.O.No.518, series of 1979, in the case of Government Financial Institutions and State Universities
and Colleges; and the Budget for the contract approved by the respective Sanggunian, in the case
of Local Government Units.
BAC refers to the Bids and Awards Committee
Bidding Documents refer to documents issued by the Procuring Entity as the basis for Bids, furnishing all information
necessary for a prospective bidder to prepare a bid for the Goods, Infrastructure Projects, and
Consulting Services to be provided.
Bid refers to signed offer or proposal submitted by a supplier, manufacturer, distributor, contractor or
consultant in response to the Bidding Documents.
Competitive Bidding refers to a method of procurement which is open to participation by any interested party and which
consist of the following processes: advertisement, pre-bid conference, eligibility screening of bids,
evaluations of bids, post - qualification, and award of contract, the specific requirements and
mechanics of which shall be defined in the IRR to be promulgated under this Act.
Consulting Services refer to services for Infrastructure Projects and other types of projects or activities of the Government
requiring adequate external technical and professional experts that are beyond the capability and/or
capacity of the government to undertake such as, but not limited to: (I) advisory and review services;
(ii) pre investment or feasibility studies; (iii) design; (iv) construction supervision; (v) management
and related services; and (vi) other technical services or special studies.
G – EPS refers to the Government Electronic Procurement System
Goods refer to all items, supplies, materials and general support services, except consulting services and
infrastructure projects, which may be needed in the transaction of the public businesses or in the
pursuit of any government undertaking, project or activity, whether in the nature of equipment,
furniture, stationery, materials for construction, or personal property of any kind, including non -
personal or contractual services such as the repair and maintenance of equipment and furniture, as
well as trucking, hauling, janitorial, security, and related or analogous services, as well as
procurement of materials and supplies provided by the procuring entity or such services.
GPPB refers to the Government Procurement Policy Board
Head of the Procuring refers to:
Entity i. The head of the agency or his duly authorized official, for national government agencies;
ii. The governing board or its duly authorized official, for government-owned and/or-controlled
corporations; or
iii. The local chief executive, for local government units. Provided, That in a department, office or
agency where the procurement is decentralized, the Head of each decentralized unit shall be
considered as the Head of the Procuring Entity subject to the limitations and authority delegated
by the head of the department, office or agency.
Infrastructure include the construction, improvement, rehabilitation, demolition, repair, restoration or maintenance
Projects of roads and bridges, railways, airports, seaports, communication faci9lities, civil works components
of information technology projects, irrigation, flood control and drainage, water supply, sanitation,
sewerage and solid waste management systems, shore protection, energy/power and electrification
facilities, national buildings, school buildings and other related construction projects of the
government.

GOVERNMENT PROCUREMENT LAW RFBT-08
IRR refer to the implementing rules and regulations to be promulgated in accordance with this Act.
Portal refers to a website that aggregates a wide variety of content for the purpose of attracting a large
number of users.
Procurement refers to the acquisition of Goods, Consulting Services, and the contracting for Infrastructure Projects
by the Procuring Entity. Procurement shall also include the lease of goods and real estate. With
respect to real property, its procurement shall be governed by the provisions of Republic Act No.8974,
entitled "An Act to Facilitate the Acquisition of Right-of -Way Site or Location of National Government
Infrastructure Projects and for Other Purposes" and other applicable laws, rules and regulations.
Procuring Entity refers to any branch, department, office, agency, or instrumentality of the government, including
state universities and colleges, government-owned and/or - controlled corporations, government
financial institutions, and local government units procuring Goods, Consulting Services and
Infrastructure Projects.
PREPARATION OF BIDDING DOCUMENTS
FORM AND CONTENTS OF BIDDING DOCUMENTS: The Bidding Documents shall be prepared by the Procuring Entity
following the standard forms and manuals prescribed by the GPPB. The Bidding Documents shall include the following:
a) Approved Budget for the Contract;
b) Instructions to Bidders, including criteria for eligibility, bid evaluation and post-qualification, as well as the date, time and
place of the pre-bid Conference (where applicable), submission of bids and opening of bids;
c) Terms of Reference;
d) Eligibility Requirements;
e) Plans and Technical Specifications;
f) Form of Bid, Price Form, and List of Goods or Bill of Quantities;
g) Delivery Time or Completion Schedule;
h) Form and Amount of Bid Security;
i) Form and Amount of Performance Security and Warranty; and,
j) Form of Contract, and General and special Conditions of Contract.
The Procuring Entity may require additional document requirements or specifications necessary to complete the information
required for the bidders to prepare and submit their respective bids.
Reference to Brand Names: Specifications for the Procurement of Goods shall be based on relevant characteristics and/or
performance requirements. Reference to brand names shall not be allowed.
Access to Information: In all stages of the preparation of the Bidding Documents, the Procuring entity shall ensure equal
access to information. Prior to their official release, no aspect of the Bidding Documents shall be divulged or released on any
prospective bidder or having direct or indirect interest in the project to be procured.
INVITATION TO BID
PRE-PROCUREMENT CONFERENCE: Prior to the issuance of the Invitation to Bid, the BAC is mandated to hold a pre-
procurement conference on each and every procurement, except those contracts below a certain level or amount specified
in the IRR, in which case, the holding of the same is optional.
The pre-procurement conference shall assess the readiness of the procurement in terms of confirming the certification
of availability of funds, as well as reviewing all relevant documents and the draft Invitation to Bid, as well as
consultants hired by the agency concerned and the representative of the end -user.
ADVERTISING AND CONTENTS OF THE INVITATION TO BID: In line with the principle of transparency and
competitiveness, all Invitations to Bid contracts under competitive bidding shall be advertised by the Procuring Entity in such
manner and for such length of time as may be necessary under the circumstances, in order to ensure the widest possible
dissemination thereof, such as, but not limited to, posting in the Procuring Entity's premises, in newspapers of general
circulation, the G-EPS and the website of the Procuring Entity, if available. The details and mechanics of implementation shall
be provided in the IRR to be promulgated under this Act.
Contents: The Invitation to Bid shall contain, among others:

a) A brief description of the subject matter of the Procurement;
b) A general statement on the criteria to be used by the Procuring entity for the eligibility check, the short listing of prospective
bidders, in the case of the Procurement of Consulting Services the examination and evaluation of Bids, and post-
qualification;
c) The date, time and place of the deadlines for the submission and receipt of the eligibility requirements, the pre-bid
conference if any, the submission and receipt of bids, and the opening of bids;
d) The Approved Budget for the Contract to be bid;
e) The source of funds;
f) The period of availability of the Bidding Documents, and the place where these may be secured and;
g) The contract duration; and
h) Such other necessary information deemed relevant by the Procuring Entity.
Pre-bid Conference: At least one pre-bid conference shall be conducted for each procurement, unless otherwise provided in the
IRR. Subject to the approval of the BAC, a pre-bid conference may also be conducted upon the written request of any prospective
bidder.
The Pre-bid conference(s) shall be held within a reasonable period before the deadline for receipt of the bids to allow prospective
bidders to adequately prepare their bids, which shall be specified in the IRR.

RECEIPT, OPENING AND SUBMISSION OF BIDS
ELIGIBILITY REQUIREMENTS FOR THE PROCUREMENT OF GOODS AND INFRASTRUCTURE PROJECTS: The BAC or,
under special circumstances specified in IRR, its duly designated organic office shall determine the eligibility of prospective
bidders for the procurement of Goods and Infrastructure Projects, based on the bidders' compliance with the eligibility
requirements within the period set forth in the Invitation to Bid. The eligibility requirements shall provide for fair and equal
access to all prospective bidders. The documents submitted in satisfaction of the eligibility requirements shall be made under
oath by the prospective bidder or by his duly authorized representative certifying to the correctness of the statements made
and the completeness and authenticity of the documents submitted.
A prospective bidder may be allowed to submit his eligibility requirements electronically. However, said bidder shall later on
certify under oath as to correctness of the statements made and the completeness and authenticity of the documents submitted.
ELIGIBILITY REQUIREMENTS AND SHORT LISTING FOR CONSULTING SERVICES: The Eligibility of prospective bidders
for the Procurement of Consulting Services shall be determined by their compliance with the eligibility requirements prescribed
for the competitive Bidding concerned, within the period stated in the Invitation to bid. The eligibility requirements shall provide
for fair and equal access to all prospective bidders. The prospective bidder shall certify under oath as to the correctness of the
statements made, and the completeness and authenticity of the documents submitted.
A prospective bidder may be allowed to submit his eligibility requirements electronically. However, said bidder shall later on
certify under oath as to correctness of the statements made and the completeness and authenticity of the documents submitted.
The eligible prospective bidders shall then be evaluated using numerical ratings on the basis of the short listing requirements
prescribed for the Competitive Bidding concerned, within the period stated in the Invitation to Bid to determine the short list of
bidders who shall be allowed to submit their respective bids.
SUBMISSION AND RECEIPT OF BIDS: A bid shall have two(2) components, namely:
1. The technical components; and
2. The financial components
Subject to the following rules:

1. The bids’ components should be in separate sealed envelopes, and which shall be submitted simultaneously.
2. The bids shall be received by the BAC on such date, time and place specified in the invitation to bid.
3. The deadline for the receipt of bids shall be fixed by the BAC, giving the prospective bidders sufficient time to study and
prepare their bids.
The deadline shall also consider the urgency of the procurement involved. Bids submitted after the deadline shall not be
accepted.
The GPPB may prescribe innovative procedure for the submission, receipt and opening of bids through the G-EPS.
MODIFICATION OF BIDS: A bidder may modify his bid, provided that this is done before the deadline for the receipt of
bids. The modification shall be submitted in a sealed envelope duly identified as a modification of the original bid and stamped
received by the BAC.
WITHDRAWAL OF BIDS: A bidder may, through a letter, withdraw his bid or express his intention not to participate
in the bidding before the deadline for the receipt of bids. In such case, he shall no longer be allowed to submit another
Bid for the same contract either directly or indirectly.
BID SECURITY: All Bids shall be accompanied by a Bid security, which shall serve as guarantee that, after receipt of the Notice
of Award, the winning bidders shall enter into contract with the Procuring Entity within the stipulated time and furnish the
required performance security. The specific amounts and allowable forms of the Bid security shall be prescribed in the IRR.
BID VALIDITY: Bids and Bid securities shall be valid for such reasonable period of time indicated in the Bidding Documents.
The duration for each undertaking shall take into account the time involved in the process of Bid evaluation and award of
contract.
BID OPENING: the BAC shall publicly open all bids at the time, date, and place specified in the bidding documents. The
minutes of the bid opening shall be made available to the public upon written request and payment of a specified fee.
BID EVALUATION
PRELIMINARY EXAMINATION OF BIDS: Prior to Bid evaluation, the BAC shall examine first the technical components
of the bids using "pass/fail" criteria to determine whether all required documents are present.
Only bids that are determined to contain all the bid requirements of the technical component shall be considered for opening
and evaluation of their financial component.
CEILING FOR BID PRICES: The ABC shall be the upper limit or ceiling for the Bid prices.
Bid prices that exceed this ceiling shall be disqualified outright from further participating in the bidding. There shall be no
lower limit to the amount of the award.
BID FOR THE PROCUREMENT OF GOODS AND INFRASTRUCTURE PROJECTS: For the procurement of Goods and
Infrastructure Projects, the BAC shall evaluate the financial component of the bids.
The bids that passed the preliminary examination shall be ranked from lowest to highest in terms of their corresponding
calculated price shall be referred to as the "Lowest Calculated Bid".

BID EVALUATION OF SHORT LISTED BIDDERS FOR CONSULTING SERVICES: For the Procurement of Consulting
Services, the Bids of the short listed bidders shall be evaluated and ranked using numerical ratings in accordance with the
evaluation criteria stated in the Bidding Documents, which shall include factors such as, but not limited to:
1. Experience
2. Performance
3. Quality or Personnel
4. Price and
5. Methodology
The Bids shall be ranked from highest to lowest in terms of their corresponding calculated ratings. The Bid with the highest
calculated rating shall be the "Highest Rated Bid."
After approved by the Head of the Procuring Entity of the Highest Rated Bid, the BAC shall invite the bidder concerned for
negotiation and/or clarification on the following items:
1. Financial proposal submitted by the bidder
2. Terms of reference
3. Scope of services
4. Methodology and work program
5. Personnel to be assigned to job
6. Services/facilities/data to be provided by the Procuring Entity concerned, and
7. Provisions of the contract.
When negotiations with first-in-rank bidder fails, the financial proposal of the second rank bidder shall opened for negotiations:
Provided, that the amount indicated in the financial envelope shall be made as the basis for negotiations and the total contract
amount shall not exceed the amount indicated in the envelope and the ABC.
Whenever necessary, the same process shall be repeated until the bid awarded to the winning bidder.
POST-QUALIFICATION
OBJECTIVE AND PROCESS OF POST-QUALIFICATION: Post-qualification is the stage where the bidder with the Lowest
Calculated Bid, in the case of Goods and Infrastructure Projects, or the Highest Rated Bid, in the case of Consulting Services,
undergoes verification and validation whether he has passed all the requirements and conditions as specified in the
Bidding Documents.
If the bidder with the Lowest Calculated Bid or Highest Rated Bid passes all the criteria for post-qualification, his Bid shall
be considered:
1. The "Lowest Calculated Responsive Bid,” in the case of Goods and Infrastructure or
2. the "Highest Rated Responsive Bid," in the case of Consulting Services.
However, if a bidder fails to meet any of the requirements or conditions, he shall be "post-disqualified" and the BAC
shall conduct the post-qualification on the bidder with the second Lowest Calculate Bid or Highest Rated Bid.
If the bidder with the second Lowest Calculated Bid or Highest Rated Bid is post-disqualified, the same procedure shall be
repeated until the Lowest Calculated Responsive Bid or Highest Rated Responsive Bid is finally determined.
In all cases, the contract shall be awarded only to the bidder with the Lowest Calculated Responsive Bid or Highest Rated
Responsive Bid.
FAILURE OF BIDDING: there shall be a failure of bidding if:

a. No bids are received;
b. No bid qualifies as the Lowest Calculated Responsive Bid/Highest Rated Responsive Bid; or,
c. Whenever the bidder with the highest rated/lowest calculated responsive bid refuses, without justifiable cause to accept
the award of contract, as the case may be.
Under any of the above instances, the contract shall be re-advertised and re-bid. The BAC shall observe the same process
and set the new periods according to the same rules followed during the first bidding.
After the second failed bidding, however, the BAC may resort to negotiated procurement, as provided below.
SINGLE CALCULATED/RATED AND RESPONSIVE BID SUBMISSION: A single calculated/rated and responsive bid shall be
considered for award if it falls under of the following circumstances:
a. If after advertisement, only one prospective bidder submits a Letter of Intent and/or applies for eligibility check, and
meets the eligibility requirements or criteria, after which it submits a bid, which is found to be responsive to the
bidding requirements;
b. If after the advertisement, more than one prospective bidder applies for eligibility check, but only one bidder meets
the eligibility requirements or criteria, after which in submits a bid which is found to be responsive to the bidding
requirements; or
c. If after the eligibility check, more than one bidder meets the eligibility requirements, but only one bidder submits
a bid, and its bid is found to be responsive to the bidding requirements.
In all instances, the Procuring Entity shall ensure that the ABC reflects the most advantageous prevailing price for the
government.
AWARD, IMPLEMENTATION AND TERMINATION OF THE CONTRACT
NOTICE AND EXECUTION OF AWARD: Within a period not exceeding fifteen (15) calendar days from the determination
and declaration by the BAC of the Lowest Calculated Responsive Bid or Highest Rated Responsive Bid, and the recommendation
of the award, the Head of the Procuring Entity or his duly authorized representative shall approve or disapprove the
said recommendation.

Notice of Award: In case of approval, the Head of the Procuring Entity or his duly authorized representative shall immediately
issue the Notice of Award to the bidder with the Lowest Calculated Responsive Bid or Highest Rated Responsive Bid.
Entering into the contract:

1. Within ten (10) calendar days from receipt of the Notice of Award, the Winning bidder shall formally enter into
contract with the Procuring Entity.
2. When further approval of higher authority is required, the approving authority for the contracts shall be given a
maximum of twenty (20) calendar days to approve or disapprove it.
3. In the case of government-owned and/or -controlled corporations, the concerned board shall take action on the said
recommendation within thirty (30) calendar days from receipt thereof.
Notice to Proceed: The Procuring Entity shall issue the Notice to Proceed to the winning bidder not later than seven (7)
calendar days from the date of approval of the contract by the appropriate authority. All notices called for by the terms of the
contract shall be effective only at the time of receipt thereof by the contractor.
PERIOD OF ACTION ON PROCUREMENT ACTIVITIES: The procurement process from the opening of bids up to the
award of contract shall not exceed three (3) months, or a shorter period to be determined by the procuring entity
concerned. The different procurement activities shall be completed within reasonable periods to be specified in the IRR.
If no action on the contract is taken by the head of the procuring entity or by his duly authorized representative, or by the
concerned board, in the case of government-owned and/or -controlled corporations, within the periods specified above, the
contract concerned shall be deemed approved.
PERFORMANCE SECURITY: Prior to the signing of the contract, the winning bidder shall, as a measure of guarantee for the
faithful performance of, and compliance with, his obligations under the contract prepared in accordance with the Bidding
Documents, be required to post a performance security in such form and amount as specified in the Bidding Documents.
FAILURE TO ENTER INTO CONTRACT AND POST PERFORMANCE SECURITY: If, for justifiable causes, the bidder with the
Lowest Calculated Responsive Bid or Highest Rated Responsive Bid fails, refuses or is otherwise unable to enter into contract
with the Procuring Entity, or if the bidder fails to post the required performance security within the period stipulated in the
Bidding Documents, the BAC shall disqualify the said bidder and shall undertake post-qualification for the next-ranked
Lowest Calculated Bid or Highest Rated Bid. This procedure shall be repeated until an award is made. However, if no award
is possible, the contract shall be subjected to a new bidding.
In the case of a failure to post the required performance security, the bid security shall be forfeited without prejudice to the
imposition of sanctions prescribed under this Act.
RESERVATION CLAUSE: The Head of the Agency reserves the right to (1) reject any and all Bids, (2) declare a failure of
bidding, or (3) not award the contract in the following situations:
a. If there is prima facie evidence of collusion between appropriate public officers or employees of the Procuring Entity,
or between the BAC and any of the bidders, or if the collusion is between or among the bidders themselves, or between a
bidder and a third party, including any act which restricts, suppresses or nullifies or tends to restrict, suppress or nullify
competition;
b. If the BAC is found to have failed in following the prescribed bidding procedures; or
c. For any justifiable and reasonable ground where the award of the contract will not redound to the benefit of the
government as defined in the IRR.
CONTRACT IMPLEMENTATION AND TERMINATION: The rules and guidelines for the implementation and termination of
contracts awarded pursuant to the provisions of this Act shall be prescribed in the IRR. The rules and guidelines shall include
standard general and special conditions for contracts.
SPLITTING OF GOVERNMENT CONTRACTS: Splitting of Government Contracts is not allowed. Splitting of Government
Contracts means the division or breaking up of government of the Philippine contracts into smaller quantities and
amounts, or dividing contract implementation into artificial phases or sub-contracts for the purpose of evading or
circumventing the requirements of law and its IRR, particularly the necessity of competitive bidding and the requirements
for the alternative methods of procurement.
Infrastructure Projects: for Infrastructure Projects to be implemented by phases, the Procuring Entity shall ensure that there is
a clear delineation of work for each phase, which must be usable and structurally sound.
GROUNDS FOR TERMINATION
A. Termination for Default

1. In contracts for Goods: The following are ground for termination of contract for default:
a. The Procuring Entity may terminate the contract when outside of force majeure, the Supplier fails to deliver or
perform any or all of the Goods within the period(s) specified in the contract, or within any extension thereof
granted by the Procuring Entity pursuant to a request made by the Supplier prior to the delay, and such failure
amounts to at least ten percent (10%) of the contract price;
b. The Procuring Entity may terminate the contract when, as a result of force majeure, the Supplier is unable to
deliver or perform any or all of the Goods, amounting to at least ten percent (10%) of the contract price, for a
period of not less than sixty (60) calendar days after receipt of the notice from the Procuring Entity stating that
the circumstance of force majeure is deemed to have ceased; or
c. The Procuring Entity shall terminate the contract when the Supplier fails to perform any other obligation under the
Contract.
2. In contracts for Infrastructure Projects: The Procuring Entity shall terminate a contract for default when any of the
following conditions attend its implementation:
a. Due to the Contractor’s fault and while the project is on-going, it has incurred negative slippage of fifteen percent
(15%) or more in accordance with Presidential Decree 1870;

b. Due to the Contractor’s fault and after the contract time has expired, it has incurred a negative slippage of ten
percent (10%) or more in the completion of the work; or
c. The Contractor:
i. abandons the contract works, refuses or fails to comply with a valid instruction of the Procuring Entity or fails
to proceed expeditiously and without delay despite a written notice by the Procuring Entity;
ii. does not actually have on the project site the minimum essential equipment listed on the Bid necessary to
prosecute the Works in accordance with the approved work plan and equipment deployment schedule as
required for the project;
iii. does not execute the Works in accordance with the contract or persistently or flagrantly neglects to carry out
its obligations under the contract;
iv. neglects or refuses to remove materials or to perform a new work that has been rejected as defective or
unsuitable; or
v. sub-lets any part of the contract works without approval by the Procuring Entity.
3. In contracts for Consulting Services: the Procuring Entity shall terminate a contract for default when any of the
following conditions attend its implementation:
a. Outside of force majeure, the Consultant fails to deliver or perform the Outputs and Deliverables within the
period(s) specified in the contract, or within any extension thereof granted by the Procuring Entity pursuant to a
request made by the Consultant prior to the delay;
b. As a result of force majeure, the Consultant is unable to deliver or perform a material portion of the Outputs and
Deliverables for a period of not less than sixty (60) calendar days after the Consultant’s receipt of the notice from
the Procuring Entity stating that the circumstance of force majeure is deemed to have ceased; or
c. The Consultant fails to perform any other obligation under the contract.
B. Termination for Convenience: the Procuring Entity may terminate the Contract, in whole or in part, at any time for its
convenience. The Head of the Procuring Entity may terminate a contract for the convenience of the Government if he has
determined the existence of conditions that make Project Implementation economically, financially or technically impractical
and/or unnecessary, such as, but not limited to, fortuitous event(s) or changes in law and national government policies.
C. Termination for Insolvency: The Procuring Entity shall terminate the contract if the Supplier/Contractor/Consultant is
declared bankrupt or insolvent as determined with finality by a court of competent jurisdiction. In this event, termination
will be without compensation to the Supplier/Contractor/Consultant, provided that such termination will not prejudice or
affect any right of action or remedy which has accrued or will accrue thereafter to the Procuring Entity and/or the
Supplier/Contractor/Consultant.
D. Termination for Unlawful Acts: the Procuring Entity may terminate the contract in case it is determined prima facie that
the Supplier/Contractor/Consultant has engaged, before or during the implementation of the contract, in unlawful deeds
and behaviors relative to contract acquisition and implementation. Unlawful acts include, but are not limited to, the
following:
a. Corrupt, fraudulent, collusive and coercive practices;
b. Drawing up or using forged documents;
c. Using adulterated materials, means or methods, or engaging in production contrary to rules of science or the trade;
and
d. Any other act analogous to the foregoing.
E. Termination by Contractor/Consultant
1. In contracts for Infrastructure Projects: the Contractor may terminate its contract with the Procuring Entity if the works
are completely stopped for a continuous period of at least sixty (60) calendar days through no fault of its own, due to
any of the following reasons:
a. Failure of the Procuring Entity to deliver, within a reasonable time, supplies, materials, right-of-way, or other items
it is obligated to furnish under the terms of the contract; or
b. The prosecution of the work is disrupted by the adverse peace and order situation, as certified by the Armed
Forces of the Philippines Provincial Commander and approved by the Secretary of National Defense.
2. In contracts for Consulting Services: the Consultant may terminate its agreement with the Procuring Entity if the latter
is in material breach of its obligations pursuant to the contract and has not remedied the same within sixty (60)
calendar days following its receipt of the Consultant’s notice specifying such breach.
DISCLOSURE OF RELATIONS
DISCLOSURE OF RELATIONS: In addition to the proposed contents of the Invitation to Bid as mentioned above, all bidding
documents shall be accompanied by a sworn affidavit of the bidder that he or she or any officer of their corporation in
not related to the Head of the Procuring Entity by consanguinity or affinity up to the third civil degree.
Failure to comply with the aforementioned provision shall be a ground for the automatic disqualification of the bid and shall
therefore not be considered for opening and evaluation of financial component.
ALTERNATIVE METHODS OF PROCUREMENT
ALTERNATIVE METHODS: Subject to the prior approval of the Head of the Procuring Entity or his duly authorized
representative, and whenever justified by the conditions provided in this Act, the Procuring Entity may, in order to promote
economy and efficiency, resort to any of the following alternative methods of Procurement:
A. LIMITED SOURCE BIDDING, otherwise known as SELECTIVE BIDDING
A method of Procurement that involves direct invitation to bid by the Procuring Entity from a set of pre-selected suppliers
or consultants with known experience and proven capability relative to the requirements of a particular contract.
Limited Source Bidding may be resorted to only in any of the following conditions:
a. Procurement of highly specialized types of Goods and Consulting Services which are known to be obtainable
only from a limited number of sources; or

b. Procurement of major plant components where it is deemed advantageous to limit the bidding to known eligible
bidders in order to maintain an optimum and uniform level of quality and performance of the plant as a whole.
B. DIRECT CONTRACTING, otherwise known as SINGLE SOURCE PROCUREMENT
A method of Procurement that does not require elaborate Bidding Documents because the supplier is simply asked to
submit a price quotation or a pro-forma invoice together with the conditions of sale, which offer may be accepted
immediately or after some negotiations.
Direct Contracting may be resorted to only in any of the following conditions:

a. Procurement of Goods of propriety nature, which can be obtained only from the propriety source, i.e. when patents,
trade secrets and copyrights prohibit others from manufacturing the same items;
b. When the Procurement of critical components from a specific manufacturer, supplier, or distributor is a
condition precedent to hold a contractor to guarantee its project performance, in accordance with the provisions his
contract; or,
c. Those sold by an exclusive dealer or manufacturer, which does not have sub-dealers selling at lower prices and for
which no suitable substitute can be obtained at more advantageous terms to the government.
C. REPEAT ORDER - a method of Procurement that involves a direct Procurement of Goods from the previous winning
bidder, whenever there is a need to replenish Goods procured under a contract previously awarded through Competitive
Bidding.
When provided for in the Annual Procurement Plan, Repeat Order may be allowed wherein the Procuring Entity directly
procures Goods from the previous winning bidder whenever there arises a need to replenish goods procured under
a contract previously awarded through Competitive Bidding, subject to post-qualification process prescribed in the
Bidding Documents and provided all the following conditions are present:
a. The unit price must be equal to or lower than that provided in the original contract;
b. The repeat order does not result in splitting of requisitions or purchase orders;
c. Except in special circumstances defined in the IRR the repeat order shall be availed of only within six (6) months
from the date of the Notice to Proceed arising from the original contract; and,
d. The repeat order shall not exceed twenty-five percent (25%) of the quantity of each item of the original
contract.
D. SHOPPING - a method of Procurement whereby the Procuring Entity simply requests for the submission of price
quotations for readily available off-the-shelf Goods or ordinary/regular equipment to be procured directly from
suppliers of known qualification.
Shopping may be resorted to under any of the following instances:

a. When there is an unforeseen contingency requiring immediate purchase, the amount shall not exceed the
following:
i. For NGAs, GOCCs, GFIs, SUCs, and Autonomous Regional Government, P200,000
ii. For LGUs, in accordance with the following schedule:
DOF Classification of Maximum Amount (in Philippine Peso)

LGUs Province City Municipality
1st Class 200,000 200,000 100,000
2nd Class 200,000 200,000 100,000
3rd Class 200,000 160,000 100,000
4th Class 160,000 120,000 100,000
5th Class 120,000 100,000 100,000
6th Class 100,000 100,000 100,000
b. Procurement of ordinary or regular office supplies and equipment not available in the DBM-PS, in the amount
not to exceed the following:
i. For NGAs, GOCCs, GFIs, SUCs, and Autonomous Regional Government, P1,000,000.
ii. For LGUs, in accordance with the following schedule:
DOF Classification Maximum Amount (in Philippine Peso)

of LGUs Province City Municipality
1st Class 1,000,000 1,000,000 200,000
2nd Class 1,000,000 1,000,000 200,000
3rd Class 1,000,000 800,000 200,000
4th Class 800,000 600,000 100,000
5th Class 600,000 400,000 100,000
6th Class 400,000 200,000 100,000
In the case of barangays, Fifty Thousand Pesos (₱50,000)
The phrase “ordinary or regular office supplies” shall be understood to include those supplies, commodities, or materials
which are necessary in the transaction of official businesses, and consumed in the day-to-day operations. However, office
supplies shall not include services such as repair and maintenance of equipment and furniture, as well as trucking, hauling,
janitorial, security, and related or analogous services.
E. NEGOTIATED PROCUREMENT - a method of Procurement that may be resorted under the extraordinary
circumstances provided for in Section 53 of this Act and other instances that shall be specified in the IRR, whereby the
Procuring Entity directly negotiates a contract with a technically, legally and financially capable supplier, contractor or
consultant.

Negotiated Procurement shall be allowed only in the following instances:
a. In case of two (2) failed biddings;
b. In case of imminent danger to life or property during a state of calamity, or when time is of the essence
arising from natural or man-made calamities or other causes where immediate action is necessary to prevent
damage to or loss of life or property, or to restore vital public services, infrastructure facilities and other public utilities;
c. Take-over of contracts, which have been rescinded or terminated for causes provided for in the contract and existing
laws, where immediate action is necessary to prevent damage to or loss of life or property, or to restore vital public
services, infrastructure facilities and other public utilities;
d. Where the subject contract is adjacent or contiguous to an on-going infrastructure project, as defined in the
IRR, subject to the following:
i. The original contract is the result of a Competitive Bidding;
ii. The subject contract to be negotiated has similar or related scopes of work;
iii. It is within the contracting capacity of the contractor;
iv. The contractor uses the same prices or lower unit prices as in the original contract less mobilization cost;
v. The amount involved does not exceed the amount of the ongoing project; and,
vi. The contractor has no negative slippage.
Provided, that negotiations for the procurement are commenced before the expiry of the original contract. Wherever
applicable, the principle shall also govern consultancy contract, where the consultants have unique experience and
expertise to deliver the required service; or,
e. Subject to the guidelines specified in the IRR, purchases of Goods from another agency of the government, such
as the Procurement Service of the DBM, which is tasked with a centralized procurement of commonly used Goods for
the government in accordance with Letters of Instruction No. 755 and Executive Order No. 359, series of 1989.
f. Scientific, Scholarly or Artistic Work, Exclusive Technology and Media Services. Where Goods, Infrastructure
Projects and Consulting Services can be contracted to a particular supplier, contractor or consultant and as determined
by the HoPE, for any of the following:
1. The requirement is for:
a. Work of art; commissioned work or services of an artist for a specific artist skill (e.g., Singer, poet, writer,
painter, sculptor, etc.);
b. Scientific, academic, scholarly work or research, or legal services;
c. Highly-specialized life-saving medical equipment, as certified by the Department of Health (DOH);
d. Scientific, technical, economic, business, trade or legal journal, magazine, paper, subscription, or other
exclusive statistical publications and references; or
e. Media documentation, advertisement, or announcement through television, radio, newspaper, internet, and
other communication media.
Due to the nature of the information to be disseminated, alongside principles of transparency, efficiency and
economy, award to more than one (1) supplier may be made by the Procuring Entity.
2. The construction or installation of an infrastructure facility where the material, equipment, or technology under a
proprietary right can only be obtained from the same contractor.
g. Highly Technical Consultants. In the case of individual consultants hired to do work that is (i) highly technical or
proprietary; or (ii) primarily confidential or policy determining, where trust and confidence are the primary
consideration for the hiring of the consultant: Provided, however, That the term of the individual consultants shall, at
the most, be on a six month basis, renewable at the option of the appointing HoPE, but in no case shall exceed the
term of the latter.
h. Defense Cooperation Agreement; Defense Inventory-Based Items-The DND may directly negotiate with an agency
or instrumentality of another country with which the Philippines has entered into a defense cooperation agreement or
otherwise maintains diplomatic relations when the procurement involves major defense equipment or material and/or
defense-related consultancy services
i. Small Value Procurement: Procurement of (a) goods not covered by Shopping under (b) infrastructure projects, and
(c) consulting services, where the amount involved does not exceed the following threshold:
1. For NGAs, GOCCs, GFIs, SUCs, and Autonomous Regional Government, P1,000,000.
2. For LGUs, in accordance with the following schedule:
DOF Classification Maximum Amount (in Philippine Peso)

of LGUs Province City Municipality
1st Class 1,000,000 1,000,000 200,000
2nd Class 1,000,000 1,000,000 200,000
3rd Class 1,000,000 800,000 200,000
4th Class 800,000 600,000 100,000
5th Class 600,000 400,000 100,000
6th Class 400,000 200,000 100,000
In the case of barangays, Fifty Thousand Pesos (₱ 50,000)
j. Lease of Real Property and Venue for official use

k. NGO Participation: When an appropriation law or ordinance earmarks an amount to be specifically contracted out to
Non-Governmental Organizations (NGOs), the Procuring Entity may enter into a Memorandum of Agreement with an
NGO
l. Community Participation: Where, in the interest of project sustainability or to achieve certain specific social
objectives, it is desirable in selected projects, or its components, to call for participation of local communities in the
delivery of goods, including non-consulting services, and simple infrastructure projects, subject to the Community
Participation Procurement Manual (CPPM) issued by the GPPB
m. United Nations Agencies, International Organizations or International Financing Institutions - Procurement
from specialized agencies of the United Nations, International Organizations or International Financing Institutions
n. Direct Retail Purchase of Petroleum Fuel, Oil and Lubricant (POL) Products and Airline Tickets.

1. The Government Procurement Act applies to the procurement of the following, except:
A. Infrastructure projects
B. Goods
C. Consulting services
2. First Statement: Specifications for the Procurement of Goods shall be based on relevant characteristics and/or
performance requirements.
Second Statement: Reference to brand names shall be preferred.
A. Both statements are correct
B. Both statements are incorrect
C. Only the first statement is correct
D. Only the second statement is correct
3. First Statement: A bidder may modify his bid even after the deadline for the receipt of bids.
Second Statement: The modification shall be submitted in a sealed envelope duly identified as a modification of the
original bid and stamped received by the BAC.
4. In the examination of the technical components:

A. A Pass/Fail criterion is used
B. The bids are ranked from highest to lowest
C. The bids are ranked from lowest to highest
D. Any of the choices
5. In the procurement of Consultation Services, the bidder with the Highest Rated Bid shall be invited for negotiations. If
negotiations fail, the second rank bidder shall be invited for negotiations. This process shall be repeated:
A. Upto three times until the bid is awarded to the winning bidder
B. Upto five times until the bid is awarded to the winning bidder
C. Upto ten times until the bid is awarded to the winning bidder
D. Until the bid is awarded to the winning bidder
6. After Bid Evaluation, the next step in the Competitive Bidding Process will be:
A. Invitation to Bid
B. Pre-Bid Conference
C. Post-Qualification
D. Posting of the Performance Bond
7. The stage where the bidder with the Lowest Calculated Bid or the Highest Rated Bid undergoes verification and
validation whether he passed all the requirements and conditions as specified in the Bidding Documents.
A. Bid Evaluation
B. Post Qualification
C. Award of the Contract
D. Posting of the Performance Bond
8. Negotiated Procurement may be resorted to after how many failed biddings?

A. One
B. Two
C. Three
D. Five
9. The procurement process from the opening of bids up to the award of contract generally shall not exceed:
A. 1 month
B. 3 months
C. 6 months
D. 12 months
10. In contracts for Consulting Services, the Consultant may terminate its agreement with the Procuring Entity if the latter
is in material breach of its obligations pursuant to the contract and has not remedied the same within ____ days
following its receipt of the Consultant’s notice specifying such breach.
A. 30 calendar days
B. 30 working days
C. 60 calendar days
D. 60 working days
1. D 6. C
2. C 7. B
3. D 8. B
4. A 9. B
5. D 10. C

RFBT-09
LAW ON CREDIT TRANSACTIONS

SIMILARITIES BETWEEN PLEDGE, REAL ESTATE MORTGAGE AND CHATTEL MORTGAGE
REQUISITES OF CONTRACT OF PLEDGE AND MORTGAGE:

1. That they be constituted to secure the fulfillment of a principal obligation;
2. That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;
3. That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof,
that they be legally authorized for the purpose.
Accessory contract: a pledge or mortgage, being an accessory contract, cannot exist without a valid obligation or a
principal contract.
Nevertheless, similar to a guaranty, a pledge or a mortgage may be constituted to guarantee the performance of a voidable
or an unenforceable contract. It may also guarantee a natural obligation.
It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or
mortgage consists may be alienated for the payment to the creditor.
The contract of pledge or mortgage may secure all kinds of obligations, be they pure or subject to a suspensive or
resolutory condition.
THIRD PERSONS who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own
property.
AUTOMATIC APPROPRIATION PROHIBITED: PACTUM COMMISSORIUM – VOID: The creditor cannot appropriate the
things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void.
The stipulation is otherwise known as Pactum Commissorium.
INDIVISIBILITY OF CONTRACT: A pledge or mortgage is indivisible, even though the debt may be divided among the
successors in interest of the debtor or of the creditor.
Therefore:
1. The debtor's heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage
as long as the debt is not completely satisfied.
2. Neither can the creditor's heir who received his share of the debt return the pledge or cancel the mortgage, to the prejudice
of the other heirs who have not been paid.
The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable.
Rule of Indivisibility NOT applicable: If there being several things given in mortgage or pledge, each one of them guarantees
only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for which
each thing is specially answerable is satisfied.
PLEDGE
PLEDGE is a contract by virtue of which the debtor delivers to the creditor or to a third person movable (Art. 2094) or document
evidencing incorporeal rights (Art. 2095) for the purpose of securing the fulfilment of a principal obligation with the
understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions.
Delivery: in addition to the above-mentioned essential requisites of contracts of pledge or mortgage, it is necessary, in order
to constitute the contract of pledge, that the thing pledged be placed in the possession of the creditor, or of a third person by
common agreement.
KINDS OF PLEDGE:
1. Voluntary or conventional – created by agreement of the parties; or
2. Legal – created by operation of law.
CHARACTERISTICS:
1. REAL CONTRACT – perfected by the delivery of the thing pledged;
2. ACCESSORY CONTRACT – no independent existence of its own;
3. UNILATERAL – creates an obligation solely on the part of the creditor to return the thing;
4. SUBSIDIARY – obligation incurred does not arise until the fulfilment of the principal obligation which is secured.
CAUSE OR CONSIDERATION:
1. Pledgor/debtor – the principal obligation;
2. Pledgor not the debtor – compensation stipulated or mere liberality.
OBJECT:
1. Movable property;
2. Incorporeal rights, evidenced by negotiable instruments, bills of lading, shares of stock, bonds, warehouse receipts and
similar documents may also be pledged. The instrument proving the right pledged shall be delivered to the creditor, and if
negotiable, must be indorsed.

LAW on CREDIT TRANSACTIONS RFBT-09
Rules:
1. Within the commerce of man and capable of possession;
2. If the pledge earns or produces fruits, income, dividends, or interests, the creditor shall compensate what he receives with
those which are owing him; but if none are owing him, or insofar as the amount may exceed that which is due, he shall
apply it to the principal.
3. Unless there is a stipulation to the contrary, the pledge shall extend to the interest and earnings of the right pledged.
4. In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of animals pledged, but shall be subject
to the pledge, if there is no stipulation to the contrary.
5. Unless the thing pledged is expropriated, the debtor continues to be the owner thereof.
6. Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in order to recover it from,
or defend it against a third person.
Deposit of the Thing Pledged with a Third Person:

1. On the part of the pledgee – if there is stipulation granting such right;
2. On the part of the pledgor:
a. If through the negligence or willful act of the pledgee, the thing pledged is in danger of being lost or impaired.
b. If the pledgee uses or misuses the thing.
Fear of destruction, loss or impairment WITHOUT pledgee’s fault

1. The pledgor may demand the return of the thing, upon offering another thing in pledge, provided the latter is of the
same kind as the former and not of inferior quality; or
2. The pledgee may cause the same to be sold at a public sale.
The proceeds of the auction shall be a security for the principal obligation in the same manner as the thing originally pledged.
The pledgee is bound to advise the pledgor, without delay, of any danger to the thing pledged.
Form: there is no form required to constitute a contract of pledge.
In order to affect third persons:
1. There must be a public instrument
2. The public instrument contains:
a. The description of the thing pledged; and
b. the date of the pledge.
Alienation (Sale) of the thing pledged: is allowed with the consent of the pledgee.
• The ownership of the thing pledged is transmitted to the vendee or transferee as soon the pledgee consents to the
alienation,
• But the creditor-pledgee shall continue in possession.
Creditor-pledgee:
1. The creditor shall take care of the thing pledged with the diligence of a good father of a family;
2. He has a right to the reimbursement of the expenses made for its preservation, and is liable for its loss or deterioration, in
conformity with the Civil Code.
3. The pledgee is responsible for the acts of his agents or employees with respect to the thing pledged.
4. If the creditor is deceived on the substance or quality of the thing pledged, he may either claim another thing in its stead,
or demand immediate payment of the principal obligation.
Use of the Thing Pledged:

General Rule: The creditor cannot use the thing pledged, without the authority of the owner.
Exceptions:
1. Authority from the owner (pledgor); or
2. When the preservation of the thing pledged requires its use, it must be used by the creditor but only for that purpose.
Use (when there is no right) or misuse will authorize the owner may ask that the thing be judicially or extrajudicially deposited.
Pledgor:
1. The pledgor who, knowing the flaws of the thing pledged, does not advise the pledgee of the same, shall be liable to the
latter for the damages which he may suffer by reason thereof.
2. The debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the
debt and its interest, with expenses in a proper case.
Extinguishment of a Contract of Pledge: can be by any mode of extinguishment of obligations or the extinguishment of the
principal obligation or contract, but also:
1. Thing Pledged is Returned: If the thing pledged is returned by the pledgee to the pledgor or owner, the pledge is
extinguished. Any stipulation to the contrary shall be void.
Presumption: If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or owner, there is
a prima facie presumption that the same has been returned by the pledgee. This same presumption exists if the thing
pledged is in the possession of a third person who has received it from the pledgor or owner after the constitution of the
pledge.
2. Renunciation or Abandonment of Pledge: A statement in writing by the pledgee that he renounces or abandons the
pledge is sufficient to extinguish the pledge. For this purpose, neither the acceptance by the pledgor or owner, nor the
return of the thing pledged is necessary, the pledgee becoming a depositary.
Foreclosure sale:
1. The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the sale of the
thing pledged.
2. This sale shall be made at a public auction, and
3. With notification to the debtor and the owner of the thing pledged in a proper case, stating the amount for which the public
sale is to be held.

Creditor’s right of appropriation:
1. If at the first auction the thing is not sold, a second one with the same formalities shall be held; and
2. If at the second auction there is no sale either, the creditor may appropriate the thing pledged.
In this case he shall be obliged to give an acquittance for his entire claim.
Pledgor’s Right to bid: At the public auction, the pledgor or owner may bid. He shall, moreover, have a better right if he
should offer the same terms as the highest bidder.
The pledgee may also bid, but his offer shall not be valid if he is the only bidder.
All bids at the public auction shall offer to pay the purchase price at once. If any other bid is accepted, the pledgee is deemed
to have been received the purchase price, as far as the pledgor or owner is concerned.
Sale of the thing; proceeds thereof:

1. If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise
agreed.
2. If the price of the sale is less, the creditor shall not be entitled to recover the deficiency, notwithstanding any
stipulation to the contrary.
The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the
amount of the principal obligation, interest and expenses in a proper case.
Credit as the object of a contract of pledge: If a credit which has been pledged becomes due before it is redeemed, the
pledgee may collect and receive the amount due. He shall apply the same to the payment of his claim, and deliver the surplus,
should there be any, to the pledgor.
Other Rules:
1. After the public auction, the pledgee shall promptly advise the pledgor or owner of the result thereof.
2. Any third person who has any right in or to the thing pledged may satisfy the principal obligation as soon as the latter
becomes due and demandable.
3. If two or more things are pledged, the pledgee may choose which he will cause to be sold, unless there is a stipulation to
the contrary. He may demand the sale of only as many of the things as are necessary for the payment of the debt.
4. If a third party secures an obligation by pledging his own movable property, he shall have the same rights as a guarantor
to be:
a. Indemnified for the total amount of the debt, including interest, expenses or damages, if they are due;
b. Subrogated to all the rights the creditor had against the debtor;
c. He is not prejudiced by any waiver of defense by the principal obligor.
5. With regard to pawnshops and other establishments, which are engaged in making loans secured by pledges, the special
laws and regulations concerning them shall be observed, and subsidiarily, the provisions of this Title.
REAL ESTATE MORTGAGE
OBJECT: Only the following property may be the object of a contract of mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the laws, imposed upon immovables.
Nevertheless, movables may be the object of a chattel mortgage.
Form: there is no form required to constitute a contract of real estate mortgage.
In order to affect third persons:

1. There must be a public instrument containing the description thereof; and
2. The same should be recorded in the Registry of Property.
The creditor-mortgagee has no other right than to demand the execution and the recording of the document in which the
mortgage is formalized.
Object: The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or income not yet
received when the obligation becomes due, and to the amount of the indemnity granted or owing to the proprietor from the
insurers of the property mortgaged, or in virtue of expropriation for public use, with the declarations, amplifications and
limitations established by law, whether the estate remains in the possession of the mortgagor, or it passes into the hands of a
third person.
Principal Obligation Covered:

General Rule: covers only that which is stated in the deed even if less than the amount of loan.
Exception: if there is stipulation to cover future advancements called a dragnet clause.
Mortgage credit is transferable: The mortgage credit may be alienated or assigned to a third person, in whole or in part,
with the formalities required by law.
Pactum de non-aliendo: the owner is allowed to alienate the immovable property mortgaged. A stipulation
prohibiting/forbidding such right is called pactum de non-aliendo and is considered void.
Third party transferee: Buyers or transferees of the property mortgaged are not affected by an unregistered mortgage.
However, if the mortgage is registered (Art. 1312) they are
1. Bound by a foreclosure sale on the property
2. Not bound to answer the deficiency
3. Unless there is novation in the person of the debtor

Foreclosure: in case of non-payment of the principal obligation, the creditor-mortgagee may foreclose the mortgage either:
1. Judicially – under Rule 68 of the Rules of Court;
2. Extra-judicially – under Act No. 3135.
Notice of Foreclosure Sale:

1. Extrajudicial – not required, unless stipulated.
2. Judicial - Posting in 3 public places at least 20 days prior to sale and publication of the notice of sale in a newspaper of
general circulation.
Proceeds: if the proceeds of the foreclosure sale:

1. Is more than the unpaid amount – the mortgagor shall be entitled to the excess;
2. Is less than the unpaid amount – the mortgagee shall be entitled to recover the deficiency.
The generic treatment is that the mortgage is still a separate contract and merely stands as a means to recover the unpaid
amount. That’s why any excess is returned to the mortgagor and any deficiency, the debtor remains liable thereto.
Redemption: exists only in Real Estate Mortgage foreclosures. The period to redeem shall depend if the foreclosure is:
1. Extrajudicial:
a. General Rule: 1 year from date of foreclosure
b. Exception: Under the General Banking Law, 3 months from sale or registration of the certificate of sale, whichever is
earlier, whenever:
i. The debtor – juridical person
ii. The creditor – bank
2. Judicial – although the Rules of Court provide that the equity of redemption is 90 to 120 days, it has been held that the
equity of redemption exists as long as there is no confirmation of sale by the court.
CHATTEL MORTGAGE
CHATTEL MORTGAGE: personal property is recorded in the Chattel Mortgage Register as a security for the performance of an
obligation.
If the movable, instead of being recorded, is delivered to the creditor or a third person, the contract is a pledge and not a chattel
mortgage.
Affidavit of Good Faith: stating that the parties swear that the mortgage is made for the purpose of securing the obligations
specified in the conditions thereof, and for no other purposes, and that the same is a just and valid obligation and not one
entered into for purposes of fraud, is also required under the law. Making it a formal contract.
However, the absence of such affidavit or the non-recording should one exist, does not affect the validity of the contract as
between the parties, it only makes the contract non-binding to third persons who acted in good faith. While, it is a formal
contract, the absence of an affidavit of good faith would make the parties in pari delicto that would have no remedy against
each other, thus having the effect of leaving the chattel mortgage in place.
To affect third persons: there must be an Affidavit of Good Faith and the same is registered with the Chattel Mortgage
Registry; or the MARINA – in case of vessels; and in case of vehicles with a report to the Land Transportation Office.
Coverage: shall be the debts existing at the time the contract was entered into and indicated in the Affidavit of Good Faith. As
a rule, an amendment of the Affidavit shall be necessary to cover subsequent obligations.
Disposal of the object during the pendency of the mortgage: is considered a criminal act under Art. 319 of the Revised
Penal Code: Removal of Mortgaged Property.
Foreclosure: shall be done extrajudicially. Rule 68 of the Rules of Court does not apply to foreclosure of a chattel mortgage.
Notice: Required 10 days prior to sale; Posting in two or more public places 10 days before auction.
Proceeds of Foreclosure Sale: if the amount of the proceeds of foreclosure sale:

1. Is more than the unpaid amount – the excess shall belong to the mortgagor;
2. Is less than the unpaid amount:
a. General Rule: the creditor is entitled to the deficiency;
b. Except: if the object is the subject matter of a sale in installment and covered by the Recto Law which prohibits
collection of unpaid amount once the creditor (unpaid seller) already foreclosed the chattel mortgage on the property
itself.
Redemption: there is no right of redemption that exists in a foreclosure of chattel mortgage.
DISTINCTIONS
PLEDGE REAL ESTATE MORTGAGE CHATTEL MORTGAGE

Object Personal property susceptible of Real property but extends to the Personal property subject
possession including incorporeal natural accessions, improvements, thereof
rights growing fruits, and the rents or income
not yet received when the obligation
becomes due, and to the amount of
indemnity from insurance or from
expropriation
And may include after acquired

properties as per stipulation.

