commercial law review green notes

COMMERCIAL LAW 2010

Table of Contents

I. Negotiable Instruments Law ............................................................................... 2II. Corporation Law (BP 68) ............................................................................................... 20III. Insurance ............................................................................................................................... 50IV. Transportation Laws

a. Common Carriers ............................................................................................... 102b. Code of Commerce Overland Transportation .................................................. 107c. Air Transportation ............................................................................................... 109d. Maritime Commerce/ Water Transportation ................................................. 110e. Carriage of Goods by Sea Act .............................................................................. 119f. Salvage Law .............................................................................................................. 120g. Warsaw Convention ............................................................................................... 121h. Public Service Law ............................................................................................... 124

V. Special Commercial Lawsa. Merchants ………………………………………………………………………………. 129b. Joint Accounts ………………………………………………………………………………. 131c. Letters of credit ……………………………………………………………………132d. Trust receipts ……………………………………………………………………………… 133e. Bulk Sales ………………………………………………………………………………. 135f. Warehouse receipts ………………………………………………………………….. 136g. Chattel mortgages ……………………………………………………………………139h. Extra-judicial foreclosure of real estate mortgages …………………….. 141i. Insolvency ………………………………………………………………………………. 143j. Central Bank Act …………………………………………………………………………….150k. General Banking Law …………………………………………………………………….. 152l. PDIC ………………………………………………………………………………………………156m. Truth in Lending …………………………………………………………………………… 157

VI. The ‘Inside Story’ On the ‘Secrecy of Bank Deposits’ Law ……………………… 159VII. Intellectual Property Code .............................................................................................. 161

ACKNOWLEDGEMENTThese notes were made under the supervision of Atty. Renato Rondez.Special thanks to Atty. Aurelio Galacgac for notes and cases in Intellectual Property Code and to Atty. Abe Dumaguing for notes and cases in Negotiable Instruments Law.

NEGOTIABLE INSTRUMENTS LAW: Rhonella Ulip, , Jesebel Agdawi, Norilen De Jesus, Missy Maramba, and Victor Morales .

CORPORATION LAW: Precious Cabradilla, Richenn Lacamento, Romelyn Kimayong, Analyn Quiniones, and Rodolfo

Santiago. INSURANCE:

Erwin Lapitan, Ana Cristina Cawed, Julie Nicer, Jan Karlo Lopez, and Jovencio Robles. TRANSPORTATION AND INTELLECTUAL PROPERTY CODE:

Myrtle Marayag, Lemwel Alapit, Aileen Bugnosen and Jason Baban.

COMMERCIAL LAW

NEGOTIABLEINSTRUMENTS LAW

(Act No. 2031, June 2, 1911)

- Written contracts for the payment of money; by its form, intended as a substitute for money and intended to pass from hand to hand, to give the holder in due course the right to hold the same and collect the sum due.(2005 BEQ)

Note: A negotiable instrument is not a legal tender.

LEGAL TENDER is that kind of money which the law compels the creditor to accept in payment of his debt. Although a NI is intended to be a substitute for money; it is not generally legal tender (cf. Sec. 60, New Central Bank Act)

Negotiable instruments produce the effect of payment only when they have been encashed or through the fault of the creditor have been impaired. (Article 1249, NCC)

Principal Features and Characteristicsa. negotiability - right of transferee to hold

the instrument and collect the sum dueb. accumulation of secondary contracts -

instrument is negotiated from person to person

INCIDENTS IN THE LIFE OF A NEGOTIABLE INSTRUMENT (INPADPDND)

(Commercial laws of the Philippines, Vol.1, Aguedo Agbayani, 1992 ed.)

1. I ssue2. N egotiation3. P resentment for acceptance, in certain

kinds of bills of exchange4. A cceptance5. D ishonor for non-acceptance6. P resentment for payment7. D ishonor by non-payment 8. N otice of dishonor 9. D ischarge

DISTINCTIONS:(2005 BEQ)

Negotiable Instruments

Non-negotiable Instruments

Contains all the requisites of Sec. 1 of the NIL

Does not contain all the requisites of Sec. 1 of the NIL

Transferred by negotiation

Transferred by assignment

Holder in due course may have better rights than transferor

Transferee acquires rights only of his transferor

Prior parties warrant payment

Prior parties merely warrant legality of title

Transferee has right of recourse against intermediate parties

Transferee has no right of recourse

Negotiable Instruments

Negotiable Documents of Title

Have requisites of Sec. 1 of the NIL

Does not contain requisites of Sec. 1 of NIL

Have right of recourse against intermediate parties who are secondarily liable

No secondary liability of intermediate parties

Holder in due course may have rights better than transferor

Transferee merely steps into the shoes of the transferor

Subject is money Subject is goods

Instrument itself is property of value

Instrument is merely evidence of title; thing of value are the goods mentioned in the document

UC-BCF COLLEGE OF LAW Dean Reynaldo U. Agranzamendez of 168

CHECK BOE- Always drawn upon a bank or banker

- May or may not be drawn against a bank

- Always payable on demand

- May be payable on demand or at a fixed or determinable future time

- Not necessary that it be presented for acceptance

- Necessary that it be presented for acceptance

- Drawn on a deposit - Not drawn on a deposit

- The death of a drawer of a check, with knowledge by the banks, revokes the authority of the banker pay

- The death of the drawer of the ordinary bill of exchange does not

- Must be presented for payment within a reasonable time after its issue (6 months)

- May be presented for payment within a reasonable time after its last negotiation.

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Promissory NoteBill of Exchange

Unconditional promise

Unconditional order

Involves 2 parties Involves 3 partiesMaker primarily liable

Drawer only secondarily liable

Only 1 presentment - for payment

Generally 2 presentments - for acceptance and for payment

PN CHECK- There are two (2) parties, the maker and the payee

- There are three (3) parties, the drawer, the drawee bank and the payee

- May be drawn against any person, not necessarily a bank

- Always drawn against a bank

- May be payable on demand or at a fixed or determinable future time

-Always payable on demand

- A promise to pay - An order to pay*Note: PN, BOE and Chek- definitions (2002 BEQ)

PROMISSORY NOTE - unconditional promise to pay in writing made by one person to anther, signed by the maker, engaging to pay on demand or a fixed determinable future time a sum certain in money to order or bearer. When the note is drawn to maker’s own order, it is not complete until indorse by him. (Sec. 184 NIL)

Parties: a. Maker – one who makes a promise and

sign the instrumentb. Payee – one to whom the promise is

made or the instrument is payable.

BILL OF EXCHANGE - unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. (Sec. 126 NIL)Parties:a. Drawer – one who gives the order to pay

money to third party.b. Payee – one to whom the bill is drawn or

is payablec. Drawee/ acceptor – person to whom

the bill is addressed and who is ordered to pay.

CHECK - bill of exchange drawn on a bank and payable on demand. (Sec. 185 NIL)

Requisites of a Negotiable Note (PN): Key: (SUDO)It must:a. be in writing s igned by the drawerb. contains an u nconditional promise or

order to pay a sum certain in moneyc. be payable on d emand or at a fixed

determinable future timed. be payable to o rder or to bearer (Sec. 1

NIL)

Requisites of a Negotiable Bill (BOE):Key: (SUDOC)It must:a. be in writing s igned by the drawerb. contains an u nconditional promise or

order to pay a sum certain in moneyc. be payable on d emand or at a fixed

determinable future timed. be payable to o rder or to bearere. the drawee must be named or otherwise

indicated with reasonable c ertainty (Sec. 1 NIL)

OTHER FORMS OF PROMISSORY NOTE1. Due bill , An instrument whereby one person acknowledges his indebtedness to another and promises to pay a sum certain in money .2. Bonds, which are in the nature of PN.3. Certificate of Deposit issued by banks payable to depositor or his order, or to bearer

FORMS OF BILL OF EXCHANGE1. Trade Acceptance , A BOE drawn by seller on the buyer for the purchase price of goods.2. Clean Bill of Exchange , A BOE wherein no document is attached upon presentment for acceptance or payment.3. Documentary Bill of Exchange, A BOE wherein documents are attached upon presentment for acceptance or payment . 4. Bank Acceptance , A draft drawn and accepted by a bank.5. Drafts, which are BOE drawn by one bank upon another.

FORMS OF CHECK1. Ordinary Check2. Cashier’s Check, A Check payable to

third person which is drawn by the bank upon itself. (2003 BEQ)

3. Certified check , A personal check with guaranteed funds to cover the payment of the check.

4. Voucher Check5. Traveller’s Check6. Manager’s Check , A check drawn by the

manager of the bank. (2003 BEQ)7. Crossed Check ( 2004, 2005 BEQ)


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8. Memorandum Check.

HOWEVER, THESE ARE NON- NEGOTIABLE:1. Treasury warrant are non-

negotiable because there is an indication of the fund as the source of payment of the disbursement.(Metrobank v. CA, 194 SCRA 169)

2. Since a postal money order is subject to restrictions and limitations under postal laws and issued by the Government which is not engaged in commercial transactions, it is not governed by NIL. (Phil. Educ. Co., Inc. vs. Soriano, 39 SCRA 587)

3. Letters of credit 4. Warehouse receipts - Non-

Negotiable for the same as Bill of lading it merely represents goods, not money.

FORM OF NI: (Sec. 1) Key: (WUPOA)1. Must be in Writing, and signed by the

maker or drawer;2. Must contain an Unconditional promise

or order to pay a sum certain in money;3. Must be Payable on demand, or at a fixed

or determinable future time;4. Must be payable to Order or to bearer;

and 5. When an instrument is Addressed to a

drawee, he must be named therein with reasonable certainty.

Factors that affect the determination of negotiability of instruments:

a. Whole instrument;b. What appears on the face of the

instrument;c. Requisites enumerated in Sec.1 of NIL;

andd. Should contain words or terms of

negotiability.(Gopenco, Commercial law Bar Reviewer, cited in Aquino p. 23)

In determining the negotiability of an instrument, the instrument in its entirety and what appears on its face must be considered. It must comply with the requirements of Sec.1 of NIL. ( Caltex Phils. V. CA, 212 SCRA 448)

The acceptance of a bill of exchange is not important in the determination of its negotiability. The nature of acceptance is important only on the determination of the kind of liabilities of the parties involved. (PBCOM v. Aruego, 102 SCRA 530)

Notes on Section 1:- In order to be negotiable, there must be a

writing of some kind, else there would be nothing to be negotiated or passed from hand to hand. The writing may be in ink, print or pencil. It may be upon parchment, cloth, leather or any other substitute of paper.

- It must be signed by the maker or drawer. It may consist of mere initials or even numbers, but the holder must prove that what is written is intended as a signature of the person sought to be charged.

- The Bill must contain an order, something more than the mere asking of a favor.

- Sum payable must be in money only. It cannot be made payable in goods, wares, or merchandise or in property.

- A drawee’s name may be filled in under Section 14 of the NIL

A SUM IS CERTAIN EVEN IF IT IS TO BE PAID (Sec. 2)1. with interest; or 2. by stated installments; or 3. by stated installments, with acceleration clause; or 4. with exchange; or 5. with costs of collection or an attorney's fee

ACCELERATION CLAUSE—renders the whole debt due and demandable upon failure of the obligor to comply with certain conditions.

General Rule: The promise or order should not depend on a contingent event. If it is conditional, it is non-negotiable.

Exceptions:a. Indication of particular fund from which

the acceptor disburses himself after payment

b. Statement of the transaction which gives rise to the instrument. (Sec. 3 NIL)

But an order or promise to pay out of a particular fund is not unconditional

NOTES ON SECTION 3 The particular fund indicated should not be

the direct source of payment, else it becomes unconditional and therefore non-negotiable. The fund should only be the source of reimbursement.

A statement of the transaction does not destroy the negotiability of the instrument.

Exception: Where the promise to pay or order is made subject to the terms and conditions of the transaction stated.


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Payable upon a determinable future time if:a. There is a fixed period after sight/dateb. On or before a specified date/fixed

determinable future timec. On or at a fixed date after the occurrence

of an event certain to happen though the exact date is not certain (Sec. 4 NIL)

Notes on Section 4If the instrument is payable upon a

contingency, the happening of the event does not cure the defect (still non-negotiable)

General Rule: If some other act is required other than the payment of money, it is non-negotiable.

Exceptions:a. Sale of collateral securitiesb. Confession of judgmentc. Waives benefit of lawd. Gives option to the holder to require

something to be done in lieu of money (Sec. 5 NIL)

The validity and negotiable character of a negotiable instrument are NOT affected by the fact that:1. It is not dated;2. It does not specify the place where it is

drawn or where it is payable;3. It bears a seal;4. It designates a particular kind of current

money in which payment is to be made (Sec. 6)

AN INSTRUMENT IS PAYABLE ON DEMAND (Sec. 7):

1. When expressed to be payable on demand, at sight or on presentation2. When no period of payment is stated3. Where issued, accepted, or indorsed after maturity (as to immediate parties)

Notes on Section 7- if the time for payment is left blank (as opposed to being omitted), it may properly be considered as an incomplete instrument and fall under the provisions of Sec. 14, 15, or 16 depending on how the instrument is delivered.

PAYABLE TO ORDER (Sec. 8)The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of –

1. A payee , who is not a maker , drawer, or drawee; or2. The drawer or maker : or

* If the maker is made the payee, the instrument must be indorsed in order to complete it. (Sec. 184) * When the instrument is payable to the order of the drawer, and it is accepted by the drawee, the instrument is equivalent to a promissory note made by the acceptor in favor of the drawer. ( Commercial Laws of the Phils., Vol.1, Aguedo Agbayani, 1992,ed.)3. Two or more payees jointly ; or4. One or more several payees ; or5. The holder of an office for the time being

PAYABLE TO BEARER (Sec.9)The instrument is payable to bearer when:1. It is expressed to be so payable; or 2. It is payable to a person named therein or bearer; or 3. It is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or 4. The name of the payee does not purport to be the name of any person; or 5. The only or last indorsement is an indorsement in blank.

The General rule is that an instrument “payable to order” may be negotiated by proper indorsement plus delivery . On the other hand , an instrument “payable to bearer” , can be negotiated by mere delivery or if originally a order instrument by blank indorsement plus delivery.

An instrument originally payable to bearer can be negotiated by mere delivery even if it is endorsed specifically. If originally a bearer instrument, it will always remain a bearer instrument.

However, with regards to an original order instrument , when specifically indorsed, it can no longer be negotiated further by mere delivery ; it must be INDORSED.

* A check that is payable to the order of cash is payable to bearer. Reason: The name of the payee does not purport to be the name of any other person. ( Ang Tek Lian v. CA, 87 Phil. 383)

Notes on Section 9 “fictitious person” is not limited to persons

having no legal existence. An existing person may be considered fictitious depending on the intention of the maker or the drawer.

“fictitious person” means a person who has no right to the instrument because the maker or drawer of it so intended. He was not intended to be the payee.

where the instrument is drawn, made or prepared by an agent, the knowledge or


COMMERCIAL LAW

intent of the signer of the instrument is controlling.

Where the agent has no authority to execute the instrument, the intent of the principal is controlling

AMBIGUOUS INSTRUMENTS: RULES OF CONSTRUCTION of NI (Sec. 17) (1998 Bar Exam)The following rules of construction apply:

1. Discrepancy between the amount in figures and that in words- the words prevail, but if the words are ambiguous, reference will be made to the figures to fix the amount; 2. Payment for interest is provided for- interest runs from the date of the instrument, if undated, from issue thereof;3. Instrument undated- consider date of the issue;4. Conflict between written and printed provisions- written provisions prevail; 5. Where the instrument is ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election; 6. If one signs without indicating in what capacity he has fixed his signature, he is considered an indorser;7. If two or more persons sign “We promise to pay,” their liability is joint (each liable for his part) but if they sign “I promise to pay”, the liability is solidary (each can be compelled to comply with the entire obligation).

PROVISIONS that do not affect the negotiability of an instrument: “1. Sum payable includes payment of interest;2. Payment in stated installments;

—The amount of each installment and the due date of each installment must be indicated.

3. Sum to be paid on installments with acceleration clause;4. Sum to be paid with cost of collection and atty’s fees;

—“Reasonable atty’s fees” does not affect negotiability but “Plus costs, charges, and atty’s fees” affects the negotiability since the sum is not certain.

5. Indication of a particular fund to which reimbursement is to be paid or a particular account to which it would be debited. OTHER PROVISIONS not affecting the negotiability of an instrument:

1. Statements which gave rise to the instrument’s issuance;

2. Provisions of clauses in regards to sale of securities;

3. Clause affecting confessions of judgment;4. A waiver of benefit intended for the

obligor;

5. Giving the holder the election to require something to be done in lieu of payment of money;

6. Absence of date;7. No seal, place of payment, place of

issuance;8. Absence of a statement of “consideration

has been paid”;9. Negotiation of a particular kind of money

Provisions that affect the NEGOTIABILITY OF THE INSTRUMENT:

1. Promise/order to do an act in addition to the payment of money;

2. Promise/order to pay out of a particular fund; or

3. Promise/order to pay depends on a contingency

ANTE-DATING/POST-DATING (Sec.12)

Ante – Dating is effected by :1.Changing the date of the instrument to an earlier date than when it was made.2. If the instrument is undated, by placing an earlier date than when it was actually issued.

Post - Dating is effected by :1. Changing the date of the instrument to a later time than when it was made.

Rule: Does not invalidate/affect the negotiability of the instrument UNLESS used for illegal/fraudulent purposes.

INSERTION OF A WRONG DATE (Sec.13)Rule: If there is a date and it is changed, apply Sec.124 on ALTERATION OF AN INSTRUMENT.

The date may be inserted in an instrument when:

a. An instrument expressed to be payable at a fixed period after date is issued undated

b. Where acceptance of an instrument payable at a fixed period after sight is undated (Sec. 13 NIL)

Effects:- Any holder may insert the true date of

issuance or acceptance- The insertion of a wrong date does not

avoid the instrument in the hands of a subsequent holder in due course

- As to the holder in due course, the date inserted (even if it be the wrong date) is regarded as the true date.

As to a holder in due course- the date inserted is the true date.


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Subsequent Holder in Due Course not affected by the following deficiencies:

a. Incomplete but delivered instrument (Sec. 14)

b. Complete but undelivered (Sec. 16)c. Complete and delivered issued without

consideration or a consideration consisting of a promise which was not fulfilled (Sec 28)

Holder in Due Course Affected by Abnormality/Deficiency:

a. Incomplete and undelivered instrument (Sec. 15)

b. Maker/drawer’s signature forged (Sec. 23)

Incomplete but Delivered Instrument: (Sec.14)(2004 & 2005 Bar Exam)

1. Where an instrument is wanting in any material particular:

a. Holder has prima facie authority to fill up the blanks therein.

b. It must be filled up strictly in accordance with the authority given and within a reasonable time.

c. If negotiated to a holder in due course, it is valid and effectual for all purpose as though it was filled up strictly in accordance with the authority given and within reasonable time. (Sec. 14 NIL)

2. Where only a signature on a blank paper was delivered:

a. It was delivered by the person making it in order that it may be converted into a negotiable instrument

b. The holder has prima facie authority to fill it up as such for any amount. (Sec. 14 NIL)

Notes on Section 14Rule: Sec. 14 applies if there is a signature on the instrument for the purpose of giving effect thereto.Rule: If no signature, refer to Sec. 15 or 23.Rule: Sec. 14 is merely a PERSONAL DEFENSE.

If the instrument is wanting in material particular, mere possession of the instrument is enough to presume prima facie authority to fill it up.

Material particular may be an omission which will render the instrument non-negotiable (e.g. name of payee), an omission which will not render the instrument non-negotiable (e.g. date)

In the case of the signature in blank, delivery with intent to convert it into a negotiable instrument is required. Mere possession is not enough.

Incomplete and Undelivered Instrument: (Sec.15) (2000,2004 & 2006 Bar Exam)

There are two steps in the execution of a NI:1. The act of writing the instrument comion

of giving effect pletely and in accordance with Sec. 1 of NIL; and

2. The delivery of the instrument with the intentention of giving effect thereto

If Completed and negotiated without authority, not a valid contract against a person who has signed before delivery of the contract against a person who has signed before delivery of the contract even in the hands of a HDC but subsequent indorsers are liable.

REASON: The law does not make any distinction between a HDC and one who is not a HDC.

Notes on Section 15It is a real defense. It can be interposed against

a holder in due course. Where an INCOMLETE and

UNDELIVERED instrument is in the hands of a HDC, there is PRIMA FACIE PRESUMPTION of delivery.

Defense of the maker is to prove non-delivery of the incomplete instrument.

Complete but Undelivered: (Sec.16) General Rule: Every contract on a negotiable

instrument is incomplete and revocable until delivery for the purpose of giving effect thereto. .

a. If between immediate parties and remote parties not holder in due course, to be effectual there must be authorized delivery by the party making, drawing, accepting or indorsing. Delivery may be shown to be conditional or for a special purpose only

b. If the holder is a holder in due course, all prior deliveries conclusively presumed valid

c. If instrument not in hands of drawer/maker, valid and intentional delivery is presumed until the contrary is proven (Sec. 16 NIL)

Rules on delivery of negotiable instruments:

1) Delivery is essential to the validity of any negotiable instrument

2) As between immediate parties or those is like cases, delivery must be with intention of passing title

3) An instrument signed but not completed by the drawer or maker and retained by him is


COMMERCIAL LAW

invalid as to him for want of delivery even in the hands of a holder in due course

4) But there is prima facie presumption of delivery of an instrument signed but not completed by the drawer or maker and retained by him if it is in the hands of a holder in due course. This may be rebutted by proof of non-delivery.

5) An instrument entrusted to another who wrongfully completes it and negotiates it to a holder in due course, delivery to the agent or custodian is sufficient delivery to bind the maker or drawer.

6) If an instrument is completed and is found in the possession of another, there is prima facie evidence of delivery and if it be a holder in due course, there is conclusive presumption of delivery.

7) Delivery may be conditional or for a special purpose but such do not affect the rights of a holder in due course.

General rule: a person whose signature does not appear on the instrument in not liable.

Exception:a. One who signs in a trade or assumed

name (Sec. 18)b. A duly authorized agent (Sec. 19)c. A forger (Sec. 23)

LIABILITY of a person SIGNING AS AGENT:An agent is exempt from personal liability, provided he: 1. Acts within the scope of his authority;2. Discloses the name of his principal; and3. Discloses that he is acting in a representative capacity (Sec. 20)

Notes on Section 20General rule: an agent is not liable on the

instrument if he were duly authorized to sign for or on behalf of a principal.

If an agent does not disclose his principal, the agent is personally liable on the instrument.

Per Procuration - operates as notice that the agent has a limited authority to sign.

Effects:- The principal in only bound if the agent

acted within the limits of the authority given

- The person who takes the instrument is bound to inquire into the extent and nature of the authority given. (Sec. 21 NIL)

General rule: Infants and corporations incur no liability by their indorsement or

assignment of an instrument. (Sec. 22 NIL)

Effects:- No liability attached to the infant or the

corporation- The instrument is still valid and the

indorsee acquires titleFORGERY (Sec.23)

A. Maker’s Signature (1989 BEQ)

B. Drawer’s Signature (2004,2006&2009 BEQ)

C. Payee’s Signature ( 2008 BEQ)

D. Indorser’s Signature(2008 BEQ)

General rule: a signature, which is forged or made without authority is wholly inoperative. (Sec. 23)

Effects: a. No right to retainb. No right to give a dischargec. No right to enforce payment can be

acquired.

Exception:- The party against whom it is sought to be

enforced is precluded from setting up the forgery or want of authority. (Sec.23)

Forgery refers to both a signature which has been forged or made without authority. Thus, Section 23 is not limited to counterfeit signatures since it also applies to genuine ones.

* A person whose signature is forged as maker, drawer, payee or indorsee of a note or check was never a party to the instrument. Since his signature does not appear in the instrument, he cannot be held liable thereon by anyone. (Gempsaw v. CA 218 SCRA 682)

CUT-OFF RULE:General Rule: Parties prior to the forged signature are cut-off from the parties after the forgery in the sense that prior parties cannot be held liable and can raise the defense of forgery. The holder can only enforce the instrument against parties who became such after forgery.

Exception: When the prior parties are precluded from setting up the defense of forgery either because of their warranties, representation or negligence. (Gempsaw v. CA)

Persons PRECLUDED from setting up the defense of forgery:1. Those who admit/warrant the genuineness of the signature in question: indorsers, persons negotiating by delivery and acceptors;


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2. Those who by their acts, silence, or negligence, are estopped from claiming forgery;3. Holder of a bearer instrument

—Forged signature is not necessary to the title of the holder.

Notes on Section 23 Section 23 applies only to forged signatures

or signatures made without authority Alterations such as to amounts or like fall

under section 124 Forms of forgery are a) fraud in factum b)

duress amounting to fraud c) fraudulent impersonation

Only the signature forged or made without authority is inoperative, the instrument or other signatures which are genuine are affected

The instrument can be enforced by holders to whose title the forged signature is not necessary

drawee bank is conclusively presumed to know the signature of its drawer

if endorser’s signature is forged, loss will be borne by the forger and parties subsequent thereto

drawee bank is not conclusively presumed to know the signature of the indorser. The responsibility falls on the bank which last guaranteed the indorsement and not the drawee bank.

Where the payee’s signature is forged, payments made by the drawee bank to collecting bank is ineffective. No debtor/creditor relationship is created. An agency to collect is created between the person depositing and the collecting bank. Drawee bank may recover from collecting bank who may in turn recover from the person depositing.

Rules on liabilities of parties on a forged instrument

In a PN- A party whose indorsement is forged on

a note payable to order and all parties prior to him including the maker cannot be held liable by any holder

- A party whose indorsement is forged on a note originally payable to bearer and all parties prior to him including the maker may be held liable by a holder in due course provided that it was mechanically complete before the forgery

- A maker whose signature was forged cannot be held liable by any holder

In a BOE- The drawer’s account cannot be charged

by the drawee where the drawee paid

- The drawer has no right to recover from the collecting bank

- The drawee bank can recover from the collecting bank

- The payee can recover from the drawer- The payee can recover from the recipient

of the payment, such as the collecting bank

- The payee cannot collect from the drawee bank

- The collecting bank bears the loss but can recover from the person to whom it paid

- If payable to bearer, the rules are the same as in PN.

- If the drawee has accepted the bill, the drawee bears the loss and his remedy is to go after the forger

- If the drawee has not accepted the bill but has paid it, the drawee cannot recover from the drawer or the recipient of the proceeds, absence any act of negligence on their part.

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

Effects:- Every person whose signature appears

thereon is a party for value- Presumption is disputable

Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time. (Sec. 26)

Sec.28:- Absence or Failure of Consideration:(1995 and 1996 Bar Exam)

Effect of want of consideration:a. Personal defense to the prejudice of a

party and available against any person not holder in due course.

b. Partial failure of consideration is a defense pro tanto, whether the failure is an asceratained and liquidated amount otherwise. (Sec 29)

Notes on Section 28 Absence of consideration is where no

consideration was intended to pass. Failure of consideration implies that

consideration was intended by that it failed to pass

The defense of want of consideration is ineffective against a holder in due course

A drawee who accepts the bill cannot allege want of consideration against the drawer

Accommodation – Accommodation is a legal arrangement under which a person called


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the accommodation party lends his name and credit to another called the accommodated party, without consideration.

Effect: A person to whom the instrument thus executed is subsequently negotiated, has a right of recourse against the accommodation party inspite of the former’s knowledge that no consideration passed between the accommodation and accommodated parties.

Requisites of Accommodation:1. The accommodation party must sign as

maker, drawer, acceptor or indorser;2. No value is received by the

accommodation party from the accommodation party; and

3. The purpose is to lend the name. (Crisologo-Jose v. CA, 177 SCRA 594).

Accommodation Party – Is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefore, and for the purpose of lending his name to another person. (2003 and 2005 BEQ)

A corporation cannot act as an accommodation party. Such is an ultra vires act. (Crisologo-Jose v CA, 117SCRA594)

Liability of the Accommodation Party:- The accommodation party is liable on

the instrument to a holder for value notwithstanding that such holder at the time of taking the instrument knew him to be only an accommodation party. It is a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument. He is liable to a holder for value by virtue of his being an accommodation party.

*An accommodation party to a negotiable instrument, inspite of the lack of consideration between him and the accommodated party, is liable to any other holder NOT to the accommodated party. (Travel-On, Inc. v. CA, et al, 210 SCRA 351).

*An accommodation party’s liability as a solidarily party is unconditional party is unconditional and is not affected by an extension of payment granted by the creditor to the debtor. HOWEVER, where the holder allowed payments by the drawer direct to the contractor without availing of the deed of assignment in its favor, said holder is a bad faith holder, NOT a holder in due course against whom an extension to pay granted by the drawer is a defense by the accommodation party. (Prudencio v. CA, 143 SCRA 6).

*The liability of an accommodation party does not extend to corporate accommodation because the act of the corporate officers is ultra vires. However, these officers are personally liable. (Crisologo-Jose v. CA, 177 SCRA 594).

*A promissory note, with an accommodation co-maker, used to settle an estafa case, has an illegality of cause, and does not make the accommodation co-maker liable. (United General Industries v. Paler, 112 SCRA 404)

*A promissory note with an accommodation maker, utilized to settle an estafa case, has an illegal consideration, and does not make the co-maker liable. (United Industries v. Paler, 112 SCRA 404)

RIGHTS OF AN ACCOMMODATION PARTY1. Against the Accommodated Party

- the accommodation party, if obliged to pay to a holder of value, can seek reimbursement from the accommodated party.

2. Against the Co-accommodation Partyo the use of some other persons- where a solidary accommodation maker paid to the bank the balance due on a promissory note, he may seek contribution from the other solidary accommodation maker, in the absence of a contrary agreement between them. This rights springs from an implied promise between the accommodation makers to share equally the burdens resulting from their execution of the note. They are joint guarantors of the principal debtor. (Sadaya v. Sevilla).

A solidary accommodation maker may:a. demand from the principal debtor

reimbursement of the amount which he paid on the promissory note and

b. demand contribution from his co-accommodation maker, without first directing his action against the principal debtor, PROVIDED that:

b.1. he made the payment by virtue of a judicial demand, or

b.2. the principal debtor is insolvent.

An instrument is negotiated when:a. It is transferred from one person to anotherb. That the transfer must be in a manner as to

constitute the transferee a holder

For a bearer instrument - by deliveryFor payable to order - by indorsement

and delivery (Sec. 30)

Indorsement to be must be:a. Written b. On the instrument itself or upon a piece

of paper attached (Sec. 31 NIL)


COMMERCIAL LAW

Notes on Section 31 The paper attached with the indorsement is

an allonge An allonge must be attached so that it

becomes a part of the instrument, it cannot be simply pinned or clipped to it.

Kinds of Indorsements:

a. Special (Sec. 34)b. Blank (Sec. 35)c. Restrictive (Sec. 36)d. Qualified (Sec. 38)e. Conditional (Sec. 39)

A. SPECIAL- specifies the person to whom or to whose order, the instrument is to be payable. (Sec. 34)

B. BLANK- Specifies no person to whom or to whose order the instrument is to be payable.

1. Instrument becomes payable to bearer and may be negotiated by delivery (Sec. 34)

2. May be converted to a special indorsement by writing over the signature of the indorser in blank any contract consistent with character of indorsement. (Sec. 35)

C. ABSOLUTE- One by which indorser binds himself to pay:a. Upon No order condition than failure

of prior parties to do so; andb. Upon due notice to him of such

failure.D. CONDITIONAL- right of the indorsee is

made to depend on the happening of a contingent event. Party required to pay may disregard the conditions. (Sec. 39)

E. RESTRICTIVE- An indorsement is restrictive, when it either:a. Prohibits further negotiation of the

instrument; orb. Constitutes the indorsee the agent of

the indorser; orc. Vests the title in the indorsee in trust

for or to the use of some other persons.

But mere absence of words implying power to negotiate does not make an indorsement restrictive. (Sec. 36)

EFFECT of Restrictive indorsement:Confers upon the indorsee the right-

a. Receive payment of the instrument;b. Bring any action thereon that the

indorser could bring;c. To transfer his rights as such indorsee,

when the form of the instrument authorizes him to do so.

F. QUALIFIED- Constitutes the indorser a mere assignor of the title to the instrument. ( Sec38)

It is made by adding to the indorser’s signature words like “sans recourse”, “without recourse”, “indorser not holder”, “at the indorsers own risk”, other terms of similar import.

* Hence, it has been held that oral testimony is not admissible to establish that an unqualified indorsement is in fact qualified. ( Velasco v. Tan Liuan & Co., March 17,1922)

A Qualified indorser has limited liability, i. e. he is liable for breach of warranty if the instrument is dishonored by non-acceptance or non- payment due to:1. Forgery; or2. Lack of good title on the part of the

indorser; or3. Lack of capacity to indorse on the

part of the prior parties; or4. The fact that at the time of the

endorsement, the instrument was valueless or nit valid, and he knew of the fact.

A Qualified indorsement does not impair the negotiable character of the instrument.

As mentioned earlier, Negotiation is the transfer of a negotiable instrument from one person to another as to constitute the transferee the holder thereof.

To be valid, negotiation must involve the entire instrument. Effects of indorsing an instrument originally payable to bearer:

- It may further be negotiated by delivery- The person indorsing is liable as indorser

to such persons as to make title through his indorsement (Sec. 40)

Notes on Section 40 Section 40 applies only to instruments

originally payable to bearer It cannot apply where the instrument is

payable to bearer because the only or last indorsement is in blank

A holder may strike out any indorsement which is not necessary to his title. (Sec. 48)

Effects:- An indorser whose indorsement is struck

out is discharged- All indorsers subsequent to such indorser

who has been discharged are likewise relieved

Effects of a transfer without endorsement:- The transferee acquires such title as the

transferor had


COMMERCIAL LAW

- The transferee acquires the right to have the indorsement of the transferor

- Negotiation takes effect as of the time the indorsement is actually made (Sec. 49)

Rights of a holder:- A holder may sue in his own name- A holder may receive payment.

Effects: (Sec. 51 NIL)- If in due course it discharges the

instrument

*Note: Holder in due Course (Secs. 52,57&59) Personal and Real Defenses ( 2000 & 2009 BEQ)

Requisites for a Holder in Due Course (HDC):a. Receives the instrument complete and

regular on its faceb. Became a holder before it was overdue

and had no notice that it had been previously dishonored if such was the fact

c. Takes the instrument for value and in good faith

d. At time he took the instrument, no notice of infirmity in instrument or defect in the title of the person negotiating it (Sec. 52 NIL)

*Note: Under the "SHELTER PRINCIPLE," the holder-in-due course, by negotiating the instrument, to a party not a holder-in-due course, transfers all his rights as such holder to the latter, who thus acquires the right to enforce the instrument as if he was a holder-in-due course. However, this principle presupposes that the "sheltered" holder is not a party to any fraud or illegality impairing the validity of the instrument. (2008 BEQ)

Notes on Section 52Every holder is presumed to be a HDC (Sec. 59)O proof to prove otherwiseIf one of the requisites are lacking, the holder

is not HDCAn instrument is considered complete and

regular on its face if a) the omission is immaterial b) the alteration on the instrument was not apparent on its face

An instrument is overdue after the date of maturity.

On the date of maturity, the instrument is not overdue and the holder is a HDC

Acquisition of the transferee or indorsee must be in good faith

Good faith means lack of knowledge or notice of defect or infirmity

A holder is not a HDC where an instrument payable on demand is negotiated at an

unreasonable length of time after its issue (Sec. 53 NIL)

Rights of a HDC:- Holds the instrument free from any defect of

title of prior parties- Free from defenses available to prior parties

among themselves (personal/ equitable defenses)

- May enforce payment of the instrument for the full amount against all parties liable(Sec. 57 NIL)

Notes on Section 57Personal or equitable defenses are those which

grow out of the agreement or conduct of a particular person in regard to the instrument which renders it inequitable for him through legal title to enforce it. Can be set up against holders not HDC

Legal or real defenses are those which attach to the instrument itself and can be set up against the whole world, including a HDC.

An instrument not in the hands of a HDC is subject to the same defenses as if it were non-negotiable.

Exception:- A holder, who derives his title through a

HDC and is not a party to any fraud or illegality affecting the instrument, has all the rights of such HDC in respect to all parties prior. (Sec. 58 NIL)

Rights of a holder not a HDC- May sue in his own name- May receive payment and if it is in due

course, the instrument is discharged- Holds the instrument subject to the same

defenses as if it were non-negotiable- If he derives his title through a HDC and

is not a party to any fraud or illegality thereto, has all the rights of such HDC

General rule: every holder is deemed prima facie to be a holder in due course.

Exception:- Where it is shown that the title of any

person who has negotiated the instrument is defective, the burden is on the holder to prove that he is a HDC or that a person under whom he claims is a HDC (Sec. 59 NIL)


COMMERCIAL LAW

Personal Defenses Real Defenses1. Absence or failure of consideration

Alteration

2. Want of delivery of complete instrument

Want of delivery of incomplete instrument

3. Insertion of wrong date where payable at a fixed period after date and issued undated; or at a fixed period after sight and acceptance is undated

Duress amounting to forgery

4. Filling up the blanks contrary to authority given or not within reasonable time

Fraud in factum or in esse contractus

5. Fraud in inducement

Minority

6. Acquisition of the instrument by force, duress or fear

Marriage in case of a wife

7. Acquisition of the instrument by unlawful means

Insanity where the insane person has a guardian appointed by the court

8. Acquisition of the instrument for an illegal consideration

Ultra vires acts of a corporation where its charter or by statue, it is prohibited from issuing commercial paper

9. Negotiation in breach of faith

Want of authority of agent

10. Negotiation under circumstances amounting to fraud

Execution of instrument between public enemies

11. MistakeIllegality of contract made by statue

12. Intoxication Forgery13. Ultra vires acts of corporations14. Want of authority of the agent where he has apparent authority15. Illegality of contract where form or consideration is illegal16. Insanity where there is no notice of insanity

A maker is primarily liable:Effects of making the instrument, the maker:a. Engages to pay according to tenor of

instrumentb. Admits existence of payee and his

capacity to indorse (Sec. 60 NIL)

Notes on Section 60A maker’s liability is primarily and

unconditionalOne who has signed as such is presumed to

have acted with care and to have signed with full knowledge of its contents, unless fraud is proved

The payee’s interest is only to see to it that the note is paid according to its terms

When two or more makers sign jointly, each is individually liable for the full amount even if one did not receive the value given

The maker is precluded from setting up the defense of:

a) The payee is fictional, b) That the payee was insane, a minor or a

corporation acting ultra vires

A drawer is secondarily liableEffects of drawing the instrument, the drawer:a. Admits the existence of the payee, b. The capacity of such payee to indorsec. Engages that on due presentment, the

instrument will be accepted or paid or both according to its tenor.

If the instrument is dishonored, and the necessary proceedings on dishonor duly takena. The drawer will pay the amount thereof

to the holderb. Will pay to any subsequent indorser who

may be compelled to pay it. (Sec. 61 NIL)

Notes on Section 61A drawer may insert an express stipulation to

negative or limit his liability

An acceptor is primarily liableBy accepting the instrument, an acceptor:- Engages that he will pay according to the

tenor of his acceptance- Admits the existence of the drawer, the

genuineness of his signature and his capacity and authority to draw the instrument

- The existence of the payee and his then capacity indorse

IRREGULAR INDORSER - a person not otherwise a party to an instrument places his signature in blank before delivery is liable as an indorser in the following manner:a. If payable to order of a third person –

liable to the payee and to all subsequent parties

b. If payable to order of the maker or drawer – liable to all parties subsequent to the maker or drawer


COMMERCIAL LAW

c. If payable to bearer – liable to all parties subsequent to the maker or drawer

d. If signs for an accommodation party – liable to all parties subsequent to the payee (Sec. 64)

*Note: Irregular Indorser v. General Indorser (2005 BEQ)Irregular Indorser, is not a party to the instrument but he places his signature in blank before delivery. He is not a party but he becomes one because of his signature in the instrument. Because his signature he is considered an indorser and he is liable to the parties in the instrument. While, a General Indorser warrants that the instrument is genuine, that he has a good title to it, that all prior parties had capacity to contract; that the instrument at the time of the indorsement is valid and subsisting; and that on due presentment, the instrument will be accepted or paid or both accepted and paid according to its tenor, and that if it is dishonored, he will pay if the necessary proceedings for dishonor are made.

Warranties where negotiating by delivery or qualified endorsement:

a. The instrument is genuine and in all respect what it purports to be

b. The indorser has good title to itc. All prior parties had the capacity to

contractd. Indorser has no knowledge of any fact

that would impair the validity or the value of the instrument.

Limitations of warranties:- If by delivery – extends only to immediate

transferee- Warranty of capacity to contract does not

apply to persons negotiating public or corporate securities (Sec. 65 NIL)

Notes on Section 65A qualified indorser is one who indorses

without recourse or sans recourseRecourse - resort to a person secondarily liable

after default of person primarily liableA qualified indorser cannot raise the defense of

a) forgery b) defect of his title or that it is void c) the incapacity of the maker, drawer or previous indorsers.

A qualified Indorsement makes the indorser mere assignor of title of instrument, relieves him of general obligation to pay if instrument is dishonored, but he is still liable for the warranties arising from instrument only up to warranties of general indorser

The warranty is to the capacity of prior parties at the time the instrument was negotiated. Subsequent incapacity does not breach the warranty.

lack of knowledge of the indorser as to any fact that would impair the validity or the value of the instrument must be subsisting all throughout

A person Negotiating by Delivery warrants same as those of qualified indorser and extends to immediate transferees only

Warranties of a general indorser:a. The instrument is genuine and in all

respect what it purports to beb. The he has good title to itc. All prior parties had the capacity to

contractd. That the instrument at the time of his

indorsement was valid and subsisting (Sec. 66)

In addition:- Engages that the instrument will be

accepted or paid or both according to its tenor on due presentment

- Engages to pay the amount thereof if it be dishonored and the necessary proceedings on dishonor are taken

Notes on Section 66The indorser under Section 66 warrants the

solvency of a prior partyThe indorser warrants that the instrument is

valid and subsisting regardless of whether he is ignorant of that fact or not.

Warranties extend in favor of a) a HDC b) persons who derive their title from HDC c) immediate transferees even if not HDC

The indorser does not warrant the genuineness of the drawer’s signature

General indorser is only secondarily liable

General rule: Presentment for payment is not necessary to charge persons primarily liable on the instrument. Presentment for payment is necessary to charge the drawer and indorsers. (Sec 70 NIL)

Notes on Section 70Presentation for payment – production of a

BOE to the drawee for his acceptance, or to a drawee or acceptor for payment. Also presentment of a PN to the party liable for payment of the same.

Consists of a) a personal demand for payment at a proper place b) the bill or note must be ready to be exhibited if required and surrendered upon payment.

Parties primarily liable – persons by the terms of the instrument are absolutely required to pay the same. E.g maker and acceptors. They can be sued directly.


COMMERCIAL LAW

If payable at the special place, and the person liable is willing to pay there at maturity, such willingness and ability is equivalent to tender of payment.

Presentment is necessary to charge persons secondarily liable otherwise they are discharged

Acts needed to charge persons secondarily liable:

a) Presentment for payment/acceptance b) Dishonor by non-payment/non-

acceptance c) Notice of dishonor to secondary parties

Acts needed to charge persons secondarily liable in other cases:

a) Protest for non-payment by the drawee b) Protest for non-payment by the acceptor

for honor

Proper presentment:a. By the holder or an authorized personb. At a reasonable hour on a business dayc. At a proper placed. To the person primarily liable or if

absent to any person found at the place where presentment is made (sec. 72 NIL)

Notes on Section 72Only the holder or one authorized by him has

the right to make presentment for paymentPresentment cannot be made on a Sunday or

holidayPresentment for payment is made to the

maker, or acceptor. Not to the person secondarily liable.

If the instrument is payable on demand – a) if it is a note – presentment must be made within reasonable time after issue b) if it is a bill - presentment must be made within reasonable time after last negotiation.

Presentment not required to charge the drawer:

a. He has no right to expectb. He has no right to require that the

drawee or acceptor will pay (Sec 79)

Presentment not required to charge the indorser where:

a. The instrument was made or accepted for his accommodation

b. He has no reason to expect that the instrument will be paid if presented (Sec. 80)

General rule: Presentment for payment necessary to charge persons secondarily liable otherwise they are discharged:

Exception:

- Section 79 and 80

Notes on Section 79 and 80Only the drawer or indorser are not

discharged. All other parties secondarily liable are discharged.

Presentment for payment excused if:a. After due diligence, presentment cannot

be madeb. Presentment is waivedc. The drawee is a fictitious person (Sec

82)

Notes on Section 82What is excused is the failure to make

presentment. There is no need to make any presentment versus under section 81 (delay in presentment) presentment for payment is still required after the cause of delay has ceased.

Summary of rules as to presentment for payment:a. Presentment not necessary to charge

persons primarily liableb. Necessary to charge persons secondarily

liable except:- The drawer under Sec. 79- The indorser under Sec. 80- When excused under Sec. 82- When the instrument has been

dishonored by non-acceptance under Sec. 83

How dishonored by non-acceptance:

- The instrument was duly presented but payment is refused or cannot be obtained

- Presentment is excused and the instrument is overdue and unpaid (Sec. 83)

Effects of dishonor by non-payment:- An immediate right of recourse to all

parties secondarily liable accrues to the holder (Sec. 84)

Notes on Section 84Parties cease to be secondarily liable and

become principal debtors.Liability becomes the same as that of the

original obligors.

Requisites for payment in due course: (sec. 88)

a. Made at or after the maturity of the instrument

b. To the holder c. In good faithd. Without notice of any defect in the

holder’s title


COMMERCIAL LAW

Notes on Section 88Payment must be made to the possessor of the

instrumentPossession of the note by the maker is

presumptive evidence that it has been paid

Notice of Dishonor may be given:

a. By or on behalf or the holderb. By or on behalf of any party who:

- Is a party to the instrument and might be compelled to pay the instrument.

- To a holder who having taken it up would have a right of reimbursement from the party to whom notice is given. (Sec. 90)

Notice:a. May be written or oral (Sec. 96)b. Written notice need not be signed or may

be supplemented by verbal communication (Sec. 95)

c. May be by personal delivery or by mail (Sec. 96)

Notice may be waived either expressly or implied:

a. Before the time of giving notice has arrived

b. After the omission to give due notice (Sec. 109)

Protest may be waived:

Effects:- Deemed a waiver of presentment and

notice of dishonor as well (Sec. 111)

Notes on Section 111Where notice is waived, presentment is not

waivedWhere presentment is waived, notice is also

waivedWhere protest is waived, notice and

presentment is waived

NOTICE OF DISHONOR - given by the holder to the parties secondarily liable, drawer and each indorser, that the instrument was dishonored by non-acceptance or non-payment by the drawee/maker

General rule: Any drawer or indorser to whom such notice is not given is discharged.

Exceptions: a. Waiver (Sec. 109) b. Notice is dispensed (Sec. 112)c. Not necessary to Drawer (Sec. 114) d. Not necessary to Indorser (Sec. 115)

- If notice is delayed, delay may be excused (Sec. 113)

Instances when Notice of Dishonor Not Necessary to Drawer

a. Drawer and drawee same personb. Drawee is a fictitious/incapacitated

personc. Drawer is the person to whom

presentment for payment is maded. Drawer has no right to expect that the

drawee will accept/pay the instrument (Sec. 114 NIL)

Instances when Notice Not Required to Indorsera. Drawee was a fictitious/incapacitated

person and the indorser was aware of such at the time of indorsement

b. Indorser is the person to whom instrument was presented for payment

c. Instrument made/accepted for his accommodation (Sec. 115 NIL)

Omission to give notice of dishonor by non-acceptance doe not prejudice a HDC (Sec. 117 NIL)

Protest only necessary for a foreign bill of exchange. Protest for other negotiable instruments is optional. (Sec. 118 NIL)

Causes of Discharge of the Instrumenta. Payment by the debtorb. Payment by accommodated partyc. Intentional cancellation by holder of

instrumentd. Any other act discharging a simple

monetary obligatione. Debtor becomes holder of the instrument

at/after maturity in his own right (Sec 119 NIL)

NOTES ON SECTION 119Discharge of the instrument discharges all the

parties theretoPayment must be in due course, and by the

principal debtor or on his behalfIf payment is not made by the principal debtor,

payment only cancels the liability of the payor and those obligated after him but does not discharge the instrument.

Payment by an accommodation party does not discharge the instrument.

Discharge of Secondary Parties:

a. Any act discharging the instrumentb. Cancellation of indorser’s signature by

indorsersc. Discharge of prior partyd. Tender of payment by prior partye. Release of principal debtor


COMMERCIAL LAW

f. Extension of payment by the holder/postponement of right to enforce without assent of secondary parties and without reservation of right of recourse against secondary parties (Sec 120 NIL)

RIGHT OF PARTY WHO DISCHARGES INSTRUMENT. (Sec. 121)A party secondarily liable who pays the instrument does not discharge it , but instead acquires certain rights ;1.Collect from prior parties ; or2. Negotiate the instrument to new parties- but not to subsequent parties.

However , Under the exceptions provided in Sec.121, the instrument is considered discharged when ;1.The BOE is payable to the order of a third person and paid by the drawer himself, or2. Where it was made or accepted for accommodation , and has been paid by the party accommodated.

RENUNCIATION BY HOLDER. (Sec 122)

Renunciation- The act of giving up or abandoning a right without transferring the right to another.

As a Rule ,the holder may expressly renounce his rights against any party to the instrument before , or after its maturity. An absolute and unconditional renunciation of his rights against the principal debtor at or after maturity of the instrument discharges the instrument.However , A renunciation does not affect the rights of a holder in due course without notice of the renunciation.

Notes on Section 122if renounced in favor of a party secondarily

liable, only he is exonerated from liability and all parties subsequent to him

discharge by novation is allowed

General rule: When materially altered, without the consent of all parties liable, the instrument is avoided except as against:

a. The party who has made the alterationb. The party who authorized or assented to

the alteration. c. Subsequent indorsersException:- If in the hands of a HDC, may be enforced

according to its original tenor

SECTION 124: MATERIAL ALTERATION- Any change in the instrument which affects or changes the liability of the parties in any way.

There is no distinction between fraudulent and innocent alteration

*An alteration is said to be material if it alters the effect of the instrument. In other words, a material alteration is one which changes the items which are required to be stated under Sec.1, NIL. ( PNB v. CA et al. 256 SCRA 491)

The EFFECTS of alteration:1. Alteration by a PARTYMaterial alteration by the holder discharged the instrument and all prior parties thereto who did not give their consent to such alteration.

Whether the alteration made is favorable or unfavorable to the party making the alteration, no distinction as to the effect is made. The intent of the law is to preserve the integrity of the negotiable instrument.

2. Alteration by a STRANGER ( SPOLIATION )If subsequently negotiated to a non-Holder in Due Course—A material alteration avoids the instrument as against any prior party who has not assented to the alteration.

If subsequently negotiated to a Holder in Due Course—He may enforce payment thereof according to its original tenor regardless of whether the alteration was innocent or fraudulent.

CHANGES that constitute MATERIAL ALTERATIONS1. The date; 2. The sum payable, either for principal or interest; 3. The time or place of payment;4. The number or the relations of the parties; 5. The medium or currency in which payment is to be made; 6. Or which adds a place of payment where no place of payment is specified; or 7. Any other change or addition which alters the effect of the instrument in any respect. (Sec. 125)

A serial number is an item which is not an essential requisite for negotiability under Sec. 1 of NIL, and which does not affect the right of the parties, hence its alteration is not material. (PNB v. CA, 256 SCRA 491) (199 BEQ)

Instances where a BOE may be treated as a PN:

a. Where the drawer and the drawee are one and the same

b. Where the drawee is a fictitious personc. Where the drawee has no capacity to

contract (Sec. 130)The holder has the option to treat it as a BOE or a PN


COMMERCIAL LAW

ACCEPTANCE is the signification by the drawee of his assent to the order of the drawer. It is an act by which a person on whom the BOE is drawn assents to the request of the drawer to pay it. (Sec. 132)Acceptance may be:a. Actualb. Constructivec. General (Sec. 140)d. Qualified (Sec. 141)

Requisites of actual acceptance:- In writing- Signed by the drawee- Must not express the drawee will perform

his promise by any other means than payment of money

- Communicated or delivered to the holder

A holder has the right:a. Require that acceptance be written on the

bill and if refused, treat it as if dishonored (Sec. 133)

b. Refuse to accept a qualified acceptance and may treat it as dishonored (Sec. 142)

Constructive Acceptance:a. Where the drawee to whom the bill has

been delivered destroys itb. The drawee refuses within 24 hrs after

such delivery or within such time as is given, to return the bill accepted or not. (Sec. 137)

Notes on Section 137Drawee becomes primarily liable as an

acceptor.Mere retention is equivalent to acceptance

When presentment for acceptance is necessary:

a. If necessary to fix the maturity of the billb. If it is expressly stipulated that it shall be

presented for acceptancec. If the bill is drawn payable elsewhere

than the residence or place of business of the drawee (Sec. 143 NIL)

Notes on Section 143

PRESENTMENT is the production of a BOE to the drawee for his acceptance.

PRESENTMENT For Acceptance (Sec. 143) For Payment ( Sec. 70)

( 2000 & 2003 BEQ)

PURPOSE: To get acceptance of the drawer for purpose of making him primarily liable as an acceptor. Presentment is also prerequisite to the accrual of secondary liability against the drawer and the indorsers.

When is presentment for acceptance MUST be made. (Sec. 143)

In the following cases:1. Where the bill is payable after sight; or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument.2. Where the bill expressly stipulates that it shall be presented for acceptance.3. Where the bill is drawn payable elsewhere than the residence or place of business of the drawee.

The REQUISITES of Presentment:1. Made within reasonable time- is meant not more than 6 months from the date of issue. Beyond said period, it is ―unreasonable time and the check becomes stale.2. By holder or his agent3. At a reasonable hour on a business day4. Before bill overdue.

WHERE PRESENTMENT IS EXCUSED. (Sec. 148.) Presentment for acceptance is excused , and a bill may be treated as dishonored by non acceptance , in either of the following cases:1.Where the drawee is dead , or has absconded , or is a fictitious person or a person not having capacity to contract.

2.Where, after the exercise of reasonable diligence , presentment cannot be made.3.Where, although presentment has been irregular , acceptance has been refused on some other ground.

General rule: Protest is required only for foreign billsException:

- Inland bills and notes may also be protested if desired

Protest is required:a. Where the foreign bill is dishonored by non

acceptanceb. Where the foreign bill is dishonored by non-

paymentc. Where the bill has been accepted for honor,

it must be protested for non-payment before it is presented for payment to the acceptor for honor

d. Where the bill contains a referee in case of need, it must be protested for non payment before presentment for payment to the referee in case of need (Sec. 152)

NOTES ON SECTION 152


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Protest - formal statement in writing made by a notary under his seal of office at the request of the holder, in which it is declare that the some was presented for payment or acceptance (as the case may be) and such was refused.

It means all steps or acts accompanying the dishonor of a bill or note necessary to charge an indorser

Required when the instrument is a foreign bill of exchange.

It must be made on the same date of dishonor, by a notary/respectable citizen of the place in the presence of 2 credible witnesses so recourse to secondary parties

ACCEPTANCE FOR HONOR (Sec. 161)– an acceptance of a bill made by a stranger to it before maturirty, where the drawee of the bill has:

a. Refused to accept it b. And the bill has been protested for non-

acceptancec. Or where the bill has been protested for

better security

Requisites for acceptance for honor:

1. The bill must have been protested a) for non-acceptance b) or for better security

2. The acceptor for honor must be a stranger to the bill

3. Bill must not be overdue4. Holder must give his consent

NOTES ON ACCEPTANCE FOR HONOR

Purpose: to save the credit of the parties to the instrument or some party to it as the drawer, drawee, or indorser or somebody else.

Acceptor for honor is liable to the holder and to all the parties to the bill subsequent to the party for whose honor he has accepted (Sec. 164)

How acceptance for honor is made: (Sec. 162 NIL)

a. In writing and indicated that it is an acceptance for honor

b. Signed by the person making the acceptance

PAYMENT FOR HONOR - payment made by a person, whether a party to the bill or not, after it has been protested for non-payment, for the benefit of any party liable thereon or for the benefit of the person for whose account it was drawn. (Secs. 171-177)

Requisites:a. The bill has been dishonored by non-

payment;b. It has been protested for non-payment;

c. Payment supra protest is made by any person, even by a party thereto;

d. The payment is attested by a notarial act of honor which must be appended to the protest or form an extension of it;

e. The notarial act must be based on the declaration made by the payor for the honor or his agent of his intention to pay the bill for honor and for whose honor he pays.

Form for payment of honor:a. Payment must be attested by notarial act

appended to the protest, or form an extension to it.

b. Notarial act of honor must be based on a declaration by the payer for honor

BILLS IN SET - bill of exchange drawn in several parts, each part of the set being numbered and containing a reference to the other parts, the whole of the parts just constituting one bill (Sec 178)

Purpose: It is usually availed of in cases where a bill had to be sent to a distant place through some conveyance. If each part is sent by different conveyances, the chance that al least one part of the set would reach its destination would be greater.

CHECKS- a bill of exchange drawn on a bank payable on demand. (Sec. 185)

CONCEPTS: Certification of Checks- An agreement

whereby the bank against whom a check is drawn, undertakes to pay at any future time when presented for payment.