PLEDGE REAL ESTATE MORTGAGE CHATTEL MORTGAGE
Perfection Delivery Consensual but covered by the statute Formal
of frauds
Public instrument required to bind Affidavit of Good Faith registered
third parties Public instrument that is registered in in the Chattel Mortgage Registry
the Registry of deeds is required to in the Registry of Deeds required
bind third parties to bind third parties.
For vessels – registration is with

the MARINA
For motor vehicles - + report to

the LTO
Possession Transferred to the pledgee Retained by the mortgagor Retained by the mortgagor
Return of the thing pledged by the

pledgee to the pledgor shall result
in extinguishment of the contract
of pledge.
Principal That which is existing at the time Generally, covers only that which is Those indicated in the Affidavit
obligation covered of the pledge stated in the deed even if less than the of Good Faith unless there is
amount of loan. Exception: if there is stipulation as to increase in
stipulation to cover future coverage which will be binding
advancements. but the security itself arises only
after amending the old contract.
Sale of the thing Valid as long as with consent of Valid – any stipulation to the contrary Mortgagor-owner cannot sell the
during the the creditor/pledgee who shall is void. property mortgaged otherwise
pendency of the continue in possession even if the he can be criminally liable under
contract ownership is transferred to the Art. 319 of the RPC: Removal of
buyer. Mortgaged Property.
Sale of the thing Done by notary public – public Extrajudicial (Act No. 3135) or judicial Extrajudicial (Act No. 1508)
to answer for the auction – always extrajudicial – (Rule 68)
debt no intervention of the courts.
Notice of sale to Required – stating the amount Extrajudicial – not required, unless Required 10 days prior to sale
the mortgagor/ due stipulated.
pledgor Posting in two or more public
In a legal pledge, a demand for Judicial Posting in 3 public places at places 10 days before auction
the amount is required and least 20 days prior to sale and
foreclosure must be made within publication of the notice of sale in a
1 month from such demand. newspaper of general circulation
Creditor’s right to The creditor is entitled to the Creditor is not entitled to the excess Creditor is not entitled to the
excess of selling excess EXCEPT: excess
price over unpaid 1. There is stipulation to the
obligation contrary; and
2. In case of legal pledges
Creditor’s right to The creditor is NOT entitled to Creditor can recover deficiency Creditor can recover deficiency
recover deficiency recover any deficiency unless covered by the RECTO
LAW (i.e., sale of personal
property on installment)
Redemption No right of redemption EXTRAJUDICIAL FORECLOSURE: No right of redemption after

1 year from date of foreclosure, foreclosure sale.
except:
1. Creditor is a bank
2. Debtor is a juridical person
In which case the redemption period is

until the registration of the foreclosure
sale, not exceeding 3 months.
JUDICIAL FORECLOSURE:
90-120 days or until the court confirms
the sale

1. The following are essential to a contract of pledge and mortgage, except:
A. That they be constituted to secure the fulfillment of a principal obligation.
B. That the pledgor or mortgagor be the absolute owner of the thing pledged at the time the
obligation to deliver the same arises.
C. That the persons constituting the pledge or mortgage have the free disposal of their property,
and in the absence thereof, that they be legally authorized for the purpose.
2. A mortgage or pledge may be constituted to secure all of the following, except:

A. Voidable contract
B. Unenforceable contract
C. Natural obligation
D. Void contract
3. A void stipulation allowing the creditor to appropriate the things given by way of pledge or
mortgage or dispose of them.
A. Pactum leonine
B. Pactum commissorium
C. Pactum de non-aliendo
D. Dacion en pago
4. D1 and D2, joint debtors, executed a contract of pledge in favor of C, delivering a diamond ring
and a gold watch, as security for his loan amounting to P250,000. Without the debt being paid, C
died leaving X and Y, his sole heirs; D1 eventually made a payment to X representing his share of
the debt owed to C. Which of the following is true?
A. X can partially release either of the things pledge since his share in the loan inherited from C
has already been paid.
B. D1 can ask for the proportionate extinguishment of the pledge since D1 and D2 are not solidary
debtors.
C. D1 can ask for the release of either the diamond ring or the gold watch by virtue of his payment
of his share in the loan.
D. D1 cannot ask for the release, and X is not authorized to return, any of the objects.
5. Which of the following is false?

A. The creditor can use the thing pledged, even without the authority of the owner.
B. If the pledgee uses the thing pledged without authority, the owner may ask that it be judicially
or extrajudicially deposited.
C. When the preservation of the thing pledged requires its use, it must be used by the creditor
but only for that purpose.
D. If the creditor is deceived on the substance or quality of the thing pledged, he may either claim
another thing in its stead, or demand immediate payment of the principal obligation.
6. First statement: As a rule, the pledgee has a right to deposit the thing pledged to a third person
unless there is stipulation to the contrary.
Second statement: Any agent or employee of the pledgee dealing with the thing pledge is solely
responsible for any damage caused by him.
A. Both statements are true
B. Both statements are false
C. Only the first statement is true
D. Only the second statement is true
7. First statement: A statement in writing by the pledgee that he renounces or abandons the pledge
extinguishes the pledge upon receipt of the pledgor of the thing pledged.
Second statement: The acceptance by the pledgor or owner, or the return of the thing pledged is
necessary to extinguish the pledge.
A. Only the first statement is correct
B. Only the second statement is correct
C. Both statements are incorrect
D. Both statements are correct
8. If the principal obligation remains unsatisfied, the pledgee-creditor can have the pledge foreclosed.
Who will conduct the foreclosure sale?
A. Pledgee C. Notary Public
B. Judge D. Sheriff

9. First statement: If the thing pledged is not sold at the public auction, a second one with the same
formalities shall be held.
Second statement: If at the second auction there is still no sale, the creditor may appropriate the
thing pledged.
10. A pledged his diamond ring to secure his debt to B amounting to P20,000. A was not able to pay
the said debt. Which of the following is incorrect if B sold the ring at a public auction?
A. If the ring sold for P25,000, B would be entitled to the excess if there is stipulation to that
effect
B. If the ring sold for P18,000, B would be entitled to the deficiency if there is stipulation to that
effect
C. Whether or not the ring was sold for more or less than the amount of the loan, the loan shall
be extinguished.
11. The sale of the thing subject of a legal pledge shall be done only after a demand is made for the
amount for which it is retained. The public auction shall take place within _______ after such
demand.
A. 30 days C. 60 days
B. One month D. 6 months
12. D is indebted to C for P10,000 payable on November 30, 2020. To secure the obligation, D
negotiated a negotiable promissory note payable to him (D) for the amount of P15,000 due on
October 30, 2020. On October 30, 2020, and C collected on the promissory note and applied the
P10,000 to the obligation of D to him. Who would be entitled to the excess P5,000?
A. D
B. C
C. Both, equally
D. Neither
13. In this type of contract, sale of the thing subject thereof during the pendency of the contract will
result in criminal liability:
A. Pledge
B. Real Estate Mortgage
C. Chattel Mortgage
D. None of the choices
14. D bought from C a motorcycle and the same was subjected to a chattel mortgage. The terms of
payment of the sale required D to pay P10,000 as down payment and the balance of P50,000 is
payable at the end of the year. D was not able to pay the balance. C foreclosed the mortgage on
the motorcycle and at the auction, it was sold for P10,000 only. Which of the following is correct?
A. C can still collect from D the deficiency of P40,000.
B. C has the option to cancel the sale and obtain possession of the motorcycle.
C. The sale is subject to the rules under Recto Law.
D. It was improper to foreclose the chattel mortgage since the installments paid already covered
half of the total price
15. The right given to the mortgagor in the event of a judicial foreclosure to recover the thing:
A. Right of redemption
B. Right of pre-emption
C. Equity of redemption
D. Pre-emptive right
1. B 6. B 11. B
2. D 7. C 12. A
3. B 8. C 13. C
4. D 9. A 14. A
5. A 10. B 15. C

RFBT-10
LAW ON SALES
CONTRACTS OF SALE, IN GENERAL
DEFINITION: By the contract of sale one of the contracting parties obligates himself to transfer the ownership and to deliver
a determinate thing, and the other to pay therefor a price certain in money or its equivalent. (Art. 1458)
Characteristics of a Contract of Sale:

1. Purpose: of the delivery is to transfer of ownership;
2. Perfection: as a rule, is by mere consent, since there exists a contract of sale the moment the parties “obligate”
themselves;
3. Subject Matter: determinate thing.
4. Cause: onerous, since the cause or consideration of the parties is the prestation or promise of the other;
5. Bilateral Contract: since both parties have their respective obligations;
6. Nominate Contract: not only because there’s a specific designation of the contract, but more so because there are specific
rules provided by law to govern the rights and obligations of the parties, after stipulations;
7. Commutative: in the sense that there is equivalence in the prestation of the parties. Ordinarily, price reflects the value of
the property, since the seller would not normally accept a price below the value of the property and the buyer would not
normally pay an amount more than the value of the property.
Aleatory: there is also a sale of hope where there is no equivalence in the value of prestations. Since the obligation of the
other party is not certain to arise. E.g., lotto. (Art. 1461)
DISTINGUISHED FROM OTHER TRANSACTIONS:

1. Contract for a piece of work
SALE: A contract for the delivery at a certain price of an article which the vendor in the ordinary course of his business
manufactures or procures for the general market, whether the same is on hand at the time or not.
CONTRACT FOR A PIECE OF WORK: if the goods are to be manufactured specially for the customer and upon his
special order, and not for the general market.
SIMILARITIES:
a. There is transfer of ownership
b. Buyer/Customer pays the price.
DISTINCTION: is as to the subject matter: in a contract of sale, the subject is a thing and its delivery, in a contract for a piece
of work, the subject is service.
Importance of Distinction: for purposes of applying the Statute of Frauds, only the sale of personal property priced P500 or
more is required to be in writing.
2. Dacion en pago
SIMILARITIES: In dacion en pago, there is also a transfer of ownership of the thing delivered and it is likewise governed by
the law on sales.
DISTINCTIONS:
CONTRACT OF SALE DACION EN PAGO
Source of obligation Special form of payment which extinguishes an obligation
No requirement for a pre-existing obligation There is a need for a pre-existing obligation
3. Barter
Art. 1468. If the consideration of the contract consists partly in money, and partly in another thing, the transaction shall be
characterized by the manifest intention of the parties. If such intention does not clearly appear, it shall be considered a barter
if the value of the thing given as a part of the consideration exceeds the amount of the money or its equivalent; otherwise,
it is a sale.
4. Contract of agency to sell

Art. 1466. In construing a contract containing provisions characteristic of both the contract of sale and of the contract of
agency to sell, the essential clauses of the whole instrument shall be considered. (n)
SIMILARITY: in both contracts, things or objects are delivered to the buyer/agent.

DISTINCTION:
1. In a contract of sale, there is transfer of ownership. In an agency to sell, the delivery of objects to the agent for him to
sell, does not transfer ownership to him.
2. In a contract of sale, after delivery, risk of loss is with the buyer already. In agency to sell, the risk of loss remains with
the principal-owner and not transferred to the agent.
KINDS OF SALE AS TO TRANSFER OF OWNERSHIP UPON DELIVERY:

1. In absolute sale, ownership transfers upon delivery, actual or constructive, even if no total payment of the price has been
made yet.
2. A conditional sale is the kind of contract of sale where ownership automatically transfers to the buyer upon fulfillment of
the condition, which is usually the full payment of the price, without need of a new agreement or to execute a new contract.
A Contract to Sell is a special kind of conditional sale where ownership does not automatically pass upon fulfillment of the
condition. It will only give the buyer the right to demand the execution of a deed of sale or to compel the seller to sell.
Ownership transfers only upon execution of the deed of sale or some other mode of delivery.

LAW on SALES RFBT-10
ELEMENTS OF A CONTRACT OF SALE
1. Natural – those which are deemed part of the contract even if not stipulated or even if the parties are unaware. Deemed
part of the contract by law. E.g., warranties.
2. Accidental – present only because the parties so stipulated. E.g. obligation to pay interest
3. Essential – required for validity.
ESSENTIAL ELEMENTS OF A CONTRACT OF SALE
1. Consent of the contracting parties, i.e., the buyer and the seller.
Incapacity: consent may have been given, but the one giving it is incapacitated.
a. Absolute Incapacity – the party cannot give consent to any and all contract, which may result in the contract being voidable
or void.
Minors and those without capacity to act: may enter into a valid contract of sale of “necessaries” as provided under
Art. 1489. Necessaries are those which are indispensable for sustenance, dwelling, clothing and medical attendance.
b. Relative Incapacity – the party is prohibited from entering some specific transactions with some persons and sometimes
over specific things.
Examples of Relative Incapacity:

a. Husband and wife cannot sell property to each other, except:
i. When a separation of property was agreed upon in the marriage settlements; or
ii. When there has been a judicial separation or property
b. The following persons cannot acquire by purchase, even at a public or judicial auction, either in person or through the
mediation of another:
i. The guardian, the property of the person or persons who may be under his guardianship;
ii. Agents, the property whose administration or sale may have been entrusted to them, unless the consent of the
principal has been given;
iii. Executors and administrators, the property of the estate under administration;
iv. Public officers and employees, the property of the State or of any subdivision thereof, or of any government-
owned or controlled corporation, or institution, the administration of which has been intrusted to them; this
provision shall apply to judges and government experts who, in any manner whatsoever, take part in the sale;
v. Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other officers and employees
connected with the administration of justice, the property and rights in litigation or levied upon an execution before
the court within whose jurisdiction or territory they exercise their respective functions; this prohibition includes
the act of acquiring by assignment and shall apply to lawyers, with respect to the property and rights which may
be the object of any litigation in which they may take part by virtue of their profession.
vi. Any others specially disqualified by law
Example: Aliens are prohibited by the Constitution from acquiring lands in the Philippines, except by succession
or in case of a former natural born Filipino citizen who has lost his citizenship.
2. Cause – as to each contracting party is the prestation or promise to be performed by the other party. For the buyer, it is
the delivery of the object, while for the seller, it is the payment of the price.
Rules as to PRICE:
a. It must be certain.
i. With reference to another thing certain, or
ii. The determination thereof be left to the judgment of a special person or persons.
1) Should such person or persons be unable or unwilling to fix it, the contract shall be inefficacious, unless the parties
subsequently agree upon the price.
2) If the third person or persons acted in bad faith or by mistake, the courts may fix the price.
3) Where such third person or persons are prevented from fixing the price or terms by fault of the seller or the
buyer, the party not in fault may have such remedies against the party in fault as are allowed the seller or the
buyer, as the case may be
b. Gross inadequacy of price does not affect a contract of sale, except as it may indicate a defect in the consent, or that the
parties really intended a donation or some other act or contract.
c. The price of securities, grain, liquids, and other things shall also be considered certain, when the price fixed is that which
the thing sold would have:
i. On a definite day, or
ii. In a particular exchange or market, or
iii. When an amount is fixed above or below the price on such day, or in such exchange or market, provided said amount
be certain.
d. The fixing of the price can never be left to the discretion of one of the contracting parties. However, if the price fixed by
one of the parties is accepted by the other, the sale is perfected.
Where the price cannot be determined in accordance with the preceding rules, or in any other manner, the contract is
inefficacious.
However, if the thing or any part thereof has been delivered to and appropriated by the buyer he must pay a reasonable
price therefor. What is a reasonable price is a question of fact dependent on the circumstances of each particular case
3. Object – is the subject matter which may be things or rights.
Service: unlike in contracts, in general, where “service” may be the object of the contract, in sales, service cannot be a valid
subject since the purpose of a contract of sale is to transfer ownership and no person acquires ownership over service. It, may,
however, be another contract, such as a lease or agency.

Rules as to Objects of Contracts of Sale:
a. It must be licit or within the commerce of men.
b. The vendor must have a right to transfer the ownership thereof at the time it is delivered.
c. It must be determinate. A thing is determinate when:
i. It is particularly designated or
ii. Physical segregated from all other of the same class.
The requisite that a thing be determinate is satisfied if at the time the contract is entered into, the thing is capable of being
made determinate without the necessity of a new or further agreement between the parties.
d. In the case of fungible goods, there may be a sale of an undivided share of a specific mass, even though
i. The seller purports to sell and the buyer to buy a definite number, weight or measure of the goods in the mass, and
ii. The number, weight or measure of the goods in the mass is undetermined.
By such a sale the buyer becomes owner in common of such a share of the mass as the number, weight or measure bought
bears to the number, weight or measure of the mass.
If the mass contains less than the number, weight or measure bought, the buyer becomes the owner of the whole mass
and the seller is bound to make good the deficiency from goods of the same kind and quality, unless a contrary intent
appears.
e. It may be either existing goods, owned or possessed by the seller, or goods to be manufactured, raised, or acquired by the
seller after the perfection of the contract of sale, called "future goods."
There may be a contract of sale of goods, whose acquisition by the seller depends upon a contingency which may or may
not happen.
i. Emptio rei speratae - sale of future thing; must come into existence otherwise the sale will not be effective; e.g. wine,
milk, butter.
ii. Emptio spei – sale of hope itself; produces effects even if the thing hoped does not come into existence. E.g., lotto
ticket
iii. Vain Hope – the sale of vain hope is void. E.g. lotto ticket that was already drawn.
f. The sole owner of a thing may sell an undivided interest therein.

g. Things subject to a resolutory condition may be the object of the contract of sale, such as one that is the subject to a right
of repurchase.
PERFECTION OF A CONTRACT OF SALE
Consensual Contract: sale, being a consensual contract, is perfected by mere consent as to the object of the contract and
upon the price.
Transfer of ownership: however, happens only after delivery, either actual or constructive, as a general rule. Except if the
parties agreed that ownership will not pass until full payment of the price.
Sale by Auction: is perfected when the auctioneer announces its perfection by the fall of the hammer, or in other
customary manner.
Before perfection:
1. Any bidder may retract his bid; and
2. the auctioneer may withdraw the goods from the sale unless the auction has been announced to be without reserve.
Object of a sale by auction: Where goods are put up for sale by auction in lots, each lot is the subject of a separate
contract of sale.
Seller’s right to bid:

1. General Rule: The seller has no right to bid
2. Requisites for the seller to have the right to bid.
a. The right to bid was expressly reserved;
b. Notice was given to the bidders; AND
c. It is not prohibited by law or stipulation.
Any sale made contradicting the above may be treated as fraudulent by the buyer.
Option Agreement and Contract: A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the
promise is supported by a consideration distinct from the price, known as option money.
Rules Appliable:
1. A period agreed upon under an Option Agreement by the offerer and the offeree is not binding upon the offeror unless it is
supported by a consideration distinct from the price, which we call the option money.
2. Accordingly, the offerer may withdraw his offer at any time, even before the expiration of the period agreed upon, without
being liable for damages.
3. If there is such a separate consideration, the agreement as to the period is covered by an Option CONTRACT. In which
case, the offerer cannot withdraw the offer without being liable for damages for breach of the option contract.
4. In either case, if there is acceptance by the offeree which was already communicated, withdrawal cannot be validly made
since there is already a perfected contract of sale and there is no “offer” to withdraw anymore, subject to the Statute of
Frauds as to enforceability.

EARNEST MONEY – forms part of the purchase price and is proof of perfection of a contract of sale.
Option Money is a separate consideration to give the offeree a definite period within which to decide whether or not to accept
an offer, there is no perfected contract of sale yet and does not form part of the purchase price.
SALE OF GOODS BY DESCRIPTION OR SAMPLE: the contract may be rescinded if the bulk of the goods delivered do
not correspond with the description or the sample.
SALE OF GOODS BY DESCRIPTION AND SAMPLE: if the contract be by sample as well as description, it is not sufficient that
the bulk of goods correspond with the sample if they do not also correspond with the description.
The buyer shall have a reasonable opportunity of comparing the bulk with the description or the sample.
FORM: no specific form is required for the perfection of a contract of sale.
However, the same is still subject to the Statute of Frauds for its enforceability, particularly the following provisions:
1. Those not to be performed within 1 year;
2. Sale of personal property the price not less than (or at least) P500
3. Sale of real property
As such, the above contracts of sale must be in writing or in some memorandum, in order to be enforceable.
INSTALLMENT SALES
RECTO LAW
APPLICATION: The Recto Law applies to a contract of sale of personal property the price of which is payable in installments.
The law, however, does not apply to sales “on credit”, only sales in “installment.”
It likewise applies to contracts purporting to be leases of personal property with option to buy, when the lessor has deprived
the lessee of the possession or enjoyment of the thing.
ALTERNATIVE REMEDIES OF THE SELLER:

1. Exact fulfillment of the obligation, should the vendee fail to pay;
2. Cancel the sale, should the vendee's failure to pay cover two or more installments;
3. Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay cover two
or more installments.
The remedies are alternative. As such, if the seller/vendor invoked one, he can no longer invoke any of the two remaining
remedies. Any agreement to the contrary shall be void.
FORFEITURE OF INSTALLMENTS IN CASE OF CANCELLATION: The 2nd option of cancelling the sale would entail mutual
restitution by the parties.
General Rule: The seller is allowed to retain a reasonable amount of the purchase price already paid as compensation
for the use of the thing (rent), or ALL of the amount paid only if there is a forfeiture clause which entitles him to the purchase
price already paid at the time of cancellation.
Exception: the retention of ALL the purchase price would be unconscionable.
FORECLOSURE OF THE CHATTEL MORTGAGE: The 3rd option entails that the foreclosed mortgage is the mortgage on the
personal property itself, and in case of deficiency of the foreclosure sale proceeds, the seller is NOT entitled to recover such,
since recovery of the deficiency falls under option 1.
However, if what is foreclosed is another security or a mortgage on different property, the prohibition to collect the deficiency
would not apply, since foreclosure of a mortgage of a different thing precisely falls under option 1 also.
MACEDA LAW
APPLICATION: the Maceda Law, or the Realty Installment Buyer Act (RA No. 6552), applies to a contract of sale of residential
realty on installments, where the buyer is given protection in case of failure to pay installments.
Similar to the Recto Law, the Maceda Law does not apply to sales “on credit”, only ones in installment.
RIGHTS OF THE BUYER UNDER THE MACEDA LAW

1. If installments already paid are less than two years equivalent:
a. Grace Period - pay without interest within 60 days. Note, however, that this right can only be applied once every 5
years.
b. The buyer may sell or assign his interest;
c. Pay the entire balance.
2. After two years’ worth of installment, the buyer will have the following additional rights:
a. In addition to the 60 day grace period, the buyer shall have additional 1 month grace period for every year of
installment payments after the first 2 years installments;
b. If the seller will exercise his right to rescind the contract, he is required to first give the Cash Surrender Value to
the buyer.
Cash Surrender Value:
i. Minimum of 50% of all payments (including downpayment) plus
ii. 5% after five years (55% after 6 years of payment); and
iii. 5% for every additional year thereafter upto a maximum of 90% (or 14 years of instalment).

VOID STIPULATIONS: The following are void stipulations:
1. Stipulation as to interest or damages or penalty during the grace period
2. Forfeiture clause
3. Automatic cancellation or rescission upon default of the buyer
RESCISSION REQUIREMENTS: the rescission will take effect only after 30 days from complying with both:
1. Notice to be given to the buyer as to the intention to rescind
2. Payment of the cash surrender value
CONDOMINIUMS
PD No 957 or the THE SUBDIVISION AND CONDOMINIUM BUYERS' PROTECTIVE DECREE covers the sale of
condominium units, among others.
Rules affecting installment purchases of Condominiums:

1. Non-forfeiture of payments: No installment payment made by a buyer in a subdivision or condominium project for the
lot or unit he contracted to buy shall be forfeited in favor of the owner or developer when the buyer, after due notice to
the owner or developer, desists from further payment due to the failure of the owner or developer to develop
the subdivision or condominium project according to the approved plans and within the time limit for complying
with the same.
Such buyer may, at his option, be reimbursed the total amount paid including amortization interests but excluding
delinquency interests, with interest thereon at the legal rate. (Section 23, PD 957)
2. Failure to pay installments: The rights of the buyer in the event of this failure to pay the installments due for reasons
other than the failure of the owner or developer to develop the project shall be governed by RA 6552 (Maceda Law).
OBLIGATIONS OF THE VENDOR
A. To take care of the thing after the contract has been perfected, prior to delivery.
Loss of the thing pending delivery:

a. If the object is entirely lost - the contract shall be without any effect.
b. If the thing is lost in part only, the buyer may choose between:
i. Withdrawing from the contract; and
ii. Demanding the remaining part, paying its price in proportion to the total sum agreed upon.
c. The goods without the knowledge of the seller have perished in part or have wholly or in a material part so deteriorated
in quality as to be substantially changed in character, the buyer may at his option treat the sale:
i. As avoided; or
ii. As valid in all of the existing goods or in so much thereof as have not deteriorated, and as binding the buyer to
pay the agreed price for the goods in which the ownership will pass, if the sale was divisible.
Risk of Loss: General Rule: the thing perishes with the owner, following the principle of res perit domino.
Exceptions:
a. Stipulation
b. Security title - Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in pursuance of
the contract and the ownership in the goods has been retained by the seller merely to secure performance by the buyer
of his obligations under the contract, the goods are at the buyer's risk from the time of such delivery;
c. Delay in the delivery – whoever causes the delay shall bear the risk of loss.
Note: the risk of loss is where it is important why there are distinctions in the following:
• Contract of Sale vs. Contract of Agency to Sell
• Sale or Return vs. Sale on Approval/Trial/Satisfaction
SALE OR RETURN: where the goods are delivered to the buyer but the buyer has an option to return the goods instead of
paying the price, the ownership passes to the buyer but he may revest the ownership in the seller by returning or tendering
the goods within the time fixed in the contract, or when no time is fixed, within a reasonable time.
Note that ownership transfers to the buyer upon delivery. As such, the buyer bears the risk of loss once the goods are
delivered.
SALE ON APPROVAL OR ON TRIAL OR ON SATISFACTION: Here, there is delivery of the goods also, but no transfer of
ownership yet. As such, the seller, being the owner, bears the risk of loss.
The ownership passes to the buyer:

a. When he signifies his approval or acceptance to the seller or does any other act adopting the transaction
b. If he does not signify his approval or acceptance to the seller, but retains the goods without giving notice of rejection,
then if a time has been fixed for the return of the goods, on the expiration of such time, and, if no time has been fixed,
on the expiration of a reasonable time. What is a reasonable time is a question of fact.
2. Obligation to pay taxes and incidents of the sale, unless otherwise agreed upon;
3. To warrant the thing (see Warranties);
4. To transfer ownership.
Seller need not be the owner for validity of the contract: the seller need not be the owner and the sale is still valid if
he sold the thing in a capacity authorizing him to do so such as a liquidator, executor, administrator, sheriff, or a notary
(in case of pledge).
This is different from a pledge or mortgage which requires the pledger or mortgagor to be the absolute owner of the thing.

SELLER IS NOT THE OWNER:
General Rule: the buyer acquires no better title to the goods than the seller had
Exceptions: In all of these exceptions, the buyer acquires GOOD TITLE to the object even if the seller is not the owner.
a. Seller is authorized by the owner – such as an agent.
b. Seller had statutory or judicial authority to sell – such as a guardian, executor, administrator, or court sheriff.
c. In cases of estoppel:
i. As to the owner: estoppel in pais - by his conduct or representation, he led the buyer to believe that the seller
had authority to sell.
ii. As to the seller: estoppel by deed – if after the sale, the seller acquired ownership, such ownership automatically
passes to the buyer as to the thing already delivered
d. Sale of an Apparent Owner: REQUISITES:
i. There is apparent ownership
ii. Buyer in good faith and for value – the buyer had no knowledge of any defect in the seller’s title at the time of full
payment (not only at the time of sale).
iii. There must be a law from which apparent ownership may be had, such as:
1) PD 1529 which provides that those dealing with registered land need not inquire beyond the title, also known
as the mirror principle, unless the buyer is required under the law to exercise the highest degree of diligence,
e.g., banks and public utility companies.
2) Factor’s Act (agency) – so far as third persons are concerned, they only have to rely on the power of attorney
as written, they need not inquire into limitations imposed by the principal to the agent not written.
3) Art. 1518 – for goods covered by negotiable instruments.
e. Purchase from a Merchant Store, Market or Fair in good faith and for value: the purpose of this exception is
to facilitate commercial transactions so as not to degrade the trust in sales made through such stores.
Right of buyer to reimbursement: One who has lost any movable or has been unlawfully deprived thereof, may
recover it from the person in possession of the same. If the possessor of a movable lost or which the owner has been
unlawfully deprived, has acquired it in good faith at a public sale, the owner cannot obtain its return without reimbursing
the price paid therefor.
5. To deliver the determinate or specific thing including the fruits from the moment the obligation to deliver
arises and the accessions and accessories thereof.
Delivery is the mode by which ownership is transferred. It is accomplished by placing the thing in the control and
possession of the vendee.
MODES OF DELIVERY: THINGS

a. Actual Delivery: The actual and physical transfer of the thing to the buyer.
b. Constructive Delivery
i. Traditio Longa Manu: literally, long-hand delivery, or by pointing to the thing sold accomplished by mere consent
of the seller, ownership transfers to the buyer, because at the time of sale, the seller cannot transfer possession
to the buyer, e.g., the thing is leased by another.
ii. Consitutum Posessorium: at the time of sale, the seller is in possession and remains in possession in another
concept other than an owner, like that of a lessee, depositary or borrower. E.g., sale lease-back.
iii. Brevi Manu: or short hand delivery. When the buyer is in possession of the thing, in a concept other than that of
an owner, at the time of sale, and remains in possession after sale, now as owner. E.g., a lessee who buys the
thing leased.
iv. Symbolic Delivery: where the seller merely gives the key to a warehouse where the goods are located or in a sale
of car, the delivery of the keys is symbolic delivery.
v. Execution of the Required Formality: by execution of a public instrument. This mode of delivery is available to
both sale of rights and sale of things;
c. Delivery to a common carrier: when the parties so agreed that the seller will deliver to the common carrier for
ultimate delivery to the buyer. In this case, there is already delivery upon receipt of the common carrier. EXCEPT:
i. Ownership is reserved by the seller – such as if it is deliverable to the seller or his agent.
ii. The seller reserved possession – goods are deliverable to the buyer, but possession of the bill of lading is with the
seller.
iii. A Bill of Exchange is drawn by the seller against the buyer and the latter dishonors the same.
MODE OF DELIVERY: As to rights:

a. By execution of an instrument;
b. Quasi Traditio:
i. When the title of ownership is placed in the possession of the vendee (e.g., certificates of stock for sale of shares
of stock);
ii. By the use of the vendee of his rights with the vendor’s consent. (e.g., the vendee of shares where the same has
not been transferred in his name yet, with the consent of the owner, through a proxy, he may exercise his rights
as a stockholder)
TIME OF DELIVERY:
a. Stipulation of the parties;
b. If no stipulation, within a reasonable time.
PLACE OF DELIVERY:
a. Stipulation of the parties;
b. If no stipulation, by usage of trade;
c. If no stipulation nor usage of trade, the seller’s place of business;
d. If none, the seller’s residence.
e. However, in case of a contract of sale of specific goods, which to the knowledge of the parties when the contract or
the sale was made were in some other place, then that place is the place of delivery.

SELLER IS NOT BOUND TO DELIVER:
a. If it is a pure obligation and the buyer does not pay; or
b. If there is a period agreed upon, the obligation to deliver shall be demandable at that time. Except, if the buyer loses
the right to make use of the period under Art. 1198
QUANTITY TO BE DELIVERED:
DELIVERY OF LESS OR MORE OF THE QUANTITY AGREED UPON IN SALE OF PERSONAL PROPERTY:
1. Delivery is less than quantity agreed upon, the buyer may:
a. Reject the delivery; or
b. Accept or retain the goods delivered and pay:
(1) The full contract price if he knew that the seller is not going to perform the contract in full; or
(2) Pay the fair value of the goods delivered if without such knowledge.
2. Delivery is greater than quantity agreed upon, the buyer may:

a. Accept the goods in the quantity agreed upon and reject the rest; or
b. Accept the whole of the goods delivered and pay for them at the contract rate.
3. Delivery of goods mixed with goods of different description not included in the contract, the buyer may accept the
goods which are in accordance with the contract and reject the rest.
4. In no. 2 and 3, if the subject matter is indivisible, the buyer may reject the whole of the goods.
DELIVERY OF LESS OR MORE OF THE QUANTITY AGREED UPON IN SALE OF REAL ESTATE
A. AT A RATE OF A CERTAIN PRICE FOR A UNIT OF MEASURE OR NUMBER:

1. Delivery is LESS than that agreed upon, the buyer may:
a. Ask for specific performance and demand delivery of the shortage;
b. Ask for the proportionate reduction of the price (accion quanti minoris)
c. Rescission, in case:
(1) The area lacking is at least 1/10 of that agreed upon; or
(2) The buyer would not have entered into the contract, had he known of its smaller area.
The same rules apply if any part of the immovable is not of the QUALITY specified in the contract (except that rescission
is an available remedy in the event that the inferior value is MORE THAN 1/10 of the price agreed upon) even if the
area delivered be that agreed upon.
2. If the delivery is in excess of the area agreed upon, the buyer may:
a. Accept the area agreed upon and reject the rest; or
b. Accept the whole and pay at the contract rate.
The above rules likewise applies to judicial sales.
B. SALE OF REAL ESTATE FOR A LUMP SUM PRICE: whatever is the actual area of the land, the buyer is still required
to pay the price agreed upon and the seller is bound to deliver the entire area.
If the actual area is bigger than the agreed upon area, and the seller should not deliver the whole actual area, the
buyer may:
a. Reduce the price to be paid, in proportion to what is lacking in the area or number; or
b. Rescind the contract for failure of the vendor to deliver what has been stipulated.
RIGHTS OF AN UNPAID SELLER
Unpaid Seller: the seller of the goods is deemed to be an unpaid seller when:
1. The whole of the price has not been paid or tendered;
2. A bill of exchange or other negotiable instrument has been received as conditional payment, and the condition on which it
was received has been broken by reason of the dishonor of the instrument, the insolvency of the buyer, or otherwise
Rights of an Unpaid Seller: notwithstanding that the ownership of the goods may have passed to the buyer, the unpaid seller
of goods has the following rights:
1. Possessory lien – right to retain the goods or right to withhold delivery of the goods.
Grounds:
a. Where the goods have been sold without any stipulation as to credit;
b. Where the goods have been sold on credit, but the term of credit has expired;
c. Where the buyer becomes insolvent.
The seller may exercise his right of lien notwithstanding that he is in possession of the goods as agent or bailee for the
buyer.
Partial Lien: Where an unpaid seller has made part delivery of the goods, he may exercise his right of lien on the remainder,
unless such part delivery has been made under such circumstances as to show an intent to waive the lien or right of
retention.
Loss of possessor lien: happens:

a. When the seller delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer without
reserving the ownership in the goods or the right to the possession thereof;
b. When the buyer or his agent lawfully obtains possession of the goods;
c. By waiver.

The unpaid seller of goods, having a lien thereon, does not lose his lien by reason only that he has obtained judgment or
decree for the price of the goods.
Sale of the thing by the buyer to third persons:

a. As a rule, the seller does not lose his right to possessory lien or right of stoppage in transitu.
b. Exceptions:
i. If the seller assented to the transfer;
ii. If the goods are covered by a negotiable document of title and it is sold to a purchaser for value in good faith to
whom such document has been negotiated.
2. Stoppage in transitu – right to stop the goods while in transit.

Requisites:
a. The seller already parted with the possession of the goods;
b. The goods are already in transit;
c. The buyer is insolvent.
Goods are in transit:
a. From the time when they are delivered to a carrier by land, water, or air, or other bailee for the purpose of transmission
to the buyer, until the buyer, or his agent in that behalf, takes delivery of them from such carrier or other bailee;
b. If the goods are rejected by the buyer, and the carrier or other bailee continues in possession of them, even if the
seller has refused to receive them back.
Goods are no longer in transit:
a. If the buyer, or his agent in that behalf, obtains delivery of the goods before their arrival at the appointed destination;
b. If, after the arrival of the goods at the appointed destination, the carrier or other bailee acknowledges to the buyer or
his agent that he holds the goods on his behalf and continues in possession of them as bailee for the buyer or his
agent; and it is immaterial that further destination for the goods may have been indicated by the buyer;
c. If the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his agent in that behalf.
If part delivery of the goods has been made to the buyer, or his agent in that behalf, the remainder of the goods may be
stopped in transitu, unless such part delivery has been under such circumstances as to show an agreement with the buyer
to give up possession of the whole of the goods.
Right of stoppage in transitu is exercised:

a. By taking actual possession of the goods; or
b. By giving notice of his claim to the carrier or other bailee who is in possession of the goods, as a consequence of which:
i. The carrier or bailee then must redeliver the goods to, or according to the directions of, the seller.
ii. The expenses of such delivery must be borne by the seller.
iii. If, however, a negotiable document of title representing the goods has been issued by the carrier or other bailee,
he shall not be obliged to deliver or justified in not delivering the goods to the seller unless such document is first
surrendered for cancellation.
3. Resale
Grounds:
a. The goods are perishable in nature
b. The seller expressly reserves the right of resale in case the buyer should make default, or
c. Where the buyer has been in default in the payment of the price for an unreasonable time
To exercise such right: the unpaid seller must have a right of lien or stoppage in transitu.
In case the resale proceeds are:

▪ LESS than the price in the original sale, the seller can recover from the original buyer the difference as damages
occasioned by the breach of contract of sale;
▪ MORE than the price in the original sale, the seller is entitled to the profit made in such resale.
Good Title: the buyer in the resale acquires a good title as against the original buyer.
Notice: except in case of resale made because the goods are perishable, notice shall be given to the original buyer about:
a. The intention to resell – which is relevant to prove that the buyer has been in default for an unreasonable length of
time.
b. The date, time and place of resale – to be considered doing the resale in good faith and entitle the seller to any
deficiency.
Note, however, that failure to give notice does not affect the validity of the resale.
Participation of the seller in the resale: is prohibited from being the buyer in the resale, either directly or indirectly, whether
the resale be public or private.
4. Rescission
Grounds:
a. When the right to rescind is expressly reserved by the seller;
b. When the buyer has been in default in the payment of the price for an unreasonable time.
To exercise such right: the unpaid seller must have a right of lien or stoppage in transitu.
Recovery of damages: the seller is not liable to the buyer upon the contract of sale, but may recover from the buyer
damages for any loss occasioned by the breach of contract.
Notice: is not necessary for the validity of rescission. But the same shall be relevant in determining whether the buyer has
been in default for an unreasonable length of time.

Mutually Exclusive Rights: the right of possessory lien and stoppage in transitu are mutually exclusive in the sense that both
rights cannot exist together at the same time. This is because the right of possessory lien presupposes that the seller retains
possession, while in stoppage in transitu, the seller should have parted with the possession already.
Note, however, that for the right of resale and right to rescind, it is necessary that the seller has either possessory lien or the
right of stoppage in transitu.
Insolvency of the buyer: is a requisite only for the right of stoppage in transitu, but not in all other rights. It is, however, a
ground to exercise possessory lien, but still, not a requisite.
RULES ON DOUBLE SALE
MOVABLE PROPERTY: if the same movable is sold by the vendor to two or more vendees, the one who has a better right over
the thing shall be the first one to take possession in good faith.
IMMOVABLE PROPERTY: if the same immovable property is sold by the vendor to two or more vendees, the one who has a
better right over the thing shall be:
1. The one to first register in good faith; if none,
2. The one to first take possession in good faith; if none still,
3. The one with the oldest title.
“Good faith” pertains to the time of registration or possession not the time of perfection of sale: as such, if at the
time of the second sale, the buyer had no knowledge of the prior sale, but learns of it prior to registration or possession (if
there is no registrant), he will NOT be considered a registrant/possessor in good faith.
BOTH SALES MUST BE VALID: In order for the Rules on Double Sale to apply, it presupposes that both the sale are valid or
at least voidable or rescissible, prior to annulment or rescission.
CONDITIONS AND WARRANTIES
CONDITIONS: where the obligation of either party to a contract of sale is subject to any condition which is not performed,
such party may:
1. Refuse to proceed with the contract; or
2. Waive the performance of the condition; or
3. Treat the non-performance as a breach of warranty and ask for damages.
WARRANTIES: Any affirmation of fact or any promise by the seller relating to the thing is an express warranty if the natural
tendency of such affirmation or promise is to induce the buyer to purchase the same, and if the buyer purchase the thing relying
thereon.
Opinion of the seller: is not understood to be a warranty unless the seller made such affirmation or statement as an expert and
it was relied upon by the buyer.
Express Warranty: is an affirmation of fact or promise by the seller relating to the thing which would induce the buyer to buy
the same. However, those relating to opinions of the seller are not considered warranties unless they are made by experts and
the buyer relies upon them.
Implied Warranties:
1. Warranty against eviction – that the seller has a right to sell the thing at the time when ownership is to pass, and that
the buyer shall from that time have and enjoy legal and peaceful possession of the thing;
Eviction requisites:
a. The vendee is deprived of the whole or of a part of the thing purchased;
b. By virtue of a final judgment
c. The vendor is summoned in the suit for eviction at the instance of the vendee.
d. Such judgment is based on:
i. A right prior to the sale or
ii. An act imputable to the vendor
Rules Applicable:
a. The warranty applies even if there is no agreement to such effect;
b. The vendee need not appeal from the decision in order that the vendor may become liable for eviction.
c. When the adverse possession had been commenced before the sale but the prescriptive period is completed after the
transfer, the vendor shall not be liable for eviction.
d. If the property is sold for non-payment of taxes due and not made known to the vendee before the sale, the vendor is
liable for eviction.
e. The judgment debtor is also responsible for eviction in judicial sales, unless it is otherwise decreed in the judgment.
f. The defendant vendee shall ask, within the time fixed in the Rules of Court for answering the complaint, that the vendor
be made a co-defendant.
Extent of Liability: First, it will depend whether the seller is in bad faith:
a. If the seller is in bad faith, he shall be liable for:
i. Value of the thing sold at the time of eviction;
ii. Income or fruits, if he has been ordered to deliver them to the party who won the suit against him;
iii. Costs of the suit which caused the eviction, and, in a proper case, those of the suit bought against the vendor for
the warranty;
iv. Expenses of the contract, if the vendee has paid them;
v. Damages and interests and ornamental expenses.
b. If the seller is in good faith, the liability of the vendor shall depend whether there is a waiver executed by the buyer:
i. If there is no waiver, the seller is liable for VICE above except Damages.
ii. If there is a waiver, the liability of the vendor shall depend whether the buyer is aware of the risk of eviction:

1) Consciente – the buyer is not aware of the risk, or without knowledge of the defect in the title of the seller:
seller is still liable but only for the VALUE of the thing at the time of eviction;
2) Intencionada – the buyer was aware of the risk of eviction or of the defect in the title of the seller, the seller
is no longer liable for anything.
Partial Loss: should the vendee lose only a part of the thing sold but the same is of such importance, in relation to the
whole, that he would not have bought it without said part, he may demand the rescission of the contract; but with the
obligation to return the thing without other encumbrances that those which it had when he acquired it, instead of enforcing
the vendor’s liability for eviction.
Two or more things sold: the same rules as to partial loss shall apply:
a. If they have been jointly sold for a lumpsum; or
b. Even if they were sold for a separate price for each of them if it should appear that the vendee would not have purchased
one without the other.
2. Warranty against hidden defects or of quality - the thing shall be free from any hidden faults or defects.
Hidden Defects: it would render the thing unfit for its intended use; or diminish its fitness for such use to such extent
that, had the vendee been aware thereof, he would not have acquired it or would have given a lower price for it.
Vendor not liable: in case:

a. The defects are patent or those which may be visible; or
b. Even if not visible, the vendee who is an expert, by reason of his trade or profession, should have known.
Warranty of Fitness of Goods: there is an implied warranty that the goods shall be reasonably fit for such purpose;
a. The buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are
acquired, and
b. It appears that the buyer relies on the seller's skill or judgment (whether he be the grower or manufacturer or not),
In the case of contract of sale of a specified article under its patent or other trade name, there is no warranty as to its fitness
for any particular purpose, unless there is a stipulation to the contrary.
Warranty of Merchantable Quality: there is an implied warranty that the goods shall be of merchantable quality
a. Where the goods are bought by description
b. From a seller who deals in goods of that description (whether he be the grower or manufacturer or not),
In the case of a contract of sale by sample, if the seller is a dealer in goods of that kind, there is an implied warranty that
the goods shall be free from any defect rendering them unmerchantable which would not be apparent on reasonable
examination of the sample.
Other rules on warranty against hidden defects or of quality:

a. The vendor is responsible to the vendee for any hidden faults or defects in the thing sold, even though he was not
aware thereof, unless there is contrary stipulation.
b. An implied warranty or condition as to the quality or fitness for a particular purpose may be annexed by the usage of
trade.
Remedies of the vendee:

a. Withdraw from the contract plus damages;
b. Accion quanti minoris or demand a proportionate reduction of the price plus damages.
Loss of the thing with hidden defect; liability of the seller:

a. If the cause was the defect itself: the seller shall be liable for:
i. Price
ii. Expenses of the contract
iii. Interest (if in good faith)
iv. Damages (if in bad faith)
b. If the cause of the loss is a fortuitous event or through the fault of the vendee, the seller shall be liable to refund the
price less the value at the time of loss, plus damages (if he was aware).
Judicial sales: the above rules likewise apply to judicial sales, except the judgment detor shall not be liable for damages.
Prescriptive period for the remedies: is 6 months from delivery.
REDHIBITORY DEFECTS IN ANIMALS

Redhibitory Defect is the hidden defect on animals that, even in case a professional inspection has been made, should be
of such nature that expert knowledge is not sufficient to discover it.
But if the veterinarian, through ignorance or bad faith shall fail to discover or disclose it, he shall be liable for damages.
Sale of more than 1 animal: General Rule: The redhibitory defect of one shall only give rise to its redhibition, and not of the
others; Except: if the vendee would not have purchased the sound animal or animals without the defective one, which is
presumed when a team, yoke pair, or set is bought, even if a separate price has been fixed for each one of the animals
composing the same.
No warranty: There is no warranty against hidden defects of animals sold at fairs or at public auctions, or of live stock sold
as condemned.
Void sale of animals:

a. The sale of animals suffering from contagious diseases shall be void.
b. If the use or service for which they are acquired has been stated in the contract, and they are found to be unfit therefor.

Remedies and Prescriptive Period: Remedies of the vendee in case of sale of animals with redhibitory defects are similar
to the remedies for breach of warranty against hidden defects; but he must make use thereof within the same period
which has been fixed for the exercise of the redhibitory action or 40 days.
Other Rules:
a. If the animal should die within three days after its purchase, the vendor shall be liable if the disease which cause the
death existed at the time of the contract.
b. If the sale be rescinded, the animal shall be returned in the condition in which it was sold and delivered, the vendee
being answerable for any injury due to his negligence, and not arising from the redhibitory fault or defect.
c. Sale of large cattle is governed by special laws.
3. Warranty against non-apparent encumbrances: an encumbrance (or an easement or servitude) is a burden imposed
upon an immovable for the benefit of another immovable belonging to a different owner. It is non-apparent, when there
are no external indications of their existence.
The warranty against non-apparent encumbrances arises when the same is:
a. Not mentioned in the agreement; or
b. Not recorded in the Registry of Property (now Registry of Deeds).
In which case, the buyer has the following remedies, within 1 year, counted from:
a. Ask for the rescission of the contract – from execution of the deed;
b. Ask for damages – from discovery.
Not applicable to: the implied warranties are not applicable to a sheriff, auctioneer, mortgagee, pledgee or other person
professing to sell by virtue of authority in fact or law, for the sale of a thing in which a third person has a legal or equitable
interest.
OBLIGATIONS OF THE VENDEE:
1. To pay the price

a. At the time and place stipulated; or if none was stipulated, the payment must be made at the time and place of
the delivery of the thing sold.
b. The vendee shall be liable for interest for the period between the delivery of the thing and the payment of the price
in the following cases:
i. Should it have been so stipulated;
ii. Should the thing sold and delivered produce fruits or income;
iii. Should he be in default, from the time of judicial or extrajudicial demand for the payment of the price.
Suspension of payments: if the vendee is disturbed in the possession or ownership of the thing acquired, or should he
have reasonable grounds to fear such disturbance, by a vindicatory action or a foreclosure of mortgage, he may suspend
the payment of the price until the vendor has caused the disturbance or danger to cease, unless:
i. The seller gives security for the return of the price in a proper case, or
ii. It has been stipulated that, notwithstanding any such contingency, the vendee shall be bound to make the payment.
iii. There was only a mere act of trespass
Vendor’s Remedy of Rescission: The vendor may immediately sue for rescission if:
i. The vendee has not yet paid after delivery is made
ii. The subject matter is immovable property
iii. There is reasonable fear of loss of the property sold and its price. (Art. 1591)
Note, however, that Art. 1191 (on reciprocal obligations) still applies, where rescission can be had even without reasonable
fear of loss if the vendee fails to pay upon delivery.
However still, even though it may have been stipulated that upon failure to pay the price at the time agreed upon the
rescission of the contract may be had, the vendee may pay, even after the expiration of the period, as long as no
demand for rescission of the contract has been made upon him either judicially or by a notarial act. After the demand,
the court may not grant him a new term.
2. To accept delivery
Delivery by installments: The buyer is not bound to accept delivery by installments, unless otherwise agreed upon.
If it was agreed that delivery be done in installments and payments separately made, and
a. the seller makes defective deliveries in respect of one or more instalments, or
b. the buyer neglects or refuses without just cause to take delivery of or pay for one or more instalments,
It depends in each case on the terms of the contract and the circumstances of the case, whether the breach of contract is:
a. So material as to justify the injured party in refusing to proceed further and suing for damages for breach of the entire
contract, or
b. Severable, giving rise to a claim for compensation but not to a right to treat the whole contract as broken
Deemed Acceptance: the buyer is deemed to have accepted the delivery if:
a. He intimates to the seller that he has accepted the thing;
b. He does any act which is inconsistent with the ownership of the seller;
c. After the lapse of a reasonable time, he retains the goods without intimating to the seller that he has rejected them.
Buyer’s obligation to notify the seller of breach of promise or warranty: After delivery is made, as a general rule,
the seller is not discharged of liability for damages or of breach of warranty.