EFFECTS:a. Equivalent to acceptance (Sec 187)

and is the operative act that makes the bank liable.

b. Assignment of the funds of the drawer in the hands of the drawee (Sec 189)

c. If obtained by the holder, discharges the persons secondarily liable thereon ( Sec 188)

A check must be presented for payment within reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay. (Sec. 186)

Reasonable Time: (Sec. 193)a. Nature of the instrument’b. Usage of business or tradec. The facts of the particular case


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CROSSED CHECK: (2004 & 2005 BEQ)

- A check which in addition to the usual contents of an ordinary check contains also the name of a certain banker or business entity through whom it must be presented for payment.- A Crossed Check under accepted banking practice, crossing a check is done by writing two parallel lines diagonally on the left top portion of the checks. The crossing is special where the name of the bank or a business institution is written between the two parallel lines, which mean that the drawee should pay only with the intervention of that company.

EFFECTS:a. That the check may not be encashed; it

may only be deposited with the bank;b. That the check may be negotiated only

once to a person who has an account with the bank; and

c. That it serves as a warning to the holder that the check has been issued for a definite purpose. (Bataan Cigar v. CA 280 SCRA 643)

*Note: Crossed Checks vs. Cancelled Checks (2004 BEQ)A crossed check is one with two parallel lines drawn diagonally across its face or across a corner thereof. On the other hand, a cancelled check is one marked or stamped "paid" and/or "cancelled" by or on behalf of a drawee bank to indicate payment thereof.

*State Investment House v IAC (GR 72764 13Jul1989), the SC considered a crossed check as subjecting a subsequent holder thereof to the contractual covenants of the payor and the payee.

2 KINDS:1. CROSSSED SPECIALLY- The same name

of a particular bank or company is written or appears between thev. Tan parallel lines in which case the drawee-bank must pay the check only upon presentment by such bank or company (Chan Wan v. tan Kim 109 Phil 706) on penalty of being made to pay agin by the rightful owner should the first payment prove to have been erroneous.

2. CROSSED GENERALLY- only the words “and Co.” are written between the parallel lines or when none at all is written at all between said lines.

* This Court has taken judicial cognizance of the practice that a check with 2 parallel lines in the upper left hand corner means that it could only be deposited and not converted into cash.

IRON CLAD RULE – prohibits the countermanding of payment of certified checks. (Rep. v. PNB, Dec. 1, 1961)

*Note: The holder must be a holder in due course before the stop payment order may not be successfully invoked against him. (Mesina v. IAC, 146 SCRA 497, 505)

TYPES OF CHECKS (Cesar Villanueva, Commercial Law Review, 2004 ed.)

a. Cashier’s Check- One drawn by the cashier of a bank, in the name of the bank against the bank itself payable to a third person. It is a primary obligation of the issuing bank and accepted in advance upon issuance. (Tan v. CA 239 SCRA 310)

b. Manager’s Check- A check drawn by the manager of a bank in the name of the bank itself payable to a third person. It is similar to the cashier’s check as to the effect and use.

c. Memorandum Check- A check given by a borrower to a lender for the amount of a short loan, with the understanding that it is not to be presented at the bank, but will be redeemed by the maker himself when the loan falls due and which understanding is evidenced by writing the word “memorandum”, “memo” or “mem” on the check.

d. Certified Check- An agreement whereby the bank against whom a check is drawn undertakes to pay it at any future time when presented for payment. (Sec. 187)

e. Traveler’s Check- It is one upon the holder’s signature must appear twice; one to be affixed by him at the time it is issued and the second, for counter-signature, to be affixed by him in the presence of the payee before it is paid, otherwise it is incomplete.


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CORPORATION LAWBP Blg. 68

x-----------------------------------------------------------xI. General Principles

A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. (Sec. 2, BP blg. 68). It has a separate and distinct personality from its incorporators. (2000 Bar Examination)

Theories on Formation1. Concession theory

Tayag v Benguet Consolidated: corporation is creature of State and has no existence independent of state recognition/concession

2. Enterprise entity theory Looks at the underlying enterprise or

group, which has to exist before the corporate fiction is granted

Just because it is a juridical entity, it is not a creature of the State – it is a creature of its own volition and maintains inherent rights under the law – moral individuals lie under the corporate veil

Tri-level existence in corporate setting1. Corporation as juridical entity – State and

Corporation relationship2. Intra-corporation:

a. Corporation and its agentsb. Corporation and its SHsc. Among SHsd. Between corporation and third

parties3. “Going concern” – business enterprise

Corporation as creature of the law Constitution:

o Congress cannot create private corporations except by general law (Art XII, Sec 16)

Private corporation created by special law – nullity (NDC v Phil Veterans Bank)

o GOCCs can be created by special charters

2008 Bar Examination: Since February 8, 1935, the legislature has not passed even a single law creating a private corporation. What provision of the Constitution precludes the passage of such a law?

Civil Code:o Person of public corporations

governed by laws creating/recognizing them

o Person of private corporations governed by laws of general application

Franchises of corporationso Corporate/general franchises:

essential for franchise to exist as corporation; granted to individuals who compose the corporation

o Special/secondary franchises: rights or privileges granted to existing corporations

Distinguishing a corporation from a partnership As to: (a) the manner of creation – a

corporation is created by law, while a partnership is created by agreement (b) the number of incorporators- a corporation generally requires a minimum of 5 and a maximum of 15 incorporators, while a partnership requires a minimum of 2. The exception is a corporation sole (c) commencement of existence- a corporation commences to have existence upon the issuance of a certificate of incorporation, while a partnership commences to have existence upon agreement (d) the powers that may be exercised- a corporation can only exercise powers allowed by law, while a partnership can exercise powers not contrary to law or public policy (e) management – a corporation is managed by a board, while a partnership is managed by the managing partner/s (f) right of succession- a corporation enjoys the right of succession, while a partnership does not (g) personal liability- as a general rule, stockholders do not have personal liability beyond the value of their shares, while partners are liable beyond what they have contributed (h) transferability of interest- one’s interest in a corporation is transferable without consent, while that in partnership, requires consent (i) term of existence- a corporation can exist for terms of no more than 50 years at any given time but subject to extension, while a partnership is not limited as to term (j) dissolution- a corporation cannot be dissolved without the consent of the state,


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while a partnership can be dissolved without need for the consent of the state.

Their similarities are: (a) both have juridical personality (b) both can only act through its agents (c) both are composed of an aggregate of individuals (d) distribution of profits is given to those who have contributed capital (e) both can only be organized if there is a law authorizing its registration

A. Classification of Corporation

In Relation to the State1. Public and Private Corporations

(Distinctions: 2004 Bar Examination)Private Public

formed for some private purpose, benefit or end

formed for the government of a portion of the State for the general good or welfare

created by special legislation or act of Congress

Must be organized under the Corporation Code.

NOTE: The true test is for the purpose of the corporation. If the corporation is created for political or public purpose connected with the administration of government, then it is a public corporation. If not, it is a private corporation although the whole or substantially the whole interest in the corporation belongs to the State.

2. Quasi-Public Corporations

As to Place of Incorporation1. Domestic Corporations2. Foreign Corporations

Test To Determine Nationality Of Corporation

i. Incorporation Test – determined by the state of incorporation, regardless of the nationality of its stockholders

ii. Domicile Test – determined by the state where it is domiciled.

iii. Control Test – determined by the nationality of the controlling stockholders or members. This test is applied in times of war. Also known as the WARTIME TEST.

As to Legal Status1. De Jure Corporation2. Corporation de Facto (2004 Bar

Examination)A de facto corporation is one which actually exists for all practical purposes as a corporation but which has no legal

right to corporate existence as against the State. It is essential to the existence of a de facto corporation that there be (1) a valid law under which a corporation might be incorporated, (2) a bona fide attempt to organize as a corporation under such law, and (3) actual use or exercise in good faith of corporate powers conferred upon it by law.

3. Corporation by Estoppel (2004 Bar Examination)

It exists when persons assume to act as a corporation knowing it to be without authority to do so. In this case, those persons will be liable as general partners for all debts, liabilities and damages incurred or arising as a result of their actions.

4. Corporation by PrescriptionA body not lawfully organized as a corporation but has been recognized by immemorial usage as a corporation with rights and duties maintainable by law

As to Existence of Shares of Stocks1. Stock Corporations2. Non-Stock Corporations

Distinctions between Stock and Non- Stock Corporations (2004 Bar Examinations)

A stock corporation is one that has capital stock divided into shares and is authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held. All other corporations are non-stock corporations.

B. Corporation, kinds by method of creation:

a. by special law or charter

b. by being organized under the corporation code

C. Corporation, how organized:

Philippine corporate entities are organized as follows:

a. Number of incorporators: (2006 Bar Examination)

Incorporators are required to be not less than five [5] but not more than fifteen [15].

b. Residency requirement: (2006 Bar Examination)


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Majority of the incorporators are required to be residents of the Philippines.

c. Qualifications:

All incorporators:

1. must be natural persons

2. must be of legal age

d. Components of a corporation

INCORPORATORS CORPORATORS

Signatory to the Articles of Incorporation

Stockholder or member

Number is limited to 5-15

No limit

e. Subscription requirement:

All incorporators must subscribe to at least one (1) share of stock of the corporation being organized.

D. Corporation, minimum subscription:

The law requires that the total capital stock to be subscribed at the time of incorporation should at least be twenty five percent [25%] of the authorized capital stock of the corporation being organized.

E. Corporation, minimum paid-up capital:

The paid-up capital of a Philippine corporation must not be less than PhP5, 000.00. Thus, it is required that at least twenty five percent [25%] of the subscribed capital stock should be fully paid up but the amount of which should not be less than said PhP5,000.00.

F. Corporate Term: (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. (Sec. 11)

G. Corporation, when corporate existence commences:

The corporate life or existence of a Philippine corporation commences from the time a Certificate of Incorporation is issued in its favor by the Securities and Exchange Commission [SEC].

H. Corporation, effect of non-use:

[a] A corporation is deemed dissolved if the corporate charter granted in its favor expires by non-use for a period of at least two [2] years from issuance thereof.

[b] A corporation is deemed suspended or its franchise revoked if it has been

duly organized but it failed to operate for a period of five [5] years.

Other Type of Corporation: Corporation Sole. (2004 Bar Examination)

Section 110 of the Corporation Code defines a “corporation sole” as one formed for the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church. It is formed by the chief archbishop, bishop, priest, minister, or other presiding elder of such religious denomination, sect or church.

I. RULES ON CONVERSION

From Stock to Non-stock corporationConversion may be made by mere

amendment of the articles of incorporation.From Non-stock to Stock corporation

The corporation must first be dissolved. Mere amendment of the articles of incorporation would not suffice because the conversion would change the corporate nature from non-profit to one for monetary gain

x-----------------------------------------------------------xII. Some Doctrines in Corporation

Law

1. DOCTRINE OF CORPORATE OPPORTUNITY (2005 Bar Examination)

A director is made to account to his corporation, gains and profits from transactions entered into by him/another competing corporation in which he has substantial interest, which should have been a transaction undertaken by the corporation. This is a breach of fiduciary relationship.

2. DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY (2006 Bar Examination)

Under the doctrine of “piercing the veil of corporate entity”, the legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders may be disregarded and the corporation will be considered as a mere associations of persons, such that liability will attach directly to the officers and the stockholders (Umali v. Court of Appeals, 189 SCRA 529, 542 [1990]). It is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes


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a. To what circumstances will the doctrine apply? (2006 Bar Examination)

The doctrine of “piercing the veil of corporate entity” will apply when the corporation’s separate juridical personality is used:1. to defeat public convenience;2. to justify wrong, protect fraud, or

defend crime;3. as a shield to confuse the legitimate

issue;4. where the corporation is the mere

alter ego or business conduit of a person; or

5. Where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation (Umali v. Court of Appeals, 189 SCRA 529, 542 [1990]).

b. Tests in determining whether to pierce veil of corporate personality. 1. Control, not mere majority or

complete stock control, but complete domination, not only of the finances, but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;

2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal right;

3. The aforesaid control and breach of duty must proximately prevent “piercing the corporate veil.”

4. The wrong-doing must be clearly and convincingly established. It cannot be presumed. (Lim v. Court of Appeals, et al., G.R. No. 124715, prom. January 24, 2000)

3. TRUST FUND DOCTRINE (2007 Bar Examination)

The subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their

credits. Corporations may not dissipate this and the creditors may sue the stockholders directly for their unpaid subscriptions Thus, dividends must never impair the subscribed capital; subscription commitments cannot be condoned or remitted; nor do the corporation buy its own shares using the subscribed capital as the consideration therefore. (National Telecommunications Commission v. Court of Appeals, et al., G.R. No. 127937, prom. July 28, 1999)

Instances where the Doctrine was applied:1. Where the corporation has

distributed its capital among the stockholders without providing for the payment of creditors;

2. Where it had released the subscribers to the capital stock from their subscriptions;

3. Where it has transferred corporate property in fraud of its creditors; and

4. Where the corporation is insolvent.

5. If the corporation is solvent, the TFD extends to the capital stock represented by the corporation's legal capital.

6. If the corporation is insolvent, the TFD extends to the capital stock of the corporation and all of its property and assets.

Exceptions to the Trust Fund Doctrine1. Redemption of redeemable

shares (Sec. 8)2. In a close corporation, when

there is a deadlock and the SEC orders the payment of the appraised value of the stockholder's share. (Sec. 104)

4. BUSINESS JUDGEMENT RULEBusiness judgment rule exists to protect

and promote the full and free exercise of managerial power granted to directors. The rule is “a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company.” (Smith v Van Gorkam)

x-----------------------------------------------------------xIII. Articles of Incorporation and By-

Laws

A. Corporation, incorporation documents:

The following incorporation documents are required:


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a. Articles of Incorporation;

b. By-laws;

c. Treasurer's Affidavit which should state compliance with the authorized subscribed and paid-up capital stock requirements.

d. Bank Certificate that the paid-up capital portion of the authorized capital stock has been deposited with the issuing bank.

B. Corporation, where filed: The incorporation documents should be filed with the Securities and Exchange Commission [SEC] of the Philippines.

C. Corporation, what should be stated:

a. the name of the corporation which must not be identical or deceptively or confusingly similar to any existing corporation;

b. the purpose of the corporation;

c. principal office of the corporation;

d. The term or life of the corporation which should not exceed fifty [50] years. This corporate lifetime may, however, be extended for another fifty [50] years but the extension must not be effected earlier than five [5] years before the expiration of its term

2002 Bar Examination: You have been asked to incorporate a new company to be called FSB Savings & Mortgage Bank, Inc. List the documents that you must submit to the Securities and Exchange Commission (SEC) to obtain a certificate of incorporation for FSB Savings and Mortgage Bank, Inc.

A: The documents to be submitted to the Securities and Exchange Commission (SEC) to incorporate a new company to be called FSB Savings & Mortgage bank, Inc., to obtain the certificate of incorporation for said company, are:

1. Articles of Incorporation2. Treasurer’s Affidavit;3. Certificate of authority from the

Monetary Board of the BSP;4. Verification slip from the records of the

SEC whether or not the proposed name has already been adopted by another corporation, partnership or association;

5. Letter undertaking to change the proposed name if already adopted by another corporation, partnership or association;

6. Bank certificate of deposit concerning the paid-up capital;

7. Letter authorizing the SEC or Monetary Board or it’s duly authorize representative to examine the bank records regarding the deposit of the paid-up capital;

8. Registration sheet;

x-----------------------------------------------------------xIV. Corporate Management

Levels of management There are three levels of control in the

corporate hierarchy: (a)The Board- which determines corporate policy and prescribes the manner of general management of its business activities (b)The Corporate Officers- who are charged with the mandate to execute the decisions of the board and who, oftentimes, determine the best manner by which the business is to be run (c) The Stockholders or Members- who are considered as having residual power over fundamental corporate changes as they are required by law to give their assent by the exercise of the right to vote.

The powers that are expressly reserved by law to stockholders or members are:(a) removal of directors or trustees (b) granting of compensation, other than per diems, to directors (c) ratification of acts of self dealing director or trustee, interlocking director/s, disloyal director/s (d) delegation of power to amend by-laws (e) calling of a meeting, upon good cause, when no person is authorized to call it (f) when management of a close corporation is vested in the stockholders.


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ARTICLES OF INCORPORATION BY-LAWS

Definition Basic contract document defining the charter of the corporation

Meant to be an intramural document, to govern the relationship between and among the members of a corporate family.

Significance Condition Precedent in the acquisition of corporate existence

Condition subsequent

Contractual Significance

A contract between 3 parties: [1] the state and the corporation, [2] the stockholders and the state, and [3] the corporation and its stockholders.

Although the power of the corporation to adopt by-laws is an inherent right, by-law provisions cannot contravene the law

Effect as to Outsiders

Bind a third person dealing with the corporation

Does not bind outsiders

Requisites for Validity

1. filed and registered with the SEC2. Banks, public utilities, insurance

companies: needs favorable recommendation from appropriate agency that articles are in accordance with law.

3. SEC shall examine AOI upon filing and upon satisfaction of all legal requirements, issue certificate of incorporation and only then shall Corporation have a personality separate and distinct from its stockholders or members.

4. Sworn Statement of the Treasurer regarding subscription requirement.

Requisites of VALID BY – LAWS:1. By-Law Provisions Cannot Contravene Law 2. By-Law Provisions Cannot Contravene the

Charter3. By-Laws Must be reasonable and Cannot

Discriminate

Effectivity – upon issuance of SEC of certification that by-laws are not inconsistent with Corporation Code

Basic Content

SEC14 1. The name of the corporation; 2. The specific purpose or purposes for

which the corporation is being incorporated.

3. The place where the principal office of the corporation is to be located, which must be within the Philippines;

4. The term for which the corporation is to exist;

5. The names, nationalities and residences of the incorporators;

6. The number of directors or trustees, which shall not be less than 5 nor more than 15;

7. 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;

8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the share are par value shares, 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 if some or all of the shares are without par value, such fact must be stated;

9. If it be a non-stock corporation, the amount of its capital, the names,

Sec47 1. The time, place and manner of calling and

conducting regular or special meetings of the directors or trustees;

2. The time and manner of calling and conducting regular or special meetings of the stockholders or members;

3. The required quorum in meetings of stockholders or members and the manner of voting therein;

4. The form for proxies of stockholders and members and the manner of voting them;

5. The qualifications, duties and compensation of directors or trustees, officers and employees;

6. The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof;

7. The manner of election or appointment and the term of office of all officers other than directors or trustees;

8. The penalties for violation of the by-laws; 9. In the case of stock corporations, the

manner of issuing stock certificates; and 10. Such other matters as may be

necessary for the proper or convenient transaction of its corporate business and affairs.


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nationalities and residences of the contributors and the amount contributed by each; and

10. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient.

Adoption File with the Securities and Exchange Commission articles of incorporation in any of the official languages Duly signed and acknowledged by all of the incorporators

2 INSTANCES:A. Prior to Incorporation, simultaneous with

the AOI Approved & Signed by ALL

incorporators and submitted to SECB. Within 1 month after receipt of official

notice of issuance of certificate of incorporation by SEC

MAJORITY VOTE OF OUTSTANDING CAPITAL STOCK

Amendment Majority vote of BOD / trustees AND vote or written assent of 2/3 of outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders

Amendments take effect upon approval by SEC or from the date of filing with SEC if not acted upon within 6months from date of filing for a cause not attributable to the corporation.

2 Ways:A. Majority Vote of BOD/Trustees AND

Majority Vote of Outstanding Capital Stock/members at a regular or special meeting duly called for the purpose of amending or repealing any by-laws or adopting new by-laws.

B. By DELEGATION of 2/3 outstanding capital stock or members.

Form File with the Securities and Exchange Commission articles of incorporationIn any of the official languages Duly signed and acknowledged by all of the incorporators

Signed by the SH or Members voting for them; A copy duly certified to by majority of directors or trustees & counter-signed by Corporation secretary shall be filed w/ SEC attached to original AOI.

Grounds for Rejection or Disapproval

SEC 17 1.That the articles of incorporation or any

amendment thereto is not substantially in accordance with the form prescribed herein;

2.That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations;

3.That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid if false;

4.That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution.


x--------------------------------------------------------xV. Board of Directors, Trustees,

Officers

A. Powers of Board of Directors or Trustees

1. Exercise corporate powers of all corporations under Corporation Code

2. Conduct all business3. Control and hold all property

B. Term of Directors For 1 year, or Until their successors are elected and

qualified [Hold-Over Principle]C. Requirements for Directors

a) Must own at least 1 share of capital stock of corporation, which shall stand in HIS name on the corporate books

b) Any director who ceases to own at least 1 share shall cease to be a director

c) Majority of Directors in BoD must be RESIDENTS

RULE: The Board of Directors/Trustees is the repository of corporate powers. Hence, all powers of the corporation shall be exercised, all business conducted and all property of such corporation controlled and held by the Board of Directors or Trustees. (Sec. 23) EXCEPTIONS: 1. Executive Committee duly authorized in the

by-laws;2. Contracted manager which may be an

individual, a partnership or another corporation.

3. Close corporations, the stockholders may manage the business of the corporation instead of a board of directors, if the articles of incorporation so provide.

D. Compensation

Directors are not entitled to compensation as such directors except that they are allowed reasonable per diems. However, directors may be given compensation when

1. There is a provision in the by-laws authorizing payment of compensation; or

2. By a vote of the Stockholders representing at least majority of the outstanding capital stock at a regular or special meeting.

LIMIT: In either case, the total yearly compensation of the directors shall not exceed 10% of the net income before income tax of the corporation during the preceding year.

E. Requirements for Trusteesa) Must be a member of the non-

stock corporationb) Majority of Trustees in BoT must

be RESIDENTSF. Causes of Directors’ Liability:

1. Knowing authorization of wrongful acts;2. Negligence; and3. Conflict of interest.

When? For a director to be held liable for the acts of corporate officers, the following conditions must be present :( LOWELL HOIT & CO. V. DETIG ET. AL)

The director must have participated in the act complained of;

He must be guilty of lack of ordinary and reasonable supervision; and

He must be guilty of lack of ordinary care in the selection of such officer.

INDEPENDENT DIRECTOR

Is a person who, apart from his fees and shareholdings, is independent of management and free from any business or other relationship which could, or could reasonably be perceived to, materially interfere with his exercise of independent judgment in carrying out his responsibilities as a director.

He must not have any personal, financial, or professional ties with the corporation, its affiliates, and subsidiaries that may adversely affect his ability to act objectively. Other qualifications are ownership of at least one share, college graduate or has been engaged or exposed to the business of the corporation for not less than 5 years, be a person of integrity, probity and hardworking

Under Section 38 of RA 8799, when the corporation (a) has a class of equity securities listed for trading on an Exchange or (b) is a company with assets of at least 50 million and having 200 or more holders who hold at least 100 shares of a class of stocks or (c) which has sold a class of equity securities to the public pursuant to an effective registration statement must have at least 2 independent directors or at least 20% of board.

Under Section 15 of RA 8791, a bank must have 2 independent directors.

ELECTION OF DIRECTORS OR TRUSTEES A. Quorum in Meeting for Election

Majority of the outstanding capital stock or members entitled to vote

Present either in person or by representative BY WRITTEN PROXY

B. How Viva Voce, or By Ballot if requested by any voting

stockholder or memberC. Stock Corporations

Methods Of Voting On The Election Of Directors: STRAIGHT VOTING- Every stockholder

through this method, may vote such number of shares for as many persons as there are directors.

CUMULATIVE VOTING-1. Every stockholder is entitled to

such number of votes that his number of shares multiplied by the total number of directors to be elected will bring. He may give all such votes to one candidate (CUMULATIVE VOTING FOR ONE CANDIDATE) or he may distribute them among as many candidates as he sees fit (CUMULATIVE VOTING BY DISTRIBUTION). (Sec. 24)

2. A minority director elected through cumulative voting cannot be removed without cause. (Sec. 28)

3. A PROXY is a written instrument, signed by the stockholder or member (as principal) and filed before the scheduled meeting with the corporate secretary, and given to another person (as agent) authorizing such person to exercise the voting rights of the former.

What is the period of validity of proxy? Unless otherwise provided in the proxy, it should be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a longer period than five years at any one time. (Sec. 58)

Instances whereby Right to vote by proxy may be exercised:

1. Election of the board of directors or trustees;

2. Voting in case of joint ownership of stock;

3. Voting by trustee under voting trust agreement;

4. Pledge or mortgage of shares;5. As provided for in its by-laws.

Stockholders or members may attend and vote in their meetings by proxy (Sec. 58); But directors

cannot do so. Directors must always act in person (Sec. 25).

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

D. Non-Stock Corporations Members may cast as many votes as

there are trustees to be elected [seats] But may not cast more than one vote

for a single candidate EXCEPT – when the AoI or By-laws

provide otherwiseE. Adjournment of Meeting for Elections

May adjourn from day to day or from time to time

But NOT Sine Die or Indefinitely if quorum is not met [majority of stockholders or members are not present]

NOTE: Proposed amendment to by-laws stipulating permanent director even without election is contrary to law. (Grace Christian High School v CA)

CORPORATE OFFICERS, QUORUM A. Corporate Officers

President – must be a director Treasurer – may or may not be a

director Secretary – shall be a resident and a

citizen of the Philippines Other officers provided in the By-Laws

B. Any 2 or more positions may be held concurrently except president and secretary or president and treasurer.

C. When Elected Immediately after election of directors

D. Duties to be Performed by Officers Enjoined on them by law Enjoined by corporate By-Laws

E. Quorum – Board Must Act as a Body For transaction of corporate business –

majority of number of directors or trustees as fixed in AoI.

For corporate act to be valid there must be a quorum and the act must be approved by majority of directors or trustees PRESENT.

For election of Officers – majority of ALL members of the board of directors or board of trustees, whether all members are present or not.

F. Directors or Trustees cannot ATTEND or VOTE by proxy at board meetings.

POWERS OF CORPORATE OFFICERS A. Rule on Corporate Officer’s Power to Bind

the Corporation

An officer’s power as an agent of the corporation must be sought from the statute, charter, by-laws or in a delegation of authority from such officer, from the acts of the board of directors formally expressed or implied from a habit or custom of doing business.

B. When Corporation Bound by the Act of Its President

In the absence of a charter or bylaw provision to the contrary, the president is presumed to have the authority to act within the domain of the general objectives of its business and within the scope of his or her usual duties. A party dealing with the president of a corporation is entitled to assume that he has the authority to enter, on behalf of the corporation, into contracts that are within the scope of the powers of said corporation and that do not violate any statute or rule on public policy.

Distinction between a Corporate Officer and Corporate EmployeeCORPORATE OFFICER CORPORATE

EMPLOYEEPosition is provided for in the by-laws or under the Corporation Code

Employed by the action of the managing officer of the corporation

RTC has jurisdiction in case of LABOR DISPUTE

NLRC has jurisdiction in case of labor dispute

NOTE: RTC has jurisdiction over cases involving removal of corporate officers.

Disqualification of Directors, Trustees or Officers

1.Conviction by final judgment of offense punishable by imprisonment for excess of 6years, or

2.Violation of Code committed within 5years prior to date of his election or appointment

Removal of Directors or Trustees A. How may be removed

1.2/3 vote of stockholders or members entitled to vote

2.During a regular meeting or a special meeting called by the secretary upon -

Order from the president Written demand from Majority of

stockholders or members entitled to vote

3.Upon Previous Notice to stockholders or members

Of the intention to propose such removal at the meeting

Of the time and place of meeting Must be given by publication or by

written notice prescribed in the Code

B. If secretary refuses/fails to call for the special meeting or give the notice, or there is no secretary

1.Call may be directly addressed to stockholders or members by demanding stockholder or member

C. Causes for Removal1.May be with or without case

Cause is usually related to the 3 Duties of an Officer/Director –

a) Loyaltyb) Obediencec) Diligence

2.Provided that removal without cause may not be used to deprive minority stockholders or members of their right of representation under sec24.

NOTE: Removal of Board of Director/ Trustee is different from removal of a corporate officer. Stockholders’ approval is necessary only for the removal of the members of the Board. For the removal of a corporate officer or employee, the vote of the Board of Directors is sufficient for the purpose . (2001 Bar Examination) Vacancies in the office of director or trustee

A. Grounds for Removal1.Removal by the stockholder or

members or upon expiration of term Vacancy shall be filled by the

stockholders in a regular or special meeting called for that purpose.

2.Other Causes than expiration or removal by SH/Ms

If remaining Directors constitute Quorum - May be filled by the MAJORITY vote of the remaining directors

If no quorum - filled by the stockholders in a regular or special meeting called for that purpose.

3.Proposed amendment of AoI resulting in increase in number of directors/trustees

Vacancy shall be filled by the stockholders in a regular or special meeting called for that purpose.

Or in the same meeting authorizing increase of directors or trustees if so stated in notice of the meeting

B. Director or Trustee so elected shall serve only unexpired portion of the term

Liability of Directors, Trustees or OfficersDUTY OF DILIGENCE

A. Violations of Duty of Diligence1.Wilfully and knowingly vote for or

assent to patently unlawful acts of the corporation

2.Guilty of gross negligence or bad faith in directing the affairs of the corporation

3.Acquire any personal or pecuniary interest in conflict with their duty as director or trustee

4.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; (Tramat Mercantile Inc. v CA)

5.He agrees to hold himself personally and solidarily liable with the corporation ; or (Tramat Mercantile Inc. v CA)

6.He is made, by a specific provision of law, to personally answer for his corporate action. (Tramat Mercantile Inc. v CA)

B. Liability for Violation of Duty of DiligenceShall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons

DUTY OF OBEDIENCEA corporation, through its BoD, should act in the manner and within the formalities, if any, prescribed by its charter or by the general law.

Since the Code still adheres to the ultra vires doctrine, then the BoD or Trustees of a corporation is bound to observe the duty of obedience, which means that they will direct the affairs of the corporation only in accordance with the PURPOSES for which it was organized.

DUTY OF LOYALTYA. To act according to the corporation’s

best interestDOCTRINE OF CORPORATE

OPPORTUNITY

DISLOYALTY OF A DIRECTOR

Cover same subject which is business opportunity

Cover same subject which is business opportunity

Applicable to directors, trustees and officers.

Only applicable to DIRECTORS and not to officers

Does not cover Ratification.Even if 99% of the SHs affirm the transactions, the remaining minority SHs can still oppose such a self-dealing transaction and file a derivative suit.

Allows RATIFICATION of a transaction by a self-dealing director by the vote of a SHs representing 2/3 of the OCS

Applies to both stock and non-stock corporations.

Applies only to stock corporations

DUTY TO CREDITORS AND OUTSIDERSA. Upon the insolvency of the corporation, the

BoD are duty bound to hold the assets of

the corporation primarily for the payment of the corporation’s liabilities [under the Trust Fund Doctrine]

B. Under Sec65 on Liability of Directors for Watered Stocks, if director or officer:

consents to issuance of stocks for a consideration less than its par or issued value

consents to payment in consideration other than cash, which is valued in excess of its fair market value

having knowledge thereof does not object in writing and file the same with the corporate secretary.

C. Such director or officer shall be SOLIDARILY LIABLE with the stockholder concerned [buyer] and its creditors for the DIFFERENCE between the fair value received at time of issuance of the stock and its par or issued value.

Dealings of Directors, Trustees or Officers with the Corporation SELF-DEALINGSContract between the corporation and one or more of its directors or trustees or officers ARE VOIDABLE at the option of the corporation

BUT VALID IF THE FOLLOWING ARE PRESENT:

1. Presence of director/trustee in the board meeting which approved contract was not necessary to constitute a quorum

2. Vote of director or trustee not necessary for approval of contract

3. Contract is fair and reasonable under the circumstances

4. In case of an officer, contract has been previously authorized by board of directors

NOTE: If director’s presence was required to meet the quorum [1st requisite] and if his vote was necessary for approval of the contract [2nd

requisite], the contract may still be valid if it is RATIFIED by 2/3 of stockholders or members in a meeting called for the purpose.

CONTRACTS BETWEEN CORPORATIONS WITH INTERLOCKING DIRECTORS

Contract between 2 or more corporations with a common director/s may be valid.

However, to be valid, it must be fair and reasonable.

A contract between the corporations with interlocking directors is VOID if there is FRAUD.

If the interest of the interlocking director in one corporation is SUBSTANTIAL [meaning stockholdings exceed 20% of the outstanding capital stock] and his interest is merely NOMINAL, contract shall be treated as under provisions of Self-Dealings [voidable but may be ratified], insofar as

the corporation where he has a nominal interest is concerned.

Note: Corporate officers are not permitted to use their position of trust and confidence to further their private interests. The doctrine of " CORPORATE OPPORTUNITY " is precisely recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interests. (Gokongwei Jr. v SEC)

EXECUTIVE COMMITTEE May be created by the By-Laws1) Composition

3 or more members of the Board of Directors

Appointed by the Board2) Scope of Powers

Those specific matters within the competence of the BoD that the latter may delegate to the committee via:

By-laws Majority vote of the Board

3) Valid Action by the Executive CommitteeRequires majority vote of all the members of the committee

4) However, Committee CANNOT act in the following instances:

1. Approval of action where shareholder’s approval is required

2. Filling of vacancies in the board of directors

3. Amendment or repeal of by-laws or adoption of new by-laws

4. Amendment or repeal of any board resolution which by express terms is not amendable or repealable

5. Distribution of cash dividends to shareholders

2005 Bar Examination: A Korean national joined a corporation which is engaged in the furniture manufacturing business. He was elected to the Board of Directors. To complement its furniture manufacturing business, the corporation also engaged in the logging business. With the additional logging activity, can the Korean national still be a member of the Board of Directors? Explain.

A: Yes. The Korean national can still be a member of the Board of Directors, if he has sufficient equity to entitle him to a seat. Since the corporation is only required to be at least 60% owned by Filipino citizens, foreigners can be members of the board of directors in proportion to their equity which cannot exceed 40% (Sec.1 P.D. No. 715, amending C.A. No. Sec. 2-A of C.A. No. 108, The Anti-Dummy Law)

2001 Bar Examination: a by-law provision of “X” Corporation “ rendering ineligible or if elected, subject to removal, a director if he is also a director in a corporation whose business is in competition with or is

antagonistic to said corporation” valid and legal? State your reasons.

A: Yes, the by-law provision is valid. It is the right of a corporation to protect itself against possible harm and prejudice that may be caused by its competitors. The position of director is highly sensitive and confidential. To say the least, to allow a person, who is a director in a corporation whose business is in competition with or is antagonistic to “X” Corporation, to become also a director in “X” Corporation would be harboring a conflict of interest which is harmful to the latter.[Gokongwei,Jr. v. SEC, 89 SCRA 336 (1979); 97 SCRA 78 (1980)].

x-----------------------------------------------------------x

VI. Powers of the Corporation

1) Corporate powers

2) Power to extend or shorten corporate term

3) Power in increase or decrease capital stock, incur, create or increase indebtedness

4) Power to deny pre-emptive right

5) Sale or other disposition of assets

6) Power to acquire shares

7) Power to invest corporate funds in another corporation or business or for any other purpose

8) Power to declare dividends

9) Power to enter into management contract

10) Ultra Vires Act of the Corporation

Classification of Corporate Powers Expressed by law or by the Corporation

Code and its articles of incorporation (AOI)

Those necessary to the exercise of the express or incidental powers

Those incidental to its existence

Corporate powers distinguished from natural persons or partnerships

Distinguished from those exercised by natural persons or partnerships, corporations can only exercise those expressly authorized by law, can be implied or are necessary to carry out its purpose/s, such as acts in the usual course of business or incidental to its existence because they attach to a corporation upon its creation and said to be inherent. Natural persons or partnerships, on the other hand can exercise or perform any act provided it is not contrary to law. The reason being is that corporations owe their existence to the state, while natural persons or partnerships do not.

Distinguishing express powers from implied powers

Express and Implied powers can further be distinguished as follows: (a)

Express powers deal with main business, object or purposes of the corporation, while Implied powers deal with the means and methods of attaining the object or purpose (b) Express powers are determined by the language of the law and its charter while implied powers may change according to time, place and circumstances.

The Test of Express Powers is whether they are found in the words of the law / charter while the Test of Implied Powers is whether they are purely incidental to its express powers and is reasonably necessary to their being carried out.

CORPORATE POWERS

1. Sue and be sued ACTUALLY incidental Corporations de facto – may sue or be

sued Dissolved corporation after the expiration

of the three-year winding up period – ceases to be de jure or de facto hence cannot sue or be sued

Foreign corporation without license from SEC cannot sue in Philippine courts

A corporation may have good reputation, if besmirched, may be a ground for the award of moral damages(The Law on Partnerships and Private Corporations, 2005 Ed.)

2. Successiona. NOT incidental or inherent, just like

other powers that go into the very nature/extent of a corporation’s juridical entity

3. Adopt/use seal4. Acquire and convey property

-Incident power5. Amend articles of incorporation6. Adopt/amend by-laws consistent with

law/PPa. ACTUALLY incidental

7. STOCK: issue/sell stocks and sell treasury stocks; NON-STOCK: admit members

8. Transact with real/personal property – including securities/bonds of other corps – as lawful business of corp. requires

9. Merge/consolidate with other corporations10. Make reasonable non-political donations

Requisites: Amount is reasonable

Must not aid political party or candidate or for purposes of partisan political activity (The Law on Partnerships and Private Corporations, 2005 Ed.)

11. Establish pension/retirement plans

POWER TO EXTEND/SHORTEN CORPORATE TERM (2000 Bar Examination)

Majority of BOD, 2/3rds of capital stock Extension – Sec 37: right of appraisal for

dissenting stockholders Shortening – Sec 81 allows for right of

appraisal, but technically there shouldn’t be, because investors are also in it for the short-term (there is no novation)

POWER TO INCREASE/DECREASE CAPITAL STOCK

Majority of BOD, 2/3rds of capital stock Needs SEC approval

o Increase – there must be certification of subscription to at least 25% of increased stock, and at least 25% of that amount paid-up

o Decrease – won’t approve if it prejudices corporate creditors

Since this is not an inherent power, there must be strict compliance with requirements in Sec 38 and Amendment provisions in Sec 16

No right of appraisal o Increase – would defeat very purpose

of raising capitalo Decrease – there already is return of

part of investments anyway ALSO, investing into a corporation comes

with expectation of possible increase/decrease of shares

Ways of Increasing/Decreasing Capital Stock1. By increasing (decreasing) the no. of

shares authorized to be issued without increasing/decreasing the par value thereof

2. By increasing (decreasing) the par value of each share without increasing (decreasing) the no. thereof

3. By increasing (decreasing) both the no. of shares authorized to be issued and the par value thereof (The Corporation Code of the Phil. Annotated by Hector De Leon, 2006 Ed Page 315-316)

What are the available methods to replenish capital?1) Additional subscription to shares of stock of

the corporation by stockholders or by

investors;2) Advances by the stockholders to the

corporation; or3) Payment of unpaid subscription by the

stockholders

2001 Bar Examination: Suppose “X” Corporation has an authorized capital stock of P1M divided into 100,000 shares of stock par value of P10 each.

a. Give two ways whereby said authorized capital stock may be increased to about 1.5 M.

Two ways of increasing the authorize capital stock of “X” Corporation to 1.5 M are :

1. Increase the number of shares from 100,000 to 150,000 shares with the same par value of P10 each.

2. Increase par value of the 100,000 shares to 15 pesos each.

b. Give three practical reasons for a corporation to increase its capital stock.

The three practical reasons for a corporation to increase its capital stock are: (1) to generate more working capital; (2) to have more shares with which to pay for the acquisition of more assets like acquisitions of company car, stocks, house, machinery or business; and (3) to have extra share with which to cover or meet the requirement for declaration of stock dividend.

POWER TO INCUR/CREATE/INCREASE BONDED INDEBTEDNESS

Corporate Bond: an obligation to pay a definite sum of money at a future time at a fixed rate of interest SEC Opinion (1987): only covers

indebtedness of corporation secured by M over real/personal property

Majority of BOD, 2/3rds of capital stock Needs SEC approval

o Corp must have minimum net worth of P25 M and must have been operating for at least 3 years

UNLIKE NORMAL INDEBTEDNESS, which does not require 2/3rds approval:

o Usually very large amounto Usually with first lien on important

assetso Usually long period of time

No right of appraisal :o Would drain financial resources

o Regardless, corporation's creditors always have priority over assets anyway

RIGHT TO SELL/DISPOSE/LEASE/ENCUMBER SUBSTANTIALL ALL assets

Majority of BOD, 2/3rds of capital stock Enterprise-level transaction : ALTHOUGH

there is no effect in relationship between State and corporation - it’s just as if there is resetting to starting point of business life

Compare:o Usual and regular course of business

(business judgment doctrine)o Proceeds of sale for conduct of

remaining business The test: it just has to be “ordinary”: so the

sale of all business of a corporation in light of using proceeds to set-up anew STILL NEEDS ratification

“substantially all”: if the business will be incapable of–

o Continuing the businesso Accomplishing its purpose for

incorporation Although technically, through

sale, a corporation’s can always pursue the business again… so the test is intent

o Qualitative test (for all: quantitative) When no ratificatory vote from the

stockholders/ members needed:a. If it is necessary in the usual and

regular course of businessb. If the proceeds of the sale or other

disposition of such property and assets be appropriated for the conduct of the remaining business

There is right of appraisal : because unlike shortening of corporate life, where there is automatic dissolution, here there is none – so SH may be stuck in a non-performing venture

POWER TO DENY PRE-EMPTIVE RIGHT

The pre-emptive right is the option privilege of an existing stockholder to subscribe to a proportionate part of shares subsequently issued by the corporation before same can be disposed of in favor of the others.

Extent and limitations of pre-emptive right under the Code

Law includes all issues or dispositions of shares of any class

Where the shares are issued in exchange for prop needed for corporate purposes,

or for a debt previously contracted, the SH cannot demand his pre-emptive right for right may prejudice corporate interest

Where the shares are issued by one corporation in exchange for shares in another corporation in pursuance of a merger, the pre-emptive right does not exist, provided that the issue is made with approval of 2/3 of the holders of outstanding stock and is not made in bad faith

Code allows waiver or denial of the pre-emptive right provided it is made in the Articles of Incorporation either as an original provision or an amendment

Waiver of Pre-emptive Right Any prior waiver or denial of the pre-

emptive right should appear in the Articles of Incorporation and not merely in an ordinary waiver agreement

A waiver through an amendment to the Articles of Incorporation would need only 2/3 who may have dissented but also all subsequent SHS

If all the existing SHS unanimously agree to a waiver, although for some reason no amendment of the Articles of Incorporation is made no one among them can later complain since they are all bound by their private agreement. But it would not bind future SHS

SHS must be given reasonable time in which to exercise their pre-emptive rights.

2001 Bar Examination: Suppose that “X” Corporation has already issued the 1000 originally authorized shares of the corporation so that it’s Board of Directors and stockholders wish to increase “X’s” authorized capital stock. After complying with the requirements of the law on increase of capital stock, “X” issued an additional 1000 shares of the same value.

a.) Assume that stockholder “A” presently holds 200 out of the 1000 original shares. Would “A” have a pre-emptive right to 200 of the new issue of 1000 shares? Why?

Yes, “A” would have a pre-emptive right to 200 of the new issue of 1000 shares. “A” is a stockholder of record holding 200 shares in “X” Corporation. According to the Corporation Code, each stockholder has the pre-emptive right to all issues of shares made by the corporation in proportion to the number of shares he holds on record in the corporation

b.) When should stockholder “A” exercise the pre-emptive right?

Pre-emptive right must be exercised in accordance with the Articles of Incorporation or the By-Laws. When Articles of Incorporation or the By-Laws are silent, the Board may fix a reasonable time within which the stockholders may exercise the right.

POWER TO PURCHASE OWN SHARESThe conditions under which a stock corporation can acquire its own share are: (2005 Bar Examination)

(a) That it be for a legitimate and proper corporate purpose; and (b) that there shall be unrestricted retained earnings to purchase the same and its capital is not thereby impaired. (Sec. 41, Corporation Code)

Instances when power may be exercised:1. To eliminate fractional shares2. To collect/compromise an indebtedness to

the corporation arising from unpaid subscription, in a delinquency sale, and to purchase the shares sold during said sale

3. To pay dissenting/withdrawing stockholders entitled to payment for their shares when exercising appraisal right

4. To decrease cost of doing business, by decreasing amount of dividends to be paid in the future

5. Other similar situations , since this is non-exclusive

POWER TO INVEST CORPORATE FUNDS IN ANOTHER CORPORATION/BUSINESS

May invest in corporation/business organized for any purpose apart from the primary purpose from which the investing business was organized

Majority of BOD + 2/3rds vote of stockholders

Sec 42: When investment is reasonably necessary to accomplish primary purpose: approval of stockholders not necessary

o Lies under business judgment doctrine

o THUS whatever the primary purpose of a corporation, it has a choice of placing funds in deposit accounts, money market, treasury bills, or even stocks of other corporations (fit into power, discretion, and purpose to obtain best returns for the corporation)

So in section 42, investment requiring ratificatory vote: when there is management

involved of the other company, and not just investment per se

o If there is no ratificatory vote: ultra vires where those entering into the contract have no authority

POWER TO DECLARE DIVIDENDSDIVIDENDS: corporate profits set aside, declared and ordered to be paid by the directors for distribution among shareholders at a fixed time.Forms:

a. Cashb. Propertyc. Stock

Requisites:1. Existence of unrestricted retained

earnings out of which the dividends may be declared and paid (2009 Bar Examination: True or False Q; 2005 Bar Examination)

2. A corporate resolution of the board of directors declaring the payment of a portion or all such earnings to the stockholders (The Corporation Code of the Phil. Annotated by Hector De Leon, 2006 Ed Page 315-316)

Out of unrestricted retained earnings, payable in cash, property, or stockso To all stockholders, based on

outstanding capital stock heldo HOWEVER, cash dividends due on

delinquent stock: Apply first to unpaid balance on

subscription Plus costs and expenses Stock dividends withheld until unpaid

subscription is fully paido No stock dividend issued without

approval of 2/3rds shares at regular/special meeting

o Nielson v Lepanto: corporation cannot issue stock dividends to pay for a non-stockholder

o Report to SEC within 15 days from declaration

GENERAL RULE: Stock corporations cannot retain surplus profits in excess of 100% of paid-up capital stock (2001 Bar Examination), except:

1. Justified by definite corporate expansion projects/programs approved by BOD

2. Loan agreement, where creditor has to first consent before corporation can declare dividends

3. Special circumstances

2005 Bar Examination: Distinguish dividend from profit; cash dividend from stock dividend. Profits

belong to the corporation, while dividends belong to the stockholders when dividend is declared.

A cash dividend involves disbursement of earnings to stockholders, while stock dividend does not involve any disbursement. A cash dividend affects the fractional interest in property which each share represents, while a stock dividend decreases the fractional interest in corporate property which each share represents. A cash dividend does not increase the legal capital, while a stock dividend does, as there is no cash outlay involved. Cash dividends are subject to income tax, while stock dividends are not. Declaration of stock dividend requires the approval of both the majority of the members of the board of directors will suffice.

2001 Bar Examination: Are there instances when a corporation shall not be held liable for not declaring dividends?

The instances when a corporation shall not be held liable for not declaring dividends are: 1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its or his consent, and such consent has not been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies.

POWER TO ENTER INTO MANAGEMENT CONTRACT

MANAGEMENT CONTRACT: is an agreement whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise. (Sec 44)GENERAL RULE: There shall be no management contract with another corporation unless: Majority of BOD Stockholders owning majority shares, in

BOTH managing and managed corporationo EXCEPT, where 2/3 votes needed: if a

stockholder/s in both managing and managed corporation owns more than 1/3 of total outstanding voting capital stock of managing corporation OR majority of BOD in managing corp. is

also majority of BOD in managed corporation

The management contract must not be longer than 5 years

ULTRA VIRES (“beyond powers”) ACT2009 Bar ExaminationAn act committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the powers conferred upon by law. (Republic vs. Acoje Mining Co., Inc. 7 SCRA 361)Types: (Philippine Corporate Law, Villanueva, 2001 ed.)1. Acts done beyond the powers of the

corporation as provided in the laws or its AoI;

2. Acts or contracts entered into in behalf of the corporation by persons who have no corporate authority (ultra vires of officers and NOT the corporation)

3. Acts or contracts, which are per se illegal as being contrary to law.

x-----------------------------------------------------------xVII. Meetings

Why required

Meetings are necessary because corporate powers are vested in the Board or stockholders or members as a body and not as individuals. It serves as protection and assurance to stockholders or members as it affords them an opportunity to be heard and to discuss the matter at hand and vote thereon.

When not necessary

The instances when meetings are not necessary are (a) when a corporation amends its articles and written asset is sufficient (b) when there is an agreement to be bound despite the absence of a meeting (c) when the Articles of a close corporation allows directors to take action without a meeting

Requisites of a valid meeting

A valid meeting is one that is: (a) held at the proper place (b)held at the stated date and time or at a reasonable time thereafter (c) called by the proper person (d) with

previous notice (e) attended by a quorum.

Effects of action taken during invalid meetings

In stockholder or member meetings, there being a quorum consisting of a majority of the outstanding capital stock, the business so transacted shall be valid if within the powers of the corporation. Even if meeting is improperly called or held, acts are still valid if within the powers of the corporation and all stockholders or members are present or duly represented.

In directors or trustees meetings, there being a quorum, all acts are valid. But if not undertaken in a duly convened meeting, they are generally invalid but may be ratified.

Percentage of votes required

Ordinarily a majority vote is required of stockholders or members in the following instances: (a) election of members of the Board (b) removal of directors or trustees (c) approval of management contracts (d) adopt by laws/amend/or repeal or revoke power delegated to the Board (e) fix issued price of no par value shares (f) fixing compensation of directors. In all other instances, a 2/3 vote is required.

In determining compliance with the 2/3 vote, non-voting shares shall be included if it involves the following: (a) amendment of articles (b) adoption or amendment of by laws (c) sale, lease, exchange, pledge or other disposition of all or substantially all of corporate property (d) increase/decrease of corporate bonded indebtedness (e) increase/decrease of capital stock (f) merger/consolidation (g) investment in another corporation or business, and (h) dissolution

Who can vote

Stockholders or Members can exercise the right to vote as it is through its exercise that they are able to participate in management. The right to vote is inherent in stock ownership or in membership. This right exists provided, they remain as such in the books of the corporation as of the date fixed in the notice.

If the stock is co-owned, the consent of all is necessary except when all of them have executed a proxy. If owned

in an and/or capacity, any one can vote.

All stockholders can exercise the right to vote provided the shares are not delinquent, they are non-voting except if Section 6 applies, or the shares are treasury shares.

A person not a stockholder may exercise the right to vote when: (a) they are pledgees or mortgagees and are given the right and such is recorded in the books of the corporation (b) they are executors, administrators, receivers and other legal representatives appointed by the Court (c) heirs of a stockholder who have executed a judicial or extra-judicial settlement, registered with the Registry of Deeds upon presentation of the settlement.

Manner of voting

The right to vote may be exercised in person or by proxy

A proxy is a formal authorization given by the holder of the stock who has the right to vote , or by a member, to another person to exercise the voting right of former.

The requisites of a valid proxy are (a) it must be in writing and signed by the stockholder or member (b) filed before the scheduled meeting with the corporate secretary (c) it should not be valid and effective for a period of 5 years at any one time (d) it is valid only for the meeting for which it is intended unless otherwise provided.

Voting trust agreements

It is an agreement in writing whereby one or more stockholders transfer their share, to any person/s having authority to act as a trustee for the purpose of vesting in such person voting or other rights pertaining to the shares for a certain period not exceeding that fixed in the Corporation Code and upon terms and conditions stated in the agreement.

Its limitations are: (a) it should not be executed for a period not excess of 5 years, except if executed as a condition for a loan nor should it be executed to circumvent the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud (b) must

be in writing, notarized containing and specifying all terms and conditions (c) a certified copy must be filed with the SEC, otherwise it is ineffective or unenforceable (d) it should be subject to examination (e) it should automatically expire at the end of the agreed period

The voting trustee shall (a) possess the right to vote (b) exercise the right to vote in person / proxy (c) has the right of inspection (d) since he is legal holder – he can be elected as a director

The distinctions between a proxy and a voting trust are (a) proxy has no legal title, trustor has legal title (b) the proxy is generally revocable, while a voting trust generally is not revocable (c) proxy can only act at a specified meeting unless it is continuing, a trustee is not so limited (d) proxy can only vote if proxy giver is not present while a trustee votes nevertheless (e) a proxy is usually shorter in duration than a voting trust

x-----------------------------------------------------------xVIII. Stocks and Stockholders

DOCTRINE OF EQUALITY OF SHARESWhere the articles of incorporation do not

provide for any distinction of the shares of stock, all shares issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are likewise subject to the same liabilities. (Sec. 6)

How are shares CLASSIFIED?1. COMMON SHARES are the basic class of stock

ordinarily and usually issued without extraordinary rights and privileges. The owners thereof are entitled to a pro rata share in the profits of the corporation and in its assets upon dissolution and, likewise, in the management of its affairs without preference or advantage whatsoever.

2. PREFERRED SHARES are those issued with par value, and preferences either with respect to: a)assets after dissolution (PREFERRED SHARES AS TO ASSETS) b)distribution of dividends( PREFERRED SHARES AS TO DIVIDENDS), c) or both, and other preferences.—Preferred or Redeemable shares may be deprived of voting rights (Sec. 6).

KINDS OF PREFERRED SHARES AS TO DIVIDENDS

1. Cumulative preferred share - a share which entitles the holder thereof not only the payment of current dividends but also of dividends in arrears.

2. Non – cumulative preferred share- a share which allows the holder thereof

to the payment of current dividends only without regards to dividends in arrears.

3. Participating preferred share- a share which gives the holder the right to participate with the holders of the common share in the remaining profits pro rata, aside from the right to receive the stipulated dividends at a preferred rate.

4. Non – participating preferred share- a share which allows the holder to receive the stipulated dividends at a preferred rate only. The holder shall not share in the dividends distributed to common shares.

REDEEMABLE SHARES are those which permit the issuing corporation to redeem or purchase its own shares.

Limitations: i. Redeemable shares may be issued only

when expressly provided for in the articles of incorporation;

ii. Terms and conditions affecting said shares must be stated both in the articles of incorporation and in the certificates of stock representing such shares;

iii. Redeemable shares may be deprived of voting rights in the articles of incorporation, unless otherwise provided in the Code.

iv. Redeemable shares may be redeemed, regardless of the existence of unrestricted retained earnings (Sec. 8), and provided further that the corporation has, after such redemption, sufficient assets in its books to absorb corporate debts and liabilities.

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

When treasury shares are sold below its par or issued value, there can be no watering of stock because watering of stock contemplates an original issuance of shares.

PAR VALUE SHARES are shares with a value fixed in the certificates of stock and the articles of incorporation.NO PAR VALUE SHARES are shares having no par value but have an issued value stated in the certificate or articles of incorporation. LIMITATIONS:

1. No par value shares can have an issued price of less than P5.00;

2. The entire consideration for its issuance constitutes capital so that no part of it should be distributed as dividends;

3. They cannot be issued as preferred stocks;

4. They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loan association;

5. The articles of incorporation must state the fact that it issued no par value shares as well as the number of said shares;

6. Once issued, they are deemed fully paid and non-assessable. (Sec. 6)

WATERED STOCKWatered Stock is stock issued not in

exchange for its equivalent in cash, property, shares, stock dividends or services. It includes stock that is issued (a) without consideration (b) issued as fully paid when the corporation receives a sum less than par or issued value (c)issued for a consideration other than cash, the fair valuation of which is less than par or issued value (d) stock dividend without sufficient returned earnings or surplus.

WAYS TO BECOME A STOCKHOLDER OF A CORPORATION .

1. Subscription contract with the corporation2. Purchase or acquisition of shares from

existing stockholder; and3. Purchase of treasury shares from the

corporationSUBSCRIPTION PURCHASE OF

SHARESrefers to unissued shares

refers to issued shares

Corporation still to be form or already in existence

Can only be made when the corporation is already in existence

The subscriber can exercise all his right as a stockholder even before full payment of the subscription.

The purchaser can only exercise his right upon full payment of the purchase price.

Corporate creditors may proceed against the subscriber for his unpaid subscription in case the corporate asset are not sufficient to satisfy their claims.

Corporate creditor cannot proceed against the purchaser for the balance of the purchase price , because of the lack of privity of contact between them.

Subscriber may not be legally released from the payment of his unpaid subscription UNLESS no creditors would be

The corporation can rescind or cancel the contract in case of non fulfillment by the buyer.

prejudiced and all the stockholders agree thereto.Subscription may be in any form , not covered by the statute of frauds.

Purchase of shares is covered by the statute of frauds in cases of purchases amounting to more than P500.

Consequently the subscribers are not real parties in interest in a case for rescission of the subscription contract of another subscriber because they are not parties thereto. (Ong Yong v. Tiu, April 6, 2003)

Kinds of subscription contract:1. Pre-incorporation subscription

One entered into before incorporation. Pre-incorporation subscription constitutes a binding contract among the subscribers.

Note: It shall be irrevocable for a period of at least 6 years from the date of subscription unless: All of the other subscribers consent to the

revocation, or The incorporation fails to materialize. It shall likewise be irrevocable after the

submission of the articles of incorporations to the SEC.

2. Post incorporation subscription3. Conditional subscription4. Absolute subscription5. Subscription with a special term.

UNDERWRITING AGREEMENTAn underwriting agreement between a

corporation and a third person, termed the underwriter”, by which the latter agrees, for a certain compensation, to purchase a stipulated amount of stocks or bonds, specified in the underwriting agreement, if such securities are not purchased by those to whom they are first offered.

CONSIDERATION OF STOCKSValid considerations in subscription agreement:

1. Cash actually received;2. Property, tangible or intangible

necessary or convenient for its use and lawful purpose;

3. Labor or services actually rendered to the corporation;

4. Previously incurred corporate indebtedness; (Note: the indebtedness involved must be one that is acknowledge by the board.)

5. Amounts transferred from unrestricted retained earnings to stated capital;

6. Outstanding shares in exchange for stocks in the event of reclassification or conversion.

CERTIFICATE OF STOCK AND TRANSFER OF SHARES.

CAPITAL STOCK SHARES OF STOCKIs the amount paid in or secured to be paid in by the stockholders upon which the corporation is to conduct its operation. It is the property of the corporation itself.

Is the interest or right which the stockholder has in the management of the corporation, its surplus profits, and upon dissolution, in all of its assets remaining after payment of corporate debts.

WHEN do stocks become DELINQUENT? If the subscription contract fixes the

date for payment, failure to pay on such date shall render the entire balance due and payable with interest. Thirty days therefrom, if still unpaid, the shares become delinquent, as of the due date, and subject to sale, unless the board declares otherwise.

If no date is fixed in the subscription contract, the board of directors can make the call for payment, and specify the due date. The notice of call is mandatory. The failure to pay on such date shall render the entire balance due and payable with interest. Thirty days therefrom, if still unpaid, the shares become delinquent, as of the date of call, and subject to sale, unless the board declares otherwise. (Sec. 67)

CERTIFICATE OF STOCKS It is the paper representation or tangible

evidence of the stock itself and of the various interest therein.

It is not essential to the ownership and/ or existence of the share of stock.

Issuance of Certificate Of StockUnder the Doctrine of Individuality of Subscription , subscription is one, entire, indivisible, and whole contract which cannot be divided into portions. Thus, no certificate of stock shall be issued until the full amount of the subscription is paid.

Lost certificates The procedure for the procurement of

lost or replacements certificates is as follows: (a) the registered owner or

legal representative shall file an affidavit in triplicate setting forth (1) circumstances of the loss, theft, or destruction (2) number of shares, number of certificate and name of the corporation (3) such other matter or evidence he may deem necessary (b) Upon verification of the affidavit and books, the corporation shall cause notice of loss to be published at stockholder expense for 3 consecutive weeks, stating the specifics of loss and that 1 year from date of publication, should no contest be presented, it will cancel and issue new certificates, unless the stockholder files a bond or surety good for 1 year satisfactory to the board. Provided, in any case, if contest or suit is brought/presented, the issuance of the certificate shall be suspended until a final decision of the court or determination of ownership is made.

Except in case of fraud, bad faith or negligence of the corporation, no action can be brought against it for issuing a certificate/s pursuant to the procedure laid down.

MODES OF STOCK TRANSFER1. Indorsement and delivery of stock certificate

and to issue a new certificate unless the original certificate is surrendered for cancellation or is clearly shown to have been lost or stolen, or destroyed.

2. Transfer made in a separate instrument- while an assignment may be valid and binding between parties despite non-compliance with the requisite endorsement and delivery, it does not necessarily make the transfer effective for the assignee cannot enjoy the status of a stockholder until and unless the issue of ownership is resolved with finality.

3. Judicial or extra judicial settlement of estate- upon the death of the stockholder, his administrator or executor becomes vested with the legal title of the stock until the settlement and division of the estate is made.

WHAT ARE THE RIGHTS OF STOCKHOLDERS?1. Managerial Rights2. Proprietary Rights3. Pre-emptive Right 4. Remedial Rights5. Appraisal Rights6. Inspection Rights

MANAGERIAL RIGHTS1. Voting rights; and2. Right to remove directors

What are the LIMITATIONS on the stockholder’s RIGHT TO VOTE?

1. Where the articles of incorporation provides for classification of shares pursuant to Sec. 6, non-voting shares are not entitled to vote except as provided for in the last paragraph of Sec. 6;

2. Preferred or redeemable shares may be deprived of the right to vote unless otherwise provided in the Code;

3. Fractional shares of stock cannot be voted;

4. Treasury shares have no voting rights as long as they remain in the treasury;

5. Holders of stock declared delinquent by the board of directors for unpaid subscription are not entitled to vote or to a representation at any stockholder's meeting; and

6. A transferee of stock cannot vote if his transfer is not registered in the stock and transfer book of the corporation.

PROPRIETARY RIGHTS1. Right to dividends;2. Right to issuance of stock certificate for

fully paid shares;3. Proportionate participation in the

distribution of assets in liquidation;4. Right to transfer of stocks in corporate

books;5. Preemptive right;6. Right to inspect books and records;7. Right to be furnished of the most recent

financial statement/financial report;8. Right to recover stocks unlawfully sold

for delinquent payment of subscription.

PREEMPTIVE RIGHT OF STOCKHOLDER It is the shareholders' preferential right to subscribe to all issues or dispositions of shares of any class in proportion to their present stockholdings.

GENERAL RULE: There is no preemptive right. This is on the theory that when a corporation at its inception offers its first shares, it is presumed to have offered all of those which the corporation is authorized to issue.

EXCEPTION: When a corporation at its inception offers only a specified portion of its authorized capital stock for subscription. If subsequently, it offers the remaining unsubscribed portion, there would be preemptive right as to the remaining portion offered for subscription.

REMEDIAL RIGHTS1. Individual suit—a suit instituted by a

shareholder for his own behalf against the corporation;

2. Representative suit—a suit filed by a shareholder in his behalf and in behalf likewise of other stockholders similarly

situated and with a common cause against the corporation; and

3. Derivative suit (2009, 2006, 2005 2004 Bar examination)—a suit filed in behalf of the corporation by its shareholders upon a cause of action belonging to the corporation, but not duly pursued by it, against any person or against the directors, officers and/or controlling shareholders of the corporation.

—Creditors do not file derivative suits, but rather have remedies which are merely subsidiary such as accion subrogatoria and accion pauliana.

Requisites for a valid derivative suit (2004 Bar Examination):

1. Existing cause of action in favor of the corporation;

2. Stockholder/member must first make a demand upon the corporation or the management to sue unless such a demand would be futile;

3. Stockholder/member must be such at the time of the objectionable acts or transactions unless the transactions are continuously injurious; and

4. Action must be brought in the name of the corporation which must be alleged.

NOTE: The stockholder is only a nominal party in a derivative suit. The real party in interest is the corporation.

APPRAISAL RIGHTS (2007 Bar Examination)Appraisal right is the right of a stockholder,

who dissents from a fundamental or extraordinary corporate action, to demand payment of the fair value of his shares. It is the right of a stockholder to withdraw from the corporation and demand payment of the fair value of his shares after dissenting from certain corporate acts involving fundamental changes in the corporate structure namely: (ASIM)

1. An amendment to the Articles of incorporation that has the effect of—

2. Sale, encumbrance or other dispositions of all or substantially all of the corporate property or assets

3. Merger or consolidation;4. Investment of corporate funds in another

corporation or in a purpose other than the primary purpose (Sec 42)

GENERAL RULE: a dissenting stockholder who demands payment of his shares is no longer allowed to withdraw from his decision;EXCEPT WHEN:

1. The corporation consents to the withdrawal

2. The proposed corporate action is abandoned or rescinded by the corporation

3. The proposed corporate action is disapproved by the SEC where its approval is necessary;

4. The Commission determines that such stockholder is not entitled to appraisal right

What is an intra-corporate controversy? (2006 Bar Examination)

An intra-corporate controversy is a dispute between a stockholder and the corporation of which he is a stockholder, or between a stockholder and another stockholder of the same corporation, where the subject of the dispute or controversy arose out of such relationship (Sunset View Condominium Corp. v. Campos, Jr., 104 SCRA 303 [1981]).

An intra-corporate dispute is a civil case involving the following: (a) devices or schemes employed by, or any act of, the board of directors, business associates, officers or partners, amounting to fraud or misrepresentation which may be detrimental to the interest of the public and/ or of the stockholders, partners, or members of any corporation, partnership, or association; (b) controversies arising out of intra-corporate, partnership, or association relations, between and among stockholders, members or associates; and between, any or all of them and the corporation, partnership, or association of which they are stockholders, members, or associates, respectively; (c) controversies in the election or appointment of directors, trustees, officers, or managers of corporations, partnerships, or associations; (d) derivative suits; and (e) inspection of corporate books (SC Adm. Memo. No. 01-2-04 [2001]).

INSPECTION RIGHTSCorporate Books and Financial Records

The following corporate books and records must be kept and preserved at its principal office (1) record of all business transactions (2) minutes of stockholders or Board meetings, setting forth: time and place, how authorized, notice given, whether regular or special, those present/absent, every act done or ordered. Upon demand, the time that the a director, trustee or officer entered or left, the yeas and the nay, and any protest may be recorded in full (3) stock and transfer book which should contain a record of all stocks, names of stockholders, installments paid/unpaid, statement of alienation, date thereof and other matters prescribed by the By-Laws. These records are subject to the inspection rights of the Stockholders.

LIMITATIONS of the Inspection rights:1. Right must be exercised during

reasonable hours on business days; 2. Person demanding the right has not

improperly used 3. any information obtained through any

previous examination of the books and records of the corporation; and

4. Demand is made in good faith or for a legitimate purpose. (Sec. 74)

x-----------------------------------------------------------xIX. STOCKHOLDER PROTECTION

DEVICES

1. Tender Offers is a public offer to purchase a specified number of shares from shareholders usually at a premium in an attempt to gain control of the issuing company. Note that in some instances, the premium is payable only if the offeror is able to obtain the required number of shares. 1.1 A Tender Offer disclosure will be required if a person (Includes a partnership, limited partnership, syndicate, corporation or any other group) intends to acquire at least thirty five percent (35%) or at least thirty five percent (35%) over a period of twelve months any class of equity security of a listed corporation or even if the acquisition is less than thirty five percent (35%) it would result in ownership of over fifty one percent (51%).

2. Proxy Solicitations is an action to secure the right to vote of so much a number of shares to ensure the approval of a proposed corporate action/s. It provides shareholders with appropriate information to permit an intelligent decision on whether to permit their shares to be voted as solicited for a particular matter at a forthcoming stockholders meeting. x-----------------------------------------------------------x

X. Merger, Consolidation, and Dissolution

MERGER CONSOLIDATIONOne or more existing corporations are absorbed by another corporation which survives (A+B =A or B)

Union of 2 or more corporations to form a new corporation called a consolidated corporation (A+B =C)

Parties called constituent corporations

Same

Absorbed corporation dissolved without liquidation of assets

All constituent corporation are dissolved without liquidation of assets; consolidated corporation survives

Absorbing corporation acquires all assets and assumes liabilities of the absorbed corporation regardless of WON creditors consented

Consolidated corporation acquires all assets and assumes liabilities of constituent corps. regardless of WON creditors consented

SHS of absorbed corporation become SHS of absorbing corp.

SHS of constituent corps. becomes SH’s of consolidated corp.

DISSOLUTIONWhen the corporation ceases to be a juridical person.METHODS: (Sec 117, BP 68)

1. Voluntary2. Involuntary

A corporation may be dissolved by the SEC upon filing of verified complaint and after proper notice and hearing on the grounds provided by existing laws, rules and regulation. (Sec 121, BP 68)

The three (3) methods by which a stock corporation may be voluntarily dissolved are: (2002 Bar Examination)

1. Voluntary dissolution where no creditors is affected. This is done by a majority vote of the directors, and resolution vote of at least 2/3 vote of the stockholders, submitted to the Securities and Exchange Commission.

2. Voluntary dissolution where creditors are affected. This is done by a petition for dissolution which must be filed with the Securities and Exchange Commission, signed by a majority of the members of the board of directors, verified by the president or the secretary, and upon affirmative vote of stockholders representing 2/3 of the outstanding capital stock.

3. Dissolution by shortening of the corporate term. This is done by amendment of the articles of incorporation.

When corporation is deemed dissolved:Method When deemed dissolvedSec. 118, when no creditors are affected

Upon issuance of certificate of SEC

Sec. 119, where When judgment is

creditors are affected rendered dissolving the corporation

Sec. 120, dissolution by shortening corporate term

Upon approval of the amended articles of incorporation or the expiration of the shortened term, as the case maybe

INVOLUNTARY DISSOLUTION

Grounds for Involuntary Dissolution:A. If the corporation does not formally

organize and commence the transaction of its business or the construction of its works within 2years from the date of its incorporation, its corporate power ceases and the corporation shall be deemed dissolved;

B. If the corporation has commenced the transaction of its business, but subsequently becomes continuously inoperative for a period of at least 5 years, the same shall be a ground for suspension or revocation of its corporate franchise or certificate of incorporation

C. When the corporation fails to adopt and filed a code of by-laws in the manner provided for by law

D. When the corporation has offended against a provision of law for its creation or renewal

E. When it has committed or omitted an act which amounts to a surrender of its corporate rights, privileges, or franchises

F. When it has misused a right, privilege, or franchise conferred upon it by law, or when it has exercised a right, privilege, or franchise in contravention of law, such as commission by the corporation of ultra vires or illegal acts.

G. When on the basis of findings and recommendations of a duly appointed management committee or rehabilitation receiver, or based on the SEC’s own findings, the continuance of the business of the corporation would not be feasible or profitable nor work to the best interest of the SHs, parties-litigants, creditors, or the general public

H. When the corporation is guilty of fraud in procuring its certificate of registration

I. When the corporation is guilty of serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or damage to the general public.

J. Refusal of the corporation to comply or defiance of any lawful order of the SEC restraining commission of acts which would amount to a grave violation of its franchise and

K. Failure of the corporation to file required reports in appropriate forms as determined by the SEC within the prescribed period

EFFECTS OF DISSOLUTIONThe effects of dissolution are: (a) legal

title to corporate property is vested in stockholders or members (b) corporation ceases as a body politic to continue the business for which it was organized (c) it cannot be revived (d) dissolution does not by itself imply the diminution or extinguishment of rights (e) upon expiration of the winding up period of 3 years, the corporation ceases, it can no longer sue or be sued

CORPORATE LIQUIDATIONEvery corporation whose charter expires by

its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for 3 years after the time when it would have been so dissolved, for the purpose of

prosecuting and defending suits by or against it

enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets,

BUT NOT for the purpose of continuing the business for which it was established. At any time during said 3 years, said corporation is authorized and empowered to convey all of its property to trustees for the benefit of : stockholders, members, creditors, and other persons in interest.

BAR QUESTION: 2001 Bar Examination“X” Corporation shortened its corporate life by amending its articles in corporation. It has no debt but owns a prime property located in Quezon City. How would the property be liquidated among the five stockholders of said corporation? Discuss two methods of liquidation.

A: The prime property of “X” Corporation can be liquidated among the five stockholders after the property has been conveyed by the Corporation to the five stockholders, by dividing or partitioning it among themselves in any of the following ways: (1) by physical division or partition based on the proportion of the values of their stockholdings; or (2) selling the property to a third person and dividing the proceeds among the five stockholders in proportion to their stockholdings; or (3) after the determination of the value of the property, by assigning or transferring the property to one stockholder with the obligation on the part of the said stockholder to pay the other four stockholders the amount/s in proportion to the value of the stockholding of each.

x-----------------------------------------------------------x

XI. Non-Stock Corporations

Some significant differences between stock and non-stock are: (a) subject to the Articles of Incorporation or By-Laws, the right to vote may be limited, broadened or denied to some extent. Unless so provided, each member is entitled to one vote. In exercising the right, he may vote by proxy and also by mail or other similar means as authorized by the Articles of Incorporation or By-Laws with the approval of and under conditions prescribed by the SEC (b) membership and all rights are personal and non transferable unless provided in the Articles of Incorporation or By-Laws. It may be terminated in the manner and for causes provided in the Articles of Incorporation or By-Laws. Courts have no power to strip membership as it constitutes an unwarranted and undue interference with the right of a corporation to determine its membership (c) it may have any number of trustees as fixed in the Articles of Incorporation or By-law from the ranks of its membership. The term of the original trustees is such that 1/3 of their number shall serve for a year, the second 1/3 for two years and the third 1/3 for three years. Trustees subsequently elected shall then serve for a term of three years. Trustees elected to fill vacancies, shall only serve for the unexpired portion (d) corporate officers are elected by the members, unless otherwise provided by Articles of Incorporation or By-Laws (e) meetings can be held outside the place of principal business. Provided, there be notice of the date, time, and place but should always be in the Philippines.

x-----------------------------------------------------------x

XII. Close Corporations

A close corporation is a corporation whose articles provide that: (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 of persons not to exceed 20 (b) all issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted in this title. Any restriction can be put provided: (1) the restriction must appear in the Articles of Incorporation/By-Laws as well as the certificate of stock, otherwise it is not binding on a purchaser in good faith (2) it or they should not be more onerous than that granting the existing stockholders or the corporation the option to purchase the shares with such reasonable terms, conditions or periods stated therein. If at the

end/expiration of the period, a stockholder/s or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person (c)the corporation must not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding, if 2/3 of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of the Corporation Code, the corporation shall not be deemed a close corporation.

x-----------------------------------------------------------x

XIII. Special Corporations Educational Corporations are stock or

non-stock corporations organized to provide facilities for teaching or instruction and are governed by special laws and by general provisions of the Corporation Code. Prior to its incorporation, a favorable recommendation must be obtained from the Department of Education.

Religious Corporations are corporations incorporated by one or more persons classified as corporation sole or religious society. They are composed of entirely spiritual persons and which is organized for the furtherance of a religion or for perpetrating the rights of the church or for the administration of church or religious work or property

x-----------------------------------------------------------x

XIV. Foreign Corporations

A foreign corporation is one formed, organized or existing under any law other than those of the Philippines and whose law allow Filipino citizens and corporation to do business in its own country or state (sec 123)

It is NOT permitted to transact or do business in the Philippines until it has secured a license for that purpose from SEC and a certificate of authority from the appropriate government agency.

Who is a RESIDENT AGENT? An individual, who must be of good moral character and of sound financial standing, residing in the Philippines, or a domestic corporation lawfully transacting business in the Philippines, designated in a written power of attorney by a foreign corporation authorized to do business in the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings

against the foreign corporation. (Sec. 127-128)

What is the test of DOING OR TRANSACTING BUSINESS IN THE PHILIPPINES? The Corporation Code does not define the phrase "doing or transacting business." (2002 Bar Examination)

A. JURISPRUDENTIAL TESTS: 1. TWIN CHARACTERIZATION TEST

a. Substance Test—Whether the foreign corporation is maintaining or continuing in the Philippines the body or substance of the business for which it was organized or whether it has substantially retired from it and turned it over another); and

b. Continuity Test—Whether there is continuity of commercial dealings and arrangements, contemplating 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. CONTRACT TESTWhether the contracts entered

into by the foreign corporation, or by an agent acting under the control and direction of the foreign corporation, are consummated in the Philippines.

B. STATUTORY TESTS:Under the Foreign Investment Act of

1991 (R.A. No. 7042) the following acts constitute "doing business":

i. Soliciting orders, service contract opening offices, whether called liaison offices or branches;

ii. Appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling 180 days or more;

iii. Participating in the management, supervision or control of any domestic business, firm or entity or corporation in the Philippines; and

iv. Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of, the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose of the business organization.

Jurisprudential Rules

1. Doctrine of Isolated Transactions

Foreign Corporations, even unlicensed ones, can sue or be sued on a transaction or series of transactions set apart from their common business in the sense that there is no intention to engage in a progressive pursuit of purpose and object of the business transaction. (eriks Pte. Ltd vs. CA, 267 SCRA 567)

2. In Pari Delicto Rule

In the case of Top-Weld Manufacturing vs. ECED, SA., the Court denied the relief prayed for by the petitioner when it ruled that the very purpose of the law was circumvented and evaded when the petitioner entered into the said agreements despite the prohibition contained in the questioned law. The parties are considered in pari delicto because they equally violated RA 5455.

3. Estoppel Rule

A party is stopped from questioning the capacity of a foreign corporation to institute an action in our courts where it had obtained benefits from its dealings with such foreign corporations and thereafter committed a breach or sought to renege on its obligations. (Merrill Lynch vs. CA, GR No. 978160, July 24, 1992)

x-----------------------------------------------------------xXV. Corporate Rehabilitation

Who can file? Filing of the VERIFIED POSITION with the appropriate RTC by:

a. Corporate debtor which foresees the impossibility of meeting its debts when they respectively fall due; or

b. Creditors holding at least 25% of the debtor’s total liabilities

Upon filing and subsequent determination by the court that the petition is sufficient in form and substance, a stay order may be issued.

A stay order will, among others, contain the following: (a)Appointment of a rehabilitation receiver or a management committee, who as long is acting in good faith is immune from suit (b) Stay of enforcement of all claims, whether for money or otherwise, and whether such enforcement is by court action or otherwise against the debtor, its guarantors, and sureties not solidarily liable with the debtor (c) Prohibiting the debtor from selling, encumbering, transferring, or disposing in any manner any of its properties, except in the ordinary course of business (d)

Prohibiting the debtor from making any payment of its outstanding liabilities as of the date of the filing of the petition (e)Prohibiting the debtor’s supplies of goods and services from withholding supplies and services in the ordinary course of business for as long as the debtor makes payments for the services and goods supplied after the issuance of the stay order

Proceedings may be terminated in case of (a) failure of the debtor to submit the rehabilitation plan (b) disapproval of the plan by the court (c) failure of rehabilitation due to failure to achieve desired targets or goal (d) failure of debtor to perform his obligations (e) determination that the plan may no longer be implemented with its terms, conditions or assumptions (f) upon successful implementation of the plan.

2006 Bar Examination: What is the rationale for the Stay Order?

The stay order is a recognition that all assets of a corporation under rehabilitation are held in trust for the equal benefit of all creditors under the doctrine of “equality is equity”. As all creditors ought to stand on equal footing, not any one of them should be paid ahead of others (Ruby Industrial Corp. v. Court of Appeals, 284 SCRA 445, 4460 [1998]). Furthermore, the stay order will enable the management committee or rehabilitation receiver to effectively exercise its or his powers free from judicial or extrajudicial interference that might unduly hinder or prevent rehabilitation of the corporation or hinder or prevent the “rescue” of the distressed company, rather than to waste its/his time, effort and resources in defending claims against the corporation (Rubberworld( Phils.), Inc. v. NLRC, 305 SCRA 721 [2000]).

SC approved Interim Rules of ProcedureOn Corporate Rehabilitation (2000)

1. Filing of the VERIFIED POSITION with the appropriate RTC by:

a. Corporate debtor which foresees the impossibility of meeting its debts when they respectively fall due; or

b. Creditors holding at least 25% of the debtor’s total liabilities

2. The following shall be ANNEXED TO THE PETITION:

a. Audited Financial Statements at end of its last fiscal year

b. Interim Financial Statementsc. Schedule of Debts and Liabilitiesd. Inventory of Aseetse. Rehabilitation Planf. Schedule of Payments & Disposition

of Assets w/in 3 mos. preceding filing of Petition

g. Schedule of Cash Flow for the last 3 mos.

h. Statement of Possible Claims

i. Affidavit of General Financial Condition

j. At least 3 nominations for rehab. receiver

k. Certificate under oath that directors & SHs have irrevocable approved/consented to all actions/matters necessary under rehab. plan

3. The REHABILITATION PLAN4. Issuance of STAY ORDER not later than

5days from filing of petition which, among others, shall:

a. Appoint a rehabilitation receiver for the petitioning corporate debtor

b. Stay all actions for claims against the debtor, which shall cover both secured & unsecured creditors or claimants

c. Set an initial hearing for the Petition; and

d. Direct the creditors & other interested parties to file their verified comment on or opposition to the petition not later than 10 days before the initial hearing and putting them on notice that their failure to do so would bar them from participating in the proceedings

5. PUBLICATION OF THE STAY ORDER in a newspaper of general circulation in the Philippines once a week for 2 consecutive weeks which makes the proceeding in rem in nature.

6. INITIAL HEARING ON PETITION not earlier than 45 days but not later than 60 days from filing of Petition

7. REFERRAL OF REHABILITATION PLAN TO REHABILITATION RECEIVER who shall submit his recommendation thereon to the RTC not later than 90 days from the initial hearing

8. MEETINGS BETWEEN CORPORATE DEBTOR AND/OR REHABILITATION RECEIVER with the creditors and other interested parties, which should take place before the final revision of the plan prior to its final submission to the RTC for approval

9. MODIFICATION OR REVISION by the debtor OF THE REHABILITATION PLAN.

10. SUBMISSION OF A FINAL REHABILITATION PLAN to the RTC for its approval

11. The PETITION SHALL BE DISMISSED [which results into the automatic lifting of the stay order unless otherwise ordered by the RTC] if no rehabilitation plan is approved by the RTC after 180 days from the date of initial hearing

12. APPROVAL OR DISAPPROVAL of the rehabilitation plan by the RTC:

If approved, implementation of the plan and modifications in the course thereof if necessary to meet the desired business targets; If not approved, Petition shall be dismissed

x-----------------------------------------------------------xXVI. Other Matters

SEC Jurisdiction: original and exclusive jurisdiction

(1) fraudulent devices and schemes employed by directors detrimental to public interest

(2) intra-corporate disputes and with the state in relation to their franchise and right to exist as such

(3) Controversies in the election, appointment of directors, trustees, etc.

(4) petition to be declared in a state of suspension of payments

NOTE: Actions involving intra-corporate controversies are cognizable by the Regional Trial Court NOT by the Securities and Exchange Commission, designated by the Supreme Court under SC Adm. Memo No. 00-11-03, which has jurisdiction over the principal office of the corporation, partnership or association concerned (Sec. 5, Rule 1, SC Adm. Memo. No. 02-2-4). (2006 Bar Examination)

INTRA-CORPORATE DISPUTES

1. For an intra-corporate dispute to exist, there must be an intra-corporate relationship and the controversy must arise from the said relationship. The controversy must be intrinsically connected with the regulation of the internal affairs of the corporation. (Arranza vs. BF Homes, 333 SCRA 799)2. RA 8799, which became effective on August 8, 2000, transferred the SEC’s jurisdiction over intra-corporate disputes to courts of general jurisdiction or regional trial courts.3. A court that is not designated as a special commercial court is not vested with jurisdiction over cases previously cognizable by the SEC and does not have the requisite power to order the transfer of cases erroneously filed with it to another branch of the RTC, the only action it could take on the matter is to dismiss the petition for lack of jurisdiction ( Calleja vs. Panday, 483 SCRA 680)

SECURITIES AND THEIR REGULATION

1. In general, securities are Shares, Participation or Interest (SPI) in a Corporation or in a Commercial enterprise or Profit-making venture (CCP) and evidenced by a Certificate, Contract; Instrument, whether written or electronic in character (CCI).2. Securities Registration is mandated to accomplish its objective of disclosure to potential investors.The reasons for mandating registration are (a) To give adequate protection and reliable information to the investing public (b) To ensure compliance with the law by the issuer (c)To allow only an issuer who is solvent, of good repute and character, and whose business is based on sound business principles.

3. Commodity Futures Contracts and Pre-Need Plans are also required to the registered.3.1 A Commodity Futures Contract is a present right to receive at a future date a specific quantity of a given commodity for a fixed price. They are commitments to buy or sell commodities at a specified time and place in the future. The object is to realize profits in anticipation of a favorable change in price.3.2 A pre-need plan is a contract that provides for the performance of future services or the payment of future monetary considerations at the time of actual need, for which plan holders pay in cash or installment at stated prices, with or without interest or insurance coverages and includes life, pension, education, internment, and other plans which SEC shall approve.

SECURITIES MANIPULATION1. Manipulation is an artificial control of security prices; it is an attempt to force securities to sell at prices either above or below those which would exist as a result of the normal operations of supply and demand. The manipulator hopes to profit by creating fictitious prices at the expense of the general trading public.

INSIDER TRADING

1. Insider Trading occurs when an insider sells or buys a security of the issuer, while in possession of material information with respect to the issuer or the security that is not generally available to the public, unless: (a) the insider proves that the information was not gained from such relationship; or (b) If the other party selling to or buying from the insider (or his agent) is identified, the insider proves: (i) that he disclosed the information to the other party, or (ii) that he had reason to believe that the other party otherwise is also in possession of the information.

A purchase or sale of a security of the issuer make by an insider defined in Subsection 3.8, or such insider’s spouse or relatives by affinity or consanguinity within the second degree, legitimate or common-law, shall be presumed to have been effected while in possession of material non-public information if transacted after such information came into existence but prior to dissemination of such information to the public and the lapse of a reasonable time for the market to absorb such information: Provided, however, That this presumption shall be rebutted upon a showing by the purchaser or seller that he was not aware of the material non-public information at the time of the purchase or sale.2. An “Insider” shall include: (a) the Issuer (b) a director or officer of, or a person controlling, controlled by, or under common

control with Issuer (c)a person whose relationship or former relationship to Issuer gives or gave him access to a fact of special significance about Issuer or the security that is not generally available (d) a government employee, or directors, or officer of an exchange, clearing agency and/or SRO who has access to material information about an Issuer or a security that is not generally available to the public (e) a person who learns such a fact from any of the foregoing insiders with knowledge that the person from whom he learns the fact is an insider. 3. Information is considered “material non-public” if: (a) It has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or (b) would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security.

I N S U R A N C EI N S U R A N C EPD 1460

PRELIMINARIESA. Definition of Contract of InsuranceB. Requisites of Insurance ContractC. Concealment and RepresentationD. Kinds of PolicyE. Warranties in Insurance ContractF. Double InsuranceG. Reinsurance ContractH. Marine InsuranceI .LossesJ .AbandonmentK. Kinds of InsuranceL. Motor Vehicle Insurane - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

WHAT LAWS GOVERN INSURANCE(a) Insurance Code (PD 1460 – whose

affectivity date is 11 June 1978)(b) In absence of applicable provisions,

the Civil Code;(c) In absence of applicable provisions in

the Insurance Code and Civil Code, the general principles on the subject in the United States (Constantino vs. Asia Life Insurance, 87 Phil 248)

WHAT IS A CONTRACT OF INSURANCE- It is an agreement whereby one

undertakes for a consideration to indemnify another against loss, damage, or liability arising from an unknown or contingent event;

- A contract of suretyship shall also be deemed an insurance contract if made by a surety who or which is doing an insurance business;

Doing an insurance business or transacting an insurance business is:

(a) making or proposing to make as insurer any insurance contract;

(b) making or proposing to make as surety contract of suretyship as a vocation and not merely incidental to

any other legitimate business or activity of the surety;

(c) doing any business including a reinsurance business, specifically as doing an insurance business within the hearing of the Code;

(d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of the Code (section 2);

NATURE AND CHARACTERISTICS OF ACONTRACT OF INSURANCE

1. It is an ALEATORY contract –2. It is a contract of INDEMNITY for Non-Life

– recovery is commensurate to the loss. It is an investment in life insurance – secured by the insured as a measure of economic security for him during his lifetime and for his beneficiary upon his death except one secured by the creditor on the life of the debtor;

3. It is a PERSONAL contract 4. It is EXECUTORY and CONDITIONAL on

part of the insurer 5. It is one of PERFECT GOOD FAITH 6. It is a contract of ADHESION – insurance

companies manage to impose upon the insured prepared contracts, which the insured cannot change. Consequently, they are to construed as follows:(a) In case there is no doubt as to the terms

of the insurance contract, it is to be construed in its plain, ordinary, and popular sense;

(b) If doubtful, ambiguous, certain, it is to be construed strictly against the insurer and liberally in favor of the insured because the latter has no voice in the selection of the words used, and the language used is selected by the lawyers of the Insurer (Qua Chee Gan vs. Law Union Rock Ins. Co. Ltd. 52 OG 1982)

Illustrations:a. P Bank obtained insurance against

robbery, which excluded loss by any criminal act of the insured or any authorized representative. While transferring funds from one branch to another, the insured’s armored truck was robbed. The driver was assigned by a labor contractor with the insured, while the security guard was assigned by an agency contracted by the insured. Both driver and guard were found to be involved. Can the loss be excluded? HELD: The loss is excluded , the driver/guard although assigned by labor contractors – are authorized representatives. The terms are clear and

unambiguous. (Fortune Insurance vs. CA, 244 SCRA 308).

b. Personal Accident policies providing payment for “loss of hand”. The insurance policy defines it as amputation. The insured has an accident resulting in a temporary total disability but hand is not amputated. HELD: Insurer is not liable. (Ty vs. First National Surety and Assurance Company – 17 SCRA 364) But – In case where the policy provided loss of both, legs by amputation, a claim against the policy was allowed for a total paralysis to exclude total paralysis is contrary to public policy, public good and sound morality, as it would force the insured to have his legs amputated to be able to claim on the policy. (Panaton vs. Malayan – 2 Court of Appeals 783)

c. Warranty in a fire insurance policy prohibited storage of oils having a flash point of below 300 Fahrenheit. Gasoline is stored. Is there a policy violation? HELD: The clause is ambiguous. In ordinary parlance oils means lubricants – not gasoline. There is no reason why gasoline could not be expressed clearly in the language public can readily understand. (Qua Chee Gan)

d. An action to recover the amount of PHP 2,000.00 due to death by drowning where the policy provided for indemnity in the amount of PHP 1,000.00 to PHP 3,000.00 HELD: The interpretation of the obscure stipulation in contract must not favor the one who caused the obscurity. Hence, judgment for additional PHP 2,000.00 was affirmed. (Del Rosario vs. Equitable Insurance and Casualty Company, 8 SCRA 343)

e. Denial of a claim on the ground that the insured vehicle was a “private” type vehicle on the ground that the policy issued to the insured was a common carrier’s liability, Insurance policy which covers a public vehicle for hire. HELD: Insurer is liable as it was aware all along that the vehicle of the insured was a private vehicle. (Fieldman Insurance vs. Mercedes Vargas vda De Songco, 25 SCRA 70)

f. Denial of a claim for benefit due to the death of Flaviano Landicho in a plane crash under the GSIS policy on the ground of non payment of the premium. HELD: The policy contained a provision that the application for insurance is authority for GSIS to cause the deduction of premium from the insured’s salary. (Landicho vs. GSIS, 44 SCRA 7)

Other case reference: New Life Enterprises vs. CA, 207 SCRA 669

MARINE RISK NOTE IS NOT AN INSURANCE POLICY – Certainly it would be obtuse for us to even to entertain the idea that the insurance contract between Malayan and ABB Koppel was actually constituted by the Marine Risk Note alone. (Malayan Insurance Co. vs. Regis Brokerage Corporation Nov. 23 2007 G.R. No. 172156)

WHAT ARE THE ELEMENTS OF AN INSURANCE CONTRACT

1. The insured should possess an interest of some kind, susceptible of pecuniary estimation – known as “insurable interest”. Generally – a person has insurable interest in the subject matter insured when:

- He has such a relation or connection with or concern in, such subject matter that he will derive pecuniary benefit or advantage from its preservation or will suffer pecuniary loss or damage from its destruction, termination or injury by the happening of the event insured against.

- It is necessary because its absence renders the contract void. This is based on the principle that insurance is a contract of indemnity. If the insured has no interest, he will not stand to suffer loss or injury by the happening of the event insured against.

INSURANCE CONTRACT – [Loss covered by the insurance policy; Burden of proof to prove that same] Any loss or damage happening during the existence of abnormal conditions (whether physical or otherwise) which are occasioned by or through in consequence directly or indirectly, of any of the said occurrences shall be deemed to be loss or damage which is not covered by the insurance, except to the extent that the insured shall prove the loss or damage, happened independently of the existence of such abnormal conditions.

An Insurance contract, being a contract of adhesion, should be so interpreted as to carry out the purpose for which the parties entered into the contract which is to insure against risks of loss or damage to the goods. Limitations of liability should be regarded with extreme jealousy and must be construed in such a way as to preclude the insurer from noncompliance with its obligations. (DBP Pool of Accredited Insurance Companies v. Radio Mindanao Network, Inc. Jan. 27, 2006, G.R. No. 147039)

ETERNAL GARDENS MEMORIAL PARK CORPORATION vs. THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY (G.R. No. 166245, April 9, 2008)

Philamlife’s assumption of risk of loss without approving the application. - The question arises as to whether Philamlife assumed the risk of loss without approving the application.

This question must be answered in the affirmative.

It must be remembered that an insurance contract is a contract of adhesion which must be construed liberally in favor of the insured and strictly against the insurer in order to safeguard the latter’s interest. Thus, in Malayan Insurance Corporation v. Court of Appeals, this Court held that:

Indemnity and liability insurance policies are construed in accordance with the general rule of resolving any ambiguity therein in favor of the insured, where the contract or policy is prepared by the insurer. A contract of insurance, being a contract of adhesion, par excellence, any ambiguity therein should be resolved against the insurer; in other words, it should be construed liberally in favor of the insured and strictly against the insurer. Limitations of liability should be regarded with extreme jealousy and must be construed in such a way as to preclude the insurer from noncompliance with its obligations.

In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we reiterated the above ruling, stating that:

When the terms of insurance contract contain limitations on liability, courts should construe them in such a way as to preclude the insurer from non-compliance with his obligation. Being a contract of adhesion, the terms of an insurance contract are to be construed strictly against the party which prepared the contract, the insurer. By reason of the exclusive control of the insurance company over the terms and phraseology of the insurance contract, ambiguity must be strictly interpreted against the insurer and liberally in favor of the insured, especially to avoid forfeiture.20

GULF RESORTS, INC., vs. PHILIPPINE CHARTER INSURANCE CORPORATION (G.R. No. 156167 May 16, 2005)

Provisions of insurance policy; no piecemeal construction or segregation of certain stipulations allowed; all parts should be reflective of clear intent of parties.- The policy cannot be construed piecemeal. Certain stipulations cannot be segregated and then made to control; neither do particular words or phrases

http://www.lawphil.net/judjuris/juri2008/apr2008/gr_166245_2008.html#fnt20

necessarily determine its character. Petitioner cannot focus on the earthquake shock endorsement to the exclusion of the other provisions. All the provisions and riders, taken and interpreted together, indubitably show the intention of the parties to extend earthquake shock coverage to the two swimming pools only.

Contract of insurance; payment of premium by the insured, an important element of the contract; Court’s finding that no premium payments with regard to earthquake shock coverage, except on the two swimming pools.- A careful examination of the premium recapitulation will show that it is the clear intent of the parties to extend earthquake shock coverage only to the two swimming pools. Section 2(1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. Thus, an insurance contract exists where the elements concur.

IN WHAT DOES A PERSON HAVE INSURABLE INTEREST IN (LIFE)

Every person has an insurable interest in the Life and Health of:

1.himself, his spouse and of his children;2.any person on whom he depends wholly

or in fact for education or support or in whom he has pecuniary interest (Note article 195 of the Family Code specifying the persons obligated to support each other. Example – pecuniary interest-partners, employees);

3.any person under legal obligation to him for the payment of money, respecting property or services of which death or illness might delay or prevent performance. Example – Mortgagors, Debtors.

4.Any person upon whose life, any estate or interest vested in him depends (Example – Usufructuary X allows Y to receive fruits of the land of the former as long as he is alive. Y has insurable interest in life of X, because the death of X will terminate his right and cause him damage. (Section 10)

WHAT IS THE BASIS OF INSURABLE INTEREST IN LIFE

- It exist when there is reasonable ground founded on the relation of the parties, either pecuniary or contractual or by blood or by affinity to expect some benefit from the continuance of life of the insured;

WHEN MUST INSURABLE INTEREST IN LIFE EXIST

- Insurable interest in life must exist at the time of the effectivity of the policy and need not exist at the time of the death of

the insured as life insurance is not a contract of indemnity. It is meant to give financial security to the insured or his beneficiaries (Section 19). However, insurable interest of a creditor on the life of the debtor must exist only at the time of effectivity but also at the time of the death of the debtor – as in this instance it is a contract of indemnity. His interest is capable of exact pecuniary measurement.

WHAT IS THE EXTENT OF INSURABLE INTEREST IN ONE’S LIFE

- He has unlimited interest in his own life or that of another person regardless of whether or not the latter has insurable interest. Provided, that if the beneficiary has no insurable interest, there is no fore or bad faith. But if he takes out a policy on the life of another and names himself as the beneficiary, he must have an insurable interest in the life of the insured;

INSURABLE INTEREST – The insurable interest of every member of petitioner’s health care program in obtaining the health care agreement is his own health. Under the agreement, petitioner is bound to indemnify any member who incurs hospital, medical or any other expense asising from sickness, injury or other stipulated contingency to the extent agreed upon under the contract. (Philippine Health Care Providers Inc. V. Commissioner of Internal Revenue, Jun. 12 2008 G.R. 167330)

IS THE CONSENT OF THE INSURED REQUIRED

WHEN INSURANCE IS TAKEN

- The law does not require the consent of the person insured and such has been considered as not essential to the validity of the contract as long as there is insurable interest at the beginning;

IN WHAT DOES A PERSON HAVE INSURABLE

INTEREST IN PROPERTY

- A person has insurable interest in property as every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured is an insurable interest (section 13). It may consist of:

(a) An existing interest

(b) An inchoate interest founded on an existing interest – (Defined: Interest in real estate which is not a present interest but which may ripen into a vested interest if not barred, extinguished, or divested.)

(c) An expectancy coupled with an existing interest in that out of which the expectancy arises;

Note: - Expectancy must be founded on an actual

right to the thing or a valid contract for it;- A carrier or depository of any kind has

insurable interest in the thing held by him such to the extent of his liability but not to exceed the value thereof (Sections 13, 14, and 15);

- But, a mere contingent or expectant interest in anything, not founded on contract or actual right to the thing is not insurable – as there is no insurable interest (Section 16);

WHO IS BOUND BY A CONTRACT OF INSURANCE – The insurance contract between the insurer and the insured, under Article 1311 of the Civil Code is binding only upon the parties (and their assigns and heirs) who execute the same.

INCHOATE RIGHT – The right to lay claim on the fun is dependent on the solvency of the insurer and is subject to all other obligations of the company arising from its insurance contracts. Thus, the respondents’ interest is merely inchoate. Being a mere expectancy, it has no attribute of property. At this time, it is nonexistent and may never exist. Hence, it would be premature to make the security deposit answerable for CISCO’s present obligation to Del Monte Motors. (Republic of the Philippines v. Del Monte Motors, Inc., Oct.9, 2006 G.R. No. 156956)

WHAT IS THE TEST OR MEASURE OF INSURABLE

INTEREST IN PROPERTY

- Whether one will derive pecuniary benefit or advantage from its preservation or will suffer pecuniary loss or damage from its destruction; (Section 17)

INSURABLE INTEREST IN BANK DEPOSITS

2000 BAR EXAM (VIII - b)Q: BD has bank deposit of half a million

pesos.Since the limit of trhe insurance coverage of the Philippine Deposit Insurance Corp Act ( 3591) is only one tenth of BD’s deposit, he would like some protection for the excess by taking out an insurance against all risks or

contingencies of loss arising from any unsound or unsafe banking practices including unforeseen adverse effects of the continuing crisis involving the banking and financial sector in Asia. Does BD have insurable interest within the meaning of the Insurance Code?

A: Yes, BD has insurable interest in his bank deposit. In case of loss of said deposit, more particularly to the extent of the amount in excess of the limit covered by the Philippine Deposit Insurance Corporation Act, BD will be damnified. He will suffer pecuniary loss of P400,000.00, that is, his bank deposit of half a million pesos minus P100,000.00 which is the maximum amount recoverable from the PDIC.

MUST THE BENEFICIARY IN PROPERTY HAVE INSURABLE INTEREST ON THE PROPERTY INSURED?

- YES, as no contract or policy of insurance on property shall be enforceable. Except for the benefit of some person having insurable interest in the property insured;

WHEN MUST INSURABLE INTEREST IN PROPERTY EXIST

- must exist at the time the insurance takes effect and when the loss occurs but need not exits in the meantime (Section 19);

COMPARE WITH INSURABLE INTEREST IN LIFE: 2002 BAR EXAM (N0.XVII)

LIFEPROPERTY

- not necessary – can be based on consanguinity or affinity

- based on pecuniary interest

- only at effectivity except that taken by a creditor in the life of the debtor

- exist at the time of effectivity and loss

- no limit exist if based on debtor

- limited to actual volume insured

IN RELATION TO THE NEED FOR THE

EXISTENCE OF INSURABLE INTEREST, PLEASE

NOTE:

- That a change in interest in any part of a thing insured accompanied by a corresponding change in the insurance suspends the insurance to an equivalent extent until interest in the thing and interest in the insurance is vested in the same person;

- No claim in insurance contract while it is suspended because it can happen that the insurable interest will be returned;

CHANGE OF INTEREST IN PROPERTY INSURED (Transfer or Sale of insured property) (1994 & 200 Bar Exams)

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 interests in the thing and the interest in the insurance are vested in the same person. (Sec. 20)

Exceptions: 1) change of interest after the loss; 2) change of interest in one or more of several things separately insured; 3) change of interest by will or succession; and 4) transfer of interest by a partner, joint owner, or common owner, to another partner, joint owner or common owner.

1980 Bar Exam:

A insures his house for P 10, 000 commencing January 1, 1952. On February 15, 1952, A sells the house to B for P15,000 without endorsing or transferring the fire policy to B. On April 20, 1952, the house is completely destroyed on account of the accidental fire. Can A or B collect the proceeds of the policy from the insurer? Explain and give reasons for your answer. (1952, 1959, 1980 Bar)

ANSWER:

Neither A, the seller, nor B, the buyer, can collect under the policy. A transfer of interest in property without any transfer of interest in the insurance suspends the latter until the interest in the property and in the insurance is vested in the same person. A has transferred his interest in the object of the insurance (the house) to B without a transfer of his interest in the insurance to B. As the interests in the object and in the insurance are in different persons at the time of the loss, none can recover under the policy.

WHAT CHANGE IS CONTEMPLATEDAn absolute transfer of the property not

life, a lease/mortgage;

EXCEPTIONS TO THE REQUIREMENTS OF

INSURABLE INTEREST:

(1) Life, health or accident insurance because they

are not contracts of indemnity and insurable interest is not required at the time of loss;

(2) A change of interest after occurrence of an injury and results in loss – does not affect the right of the insured to indemnity;- After a loss, the liability of the insurer is fixed

(3) A change of interest in one or more several distinct things, separately insured by one policy, does not avoid as to the others (Section 22);

(4) A change of interest in one or more several distinct things, separately insured by one policy, does not avoid the insurance as to the insured; (Section 23)

(5) A transfer of interest by one or several partners, joint owners, or owners in common, who are jointly insured – to the others, does not avoid insurance even though it has been agreed that the insurance shall lease upon an allocation of the thing insured;

Note: - There must be no stipulation

against it – otherwise it is avoided;

- Transfer to strangers avoid the policy

(6) When notwithstanding a prohibition, the consent of the insurer is obtained;

(7) When the policy is so framed that it will insure to the benefit of whomsoever may become the owner during the continuance of the risk;

CONTINUATION OF ELEMENTS1. Insurable interest;2. The insured is subject to risk of loss

through the destruction or impairment of that interest by the happening of the designated risk;

3. The insurer assumes the risk of loss;4. Such assertion is part of a general scheme

to distribute actual loss among a large group of persons bearing somewhat similar risk;

5. As a consideration for the insurers promise, the insured makes a ratable contribution called a premium to the general insurance fund;

WHAT MAY BE INSURED AGAINST- Any unknown or contingent event,

whether past or future, which may damnify a person having insurable interest or create a liability against him, may be insured against (Section 3);

Example: Insurance against damage, liability, unknown past event (in marine insurance – insurance is over the vessel against perils of the sea, lost or not lost), or future event like loss or theft of the object;

- In relation to the insurance so secured, note:

1. The consent of the husband is not necessary for the validity of an insurance policy taken by a Married woman on her life and that of her children. Under art. 145 of the family code, she can also insure her separate property without the consent of the husband;

2. A minor may take out a contract for life, health and accident insurance with any company authorized to do business in the Philippines, provided it be taken out on his own life and the beneficiary named is his estate, father, mother, husband, wife, child, brother or sister. In so doing, the married woman/minor may exercise all the rights or privileges under the policy;

But – What is the effect of the death of the original owner of a policy, which covers the life of a minor, ahead of the minor – all rights, title and interest in the policy shall automatically vest in the minor unless otherwise provided in the policy;

WHAT CANNOT BE INSURED- An insurance for or against the

drawing of any lottery or for or against any chance or ticket in a lottery drawing or prize. Because gambling results in profit and insurance only seeks to indemnify the insured against loss (Section 4)

WHO ARE THE PARTIES TO A CONTRACT OF INSURANCE

1. INSURER – every person, partnership, association or corporation duly authorized to transact insurance business as provided in the code may be an insurer. It is the party who agrees to indemnify another upon the happening of specified contingency;

2. INSURED – party to be indemnified in case of loss (section 6). Anyone except a public enemy (a nation at war with Philippines and every citizen subject of such nation. Reason: the purpose of war is to cripple the power and exhaust the resources of the enemy, and it is inconsistent to destroy its resources then pay it the value of what has been destroyed) may be insured;

2000 BAR EXAM (VIII - a)

Q: May a member of the MORo Islamic Liberation Front ( MILF ) or it’s breakawy group, the Abu Sayaff, be insured with a company licensed to do business under the Insurance Code of the Philippines? Explain?

A: A member of the MILF or the Abu Sayyaf may be insured with a company licensed to do business under the Insurance Code of the Philippines. What is prohibited to be insured is a public enemy. A public enemy is a citizen or national of a country with which the Philippines is at war. Such member if the MILF or the Abu Sayyaf is not a citizen or national of another country, but of the Philippines.

WHO MAY INSURE A MOrTGAGED PROPERTY- Both the mortgagor and the mortgagee

may take out separate policies with the same or different companies. The mortgagor – to the extent of his property, the mortgagee – to the extent of his credit; (section 8)

INSURANCE INTEREST ON MORTGAGED PROPERTY (2005 BAR EXAM (N0. X - 2- a)

Armando Geagonia v. CA 241 SCRA 154

SC RULINGCondition 3 is what is known as “other insurance clause” which is a valid provision allowed by the insurance code in order to prevent in an increase in the moral hazard and to serve as a warranty that no other insurance exists. Its incorporation in fire policies prevents over insurance and adverts the perpetration of fraud. Its violation will thus avoid the policy. However, in order to constitute a violation, the other insurance must be upon the same subject matter, the same interest therein, and the same risk.

Double insurance exists where the same person is insured by several insurers separately in respect of the same subject and interest.

The court ruled that since the stocks in trade insured with PFIC were mortgaged property, separate insurances covering different insurable interests maybe obtained by the mortgagor and mortgagee. The insurable interests of a mortgagor and mortgagee are

separate and distinct, thus no double insurance exists since the policies of PFIC do not cover the same interest as that covered under the policy of Country Banker’s Insurance Corp. The non-disclosure of the policies with PFIC was not fatal to Armando’s right to recover on his policy with Country Banker’s Insurance Corp.

WHAT ARE THE CONSEQUENCES WHERE THE MORTGAGOR INSURES THE PROPERTY MORTGAGED IN HIS OWN NAME BUT MAY THE LOSS PAYABLE TO THE MORTGAGEE OR ASSIGNS THE POLICY TO HIM.

UNLESS THE POLICY PROVIDES OTHERWISEa. The insurance is still deemed to be upon

the interest of the mortgagor who does not cease to be a party to the original contract. Hence, if the policy is cancelled, notice must be given to the mortgagor;

b. Any act of the mortgagor, prior to loss, which would otherwise avoid the policy or insurance, will have the same effect although the property is in the hands of the mortgagee. Hence, if there is a violation of the policy by the mortgagor, the mortgagee cannot recover;

c. Any act required to be done by the mortgagor may be performed by the mortgagee with the same effect if it has been performed by the mortgagor. Example: If notice of loss is required, the mortgagee may give it;

d. Upon the occurrence of the loss, the mortgagee is entitled to recover to the extent of his credit and the balance if any to be paid to the mortgagor, since such is for both their benefits;

e. Upon recovery by the mortgagee, his credit is extinguished;

If on the other hand, (section 9), the insurer assents to the transfer of the insurance from the mortgagor to the mortgagee, and at the time of his assent, imposes further qualifications on the assignee, making a new contract with him, the acts of the mortgagor cannot affect the rights of the assignee – Note the Union Mortgage Clause – creates the relation of insured and insurer between mortgagee and the insurer independent of the contract of the mortgagor. In such case, any act of the mortgagor can no longer affect the rights of the mortgagee – the insurance contract is now independent of that with the mortgagor;

WHAT IS THE EFFECT OF INSURANCE PROCURED BY THE MORTGAGEE WITHOUT REFERENCE TO THE RIGHT OF THE MORTGAGOR

a. The mortgagee may collect from the insurer upon the occurrence of the loss to the extent of his credit;

b. Unless otherwise stated, the mortgagor cannot collect the balance of the proceeds after the mortgagee is paid;

c. The insurer, after payment to the mortgagee, becomes subrogated to the rights of the mortgagee against the mortgagor and may collect the debt to the extent paid to the mortgagee;

d. The mortgagee after payment cannot collect anymore from the mortgagor BUT if he is unable to collect in full from insurer, he can recover from the mortgagor;

e. The mortgagor is not released from the debt because the insurer is subrogated in place of the mortgagee;

3. BENEFICIARY – the person who receives the benefits of an insurance policy upon maturity;

property insurance – yes the insured himself but cant assign the proceeds;

life insurance – not required to have insurable interest;

WHO MAY BE BENEFICIARIES IN LIFE INSURANCE

- Anyone, except who are prohibited by law to receive donations from the insured. Note art. 739 of the Civil Code, hence the following cannot be designated as beneficiaries;1. Those made between persons guilty

of adultery or concubinage at the time of the designation;

2. Those guilty of the same criminal offense in consideration thereof;

2008 BAR EXAM

On January 1, 2000, Antonio Rivera secured a life insurance from SOS Insurance Corp. for P1 Million with Gemma Rivera, his adopted daughter, as the beneficiary. Antonio Rivera died on March 4, 2005 and in the police investigation, it was ascertained that Gemma Rivera participated as an accessory in the killing of Antonio Rivera. Can SOS Insurance Corp. avoid liability by setting up as a defense the participation of Gemma Rivera in the killing of Antonio Rivera? Discuss with reasons. (4%)

Answer: Section 12. The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal, accomplice, or accessory in willfully bringing about the death of the insured; in which event, the nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified.Thus, the insurance company must still pay out the

proceeds of the life insurance policy to the nearest qualified relative of the insured.

3. Those made to a public officer or his wife, descendants/ascendants by reasons of his office;

- A prior conviction for adultery/concubinage is not required, it can be proven by proponderance of evidence in the same action nullifying the designation. Note the cases of Insular Life vs. Ebrado, 80 SCRA 181, where a common law wife of the insured who is married could not be named as a beneficiary and SSS vs. Davac, 17 SCRA 863, where the insured designated his second wife as a beneficiary was upheld as the latter was not aware of the first marriage;

- The disqualification does not extend to the children of the adultery or concubinage in view of the express recognition of the successional rights of illegitimate children (Art. 287, NCC and Art. 176, Family Code);

MUST THE BENEFICIARY HAVE INSURABLE INTEREST ON THE LIFE OF THE INSURED

- It is recognized that the insured may name anyone he chooses except those disqualified to receive donations as a beneficiary in his life insurance, even if he is a stranger and has no insurable interest in the life of the insured. The designation, however, must be in GOOD FAITH AND WITHOUT FRAUD OR INTENT TO ENTER INTO A WAGERING CONTRACT.

Beneficiary in life and property insurance (2005 bar exams)Philippine American Life Insurance Company v. Pineda (175 SCRA 416)

SC Ruling:Under the law, the beneficiary designated in a life insurance contract cannot be changed without his or her consent because of the beneficiary’s vested interest in the policy. In this regard, it is worth nothing that the beneficiary designation indorsement which forms part of the policy in the name of Rodolfo Dimayuga states that the designation of the beneficiaries is irrevocable and no right or privilege under the policy may be exercised, or agreement made with the insurance company to any change in or amendment to the policy without the consent of the said beneficiary. Accordingly, based on the provisions of the contract and the law applicable, it is only with the consent of all the beneficiaries that any change or amendment to the policy concerning the irrevocability of beneficiaries may be legally and validly effected.

Insurable interest on property

Spouses Nilo Cha v. CA Aug. 18, 1997 2009 bar examsSC RULING:

1. The lessor cannot validly be a beneficiary of the fire insurance policy taken by the spouses Cha. It has no insurable interest on the merchandize insured because it remains with the spouses.

2. The automatic assignment of the policy to the lessor is void for being contrary to law and public policy. The proceeds of the fire insurance policy rightfully belong to the spouses cha.

3. The insurer cannot be compelled to pay the proceeds of the policy to the lessor who has no insurable interest on the property insured.

CAN THE BENEFICIARY BE CHANGED- The insured shall have the right to

change the beneficiary he designated – unless he has expressly waived the right in the policy (Section 11);

- If he has waived the right, the effect is to make the designation as irrevocable. Note that the designation of the guilty spouse as irrevocable beneficiary is revocable as the instance of the innocent spouse in cases of termination of:(1) a subsequent marriage;(2) nullification of marriage;(3) annulment of marriage; and(4) legal separation (Art. 34, (4)

Family CodeWHAT IS THE EXTENT OF THE INTEREST OF THE IRREVOCABLE BENEFICIARY IN A LIFE INSURANCE CONTRACT

The beneficiary has a vested right that cannot be taken away without his consent. In fact should the insured discontinue payment of the premium, the beneficiary may continue paying. Neither can the insured get a loan or obtain the cash surrender value of the policy without his consent (Nario vs. Philamlife, 20 SCRA 434).