EXCEPT:
a. There is an express or implied agreement to the contrary; or
b. The buyer fails to give notice to the seller of the breach within a reasonable time after the buyer knows, or ought to
know of such breach.
Notify the seller in case of refusal: Unless otherwise agreed, where goods are delivered to the buyer, and he refuses to
accept them, having the right so to do, he is not bound to return them to the seller, but it is sufficient if he notifies the seller
that he refuses to accept them.
If he voluntarily constitutes himself a depositary thereof, he shall be liable as such.
Right to Examine:
a. Delivered goods not previously examined: he is not deemed to have accepted them unless and until he has had a
reasonable opportunity of examining them for the purpose of ascertaining whether they are in conformity with the
contract if there is no stipulation to the contrary.
b. Unless otherwise agreed, the seller is bound, on request, to afford the buyer a reasonable opportunity of
examining the goods for the purpose of ascertaining whether they are in conformity with the contract
c. Where goods are delivered to a carrier by the seller, upon the terms that the goods shall not be delivered by the
carrier to the buyer until he has paid the price, the buyer is not entitled to examine the goods before the
payment of the price, in the absence of agreement or usage of trade permitting such examination.
Vendor’s Remedy of Rescission is an available remedy to the seller with respect to movable property, if the vendee
upon the expiration of the period fixed for the delivery of the thing :
a. Should not have appeared to receive it, or,
b. Having appeared, he should not have tendered the price at the same time, unless a longer period has been stipulated
for its payment.
EXTINGUISHMENT OF A CONTRACT OF SALE:

Sales are extinguished by the same causes as all other obligations, and by conventional or legal redemption.
CONVENTIONAL REDEMPTION
CONVENTIONAL REDEMPTION: otherwise known as “right of repurchase” shall take place when the vendor reserves the
right to repurchase the thing sold, with the obligation to return the price, expenses related thereto and useful and necessary
expenses, and other stipulations which may have been agreed upon.
The sale, with a right of repurchase, is also known as pacto de retro sale.
Ownership: transfers to the vendee-a-retro upon delivery. However, this ownership is not absolute but only conditional. This
is because the vendor-a-retro may be able to exercise the right to repurchase and the ownership of the buyer will be terminated.
Thus, it can be said that the ownership of the vendee-a-retro is subject to a resolutory condition.
Amount to be paid at the time the right is exercised:

1. The purchase price;
2. The expenses of the contract, and any other legitimate payments made by reason of the sale; and
3. Useful and necessary expenses (e.g., fencing of the land)
Fruits:
At the time of At the time of Effect
sale redemption
There are There were fruits If purchaser paid for the fruits existing at the time of sale, he shall be entitled to
visible or as well reimbursement or pro-rating of the fruits existing at the time of redemption.
growing fruits
If no indemnity was paid by the purchaser, there is no such liability for reimbursement
or pro-rating.
No fruits Some exist The fruits shall be prorated between the redemptioner (Seller-a-retro) and the vendee,
giving the latter the part corresponding to the time he possessed the land in the last
year, counted from the anniversary of the date of the sale.
Equitable Mortgage: a sale with a right of repurchase (or even a contract of absolute sale) is presumed to be an equitable
mortgage in the following cases:
1. When the price of a sale with right to repurchase is unusually inadequate;
2. When the vendor remains in possession as lessee or otherwise;
3. When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or
granting a new period is executed;
4. When the purchaser retains for himself a part of the purchase price;
5. When the vendor binds himself to pay the taxes on the thing sold;
6. In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure
the payment of a debt or the performance of any other obligation.
The remedy would be to ask for the reformation of the instrument purporting to be a contract of sale with right of repurchase
or a contract of absolute sale.
In case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage.
Period to exercise right of repurchase:

1. That which was agreed upon which cannot exceed 10 years;
2. If no agreement as to the period, it shall be four years from the date of the contract.
3. The vendor may still exercise the right to repurchase within thirty days from the time final judgment was rendered in a civil
action on the basis that the contract was a true sale with right to repurchase.

No Redemption/Repurchase was made:
1. In case of real property, the consolidation of ownership in the vendee by virtue of the failure of the vendor to pay the
required amounts shall not be recorded in the Registry of Property without a judicial order, after the vendor has been
duly heard.
2. In case of personal property, the consolidation of ownership is by operation of law.
By consolidation of ownership, it means that the ownership of the vendee becomes absolute and the resolutory condition is
removed.
Vendor’s Right of Repurchase:
1. The vendor may bring his action against every possessor whose right is derived from the vendee, even if in the second
contract no mention should have been made of the right to repurchase, without prejudice to the provisions of the Mortgage
Law and the Land Registration Law with respect to third persons.
2. The vendee is subrogated to the vendor's rights and actions.
3. The creditors of the vendor cannot make use of the right of redemption against the vendee, until after they have exhausted
the property of the vendor.
Multiple Parties
1. SALE OF UNDIVIDED IMMOVABLE – vendee eventually acquires the whole; may compel the vendor to redeem the whole
property.
2. SEVERAL PERSONS JOINTLY AND IN THE SAME CONTRACT: sell an undivided immovable with a right of repurchase:
a. SELLERS – can only redeem their share
b. BUYER – can compel redemption of the entire property; cannot be compelled to agree to a partial redemption
3. CO-OWNERS SOLD SEPARATELY – each can exercise his own right of redemption and cannot be compelled to redeem
the whole property.
LEGAL REDEMPTION
LEGAL REDEMPTION: is the right to be subrogated, upon the same terms and conditions stipulated in the contract, in the
place of one who acquires a thing by purchase or dation in payment, or by any other transaction whereby ownership is
transmitted by onerous title.
The Right of Legal Redemption is available to:

1. Co-owners – a co-owner of a thing may exercise the right of redemption in case the shares of all the other co-owners or
of any of them, are sold to a third person.
Subject property: may be movable or immovable property.
Amount to be paid for redemption: is the purchase price, unless the price of alienation is grossly excessive, in which case,
the redemptioner shall pay only a reasonable one.
Multiple redemptioners: should two or more co-owners desire to exercise the right of redemption, they may only do so in
proportion to the share they may respectively have in the thing owned in common
2. Owners of adjoining lands – have the right of redemption in case of transfers of land.
Rural Land; Requisites:

a. The subject is rural land;
b. The land does not exceed one hectare;
c. The redemptioner is an owner of a land adjoining the subject rural land;
d. The adjacent lands is not separated by brooks, drains, ravines, roads and other apparent servitudes for the benefit of
other estates; and
e. The grantee/buyer owns a rural land;
Multiple redemptioners: in case two or more adjoining owners desire to exercise the right of redemption at the same time:
a. The owner of the adjoining land of smaller area shall be preferred; and
b. Should both lands have the same area, the one who first requested redemption.
Redemption and Pre-emption of Urban Land; Requisites:

a. The subject is urban land;
b. The area of the land is so small and so situated that a major portion thereof cannot be used for any practical purpose
within a reasonable time, having been bought merely for speculation;
c. The one exercising the right of redemption or pre-emption is an adjoining land owner.
When redemption, when pre-emption:
a. Pre-emption is the right exercised by the adjoining land owner if the sale is NOT YET perfected;
b. Redemption is the right exercised if the sale is already perfected.
Multiple persons exercising the right of redemption/pre-emption: the one whose intended use is best justified shall be
preferred.
PERIOD TO EXERCISE LEGAL RIGHT OF REDEMPTION: 30 days from NOTICE in writing by the prospective vendor, or by
the vendor. The deed of sale shall not be recorded in the Registry of Property, unless accompanied by an affidavit of the vendor
that he has given written notice thereof to all possible redemptioners.
1. First Statement: Sale is not a mode of acquiring ownership. Second Statement: Delivery is the operative mode that
transfers ownership.
A. Only the first statement is true.
B. Only the second statement is true.
C. Both statements are true.
D. None of the statements is true.

2. A deed of sale where the stated consideration had not in fact been paid is:
B. Unenforceable D. Null and void
3. The characteristics of a contract of sale are: (1) consensual, (2) bilateral, (3) onerous, (4) principal, and (5) nominate.
A. All of the five C. 1, 2, 3, and 5 only
B. 1, 2, 3, and 4 only D. 1, 3, 4, and 5 only
4. The incapacity of minors, demented persons, imbeciles, deaf and dumb, prodigals and civil interdictees in entering into
contracts of sale is:
A. Relative C. Partial
B. Absolute D. Total
5. If the property regime between husband and wife is the regime of separation of property, a sale by one spouse to
another is:
A. Valid C. Void
B. Unenforceable D. Voidable
6. A contract of sale between husband and wife entered into after a judicial separation of properties has been decreed is:
A. Valid C. Void
B. Unenforceable D. Voidable
7. A guardian cannot acquire even at a public auction, either in person or through the mediation of another which property?
A. Property whose administration or sale may have been entrusted to them, unless the consent of the principal has
been given
B. Property of his ward
C. Property of the estate under administration
D. Property of the government, its political subdivisions or GOCCs entrusted to him
8. An executor or administrator cannot acquire even at a public auction, either in person or through the mediation of
another which property?
A. Property of the government, its political subdivisions or GOCCs entrusted to him
B. Property of his ward
C. Property of the estate under administration
D. Property whose administration or sale may have been entrusted to them, unless the consent of the principal has
been given
9. A judge, justice, prosecuting attorney, or clerk of court cannot acquire even at a public auction, either in person or
through the mediation of another which property?
A. Property of the government, its political subdivisions or GOCCs entrusted to him
B. Property in custodia legis
C. Property of his ward
D. Property whose administration or sale may have been entrusted to them, unless the consent of the principal has
been given
10. For a thing to be a valid subject matter, it has to be:

A. Determinate or determinable, illicit and possible
B. Determinate or determinable, illicit and impossible
C. Determinate or determinable, licit and possible
D. Indeterminate, licit and not impossible
11. For a right to be a valid subject matter, it must be:

A. Transmissible C. Encumbered
B. Intransmissible D. Levied upon
12. If there is mere inadequacy of the price, the contract is:

A. Void C. Valid
13. If the parties really intended a donation or some other act or contract, the contract of sale is:
A. Void C. Unenforceable
B. Voidable D. Void
14. Where the price of the thing sold cannot be determined and the thing has been delivered to and appropriated by the
buyer, how much does the buyer have to pay?
A. Reasonable price C. Price given by the buyer
B. Price given by the seller D. Nothing
15. What distinguishes earnest money from option money?

A. If there is earnest money, in case of non-payment, there can be an action for specific performance only; while if
there is option money, an action for specific performance or for rescission can be filed by the injured party.
B. The earnest money is a distinct consideration for an option contract; while the option money is part of the purchase
price.
C. If there is earnest money, title passes to the buyer upon delivery of the thing sold; while if there is option money,
ownership is reserved to the seller and is not to pass until full payment.
D. If there is earnest money, the would-be buyer is not required to buy; while if there is option money, the buyer is not
bound to pay the balance.

16. First Statement: If earnest money is paid, there is already a sale perfected. Second Statement: If option money is paid,
no sale is perfected yet.
17. The following sales must be in writing to be enforceable: (1) sale of personal property at a price not less than P500, (2)
sale of real property or an interest therein, and (3) sale of any property not to be performed within a year from the date
thereof.
B. 1 and 3 only D. All of three
18. It refers to an agreement that dominion is reserved in favor of the seller until the full payment of purchase price.
A. Pactum reservati dominii C. Pactum commissorium
B. Pactum sun servanda D. Pactum leonina
19. It refers to a delivery where the seller points out to buyer the things which are transferred.
A. Traditio constitutum possessorium C. Traditio longa manu
B. Traditio brevi manu D. Traditio symbolica
20. It refers to a delivery where the seller continues in possession but under a different title other than ownership.
A. Traditio constitutum possessorium C. Traditio brevi manu
B. Traditio longa manu D. Traditio symbolica
21. It refers to a delivery of rights, credits or incorporeal property, made by placing titles of ownership in the hands of the
buyer and allowing buyer to make use of rights.
A. Quasi-tradition C. Traditio brevi manu
B. Traditio longa manu D. Traditio symbolica
22. Who is preferred in case of double sale of personal property?

A. Registrant in good faith C. Person with oldest title in good faith
B. Possessor in good faith D. Buyer with higher price
23. What is the order of preference of the following in case of double sale of real property: (1) registrant in good faith, (2)
possessor in good faith, and (3) person with oldest title in good faith?
A. I, II and III C. III, II and I
B. I, III and II D. III, I and II
24. Who bears the risk of loss and deterioration of the thing sold before perfection?
A. Buyer C. Both the seller and buyer
B. Seller D. None
25. The remedies of an unpaid seller are (1) possessory lien, (2) stoppage in transitu, (3) resale, and (4) rescission.
A. 1, 2, and 3 C. 1, 3, and 4
B. 1, 2, and 4 D. All of four
26. What is the effect of waiver of warranty against eviction if the seller is in bad faith?
A. Waiver is null and void. C. Seller is not liable.
B. Only limits the liability of the seller. D. Wipes out the warranty.
27. What is the effect of waiver of warranty against eviction if the buyer has no knowledge of a particular risk?
A. Waiver is null and void. C. Seller is not liable.
B. Only limits the liability of the seller. D. Wipes out the warranty.
28. What is the effect of waiver of warranty against eviction if the buyer has knowledge of risk of eviction and assumed its
consequences?
A. Seller is not liable. C. Only limits the liability of the seller.
B. Waiver is null and void. D. Wipes out the warranty.
29. It refers to an action to procure the return of a part of the purchase price paid by the vendee to the vendor by reason of
such defect.
A. Accion redhibitoria C. Accion quanti minoris
B. Accion pauliana D. Accion quanti majoris
30. The prescription period to file an accion redhibitoria or accion quanti minoris is __ months from the date of delivery to the
vendee.
A. 1 C. 9
B. 6 D. 12
31. In redhibitory actions based on the faults or defects of animals, the period is __ days.
A. 40 C. 30
B. 45 D. 15
32. The vendee is liable for interest on the price (1) should it have been so stipulated, (2) should the thing sold and delivered
produce fruits or income, and (3) should he be in default, from the time of judicial or extra-judicial demand for the
payment of the price.

33. The vendee may suspend the payment of price (1) should he be disturbed in the possession or ownership of
the thing sold and (2) should he have reasonable grounds to fear such disturbance by a vindicatory action
or by a foreclosure of mortgage.
A. 1 only C. Both of them
B. 2 only D. None of them
34. Under Recto Law, the seller may ask for the rescission of the sale if buyer has failed to pay __ or more
installments.
A. 2 C. 4
B. 3 D. 5
35. Under Recto Law, if the seller chose to foreclose the chattel mortgage on the thing sold, __.
A. The seller can still pursue the buyer for the deficiency.
B. The seller can also seek for specific performance.
C. The seller can also seek for rescission of the sale.
D. There shall be no deficiency judgment.
36. First Statement: Under PD 957, no installment payment made by a buyer in a subdivision or condominium
project for the lot or unit he contracted to buy shall be forfeited in favor of the owner or developer when the
buyer, after due notice to the owner or developer, desists from further payment due to the failure of the
owner or developer to develop the subdivision or condominium project according to the approved plans and
within the time limit for complying with the same. Second Statement: The rights of buyer in the event of his
failure to pay the installments due for reasons other than the failure of the owner or developer to develop
the project shall be governed by RA 6552.
37. Under Maceda Law, if the buyer paid at least 2 years installment, he may pay the balance __ within a grace
period of __ for every year of installment payment.
A. Without interest; one month C. Without interest; two months
B. With interest; one month D. With interest; two months
38. Under Maceda Law, if the seller cancels the sale and the buyer paid at least 2 years installment, buyer is
entitled to __ of what he has paid if after 5 years of installments, __ for every year but not to exceed __ of
total payments made.
A. 50%; 5%; 80% C. 60%; 5%; 90%
B. 50%; 5%; 90% D. 60%; 5%; 80%
39. Under Maceda Law, if the seller cancels the sale and buyer paid at least 2 years installment, cancellation is
effected __ days from notice and upon payment of cash surrender value.
A. 30 C. 60
B. 45 D. 90
40. Under Maceda Law, if the buyer paid less than 2 years installment, the second grace period is __ days from
notice of cancellation/demand for rescission.
A. 30 C. 60
B. 45 D. 90
1. C 9. B 17. D 25. D 33. C

2. D 10. C 18. A 26. A 34. A
3. A 11. A 19. C 27. B 35. D
4. B 12. C 20. A 28. A 36. C
5. A 13. D 21. A 29. C 37. A
6. A 14. A 22. B 30. B 38. B
7. B 15. C 23. A 31. A 39. A
8 C 16. C 24. B 32. D 40. A

RFBT-11
CONSUMER PROTECTION ACT & LEMON LAW

CONSUMER PROTECTION ACT
(Republic Act No. 7394)
DECLARATION OF BASIC POLICY: It is the policy of the State to protect the interests of the consumer, promote his
general welfare and to establish standards of conduct for business and industry. Towards this end, the State shall
implement measures to achieve the following objectives:
1. protection against hazards to health and safety;
2. protection against deceptive, unfair and unconscionable sales acts and practices;
3. provision of information and education to facilitate sound choice and the proper exercise of rights by the consumer;
4. provision of adequate rights and means of redress; and
5. involvement of consumer representatives in the formulation of social and economic policies.
CONSTRUCTION: The best interest of the consumer shall be considered in the interpretation and implementation of the
provisions of this Act, including its implementing rules and regulations.
PROTECTION AGAINST DECEPTIVE, UNFAIR AND

UNCONSCIONABLE SALES ACTS OR PRACTICES
DECLARATION OF POLICY: The State shall promote and encourage fair, honest and equitable relations among parties in
consumer transactions and protect the consumer against deceptive, unfair and unconscionable sales acts or practices.
Implementing Agency: The Department of Trade and Industry (“the Department”)
REGULATION OF SALES ACTS AND PRACTICES
DECEPTIVE SALES ACTS OR PRACTICES: An act or practice shall be deemed deceptive whenever the producer,
manufacturer, supplier or seller, through concealment, false representation of fraudulent manipulation, induces a
consumer to enter into a sales or lease transaction of any consumer product or service.
Without limiting the scope of the above paragraph, the act or practice of a seller or supplier is deceptive when it represents
that:
a) a consumer product or service has the sponsorship, approval, performance, characteristics, ingredients, accessories, uses,
or benefits it does not have;
b) a consumer product or service is of a particular standard, quality, grade, style, or model when in fact it is not;
c) a consumer product is new, original or unused, when in fact, it is in a deteriorated, altered, reconditioned, reclaimed or
second-hand state;
d) a consumer product or service is available to the consumer for a reason that is different from the fact;
e) a consumer product or service has been supplied in accordance with the previous representation when in fact it is not;
f) a consumer product or service can be supplied in a quantity greater than the supplier intends;
g) a service, or repair of a consumer product is needed when in fact it is not;
h) a specific price advantage of a consumer product exists when in fact it does not;
i) the sales act or practice involves or does not involve a warranty, a disclaimer of warranties, particular warranty terms or
other rights, remedies or obligations if the indication is false; and
j) the seller or supplier has a sponsorship, approval, or affiliation he does not have.
A deceptive act or practice by a seller or supplier in connection with a consumer transaction violates this Act whether it occurs
before, during or after the transaction.
UNFAIR OR UNCONSCIONABLE SALES ACT OR PRACTICE: An act or practice shall be deemed unfair or unconscionable
whenever the producer, manufacturer, distributor, supplier or seller, by taking advantage of the consumer's physical or
mental infirmity, ignorance, illiteracy, lack of time or the general conditions of the environment or surroundings,
induces the consumer to enter into a sales or lease transaction grossly inimical to the interests of the consumer
or grossly one-sided in favor of the producer, manufacturer, distributor, supplier or seller.
In determining whether an act or practice is unfair and unconscionable, the following circumstances shall be considered:
a) that the producer, manufacturer, distributor, supplier or seller took advantage of the inability of the consumer to reasonably
protect his interest because of his inability to understand the language of an agreement, or similar factors;
b) that when the consumer transaction was entered into, the price grossly exceeded the price at which similar products or
services were readily obtainable in similar transaction by like consumers;
c) that when the consumer transaction was entered into, the consumer was unable to receive a substantial benefit from the
subject of the transaction;
d) that when the consumer was entered into, the seller or supplier was aware that there was no reasonable probability or
payment of the obligation in full by the consumer; and
e) that the transaction that the seller or supplier induced the consumer to enter into was excessively one-sided in favor of the
seller or supplier.
An unfair or unconscionable sales act or practice by a seller or supplier in connection with a consumer transaction violates this
Chapter whether it occurs before, during or after the consumer transaction.
Chain Distribution Plans or Pyramid Sales Schemes: or "pyramid sales schemes" means sales devices whereby a person,
upon condition that he makes an investment, is granted by the manufacturer of his representative a right to recruit for profit
one or more additional persons who will also be granted such right to recruit upon condition of making similar investments:
Provided, That the profits of the person employing such a plan are derived primarily from the recruitment of other persons into
the plan rather than from the sale of consumer products, services and credit: Provided, further, That the limitation on the
number of participants does not change the nature of the plan.

CONSUMER PROTECTION ACT AND LEMON LAW RFBT-11
Rule: Chain distribution plans or pyramid sales schemes shall not be employed in the sale of consumer products.
Home Solicitation Sales: means consumer sales or leases which are personally solicited by any person or organization by
telephone, person-to-person contact or by written or printed communication other than general advertising or consummated at
the buyer's residence or a place of business, at the seller's transient quarters, or away from a seller's regular place of business.
Rule: No business entity shall conduct any home solicitation sale of any consumer product or service without first obtaining
a permit from the Department. Such permit may be denied suspended or revoked upon cause as provided in the rules and
regulations promulgated by the Department, after due notice and hearing.
When: Home solicitation sales may be conducted only between the hours of 9:00AM and 7:00PM of each working day: Provided,
That solicitation sales may be made at a time other than the prescribed hours where the person solicited has previously agreed
to the same.
By whom: Home solicitation sales shall only be conducted by a person who has the proper identification and authority from
his principal to make such solicitations.
Receipts: Sales generated from home solicitation sales shall be properly receipted as per existing laws, rules and regulations
on sale transactions.
Prohibited Representations: A home solicitation sale shall not represent that:

a) the buyer has been specially selected;
b) a survey, test or research is being conducted; or
c) the seller is making a special offer to a few persons only for a limited period of time.
Referral Sales: means the sales device employed by the sellers wherein the buyer is induced to acquire goods or services by
representing that after the acquisition of the goods or services, he will receive a rebate, commission or other benefit in return
for the submission of names of potential customers or otherwise helping the seller enter into other sales, if the receipt of such
benefit is contingent on an event occurring after the sale is made.
General Rule: Referral selling plans shall not be used in the sale of consumer products
Exception: when the seller executes in favor of the buyer a written undertaking that will grant a specified compensation or
other benefit to said buyer in return for each and every transaction consummated by said seller with the persons referred by
said buyer or for subsequent sales that said buyers has helped the seller enter into.
PENALTIES:
Fine P5,000 to P10,000*
Imprisonment Not more than 1 year*
*Or both upon the discretion of the court
The court may likewise grant an injunction restraining the conduct constituting the contravention of the provisions of Deceptive
Sales and/or actual damages and such other orders as it thinks fit to redress injury to the person caused by such conduct.
LABELING AND FAIR PACKAGING

DECLARATION OF POLICY: The State shall enforce compulsory labeling, and fair packaging to enable the consumer to obtain
accurate information as to the nature, quality and quantity of the contents of consumer products and to facilitate his comparison
of the value of such products.
Implementing Agency: The Department of Trade and Industry. Provided, That with respect to food, drugs, cosmetics, devices
and hazardous substances, it shall be enforced by the concerned department.
PROHIBITED ACTS ON LABELING AND PACKAGING: It shall be unlawful for any person, either as principal or agent,
engaged in the labeling or packaging of any consumer product, to display or distribute or to cause to be displayed or
distributed in commerce any consumer product whose package or label does not conform to the provisions hereof.
The prohibition shall not apply to persons engaged in the business of wholesale or retail distributors of consumer products
except to the extent that such persons:
a) are engaged in the packaging or labeling of such products;
b) prescribe or specify by any means the manner in which such products are packaged or labeled; or
c) having knowledge, refuse to disclose the source of the mislabeled or mispackaged products.
MINIMUM LABELING REQUIREMENTS FOR CONSUMER PRODUCTS: – All consumer products domestically sold whether
manufactured locally or imported shall indicate the following in their respective labels of packaging:
a) its correct and registered trade name or brand name;
b) its duly registered trademark;
c) its duly registered business name;
d) the address of the manufacturer, importer, repacker of the consumer product in the Philippines;
e) its general make or active ingredients;
f) the net quality of contents, in terms of weight, measure or numerical count rounded of to at least the nearest tenths in the
metric system;
g) country of manufacture, if imported; and
h) if a consumer product is manufactured, refilled or repacked under license from a principal, the label shall so state the fact.
The following may be required by the concerned department in accordance with the rules and regulations they will promulgate
under authority of this Act:
a) whether it is flammable or inflammable;
b) directions for use, if necessary;
c) warning of toxicity;
d) wattage, voltage or amperes; or
e) process of manufacture used if necessary.

Any word, statement or other information required by or under authority of the preceding paragraph shall appear on the label
or labeling with such conspicuousness as compared with other words, statements, designs or devices therein, and in such terms
as to render it likely to be read and understood by the ordinary individual under customary conditions of purchase or use.
The above requirements shall form an integral part of the label without danger of being erased or detached under ordinary
handling of the product.
Philippine Product Standard Mark: The label may contain the Philippine Product Standard Mark if it is certified to have
passed the consumer product standard prescribed by the concerned department.
Authority of the Concerned Department to Provide for Additional Labeling and Packaging Requirements. – Whenever
the concerned department determines that regulations containing requirements other than those in the Minimum Labelling
Requirements above are necessary to prevent the deception of the consumer or to facilitate value comparisons as to any
consumer product, it may issue such rules and regulations to:
a) establish and define standards for characterization of the size of a package enclosing any consumer product which may be
used to supplement the label statement of net quality, of contents of packages containing such products but this clause
shall not be construed as authorizing any limitation on the size, shape, weight, dimensions, or number of packages which
may be used to enclose any product;
b) regulate the placement upon any package containing any product or upon any label affixed to such product of any printed
matter stating or representing by implication that such product is offered for retail at a price lower than the ordinary and
customary retail price or that a price advantage is accorded to purchases thereof by reason of the size of the package or
the quantity of its contents;
c) prevent the nonfunctional slack-fill of packages containing consumer products.
For purposes of paragraph (c), a package shall be deemed to be nonfunctionally slack-filled if it is filled to substantially less
than its capacity for reasons other than:
1. protection of the contents of such package,
2. the requirements of machines used for enclosing the contents in such package, or
3. inherent characteristics of package materials or construction being used.
SPECIAL PACKAGING OF CONSUMER PRODUCTS FOR THE PROTECTION OF CHILDREN: The concerned department may
establish standards for the special packaging of any consumer product if it finds that:
a) the degree or nature of the hazard to children in the availability of such product, by reason of its packaging, is such that
special packaging is required to protect children from serious personal injury or serious illness resulting from handling and
use of such product; and
b) the special packaging to be required by such standard is technically feasible, practicable and appropriate for such product.
In establishing a standard under this Article, the concerned department shall consider:
1. the reasonableness of such standard;
2. available scientific, medical and engineering data concerning special packaging and concerning accidental, ingestions,
illnesses and injuries caused by consumer product;
3. the manufacturing practices of industries affected by this Article; and
4. the nature and use of consumer products.
ADDITIONAL LABELING REQUIREMENTS
For FOOD For COSMETICS For DRUGS For CIGARETTES

a) expiry or expiration date, a) expiry or expiration The Generics Act All cigarettes for sale or distribution
where applicable; date; shall apply within the country shall be
b) whether the consumer product b) whether or not it contained in a package which shall
is semi-processed, fully may be an irritant; bear the following statement or its
processed, ready-to-cook, c) precautions or equivalent in Filipino: "Warning"
ready-to-eat, prepared food or contra-indications; Cigarette Smoking is Dangerous to
just plain mixture; and Your Health". Such statement shall
c) nutritive value, if any; d) such other labeling be located in conspicuous place on
d) whether the ingredients use requirements as the every cigarette package and shall
are natural or synthetic, as the concerned appear in conspicuous and legible
case may be; department may type in contrast by typography,
e) such other labeling deem necessary and layout or color with other printed
requirements as the concerned reasonable. matter on the package. Any
department may deem advertisement of cigarette shall
necessary and reasonable. contain the name warning as
indicated in the label.
Mislabeled Food: A food shall also be deemed mislabeled:

a) if its labeling or advertising is false or misleading in any way;
b) if it is offered for sale under the name of another food;
c) if it is an imitation of another food, unless its label bears in type of uniform size and prominence, the word "imitation"
and, immediately thereafter, the name of the food imitated;
d) its containers is so made, formed, or filled as to be misleading;
e) if in package form unless it bears a label conforming to the requirements of this Act: Provided, That reasonable variation
on the requirements of labeling shall be permitted and exemptions as to small packages shall be established by the
regulations prescribed by the concerned department of health;
f) if any word, statement or other information required by or under authority of this Act to appear on the principal display
panel of the label or labeling is not prominently placed thereon with such conspicuousness as compared with other words,
statements, designs or devices in the labeling and in such terms as to render it likely to be read and understood by the
ordinary individual under customary conditions of purchase and use;
g) if it purports to be or is represented as a food for which a definition or standard of identity has been prescribed unless:
1. it conforms to such definition and standard; and
2. its labels bears the name of the food specified in the definition or standards, and insofar as may be required by such
regulations, the common names of optional ingredients other than spices, flavoring and coloring, present in such food;

h) if it purports to be or represented as:
1. a food for which a standard of quality has been prescribed by regulations as provided in this Act and its quality fall
below such standard, unless its label bears in such manner and form as such regulations specify, a statement that it
falls below such standard; or
2. a food for which a standard or standards or fill of container have been prescribed by regulations as provided by this
Act and it falls below the standard of fill of container applicable thereto, unless its label bears, in such manner and
form as such regulations specify, a statement that it falls below such standard;
i) if it is not subject to the provisions of paragraph (g) of this Article unless its label bears:
1. the common or usual name of the food, if there be any; and
2. in case it is manufactured or processed from two or more ingredients, the common or usual name of such ingredient;
except the spices, flavorings and colorings other than those sold as such, may be designated as spices, flavorings and
colorings without naming each: Provided, That to the extent that compliance with the requirement of clause (2) of this
paragraph is impracticable or results in deception or unfair competition, exemptions shall be established by regulations
promulgated by the concerned department of health;
j) if it purports to be or is represented for special dietary uses, unless its label bears such information concerning its vitamin
or mineral or other dietary properties as the concerned department determines to be, or by regulations prescribed as
necessary in order fully to inform purchasers as its value for such uses;
k) if it bears or contains any artificial flavoring, artificial coloring, or chemical preservative, unless it bears labeling, stating
that fact: Provided, That to the extent that compliance with the requirements of this paragraph is impracticable, exemptions
shall be established by regulations promulgated by the concerned department. The provisions of this paragraph or
paragraphs (g) and (i) with respect to the artificial coloring shall not apply in the case of butter, cheese or ice cream.
Mislabeled Cosmetics: A cosmetic shall be deemed mislabeled:

a) if its labeling or advertising is false or misleading in any way;
b) if in package form unless it bears a label conforming to the requirements of labeling provided for in this Act or under existing
regulations: Provided, That reasonable variations shall be permitted, and exemptions as to small packages shall be
established by regulations prescribed by the concerned department;
c) if any word, statement or other information required by or under authority of this Act to appear on the label or labeling is
not prominently placed thereon with such conspicuousness, as compared with other words, statements, designs or devices
in the labeling, and in such terms as to render it likely to be read and understood by the ordinary individual under customary
conditions of purchase and use;
d) if its container is so made, formed or filled as to be misleading; or
e) if its label does not state the common or usual name of its ingredients.
Mislabeled Drugs and Devices: A drug or device shall be deemed to be mislabeled:

a) if its labeling is false or misleading in any way;
b) if its in package form unless it bears a label conforming to the requirements of this Act or the regulations promulgated
therefor: Provided, that reasonable variations shall be permitted and exemptions as to small packages shall be established
by regulations prescribed by the concerned department.
c) if any word, statement or other information required by or under authority of this Act to appear on the principal display
panel of the label or labeling is not prominently placed thereon with such conspicuousness as compared with other words,
statements, designs or devices in the labeling and in such terms as to render it likely to be read and understood by the
ordinary individual under customary conditions of purchase and use;
d) if it is for use by man and contains any quantity of the narcotic or hypnotic substance alpha-eucaine, barbituric acid, beta-
eucaine, bromal, cannabis, carbromal, chloral, coca, cocaine, codeine, heroin, marijuana, morphine, opium, paraldehyde,
peyote or sulfonmethane, or any chemical derivative of such substance, which derivative has been designated by the
concerned department after investigation, and by regulations as habit forming; unless its label bears the name and quantity
or proportion of such substance or derivative and in juxtaposition therewith the statement "Warning-May be habit forming";
e) its labeling does not bear:
1. adequate directions for use; and
2. such adequate warning against use in those pathological conditions or by children where its use may be dangerous to
health, or against unsafe dosage or methods or duration of administration or application, in such manner and form, as
are necessary for the protection of users: Provided, That where any requirement of clause (1) of this paragraph, as
applied to any drug or device, is not necessary for the protection of the public health, the concerned department may
promulgate regulations exempting such drug or device from such requirement;
f) if it purports to be a drug the name of which is recognized in an official compendium, unless it is packaged and labeled as
prescribed therein: Provided, That the method of packing may be modified with the consent of the concerned department;
g) if it has been found by the concerned department to be a drug liable to deterioration, unless it is packaged in such form
and manner, and its label bears a statement of such precautions, as the concerned department, shall by regulations, require
as necessary for the protection of the public health;
h) 1. if it is a drug and its container is so made, formed or filled as to be misleading; or
2. if it is an imitation of another drug; or
3. if it is dangerous to health when used in the dosage, or with the frequency of duration prescribed, recommended or
suggested in the labeling thereof;
i) if it is, purports to be or is represented as a drug composed wholly or partly of insulin or of any kind of penicillin,
streptomycin, chlortetracycline, chloramphenicol, bacitracin, or any other antibiotic drug, or any derivative thereof, unless:
1. it is from a batch with respect to which a certificate of release has been issued pursuant to regulations of the concerned
department; and
2. such certificate of release is in effect with respect to such drug: Provided, That this paragraph shall not apply to any
drug or class of drugs exempted by regulations promulgated under Authority of this Act.
Regulation-making Exemptions: The concerned department may promulgate regulations exempting from any labeling
requirements of this Act food, cosmetics, drugs or devices which are, in accordance with the practice of trade, to be processed,
labeled or repacked in substantial quantities at establishments other than those where originally processed, labeled or packed
on condition that such food, cosmetics, drugs or devices are not adulterated or mislabeled under the provisions of this Act and
other applicable laws upon approval from such processing, labeling and repacking establishments.
Mislabeled Hazardous Substances: Hazardous substances shall be deemed mislabeled when:

a) having been intended or packaged in a form suitable for use in households, especially for children, the packaging or labeling
of which is in violation of the special packaging regulations issued by the concerned department;

b) such substance fails to bear a label;
1. which states conspicuously:
i. the name and the place of business of the manufacturer, packer, distributor or seller;
ii. the common or usual name or the chemical name, if there be no common or usual name, of the hazardous
substance or of each component which contributes substantially to the harmfulness of the substance, unless the
concerned department by regulation permits or requires the use of the recognized generic name;
iii. the signal word "danger" on substances which are extremely flammable, corrosive or highly toxic;
iv. the signal word "warning" or "caution" with a bright red or orange color with a black symbol on all other hazardous
substances;
v. a clear statement as to the possible injury it may cause if used improperly;
vi. precautionary measures describing the action to be followed or avoided;
vii. instructions when necessary or appropriate for first-aid treatment;
viii. the word" poison" for any hazardous substance which is defined as highly toxic;
ix. instructions for handling and storage of packages which require special care in handling and storage; and
x. the statement "keep out of the reach of children", or its practical equivalent, if the article is not intended for use
by children and is not a banned hazardous substance, with adequate directions for the protection of children from
the hazard involved. The aforementioned signal words, affirmative statements, description of precautionary
measures, necessary instructions or other words or statements may be in English language or its equivalent in
Filipino; and
2. on which any statement required under clause 1) of this paragraph is located prominently in bright red and orange
color with a black symbol in contrast typography, layout or color with the other printed matters on the label.
Exemptions: If the concerned department finds that for good or sufficient reasons, full compliance with the labeling requirements
otherwise applicable under this Act is impracticable or is not necessary for the adequate protection of public health and safety,
it shall promulgate regulations exempting such substances from these requirements to the extent it deems consistent with the
objective of adequately safeguarding public health and safety, and any hazardous substance which does not bear a label in
accordance with such regulations shall be deemed mislabeled hazardous substance.
Grounds for Seizure and Condemnation of Mislabeled Hazardous Substances:

a) Any mislabeled hazardous substance when introduced into commerce or while held for sale shall be liable to be
proceeded against and condemned upon order of the concerned department in accordance with existing procedure for
seizure and condemnation of articles in commerce: Provided, That this Article shall not apply to a hazardous substance
intended for export to any foreign country if:
1. it is in a package labeled in accordance with the specifications of the foreign purchaser;
2. it is labeled in accordance with the laws of the foreign country;
3. it is labeled on the outside of the shipping package to show that it is intended for export; and
4. it is so exported,
b) any hazardous substance condemned under this Article shall after entry of order of condemnation be disposed of by
destruction or sale as the concerned department may direct, and the proceeds thereof, if sold, less the legal cost and
charges, shall be paid into the treasury of the Philippines; but such hazardous substance shall not be sold under any order
which is contrary to the provisions of this Act; Provided, That, after entry of the order and upon the payment of the costs
of such proceedings and the execution of a good and sufficient bond conditioned that such hazardous substance shall not
be sold or disposed of contrary to the provisions of this Act, the concerned department may direct that such hazardous
substance be delivered to or retained by the owner thereof for destruction or for alteration to comply with the provisions
of this Act under the supervision of an officer or employee duly designated by the concerned department. The expenses for
such supervision shall be paid by the person obtaining release of the hazardous substance under bond.
c) all expenses in connection with the destruction provided for in paragraphs (a) and (b) of this Article and all expenses in
connection with the storage and labor with respect to such hazardous substance shall be paid by the owner or consignee,
and default in such payment shall constitute a lien against any importation by such owner or consignee.
Penalties:
Food/Cosmetic/Drug/Device/Hazardous Substance Fine of P500 – P20,000 or Imprisonment of 3 months – 2 years, or both
Not any of the above Fine of P200 – P5,000 or Imprisonment of 1 month – 1 year, or both
CONSUMER PRODUCT AND SERVICE WARRANTY

Implementing Agency: The Department of Trade and Industry.
Applicable Law on Warranties: The provisions of the Civil Code on conditions and warranties shall govern all contracts of
sale with conditions and warranties.
ADDITIONAL PROVISIONS ON WARRANTIES. – In addition to the Civil Code provisions on sale with warranties, the
following provisions shall govern the sale of consumer products with warranty:
a) Terms of express warranty – Any seller or manufacturer who gives an express warranty shall:
1. set forth the terms of warranty in clear and readily understandable language and clearly identify himself as the
warrantor;
2. identify the party to whom the warranty is extended;
3. state the products or parts covered;
4. state what the warrantor will do in the event of a defect, malfunction of failure to conform to the written warranty and
at whose expense;
5. state what the consumer must do to avail of the rights which accrue to the warranty; and
6. stipulate the period within which, after notice of defect, malfunction or failure to conform to the warranty, the warrantor
will perform any obligation under the warranty.
b) Express warranty – operative from moment of sale – All written warranties or guarantees issued by a manufacturer,
producer, or importer shall be operative from the moment of sale.
1. Sales Report. – All sales made by distributors of products covered by this Article shall be reported to the manufacturer,
producer, or importer of the product sold within thirty (30) days from date of purchase, unless otherwise agreed upon.
The report shall contain, among others, the date of purchase, model of the product bought, its serial number, name
and address of the buyer. The report made in accordance with this provision shall be equivalent to a warranty
registration with the manufacturer, producer, or importer. Such registration is sufficient to hold the manufacturer,
producer, or importer liable, in appropriate cases, under its warranty.

2. Failure to make or send report. – Failure of the distributor to make the report or send them the form required by the
manufacturer, producer, or importer shall relieve the latter of its liability under the warranty: Provided, however, That
the distributor who failed to comply with its obligation to send the sales reports shall be personally liable under the
warranty. For this purpose, the manufacturer shall be obligated to make good the warranty at the expense of the
distributor.
3. Retail. – The retailer shall be subsidiarily liable under the warranty in case of failure of both the manufacturer and
distributor to honor the warranty. In such case, the retailer shall shoulder the expenses and costs necessary to honor
the warranty. Nothing therein shall prevent the retailer from proceeding against the distributor or manufacturer.
4. Enforcement of warranty or guarantee. – The warranty rights can be enforced by presentment of a claim. To this end,
the purchaser needs only to present to the immediate seller either the warranty card or the official receipt along with
the product to be serviced or returned to the immediate seller. No other documentary requirement shall be demanded
from the purchaser. If the immediate seller is the manufacturer's factory or showroom, the warranty shall immediately
be honored. If the product was purchased from a distributor, the distributor shall likewise immediately honor the
warranty. In the case of a retailer other than the distributor, the former shall take responsibility without cost to the
buyer of presenting the warranty claim to the distributor in the consumer's behalf.
5. Record of purchases. – Distributors and retailers covered by this Article shall keep a record of all purchases covered
by a warranty or guarantee for such period of time corresponding to the lifetime of the product's respective warranties
or guarantees.
6. Contrary stipulations – null and void. – All covenants, stipulations or agreements contrary to the provisions of this
Article shall be without legal effect.
c) Designation of warranties. – A written warranty shall clearly and conspicuously designate such warranty as:
1. "Full warranty" if the written warranty meets the minimum requirements set forth in paragraph (d); or
2. "Limited warranty" if the written warranty does not meet such minimum requirements.
d) Minimum standards for warranties. – For the warrantor of a consumer product to meet the minimum standards for warranty,
he shall:
1. remedy such consumer product within a reasonable time and without charge in case of a defect, malfunction or failure
to conform to such written warranty;
2. permit the consumer to elect whether to ask for a refund or replacement without charge of such product or part, as
the case may be, where after reasonable number of attempts to remedy the defect or malfunction, the product
continues to have the defect or to malfunction.
The warrantor will not be required to perform the above duties if he can show that the defect, malfunction or failure to
conform to a written warranty was caused by damage due to unreasonable use thereof.
e) Duration of warranty. – The seller and the consumer may stipulate the period within which the express warranty shall be
enforceable. If the implied warranty on merchantability accompanies an express warranty, both will be of equal duration.
Any other implied warranty shall endure not less than sixty (60) days nor more than one (1) year following the sale of new
consumer products.
f) Breach of warranties:
1. In case of breach of express warranty, the consumer may elect to have the goods repaired or its purchase price
refunded by the warrantor. In case the repair of the product in whole or in part is elected, the warranty work must be
made to conform to the express warranty within thirty (30) days by either the warrantor or his representative. The
thirty-day period, however, may be extended by conditions which are beyond the control of the warrantor or his
representative. In case the refund of the purchase price is elected, the amount directly attributable to the use of the
consumer prior to the discovery of the non-conformity shall be deducted.
2. In case of breach of implied warranty, the consumer may retain in the goods and recover damages, or reject the goods,
cancel and contract and recover from the seller so much of the purchase price as has been paid, including damages.
WARRANTIES IN SUPPLY OF SERVICES:

a) In every contract for the supply of services to a consumer made by a seller in the course of a business, there is an implied
warranty that the service will be rendered with due care and skill and that any material supplied in connection with such
services will be reasonably fit for the purpose for which it is supplied.
b) Where a seller supplies consumer services in the course of a business and the consumer, expressly or by implication, makes
known to the seller the particular purpose for which the services are required, there is an implied warranty that the services
supplied under the contract and any material supplied in connection therewith will be reasonably fit for that purpose or are
of such a nature or quality that they might reasonably be expected to achieve that result, unless the circumstances show
that the consumer does not rely or that it is unreasonable for him to rely, on the seller's skill or judgment.
PROFESSIONAL SERVICES: The provision of this Act on warranty shall not apply to professional services of certified public
accountants, architects, engineers, lawyers, veterinarians, optometrists, pharmacists, nurses, nutritionists, dietitians, physical
therapists, salesmen, medical and dental practitioners and other professionals engaged in their respective professional
endeavors.
GUARANTY OF SERVICE FIRMS. – Service firms shall guarantee workmanship and replacement of spare parts for a period
not less than ninety (90) days which shall be indicated in the pertinent invoices.
PROHIBITED ACTS. – The following acts are prohibited:

a) refusal without any valid legal cause by the local manufacturer or any person obligated under the warranty or guarantee
to honor a warranty or guarantee issued;
b) unreasonable delay by the local manufacturer or any person obligated under the warranty or guarantee in honoring the
warranty;
c) removal by any person of a product's warranty card for the purpose of evading said warranty obligation;
d) any false representation in an advertisement as to the existence of a warranty or guarantee.
Penalties
Any person who shall violate the provisions of Article Fine of P500 – P5,000 or Imprisonment of 3 years to 2
67 (Conditions and Warranties governed by the Civil years, or both
Code)
Prohibited Acts other than Art. 67 Fine of P1,000 – P50,000 or Imprisonment of 1 to 5
years, or both.
The imposition of any of the penalties herein provided is without prejudice to any liability incurred under the warranty or
guarantee.

PRICE TAG REQUIREMENT
PROHIBITED ACT: It shall be unlawful to offer any consumer product for retail sale to the public without an
appropriate price tag, label or marking publicly displayed to indicate the price of each article and said products shall not
be sold at a price higher than that stated therein and without discrimination to all buyers.
Lumber: lumber sold, displayed or offered for sale to the public shall be tagged or labeled by indicating thereon the price and
the corresponding official name of the wood.
Small consumer products: if consumer products for sale are too small or the nature of which makes it impractical to place a
price tag thereon, a price list placed at the nearest point where the products are displayed indicating the retail price of
the same may suffice.
Manner of Placing Price Tags: Price tags, labels or markings must be written clearly, indicating the price of the consumer
product per unit in pesos and centavos.
Regulations for Price Tag Placement: The concerned department shall prescribe rules and regulations for the visible
placement of price tags for specific consumer products and services. There shall be no erasures or alterations of any sort of
price tags, labels or markings.
Penalties:
Fine P200 – P5,000
Imprisonment 1 month – 6 months, or both
A second conviction shall also carry with it the penalty of revocation of business permit and license.
PHILIPPINE LEMON LAW

(RA No. 10642, AN ACT STRENGTHENING CONSUMER PROTECTION IN THE PURCHASE OF BRAND NEW MOTOR
VEHICLES)
DECLARATION OF POLICY: It is hereby declared the policy of the State to promote full protection to the rights of
consumers in the sale of motor vehicles against business and trade practices which are deceptive, unfair or otherwise
inimical to consumers and the public interest.
The State recognizes that a motor vehicle is a major consumer purchase or investment. Hence, the rights of consumers
should be clearly defined, including the means for redress for violations thereof.
REQUISITES TO INVOKE LEMON LAW RIGHTS:

1. Brand new motor vehicles
Motor Vehicles: refers to any self-propelled, four (4) wheeled road vehicle designed to carry passengers
including, but not limited to, sedans, coupes, station wagons, convertibles, pick-ups, vans, sports utility vehicles (SUVs)
and Asian Utility Vehicles (AUVs) but excluding motorcycles, delivery trucks, dump trucks, buses, road rollers, trolley
cars, street sweepers, sprinklers, lawn mowers and heavy equipment such as, but not limited to, bulldozers, payloaders,
graders, forklifts, amphibian trucks, cranes, and vehicles which run only on rails or tracks, and tractors, trailers and
traction engines of all kinds used exclusively for agricultural purposes. Trailers having any number of wheels, when
propelled or intended by attachment to a motor vehicle, shall be classified as separate motor vehicle with no power rating
2. Purchased in the Philippines
3. Reported by a consumer to be in nonconformity with the vehicle’s manufacturer or distributor’s standards or
specifications
Non-conformity: refers to:

a. Any defect or condition that substantially impairs the use, value or safety of a brand new motor vehicle
b. Which prevents it from conforming to the manufacturer’s or distributor’s standards or specifications,
c. Which cannot be repaired
But excluding:
i. Conditions resulting from noncompliance by the consumer of his or her obligations under the warranty,
ii. Modifications not authorized by the manufacturer or distributor,
iii. Abuse or neglect, and
iv. Damage due to accident or force majeure
4. Within twelve (12) months from the date of original delivery to the consumer, or up to twenty thousand (20,000) kilometers
of operation after such delivery, whichever comes first.
REPAIR ATTEMPTS: At any time within the Lemon Law rights period, and after at least 4 separate repair attempts
by the same manufacturer, distributor, authorized dealer or retailer for the same complaint, and the nonconformity issue
remains unresolved, the consumer may invoke his or her rights under this Act.
The repair may include replacement of parts components, or assemblies.
NOTICE OF AVAILMENT: Before availing of any remedy under this Act and subject to compliance with the provisions of Repair
Attempts above, the consumer shall, in writing, notify the manufacturer, distributor, authorized dealer or retailer of
(1) the unresolved complaint, and (2) the consumer’s intention to invoke his or her rights under this Act within the Lemon
Law rights period.
Warranty Booklet: The warranty booklet issued by the manufacturer, distributor, authorized dealer or retailer shall clearly
state the manner and form of such notice to constitute a valid and legal notice to the manufacturer, distributor, authorized
dealer or retailer. It shall also clearly state the responsibility of the consumer under this section.

AVAILMENT OF LEMON LAW RIGHTS: Subsequent to filing the notice of availment, the consumer shall bring the vehicle
to the manufacturer, distributor, authorized dealer or retailer from where the vehicle was purchased for a final attempt to
address the complaint of the consumer to his or her satisfaction.
It shall be the duty of the manufacturer, distributor, authorized dealer or retailer, upon receipt of the motor vehicle and the
notice of nonconformity, to attend to the complaints of the consumer including, as may be necessary, making the repairs
and undertaking such actions to make the vehicle conform to the standards or specifications of the manufacturer, distributor,
authorized dealer or retailer for such vehicle.
In case the nonconformity issue remains unresolved despite the manufacturer, distributor, authorized dealer or retailer’s
efforts to repair the vehicle, pursuant to the consumer’s availment of his or her Lemon Law rights, the consumer may file a
complaint before the DTI as provided for under this Act.
Deemed successful repair: If the vehicle is not returned for repair, based on the same complaint, within thirty (30)
calendar days from the date of notice of release of the motor vehicle to the consumer following this repair attempt within
the Lemon Law rights period, the repair is deemed successful.
In the event that the nonconformity issue still exists or persists after the thirty (30)-day period but still within the Lemon
Law rights period, the consumer may be allowed to invoke his rights under this Act.
Compensation for non-use: To compensate for the non-usage of the vehicle while under repair and during the period of
availment of the Lemon Law rights, the consumer shall be provided a reasonable daily transportation allowance, an amount
which covers the transportation of the consumer from his or her residence to his or her regular workplace or destination and
vice versa, equivalent to:
1. Air-conditioned taxi fare, as evidenced by official receipt, or
2. In such amount to be agreed upon by the parties, or
3. A service vehicle at the option of the manufacturer, distributor, authorized dealer or retailer.
Any disagreement on this matter shall be resolved by the DTI.
Nothing herein shall be construed to limit or impair the rights and remedies of a consumer under any other law.
REMEDIES FOR DISPUTE RESOLUTION: The DTI shall exercise exclusive and original jurisdiction over disputes arising from
the provisions of the Lemon Law. All disputes arising from the provisions of this Act shall be settled by the DTI in accordance
with the following dispute resolution mechanisms:
1. Mediation
a. The principles of negotiation, conciliation and mediation towards amicable settlement between the manufacturer,
distributor, authorized dealer or retailer and the consumer shall be strictly observed;
b. In the course of its dispute resolution efforts, the DTI shall endeavor to independently establish the validity of the
consumer’s outstanding complaint. The DTI shall likewise retain the services of other government agencies or qualified
independent private entities in the ascertainment of the validity of the consumer’s complaint. Any cost incurred in
establishing the validity of the consumer’s complaint shall be borne jointly by the consumer and the manufacturer,
distributor, authorized dealer or retailer;
c. The complaint shall be deemed valid if it is independently established that the motor vehicle does not conform to the
standards or specifications set by the manufacturer, distributor, authorized dealer or retailer;
d. Upon failure of the negotiation or mediation between the manufacturer, distributor, authorized, dealer or retailer and
the consumer, the parties shall execute a certificate attesting to such failure; and
e. At any time during the dispute resolution period, the manufacturer, distributor, authorized dealer or retailer and the
consumer shall be encouraged to settle amicably. All disputes that have been submitted for mediation shall be settled
not later than ten (10) working days from the date of filing of the complaint with the DTI.
2. Arbitration
In the event there is a failure to settle the complaint during the mediation proceedings, both parties may voluntarily decide
to undertake arbitration proceedings.
3. Adjudication
1. In the event that both parties do not undertake arbitration proceedings, at least one of the parties may commence
adjudication proceedings, administered by the DTI. The DTI shall rely on the qualified independent findings as to
conformity to standards and specifications established herein. In no case shall adjudication proceedings exceed twenty
(20) working days;
2. In case a finding of nonconformity is arrived at, the DTI shall rule in favor of the consumer and direct the manufacturer,
distributor, authorized dealer or retailer to grant either of the following remedies to the consumer:
i. Replace the motor vehicle with a similar or comparable motor vehicle in terms of specifications and values, subject
to availability; or
ii. Accept the return of the motor vehicle and pay the consumer the purchase price plus the collateral charges.
Collateral charges: refer to the fees paid to the Land Transportation Office (LTO) for the registration of a brand new
motor vehicle and other incidental expenses such as, but not limited to, the cost of insurance pertaining to the vehicle,
chattel mortgage fees and interest expenses if applicable
In case the consumer decides to purchase another vehicle with a higher value and specifications from the same
manufacturer, distributor, authorized dealer or retailer, the consumer shall pay the difference in cost.
In both cases of replacement and repurchase, the reasonable allowance for use, as defined in this Act, shall be deducted
in determining the value of the nonconforming motor vehicle; and
3. In case a nonconformity of the motor vehicle is not found by the DTI, it shall rule in favor of the manufacturer,
distributor, authorized dealer or retailer, and direct the consumer to reimburse the manufacturer, distributor,
authorized dealer or retailer the costs incurred by the latter in validating the consumer’s complaints.

An appeal may be taken from a final judgment or order of the Adjudication Officer which completely disposes of the
case within fifteen (15) days from receipt thereof. The appeal shall be taken by filing a Memorandum of Appeal with
the Secretary of the DTI, with Notice of Appeal to the Adjudication Officer, and with a copy duly furnished the adverse
party or parties on any of the following grounds:
i. Grave abuse of discretion;
ii. The decision/order is in excess of jurisdiction or authority of the Adjudication Officer; and
iii. The decision/order is not supported by the evidence or there is serious error in the findings of facts.
The Secretary of the DTI shall decide on the appeal within thirty (30) days from receipt thereof. A party seeking further appeal
from the decision of the Secretary of the DTI may file a case for certiorari to the Court of Appeals under Section 4, Rule 65 of
the Revised Rules of Court.
DETERMINATION OF REASONABLE ALLOWANCE FOR USE: For purposes of this Act, "reasonable allowance for use" shall
mean whichever is lower between:
1. 20% per annum deduction from the purchase price, or
2. By using this formula:
Distance traveled (in kms) * purchase price

100,000 kms
DISCLOSURE ON RESALE: Should the returned motor vehicle be made available for resale, the manufacturer, distributor,
authorized dealer or retailer shall, prior to sale or transfer, disclose in writing to the next purchaser of the same vehicle the
following information:
1. The motor vehicle was returned to the manufacturer, distributor, authorized dealer or retailer;
2. The nature of the nonconformity which caused the return; and
3. The condition of the motor vehicle at the time of the transfer to the manufacturer, distributor, authorized dealer or retailer.
The responsibility of the manufacturer, distributor, authorized dealer or retailer under this section shall cease upon the sale of
the affected motor vehicle to the first purchaser.
Penalty: The manufacturer, distributor, authorized dealer or retailer adjudged to have violated the provisions requiring
disclosure as mentioned in the preceding section shall be liable to pay a minimum amount of P100,000 as damages to the
aggrieved party without prejudice to any civil or criminal liability they and/or the responsible officer may incur under existing
laws.
1. In case of ambiguity in the provisions of the Consumer Protection Act and its IRR, the rule of
construction to be followed shall be:
A. The greatest reciprocity of interest
B. The best interest of the consumer
C. The best interest of the seller
D. The least transmission of rights
2. An act or practice may violate the Consumer Protection Act whether it occurs before, during or
after the transaction. This applies to:
A. Deceptive Sales Acts or Practices
B. Unfair or Unconscionable Sales Act or Practices
C. Both Deceptive Sales Acts or Practices and Unfair or Unconscionable Sales Act or Practices
D. Neither Deceptive Sales Acts nor Unfair or Unconscionable Sales Act or Practices
3. This requires a prior permit from the Department of Trade and Industry before being conducted
by sellers or business entities:
A. Chain Distribution Plans
B. Home Solicitation Sales
C. Referral Sales
4. Prohibited Acts on Labeling generally does not apply to wholesalers or retail distributors of
consumer products. Choose which one is not an exception to this rule:
A. If they are not engaged in the packaging or labeling of consumer products
B. If they prescribe the means in which the consumer products are packaged or labeled
C. If they have knowledge, but refuse to disclose the source of the mislabeled or mispackaged
products.
D. All of the choices are exceptions to the rule

5. The indication of the possible irritants in the label as an additional labeling requirement under the
Consumer Protection Act applies to:
A. Foods
B. Cosmetics
C. Drugs
6. Which is incorrect? A product is deemed mislabeled if the label fails to state conspicuously:
I. The word “danger” with a bright red or orange color with a black symbol on all hazardous
products
II. The word “warning” or “caution” on substances which are extremely flammable, corrosive or
highly toxic
III. The word “poison” for any hazardous substance which is defined as highly toxic
A. I, II and III C. I and III only

B. I and II only D. II and III only
7. A contract of sale with conditions and warranties shall be governed primarily by:
A. The Consumer Protection Act
B. The Civil Code
C. The Recto Law
D. The Law on Personal Relations
8. First Statement: A distributor of products covered by the Warranty provisions of the Consumer
Act must report the sales made within 60 days from the date of purchase.
Second Statement: Failure of the distributor to make the required report or send the form
required by the manufacturer, producer, or importer shall relieve the latter of its liability under
the warranty.
9. Service Firms shall guarantee workmanship and replacement of spare parts for a period:
A. Not less than 60 days
B. Not less than 90 days
C. Not less than 60 days nor more than 90 days
D. Not less than 90 days nor more than 120 days
10. The consumer may invoke his rights under the Lemon Law if, at any time within the Lemon Law
rights period, there has been at least __ separate repair attempts and the same complaint and the
nonconformity issue remains unresolved.
A. 2
B. 3
C. 4
D. 5
1. B 6. B
2. C 7. B
3. B 8. D
4. D 9. B
5. B 10. C

RFBT-12
PHILIPPINE COMPETITION ACT

DECLARATION OF POLICY: The efficiency of market competition as a mechanism for allocating goods and services is a
generally accepted precept. The State recognizes that past measures undertaken to liberalize key sectors in the economy need
to be reinforced by measures that safeguard competitive conditions. The State also recognizes that the provision of equal
opportunities to all promotes entrepreneurial spirit, encourages private investments, facilitates technology development and
transfer and enhances resource productivity. Unencumbered market competition also serves the interest of consumers by
allowing them to exercise their right of choice over goods and services offered in the market.
Pursuant to the constitutional goals for the national economy to attain a more equitable distribution of opportunities, income,
and wealth; a sustained increase in the amount of goods and services produced by the nation for the benefit of the people; and
an expanding productivity as the key to raising the quality of life for all, especially the underprivileged and the constitutional
mandate that the State shall regulate or prohibit monopolies when the public interest so requires and that no combinations in
restraint of trade or unfair competition shall be allowed, the State shall:
(a) Enhance economic efficiency and promote free and fair competition in trade, industry and all commercial economic
activities, as well as establish a National Competition Policy to be implemented by the Government of the Republic of the
Philippines and all of its political agencies as a whole;
(b) Prevent economic concentration which will control the production, distribution, trade, or industry that will unduly stifle
competition, lessen, manipulate or constrict the discipline of free markets; and
(c) Penalize all forms of anti-competitive agreements, abuse of dominant position and anti-competitive mergers
and acquisitions, with the objective of protecting consumer welfare and advancing domestic and international trade and
economic development.
APPLICABILITY: This Act shall be enforceable against any person or entity engaged in any trade, industry and commerce
in the Republic of the Philippines. It shall likewise be applicable to international trade having direct, substantial, and
reasonably foreseeable effects in trade, industry, or commerce in the Republic of the Philippines, including those that result
from acts done outside the Republic of the Philippines.
Exclusion: This Act shall not apply to the combinations or activities of workers or employees nor to agreements or
arrangements with their employers when such combinations, activities, agreements, or arrangements are designed solely
to facilitate collective bargaining in respect of conditions of employment.
PROHIBITED ACTS
Prohibited Acts under the Philippine Competition Act includes:
1. Anti-Competitive Agreements
2. Abuse of Dominant Position
3. Prohibited Mergers
RELEVANT MARKET: refers to the market in which a particular good or service is sold and which is a combination of the
relevant product market and the relevant geographic market, defined as follows:
1. A relevant product market comprises all those goods and/or services which are regarded as interchangeable or
substitutable by the consumer or the customer, by reason of the goods and/or services’ characteristics, their prices and
their intended use; and
2. The relevant geographic market comprises the area in which the entity concerned is involved in the supply and demand
of goods and services, in which the conditions of competition are sufficiently homogenous and which can be distinguished
from neighboring areas because the conditions of competition are different in those areas
ANTI-COMPETITIVE AGREEMENT:
a) The following agreements, between or among competitors, are per se prohibited:
1) Restricting competition as to price, or components thereof, or other terms of trade;
2) Fixing price at an auction or in any form of bidding including cover bidding, bid suppression, bid rotation and market
allocation and other analogous practices of bid manipulation;
b) The following agreements, between or among competitors which have the object or effect of substantially preventing,
restricting or lessening competition shall be prohibited:
1) Setting, [limiting], or controlling production, markets, technical development, or investment;
2) Dividing or sharing the market, whether by volume of sales or purchases, territory, type of goods or services, buyers
or sellers or any other means;
c) Agreements other than those specified in (a) and (b) of this section which have the object or effect of substantially
preventing, restricting or lessening competition shall also be prohibited
Defense: An agreement may not necessarily be deemed a violation of this Act, if the transaction contributes to improving the
production or distribution of goods and services or to promoting technical or economic progress, while allowing
consumers a fair share of the resulting benefits.
Excluded from “competitors”: An entity that controls, is controlled by, or is under common control with another entity or entities,
have common economic interests, and are not otherwise able to decide or act independently of each other, shall not be
considered competitors for purposes of this section.
ABUSE OF DOMINANT POSITION: refers to a position of economic strength that an entity or entities hold which makes it
capable of controlling the relevant market independently from any or a combination of the following: competitors, customers,
suppliers, or consumers.
It shall be prohibited for one or more entities to abuse their dominant position by engaging in conduct that would substantially
prevent, restrict or lessen competition:
a) Selling goods or services below cost with the object of driving competition out of the relevant market: Provided, That in
the Commission’s evaluation of this fact, it shall consider whether the entity or entities have no such object and the price
established was in good faith to meet or compete with the lower price of a competitor in the same market selling the same
or comparable product or service of like quality;

PHILIPPINE COMPETITION ACT RFBT-12
b) Imposing barriers to entry or committing acts that prevent competitors from growing within the market in an
anti-competitive manner except those that develop in the market as a result of or arising from a superior product or
process, business acumen, or legal rights or laws;
c) Making a transaction subject to acceptance by the other parties of other obligations which, by their nature or
according to commercial usage, have no connection with the transaction;
d) Setting prices or other terms or conditions that discriminate unreasonably between customers or sellers of the
same goods or services, where such customers or sellers are contemporaneously trading on similar terms and conditions,
where the effect may be to lessen competition substantially: Provided, That the following shall be considered permissible
price differentials:
1) Socialized pricing for the less fortunate sector of the economy;
2) Price differential which reasonably or approximately reflect differences in the cost of manufacture, sale, or delivery
resulting from differing methods, technical conditions, or quantities in which the goods or services are sold or delivered
to the buyers or sellers;
3) Price differential or terms of sale offered in response to the competitive price of payments, services or changes in the
facilities furnished by a competitor; and
4) Price changes in response to changing market conditions, marketability of goods or services, or volume;
e) Imposing restrictions on the lease or contract for sale or trade of goods or services concerning where, to whom,
or in what forms goods or services may be sold or traded, such as fixing prices, giving preferential discounts or rebate
upon such price, or imposing conditions not to deal with competing entities, where the object or effect of the
restrictions is to prevent, restrict or lessen competition substantially: Provided, That nothing contained in this Act shall
prohibit or render unlawful:
1) Permissible franchising, licensing, exclusive merchandising or exclusive distributorship agreements such as those which
give each party the right to unilaterally terminate the agreement; or
2) Agreements protecting intellectual property rights, confidential information, or trade secrets;
f) Making supply of particular goods or services dependent upon the purchase of other goods or services from the
supplier which have no direct connection with the main goods or services to be supplied;
g) Directly or indirectly imposing unfairly low purchase prices for the goods or services of, among others, marginalized
agricultural producers, fisherfolk, micro-, small-, medium-scale enterprises, and other marginalized service providers and
producers;
h) Directly or indirectly imposing unfair purchase or selling price on their competitors, customers, suppliers or
consumers, provided that prices that develop in the market as a result of or due to a superior product or process, business
acumen or legal rights or laws shall not be considered unfair prices; and
i) Limiting production, markets or technical development to the prejudice of consumers, provided that limitations that
develop in the market as a result of or due to a superior product or process, business acumen or legal rights or laws shall
not be a violation of this Act.
Subject to the following:
1. Nothing in this Act shall be construed or interpreted as a prohibition on having a dominant position in a relevant
market or on acquiring, maintaining and increasing market share through legitimate means that do not substantially
prevent, restrict or lessen competition.
2. Any conduct which contributes to improving production or distribution of goods or services within the relevant
market, or promoting technical and economic progress while allowing consumers a fair share of the resulting
benefit may not necessarily be considered an abuse of dominant position.
3. That the foregoing shall not constrain the Commission or the relevant regulator from pursuing measures that
would promote fair competition or more competition as provided in this Act.
MERGERS AND ACQUISITIONS

MERGERS: refers to the joining of two (2) or more entities into an existing entity or to form a new entity
ACQUISITION: refers to the purchase of securities or assets, through contract or other means, for the purpose of obtaining
control by:
1. One (1) entity of the whole or part of another;
2. Two (2) or more entities over another; or
3. One (1) or more entities over one (1) or more entities;
REVIEW OF MERGERS AND ACQUISITIONS: The Commission shall have the power to review mergers and acquisitions based
on factors deemed relevant by the Commission.
PROHIBITED MERGERS AND ACQUISITIONS: Merger or acquisition agreements that substantially prevent, restrict or
lessen competition in the relevant market or in the market for goods or services as may be determined by the Commission
shall be prohibited.
EXCEPTIONS:
1. Merger or acquisition agreement may, nonetheless, be exempt from prohibition by the Commission when the parties
establish either of the following:
a) The concentration has brought about or is likely to bring about gains in efficiencies that are greater than the effects
of any limitation on competition that result or likely to result from the merger or acquisition agreement; or
b) A party to the merger or acquisition agreement is faced with actual or imminent financial failure, and the
agreement represents the least anti-competitive arrangement among the known alternative uses for the failing
entity’s assets.
2. An entity shall not be prohibited from continuing to own and hold the stock or other share capital or assets of another
corporation which it acquired prior to the approval of this Act or acquiring or maintaining its market share in a relevant
market through such means without violating the provisions of this Act.
3. The acquisition of the stock or other share capital of one or more corporations solely for investment and not used for
voting or exercising control and not to otherwise bring about, or attempt to bring about the prevention, restriction, or
lessening of competition in the relevant market shall not be prohibited.
Burden of Proof: The burden of proof for exemptions above lies with the parties seeking the exemption. A party seeking to rely
on the exemption specified in 1(a) above must demonstrate that if the agreement were not implemented, significant efficiency
gains would not be realized.

Finality of Ridings on Mergers and Acquisitions: Merger or acquisition agreements that have received a favorable ruling from
the Commission, except when such ruling was obtained on the basis of fraud or false material information, may not be
challenged under this Act.
COMPULSORY NOTIFICATION: Parties to the merger or acquisition agreement wherein the value of the transaction
exceeds one billion pesos (P1,000,000,000.00) are prohibited from consummating their agreement until thirty (30)
days after providing notification to the Commission in the form and containing the information specified in the regulations
issued by the Commission.
The Commission shall promulgate other criteria, such as increased market share in the relevant market in excess of minimum
thresholds, that may be applied specifically to a sector, or across some or all sectors, in determining whether parties to a merger
or acquisition shall notify the Commission.
Effect of no notice:
1. An agreement consummated in violation of this requirement to notify the Commission shall be considered void and
2. Subject the parties to an administrative fine of 1% to 5% of the value of the transaction.
Request for further information; effect: Should the Commission deem it necessary, it may request further information that are
reasonably necessary and directly relevant to the prohibition under Section 20 (Prohibited Mergers and Acquisitions) from the
parties to the agreement before the expiration of the thirty (30)-day period.
The issuance of such a request has the effect of extending the period within which the agreement may not be
consummated for an additional sixty (60) days, beginning on the day after the request for information is received by the
parties. In no case shall the total period for review by the Commission of the subject agreement exceed ninety (90) days
from initial notification by the parties.
Expiration of the period of review: When the period has expired and no decision has been promulgated for whatever reason,
the merger or acquisition shall be deemed approved and the parties may proceed to implement or consummate it.
Confidentiality: All notices, documents and information provided to or emanating from the Commission shall be subject to
confidentiality rule except when the release of information contained therein is with the consent of the notifying entity or is
mandatorily required to be disclosed by law or by a valid order of a court of competent jurisdiction, or of a government or
regulatory agency, including an exchange.
Effect on the requirement of favorable recommendation: In the case of the merger or acquisition of banks, banking institutions,
building and loan associations, trust companies, insurance companies, public utilities, educational institutions and other special
corporations governed by special laws, a favorable or no-objection ruling by the Commission shall not be construed as
dispensing of the requirement for a favorable recommendation by the appropriate government agency under Section 79
of the Corporation Code of the Philippines.
A favorable recommendation by a governmental agency with a competition mandate shall give rise to a disputable
presumption that the proposed merger or acquisition is not violative of this Act.
Effect of Notification: If within the relevant periods mentioned above, the Commission determines that such agreement is
prohibited and does not qualify for exemption, the Commission may:
1. Prohibit the implementation of the agreement;
2. Prohibit the implementation of the agreement unless and until it is modified by changes specified by the Commission.
3. Prohibit the implementation of the agreement unless and until the pertinent party or parties enter into legally enforceable
agreements specified by the Commission.
Notification Threshold: The Commission shall, from time to time, adopt and publish regulations stipulating:
a) The transaction value threshold and such other criteria subject to the notification requirement of Section 17 of this Act;
b) The information that must be supplied for notified merger or acquisition;
c) Exceptions or exemptions from the notification requirement; and
d) Other rules relating to the notification procedures.
FINES AND PENALTIES

ADMINISTRATIVE FINES: The Commission may impose administrative fines of upto P100M for the first offense and P100M to
P200M for the second offense for the investigations relative to the following:
1. Anti-Competitive Agreements;
2. Abuse of Dominant Position
3. Compulsory Notification on Mergers and Acquisitions
4. Prohibited Mergers and Acquisitions
In fixing the amount of the fine, the Commission shall have regard to both the gravity and the duration of the violation.
FAILURE TO COMPLY WITH AN ORDER OF THE COMMISSION: An entity which fails or refuses to comply with a ruling,
order or decision issued by the Commission shall pay a penalty of P50,000 to P2,000,000 for each violation and a similar
amount of penalty for each day thereafter until the said entity fully complies. Provided that these fines shall only accrue daily
beginning forty-five (45) days from the time that the said decision, order or ruling was received.
SUPPLY OF INCORRECT OR MISLEADING INFORMATION: The Commission may likewise impose upon any entity fines of
up to P1,000,000 where, intentionally or negligently, they supply incorrect or misleading information in any document,
application or other paper filed with or submitted to the Commission or supply incorrect or misleading information in an
application for a binding ruling, a proposal for a consent judgment, proceedings relating to a show cause order, or application
for modification of the Commission’s ruling, order or approval, as the case may be.
OTHER VIOLATIONS: Any other violations not specifically penalized under the relevant provisions of this Act shall be penalized
by a fine P50,000 to P2,000,000.
Provided that the schedule of fines indicated in this section shall be increased by the Commission every five (5) years to maintain
their real value from the time it was set.

CRIMINAL PENALTIES: An entity that enters into any anti-competitive agreement shall, for each and every violation, be
penalized by imprisonment from two (2) to seven (7) years, and a fine of not less than fifty million pesos (P50,000,000.00) but
not more than two hundred fifty million pesos (P250,000,000.00). The penalty of imprisonment shall be imposed upon the
responsible officers, and directors of the entity.
When the entities involved are juridical persons, the penalty of. imprisonment shall be imposed on its officers, directors, or
employees holding managerial positions, who are knowingly and willfully responsible for such violation.
1. A security clause contained in a Collective Bargaining Agreement:

A. Is not covered by the Philippine Competition Act
B. Is covered by the Philippine Competition Act
C. Will be covered by the Philippine Competition Act if it requires employees to join the union
D. Will be covered by the Philippine Competition Act if it prohibits the employees to join the union
2. The following are prohibited acts under the Philippine Competition Act, except:
A. Anti-Competitive Agreements C. Anti-Competitive Mergers
B. Abuse of Dominant Position D. None of the choices is an exception
3. First Statement: An agreement between competitors that restricts competition as to price, or components thereof, or other
terms of trade is prohibited only if they have the object or effect of substantially preventing, restricting or lessening
competition.
Second Statement: An agreement may not necessarily be deemed a violation of the Philippine Competition Act, if the
transaction contributes to improving the production or distribution of goods and services or to promoting technical or
economic progress, while allowing consumers a fair share of the resulting benefits.
A. Both statements are correct C. Only the first statement is correct
B. Both statements are incorrect D. Only the second statement is correct
4. Requiring a customer to buy an x-ray machine together with the intended photocopying machine may be considered abuse
of dominant position under which of the following categories of conduct provided under the Philippine Competition Act?
A. Imposing barriers to entry or committing acts that prevent competitors from growing within the market in an anti-
competitive manner except those that develop in the market as a result of or arising from a superior product or process,
business acumen, or legal rights or laws
B. Making a transaction subject to acceptance by the other parties of other obligations which, by their nature or according
to commercial usage, have no connection with the transaction
C. Making supply of particular goods or services dependent upon the purchase of other goods or services from the supplier
which have no direct connection with the main goods or services to be supplied
D. Directly or indirectly imposing unfairly low purchase prices for the goods or services of, among others, marginalized
agricultural producers, fisherfolk, micro-, small-, medium-scale enterprises, and other marginalized service providers
and producers
5. Compulsory Notification of mergers will be applicable if the value of the transaction is:
A. At least P100,000,000 C. At least P 1,000,000,000
B. More than P100,000,000 D. More than P 1,000,000,000
6. The total number of days that the Philippine Competition Commission will have to review a merger shall be a maximum of:
A. 30 days C. 90 days
B. 60 days D. 120 days
7. If the merger will have a transaction value of P10B, failure to notify the Philippine Competition Commission can subject
them to a fine of:
A. P50M to P250M C. P 200M to P 1B
B. P100M to P500M D. P 400M to P 2B
8. The following constitute permissible pricing differentials and not abuse of dominant position, except:
A. Socialized pricing for the less fortunate sector of the economy;
B. Price differential which reasonably or approximately reflect differences in the cost of manufacture, sale, or delivery
resulting from differing methods, technical conditions, or quantities in which the goods or services are sold or delivered
to the buyers or sellers;
C. Price differential or terms of sale offered in response to the competitive price of payments, services or changes in the
facilities furnished by a competitor
D. None is an exception
9. First Statement: The provisions of the Philippine Competition Act on abuse of dominant position may be interpreted as to
prohibited obtaining a dominant position.
Second Statement: Any conduct which contributes to improving production or distribution of goods or services within the
relevant market, or promoting technical and economic progress while allowing consumers a fair share of the resulting
benefit may not necessarily be considered an abuse of dominant position.
A. Both statements are correct C. Only the first statement is correct
B. Both statements are incorrect D. Only the second statement is correct
10. The Commission may impose administrative fines of upto P100M for the first offense and P100M to P200M for the second
offense for the investigations relative to the following, except:
A. Anti-Competitive Agreements C. Compulsory Notification on Mergers and Acquisitions
B. Abuse of Dominant Position D. None is an exception
1. A 6. C
2. D 7. B
3. D 8. D
4. C 9. D
5. D 10. D

RFBT-13
BANKING LAWS
SECRECY OF BANK DEPOSITS (RA 1405, AS AMENDED)
PURPOSE OF THE LAW: It hopes to discourage private hoarding and at the same time encourage the people to deposit their
money in banking institutions, so that it may be utilized by way of authorized loans and thereby assist in economic development.
PROHIBITED ACTS: It shall be unlawful:

1. Bank (any official or employee or independent auditor of a bank) - to disclose to any person other than a bank director,
official or employee authorized by the bank, any information concerning deposits.
2. Any person, including the government – to inquire, examine or look into bank deposits or bonds issued by the government.
DEPOSITS COVERED:
1. All deposits of whatever nature with banks or banking institutions in the Philippines, including Trust Accounts.
2. Investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities.
EXCEPTIONS; Peso Deposits: (WIOBMU CARO TEA)

1. When there is a written permission of the depositor or investor
2. Impeachment cases
3. Upon the order of a competent court in cases:
a. of bribery or dereliction of duty of public officials (including plunder)
b. Where the money deposited or invested is the subject of litigation
c. Involving unexplained wealth under RA 3019, or the Anti-Graft and Corrupt Practices Act.
4. Upon inquiry by the Commissioner of BIR for the purpose of determining the net estate of a deceased depositor
5. Upon the order of a competent court or in proper cases by the AMLC where there is probable cause of money laundering
and in some instances even without court order
6. Reports:
a. Disclosure to the Treasurer of the Philippines for unclaimed balances under the Unclaimed Balances Act (RA 3936)
b. Report of banks to AMLC of covered and/or suspicious transactions.
7. The Ombudsman has the power to issue subpoena and subpoena duces tecum, take testimony in any investigation or
inquiry, as well as examine and access bank accounts and records. The power of the Ombudsman to subpoena deposit
information of a government official may be exercised when the following conditions concur: (1) there must be a case
pending before a court of competent jurisdiction; (2) the account must be clearly identified; (3) the inspection must be
limited to the subject matter of the pending case; and (4) the bank personnel and the account holder must be notified to
be present during the inspection. (Marquez v. Desierto, 359 S.C.R.A. 772 [2001])
8. Upon order of the CA, examination by law enforcement officers in terrorism cases under the Human Security Act of 2007
(RA 9372)
9. Examination is made:
a. In the course of a special or general examination of bank and is specifically authorized by the Monetary Board (BSP)
after being satisfied that there is reasonable ground to believe that a bank fraud or serious irregularity has been or is
being committed and that is necessary to look into the deposit to establish such fraud or irregularity.
b. By the Philippine Deposit Insurance Commission (PDIC) who may inquire into bank deposits when there is a
finding of unsafe or unsound banking practices. (Sec. 8, Rep. Act No. 3591, as amended)
c. By the Commission on Audit (COA) who is authorized to examine and audit government deposits pertaining to the
revenue and receipts of, and expenditures or uses of funds and properties, owned or held in trust by, or pertaining to,
the Government or any of its subdivisions, agencies or instrumentalities, including government-owned and controlled
corporations with original charters. (See Art. IX-D, 1987 Constitution and Pres. Dec. No. 1445)
d. By the Presidential Commission on Good Government (PCGG) who, in the conduct of its investigations to recover
ill-gotten wealth accumulated by former President Ferdinand E. Marcos, his immediate family, relatives, subordinates
and close associates, may issue subpoenas requiring the attendance and testimony of witnesses and/or the production
of books, papers, contracts, records, statement of accounts and other documents. (Sec. 3 [e], Exec. Order No. 1
[1986])
10. Examination is made by an independent auditor hired by the bank to conduct its regular audit provided that the
examination is for audit purposes only and the results thereof shall be for the exclusive use of the bank
EXCEPTIONS for Foreign Currency Deposits (FOREIGN CURRENCY DEPOSIT ACT): foreign currency deposits in banks
are likewise absolutely confidential and cannot be disclosed, except:
1. When there is written consent of depositor under Section 8 of the Foreign Currency Deposits Act (RA 6426)
2. Under Section 11 of the Anti-Money Laundering Act (probable cause established that it is related to an unlawful activity
as defined or money laundering)
3. Under Section 27 and 28 of the Human Security Act (existence of probable cause in anti-terrorism cases and those
involving persons charged with or suspected of the crime of terrorism or conspiracy to commit terrorism, judicially declared
and outlawed terrorist organization, association, or group of persons, or member of such organization, association, or group
of persons)
4. Examination by the BSP, PDIC, PCGG and COA
GARNISHMENT: Bank accounts may be garnished by the creditors of the depositor. In garnishment, there is no violation of
the bank secrecy law since the amount of the deposit is not actually disclosed.
Deposits exempt from garnishment:

1. Foreign currency deposits, Section 8 of RA 6426 (except for transient foreigners)
2. Those exempt under Rules of Court

BANKING LAWS RFBT-13
Penalties for violation
Peso Deposits Foreign Currency Deposits
Imprisonment Not to exceed 5 years 1 to 5 years
Fine Not to exceed P20,000 P5,000 to P25,000
PDIC ACT (RA 3591, AS AMENDED)
Functions: to act as
1. Deposit Insurer – the PDIC shall promote and safeguard the interests of the depositing public by way of providing
permanent and continuing insurance coverage on all insured deposits.
2. Co-regulator of banks – as a bank regulator, the PDIC is empowered to examine and investigate banks.
3. Receiver and liquidator of closed banks – the PDIC as receiver shall control, manage and administer the affairs of the
bank.
INSURED DEPOSITS: Amount due to any bona fide depositor for legitimate deposits in an insured bank net of any obligation
of the depositor to the insured bank as of the date of closure, but not to exceed P500,000.
Adjustment of maximum deposit insurance: the amount of coverage may be adjusted in such amount, for such a period,
and/or for such deposit products, provided:
1. The Monetary Board has determined that there is a condition that threatens the monetary and financial stability of the
banking system that may have systematic consequences as defined under RA No. 3591;
2. Approval by a unanimous vote of the Board of Directors of the PDIC in a meeting called for the purpose and chaired by the
DOF Secretary;
3. Approval of the President of the Philippines.
Under Section 22 of the PDIC Charter, a systemic risk refers to the possibility of failure of one bank to settle net transactions
with other banks will trigger a chain reaction, depriving other banks of funds leading to a general shutdown of normal clearing
and settlement activity. It also means the likelihood of a sudden, unexpected collapse of confidence in a significant portion of
the banking or financial system with potentially large real economic effects.
Coverage: The deposit liabilities of any bank or banking institution, which is engaged in the business of receiving deposits as
herein defined on the effective date of the PDIC Act, or which thereafter may engage in the business of receiving deposits, shall
be insured with the PDIC.
Deposit accounts not entitled to payment: (SHA OU2I)

1. Deposit products that resulted from splitting of deposit.
Splitting of Deposit – occurs whenever:

a. A deposit account with an outstanding balance more than P500,000 is broken down and transferred to two or more
accounts in the name of persons or entities who have no beneficial ownership in the transferred deposits in their names
b. within 120 days immediately preceding or during a bank-declared bank holiday or immediately preceding a closure
order issued by the Monetary Board
c. for the purpose of availing the maximum deposit insurance coverage.
This is considered a criminal act punishable by imprisonment of not less than 6 years but not more than 12 years or a fine
not less than P50,000 but not more than P10,000,000, or both, at the discretion of the court.
2. Deposit products or money placements by the head office of a foreign bank in its branch in the Philippines because
there is only one entity.
3. Deposits that are determined to be the proceeds of an unlawful activity as defined under RA 9160 or the Anti-Money
Laundering Act, as amended
4. Deposits payable in a place outside the Philippines (like those in foreign branches)
5. Deposit accounts or transactions which are unfunded and that are fictitious or fraudulent
6. Deposit accounts or transactions constituting and/or emanating from, unsafe and unsound banking practice/s, as
determined by PDIC, in consultation with BSP, after due notice and hearing, and publication of a cease and desist order
issued by PDIC against such deposit accounts or transactions.
7. Investment products such as bonds and securities, trust accounts and other similar instruments
DETERMINATION OF THE AMOUNT DUE
Per Bank: the entitlement to deposit insurance is on a per bank basis. Such that if X has a deposit with A Bank and B Bank
and both banks closed, X is entitled to P500,000 insurance coverage for each bank.
Per Depositor, Per Capacity Rule: all deposits in the bank maintained in the same right and capacity for his benefit either in
his own name or in the name of others shall be added together in determining the insured amount, and regardless of the type
of account.
Accounts “By”, “In Trust For (ITF)” or “For the Account of (FAO)” another person:
1. In a “By” account (Juan by Pedro) – Juan is the depositor.
2. In an “ITF” account (Juan ITF Pedro) – Pedro is the depositor.
3. In a “FAO” account (Juan FAO Pedro) – Pedro is the depositor.
Joint accounts: A joint account regardless of whether the conjunction “and”, “or”, “and/or” is used shall be insured
separately from any individually owned deposit account, provided that:
1. If the account is held jointly by two or more natural persons, or by two or more juridical persons or entities, the maximum
insured deposit shall be divided into as many equal shares as there are individuals, juridical persons or entities, unless a
different sharing is stipulated in the document of deposit, and
2. If the account is held by a juridical person or entity jointly with one or more natural persons, the maximum insured deposit
shall be presumed to belong entirely to such juridical person or entity.

Provided, further, that the aggregate of the interest of each co-owner over several joint accounts, whether owned by the same
or different combinations of individuals, juridical persons or entities, shall likewise be subject to the maximum insured deposit
of P500,000.
The P500,000 entitlement to joint deposits is separate from the P500,000 applicable to the individually owned
accounts by the depositor, giving him a maximum of P1,000,000 insurance coverage.
Procedure for the PDIC:

1. PDIC shall commence the determination of insured deposits due the depositors of a closed bank upon its actual takeover
of the closed bank.
2. PDIC shall give notice to the depositors of the closed bank of the insured deposits due them by whatever means deemed
appropriate by the Board of Directors.
3. PDIC shall publish the notice once a week for at least 3 consecutive weeks in a newspaper of general circulation or, when
appropriate, in a newspaper circulated in the community or communities where the closed bank or its branches are located.
Certificate of Deposit: No owner/holder of any negotiable certificate of deposit shall be recognized as a depositor entitled to
the rights in PDIC Act unless his name is registered as owner/holder thereof in the books of the issuing bank.
Period for the depositor to file and enforce claim:

1. Period to file claim – 2 years from actual takeover of the closed bank;
2. Period to enforce claim – 2 years after the 2-year period to file a claim
Proof of claim: The PDIC, in its discretion, may require proof of claims to be filed before paying the insured deposits, and that
in any case where the PDIC is not satisfied as to the validity of a claim, it may require final determination of a court of competent
jurisdiction before paying such claim.
Effects of non-filing or non-enforcement of claim within the periods above:

1. All rights of the depositor against the PDIC with respect to the insured deposit shall be barred,
2. All rights of the depositor against the closed bank and its shareholders or the receivership estate to which PDIC may
have become subrogated, shall thereupon revert to the depositor.
3. PDIC shall be discharged from any liability on the insured deposit.
Modes of payment: made as soon as possible either:

1. By cash
2. By making available to each depositor a transferred deposit in another insured bank in an amount equal to insured deposit
of such depositor
Withholding of payment: The PDIC may withhold payment of such portion of the insured deposit for the payment of any
liability of such depositor as a stockholder of the closed bank, or of any liability of such depositor to the closed bank or its
receiver, which is not offset against a claim due from such bank, pending determination and payment of such liability by such
depositor or any other liable therefor.
Effect of payment: PDIC shall be subrogated to all rights of the depositor against the closed bank to the extent of such
payment. Such subrogation shall include the right on the part of PDIC to receive the same dividends and payments from the
proceeds of the assets of such closed bank and recoveries on account of stockholders’ liability as would have been payable to
the depositor on a claim for the insured deposits, but such depositor shall retain his claim for any uninsured portion of his
deposit.
Under Section 21 of the PDIC Charter, payment of an insured deposit to any person by PDIC shall discharge the PDIC, and
payment of transferred deposit to any person by the new bank or by an insured bank in which a transferred deposit has been
made available shall discharge PDIC and such new bank or other insured bank, to the same extent that payment to such person
by the closed bank would have discharged it from liability for the insured deposit.
Preference: All payments by PDIC of insured deposits in closed banks partake of the nature of public funds, and as such, must
be considered a preferred credit similar to taxes due to the National Government in the order of preference under Article
2244(9) of NCC, provided further, that this preference shall be likewise effective upon liquidation proceedings already
commenced and pending as of the approval of PDIC Act, where no distribution of assets has been made.
Period for the PDIC to settle claim: 6 months from the date of filing of the claim.
Failure to settle the claim within 6 months from the date of filing of claim for insured deposit, where such failure was due to
grave abuse of discretion, gross negligence, bad faith or malice, shall upon conviction, subject the directors, officers or
employees of PDIC responsible for the delay, to imprisonment from 6 months to one year.
Except: that the period shall not apply if the validity of the claim requires the resolution of issues of facts and/or law by another
office, body or agency.
TRUTH IN LENDING ACT

(RA No. 3765, AN ACT TO REQUIRE THE DISCLOSURE OF FINANCE CHARGES IN CONNECTION WITH EXTENSIONS
OF CREDIT)
DECLARATION OF POLICY: It is hereby declared to be the policy of the State to protect its citizens from a lack of
awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a view of preventing the
uninformed use of credit to the detriment of the national economy.
Under BSP Circular No. 755 Series of 2012, it is provided that the objective of transparent pricing is not to set limits on rates,
but rather to make such rates more understandable, comparable and known to the client. Transparent pricing will facilitate
healthy competition among credit providers as clients are better able to compare products and services.

REQUIRED INFORMATION: Any creditor shall furnish to each person to whom credit is extended, prior to the consummation
of the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with rules and
regulations prescribed by the Board, the following information:
1. the cash price or delivered price of the property or service to be acquired;
2. the amounts, if any, to be credited as down payment and/or trade-in;
3. the difference between the amounts set forth under clauses (1) and (2);
4. the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but
which are not incident to the extension of credit;
5. the total amount to be financed;
6. the finance charge expressed in terms of pesos and centavos; and
7. the percentage that the finance charge bears to the total amount to be financed expressed as a simple annual rate
on the outstanding unpaid balance of the obligation.
Under Section 5 of BSP Circular No. 755, Series of 2012, the following are the required information to be disclosed:
a. the total amount to be financed;
b. the finance charge expressed in terms of pesos and centavos
c. the net proceeds of the loan; and
d. the percentage that the finance charge bears to the total amount to be financed expressed as a simple annual rate
or an effective annual interest rate (EIR). EIR may also be quoted as a monthly rate in parallel with the quotation of
the contractual rate.
All registered CGEs shall furnish each borrower with a copy of the disclosure statement, prior to the consummation of the
transaction.
The disclosure statements hall be a required attachment to the loan contract and the customer has a right to demand a copy
of such disclosure.
Loan Documents and Marketing Materials: All loan-related documents shall show repayment schedules in a manner consistent
with BSP Circular No. 755, Series of 2012. Marketing materials and presentations shall likewise be consistent with the said
circular.
Posters: In BSP Circular 730, Series of 2011, it provides that Banks shall post in conspicuous places in their principal place of
business and branches, the information contained in the revised format of disclosure statement. The posters shall include an
explicit notification that the disclosure statement is a required attachment to the loan contract and the customer has a right to
demand a copy of such disclosure. (Section 4)
MANNER OF COMPUTING INTEREST: All registered CGEs shall charge interest based on the outstanding balance of a loan
at the beginning of an interest period.
For a loan where principal is payable in installments, interest per installment period shall be calculated based on the outstanding
balance of the loan at the beginning of each installment period. (Sec. 4 of BSP Circular No. 755, Series of 2012)
REGISTRATION: Under Section 3 of BSP Circular No. 755, Series of 2012, a CGE may register its lending or financing facility
with the BSP for the purpose of ensuring compliance with the requirements of the Act. Through BSP-registration, a CGE
demonstrates its commitment to corporate social responsibilities and adherence to the law. Registration will allow a CGE to gain
greater advantage in promoting and declaring its competitive edge. Further, registration will build long-term brand value,
accountability and transparency, making the registered CGE more valued by its clients and other stakeholders.
To register, they shall submit the following minimum information to the BSP:
1. Business Name
2. Directors, Key Officers and Substantial Stakeholders
3. Principal Place of Business and Contact Details
4. Notarized Deed of Undertaking to strictly and continuously comply with the requirements of all relevant laws, rules and
regulations, signed either by the owner, partner, president or officer of equivalent rank and
5. Such other information or documents that may be required by the BSP.
After due registration and payment of registration fee, an electronically generated serially numbered Acknowledge of
Registration (AoR) shall be issued and shall be valid for a period of 3 years from the date of issuance and renewable thereafter
on the anniversary month when it was originally registered.
The entity shall be allowed to post the BSP-issued AOR and certified true copies thereof in its place of business and branches,
if any.
The list of registered CGEs shall be published in the BSP website in order to enable the public, its clients/consumers to determine
if their counterparty is registered with the BSP, for purposes of determining compliance with the Act and its IRRs.
PENALTIES:
a. Any creditor who in connection with any credit transaction fails to disclose to any person any information in violation of
this Act or any regulation issued thereunder shall be liable to such person whichever is greater between:
i. in the amount of P100 or
ii. in an amount equal to twice the finance charged required by such creditor in connection with such transaction, upto
a maximum of P2,000 on any credit transaction).
Prescriptive period: Action to recover such penalty may be brought by such person within one year from the date of
the occurrence of the violation, in any court of competent jurisdiction.
Costs: In any action under this subsection in which any person is entitled to a recovery, the creditor shall be liable for
reasonable attorney's fees and court costs as determined by the court.
Except as specified in subsection (a) above, nothing contained in this Act or any regulation contained in this Act or any
regulation thereunder shall affect the validity or enforceability of any contract or transactions.

b. Any person who willfully violates any provision of this Act or any regulation issued thereunder shall be subject to a
i. Fine of not less than P1,00 or more than P5,000 or
ii. Imprisonment for not less than 6 months, nor more than one year or both.
No punishment or penalty provided by this Act shall apply to the Philippine Government or any agency or any political subdivision
thereof.
A final judgment hereafter rendered in any criminal proceeding under this Act to the effect that a defendant has willfully violated
this Act shall be prima facie evidence against such defendant in an action or proceeding brought by any other party against
such defendant under this Act as to all matters respecting which said judgment would be an estoppel as between the parties
thereto.
ANTI-MONEY LAUNDERING ACT (RA 9160, AS AMENDED BY RA 9194, 10365 and 11521)
MONEY LAUNDERING: a crime committed by any person knowing that any monetary instrument or property represents,
involves or relates to, the proceeds of any unlawful activity:
1. Transacts or attempts to transact said monetary instrument or property
2. Converts, transfers, disposes of, moves, acquires, possesses or uses said monetary instrument or property;
3. Conceals or disguises the true nature, source, location, disposition, movement or ownership of or rights with
respect to said monetary instrument or property
4. Attempts or conspires to commit money laundering offenses referred to above;
5. Aids, abets, assists in or counsels the commission of the money laundering offenses referred to above (1 to 3)
6. Performs or fails to perform any act as a result of which he facilitates the offense of money laundering referred to
above (1 to 3);
7. Those committed by failure to report to the Anti-Money Laundering Council (AMLC) by any covered person knowing
that a covered or suspicious transaction is required under the Anti-Money Laundering Law to be reported thereto.
STAGES OF MONEY LAUNDERING:

1. Placement - The launderer inserts dirty money into a legitimate financial institution
2. Layering - Involves sending money through various financial transactions to change its form and make it more difficult to
follow.
3. Integration - At this stage the money re-enters mainstream economy in legitimate-looking form, appearing to have come
from legitimate transaction.
UNLAWFUL ACTIVITIES: Any act or omission or series or combination thereof involving or having relation to the following:
1. Kidnapping for ransom under Article 267 of RPC
2. Sections 4, 5, 7, 8, 9, 10, 12, 13, 14, 15 and 16 of Comprehensive Dangerous Drugs Act (RA 9165)
a. Importation of prohibited drugs
b. Sale of prohibited drugs
c. Administration of prohibited drugs
d. Distribution of prohibited drugs
e. Transportation of prohibited drugs
f. Maintenance of a den, dive, or resort for prohibited users
g. Manufacture of prohibited drugs
h. Possession of prohibited drugs
i. Use of prohibited drugs
j. Cultivation of plants which are sources of prohibited drugs
k. Culture of plants which are sources of prohibited drugs
3. Section 3, paragraphs B, C E, G, H and I of RA 3019, or the Anti-Graft and Corrupt Practices Act
a. Directly or indirectly requesting or receiving any gift, present, share, percentage, or benefit for himself or for any other
person in connection with contract or transaction between the Government and any party, wherein the public officer
in his official capacity has to intervene under the law
b. Directly or indirectly requesting or receiving any gift, present, or other pecuniary or material benefit, for himself or for
another, from any person for whom the public officer, in any manner or capacity, has secured or obtained, or will
secure or obtain, any government permit or license, in consideration for the help given or to be given
c. Causing any undue injury to any party, including the government, or giving any private party any unwarranted benefits,
advantage, or preference in the discharge of his official, administrative, or judicial functions through manifest partiality,
evident bad faith, or gross inexcusable negligence
d. Entering, on behalf of the government, into any contract or transaction manifestly and grossly disadvantageous to the
same, whether or not the public officer profited or will profit thereby
e. Directly or indirectly having financial or pecuniary interest in any business contract or transaction in connection with
which he intervenes or takes part in his official capacity, or in which he is prohibited by the Constitution or by any law
from having any interest
f. Directly or indirectly becoming interested, for personal gain, or having material interest in any transaction or act
requiring the approval of a board, panel, or group of which he is a member, and which exercise of discretion in such
approval, even if he votes against the same or he does not participate in the action of the board, committee, panel,
group
4. Plunder under RA 7080
5. Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and 302 of RPC
a. Robbery with violence or intimidation of persons
b. Robbery with physical injuries, committed in an uninhabited place and by a band, or with use of firearms on a street,
road, or alley
c. Robbery in an uninhabited house or public building or edifice devoted to worship
Note: Theft, or the taking of personal property with intent to gain but without violence or intimidation of persons or force
upon things, is not an unlawful activity under the AMLA. Unless what was stolen are coconuts in a coconut farm, fish in a
fish pond, mail matter, vehicle or cattle, or the crime was committed with abuse of confidence – in which cases, it will be
Qualified Theft, which is covered as an unlawful act; or if the thing stolen was sold, in which case a violation of the Anti-
Fencing Law is committed, which is likewise covered as an unlawful activity.