Note: where the wife and minor children were named irrevocable beneficiaries, wife dies, the husband seeks to change the beneficiaries with the consent of the children. The consent is not valid due to minority. (Philamlife vs. Pineda, 170 SCRA 416).

2005 BAR EXAM (NO. IX -1)

Q: What are the effects of an irrevocable designation of a beneficiary under the Insurance Code? Explain. (2%)

A: The irrevocable beneficiary has a vested interest in the policy, including its incident such as the policy loan and cash surrender value. (Grogorio v. Sun Life Assurance Company of Canada, 48 Phil. 53 [1925])

2005 BAR EXAM (NO. IX- 2)

Q: Jacob obtained a life insurance policy for P1 Million designating irrevocably Diwata, a friend, as his beneficiary. Jacob, however, changed his mind and wants Yob and Jojo, his other friends, to be included as beneficiaries considering that the proceeds of the policy are sufficient for the three friends.Can Jacob still add Yob and Jojo as his beneficiaries? Explain. (2%)

A: The insured cannot add other beneficiaries as this would diminish the interest of Diwata who is the irrevocably designated beneficiary. The insured can only do so with the consent of Diwata.WHAT IS THE INTEREST OF AN IRREVOCABLE BENEFICIARY IN AN ENDOWMENT POLICY

- His interest is contingent as benefits are to be paid only if the assured dies before the specified period. If the insured outlives the period, the benefits are paid to the insured;

WHAT IS THE EFFECT OF FAILURE TO DESIGNATE OR BENEFICIARY IS DISQUALIFIED

- The benefits of the policy shall accrue to the estate of the insured;

WHO RECOVERS IF BENEFICIARY PREDECEASES THE INSURED

- If the designation is irrevocable, the legal representatives of the beneficiary may recover unless it was stipulated that the benefits are payable only “if living.” If designation is revocable, and no change is made, the benefits passes to the estate of the insured. The rule holds also if benefits were payable “only if living” or “if surviving” and the beneficiary dies before the insured;

WHAT HAPPENS TO INTEREST OF THE BENEFICIARY IN LIFE INSURANCE WHERE HE WILLFULLY KILLS THE INSURED

- If the killing is willful, the interest is forfeited, if he is the principal, an accomplice, or an accessory. The nearest relative of insured gets the proceeds if not otherwise disqualified (Section 12). If not willful or felonious, the provision does not apply;

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WHAT IS CONCEALMENT?

- Concealment is a neglect to communicate that which a party knows and ought to communicate (Section 26);

WHAT IS THE EFFECT OF CONCEALMENT?

- Whether intentional or not, it entitles the injured party to rescind the contract of insurance (Section 27). Examples:

(1) The insured does not disclose sickness but dies of another cause. There is concealment because it is material to a determination of the assumption of risk by the insurer;

(2) The father of the insured obtained an insurance policy over his daughter, but did not disclose that she was a mongoloid child, the child dies of influenza, the concealment relieves the insurer of liability (Grepalife vs. CA 89 SCRA 543)

BASIS OF PROVISIONS ON CONCEALMENT/REPRESENTATION

- Fundamental characteristic of a contract of insurance that it is one of perfect/utmost good faith;

2001 BAR EXAM (N0.XVI): A applied for a non-medical life insurance. The insured did not inform the insurer that one week prior to his application for insurance, he was examined and confined at St. Lukes hospital where he was diagnosed for lung cancer. The insured soon thereafter died in a plane crash. Is the insurer liable considering that the fact concealed had no bearing with the cause of death of the insured? Why?

A: No. The concealed fact is material to the approval and issuance of the insurance policy. It is well settled that the insured need not die of the disease he failed to disclose to the insurer. It is sufficient that his non-disclosure misled the insurer in forming his estimate of the risks of the proposed insurance policy or in making inquiries.

WHO MUST PROVE KNOWLEDGE OF THE FACT CONCEALED?

- The party claiming existence of concealment must prove that there was knowledge on the part of the party charged with concealment;

AS OF WHAT TIME MUST THE PARTY CHARGED WITH CONCEALMENT HAVE KNOWLEDGE OF THE FACT CONCEALED?

- Generally, a party must have knowledge of the fact concealed at the time of the effectivity of the policy. Note that even if a party did not know of the existence at the rime of application but before its effectivity, there is concealment;

- Information acquired after effectivity is not concealment and does not constitute ground to rescind the policy, as after the policy is issued, information subsequently acquired is no longer material as it will not affect or influence the party to enter into contract. However, in case of the reinstatement of a lapsed policy, facts known after effectivity but before reinstatement must be disclosed;

HOW IS THE MATERIALITY OF THE CONCEALMENT OR REPRESENTATION DETERMINED?

Materiality is determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the disadvantages of the proposed contract or in making his inquiries (Section 31);

WHAT IS THE TEST OF MATERIALITY?

The test of materiality is whether knowledge of the true facts could have influence a prudent insurer in determining whether to accept the risk or in fixing the premiums;

MUST THERE BE A CAUSAL CONNECTION BETWEEN THE FACT CONCERNED AND THE CAUSE OF THE LOSS? Not necessary

Concealment need not be material, be of facts which about or contribute to or are connected of the insured’s loss. It is immaterial that there is no causal relationship between the fact concealed and the loss sustained. It is sufficient that the non-revelation has misled the insurer in forming its estimate of disadvantage of fixing the premium.

Examples: Insured concealed kidney disease and enlarged liver – later he died of thrombosis, is the insurer liable? No, since the fact concealed was material though the insured did not die therefrom (Henson vs. Philam 50 OG 73428). Insured had concealed that he had kidney disease. He dies in plane crash. The insurer is not liable (Sunlife vs. CA, 245 SCRA 269);

WHAT FACTS MUST BE COMMUNICATED?

Each party to an insurance contract is bound to communicate to the other all facts that meet the following requisites:

(a) Such fact that must be within his knowledge – as concealment requires knowledge of the fact

concealed by the party charged with concealment;

(b) Fact/s must be material to the contract – it must be of such nature that had the insurer known of it, it would not have accepted the risk or demanded a higher premium;

(c) That the other party had no means of ascertaining such fact/s;

(d) That the party with a duty to communicate makes no warranty (Section 28) – as the existence of a warranty make the requirement to disclose superfluous but – an intentional fraudulent omission on the part of the one insured to communicate information on a matter proving or tending to prove falsity of a warranty entitles the insurer to rescind (Section 29).

WHAT MATTER NEED NOT BE COMMUNICATED?

Except in answer to the inquiries of the other:

(1) Those which the other knows – as the insurer cannot say that it has been deceived or misled;

Example: Insured discloses that he has tuberculosis to he agent of the insurer, who in turn omits to state the same in the application of the insured was deemed knowledge of the insurer (Insular Life Assurance Co. vs. Feliciano, 74 Phil 468). Insurer had surveyed the location and surrounding area of a building that it is to be insured against fire, an omission to state that there are neighboring buildings will not avoid policy;

(2) Those which in the exercise of ordinary care, the other ought to know, and of which, the former has no reason to suppose him to be ignorant. The facts that the other ought to know as per section 32 are:

(3) Those of which the other waives communication. A waiver takes place either, by the terms of the insurance or by he neglect to make inquiries as to such facts where they are distinctly implied in other facts of which information is communicated (section 33).

(4) Those which prove or tend to prove the existence of a risk excluded by a warranty, and which are not otherwise material.

(5) Those which relate to the risk exempted from the policy, and which are not otherwise material (section 30).

SUNLIFE ASSURANCE CO. OF CANADA VS. CA, JUNE 22, 1995(1996, 1997, and 2001 Bar Exams)

Robert Bacani was issued life insurance non-medical policy for P100,000.00 with his mother as beneficiary. In his application, he concealed his confinement at the Lung Center of the Philippines for certain illness. He died of a plane crash. The insurance company refused to pay for breach of the insurance contract.RTC and CA granted the claim of the beneficiary because the concealed facts were not material or irrelevant to the cause of death.

SC RULING: The SC reversed the ruling and held that the information which the insured failed to disclose was material and relevant to the approval and issuance of the policy. The facts concealed would have affected the insurer’s action on the application either by charging a higher rate of premium or rejecting the same. The insured need not die of the disease he concealed. It is sufficient that his non-disclosure misled the insurer in forming his estimate of the risk involved or in making inquiries. The contract of insurance can be rescinded by reason of concealment and this has to be exercised within the two year contestability period.

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WHAT IS REPRESENTATION?

Oral or written statement of a fact or a condition affecting the risk made by the insured to the insurance company, tending to induce the insurer to take the risk (Section 36);

WHEN MAY REPRESENTATION BE MADE

Since it is an inducement to entering a contract – it must ordinarily be made at the same time as or before – the insurance of the policy (section 37). Note that it can also be made after the issuance of the policy when the purpose thereof is to induce the insurer to modify an existing insurance contract – as the provisions also apply to a modification (Same with concealment)

HOW SHOULD REPRESENTATION BE CONSTRUED

The language of a representation is to be interpreted by the same rules as the language of the contracts in general (section 38). Hence, it need not be literally true and correct/accurate in

every respect, rather, it is sufficient if it is substantially or materially true. In case of a promissory representation, it is sufficient if it is substantially complied with;

WHAT ARE THE FORMS AND KINDS OF REPRESENTATION

Representations may be Oral or Written and can either be:

(a) Affirmative – which is an affirmation of a fact existing when the contract begins;

(b) Promissory – which is a statement by the insured concerning what is to happen during the term of the insurance;

IS A REPRESENTATION PART OF THE CONTRACT

No, it cannot qualify as an express provision in a contract (it is a collateral inducement to the contract but it may qualify an implied warranty (section 40);

CAN A REPRESENTATION BE WITHDRAWN OR ALTERED

Yes, as long as the insurance has not yet been effected and the insurer has not yet been induced to issue the policy. If withdrawn or altered afterwards, the contract can be rescinded as the insurer has already been led to issue the policy (section 41);

TO WHAT DATE DOES A REPRESENTATION REFER

It must be presumed to refer to the date on which the contract goes into effect (section 42);

Note: There is no false representation if it is true at the time the contract takes effect although false at the time it is made;

WHEN IS A REPRESENTATION SAID TO BE FALSE

When the facts fail to correspond with its assertions or stipulations (Section 44);

MUST THE INSURED COMMUNICATE INFORMATION OF WHICH HE HAS NO PERSONAL KNOWLEDGE BUT MERELY RECEIVES THE SAME FROM OTHERS?

When a person has no personal knowledge of facts – he may or may not communicate such information to the insurer. If he does communicate, he is not responsible for its truth (section 43). Hence, there can be no misrepresentation;

WHEN IS THE INSURED REQUIRED TO DISCLOSE INFORMATION FROM A 3RD PERSON

When the information material to the transaction was acquired by an agent of the insured, as knowledge of the agent is also knowledge of the principal;

WHAT IS THE EFFECT OF MISREPRESENTATION ON A MATERIAL POINT?

If it is false on material point, whether affirmative or promissory – the injured party is entitled to rescind the contract from the time the representation becomes false. However, the right to rescind is considered waived by the acceptance of premium payments despite knowledge of the ground to rescind (section 45);

Examples:

(a) Insurer was aware of the lack of the extinguishers required by the policy. But there is no waiver – if the insurer had no knowledge of the ground at the time of the acceptance of the premium;

(b) Unauthorized driver (Strokes vs. Malayan, 127 SCRA 766)

HOW IS MATERIALITY DETERMINED?

The same as concealment (Section 46) probable and reasonable influence of the facts upon the party to whom the representation is made in forming his estimate of the advantage/disadvantages of the contract or I making inquiries;

WHEN IS THE RIGHT TO RESCIND SUPPOSED TO BE EXERCISED – (SEC 48)

The right to rescind must be exercised previous to the commencement of an action on the contract (section 48). Note the case of Tan Chay Hing vs. West Coast Life Insurance Co., 51 Phil 80, where an insurer interposed the defense in an action to claim the proceeds that the contract is null and void. Section 48 was held to apply only when there is a contract to rescind.

It is also qualified by 2nd paragraph of section 48 which provides that after a policy of life insurance payable on the death of the insured

shall have been in force during the lifetime of the insured for a period of 2 years from the date of issue or its last reinstatement, the insurer cannot prove that the policy is void ab initio or is subject to rescission by reason of a fraudulent concealment or misrepresentation of the insured or his agent (known as the incontestability clause);

WHAT IS THE THEORY AND OBJECT BEHIND THE INCONTESTABILITY CLAUSE

(a) On the part of the insurer – an insurer has/should have a reasonable opportunity to investigate the statements which are made by the applicant an that after a definite period, it should no longer be permitted to question its validity;

(b) On part of the insured – its object is to give the greatest possible assurance that the beneficiaries would receive payment of the proceeds without question as to validity or the policy;

REQUISITES OF INCONTESTABILITY CLAUSE

The requisites are:

(1) It is a life insurance policy;(2) It is payable on the death of the

insured;(3) It has been in force during the

lifetime of the insured for at least two years from date of issue/or last reinstatement;

Tan vs. CA, 174 SCRA 403 – during the lifetime of the insured means that the policy is no longer in force if the insured dies. Facts: Philam issued policy on November 6, 1973. On April 26, 1975 the insured died. The beneficiaries claimed but the insurer denied the claim on September 11, 1975 and rescinded the policy on the ground of misrepresentation and concealment. Held: Insurer has two years from date of issue/reinstatement within which to contest the policy whether or not the insured still lives within the period;

WHAT DEFENSES ARE NOT BARRED BY INCONTESTABILITY EVEN AFTER THE LAPSE OF 2 YEARS?

(1) non-payment of premiums;(2) lack of insurable interest;(3) that the cause of death was excepted

or not covered by the terms of the policy;

(4) that the fraud was of a particular vicious type such as:a. policy was taken in furtherance of

a scheme to murder the insured;

b. where the insured substituted another for the medical examination;

c. where the beneficiary feloniously killed the insured;

(5) violation of a condition in the policy relating to military or naval service in time of war;

(6) the necessary notice or proof of death was not given;

(7) action is not brought within time specified in the policy, which in no case should be less than 1 year as per section 63;

WHAT ARE THE EFFECTS OF INCONTESTABILITY?

The insurer can no longer escape liability, tender the policy or be allowed to prove that the policy is void ab initio or may be rescinded by reason of concealment or misrepresentation by the agent of the insured or the insured;

DISTINGUISH CONCEALMENT FROM REPRESENTATION

Concealment is the neglect of one party to communicate to the other material facts. The information he gives in compliance with his duty to reveal information is representation. Representation therefore is the communication required to comply with the prohibition against concealment;

Concealment is the passive and misrepresentation is the active form of the same bad faith;

CONCEALMENT AND REPRESENTATION COMPARED

1. In concealment – the insured withholds information of material facts, while in representation – the insured makes erroneous statements;

2. In concealment and misrepresentation both give the insurer the right to rescind the contract of insurance;

3. The materiality of concealment and representation are determined by the same rules;

4. Whether the concealment or representation is intentional or not, the injured party can rescind;

5. Since insurance contracts are of utmost good faith – the insurer is also covered by the rules;

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DEFINE POLICY

It is the written instrument in which a contract of insurance is set forth (Section 49.);

HOW IS IT CONSTRUED, WHAT IF THE INSURED DOES NOT UNDERSTAND THE CONTENTS OF THE POLICY?

Generally in favor of the insured and against the insurer. The burden of proving that the terms of the policy have been explained is upon the party seeking to enforce it. The claim of the beneficiary that since the insured was illiterate and spoke Chinese only, she could not be held guilty of concealment because the application and policy was in English (Tang vs. CA, 90 SCRA 236);

FORM OF THE POLICY

It shall be printed and may contain blank spaces and any word, phrase, clause or mark, sign, symbol, signature, or number necessary to complete it shall be written in the blank spaces (Section 50). If there are riders, clauses, warranties or endorsements purporting to be part of the contract of insurance and which are pasted or attached to the policy is not binding on the insured – unless the descriptive title of the same is also mentioned and written on the blank spaces provided in the policy. Note: if pasted or attached to the original policy at the time it was issued – the signature of the insured is not necessary to make it binding. If after the original policy is issued, it must be counter-signed by the insured unless applied for by the insured;

No rider, clauses, or warranties, or endorsements shall be attached, printed or stamped on the policy unless the form of such application has been approved by the insurance commissioner;

Riders – are forms attached to the policy when the company finds it necessary to alter or amend the applicant’s answer to any question in the application;

Clauses – are forms containing additional stipulations;

Warranties – are written statement/stipulations inserted on the face of the contract or incorporated by proper words or reference – where the insured contracts as to the existence of facts, circumstances or conditions – the truth of which are essential to the validity of the contract;

Endorsements – are agreements not contained but may be written or attached to policy to change or modify a part thereof;

WHAT MUST A POLICY SPECIFY?

A policy must specify:

(1) The parties whom the contract is made;

(2) The amount to be insured except in open or running policies;

(3) The premium, or if the premium is to be determined at the termination of the contract, a statement of the basis and rates upon which the final premium is to be determined;

(4) The property or life insured;(5) The interest of the insured in the

property insured, if not the absolute owner;

(6) The risks insured against;(7) The period during which the

insurance is to continue (Section 51);

FGU INSURANCE CORPORATION vs. CA ( G.R. No. 137775. March 31, 2005)

Fortuitous event; Definition. – Caso fortuito or force majeure (which in law are identical insofar as they exempt an obligor from liability) by definition, are extraordinary events not foreseeable or avoidable, events that could not be foreseen, or which though foreseen, were inevitable. 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.

The fortuitous event should be the proximate and only cause of the loss;

While the loss of the cargoes was admittedly caused by the typhoon Sisang, a natural disaster, ANCO could not escape liability to respondent SMC. The records clearly show the failure of petitioners’ representatives to exercise the extraordinary degree of diligence mandated by law. To be exempted from responsibility, the natural disaster should have been the proximate and only cause of the loss. There must have been no contributory negligence on the part of the common carrier. As held in the case of Limpangco Sons v. Yangco Steamship Co.: . Carelessness and negligence of the insured or his agents constitute no defense on the part of the insurer. –One of the purposes for taking out insurance is to protect the insured against the consequences of his own negligence and that of his agents. Thus, it is a basic rule in insurance that the carelessness and negligence of the insured or his agents constitute no defense on the part of the insurer.

When the insured’s negligence is gross as to constitute a willful act, the insurer must be exonerated.- The question now is whether there is a certain degree of negligence on the part of the insured or his agents that will deprive him

the right to recover under the insurance contract. We say there is. However, to what extent such negligence must go in order to exonerate the insurer from liability must be evaluated in light of the circumstances surrounding each case. When evidence show that the insured’s negligence or recklessness is so gross as to be sufficient to constitute a willful act, the insurer must be exonerated.

The United States Supreme Court has made a distinction between ordinary negligence and gross negligence or negligence amounting to misconduct and its effect on the insured’s right to recover under the insurance contract. According to the Court, while mistake and negligence of the master or crew are incident to navigation and constitute a part of the perils that the insurer is obliged to incur, such negligence or recklessness must not be of such gross character as to amount to misconduct or wrongful acts; otherwise, such negligence shall release the insurer from liability under the insurance contract.

WHAT ARE COVER NOTES?

It is a written memorandum of the most important terms of a preliminary contract of insurance intended to give protection pending investigation by the insurer of the risk or until the insurance of the formal policy (Section 52). It is also known as binding slip or receipt or binder;

EFFECTIVITY OF A COVER NOTE

The effectivity of a cover note is 60 days – as within such period, a policy shall be issued including in its terms the identical assurance found under the cover rate and the premium therefore. It may however, be extended beyond 60 days and with the written approval of the Insurance Commissioner if he determines that it does not violate the Insurance Code;

NOTE THE FOLLOWING RULES HAVE BEEN PROMULGATED BY THE INSURANCE COMMISSIONER:

(1) A cover note is valid for 60 days whether or not a premium is paid but may be cancelled by either party upon at least 7 day notice to the other party;

(2) If the other note is not cancelled, a regular policy must be issued within 60 days from the date of issue of the cover note including within its terms the identical insurance;

(3) It may be extended with the written approval of the commissioner but may be dispensed with by a

certification of the President, Vice-President or General Manager of the insurer that the risks involved and the extension do not violate the code;

(4) Insurance companies may impose a deposit premium equivalent to at least 25% of the estimated premium but in no case less than Php500.00;

WHEN WILL A COVER NOTE GIVE ADEQUATE INSURANCE PROTECTION?

It gives adequate insurance protection when it is a preliminary contract of present insurance and not a mere agreement to insure a future time, as on acceptance of the application or issuance/delivery of the policy. (44 CJS 958)

Example:

(1) Agent issued a provisional policy acknowledging receipt of premiums and stating that the insurance shall be effective upon approval and issuance of the policy by the head office. There is no protection as it is a mere acknowledgement of the payment of premiums as the effectivity of the insurance is expressly provided (Lim vs. Sunlife, 41 Phil 265);

(2) In life insurance, a binding slip does not insure by itself as it was stated that it was subject to the approval of the insurer and the same was subsequently disapproved (Grepalife vs. CA, 89 SCRA 546);

IS PAYMENT OF A PREMIUM PAYMENT FOR THE COVER NOTE NECESSARY TO BE PROTECTED AGAINST RISK INSURED AGAINST?

Cover note held to be binding despite the absence of a premium payment for its issuance. No separate premiums are intended or required to be paid on a cover note because they do not contain particulars of the property insured that would serve as the basis for the computation of premiums – such being the case no premium can be fixed. The cover notes should not be treated as a separate policy but should be integrated in the regular policy subsequently issued so that premiums on the regular policy should include that for the cover note (Pacific Timber vs. CA, 112 SCRA 199);

2009 BAR EXAM (IV)

Antarctica Life Assurance Corporation (ALAC) publicly offered a specially designed insurance policy covering persons between the ages of 50 to 75 who may be afflicted with serious and debilitating illnesses. Quirico applied for insurance coverage, stating that he was already 80 years old. Nonetheless, ALAC approved his

application.Quirico then requested ALAC for the issuance of a cover note while he was trying to raise funds to pay the insurance premium. ALAC granted the request. Ten days after he received the cover note, Quirico had a heart seizure and had to be hospitalized. He then filed a claim on the policy.

a. Can ALAC validly deny the claim on the ground that the insurance coverage, as publicly offered, was available only to persons 50 to 75 years of age? Why or why not? (2%)

b. Did ALAC’s issuance of a cover note result in the perfection of an insurance contract between Quirico and ALAC? Explain. (3%)

Answer:

a. no. there was no concealment on the part of quirico as to his age.

b. yes, one of the exception of the cash and carry rule is in life insurance when the grace period applies. in the case at bar, the issuance of the cover note shows that the insurer granted a grace period.

WHOSE INTEREST IS INSURED

(1) The insurance proceeds shall be applied exclusively to the proper interest of the person in whose name or for whose benefit it is made unless otherwise specified in the policy (Section 53).

Example:

(a) In the case of Del Val vs. Del Val, 29 Phil 534, the designation of a sister as a sole beneficiary in life insurance cannot be defeated by the contention of the plaintiff that the proceeds belong to the estate of the insured was disregarded as insurance is to be governed by special law, not by the law covering donations or succession;

(b) In the case of Bonifacio Bros. vs. Mara, G.R. No. 20853, 29 May 1967, action to recover cost of repairs and labor to a motor vehicle where the policy states loss is payable to H.S. Reyes, the mortgagee of the vehicle who had no knowledge of the fact that Mara had it repaired with Bonifacio Bros., where the court ruled that H.S. Reyes is the one entitled to the proceeds because a policy of insurance is a separate and independent contract between the insured and the insurer, and that third persons have no right to the proceeds of the insurance.

MAY A 3RD PERSON SUE THE INSURER – No, in general rule unless there is stipulation. Unless otherwise specified in the policy, a 3RD person may sue if:

(a) The insurance contract contain stipulation in favor of a 3RD person, the latter though not a party may sue to enforce before the contract is revoked by the parties;

Example: In case of Coquia vs. Fieldmens Insurance Co. 26 SCRA 179, the insurance company undertook to indemnify any authorized driver who was driving the motor vehicle insured. Coquia, while driving the insured motor vehicle met an accident and died. His heirs were allowed to sue the insurer, the policy being considered in the nature of a contract pour autrui and therefore the enforcement thereof may be demanded by a 3rd party whose benefit it was made;

(b) The insurance contract provides for indemnity against liability to 3RD

persons.

Example: In the case of Guingon vs. Del Monte, 20 SCRA 1043, the insured procured insurance that would indemnify him against any and all sums, which he may be legally liable to pay in respect to the death or bodily injury to any person. A jeepney covered by the insurance had bumped Guingon and had caused his death. The insurance was held to be one for indemnity for liability to third persons (Third Party Liability), and therefore, such third person is entitled to sue the insurer. The test to determine whether a 3rd person may directly sue the insurer of the wrongdoer is: if the contract provides indemnity against liability to 3RD persons, then the latter to whom the insured is liable may directly sue the insurer, on the other hand, if the insurance if for the indemnity against actual loss or payment – then the 3rd person cannot sue the insurer – recourse is against the insured alone.

(2) If the contract is executed with an agent or trustee as the insured, the fact that his principal or beneficiary is the real party in interest may be indicated by describing the insured as the agent/trustee or by general words in the policy (Section 54). If not indicated, it is as if the insurance is the taken out by the agent/trustee alone, consequently the principal has no right against the insurer;

(3) If a partner or part owner effects insurance, it is necessary that the terms of the policy should be such as are applicable to the joint or common interest so that it may be applicable to the interest of his co-partners/owners (Section 55). Consequently, the policy must state that the interest of all is insured, if not, it is only the interest of the one getting the policy that is insured;

(4) When the description of the insured in the policy is so general that it may comprehend any person or any class of persons, only he who can show that it was intended to include him can claim the benefit of the policy (Section 56).

(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 (Section 57). The proceeds become payable to who may be the owner at the time the loss or injury occurs. This is an exception to section 20.

(6) The mere transfer of a thing insured does not transfer the policy but suspends it until the same person becomes the owner of both the policy and the thing insured (Section 58). Note the exceptions to this rule as found in sections 20-24 and 57;

WHAT ARE KINDS OF INSURANCE POLICIES

The kinds of policies are (1) Open, (2) Valued, or (3) Running (Section 59);

An Open Policy is one in which the value of the thing insured is not agreed upon, but is left to be ascertained in case of loss (Section 60). What is mentioned, as the amount is not the value of the property but merely the maximum limit of the insurer’s liability. In case of loss, the insurer only pays the actual cash value at the time of loss;

A Valued Policy is one, which expresses on its face that the thing insured shall be valued at a specified sum (Section 61). The valuation of the property insured is conclusive between the parties. In the absence of fraud or mistake, such value will be paid in case of a total loss;

A Running Policy (Floating Policy) is one which contemplates successive insurances and which provides that the object of the policy may be from time to time defined especially as to the subjects of insurance, by additional statements or indorsements (Section 62). This is also known as a Floating Policy – usually issued to provide indemnity for property, which cannot be covered by specific insurance because of a frequent change in location and quantity.

Example: Insurance procured by a retail establishment to cover its inventory that fluctuates in quantity, or is located in several areas;

VALUED POLICY DISTINGUISHED FROM AN OPEN POLICY

(1) In a valued policy, proof of value of the thing after the loss is not necessary. In an open policy, the insured must prove the value of the thing insured;

(2) In a valued policy, the parties have conclusively stipulated that the property insured is valued at a specified sum. In an open policy, the value is not agreed but left to be ascertained upon loss;Note: this does not violate the principle that a contract of insurance is a contract of indemnity as long as the valuation is reasonable and is bonafide).

OPEN AND VALUED POLICIES

PROBLEMSuppose A constructed a house in

1990 at a cost of P 200,000.00 which he insured against fire to the said amount. The policy for P 200,000.00 was renewed every year. In 1995, when the said house was already P 400,000.00, ¼ of the house was burned or destroyed by fire. How much can he recover from the insurer?ANSWER:

It depends. If the policy is a valued policy, A can recover only P 50,000.00. If a policy is an open policy, A can recover his actual loss of P 100,000.00.

CAN THERE BE AGREEMENTS AS TO PRESCRIPTION OF AN ACTION OR LIMITATIONS ON THE PERIOD OF TIME TO BRING AN ACTION

Yes, provided the period agreed upon should not be less than one year (Section 63). If less than one year, the agreement is void. The period so agreed shall be considered as having commenced from the time the cause of action accrues. Usually, the cause of action accrues from the date of the insurers rejection of the claim of the beneficiary or of the insured – since before rejection there is no necessity to bring suit. When no period is stipulated or if the stipulation is void, the period is within 10 years under article 1144, New Civil Code, it being a written contract (Eagle Star vs. Chia Yu 96 Phil 696, ACCFA vs. Alpha Insurance, 24 SCRA 151). If the insured asks for a reconsideration of the denial, the period is still counted from the time the claim is denied at the first instance – not reconsideration - as it gives the insured a scheme or devise to waste time until evidence that may be considered against him can be destroyed (Sun Life Office Ltd. Vs. CAR, 195 SCRA 193). The period does not run if action is brought against an agent of the insurer;

WHAT IS THE PRESCRIPTIVE PERIOD OF MOTOR VEHICLE INSURANCE

One year from denial of the claim – not date of accident – (Summit Guaranty vs. De Guzman, 15 SCRA 389);

WHERE IS THE ACTION FILED

The action may be filed in the following:

(1) Courts;(2) Insurance Commissioner, who has

concurrent jurisdiction with courts for claims not exceeding Php100,000.00;

(3) POEA/DOLE have the power to compel a surety to make good on a solidary undertaking in the same proceeding where the liability of the principal obligor is determined.

Note that the claim becomes action upon filing with the court;

CANCELLATION OF THE POLICY

If policy other than life shall be cancelled by the insurer except upon prior notice thereof to the insured. No notice of cancellation shall be effective if not based on the occurrence, after effective date of one or more grounds: (Section 64)

(1) Non payment of premium;

(2) Conviction of a crime arising out of acts increasing the hazard insured against

(3) Discovery of material representation;

(4) Discovery of willful or reckless acts or omissions increasing the hazard insured against;

(5) Physical changes in the property insured which the result in the property being uninsurable;

(6) Determination by the insurance commissioner that continuation of the policy would place the insurer in violation of the code:

FORM OF NOTICE OF CANCELLATION

It must be in writing, mailed or delivered to the name insured at the address shown in the policy which shall state:

(1) The grounds relied upon as per section 64, and;

(2) That upon written request of the named insured, the insurer will furnish the facts on which cancellation is based (Section 65).

Notes:

(1) A fire insurance policy is cancelled on October 15, 1981. The insurer’s clerk allegedly got notice of cancellation by mail but there was no proof that it was actually mailed and received. Insurer relies on the presumption of regularity. Held: Considering the strict language of the law that no policy can be cancelled without prior notice – it behooved on the insurer to make sure that cancellation was actually sent and received by the insured (Malayan vs. Arnaldo, 156 SCRA 762);

(2) A insured his building against fire and made the loss payable to mortgagee. Upon cancellation notice was sent to the mortgagee. Held: There was no valid notice of cancellation. The notice is personal to the insured and not to any unauthorized person (Saura Import Export vs. Philippine International Surety Co., Inc., 8 SCRA 143);

IS THE INSURED HAVE THE RIGHT TO RENEW HIS POLCY

Yes, in insurance other than life, the named insured, may renew the policy upon

payment of the premium due on the effective date of the renewal, if, he has not been given notice by the insurer of the intention not to renew or to condition renewal upon reduction of limits or elimination of coverages by mail or delivery at least forty five days in advance of the end of the policy;

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Defined

- It is a statement or promise stated in the policy or incorporated therein by reference, whereby the insured – expressly or impliedly (Section 67) contracts as to the past, present or future (Section 68) existence of certain facts, conditions or circumstances – the literal truth of which is essential to the validity of the contract;

FORM

No particular form of words is necessary to create a warranty (Section 69). What is essential is what the parties intend a statement to be and if so intended as a warranty it must be included as part of the contract;

Note:

(1) Whether a warranty is constituted or not depends upon the intention of the parties, the nature of the contract, or the words used thereto;

(2) In case of doubt, the statement is presumed to be a representation not a warranty;

WHAT ARE THE KINDS OF WARRANTIES

(1) Affirmative – those that relate to matters that exist at or before the issuance of the policy;

(2) Promissory – those where the insured promises or undertakes that certain matters shall exist or will be done or will be omitted after the policy takes effect. It is a statement in the policy, which imparts that it is intended to do or not to do a thing which materially affects the risk, is a warranty that such act or omission shall take place (Section 72);Note that unless the contrary intention appears, the courts will presume that the warranty is merely an affirmative warranty.

(3) Express – a statement in a policy of a matter relating to the person or thing insured or to the risk as a fact

(Section 71) and where the assertion or promise is clearly set forth in the policy or incorporated therein by reference. They can be affirmative or promissory warranties;

An express warranty made at or before the execution of the policy should be contained (a) in the policy itself (b) in another instrument signed by the insured and referred to in the policy as making a part of it (Section 70). This includes a rider – it is a part of the policy, it need not be signed unless the rider was issued after the original policy took effect;

(4) Implied – where the assertion or promise is not expressly set forth in the policy but because of the general tenor of the terms of the policy or from the very nature of the insurance contract, a warranty is necessarily inferred or understood. Note that the law only provides for implied warranties in contracts of marine insurance. See section 113 (seaworthiness) and 126 (deviation);

EFFECT OF VIOLATION OF A WARRANTY

The violation of a material warranty, or other material provision of the policy, on the part of either party thereto, entitles the other to rescind (Section 74) Note that the insured can exercise the right also when the insurer violates a warranty, like when it refuses to grant a loan on the policy. But as far as the insured, Note also that:

(1) While a policy may declare that a violation of a specified provisions thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid the policy (Section 75). Meaning ordinarily a breach of an immaterial provision does not avoid a policy, however, if stipulated that any breach avoids the policy, the policy is avoided;

(2) A breach of a warranty without fraud, merely exonerates an insurer from the time it occurs, or where it is broken at its inception, prevents the policy from attaching to the risk (Section 76). Meaning – that if the breach is without fraud – the policy is avoided only from the time of the breach it is still effective. Consequently, the insured is entitled to a pro-rate return of the premium paid under section 79 (b) or all premiums, if the breach occurs at the

inception of the contract, as such is void ab initio and had never become binding;

Note that a causal connection between the violation of the warranty is not necessary – So, even if the violation did act contribute in the loss – the other party may still rescind.

Example: A insured building against fire. A warranty stated that no hazardous goods should be stored. A stored fireworks. The building was burned and the fireworks were discovered stored in the area not affected by the fire. The insurer was not held liable as the storage had increased the risk (Young vs. Midland Textiles Ins. – 30 Phil 617);

THE NON PERFORMANCE OF A PROMISSORY WARRANTY DOES NOT AVOID THE POLICY WHEN BEFORE THE ARRIVAL OF THE TIME FOR PERFORMANCE (Section 73)

(1) The loss insured against happens;

(2) The performance becomes unlawful at the place of the contract;

(3) The performance becomes impossible;

DISTINGUISHING IT FROM REPRESENTATIONS

WARRANTY REPRESENTATION

- A warranty is part of the contract;

- A warranty is expressly set forth in the policy or incorporated therein by reference;

- A warranty must strictly and literally performed;

- A warranty is presumed material;

- A breach of warranty is a breach of the contract itself

-Representation is merely a collateral inducement thereto;

-A Representation my be oral or written in another statement;

- Representation must be substantially true;

- A representation must be shown to be so;

- (mis)representation is a ground to rescind the contract;

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DEFINED

The agreed price for assuming and carrying the risk;

WHEN IS THE INSURER ENTITLED TO A PREMIUM?

The insurer is entitled to the payment of a premium as soon as the thing insured is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium is paid except in:

(1) In case of life or industrial life (life insurance policy where the premium is payable monthly or oftener) whenever the grace period applies (Section 77);

(2) When the insurer makes a written acknowledgement of the receipt of premium, such is conclusive evidence of the payment of the premium to make it binding notwithstanding any stipulation therein that it shall not be binding until the premium is paid (Section 78) HENCE, the effect of an acknowledgement in a policy or contract of insurance of the receipt of the premium – is that it is conclusive evidence of payment – so far as to make the policy binding. However, it is conclusive only to make the policy binding and not for the purpose of collecting premium, and;

(3) Where the obligee has accepted the bond or suretyship contract in which case such bond or suretyship contract becomes valid and enforceable irrespective of whether or not the premium has been paid by the obligor to the surety (Section 177);

EXCEPTIONS TO SECTION 77:

UCPB GENERAL INSURANCE CO., INC. vs.MASAGANA TELAMART, INC. (G.R. No. 137172 April 4, 2001)

1. In case of life or industrial life insurance, when the grace periods applies; (Sec. 77)

2. When the insurer makes a written acknowledgment of the receipt premium; (Sec. 78)

3. Section 77 may not apply if the parties have agreed to the payment of the premium in installments and partial payment has been made at the time of the loss. (Makati Tuscany Condominium Corp. v. CA, 215 SCRA 462)

4. If the insurer granted the insured a credit term for the payment of the premium and loss occurs before the expiration of the term, recovery should be allowed even the premium is paid after the loss but within the credit term.

5. Where the parties are barred by estoppel.

UCPB GENERAL INSURANCE CO. VS. MASAGANA TELEMART, APRIL 24, 2001

Ruling. It was established that UCPB had been issuing fire policies to Masagana and these policies were annually renewed. UCPB had been granting Masagana a 60 to 90-day credit term within which to pay the premium on the renewed policies. There was no valid notice of non-renewal of the policies. The premium were paid within the 60 to 90 day credit term and duly accepted by UCPB. It would be unjust and inequitable if Masagana cannot recover on the policies. UCPB is estopped from taking refuge under Section 77 since Masagana had relied in good faith on such practice.

AMERICAN HOME ASSURANCE CO. VS. ANTONIO CHUA, JUNE 28, 1999

SC RULING:

SC sustained/affirmed the decision of the RTC and CA because there was a valid check payment by Chua to the insurer. The renewal certificate issued to Chua contained the acknowledgment that premium has been paid.

VIRGINIA A. PEREZ vs. CA (G.R. No. 112329 January 28, 2000)

Only when the applicant pays the premium and receives and accepts the policy while he is in good health that the contract of insurance is deemed to have been perfected. -Insurance is a contract whereby, for a stipulated consideration, one party undertakes to compensate the other for loss on a specified subject by specified perils.7 A contract, on the other hand, is a meeting of the minds between two persons whereby one binds himself, with respect to the other to give something or to render some service.8Under Article 1318 of the Civil Code,

When Primitivo filed an application for insurance, paid P2,075.00 and submitted the results of his medical examination, his application was subject to the acceptance of private respondent BF Lifeman Insurance Corporation. The perfection of the contract of insurance between the deceased and respondent corporation was further conditioned upon compliance with the following requisites stated in the application form:

there shall be no contract of insurance unless and until a policy is issued on this application and that the said policy shall

not take effect until the premium has been paid and the policy delivered to and accepted by me/us in person while I/We, am/are in good health.9

The assent of private respondent BF Lifeman Insurance Corporation therefore was not given when it merely received the application form and all the requisite supporting papers of the applicant. Its assent was given when it issues a corresponding policy to the applicant. Under the abovementioned provision, it is only when the applicant pays the premium and receives and accepts the policy while he is in good health that the contract of insurance is deemed to have been perfected.

In the case at bar, the following conditions were imposed by the respondent company for the perfection of the contract of insurance:

(a) a policy must have been issued;

(b) the premiums paid; and

(c) the policy must have been delivered to and accepted by the applicant while he is in good health.

The condition imposed by the corporation that the policy must have been delivered to and accepted by the applicant while he is in good health can hardly be considered as a potestative or facultative condition. On the contrary, the health of the applicant at the time of the delivery of the policy is beyond the control or will of the insurance company. Rather, the condition is a suspensive one whereby the acquisition of rights depends upon the happening of an event which constitutes the condition. In this case, the suspensive condition was the policy must have been delivered and accepted by the applicant while he is in good health. There was non-fulfillment of the condition, however, inasmuch as the applicant was already dead at the time the policy was issued. Hence, the non-fulfillment of the condition resulted in the non-perfection of the contract.

No contract of insurance, unless unless the minds of the parties have met in agreement.- A contract of insurance, like all other contracts, must be assented to by both parties, either in person or through their agents and so long as an application for insurance has not been either accepted or rejected, it is merely a proposal or an offer to make a contract. The contract, to be binding from the date of application, must have been a completed contract, one that leaves nothing to be done, nothing to be completed, nothing to be passed upon, or determined, before it shall take effect. There can be no contract of insurance unless the minds of the parties have met in agreement.

Delay in acting on the application not unreasonable so as to constitute gross negligence for which the insurance corporation may be penalized. - Respondent corporation cannot be held liable for gross negligence. It

should be noted that an application is a mere offer which requires the overt act of the insurer for it to ripen into a contract. Delay in acting on the application does not constitute acceptance even though the insured has forwarded his first premium with his application. The corporation may not be penalized for the delay in the processing of the application papers. Moreover, while it may have taken some time for the application papers to reach the main office, in the case at bar, the same was acted upon less than a week after it was received. The processing of applications by respondent corporation normally takes two to three weeks, the longest being a month.12 In this case, however, the requisite medical examination was undergone by the deceased on November 1, 1987; the application papers were forwarded to the head office on November 27, 1987; and the policy was issued on December 2, 1987. Under these circumstances, we hold that the delay could not be deemed unreasonable so as to constitute gross negligence.

WHAT IS THE EFFECT OF PARTIAL PAYMENT?

Ordinarily, the obligation to pay premium when due is considered an indivisible obligation. Hence, forfeiture is not prevented by a part payment unless, payment by installment has been agreed upon or is the established practice – the basic principles of equity and fairness would not allow the insurer to collect and accept installments and later deny liability as premiums were not paid in full. (See Philippine Phoenix Surety and Ins. vs. Woodworks – 20 SCRA 1270, Makati Tuscany Condominium Corporation vs. CA, - payment by installment was agreed upon, note also Tibay vs. CA – 257 SCRA 126 – any partial payment when there is an agreement that the policy shall not be effective pending payment of full premium was in the concept of deposit.)

PAYMENT TO INSURANCE AGENT OR BROKER is payment to the insurance company;

WILL PAYMENT BY PROMISORY NOTE OR CHECK BE SUFFICIENT TO MAKE THE POLICY BINDING?

No, art. 1249 2ND paragraph of the Civil Code, that such produces payment only when it is ENCASHED;

WHEN IS THE INSURED ENTITLED TO A RETURN OF THE PREMIUMS PAID?

2000 BAR EXAM (IX – a)

The insured is entitled to a return when:

(1) To the whole premium, when no part of the interest in the thing insured is exposed to any of the perils insured against (Section 79 –A);

(2) Where the insurance is made for a definite period of time and the insured surrenders his policy before the expiration of the period, here the insured only recovers a portion of the policy premiums corresponding with the unexpired time but it does not apply if:(a) the policy is not so definite;(b) a short period rate (insurance

is for a period of less than a year and a rate has been agreed to if the policy is surrendered; Example: If the policy is in force for a month the insurer retains 20% of the premium) has been agreed upon;

(c) the policy is a life insurance policy – it is indivisible but he has a cash surrender value;

(3) When the contract is voidable on account of fraud or misrepresentation of the insurer or the agent (Section 81);

(4) Where the contract is voidable on account of facts, the existence of which the insured was ignorant without his fault (Section 81);

(5) When by any default of the insured other than actual fraud, the insurer never incurred any liability under the policy; (Section 81);

(6) In case of over insurance. Here the insurance is in excess of the amount of the insurable interest of the insured and it is insured by several insurers, the insured is entitled to a RATABLE RETURN OF PREMIUM, proportional to the amount by which the aggregate sum insured in all the policies exceeds the insurable value;

WHOM ARE THE PREMIUMS RETURNED

Unless otherwise stated, they shall be returned to the insured who paid them;

WHEN ARE THEY NOT RECOVERABLE

Premiums cannot be recovered:

(1) If the peril insured against has existed, and the insurer has been liable for any period, the period being entire and indivisible (Section 80);

(2) In life insurance – (Section 79-b) cash surrender value;

(3) When the insured is guilty of fraud or misrepresentation (Section 81);

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WHAT ARE THE RULES TO DETERMINE WHETHER THE INSURER IS LIABLE FOR THE LOSS OF THE THING INSURED?

1. Loss of which a peril insured is the proximate cause. Although a peril not contemplated by the contract may have been a remote cause but the insurer is not liable for a loss of which the peril insured against was only a remote cause. (Section 84)

Proximate cause- that which in natural and continuous sequence, unbroken by any efficient intervening cause, produces an injury and without which the injury would not have occurred)

Example: In life insurance that covers death by accident, if the insured sustains an accident that renders him weak, while in said state, he contracts a cold that develops into pneumonia. The proximate cause is the accident, while the remote cause is the pneumonia, the insurer is liable;

2. Loss caused by efforts to rescue the thing insured from a peril insured against that would otherwise have caused a loss, if in the course if such rescue, the thing is exposed to peril not insured against, which permanently deprives the insured of its possession in whole or in part, or where a loss is caused by efforts to rescue the thing insured from a peril insured against (Section 85). Here the principle of proximate cause is extended to loss incurred while saving the thing insured.

Examples: (a) When the thing insured is water damaged due to efforts to put out a fire, the fire being a peril insured against

(b) Theft by 3RD persons while the goods are brought out in the course of rescuing them from a fire, which is the peril insured against BUT – no loss if the goods are left out and are lost – it is now due to lack of reasonable care and vigilance;

(C) A insures the contents of his house against fire. A fire breaks out, while removing the contents, they were stolen or they were broken or damaged, theft or breakage not being perils insured against;

3. Where a peril is especially excepted in a contract of insurance a loss, which would not have occurred but for such peril, is thereby excepted although the immediate cause of the loss was a peril which was not excepted (Section 86). The immediate cause is the CAUSE OR CONDITION NEAREST THE TIME AND PLACE OF THE INJURY. Here, the insurer will be liable if both the immediate cause and the proximate cause are not excepted. If the proximate cause is excepted and the immediate cause is not, the insurer is not liable.

4. An insurer is not liable for loss caused by the willful act or through the convenience of the insured; but he is not exonerated by the negligence of the insured, or of the insured’s agent or others (Section 87). Consequently, if the insured was merely negligent, the insurer is still liable as one of the principal reasons of procuring insurance is to protect himself against the consequences of his own negligence or that of his agents.

2007 BAR EXAM (IV)

Alfredo took out a policy to insure his commercial building against fire. The broker for the insurance company agreed to give a 15-day credit within which to pay the insurance premium. Upon delivery of the policy on May 15, 2006, Alfredo issued a postdated check payable on May 30, 2006. On May 28, 2006, a fire broke out and destroyed the building owned by Alfredo.Reason briefly in (a), (b) and (c).

a. May Alfredo recover on the insurance policy? Yes, Alfredo can recover on the insurance policy. Although Section 77 of the Insurance Code provides that in fire insurance, payment of premium is necessary for validity of the policy (also known as “cash and carry” provision), nonetheless, the rule has been modified by the decisions of the Supreme Court after the promulgation of the Insurance Code. Thus, in UCPB General Insurance v. Masagana Telemart, G.R. No. 137172, April 4, 2001, it was held that the insured should be allowed to recover on losses sustained even when premium was paid after the fact of loss, provided payment was received by the insurer during the credit period

given to the insured. (See also South Sea Surety v. Court of Appeals, G.R. No. 102253, June 2, 1995; American Home Assurance v. Chua, G.R. No. 130421, June 28, 1999) where the Supreme Court ruled that is the check payment for premium was received by the insurer prior to the loss or within the credit period, the insured was allowed to recover.

b. Would your answer in (a) be the same if it was found that the proximate cause of the fire was an explosion and that fire was but the immediate cause of loss and there is no excepted peril under the policy? Yes, recovering under an insurance contract is allowed if the cause of the loss was either the proximate or the immediate cause as long as an expected peril was not the proximate cause of the loss. (Section 86, Insurance Code of the Philippines.) The fire being the immediate cause for the loss of the commercial building, would warrant recovery under the policy.

c. If the fire was found to have been caused by Alfredo's own negligence, can he still recover on the policy?Yes, he can still recover. The doctrine of contributory negligence does not in any way apply to rights under a contract of insurance, unless it is a case of willful act. (Section 87, Insurance Code of the Philippines)

ADMISSION OF PRIVATE DOCUMENTS AS EVIDENCE – Before a private document is admitted in evidence, it must be authenticated either by the person who executed it, the person before whom its execution was acknowledged, any person who was present and saw executed, or who after its execution, saw it and recognized the signatures, or the person to whom the parties to the instruments had previously confessed execution thereof. (sec.20 Rule 132 ROC as cited in Malayan Insurance Co., Inc. V. Philippine Nails and Wires Corporation, Apr.10, 2002 G.R. No. 138084)

ISSUANCE OF CLAIM FOR LOSS; FILING OF CLAIM WITHIN THE PERIOD A CONDITION PRECEDENT – The issuance of claim for loss or damages to cargo should be filed within 24 hours from the time the goods were received.The filing of a claim with the carrier within the time limitation therefore actually constitutes a condition precedent to the accrual of a right of action against a carrier for loss of, or damage to, the goods. The shipper or consignee must allege and prove the fulfillment of the condition. If it fails to do so, no right of action against the carrier can accrue in favor of the former. The aforementioned requirement is a reasonable condition precedent; it does not constitute a limitation of action. (Philippine Charter

Insurance Corp. v. Chemoil Lighterage Corp., Jun. 29, 2005 G.R. No. 136888)

RECOGNIZING THAT THERE ARE PROBLEMS IN DETERMINING PROXIMATE CAUSE – NOTE THE FOLLOWING RULES:

(a) If there is a single cause which is an insured peril, clearly it is the proximate cause and there is liability;

(b) If there are concurrent causes (those happening together) with no excluded perils, there if liability if one of the causes is an insured peril, the others may be ignored;

(c) If there are concurrent causes with an excepted peril (insured peril operate together to produce the loss) the claim will be outside the scope of the policy;

(d) But if the results of the operation of the insured peril can be clearly separated from the effects of the excepted peril, the insurer is liable;

(e) Where a number of causes operate one from the other, the original cause happens to be a peril, the insurer is liable.

TRANSFER OF CLAIMSAn agreement not to transfer the claim of

the insured after the loss happens – is VOID if MADE BEFORE THE LOSS except as otherwise provided in case of life insurance (Section 33).

This means that the insured has an absolute right to transfer his claim against the insurer AFTER THE LOSS occurs, what is prohibited is a transfer prior to the loss.

This is so because such stipulation after the loss occurs shall hinder the transmission of property. Neither does it affect the insurer as its liability is already fixed and what is actually assigned is the money claim, not the contract itself. The exception in section 173 that provides that the transfer of a fire insurance policy to any person or company who acts as an agent for or otherwise represents the issuing company is prohibited and is void insofar as it affects other creditors of the insured;

NOTICE AND PROOF OF LOSSNotice of loss must be given without

unnecessary delay by the insured or some person

entitled to the benefit of the insurance. IF NOT

THEN, the insurer is exonerated (Section 88).

WITHOUT UNNECESSARY DELAY – is within a reasonable time, depending on circumstances of a peculiar case, although courts have construed the requirement liberally in favor of the insured.

PROOF OF LOSSIf the policy requires Preliminary Proof of

Loss (evidence given the insurer of the occurrence of the loss, its particulars, and data necessary to enable it to determine liability and the amount thereof) IT IS NOT NECESSARY that the insured give such proof – AS MAY OR WOULD BE NECESSARY IN A COURT OF JUSTICE WHAT IS SUFFICIENT is the BEST EVIDENCE which he has in his power at that time (Section 89)

WHEN ARE DEFECTS IN THE NOTICE OR PROOF LOSS DEEMED WAIVED BY THE INSURER

1. When the insurer fails to specify to the insured any defect which the insured can remedy without delay;

2. When the insurer denies liability on a ground other than that defect in the notice or proof of loss;

Example: Denial is based on nullity of the contract (Section 90)

WHEN IS DELAY IN THE GIVING OF NOTICE WAIVED

1. If it is caused by any act of the insurer.

2. If the insurer omits to make an objection promptly and specifically on that ground. – despite delay, the insurer does not object (Section 91);

REQUIREMENT OF CERTIFICATION OR

TESTIMONY OF A THIRD PERSON

In the giving of preliminary proof of loss, a certification or testimony of a third person other than the insured is required, it is sufficient for the insured to use REASONABLE DILIGENCE to procure it. In case of REFUSAL to give it, the insured can furnish REASONABLE EVIDENCE to the insurer that such refusal WAS NOT INDUCED BY ANY JUST GROUNDS OF DISBELIEF in the facts necessary to be certified or testified – ONCE SHOWN or GIVEN the requirement may be dispensed with (Section 92).

WHAT HAPPENS AFTER PAYMENT BY THE INSURER SUBSEQUENT TO GIVING OF NOTICE OF LOSS

In property insurance, after the insured has received payment from the insurer of the loss covered by the policy, the insurance company is SUBROGATED to the rights of the insured against the wrongdoer or the person who has violated the contract. The right of subrogation accrues upon payment of the insurance claim.

NOTE: Subrogation takes effect by operation of law and does not require the consent of the wrong doer (Fireman’s Fire Insurance vs. Jamilla & Company, 70 SCRA 323).

THERE IS NO SUBROGATION IN:

(a) Life insurance as it is not a contract of indemnity

(b) When proximate cause of the loss is the insured himself

(c) When the insurer pays to the insured a loss not covered by the policy; The insured is no longer to collect

from the wrongdoer if the amount that he received from the insurer has fully compensated for the loss;

SUBROGATION (ART. 2207, NEW CIVIL CODE)PHILIPPINE AMERICAN GEN. INSURANCE

CO. VS. CA & FELMAN SHIPPING LINES,JUNE 11,1997.

SC RULING:

It ordered Felman to pay Phialamgen P 755, 250.00 plus interest pursuant to Art. 2207 0f the Civil Code which provides:

“Art. 2207. If the plaintiff’s property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract, the insurance company shall be subrogated to the right of the insured against the wrongdoer or the person who violated the contract.”

DOUBLE INSURANCE

When does double insurance exist?- Where the same person is insured by

several insurers separately in respect to the same subject or interest (Section 91).

2005 BAR EXAM (N0. X – 2 -b)

Q: What is the nature of the liability of the several insurers in double insurance? Explain. (2%)

-A: In double insurance, the insurers considered as co-insurers. Each one is bound to contribute ratably to the loss in proportion to the amount for which he is liable under his contract. (Section 94(e), Insurance Code.

REQUISITES OF DOUBLE INSURANCE1. Same person is insured;2. There are several insurers;3. Subject insured is the same;4. Interest insured is the same;5. Risk of peril insured against is the

same; There is prohibition TO PREVENT

OVER-INSURANCE, thus preventing fraud.

2008 BAR EXAM

Terrazas de Patio Verde, a condominium building, has a value of P50 Million. The owner insured the building against fire with three (3) insurance companies for the following amounts:Northern Insurance Corp. 20M,Sounthern Insurance Corp.30M, Eastern Insurance Corp.50M.

a. Is the owner's taking of insurance for the building with three (3) insurers valid? Discuss. (3%)

b. The building was totally razed by fire. If the owner decides to claim from Eastern Insurance Corp. only P50 Million, will the claim prosper? Explain. (2%)

Answer: A. Taking out insurance covering the same property, same insurable interest and same risk with three insurance companies is “double insurance” recognized under sec 93 of ICP. However, in American Home Assurance Corp vs. Chua June 28, 1999, the court referred to the common inclusion of the other insurance clause in the fire insurance policies requiring disclosure of co-insurance of the same property with other insurers.

Answer: B Insured can recover from Eastern Inssurance Corp up to the extent of his loss. However, Eastern may refuse to pay if the policy contains an “ other insurance clause” stipulating that non-disclosure of double insurance will avoid the policy. ( Geagonia v. Country Bankers Insurance )6 February, 1995. As there is no indication of a contractual prohibition on double or other insurance, all insurance contracts over the building are deemed valid and enforceable.

The law prohibits double or over-recovery, not double insurance. Since eastern insured the property up 50% the total coverage, it is liable for only 50% of the total actual loss. Eastern Insurance Corp, is liable to the extent of its coverage but may recover one half of the total indemnity from the co-insurers in the

proportion of 60% ( Southern Insurance)- 40 % ( northern Insurance)

EFFECTS OF OVER-INSURANCE BY DOUBLE INSURANCE

1. Insured, unless the policy otherwise provide, may claim payment from the insurers in such order as he may select up to the amount for which the insurers are severally liable under their respective contracts.

2. Where the policy under which the insured claims is a valued policy, the insured must give credit as against the valuation for any sum received by him under any policy without regard to the actual value of the subject matter insured.

3. Where the policy under which the insured claims is an unvalued policy, he must give credit, as against the full insurable value, for any sum received by him under the policy.