6. Jueteng and masiao under PD 1602
7. Piracy on the high seas under RPC and PD 532
a. Piracy on the high seas
b. Piracy in inland Philippine waters
c. Aiding and abetting pirates and brigands
8. Qualified theft under Article 310 of RPC
9. Swindling (or Estafa) under Article 315 of RPC
10. Smuggling under RA 455 and RA 1937
11. Violations of Electronic Commerce Act (RA 8792)
12. Hijacking and other violations under RA 6235
13. Destructive arson and murder as defined under RPC
14. Terrorism and conspiracy to commit terrorism as defined and penalized under Sections 3 and 4 of Republic Act No.
9372
15. Financing of terrorism under Section 4 and offenses punishable under Sections 5, 6, 7 and 8 of Republic Act No. 10168,
otherwise known as the Terrorism Financing Prevention and Suppression Act of 2012
16. Bribery under Articles 210, 211 and 211-A of the Revised Penal Code, as amended, and Corruption of Public Officers
under Article 212 of the Revised Penal Code, as amended
17. Frauds and Illegal Exactions and Transactions under Articles 213, 214, 215 and 216 of the Revised Penal Code, as
amended
18. Malversation of Public Funds and Property under Articles 217 and 222 of the Revised Penal Code, as amended
19. Forgeries and Counterfeiting under Articles 163, 166, 167, 168, 169 and 176 of the Revised Penal Code, as amended
20. Violations of Sections 4 to 6 of Republic Act No. 9208, otherwise known as the Anti-Trafficking in Persons Act of 2003
21. Violations of Sections 78 to 79 of Chapter IV, of Presidential Decree No. 705, otherwise known as the Revised Forestry
Code of the Philippines, as amended
22. Violations of Sections 86 to 106 of Chapter VI, of Republic Act No. 8550, otherwise known as the Philippine Fisheries
Code of 1998
23. Violations of Sections 101 to 107, and 110 of Republic Act No. 7942, otherwise known as the Philippine Mining Act of
1995
24. Violations of Section 27(c), (e), (f), (g) and (i), of Republic Act No. 9147, otherwise known as the Wildlife Resources
Conservation and Protection Act
25. Violation of Section 7(b) of Republic Act No. 9072, otherwise known as the National Caves and Cave Resources
Management Protection Act
26. Violation of Republic Act No. 6539, otherwise known as the Anti-Carnapping Act of 2002, as amended
27. Violations of Sections 1, 3 and 5 of Presidential Decree No. 1866, as amended, otherwise known as the decree Codifying
the Laws on Illegal/Unlawful Possession, Manufacture, Dealing In, Acquisition or Disposition of Firearms,
Ammunition or Explosives
28. Violation of Presidential Decree No. 1612, otherwise known as the Anti-Fencing Law
29. Violation of Section 6 of Republic Act No. 8042, otherwise known as the Migrant Workers and Overseas Filipinos Act
of 1995, as amended by Republic Act No. 10022
30. Violation of Republic Act No. 8293, otherwise known as the Intellectual Property Code of the Philippines
31. Violation of Section 4 of Republic Act No. 9995, otherwise known as the Anti-Photo and Video Voyeurism Act of 2009
32. Violation of Section 4 of Republic Act No. 9775, otherwise known as the Anti-Child Pornography Act of 2009
33. Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e), 11, 12 and 14 of Republic Act No. 7610, otherwise known as the
Special Protection of Children Against Abuse, Exploitation and Discrimination
34. Fraudulent practices and other violations under Republic Act No. 8799, otherwise known as the Securities Regulation
Code of 2000;
35. Violation of Sec. 19(a)(3) of RA No. 10697 (Strategic Trade Management Act) [To engage in any activity
prohibited by, or in contravention of, any orders or regulations issued by the NSC-STMCom to implement the
provisions of this Act] (as amended by RA No. 11521, effective January 31, 2021)
36. Violations of Section 254 of Chapter II of Title X of the NIRC (Tax Evasion), where the basic tax in the final
assessment is in excess of P25M per taxable year for each tax type with finding of probable cause; willful
misrepresentation or malicious intent; AMLC cannot institute forfeiture proceedings if the same has been
recovered by the BIR (as amended by RA No. 11521, effective January 31, 2021)
37. Felonies or offenses of a similar nature that are punishable under the penal laws of other countries. (as amended by
RA No. 10365)
COVERED ENTITIES:
1. Banks, offshore banking units, quasi-banks, trust entities, non-stock savings and loan associations, pawnshops, and all
other institutions and their subsidiaries and affiliates supervised and/or regulated by the BSP
2. Other entities administering or otherwise dealing in currency, commodities, or financial derivatives based thereon, valuable
objects, cash substitutes, and other similar monetary instruments or property supervised and/or regulated by the SEC
3. Insurance companies, insurance agents, insurance brokers, professional reinsurers, reinsurance brokers, holding
companies, holding company systems, and all other persons and entities supervised and/or regulation by the
Insurance Commission
4. Securities dealers, brokers, salesmen, associated persons of brokers or dealers, investment houses, investment agents
and consultants, trading advisors, and other entities managing securities or rendering similar services
5. Mutual funds or open-end investment companies or issuers and other similar entities
6. Jewelry dealers in precious metals/stones, who as, a business, trade in precious metals/stones, for transactions in excess
of P1M
7. Foreign exchange corporations, money changers, money payment, remittance, and transfer companies and other similar
entities
8. Casinos, including internet and ship-based casinos with respect to their casino cash transactions related to their gaming
operations. (as amended by RA No. 10927)
9. Company service providers to 3rd parties including CPAs and Lawyers
a. acting as a formation agent of juridical persons;
b. acting as (or arranging for another person to act as) a director or corporate secretary of a company, a partner of a
partnership, or a similar position in relation to other juridical persons;
c. providing a registered office; business address or accommodation, correspondence or administrative address for a
company, a partnership or any other legal person or arrangement; and
d. acting as (or arranging for another person to act as) a nominee shareholder for another person.

10. Person providing the following services including CPAs and lawyers
a. managing of client money, securities or other assets;
b. management of bank, savings or securities accounts;
c. organization of contributions for the creation, operation or management of companies; and
d. creation, operation or management of juridical persons or arrangements, and buying and selling business entities.
11. Real Estate Developers and Brokers
12. Offshore Gaming Operators and their Service Providers (as amended by RA No. 11521, effective January 31,
2021)
Lawyers and accountants: acting as independent legal professionals are NOT covered with respect to privileged information
covered by confidentiality and attorney-client relationship.
Obligations of covered institutions:

1. Customer identification: Covered institutions shall establish and record the true identity of its clients based on official
documents.
2. Record keeping: All records of all transactions of covered institutions shall be maintained and safely stored for 5 years
from the date of transactions.
3. Safe Harbor: No administrative, criminal, or civil proceedings, shall lie against any person for having made a transaction
report in the regular performance of his duties and in good faith, whether or not such results in any criminal prosecution
under Philippine laws.
4. REPORTORIAL REQUIREMENTS:
a. Covered Transactions - covered institutions shall report to the AMLC all covered transactions within 5 working
days from occurrence thereof, unless the AMLC prescribes a longer period not exceeding 15 working days. Conviction
of the unlawful activity is not necessary before a report is made.
COVERED TRANSACTION: a transaction in cash or other equivalent monetary instrument involving a total amount
in excess of P500,000 within one banking day.
For casinos, a single casino cash transaction in excess of P5,000,000 or its equivalent in any other currency. (as
amended by RA No. 10927)
For real estate developers/brokers, a single cash transaction involving an amount in excess of P7,500,000 or its
equivalent in any other currency. (as amended by RA No. 11521, effective January 31, 2021)
b. Suspicious Transactions - covered persons to promptly file suspicious transaction reports within the next working
day from occurrence thereof, which for purposes of the Rule, shall be the date of establishment of suspicion or
determination of the suspicious nature of the transaction. (as amended by Sec. 9 of 2020 IRR amending Sec. 2.2 of
2018 IRR, which originally provided: 5 working days from occurrence as well, “Occurrence” meaning the time the
covered entity has determined that the transaction is suspicious, which should not exceed 10 days from the date of
the transaction).
SUSPICIOUS TRANSACTION: a transaction with covered institutions, regardless of the amount involved, where any
of the following circumstances exist:
i. There is no underlying legal or trade obligation, purpose or economic justification
ii. The client is not properly identified
iii. The amount involved is not commensurate with the business or financial capacity of the client
iv. Taking into account all known circumstances, it may be perceived that the client’s transaction is structured in
order to avoid being the subject of reporting requirements under the Act
v. Any circumstances relating to the transaction which is observed to deviate from the profile of the client and/or
the client’s past transactions with the covered institution
vi. The transaction is in any way related to an unlawful activity or offense under this Act that is about to be, is being
or has been committed
vii. Any transaction that is similar or analogous to any of the foregoing
• Should a transaction be determined to be both a covered and a suspicious transaction, it shall be reported as a
suspicious transaction.
• When reporting, it shall not be considered a violation of bank secrecy laws and similar laws. It shall be prohibited from
communicating, directly or indirectly, in any manner or by any means, to any person the fact that a covered or
suspicious transaction report was made, the content thereof, or any other information in relation thereto.
ANTI-MONEY LAUNDERING COUNCIL: composed of:

1. Chairman: BSP Governor
2. Members:
a. Commissioner of Insurance Commission
b. Chairman of SEC
Functions of AMLC:
1. to investigate suspicious transactions and covered transactions deemed suspicious after determination by
AMLC, money laundering activities and other violations of this Act. (as included by RA No. 11521, effective January
31, 2021)
2. To require and receive covered transaction reports from covered institutions
3. To issue orders addressed to the appropriate Supervising Authority or the covered institution to determine the true identity
of any monetary instrument or property subject of a covered transaction report or request for assistance from a foreign
State, or believed by the Council, on the basis of substantial evidence to be in whole or in part, whenever located,
representing, involving or related to, directly or indirectly, in any manner or by any means, the proceeds of an unlawful
activity
4. To institute civil forfeiture proceedings and all other remedial proceedings through the OSG
5. To cause the filing of complaints with the DOJ or Ombudsman for the prosecution of money laundering offenses
6. To initiate investigations of covered transactions, money laundering activities and other violations of RA 9160
7. To freeze any monetary instrument or property alleged to be proceeds of any unlawful activity

8. To implement such measures as may be necessary and justified under RA 9160 to counteract money laundering
9. To receive and take action in respect of, any request from foreign states for assistance in their own anti-money laundering
operations provided in RA 9160
10. To develop educational programs on the pernicious effects of money laundering, the methods and techniques used in money
laundering, the viable means of preventing money laundering and the effective ways of prosecuting and punishing offenders
11. To enlist the assistance of any branch, department, bureau, office, agency or instrumentality of the government, including
GOCCs, in undertaking any and all anti-money laundering operations, which may include the use of its personnel, facilities
and resources for the more resolute prevention, detection and investigation of money laundering offenses and prosecution
of offenders.
12. To impose administrative sanctions for the violation of laws, rules, regulations, orders, and resolutions issued pursuant to
law
13. "in the conduct of its investigation, the AMLC shall apply for the issuance of a search and seizure order with
any competent court; (as included by RA No. 11521, effective January 31, 2021)
14. "in the conduct of its investigation, the AMLC shall apply for the issuance of subpoena ad
testificandum and/or subpoena duces tecum with any competent court; (as included by RA No. 11521, effective
January 31, 2021)
15. "to implement targeted financial sanctions in relation to proliferation of weapons of mass destruction and its
financing, including ex parte freeze, without delay, against all funds and other assets that are owned and
controlled, directly or indirectly, including funds and assets derived or generated therefrom, by individuals or
entities designated and listed under United Nations Security Council Resolution Numbers 1718 of 2006 and
2231 of 2015 and their successor resolutions as well as any binding resolution of the Security Council; and (as
included by RA No. 11521, effective January 31, 2021)
16. "to preserve, manage or dispose assets pursuant to a freeze order, asset preservation order, or judgment of
forfeiture: Provided, however, That pending their turnover to the national government, all expenses incurred
in relation to the duties herein mentioned shall be deducted from the amount to be turned over to the national
government." (as included by RA No. 11521, effective January 31, 2021)
Freezing of Monetary Instrument or Property: The Court of Appeals, upon application ex parte by AMLC and after
determination that probable cause exists that any monetary instrument or property is in any way related to an unlawful activity,
may issue a freeze order which shall be effective immediately (for a period of 20 days unless extended by the court upon
application by the AMLC).
Considering the intricate and diverse web of related and interlocking accounts pertaining to the monetary instruments or
properties that any person may create in the different covered institutions, their branches and/or other units, AMLC may apply
to freeze monetary instruments or properties in the names of the reported owners/holders, and monetary instruments or
properties named in the application of the AMLC, including all other related web of accounts.
Related Web of Accounts are those accounts, the funds and sources of which originated from and/or are materially linked to the
monetary instruments or properties subject of the freeze orders.
AMENDMENTS UNDER RA No. 11521 (effective January 31, 2021)

1. Within the twenty (20) day period, the Court of Appeals shall conduct a summary hearing, with notice to the parties, to
determine whether or not to modify or lift the freeze order, or extend its effectivity.
2. The total period of the freeze order issued by the Court of Appeals under this provision shall not exceed six (6) months.
3. This is without prejudice to an asset preservation order that the Regional Trial Court having jurisdiction over the
appropriate anti-money laundering case or civil forfeiture case may issue on the same account depending on the
circumstances of the case, where the Court of Appeals will remand the case and its records.
4. If there is no case filed against a person whose account has been frozen within the period determined by the Court of
Appeals, not exceeding six (6) months, the freeze order shall be deemed ipso facto lifted.
5. This new rule shall not apply to pending cases in the courts. In any case, the court should act on the petition to freeze
within twenty-four (24) hours from filing of the petition. If the application is filed a day before a nonworking day, the
computation of the twenty-four (24) hour period shall exclude the nonworking days.
6. The freeze order or asset preservation order issued under this Act shall be limited only to the amount of cash or
monetary instrument or value of property that court finds there is probable cause to be considered as proceeds of a
predicate offense, and the freeze order or asset preservation order shall not apply to amounts in the same account in
excess of the amount or value of the proceeds of the predicate offense.
7. A person whose account has been frozen may file a motion to lift the freeze order and the court must resolve this motion
before the expiration of the freeze order.
8. No court shall issue a temporary restraining order or a writ of injunction against any freeze order, except the
Supreme Court.
9. For purposes of implementing targeted financial sanctions in relation to proliferation of weapons of mass destruction
and its financing, the AMLC shall have the power to issue, ex parte, an order to freeze without delay.
10. The freeze order shall be effective until the basis for its issuance shall have been lifted. During the effectivity of the
freeze order, the aggrieved party may, within twenty (20) days from issuance, file with the Court of Appeals a petition to
determine the basis of the freeze order according to the principle of effective judicial protection:
11. The person whose property or funds have been frozen may withdraw such sums as the AMLC determines to be
reasonably needed for monthly family needs and sustenance including the services of counsel and the family medical
needs of such person.
12. The AMLC, if circumstance warrant, may initiate civil forfeiture proceedings to preserve the assets and to protect it
from dissipation.
13. No court shall issue a temporary restraining order or a writ of injunction (or even an asset preservation order
as per Sec. 12(d), as amended) against the freeze order (referred to in 9 and 12), except the Court of Appeals or
the Supreme Court.
Authority to inquire into bank deposits: The AMLC may inquire into deposits upon order of the court when there is probable
cause that the deposits are related to the crime or unlawful activities.
However, a court order is not necessary when the offense or unlawful activity involved is any of the following:
1. Kidnapping for ransom
2. Sections 4, 5, 7, 8, 9, 10, 12, 13, 14, 15 and 16 of Comprehensive Dangerous Drugs Act (RA 9165)

3. Hijacking and other violations under RA 6235, destructive arson and murder, including those perpetrated by terrorists
against non-combatant persons and similar targets
4. Terrorism and conspiracy to commit terrorism as defined under the Human Security Act.
Inquiry into deposits may be availed of even in the absence of a pre-existing criminal case under the same law. However, the
order authorizing bank inquiry cannot be issued ex parte.
PDIC LAW
1. All deposits of any bank are insured with the:
A. BSP C. PDIC
B. Insurance Commission D. Monetary Board
2. Insured deposit means the net amount due to any depositor for deposits in an insured bank but should not exceed:
A. P1,000,000 C. P250,000
B. P500,000 D. P300,000
3. Under the PDIC Law, a joint account held by a juridical person or entity jointly with a natural person shall be presumed to
belong to the:
A. Juridical person C. Both the juridical and natural persons
B. Natural person D. One who first files the claim
4. The proceeds of the insurance shall be paid by the PDIC to the depositor whenever:
A. The depositor files the claim with supporting documents
B. The insured bank submits the list of qualified depositors
C. The insured bank is closed on account of insolvency
D. The order from the BSP to pay is issued
5. The claim must be filed within how many years from the actual takeover by the receiver?
A. 5 B. 3 C. 2 C. 1
BANK SECRECY
6. All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued
by the Government of the Philippines, its political subdivisions and its instrumentalities, are considered __ and may not be
examined, inquired or looked into by any person, government official, bureau or office.
A. Totally confidential C. Definitely confidential
B. Generally confidential D. Absolutely confidential
7. In order for a depositor or investor to waive the secrecy of his deposits and/or investments, his waiver must be:
A. In writing
B. Made orally or in writing
C. Communicated as soon as possible to the bank manager
D. Made orally only
8. The secrecy of foreign currency deposits are not applicable (1) when there is written consent of depositor, (2) under
Section 11 of the Anti-Money Laundering Act, and (3) under Sections 27 and 28 of the Human Security Act.
A. 1 and 2 only C. All of three
9. There is no secrecy of bank deposits when the banks report to the Anti-Money Laundering Council the following
transaction/s:
A. Covered only
B. Suspicious only
C. Covered and/or suspicious
D. None can be reported without violating the secrecy of bank deposits
10. There is no secrecy of bank deposits if ordered by the __, the examination by law enforcement officers in terrorism cases.
A. Regional Trial Court C. Municipal Trial Court
B. Court of Appeals D. Supreme Court
11. Who may inquire into the bank deposits and investment for the purpose of determining the net estate of a deceased
depositor and investor?
A. Commissioner of Internal Revenue
B. Assistant Commissioner of Internal Revenue
C. BIR Regional Director
D. BIR Examiner
12. Which court can order the disclosure of bank deposits in cases where the money deposited or invested is the subject of
litigation?
A. Court of Appeals C. Supreme Court
B. Regional Trial Court D. Any competent court
ANTI-MONEY LAUNDERING
13. Suspicious transactions refer to transactions with covered institutions, regardless of the amount involved, where any of
the following circumstances exist:
A. No underlying legal or trade obligation, purpose or economic justification
B. Client is properly identified
C. Amount involved commensurate with client’s business or financial capacity
D. Based on all known circumstances, it may be perceived that client’s transaction is not structured in order to avoid
being subject of reporting requirements

14. Jewelry dealer is a covered institution if it deals in precious metals, who as a business or trade in excess of:
A. P10,000,000 C. P1,000,000
B. P5,000,000 D. P500,000
15. A covered person is obligated to keep records for how many years?
A. 5 B. 4 C. 3 C. 2
16. A covered person is obligated to report covered and/or suspicious transactions to AMLC within how many days from
occurrence?
A. 5 working days C. 7 working days
B. 5 calendar days D. 7 calendar days
17. The AMLC can prescribe a different period for reporting covered and/or suspicious transactions to AMLC as long as it does
not exceed:
A. 10 working days C. 15 working days
B. 10 calendar days D. 15 calendar days
18. Which professionals are not required to report covered and/or suspicious transactions if the relevant information was
obtained in circumstances where they are subject to professional secrecy or legal professional privilege?
A. Lawyers and accountants C. Accountants only
B. Lawyers only D. All professionals are required
19. Should a transaction be determined to be both a covered transaction and a suspicious transaction, the covered institution
shall be required to report the same as a:
A. Covered transaction
B. Suspicious transaction
C. Both a suspicious and covered transaction
D. At the election of the covered institution
20. All cases on money laundering shall be within the jurisdiction of:
A. Regional Trial Courts (RTC) C. Sandiganbayan (SB)
B. Court of Appeals (CA) D. Court of Tax Appeals (CTA)
21. Acts of money laundering committed by public officers, and private persons in conspiracy with such public officers shall
be within the jurisdiction of:
A. Regional Trial Courts (RTC) C. Court of Appeals (CA)
B. Sandiganbayan (SB) D. Court of Tax Appeals (CTA)
22. It is an extraordinary and interim relief issued to prevent the dissipation, removal, or disposal of properties that are
suspected to be the proceeds of, or related to, unlawful activities as defined in RA9160:
A. Status quo ante order C. Writ of injunction
B. Temporary restraining order D. Freeze order
23. The power to freeze accounts is vested unto:

A. AMLC C. Court of Tax Appeals (CTA)
B. Court of Appeals (CA) D. Supreme Court (SC)
24. What are the requisites for issuance of freeze order?

A. Application ex parte by AMLC only
B. Determination of probable cause by CA only
C. Application ex parte by AMLC and determination of probable cause by CA
D. Application ex parte by AMLC and determination of probable cause by AMLC
25. The Court should act on the petition to freeze within how many hours from filing thereof?
A. 24 B. 36 C. 48 C. 72
26. A freeze order shall be effective immediately for a period not to exceed:
A. 6 months B. 3 months C. 1 month C. 20 days
27. A freeze order may be extended for a period not exceeding:

A. 6 months B. 3 months C. 1 month C. 1 year
28. Who serves as Chairman of the AMLC?

A. SEC Chairman C. Insurance Commission Chairman
B. BSP Governor D. DOF Secretary
29. AMLC may conduct an examination of bank accounts without a court order in cases involving:
A. Kidnapping for ransom C. Plunder
B. Drug possession D. Robbery and extortion
1. C 11. A 21. B
2. B 12. D 22. D
3. A 13. A 23. B
4. C 14. C 24. C
5. C 15. A 25. A
6. D 16. A 26. C
7. A 17. C 27. A
8 C 18. A 28. B
9. C 19. B 29. A
10. B 20. A

RFBT-14
INTELLECTUAL PROPERTY LAW

INTELLECTUAL PROPERTY CODE OF THE PHILIPPINES
[RA No. 8293, as amended by RA No. 10372]
Patent Trademark Copyright

New, useful and industrially Goods manufactured or Literary, scientific or artistic
Subject matter of the right
applicable inventions produced work
Where right is to be registered IPO IPO National Library
Protection starts Application Issuance of CoR Creation

Lifetime of the author +
Duration of right 20 years 10 years Generally 50 years after
death of the author
PATENT
PATENT: is a grant issued by the government to an inventor, designer or maker, the right to exclude others from making,
using or selling his invention, design or utility model within the country for a specific term, in exchange of his patentable
disclosure.
KINDS OF PATENTS; Requisites:

1. Invention Patent: Novelty, Inventive Step, Industrial Applicability;
2. Design Patent: Novelty and Ornamentality;
3. Utility Model: Novelty and Industrial Applicability.
INVENTION PATENT:
Patentable Inventions. - Any technical solution of a problem in any field of human activity which is new, involves an inventive
step and is industrially applicable shall be patentable. It may be, or may relate to, a product, or process, or an improvement of
any of the foregoing.
Non-patentable Inventions: The following shall be excluded from patent protection:

1. Discoveries, scientific theories and mathematical methods;
2. Schemes, rules and methods of performing mental acts, playing games or doing business, and programs for computers;
3. Methods for treatment of the human or animal body by surgery or therapy and diagnostic methods practiced on the human
or animal body. This provision shall not apply to products and composition for use in any of these methods;
4. Plant varieties or animal breeds or essentially biological process for the production of plants or animals. This provision shall
not apply to micro-organisms and non-biological and microbiological processes.
This does not preclude Congress to consider the enactment of a law providing sui generis protection of plant varieties and
animal breeds and a system of community intellectual rights protection:
5. Aesthetic creations; and

6. Anything which is contrary to public order or morality.
ELEMENTS OF A PATENT:
1. Novelty: An invention shall not be considered new if it forms part of a prior art.
Prior Art:
a. Everything which has been made available to the public anywhere in the world, before the filing date or the priority
date of the application claiming the invention;
b. Those already covered by an earlier application.
Non-prejudicial disclosure: The disclosure of information contained in the application during the twelve (12) months
preceding the filing date or the priority date of the application shall not prejudice the applicant on the ground of lack of
novelty if such disclosure was made by:
a. The inventor;
b. A patent office and the information was contained (a) in another application filed by the inventor and should not have
been disclosed by the office, or (b) in an application filed without the knowledge or consent of the inventor by a third
party which obtained the information directly or indirectly from the inventor; or
c. A third party which obtained the information directly or indirectly from the inventor
2. Inventive Step: - An invention involves an inventive step if, having regard to prior art, it is not obvious to a person
skilled in the art at the time of the filing date or priority date of the application claiming the invention.
3. Industrial Applicability: An invention that can be produced and used in any industry shall be industrially applicable.
Application Process:
1. Filing date requirements
2. Payment of fees
3. Formal examination
4. Search of Prior Art
5. 1st publication

INTELLECTUAL PROPERTY LAW RFBT-14
a. within 18 months from filing date
b. After publication, any interested party may inspect documents
c. Publication may be prohibited or restricted if it would be prejudicial to the national security and interests
d. After publication, applicant acquires rights of a patentee – i.e., to exclude anyone from using the invention (if they
have actual knowledge or written notice)
e. But no action can be filed until the grant of the patent (prescription 4 years from commission)
6. Substantive Examination (which must be done within 6 months from first publication)
7. Publication of Patent
Contents of Application:
1. A request for the grant of a patent;
2. A description of the invention (sufficiently clear and complete for it to be carried out by a person skilled in the art);
3. Drawings necessary for the understanding of the invention;
4. One or more claims (define the matter for which protection is sought; clear and concise); and
5. An abstract (concise summary of the disclosure of the invention as contained in the description, claims, and drawings in
preferably not more than 150 words)
Unity of Invention – one application = one invention (group of inventions forming a single general inventive concept)
Divisional Application - may be allowed if there is more than one invention, either voluntarily or within 4 months from
recommendation of the Director.
Grounds for Cancellation of Patent:

1. Invention is not new (no novelty)
2. The patent did not disclose the invention in a manner sufficiently clear and complete for it to be carried out by any person
skilled in the art.
3. Contrary to public order or morality
RIGHT TO A PATENT: The right to a patent belongs to the inventor, his heirs, or assigns.
When two (2) or more persons have jointly made an invention, the right to a patent shall belong to them jointly.
First to File Rule: if two or more persons separately made the same invention, priority is given to one who filed first.
Right of Priority/Priority Claim: Application made locally when an earlier application is filed abroad. Process:
1. A CLAIM of priority based on an earlier filing date abroad.
2. A local application is filed within 12 months from priority date (application date of foreign application for patent)
3. Certified copy of priority application and English translation thereof within 6 months from filing date.
Priority date: date of filing of FOREIGN application for the same invention.
Actual Inventor; Remedies:
1. Application still pending – file an action in court to prove that he is the actual inventor within 1 year from first
publication. Once declared that he is the true inventor:
a. Request that the application be refused
b. File a new application but filing date will retroact to original filing date
2. Patent already granted – within 1 year from publication of the patent, he can either:
a. Be substituted as patentee; or
b. Seek cancellation of patent.
COMMISSIONED INVENTIONS: The person who commissions the work shall own the patent, unless otherwise provided in
the contract.
Note that this rule is different with regards a copyright, where the copyright belongs to the author/artist and the work to the
one who commissioned the work.
In case the employee made the invention in the course of his employment contract, the patent shall belong to:
1. The employee, if the inventive activity is not a part of his regular duties even if the employee uses the time, facilities and
materials of the employer.
2. The employer, if the invention is the result of the performance of his regularly-assigned duties, unless there is an
agreement, express or implied, to the contrary.
TERM OF PATENT: The term of a patent shall be twenty (20) years from the filing date of the application.
PATENT RIGHTS: A patent shall confer on its owner the following exclusive rights:
1. Where the subject matter of a patent is a product, to restrain, prohibit and prevent any unauthorized person or entity from
making, using, offering for sale, selling or importing that product;
2. Where the subject matter of a patent is a process, to restrain, prevent or prohibit any unauthorized person or entity from
using the process, and from manufacturing, dealing in, using, selling or offering for sale, or importing any product obtained
directly or indirectly from such process.
3. The right to assign, or transfer by succession the patent, and
4. Right to conclude licensing contracts for the same.
LIMITATION OF PATENT RIGHTS: The owner of a patent has no right to prevent third parties from performing, without his
authorization, acts mentioned above in the following circumstances:
1. Using a patented product which has been put on the market in the Philippines by the owner of the product, or with his
express consent, insofar as such use is performed after that product has been so put on the said market;
2. Where the act is done privately and on a non-commercial scale or for a non-commercial purpose: Provided, That it does
not significantly prejudice the economic interests of the owner of the patent;
3. Where the act consists of making or using exclusively for the purpose of experiments that relate to the subject matter of
the patented invention;

4. Where the act consists of the preparation for individual cases, in a pharmacy or by a medical professional, of a medicine in
accordance with a medical prescription or acts concerning the medicine so prepared;
5. Where the invention is used in any ship, vessel, aircraft, or land vehicle of any other country entering the territory of the
Philippines temporarily or accidentally: Provided, that such invention is used exclusively for the needs of the ship, vessel,
aircraft, or land vehicle and not used for the manufacturing of anything to be sold within the Philippines.
PRIOR USER: Notwithstanding the exclusivity of rights mentioned above, any prior user, who, in good faith was using the
invention or has undertaken serious preparations to use the invention in his enterprise or business, before the filing date or
priority date of the application on which a patent is granted, shall have the right to continue the use thereof as envisaged in
such preparations within the territory where the patent produces its effect.
The right of the prior user may only be transferred or assigned together with his enterprise or business, or with that part of his
enterprise or business in which the use or preparations for use have been made. (Section 73)
USE OF INVENTION BY GOVERNMENT: A Government agency or third person authorized by the Government may exploit
the invention even without agreement of the patent owner where:
1. The public interest, in particular, national security, nutrition, health or the development of other sectors, as determined by
the appropriate agency of the government, so requires; or
2. A judicial or administrative body has determined that the manner of exploitation, by the owner of the patent or his licensee
is anti-competitive.
INFRINGEMENT: The making, using, offering for sale, selling, or importing a patented product or a product obtained directly
or indirectly from a patented process, or the use of a patented process without the authorization of the patentee constitutes
patent infringement.
Kinds of Infringement:
1. LITERAL INFRINGEMENT
a. Exactness Rule – the item that is being sold, made or used conforms exactly to the patent claim of another.
b. Addition Rule - one makes, uses or sells an item that has all the elements of the patent claim of another plus other
elements.
2. DOCTRINE OF EQUIVALENTS: with some modification and change, but SUBSTANTIALLY THE SAME:
a. Function
b. Way/Means/Principle or Mode of Operation
c. Result
The doctrine of equivalents provides that an infringement also takes place when a device appropriates a prior invention by
incorporating its innovative concept and, although with some modification and change, performs substantially the same function
in substantially the same way to achieve substantially the same result. Identity of result does not amount to infringement of
patent unless the invention being questioned operates in substantially the same way or by substantially the same means as the
patented one, even though it performs the same function and achieves the same result. In other words, the principle or mode
of operation must be the same or substantially the same.
The doctrine of equivalents thus requires satisfaction of the function-means-and-result test, the patentee having the burden to
show that all three components of such equivalency test are met.
REMEDIES OF PATENTEE:
1. Civil action to recover damages plus attorney’s fees and other expenses of litigation or reasonable royalty.
2. Injunction for the protection of rights.
3. The court may, in its discretion, order that the infringing goods, materials and implements predominantly used in the
infringement be disposed of outside the channels of commerce or destroyed, without compensation.
4. Criminal Action for Repetition of Infringement: if infringement is repeated by the infringer or by anyone in connivance
with him after finality of the judgment of the court against the infringer, the offenders shall, without prejudice to the
institution of a civil action for damages, be criminally liable therefor and, upon conviction, shall suffer imprisonment for the
period of not less than six (6) months but not more than three (3) years and/or a fine of not less than One hundred
thousand pesos (P100,000) but not more than Three hundred thousand pesos (P300,000), at the discretion of the court.
The criminal action herein provided shall prescribe in three (3) years from date of the commission of the crime.
NOTICE TO INFRINGER: Damages cannot be recovered for acts of infringement committed before the infringer had known,
or had reasonable grounds to know of the patent. It is presumed that the infringer had known of the patent if on the patented
product, or on the container or package in which the article is supplied to the public, or on the advertising material relating to
the patented product or process, are placed the words "Philippine Patent" with the number of the patent.
VOLUNTARY LICENSING: Mandatory Provisions:

1. Jurisdiction of disputes – Philippines; Venue – principal place of business of patentee
2. Continuous access to improvements in techniques and processes
3. If it includes Arbitration – venue: PH or other neutral countries, and the following laws are applicable:
a. the Procedure of Arbitration of the Arbitration Law of the Philippines or
b. the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL) or
c. the Rules of Conciliation and Arbitration of the International Chamber of Commerce (ICC)
4. Taxes – borne by the licensor
COMPULSORY LICENSING: Issuance of a license by the Director General of the IPO to exploit a patented invention without
the permission of the patent holder, either by manufacture or through parallel importation.
Grounds:
1. National emergency/circumstances of extreme urgency
2. Public interest so requires
3. The use of the patent is anti-competitive
4. Public non-commercial use without satisfactory reasons
5. Invention is not being worked in the PH on a commercial scale without satisfactory reasons (importation counts as working
or using)
6. Demand for patented drugs and medicine is not being met to an adequate extent and or reasonable terms, as determined
by DOH.

TRADEMARKS
“Mark” means any visible sign capable of distinguishing the goods (trademark) or services (service mark) of an enterprise and
shall include a stamped or marked container of goods
"Collective mark" means any visible sign designated as such in the application for registration and capable of distinguishing
the origin or any other common characteristic, including the quality of goods or services of different enterprises which use the
sign under the control of the registered owner of the collective mark
“Trade name” means the name or designation identifying or distinguishing an enterprise
HOW RIGHTS ARE ACQUIRED: The rights in a mark shall be acquired through registration.
MARKS WHICH CANNOT BE REGISTERED:
1. Consists of immoral, deceptive or scandalous matter, or matter which may disparage or falsely suggest a
connection with persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt or disrepute;
2. Consists of the flag or coat of arms or other insignia of the Philippines or any of its political subdivisions, or of any
foreign nation, or any simulation thereof;
3. Consists of a name, portrait or signature identifying a particular living individual except by his written consent, or the
name, signature, or portrait of a deceased President of the Philippines, during the life of his widow, if any, except by
written consent of the widow;
4. Is identical with a registered mark belonging to a different proprietor or a mark with an earlier filing or priority date, in
respect of:
a. The same goods or services, or
b. Closely related goods or services, or
c. If it nearly resembles such a mark as to be likely to deceive or cause confusion;
COLORABLE IMITATION: denotes such a “close or ingenious imitation as to be calculated to deceive ordinary persons,
or such a resemblance to the original as to deceive an ordinary purchaser, giving such attention as a purchaser usually
gives, and to cause him to purchase the one supposing it to be the other. (Etepha, AG vs. Director of Patents)
5. Is identical with, or confusingly similar to, or constitutes a translation of a mark which is considered by the
competent authority of the Philippines to be well-known internationally and in the Philippines, whether or not it is
registered here, as being already the mark of a person other than the applicant for registration, and used for identical or
similar goods or services: Provided, That in determining whether a mark is well-known, account shall be taken of the
knowledge of the relevant sector of the public, rather than of the public at large, including knowledge in the Philippines
which has been obtained as a result of the promotion of the mark;
6. Is identical with, or confusingly similar to, or constitutes a translation of a mark considered well-known in
accordance with the preceding paragraph, which is registered in the Philippines with respect to goods or services which
are not similar to those with respect to which registration is applied for: Provided, That use of the mark in relation
to those goods or services would indicate a connection between those goods or services, and the owner of the registered
mark: Provided further, That the interests of the owner of the registered mark are likely to be damaged by such use;
7. Is likely to mislead the public, particularly as to the nature, quality, characteristics or geographical origin of the goods
or services;
8. Consists exclusively of signs that are generic for the goods or services that they seek to identify;
9. Consists exclusively of signs or of indications that have become customary or usual to designate the goods or services
in everyday language or in bona fide and established trade practice;
10. Consists exclusively of signs or of indications that may serve in trade to designate the kind, quality, quantity,
intended purpose, value, geographical origin, time or production of the goods or rendering of the services, or
other characteristics of the goods or services;
11. Consists of shapes that may be necessitated by technical factors or by the nature of the goods themselves or factors that
affect their intrinsic value;
12. Consists of color alone, unless defined by a given form; or
13. Is contrary to public order or morality.
KINDS OF TERMS:
1. Generic terms are those which constitute "the common descriptive name of an article or substance," or comprise the
"genus of which the particular product is a species," or are "commonly used as the name or description of a kind of goods,"
or "imply reference to every member of a genus and the exclusion of individuating characters," or "refer to the basic nature
of the wares or services provided rather than to the more idiosyncratic characteristics of a particular product," and are not
legally protectable.
2. Descriptive terms, as understood in its normal and natural sense, it "forthwith conveys the characteristics, functions,
qualities or ingredients of a product to one who has never seen it and does not know what it is," or "if it forthwith conveys
an immediate idea of the ingredients, qualities or characteristics of the goods," or if it clearly denotes what goods or services
are provided in such a way that the consumer does not have to exercise powers of perception or imagination, and therefore
invalid as a trademark.
3. Suggestive terms are those which, in the phraseology of one court, require "imagination, thought and perception to reach
a conclusion as to the nature of the goods." Such terms, "which subtly connote something about the product," are eligible
for protection in the absence of secondary meaning. While suggestive marks are capable of shedding "some light" upon
certain characteristics of the goods or services in dispute, they nevertheless involve "an element of incongruity,"
"figurativeness," or " imaginative effort on the part of the observer."
DOCTRINE OF SECONDARY MEETING: "Under the doctrine of secondary meaning, a word or phrase originally incapable of
exclusive appropriation with reference to an article in the market, because geographical or otherwise descriptive might
nevertheless have been used so long and so exclusively by one producer with reference to this article that, in that trade
and to that group of the purchasing public, the word or phrase has come to mean that the article was his produce. (Ana
Ang vs. Toribio Teodoro, 74 Phil. 56)
CERTIFICATES OF REGISTRATION: A certificate of registration of a mark shall be prima facie evidence of:
1. The validity of the registration,
2. The registrant’s ownership of the mark, and
3. The registrant’s exclusive right to use the same in connection with the goods or services and those that are related
thereto specified in the certificate.

PRIORITY CLAIM: is a local application of a trademark when an earlier application (“priority application”) is filed abroad.
1. Filed within 6 months from filing of priority application
2. Certified copy of priority application within 3 months from filing date
3. Failure to file is treated as a waiver of priority claim.
DURATION OF PROTECTION AND RIGHTS: The rights to a trademark shall be 10 years from registration.
Renewal: the rights to a trademark in a certificate of registration may be renewed for periods of 10 years at its expiration
upon payment of the prescribed fee and upon filing a request at any time within 6 months before expiration or within 6 months
after such exploration upon payment of an additional fee.
Declaration of Actual Use: A declaration of actual use shall be filed:

1. Within 3 years from filing date of application; Extendible for another 6 months; Otherwise, it shall be deemed an
abandonment of the application.
2. AND another DAU within 1 year from the 5th anniversary of the registration of the mark; Otherwise, the mark shall be
removed from the Register by the Office.
3. AND within 1 year rom date of renewal of the trademark registration.
Effect of non-compliance: Otherwise, the application will be deemed abandoned or the registration cancelled.
RIGHTS CONFERRED: The owner of a registered mark shall have the exclusive right to prevent all third parties not having
the owner’s consent from using in the course of trade identical or similar signs or containers for goods or services which are
identical or similar to those in respect of which the trademark is registered where such use would result in a likelihood of
confusion. In case of the use, of an identical sign for identical goods or services, a likelihood of confusion shall be presumed.
Rights of an owner of a well-known mark: (Theord of Dilution) The exclusive right of the owner of a well-known mark
which is registered in the Philippines, shall extend to goods and services which are not similar to those in respect of
which the mark is registered:
Requisites:
1. That use of that mark in relation to those goods or services would indicate a connection between those goods or services
and the owner of the registered mark; and
2. That the interests of the owner of the registered mark are likely to be damaged by such use.
Not included in the rights: Registration of the mark shall not confer on the registered owner the right to preclude third parties
from using bona fide their names, addresses, pseudonyms, a geographical name, or exact indications concerning the kind,
quality, quantity, destination, value, place of origin, or time of production or of supply, of their goods or services: Provided,
That such use is confined to the purposes of mere identification or information and cannot mislead the public as to the
source of the goods or services.
ASSIGNMENT AND TRANSFER: Assignments and transfers of registration of marks shall be recorded at the Office on payment
of the prescribed fee; assignment and transfers of applications for registration shall, on payment of the same fee, be
provisionally recorded, and the mark, when registered, shall be in the name of the assignee or transferee.
Assignments and transfers shall have no effect against third parties until they are recorded at the Office
CANCELLATION OF REGISTRATION: a petition to cancel a registration of a mark under this act may be filed with the Bureau
of Legal Affairs by any person who believes that he is or will be damaged by the registration of a mark.
PERIOD: GENERAL RULE: Within five (5) years from the date of the registration of the mark under this Act.
EXCEPTIONS:
1. At any time, if the registered owner of the mark without legitimate reason fails to use the mark within the Philippines, or
to cause it to be used in the Philippines by virtue of a license during an uninterrupted period of three (3) years or longer.
2. At any time, if the registered mark becomes the generic name for the goods or services, or a portion thereof, for which it
is registered, or has been abandoned, or its registration was obtained fraudulently or contrary to the provisions of this Act,
or if the registered mark is being used by, or with the permission of, the registrant so as to misrepresent the source of the
goods or services on or in connection with which the mark is used.
3. In any action to enforce the rights to a registered mark – Notwithstanding the foregoing provisions, the court or the
administrative agency vested with jurisdiction to hear and adjudicate any action to enforce the rights to a registered mark
shall likewise exercise jurisdiction to determine whether the registration of said mark may be cancelled in accordance with
this Act. (Section 151.2)
TRADEMARK INFRINGEMENT: Any person who shall, without the consent of the owner of the registered mark:
1. Use in commerce any reproduction, counterfeit, copy, or colorable imitation of a registered mark or the same container or
a dominant feature thereof in connection with the sale, offering for sale, distribution, advertising of any goods or services
including other preparatory steps necessary to carry out the sale of any goods or services on or in connection with
which such use is likely to cause confusion, or to cause mistake, or to deceive; or
2. Reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant feature thereof and apply such
reproduction, counterfeit, copy or colorable imitation to labels, signs, prints, packages, wrappers, receptacles or
advertisements intended to be used in commerce upon or in connection with the sale, offering for sale, distribution, or
advertising of goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake,
or to deceive, shall be liable in a civil action for infringement by the registrant, regardless of whether there is actual
sale of goods or services using the infringing material.
TESTS TO DETERMINE INFRINGEMENT:

1. HOLISTIC OR TOTALITY TEST: considers the entirety of the marks in question.
2. DOMINANCY TEST: focus is on prevalent or dominant features. Confusing similarity is to be determined not only on the
visual but also on the aural and connotative comparisons and overall impressions between the two trademarks.

REMEDIES FOR TRADEMARK OWNER
1. Recover damages which shall be based on the reasonable profit which the complaining party would have made, had the
defendant not infringed his rights, or the profit which the defendant actually made out of the infringement, or in the event
such measure of damages cannot be readily ascertained with reasonable certainty, then the court may award as damages
a reasonable percentage based upon the amount of gross sales of the defendant or the value of the services in connection
with which the mark or trade name was used in the infringement of the rights of the complaining party.
In cases where actual intent to mislead the public or to defraud the complainant is shown, in the discretion of the court,
the damages may be doubled.
2. Seek injunction.
3. Seek the destruction of infringing materials without compensation of any sort or disposed outside of commerce in such
a manner as to avoid any harm caused to the right holder.
PRIOR USER IN GOOD FAITH: A registered mark shall have no effect against any person who, in good faith, before the filing
date or the priority date, was using the mark for the purposes of his business or enterprise: Provided, That his right may only
be transferred or assigned together with his enterprise or business or with that part of his enterprise or business in which the
mark is used.
UNFAIR COMPETITION: the following shall be deemed guilty of unfair competition:

1. Any person, who in selling his goods shall give them the general appearance of goods of another manufacturer or
dealer, either as to the goods themselves or in the wrapping of the packages in which they are contained, or the devices
or words thereon, or in any feature of their appearance, which would be likely to influence purchasers to believe that
the goods offered are those of a manufacturer or dealer, other than the actual manufacturer or dealer, or who
otherwise clothes the goods with such appearance as shall deceive the public and defraud another of his legitimate trade,
or any subsequent vendor of such goods or any agent of any vendor engaged in selling such goods with a like purpose;
2. Any person who by any artifice, or device, or who employs any other means calculated to induce the false belief that such
person is offering the services of another who has identified such services in the mind of the public; or
3. Any person who shall make any false statement in the course of trade or who shall commit any other act contrary to good
faith of a nature calculated to discredit the goods, business or services of another.
Penalty: Imprisonment: 2 to 5 years; Fine: 50,000 to 200,000
TRADEMARK INFRINGEMENT VS. UNFAIR COMPETITION:
TRADEMARK INFRINGEMENT UNFAIR COMPETITION

Registration of the mark is a pre-requisite No registration necessary
No fraudulent intent is required Fraudulent intent is necessary
Likelihood of confusion Sale is required
Passing-off element
Unfair competition is broader than trademark infringement and includes passing off goods with or without trademark
infringement. Trademark infringement is a form of unfair competition. There can be trademark infringement without unfair
competition as when the infringer discloses on the labels containing the mark that he manufactures the goods, thus preventing
the public from being deceived that the goods originate from the trademark owner.
COPYRIGHT
Copyright is the right of literary property as recognized and sanctioned by positive law. An intangible, incorporeal right granted
by statute to the author or originator of certain literary or artistic productions, whereby he is invested, for a specific period,
with the sole and exclusive privilege of multiplying copies of the same and publishing and selling them. (Black’s Law Dictionary)
In the Philippines, the owner of a work subject of a copyright is granted exclusive economic and moral rights.
"Author" is the natural person who has created the work;
A "collective work" is a work which has been created by two (2) or more natural persons at the initiative and under the
direction of another with the understanding that it will be disclosed by the latter under his own name and that contributing
natural persons will not be identified.
"Communication to the public" or "communicate to the public" means any communication to the public, including
broadcasting, rebroadcasting, retransmitting by cable, broadcasting and retransmitting by satellite, and includes the making of
a work available to the public by wire or wireless means in such a way that members of the public may access these works from
a place and time individually chosen by them.
"Public lending" is the transfer of possession of the original or a copy of a work or sound recording for a limited period, for
non-profit purposes, by an institution the services of which are available to the public, such as public library or archive.
“Published works" means works, which, with the consent of the authors, are made available to the public by wire or wireless
means in such a way that members of the public may access these works from a place and time individually chosen by them:
Provided, That availability of such copies has been such, as to satisfy the reasonable requirements of the public, having regard
to the nature of the work.
ORIGINAL WORKS: Literary and artistic works, hereinafter referred to as "works", are original intellectual creations in the
literary and artistic domain protected from the moment of their creation and shall include in particular:
1. Books, pamphlets, articles and other writings;
2. Periodicals and newspapers;
3. Lectures, sermons, addresses, dissertations prepared for oral delivery, whether or not reduced in writing or other material
form;
4. Letters;
5. Dramatic or dramatico-musical compositions; choreographic works or entertainment in dumb shows;

6. Musical compositions, with or without words;
7. Works of drawing, painting, architecture, sculpture, engraving, lithography or other works of art; models or designs for
works of art;
8. Original ornamental designs or models for articles of manufacture, whether or not registrable as an industrial design, and
other works of applied art;
9. Illustrations, maps, plans, sketches, charts and three-dimensional works relative to geography, topography, architecture
or science;
10. Drawings or plastic works of a scientific or technical character;
11. Photographic works including works produced by a process analogous to photography; lantern slides;
12. Audiovisual works and cinematographic works and works produced by a process analogous to cinematography or any
process for making audio-visual recordings;
13. Pictorial illustrations and advertisements;
14. Computer programs; and
15. Other literary, scholarly, scientific and artistic works.
PROTECTION COMMENCES: from the moment of creation, irrespective of the mode or form expression, as well as the
content, quality or purpose.
DERIVATIVE WORKS: The following are derivative works which shall also be protected by copyright:
1. Dramatizations, translations, adaptations, abridgments, arrangements, and other alterations of literary or artistic works;
and
2. Collections of literary, scholarly or artistic works, and compilations of data and other materials which are original by reason
of the selection or coordination or arrangement of their contents.
The above shall be protected as a new works: Provided however, that such new work shall not affect the force of any subsisting
copyright upon the original works employed or any part thereof, or be construed to imply any right to such use of the original
works, or to secure or extend copyright in such original works.
RIGHT OF PUBLISHER: In addition to the right to publish granted by the author, his heirs or assigns, the publisher shall have
a copy right consisting merely of the right of reproduction of the typographical arrangement of the published edition of the
work.
“Reproduction" is the making of one (1) or more copies of a work or a sound recording in any manner or form.
WORKS NOT PROTECTED: no protection shall extend to:

1. Any idea
2. Procedure
3. System method or operation,
4. Concept
5. Principle
6. Discovery or
7. Mere data as such, even if they are expressed, explained, illustrated or embodied in a work
8. News of the day and other miscellaneous facts having the character of mere items of press information; or
9. Any official text of a legislative, administrative or legal nature, as well as any official translation thereof
WORKS OF THE GOVERNMENT

A “work of the Government of the Philippines" is a work created by an officer or employee of the Philippine Government
or any of its subdivisions and instrumentalities, including government-owned or controlled corporations as part of his regularly
prescribed official duties.
No copyright shall subsist in any work of the Government of the Philippines. However, prior approval of the government
agency or office wherein the work is created shall be necessary for exploitation of such work for profit. Such agency or office
may, among other things, impose as a condition the payment of royalties.
No prior approval or conditions shall be required for the use of any purpose of:
1. Statutes
2. Rules and regulations, and
3. Speeches, lectures, sermons, addresses, and dissertations, pronounced, read or rendered in courts of justice, before
administrative agencies, in deliberative assemblies and in meetings of public character.
The Author of speeches, lectures, sermons, addresses, and dissertations mentioned in the preceding paragraphs shall have
the exclusive right of making a collection of his works.
However, the Government is not precluded from receiving and holding copyrights transferred to it by assignment, bequest or
otherwise; nor shall publication or republication by the government in a public document of any work in which copy right is
subsisting be taken to cause any abridgment or annulment of the copyright or to authorize any use or appropriation of such
work without the consent of the copyright owners.
ECONOMIC RIGHTS OF AN AUTHOR: shall consist of the exclusive right to carry out, authorize or prevent the following acts:
1. Reproduction of the work or substantial portion of the work;
2. Dramatization, translation, adaptation, abridgment, arrangement or other transformation of the work;
3. The first public distribution of the original and each copy of the work by sale or other forms of transfer of ownership;
4. Rental of the original or a copy of an audiovisual or cinematographic work, a work embodied in a sound recording, a
computer program, a compilation of data and other materials or a musical work in graphic form, irrespective of the
ownership of the original or the copy which is the subject of the rental; (n)
5. Public display of the original or a copy of the work;
6. Public performance of the work; and
7. Other communication to the public of the work

OWNERSHIP OF COPYRIGHT shall be governed by the following rules:
Work Owner
Original Author
Works of Joint The co-authors shall be the original owners of the copyright and in the absence of agreement, their
authorship rights shall be governed by the rules on co-ownership.
If, however, a work of joint authorship consists of parts that can be used separately and the author of
each part can be identified, the author of each part shall be the original owner of the copyright in the
part that he has created.
Works during The employee, if the creation of the object of copyright is not a part of his regular duties even if the
employment employee uses the time, facilities and materials of the employer.
The employer, if the work is the result of the performance of his regularly-assigned duties, unless there
is an agreement, express or implied, to the contrary
Commissioned The person who so commissioned the work shall have ownership of work, but the copyright thereto shall
work remain with the creator, unless there is a written stipulation to the contrary.
Audiovisual work The producer, the author of the scenario, the composer of the music, the film director, and the author
of the work so adapted. However, subject to contrary or other stipulations among the creators, the
producers shall exercise the copyright to an extent required for the exhibition of the work in any manner,
except for the right to collect performing license fees for the performance of musical compositions, with
or without words, which are incorporated into the work.
Letters Writer
Anonymous and Publishers shall be deemed to represent the authors of articles and other writings published without the
Pseudonymous names of the authors or under pseudonyms, unless the contrary appears, or the pseudonyms or adopted
Works name leaves no doubts as to the author’s identity, or if the author of the anonymous works discloses
his identity.
TRANSFER AND ASSIGNMENT OF COPYRIGHT

The copyright may be assigned in whole or in part inter vivos only if there is a written indication of such intention.
The submission of a literary, photographic or artistic work to a newspaper, magazine or periodical for publication shall constitute
only a license to make a single publication unless a greater right is expressly granted.
Rights of Assignee: Within the scope of the assignment or license, the assignee or licensee is entitled to all the rights and
remedies which the assignor or licensor had with respect to the copyright.
Right of owner to accounting: The copyright owner has the right to regular statement of accounts from the assignee or the
licensee with regard to assigned or licensed work.
Co-owned work: If two (2) or more persons jointly own a copyright or any part thereof, neither of the owners shall be entitled
to grant licenses without the prior written consent of the other owner or owners.
Copyright and the Material Object: The copyright is distinct from the property in the material object subject to it. Consequently
the transfer assignment or licensing of the copyright shall not itself constitute a transfer of the material object. Nor shall a
transfer or assignment of the sole copy or of one or several copies of the work imply transfer assignment or licensing of the
copyright.
Filing of Assignment of License: An assignment or exclusive license may be filed in duplicate with the National Library upon
payment of the prescribed fee for registration in books and records kept for the purpose. Upon recording, a copy of the
instrument shall be, returned to the sender with a notation of the fact of record. Notice of the record shall be published in the
IPO Gazette.
Designation of Society: The owners of copyright and related rights or their heirs may designate a society of artists, writer,
composers, and other right-holders to collectively manage their economic or moral rights on their behalf. For the said societies
to enforce the rights on their members, they shall be first secure the necessary accreditation from the Intellectual Property
Office.
LIMITATIONS ON COPYRIGHT: The following acts shall not constitute infringement of copyright:
1. The reproduction or distribution of published articles or materials in a specialized format exclusively for the use of the
blind, visually and reading-impaired persons: Provided, that such copies and distribution shall be made on a non-
profit basis and shall indicate the copyright owner and the date of the original publication.
2. The recitation or performance of a work, once it has been lawfully made accessible to the public, if done privately and
free of charge or if made strictly for a charitable or religious institution or society;
3. The making of quotations from a published work if they are compatible with fair use and only to the extent justified
for the purpose, including quotations from newspaper articles and periodicals in the form of press summaries: Provided,
That the source and the name of the author, if appearing on the work, are mentioned;
4. The reproduction or communication to the public by mass media of articles on current political, social, economic,
scientific or religious topic, lectures, addresses and other works of the same nature, which are delivered in public
if such use is for information purposes and has not been expressly reserved: Provided, That the source is clearly indicated;
5. The reproduction and communication to the public of literary, scientific or artistic works as part of reports of current
events by means of photography, cinematography or broadcasting to the extent necessary for the purpose;
6. The inclusion of a work in a publication, broadcast, or other communication to the public, sound recording or film, if such
inclusion is made by way of illustration for teaching purposes and is compatible with fair use: Provided, That the
source and of the name of the author, if appearing in the work, are mentioned;
7. The recording made in schools, universities, or educational institutions of a work included in a broadcast for the use of
such schools, universities or educational institutions: Provided, That such recording must be deleted within a
reasonable period after they were first broadcast: Provided, further, That such recording may not be made from audiovisual
works which are part of the general cinema repertoire of feature films except for brief excerpts of the work;

8. The making of ephemeral recordings by a broadcasting organization by means of its own facilities and for use in its own
broadcast;
9. The use made of a work by or under the direction or control of the Government, by the National Library or by
educational, scientific or professional institutions where such use is in the public interest and is compatible with fair use;
10. The public performance or the communication to the public of a work, in a place where no admission fee is charged in
respect of such public performance or communication, by a club or institution for charitable or educational purpose
only, whose aim is not profit making, subject to such other limitations as may be provided in the Regulations;
11. Public display of the original or a copy of the work not made by means of a film, slide, television image or otherwise
on screen or by means of any other device or process: Provided, That either the work has been published, or, that original
or the copy displayed has been sold, given away or otherwise transferred to another person by the author or his successor
in title; and
12. Any use made of a work for the purpose of any judicial proceedings or for the giving of professional advice by a legal
practitioner.
The above shall be interpreted in such a way as to allow the work to be used in a manner which does not conflict with the
normal exploitation of the work and does not unreasonably prejudice the right holder's legitimate interest.
FAIR USE OF A COPYRIGHT WORK: The fair use of a copyrighted work for criticism, comment, news reporting, teaching
including limited number of copies for the classroom use, scholarship, researched, and similar purposes is not an infringement
of copyright.
In determining whether the use made of a work in any particular case is fair use, the factors to be considered shall include:
1. The purpose and character of the use, including whether such use is of a commercial nature or is for non-profit education
purposes;
2. The nature of the copyrighted work;
3. The amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
4. The effect of the use upon the potential market for or value of the copyrighted work.
The fact that a work is unpublished shall not by itself bar a finding of fair use if such finding is made upon consideration of all
the above factors.
Work of Architecture: Copyright in a work of architecture shall include the right to control the erection of any building which
reproduces the whole or a substantial part of the work either in its original form or in any form recognizably derived from the
original; Provided, That the copyright in any such work shall not include the right to control the reconstruction or rehabilitation
in the same style as the original of a building to which the copyright relates.
Reproduction of Published Work:

1. Reproduction of a single copy: The private reproduction of a published work in a single copy shall be permitted, without
the authorization of the owner of copyright in the work. where:
a. The reproduction is made by a natural person
b. Exclusively for research and private study
EXCEPT: The permission granted shall not extend to the reproduction of:
a. A work of architecture in form of building or other construction;
b. An entire book, or a substantial past thereof, or of a musical work in which graphics form by reprographic means;
c. A compilation of data and other materials;
d. Any work in cases where reproduction would unreasonably conflict with a normal exploitation of the work or would
otherwise unreasonably prejudice the legitimate interests of the author;
e. A computer program*;
*Exception: the reproduction in one (1) back-up copy or adaptation by the lawful owner of that computer program:
Provided, That the copy or adaptation is necessary for:
i. The use of the computer program in conjunction with a computer for the purpose, and to the extent, for which the
computer program has been obtained; and
ii. Archival purposes, and, for the replacement of the lawfully owned copy of the computer program in the event that
the lawfully obtained copy of the computer program is lost, destroyed or rendered unusable
2. Reproduction by Libraries: any library or archive whose activities are not for profit may, without the authorization of the
author of copyright owner, make a single copy of the work by reprographic reproduction:
a. Where the work by reason of its fragile character or rarity cannot be lent to user in its original form;
b. Where the works are isolated articles contained in composite works or brief portions of other published works and the
reproduction is necessary to supply them; when this is considered expedient, to person requesting their loan for
purposes of research or study instead of lending the volumes or booklets which contain them; and
c. Where the making of such limited copies is in order to preserve and, if necessary in the event that is lost, destroyed
or rendered unusable, replace a copy, or to replace, in the permanent collection of another similar library or achieve,
a copy which has been lost, destroyed or rendered unusable and copies are not available with the publisher.
It shall not be permissible to produce a volume of a work published in several volumes or to produce missing tomes
or pages of magazines or similar works, unless the volume, tome or part is out of stock; Provided, That every library
which, by law, is entitled to receive copies of a printed work, shall be entitled, when special reasons so require, to
reproduce a copy of a published work which is considered necessary for the collection of the library but which is out of
stock.
MORAL RIGHTS: The author of a work shall, independently of the economic rights or the grant of an assignment or license
with respect to such right, have the right:
1. To require that the authorship of the works be attributed to him, in particular, the right that his name, as far as practicable,
be indicated in a prominent way on the copies, and in connection with the public use of his work;
2. To make any alterations of his work prior to, or to withhold it from publication;
3. To object to any distortion, mutilation or other modification of, or other derogatory action in relation to, his work which
would be prejudicial to his honor or reputation; and
4. To restrain the use of his name with respect to any work not of his own creation or in a distorted version of his work.

Waiver of Moral Rights: An author may waive his rights mentioned above by a written instrument, but no such waiver shall be
valid where its effects is to permit another:
1. To use the name of the author, or the title of his work, or otherwise to make use of his reputation with respect to any
version or adaptation of his work which, because of alterations therein, would substantially tend to injure the literary or
artistic reputation of another author; or
2. To use the name of the author with respect to a work he did not create.
Contribution to a collective work: When an author contributes to a collective work, his right to have his contribution attributed
to him is deemed waived unless he expressly reserves it.
Term of Moral Rights: The moral rights of the author shall last during the lifetime of the author and for fifty (50) years after his
death and shall not be assignable or subject to license except the right of attribution (no. 1) which shall be in perpetuity.
The person or persons to be charged with the posthumous enforcement of these rights shall be named in writing to be filed with
the National Library. In default of such person or persons, such enforcement shall devolve upon either the author's heirs, and
in default of the heirs, the Director of the National Library.
Rights to Proceeds in Subsequent Transfers: In every sale or lease of an original work of painting or sculpture or of the original
manuscript of a writer or composer, subsequent to the first disposition thereof by the author, the author or his heirs shall have
an inalienable right to participate in the gross proceeds of the sale or lease to the extent of five percent (5%). This
right shall exist during the lifetime of the author and for fifty (50) years after his death.
The above shall not apply to prints, etchings, engravings, works of applied art, or works of similar kind wherein the author
primarily derives gain from the proceeds of reproductions.
TERMS OF PROTECTION:
General During the life of the author and for fifty years after his death. This will likewise
apply to posthumous work.
Joint Authorship The economic rights shall be protected during the life of the last surviving author
and for fifty (50) years after his death.
Anonymous or Pseudonymous works Fifty (50) years from the date on which the work was first lawfully published:
Provided, That where, before the expiration of the said period, the author's identity
is revealed or is no longer in doubt, the general terms of protection shall apply, as
the case may be: Provided, further, That such works if not published before shall
be protected for fifty (50) years counted from the making of the work.
Works of applied art The protection shall be for a period of twenty-five (25) years from the date of
making.
Photographic works The protection shall be for fifty (50) years from publication of the work and, if
unpublished, fifty (50) years from the making.
Audio-visual works including those Fifty (50) years from date of publication and, if unpublished, from the date of
produced by process analogous to making.
photography or any process for making
audio-visual recordings
Performers and producers of sound For performances not incorporated in recordings, fifty (50) years from the end of
recordings the year in which the performance took place; and
For sound or image and sound recordings and for performances incorporated
therein, fifty (50) years from the end of the year in which the recording took place.
In case of broadcasts Twenty (20) years from the date the broadcast took place. The extended term
shall be applied only to old works with subsisting protection under the prior law.
CALCULATION OF TERM: The term of protection subsequent to the death of the author shall run from the date of his death
or of publication, but such terms shall always be deemed to begin on the first day of January of the year following the event
which gave rise to them.
COPYRIGHT INFRINGEMENT: A person infringes a right protected when one:

1. Directly commits an infringement;
2. Benefits of the infringing activity of another person who commits an infringement if the person benefiting has been giving
notice of the infringing activity and has the right and ability to control the activities of the other person;
3. With knowledge of infringing activity induces, cause or materially contributes to the infringing conduct of another.
1. It refers to a work which has been created by 2 or more natural persons at the initiative and under the direction
of another with the understanding that it will be disclosed by the latter under his own name and that
contributing natural persons will not be identified.
A. Collective work C. Work of applied art
B. Joint work D. Joint product
2. It refers to an artistic creation with utilitarian functions or incorporated in a useful article, whether made by
hand or produced on an industrial scale.
A. Work of applied art C. Collective work
B. Joint work D. Joint product
3. When do rights over copyrights conferred?

A. From the moment of creation C. Upon registration with IPO
B. Upon publication D. Upon registration with National Library

4. In case of joint creation, who owns the copyright?
A. Co-authors C. State
B. Main author D. The heirs and assigns
5. In case of commissioned work, who owns the copyright?

A. Creator, unless there is a contrary agreement
B. Creator, notwithstanding a contrary agreement
C. Person commissioning the work
D. Employer
6. For purposes of exhibition, who owns the copyright over an audio-visual work?
A. Producer C. Author
B. Composer D. Director
7. In case of pseudonymous and anonymous works and the author is indisputably unknown, who shall be
presumed to be the representative of the author?
A. Publisher C. Heirs and assigns
B. Distributor D. Employer
8. In case of employee’s work during the course of employment and it results from the regular functions
or duties, who owns the copyright?
A. Employer C. Publisher
B. Employee D. Heirs and assigns
9. In case of employee’s work during the course of employment and it does not result from the regular
functions or duties, who owns the copyright?
A. Employee C. Publisher
B. Employer D. Heirs and assigns
10. The duration of copyright for joint creation is during the life of the last surviving author and for 50
years after the death of the __ surviving author.
A. Last C. Second
B. First D. Heirs of the last
11. The duration of copyright for an anonymous or a pseudonymous work is until the end of 50 years
following the date of its first:
A. Publication C. Registration
B. Creation D. Distribution
12. The 50-year duration of copyright for anonymous or pseudonymous works commences from:
A. January 1 following the date of C. January 1 following the date of
publication registration
B. January 1 following the date of D. The moment of creation
distribution
13. The duration of copyright for published photographic works is:

A. 50 years from the publication of the work C. 50 years from the creation of the work
B. 25 years from the publication of the work D. 25 years from the creation of the work
14. How many times can a periodical or newspaper publisher publish a material sent by a writer, a
photographer, or an artist?
A. Only once C. Thrice
B. Twice D. Unlimited
15. When a material is sent by a writer or an artist to a periodical or newspaper publisher, who owns the
copyright over the material?
A. Still the writer or the artist C. The publisher
B. The writer/artist and the publisher, D. No more copyright due to publication
jointly
16. Recordings made in schools, universities, or educational institutions of a work included in a broadcast
for the use of such institutions do not constitute copyright infringement if said recordings are deleted
within:
A. A reasonable period C. 15 days from date of recording
B. 5 days from date of recording D. 30 days from date of recording
17. How many back-up copy/ies of a computer program can be made without committing copyright
infringement?
A. 1 B. 2 C. 3 C. 5

18. It refers to use of a copyrighted work for criticism, comment, news reporting, teaching including
multiple copies for classroom use, scholarship, research, and similar purposes which is not an
infringement of copyright.
A. Fair Use C. Use in Good Faith
B. Good Use D. Justified Use
19. The importation of a copy of a work by an individual for his personal purposes shall be permitted
without the authorization of the author of, or other owner of copyright if the copies form part of libraries
and personal baggage belonging to persons or families arriving from foreign countries and are not
intended for sale, provided that such copies do not exceed __ copies.
A. 3 B. 4 C. 5 C. 6
20. It is committed when there is piracy or substantial reproduction.

A. Copyright Infringement C. Patent Infringement
B. Trademark Infringement D. Unfair Competition
21. What are the remedies available in case there is copyright infringement?
A. Injunction, action for damages, and criminal case
B. Injunction only
C. Action for damages only
D. Criminal case only
22. An action for damages in case of copyright infringement must be filed within __ years.
A. 4 B. 3 C. 2 C. 1
23. The basic requirements of a trademark are:

A. Visibility and distinctiveness C. Originality and distinctiveness
B. Visibility and originality D. Visibility, distinctiveness and originality
24. How are rights in a mark required?

A. Registration with IPO C. Prior use
B. Actual use D. Reservation with IPO
25. The registrant shall file a declaration of actual use of the mark with evidence to that effect within __
years from the filing date of the application otherwise it may be cancelled.
A. 3 B. 4 C. 5 C. 6
26. The certificate of registration of a mark shall be __ evidence of the validity of the registration, the
registrant’s ownership of the mark, and the registrant’s exclusive right to use the same.
A. Prima facie C. Conclusive
B. Disputable D. Iota of
27. First Statement: A registrant’s right over a mark may be questioned by a person who has a better right
including persons with internationally known marks.
Second Statement: Registration of a mark is not important to keep the goodwill that identifies in the
mind of the public the goods he manufactures or deals in.
A. Both statements are true. C. Only second statement is true.
B. Only first statement is true. D. None of the statements is true.
28. It provides that a generic or descriptive mark may later acquire the characteristic of distinctiveness
and can later be registered if it acquires a meaning which is different from its ordinary connotation.
A. Doctrine of Secondary Meaning C. Doctrine of Tertiary Meaning
B. Doctrine of Primary Meaning D. Doctrine of Second Meaning
29. How many renewals can be made on a trademark registration?

A. Indefinite C. 10 of 5 years each
B. 10 of 10 years each D. 5 of 10 years each
30. It is when an otherwise prudent purchaser is induced to purchase one product in the belief that he is
purchasing another, in which case the defendant’s goods are then bought as the plaintiff’s and its poor
quality reflects badly on the plaintiff’s reputation.
A. Confusion of goods C. Merger of goods
B. Confusion of business D. Merger of business
31. It focuses on the similarity of the prevalent features of the competing trademarks which might cause
confusion or deception, and thus infringement.
A. Dominancy Test C. All Events Test
B. Holistic Test D. Comparative Test

32. These refer to contested cases filed before the IPO.
A. Inter Partes Cases C. Multi-party Cases
B. Related Cases D. Multiple Cases
33. It provides that a mark cannot be registered if it is identical with, or confusingly similar to, or constitutes
a translation of a mark considered well-known which is registered in the Philippines with respect to
goods or services which are not similar to those with respect to which registration is applied for,
provided that use of the mark in relation to those goods or services would indicate a connection
between those goods or services, and the owner of the registered mark, provided further, that the
interests of the owner of the registered mark are likely to be damaged by such use.
A. Theory of Dilution C. Theory of Similarity
B. Theory of Confusion D. Theory of Connection
34. It refers to having regard to prior art, it is not obvious to a person skilled in the art at the time of the
filing date or priority date of the application claiming the invention.
A. Inventive step C. Novelty
B. Industrial applicability D. Originality
35. Who is presumed to be an ordinary practitioner aware of what was common general knowledge in the
art at the relevant date?
A. Person skilled in the art C. Consultant
B. Expert D. Researcher
36. If two or more persons have made the invention separately and independently of each other the right
to the patent shall belong to the person who:
A. First filed an application for such invention
B. First started with the invention
C. First finished the invention
D. Has the greatest use for the public
37. It refers to importation of drugs and medicines by a government agency or by any private third party.
A. Parallel importation C. Technical smuggling
B. Illegal smuggling D. Complex importation
38. There is infringement of patent under this test if one makes, uses, or sells an item that contains all the
elements of the patent claim.
A. Literal Infringement C. Exactness Rule
B. Doctrine of Equivalents D. Addition Rule
39. First Statement: Compulsory license should be granted to any person who has shown his capability to
exploit the invention.
Second Statement: The compulsory license will only be granted after the petitioner has made efforts
to obtain authorization from the patent owner on reasonable commercial terms and conditions but such
efforts have not been successful within a reasonable period of time.
A. Both statements are true. C. Only the second statement is true.
B. Only the first statement is true. D. None of the statements is true.
40. This concept comes into play when two or more inventions are claimed in a single application but are
of such a nature that a single patent may not be issued for them.
A. Concept of divisional applications C. Concept of complex applications
B. Concept of multiple applications D. Concept of complicated applications
NOTE: Letter “A” is the answer to all items (1 to 40).

RFBT-15
E-COMMERCE, DATA PRIVACY & EASE OF DOING BUSINESS

ELECTRONIC COMMERCE ACT
(RA No. 8792)
Objective: The E-Commerce Act (Act) aims

1. to facilitate domestic and international dealings, transactions, arrangements, agreements, contracts and
exchanges and storage of information through the utilization of electronic, optical and similar medium, mode,
instrumentality and technology,
2. to recognize the authenticity and reliability of electronic data messages or electronic documents related to such
activities and
3. to promote the universal use of electronic transactions in the government and by the general public.
Sphere of Application: The Act shall apply to any kind of electronic document used in the context of commercial and non-
commercial activities to include domestic and international dealings, transactions, arrangements, agreements contracts and
exchanges and storage of information.
Definition of Terms: For the purposes of the Act, the following terms are defined, as follows:
"Computer" refers to any device or apparatus singly or interconnected which, by electronic, electro-mechanical, optical
and/or magnetic impulse, or other means with the same function, can receive, record, transmit, store, process, correlate,
analyze, projects, retrieve, and/or produce information, data, text, graphics, figures, voice, video, symbols or other modes of
expression or perform any one or more of these functions.
"Information and Communications System" refers to a system for generating, sending, receiving, storing, or otherwise
processing electronic documents and includes the computer system or other similar device by or in which data is recorded
or stored and any procedures related to the recording or storage of electronic document.
"Originator" refers to a person by whom, or on whose behalf, the electronic document purports to have been created,
generated and/or sent. The term does not include a person acting as an intermediary with respect to that electronic
document.
"Addressee" refers to a person who is intended by the originator to receive the electronic data message or electronic
document, but does not include a person acting as an intermediary with respect to that electronic data message or electronic
data document.
"Intermediary" refers to a person who in behalf of another person and with respect to a particular electronic document
sends, receives and/or stores, provides other services in respect of that electronic data message or electronic document.
"Service provider" refers to a provider of:

1. Online services or network access or the operator of facilities therefor including entities offering the transmission,
routing, or providing of connections for online communications, digital or otherwise, between or among points specified by
a user, of electronic documents of the user's choosing; or
2. The necessary technical means by which electronic documents of an originator may be stored and made accessible to
designated or undesignated third party.
Such service providers shall

a. Have no authority to:
i. modify or alter the content of the electronic document received or
ii. to make any entry therein on behalf of the originator, addressee or any third party unless specifically
authorized to do so,
b. Retain the electronic document in accordance with the specific request or as necessary for the purpose of
performing the services it was engaged to perform.
"Electronic data message" refers to information generated, sent, received or stored by electronic, optical or similar
means.
“Electronic signature" refers to any distinctive mark, characteristic and/or sound in electronic from, representing the
identity of a person and attached to or logically associated with the electronic data message or electronic document or any
methodology or procedures employed or adopted by a person and executed or adopted by such person with the intention of
authenticating or approving an electronic data message or electronic document.
"Electronic key" refers to a secret code which secures and defends sensitive information that crossover public channels
into a form decipherable only with a matching electronic key.
"Electronic document" refers to information or the representation of information, data, figures, symbols or other modes of
written expression, described or however represented, by which a right is established or an obligation extinguished, or
by which a fact may be prove and affirmed, which is receive, recorded, transmitted, stored, processed, retrieved or
produced electronically.
LEGAL RECOGNITION OF ELECTRONIC DATA MESSAGES AND ELECTRONIC DOCUMENTS
Legal Recognition of Electronic Data Messages: Information shall not be denied validity or enforceability solely on
the ground that it is in the form of electronic data message purporting to give rise to such legal effect, or that it is merely
incorporated by reference in that electronic data message.

E-COMMERCE, DATA PRIVACY and EASE OF DOING BUSINESS RFBT-15
Legal Recognition of Electronic documents: Electronic documents shall have the legal effect, validity or enforceability
as any other document or legal writing, and:
a. Where the law requires a document to be in writing, that requirement is met by an electronic document if the said
electronic document:
i. maintains its integrity and reliability and
ii. can be authenticated so as to be usable for subsequent reference, in that:
(1) The electronic document has remained complete and unaltered, apart from the addition of any endorsement
and any authorized change, or any change which arises in the normal course of communication, storage and
display; and
(2) The electronic document is reliable in the light of the purpose for which it was generated and in the light of all
relevant circumstances.
b. Paragraph (a) applies whether the requirement therein is in the from of an obligation or whether the law simply
provides consequences for the document not being presented or retained in its original from.
c. Where the law requires that a document be presented or retained in its original form, that requirement is met by an
electronic document if-
i. There exists a reliable assurance as to the integrity of the document from the time when it was first generated in
its final from; and
ii. That document is capable of being displayed to the person to whom it is to be presented: Provided, That no
provision of the Act shall apply to vary any and all requirements of existing laws on formalities required in the execution
of documents for their validity.
For evidentiary purposes, an electronic document shall be the functional equivalent of a written document under existing
laws.
The Act does not modify any statutory any statutory rule relating to admissibility of electronic data massages or
electronic documents, except the rules relating to authentication and best evidence.
Legal Recognition of Electronic Signatures: An electronic signature on the electronic document shall be equivalent to the
signature of a person on a WRITTEN DOCUMENT if:
a. the signature is an electronic signature and
b. proved by showing that a prescribed procedure, not alterable by the parties interested in the electronic document,
existed under which-
i. A method is used to identify the party sought to be bound and to indicate said party's access to the electronic
document necessary for his consent or approval through the electronic signature;
ii. Said method is reliable and appropriate for the purpose for which the electronic document was generated or
communicated, in the light of all circumstances, including any relevant agreement;
iii. It is necessary for the party sought to be bound, in order to proceed further with the transaction to have
executed or provided the electronic signature; and
iv. The other party is authorized and enable to verify the electronic signature and to make the decision to
proceed with the transaction authenticated by the same.
Presumption Relating to Electronic Signatures: In any proceedings involving an electronic signature, it shall be presumed
that,
a. The electronic signature is the signature of the person to whom it correlates; and
b. The electronic signature was affixed by that person with the intention of signing or approving the electronic
document unless
i. the person relying on the electronically designed electronic document knows or has notice of defects in or
unreliability of the signature or
ii. reliance on the electronic signature is not reasonable under the circumstances.
Original Documents:
1. Where the law requires information to be presented or retained in its ORIGINAL FORM, that requirement is met by
an electronic data message or electronic document if:
a. the integrity of the information from the time when it was first generated in its final form, as an electronic
document is shown by evidence aliunde or otherwise; and
b. where otherwise it is required that information be presented, that the information is capable of being displayed to
the person to whom it is to be presented.
2. Paragraph (1) applies whether the requirement therein is in the form of an obligation or whether the law simply
provides consequences for the information not being presented or retained in its original form.
3. For the purpose of subparagraph (a) of paragraph (1):
a. the criteria for assessing integrity shall be whether the information has remained complete and unaltered,
apart from the addition of any endorsement and any change which arises in the normal course of communication,
storage and display ; and
b. the standard of reliability required shall be assessed in the light of purpose for which the information was
generated and in the light of all the relevant circumstances.
Authentication of Electronic Data Messages and Electronic Documents: Until the Supreme Court by appropriate rules
shall have so provided, electronic documents, electronic data messages and electronic signatures, shall be authenticated by
demonstrating, substantiating and validating a claimed identity of a user, device, or another entity is an information or
communication system, among other ways, as follows;
a. The electronic signatures shall be authenticated by proof that a letter, character, number or other symbol in electronic
form representing the persons named in and attached to or logically associated with an electronic data message,
electronic document, or that the appropriate methodology or security procedures, when applicable, were employed
or adopted by such person, with the intention of authenticating or approving in an electronic data message or electronic
document;
b. The electronic data message or electronic document shall be authenticated by proof that an appropriate security
procedure, when applicable was adopted and employed for the purpose of:
i. verifying the originator of an electronic data message or electronic document, or

ii. detecting error or alteration in the communication, content or storage of an electronic document or electronic
data message from a specific point, which, using algorithms or codes, identifying words or numbers, encryptions,
answers back or acknowledgement procedures, or similar security devices.
The Supreme Court may adopt such other authentication procedures, including the use of electronic notarization systems as
necessary and advisable, as well as the certificate of authentication on printed or hard copies of the electronic documents or
electronic data messages by electronic notaries, service providers and other duly recognized or appointed certification
authorities.
Burden of Proof: The person seeking to introduce an electronic data message or electronic document in any legal proceeding
has the burden of proving its authenticity by evidence capable of supporting a finding that the electronic data message or
electronic document is what the person claims it on be.
Integrity of the Information and Communication System: In the absence of evidence to the contrary, the integrity
of the information and communication system in which an electronic data message or electronic document is recorded or stored
may be established in any legal proceeding –
a. By evidence that:
i. at all material times the information and communication system or other similar device was operating in a
manner that did not affect the integrity of the electronic data message or electronic document, and
ii. there are no other reasonable grounds to doubt the integrity of the information and communication system,
b. By showing that the electronic data message or electronic document was recorded or stored by a party to the
proceedings who is adverse in interest to the party using it; or
c. By showing that the electronic data message or electronic document was recorded or stored in the usual and
ordinary course of business by a person who is not a party to the proceedings and who did not act under the control of
the party using the record.
Admissibility and Evidential Weight of Electronic Data Message or electronic document: In any legal proceedings,
nothing in the application of the rules on evidence shall deny the admissibility of an electronic data message or
electronic document in evidence –
a. On the sole ground that it is in electronic form; or
b. On the ground that it is not in the standard written form, and the electronic data message or electronic document
meeting, and complying with the requirements under Legal Recognition of Electronic Data Messages and Electronic
Documents mentioned above, shall be the best evidence of the agreement and transaction contained therein.
In assessing the evidential weight of an electronic data message or electronic document, the following shall be given due regard:
a. the reliability of the manner in which it was generated, stored or communicated,
b. the reliability of the manner in which its originator was identified, and
c. other relevant factors.
Retention of Electronic Data Message or Electronic Document: Notwithstanding any provision of law, rule or regulation
to the contrary –
a. The requirement in any provision of law that certain documents be retained in their original form is satisfied by
retaining them in the form of an electronic data message or electronic document which –
i. Remains accessible so as to be usable for subsequent reference;
ii. Is retained in the format in which it was generated, sent or received, or in a format which can be demonstrated to
accurately represent the electronic data message or electronic document generated, sent or received;
iii. Enables the identification of its originator and addressee, as well as the determination of the date and the
time it was sent or received.
b. The requirement referred to in paragraph (a) is satisfied by using the services of a third party, provided that the
conditions set fourth in subparagraphs (1), (2) and (3) of paragraph (a) are met.
Proof by Affidavit: The matters referred on admissibility and on the presumption of integrity, may be presumed to have
been established by an affidavit given to the best of the deponent's knowledge subject to the rights of parties in interest
as defined in the cross-examination provided below.
Cross – Examination:
1. A deponent of an affidavit referred to above that has been introduced in evidence may be cross-examined as of right
by a party to the proceedings who is adverse in interest to the party who has introduced the affidavit or has caused the
affidavit to be introduced.
2. Any party to the proceedings has the right to cross-examine a person who is not a party to the proceedings and who
did not act under the control of the party using the record proving that the electronic data message or electronic
document was recorded or stored in the usual and ordinary course of business.
COMMUNICATION OF ELECTRONIC DATA MESSAGES OR ELECTRONIC DOCUMENTS
Formation of Validity of Electronic Contracts:

1. Except as otherwise agreed by the parties, (1) an offer, (2) the acceptance of an offer and (3) such other
elements required under existing laws for the formation of contracts may be expressed in, demonstrated and
proved by means of electronic data messages or electronic documents and no contract shall be denied validity or
enforceability on the sole ground that it is in the form of an electronic data message or electronic document, or that any or
all of the elements required under existing laws for the formation of contracts is expressed, demonstrated and proved by
means of electronic data messages or electronic documents.
2. Electronic transactions made through networking among banks, or linkages thereof with other entities or networks,
and vice versa:
a. shall be deemed consummated upon the actual dispensing of cash or the debit of one account and the
corresponding credit to another, whether such transaction is initiated by the depositor or by an authorized collecting
party.
b. The obligation of one bank, entity, or person similarly situated to another arising therefrom shall considered
absolute and shall not be subjected to the process of preference of credits.

Recognition by Parties of Electronic Data Message or Electronic document: As between the originator and the
addressee of an electronic data message or electronic document, a declaration of will or other statement shall not be denied
legal effect, validity or enforceability solely on the ground that it is in the form of an electronic data message or electronic
document.
Attribution of Electronic Data Message:
1. The Electronic Data Message or Electronic Document is that of the originator:
a. If it was sent by the originator himself.
b. As between the originator and the addressee, an electronic data message or electronic document is deemed to be
that of the originator if it was sent:
i. by a person who had the authority to act on behalf of the originator with respect to that electronic data
message or electronic document; or
ii. by an information system programmed by, or on behalf of the originator to operate automatically.
2. As between the originator and the addressee, an addressee is entitled to regard an electronic data message or
electronic document as being that of the originator, and to act on that assumption, if:
a. in order to ascertain whether the electronic data message or electronic document was that of the originator, the
addressee properly applied a procedure previously agreed to by the originator for that purpose; or
b. the electronic data message or electronic document as received by the addressee resulted from the actions of a
person whose relationship with the originator or with any agent of the originator enabled that person to
gain access to a method used by the originator to identify electronic data message or electronic documents as his
own.
The above does not apply:
i. as of the time when the addressee has both received notice from the originator that the electronic data message
or electronic document is not that of the originator, and has reasonable time to act accordingly; or
ii. in a case within paragraph (2) sub-paragraph (b), at any time when the addressee knew or should have
known, had it exercised reasonable care of used any agreed procedure, that the electronic data message or electronic
document was not that of the originator.
iii. That the transmission resulted in any error in the electronic data message or electronic document as received.
3. The addressee is entitled to regard each electronic data message or electronic document received as a separate
electronic data message or electronic document and to act on that assumption.
Except
a. To the extent that it duplicates another electronic data message or electronic document and
b. The addressee knew or should have known, had it exercised reasonable care or used any agreed procedure, that
the electronic data message or electronic document was a duplicate.
Error on Electronic Data Message or Electronic Document: The addressee is entitled to regard the electronic data
message or electronic document received as that which the originator intended to send, and to act on that assumption,
unless the addressee knew or should have known, had the addressee exercised reasonable care or used the appropriate
procedure –
a. That the transmission resulted in any error therein or in the electronic data message or electronic document enters
the designated information system, or
b. That electronic data message or electronic document is sent to an information system which is not so designated
by the addressee for the purposes.
Acknowledgement of Receipt of Electronic Data Message or Electronic Document:

General Rule: No acknowledgment of receipt is necessary
Exceptions:
1. If the parties agree to it
2. Originator requested in the EDM/ED
Modes of acknowledgement when required:
1. Agreement as to particular method – to be followed
2. No agreement as to particular method:
a. Any communication by the addressee
b. Any conduct of the addressee sufficient to indicate the receipt to the originator
Instances when the originator can regard non-receipt since there was no acknowledgment:
1. When the originator stated the effect or significance of acknowledgment or the ED is CONDITIONAL upon receipt
2. No statement as to effect/significance – originator gave notice stating that no acknowledgement has been received and
specifying a reasonable time by which acknowledgement is to be received, and no acknowledgement is received within
such reasonable time.
Time of Dispatch of Electronic Data Messages or Electronic Documents: General Rule: the dispatch of an electronic
data message or electronic document occurs when it enters an information system outside the control of the originator
or of the person who sent the electronic data message or electronic document on behalf of the originator.
Except: when otherwise agreed upon.
Time of Receipt of Electronic Data Messages or Electronic Documents. – Unless otherwise agreed between the originator
and the addressee, the time of receipt of an electronic data message or electronic document is as follows:
a. Upon entry in the designated information system – if the parties has designated an information system for the purpose
of receiving electronic data messages or electronic documents
b. Upon retrieval by the addressee:
i. There is a designated information system, but the originator and the addressee are both participants in the
designated information system;
ii. The electronic message or electronic document enters an information system of the address that is not the designated
information system;
c. Upon entry in the information system of the addressee - The parties did not designate an information system.

These rules apply notwithstanding that the place where the information system is located may be different from the place where
the electronic data message or electronic document is deemed to be received.
Place of Dispatch and Receipt of Electronic Data Messages or Electronic Documents: Unless otherwise agreed
between the originator and the addressee, an electronic data message or electronic document is deemed to be:
1. dispatched at the place where the originator has its place of business and
2. received at the place where the addressee has its place of business.
This rule shall apply even if the originator or addressee had used a laptop other portable device to transmit or received his
electronic data message or electronic document. These rules shall also apply to determine the tax situs of such transaction.
For the purpose hereof –
a. If the originator or addressee has more than one place of business is that which has the closest relationship to the
underlying transaction or, where there is no underlying transaction, the principal place of business.
b. If the originator or the addressee does not have a place of business, reference is to be made to its habitual
residence; or
c. The "usual place of residence" in relation to a body corporate, means the place where it is incorporated or
otherwise legally constituted.
Choice of Security Methods: Subject to applicable laws and /or rules and guidelines promulgated by the DTI with other
appropriate government agencies, parties to any electronic transaction shall be free to:
1. Determine the type of level of electronic data message or electronic document security needed, and
2. To select and use or implement appropriate technological methods that suit their need.
ELECTRONIC COMMERCE IN CARRIAGE OF GOODS

Actions Related to Contracts of Carriage of Goods: applies to any action in connection with, or in pursuance of, a contract
of carriage of goods, including but not limited to:
a. (i) furnishing the marks, number, quantity or weight of goods;
(ii) stating or declaring the nature or value of goods;
(iii) issuing a receipt for goods;
(iv) confirming that goods have been loaded;
b. (i) notifying a person of terms and conditions of the contract;
(ii) giving instructions to a carrier;
c. (i) claiming delivery of goods;
(ii) authorizing release of goods;
(iii) giving notice of loss of, or damage to goods;
d. giving any other notice or statement in connection with the performance of the contract;
e. undertaking to deliver goods to a named person or a person authorized to claim delivery;
f. granting, acquiring, renouncing, surrendering, transferring or negotiating rights in goods;
g. acquiring or transferring rights and obligations under the contract.
Transport Documents:
1. Where the law requires that any action referred to contract of carriage of goods be carried out in writing or by using a
paper document, that requirement is met if the action is carried out by using one or more electronic data messages or
electronic documents.
The above applies whether the requirement there in is in the form of an obligation or whether the law simply provides
consequences for failing either to carry out the action in writing or to use a paper document.
2. If (a) a right is to be granted to, or (b) an obligation is to be acquired by, one person and no person, and if the law
requires that, in order to effect this, the right or obligation must be conveyed to that person by the transfer, or use of,
a paper document, that requirement is met if the right or obligation is conveyed by using one or more electronic data
messages or electronic documents: Provided, that a reliable method is used to render such electronic data messages or
electronic documents unique.
For the purposes of above, the standard of reliability required shall be assessed in the light of the purpose for which the
right or obligation was conveyed and in the light of all the circumstances, including any relevant agreement.
3. Where one or more electronic data messages or electronic documents are used to effect any action in subparagraph (f) and
(g) of the above (Actions Related to Contracts of Carriage of Goods), no paper document used to effect any such action is
valid unless the use of electronic data message or electronic document has been terminated and replaced by the used
of paper documents. A paper document issued in these circumstances shall contain a statement of such
termination. The replacement of the electronic data messages or electronic documents by paper documents shall not
affect the rights or obligation of the parties involved.
4. If a rule of law is compulsorily applicable to a contract of carriage of goods which is in, or is evidenced by, a paper
document, that rule shall not be inapplicable to such a contract of carriage of goods which is evidenced by one or more
electronic data messages or electronic documents by reason of the fact that the contract is evidenced by such electronic
data message or electronic documents instead of by a paper document.
ELECTRONIC TRANSACTIONS IN GOVERNMENT

Government Use of Electronic Data Messages, Electronic Documents and Electronic Signature: Notwithstanding any
law to the contrary, within two (2) years from the date of the effectivity of the Act, all departments, bureaus, offices and
agencies of the government, as well as all government-owned and –controlled corporations, that pursuant to law require or
accept the filing of documents, require that documents be created, or retained and/or submitted, issue permits, licenses or
certificates of registration or approval, or provide for the method and manner of payment or settlement of fees and other
obligations to the government, shall –
a. accept the creation, filing or retention of such documents in the form of electronic data messages or electronic documents;
b. issue permits, licenses, or approval in the form of electronic data messages or electronic documents;
c. require and/or accept payments, and issue receipt acknowledging such payments, through systems using electronic data
messages or electronic documents; or

d. transact the government business and/or perform governmental factions using electronic data messages or electronic
documents, and for the purpose, are authorized to adopt and promulgate, after appropriate public hearing and with due
publications in newspapers of general circulation, the appropriate rules, regulations, or guidelines, to, among others, specify
1. the manner and format in which such electronic data messages or electronic documents shall be filed, created,
retained or issued;
2. where and when such electronic data messages or electronic documents have to signed, the use of an electronic
signature, the type of electronic signature required;
3. the format of an electronic data message or electronic document and the manner the electronic signature shall be
affixed to the electronic data messages or electronic documents;
4. the control processes and procedures appropriate to ensure adequate integrity, security and confidentiality of
electronic data messages or electronic documents or records of payments;
5. other attributes required to electronic data messages or electronic documents; and
6. the full or limited use of the documents and papers for compliance with the government
requirements: provided, That the Act shall be itself mandate any department of the government, organ of state or
statutory corporation to accept or issue any document in the form of electronic data messages or electronic documents
upon the adoption, promulgation and publication of the appropriate rules, regulations or guidelines.
DATA PRIVACY ACT (RA No. 10173)
Commission shall refer to the National Privacy Commission created by virtue of this Act.
Consent of the data subject refers to any freely given, specific, informed indication of will, whereby the data subject agrees
to the collection and processing of personal information about and/or relating to him or her. Consent shall be evidenced by
written, electronic or recorded means. It may also be given on behalf of the data subject by an agent specifically authorized by
the data subject to do so.
Data subject refers to an individual whose personal information is processed.
Direct marketing refers to communication by whatever means of any advertising or marketing material which is directed to
particular individuals.
Filing system refers to any act of information relating to natural or juridical persons to the extent that, although the information
is not processed by equipment operating automatically in response to instructions given for that purpose, the set is structured,
either by reference to individuals or by reference to criteria relating to individuals, in such a way that specific information
relating to a particular person is readily accessible.
Information and Communications System refers to a system for generating, sending, receiving, storing or otherwise
processing electronic data messages or electronic documents and includes the computer system or other similar device by or
which data is recorded, transmitted or stored and any procedure related to the recording, transmission or storage of electronic
data, electronic message, or electronic document.
Personal information controller refers to a person or organization who controls the collection, holding, processing or use
of personal information, including a person or organization who instructs another person or organization to collect, hold,
process, use, transfer or disclose personal information on his or her behalf. The term excludes:
1. A person or organization who performs such functions as instructed by another person or organization; and
2. An individual who collects, holds, processes or uses personal information in connection with the individual’s personal,
family or household affairs.
Personal information processor refers to any natural or juridical person qualified to act as such under this Act to whom a
personal information controller may outsource the processing of personal data pertaining to a data subject.
SCOPE OF APPLICATION
Applicability:
1. The processing of all types of personal information and
2. To any natural and juridical person involved in personal information processing including those personal
information controllers and processors who, although not found or established in the Philippines, use equipment that are
located in the Philippines, or those who maintain an office, branch or agency in the Philippines subject to the immediately
succeeding paragraph.
Does not apply to:

1. Information about any individual who is or was an officer or employee of a government institution that relates to the
position or functions of the individual, including:
a. The fact that the individual is or was an officer or employee of the government institution;
b. The title, business address and office telephone number of the individual;
c. The classification, salary range and responsibilities of the position held by the individual; and
d. The name of the individual on a document prepared by the individual in the course of employment with the government;
2. Information about an individual who is or was performing service under contract for a government institution that
relates to the services performed, including the terms of the contract, and the name of the individual given in the course
of the performance of those services;
3. Information relating to any discretionary benefit of a financial nature such as the granting of a license or permit given
by the government to an individual, including the name of the individual and the exact nature of the benefit;
4. Personal information processed for journalistic, artistic, literary or research purposes;
5. Information necessary in order to carry out the functions of public authority which includes the processing of personal
data for the performance by the independent, central monetary authority and law enforcement and regulatory agencies of
their constitutionally and statutorily mandated functions.
No amendments or repeal to the following laws:
a. Republic Act No. 1405, otherwise known as the Secrecy of Bank Deposits Act;
b. Republic Act No. 6426, otherwise known as the Foreign Currency Deposit Act; and
c. Republic Act No. 9510, otherwise known as the Credit Information System Act (CISA);

6. Information necessary for banks and other financial institutions under the jurisdiction of the independent, central
monetary authority or Bangko Sentral ng Pilipinas to comply with the CISA and Republic Act No. 9160, as amended,
otherwise known as the Anti-Money Laundering Act and other applicable laws; and
7. Personal information originally collected from residents of foreign jurisdictions in accordance with the laws of those
foreign jurisdictions, including any applicable data privacy laws, which is being processed in the Philippines.
Protection Afforded to Journalists and Their Sources: No amendment or repeal of Republic Act No. 53, which affords the
publishers, editors or duly accredited reporters of any newspaper, magazine or periodical of general circulation protection
from being compelled to reveal the source of any news report or information appearing in said publication which was
related in any confidence to such publisher, editor, or reporter.
Extraterritorial Application: The Data Privacy Act applies to an act done or practice engaged in and outside of the Philippines
by an entity if:
1. The act, practice or processing relates to personal information about a Philippine citizen or a resident;
2. The entity has a link with the Philippines, and the entity is processing personal information in the Philippines or even if
the processing is outside the Philippines as long as it is about Philippine citizens or residents such as, but not limited to,
the following:
a. A contract is entered in the Philippines;
b. A juridical entity unincorporated in the Philippines but has central management and control in the country; and
c. An entity that has a branch, agency, office or subsidiary in the Philippines and the parent or affiliate of the
Philippine entity has access to personal information; and
3. The entity has other links in the Philippines such as, but not limited to:
a. The entity carries on business in the Philippines; and
b. The personal information was collected or held by an entity in the Philippines.
DATA PRIVACY PRINCIPLES
The processing of personal information shall be allowed, subject to:

1. Compliance with the requirements of the Data Privacy Act and other laws allowing disclosure of information to the public
and
2. Adherence to the following principles:
a. Principle of Proportionality: The Processing of Personal data shall be adequate, relevant, suitable, necessary, and
not excessive in relation to a declared and specified purpose. Personal Data shall be processed by the Company only
if the purpose of the Processing could not reasonably be fulfilled by other means.
b. Principle of Legitimate Purpose: The Processing of Personal Data by the Company shall be compatible with a
declared and specified purpose which must not be contrary to law, morals, or public policy.
c. Principle of Transparency: The Data Subject must be aware of the nature, purpose, and extent of the Processing of
his or her Personal Data by the Company, including the risks and safeguards involved, the identity of persons and
entities involved in processing his or her Personal Data, his or her rights as a Data Subject, and how these can be
exercised. Any information and communication relating to the Processing of Personal Data should be easy to access
and understand, using clear and plain language.
PROCESSING OF PERSONAL INFORMATION

Processing refers to any operation or any set of operations performed upon personal information including, but not limited to:
1. Collection,
2. Recording,
3. Organization,
4. Storage,
5. Updating Or Modification,
6. Retrieval,
7. Consultation,
8. Use,
9. Consolidation,
10. Blocking,
11. Erasure Or
12. Destruction of data.
PERSONAL INFORMATION, whether recorded in a material form or not, are those from which the identity of an individual:
1. is apparent, or
2. can be reasonably and directly ascertained by the entity holding the information, or
3. when put together with other information would directly and certainly identify an individual
Examples: include the Data Owner’s Name, Home address and Phone number
Personal information must be:
1. Collected for specified and legitimate purposes determined and declared before, or as soon as reasonably practicable after
collection, and later processed in a way compatible with such declared, specified and legitimate purposes only;
2. Processed fairly and lawfully;
3. Accurate, relevant and, where necessary for purposes for which it is to be used the processing of personal information,
kept up to date; inaccurate or incomplete data must be rectified, supplemented, destroyed or their further processing
restricted;
4. Adequate and not excessive in relation to the purposes for which they are collected and processed;
5. Retained only for as long as necessary for the fulfillment of the purposes for which the data was obtained or for the
establishment, exercise or defense of legal claims, or for legitimate business purposes, or as provided by law; and
6. Kept in a form which permits identification of data subjects for no longer than is necessary for the purposes for which the
data were collected and processed: Provided, That personal information collected for other purposes may lie processed for
historical, statistical or scientific purposes, and in cases laid down in law may be stored for longer periods: Provided, further,
That adequate safeguards are guaranteed by said laws authorizing their processing.
The personal information controller must ensure implementation of personal information processing principles set out herein.