4. Where the insured receives any sum in excess of the valuation in case of a valued policy or the insurable value in case of an unvalued policy, he must hold such sum in trust for the insurers, according to their right of contribution among them;

5. In relation paragraph (4) – Each insurer is bound, as between himself and the other insurers to contribute ratably to the loss in proportion to the amount for which it is liable under his contract. ALSO REFERRED TO AS THE PRINCIPLE OF CONTRIBUTION – WHICH HAS ALREADY BEEN INCOPORATED IN ALMOST ALL POLICIES – that should there be other insurances covering the same property, the liability of the company would be limited to its ratable proportion of the loss or damage (Also known as CONTRIBUTION CLAUSE)

TEST TO DETERMINE EXISTENCE OF DOUBLE INSURANCE

- Whether the insured, in case of happening of the risk, can directly benefited by recovering on both policies? If yes – there is double insurance.

IS DOUBLE INSURANCE VALID?- It depends, if there is prohibition in

the policy then it is not valid, but if there is no prohibition, it is valid provided it must follow the provisions of the law.

- If there is an OTHER INSURANCE CLAUSE – one that prevents other

insurance on the property except without the consent of the company – THEN IT WILL PREVENT ENFORCEMENT OF THE POLICY, the policy will be NULL and VOID. If there is no OTHER INSURANCE CLAUSE, then double insurance is allowed but the provisions of Section 94 must be followed because property insurance is a contract of indemnity.

DISTINGUSHING OVER INSURANCE FROM DOUBLE INSURACE

DOUBLE INSURANCE

OVER INSURANCE

- there must be two or more insurers;

- one insurer is sufficient;

- the total amount of the policies need not exceed the value of the insurable interest;

- the value must always be in excess of the insurable interest;

REINSURANCE- occurs when an insurer procures a 3RD

person to insure him against loss or liability by reason of such original insurance. (Section 95)

WHEN IS REINSURANCE COMPULSORY?1. When a non-life insurer insured in any

one risk or hazard an amount exceeding 20% of its net worth, the insurer needs reinsurance of the excess over such limit (Section 215 (1))

2. When a foreign insurance company withdraws from the Philippines, it should cause its primary liabilities under policies insuring residents of the Philippines to be reinsured by another company authorized to transact an insurance business in the Philippines;

DOUBLE INSURANCE VS. REINSURANCE

DOUBLE INSURANCE REINSURANCE

- the insurer remains an insurer

- insurer becomes the insured

- subject matter is property

- the subject matter is the insurer’s risk or liability

- same interest and risk is insured with another

- different interest and risk are insured

DIFFERENTIATE DOUBLE INSURANCE, REINSURANCE & MUTUAL INSURANCE (for further discussion)

NEW LIFE ENTERPRISES VS. CA , 207 SCRA 669 (1992)

SC RULING:The terms of the contract are clear and

unambiguous. The insured is specifically required to disclose to the insurer any other insurance and its particulars which he may have effected on the same subject matter. The parties must abide by the terms of the contract because such terms constitute the measure of the insurer’s liability and compliance therewith is a condition precedent to the insured’s right of recovery from the insurer.

WHAT MUST BE COMMUNICATED WHEN THE ORIGINAL INSURER OBTAINS REINSURANCE?

Except in automatic reinsurance treaties (when two or more insurance companies agree in advance that they will reinsure a part of any line of insurance taken by the other. Since such contracts are self-executing and the obligation attaches automatically, the information required to be communicated herein could not influence the reinsurer in deciding whether or not to accept the reinsurance because it is automatZ representations of the original insured;all information or knowledge he possesses whether previously or subsequently acquired, which are material to the risk (Section 96);

WHAT KIND OF CONTRACT IS REINSURANCE?

- It is presumed to be a contract of indemnity against liability, and merely against damage (Section 97).

- As a RULE, the reinsurer is not liable to the reinsured for a loss under an original policy if the reinsured is not liable to the original policyholder.

Note: The subject of the reinsurance contract is the insurers risk not the property insured in the original policy – Thus, it is not necessary that the insurer first pay on the claim on the original policy before claiming from the insurer;

WHAT IS THE EXTENT OF LIABILITY OF THE REINSURER?

- The liability of the reinsurer is measured by the liability of the reinsured to the original policy holder PROVIDED, it does not exceed the amount of reinsurance;

Example: A insures his house valued at 1 million to X insurance for 1.5 Million. X insurance reinsured with Z insurance for 1.2 million. The house burns. The liability of Z insurance is only up to 1 million, which is the liability of X Insurance. What if the original insured and insurance company settles for less, the liability of Z Insurance is still only up to what is paid by X Insurance OTHERWISE, the original insurer profits and thus violates that the principle that is a contract of indemnity.

WHAT IS THE INTEREST OF THE ORIGINAL INSURED IN THE CONTRACT OF REINSURANCE?

- The original insured has no interest in the contract of reinsurance (section 98). Hence only the reinsured can claim against the reinsurer;

CLASSES OF INSURANCE

M A R I N E I N S U R A N C E

WHAT IS MARINE INSURANCE?

- Insurance against loss or damage to:

(a) Vessels, craft, aircraft, vehicles, goods freight, cargoes, merchandise effects, disbursements, profits, moneys, securities, loses in action, evidences of debt, valuable papers, bottomry or respondentia interest and all other kind 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, transshipment or reshipment incident thereto,

(b) Person or property in connection with or appertaining to marine, island

marine, transit or transportation insurance, including liability for loss or in connection with the construction, repair, operation, maintenance, use of the subject matter of the insurance. (But not including life insurance, or surety bonds nor insurance against loss by reason of bodily injury to any person arising out of the ownership, maintenance, use of automobiles)

(c) Precious stones, jewels, jewelry, precious metals whether in the course of transportation or otherwise;

(d) Bridges, tunnels or other instrumentalities of transportation and communications (excluding buildings, their furniture and furnishings, fixed contents, and supplies held in storage), piers, wharves, docks, slips, and other aids to navigation and transportation including dry docks, marine railways, dams and appurtenant facilities for the control of waterways;

AND – “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 in ocean or island waterways, including liability of the insured for personal injury, illness or death or for loss or damage to the property of another person (section 99).

NOTE: That marine insurance is really TRANSPORTATION INSURANCE that is a kind of insurance that is concerned with the perils of property in (or incidental to) transit as opposed to property perils at a generally fixed location. But does not include normal motor vehicle insurance which is treated separately by law;

INSURANCE POLICY – [effect of failure to present insurance policy] – since the Marine insurance policy was never presented in evidence before the trial court or the Court of Appeals even, there is no legal basis to consider such document in the resolution of this case, x x x (Malayan Insurance Co. vs. Regis Brokerage Corporation Nov. 23 2007 G.R. No. 172156)

MARINE RISK NOTE IS NOT AN INSURANCE POLICY – Certainly it would be obtuse for us to even to entertain the idea that the insurance

contract between Malayan and ABB Koppel was actually constituted by the Marine Risk Note alone. (Malayan Insurance Co. vs. Regis Brokerage Corporation Nov. 23 2007 G.R. No. 172156)

WHAT ARE THE DIVISIONS OF TRANSPORTATION INSURANCE?

1. Ocean Marine Insurance – pertaining primarily to sea perils of ships and cargoes;

2. Inland Marine Insurance – pertaining primarily to land or overland (but sometimes) transportation of property shipped by railroads, motor trucks, airplanes, and other means of transportation. Includes four basic principles that are:

(a) Property in transit – providing protection to property frequently exposed to loss while in transport from one place to another;

(b) Bailee liability – providing protection to persons who have temporary custody of goods or personal property of others;

(c) Fixed transportation property – providing protection to fixed property considered aids to the movement of property, like bridges and tunnels, and

(d) Floater – providing protection to personal property (such as precious stones, jewelry, works of art) whenever it may be located subject always to territorial limits of the contract and need not necessarily be in the course of transportation.

NOTE: Marine Insurance may be in form of property insurance, indemnifying the insured for loss or damage to property (Par.1, Section 99) or liability insurance, protecting the insured against the consequences of legal liability for loss or damage to property or for personal injury, illness or death of a person (Par.2, Section 99);

WHAT RISKS ARE INSURED AGAINST?

- The basic risk insured against is commonly known as PERILS OF THE SEA (all kinds of marine casualties and damages done to the ship or

goods at sea by the violent action of the winds or waves, one that could not be foreseen and is not attributable to the fault of anybody.

WHAT ARE NOT COVERED?

- Generally, perils of the ship are not covered losses that result from:

(a) natural and inevitable action of the sea;

(b) ordinary wear and tear of the ship;

(c) negligent failure of the ship owner to provide the vessel with the proper equipment to convey the cargo under ordinary conditions;

WHO MUST CHECK ON THE SEA WORTHINESS OF A VESSEL?

- Since there is an implied warranty of seaworthiness, it becomes the obligation of the cargo owner or the insured to look for a reliable common carrier, which keeps it vessels seaworthy. The insured may have no control on the vessel but has full control in the choice of common carrier;

2008 BAR EXAM (IX –b)

Q: On October 30, 2007, M/V Pacific, a Philippine registered vessel owned by Cebu Shipping Company (CSC), sank on her voyage from Hong Kong to Manila. Empire Assurance Company (Empire) is the insurer of the lost cargoes loaded on board the vessel which were consigned to Debenhams Company. After it indemnified Debenhams, Empire as subrogee filed an action for damages against CSC. b) Assume that the vessel was not seaworthy as in fact its hull had leaked, causing flooding in the vessel. Will your answer be the same? Explain. (2%)A: When the vessel is not seaworthy, it is an exception to the hypothecary principle in maritime commerce. To limit its liability to the amount of the insurance proceeds, the carrier has the burden of proving that the unseaworthiness of its vessel was not due to its fault or negligence. The failure to discharge such a heavy burden precludes application of the limited liability rule and the carrier is liable to the full extent of the claims of the cargo owners (Aboitiz Shipping v. New India Assurance Company, G.R. No. 156978, 02 May 2006).

2008 EXAM (IX –c)-

Q:c) Assume the facts in question (b). Can the heirs of the three (3) crew members who perished recover from CSC? Explain fully. (3%)

A: Yes, because the crew members died while performing their assigned duties, aggravated by the failure of the ship owner to ensure that the vessel is seaworthy. Workmen’s compensation has been classified by jurisprudence as an exception to the hypothecary nature of maritime commerce, Abueg v.San Diego, 77 Phil. 730 (1948), especially in this case where the vessel was not seaworthy at the time it sank.

WHAT PERILS ARE INSURED IN AN “ALL RISK POLICY”

- It is to be construed as creating a special insurance and extending to all risk than are usually contemplated and will cover all losses except such that may arise from intentional fraud, intentional misconduct, or that otherwise excluded. It may include all losses whether arising from a marine peril or not to include pilferage during a war (Filipino Merchant Insurance Co. vs. CA, 179 SCRA 638).

DEFINITION OF TERMS

(a) Barratry – is willful act of the master and crew in pursuance of some fraudulent or unlawful purpose without the consent of the owner and to the prejudice of his interest.

Example: Burning of the ship or unlawfully selling the cargo;

(b) Inchamaree Clause – one that covers any loss other than a willful and fraudulent act of the insured and avoids putting upon the insured the burden of establishing that a loss was due to a peril within the policy’s coverage, whether arising from a marine peril or not provided the risk is not excluded;

WHAT CONSTITUTES INSURABLE INTEREST IN OCEAN MARINE INSURANCE?

1. The owner of a vessel has insurable interest in the vessel

such shall continue even if the vessel has been chartered by one who covenants to pay the owner the value of the vessel upon loss but in case of loss, the owner is liable only for the part of the loss which the insured cannot recover from the charterer. (Section 100);

2. The insurable interest of the owner of a ship hypothecated by bottomry is only the excess of its value over the amount secured by bottomry. (Section 101);

BOTTOMRY/RESPONDENTIA

– is a loan payable only if the vessel given as a security for said loan arrives safely at port from contemplated voyage (bottomry) or a loan payable only upon the safe arrival in port of the goods given as a security (respondentia).

- this contracts are in the nature of a mortgage as the owner borrows money for the use, equipment or repair of the vessel for a definite term with the ship as security with maritime or extraordinary interest on account of the risks borne by the lender, it being stipulated that if a ship be lost during the voyage or within a limited period, the lender also loses his money (Note that the lender has insurable interest to the extent of loan);

3. The owner of a vessel also has insurable interest in expected freightage, which according to the ordinary course of things he would have earned but for the intervention of a peril insured against or other peril incident to the voyage. (Section 102)

Freightage – are the benefits derived by the owner from:

(a) chartering of a ship;(b) its employment for the carriage

of his own goods or those of others (Section 102)

IT EXIST (a) In case of a charter party – when the ship has broken ground on the intended voyage (b) if a price is to be paid for the carriage of goods, when they are actually on board or there is contract to put them on

board AND the vessel and goods are ready for specified voyage (Section 104);

ARE THERE PERSONS/PARTIES OTHER THAN THE OWNER WHO HAS INSURABLE INTEREST? YES;

1. One who has an interest in the thing from which profits are expected to proceed, has insurable interest on the profits (Section 105);

Example: Owner of a cargo transported on a vessel not only has insurable interest on the cargo but also on the expected profits from a future sale;

2. The charterer of a ship has insurable interest to the extent that he is liable to be damnified by its loss (Section 106).

Example: A charters B’s vessel on condition that A would pay B in case of loss the amount 300,000.00. A has insurable interest to the extent of 300,000.00

CONCEALMENT IN MARINE INSURANCE

- A party is bound to communicate, in addition to what is required by section 28 (facts within his knowledge, material to the contract, other party has not the means of ascertaining, as to which party with a duty to communicate makes no warranty) information that he possesses, that are material to the risk AND, to state the EXACT and WHOLE TRUTH in relation to all matters that he represents, or upon inquiry discloses or assumes to disclose EXCEPT those that the insurer knows or those in the exercise of ordinary care, the other ought to know, and which the former has no reason to suppose him to be ignorant under Section 30 (Section 107);

NOTE: That the rules on concealment in marine insurance are stricter as it is sufficient that the insured is in POSSESSION OF THE MATERIAL FACT, ALTHOUGH HE IS UNAWARE OF IT.

Example: If an agent fails to notify principal of the loss of the cargo and the latter, after the loss but ignorant thereof,

secured insurance lost or not lost, the insurance will be void due to concealment;

A party is also bound to communicate, the information belief or expectation of a 3rd person, in reference to a material fact, is material. Note: under section 35 such is not required to be communicated in ordinary insurance (section 108);

PRESUMPTION OF A PRIOR LOSS

- Insured in marine insurance is presumed to have knowledge, at the time of insuring, or prior, if information might possibly reached him in the usual mode of transportation and the usual rate of communication (section 109)

EFFECT OF CONCEALMENT

- While concealment as a rule entitles the injured party to rescind, the rule must yield to section 110 – as it does not vitiate the contract but merely exonerates the insurer from a loss resulting from the risks concealed as related to:

(a) the national character of the insured;

(b) the liability of the thing insured to capture and detention;

(c) the liability to seizure from breach of laws of foreign laws of trade;

(d) the want of necessary documents ;

(e) the use of false/simulated documents

Example: The vessel is seized due to lack of documents, the insurer is exonerated. If the vessel is lost due to storm, the insurer is liable despite concealment due to lack of;

DISTINGUISHING ORDINARY CONCEALMENT FROM THAT IN MARINE INSURANCE

Ordinary Insurance Marine Insurance

- Opinion or belief of a 3RD person or own judgment of the insured is not material and need not be communicated (section 35);

- Belief or expectation of 3RD person in reference to a material fact is material and has to be communicated;

- A causal connection between the fact concealed and cause of loss is not necessary for the insurer to rescind;

- The concealment of any of the matters stated in section 110 merely exonerates the insurer from loss, if the results from the fact concealed;

REPRESENTATION IN MARINE INSURANCE

- If the representation is intentionally false in any material respect, or, in respect of any fact on which the character and nature of the risk depends, the insurer may rescind (Section 111). But the eventual falsity of a representation as to an expectation does not in the absence of fraud avoid the contract (section 112).

Example: statement as to time of sailing, nature of the cargo or amount of profits;

WHAT ARE THE IMPLIED WARRANTIES IN MARINE INSURANCE?

2000 BAR EXAM (IX – b)

1. In every contract of marine insurance upon a ship or freight, freightage or upon anything which is the subject of marine insurance, there is an implied warranty that the ship is sea worthy (section 113);

A ship is sea worthy when it is reasonably fit to perform the service and encounter the ordinary perils of the voyage, contemplated by the parties (section 114). Note that it is relative and is made to depend on the circumstances.

The implied warranty of seaworthiness complied with as a general rule when it is seaworthy at the time of the commencement of the risk except:(a) when the insurance is made

for a specified length of time, it must be seaworthy at the commencement of every voyage it undertakes at that time;

(b) when the insurance is upon cargo, which by the terms of

the policy description of the voyage, or established custom of trade, it is required to be transshipped at an immediate port in which case – each vessel upon which the cargo is shipped or transshipped must be seaworthy at the commencement of each particular voyage (section 115);

(c) where different portions of the voyage contemplated in the policy differ in respect to the things requisite to make the ship seaworthy, I which case it must be seaworthy at the commencement of each portion (section 117);

Example: The voyage will pass thru rivers – then seas – the warranty is not complied with if at the time it goes out to sea – it is not seaworthy to encounter the perils of the sea;

TO WHAT DOES THE WARRANTY OF SEAWORTHINESS EXTEND TO:

The warranty of seaworthiness extends not only to the condition of the structure of the ship, but it requires that:

(a) it be properly laden or loaded with cargo;

(b) is provided with a competent master, sufficient number of officers and seamen;

(c) it must have the requisite equipment and appurtenances like ballast, cables, anchors, cordage, sails, food, water, fuel, lights and other necessary and proper stores and implements for the voyage (section 116);

Note that when a ship becomes unseaworthy during the voyage – it will not avoid the policy – as long as – there is no unreasonable delay in repairing the defect. Otherwise – the insurer is exonerated on the ship or the ship owners’ interest from any liability from any loss arising therefrom (section 118). Hence, if loss is not one due to the defect or peril was not increased by the defect insurer is liable;

Also, while a ship may be seaworthy for purposes of insurance on it, it may by reason of being unfitted to receive cargo, be unseaworthy for the purpose of insurance on the cargo (section 119).

Example: A cargo of wheat was laden on a ship which had a port hole insecurely fastened at the time of lading. The port hole was foot above the water line, and in the course of the voyage, water entered the cargo area and damaged the wheat. The ship was deemed unworthy with reference to the cargo, hence the insurer of the cargo was not liable (Steel vs. Stateline Steamship, cited Go Tiaco vs. Union Society of Canton, 40 Phil 40);

2. It shall carry the requisite documents to show its nationality or neutrality and that it shall not carry any document that will cast reasonable suspicion on the vessel (section 120). This warranty arises only when nationality or the neutrality of the vessel or cargo is expressly warranted;

3. That the vessel shall not make any improper deviation from the intended voyage;

HOW IS THE INTENDED VOYAGE DETERMINED

(a) When its is described by places of beginning and ending, the voyage is the course of sailing fixed by mercantile usage between those places (section 121);

(b) When its is not fixed by mere usage, the voyage is the way between the places specified which to a master of ordinary will and discretion would seem the most natural, direct and advantageous (section 122);

WHAT IS DEVIATION

- is a departure from the course of the voyage as defined by section 121 and 122 or an unreasonable delay in pursuing the voyage or the commencement of an entirely different voyage (section 123);

WHEN IS DEVIATION PROPER

(a) When it is caused by circumstances over which neither the master nor the owner of the ship has any control;Example: An ailment strikes the crew of the vessel;

(b) When necessary to comply with warranty, or to avoid a peril, whether or not the peril is insured against;Example: When repairs are necessary or to avoid getting caught in a conflict;

(c) When made in good faith, for the purpose of saving human life or relieving another vessel in distress;Example: When assistance is given

2005 BAR EXAM (N0. XIV -1- b)

Q: Under what circumstances can a vessel properly proceed to a port other than its port of destination? Explain. (4%)

A: A vessel can properly proceed to a port other than its port of destination in the following cases:

1. When caused by circumstances over which neither the master or the owner of the ship has any control;

2. When necessary to comply with a warranty, or to avoid a peril, whether or not the peril is insured against;

3. When made in good faith, and upon reasonable grounds of belief In the necessity to avoid peril;

4. When made in good faith for the purpose of saving human life or relieving another vessel in distress. (Section 124, Insurance Code)

*** ANY DEVIATION THAT IS NOT INCLUDED IS NOT PROPER (SECTION 124 AND 125)

2005 BAR EXAM (N0. XIV -1 - a) Q: On a clear weather, M/V Sundo, carrying insured cargo, left the port of Manila bound for Cebu. While at sea, the vessel encountered a strong typhoon forcing the captain to steer the vessel to the nearest island where it stayed for seven days. The vessel ran out of provisions for its passengers. Consequently, the vessel proceeded to Leyte to replenish its supplies.

a) Assuming that the cargo was damaged because of such deviation, who between the insurance company and the owner of the cargo bears the loss? Explain.

A: The Insurance company should bear the loss. Since the deviation was cured by a strong typhoon, it was caused by circumstances beyond the control of the captain, and also to avoid a peril whether or not insured against. Deviation is therefore proper. (Section 145(a), Insurance Code)

CONSEQUENCE OF IMPROPER DEVIATION

Insurer is not liable for any loss happening to the thing insured subsequent to an improper deviation (section 126). This applies whether the risk has been increased or diminished.

4. That the vessel does not or will not engage in any illegal venture;

LOSS IN MARINE INSURANCE

- Losses in marine insurance may be partial or total (section 127). A loss that is not total is partial (section 128);

BURDEN OF PROOF AS TO LOSS OR DAMAGE – The burden of proof” contemplated by the aforesaid provision actually refers to the “burden of evidence” (Burden of going forward). As applied in this case it refers to the duty of the insured to show that the loss or damage is covered by the policy. The foregoing clause notwithstanding, the burden of proof still rests upon petitioner to prove that the damage or loss was caused by an excepted risk in order to escape any liability under the contract. (DBP Pool of Accredited Insurance Companies v. Radio Mindanao Network, Inc. Jan. 27, 2006, G.R. No. 147039)

KINDS OF TOTAL LOSSES

- a total loss may be actual or constructive (section 129)

(1) If it is an Actual Total Loss it may be caused by:

a. total destruction of the thing insured;

b. the irretrievable loss of the thing which renders it valueless to the owner for the purpose that he held it;

c. any other event which effectively deprives the owner of the possession at the port of destination of

the thing insured (section 130)

Example: When palay was rendered valueless because they began to germinate, thus it no longer remains as the same thing, it was an actual total loss. (Pan Malayan vs. CA 201 SCRA 382)

An actual total loss can also be presumed from the continued absence of the ship without being heard of (section 132). The length of time which is sufficient to raise these presumption depends on the circumstances of the case;

If the vessel be prevented, at an immediate port, from completing the voyage, by the perils insured against, the liability of the marine insurer on the cargo continues after they are reshipped (section 133) and the liability extends to damages, expenses of discharging, storage, shipment, extra freightage and all other expenses incurred in saving the cargo reshipped up to the amount insured – nothing shall render the insurer liable for an amount in excess of the insured value or if none, of the insurable value (section 134);

Upon actual total loss, the insured is entitled to payment without notice of abandonment (section 135) and if the insurance is confined to an actual loss it will not cover a constructive loss, but will cover any loss, which necessarily results in depriving the insured of possession, at the port of destination of the entire thing insured (section 137);

(2) It is a constructive total loss when the person insured is given a right to abandon under section 139 (section 131);

ORIENTAL ASSURANCE CORP., VS. CA AND PANAMA SAWMILL CO., INC. 200 SCRA 459 (1991)

SC RULING:

The policy in question shows that the subject matter insured was the entire shipment of apitong logs. The fact that the logs were loaded on two different barges

did not make the contract several and divisible as to the terms insured. The

logs on the two barges were not separately valued or separately valued or separately insured. Only one premium was paid for the entire shipment, making only one cause or consideration.

The insurance contract should be considered indivisible. Under the Insurance Code, a total loss may either be an actual loss or a constructive total loss. The appellate court treated the loss suffered by Panama as a constructive total loss, and for the purpose of computing the more than three-fourths value of the logs actually lost, considered the cargo in one barge as separate from the logs in the other. The logs having been insured as one inseparable unit, the correct basis for determining the existence of constructive total loss is the totality of the shipment of logs. Of the entirety of 1,208 pieces of logs, only 497 pieces thereof were lost or 41.45% of

the entire shipment. Since the cost of those 497 pieces does not exceed 75% of the value of all 1,208 pieces of logs, the shipment cannot be said to have sustained a constructive total loss under Section 139(a) of the Insurance Code. In the absence of

either actual or constructive total loss, there can be no recovery by Panama against Oriental Assurance.

2005 BAR EXAM (N0. X -1- a)

Q: M/V Pearly Shells, a passenger and cargo vessel, was insured for P40,000,000.00 against “constructive total loss.” Due to a typhoon, it sank near Palawan. Luckily, there were no casualties, only injured passengers. The shipowner sent a notice of abandonment of his interest over the vessel to the insurance company which then hired professionals to afloat the vessel for P900,000.00. When re-floated, the vessel needed repairs estimated at P2,000,000.00. The insurance company refused to pay the claim of the shipowner, stating that there was “no constructive total loss.”

a) Was there “constructive total loss” to entitle the shipowner to recover from the insurance company? Explain.

A: There was constructive total loss. When the vessel sank, it was likely that it would be totally lost because of the improbability of recovery. (Arnold’s Law of Marine Insurance and Average, 16th ed., Vol. II, pp. 954-955)

Suggested Alternative Answer: There was no constructive total loss. The loss is not more than ¾ the value of the vessel which was insured for P40,000,000.00. The cost of refloating is P900,000.00 and the needed repairs amount P2,000,000.00, or a total of only P2,900,000.00 which does not constitute more than ¾ the value of the vessel.

THE DOCTRINE OF LIMITED LIABILITY – [when not applicable] – The doctrine of limited liability under Article 587 of the Code of Commerce is not applicable to the present case. This rule does not apply to situations in which the loss or the injury is due to the concurrent negligence of the ship owner and the captain. It has already been established that the sinking of the M/V Central Bohol had been caused by the fault or negligence of the Ship Captain and the crew, as shown by the improper stowage of the cargo logs. “Closer supervision on the part of the ship owner could have prevented this fatal miscalculation.” As such, the ship owner was equally negligent. It cannot escape liability by virtue of the limited liability rule. (Central Shipping Company, Inc. v. Insurance Company of North America, Sept. 20, 2004, G.R. No. 150751)

ABANDONMENT – is the act of the insured by which, after a constructive total loss, he desires to the insurer the relinquishment in its favor his interest in the thing insured (section 138);

A person insured by a contract of marine insurance may abandon the thing insured, or any particular portion thereof separately valued by the policy, or otherwise separately insured and recover a total loss – when the cause of loss is a peril insured against if:

1 .more than ¾ thereof in value is actually lost or would have to be expended to recover it form the peril insured against;

2 .if it is injured to such extent as to reduce its value by more than ¾ of value;

3 .if the thing injured is a ship and contemplated voyage cannot lawfully be performed without incurring either an expense to the insured of more than ¾ the value of the thing abandoned or a risk which a prudent man would not take under the circumstances;

4 .if the insured is freightage or cargo – and the voyage cannot be performed – nor another ship cannot be procured by the master – within a reasonable time with reasonable diligence – to forward the cargo without incurring the like expense or risk mentioned in item (c) but, freightage cannot be abandoned unless the ship is abandoned (section 139);

Abandonment must neither be partial nor conditional (section 140). Hence, it must be total and absolute;

Abandonment must be made within a reasonable time after receipt of reliable information of the loss but, where the information is of doubtful character, the insured is entitled to a reasonable time to make an inquiry (section 141). This is to enable the insurer to take steps to preserve the property;

If the information proves incorrect or thing insured is restored when the abandonment was made that there was then in fact no total loss – the abandonment becomes ineffectual (section 142);

HOW NOTICE OF ABANDONMENT IS MADE

- By giving notice, oral or written notice to the insurer but if orally given, a written notice of such must be submitted within seven days from giving oral notice (section 143). The notice must be explicit and specify the particular cause of the abandonment but need start only enough to show that there is probable cause therefore and need not be accompanied by proof of interest or of loss (section 144). The requirement as the explicitness of the notice is due to the fact that abandonment can only be sustained upon the cause specified in the notice (section 145);

2005 BAR EXAM (N0. X - 1- b)-

Q: b) Was it proper for the shipowner to send a notice of abandonment to the insurance company? Explain. (5%)

-A: It was proper for the shipowner to send a notice of abandonment to the insurance company, because there was reliable information of the loss of the vessel.(Section 141, Insurance Code)

EFFECTS OF ABANDONMENT

(1) It is equivalent to a transfer by the insured of his interest to the insurer, with all the chances of recovery and indemnity (section 146) Note though, if the insurer pays for a loss as if it were an actual total loss, he is entitled to whatever may remain of the thing insured, or its proceeds or salvage as if there has been a formal abandonment. Here the insurer has opted to pay for total actual loss

notwithstanding the absence on actual abandonment;

(2) Acts done in good faith by those who were agents of the insured in respect to the thing insured subsequent to the loss are at the risk of the insurer and for his benefit (section 148). The agents of the insured become agents of the insurer. This retroacts to the date of the loss when abandonment is effectively made;

EFFECTIVITY OF ABANDONMENT

(1) Abandonment becomes effective upon the acceptance of the insurer. Acceptance may either be express or implied from the conduct of the insurer. The mere silence of the insurer for an unreasonable length of time after notice shall be construed acceptance (section 150). Once accepted, it is conclusive between the parties. The loss is admitted together with the sufficiency of the abandonment (section 151). It is also irrevocable upon acceptance and upon its being made unless the ground upon which is made proves to be unfounded (section 152). Thus, if the insurer accepts the abandonment, it cannot raise any question as to insufficiency of the form under section 143, time for giving notice under section 141, or right to abandon under 139. The only exception the is under section 152 when the ground is unfounded which is defined in section 142 and/or as related to section 145;

- No abandonment of freightage unless ship is also abandoned;

(2) On an accepted abandonment involving a ship, freightage earned previous to the loss belongs to the insurer of the freightage, that subsequently earned belongs to the insurer of the ship (section 153).

Example: The contemplated voyage of the transport of cargo is from point X to point Y. In between, a loss occurs and the ship is abandoned. The freightage already earned from point X until the point of loss, belongs to the insurer of the freightage. If the ship is subsequently repaired, and continues on to point Y the

freightage due belongs to the insurer of the ship;

(3) If abandonment is not accepted despite its validity, the insurer is liable upon an actual total loss, deducting from the amount any proceeds of the thing insured that may have come to the hands of the thing insured (section 154). This is due the fact that under section 149, which provides that if notice is properly given, it does not prejudice the insured, if the insurer refuses to accept the abandonment;

IF ABANDONMENT IS NOT MADE OR OMMITTED

- The fact that abandonment is not made or is omitted does not prejudice the insured as he may nevertheless recover his actual loss (section 155);

LIABILITY FOR AVERAGES

AVERAGE DEFINED – is any extraordinary or accidental expense incurred during the voyage for the preservation of the vessel, cargo, or both and all damages to the vessel or cargo from the time it is loaded and the voyage commenced until it ends and the cargo is unloaded;

KINDS OF AVERAGES

(a) Particular or simple average – is a damage or expense caused to the vessel, cargo, or which has not inured to the common benefit and profit of all persons interested in the cargo or the vessel. This damage or expense is borne ordinarily by the owner of the vessel or cargo that gives rise to the expenses or suffered the damage;

Example: Damage sustained by a cargo from the time it is loaded to the time it is unloaded or additional expenses that are incurred by the vessel from the time it puts out to the sea until it reaches its destination

(b) General or gross average is an expense or damage suffered deliberately in order to save the vessel or its cargo or both from real and known risk. Thus, all persons

having an interest in the vessel and cargo or both at the occurrence of the average shall contribute.

Example: Jettisoning of cargo;

As a rule when it has been agreed that an insurance upon a particular thing or class of things shall be free from particular average, a marine insurer is not liable for a particular average loss not depriving the insured of the possession, at the port of destination, of the whole such thing, or class of things, even though it becomes entirely worthless, but such insurer is liable for his proportion of all general average loss assessed upon the thing insured (section 136);

2009 BAR EXAM (VII)

Global Transport Services, Inc. (GTSI) operates a fleet of cargo vessels plying interisland routes. One of its vessels, MV Dona Juana, left the port of Manila for Cebu laden with, among other goods, 10,000 television sets consigned to Romualdo, a TV retailer in Cebu.

When the vessel was about ten nautical miles away from Manila, the ship captain heard on the radio that a typhoon which, as announced by PAG-ASA, was on its way out of the country, had suddenly veered back into Philippine territory. The captain realized that MV Dona Juana would traverse the storm’s path, but decided to proceed with the voyage. True enough, the vessel sailed into the storm. The captain ordered the jettison of the 10,000 television sets, along with some other cargo, in order to lighten the vessel and make it easier to steer the vessel out of the path of the typhoon. Eventually, the vessel, with its crew intact, arrived safely in Cebu.

a. Will you characterize the jettison of Romualdo’s TV sets as an average? If so, what kind of an average, and why? If not, why not? (3%)

b. Against whom does Romualdo have a cause of action for indemnity of his lost TV sets? Explain. (3%)

IN CASE OF GENERAL AVERAGE LOSS

- The insurer is liable for the loss falling upon the insured, though a contribution in respect to the thing insured when required to be made by him towards a general average loss called for a peril insured against but liability is limited to the proportion of the contribution attaching to his policy value where this is less than the contributing value of the thing insured (section 164). Meaning that the insured can hold his insurer liable for contribution up to the value of the policy;

RIGHT OF SUBROGATION

- When a person injured in a contract of marine insurance has a demand against the others for contribution, he may claim the whole loss from his insurer subrogating the insurer to his own right to contribution but no such claim can be made upon the insurer if:

(a) there is separation of the interest liable to contribution;

Example: When the cargo liable for contribution has been removed from the vessel

(b) when the insured having the right and opportunity to enforce contribution from others, has neglected or waived the exercise of the right (section 165). Meaning that the insured has a choice of recovery on the happening of a general average loss. They are:

(1) Enforcing the contribution against interested parties; or

(2) Claiming from the insurer. If it be the latter, subrogation takes place;

SUBROGEE – x x x right to recovery derives from the contractual subrogation as an incident to an insurance relationship and not from any proximate injury to it inflicted by the respondents x x x (Malayan Insurance Co. vs. Regis Brokerage Corporation Nov. 23 2007 G.R. No. 172156)

SUBROGATION – [meaning] Subrogation is the substitution of one person in the place of another with reference to a lawful claim or right, so that he who is substituted succeeds to the rights of the other in relation to a debt or claim, including its remedies or securities. The principle covers the situation under which an insurer that has paid loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy. It contemplates full substitution such that it places the party subrogated in the shoes of the creditor, and he may use all means which the creditor could employ to enforce payment. (Lorenzo Shipping Corp. v. Chubb and Sons, Inc. Et Al. Jun 8, 2004 G.R. No. 147724)

SUBROGEE – The rights to which the subrogee succeeds the same as, but not greater than, those of the person for whom he is substituted – he cannot acquire any claim, security, or remedy the subrogor did not have. In other words, a subrogee cannot succeed to a right not possessed by the subrogor. A subrogee in effect steps into the shoes of the insured and can recover only if insured likewise could have recovered.

However when the insurer succeeds to the rights of the insured, he does so only in relation to the debt. The person substituted (the insurer) will succeed to all the rights of the creditor(the insured), having reference to the debt due the latter. (Lorenzo Shipping Corp. v. Chubb and Sons, Inc. Et Al. Jun 8, 2004 G.R. No. 147724)

DELSAN TRANSPORT LINES, INC. vs. CA and AMERICAN HOME ASSURANCE CORPORATION (G.R. No. 127897 November 15, 2001)

Common Carriers; Failure to deliver cargo; Payment by insurance company of insurable value of the goods; Insurance company subrogated to the rights of the assured against the common carrier. -The payment made by the private respondent for the insured value of the lost cargo operates as waiver of its (private respondent) right to enforce the term of the implied warranty against Caltex under the marine insurance policy. However, the same cannot be validly interpreted as an automatic admission of the vessel’s seaworthiness by the private respondent as to foreclose recourse against the petitioner for any liability under its contractual obligation as a common carrier. The fact of payment grants the private respondent subrogatory right which enables it to exercise legal remedies that would otherwise be available to Caltex as owner of the lost cargo against the petitioner common carrier.8 Article 2207 of the New civil Code provides that:

Art. 2207. If the plaintiff’s property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury.

Presentation of marine insurance policy not necessary for insurance company to go after the vessel-owner.- The presentation in evidence

of the marine insurance policy is not indispensable in this case before the insurer may recover from the common carrier the insured value of the lost cargo in the exercise of its subrogatory right. The subrogation receipt, by itself, is sufficient to establish not only the relationship of herein private respondent as insurer and Caltex, as the assured shipper of the lost cargo of industrial fuel oil, but also the amount paid to settle the insurance claim. The right of subrogation accrues simply upon payment by the insurance company of the insurance claim.

MEASURE OF INDEMNITY IN MARINE INSURANCE

IF THE POLICY IS VALUED;

1.A valuation in the policy of marine insurance is exclusive between the parties thereto in the adjustment of either a partial or total loss, if the insured has some interest at risk and there is no fraud on his part. If there is fraud in valuation, it entitles the insurer to rescind as it is an exception as to conclusiveness (Section 156);

2.If however, hyphotecated by the bottomry or respondentia – before insurance and without knowledge of the person securing it – he may show the real value:

3.An insurer is liable upon a partial loss – only for such proportion of the amount insured by him – as the loss bears to the whole interest of the insured (section 157). The effect is that the insured is deemed a co-insurer if the value of the insurance is less than the value of the property. This applies even in the absence of a stipulation in the contract and is also known as the average clause.

I

The two requisites for the application of the average clause:

(1) insurance is for less than actual value;

(2) the loss is partial

Note: That co-insurance exist in Marine Insurance: In Fire Insurance, there is no co-insurance unless expressly stipulated (sections 171-172). In life insurance, there is none also as value is fixed in the policy (section 183)

4.In case profits are separately insured in a contract of marine insurance (see section 105) , the insured can recover in case of a loss (and under section 160, there is a conclusive presumption of a loss from the loss of the property out of which they were expected to arise, and the valuation fixes their amount), a proportion of such profits equivalent to proportion of the value of the property lost bears to the value of the whole (section 158).

(1) IF THE POLICY IS OPEN

(a) The value of the ship is the value at the beginning of the risk, including all articles or charges which add to its permanent value or which are necessary to prepare it for the voyage insured;

(b) The value of the cargo is its actual cost to the insured, when laden on board where the cost cannot be ascertained, its Market Value at the time and place of lading. Adding the charges incurred in purchasing and placing it on board – but without reference to any loss incurred in raising money for its purchase or any DRAWBACK on its EXPROPRIATION or FLUCTUATION of the market at the port of destination or expenses incurred on the way or on arrival;

Drawback – government allowance upon duties on imported merchandise when the importer re-exports instead of selling it;

(c) Value of freightage is the gross freightage, exclusive or primage without reference to the cost of earning it;

Primage – compensation paid by the shipper to the master of the vessel for his care and trouble bestowed on the goods of the shipper, which he retains in the absence of a contrary stipulation with the owner of the vessel;

(d) The cost of insurance is in each case to be added to the value thus estimated (section 161);

IF THE CARGO INSURED AGAINST PARTIAL LOSS

If it arrives at the port of destination in a damaged condition, the loss of the insured is deemed to be the same proportion of the value which the market price at that port of the thing so damaged bears to the market price it would have brought if sound (section 162). Meaning if reduction in value is 1/5, then amount of recovery on the insurance is also 1/5.

The formula is:

(a) Market price in sound state less market price in damaged state equals reduction in value;

(b) Reduction in value divided by market price in sound state multiplied with the amount of insurance equals the amount of recovery;

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COVERAGE IN FIRE INSURANCE

Insurance against fire includes loss or damage due to lightning, windstorm, tornado, earthquake or other allied risks when such risks are covered by extensions to the fire insurance policy or under separate policies (section 167). Hence, while it is not limited to loss or damage due to fire, coverage as to other risks is not automatic;

2001 BAR EXAM (N0.XVII)

Q: JQ, owner of the condominium unit, insured the same against fire with XYZ Insurance Corp. and made the loss payable to his brother. MLQ. In case of loss by fire of the said condominium unit, who may recover on the fire insurance policy? State the reasons for your answer?

A: JQ can recover on the fire insurance policy for the loss of the said condominium unit. He has the insurable interest as owner-insured. As beneficiary in the fire insurance policy, MLQ cannot recover on the fire insurance policy. For the beneficiary to recover on the fire or property insurance policy, it is required that he must have insurable interest in the property insured. In this case, MLQ does not have insurable interest in the condominium unit.

FIRE DEFINED

In insurance, it is defined as the active principle of burning, characterized by heat and light combustion. Combustion without

visible light or glow is not fire. Example: Damage caused by smoke from a lamp when no ignition occurred outside the lamp.

To allow recovery, it must be the proximate of the damage or loss and fire must be hostile if it:

a. burns at a piece where it is not intended to burn;

b. starts as a friendly fire but becomes hostile if it should escape from the place where it is intended to burn and becomes uncontrollable;

c. is a friendly fire which becomes HOSTILE by not escaping from its proper place but because of the unsuitable material used to light it and it becomes inherently dangerous and uncontrollable;

-as opposed to friendly fire – one that burns in a place where it is intended to burn and employed for the ordinary purpose of lighting, heating, or manufacturing. But the policy itself may limit or restrict coverage to losses under ordinary conditions but not those due to extra-ordinary circumstances or abnormal conditions like war, invasion, rebellion, civil war or similar case. In these cases recovery is still possible;

ALTERATION DEFINED

Is a change in the use or condition of a thing insured from that to which it is limited by the policy, made without the consent of the insurer, by means within the control of the insured, and increasing the risk, which entitles the insurer to rescind the contract of insurance (section 168);

-From the foregoing definition, the REQUISITES must be present to constitute an alteration so as to allow the rescission of the contract to wit:

(a) The use or condition of the thing insured is specifically limited or stipulated in the policy but under section 170, the contract of insurance is not affected by an act of the insured subsequent to the execution of the policy, which does not violate its provisions even though it increases the risk and is the cause of the loss;

Example: (1) If the insured stored thinner, paints and varnish. A fire subsequently occurs and there is no express prohibition as to storage of such items, even if the risk is

increased, the insurer is still liable (Bachrach vs. British Assurance, 17 Phil 555);

(2) The policy states that the 1st floor is unoccupied, it is later occupied. There is no alteration that entitles the insurer to rescind, the description of the house cannot be said to be a limitation as to use (Hodges vs. Capital Insurance 60 O.G. 2227)

(b) There is an alteration in the said use or condition;

(c) The alteration is without the consent of the insurer;

(d) The alteration is made by means within the insured’s control. If the alteration be by accident or means beyond the control of the insured, the requisite is not met.

Example: The alteration is made by a tenant with the consent or knowledge of the insured, the insurer cannot rescind;

(e) The alteration increases the risk of loss but under section 169 any alteration in the use or condition of the thing insured from that to which is limited by the policy, which does not increase the risk does not affect the contract;

BUT THERE MUST NOT BE ANY VIOLATION OF THE CONTRACT OTHERWISE

- The basis for rescission is that payment of the premium is based on the risk as assessed at the time of the issuance of the policy when the risk is increased without a corresponding increase in premium is paid;

MEASURE OF INDEMNITY IN FIRE INSURANCE

- In an open policy, it is the expense it would be to the insured at the time of the commencement of the fire to replace the thing lost or injured in the condition in which it was at the time of the injury.

- In a valued policy, it is the same as in marine insurance, the valuation as agreed upon by the parties is conclusive in the adjustment of either a partial or total loss in the absence of fraud (section 171).

HOW IS VALUATION MADE

(1) Whenever the insured would like to have a valuation stated in a policy insuring a building or structure

against fire, it may be made by an independent appraiser, who is paid by the insured and the value may be fixed between the insurer and the insured;

(2) Subsequently, the clause is then inserted in the policy that said valuation has thus been fixed;

(3) In case of loss, provided there is no change increasing the risk without the consent of the insured or fraud on the part of the insured, the insurer will pay the whole amount so insured and stated in the policy is paid. If it is a partial loss, the whole amount of the partial loss is paid. In case there are 2 or more policies, each shall contribute pro-rata to the total or partial loss but the liability of the insurers cannot be more than the amount stated in the policy;

(4) Or the parties may stipulate that instead of payment, the option to repair, rebuild or replace the property wholly or partially damaged or destroyed shall be exercised. (Section 172).

No policy of fire insurance shall be pledged, hypothecated or transferred to any person, firm or company that acts as agent for or otherwise represents the issuing company, such shall be void and of no effect insofar as it may affect other creditors of the insured (section 173)

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CASUALTY INSURANCE DEFINED

- Generally, it is one that covers loss or liability arising from an accident or mishap excluding those that fall exclusively within other types of insurance like fire or marine. It includes employer’s liability, workmen’s compensation, public liability, motor vehicle liability, plate glass liability, burglary and theft, personal accident and health insurance as written by non-life companies and other substantially similar insurance (section 174);

DEFINITIONS

EMPLOYER’S LIABILITY

- is insurance obtained by the employer against liability to an employee for damages caused or

arising from injuries by reason of his employment;

WORKMEN’S COMPENSATION

- is insurance secured by an employer for the benefit of his employees and laborers for loss resulting from injuries, disablement, or death through industrial accident, casualty, or disease in connection with their employment. Note that most if not all types of this insurance is underwritten by the GSIS or the SS.

PUBLIC LIABILITY

- is insurance against liability of the insured to pay damages for accidental bodily injury or damage to property arising from an activity of the insured defined in the policy;

MOTOR VEHICLE LIABILITY

- is insurance against loss or injury arising from the use of a motor vehicle by its owner as opposed loss or damage to the vehicle itself. Coverage for both may however be contained in the policy;

PLATE GLASS

- is insurance that indemnifies the insured against loss caused by the accidental breaking of plate glass, windows, doors or show cases;

BURGLARY AND THEFT

- is insurance against loss of property through burglary and theft;

PERSONAL ACCIDENT

- is insurance against expense, loss of time and suffering from accidents that cause a physical injury;

SUN INSURANCE OFFICE vs. CA July 17, 1992 (1993 and 1994 Bar exams)X was issued a personal accident insurance for P200,000. Two months later, he died of a bullet wound in his head. He was playing with his hand gun from which he removed the magazine. He pointed his gun to his temple and fired. The insurance company refused to pay the beneficiary. Was there suicide or accident?SC Ruling:

1. X was negligent but it should not prevent the beneficiary from recovery because

there is nothing in the policy that exempts the insurer of the responsibility to pay indemnity if the insured is shown to have contributed to his own accident.t

2. The death is accidental. Accident happens by chance without intention or design and which is unexpected or unforeseen.

HEALTH

-- is insurance for indemnity for expenses or loss occasioned by sickness or disease;

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DEFINITION

- An agreement whereby a party called the surety guarantees the performance by another party called the principal or obligor of an obligation or undertaking in favor of a 3RD party called the obligee (section 175);

Includes – official recognizance’s, bonds or undertakings issued by any company under act no. 536, as amended by act no. 2206 (government transactions – by authorized companies)

WHAT IS THE LIABILITY OF THE SURETY

- It is joint and several (solidary) with the obligor but limited to the amount of the bond and determined strictly by the terms of the contract in relation to the principal contract between obligor – obligee (section 176);

IS A SURETYSHIP CONTRACT VALID AND BINDING WHERE THE PREMIUM HAS NOT YET BEEN PAID?

- Generally, payment of the premium is a condition precedent. Hence the bond is not valid. An exception is when it is issued and accepted by the obligor, it is valid despite non payment of the premium (Section 177);

WHAT OTHER LAWS GOVERN A SURETYSHIP CONTRACT?

- In the absence of specific provisions, civil code provisions apply in a suppletory character if necessary to interpret the contract provisions (Section 178);

DISTINGUISHED WITH GUARANTY

(1) A surety assumes liability as a regular party to the agreement, a guarantor’s liability depends on an independent agreement to pay if primary debtor fails to pay;

(2) A surety is primarily liable, a guarantor is secondarily liable;

(3) A surety is not entitled to exhaustion, a guarantor is entitled to exhaustion;

NON-NECESSITY OF A DEMAND ON THE SURETY – Demand on the surety is not necessary before bringing the suit against them. On this point, it may be worth mentioning that a surety is not even entitled, as a matter of right, to be given notice of the principal’s default. (Intra-Strata Assurance Corporation, Et Al. v. Republic of the Philippines, Etc., Jul. 9, 2008 G.R. No. 156571)

REPUBLIC vs. CA and R & B SURETY AND INSURANCE COMPANY, INC. (G.R. No. 103073 March 13, 2001)

Surety of Sureties; Liability of; Joint and several with the obligor; Limited to the total amount of the bond. -Section 176 of the Insurance Code provides:

"SECTION 176. The liability of the surety of sureties shall be joint and several with the obligor and shall be limited to the amount of the bond. It is determined strictly by the terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee, (as amended by P.D. No. 1455)."

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DEFINITION

- Is insurance on human lives and insurance appertaining thereto or connected therewith (section 179);

WHEN IS IT PAYABLE

- An insurance upon life may be made payable upon:

(a) death of the person; or(b) his surviving a specified period;

or(c) otherwise, contingently on the

continuance or cessation of life;

COMMON KINDS

WHOLE LIFE/ORDINARY LIFE/STRAIGHT LIFE

- premiums are payable for life and the insurer agrees to pay the face

value upon the death of the insured;

LIMITED PAYMENT LIFE

- insured pays premiums for a limited period after which he stops with a guarantee by the insurer that upon death the face amount is to be paid – if death occurs while payment is not complete – beneficiary acts face amount;

TERM POLICY

- insurer is liable only upon death of the insured within the agreed term or period. If insured survives the insurer is not liable;

ENDOWMENT

- protection is for a limited period, if the insured is still alive at the end of the period, the value of the policy is paid to him. If he dies before the end period, it is paid to the beneficiaries;

ANNUITY

- where the insured or a named person/s is paid a sum or sums periodically during life or a certain period (note that contracts for the payment of endowment or annuities are considered as life insurance contracts);

DISTINGUISHING LIFE INSURANCE FROM

PAYMENT OF ANNUITY

(1) In life insurance, it is payable upon the death of the insured, while in annuity, it is payable during the lifetime of the annuitant;

(2) In life insurance, the premium is paid in installments, while in annuity, annuitant pays a single premium;

(3) In life insurance, there is lump sum payment upon death, while in annuity, annuities are paid until death;

WHAT RISKS ARE COVERED?

(1) Generally - all causes of death are covered unless excluded by law, by policy or public policy.

Examples:

a. By law – beneficiary is the principal, accomplice or accessory in bringing death of the insured;

b. By policy – when it does not cover assault, murder or injuries inflicted intentionally by a 3RD person but where the insured is not the intended victim, insurer is liable (Calanoc vs. CA, 98 Phil 79). What must be considered is that death or injury is not the natural or probable result of the insured’s voluntary act (Finman General Assurance Corporation vs. CA, 213 SCRA 493) as opposed to an act of the insured to confront burglars (Balagtan vs. Insular Life Assurance Company, 44 SCRA 58).

c. By public policy – when the insured is executed for a crime committed;

(2) Suicide, if committed after the policy has been in force for a period of two years from date of issue or last reinstatement unless policy provides a shorter period but it is nevertheless compensable if committed in the state of insanity regardless of date of commission (Section 180-A)

IS A LIFE INSURANCE POLICY TRANSFERABLE OR ASSIGNABLE?

- Yes, it may pass by transfer, will or succession to any person, whether he has insurable interest or not. (Section 181);

- Effect, the person to whom it is transferred may recover upon it whatever the insured might have recovered;

Note while there is no need for the assignee/transferee to have insurable interest, it should not be used to circumvent the law prohibiting insurance without insurable interest. Thus, an assignment contemporaneous with issuance may invalidate the policy unless made in good faith;

IS NOTICE TO THE INSURER OR TRANSFER OR BEQUEST REQUIRED?

- It is not necessary to preserve the validity of the policy unless thereby expressly required (Section 181);

IS THE CONSENT OF THE BENEFICIARY REQUIRED?

- Yes, if he designated as an irrevocable beneficiary as he has acquired a vested right;

WHAT IS THE MEASURE OF INDEMNITY IN LIFE INSURANCE?

- Unless the interest of a person insured is susceptible of pecuniary estimation, the amount stated or specified in the policy is the measure of indemnity (section 183). Hence a life insurance policy has been held to be a valued policy;

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ORGANIZATION, CAPITALIZATION AND AUTHORIZATION

REQUIREMENTS FOR A CERTIFICATE OF AUTHORITY FROM THE INSURANCE COMMISSION

(a) Qualified by Philippines Laws to transact insurance business;

(b) Has a name that is not in anyway similar to another company;

(c) If organized as a stock corporation, it should have a paid up capital of no less that Php5,000,000.00;

(d) If it is organized as a mutual company (one whose capital funds are not contributed by stockholders but by policy holders) it must have available cash assets of at least Php5,000,000.00 above all liabilities for losses reported, expenses, taxes, legal reserves of all outstanding risks, and the contributed surplus fund equal to the amounts required of stock corporations (Php1,000,000.00 if a life insurance company or Php500,000.00, if a non life insurance company).

(e) If a foreign insurance company, it must appoint a resident agent, deposit securities and maintain a legal reserve (Section 184-193);

MARGIN OF SOLVENCY

- The margin of solvency is the excess of the value of insurance company’s

admitted assets exclusive of its paid up capital. In case of a domestic insurance company and the excess of the value of its admitted assets in the Philippines exclusive of security deposits over the amount of its liabilities, unearned premiums, and reinsurance reserves in the Philippines (Section 194);

- The required margin is in case of life insurance companies is two percent (2%) of the total amount of its insurance in force as of the preceding calendar year on all policies except term insurance and in case of non life insurance companies, at least ten percent (10%) of total amount of its net premium during the preceding calendar year but in no case to be less than Php500,000.00. If not met, the insurance company is (a) not permited to take on any risk and no dividends can be declared (section 195).

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CONCEPT OF COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

It is to provide protection or coverage to answer for bodily injury or property damage that may be sustained by another arising from the use of motor vehicle. Please note though that what is now compulsory is death of bodily injury arising from motor vehicle accidents as per amendment to the insurance code by PD 1814 and PD 1455 brought about by insurance losses due to padded claims for property damage. Hence, property damage is now optional;

HOW IS ITS COMPULSORY NATURE ENFORCED?

-The compulsory nature of the insurance is enforced by prescribing that any land transportation operator (owner/s or motor vehicles for transportation of passengers for compensation, including school buses) or owner of a motor vehicle (actual legal owner of a motor vehicle in whose name the vehicle is registered with the LTO) would be considered as unlawfully operating a motor vehicle (is any vehicle as defined in Section (3) RA 4136 which is propelled by any power other than muscular power using public high ways with exceptions:

(a) road rollers, holley cars, street sweepers, sprinkles, lawn movers, bulldozers, graders, forklifts, amphibian trucks or cranes not used on public highways;

(b) Those that run on rails or trucks;(c) Tractor, trailers (when propelled

or intended to be propelled by an attachment to a motor vehicle is classified as a motor vehicle without power rating), traction engines of all kinds used exclusively for agricultural purposes) Unless there is:

(1) policy of insurance (contract of insurance against passenger or 3RD party liability for death or body injury arising from motor vehicle accidents); or

(2) guaranty in cash; or surety bond

Compliance by the motor vehicle owner or the land transportation operator is monitored as the Land Transportation Office shall not allow registration or renewal of registration without compliance with section 374 (section 376);

DISTINGUISHED FROM OWN DAMAGE COVERAGE AND COMPREHENSIVE MOTOR VEHICLE INSURANCE

(a) Third party liability answers for liabilities arising from death or bodily injury to 3RD persons or passengers;

(b) Own damage insurance answers for reimbursement of the cost of repairing the damage to vehicle of the insured;

(c) Comprehensive insurance answers for all liabilities/damages arising from the use/operation of a motor vehicle it includes third party own damage, theft and property damage;

WHEN DOES THE LIABILITY OF THE INSURER ACCRUE?

- in an insurance policy that directly insures against liability, the insurers liability accrues immediately upon the occurrence of the injury upon which liability depends, and does not depend on the recovery of judgment by the injured party against the insured. Hence, there is no need for the insured to wait for a decision of the court finding him guilty of reckless imprudence. The occurrence of an injury for which the insured may be liable immediately gives rise to insurer liability (Shafer vs. Judge, 167 SCRA 386). In fact a third party

can bring a claim or an action directly against the insurer as the general purpose of the statute is to protect the injured against the insolvency of the insured;

NATURE OF THE LIABILITY OF THE INSURER

- It is not solidary with the insured. The liability of the insurer is based on contract, while that of the insured is based on tort. (Malayan Insurance vs. CA, 165 SCRA 536);

WHO CAN ISSUE POLICY OR SURETY BOND?