Criteria for Lawful Processing of Personal Information: The processing of personal information shall be permitted only if
not otherwise prohibited by law, and when at least one of the following conditions exists:
1. The data subject has given his or her consent;
2. The processing of personal information is necessary and is related to the fulfillment of a contract with the data subject
or in order to take steps at the request of the data subject prior to entering into a contract;
3. The processing is necessary for compliance with a legal obligation to which the personal information controller is
subject;
4. The processing is necessary to protect vitally important interests of the data subject, including life and health;
5. The processing is necessary in order to respond to national emergency, to comply with the requirements of public
order and safety, or to fulfill functions of public authority which necessarily includes the processing of personal data
for the fulfillment of its mandate; or
6. The processing is necessary for the purposes of the legitimate interests pursued by the personal information controller
or by a third party or parties to whom the data is disclosed, except where such interests are overridden by fundamental
rights and freedoms of the data subject which require protection under the Philippine Constitution.
PRIVILEGED INFORMATION refers to any and all forms of data which under the Rules of Court and other pertinent laws
constitute privileged communication.
Examples include:
1. Attorney-client privileged information
2. Doctor-patient privileged information
3. Marital privilege communication
4. Priest-confessor privileged information
SENSITIVE PERSONAL INFORMATION refers to personal information:

1. About an individual’s race, ethnic origin, marital status, age, color, and religious, philosophical or political affiliations;
2. About an individual’s health, education, genetic or sexual life of a person, or to any proceeding for any offense committed
or alleged to have been committed by such person, the disposal of such proceedings, or the sentence of any court in such
proceedings;
3. Issued by government agencies peculiar to an individual which includes, but not limited to, social security numbers,
previous or current health records, licenses or its denials, suspension or revocation, and tax returns; and
4. Specifically established by an executive order or an act of Congress to be kept classified.
Sensitive Personal Information and Privileged Information: The processing of sensitive personal information and
privileged information shall be prohibited, except in the following cases:
1. The data subject has given his or her consent, specific to the purpose prior to the processing, or in the case of privileged
information, all parties to the exchange have given their consent prior to processing;
2. The processing of the same is provided for by existing laws and regulations, provided:
a. Such regulatory enactments guarantee the protection of the sensitive personal information and the privileged
information; and
b. The consent of the data subjects are not required by law or regulation permitting the processing of the sensitive
personal information or the privileged information;
3. The processing is necessary to protect the life and health of the data subject or another person, and the data subject
is not legally or physically able to express his or her consent prior to the processing;
4. The processing is necessary to achieve the lawful and noncommercial objectives of public organizations and their
associations: provided:
a. That such processing is only confined and related to the bona fide members of these organizations or their associations;
b. That the sensitive personal information are not transferred to third parties; and
c. That consent of the data subject was obtained prior to processing;
5. The processing is necessary for purposes of medical treatment, is carried out by a medical practitioner or a medical
treatment institution, and an adequate level of protection of personal information is ensured; or
6. The processing concerns such personal information as is necessary for the protection of lawful rights and interests of
natural or legal persons in court proceedings, or the establishment, exercise or defense of legal claims, or when provided
to government or public authority.
Subcontract of Personal Information: A personal information controller may subcontract the processing of personal
information.
The personal information controller shall be responsible for ensuring that proper safeguards are in place to ensure :
1. The confidentiality of the personal information processed,
2. Prevent its use for unauthorized purposes, and generally,
3. Comply with the requirements of the Data Privacy Act and other laws for processing of personal information.
The personal information processor shall comply with all the requirements of the Data Privacy Act and other applicable laws.
Extension of Privileged Communication: Personal information controllers may invoke the principle of privileged
communication over privileged information that they lawfully control or process. Subject to existing laws and regulations, any
evidence gathered on privileged information is inadmissible.
RIGHTS OF THE DATA SUBJECT
Rights of the Data Subject:

1. Right to Informed Consent – The data subject shall be informed whether personal information pertaining to him or her
shall be, are being or have been processed;
The following information must be provided before the entry of the personal information into the processing system, or at
the next practical opportunity:
a. Description of the personal information to be entered into the system;
b. Purposes for which they are being or are to be processed;
c. Scope and method of the personal information processing;

d. The recipients or classes of recipients to whom they are or may be disclosed;
e. Methods utilized for automated access, if the same is allowed by the data subject, and the extent to which such access
is authorized;
f. The identity and contact details of the personal information controller or its representative;
g. The period for which the information will be stored; and
h. The existence of their rights, i.e., to access, correction, as well as the right to lodge a complaint before the
Commission.
2. Right to Object: The data subject shall have the right to object to the processing of his or her personal data, including
processing for direct marketing, automated processing or profiling.
3. Right to Withhold Consent: The data subject shall be notified and given an opportunity to withhold consent to the
processing in case of changes or any amendment to the information supplied or declared to the data subject in the preceding
paragraph
Amendment of information: Any information supplied or declaration made to the data subject on these matters shall not
be amended without prior notification of data subject. Except: the notification shall not apply should the personal
information be needed pursuant to a subpoena or when the collection and processing are for obvious purposes, including
when it is necessary for the performance of or in relation to a contract or service or when necessary or desirable in the
context of an employer-employee relationship, between the collector and the data subject, or when the information is being
collected and processed as a result of legal obligation.
4. Right to Access: The data subject has reasonable access to, upon demand, the following:
a. Contents of his or her personal information that were processed;
b. Sources from which personal information were obtained;
c. Names and addresses of recipients of the personal information;
d. Manner by which such data were processed;
e. Reasons for the disclosure of the personal information to recipients;
f. Information on automated processes where the data will or likely to be made as the sole basis for any decision
significantly affecting or will affect the data subject;
g. Date when his or her personal information concerning the data subject were last accessed and modified; and
h. The designation, or name or identity and address of the personal information controller.
5. Right to Correction: The data subject shall have the right to dispute the inaccuracy or error in the personal information
and have the personal information controller correct it immediately and accordingly, unless the request is vexatious or
otherwise unreasonable.
If the personal information have been corrected, the personal information controller shall ensure the accessibility of
both the new and the retracted information and the simultaneous receipt of the new and the retracted information
by recipients thereof: Provided, That the third parties who have previously received such processed personal information
shall he informed of its inaccuracy and its rectification upon reasonable request of the data subject;
6. Right to Erasure: the data subject shall have the right to suspend, withdraw or order the blocking, removal or
destruction of his or her personal information from the personal information controller’s filing system upon discovery
and substantial proof that the personal information are incomplete, outdated, false, unlawfully obtained, used for
unauthorized purposes or are no longer necessary for the purposes for which they were collected. In this case, the personal
information controller may notify third parties who have previously received such processed personal information;
7. Right to Damages: The data subject shall be indemnified for any damages sustained due to such inaccurate,
incomplete, outdated, false, unlawfully obtained or unauthorized use of personal information.
8. Right to Data Portability: The right of the data subject to obtain from the personal information controller a copy of
data, where personal information is processed:
a. by electronic means and
b. in a structured and commonly used format.
The Commission may specify the electronic format referred to above, as well as the technical standards, modalities and
procedures for their transfer.
Transmissibility of Rights of the Data Subject: The lawful heirs and assigns of the data subject may invoke the rights
of the data subject for which he or she is an heir or assignee at any time after the death of the data subject or when the
data subject is incapacitated or incapable of exercising the rights as enumerated above.
Non-Applicability of Rights: The above rights of a data subject are not applicable:
1. If the processed personal information are used only for the needs of scientific and statistical research and, on the
basis of such, no activities are carried out and no decisions are taken regarding the data subject: Provided, That
the personal information shall be held under strict confidentiality and shall be used only for the declared purpose; and
2. To processing of personal information gathered for the purpose of investigations in relation to any criminal,
administrative or tax liabilities of a data subject.
SECURITY OF PERSONAL INFORMATION
Security of Personal Information:

1. The personal information controller must implement reasonable and appropriate organizational, physical and technical
measures intended for the protection of personal information against any accidental or unlawful destruction,
alteration and disclosure, as well as against any other unlawful processing.
2. The personal information controller shall implement reasonable and appropriate measures to protect personal information
against natural dangers such as accidental loss or destruction, and human dangers such as unlawful access, fraudulent
misuse, unlawful destruction, alteration and contamination.

3. The determination of the appropriate level of security must take into account (1) the nature of the personal
information to be protected, (2) the risks represented by the processing, (3) the size of the organization and complexity
of its operations, (4) current data privacy best practices and (5) the cost of security implementation.
Subject to guidelines as the Commission may issue from time to time, the measures implemented must include:
a. Safeguards to protect its computer network against accidental, unlawful or unauthorized usage or interference with
or hindering of their functioning or availability;
b. A security policy with respect to the processing of personal information;
c. A process for identifying and accessing reasonably foreseeable vulnerabilities in its computer networks, and
for taking preventive, corrective and mitigating action against security incidents that can lead to a security breach;
and
d. Regular monitoring for security breaches and a process for taking preventive, corrective and mitigating action against
security incidents that can lead to a security breach.
4. The personal information controller must further ensure that third parties processing personal information on its behalf
shall implement the security measures required by this provision.
5. The employees, agents or representatives of a personal information controller who are involved in the processing of
personal information shall operate and hold personal information under strict confidentiality if the personal information
are not intended for public disclosure. This obligation shall continue even after leaving the public service, transfer to another
position or upon termination of employment or contractual relations.
6. The personal information controller shall promptly notify the Commission and affected data subjects when sensitive
personal information or other information that may, under the circumstances, be used to enable identity fraud are
reasonably believed to have been acquired by an unauthorized person, and the personal information controller or the
Commission believes that such unauthorized acquisition is likely to give rise to a real risk of serious harm to any
affected data subject.
Notification to the Commission: The notification shall at least describe the nature of the breach, the sensitive personal
information possibly involved, and the measures taken by the entity to address the breach. Notification may be delayed
only to the extent necessary to determine the scope of the breach, to prevent further disclosures, or to restore reasonable
integrity to the information and communications system.
a. In evaluating if notification is unwarranted, the Commission may take into account compliance by the personal
information controller with this provision and existence of good faith in the acquisition of personal information.
b. The Commission may exempt a personal information controller from notification where, in its reasonable judgment,
such notification would not be in the public interest or in the interests of the affected data subjects.
c. The Commission may authorize postponement of notification where it may hinder the progress of a criminal
investigation related to a serious breach.
Period to report: If there is likelihood of risk to individuals, the data processor must report data breaches within 72 hours.
ACCOUNTABILITY FOR TRANSFER OF PERSONAL INFORMATION
Principle of Accountability: Each personal information controller is responsible for personal information under its control or
custody, including information that have been transferred to a third party for processing, whether domestically or internationally,
subject to cross-border arrangement and cooperation.
1. The personal information controller is accountable for complying with the requirements of the Data Privacy Act and
shall use contractual or other reasonable means to provide a comparable level of protection while the information are being
processed by a third party.
2. Data Protection Officer: The personal information controller shall designate an individual or individuals who are
accountable for the organization’s compliance with the Data Privacy Act. The identity of the individual(s) so designated
shall be made known to any data subject upon request.
SECURITY OF SENSITIVE PERSONAL INFORMATION IN GOVERNMENT
Responsibility of Heads of Agencies: All sensitive personal information maintained by the government, its agencies and
instrumentalities shall be secured, as far as practicable, with the use of the most appropriate standard recognized by the
information and communications technology industry, and as recommended by the Commission.
The head of each government agency or instrumentality shall be responsible for complying with the security
requirements mentioned while the Commission shall monitor the compliance and may recommend the necessary action in
order to satisfy the minimum standards.
Requirements Relating to Access by Agency Personnel to Sensitive Personal Information:

1. On-site and Online Access – Except as may be allowed through guidelines to be issued by the Commission, no employee
of the government shall have access to sensitive personal information on government property or through online facilities
unless the employee has received a security clearance from the head of the source agency.
2. Off-site Access – Unless otherwise provided in guidelines to be issued by the Commission, sensitive personal information
maintained by an agency may not be transported or accessed from a location off government property unless a
request for such transportation or access is submitted and approved by the head of the agency in accordance with
the following guidelines:
a. Deadline for Approval or Disapproval – In the case of any request submitted to the head of an agency, such head
of the agency shall approve or disapprove the request within two (2) business days after the date of submission of
the request.
In case there is no action by the head of the agency, then such request is considered disapproved;
b. Limitation to 1,000 Records – If a request is approved, the head of the agency shall limit the access to not more
than one thousand (1,000) records at a time; and
c. Encryption – Any technology used to store, transport or access sensitive personal information for purposes of off-site
access approved under this subsection shall be secured by the use of the most secure encryption standard
recognized by the Commission.

Applicability to Government Contractors: In entering into any contract that may involve accessing or requiring sensitive
personal information from one thousand (1,000) or more individuals, an agency shall require a contractor and its
employees to register their personal information processing system with the Commission in accordance with the Data
Privacy Act and to comply with the other provisions of said Act, in the same manner as agencies and government employees
comply with such requirements.
UNLAWFUL ACTS AND PENALTIES
1. Unauthorized Processing: any person who process personal information without the consent of the data subject, or
without being authorized under the Data Privacy Act or any existing law. Penalties:
Imprisonment Fine
Personal Information 1 to 3 years P500,000 – P2,000,000
Sensitive Personal Information 3 to 6 years P500,000 – P4,000,000
2. Access – any person who, due to negligence, provided access to personal information without being authorized under the
Data Privacy Act or any existing law. Penalties:
Imprisonment Fine
Personal Information 1 to 3 years P500,000 – P2,000,000
3. Improper Disposal – any person who knowingly or negligently dispose, discard or abandon the personal information of
an individual in an area accessible to the public or has otherwise placed the personal information of an individual in its
container for trash collection. Penalties:
Imprisonment Fine
Personal Information 6 mos. to 2 years P100,000 – P500,000
4. Processing for Unauthorized Purposes - processing personal information for purposes not authorized by the data
subject, or otherwise authorized under this Act or under existing laws. Penalties:
Imprisonment Fine
Personal Information 1 year and 6 mos. to 5 years P500,000 – P1,000,000
5. Unauthorized Access or Intentional Breach – any person who knowingly and unlawfully, or violating data confidentiality
and security data systems, breaks in any way into any system where personal and sensitive personal information is stored.
Penalty shall be imprisonment of 1 year to 3 years and a fine of P500,000 to P2,000,000.
6. Concealment of Security Breaches Involving Sensitive Personal Information. – any person who, after having
knowledge of a security breach and of the obligation to notify the Commission, intentionally or by omission conceals the
fact of such security breach. The penalty shall be imprisonment of 1 year and 6 months to 5 years and a fine of P500,000
to P1,000,000.
7. Malicious Disclosure – Any personal information controller or personal information processor or any of its officials,
employees or agents, who, with malice or in bad faith, discloses unwarranted or false information relative to any personal
information or personal sensitive information obtained by him or her. The penalty shall be imprisonment of 1 year and 6
months to 5 years and a fine of P500,000 to P1,000,000.
8. Unauthorized Disclosure. – Any personal information controller or personal information processor or any of its officials,
employees or agents, who discloses to a third party personal or sensitive personal information, not covered by Malicious
Disclosure above, without the consent of the data subject. The penalties:
Imprisonment Fine
Personal Information 1 year to 3 years P500,000 – P1,000,000
shall he subject to imprisonment ranging from one (1) year to three (3) years and a fine of not less than Five hundred
thousand pesos (Php500,000.00) but not more than One million pesos (Php1,000,000.00).
9. Combination or Series of Acts – Any combination or series of acts as defined in above shall make the person subject to
imprisonment 3 to 6 years and a fine of P1,000,000 to P5,000,000.
Extent of Liability:
1. Juridical Persons: If the offender is a corporation, partnership or any juridical person, the penalty shall be imposed upon
the responsible officers, as the case may be, who participated in, or by their gross negligence, allowed the commission
of the crime. If the offender is a juridical person, the court may suspend or revoke any of its rights under the Data Privacy
Act.
2. Alien: If the offender is an alien, he or she shall, in addition to the penalties above, be deported without further
proceedings after serving the penalties prescribed.
3. Large-Scale: The maximum penalty in the scale of penalties respectively provided shall be imposed when the personal
information of at least one hundred (100) persons is harmed, affected or involved as the result of the above-mentioned
actions.
4. Public Official or Employee: If the offender is a public official or employee and he or she is found guilty of Improper
Disposal of Personal Information and Sensitive Personal Information and Processing of Personal Information and Sensitive
Personal Information for Unauthorized Persons, he or she shall, in addition to the penalties prescribed, suffer perpetual
or temporary absolute disqualification from office, as the case may be.
5. Offense Committed by Public Officer: When the offender or the person responsible for the offense is a public officer as
defined in the Administrative Code of the Philippines in the exercise of his or her duties, an accessory penalty consisting
in the disqualification to occupy public office for a term double the term of criminal penalty imposed shall he
applied.
6. Restitution: Restitution for any aggrieved party shall be governed by the provisions of the New Civil Code.

DATA BREACH NOTIFICATION
NOTIFICATION OF THE COMMISSION: The personal information controller shall notify the Commission of a personal data
breach subject to the following procedures:
When Notification Should be Done: The Commission shall be notified within seventy-two (72) hours upon knowledge of
or the reasonable belief by the personal information controller or personal information processor that a personal data breach
has occurred.
Delay in Notification: Notification may only be delayed to the extent necessary to determine the scope of the breach, to
prevent further disclosures, or to restore reasonable integrity to the information and communications system. The personal
information controller need not be absolutely certain of the scope of the breach prior to notification. Its inability to immediately
secure or restore integrity to the information and communications system shall not be a ground for any delay in notification, if
such delay would be prejudicial to the rights of the data subjects. Delay in notification shall not be excused if it is used to
perpetuate fraud or to conceal the personal data breach.
When delay is prohibited: There shall be no delay in the notification if the breach involves at least one hundred (100) data
subjects, or the disclosure of sensitive personal information will harm or adversely affect the data subject. In both instances,
the Commission shall be notified within the 72-hour period based on available information. The full report of the personal data
breach must be submitted within five (5) days, unless the personal information controller is granted additional time by the
Commission to comply.
Content of Notification: The notification shall include, but not be limited to:
1. Nature of the Breach
a. description of how the breach occurred and the vulnerability of the data processing system that allowed the breach;
b. a chronology of the events leading up to the loss of control over the personal data;
c. approximate number of data subjects or records involved;
d. description or nature of the personal data breach;
e. description of the likely consequences of the personal data breach; and
f. name and contact details of the data protection officer or any other accountable persons.
2. Personal Data Possibly Involved
a. description of sensitive personal information involved; and
b. description of other information involved that may be used to enable identity fraud.
3. Measures Taken to Address the Breach
a. description of the measures taken or proposed to be taken to address the breach;
b. actions being taken to secure or recover the personal data that were compromised;
c. actions performed or proposed to mitigate possible harm or negative consequences, and limit the damage or distress
to those affected by the incident;
d. action being taken to inform the data subjects affected by the incident, or reasons for any delay in the notification;
e. the measures being taken to prevent a recurrence of the incident.
The Commission reserves the right to require additional information, if necessary.
Form: Notification shall be in the form of a report, whether written or electronic, containing the required contents of notification:
Provided, that the report shall also include the name and contact details of the data protection officer and a designated
representative of the personal information controller: Provided further, that, where applicable, the manner of notification of the
data subjects shall also be included in the report. Where notification is transmitted by electronic mail, the personal information
controller shall ensure the secure transmission thereof. Upon receipt of the notification, the Commission shall send a
confirmation to the personal information controller. A report is not deemed filed without such confirmation. Where the
notification is through a written report, the received copy retained by the personal information controller shall constitute proof
of such confirmation
SUBCONTRACT OF PERSONAL INFORMATION
SUBCONTRACT OF PERSONAL DATA: A personal information controller may subcontract or outsource the processing of
personal data: Provided, that the personal information controller shall use contractual or other reasonable means to ensure that
proper safeguards are in place, to ensure the confidentiality, integrity and availability of the personal data processed, prevent
its use for unauthorized purposes, and generally, comply with the requirements of the Act, these Rules, other applicable laws
for processing of personal data, and other issuances of the Commission.
AGREEMENTS FOR OUTSOURCING: Processing by a personal information processor shall be governed by a contract or other
legal act that binds the personal information processor to the personal information controller.
a. The contract or legal act shall set out the subject-matter and duration of the processing, the nature and purpose of the
processing, the type of personal data and categories of data subjects, the obligations and rights of the personal information
controller, and the geographic location of the processing under the subcontracting agreement.
b. The contract or other legal act shall stipulate, in particular, that the personal information processor shall:
1. Process the personal data only upon the documented instructions of the personal information controller, including
transfers of personal data to another country or an international organization, unless such transfer is authorized by
law;
2. Ensure that an obligation of confidentiality is imposed on persons authorized to process the personal data;
3. Implement appropriate security measures and comply with the Act, these Rules, and other issuances of the
Commission;
4. Not engage another processor without prior instruction from the personal information controller: Provided, that any
such arrangement shall ensure that the same obligations for data protection under the contract or legal act are
implemented, taking into account the nature of the processing;
5. Assist the personal information controller, by appropriate technical and organizational measures and to the extent
possible, fulfill the obligation to respond to requests by data subjects relative to the exercise of their rights;

6. Assist the personal information controller in ensuring compliance with the Act, these Rules, other relevant laws, and
other issuances of the Commission, taking into account the nature of processing and the information available to the
personal information processor;
7. At the choice of the personal information controller, delete or return all personal data to the personal information
controller after the end of the provision of services relating to the processing: Provided, that this includes deleting
existing copies unless storage is authorized by the Act or another law;
8. Make available to the personal information controller all information necessary to demonstrate compliance with the
obligations laid down in the Act, and allow for and contribute to audits, including inspections, conducted by the personal
information controller or another auditor mandated by the latter;
9. Immediately inform the personal information controller if, in its opinion, an instruction infringes the Act, these Rules,
or any other issuance of the Commission.
DUTY OF PERSONAL INFORMATION PROCESSOR: The personal information processor shall comply with the requirements
of the Act, these Rules, other applicable laws, and other issuances of the Commission, in addition to obligations provided in a
contract, or other legal act with a personal information controller.
REGISTRATION AND COMPLIANCE REQUIREMENTS
ENFORCEMENT OF THE DATA PRIVACY ACT: Pursuant to the mandate of the Commission to administer and implement the
Act, and to ensure the compliance of personal information controllers with its obligations under the law, the Commission requires
the following:
a. Registration of personal data processing systems operating in the country that involves accessing or requiring sensitive
personal information of at least one thousand (1,000) individuals, including the personal data processing system of
contractors, and their personnel, entering into contracts with government agencies;
b. Notification of automated processing operations where the processing becomes the sole basis of making decisions that
would significantly affect the data subject;
c. Annual report of the summary of documented security incidents and personal data breaches;
d. Compliance with other requirements that may be provided in other issuances of the Commission.
REGISTRATION OF PERSONAL DATA PROCESSING SYSTEMS.
The personal information controller or personal information processor that employs fewer than two hundred fifty (250) persons
shall not be required to register unless the processing it carries out is likely to pose a risk to the rights and freedoms of data
subjects, the processing is not occasional, or the processing includes sensitive personal information of at least one thousand
(1,000) individuals.
Contents: The contents of registration shall include:
1. The name and address of the personal information controller or personal information processor, and of its representative,
if any, including their contact details;
2. The purpose or purposes of the processing, and whether processing is being done under an outsourcing or subcontracting
agreement;
3. A description of the category or categories of data subjects, and of the data or categories of data relating to them;
4. The recipients or categories of recipients to whom the data might be disclosed;
5. Proposed transfers of personal data outside the Philippines;
6. A general description of privacy and security measures for data protection;
7. Brief description of the data processing system;
8. Copy of all policies relating to data governance, data privacy, and information security;
9. Attestation to all certifications attained that are related to information and communications processing; and
10. Name and contact details of the compliance or data protection officer, which shall immediately be updated in case of
changes.
Procedure: The procedure for registration shall be in accordance with these Rules and other issuances of the Commission.
NOTIFICATION OF AUTOMATED PROCESSING OPERATIONS. The personal information controller carrying out any wholly
or partly automated processing operations or set of such operations intended to serve a single purpose or several related
purposes shall notify the Commission when the automated processing becomes the sole basis for making decisions about a data
subject, and when the decision would significantly affect the data subject.
a. The notification shall include the following information:

1. Purpose of processing;
2. Categories of personal data to undergo processing;
3. Category or categories of data subject;
4. Consent forms or manner of obtaining consent;
5. The recipients or categories of recipients to whom the data are to be disclosed;
6. The length of time the data are to be stored;
7. Methods and logic utilized for automated processing;
8. Decisions relating to the data subject that would be made on the basis of processed data or that would significantly
affect the rights and freedoms of data subject; and
9. Names and contact details of the compliance or data protection officer.
b. No decision with legal effects concerning a data subject shall be made solely on the basis of automated processing without
the consent of the data subject.
REVIEW BY THE COMMISSION: The following are subject to the review of the Commission, upon its own initiative or upon
the filing of a complaint by a data subject:
a. Compliance by a personal information controller or personal information processor with the Act, these Rules, and other
issuances of the Commission;
b. Compliance by a personal information controller or personal information processor with the requirement of establishing
adequate safeguards for data privacy and security;
c. Any data sharing agreement, outsourcing contract, and similar contracts involving the processing of personal data, and its
implementation;

d. Any off-site or online access to sensitive personal data in government allowed by a head of agency;
e. Processing of personal data for research purposes, public functions, or commercial activities;
f. Any reported violation of the rights and freedoms of data subjects;
g. Other matters necessary to ensure the effective implementation and administration of the Act, these Rules, and other
issuances of the Commission
EASE OF DOING BUSINESS ACT
(RA No. 11032)
DECLARATION OF POLICY: It is hereby declared the policy of the State to promote integrity, accountability, proper
management of public affairs and public property as well as to establish effective practices, aimed at efficient turnaround of the
delivery of government services and the prevention of graft and corruption in government. Towards this end, the State shall
maintain honesty and responsibility among its public officials and employees, and shall take appropriate measures to promote
transparency in each agency with regard to the manner of transacting with the public, which shall encompass a program for
the adoption of simplified requirements and procedures that will reduce red tape and expedite business and nonbusiness related
transactions in government.
DEFINITION OF TERMS:
Action refers to the written approval or disapproval made by a government office or agency on the application
or request submitted by an applicant or requesting party for processing;
Business One a single common site or location, or a single online website or portal designated for the Business Permit
Stop Shop and Licensing System (BPLS) of an LGU to receive and process applications, receive payments, and issue
(BOSS) approved licenses, clearances, permits, or authorizations;
Business- a set of regulatory requirements that a business entity must comply with to engage, operate or continue
related to operate a business, such as, but not limited to, collection or preparation of a number of documents,
transactions submission to national and local government authorities, approval of application submitted, and receipt
of a formal certificate or certificates, permits, licenses which include primary and secondary, clearances
and such similar authorization or documents which confer eligibility to operate or continue to operate as
a legitimate business
Complex applications or requests submitted by applicants or requesting parties of a government office which
transactions necessitate evaluation in the resolution of complicated issues by an officer or employee of said government
office, such transactions to be determined by the office concerned;
Fixer any individual whether or not officially involved in the operation of a government office or agency who
has access to people working therein, and whether or not in collusion with them, facilitates speedy
completion of transactions for pecuniary gain or any other advantage or consideration;
Government the process or transaction between applicants or requesting parties and government offices or agencies
service involving applications for any privilege, right, reward, license, clearance, permit or authorization,
concession, of for any modification, renewal or extension of the enumerated applications or requests which
are acted upon in the ordinary course of business of the agency or office concerned
Highly technical an application which requires the use of technical knowledge, specialized skills and/or training in the
application processing and/or evaluation thereof
Nonbusiness all other government transactions not falling under Section 4 (c) of this Act
transactions
Officer or a person employed in a government office or agency required to perform specific duties and
employee responsibilities related to the application or request submitted by an applicant or requesting party for
processing
Processing time the time consumed by an LGU or national government agency (NGA) from the receipt of an application or
request with complete requirements, accompanying documents and payment of fees to the issuance of
certification or such similar documents approving or disapproving an application or request
Red tape any regulation, rule, or administrative procedure or system that is ineffective or detrimental in achieving
its intended objectives and, as a result, produces slow, suboptimal, and undesirable social outcomes
Regulation any legal instrument that gives effect to a government policy intervention and includes licensing, imposing
information obligation, compliance to standards or payment of any form of fee, levy, charge or any other
statutory and regulatory requirements necessary to carry out activity
Simple applications or requests submitted by applicants or requesting parties of a government office or agency
transactions which only require ministerial actions on the part of the public officer or employee, or that which present
only inconsequential issues for the resolution by an officer or employee of said government.
COVERAGE: all government offices and agencies including LGUs, GOCCs and other government instrumentalities, whether
located in the Philippines or abroad, that provide services covering business and nonbusiness related transactions.
Business-related transactions - a set of regulatory requirements that a business entity must comply with to engage, operate
or continue to operate a business.
Non-business transactions - all other government transactions.
REENGINEERING OF SYSTEMS AND PROCEDURES: All offices and agencies which provide government services are hereby
mandated to regularly undertake cost compliance analysis, time and motion studies, undergo evaluation and improvement of
their transaction systems and procedures and reengineer the same if deemed necessary to reduce bureaucratic red tape and
processing time.
The Anti-Red Tape Authority shall coordinate with all government offices covered under this Act in the review of existing laws,
executive issuances and local ordinances, and recommend the repeal of the same if deemed outdated, redundant, and adds
undue regulatory burden to the transacting public.
All proposed regulations of government agencies shall undergo regulatory impact assessment to establish if the proposed
regulation does not add undue regulatory burden and cost to these agencies and the applicants or requesting parties: Provided,
That when necessary, any proposed regulation may undergo pilot implementation to assess regulatory impact.

All LGUs and NGAs are directed to initiate review of existing policies and operations and commence with the reengineering of
their systems and procedures in compliance with the provisions of this Act, pending the approval of the implementing rules and
regulations (IRR) thereof.
CITIZEN’S CHARTER: All government agencies including departments, bureaus, offices, instrumentalities, or government-
owned and/or –controlled corporations, or LGUs shall set up their respective most current and updated service standards to be
known as the Citizen’s Charter in the form of information billboards which shall be posted at the main entrance of offices or at
the most conspicuous place, in their respective websites and in the form of published materials written either in English, Filipino,
or in the local dialect, that detail:
a. A comprehensive and uniform checklist of requirements for each type of application or request;
b. The procedure to obtain a particular service;
c. The person/s responsible for each step;
d. The maximum time to conclude the process;
e. The document/s to be presented by the applicant or requesting party, if necessary;
f. The amount of fees, if necessary; and
g. The procedure for filing complaints.
RULES IN ACCESSING GOVERNMENT SERVICES
ACCEPTANCE OF APPLICATIONS OR REQUESTS

1. All officers or employees shall accept written applications, requests, and/or documents being submitted by applicants or
requesting parties of the offices or agencies.
2. The receiving officer or employee shall perform a preliminary assessment of the application or request submitted with
its supporting documents to ensure a more expeditious action on the application or request. The receiving officer or
employee shall immediately inform the applicant or requesting party of any deficiency in the accompanying
requirements, which shall be limited to those enumerated in the Citizen's Charter.
3. The receiving officer or employee shall assign a unique identification number to an application or request, which shall
be the identifying number for all subsequent transactions between the government and the applicant or requesting party
regarding such specific application or request.
4. The receiving officer or employee shall issue an acknowledgement receipt containing the seal of the agency, the name
of the responsible officer or employee, his/her unit and designation, and the date and time of receipt of such application or
request.
ACTIONS OF OFFICERS:
1. PRESCRIBED PERIODS TO PROCESS: All applications or requests submitted shall be acted upon by the assigned officer
or employee within the prescribed processing time stated in the Citizen's Charter which shall not be longer than:
TYPE OF TRANSACTION PERIOD TO PROCESS

Simple Transactions - applications or requests submitted by 3 working days from date of receipt
applicants or requesting parties of a government office or
agency which
a. only require ministerial actions on the part of the
public officer or employee, or
b. that which present only inconsequential issues for the
resolution by an officer or employee of said government
office
Complex Transactions - applications or requests submitted 7 working days from date of receipt
by applicants or requesting parties of a government office
which necessitate evaluation in the resolution of
complicated issues by an officer or employee of said
government office, such transactions to be determined by the
office concerned.
Highly technical application – an application which requires Whichever is shorter between:

the use of technical knowledge, specialized skill and/or a. 20 working days or
training in the process and/or evaluation thereof. b. As determined by the government agency or
instrumentality concerned.
Applications or requests involving activities which pose
danger to public health, public safety, public morals,
public policy.
If the application or request for license, clearance, permit, the Sanggunian concerned shall be given a period of
certification or authorization shall require the approval of the forty-five (45) working days to act on the
local Sanggunian (Sangguniang Bayan, Sangguniang application or request, which can be extended for
Panlungsod, or the Sangguniang Panlalawigan as the case may another twenty (20) working days.
be)
If the local Sanggunian concerned has denied the
application or request, the reason for the denial, as
well as the remedial measures that maybe taken by
the applicant shall be cited by the concerned
Sanggunian
2. EXTENSTION: The maximum time prescribed above may be extended only once for the same number of days, which
shall be indicated in the Citizen's Charter. Prior to the lapse of the processing time, the office or agency concerned shall
notify the applicant or requesting party in writing of the reason for the extension and final date of release of the
government service/s requested. Such written notification shall be signed by the applicant or requesting party to serve as
proof of notice.

3. ADJUSTMENT/SUSPENSION OF PERIOD TO PROCESS: In cases where the cause of delay is due to force majeure or
natural or man-made disasters, which result to damage or destruction of documents, and/or system failure of the
computerized or automatic processing, the prescribed processing times mandated in this Act shall be suspended and
appropriate adjustments shall be made.
AUTOMATIC APPROVAL OR EXTENSION OF LICENSE, CLEARANCE, PERMIT, CERTIFICATION OR AUTHORIZATION:

1. If a government office or agency fails to approve or disapprove an original application or request for issuance of license,
clearance, permit, certification or authorization within the prescribed processing time, said application or request shall
be deemed approved: Provided, That all required documents have been submitted and all required fees and
charges have been paid.
2. The acknowledgement receipt together with the official receipt for payment of all required fees issued to the applicant
or requesting party shall be enough proof or has the same force and effect of a license, clearance, permit, certification
or authorization under this automatic approval mechanism.
3. If a government office or agency fails to act on an application or request for renewal of a license, clearance, permit,
certification or authorization subject for renewal within the prescribed processing time, said license, clearance, permit,
certification or authorization shall automatically be extended: Provided, That the Authority, in coordination with the Civil
Service Commission (CSC), Department of Trade and Industry (DTI) , Securities and Exchange Commission (SEC),
Department of the Interior and Local Government (DILG) and other agencies which shall formulate the IRR of this Act, shall
provide a listing of simple, complex, highly technical applications, and activities which pose danger to public
health, public safety, public morals or to public policy.
DENIAL OF APPLICATION OF REQUEST FOR ACCESS TO GOVERNMENT SERVICE:

Any denial of application or request for access to government service shall be:
1. Fully explained in writing,
2. Stating the name of the person making the denial and
3. the grounds upon which such denial is based.
Any denial of application or request is deemed to have been made with the permission or clearance from the highest
authority having jurisdiction over the government office or agency concerned.
LIMITATION OF SIGNATORIES
The number of signatories in any document shall be limited to a maximum of three (3) signatures which shall represent
officers directly supervising the office or agency concerned: Provided, That in case the authorized signatory is on official
business or official leave, an alternate shall be designated as signatory.
Electronic signatures or pre-signed license, clearance, permit, certification or authorization with adequate security and
control mechanism may be used.
ELECTRONIC VERSIONS OF LICENSES, CLEARANCES, PERMITS, CERTIFICATIONS OR AUTHORIZATION
All government agencies covered shall, when applicable, develop electronic versions of licenses, clearances, permits,
certifications or authorizations with the same level of authority as that of the signed hard copy, which may be printed by the
applicants or requesting parties in the convenience of their offices.
ADOPTION OF WORKING SCHEDULES TO SERVE APPLICANTS OR REQUESTING PARTIES
Heads of offices and agencies which render government services shall adopt appropriate working schedules to ensure that
all applicants or requesting parties who are within their premises prior to the end of official working hours are
attended to and served even during lunch break and after regular working hours.
STREAMLINED PROCEDURES IN LOCAL GOVERNMENT UNITS:
The LGUs are mandated to implement the following revised guidelines in the issuance of business licenses, clearances, permits,
certifications or authorizations:
a. A single or unified business application form shall be used in processing new applications for business permits and
business renewals which consolidates all the information of the applicant or requesting party by various local government
departments, such as, but not limited to, the local taxes and clearances, building clearance, sanitary permit, zoning
clearance, and other specific LGU requirements, as the case may be, including the fire clearance from the Bureau of Fire
Protection (BFP).
The unified form shall be made available online using technology-neutral platforms such as, but not limited to, the central
business portal or the city/municipality's website and various channels for dissemination. Hard copies of the unified
forms shall likewise be made available at all times in designated areas of the concerned office and/or agency.
b. A one-stop business facilitation service, hereinafter referred to as the business one stop shop, (BOSS) for the
city/municipality's business permitting and licensing system to receive and process manual and/or electronic submission of
application for license, clearance, permit, certification or authorization shall be established within the
cities/municipalities’ Negosyo Center as provided for under Republic Act No. 10644, otherwise known as the "Go
Negosyo Act".
There shall be a queuing mechanism in the BOSS to better manage the flow of applications among the LGUs' departments
receiving and processing applications. LGUs shall implement colocation of the offices of the treasury, business permits
and licensing office, zoning office, including the BFP, and other relevant city/municipality offices, departments, among
others, engaged in starting a business, dealing with construction permits.
c. Cities/Municipalities are mandated to automate their business permitting and licensing system or set up an
electronic BOSS within a period of three (3) years upon the effectivity of this Act for a more efficient business
registration processes.

Cities/Municipalities with electronic BOSS shall develop electronic versions of licenses, clearances, permits, certifications
or authorizations with the same level of authority, which may be printed by businesses in the convenience of their
offices. The DICT shall make available to LGUs the software for the computerization of the business permit and licensing
system. The DICT, DTI, and DILG, shall provide technical assistance in the planning and implementation of a computerized
or software-enabled business permitting and licensing system.
d. To lessen the transaction requirements, other local clearances such as, but not limited to, sanitary permits,
environmental and agricultural clearances shall be issued together with the business permit.
e. Business permits shall be valid for a period of one (1) year. The city/municipality may have the option to renew
business permits within the first month of the year or on the anniversary date of the issuance of the business
permit.
f. Barangay clearances and permits related to doing business shall be applied, issued, and collected at the
city/municipality in accordance with the prescribed processing time of this Act: Provided, That the share in the
collections shall be remitted to the respective barangays. The pertinent provisions of Republic Act No. 7160, otherwise
known as "The Local Government Code of 1991", specifically Article IV, Section 152(c) is hereby amended accordingly.
VIOLATIONS AND PERSONS LIABLE: Any person who performs or cause the performance of the following acts shall be
liable:
a. Refusal to accept application or request with complete requirements being submitted by an applicant or requesting party
without due cause;
b. Imposition of additional requirements other than those listed in the Citizen’s Charter;
c. Imposition of additional costs not reflected in the Citizen’s Charter;
d. Failure to give the applicant or requesting party a written notice on the disapproval of an application or request;
e. Failure to render government services within the prescribed processing time on any application or request without due
cause;
f. Failure to attend to applicants or requesting parties who are within the premises of the office or agency concerned prior to
the end of official working hours and during lunch break;
g. Failure or refusal to issue official receipts; and
h. Fixing and/or collusion with fixers in consideration of economic and/or other gain or advantage."
Penalties and Liabilities: Any violations of the above will warrant the following penalties and liabilities.
a. First Offense: Administrative liability with 6 months suspension: Provided, however, That in the case of fixing and/or
collusion with fixers, the penalty below shall apply.
b. Second Offense: Administrative liability and criminal liability of dismissal from the service, perpetual disqualification from
holding public office and forfeiture of retirement benefits and imprisonment of 1 to 6 years with a fine of not less than
P500,000.00, but not more than P2,000,000.00.
Criminal liability shall also be incurred through the commission of bribery, extortion, or when the violation was done deliberately
and maliciously to solicit favor in cash or in kind. In such cases, the pertinent provisions of the Revised Penal Code and other
special laws shall apply.
RANKING OF THE PHILIPPINES IN THE WORLD BANK’S ANNUAL DOING BUSINESS REPORT:
1. 2016 – 103rd
2. 2017 – 99th
3. 2018 – 113th
4. 2019 – 124th
5. 2020 – 95th
E- COMMERCE ACT
1. The Electronic Commerce Act applies to any kind of data message and electronic document used in the context of __
activities to include __ dealings, transactions, arrangements, agreements, contracts, and exchanges and storage of
information.
A. Commercial and non-commercial; domestic and international
B. Only commercial; domestic and international
C. Only commercial; only domestic
D. Commercial and non-commercial; only domestic
2. It refers to information generated, sent, received, or stored by optical or similar means.
A. Electronic key C. Electronic signature
B. Electronic data message D. Electronic document
3. It refers to any distinctive mark, characteristic and/or sound in electronic form, representing the identity of a person
and attached to or logically associated with the electronic data message or electronic document
4. It refers to information or the representation of information, data, figures, symbols or other modes of written
expression, described or however represented, by which a right is established or an obligation extinguished, or by
which a fact may be prove and affirmed, which is receive, recorded, transmitted, stored, processed, retrieved or
produced electronically.
5. It refers to a secret code which secures and defends sensitive information that cross over public channels into a form
decipherable only with a matching electronic key.

6. First Statement: Information shall be denied legal effect, validity or enforceability solely on the grounds that it is in
the data message purporting to give rise to such legal effect, or that it is merely referred to in that electronic data
message.
Second Statement: For evidentiary purposes, an electronic document shall be the functional equivalent of a written
document under existing laws.
A. Only the first statement is true. C. Both of the statements are true.
7. In any proceedings involving an electronic signature, it shall be presumed that (a) The electronic signature is the
signature of the person to whom it correlates; and (b) The electronic signature was affixed by that person with the
intention of signing or approving the electronic document even if the person relying on the electronically signed
electronic document knows or has noticed of defects in or unreliability of the signature or reliance on the electronic
signature is not reasonable under the circumstances.
A. (a) only C. Both (a) and (b)
B. (b) only D. Neither (a) and (b)
8. Who has the burden of proving the authenticity of an electronic data message or electronic document in any legal
proceeding?
A. The person who sent the electronic data message
B. The person who signed the electronic document
C. The person denying the authenticity of said electronic data message or electronic document
D. The person seeking to introduce said electronic data message or electronic document
9. What may be presumed to have been established by an affidavit given to the best of the deponent’s knowledge?
A. Admissibility of electronic evidence only
B. Admissibility and presumption of integrity of electronic evidence
C. Presumption of integrity of electronic evidence only
10. First Statement: As between the originator and the addressee of an electronic data message or electronic document,
a declaration of will or other statement shall not be denied legal effect, validity or enforceability solely on the ground
that it is in the form of an electronic data message.
Second Statement: An electronic data message or electronic document is that of the originator if it was sent by the
originator himself.
11. On March 1, 2019, Alvin sent an email to Simon offering to sell his cellphone for P15,000. In the same email, Alvin
wrote that Simon shall have 10 days from acknowledging the receipt of Alvin’s email to decide whether to accept his
offer or not. The required acknowledgment must be sent on or before March 5, 2019. Simon, without acknowledging
Alvin’s email, replied 5 days after, signifying his acceptance of Alvin’s offer.
Is there a contract perfected?
A. Yes, because there is a meeting of the minds.
B. Yes, because Simon accepted Alvin’s offer before the expiration of the 10-day period.
C. None, because Alvin is not in writing, hence an unacceptable offer.
D. None, because Alvin’s offer is ineffective since Simon failed to acknowledge Alvin’s email.
12. When is an electronic data message or electronic document considered dispatched?
A. As agreed by the parties
B. When it enters an information system outside the control of the originator or his agent
C. When it enters an information system still within the control of the originator or his agent
D. Never, since anything electronic cannot be dispatched
13. When is an electronic data message or electronic document considered received if it was sent to an information system
of the addressee that is not the designated information system?
A. As agreed by the parties
B. At the time when the electronic data message or electronic document enters the designated information
system
C. At the time when the electronic data message or electronic document is retrieved by the addressee
D. At the time when the electronic data message or electronic document enters an information system of the
addressee
14. Where is the place of dispatch of electronic data messages or electronic documents if the originator has more than one
place of business and there is an underlying transaction?
A. Place which has the closest relationship to the underlying transaction
B. Principal place of business
C. Habitual residence
D. Place where the server is located
15. Where is the place of receipt of electronic data messages or electronic documents if the addressee has no place of
business?
A. Place which has the closest relationship to the underlying transaction
B. Principal place of business
C. Habitual residence
D. Place where the server is located
16. Which government agency is empowered to promulgate rules and regulations for the implementation of the Electronic
Commerce Act?
A. Department of Trade and Industry (DTI)
B. Department of Transportation and Communication (DOTC)
C. Department of Information and Communications Technology (DICT)
D. Supreme Court (SC)
17. First Statement: Where the requires that any action referred to contract of carriage of goods be carried out in writing
or by using a paper document, that requirement is met if the action is carried out by using one or more electronic data
messages or electronic documents.
Second Statement: The "usual place of residence" in relation to a body corporate, means the place where it is
incorporated or otherwise legally constituted.

18. On March 1, 2019, Donald, through a text message, offered to sell his land to Hillary for P10,000. Hillary accepted Donald’s
offer by sending an email to Donald on March 2, 2019, which Donald was able to read on March 3, 2019. On March 4, 2019,
wondering if Donald received her email, Hillary sent a text message to Donald signifying once again her acceptance of
Donald’s offer, to which Donald immediately replied, “K”. Is there an enforceable contract of sale?
A. Yes, because the offer and the acceptance in electronic form satisfy the requirement that a sale of land be in
writing.
B. Yes, because a contract of sale of land is enforceable whether executed in writing or not.
C. No, the offer and the acceptance were not reduced into writing.
D. No, there was no valid contract at all.
offer by sending an email to Donald on March 2, 2019, which Donald was able to read on March 3, 2019. On March 4,
2019, wondering if Donald received her email, Hillary sent a text message to Donald signifying once again her acceptance
of Donald’s offer, to which a recipient (Donald’s wife) immediately replied, “Sorry, but Donald just died a few hours ago”.
Is there a perfected contract of sale?
A. No, because Hillary’s acceptance was not made in a text message.
B. No, because Donald has already died and can no longer perform any contractual obligation.
C. Yes, because the knowledge of Donald’s wife of Hillary’s acceptance through a text message on March 4, 2019
perfects the contract since she is a legal heir of Donald.
D. Yes, because the email Hillary sent on March 2, 2019 signifying her acceptance was read by Donald on March 3,
2019.
offer by sending an email to Donald on March 2, 2019, which Donald was able to read on March 3, 2019. On March 4,
2019, wondering if Donald received her email, Hillary sent a text message to Donald signifying once again her acceptance
of Donald’s offer, to which Donald immediately replied, “K”. When was the contract of sale of land perfected?
A. March 1, 2019 C. March 3, 2019
B. March 2, 2019 D. March 4, 2019
1 A 6 B 11 D 16 A
2 B 7 A 12 A 17 C
3 C 8 D 13 A 18 A
4 D 9 B 14 A 19 D
5 A 10 C 15 C 20 C
DATA PRIVACY ACT
1. It refers to any information whether recorded in a material form or not, from which the identity of an individual is apparent
or can be reasonably and directly ascertained by the entity holding the information, or when put together with other
information would directly and certainly identify an individual.
a Data subject c Privileged information
b Personal information d Sensitive personal information
2. It refers to any and all forms of data which under the Rules of Court and other pertinent laws constitute privileged
communication.
a. Data subject c Privileged information
b. Personal information d Sensitive personal information
3. First Statement: DPA applies to the processing of all types of personal information and to any natural and juridical person
involved in personal information processing including those personal information controllers and processors who, although
not found or established in the Philippines, use equipment that are located in the Philippines, or those who maintain an
office, branch or agency in the Philippines, except when DPA is not applicable, subject to the requirements of extraterritorial
application.
Second Statement: The Data Privacy Act is applicable to Information about any individual who is or was an officer or
employee of a government institution that relates to the position or functions of the individual.
a. Only the first statement is true. c Both of the statements are true
b. Only the second statement is true. d None of the statements is true
4. Which information is/are not covered by the Data Privacy Act?
a. About an individual who is or was performing service under contract for a government institution that relates to
the services performed
b. Relating to any discretionary benefit of a financial nature such as the granting of a license or permit given by the
government to an individual
c. Processed for journalistic, artistic, literary or research purposes
d. All of the above
5. Which information is/are not covered by the Data Privacy Act?
a. Necessary in order to carry out the functions of public authority
b. Necessary for banks and other financial institutions under the jurisdiction of the independent, central monetary
authority or Bangko Sentral ng Pilipinas to comply with RA 9510, and RA 9160, as amended
c. Originally collected from residents of foreign jurisdictions in accordance with the laws of those foreign jurisdictions,
including any applicable data privacy laws, which is being processed in the Philippines
d. All of the above
6. First Statement: The Data Privacy Act did not amend or repeal the provisions of RA 53, which affords the publishers,
editors or duly accredited reporters of any newspaper, magazine or periodical of general circulation protection from being
compelled to reveal the source of any news report or information appearing in said publication which was related in any
confidence to such publisher, editor, or reporter.
Second Statement: The Data Privacy Act applies to an act done or practice engaged within the Philippines by an entity
only and does not apply to those done and engaged outside of the Philippines.
a. Only the first statement is true. c Both of the statements are true
b. Only the second statement is true. d None of the statements is true

7. Which of the following is/are the functions of the National Privacy Commission?
a. Ensure compliance of personal information controllers with the DPA
b. Issue cease and desist orders, impose a temporary or permanent ban on the processing of personal information,
upon finding that the processing will be detrimental to national security and public interest
c. Compel or petition any entity, government agency or instrumentality to abide by its orders or take action on a
matter affecting data privacy
d. All of the above
8. First Statement: The National Privacy Commission shall ensure at all times the confidentiality of any personal information
that comes to its knowledge and possession.
Second Statement: The National Privacy Commission is attached to the Department of Information and Communications
Technology (DICT).
a. Only the first statement is true. c. Both of the statements are true
b. Only the second statement is true. d. None of the statements is true
9. Who heads the National Privacy Commission?
a. Privacy Chairman c. Privacy President
b. Privacy Commissioner d. Privacy Head
10. What are the two responsibilities of the Deputy Privacy Commissioners?
a. Data Processing Systems and Policies and Planning c. Data Processing Systems and Finance
b. Data Collection Systems and Policies and Planning d. Data Privacy Systems & Policies & Performance
11. Who appoints the officers of the National Privacy Commission?
a. DICT Secretary c. Executive Secretary
b. President d. DTI Secretary
12. How long is the term of a Privacy Commissioner?
a. 1 year c. 3 years
b. 2 years d. 5 years
13. What is/are the qualifications of a Privacy Commissioner?
a. At least 36 years of age
b. Of good moral character, unquestionable integrity, and known probity
c. A recognized expert in the field of information technology only
d. All of the above
14. A Deputy Privacy Commissioner shall enjoy the benefits, privileges, and emoluments equivalent to the rank of:
a. Secretary c. Assistant Secretary
b. Undersecretary
15. The processing of personal information adheres to which principle/s?
a. Transparency c. Proportionality
b. Legitimate purpose d. All of the above
16. Who must ensure implementation of personal information principles set out in the Data Privacy Act?
a. Personal information controller c. Privacy Commissioner
b. Personal information processor d. Deputy Privacy Commissioner
17. When is processing of personal information lawful?
a. Data subject gave his or her consent
b. When necessary or related to the fulfillment of a contract with the data subject or in order to take steps at the
request of the data subject prior to entering into a contract
c. When necessary for compliance with a legal obligation to which the personal information controller is subject
d. All of the above
18. When is processing of personal information lawful?
a. When necessary to protect the life and health of the data subject or another person, even when the data subject is
legally or physically able to express his or her consent prior to the processing
b. When necessary for purposes of medical treatment, is carried out by a medical practitioner or a medical treatment
institution, and an adequate level of protection of personal information is ensured
c. When not necessary for the protection of lawful rights and interests of natural or legal persons in court proceedings,
or the establishment, exercise or defense of legal claims, or when provided to government or public authority
d. None of the above
19. First Statement: A personal information controller may subcontract the processing of personal information.
Second Statement: Personal information controllers may invoke the principle of privileged communication over
privileged information that they lawfully control or process.
b. Only the second statement is true. d. Both of the statements are false
20. First Statement: The lawful heirs and assigns of the data subject may invoke the rights of the data subject for, which
he or she is an heir or assignee at any time after the death of the data subject or when the data subject is incapacitated
or incapable of exercising the rights of the data subject.
Second Statement: The rules on rights, its transmissibility, and portability are not applicable if the processed personal
information are used only for the needs of scientific and statistical research and, on the basis of such, no activities are
carried out and no decisions are taken regarding the data subject.
b. Only the second statement is true. d. Both of the statements are false
21. In case of privacy breach, who is mandated to notify the National Privacy Commission?
a. Personal information controller c. President
b. Personal information processor d. Independent auditor
22. Except as may be allowed through guidelines to be issued by the National Privacy Commission, no employee of the
government shall have access to sensitive personal information on government property or through online facilities
unless the employee has received a security clearance from the __ of the source agency.
a. Personal information controller c. Head
b. Personal information processor d. Lawyer
23. In the case of any request submitted to the head of an agency, such head of the agency shall approve or disapprove
the request __ after the date of submission of the request.
a. One calendar day c. One business day
b. Two calendar days d. Two business days

24. In entering into any contract that may involve accessing or requiring sensitive personal information from __, an agency
shall require a contractor and its employees to register their personal information processing system with the National
Privacy Commission in accordance with the DPA and to comply with the other provisions of the DPA including the
immediately preceding section, in the same manner as agencies and government employees comply with such
requirements.
a. 100 or more individuals c. 1,000 or more individuals
b. 500 or more individuals d. 5,000 or more individuals
25. If the offender is a corporation, partnership or any juridical person, the penalty shall be imposed upon the __.
a. Directors c. Incorporators
b. Responsible officers d. Stockholders/Partners
26. First Statement: If the offender under DPA is a juridical person, the court may suspend or revoke any of its rights under the
DPA.
Second Statement: If the offender under DPA is an alien, he or she shall, in addition to the penalties herein prescribed,
be deported without further proceedings after serving the penalties prescribed.
a. Only the first statement is true c. Both of the statements are true
b. Only the second statement is true d. Both of the statements are false
27. The __ penalty in the scale of penalties respectively provided for the preceding offenses shall be imposed when the
personal information of at least __ persons is harmed, affected or involved as the result of the punishable actions.
a. Maximum; 100 c. Minimum; 100
b. Maximum; 1,000 d. Minimum; 1,000
28. When the offender or the person responsible for the offense under DPA is a public officer as defined in the Administrative Code
of the Philippines in the exercise of his or her duties, an accessory penalty consisting in the disqualification to occupy public
office for a term __ the term of criminal penalty imposed shall he applied.
a. Same as c. Triple
b. Double d. Quadruple
29. Restitution for any aggrieved party under DPA shall be governed by the provisions of the __.
a. Code of Commerce c. 1987 Philippine Constitution
b. Data Privacy Act d. New Civil Code
30. The act of processing sensitive personal information for unauthorized purposes is punishable by:
a. 1.5 to 5 years of imprisonment and fine 500,000 to 1,000,000
b. 2 to 7 years of imprisonment and fine 500,000 to 1,000,000
c. 1.5 to 5 years of imprisonment and fine500,000 to 2,000,000
d. 2 to 7 years of imprisonment and fine 500,000 to 2,000,000
1 B 11 B 21 A
2 C 12 C 22 C
3 A 13 B 23 D
4 D 14 B 24 C
5 D 15 D 25 B
6 A 16 A 26 C
7 D 17 D 27 A
8 C 18 B 28 B
9 B 19 C 29 D
10 A 20 C 30 D
EASE OF DOING BUSINESS
1. Under the Ease of Doing Business Act, this has been defined as a set of regulatory requirements that
a business entity must comply with to engage or operate or continue to operate a business:
A. Business-related transaction
B. License
C. Non-business transactions
D. Complex transactions
2. After acceptance of the written applications, requests, and/or documents, who shall perform the
preliminary assessment of the application or request?
A. The receiving officer
B. The direct supervisor of the receiving officer
C. The head of the agency
D. The Anti-Red Tape Authority
3. A transaction which present only inconsequential issues for the resolution by an officer or employee of
the concerned government office is known as:
A. Simple transaction
B. Complex transaction
C. Highly-technical transaction
D. A transaction that will require the approval of a local sanggunian

4. For this type of transactions, the Ease of Doing Business Act allows a maximum of 20 working days to
process. Which one is an exception?
A. an application or request which requires the use of technical knowledge, specialized skill and/or
training in the process and/or evaluation thereof.
B. An application involving activities which pose danger to public health
C. A request involving activities which pose danger to public safety
D. Applications or requests submitted by applicants or requesting parties of a government office which
necessitate evaluation in the resolution of complicated issues by an officer or employee of said
government office, such transactions to be determined by the office concerned
5. An application which requires the use of technical knowledge, specialized skill and/or training in the
process and/or evaluation thereof.
A. Simple Transaction
B. Complex Transaction
C. Highly-Technical Transaction
D. None of the choices
6. If the approval of the local Sanggunian is required, the processing time of the application or request,
the approval of the Sanggunian concerned shall be given a period of ____________.
A. 20 calendar days
B. 45 calendar days
C. 20 working days
D. 45 working days
7. If a transaction is categorized as complex, it shall be processed not more than 7 working days from the
date of receipt, which is also the number of days indicated in the citizens’ charter. The maximum time
for extension that may be granted is:
A. 3 working days
B. 7 working days
C. 20 working days
D. 45 working days
8. If a government office fails to approve or disapprove an application within the prescribed processing
time:
A. It shall be deemed approved
B. It shall be deemed denied
C. It shall be deemed approved only if all the required documents have been submitted and all required
fees and charges have been paid
D. It shall be deemed denied if all the required documents have not been submitted even if all required
fees and charges have been paid
9. The number of signatories in any document shall be limited to a maximum of ___ signatures which shall
represent officers directly supervising the office or agency concerned.
A. 1
B. 3
C. 5
D. 7
10. Mr. X went to a government agency and arrived at 4:58pm. He was 12th in the number of persons who
sill be submitting an application for a government license. The agency closes at 5:00pm and it takes on
average 20mins to process the submission which means only 1 applicant will be processed before closing
time. In this case,
A. Mr. X would have to go back the following day and will be considered 11th in the processing queue.
B. Mr. X would have to go back the following day and obtain a new queueing number.
C. Mr. X would not have to go back as his application is still required to be processed that same day.
D. Mr. X can be considered a priority.
1 A 6 D
2 A 7 B
3 A 8 C
4 D 9 B
5 C 10 C

RFBT-16
FINANCIAL REHABILITATION & INSOLVENCY ACT

FINANCIAL REHABILITATION AND INSOLVENCY ACT
(RA No. 10142)
DECLARATION OF POLICY: It is the policy of the State to encourage debtors, both juridical and natural persons, and their
creditors to collectively and realistically resolve and adjust competing claims and property rights. In furtherance thereof, the
State shall ensure a timely, fair, transparent, effective and efficient rehabilitation or liquidation of debtors. The rehabilitation or
liquidation shall be made with a view to ensure or maintain certainly and predictability in commercial affairs, preserve and
maximize the value of the assets of these debtors, recognize creditor rights and respect priority of claims, and ensure equitable
treatment of creditors who are similarly situated. When rehabilitation is not feasible, it is in the interest of the State to facilities
a speedy and orderly liquidation of these debtor's assets and the settlement of their obligations. (Section 2)
NATURE OF PROCEEDINGS:
1. In rem. Meaning it is a proceeding which binds the whole world.
2. Jurisdiction over all persons affected shall be acquired upon publication of the notice of commencement in a newspaper of
general circulation in the Philippines.
3. Proceedings shall be summary and non-adversarial. (Section 3)
PURPOSE:
1. To encourage debtors and creditors to collectively and realistically resolve and adjust competing claims and property rights
through rehabilitation
2. If not feasible, to facilitate speedy and orderly liquidation of debtor’s assets and the settlement of their obligations.
DEBTORS: as defined under the law are insolvent:

1. Sole proprietorship registered with the DTI;
2. Partnership registered with the SEC
3. Corporations organized and existing under the laws of the Philippines; or
4. Individual debtors which are natural persons who are residents and citizens of the Philippines.
GROUP OF DEBTORS: refer to:

1. Financially related corporations – parent, subsidiary or affiliates
2. Partnerships – more than 50% of which is owned by the same person
3. Single Proprietorships – owned by the same individual
EXCLUDED DEBTORS: Banks, pre-need companies, insurance companies and government agencies or units – governed by
their respective special laws.
INSOLVENT: shall refer to the financial condition of a debtor that is generally

1. Unable to pay its or his liabilities as they fall due; or
2. Has liabilities greater than its or his assets
CREDITORS: include natural or juridical persons which has a claim against the debtor that arose on or before commencement
date, which can either be secured or unsecured.
1. Unsecured creditors are those whose claim or a portion thereof is neither secured, preferred nor subordinated
2. Secured creditors are those whose claims are secured by a lien (either by law, agreement or by judicial judgment) which
legally entitles a creditor to resort the property subject of a lien for payment of his claim. Example: loan secured by a
mortgage. Lien of workers and suppliers on inventory. Attachment issued by the court.
Claim shall refer to all claims or demands of whatever nature or character against the debtor or its property, whether for money
or otherwise, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, including, but not
limited to;
1. All claims of the government, whether national or local, including taxes, tariffs and customs duties; and
2. Claims against directors and officers of the debtor arising from acts done in the discharge of their functions falling within
the scope of their authority.
This inclusion does not, however, prohibit the creditors or third parties from filing cases against the directors and officers
acting in their personal capacities
PROCEEDINGS COVERED BY THE PRIA:

1. Rehabilitation – voluntary or involuntary
2. Pre-negotiated rehabilitation
3. Liquidation – voluntary or involuntary
4. Suspension of payments
I. SUSPENSION OF PAYMENTS
This involves calling the creditors to a meeting to propose and agree on a schedule of payments and to prevent the debtor from
making any payment outside the necessary or legitimate expenses of the business, and the issuance of a suspension order to
prevent pending executions against the debtor.
COVERAGE: only INDIVIDUAL DEBTORS (no partnerships/corporations)
FEATURES:
1. The debtor has sufficient properties to cover all his debts but he foresees the impossibility of meeting his debts when
they respectively fall due.
2. The purpose is to suspend or delay the payment of debts.
3. The amount of indebtedness is not affected (not reduced or discharged).
4. The number of creditors is immaterial

FINANCIAL REHABILITATION AND INSOLVENCY ACT RFBT-16
DISTINCTION WITH REHABILITATION:
SUSPENSION OF PAYMENTS REHABILITATION

Applies only to individual debtors Applies to business organizations also
Debtor has sufficient assets to cover its liabilities Debtor is insolvent
Secured debtors are not affected Secured debtors are affected by stay order
Filed by the debtor Maybe filed by creditors
No minimum requirement for the amount of claims When creditors file, the claims must be:
1. at least 1M or
2. at least 25% of the subscribed capital stock or partners’
contribution, whichever is higher
SUSPENSION ORDER: Upon motion filed by the individual debtor, the court may issue an order suspending any pending
execution against the individual debtor.
As a rule, no creditor shall sue or institute to collect his claim from the debtor from the time of the filing of the petition for
suspension of payments and for as long as the proceedings remain pending. Exceptions:
1. Those creditors having claims for:
a. Personal labor
b. Maintenance
c. Expense of last illness and funeral of the wife or children of the debtor
If incurred in the 60 days immediately prior to the filing of the petition
2. Secured creditors
The suspension order shall lapse when 3 months shall have passed without the proposed agreement being accepted by the
creditors or as soon as such agreement is denied.
PROHIBITED ACTS OF THE DEBTOR: after filing and during pendency, the debtor cannot:
1. Sell, transfer, encumber or dispose in any manner his property, except those used in the ordinary operations of commerce
or industry in which the petitioning individual is engaged
2. Making any payment outside of the necessary or legitimate expenses of his business or industry
CREDITORS’ MEETING: the debtor shall attach to his petition a proposed agreement with creditors, which shall be approved
in a creditors’ meeting.
1. Quorum: presence of creditors holding at least 3/5 of the liabilities of the debtor.
2. Approval: double majority is required:
a. 2/3 of the creditors voting; and
b. Claims of the majority vote amount to at least 3/5 of the total liabilities
A creditor whose claim is incurred within 90 days prior to the filing of the petition for suspension is not entitled to vote.
Creditors not affected by the suspension order may refrain from attending the meeting and voting therein and he shall not
be bound by any agreement determined in the meeting. However, if they should join in the voting they shall be bound in
the same manner as are other creditors.
3. Disapproval – the proceedings shall be terminated and the creditors shall be at liberty to enforce their rights.
II. REHABILITATION
Rehabilitation is the restoration of the debtor to a condition of successful operation and solvency. If it is shown that its
continuance of operation is economically feasible; and its creditors can recover by way of the present value of payments
projected in the plan, more if the debtor continues as a going concern than if it is immediately liquidated
TYPES OF REHABILITATION:
1. Voluntary – initiated by the debtor, upon showing that:
a. The debtor is insolvent; and
b. The viability of rehabilitation
Who will file?
Sole proprietorship Owner/proprietor

Partnership Majority of partners
Corporation Majority of the directors or trustees; AND
Stockholders representing 2/3 of outstanding capital/members of non-stock corporation
2. Involuntary – initiated by the creditor or group of creditors, if:

a. There is no genuine issue of fact or law on the claim/s of the petitioner/s;
b. No payments on the due and demandable debts have been made for at least 60 days;
c. or that the debtor has failed generally to meet its liabilities as they fall due; or
d. a creditor, other than petitioner/s has initiated foreclosure proceedings against the debtor that will prevent the debtor
from paying its debts as they become due or will render it insolvent.
Who will file? Creditors with claims or aggregate of whose claim is at least P1M or 25% of the subscribed capital stock
or partners’ contributions, whichever is higher

COMMENCEMENT/STAY ORDER: the court shall issue a Commencement Order which shall include a Stay Order, which shall:
1. Suspend all actions or proceedings, in court or otherwise for the enforcement of claims against the debtor;
2. Suspend all actions to enforce any judgment, attachment or other provisional remedies against the debtor;
3. Prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the
ordinary course of business;
4. Prohibit the debtor from making any payment of its liabilities outstanding as of commencement date except as may be
provided for by law.
Commencement Date: the date when the court issues the Commencement Order retroactive to the date of filing of the petition
for voluntary or involuntary proceedings.
The Commencement Order is issued within 5 days from the filing of the petition.
Duration: the entire duration of the rehabilitation proceeding but may be lifted if there is no substantial likelihood for the debtor
to be successfully rehabilitated.
CLAIMS: refer to all claims or demands of whatever nature or character against the debtor or its property, whether for money
or otherwise, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, including but not
limited to: (1) claims of the government; and (2) claims against directors and officers of the debtor arising from acts done in
the discharge of their functions falling within the scope of their authority.
Creditors/third parties are not prohibited from filing cases against the directors and officers acting in their personal capacities.
EFFECT OF STAY ORDER ON SECURED CREDITS: the preference of creditors is retained, but the enforcement of such
preference is suspended.
EXCEPTIONS TO THE STAY ORDER:

1. Cases already pending appeal in the SC as of commencement date.
2. Cases pending or filed at a specialized court or quasi-judicial agency.
3. Enforcement of claims against sureties and other persons solidarily liable with the debtor, and third party or accommodation
mortgagors as well as issuers of letters of credit, unless the property subject of the third party or accommodation mortgage
is necessary for the rehabilitation of the debtors.
4. Any form of action of customers or clients of a securities market participant to recover or otherwise claim moneys and
securities entrusted to the latter in the ordinary course of the latter’s business as well as any action of such securities
market participant or the appropriate regulatory agency or self-regulatory organization to pay or settle such claims or
liabilities.
5. Actions of a licensed broker or dealer to sell pledged securities of a debtor pursuant to a securities pledge or margin
agreement for the settlement of securities transactions
6. The clearing and settlement of financial transactions through facilities of a clearing agency or similar entities, as well as
any form of actions of such agencies or entities to reimburse themselves for any transactions settled for the debtor.
7. Any criminal action against individual debtor or owner, partner, director, or officer of a debtor shall not be affected by any
proceeding commenced under the FRIA.
COURT ACTION: Upon filing of the petition for rehabilitation, the court may:
1. Give due course to the petition if:
a. The debtor is insolvent; and
b. There is substantial likelihood for the debtor to be successfully rehabilitated
2. Deny the petition, if any of the following are present:
a. When the debtor is not insolvent;
b. The petition is a sham filing intended only to delay the enforcement of the rights of the creditors
c. The petition/rehabilitation plan/and the attachments are materially false or misleading statements; or
d. The debtor has committed acts of misrepresentation in fraud of creditors
3. Covert the proceedings to liquidation – there is no substantial likelihood for the debtor to be successfully rehabilitated
WHO WILL MANAGE THE BUSINESS OF THE DEBTOR: during the rehabilitation proceeding, the management shall be done
by the:
1. Existing Board and/or management; or
2. Upon motion, the court may appoint:
a. Rehabilitation Receiver; or
b. Management Committee
GROUNDS FOR APPOINTMENT OF A REHABLITATION RECEIVER/MANAGEMENT COMMITTEE:

1. Actual or eminent danger of dissipation, loss, wastage or destruction of the debtor’s assets or properties;
2. Paralyzation of the business operations of the debtor; or
3. (a) Gross mismanagement of the debtor, or (b) fraud or (c) other wrongful conduct on the part of, or gross or willful
violation of the FRIA by existing management of the debtor, owner, partner, director, officer of representative/s in the
management of the debtor.
REHABILITATION RECEIVER: appointed by the court with the principal duty of:
1. Preserving the value of the assets of the debtor during the rehabilitation proceedings,
2. Determining the viability of the rehabilitation of the debtor,
3. Preparing and recommending a Rehabilitation Plan to the court, and
4. Implementing the approved Rehabilitation Plan.
Qualifications:
1. Citizen of the Philippines
2. Resident of the Philippines in the 6 months immediately preceding the nomination
3. Has the requisite knowledge of insolvency and commercial laws
4. No conflict of interest

MANAGEMENT COMMITTEE: when appointed by the court, shall take the place of the management and the governing body
of the debtor and assume their rights and responsibilities.
CREDITORS’ COMMITTEE: creditors belonging to a class may formally organize a committee, or as a body create a committee
composed of each class of creditors, such as:
1. Secured creditors;
2. Unsecured creditors
3. Trade creditors and suppliers; and
4. Employees of the debtor.
The ROLE of the creditors’ committee is to assist the rehabilitation receiver in communicating with the creditors and shall be
the primary liaison between the rehabilitation receiver and the creditors
They cannot exercise or waive any right or give any consent on behalf of any creditor unless specifically authorized in writing
by such creditor.
ACTS OF DEBTORS/OWNERS/PARTNERS/DIRECTORS OR OFFICERS which may subject him/them to liability:

1. Dispose or cause to be disposed of any property of the debtor other than in the ordinary course of business or authorize or
approve any transaction in fraud of creditors or in a manner grossly disadvantageous to the debtor and/or creditors; or
2. Conceal or authorize or approve concealment, from the creditors, or embezzles or misappropriates, any property of the
debtor.
Extent of Liability: whichever is higher between:

1. Double the value of the property sold, embezzled or disposed; or
2. Double the value of the transaction involved
REHABILITATION PLAN – a plan by which the financial well-being and viability of an insolvent debtor can be restored using
various means including, but not limited to:
1. Debt forgiveness;
2. Debt rescheduling;
3. Reorganization or quasi-reorganization;
4. Dacion en pago;
5. Debt-equity conversion; and
6. Sale of the business (or parts of it) as a going concern; or
7. Setting up of new business entity; or
8. Other similar arrangements,
As may be approved by the court or creditors.
Approval required:
1. Creditors representing more than 50% of total claims and the confirmation of the court; or
2. The court even without approval of the creditors or even over the objections of the creditors, in the following cases:
a. The Rehabilitation Plan complies with the requirements of the FRIA;
b. The rehabilitation receiver recommends the confirmation of the Rehabilitation Plan;
c. The shareholders, owners or partners of the juridical debtor lose at least their controlling interest as a result of the
Rehabilitation Plan; and
d. The Rehabilitation Plan would likely provide the objecting class of creditors with compensation which has a net present
value greater than that which they would have received if the debtor were under liquidation.
Submission of the Rehabilitation Plan: If the Rehabilitation Plan is approved, the rehabilitation receiver shall submit the same
to the court for confirmation. Within 5 days from receipt of the Rehabilitation Plan, the court shall notify the creditors that the
Rehabilitation Plan has been submitted for confirmation, that any creditor may obtain copies of the Rehabilitation Plan and that
any creditor may file an objection thereto.
Objection of creditors: may be filed within 20 days from receipt of notice from the court that the Rehabilitation Plan has been
submitted for confirmation, on the following grounds:
1. The creditors’ support was induced by fraud;
2. Documents or data relied upon in the plan are materially false or misleading; or
3. The plan is in fact not supported by the voting creditors.
Confirmation of the Rehabilitation Plan: the court shall issue an order confirming the Rehabilitation Plan if:
1. No objections are filed within the relevant period or,
2. If objections are filed, the court finds them lacking in merit, or
3. The court determines that the basis for the objection has been cured, or d
4. The court determines that the debtor has complied with an order to cure the objection.
The court may confirm the Rehabilitation Plan notwithstanding unresolved disputes over claims if the Rehabilitation Plan has
made adequate provisions for paying such claims.
For the avoidance of doubt, the provisions of other laws to the contrary notwithstanding, the court shall have the power to
approve or implement the Rehabilitation Plan despite the lack of approval, or objection from the owners, partners or stockholders
of the insolvent debtor: Provided, That the terms thereof are necessary to restore the financial well-being and viability of the
insolvent debtor.
Period of Confirmation: must be within 1 year from the date of filing the petition.
If no plan is confirmed within the said period, the proceedings may upon motion, or motu propio, be converted into one for
the liquidation of the debtor.

Cram Down Effect: the rehabilitation plan approved by the court shall be binding upon the:
1. Debtor and
2. All persons who may be affected by it, including creditors, whether or not such persons:
a. have participated in the proceedings,
b. opposed the plan, or
c. whether or not the claims have been scheduled.
III. PRE-NEGOTIATED (OUT-OF-COURT) REHABILITATION
REQUIREMENTS:
1. The debtor must agree to the out-of-court or informal restructuring/workout agreement or rehabilitation plan;
2. Approved by creditors:
a. Representing at least 67% of the secured obligations;
b. Representing at least 75% of the unsecured obligations; and
c. Holding at least 85% of the total liabilities, secured and unsecured
STANDSTILL PERIOD: A standstill period that may be agreed upon by the parties pending negotiation and finalization of the
out-of-court or informal restructuring/workout agreement or Rehabilitation Plan and it shall be effective and enforceable not
only against the contracting parties but also against the other creditors, if:
1. Such agreement is approved by creditors representing more than fifty percent (50%) of the total liabilities of the debtor;
2. Notice thereof is publishing in a newspaper of general circulation in the Philippines once a week for two (2) consecutive
weeks; and
3. The standstill period does not exceed one hundred twenty (120) days from the date of effectivity.
The notice must invite creditors to participate in the negotiation for out-of-court rehabilitation or restructuring agreement and
notify them that said agreement will be binding on all creditors if the required majority votes are met.
CRAM DOWN EFFECT: A restructuring/workout agreement or Rehabilitation Plan that is approved pursuant to an informal
workout framework shall have the same legal effect as confirmation of a Plan as earlier discussed.
Publication requirement: The notice of the Rehabilitation Plan or restructuring agreement or Plan shall be published once a week
for at least three (3) consecutive weeks in a newspaper of general circulation in the Philippines.
Effectivity: The Rehabilitation Plan or restructuring agreement shall take effect upon the lapse of fifteen (15) days from the
date of the last publication of the notice thereof
IV. LIQUIDATION
Liquidation is the proceeding where:

1. Claims are filed; and
2. The assets of the insolvent debtor are disposed; and the
3. Proceeds are divided among the creditors.
LIQUDATOR: is one appointed by the court who will facilitate the liquidation proceedings. He may likewise be appointed by the
creditors who have filed their claims within the period set by court.
LIQUIDATION VS. SUSPENSION OF PAYMENTS
SUSPENSION OF PAYMENTS LIQUIDATION

Debtor has sufficient assets to cover liabilities Debtor is already insolvent
Payment of obligations is stayed Obligations are discharged
Applies only to individual debtors Also applies to business organizations
Filed by the debtor May be initiated by the creditors
No minimum amount of liabilities Debt of the individual must be at least P500,000 in
voluntary liquidation and more than P500,000 in
involuntary liquidation
Rules on concurrence and preference of credits DO NOT Applicable
apply
SIMILARITIES BETWEEN VOLUNTARY AND INVOLUNTARY LIQUIDATION:

1. Debtor is insolvent
2. P500,000 – is the qualifying amount:
a. More than P500,000 – for voluntary liquidation
b. At least P500,000 – for involuntary liquidation
DIFFERENCE BETWEEN VOLUNTARY AND INVOLUNTARY LIQUIDATION
VOLUNTARY INVOLUNTARY
Acts of insolvency need not be alleged and proved Creditors must prove acts of insolvency*
The individual debtor files the petition A creditor or group of creditors files the petition
The debtor is not absent as he is the one who files Apples even in the case of an absent debtor (one who resides or has
the petition departed from the Philippines, cannot be found or conceals himself)
Posting of bond by creditors not required Posting of bond by creditors is required
Liquidation order issued without trial Liquidation order issued only after trial
Number of creditors immaterial Must be 3 or more creditors whose claim is at least P1M or at least
25% of the subscribed capital stock or partners’ contributions,
whichever is higher. (same with rehabilitation)

*ACTS OF INSOLVENCY:
(a) That such person is about to depart or has departed from the Republic of the Philippines, with intent to defraud his
creditors;
(b) That being absent from the Republic of the Philippines, with intent to defraud his creditors, he remains absent;
(c) That he conceals himself to avoid the service of legal process for the purpose of hindering or delaying the liquidation or of
defrauding his creditors;
(d) That he conceals, or is removing, any of his property to avoid its being attached or taken on legal process;
(e) That he has suffered his property to remain under attachment or legal process for three (3) days for the purpose of
hindering or delaying the liquidation or of defrauding his creditors;
(f) That he has confessed or offered to allow judgment in favor of any creditor or claimant for the purpose of hindering or
delaying the liquidation or of defrauding any creditors or claimant;
(g) That he has willfully suffered judgment to be taken against him by default for the purpose of hindering or delaying the
liquidation or of defrauding his creditors;
(h) That he has suffered or procured his property to be taken on legal process with intent to give a preference to one or more
of his creditors and thereby hinder or delay the liquidation or defraud any one of his creditors;
(i) That he has made any assignment, gift, sale, conveyance or transfer of his estate, property, rights or credits with intent
to hinder or delay the liquidation or defraud his creditors;
(j) That he has, in contemplation of insolvency, made any payment, gift, grant, sale, conveyance or transfer of his estate,
property, rights or credits;
(k) That being a merchant or tradesman, he has generally defaulted in the payment of his current obligations for a period of
thirty (30) days;
(l) That for a period of thirty (30) days, he has failed, after demand, to pay any moneys deposited with him or received by
him in a fiduciary; and
(m) That an execution having been issued against him on final judgment for money, he shall have been found to be without
sufficient property subject to execution to satisfy the judgment
CONVERSION BY THE COURT INTO LIQUIDATION PROCEEDINGS: During the pendency of court-supervised or pre-
negotiated rehabilitation proceedings, the court may order the conversion of rehabilitation proceedings to liquidation
proceedings, in the following cases:
1. When a petition for rehabilitation is filed and it is established that the debtor is indeed insolvent but there is no substantial
likelihood for the debtor to be successfully rehabilitated.
2. If no rehabilitation plan is confirmed within a period of 1 year from the filing of the petition for rehabilitation.
3. Failure of rehabilitation or dismissal of the petition for rehabilitation on technical grounds; or
4. Upon filing of the verified motion of the debtor during the pendency of the court-supervised or pre-negotiated rehabilitation
proceedings.
Thereupon, the court shall issue the Liquidation Order mentioned in Section 112 hereof.
LIQUIDATION ORDER: includes, among others:

(a) declare the debtor insolvent;
(b) order the liquidation of the debtor and, in the case of a juridical debtor, declare it as dissolved;
(c) order the sheriff to take possession and control of all the property of the debtor, except those that may be exempt from
execution;
(d) order the publication of the petition or motion in a newspaper of general circulation once a week for two (2) consecutive
weeks;
(e) direct payments of any claims and conveyance of any property due the debtor to the liquidator;
(f) prohibit payments by the debtor and the transfer of any property by the debtor;
(g) direct all creditors to file their claims with the liquidator within the period set by the rules of procedure;
(h) authorize the payment of administrative expenses as they become due;
(i) state that the debtor and creditors who are not petitioner/s may submit the names of other nominees to the position of
liquidator; and
(j) set the case for hearing for the election and appointment of the liquidator, which date shall not be less than thirty (30)
days nor more than forty-five (45) days from the date of the last publication
RIGHTS OF SECURED CREDITORS: the liquidation order will not affect the right of a secured creditor to enforce his lien in
accordance with the applicable contract or law. He may:
1. waive his right under the security or lien, prove his claim in the liquidation proceedings and share in the distribution of
assets of the debtor; or
2. Maintain his rights under the security or lien. In which case:
a. The value of the property may be fixed in a manner agreed upon by the creditor and the liquidator.
i. Value is less than the claim – the liquidator may convey the property to the creditor and the latter will be admitted
in the liquidation proceedings as a creditor for the balance
ii. Value exceeds the claim – the liquidator may convey the property to the creditor and waive the debtor’s right of
redemption upon receiving the excess from the creditor.
b. The liquidator may sell the property and satisfy the secured creditor’s entire claim from the proceeds of the sale; or
c. The secured creditor may enforce the lien and foreclose on the property pursuant to applicable laws.
LIQUIDATOR:
Election of Liquidator: Only creditors who have filed their claims within the period set by the court, and whose claims are not
barred by the statute of limitations, will be allowed to vote in the election of the liquidator.
A secured creditor will not be allowed to vote, unless:

a) he waives his security or lien; or
b) has the value of the property subject of his security or lien fixed by agreement with the liquidator, and is admitted for the
balance of his claim.
The creditors entitled to vote will elect the liquidator in open court. The nominee receiving the highest number of votes cast in
terms of amount of claims, and who is qualified shall be appointed as the liquidator.

Court-Appointed Liquidator: The court may appoint the liquidator if:
a. on the date set for the election of the liquidator, the creditors do not attend;
b. the creditors who attend, fail or refuse to elect a liquidator;
c. after being elected, the liquidator fails to qualify; or
d. a vacancy occurs for any reason whatsoever, In any of the cases provided herein, the court may instead set another hearing
of the election of the liquidator.
A rehabilitation receiver, who was administering the debtor prior to the commencement of the liquidation, may also be appointed
as a liquidator.
Qualifications of the Liquidator: The liquidator shall have the qualifications enumerated above for rehabilitation receivers.
Removal: He may be removed at any time by the court for cause, either motu propio or upon motion of any creditor entitled
to vote for the election of the liquidator.
DETERMINATION OF CLAIMS
Registry of Claims: Within twenty (20) days from his assumption into office the liquidator shall prepare a preliminary
registry of claims of secured and unsecured creditors.
Secured creditors who have waived their security or lien, or have fixed the value of the property subject of their security or lien
by agreement with the liquidator and is admitted as a creditor for the balance, shall be considered as unsecured creditors.
The liquidator shall make the registry available for public inspection and provide publication notice to creditors, individual
debtors owner/s of the sole proprietorship-debtor, the partners of the partnership-debtor and shareholders or members of the
corporation-debtor, on where and when they may inspect it. All claims must be duly proven before being paid.
Right of Set-off: If the debtor and creditor are mutually debtor and creditor of each other one debt shall be set off against the
other, and only the balance, if any shall be allowed in the liquidation proceedings.
Opposition or Challenge to Claims: Within thirty (30 ) days from the expiration of the period for filing of applications for
recognition of claims, creditors, individual debtors, owner/s of the sole proprietorship-debtor, partners of the partnership-debtor
and shareholders or members of the corporation -debtor and other interested parties may submit a challenge to claim or claims
to the court, serving a certified copy on the liquidator and the creditor holding the challenged claim. Upon the expiration of the
(30) day period, the rehabilitation receiver shall submit to the court the registry of claims containing the undisputed claims that
have not been subject to challenge. Such claims shall become final upon the filling of the register and may be subsequently set
aside only on grounds or fraud, accident, mistake or inexcusable neglect.
Submission of Disputed Claims to the Court: The liquidator shall resolve disputed claims and submit his findings thereon
to the court for final approval. The liquidator may disallow claims.
THE LIQUIDATION PLAN: Within three (3) months from his assumption into office, the Liquidator shall submit a
Liquidation Plan to the court. The Liquidation Plan shall, as a minimum enumerate:
1. All the assets of the debtor
2. A schedule of liquidation of the assets and
3. Payment of the claims.
Exempt Property to be Set Apart: It shall be the duty of the court, upon petition and after hearing, to exempt and set apart,
for the use and benefit of the said insolvent, such real and personal property as is by law exempt from execution, and
also a homestead; but no such petition shall be heard as aforesaid until it is first proved that notice of the hearing of the
application therefor has been duly given by the clerk, by causing such notice to be posted it at least three (3) public places in
the province or city at least ten (10) days prior to the time of such hearing, which notice shall set forth the name of the said
insolvent debtor, and the time and place appointed for the hearing of such application, and shall briefly indicate the homestead
sought to be exempted or the property sought to be set aside; and the decree must show that such proof was made to the
satisfaction of the court, and shall be conclusive evidence of that fact.
Sale of Assets in Liquidation: The liquidator may sell the unencumbered assets of the debtor and convert the same into
money.
General Rule: The sale shall be made at public auction.
Exceptions: A private sale may be allowed with the approval of the court if;
a) the goods to be sold are of a perishable nature, or are liable to quickly deteriorate in value, or are disproportionately
expensive to keep or maintain; or
b) the private sale is for the best interest of the debtor and his creditors.
With the approval of the court, unencumbered property of the debtor may also be conveyed to a creditor in satisfaction of his
claim or part thereof.
Order Removing the Debtor from the List of Registered Entitles at the Securities and Exchange Commission: Upon
determining that the liquidation has been completed, the court shall issue an Order approving the report and ordering the SEC
to remove the debtor from the registry of legal entities.
Termination of Proceedings: Upon receipt of evidence showing that the debtor has been removed from the registry of legal
entities at the SEC. The court shall issue an Order terminating the proceedings.

1. Proceedings under the FRIA can be described as follows, except:
A. In rem
B. Summary
C. Adversarial
2. Which of the following is a proceeding which applies only to individual debtors and not to business
organizations?
A. Rehabilitation
B. Pre-negotiated rehabilitation
C. Suspension of Payments
D. Liquidation
3. Suspension of Payments differ from Rehabilitation in that the latter:
A. Applies only to individuals
B. Filed only by the debtor
C. Secured debtors are not affected
D. Debtor’s assets are less than the liabilities
4. The following, if incurred within 60 days prior to the filing of the petition, will not be covered by the suspension
order issued by the court, except:
A. Personal labor
B. Maintenance
C. Expense of last illness and funeral of the wife or children of the debtor
D. Purchase of raw materials
5. In the creditors’ meeting relative to a Suspension of Payments proceeding, the required quorum shall be:
A. Majority of the number creditors
B. 2/3 of the liabilities
C. 3/4 of the liabilities
D. 3/5 of the liabilities
6. First Statement: Creditors not affected by the suspension order may refrain from attending the creditors’
meeting and voting in a suspension of payments proceedings.
Second Statement: If they should join in the voting they shall be bound in the same manner as are other
creditors.
7. The debtor’s proposed agreement in a suspension of payments proceeding in order to be approved would
require:
I. 2/3 of the creditors voting
II. Claims of the majority vote amount to at least 3/5 of the total liabilities
A. I and II
B. I or II
C. I only
D. II only
8. For the creditor/s to file an involuntary rehabilitation of a debtor, the required amount of debt/s the creditor/s
should have would be:
A. At least P1M
B. At least 25% of the subscribed capital stock or partners’ contribution
C. At least P1M or At least 25% of the subscribed capital stock or partners’ contribution, whichever is higher
D. At least P1M or At least 25% of the subscribed capital stock or partners’ contribution, whichever is lower
9. A rehabilitation proceeding may be converted into liquidation if there is no rehabilitation plan is confirmed
within a period of _____ from the filing of the petition:
A. 1 year
B. 18 months
C. 2 years
D. 30 months
10. For voluntary liquidation to be commenced the debts of the debtor must be:
A. At least P500,000
B. More than P500,000
C. At least P1,000,000
D. More than P1,000,000
1. C 6. A
2. C 7. A
3. D 8. C
4. D 9. A
5. D 10. B

RFBT-17
ANTI-BOUNCING CHECKS LAW

ELEMENTS OF VIOLATION of Bouncing Checks Law (BP 22):
1. The making, drawing, and issuance of any check to apply for account or for value;
2. The knowledge* of the maker, drawer, or issuer that at the time of issue he does not have sufficient funds in or credit with
the drawee bank for the payment of the check in full upon its presentment; and
3. (a) The subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit or (b) would have been
dishonored for the same reason had not the drawer, without any valid cause, ordered the bank to stop payment.
*Knowledge of the maker/drawer: The making, drawing and issuance of a check payment of which is refused by the drawee
because of insufficient funds in or credit with such bank, when presented within ninety (90) days from the date of the
check, shall be prima facie evidence of knowledge of such insufficiency of funds or credit.
Valid Defense – payment; Requirement of Notice: Such maker or drawer will not be liable if he pays the holder thereof
the amount due thereon, or makes arrangements for payment in full by the drawee of such check within (5) banking days
after receiving notice that such check has not been paid by the drawee.
DUTY OF THE DRAWEE: It shall be the duty of the drawee of any check, when refusing to pay the same to the holder thereof
upon presentment, to cause to be written, printed, or stamped in plain language thereon, or attached thereto, the
reason for drawee's dishonor or refusal to pay the same.
Where there are no sufficient funds in or credit with such drawee bank, such fact shall always be explicitly stated in
the notice of dishonor or refusal.
In all prosecutions under BP Blg 22, the introduction in evidence of any unpaid and dishonored check, having the drawee's
refusal to pay stamped or written thereon or attached thereto, with the reason therefor as aforesaid, shall be prima facie
evidence of:
1. The making or issuance of said check, and
2. The due presentment to the drawee for payment and
3. The dishonor thereof, and
4. That the same was properly dishonored for the reason written, stamped or attached by the drawee on such dishonored
check.
Notwithstanding receipt of an order to stop payment, the drawee shall state in the notice that there were no sufficient funds in
or credit with such bank for the payment in full of such check, if such be the fact.
CREDIT CONSTRUED: The word "credit" as used herein shall be construed to mean an arrangement or understanding with
the bank for the payment of such check.
EFFECT OF ACQUITTAL ON CIVIL LIABILITY: An acquittal does not entail the extinguishment of the civil liability for the
dishonored checks. An acquittal based on lack of proof beyond reasonable doubt does not preclude the award of civil damages.
(Mateo v. People, GR 200090, March 6, 2013)
PENALTY:
1. Imprisonment – not less than 30 days but not more than 1 year
2. Fine – not less than but not more than double the amount of the check, which fine shall not exceed the amount of P200,000;
or
3. Both, at the discretion of the court.
Prescriptive period: Prescriptive period of BP 22 Violation of B.P. Blg. 22 prescribes in four (4) years from the commission
of the offense or, if the same be not known at the time, from the discovery. thereof
DIFFERENCE WITH ESTAFA BY POST-DATING OR ISSUING A CHECK:
a. GOOD FAITH IS A DEFENSE IN ESTAFA: So that when the accused who issued the check believing that he would be
able to make the corresponding deposit, informed the complainant, when he sensed that he could not make the deposit,
not to present the check to the bank for cancellation, he could not be held liable for Estafa. (See People vs. Villapando) By
informing the payee, there is no deceit. (Firestone Tire and Rubber Co. of the Philippines vs. Ines Chavez)
In BP Blg. 22, good faith is NOT a valid defense.
b. PAYMENT OF A PRE-EXISTING OBLIGATION – NO ESTAFA: If the check is in payment of a pre-existing obligation there
is no deceit and hence, the crime of Estafa cannot exist.
In BP Blg. 22, even if the check is issued to pay a pre-existing obligation, there may still be liability.
c. ESTAFA MAY BE COMMITTED BY MERELY ISSUING A WORTHLESS CHECK – unlike in BP Blg. 22 which requires that
the accused BOTH drew and issued the check.
d. PERIOD TO MAKE GOOD THE CHECK – is only 3 days in estafa, but 5 banking days in BP Blg. 22.
LIABLE FOR BOTH ESTAFA AND BP 22: Under Sec. 5 of BP Blg. 22, the prosecution thereof shall be without prejudice to any
liability for violation of any provision of the RPC. It is now well settled that a single act can give rise to Estafa and at the same
time to violation of BP Blg. 22.

ANTI-BOUNCING CHECKS LAW RFBT-17
MULTIPLE CHOICE QUESTIONS
1. Knowledge of insufficiency of funds in BP Blg 22 would be presumed if the check was presented within __ days from the
date of the check
A. 30
B. 60
C. 90
D. 120
2. The drawer and issuer of the worthless check will not be liable under BP Blg. 22 if he pays the holder or makes arrangements
for the payment in full by the drawee of the amount of the check within ___________ after receiving notice that such check
has not been paid by the drawee:
A. 3 calendar days
B. 3 banking days
C. 5 calendar days
D. 5 banking days
3. The stamp of the drawee written on the dishonored check, with the reason therefor, shall be prima facie evidence of the
following, except:
A. Making or issuance of the check
B. Due presentment to the drawee for payment
C. The dishonor of the check
4. This shall be construed to mean an arrangement or understanding with the bank for the payment of the subject check
under BP Blg 22:
A. Arrangement
B. Contract
C. Credit
D. Loan
5. Violation of BP Blg. 22 may subject the accused to a fine not to exceed:

A. P100,000
B. P200,000
C. P500,000
D. P1,000,000
6. Good faith is a valid defense in:

A. Estafa by postdating or issuing a worthless check
B. BP Blg 22
C. Both Estafa and BP Blg 22
D. Neither Estafa nor BP Blg 22
7. Neal Caffrey issued a check to Peter Burke as payment for goods purchased by the former from the latter. Peter presented
the check 30 days from the date of the check and the same was dishonored due to insufficiency of funds. Assuming the
notice requirement has already been complied with, Neal
A. Can be guilty of violating the Anti-Bouncing Checks Law
B. Can be guilty of Estafa for issuing a worthless check
C. Can be guilty of violating both the Anti-Bouncing Checks Law and Estafa for issuing a worthless check
D. Did not commit any crime
8. Neal Caffrey issued a check to Peter Burke which induced the latter to deliver goods in exchange for the check. Peter
presented the check 30 days from the date of the check and the same was dishonored due to insufficiency of funds.
Assuming the notice requirement has already been complied with, Neal
A. Can be guilty of violating the Anti-Bouncing Checks Law
B. Can be guilty of Estafa for issuing a worthless check
C. Can be guilty of violating both the Anti-Bouncing Checks Law and Estafa for issuing a worthless check
D. Did not commit any crime
9. In the violation of the Anti-Bouncing Checks Law, the accused must be:
A. The issuer
B. The drawer
C. Both the issuer and drawer
D. Either the issuer or the drawer
10. In the violation of Estafa involving worthless checks, the accused must be:
A. The issuer
B. The drawer
C. Both the issuer and drawer
D. Either the issuer or the drawer
1. C 6. A
2. D 7. A
3. D 8. C
4. C 9. C
5. B 10. D

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ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 45  May 2023 CPA Licensure Examination

2. KINDS OF OBLIGATIONS AS TO BASIS AND ENFORCEABILITY

Civil obligations give a right of action to compel their performance.

EXAMPLES OF NATURAL OBLIGATIONS:

3. ESSENTIAL ELEMENTS OF OBLIGATION

General Rule: all rights acquired in virtue of an obligation are transmissible

1. LAW (Obligations ex lege)

2. CONTRACTS (Obligations ex contractu)

3. QUASI-CONTRACTS (Obligations ex quasi-contractu)

Page 1 of 16 0915-2303213  www.resacpareview.com

4. DELICT (Obligations ex maleficio or ex delicto)

Revised Penal Code:

The civil liability arising from a crime includes:

5. QUASI-DELICTS (Obligations ex quasi-delicto or ex quasi-maleficio)

Acts done by: Who is responsible?

KINDS OF CIVIL OBLIGATIONS

1. AS TO PERFECTION AND EXTINGUISHMENT

Page 2 of 16 0915-2303213  resacpareview@gmail.com

Impossibility: can either be:

Effect of fulfillment of conditions:

Without fault of the debtor Obligation is extinguished

The above rules likewise apply to obligations with a period.

Page 3 of 16 0915-2303213  resacpareview@gmail.com

As to effect, a term/period may be:

The courts can fix the period in the following circumstances:

Consequences of general rule:

1. Where several objects are due, the fulfillment of one is sufficient.

Right of choice belongs to:

Fortuitous Event Extinguished

Fortuitous Event Extinguished

Page 4 of 16 0915-2303213  resacpareview@gmail.com

What is lost through fortuitous event The obligation

3. AS TO RIGHTS AND OBLIGATIONS OF MULTIPLE PARTIES

Solidary obligation arises when the obligation:

ENFORCEMENT OF SOLIDARY OBLIGATIONS:

Examples of Total Defenses:

Page 5 of 16 0915-2303213  resacpareview@gmail.com

Obligations deemed indivisible:

Obligations deemed divisible:

5. OBLIGATION WITH A PENAL CLAUSE

REDUCTION OF PENALTY: the courts can reduce the penalty whenever:

6. OTHER CLASSIFICATIONS OF OBLIGATIONS

As to subject matter Real – obligation to give

Page 6 of 16 0915-2303213  resacpareview@gmail.com

NATURE AND EFFECT OF OBLIGATIONS

NOTE: In an obligation to give a generic thing, no such concurrent obligations exist.

REMEDIES FOR BREACH OF OBLIGATIONS

RESCISSION AS A REMEDY: TWO KINDS:

Damages; KINDS (MENTAL):

SPECIFIC CIRCUMSTANCES AFFECTING OBLIGATIONS IN GENERAL

Page 7 of 16 0915-2303213  resacpareview@gmail.com

Degree of care required:

Kinds of Negligence as to SOURCE:

Negligence on the part of the supposed creditor:

d. ANY OTHER MANNER OF CONTRAVENTION (VIOLATIO)

FORTUITOUS EVENT: is an excuse for non-performance.

Elements: To constitute a fortuitous event, the following elements must concur:

MODES OF EXTINGUISHMENT OF OBLIGATIONS

Page 8 of 16 0915-2303213  resacpareview@gmail.com

Other causes of extinguishment of obligations:

These other causes are governed elsewhere in the Civil Code.

a. Provisions as to the PAYOR