- Those authorized by the commissioner in the list furnished to the Land Transportation Office (Section 375). If the Motor Vehicle Owner or the Land Transportation Operator is unable to obtain or is unreasonably denied the policy of insurance, they will be required to show proof of a cash deposit with the commissioner, but the authority of the insurance company to engage in casualty or surety lines of business shall be withdrawn immediately (section 379);

CANCELLATION OF THE POLICY

(a) By the insurer – requires written notice to motor vehicle owner/land transportation operator at least 15 days prior to intended effective date. If so canceled, the Land Transportation Office may order the immediate confiscation of license plates unless it receives a new valid insurance/surety/proof of cash deposit or revival by endorsement of the cancelled policy (Section 130);

(b) By the insured – the motor vehicle owner/land transportation operator shall secure a similar policy or surety before the cancelled policy/surety ceases to be effective or make a cash deposit and file the same or proof thereof with the Land Transportation Office (Section 381);

EFFECT OF CHANGE IN OWNERSHIP OR CHANGE IN ENGINE

There is no need to issue a new policy until the next date of registration provided the insurer shall agree to continue the policy and such change shall be indicated in a second duplicate which is filed the Land Transportation Office;

OTHER PROHIBITED ACTS

(1) The motor vehicle owner or the Land Transportation Operator cannot require driver/s/employees to contribute to the payment of the premium (section 385);

(2) Any government office or agency having the duty to implement the provisions, official or employee thereof shall not act as an agent in procuring the policy or surety bond and in no case shall the commission of the procuring agent exceed 10% of the premiums paid (section 387);

PENALTIES FOR VIOLATION

- The penalties for a violation by the Motor Vehicle Owner or the Land Transportation Operator is a fine of not less than Php500.00 nor more than Php1,000.00 and/or imprisonment for not more than 6 months. If a Land Transportation Operator violates section 377 (minimum limits of coverage) it is sufficient cause for revocation of a certificate of public convenience (section 388);

- If the violation is committed by a corporation/association or government office/entity, the executive officer/s who shall have knowingly permitted or failed to prevent the violation shall be held liable as principals (Section 389);

PAYMENT OF CLAIMS

- A claim for payment must be filed without any unnecessary delay, within 6 month from the date of accident by giving written notice setting forth the nature, extent and duration of the injuries as certified by a duly licensed physician (section 384);

EFFECT OF FAILURE TO FILE CLAIM WITHIN PERIOD

- The failure to file a claim will be deemed a waiver. If a claim is filed but denied, an action must be brought within 1 year from date of denial with the Insurance Commissioner or the Court, otherwise the right of action will be deemed as having prescribed;

WHAT SHALL INSURANCE COMPANY DO UPON FILING OF THE CLAIM?

- It shall forthwith ascertain the truth and extent of the claim and make payment within 5 working days after reaching an agreement. If no agreement is reached, it must nevertheless pay the no fault indemnity (Section 378) without prejudice to a further pursuit of the clam – in which case he shall not be required or compelled to execute a quit claim or release from liability. Note though that in case of dispute as to enforcement of policy provisions, the adjudication shall be within the original and exclusive jurisdiction of the commissioner subject to section 416, which provides for concurrent jurisdiction but the filing with the insurance commissioner shall preclude filing with the court (Section 385);

-WHAT IS NO FAULT INDEMNITY?

- A no fault indemnity claim is a claim for payment for death or injury to a passenger of third party without necessity of proving fault or negligence. This is payable by the insurer provided:(a) indemnity in respect of one

person shall not exceed Php5,000.00;

(b) the necessary proof of loss under oath to substantiate the claim is submitted, these are: police report of accident and either the death certificate and sufficient evidence to establish the payee or medical report and evidence of medical or hospital disbursement in respect of which refund is made;

AGAINST WHOM IS THE PAYMENT CLAIMED

- a claim under the no fault indemnity clause may be made against one motor vehicle insurer only as follows:

(a) in case of an occupant of a vehicle – against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from;

(b) in any other case, from the insurer of the directly offending vehicle;

(c) in all cases, the right of the party paying the claim to recover against the owner of

the vehicle responsible for the accident shall be maintained;

INTERPRETATION OF THE AUTHORIZED DRIVER CLAUSE

- The authorized driver clause is interpreted to refer to the insured or any person driving on the order of the insured or with his permission provided, such person is permitted to operate a motor vehicle in accordance with our licensing laws or regulations and who is not otherwise disqualified;

NOTE THE FOLLOWING JURISPRUDENCE

(1) If license is expired, person is not authorized to operate a motor vehicle (Tarco Jr. vs. Phil Guaranty, 15 SCRA 313);

(2) Issued a temporary operators permit or a temporary vehicle receipt, a person is authorized to operate a motor vehicle, but if it has expired, it is as if he has no license (Guiterez vs. Capital Insurance, 130 SCRA 618, PEZA vs. Alikpala, 160 SCRA 31);

(3) A tourist with license but in the country for more than 90 days, is not authorized to operate a motor vehicle because it is as if he has no license (Strokes vs. Malayan, 127 SCRA 766);

(4) A drivers license that bears all the earmarks of a duly issued license is presumed genuine;

(5) A license is not necessary, where the insured himself is the driver (Paterno vs. Pyramid Insurance, 161 SCRA 677, 1986 BAR)

COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE(ThirdPartyLiability

Insurance)

The purpose of this kind of insurance is to indemnify the death or injury of a third person or passenger from the use of the motor vehicle. The injured party can sue immediately and directly the insurance company. This will protect the injured person against the insolvency of the insured. It allows the passenger to recover from the insurer of the vehicle where he was riding.

1996 BAR EXAM

PROBLEM

1.While driving his car, X sideswiped A causing injuries to the latter. A sued X and the

third party liability insurer for the damage sustained by A.

2. The insurance company moved to dismiss the complaint contending that theliability of X has not yet been determined with finality.

Is the contention of the insurance company correct? May the insurer be held solidarily liable with X

ANSWER:

No. When an insurance policy insures directly against liability, the insurer’s liability accrues immediately upon the occurrence of the injury.

No. The insurer cannot be held solidarily liable with X because its liability is based on a contract while that of X is based on torts. (Vda. De Maglana vs. Consolacion, August 6, 1992)

VDA. DE MAGLANA VS. CONSOLACION

SC RULING:

Where an insurance policy insures directly against liability, the insurer’s liability accrues immediately upon the occurrence of the injury or even upon which the liability depends, and does not depend upon the recovery of judgment by the insured party against the insured. The underlying reason behind the third party liability of the Compulsory Motor Vehicle Liability Insurance is to protect the injured person against the insolvency of the insured who causes such injury, and to give such injured person a certain beneficial interest in the proceeds of the policy. However, the direct liability of the insurer under the indemnity contracts against third party liability does not mean that the insurer can be held solidarily liable with the insured and/or the other parties found at fault. The liability of the insurer is based on contract and the liability of the insured is based on tort. If the insurer was to be held solidarily liable with the insured under the indemnity contract against third party liability, then this would violate the principles underlying solidary obligation and insurance contracts. In fine, the court concludes that the liability of AFISCO based on the insurance contract is direct, but not solidary with that of Destrajo which is

based on Article 2180 of the Civil Code. As such, petitioners have the option either to claim the 15, 000 from AFISCO , the P 5,000 had already been paid under the no-fault clause, and the balance from Destrajo or enforce the entire judgment from Destrajo subject to reimbursement from AFISCO to the extent of the insurance coverage.

2.COMPREHENSIVE MOTOR VEHICLE INSURANCE ( 1993 & 2000 Bar Exam)

The liability of the insurance company s direct and solidary with the operator but only up to the amount stated in the policy and accrues immediately upon the occurrence of the accident. Any amount awarded beyond the amount stated in the policy is the sole responsibility of the carrier.

PERLA COMPANIA DE SEGUROS, INC. VS. COURT OF APPEALS208 SCRA 487 (1992)

SC RULING:

Where a car is admittedly, as in this case, unlawfully and wrongfully taken without the owner’s consent or knowledge, such taking constitutes theft, and therefore it is the “theft

clause” and not the “authorized driver clause that should apply. Clearly, the risk

against accident is distinct from the risk against theft. The “authorized driver” clause in a typical insurance policy is in contemplation or anticipation of accident in the legal sense in which it should be understood, and not in contemplation or anticipation of an event such as

theft. In the present case the loss of the insured vehicle did not result from accident where intent was involved; the loss was caused by theft, the commission of which was attended by intent. It is worthy to note that there is no casual connection between the possession of a valid driver’s license and the loss of the vehicle. To rule otherwise would render car insurance practically a sham since the insurance company can easily escape liability by citing restrictions which are not applicable or germane to the claim, thereby reducing indemnity to a shadow.

3. AUTHORIZED DRIVER RULE (1991 Bar Exams)

For purposes of recovery, the driver of the vehicle must be in possession of a valid, subsisting and professional driver’s license. But this rule will not apply if the one driving the vehicle at the time of the accident was the owner of the vehicle. (Palermo v. Pyramids Ins., 161 SCRA 677)

PALERMO V. PYRAMIDS INSURANCE CO., INC., MAY 31, 1988

SC RULING:

Since the driver of the insured motor vehicle at the time of the accident was the

insured himself, he was an ”authorized driver” under the policy. Any infraction of the Motor Vehicle Law which prohibits a person from operating a motor vehicle on the highway without a license or with an expired license, subjects him to penal sanctions under the Motor Vehicle Law but does not bar recovery under the

insurance contract. The requirement that the driver be permitted in accordance with law and regulations to drive the motor vehicle and is not disqualified from driving such vehicle by order of a Court of law or by reason of any enactment or regulation applies only when the driver is driving on the insured’s order or permission, such as a regular driver, a friend, a member of the family, or the employee of a car service or repair shop. It doe not apply when the person driving is the insured himself.

4. NON-FAULT CLAUSE IN COMPULSORY MOTOR VEHICLE INSURANCE POLICY (2000 Bar Exam)

Proof of fault or negligence is not necessary for the payment of any claim for death or injury to a passenger or to a third party. The maximum amount of indemnity is P 10, 000.00 upon submission of death certificate, medical certificate and police report. The purpose is in order to give immediate assistance to the victim of motor vehicle accidents and/or the dependents specially if they are poor, regardless of the financial capability of the owner of the motor vehicle or operator responsible for the accident. This does not include property damage.

- The claim is collected from the insurer of the vehicle where the claimant is riding, mounting or dismounting. In all other cases, the claim is against the insurer of the offending vehicle.

- The insurer who pays the claim can ask reimbursement from the offending vehicle.

- The recovery by the insured from the insurer is direct and not dependent on the recovery against the insurer by the insured party.

NECESSITY TO REGULATE INSURANCE COMPANIES COVERING PUBLIC UTILITY VEHICLES – The present case shows a clear public necessity to regulate the proliferation of such insurance companies. Because of the PUV operators’ complaints, the LTFRB thus assessed the situation. It found that in order to protect the interests of the riding public and to resolve problems involving the passenger insurance coverage of PUV’s, it had to issue Memorandum Circular No. 2001-001 accrediting PAMI and PAIC II as the two groups allowed to participate in the program.Memorandum Circular No. 2001-001 required that “[a]ll public utility vehicles whose LTO license plate, as per latest LTO Official Receipt, with an EVEN middle number (0, 2, 4, 6 and 8) shall be insured with UCPB insurance (PAMI) while those with an ODD middle number (1, 3, 5, 7 and 9) shall be insured with Great Domestic Insurance (PAIC II) x x x .” It should be stressed that PUV’s, as common carriers, are engaged in a business affected with

public interest. Under Article 1756 of the Civil Code, in cases of death or injuries to passengers, common carriers are presumed to be at fault and are required to compensate the victims, unless they observed extraordinary diligence. To assure this compensation, PUV’s are required to obtain insurance policies. (Eastern Assurance and Surety Corporation [easco] v. Land Transportation Franchising and Regulatory Board, Oct. 7, 2003 G.R. No. 149717)

OTHER PROVISIONS

1.Chapter VII – Mutual Benefit Associations (Section 390. Any society, association or corporation, without capital stock, formed or organized not for profit but mainly for the purpose of paying sick benefits to members, or of furnishing financial support to members while out of employment, or of paying to relatives of deceased members of fixed or any sum of money, irrespective of whether such aim or purpose is carried out by means of fixed dues or assessments collected regularly from the members, or of providing, by the issuance of certificates of insurance, payment of its members of accident or life insurance benefits out of such fixed and regular dues or assessments, but in no case shall include any society, association, or corporation with such mutual benefit features and which shall be carried out purely from voluntary contributions collected not regularly and or no fixed amount from whomsoever may contribute, shall be known as a mutual benefit association within the intent of this Code. Any society, association, or corporation principally organized as labor union shall be governed by the Labor Code notwithstanding any mutual benefit feature provisions in its charter as incident to its organization.) and trust for charitable institutions (Sec. 410. The term "trust for charitable uses", within the intent of this Code, shall include, all the real or personal properties or funds, as well as those acquired with the fruits or income therefrom or in exchange or substitution thereof, given to or received by any person, corporation, association, foundation, or entity, except the National Government, it instrumentalities or political subdivisions, for charitable, benevolent, educational, pious, religious, or other uses for the benefit of the public at large or a particular portion thereof or for the benefit of an indefinite number of persons.) (Sections 396 to 413);

2.Chapter VIII – Insurance Commissioner (Section 414 – Administrative Functions, Section 415 – Power to impose fines/suspensions – Section 415, Adjudicatory Powers – Note: it is concurrent with courts but

the filing with the commissioner shall preclude civil courts from taking cognizance of a suit over the same subject matter. Decisions are appealable to the CA within 30 days by notice of appeal (Section 416);

WHITE GOLD MARINE SERVICES, INC., vs. PIONEER INSURANCE AND SURETY CORPORATION AND THE STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION (BERMUDA) LTD., . [G.R. No. 154514. July 28, 2005]

Relatedly, a mutual insurance company is a cooperative enterprise where the members are both the insurer and insured. In it, the members all contribute, by a system of premiums or assessments, to the creation of a fund from which all losses and liabilities are paid, and where the profits are divided among themselves, in proportion to their interest.[17] Additionally, mutual insurance associations, or clubs, provide three types of coverage, namely, protection and indemnity, war risks, and defense costs. A P & I Club is “a form of insurance against third party liability, where the third party is anyone other than the P & I Club and the members. By definition then, Steamship Mutual as a P & I Club is a mutual insurance association engaged in the marine insurance business.

The records reveal Steamship Mutual is doing business in the country albeit without the requisite certificate of authority mandated by Section 187[20] of the Insurance Code. It maintains a resident agent in the Philippines to solicit insurance and to collect payments in its behalf. We note that Steamship Mutual even renewed its P & I Club cover until it was cancelled due to non-payment of the calls. Thus, to continue doing business here, Steamship Mutual or through its agent Pioneer, must secure a license from the Insurance Commission.

Since a contract of insurance involves public interest, regulation by the State is necessary. Thus, no insurer or insurance company is allowed to engage in the insurance business without a license or a certificate of authority from the Insurance Commission.

The test to determine if a contract is an insurance contract or not, depends on the nature of the promise, the act required to be performed, and the exact nature of the agreement in the light of the occurrence, contingency, or circumstances under which the performance becomes requisite. It is not by what it is called.

http://sc.judiciary.gov.ph/jurisprudence/2005/jul2005/154514.htm#_ftn20

http://sc.judiciary.gov.ph/jurisprudence/2005/jul2005/154514.htm#_ftn17

TRANSPORTATION LAWS

COMMON CARRIERS

(Arts. 1732-1766, New Civil Code)

Common Carriers are persons, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public.

Transportation defined. a contract of transportation is one whereby a certain person or association of persons obligate themselves to transport persons, things, or news from one place to another for a fixed price

Classification:1. As to object: (1) things; (2) persons; (3) news2. As to place of travel: (1) land; (2) water; (3) air

Parties to contract of transportation:(1) shipper or consignor.(2) carrier or conductor.(3) consignee

Common Carrier Private CarrierAs to Availability

Holds himself out for all people indiscriminately

Contracts with particular individuals or groups only

As to require DiligenceExtraordinary Diligence

Ordinary Diligence

As to regulationSubject to state regulation

Not subject to state regulation

Stipulation limiting liabilityParties may agree on limiting the carrier’s liability except when provided by law

Parties may limit the carrier’s liability, provided it is not contrary to morals or good customs

Exempting circumstancesProve extraordinary diligence and Art.1734,NCC

Caso forfuito,art. 1174 NCC

Presumption of NegligenceThere is a presumption of fault or negligence

No presumption of fault or Negligence

Governing lawLaw on Common Carriers

Law on obligations and contracts

(2002 Bar exams)

Test for a common carrier:1. He must be engaged in the business of

carrying goods for others as a public employment, and must hold himself out as ready to engage in the transportation of goods for persons generally as a business, and not a casual occupation.

2. He must undertake to carry goods of the kind to which his business is confined.

3. He must undertake to carry by the methods by which his business is conducted, and over his established roads.

4. The transportation must be for hire.

The true test is whether the given undertaking is a part of the business engaged in by the carrier which he has held out to the general public as his occupation rather than the quantity or extent of the business actually transacted, or the no. and character of the conveyances used in the employment (the test is therefore the character of the business actually carried on by the carrier.

Characteristics of common carriers: (1) The common carrier undertakes to carry for all people indifferently; (2) The common carrier cannot lawfully decline to accept a particular class of goods for carriage to the prejudice of the traffic in those goods

Exception : for some sufficient reason, where the discrimination in such goods is reasonable and necessary (substantial grounds)(3) No monopoly is favored - the Commission has the power to say what is a reasonable compensation to the utility and to make reasonable rules and regulations for the convenience of the traveling public and to enforce them(4) Public convenience - for the best interests of the public

The law prohibits unreasonable discrimination by common carriers.-- The law

requires common carriers to carry for all persons, either passengers or property, for exactly the same charge for a like or contemporaneous service in the transportation of like kind of traffic under substantially similar circumstances or conditions. The law prohibits common carriers (CC) from subjecting any person, etc. or locality, or any kind of traffic, to any undue or unreasonable prejudice or discrimination whatsoever.Exception: When the actual cost of handling and transporting is different, then different rates may be chargedDetermination of justifiable refusal: This involves a consideration of the following:

1. suitability of the vessels of the company for the transportation of such products;

2. reasonable possibility of danger or disaster, resulting from their transportation in the form and under the conditions in which they are offered for carriage;

3. the general nature of the business done by the carrier;

4. all the attendant circumstances which might affect the question of the reasonable necessity for the refusal by the carrier to undertake the transportation of this class of merchandise.

What is the DILIGENCE required by common carriers?Common carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them, according to all the circumstances of each case. Extraordinary diligence lasts from the time the cargoes are loaded in the vessel until they are discharged and delivered to the consignee.Air carriers can terminate services of pilots for serious misconduct and drunkenness because of its extraordinary diligence.

LIABILITY OF COMMON CARRIERS: The common carrier, is at all times, required to observe extraordinary diligence with respect to transport of goods.

1. To bring passengers safely to his place of destination. He is obliged to carry passengers safely as far as human care and foresight can provide, using the utmost diligence of a very cautious person with due regard for all circumstances. In case of death or injury, the common carriers are presumed to have been at fault or negligent in transporting the passengers unless they prove that they observed extraordinary diligence.

2. To transport the goods/ cargoes safely to the point of destination if there is loss or damage to the goods/cargoes, immediately a presumption of negligence

arises that the loss/ damage to the goods/ cargoes was due to the negligence of the common carrier. The shipper may only prove that the goods arrived in a damaged condition or that they did not arrive at all.

LOADSTAR SHIPPING CO., INC VS. PIONEER ASIA INSURANCE CORP.Jan 24, 2006A common carrier is required to observe extraordinary diligence in the vigilance over the goods it transports.

I. VIGILANCE OVER THE GOODSRULES governing common carrier’s LIABILITY over Goods:General RULE: Common carriers are responsible for the loss, destruction, or deterioration of the goods, UNLESS the same is due to any of the following causes only: 1) Flood, storm, earthquake, lightning, or other natural disaster or calamity; 2) Act of the public enemy in war, whether international or civil; 3) Act or omission of the shipper or owner of the goods; 4) The character of the goods or defects in the packing or in the containers; 5) Order or act of competent public authority. (Art. 1734) The CC may absolve itself from liability by proving any of the following DEFENSES: (2002 Bar exams )

A) That the CC encountered:a. An act of God;

— there must have been no delay on the part of the common carrier. Otherwise, if delayed and not for good reason, then it shall be held liable notwithstanding the fact that all the subsequent requisites were present.

— must be an unforeseen event or an event which cannot be avoided

— The carrier must have exercised extraordinary

diligence before, during, and after the time of the accident.—The proximate cause must not be committed by the carrier. If the proximate cause of the event is caused by the carrier, then he cannot invoke the act of God defense.

Under the rule on Contributory Negligence, if the negligence attributable to carrier is not proximate in character, the carrier shall be responsible, although such liability shall be mitigated.

b. Act of public enemy in war; c. Act by a competent public authority; d. Acts/omissions of the shipper or his agent;

e. The goods or the packaging is inherently defective.

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

REQUISITES for natural disaster or calamity – 1. The natural disaster must have been the

proximate cause of the loss2. It must have been the only cause of the

loss3. The common carrier must have exercised

due diligence to prevent or minimize before , during and after the natural disaster

4. The common carrier has not negligently incurred delay in transporting the goods

REQUISITES for act of public enemy -1. The act of public enemy must have been the proximate of the loss2. It must have been the only cause of the

loss3. The common carrier must have exercised

due diligence to prevent or minimize before , during and after the act of public enemy in war.

REQUSITE FOR act or omission of Shipper -1. That the act or omission of the shipper

/owner of the goods must have been the proximate cause of the loss

2. That it must have been the only cause of the loss.

REQUSITES for character of goods , fault in packing or containers-1. That the loss , destruction or deterioration was caused by the character of the goods ; or the faulty nature of the packing /containers2. That the common carrier had exercised due diligence to forestall or lessen the loss.

REQUISTES for the act of public authority –1. The common carrier must prove that the public authority had the power to issue the order for the destruction / seizure of the goods.

B.) Another defensive strategy to escape liability is to invoke that it exercised extraordinary diligence to prevent or minimize the loss at the time the accident occurred.

Negligence is the failure to observe due diligence with respect to the circumstances at hand.

Contributory Negligence is the failure to observe due diligence that an ordinary or

prudent man undertakes in relation to the negligence of another.

When does the carrier’s responsibility over the goods arise?The carrier shall be liable the moment the goods arrive in his possession whether actual or constructive, until such time that the carrier delivers the same to the consignee OR the consignee has been informed of the arrival of the goods and the consignee had reasonable time to remove the same.Under maritime laws, the responsibility of the carrier ends when the goods were transmitted by the carrier to the customs arrastre operator. Recall that before the goods are delivered to the consignee, the state has the responsibility to ensure that the goods being brought in are in accordance with the law. EFFECT: The carrier would no longer be liable. The succeeding relationship would be between the consignee and the arrastre operator, the relationship governing them would be akin to a contract of Deposit.

There is already an existing Contract of carriage when the carrier took possession of the cargo by placing it on a lighter or barge manned by its authorized employees. (COMPANIA MARITIMA vs. INSURANCE COMP )

A bill of lading that was issued covering certain shipment which contained a provision that the carrier does not assume liability for any loss /damage to the goods once they have been under the custody of the custom or other authorities or when they have been delivered at ship’s tackle have been considered valid , because it was held that it is not contrary to morals and public policy ; said stipulation is clear and have been adopted to mitigate the responsibility of the common carrier. (LU DO vs. BINAMIRA)

Stoppage in Transitu is the right of the unpaid seller who has parted with the possession of the goods to stop them in transit, when the buyer of goods is or becomes insolvent.

Requisites:

1. Seller must be an unpaid seller;2. Goods must be in transit;3. Buyer must be in a state of insolvency;

EFFECT: Once the right is exercised, the common carrier becomes a mere warehouseman.

In the event that the UNPAID Seller exercises its right of stoppage in transitu , the carrier thereafter holds the goods in the capacity of an ordinary bailee or warehouseman and shall be liable only as such , upon the theory that the exercise of the right by the unpaid seller , such terminates the contract of carriage.

A STIPULATION LIMITING LIABILITY IS VALID PROVIDED THAT it be: (2002 bar Exam)1. in writing signed by both parties2. supported by a valuable consideration other

than the service rendered by common carrier3. reasonable, just and not contrary to public

policy

SOME VALID STIPULATIONS LIMITING CARRIER'S LIABILITY:1. account of strikes or riot;2. value of the goods appearing in bill of lading

UNLESS shipper declares a greater value;3. contract fixing the sum that may be

recovered.

VOID STIPULATIONS LIMITING CARRIER'S LIABILITY (2002 bar exams)1. that the goods are transported at the risk of

the shipper;2. that the shipper is not liable for any loss or

destruction of the goods;3. that the common carrier need not observe

any diligence in the custody of the goods;4. that the common carrier shall exercise a

degree of diligence less than that of a good father of a family;

5. that the common carrier shall not be responsible for any acts of its employee;

6. that the common carrier’s liability for acts committed by thieves, or of robbers who do not act with grave or irresistible threat, violence or force, is dispensed with or diminished;

7. that the common carrier is not responsible for the loss, destruction, or deterioration of goods on account of the defective condition of the car, vehicle, ship, airplane or other equipment used in the contract of carriage.

A stipulation that the common carrier's liability is limited to the value of the goods appearing in the bill of lading, unless the shipper or owner declares a greater value, is binding. A contract fixing the sum that may be recovered by the owner or shipper for the loss, destruction, or deterioration of the goods is valid, if reasonable and just under the circumstances, and has been fairly and freely agreed upon. The law of the country to which the goods are to be transported governs the liability of the common carrier in case of loss, destruction or deterioration.

The provisions of articles 1733 to 1753 shall apply to the passenger's baggage which is not in his personal custody or in that of his employee. As to other baggage, the rules in articles 1998 and 2000 to 2003 concerning the responsibility of hotel-keepers shall be applicable.

Fire may not be considered as a natural disaster or calamity. It does not fall within the category of act of God UNLESS caused by lighting or by

natural disaster or calamity. It may even be caused by actual privy or fault of the carrier. (EASTERN SHIPPING VS. IAC)The Civil Code provisions on Common carrier shall not be applied when the carrier is not acting as such but as a private carrier. The stipulation in the charter party absolving the owner from liability for loss due to the negligence of its agent would be void only if strict public policy governing common carriers are applied. Such policy has no force when the public at large is not involved, as in the case of a ship totally chartered for the use of a single party (HOME INSURANCE vs. AMERICAN STEAMSHIP)In case where the Common carrier w/o just cause-

1. Delays the transportation of goods2. Changes the stipulated route / usual route

The annulment of the agreement limiting the carrier’s liability is no longer necessary ; The carrier cannot simply avail of the benefit /defense of limited liability.When the conditions printed in the back of the ticket stub are in letters so small that they are hard to read, this would not warrant the presumption that the passenger were aware of those conditions such that he had “fairly and freely agreed” to them . The passenger therefore is not bound by such stipulations. (SHEWARAN vs. PAL)

II. SAFETY OF PASSENGERS DUTY: A common carrier is bound to carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances. RULE: The responsibility of a common carrier for the safety of passengers as required in articles 1733 and 1755 cannot be dispensed with or lessened by stipulation, by the posting of notices, by statements on tickets, or otherwise. EXCEPTION: When a passenger is carried gratuitously, a stipulation limiting the common carrier's liability for negligence is valid, but not for willful acts or gross negligence.

The common carrier is liable even if the ticket issued to passenger provides exemption of common carrier from death or injury of paseenger and notices were posted dispensing extraordinary diligence of the common carrier or even if the passenger was given a discount of his fares.(2001 Bar exams)

If the passenger is carried gratuitously, stipulation limiting CC for negligence is valid but not for WILLFUL ACT OR GROSS NEGLIGENCE.A reduction of fare does not justify any limitation of the common carrier's liability.

Is the carrier liable for death of or injuries to the passengers due to the negligence or willful acts of ITS EMPLOYEES?

YES, although such employees may have acted beyond the scope of their authority or in violation of the orders of the common carriers.

Illustrative rule: Two passengers engage in a fist-fight inside a bus terminal. An on-duty driver attempts to pacify them but instead kills one. The carrier is liable! But, if the killing of the passenger occurred while the driver is off-duty, the carrier is not liable. (Recall the case of Gillaco v. Manila Railroad, the carrier was held not liable when its employee, a security guard who harbored a grudge against a fellow passenger, shot and killed the latter. The guard committed the killing while he was off-duty.)The Common carrier is held liable because -

1. The driver , although stopping the bus, nevertheless did not put off the engine.

2. He started to run the bus even before the conductor gave him the signal to go and while the passenger was still unloading part of the baggage . ( LA MALLORCA vs. CA)

In the case of LACAM vs. SMITH , the Court held that an accident caused by defects in the automobile is not a caso fortuito. The rationale of the carrier’s liability is the fact that the passenger has neither the choice nor control over the carrier in the selection and use of the equipment and appliances in use by the carrier.

***Is the carrier liable for death of or injuries to the passengers due to the willful acts or negligence of OTHER PASSENGERS OR OF STRANGERS?YES, a common carrier is responsible for injuries suffered by a passenger if the common carrier's employees through the exercise of the diligence of a good father of a family could have prevented or stopped the act or omission. The act of the passengers stabbing another passenger in the bus. To be absolved, the common carrier must prove that it was negligent in preventing the injuries from accident; otherwise, it would be held liable. (Bachelor Express vs. Ca 188 scra 216)

EE riding on train who stepped on watermelons. Held: The conduct of plaintiff in undertaking to alight while the train was yet slightly underway was not characterized by imprudence and that he was not guilty of contributory negligence.The circumstances show that it was no means so risky for him to get off while the train was yet moving. It is not negligence per se for a traveler to alight from a slowly moving train. (Cangco vs MRR 38 Phil 768)

The DUTY of the PASSENGER is to observe the diligence of a good father of a family to avoid injury to himself. The contributory negligence of the passenger does not bar recovery of damages for his death or injuries, if the proximate cause thereof is the negligence of the common carrier, but the amount of damages shall be equitably reduced.

Condition printed on the back of a passenger ticket commonly known as “CONTRACT OF ADHESION” , being drafted only by one party , usually the corporation , and the only participation of the other party (passenger ) is the signing of his signature “his adhesion thereto calls for greater strictness and vigilance on the part of the court of justice with the view of protecting the weaker party from abuses . Such contract if enforced will be subversive of public good , thus placing the common carrier at a decided advantage over those who may have legitimate claims against it. The said condition is therefore unenforceable, as contrary to public policy- to make the court accessible to all those who have need of their services.

Moral damages are not recoverable on breach of contract of carriage in view of ART.2219-20 NCC . EXCEPTIONS-

1. Where the mishap results in the death of a passenger; Because the common carrier becomes subject to the rule in ART.2206 NCC entitles the spouse, descendants, ascendants to moral damages for mental anguish as a result of the death of the deceased.

2. 2.Where it is proved that carrier was guilty of fraud or bad faith EVEN if death does not result.

Mere carelessness does not per se justify an inference of malice or bad faith on the part of the common carrier ; Must be GROSS negligence

Concurring causes of action arising from negligent act of the common carrier:

1. Culpa Contractual/breach of contract (2003 Bar Exams)

Only the carrier is primarily liable not the driver, because there is no privity between the driver and the passenger.(art 1759, NCC.)

No defense of due diligence in the selection and supervision of the employees.

2. Culpa aquiliana (quasi delict)The carrier and the driver are solidarily liable as joint torfeasors.(Art 2180 NCC)

Defense of due diligence in the selection and supervision of employees is available. Exception: maritime tort resulting in collision Although the relation of passenger and carrier is contractual both in origin and nature, nevertheless, the act that breaks the contract may also be a tort.( air france vs. Carrascoso 18 SCRA 155)In the case of injury to a passenger due to the negligence of the driver of the bus on which the passenger was riding on and of the driver of another vehicle, the drivers as well as the owners of the two vehicles are jointly and severally liable for

damages. It should not make any difference that the liability of the bus owner springs from a contract while that of the driver springs from a quasi delict.(tiu vs. arriesgado)

3. Culpa criminal( Criminal Negligence)The driver is primarily liable. The carrier is subsidiaarilly liable only if the driver is convicted and declared insolvent.(art 100 RPC)

The principle of last clear chance would call for application in a suit between the owners and drivers of the two colliding vehicles. It does not arise where a passenger demands responsibility from the carrier to enforce its contractual obligations.(Phil. Rabbit Bus Lines vs. CA)

CODE OF COMMERCE OVERLAND TRANSPORTATIONNature of Contract

Art. 349. A contract of transportation by land or waterways of any kind shall be considered commercial:

1. When it involves merchandise or any object of commerce.

2. When, no matter what its object may be, the carrier is a merchant or is customarily [habitually] engaged in transportation for the public.Requisites for a contract of transportation by land or water to be commercial :

(1) transportation of merchandise is always commercial

(2) transportation of person or news is commercial only when the CC is a merchant or is habitually engaged in transportation for the public

* principal requirement : the CC is a merchant or is habitually engaged in transportation for the public; the object carried is of little importance

Effect of Civil Code on the provisions of the Code of Commerce on Overland Transportation

– The NCC does not expressly repeal the provisions of the Code of Commerce on overland transportation. Instead, it makes such provisions suppletory to the provisions of the NCC on common carriers

Bill of Lading: Written acknowledgement of receipt of goods and agreement to transport them to a specific place to a person named or to his order or bearer.

Ambiguity is construed against the carrier, the contract being one of adhesion.

Kinds of Bills of Lading

1. Negotiable Bill of Lading – one in which it is stated that the goods referred to therein

will be delivered to the bearer, or to the order of any person named in such document.

2. Non–Negotiable Bill of Lading – the goods referred to therein will be delivered to a specified person.

3. Clean Bill of Lading – One which does not indicate any defect in the goods

4. Foul Bill of Lading – Contains a notation indicating that the goods are in bad Condition.

5. Spent Bill of Lading – Covers goods that have already been delivered by the carrier without a surrender of a signed copy of the Lading.

6. Through Bill of Lading – Issued by a carrier who is obliged to use the facilities of other carriers.

7. On Board Bill of Lading – one in which it is stated that the goods have been received on board the vessel which is to carry the goods.

8. Received for Shipment Bill of Lading – it is stated that the goods have been received for shipment with or without specifying the vessel by which the goods are to be shipped.

9. Custody Bill of Lading – issued by the carrier to the whom the goods have been delivered for shipment but the vessel indicated in the bill of leading which is to carry the goods has not yet reached the port where the goods are held for shipment.

10. Port Bill of Lading – one which is issued by the carrier to whom the goods have been delivered, and the vessel to carry the goods is already in the port where the goods are held for shipment.

Three–Fold Nature of Bills of Lading

1. A contract in itself and the parties are bound by its terms;

2. A receipt; and

3. A symbol of the covered by it

They are also documents of title, and if negotiable in form they can constitute negotiable documents of title.

Legal effect of the Issuance of Bill of Lading

– Bill of leading constitute the legal evidence of the contract between the shipper and the carrier by the contents of which the disputes which may arise regarding their execution and performance shall be decided, no exception being admissible other than those of falsity and material error in the drafting.

Effect of absence of a bill of lading

– It does not preclude liability on a contract of transportation. The dispute shall be determined by the legal proofs which the parties may present in support of their respective claims, according to the general provisions established in the Code for commercial contracts.

Right to refuse packages

Gen. Rule: – a common carrier cannot ordinarily refuse to carry a particular class of goods to the prejudice of the traffic in those goods.

Exception: However, under Art. 365, carriers are authorized to refuse packages if they are unfit for transportation.

Time for delivery of goods

Where no period fixedThe carrier shall be bound to forward them in the first shipment of the same or similar goods, which he makes to the points where he must deliver them. Should he not do so, the damages caused by the delay shall be for his account.

Where for delivery of goodsThe carrier must deliver the goods within the time fixed. For failure to do so, the carriers shall pay the indemnity stipulated in the bill of lading. Also, damages shall be paid if the carrier refuses to pay the stipulated indemnity or is guilty of fraud in the fulfillment of his obligation.

Limitation as to carrier’s liability ( 2002 Bar exams)

(1). No Liability

– The carrier will not be liable at all for the negligent acts of its crew and employees. This is NULL and VOID for being contrary to public policy

(2). Limited Liability

– Regardless of the value of the cargo, the maximum liability of the carrier will be, for example, P500. This is VOID for being contrary to public policy.

(3). Qualified Liability

– A stipulation in the bill of lading limiting the liability of the carrier to a valuation unless the shipper declares a higher value and pays a higher rate of freight is valid. However, the carrier cannot limit

its liability for injury to, or loss of, good shipped where such injury or loss was caused by its own negligence.

Recovery of Damages from carriers for carriage of goods:

(1) Inter-island – if goods arrived in damaged condition:

If damage is apparent, the shipper must file a claim immediately.

If damage is Not apparent he should file a claim within 24 hours from delivery.

The filing of claim is a condition precedent for recovery.

If the claim is filed, but the carrier refuses to pay:– Enforce carrier’s liability in

court by filing a case: Within 6 years , if no

bill of lading has been issued, or

Within 10 years , if a bill of lading has been issued.

(2) Overseas – Where goods arrived in a damaged condition from a foreign port to a Philippine Port of Entry:

Upon discharge of goods, if the damage is apparent claim should be filed immediately;

If damage is not apparent, claim should be filed within 3 days from delivery.

When may a consignee of goods abandon the goods and recover the value thereof from the carrier?

In any of the following cases:

(1) Under Art. 363, in case of partial non-delivery, where the consignee proves that he cannot make use of the goods capable of delivery independently of those not delivered.

(2) Under Art. 365, where the goods are rendered useless for sale and consumption for the purpose for which they are properly destined; or

(3) Under Art. 371, where there is delay through the fault of the carrier.

Two special sanctions for the enforcement by the carrier of the payment of expenses and transportation charges.

(1) Under Art. 374, judicial sale of the goods transported; and

(2) Under Art. 375, by creating a lien in favor of the carrier on the goods transported.

AIR TRANSPORTATIONThe nature of an airline’s contract of carriage partakes of two types, namely: a contarct to deliver a cargo or merchandise to its destination, and a contarct to transport passengers to their destination.( british Airways vs. CA, 285 scra 450)Special rules on liabilities:

In case of flight diversion due to bad weather or other circumstances beyond the pilot’s control, the relation between the carrier and the passengers continues

until the latter has been landed at the port of destination and has left the carrier’s premises. The carrier should necessarily exercise extraordinary diligence in safeguarding the comfort, convenience and safety of its stranded passengers until they have reached their final destination ( Phil Airlines vs. CA sept 15, 1993)

It is firmly settled that moral damages are recoverable in suits predicted on breach of a contract of carriage where it is proved that the carrier was guilty of fraud or bad faith- in attention to and lack of care for the interests of its passengers who are entitled to its utmost consideration, particularly as to their convenience- amount to bad faith which entitles the passenger to an award of moral damages(japan Airlines vs Simangon, April 22, 2009)

Even where overbooking of passengers is allowed as a commercial practice, the airline company would still be guilty of bad faith and still be liable for damages if it did not properly inform passenger that it could breach the contract of carriage even if they were confirmed passengers( Zalamea vs. CA GR 104235)

Neglect or malfeasance of the carrier’s employees could give ground for an action for damages. Passengers have a right to be treated by the carrier’s employees with kindness, respect, courtesy and due consideration and are entitled to be protected against personal misconduct, injurious language, indignities and abuses from such employees.

An air carrier is not liable for the loss of baggage in an amount in excess of the limit specified in the tariff which was filed with the proper authorities, such tariff being binding on the passenger regardless of the passenger’s lack of knowledge thereof or assent thereto. In a contract of air carriage, a declaration by the passenger of a higher value is needed to recover a greater amount.

An open dated ticket constitutes a complete contract between the carrier and passenger. Hence the airline company is liable if it refused to confirm a passenger’s flight reservation (Singson vs.CA, GR No. 119995)

An airline company which issued a confirmed ticket to a passenger covering successive trips on a trips on different airlines can be held liable for damages occasioned by bumping off by one of the

successive airlines(Lufthansa german Airlines vs. CA Gr no 83612)

MARITIME COMMERCE/ WATER TRANSPORTATIONSpecial contract of maritime commerce:

1. Charter party2. Bill of lading3. Loan of bottomry/respondentia4. contract of transportations passengers5. Marine insurance

VESSELS (in general)extends to everything floating in and on the water, built in the form of vessel and used for navigation regardless of form, right or motive power.

MERCHANT VESSELS- engaged in the transportation of passengers and freight from one port to another or from one place to another.

*Are vessels real or personal property?PERSONAL- but they partake to a certain extent, of the nature and conditions of real property, on account of their value and importance of the world of commerce.

CHARACTERISTICS OF MARITIME TRANSACTIONS:1. Real- similar to transactions over real

property with respect to effectivity against third persons, which are done through registration. The evidence of real nature is shown by:

the limitation of the liability of the agents to the actual value of the vessel and the freight money and

the right to retain cargo, embargo and detention of the vessel even in cases where ordinary civil law would not allow more than a personal action against debtor.

2. Hypothecary- the liability of the owner of the vessel is limited to the vessel itself.

3. Preference of credits- Mortgage of a vessel properly registered becomes of preferred mortgage lien which shall have priority over all claims against the vessel in an extrajudicial foreclosure for:a. credit in favor of the public treasury;b. judicial cost of the proceedings;c. pilotage and tonnage charges and other

sea and port changes;d. salaries of depositories and keepers of the

vessel;e. captain and crew's wages;f. general averageg. salvage including contract salvage;h. maritime liens arising prior in time to the

recording of the preferred mortgage;i. damages arising out of tort; andj. Preferred mortgage registered prior in

time.

A.BILL OF LADING ( 1998 and 2005 bar Exams)A bill of lading serves two functions:

a. It is a receipt for the goods shipped;b. It is a contract by which three parties,

namely the shipper, the carrier, and the consignee undertake specific responsibilities and assume stipulated obligations.

A bill of lading delivered and accepted constitutes the contract of carriage even though not signed, because the acceptance of a paper containing the terms of a proposed contact generally constitutes an acceptance of the contract and of all of its terms and conditions of which the acceptor has actual or constructive notice (keng hua paper Products Inc. vs. CA, feb 1998)

A bill of lading is in the nature of a contract of adhesion.

DOCTRINE OF LIMITED LIABILITY (HYPOTHECARY NATURE OF MARITIME COMMERCE) ART. 587, CODE OF COMMERCE1994, 1997,1999 and 2000 bar exams

The liability of the ship owner is limited to the value of the vessel. The limited liability of the owner is confined to the vessel, equipment and freight or insurance, if any. If the shipowner has abandoned the ship, equipment and freight, his liability is extinguished.

If the vessel sinks the liability of the owner is extinguished, although he may have other properties.

If the vessel does not sink, the ownerMay exercise the right of abandonment and the liability of the shipowner is limited to the value of the vessel.

EXCEPTIONS TO LIMITED LIABILITY RULE:1. When the vessel is not abandoned by the

owner or shipagent2. When the vessel is covered by insurance3. Expenses for repair of the vessel before it

sails4. Claims of employees under the labor laws5. When shipowner/ship captain is at fault

or guilty of negligence.a. lack of proper and adequate equipment(insufficient lifevests)b. lack of proper technical training of the offices and of the vessel

Monarch Ins Co.vs. Ca; Allied guarantee insurance Co vs CA & Equitable Insurance vs. CA, June 8, 2000 As a general rule, a ship owner's liability is merely co-extensive with his interest in the vessel, except where actual fault is attributable to the shipowner. Thus, as an exception to the limited liability doctrine, a

shipowner or ship agent may be held liable for damages when the sinking of the vessel is attributable to the actual fault or negligence of the shipowner or its failure to ensure the seaworthiness of the vessel. The instant petitions cannot be spared from the application of the exception to the doctrine of limited liability in view of the unanimous findings of the courts below that both Aboitiz and the crew failed to ensure the seaworthiness of the M/V P. Aboitiz.( Aboitiz Shipping Corp vs CA, October 17,2008)

PHILIPPINE COAST GUARD (PCG) vested with exclusive authority over the registration and documentation of Philippine vessels, issuance of all certificates, licenses or documents, necessary or incident to registration.VESSELS REQUIRED TO BE REGISTERED:1. All vessels used in Philippine water;2. Vessels of 3 tons gross shall not be registered

UNLESS the owner shall so desire;3. All undocumented vessels.

Where Registration to be effected?- at its home port (when a coast guard district

or station is on the same port); if none, at the nearest COAST GUARD DISTRICT OR STATION).

OPTIONS AS TO SMALL BOATS:1.) If vessel is of domestic ownership and 15 tons

gross or less certificate of Philippine registry is optional.Purpose: declare nationality of a vessel

2.) Vessel (5 tons gross or less) & no certificate of Philippine registry certificate of ownership is optional.Privileges: right to engage in Philippine coastwise trade and protection of the authorities and the flag is also subject to the same privileges.

3.) Vessel (3 tons gross or less) not to be registered unless the owner shall so desire.

PURPOSE OF REGISTRATION:Purchaser's rights maybe maintained against a claim filed by the THIRD PERSON.

*Who shall be entitled to the freightage and who shall be obliged to pay the crew and other persons who make up the compliment of the vessel?>It depends upon the time of the sale.

If made while it is on a voyage, freightage shall pertain entirely to PURCHASER and payment of the crew and other persons who make up its compliment for same voyage shall be for his account.

If made after the vessel has arrived at the port of its destination, freightage shall pertain to the VENDOR and other individuals who make up its complement shall be for his account, UNLESS the contrary is stipulated in either case.

FORMALITIES FOR VOLUNTARY SALE ABROAD:1. Execution of the bill of sale before consul of

the Philippines at the port where it terminates its voyage;

2. Inscription in the registry of the consulate;3. Forwarding by the consul of a true copy of the

instrument of purchase and sale to the registry of vessel;

4. Statement whether the vendor receives its price in whole or in part.

FORMALITIES FOR SALE WHEN VESSEL RENDERED USELESS:1. application for examination;2. notification of the consignee/ insurer;3. proof of damage and impossibility of the

repair of the vessel;4. order for the sale of vessel at public auction.

RULES FOR THE SALE OF VESSEL AT PUBLIC AUCTION:1. articles of the vessel shall be appraised after

making an inventory2. posting of the order of the auction3. announcement4. auction shall be held on the day fixed5. Observance of special provisions, governing

the sale of the vessel while it is on the foreign country.

2 METHODS OF SALE:1. judicial2. voluntary

*EFFECT OF REGISTRATION OF VOLUNTARY SALE- if it take place while the vessel is on a voyage,

the preferred & hypothecary nature of the credit subsists against the vessel until after its return to the port of registry and 3 months after the inscription of the sale in the registry of vessels or after the return, so as to prevent the possibility of fraud upon creditors through voluntary sale.

PARTICIPANTS IN MARITIME COMMERCE:a. ship owners and ship agentsb. captains and masters of the vesselc. officers and crew of the vessel

c.1 sailing (1st mate)c.2 quartermaster (2nd mate)c.3 engineer

d. seamene. supercargoes

A. SHIP OWNERS AND SHIP AGENTSShip owner - A person who has possession or control in the management of the vessel and the consequent right to direct her navigation and receive freight earned and paid, while his possession continues.Ship agent – A person entrusted with provisioning and representing the vessel in the

port in which it may be found; also includes the ship owner

LIABILITY OF SHIP OWNER AND SHIP AGENT:1. for the acts of the captain2. contracts entered into by the captain to

repair, equip, and provision the vessel PROVIDED that the amount claimed was invested for the benefit of the vessel

3. Indemnities in favor of third person that may arise from the conduct of the captain in the care of goods and safety of passengers transported.

4. Tort or quasi-delict committed by captain EXCEPT collision with another vessel.

5. Damages in case of collision due to the fault, negligence or want of skill of captain, sailing mate or by other member of the complement.

SHIP AGENT'S AND OWNER’S LIABILITY LIMITED:- By abandoning the vessel with all her

equipment and the freight it may have earned during the voyage(by NECESSARY IMPLICATION); limited to the value of the vessel or its insurance in view of the so-called REAL AND HYPOTHECARY nature of maritime law.

- Effect: cessation of the responsibility of the owner

POWER AND FUNCTIONS AND LIABILITIES OF SHIP AGENT:1. capacity to trade;2. discharge duties of the captain in case of the

latter's absence;3. contract in the name of the owners with

respect to repairs, details of equipment, armament, and all that relate to the requirements of navigation;

4. order of new voyage and make a new charter or insure the vessel after obtaining authorization from the ship owners.

DUTY OF SHIP AGENT TO DISCHARGE THE CAPTAIN AND MEMBERS OF THE CREW:- If the seamen contract is not for a definite period or voyage, he may discharge them at his discretion- If for a definite period, he may not discharge

them until after the fulfillment of their contracts EXCEPT on the ff. grounds:a. insubordination in serious mattersb. robberyc. theftd. habitual drunkennesse. damage caused to the vessel or to its

cargo through malice, manifest or proven negligence

EFFECT/LOSS/DESTRUCTION OF VESSEL:1. extinguishes liability arising from the conduct

of the captain in the vigilance of the goods and for the safety of the passengers and for any liability arising from negligent acts of the captain

2. extinguishes liability for the wages of the captain and the crew and for advances made by the ship agent if the vessel is lost by shipwreck or capture

3. liability for collision

B. CAPTAINS AND MASTERS OF THE VESSELCaptain- who govern vessels that navigate the high seas or ships of large dimensions and importance, although engaged in the coastwise tradeMasters- who command smaller ships engaged exclusively in the coastwise trade

NATURE OF POSITION:1. General agent of the ship owner2. Technical Director of the vessel3. Representative of the Government of the

country under whose flag he navigates

QUALIFICATIONS:1. Filipino citizen2. Legal capacity to contract3. Must have passed the required physical,

mental examination required for licensing him as such

INHERENT POWERS OF THE CAPTAIN:1. appoint crew in the absence of ship agent2. command and direct crew3. impose correctional punishment on those

who while on board vessel fail to comply with his orders or are wanting in discipline

4. make contracts for the charter of vessel in the absence of ship agent

5. supply, equip, and provision the vessel6. order repair of vessel to enable it to continue

its voyage

SOURCES OF FUNDS TO COMPLY WITH THE INHERENT POWERS OF THE CAPTAIN:1. from the consignee of the vessel2. from the consignee of the cargo3. by drawing on the ship agent4. by a loan on bottomry5. by sale of part of the cargo

DUTIES OF THE CAPTAIN:1. bring on board the proper certificate and

document and a copy of the Code of Commerce

2. keep a logbook, accounting book and freight book

3. examine before the voyage4. stay on board during the loading and

unloading of the cargo5. be on deck while leaving or entering the port6. seeks protest, arrival under stress and in case

of shipwreck7. follow instruction of and render accounting to

the ship agent8. save the vessel lost in case of wreck9. hold in custody properties left by deceased by

passengers and crew members

10. comply with the requirements of customs, health, etc. at the port of arrival

LIABILITIES OF THE SHIP AGENT/SHIP OWNER FOR ACTS DONE BY THE CAPTAIN TOWARDS PASSENGERS AND CARGOES MAKING THEM SOLIDARILY LIABLE TO THE LATTER:1. damages to vessel and to cargo due to lack of

skill and negligence2. theft and robbery of the crew3. losses and fines in violation of laws4. damages due to mutinies5. damages due to misuse of power6. deviations7. arrival under stress8. damages due to non-observance of marine

regulations

NO LIABILTY FOR THE FOLLOWING:1. damages caused to the vessel by force majeure2. obligations contracted for the repair, equipment and provisioning of the vessel UNLESS he has expressly bound himself personally or has signed a bill of exchange or promissory note in his name

CARGO- which includes all goods, wares and merchandise aboard a ship which do not from part of the ship's stores.

REQUIREMENTS FOR DEFENSE OF PUBLIC ENEMY:1. act of public enemy in war was the proximate and only cause of the loss2. common carrier exercise due diligence to prevent, minimize loss before, during, and after occurrence of the act of the public enemy in war

FORMALITIES REQUIRED WHERE VESSEL HAS GONE THROUGH HURRICANE1. Captain must make a protest before

competent authority at the first port he touches

2. Such a protest must be made within 24 hours following his arrival

3. captain must ratify it within some period when he arrives at his destination

4. he must immediately proceed with the proof of the facts

FORMALITIES REQUIRED WHERE VESSEL SHIPWRECKED:1. captain must make a protest before the

nearest competent authority2. protest be made within 24 hours following

his arrival3. make sworn statement of the facts4. authority/consul abroad shall verify said

facts5. such authority shall take other steps in

carrying at the facts

6. such authority shall also make statements of what may be the result of the proceeding in the logbook and in that of the sailing mate

7. he shall deliver the original records to the captain

8. captain must ratify the protest

C. OFFICERS AND CREW

1. Sailing mate/First mate- second chief of the vessel who takes the place

of the captain in case of absence, sickness, or death and shall assume all of his duties, powers, and responsibilities

DUTIES:1. provide himself with maps, and charts

with astronomical tables necessary for the discharge of his duties

2. keep the Binnacle book3. Change the course of the voyage on

consultation with captain and the officers of the boat, following the decision of the captain in case of disagreements.

4. Responsible for all the damages caused to the vessel or to the cargo by reason of his negligence

2. Second mate- takes command of the vessel in case of the

inability or disqualification of the captain and the sailing mate, assuming in such case their powers and responsibilities and duties

DUTIES:1. preserve the hull and rigging of the vessel2. arrange well the cargo3. discipline the crew4. assign work to crew members5. Inventory the rigging and equipment of

the vessel, if laid up.

3. Engineers- Officers of the vessel but have no authority

EXCEPT in matters to motor apparatus. When 2 or more are hired, one of them should be the Chief Engineer

DUTIES:1. in charge of motor apparatus, spare parts,

and other instruments pertaining to the engines

2. keep the engines and boilers in good condition

3. not to change or repair the engine without authority of the captain

4. inform the captain of any damage to the motor apparatus

5. keep an Engine book6. supervise all personnel maintaining the

engine

4. Members of the CrewHired by the ship agent. Where he is present and in his absence, the captain hires them preferring Filipinos, and in their absence, he ,ay take in foreigners but not exceeding 1/5 of the crew.

CLASSES OF SEAMAN'S CONTRACT:1. by the voyage2. by the month3. by share of profits or freightage

JUST CAUSES FOR THE DISCHARGE OF SEAMAN WHILE CONTRACT SUBSISTS:1. perpetration of a crime2. repeated insubordination, want of discipline3. repeated incapacity and negligence4. habitual drunkenness5. physical incapacity6. desertion

CAUSES OF REVOCATION OF VOYAGE:1. war2. blockade3. prohibition to receive cargo at destination4. embargo5. inability of the vessel to navigate

RULES IN CASE OF DEATH OF A SEAMAN:The seaman's heirs are entitled to the payment as follows:1. if death is natural:

a. compensation up to time of death if engaged on voyage

b. if by voyage- half of amount if death occurs on voyage out; and full if on voyage in

c. if by shares- none if before departure; full if after departure

2. if death is due to defense of vessel- full payment

3. if captured in defense of vessel- full payment

4. if captured due to carelessness- wages up to the date of the capture

NO LIABILY UNDER THE FOLLOWING CIRCUMSTANCES:

1. If before beginning voyage, captain attempts to change it or a naval war with the power to which was destined occurs

2. If a disease breaks out and be officially declared an epidemic in the port of destination

3. If the vessel change owner or captain

COMPLEMENT OF THE VESSEL- All persons on board, from the captain to the

cabin boy, necessary for the management, maneuvers, and service, thus including the crew, the sailing mates, engineers, stalkers and other employees on board not having specific designations

- It does not include the passengers or the person whom the vessel is transported

FORMALITIES REQUIRED FOR SEAMAN'S AGREEMENT:1. reduced to writing in Accounting Book2. signed by parties3. visaed by marine authority if executed in

Philippine territory/consul or consular agents if executed abroad

4. read to the seaman concerned and such fact must be stated in the agreement

Interdiction of Commercea governmental prohibition of commercial intercourse intended to bring about an entire cessation for the time being of all trade

Embargo- a proclamation or order of the State usually

issued in time of war/ threatened hostilities prohibiting the departure ships/ goods from some or all the ports of such State until further order

Blockade- a sort of circumvallation of place by all

foreign connections and correspondence is as far as human power can affect it to be cut-off

SUPERCARGOES- person who discharge administrative duties

assigned to him by ship agent or shippers, keeping an account and record of transaction as required in the accounting book of the captain

B.CHARTER PARTY- Contract by virtue of which the owner or

agent binds himself to transport merchandise or persons of a fixed price. It may either be contract of affreightment (time and Voyage Charter) and bareboat or demise charter.

CLASSES OF CHARTER PARTY

1. As to extent of vessel hireda. total- whole of the vessel is charteredb. partial- only part of the vessel is chartered

2. As to timea. until a fixed day/ for a determined

number of days and monthsb. for a voyage(outgoing/return/roundtrip)

3. As to freightagea. for a fixed amount for the whole cargob. for a fixed amount per tonc. for an amount per month

a. Contract of Affreightment- the owner of the vessel leases a part or all of the space of the vessel to carry goods but retains the possession , command and navigation of the vessel. The charter merely have the

use of the space in the vessel in return for the payment of the charter hire.

b. Bareboat/ Demise Charter—involves the transfer of full possession and contol of the vessel to the charterer. The entire control and management of the vessel is given up to the charterer. The charterer mans the vessel with his own people. (2003 Bar exams)

The owner of the vessel has no more insurable interest on the vessel. In case of loss of the vessel, the shipowner can recover the value of the vessel from the charterer.(Caltex vs. sulpicio line, 1999)

FORMAILITIES REQUIRED FOR A CHARTER PARTY:1. in writing2. drawn in duplicate3. signed by the parties4. contain stipulation not all requisites are essential for the validity

of charter party

Primage- belongs to owner/ freighters;- increase of the freight rate- considered gratuity to master if is stipulated- a bonus to be paid to a captain after a

successful voyageDemurrage- sum which is fixed by the contract of carriage,

or which is allowed, as remuneration to the owner of a ship for the detention of his vessel beyond the number of days allowed by the charter party for loading/unloading/sailing.

"Lay days"-days allowed to charter parties for loading and unlading- period when vessel will be delayed in port for

loading and unloading."Extra Lay Days"- days which followed after lay days have

elapsedDeadfreight – A cargo not loaded is considered as deadfreight, which covers the amount paid by or recoverable from the charterer for the portion of the ship’s capacity the latter contracted for but failed to occupy.

GOODS TRANSFERRED MAY BE:1. sold by captain to necessary repairs2. jettisoned for the common safety3. loss by reason of shipwreck/stranding4. seized by pirates/enemies5. suffer deterioration/diminutions6. increase by natural cause and weight or size

RIGHTS AND OBLIGATIONS OF CHARTER PARTY:A. Of the ship owner or ship agent

1. If the vessel is chartered wholly not to accept cargo from others;

2. To observe represented capacity;3. To unload cargo clandestinely placed;4. To substitute another vessel if load is less

than 3/5 of capacity;5. To leave the port if the charter does not

bring the cargo within the lay days and extra lay days allowed;

6. To place in a vessel in a good condition to navigate;

7. To bring cargo to nearest neutral port in case of war or blockade.

B. Of the charterer1. to pay the agreed charter price2. to pay freightage or unboarded cargoes3. to pay losses to others for loading

uncontracted cargo and illicit cargo4. to wait if the vessel needs repair5. to pay expenses for deviation

RESCISSION OF CHARTER PARTYA. At charterer's request

1. by abandoning the charter and paying half of the freightage

2. error in tonnage or flag3. failure to place the vessel at the

charterer's disposal4. return of the vessel due to pirates,

enemies or bad weather5. arrival at the port for repairs

B. At ship owner’s request1. If the extra lay days terminate without

cargo being placed alongside the vessel2. Sale by the owner of the vessel before

loadingC. Fortuitous causes

1. war2. blockade3. prohibition to receive cargo4. embargo5. inability of the vessel to navigate

D. LOANS ON BOTTOMRY/ RESPONDENTIA (1961,1967,& 1980 bar exams)

These loans are secured by the owner or captain of the vessel for the use of the vessel. In the case of loans on bottomry, the security of the loan is the vessel itself; while loan on respondentia, the security of the loan is the cargo.The loan is in the nature of insurance. The loan will only be paid on the safe arrival of the vessel or cargo fails to reach the port of destination, the creditor loses his right to recover the amount of the loan.

COMMON ELEMENTS OF LOANS ON BOTTOMRY AND RESPONDENTIA1. exposure of security or marine peril2. obligation of the debtor conditioned only

upon safe arrival of security at the point of destination

HYPOTHECARY NATURE OF BOTTOMRY AND RESPONDENTIA:General Rule: the obligation of the borrower to pay is extinguished if the goods given as security

are absolutely lost by reason of an accident of the voyage designated, and if it is proven that the goods were on board.EXCEPTIONS:1. loss due to inherent defect2. loss due to the barratry on the part of the

captain3. loss due to the fault or malice of the borrower4. that the vessel is engaged in contraband5. that the cargo loaded on the vessel be

different from that agreed upon

Bottomry/repondentia Simple loanMarine risk

Duly established existence of a marine risk is necessary

Not necessary

Form and mannerMust be executed in accordance with the form and manner prescribed by the code of commerce

Formal requisites of an ordinary contract will suffice

Registry of VesselsMust be recorded in the registry of Vessel to be binding to third persons

No such registration is required

PreferencePreference is extended to the last lender

Preference is extended to the first lender

When loan on bottomry or respondentia regarded as Simple Loan

1. lender loaned an amount larger than the value of the object due to fraudulent means employed by the borrower(art 726 code of commerce)2. Full amount of the loan is not used for the cargo or given on the goods if all of them could not have been loaded, the balance will be considered a simple loan( art 727 Code of Commerce)3.If the effects on which the money is taken is not subjected to any risk(729 Code of commerceNote: under existing laws, the parties to a loan, whether ordinary or maritime, may agree on any rate of interest (Cb circular 905); provided the same is not contrary to law, morals, good customs, public order or public policy.Art 1306 NCCACCIDENTS IN MARITIME COMMERCE(2000 bar exams)1.averages2. Arrival Under stress3. collision4.shipwreck

AverageAn extraordinary or accidental expense incurred during the voyage in order to preserve the cargo, vessel or both, and all damages or deterioration suffered by the vessel from departure to the port

of loading to the consignment (art 806 Code of commerce)

The person whose property has been saved must contribute to reimburse the damage caused or expense incurred if the situation constitutes general average.It is classified into: (1) general or gross average or (2) simple or particular.

Particular/ simple Gross/ generaldefinition

Damages or expenses caused to the vessel or cargo that did not inure to the common benefit, and borne by respective owner.( art 809)

Damages or expenses deliberately caused in order to save the vessel, its cargo orboth from real and known risk.(811)

LiabilityThe owner of the goods which gave rise to the expense or suffered the damage shall bear this average.(810)

All persons having an interest in the vessel and the cargo therein at the time of the average shall contribute to satisfy this average(812)The insurers and lenders on bottomry and respondentia shall likewise contribute

Numbers of interests involvedOnly one interest involved

Several interests is involved

Share in the damage/expense100% share In proportion to

the value of the owner’s property saved

Right to recoverNo reimbursement There may be

reimbursementRequisites of Gross or General average 1. Common danger

that both the ship and the cargo, after has been loaded, are subject to the voyage, or in the port of loading or unloading

that the danger arises from the accidents of the sea, dispositions of the authority or faults of men, provided that the circumstances producing the peril should be ascertained and imminent or may rationally be said to be certain and imminent.

2.Deliberate SacrificeGen. rule: sacrifice is made through the

jettison of the cargo or part of the shipis thrown overboard DURING THE VOYAGE.Exceptions:

a. where the sinking of a vessel is necessary to extinguish a fire in a port, roadsteads, creek or bay

b. where cargo is transferred to lighten the ship on account of a storm to facilitate entry into a port.

3.SucessPupose:to be able to demand general contribution4.Proper formalities and legal stepsa. procedure for recoveryb. assembly and deliberationc. resolution of the captiond. entry of the resolution in the logbooke. detailed minutesf. delivery of the minutes to the maritimejudicial authority of the first port, within 24hours from arrival

Ratification by the captain under oath.

Goods Not Covered By General Average Even if sacrified:Goods carried on deck1.goods not recorded in the books or records of vessel2.fuel for the vessel if there is more than sufficient fuel for the voyage.

JETTISONAct of throwing cargo overboard in order to lighten the vesselORDER OF GOODS TO BE CAST OVERBOARD IN CASE OF JETTISON:1. those which are on the deck, preferring the

heaviest one with the least utility of value2. those which are below the upper deck

beginning with the one with greatest weight and smallest value jettisoned goods are not res nullius nor deemed abandoned within the meaning of civil law so as to be the object of occupation by salvage.

Arrival Under stress- arrival of a vessel at a port of destination on

account of lack of provision, well-founded fear of seizure, pirates, or accidents in sea disabling navigation

When lawful When unlawful

Who bears expenses

The inability to continue voyage is due to lack of provisions, well founded fear of seizure, privateers,pirates or accidents of the sea disabling it to navigate

1. lack of provisions due to negligence to carry according to usage and customs; 2.risk of enemies not well-known or manifest;3.defect due to improper repair;4.malice, negligence, lack of

The shipowner or ship agent is liable in case of unlawful arrival under stress. But they shall not be liable for damges cauded by a reason of a lawful arrival.

foresight, lack of skill

Cases of collision :1. due to the fault, negligence or lack of skill of the captain, sailing mate or the complement of the vessel--under 826, the shipowner shall be liable for the losses and damages2. due to the fault of both vessels --> under 827, each vessel shall suffer its own losses, but as regards the owners of the cargoes, both vessels shall be jointly and severally liable3. where it cannot be determined which of the 2 vessels is at fault --> under 828, each vessel shall suffer its own losses, and both shall also be solidarily responsible for the losses and damages caused to their cargoes4. collision due to fortuitous event or force majeure --> under 830, each vessel shall bear its own damages5. where two vessels collide with each other without their fault but by reason of the fault of a third vessel --> under 831, the owner of the third vessel causing the collision shall be liable for the losses and damages 6. a vessel which is properly anchored and moored may collide with those nearby by reason of a storm or other cause of force majeure --> under 832, the vessel run into shall suffer its own damages and expenses

Nautical Rules to determine negligence :1. When 2 vessels are about to enter a

port, the farther one must allow the nearer to enter first; if they collide, the fault is presumed to be imputable to the one who arrived later, unless it can be proved that there was no fault on its part.

2. When 2 vessels meet, the smaller should give the right of way to the larger one.

3. A vessel leaving port should leave the way clear for another which may be entering the same port.

4. The vessel which leaves later is presumed to have collided against one who has left earlier.

5. There is also a presumption against the vessel which sets sail at night.

6. The presumption also works against the vessel with spread sails which collides with another which is at anchor, and cannot move, even when the crew of the latter has received word to lift anchor, when there was not sufficient time to do so or there was fear of a greater damage or other legitimate reason.

7. The vessel which is not properly moored or does not observe the proper distances, has the presumption against itself.

8. The vessel which is moored at a place not used for the purpose, or which is improperly moored or does not have sufficient cables, or which has been left without watch, has also against itself the presumption.

9. The same rule applies to those vessels which do not have buoys to indicate the location of its anchors to prevent damage to these vessels which may approach it.

Zones in time of collisions (3 time zones):

1. all the time up to the moment when the risk of collision may have said to have begun

--> within this zone, no rule is applicable because none is necessary. Each vessel is free to direct its course as it deems best with reference to the movements of the other vessel.

2. the time between the moment when the risk of collission begins and the moment when it has become a practical necessity.

3. the time between the moment when collission has become a practical certainty and the moment of actual contact

Effect of fault of privileged vessel during third zone :

If a vessel having a right of way suddenly changes its course during the third zone, in an effort to avoid an imminent collision due to the fault of another vessel, such act may be said to be done in extremis, and even if wrong, cannot create responsibility on the part of said vessel with the right of way. Thus, it has been held that fault on the part of the sailing vessel at the moment preceding a collission, that is, during the third division of time, does not absolve the steamship which has suffered herself and a sailing vessel to get into such dangerous proximity as to cause inevitable harm and confusion, and a collision results as a consequence. The steamer having a far greater fault in allowing such proximity to be brought about is chargeable with all the damages resulting from the collission; and the act of the sailing vessel having been done in extremis and even wrong, is not responsible for the result.

CASES COVERED BY COLLISION AND ALLISION:1. one vessel at fault- such vessel is liable for

damage caused to innocent vessel as well as damages suffered by owners of cargo of both vessels

2. both vessels at fault- each vessel must bear its own loss but the shippers of both vessel may go against the ship owner who will be solidarily liable

3. vessel at fault not known- same as rule 24. third vessel at fault- same rule 15. fortuitous event- no liability, each bear its

own loss

Rules governing LIABILITIES of parties in case of COLLISION : (1995, 1997,1998, &2007 bar exams)1. Where collision is due to the negligence or malice of the captain and/or other ship officers of one vessel, the ship owner of such vessel shall be liable for all resulting damages.

2. Where collision is due to the fault of both vessels, each vessel shall suffer their respective losses but as regards to the owners of the cargoes, both vessels shall be jointly and severally liable.3. If it cannot be determined which vessel is at fault, each vessel shall suffer its own loses and both shall be solidarily liable for loses or damages on the cargo. (DOCTRINE OF INSCRUTABLE FAULT)4. The vessels may collide with each other through fortuitous event or force majeure. In which case, each shall bear its own damage.5. Two vessels may collide without their fault but by reason of a third vessel. The third vessel shall be liable for losses and damages sustained.Requisite for RECOVERY arising from collision:1. Protest must be made within 24 hours before:

a) Competent authority at the point of collision or

b) At the first port of arrival, if in the Philippines and to the Philippine Consul, if the collision took place abroad.

Injuries to persons and damage to cargo of owners not on board on time of collision need not be protested.Article 835, Code of Commerce: In case of collision, there must be a marine protest to recover collision damage; in such a case, the marine protest is a condition sine qua non and not merely a disclaimer unlike in the case of arrival under stress and shipwreck.

CARRIAGE OF GOODS BY SEA ACTApplicable to all transportation of goods by sea in foreign trade to and from Philippine ports AND does not apply to purely domestic transport.

Laws applicable to a contract for the carriage of goods by sea:

1. Distinguish - common carrier (Civil Code) - private carrier2. Where is the vessel going? a. Common carrier coming to the Phils. 1st: Civil Code 2nd: COGSA (it's more specific than Code of Commerce) - in foreign trade 3rd: Code of Commerce

b. Private carrier coming to the Phils. in foreign trade 1st: COGSA (because it's more specific) 2nd: Code of Commerce 3rd: Civil Code (provisions not on common carriers e.g. torts, contracts)

c. From the Phils. to a foreign country: apply laws of such foreign country (Art. 1753)

- with respect to vessels destined for foreign ports, the COGSA doesn't apply unless parties make it applicable.

Q: In what situations does COGSA primarily apply?A: Where the parties expressly stipulate that COGSA shall govern their respective rights and obligations.

Q: Can the COGSA apply in domestic shipping?A: Generally, NO.

EXCEPTION: when parties agree to make it apply.

Q: What application does COGSA have in carriage of passengers?A: None. Applies only to carriage of goods.

What is the “TACKLE TO TACKLE” RULE? The shipper shall be responsible for the goods the moment it passes through one side of the ship for the purpose of loading until it passes through the other side for discharging. The reason for this being that there are two tackles involved in this operation; one for loading, the other, unloading.The shipper is responsible for: Loading, Handling, Transport,Carriage, Custody, Discharge

What is the Rule for LOSS or DAMAGE to the goods? (1992, 1995, 20000 & 2005 bar exams)

If the damage is apparent, then notice must be immediately given. The notice may either be in writing or orally. If the damage is not apparent, notice must be given within three days from such delivery.

Failure to give notice is not a bar to the action to file provided the filing of the suit is made within one year from delivery to consignee.

Notice requirements: COGSA: Sec. 3(6)

If loss or damage is apparent - protest as soon as receipt of goodsIf not apparent -> within 3 days of delivery

Rationale behind the 3-day notice and relatively short prescriptive period:

- to provide carrier an opportunity to look for the lost goods

- to discover who was at fault-in case of transshipment, to determine,

when and where damage occurred.

Code of Commerce: Art. 366apparent - protest at time of receiptnon-apparent - within 24 hours after receipt

WARSAW: Art. 26in case of damage of:baggage - within 3 days from receiptgoods - within 7 days

in case of delay: within 14 days from receipt

Prescriptive period the carrier and the agent shall be

discharged form liability in respect of loss or damage unless suit is brought within 1 year from:

(1) in case of damaged goods: from the time delivery of the goods was made(2) in case of non-delivery (i.e., lost goods): from the date the goods should have been delivered

Loss or damage as applied to the COGSA contemplates a situation where no delivery at all times was made by the shipper of the goods because the same had perished, gone out of commerce, or disappeared in such a way that their existence is unknown or they cannot be recovered. It does not include a situation where there was indeed a delivery but to the wrong person or a misdelivery (Ang vs. American steamship Agencies 19 scra123) and damage arising from delay or late delivery( Mitsui O.S.K line ltd vs CA 287 scra 366) in such instance the civil code rules on prescription shall apply.

Hence, in case of misdelivery (delivery to wrong person) or conversion of the goods, the rules on prescription found in the Civil Code shall apply (10 years for contracts; 4 years for tortuous obligations)

The one year period is suspended by:a.the express agreement of the parties(Universal Shipping Lines Inc vs. IAC 1990)b.the filing of an action in court until it is dismissed

the 1yr period shall run from delivery of the last package and is not suspended by extrajudicial demand.

the one year period shall run from delivery to the arrasstre operator and not to the consignee

SALVAGE LAW (ACT 2616)

I. FOUR REQUISITES FOR SALVAGE REWARD TO BE WARRANTED:

A. There must be a valid object of salvage, i.e., vessel, cargo, freight or wreck of vessel or cargo;

B. Such object must have been exposed to marine peril;

C. Salvage services must be rendered voluntarily, i.e., not arising from pre-existing duty;

D. Salvage effort must be successful.

II. SHIPWRECK AND DERELICT:A. Shipwreck. A shipwreck refers to the

injuries suffered by the vessel disabling the latter for navigation.

B. Derelict. It refers to the vessel or cargo abandoned at sea by those entrusted by such vessel or cargo. A derelict is a vessel or cargo badly

damaged and abandoned by the crew to the mercy of the sea. Mere abandonment of such vessel or cargo does not make it res nullius so that anybody can claim it. The proper procedure must be followed.

III. PROCEDURE:A. If the vessel is abandoned, salvor

must tow it to the nearest port where it will be delivered to the Municipal Treasurer or to the Collector of Customs who will advertise the fact of salvage;

B. If owner of salvaged vessel appears, he may take possession of the vessel and must pay a reward, the amount of which is not more than 50% of the value of the vessel;

C. If no claim for the vessel is made within 3 months after the publication of the advertisement, the Municipal Treasurer will sell the property saved at a public auction and the reward and expenses shall be deducted from the proceeds. The balance is deposited with the Treasury;

D. If no one claims the same after 3 years, ½ shall go to the salvors and the other half to the government.

IV. CONSIDERATIONS IN DETERMINING THE AMOUNT OF REWARD1.) First case

A. Value of the property saved;B. Zeal employed by those who made the

salvage;C. Danger to the lives of those who

participated;D. Number of persons who took part;E. Services rendered;F. Expenses incurred

2.) Second case: If one vessel saves another vessel, the reward going to the former shall be divided as follows:A. ½ to the ship owner;B. ¼ to the captain; andC. ¼ to the crew.

WARSAW CONVENTION

Convention for the Unification of Certain Rules Relating to International Transportation by Air

The Warsaw Convention: mandates carriers to issue

passenger tickets; requires carriers to issue baggage

checks for checked luggage; creates a limitation period of 2

years within which a claim must be brought (Article 29); and

limits a carrier's liability to at most: 250,000 Francs or 16,600

Special Drawing Rights (SDR) for personal injury;

17 SDR per kilogram for checked luggage and cargo, or $20USD per kilogram for non-signatories of the amended Montreal Protocols.

5,000 Francs or 332 SDR for the hand luggage of a traveller.

I. NATURE AND SCOPE OF WARSAW CONVENTION

SCOPE: Applies to all international carriage of persons, luggage or goods performed by aircraft for reward. It applies equally to gratuitous carriage by aircraft performed by an air transport undertaking.

International Carriage: Means any carriage in which, according to the contract made by the parties, the place of departure and the place of destination, whether or not there be a break in the carriage or a transhipment, are situated either within the territories of two High Contracting Parties, or within the territory of a single High Contracting Party, if there is an agreed stopping place within a territory subject to the sovereignty, suzerainty, mandate or authority of another Power, even though that Power is not a party to this Convention.

The Warsaw Convention to which the Republic of the Philippines is a party and which has the force and effect of law in this country applies to all international transportation of persons, baggage or goods performed by an aircraft gratuitously or for hire.

When a contract of carriage is a contract of international transportation, provisions of the Convention automatically apply and exclusively govern the rights and liabilities of the airline and its passengers. (American Airlines vs. CA, G.R. No. 116044-45 March 9, 2000)

Two categories of International Transportation covered:

1.) that where the place of departure and the place of destination are situated within the territories of two High Contracting Parties regardless of whether or not there be a break in the transportation or a transshipment; and

2.) that where the place of departure and the place of destination are within the territory of a single High Contracting Party if there is

an agreed stopping place within a territory subject to the sovereignty, mandate, or authority of another power, even though the power is not a party of the Convention. (Mapa vs. CA, G.R. No. 122308 July 8, 1997)

(Lhuillier vs. British Airways, G.R. No. 171092 March 15, 2010)

When the airline tickets evidencing the contract of transportation between Mapa and TWA, which were purchased in Bangkok, show the place of departure and the place of destination to be within the United States, the contract cannot come within the purview of the first category of “International Transportation.”

The linkage of the contract to the Manila-Los Angeles travel tickets obtained by the Mapas from PAL cannot bring the arrangements within the second category, where the same were filled-up only by the Mapas in response to the query “Your Complete Intinerary” at the time they claimed for their lost pieces of baggage. (Mapa vs. CA, G.R. No. 122308 July 8, 1997)

It does not however preclude operation of the Civil Code or other pertinent laws:

Although the Warsaw Convention has the force and effect of law in this country, being a treaty commitment assumed by the Philippine government, said convention does not operate as an exclusive enumeration of the instances for declaring a carrier liable for breach of contract of carriage or as an absolute limit of the extent of that liability. The Warsaw Convention declares the carrier liable in the enumerated cases and under certain limitations. However, it must not be construed to preclude the operation of the Civil Code and pertinent laws. (PAL vs. CA, G.R. No. 119641 May 17, 1996)

II. SALIENT ASPECTS OF THE WARSAW CONVENTION

A. Provision on the valuation of cargo

Article 22. (1) In the transportation of passengers, the liability of the carrier for each passenger shall be limited to the sum of 125,000 francs. Where in accordance with the law of the court to which the case is submitted, damages may be awarded in the form of periodical payments, the equivalent capital value of the said payments shall not exceed 125,000 francs. Nevertheless, by special contract, the carrier and the passenger may agree to a higher limit of liability.

Art 25 (1) The carrier shall not be entitled to avail himself of the provisions of this Convention which exclude or limit his liability, if the damage is caused by his willful misconduct or by such default on his part as, in accordance with the law of the court to which the case is submitted, is considered equivalent to willful misconduct.

Admittedly, in a contract of air carriage a declaration by the passenger of a higher value is needed to recover a greater amount, and that the air carrier is not liable for loss of baggage in an amount in excess of the limits specified in the tariff which was filed with the proper authorities, such tariff being binding on the passenger regardless of his lack of knowledge thereof or assent thereto. Nevertheless, there can be no blind reliance on adhesion of contracts where:

1.) the facts and circumstances justify that they should be disregarded; and

2.) when the benefits of limited liability have been waived when the air carrier failed to raise timely objections during the trial when questions and answers regarding the actual claims and damages sustained by the passenger were asked. (British Airways vs. CA, G.R. No. 121824 January 29, 1998)

B. Provision on limiting liability

The Convention's provisions do not "regulate or exclude the following areas:

1.) liability for other breaches of contract by the carrier;

2.) misconduct of its officers and employees; or

3.) for some particular or exceptional type of damage. (Northwest Airlines vs. CA, G.R. No. 120334 January 20, 1998)

Varying views as regards misconduct:

1st View – Outside WC CoverageThe Warsaw Convention denies to the

carrier availment of the provisions which exclude or limit his liability, if the damage is caused by his wilful misconduct or by such default on his part as, in accordance with the law of the court seized of the case, is considered to be equivalent to wilful misconduct, or if the damage is similarly caused by any agent of the carrier acting within the scope of his employment.

Under domestic law and jurisprudence (the Philippines being the country of destination), the attendance of gross negligence (given the equivalent of fraud or bad faith) holds the common carrier liable for all damages which can be reasonably

attributed, although unforeseen, to the non-performance of the obligation, including moral and exemplary damages. (Sabena Beligian World Airways vs. CA, G.R. No. 104685 March 14, 1996)

2nd View - Tortious conduct as ground for the petitioner’s complaint is within the purview of the Warsaw Convention (Lhuillier vs. British Airways, G.R. No. 171092 March 15, 2010)

C. On limitation of time to file actionArticle 29. (1) The right to damages shall be extinguished if an action is not brought within two years, reckoned from the date of arrival at the destination, or from the date on which the aircraft ought to have arrived, or from the date on which the carriage stopped.

(2) The method of calculating the period of limitation shall be determined by the law of the court to which the case is submitted.

The two (2)-year limitation incorporated in Art. 29 as an absolute bar to suit and not to be made subject to the various tolling provisions of the laws of the forum. This therefore forecloses the application of our own rules on interruption of prescriptive periods. Article 29, par. (2), was intended only to let local laws determine whether an action had been commenced within the two (2)-year period. (United Airlines vs. Uy, G.R. No. 127768 November 19, 1999)

Prescription of action covered by Warsaw convention distinguished from those arising from torts:

Respondent's complaint reveals that he is suing on two (2) causes of action: (a) the shabby and humiliating treatment he received from petitioner's employees at the San Francisco Airport which caused him extreme embarrassment and social humiliation; and, (b) the slashing of his luggage and the loss of his personal effects amounting to US $5,310.00.

While his second cause of action — an action for damages arising from theft or damage to property or goods — is well within the bounds of the Warsaw Convention, his first cause of action — an action for damages arising from the misconduct of the airline employees and the violation of respondent's rights as passenger — clearly is not.

Consequently, insofar as the first cause of action is concerned, respondent's failure to file his complaint within the two (2)-year limitation of the Warsaw Convention does not bar his action since petitioner airline may still be held liable for breach of other

provisions of the Civil Code which prescribe a different period or procedure for instituting the action, specifically, Art. 1146 thereof which prescribes four (4) years for filing an action based on torts. (United Airlines vs. Uy, G.R. No. 127768 November 19, 1999)

Use of delaying tactics by the carrier won’t preclude enforcement of action even beyond the prescriptive period:

Despite the express mandate of Art. 29 of the Warsaw Convention that an action for damages should be filed within two (2) years from the arrival at the place of destination, such rule shall not be applied in the instant case because of the delaying tactics employed by petitioner airline itself. (United Airlines vs. Uy, supra)

IV. Jurisdiction of Local Courts under the Warsaw Convention

Art. 1 (2) For the purposes of this Convention the expression "international carriage" means any carriage in which, according to the contract made by the parties, the place of departure and the place of destination, whether or not there be a break in the carriage or a transhipment, are situated either within the territories of two High Contracting Parties, or within the territory of a single High Contracting Party, if there is an agreed stopping place within a territory subject to the sovereignty, suzerainty, mandate or authority of another Power, even though that Power is not a party to this Convention. A carriage without such an agreed stopping place between territories subject to the sovereignty, suzerainty, mandate or authority of the same High Contracting Party is not deemed to be international for the purposes of this Convention. (Emphasis supplied)

Art. 17. The carrier shall be liable for damage sustained in the event of the death or wounding of a passenger or any other bodily injury suffered by a passenger, if the accident which caused the damage so sustained took place on board the aircraft or in the course of any of the operations of embarking or disembarking.

Art 28 (1) An action for damages must be brought at the option of the plaintiff, in the territory of one of the High Contracting Parties, either before the court of the domicile of the carrier or of his principal place of business or where he has a place of business through which the contract has been made, or before the court at the place of destination.

“Destination” vs. “Agreed Stopping Place”Article 1(2) also draws a distinction

between a "destination" and an "agreed stopping place." It is the "destination" and not an "agreed

stopping place" that controls for purposes of ascertaining jurisdiction under the Convention.

The contract is a single undivided operation, beginning with the place of departure and ending with the ultimate destination. The use of the singular in the expression indicates the understanding of the parties to the Convention that every contract of carriage has one place of departure and one place of destination. An intermediate place where the carriage may be broken is not regarded as a "place of destination." (Lhuillier vs. British Airways, G.R. No. 171092 March 15, 2010)

Jurisdictional Character of Art. 28

We further held that Article 28(1) of the Warsaw Convention is jurisdictional in character. Thus:

A number of reasons tends to support the characterization of Article 28(1) as a jurisdiction and not a venue provision. First, the wording of Article 32, which indicates the places where the action for damages "must" be brought, underscores the mandatory nature of Article 28(1). Second, this characterization is consistent with one of the objectives of the Convention, which is to "regulate in a uniform manner the conditions of international transportation by air." Third, the Convention does not contain any provision prescribing rules of jurisdiction other than Article 28(1), which means that the phrase "rules as to jurisdiction" used in Article 32 must refer only to Article 28(1). In fact, the last sentence of Article 32 specifically deals with the exclusive enumeration in Article 28(1) as "jurisdictions," which, as such, cannot be left to the will of the parties regardless of the time when the damage occurred.

x x x x

In other words, where the matter is governed by the Warsaw Convention, jurisdiction takes on a dual concept. Jurisdiction in the international sense must be established in accordance with Article 28(1) of the Warsaw Convention, following which the jurisdiction of a particular court must be established pursuant to the applicable domestic law. Only after the question of which court has jurisdiction is determined will the issue of venue be taken up. This second question shall be governed by the law of the court to which the case is submitted. (Lhuillier vs. British Airways, Supra.)

PUBLIC SERVICE LAW

What is a public utility? (2000 bar exams)A public utility is a business or service engaged in regularly supplying the public with some commodity or service of public consequence such as electricity, gas, water, transportation, telephone or telegraph service. Apart from statutes which define the public utilities that are within the purview of such statutes, it would be

difficult to construct a definition of a public utility which would fit every conceivable case. As its name indicates, however, the term public utility implies a public use and service to the public. (Am. Jur. 2d V. 64, p.549.) (Albano vs Reyes)

ORDINARY AND PRIMARY PURPOSE OF THE PUBLIC SERVICE LAW

ORDINARY PURPOSE: To subject public services to state control

and regulation. SPECIFIC PURPOSES:

1. To secure adequate, sustained service for the public at the least possible cost, and protect the public against unreasonable charges and poor inefficient service.

2. To protect and conserve investments which have already been made for public service, and prevent ruinous competition.

BASIS OF THE LEGISLATIVE POWER TO REGULATE PUBLIC SERVICES:

POLICE POWER, for the protection of the public as well as the utilities themselves. (Pantranco v. P.S.C., 70 Phil 221)

CONSTITUTIONAL BASIS:CONSTITUTIONAL BASIS:1. ARTICLE XII, SECTION 11:> A franchise, certificate, or any other form of authorization for the operation of public utility shall be granted to:

- Filipino Citizens- Corporations or

associations organized under Philippine Laws where at least 60% of the capital is owned by Filipino Citizens.

- 100% Filipino Management

> Mass media and commercial telecommunications shall be:

- 100% Filipino Capital, and- 100% Filipino

management2. ARTICLE XII, SEC 17:

In times of national emergency, when the public interest so requires, the State may during the emergency and under reasonable terms, temporarily take over or direct the operation of any private owned public utility or business affected with public interests.

3. ARTICLE XII, SECTION 18The state may, in the interest of national welfare or defense, establish and operate vital industries and upon payment of just compensation, transfer to public ownership utilities and other private

enterprises to be operated by the government.

4. ARTICLE XII, SECTION 19The state shall regulate or prohibit monopolies when the public interest so requires; no combination in restraint of trade or unfair competition shall be allowed

Distinguish a Certificate of Public Convenience from a Certificate of Public Convenience and Necesssity

A cpc is issued whenever the Commission finds that the operation of the proposed public service will promote the public interests in a proper and suitable manner, for which a municipal or legislative franchise is not necessary. On the other hand, cpcn is issued upon approval of any political subdivision of the Philippines when in the judgement of the Commission, such franchise or privilege will properly conserve the public interest (Perez, Transportation Laws and Public service Act).

OFFICES NOW CHARGED WITH ENFORCEMENT OF PUBLIC SERVICE LAWThe Public Service Commission has been abolished. The following replaced it:

1. LAND TRANSPORTATION - Department of Transportation and Communication (DOTC) and the Land Transportation Franchising and Regulatory Board (LTFRB)

2. WATER TRANSPORTATION - Maritime Industry Authority (MARINA)

3. AIR TRANSPORTATION - Air Transportation Office (ATO) headed by an assistant secretary and the Civil Aeronautics Board, which has been placed under the DOTC as an attached agency.

4. TELECOMMUNICATIONS - National Telecommunications Commission, which has been placed under the DOTC as an attached agency.

5. ENERGY - Board of Energy but transferred to the Energy Regulatory Board (ERB)

6. WATERWORKS - National Water Resources Council

LIMITATIONS ON THE POWERS OF THE REGULATORY BOARDS, COMMISSIONS AND COUNCILS:1. General:

Powers are limited from those granted in the legislation creating the body.2. Constitutional:

Regulations imposed must not have the effect of depriving an owner of his property without due process of law nor confiscating or appropriating private property without just compensation.3. Judicial:

Boards, commissions are not judicial tribunals and therefore cannot determine judicial questions such as validity of contract.4. Jurisdiction:

Extends only to persons engaged in public utilities, or over a public utility, which holds a Certificate of Public Convenience.

B. JURISDICTION

General Rule: Over persons engaged in public utilities, or over a public utility, which holds a Certificate of Public Convenience.

Exemption: violators of a valid regulation promulgated under the law

Distinguish Legislative Franchise from a CPC● A franchise is a grant or privilege from

the sovereign power, while the certificate is a form of regulation through an administrative agency.

● a franchise is a property right and cannot be revoked or forfeited without due process of law (PLDT, Co. v. NTC and CELLCOM, Inc. (Express Telecommunications Co.,Inc. G.R. No. 88404, 18 October 1990), whereas a CPC or a CPCN as far as the interest of the State is concerned , constitutes neither a franchise nor a contract, confers no property right, and is a mere license or a privilege. The holder of said certificate does not acquire a property right in the route covered thereby. Nor does it confer upon the holder any proprietary right or interests or franchise in the public highways. Revocation of this certificate deprives him of no vested right. New and additional burdens alteration of the certificate, or even revocation or annulment thereof is reserved to the State (Lugue v. Villegas, G.R. No. L-22545, 28 November 1969).

Essentials before Granting a CPC/ CPCN1. The granter must be a citizen of the

Philippines or entity sixty percent of which is owned by such citizens.

2. The grantee must have sufficient financial capability to undertake the service and,

3. The service will promote public interests and convenience in a proper and suitable manner.

Note: The overriding principle is a public interest, necessity and convenience (Sundiang &Aquino, Reviewer on Commercial Law).Coverage of CPC● a ferry boat service is considered as a continuation of the highway when crossing rivers or lakes , which are small bodies of water; hence a land transportation company is no longer required to secure a separate CPC in order to operate a ferry boat for the use of its buses.

Grounds for Revocation of Certificate

1. The holder violates or contumaciously refuses to comply with any order, rule or regulation of the commission (Sec.16(n)of Public Service Act)

2. The holder is a mere dummy3. The operator ceased operation and placed

his buses on storage; or4. The operator abandons totally the service

(Manzanal v. Ausejo, No. L-31056, August 4, 1988).

Unlawful Acts of Public Utility Companies1. Engagement in public service business

without first securing the proper certificate

2. Providing or maintaining unsafe, improper or inadequate service as determined by the proper authority

3. Committing any act of unreasonable and unjust preferential treatment to any particular person, corporation or entity as determined by the proper authority

4. Refusing or neglecting to carry public mail upon request (Secs.18 &19).

Prior Old Operator RuleBefore permitting a new operator to

invade the territory of another already established with a cpc, the prior operator must first be given the opportunity to extend its service in order to meet public needs in the matter of transportation. It means that a public utility operator should be shielded from ruinous competition by affording him the opportunity to improve his equipment and service before allowing a new operator to serve in the same territory he covers(Mandaluyong Bus Co. v. Francisco).The law contemplates that the first licensee will be protected in his investment and will not be subjected to a ruinous competition. It is not therefore the policy of the law to issue a CPC to a second operator to cover the same field and in competition with a first operator who is rendering sufficient, adequate and satisfactory service, and who in all things and respects is complying with the rules and regulations of the commission. The old operator must be given the opportunity to improve and extend his lines. (Batangas Trans Co. v Orlanes, 52 Phil 455)

BASIS OF THE PRIOR OPERATOR RULEPrevent ruinous and wasteful competition

and interest of public will be preserved.

EXCEPTIONS TO THE PRIOR OPERATOR RULE:

1. Operator fails/ neglects to make improvement or effect the increase in service when given the opportunity.

2. When Prior operator offers to meet increases in demand only when another operator offered to render additional service

3. Abandonment of operation4. Prior operators did not oppose application

5. Prior operator cannot satisfy needs of the public

6. When opportunity to improve service is raised by prior operator only on appeal.

7. CPC granted to the applicant is a maiden franchise covering a new route, albeit overlapping with that of the old operator

8. Expiration of corporate existence of prior operator.

9. Monopoly10. Passage through private subdivision which

granted permit to another

Prior Applicant RuleWhere there are various applicants for a

public utility over the same authority, all conditions being equal, priority in the filing of the application for a certificate of public convenience becomes an important factor in granting or refusal of a certificate of convenience and the Commission is authorized to determine which of the applicants can best meet the requirements of public convenience (delos Santos v. Pasay Trans. Co.).

Protection of Investment RuleOne of the purposes of the Public Service

Act is to protect and conserve investments which have already been made for that purpose by public service operators

Registered Owner RuleThe registered owner of a certificate of a

public convenience is liable to the public for the injuries or damages suffered by third persons caused by the operation of said vehicle, even though the same had been transferred to a third person.

The registered owner is not allowed to escape responsibility by proving that a third person is the actual and real owner.

The registered owner is the lawful operator insofar as the public and third persons are concerned; consequently, it is directly and primarily responsible for the consequences of its operation. In contemplation of law, the owner/operator of record I sthe employer of the driver, the actual operator and employer being considered as merely its agent. The same principle applies even if the registered of any vehicle does not use it for public service (Equitable Leasing Corp. v. Suyom, G. R. No.143360, September 5, 2002), or otherwise stated, to privately-owned vehicles.

A sale , lease or financial lease that is not registered with the LTO does not bind third persons who are aggrieved in tortuous incidents, for the latter need only to rely on the public registration of a motor vehicle as conclusive evidence of ownership. A lease is an encumbrance in contemplation of law, which needs to be registered in order for it to bind third parties (PCI Leasing Corp and Finance Inc. v.

UCPB General Insurance Co., Inc. G.R. No. 162267, 4 July 2008).

Registered Owner had Recourse against Vendee/ Transferee

A registered owner who has already sold or transferred a vehicle has a recourse to a third-party complaint, in the same action brought against him to recover for the damage or injury done, against the vendee or transferee of the vehicle (Villanueva v. Domingo, 438 Scra 485,2004).

Kabit System( 2005 bar Exams)It is an arrangement whereby a person

who has been granted a certificate of public convenience allows other persons who own motor vehicles to operate under such license, for a fee or percentage of such earnings. Although the parties to such agreement are not out rightly penalized by law,the kabit system is invariably recognized as being contrary to public policy and therefore void and inexistent under Art.1409, New Civil Code ( Lim v. C.A. G.R.No. 125817, 16 January 2002)

Effects1. The transfer, sale, lease or assignment of

the privilege granted is valid between the contracting parties but not upon the public or third persons (Gelisan v. Alday No.L- 30212, 30 September 1987)

2. The registered owner is primarily liable for all the consequences flowing from the operations of the carrier. The public has the right to assume that the registered owner is the actual or lawful owner thereof. It would be very difficult and often impossible, as a particular matter, for the public to enforce their rights of action for injuries inflicted by the vehicle if they should be required to prove who the actual owner is (Benedicto v. IAC G.R No. 70876, 19 July 1990).

3. The thrust of the law in enjoining the Kabit system is to identify the person upon whom responsibility may be fixed with the end in view of protecting the riding public.(Lim v. C.A. G.R. No 125817, 16 January 2002)

4. Application of Article 1412 of the NCC or in pari delicto rule. The registered ownercannot recover from the actual owner and the latter cannot obtain transfer of the vehicle to himself,both being in pari delicto. (Teja Marketing Vs. IAC)

5. For the better protection of the public, both the registered owner and the actual owner are jointly and severally liable with the driver (Zamboanga Transporatation Co. v. C.A, 29 November 1969)

6. The determining factor which negates the existence of Kabit system is the possession of the franchise to operate and

not the issuance of one SS I.D. Number for both bus line (Baliwag Transit V. C.A, 7 January 1987)

Requisites for the Inapplicability of the Kabit System

1. When neither of the parties to the pernicious Kabit system is being held liable for damages.

2. When the case arose from the negligence of another vehicle using the public road to which no representation or misrepresentation as regards the ownership and operation of passenger jeepney was made.

3. When the riding public was not bothered of inconvenienced at the very least by the illegal arrangement (Lim v. C.A. 16 January 2002)

Boundary System1. The driver does not receive a fixed wage

but gets only the excess of the receipt of the fares collected by him over the amount he pays to the jeep owner.

2. The gasoline consumed by the jeep is for the account of the driver.

These two features are not sufficient to withdraw the relationship between the owner and the driver from that of employer and employee. The jeepney owner is subsidiarily liable as employer in accordance with Art.103 of RPC (Magboo v. Bernardo, 30 April 1963).

Indeed to exempt from liability the owner of public vehicle who operates it under the boundary system on the ground that he is a mere lessor would be not only to abet flagrant violations of the public service law, but also to take place the riding public at the mercy of reckless and irresponsible drivers (Spouses Henandez v. Spouses Dolor, 30 July 2004)

The Civil Aeronautics Board is expressly authorized by R.A. No. 776 to issue a temporary operating permit of certificate of Public Convenience and Necessity (PAL v. CAB 26 March 1997)

The Legislature has delegated to the defunct Public Service Commission and presently the LTFRB, the power of fixing rates of public services. But nowhere under the provisions of law are the regulatory bodies, the PSC and LTFRB alike, authorized to delegate that power to a common carrier like transport operator, or other public service (KMU Labor v. Garcia, 23 December 1984).

A public Utility is entitled to reasonable compensation in return for the service it provides and that it may exact reasonable charges in accordance with the service provided of the rates established therefore. In computing the just and reasonable rates to be charged by a public utility, three major factors are to be considered: 1). Rate of Return; 20. The rate base, 3) the return itself or the computed revenue to be earned by the public

utility based on the rate of return and base rate (Davao Light and Power Company, Inc., 3 April 2003)

A rate is just and reasonable if it conforms to the following requirements:

1. One which yields to the carrier a fair return upon the value of the property employed in performing the service; and

2. One which is fair to the public for the service rendered.

Service of a Public Utility considered UnlawfulIt shall be unlawful for any public service

to provide or maintain ant service that is unsafe, improper, or inadequate, or withhold or refuse any service which can be reasonably be demanded and furnished as founded and determined by the Commission in a final order which shall be conclusive and shall effect and shall effect in accordance with this Act, upon Appeal for otherwise (Sec.19 (a) Public Service Act)

Certificate of Public Convenience and Necessity

a. A certificate of Public Convenience is issued where no special government franchise is required.

b. A certificate of Certificate of Public Convenience and Necessity is issued where the public service would require in its operation the use of government property, such as the installation of electric and telephone posts and lines along public streets requiring a previous franchise therefore

c. No certificate is necessary where the service of utility is owned, operated and managed for a private use or where the owner is not engaged in public service.

Liability of Registered Owner and Authorized Operator under the Kabit System and

Boundary SystemBoth the registered owner and the

Authorized operator of a common carrier under the Kabit System are jointly and severally (solidarily) liable for any death or injury to the passengers and loss/damage to the goods.

Under the Boundary System the authorized operator of a common carrier is liable for the conduct of the driver, there being an employer-employee relationship between the operator and the driver

SPECIAL COMMERCIAL LAWS**(Notes of Atty. Renato Rondez)

MERCHANTS AND COMMERCIAL TRANSACTIONS:

1. Commercial Law is that branch of law relating to the rules that govern the rights, obligations and relations of persons engaged in commerce or trade.

1.1 It is that branch of private law which regulates the juridical relations arising from

commercial acts and according to which, the questions and controversies arising therefrom are resolved.

1.2 Law Merchant is the commercial law consisting of customs, practices, and usages given the force and effect of law by the courts through judicial pronouncements. It is the common law of commercial law.

1.3 Its three principal characteristics are: (a) universal because it exists in every civilized society as trade is necessary (b) progressive as it accumulates new ideas and keeps abreast with contemporary developments, and (c) equitable since commercial transactions involve the exchange of values or consideration.

2. Merchants are, those who having legal capacity to engage in commerce, habitually devote themselves thereto.

2.1 By definition, only individuals may be merchants, but it must be noted that foreigners and companies created abroad may engage in commerce in the Philippines, subject to the law of their country with regard to capacity to contract, and to the provisions of the Code of Commerce as regards creation of the their establishments in the Philippines (Article 15, Code of Commerce), which provision shall be without prejudice to what, in particular cases, may be established by treaties or agreements with other countries. Hence, it should necessarily follow that corporations engaged for business and partnerships are merchants from the time they are incorporated or formed.

3. Persons shall be deemed as having met the required legal capacity to habitually engage in commerce if:

3.1 Being an individual: (a) Must be 18 years of age and (b) having free disposal of property

3.2 As far as an alien is concerned, his legal capacity is determined by his national law but is limited by the nature of the industry that he would like to participate in and Philippine Law that will govern the: (a) creation of the establishment (b) mercantile operations, and (c) jurisdiction of our courts or the provisions of any treaty obtaining between the Philippines and the country of which he is a national (Article 15, Code of Commerce).

3.3 Being a juridical person, it is required that it be organized in accordance with law. If it is a foreign juridical person, it must obtain a license to transact business in the Philippines and is subject to the same limitations imposed on individual aliens.

3.4 The following cannot engage in commerce nor hold office or have any direct, administrative,

or financial intervention in commercial or industrial companies: (a) Persons sentenced to the penalty of civil interdiction, while they have not served their sentence or have not been amnestied or pardoned (b)Persons who have been declared bankrupts, while they have not obtained their discharge, or been authorized by virtue of an agreement accepted at a general meeting of creditors and approved by judicial authority, to continue at the head of their establishments; the discharge being considered in such cases is limited to that expressed in the agreement; and (c) Persons who, on account of laws or special provisions, may not engage in commerce (Article 13, Code of Commerce)

3.5 Further, the following cannot engage in the commerce, either in person or by proxy, nor can they hold any office or have any direct, administrative, or financial intervention in commercial or industrial companies, within the limits of the districts, provinces or towns in which they discharge their duties: (a) Justice of the Supreme Court, judges and officials of the department of public prosecutors in active service. This provision shall not be applicable to the municipal mayors, judges and prosecuting attorneys, nor to those who by chance are temporarily discharging the functions of judges or prosecuting attorneys (b) Administrative, economic or military heads of districts, provinces, or posts (c) Employees engaged in the collection and administration of funds of the State, appointed by the Government. Persons who by contract administer and collect temporarily or their representatives are exempted (d)

Stock and commercial brokers of whatever class they may be (e) Those who by virtue of laws or special provisions, may not engage in commerce in a determinate territory.

3.6 Note further, the current prohibitions as appearing in the Constitution as to (a) Members of the Senate and the House of Representatives (Section 14, Article VI) (b) President, Vice-President, Members of the Cabinet, their deputies or assistants (Section 13, Article VII) (c) Members of Constitutional Commissions ( Section 2, Article IX), the Revised Administrative Code, as to municipal officers (Section 2176), the Anti Graft and Corrupt Practices Act, as to public officers (Section 3 (h), RA 3019), Civil Service Rules and Regulations, as to public officers and employees (Rule XIII (5), CSC)

3.7 Distinguishing between absolute and relative incapacity, the former extends over all Philippines and the act is void, while in the latter, it is only co-extensive with the place wherein the officer incapacitated exercises functions and the act is valid but there is a disciplinary sanction.

3.8 Acts of persons who are incapacited are generally voidable as they are unable to give effective consent ( Article 1390, Civil Code)

4. The legal presumption of habitually engaging in commerce shall exist from the moment the person who intends to engage therein announces through circulars, newspapers, handbills, posters exhibited to the public, or in any other manner whatsoever, an establishment which has for its object some commercial operation (Article 3, Code of Commerce)

5. The applicable laws to commercial transactions in hierarchical order are: (a) Code of Commerce (b) Commercial Customs, and (c) Civil Code. The listed laws shall apply to the requisites, modifications, exceptions, interpretations, extinction of commercial contracts and to the capacity of the contracting parties (Articles 2 and 50, Code of Commerce)

6. Commercial Contracts are those entered into by merchants in the pursuit of their activities and involve articles of commerce. It is an agreement between two or more merchants, and at times between those who are not, whereby they bind themselves to give or do something in commercial transactions. The rules to be observed in respect to commercial contracts are:

6.1 As to formalities- commercial contracts shall be valid and shall give rise to obligations and causes of action in suits, whatever the form and language in which they may be executed, the class to which they may belong, and the amount they may involve, provided their existence is shown by any means established by the civil law. However, the testimony of witness alone shall not be sufficient to prove the existence of a contract which involves an amount exceeding 1,500 pesetas unless supported by some other evidence (Article 51, Code of Commerce).

Thus, a commercial contract exceeding P300.00, which traditionally has been accepted as the approximate equivalence of 1,500 pesetas cannot be proven by parol evidence only.

6.2 The exceptions to the rule on formalities are: (a) Contracts which, in accordance with this Code or with special laws, must be reduced to writing or require forms or formalities necessary for their efficacy. Examples: Bottomry or Respondentia (b)Contracts executed in a foreign country in which the law requires certain instruments, forms or formalities for their validity, although Philippine law does not require them. In either case, contracts which do not satisfy the circumstances respectively required shall not give rise to obligations or causes of action (Article 52, Code of Commerce)

6.3 Illicit agreements do not give rise to obligations or causes of action even if they should refer to a commercial transaction (Article 53, Code of Commerce).

7. Contracts entered into by correspondence shall be perfected from the moment an answer is made accepting the offer or the conditions by which the latter may be modified (Article 54, Code of Commerce).

7.1 Generally, commercial contracts are perfected by mere consent. Consequently, prior to, but never after, the perfection of the contract, an offeror may withdraw his offer. If a period is given to the offeree, but no valuable consideration is paid therefore, the offer may still be withdrawn as a matter of right. But, if the withdrawal is exercised arbitrarily or whimsically, an award for damage is warranted. (Article 19, Civil Code, Sanchez vs Rigos, 45 SCRA 368)

7.2 In commercial contracts entered into by correspondence, the contract is deemed perfected upon the making of an answer accepting the offer or from the time the acceptance is dropped in the mailbox even before knowledge of the offeror. There is intent to be bound. This is known as the Manifestation Theory. In other contracts not covered by the Code of Commerce, the acceptance is not binding until it is made known to the offeror. This is known as the Cognition Theory.

8. In a commercial contract containing an indemnification clause against the person who fails to comply therewith, the aggrieved party may take legal steps to demand the fulfillment of the contract or the indemnity stipulated; but in resorting to either of these two actions, the other one shall be annulled unless there is an agreement to the contrary (Article 56, Code of Commerce). Note Article 1226 of the Civil Code

9. In interpreting commercial contracts, the following rules shall be observed:

9.1 Commercial contracts shall be executed and complied with in good faith according to the terms in which they were made and drafted, without evading the honest, proper and usual meaning of written or spoken words with arbitrary interpretations, nor limiting the effects which are naturally derived from the manner in which the contracting parties may have explained their wishes and contracted their obligations (Article 57, Code of Commerce).

9.2 In case of conflict between copies of the contract, and an agent should have intervened in its negotiation, that which appears in the agent’s book shall prevail (Article 58, Code of Commerce)

9.3 In case of a doubt, and the rules enunciated cannot resolve the conflict, issues shall be decided in favor of the debtor (Article 59, Code of Commerce)

10. In commercial contracts, time generally is of the essence. Consequently, every debtor would be in delay without making a demand. When compared to the Civil Code, the general rule is the mere non-compliance at the designated time or period would not constitute default, even if a date has been fixed for the performance of an obligation. Thus, demand is necessary.

10.1 The rules on computing periods in commercial contracts are: (a) In all computations of days, months and years, it shall be understood that a day has twenty-four hours, the months as designated in the Gregorian calendar, and the year has three hundred sixty-five days (Article 60, Code of Commerce). Note that under Article 13 of the Civil Code, a month is 30 days, unless designated by name (b) Days of grace, courtesy or others which under any name whatsoever defer the fulfillment of commercial obligations, shall not be recognized, except those which the parties may have previously fixed in contract or which are based on a definite provision of law (Article 61, Code of Commerce). Example is the grace period provided for by Section 230 of the Insurance Code

10.2 A debtor in a commercial contract shall be determined to be in delay when: (a) On the eleventh day, in obligations which do not have a period previously fixed by the parties or by the provisions of this Code, as they are demandable ten days after having been contracted if they give rise only to an ordinary action, or on the day following the next day if they involve immediate execution (Article 62, Code of Commerce) (b) in contracts with a day fixed for their compliance by the will of the parties or by law, on the day following their maturity or in contracts in which no such day is fixed, from the day on which the creditor legally makes demand upon the debtor or notifies him of the protest of losses and damages made against him before a justice, notary or other public official authorized to admit the same.

10.3 In summary: (a) If period of performance fixed, next day in delay without need of demand, debtor in delay on the day following the day fixed; (b) If no period fixed, ten (10) days from execution of contract and on eleventh day, debtor is in delay without need of demand (c) If there is a Potestative period, the debtor is in delay from demand. Note period, as “when the debtor desires” (Article 1182, Civil Code) not condition as “if the debtor desires” (Article 1180), as the latter is a void obligation.

JOINT ACCOUNTS

1. A joint account or cuentas en participacion is an arrangement among merchants who interest themselves in the transactions of other merchants, contributing thereto the part of the capital they may agree upon, and who participate in the favorable or unfavorable results thereof in the proportion they may determine (Art. 239).

(b) A joint account may be formed without any formality and may be privately contracted orally or in writing (Art. 240).

(c) A joint account shall not adopt a commercial name common to all the participants, nor shall any further direct credit be made use of except that of the merchant who transacts and manages the business in his own name and under his individual responsibility (Art. 241).

(d) Those who contract with the merchant who carried on the business shall have a right of action against him only and not against the others interested therein. The latter shall also have no right against the third person who contracted with the manager, unless the latter formally cedes his rights to them (Art. 242)

(e) The liquidation of the joint account shall be made by the manager thereof who, upon the conclusion of the transactions, shall render a verified account of their results (Art. 243)

LETTERS OF CREDIT

1. A letter of credit is basically an open letter of request whereby one person requests another to advance money or give credit to a third person for a certain amount and promises to repay the person advancing the money.

1.1 They are intended generally to facilitate the purchase and sale of goods by providing assurance to the seller of prompt payment upon compliance with specified conditions or presentation of stipulated documents without the seller having to rely upon the solvency and good faith of the buyer. This is known as the rule of strict compliance in a letter of credit transaction means that the documents tendered by the seller or beneficiary must strictly conform to the terms of the letter of credit, i.e., they must include all documents required by the letter of credit such as: (a) a draft which is also called a bill of exchange, is an order written by an exporter/seller instructing an importer/buyer or its agent to pay a specified amount of money at a specified time (b) a bill of lading, which is a document issued to the exporter by a common carrier transporting the merchandise, and (c) invoices.

1.2 The issuing bank in determining compliance with the terms of the letter of credit is required to examine only the shipping documents presented by the seller and is precluded from determining whether the main contract is actually accomplished or not. This arrangement assures the seller of prompt payment, independent of any breach of the main sales contract. This known as the independence principle in a letter of credit transaction.

2. The primary purpose of a letter of credit is to substitute for, and therefore support, the agreement of the buyer-importer to pay money under a contract or other arrangement.This instrument is basically a credit security through availment of credit facilities of the participating banks.

3. The parties to a letter of credit are: (a) The Buyer- he is the one who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents of title (b) The Issuing Bank- is the bank from whom the letter of credit is procured and which undertakes to pay the seller upon receipt of the draft and proper documents of titles and to surrender the documents to the buyer upon reimbursement, and (c) The seller- who in compliance with the contract of sale ships the goods to the buyer and deliver the documents of title and draft to the issuing bank to recover payment.

3.1. In an international credit transaction carried through a letter of credit, the parties are: (a) The Customer- who is the party who applies to a bank in one country for the opening of a letter of credit in favor of the seller in another country (b) The Issuing Bank- is the bank in the country of the customer to which the customer applies for the issuance of a letter of credit (c) The Beneficiary- who is the party in another country who is the creditor of the customer. Usually, he is the one selling goods to the customer (d) The Advising Bank – is the bank in the country of the beneficiary which communicates to the beneficiary the notice of the credit issued by the issuing bank (e) The Confirming/Correspondent Bank- is the bank that undertakes that the letter of credit will be fully paid. Usually the confirming bank is also the advising bank, otherwise it is utilized to lend credence to the letter of credit issued by a lesser known issuing bank and is directly liable to the beneficiary.

3.2 The relationships of the parties are to be governed as follows: (a)Issuing bank and applicant/buyer/importer – Their relationship is governed by the terms of the application and agreement for the issuance of the letter of credit by the bank. Unless the contrary is provided for, the liability of the issuing bank is solidary with the buyer (b) Issuing bank and

beneficiary/seller/exporter – Their relationship is governed by the terms of the letter of credit issued by the bank, and (c) Applicant and beneficiary – Their relationship is governed by the sales contract.

3.3 It is clearly settled in law that there are thus three contracts which make up the letter of credit transaction: The contract between buyer and seller, buyer and issuing bank, and the letter of credit proper. These transactions are to be maintained in a state of perpetual separation.

4. The essential conditions of a letter of credit are: (a) That it be issued in favor of a definite person and not to order; and (b)

That it be limited to a fixed and specified amount, or to one or more undetermined amounts, but within a maximum the limits of which has to be stated exactly.

4.1 Hence, a letter of credit is not a negotiable instrument because it is required to be drawn in favor of a definite person.

4.2 Those which do not have any of the essential conditions shall be considered merely as a letter of recommendation.

4.3 The bank or drawer of a letter of credit shall be liable to the person on whom it was issued for the amount paid by virtue thereof, within the maximum fixed therein, while a notifying bank does not incur any liability except to notify the beneficiary of the letter of credit. Before paying, it shall have the right to demand the proof of the identity of the person in whose favor the letter of credit is issued.

4.4 The drawer of a letter of credit may annul it, informing the bearer and the person to whom it is addressed of such revocation. The waiver of the right to annul makes the letter of credit irrevocable

4.5 The bearer of a letter of credit shall pay the amount received to the drawer without delay. Should he not do so, an action involving execution may be brought to recover it, with legal interest and current exchange in the place where payment was made on the place where it is repaid.

4.6 A letter of credit becomes void if the bearer of a letter of credit does not make use thereof within the period agreed upon with the drawer, or, in default of a period fixed, within 6 months counted from its date, in any point in the Philippines, and within 12 months anywhere outside thereof, it shall be void in fact and in law.

5. A standby letter of credit is a bank-issued option on a loan involving three parties: the bank issuing the credit, the party requesting for such

issuance (otherwise known as the account party) and the beneficiary. Under the terms of standby letter of credit (SLC), the beneficiary has the right to trigger the loan option (referred to as taking down the loan) if the account party fails to meet its commitment, in which case the issuing bank disburses a specified sum to the beneficiary and books an equivalent loan to its customer. SLCs may support nonfinancial obligations such as those of bidders, or financial obligations such as those of borrowers. In the latter case, the borrower purchases an SLC and names the lender as beneficiary. Should the borrower default, the beneficiary has the right to take down the SLC and receive the principal balance from the issuing.

5.1 Another definition is that it is a bank-issued option on a loan involving three parties: the bank issuing the credit, the party requesting for such issuance (account party) and the beneficiary. Under its terms, the beneficiary has the right to trigger the loan option if the account party fails to meet its commitment, in which the case the issuing bank disburses a specified sum to the beneficiary and books an equivalent loan to its customer.

6. The common types of letters of credit are: (a) Irrevocable vs. revocable – An irrevocable letter of credit obligates the issuing bank to honor drafts drawn in compliance with the credit and can be neither cancelled nor modified without the consent of all parties, including in particular the beneficiary/exporter. A revocable letter of credit can be cancelled or amended at any time before payment; it is intended to serve as a means of arranging payment but not as a guarantee of payment (b) Confirmed vs. unconfirmed – A letter of credit issued by one bank can be confirmed by another, in which case both banks are obligated to honor drafts drawn in compliance with the credit. An unconfirmed letter of credit is the obligation only of the issuing bank. Why would an exporter want a foreign bank’s letter of credit confirmed by a domestic bank? One reason could be if he has doubts

6.1 Other types: (a) Revolving Letter of Credit-one that provides for renewed credit to become available as soon as the opening bank has advised the negotiating or paying bank that the drafts already drawn by the beneficiary have been reimbursed to the opening bank by the buyer (b) Back to Back Letter of Credit- a credit with identical documentary requirements and covering the same merchandise as another letter of credit, except for the difference in price of the merchandise as shown by the invoice and draft. The second letter of credit can only be negotiated after the first is negotiated.

TRUST RECEIPTS

1. A trust receipt is a commercial document whereby the bank releases the goods in the possession of the entrustee but retains ownership thereof while the entrustee shall sell the goods and apply the proceeds for the full payment of the liability to the bank.

1.1 It is a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchases of merchandise, and who may not be able to acquire credit, except through utilization, as collaterals, of the merchandise imported or purchased.

1.2 The subject matter of a trust receipt is always chattel. It will not apply to chattel so attached to land so as to become part thereof.

2. A trust receipt transaction is a transaction between an entruster and an entrustee whereby the entruster, who owns or hold absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter’s execution and delivery to the entruster of a trust receipt wherein the entrustee binds himself to hold the specified gods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster, or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of.

2.1 A Security Interest means a property interest in goods, documents or instruments to secure performance of some obligations of the entrustee or of some third persons to the entruster and includes title, whether or not expressed to be absolute, whenever such title is in substance taken or retained for security only.

2.2 A trust receipt transaction distinguished from:(a) A pledge-in a pledge, the person doing the financing has possession of the property; in a trust receipt, the property is in the possession of the person financed (b) A conditional sale-in a conditional sale, there is a sale of the property from the seller to the buyer; in a trust receipt, there is no sale of the property from the entruster to the entrustee (c) A chattel mortgage-a chattel mortgage involves the creation of a lien upon the property; a trust receipt does not involve the creation of a lien (d) A consignment-in a consignment, the consignor retains title to the property to secure the indebtedness due from the consignee; in a trust receipt, the seller does not retain title to the property but transfers such title to the entruster, not to the entrustee

2.3 When a debtor has received the goods from a supplier thereby acquiring title and will after borrow money from a bank to pay for the

same, the transaction is a loan even he signs a trust receipt agreement. It is essential for a trust receipt transaction for the bank to first acquire ownership and possession.

2.4 When a Memorandum of Agreement is entered between a debtor corporation and a creditor bank is entered into rescheduling the payments due from the former, the trust receipt transaction is novated and transformed into a simple loan.

3. The parties to a trust receipt transaction are: (a) The entruster- is the person holding title over the goods, documents or instruments subject to a trust receipt transaction, and any successor in interest of such person, and (b) The entrustee – is the person having or taking possession of goods, documents or instruments under a trust receipt transaction, and any successor in interest of such person for the purpose or purposes specified in the trust receipt

4. The rights of the entruster are: (a) to be entitled to receive the proceeds of the sale of the goods released under a trust receipt to the entrustee to the extent of the amount owing to the entruster (b) to the return of the said goods, in case they could not be sold; and (c) to cancel the trust in case the entrustee defaults, take possession of the goods, and sell the same at public or private sale.

4.1 The process of taking possession and selling the goods is as follows: (a) the entruster may cancel the trust and take possession of the goods, documents or instruments subject of the trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with any of the terms and conditions of the trust receipt or any other agreement between the entruster and the entrustee (b) The entruster in possession of the goods, documents or instruments may, on or after default, give notice to the entrustee of the intention to sell, and may, not less than five days after serving or sending of such notice, sell the goods, documents or instruments at public or private sale, and the entruster may, at a public sale, become a purchaser. Notice of the sale shall be deemed sufficiently given if in writing, and either personally served on the entrustee or sent by post-paid ordinary mail to the entrustee’s last known business address (c) the proceeds of any such sale, whether public or private, shall be applied (1) to the payment of the expenses thereof; (2) to the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; (3) to the satisfaction of the entrustee’s indebtedness to the entruster. The entrustee shall receive any surplus but shall be liable to the entruster for any deficiency.

4.2 Cancellation of the trust receipt and repossession is not essential for the entruster to

have a cause of action against the entrustee. They are options available to the entruster and do not prejudice resort to other remedies.

5. The obligations of the entrustee are as follows: (a) to hold the goods in trust for the entruster and to dispose of them strictly in accordance with the terms of the trust receipt; This includes the authority to manufacture or process the goods with the purpose of ultimate sale. Provided, however, that the entruster retains title over the goods whether in its original or processed form until the entrustee has complied with the obligation under the receipt. It also includes authority to load, unload, ship or transship or otherwise deal with the goods in a manner preliminary or necessary to their sale (b)

To receive the proceeds of the sale of the goods in trust for the entruster and to turn over the same to the entruster to the extent of the amount owing to the entruster (c) to insure the goods for their total value against loss from fire, theft, pilferage or other casualties (d) to keep the goods or the proceeds thereof, whether in money or whatever form, separate and capable of identification as property of the entruster; and (e) to return the goods,to the entruster in case they could not be sold or upon demand of the entruster. 5.1 Notwithstanding the security interest of the entruster, the entrustee shall be responsible as principal or as vendor under any sale or contract to sell made by the entrustee. Hence, although the entrustee is not the owner of the goods under a trust receipt (ownership is retained by the entrustor) anyone who acquires the goods from the entrustee acquires good title (ownership) over the goods. Note that it runs counter to the provisions of Article 1505 of the Civil Code, where there is a contract of sale, the buyer is to acquire only whatever title the seller had at the time the sale was perfected.

5.2 Risk of loss shall aslso be borne by the entrustee. Hence, the loss of goods, documents, or instruments which are the subject of a trust receipt, pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof. This is not in accordance with the civil law principle that it is generally the owner who must bear the risk of loss of the object

6. A trust receipt arrangement does not involve a simple loan transaction between a creditor and debtor-importer. The law warrants the validity of the trust receipt agreement. Consequently, the goods covered by the trust receipt cannot be levied upon by the creditors of the entrustee. The validity of entruster’s security interest as against creditors-the entruster’s security interest in goods, documents, or instruments pursuant to the written terms of a

trust receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement.

7. The acts punishable by the Trust Receipts Law as Estafa as defined by Article 315, Section 1(b) of the Revised Penal Code are: (a) The failure to comply with the provision referring to the obligation involving the duty to deliver (entregaria) the money received to the owner of the merchandise sold, or(b)The failure to comply with the provision referring to the obligation involving the duty to return (devolvera) the goods to the owner if not disposed of in accordance with the terms of the trust receipt.

7.1 There is no need to prove intent to defraud as the offense is malum prohibitum.

7.2 There is also no need to prove damage to the entrustor because the nature of a trust receipt transaction and the damage caused to trade circles and the banking community in case of a violation thereof is the basis for the criminal offense.

7.3 Consequently, the law has consistently been declared as not violating the constitutional proscription against imprisonment for non-payment of debt. It is a declaration by the legislative authority that, as a matter of public policy, the failure of a person to turn over the proceeds of the sale of goods covered by the receipt or to return the goods if not sold is a public nuisance to be abated by penal sanctions.

BULK SALES

1. A sale is considered as a sale and transfer in bulk if: (a) It is a sale, transfer, mortgage, or assignment of a stock of goods, wares, merchandise, provisions otherwise than in the ordinary course of trade and the regular prosecution of the business, or (b) It is a sale or transfer of all or substantially all, of the business or trade; or (c) It is a sale or transfer of all, or substantially all, of the fixtures and equipment used in the business.

1.1 A sale under Section 40 of the Corporation Code will be covered if the business involves the buying and selling of merchandise.

1.2 A Merger or Consolidation however is not covered as the surviving or consolidated corporation assumes all the liabilities of the constituent corporations

2. A sale or transaction in bulk is not covered by the Bulk Sales Law when: (a)the transaction is in the ordinary course of trade and the regular prosecution of the business of the vendor (b) the vendor in bulk produces and delivers a written waiver of the provisions of the

Bulk Sales Law from the creditors (c) the sale in bulk is made by executors, administrators, receivers, assignees in insolvency, or public officers acting under judicial process; and (d) sales of properties that are exempt from attachment or execution by creditors (Sec. 13, Rule 39 of Rules of Court)

3. The purpose of the law is to prevent the defrauding of creditors by the secret sale in bulk of all or substantially all of a merchant’s stock of goods until the creditors of the sellers should have been paid in full.

4. The protection afforded to creditors of the seller in bulk are: (a) requirement that the vendor deliver to the vendee a written statement under oath of the names and addresses of all creditors to whom said vendor is indebted together with the amount of his indebtedness (b) requirement that at least ten days before the sale, the vendor shall make a full detailed inventory thereof showing the quantity and the cost price of the goods and shall notify every creditor of the price, terms and conditions of the sale (c) requirement that the purchase price paid must be applied to the debt owing to the creditors. In addition, the law also prohibits the vendor in bulk to transfer title to the same without consideration or for a nominal value.

4.1 If the sale in bulk is not made in accordance with the Bulk Sales Law, the sale is fraudulent and void. The creditors may proceed against the vendee who shall hold the stock of merchandise in trust for the creditors.

4.2 The provision of the law that the sale is “fraudulent and void” is not a mere presumption. Therefore, the motivation of the parties or whether they are in good or bad faith is immaterial

WAREHOUSE RECEIPTS:

1. The purpose of the Warehouse Receipts Law is to regulate the status, rights and liabilities of parties. In particular, it prescribes the rights and duties of a warehouseman and to regulate his relationship with (a) the depositor of the goods, or (b) the holder of a warehouse receipt, or (c) the person lawfully entitled to the possession of the goods, or (d) other persons. It also covers all warehouses, whether bonded or not.

1.2 As far as the effect of the New Civil Code provisions on documents of title to goods which include quedans or warehouse receipts, there is no conflict between the two. The Warehouse Receipts Law refers to and will apply to warehouse receipts issued by warehouseman, while the New Civil Code refers to and will apply to receipts that are not issued by warehouseman.

2. The purpose of the General Bonded Warehouse Act is to regulate the business of receiving commodities for storage in order to protect persons who may want to avail themselves of warehouse facilities and to encourage the establishment of more warehouses.

2.1 Distinguishing between the 2 laws, the Warehouse Receipts Law refers to the rights and obligations of parties in a warehousing contract, while the General Bonded Warehouse Act refers to state regulation and supervision of warehouses

3. A warehouse receipt is a written acknowledgment by a warehouseman that he holds certain goods in store for the person to whom the document is issued. This is also known as “warehouse-keeper’s receipt” or “storage receipt.”

3.1 While no particular form is required, it should however include the necessary terms stating: (a) Location of the warehouse (b) Date of issue (c) Number of receipt (d) Description of the goods (e) Advances made (f) Rate of charges (g) Ownership of the goods by language indicating if the warehouseman is an owner, solely or jointly with others, of the goods deposited (h) Signature of the warehouseman, and (i) Person to whom goods should be delivered by language indicating whether the receipt is negotiable or non-negotiable, that is whether the goods received will be delivered to the bearer, to a specified person, or to a specified person or his order

3.2 A negotiable warehouse receipt is not a negotiable instrument as the same does not comply with the requisites of Section 1, Act 2031. However, ownership thereof may be transferred by delivery if it states that it is deliverable to bearer or a named person or bearer. If it is deliverable to a named person or order, ownership may be transferred by special endorsement and delivery. The endorsement can be to bearer or to a specified person.

3.3 A negotiable warehouse receipt is not convertible to a non-negotiable receipt. The insertion of a provision making it non-negotiable is void. To make a warehouse receipt non-negotiable, it must be written out as such and to prevent any person from supposing it to be negotiable, the words “non-negotiable” should be placed plainly on its face. A non-negotiable receipt may only be assigned.

3.4 The advantages of a negotiable warehouse receipt over one which is non-negotiable are: (a) goods cannot be garnished or levied upon under execution unless receipt is surrendered, or impounded or its negotiation enjoined (Section 25, Warehouse Receipts Law) (b) In case of negotiation, holder acquires the

direct obligation of the warehouseman to hold possession of the goods for him (Section 41, Warehouse Receipts Law), and (c) Goods are not subject to vendor’s lien or stoppage “in transitu” (Section 49, Warehouse Receipts Law)

3.5 Other terms may be included in a warehouse receipt, except: (a) terms that are contrary to the provisions of this Act, or (b) terms which will in anyway impair the obligation to exercise due care in the safekeeping of the goods entrusted to the warehouseman.

4. A warehouseman defined - is a person lawfully engaged in the business of storing goods for profit. Under the General Bonded Warehouse Act he is defined as a person lawfully engaged in the business of storing goods for profit. In other words, he is one who receives and stores goods owned by others and collects fees for so doing.

4.1 Included in the phrase “the business of receiving commodity for storage” includes any contract or transaction wherein: (a) the warehouseman is to return same commodity deposited or pay its value (b) the commodity is to be milled for the owner thereof, or (c) the commodity delivered is commingled with the commodity belonging to other persons, and the warehouseman is obligated to return commodity of the same kind or pay its value.

5. The Primary Obligations of the Warehouseman are:(a) he must issue a receipt for any commodity that he receives for storage (b) he must exercise that degree of care in the safekeeping of the goods entrusted to him which a reasonable careful man would exercise in regard to similar goods of his own. However, in the absence of an agreement to the contrary, he shall not be liable for any loss or injury to the goods which could not have been avoided by the exercise of such care (c) In the absence of any lawful excuse, he is bound to deliver the goods upon a demand by: (1) holder of a receipt for the goods, or (2) by the depositor, provided that the demand be accompanied by (a) an offer to satisfy the warehouseman’s lien (b) an offer to surrender the receipt if it is negotiable, and (c) a readiness and willingness to sign acknowledgment of delivery of the goods if requested by the warehouseman.

5.1 A warehouseman is obliged to deliver goods to: (a) person lawfully entitled to it. Examples: person determined by the court to be entitled to it in an interpleader case, person who purchases the goods at an auction to satisfy a warehouseman’s lien or because the goods are hazardous or of a perishable nature (b) the person who is himself entitled to delivery by the terms of the receipt. If receipt is non-negotiable, delivery will be to the person entitled to it under its terms or by written authority clearly indicated therein or another document. If receipt is

negotiable, to the person named or the last indorsee.

5.2 A warehouseman may thus legally refuse to deliver goods covered by a warehouse receipt under the following instances: (a)When the demand is not accompanied by the three requirements provided in Section 8 (b)When he has a lien valid against the person demanding the goods, he can refuse to deliver the goods until the lien is satisfied and, (c) In cases when there are several adverse claimants to the title or possession of the goods. The warehouseman can refuse to deliver to any of the claimants until he has had a reasonable to ascertain the validity of the claims.

5.3 A misdelivery or conversion occurs when (a) delivery is made to one not lawfully entitled to it, or (b) even if delivery is made to a person holding a non-negotiable or negotiable receipt, if prior to delivery, he had either been requested not to make delivery by the person lawfully entitled to a right of property or possession in the goods or had information that delivery about to be made was to one not lawfully entitled to possession of the goods.

5.4 A warehouseman can protect against a misdelivery by: (a) availing of a the reasonable time that he is entitled to within which to ascertain the validity of an adverse claim or to bring legal proceedings to force the claimants to interplead or may actually require the claimants to interplead.

5.5 A warehouseman cannot commingle as he is bound to keep the goods of a depositor separate from the goods of other depositors or from the goods of the same depositor for which a separate receipt has been issued. The purpose of the prohibition is to permit inspection and redelivery at all times.Exceptions are: (a) the goods are fungible, as when any unit of the good is from its nature or mercantile usage, treated as an equivalent of any other unit (Section 58, Warehouse Receipts Law) or (b) it is authorized by agreement or custom.

6. For failure to take up and cancel a negotiable receipt, or one the negotiation of which would transfer the right to the possession of the goods when goods are delivered(Section 11, Warehouse Receipts Law) or for the failure to take up and cancel a negotiable receipt or to place upon it a statement of what goods have been delivered, when goods are partly delivered (Section 12, Warehouse Receipts Law). The warehouseman shall be liable for failure to deliver the goods to any one who purchases for value in good faith such receipt whether such purchaser acquired title to the receipt before or after the delivery of the goods by warehouseman

6.1 Exception: The warehouseman shall not be liable for failure to deliver the goods covered by the receipt or be guilty of a crime where the goods (a) have been lawfully sold to satisfy the warehouseman’s lien, or (b) have been lawfully sold or disposed of because of their perishable or hazardous nature (Section 36, Warehouse Receipts Law)

7. An alteration in a warehouse receipt is said to be:(a)Immaterial if it does not change the tenor of the warehouse receipt (b)Material if it substantially changes the tenor of the receipt (c)

Authorized if it is made with the authority of the holder and the warehouseman (d)Unauthorized if it is made without the authority of the holder and warehouseman. This may be material or immaterial (e) Fraudulent if it is made with malice or bad faith by the holder with intent to defraud subsequent holders (f)

Without fraudulent intent if its is made without malice or bad faith

7.1 The effects of an alteration in a warehouse receipt are: (a)Where the alteration is immaterial, the warehouseman shall be liable according to the terms of the receipt as originally issued (b)Where the alteration is immaterial, whether fraudulent or not, authorized or not, the warehouseman is liable according to the terms of the receipt as originally issued (c) Where the alteration is material and is authorized, the warehouseman shall be liable according to the terms of the receipts as altered (d) Where the alteration is material, unauthorized but without fraudulent intent, the warehouseman shall be liable according to the terms of the receipts as they were before the alteration (e) Where the alteration is material, unauthorized and with fraudulent intent, the warehouseman shall be liable according to the terms of the receipts as originally issued even (1) to a purchaser of the receipt for value without notice of the alteration, or (2) to the person who made the alteration and to any person who took it with notice of the alteration. However, in the latter case, such material and fraudulent alteration shall excuse the warehouseman from any other liability to the said persons. except as regards the alterer and subsequent holders with notices.

8. For the non-existence or misdescription of goods, a warehouseman shall be liable to the holder of a receipt for damages caused by the non-existence of the goods or by the failure of the goods to correspond with the description thereof in the receipt at the time of its issue.

8.1 Exception: No such liability shall attach to the warehouseman if the goods are described in the receipt merely (a) by a statement of the marks or labels upon them or upon the packages containing them, or (b) by a statement that the goods are of a certain kind or that the packages

containing the goods contain goods of a certain kind or by words of similar import.

9. The warehouseman’s lien refers to the lien of that a warehouseman has on the goods deposited with him or on the proceeds thereof in his hands for all lawful charges for storage and preservation of the goods, money advanced by him in relation to such goods such as the expenses of transportation or labor, or other related expenses.

9.1 The basis for the lien is the obligation of the depositor to pay the warehouseman for (a) Storage and preservation charges (b) Money advanced (c) Interest (d) Insurance (e) Transportation (f) Labor (g) Weighing, and (h)Coopering and other similar charges (Section 27, Warehouse Receipts Law)

9.2 With the exception of storage and preservation charges, the other claims must be expressly specified in the warehouse receipt for it to serve as basis for the lien (Section 30, Warehouse Receipts Law)

9.3 The lien may be enforced against all goods belonging to the person liable for the charges, as well as against all goods belonging to the others deposited by the person liable for the charges who has been entrusted with the possession of the goods and could have validly pledged the same (Section 28, Warehouse Receipts Law). Hence, it is enforceable against the depositor’s goods and the goods of other persons stored by depositor, if pledge of such goods by him are valid but not against the true owner if the depositor has neither title nor right of possession to the goods (Section 31, Warehouse Receipts Law; Young v. Colyear, 201 Pac. 623)

9.4 The warehouseman can enforce his lien by the sale of the goods (Section 33, Warehouse Receipts Law) or by an action in court (Section 35, Warehouse Receipts Law). Provided, however, that notice of sale of goods in order to satisfy the warehouseman’s lien is given.

9.5 The lien can be lost if a warehouseman surrenders possession of the goods, or by refusing to deliver the goods when a demand is made with which he is bound to comply under the provisions of the Act (Section 29, Warehouse Receipts Law)

9.6 The effect of the sale of goods to satisfy the warehouseman’s lien or on account of the goods’ perishable or hazardous nature under Section 36 shall not make the warehouseman, after the sale, liable for failure to deliver the goods to the depositor, or owner of the goods, or to the holder of a receipt given for the goods when they were deposited, even if such receipt were negotiable.

10. A negotiable receipt is negotiated by delivery when: (a) the goods are deliverable to bearer, or (b) the goods are deliverable to a specified person and the latter has indorsed it in blank or to bearer. If endorsed as deliverable to a person, the bearer receipt is transformed into a an order receipt.

10.1 A negotiable receipt is negotiated by indorsement when the goods are, by the terms of the receipt, deliverable to a specified person (Section 38, Warehouse Receipts Law)

10.2 The negotiation may be made by the: (a) owner or (b) the person to whom possession of the receipt was entrusted by the owner (Section 40, Warehouse Receipts Law)

10.3 The rights acquired by one to whom a negotiable warehouse receipt has been duly negotiated are: (a) Such title to the goods as the one negotiating could convey to a purchaser in good faith for value (b) Such title to the goods as the depositor or one to whose order the goods were to be delivered could convey to a purchaser in good faith for value, and (c) Direct obligation of the warehouseman to hold the goods for him as if the warehouseman contracted with him directly. Hence, a person to whom a warehouse receipt has been negotiated by one who has stolen the goods stated in the receipt cannot claim a misdelivery if the warehouseman delivers the goods to the rightful owner, who is the person lawfully entitled to it.

10.4 Mortgagee or pledgee of a warehouse receipt to whom a negotiable warehouse receipt has been indorsed does not acquire title over the goods. He only acquires the rights of a pledgee or mortgagee, namely to foreclose the pledge or mortgage. The intent in this case is not the negotiation of the receipt with its consequent transfer of title, but merely as security (Martinez v. P.N.B., 93 Phil. 765); P.N.B. v. Atendido, 94 Phil. 254)

11. A non-negotiable receipt is transferred by delivery accompanied with a deed of assignment or transfer. If this is indorsed, the indorsement will not give the transferee any right whatsoever (Section 39, Warehouse Receipts Law)

11.1 Rights acquired by a person to whom a warehouse receipt has been transferred but not negotiated are: (a) Title to the goods subject to the terms of any agreement with the transferor, and (b)The right to notify the warehouseman of the transfer in his favor and thereby acquire the direct obligation of the warehouseman to hold the goods for him (Section 42, Warehouse Receipts Law). Note that pending notification, his rights can still be defeated by a subsequent attaching creditor, or levy on execution, a vendor’s lien or right of stoppage in transitu.

CHATTEL MORTGAGES:1. A chattel mortgage defined - personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation.

1.1 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.

1.2 Distinguishing a chattel mortgage from a pledge: (a) the chattel mortgage is recorded in the Chattel Mortgage Register; the pledge is not, instead the movable is delivered to the creditor (b) in a chattel mortgage, the consent of the mortgagee to the sale of the thing mortgaged must be in writing and annotated on the back of the mortgage instrument; in pledge, the consent of the pledge need not be in writing but may be oral (c) in a chattel mortgage, in addition to other formal requirements, the mortgagor must execute an affidavit of good faith; in pledge, there is no requirement that the pledgor execute such an affidavit (d) in a chattel mortgage, in case of foreclosure of the thing mortgaged, the mortgagee is not entitled to the entire proceeds of the sale but only to a portion thereof sufficient to pay the mortgage debt, interest and incidental expenses; in pledge, the pledgee is entitled to the entire proceeds of the sale even if it exceeds the amount of the debt (e) in a chattel mortgagee, the mortgagee is entitled to recover deficiency as a rule; in pledge, the pledgee is not entitled to recover deficiency.

1.3 Distinguishing a chattel mortgage from a real estate mortgage: (a) in a chattel mortgage, the thing mortgaged must be personal or movable property; in a real estate mortgage, the thing mortgaged must be real or immovable property (b) an affidavit of good faith is required to be executed in a chattel mortgage but not in a real estate mortgage (c) in a chattel mortgage, the mortgagor cannot alienate the thing mortgaged without the written consent of the mortgagee annotated on the back of the mortgage instrument; in real estate mortgage, the mortgagor can alienate the thing mortgaged without the consent of the mortgagee and any stipulation prohibiting such alienation is void (d) in a chattel mortgage, redemption of the thing mortgaged may be made only before the sale thereof; in real estate mortgage, the thing mortgaged may be redeemed after it is judicially sold but before judicial confirmation of the sale, or if extrajudicially sold, within one year from and after the date of sale (except where the mortgagor is juridical person whose property has been mortgaged in favor of a bank, quasi-bank or trust entity, in which case the redemption shall be made until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case

shall be more 3 months after foreclosure whichever is earlier)

2. The essential requisites of a chattel mortgage are: (a) It must be constituted to secure the fulfillment of a principal obligation (b) The mortgagor must be absolute owner of the property mortgaged (c) The mortgagor must have free disposal of such property , or be legally authorized for the purpose (d)The property involved must be personal or movable, and (e)

Contract must be recorded in the Chattel Mortgage Register

2.1 A chattel mortgage which provides that the security stated therein is for the payment of any and all obligations therein before contracted and which may thereafter be contracted, or future debts and obligations, by the mortgagor in favor of the mortgagee is void. The law requires parties to a mortgage to execute an affidavit of good faith, that the debt is honestly due and owing. A valid mortgage cannot be made to secure a debt to be contracted in the future (Jaca v. Davao Lumber, L-25771, March 29, 1982, 113 SCRA 107; Vide; Lopez v. CA, 114 SCRA 671, Co v. PNB, 114 SCRA 842). An affidavit of good faith is a certificate included in the chattel mortgage contract executed by both mortgagor and mortgagee that the mortgage is constituted to secure the specified obligation, and that said obligation is a valid, just and subsisting obligation and not one entered into for the purpose of fraud.

2.2 Although a promise expressed in the chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be acted upon, the security itself does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by a fresh chattel mortgage deed or by amending the old contract to conform to the law, particularly the execution of an affidavit of good faith (Acme Shoe etal v. CA, GR No. 103576, August 22, 1996)

2.3. The chattel mortgage cannot be considered to include after-acquired properties as it shall cover only the property described in the deed and not any other like or substituted property (Section 7). Recognized as exceptions are: (1) properties that are perishable, like fruits or subject to inevitable wear and tear like tires or intended to be sold or used but with the understanding that they would be replaced with similar properties to be thereafter acquired by the mortgagor. An Example is: Where the debtor gives as security the stock or merchandise in his store and it is the “intention” of the parties that the mortgage shall cover the stock that will take its place in the course of the business. [Torres v. Limjap, 56 Phil. 141 ,1931] (2) In the case of other properties, if their inclusion is expressly stipulated and a supplement to the mortgage specifically listing and describing the property is

executed and registered in the chattel mortgage register

2.4 The registration in the chattel mortgage register is not necessary to make it binding between the parties. It is necessary though to make it binding on third persons.

3. The remedies of a creditor are: (a) Extrajudicial Foreclosure (b) An action for replevin (c) Judicial Foreclosure, and (d)

Bring an action for the payment of a sum of money

3.1 A creditor cannot forceably take possession of the chattel without court intervention (BPI Credit v. CA, 204 SCRA 601, Filinvest Credit Corporation v. CA, 248 SCRA 549)

3.2 Neither can the creditor take possession and appropriate the chattel, since it would constitute pactum commissorium, referring to an act or a stipulation giving power to the creditor to appropriate the thing given as security, if the principal obligation is not fulfilled without any formality, such as foreclosure proceedings and public sale. Such an act or stipulation is null and void (Art. 2088, N.C.C.). In other words, the mortgagor’s default does not operate to vest in the mortgagee the ownership of the mortgaged property.

3.3 Availment of the remedy of bringing an action to collect a sum of money is a waiver or abandonment of the chattel mortgage. This also bars the recovery of a deficiency judgment which is only available when the proceeds of the sale are insufficient to cover the debts pursuant to a foreclosure. The prescriptive period for which is ten (10) years.

3.4. Note that when the financing company to whom a loan and chattel mortgage have been refinanced had been constituted as the attorney-in-fact of the borrower to file any insurance claim covering the chattel, and it failed to do so upon a total loss of the same, will relieve the borrower-mortgagor of his obligation (BA Finance Corporation v. CA, 201 SCRA 157) 3.5 There are limitations on the enforcement of chattel mortgages executed in relation to the sale of personal property in installments, where the remedies are: (1) Exact fulfillment of the obligation (2)Cancel the sale, should the vendee’s failure to pay cover two or more installments; or (3) Foreclose the chattel mortgage on the thing sold should the vendee’s failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void (Art. 1484, N.C.C.). This remedies are exclusive not alternative.

EXTRA-JUDICIAL FORECLOSURE OF REAL ESTATE MORTGAGES:1. The resort to the process of extra-judicial foreclosure emanates from the presence of a stipulation that allows the creditor/mortgagee to extra-judicially foreclose and designating the said party as the attorney-in-fact of the mortgagor to cause the same and to sell the subject property at a foreclosure sale by an insertion into or attachment to the real estate mortgage.

1.1 When a debt is secured by a real estate mortgage, the creditor has two options: (a) to foreclose, or (b) file an ordinary action to collect. If he avails of the option to foreclose, he is still allowed to bring a claim for any deficiency. On the other hand, if he avails of the option to file an ordinary action, he abandons or waives his mortgage lien, without prejudice to his levying on the same property but subject to the rights of other creditors, if any.

1.2 When the mortgagor files a criminal case for violation of BP Blg 22 against the mortgage debtor, he is deemed to have already availed himself of the remedy of a collection suit, and following the rule on alternative remedies, he is barred from subsequently resorting to an action for foreclosure.

1.3 A mortgage contract is, by nature, indivisible. The debtor who has paid cannot ask for a proportionate extinguishment of the mortgage as long as the debt is not completely satisfied. Generally, the divisibility of the principal obligation is not affected by the indivisibility of the mortgage.

2. The foreclosed property shall be redeemed within 1 year from and after the date of the sale (Sec. 6). The aforementioned date of sale has been construed by the Supreme Court to mean the date of registration of the sheriff’s certificate of foreclosure sale in the office of the Register of Deeds concerned (Reyes vs. Noblejas, et al., G.R. No. L-23691, November 25, 1967). Note that the period for redemption may be the subject of an extension as may be agreed upon by the parties.

2.1 The amount to be paid at redemption is the Bid Price, plus 12% interest per annum. Note again that under RA 8791, the redemption amount is such which is due under the mortgage deed with interest at the specified rate therein.

2.2 Redemption may be effected by: (a) The debtor, or (b) His successor in interest , or (c) Any judicial creditor or judgment creditor of the debtor, or (d) Any person having a lien on the property subsequent to the mortgage.

2.3 Notwithstanding the foregoing provision, juridical persons whose property is sold pursuant to an extra-judicial foreclosure, shall have the right to redeem the property until, but not after, the registration of the certificate of foreclosure sale which in no case shall be more than three (3) months after foreclosure whichever is earlier, as provided in Section 47 of Republic Act. No. 8791 (A.M. No.99-10-05-0)

2.4 Note the probable constitutional challenges that may be brought against the quoted provision of RA 8791 on the basis of the equal protection clause as there is no substantive distinction between a corporate and individual debtor or between a bank or non-bank lender.

2.5 Further, the application of the law should be prospective as a corporate mortgagor has acquired as vested right to the one year redemption period if his mortgage was executed prior to RA 8791 as the controlling consideration is the law on redemption at the time of the execution of the mortgage.

2.6 The purchaser of foreclosed property is not automatically entitled to the possession thereof during the redemption period as he must petition the Regional Trial Court of the province or city where the property is situated to give him possession thereof during the redemption period. He must also put up a bond equivalent in value to the use of the property for a period of 12 months to indemnify the debtor in case it is shown that the sale was made without complying with the requirements of Act No. 3135 or that there was no violation of the mortgage deed.

3. In general, formal and substantive defects in the real estate mortgage and the foreclosure proceedings provide the legal and equitable grounds to enjoin or eventually nullify foreclosure proceedings, if not the real estate mortgage itself.

3.1 The general basis would be Article 5, Civil Code, which provides: Acts executed against the provisions of mandatory or prohibitory laws shall be void, except, when the law authorizes their validity

4. Disputes in the amount of the obligation may cause the foreclosure to be enjoined as a bank may legally proceed with foreclosure only when the exact amount of the obligation of the mortgagor is determined in a trial on the merits and the mortgagor cannot meet the obligation following that determination.

4.1 Where the debtor is not given an opportunity to settle the debt at the correct amount and without iniquitous interest imposed, no foreclosure proceedings can be instituted.

4.2 The total amount due on the mortgage is also undetermined if some of the properties are subject to the coverage of the CARP, in which case a portion of the mortgage indebtedness will be assumed by the government up to the amount equivalent to the landowner’s compensation. Hence, until the final valuation of the lands subject to CARP is determined, the amount of the mortgage debt is unliquidated

5. Issue of the legality of the Floating Rate of Interest, which refers to the rate of interest periodically fixed by a bank based on the prevailing interest rate in the market, such as the Manila Reference Rate or Treasury Bill Rate, plus a margin as determined by the bank.

5.1 If this rate of interest is unilaterally fixed by the bank for each interest period without the written conformity of the borrower, the interest may be declared null and void for being potestative and for lack of mutuality based on essential equality between the parties

5.2 Its being a potestative condition (one within the sole power of the one obligated to perform), consequently null and void finds basis in Article 1308 of the Civil Code that provides that the fulfillment of a condition cannot be left to the sole will of one of the contracting parties

5.3 As held by the Supreme Court in Almeda v. Court of Appeals and PNB,256 SCRA 293: The binding effect of any agreement between the parties to contract is premised on two settled principles: (1) that any obligation arising from contract has the force of law between the parties; and (2) that there must be mutuality between the parties based on their essential equality. Any contract which appears to be heavily weighted in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties is likewise invalid.

5.4 The floating rate of interest being unilaterally fixed and determined by the bank also violates the provision of CB Circular No. 1191 that the interest rate for each re-pricing period is subject to mutual agreement between the Borrower and the Bank.

5.5 Under Article 1956 of the Civil Code, no interest is due unless it has been expressly stipulated in writing. The floating rate being unilaterally fixed by the Bank without the written mutual agreement of the Borrower for each re-pricing of interest is null and void under Art. 1956 of the Civil Code, and for violation of CB Circular No. 1191 that the interest rate for each re-pricing period under the floating rate of interest in subject to mutual agreement.

5.6 Consequently, if the interest is declared null and void, the foreclosure sale for a higher amount than what is legally due is likewise null and void because under the Civil Code, a mortgage may be foreclosed only to enforce the fulfillment of the obligation for whose security it was constituted.

5.7 In fact, because there is a dispute on the amount of the interest legally due, the Bank may legally proceed with foreclosure or consolidation only when the exact amount of the obligations of the Mortgagor is determined after trial on the merit and the mortgagor cannot meet the obligation following that determination.

6. Issue of the mortgage as security for future loans. The rule is unless a continuing real estate mortgage is involved, a real estate mortgage is not a valid security for future loans under the so called “Dragnet Clause”.

6.1 This finds basis in the fact that real estate mortgage is an accessory contract, which cannot exist independently of the principal obligation. The consideration for the mortgage is the consideration of the contract of loan. Consequently, the amount of the loan must be specified, otherwise the contract of loan, as well as the accessory contract of mortgage, shall not be perfected for lack of consideration with respect to the unspecified loan in the future. The Supreme Court has held in China Banking Corporation vs. Lichuaco, 46 Phil 460 that: a mortgage is an accessory contract, its consideration is the very consideration of the principal contract, from which it derives life, and without which it cannot exist as an independent contract.

6.2 Further, under Article 2176 of the Civil Code, a mortgage may only be foreclosed for the fulfillment of the obligation for whose security it was constituted

6.3 Mortgages with a dragnet clause is a contract of adhesion that must be strictly construed as against the bank.

6.4 To constitute a real estate mortgage as security for future loans, the future loans must be agreed upon and fixed in the mortgage deed at the time of the execution of the same

6.5 A stipulation that the amounts named as consideration in a contract of mortgage do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered is valid and binding and is known in American Jurisprudence as the “blanket mortgage clause”.

7. Issue of PD 385 prohibiting the issuance of an injunction against foreclosure by any

government financial institution is arbitrary and unreasonable. Hence, may be argued as being unconstitutional. Hence, it cannot be sustained if there is a clear legal ground to restrain foreclosure

8. Issue of the right to take possession. The rule is that the purchaser still has to file a petition for the issuance of a writ of possession to obtain possession.

8.1 The proceedings related thereto allow the mortgagor to participate although jurisprudence provides that the hearings are ex-parte. However, with the mandate of Section 8 of Act 3135 which allow the mortgagor to set aside foreclosure in the same proceedings, it is the better rule to actually allow the mortgagor’s active participation.

8.2 The obligation of the court to issue a writ of possession in favor of the purchaser in an extrajudicial foreclosure sale ceases to be ministerial once it is shown that there is a third party in possession of the property who is claiming a right adverse to that of the mortgagor and that such third party is a stranger to the foreclosure proceedings in which the ex-parte writ of possession was applied for.

8.3 As a limitation on the right to possession, a writ of possession may be legally issued only if the debtor is in possession and no third person has intervened.

8.4 Order granting a writ of possession under Act 3135 is a final order. Hence, it is appealable. In expropriation, it is interlocutory.

9. Grounds for the proper annulment of the foreclosure sale are the following: (a) there was fraud, collusion, accident, mutual mistake, breach of trust or misconduct by the purchaser (b) the sale was not fairly and regularly conducted (c) price was inadequate and the inadequacy was so great as to shock the conscience of the court.

INSOLVENCY:

1. The purpose of the law is to provide for an orderly mechanism by which the assets of the insolvent debtor could be converted into money for distribution among his creditors and thereby relieve the debtor from the weight of his debts and permit him to start anew free from such debts.

2. The situations contemplated by law are: (a) suspension of payments (b) voluntary insolvency, and (c) involuntary insolvency

2.1 Suspension of Payments contemplates a state desired by a debtor who, possessing sufficient property to cover all his debts, foresees

the impossibility of meeting them when they fall due.

2.2 Insolvency contemplates a state where the debtor has more obligations than assets.

2.3 Further distinguishing between the two: Suspension of Payments is always initiated by the debtor, while Insolvency is initiated by the debtor when it is voluntary, or by his creditors or other persons when it is involuntary.

2.4 Other distinctions are: (a) The object of a suspension of payments is the deferment of the payment of debts until such time as the debtor, who possesses sufficient property to cover all his debts, is able to convert such assets into cash or otherwise acquires the cash necessary to pay his debts. In an insolvency proceeding, the object is to compel the presentment of all debts, due or not due, and secure a complete discharge from such debts (b)The amount of debts in suspension of payments is not affected although their payment is postponed. In insolvency, the creditors receive less than what they are entitled to. In some cases where preferences are proper, some creditors may not receive any amount at all

Suspension of Payments in detail:

1. A petition for the suspension of payments is initiated by the debtor, whether he is an individual, corporation, partnership or association.

1.1 When initiated by a natural person, he must have assets sufficient to settle liabilities and will not bar enforcement of claims by creditors holding contractual mortgages. If by a juridical entity, it may avail of the remedy even if it has no sufficient assets to cover debts and liabilities but is under the management of a rehabilitation receiver or management committee and it will result in preferred creditors not being able to enjoy their preference.

1.2 Jurisdiction is vested in the regular courts if initiated by a natural person. If by a juridical person, it is vested with the designated Special Commercial Court.

2. The petition may be filed with the court of the province or city in which the debtor has resided for 6 months next preceding the filing of the petition.

3. Upon the filing of the petition, the court shall issue an order calling for a meeting of the creditors, which to be published and served on the creditors.

4. Subsequently, a meeting of creditors for approval or disapproval of the debtor’s proposition is to be held.

4.1 The meeting of the creditors on the debtor’s proposal requires a quorum and minimum vote consisting of the presence of at least two thirds of the creditors representing at least three-fifths of the liabilities (Section 8[e]). This is known as the “two-thirds/three-fifths rule”. There is no requirement for a majority to reject.

4.2 The action by the creditors on the debtor’s proposal shall have the following effects: (a) If the required vote has not been achieved, the proceedings are terminated and the creditors are at liberty to enforce their respective rights (b)If the creditors approve the proposition and there is no objection on the part of any creditor, the court issues an order that the decision be carried out and that it shall be binding on all creditors included in the Schedule who have been properly summoned; and (c) If the creditors approve the proposition, but a creditor disagrees with or objects to the decision, the court shall conduct a hearing on the objection: (1) If the objection is found to be meritorious, the proceedings will terminate and creditors will be at liberty to enforce their respective rights, or (2) If found to be without merit, court shall proceed as though no objection had been made.

4.3 The grounds for an objection are: (1)Defects in call for the meeting, in the

holding thereof, or in deliberations had thereat, which prejudiced creditor’s rights (2) Fraudulent connivance between one or more creditors and debtor to vote in favor of the proposed agreement; or (3) Fraudulent connivance of claims to obtain a majority.

5. It shall be forbidden of a petitioner for suspension of payments to dispose of his property, unless such disposition is in the ordinary operation of his business, or make any payments outside of the necessary or legitimate expenses of his business.

6. The effects of the filing of a petition for suspension of payments on the below listed situations:

6.1. An execution pending against the debtor- Any execution pending against the debtor shall be suspended before the sale of the property is made. However, the debtor must make a request for this purpose to the court before which the proceeding for suspension of payments is pending. Such suspension shall lapse after 3 months without the proposed agreement being accepted by the creditors or as soon as it is denied. (Section 6)

6.2. An execution against a property of the debtor specially mortgaged – the execution is not suspended (Section 9)

6.3. An action to be filed against the debtor for the collection of a sum of money – no creditor may sue to collect his claim from the debtor from the moment that suspension of payments is applied for and while the proceedings are pending subject to certain exceptions such as claims for personal labor, maintenance, expenses of last illness and claims by persons having mortgages. (Sections 6 and 9)

Voluntary Insolvency in detail:

1. Voluntary insolvency is the state desired by an insolvent debtor who owes debts exceeding the sum of P1, 000.00. He may apply to be discharged from his debts by filing a petition with the Regional Trial Court of the province or city in which he has resided for 6 months next preceding the filing of such petition. The petition must be accompanied by a schedule of debts and an inventory of properties.

1.1 Voluntary Insolvency is different from Involuntary Insolvency in the following manner: In voluntary insolvency, a debtor is deemed insolvent upon his filing of a petition for voluntary insolvency; while in involuntary insolvency, the debtor is considered insolvent upon the issuance by the court of an order declaring him an insolvent.

2. The procedure for voluntary insolvency is initiated by the filing by the debtor of a petition.

2.1 Issuance by the court of an order declaring, among other things, that the petitioner is insolvent. Note that the filing of such petition shall be an act of insolvency. Thus, if the court finds the petition to be in order, it shall issue on the same date it is filed an Order of Adjudication that the debtor is insolvent. If found to contain a falsity, the petition is dismissed.

2.2 Publication of order and service thereof on the creditors. Being a proceeding in rem, there must be publication, as many times as the court may deem proper, and all creditors appearing in the schedule shall be given notice.

2.3 Meeting of creditors for election of assignee in insolvency. An assignee in insolvency is a person selected in both voluntary and involuntary proceedings, either by the creditors or by the court, to whom a debtor declared insolvent, by legal mandate, makes an assignment of his properties for the benefit of creditors.His principal function is to recover all the estate, debts and effects of the insolvent. He shall thereafter as speedily as possible convert the estate, real or personal, into money. The

following property of the insolvent debtor shall pass to the assignee: (a) All real and personal property and effects (b) All deeds, books, and papers (c) The debtor’s right of action for damages to real property (d)Right to release property fraudulently conveyed. The following property shall not pass to the assignee and shall remain with the debtor: (a) After acquired property, except its fruits and income. After-acquired property is that acquired by the debtor subsequent to the filing of petition for insolvency (b)Non leviable assets, such as an insurance policy without any cash surrender value or the premium of which does not exceed P500.00 (c)An expectancy to inherit (d) Right of action in personal injury cases which pertains exclusively to the debtor (e) Property held in trust by debtor or merely leased by debtor (f) Property exempt from execution. (Sec. 12, Rule 39, Rules of Court; Art. 223, Civil Code).

2.4 It is the creditors who have filed their claims who are entitled to elect the assignee and when they submit the name to the court (Section 29). The court will then appoint the person nominated and from then on he will be an officer of the court. A majority of the creditors concurring with majority of the claims will be necessary to properly elect the assignee. (Section 30).

2.5 The assignee’s duty is to convert the property of the debtor to cash and, thereafter, he will declare “dividends” (Sec. 43) to the creditors. “Dividends” are the equitable distribution of the property to the creditors. They are the amounts paid, upon order of the court, to the creditors of an insolvent out of the capital or assets of the insolvent’s estate for the purpose of liquidating or discharging a debt. Thus, the creditors must prove their claims twice: first, under Sec. 29 in the election of the assignee; second, under Sec. 43, to entitle them to dividends. If the creditor fails to prove his claim under Sec. 29, then he is not barred from proving his claim under Sec. 43 in order to be entitled to dividends. And even if the creditor does not present the best proof of his claim under Sec. 29, he can still show the best proof of his credit under Sec. 43, even if the claim was rejected under Sec. 29.

2.6. Composition, if agreed upon. Composition is an agreement whereby the creditors of an insolvent agree to accept a certain percentage of their claims in full settlement of such claims. It is a method of dividing the estate of the insolvent among his creditors amicably.

2.7 Requisites for Valid Offer of Composition are: (a) Offer must be made after the filing of the Schedule of the debtor’s property and the list of his creditors (b) Offer must be accepted in

writing by a majority of the creditors representing a majority of the claims which have been allowed (c) Offer must be made only after the insolvent deposits the consideration to be paid to the creditors; and (d) Offer accepted by the creditors must be confirmed by the Court. (Sec. 53).

2.8 The effects of composition are: (1)Insolvency proceedings dismissed, the

amount agreed upon is deposited in court, and if the court finds settlement meritorious it shall approve the same (2) All debts are discharged – Effect shall be as if the debtor has obtained a discharge, so that all claims against debtor are extinguished and assignee must return all properties to debtor.

2.9 Discharge is the release of the debtor from his debts which were or might be proved in the insolvency proceedings such that they are no longer a charge upon him. An insolvent debtor may apply to the court for a discharge from his debts any time after the expiration of 3 months from the adjudication of insolvency but not later than 1 year from such adjudication, unless the property of the insolvent has not been converted into money.

2.10 To obtain a discharge, the following should be complied with: (1) Debtor must have complied with statutory requirements regarding surrender of his assets for the benefit of creditors and regarding the rendition of an account of his assets and liabilities (2) He must have applied for discharge after three months from date of adjudication of insolvency, but not later than one year thereafter (3)Debtor must not have committed any of the acts of insolvency enumerated in Sec. 65 of Insolvency Law, preventing discharge of a debtor.

2.11 If after being adjudged insolvent, the debtor fails to apply for a discharge within the required period, he loses his right to be discharged.

2.12 The debtor would be entitled to a second discharge if it takes place after 6 years from the first discharge or, if takes place within 6 years from the first discharge, if the second insolvency proceeding is involuntary.

2.13 The effect of a discharge is that it releases a debtor from all debts contracted by him prior to the insolvency proceeding, with the exception of those expressly mentioned by the law. The debts that are not discharged are: (1)Taxes and assessments due to the government, national or local (2)Debts created by the fraud or embezzlement of the debtor (3) Debts created by the defalcation of the debtor as a public officer or while acting in a fiduciary

capacity (4) Debts which have not been scheduled, unless the creditor had actual knowledge or notice of the proceedings in insolvency; and (5) Debts owing to creditors who were not duly notified and had no actual knowledge of the insolvency proceedings.

2.8. Resolution of objections to a discharge, if any. Such objections are to be based on any one or more of the following as the debtor is deemed in bad faith and not entitled to discharge if:

a. Debtor submitted a false affidavit, either in his petition, inventory or schedule;

b. He concealed part of his estate or effects;

c. Debtor was guilty of fraud or neglect in care of his property;

d. Debtor procured an attachment or execution on his property during the one-month period prior to the insolvency proceedings;

e. Debtor destroyed or falsified important papers and documents;

f. Debtor fraudulently gave certain creditors preferences;

g. Debtor failed to disclose that certain claims which had been proven were false or fraudulent;

h. Being a merchant, debtor failed to keep proper books of account;

i. Debtor influenced the action of any creditor by pecuniary means;

j. In contemplation of insolvency, debtor made fraudulent conveyances of or encumbrances upon his properties;

k. Debtor had been convicted of any of the penal provisions of the Insolvency Law; or

l. In case of involuntary insolvency, debtor had already availed of the benefits of the Insolvency Law within the six-year period preceding his application for discharge.

Note that if debtor is one who is in bad faith, the concept of “after-acquired properties” does not apply. In such instance, all properties of the debtor acquired before or after the date of cleavage shall be liable for the payment of all his debts.

Cleavage is the date when the petition is filed, from which the period of thirty days is counted forward or backward in determining the effects provided for in the Insolvency Law, as when: (a) Under Section 20-to determine if at least three (3) creditors filed the petition for insolvency-a

creditor by assignment of credit made within thirty (30) days from date of cleavage shall be disqualified as petitioning creditor (b) Under Section 32- (1) attachment levied upon within a period of thirty (30) days before the date of cleavage may be set aside by the assignee (2) judgments on cases filed and decided within thirty (30) days prior to the date of cleavage may be set aside by the assignee (3)judgments on cases filed before thirty (30) days from the date of cleavage but decided within said thirty (30) days because of confession of judgment or declaration of default of debtor may be set aside by action of assignee (4) properties acquired after date of cleavage, after discharge of debtor in good faith shall not be liable for debts incurred prior to date of cleavage (5) Under Section 70-fraudulent preferences made within thirty (30) days prior to the date of cleavage may be set aside in an action brought by assignee.

Note Section 70 pertains to Fraudulent Preferences when debtor transferred property to any person to give him preference, such transfer may be set aside by proper court action by the assignee provided that the transfer took place within 30 days period from the date of cleavage. The property transferred will be returned to the insolvent’s estate for equitable distribution among his creditors. There is a Presumed Fraudulent Transfer if: (a) Not in the ordinary course of business (b) Under confession of judgment (c)Not for valuable consideration.

Dead Persons Being Under Insolvency (Section 72) – Dead person may be subject of insolvency proceedings. If proceedings filed and debtor dies before Order of Adjudication, case must be dismissed and remedy of the creditors will be to file a claim n the testate or intestate proceedings. But if the debtor dies after the Order of Adjudication has issued, proceedings will continue.

2.9. Appeal to the Supreme Court in certain cases: (a) From an order granting or refusing an adjudication of insolvency and, in the latter case, from the order fixing the amount of costs, expenses, damages, and attorney’s fees allowed the debtor (b) From an order made at the hearing of any account of an assignee, allowing or rejecting a creditor’s claim, in whole or in part, when the amount in dispute exceeds three hundred pesos (c) From an order allowing or denying a claim for property not belonging to the insolvent, presented under section forty-eight of this Act (d) From an order settling an account of an assignee (e) From an order against or in favor of setting apart homestead or other property claimed as exempt from execution (e) From an order granting or refusing a discharge o the debtor. (Section 82)

a. Note that the Insolvency Law provides that the decision of the trial court is final and not appealable BUT due consideration must be accorded the provisions of the 1997 Rules of Civil Procedure regarding appeals to the Supreme Court and what may be the subject of an appeal, which would tend to imply that Insolvency is a case that allows multiple appeals, being a special proceedings case.

Involuntary Insolvency is Detail

1. Involuntary insolvency is the state of which a debtor may be placed by 3 or more of his creditors, residents of the Philippines, whose credits accrued in the Philippines and the amount of which credits are in the aggregate not less than P1,000.00. The said creditors may file a petition with the Regional Trial Court of the province or city in which the debtor resides or has his principal place of business. The petition must allege the commission by the debtor of one or more acts of insolvency.

1.1 One or more of the following 13 acts of insolvency must be alleged in the petition:

a. The debtor is about to depart or has departed from the Philippines with intent to defraud his creditors;

b. The debtor, being absent from the Philippines with intent to defraud his creditors, remains absent;

c. The debtor conceals himself to avoid the service of process for the purpose of hindering, delaying or defrauding his creditors; Personal

d. The debtor conceals or is removing any of his property to avoid its being attached or taken on legal process;

e. The debtor has suffered his property to remain under attachment or legal process for 3 days for the purpose of hindering, delaying or defrauding his creditors;

f. The debtor has confessed or offered to allow judgment in favor or any creditor or claimant for the purpose of hindering, delaying or defrauding any creditor or claimant;

g. The debtor has willfully suffered judgment to be taken against him by default for the purpose of hindering, delaying of defrauding his creditors; Judicial

h. The debtor 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, delay or defraud any one of his creditors;

i. The debtor has made any assignment, gift, sale, conveyance or transfer of his estate, property, rights or credits with intent to delay, defraud or hinder his creditors;

j. The debtor has, in contemplation of insolvency, made any payment, gift, grant, sale, conveyance or transfer of his estate, property, rights or credits; Preference

k. The debtor, being a merchant or tradesman, has generally defaulted in the payment of his current obligations for a period of 30 days;

l. The debtor, for a period of 30 days, has failed after demand to pay any moneys deposited with him or received by him in a fiduciary capacity;

m. The debtor, an execution having been issued against him on final judgment for money, shall have been found to be without sufficient property subject to execution to satisfy the judgment. Merchant

2. The procedure for involuntary insolvency is as follows:

2.1. Filing of petition by creditors of the debtor (Section 20);

2.2. Order by the court requiring the debtor to show cause why he should not be declared insolvent (Section 21);

2.3. Service of the order on the debtor and publication(Section 22);

2.4. Filing of answer or motion to dismiss by the debtor (Section 23);

2.5. Trial of the case (Section 23);

2.6. If the court finds for the debtor, then the proceedings shall be dismissed (Section 23); if the debtor defaults or the court finds for the creditors, then the court shall issue an order adjudging debtor insolvent (Section 24);

2.7. Publication of order and service thereof on the creditors (Section 25)

2.8. Meeting of creditors for election of assignee in insolvency (section 30);

2.9. Conveyance of debtor’s property to assignee in insolvency (Section 32);

2.10. Liquidation of assets and payment of debts (Sections 33, et seq.);

2.11. Discharge of the debtor (Section 64);

2.12. Objections to discharge, if any (Section 66);

2.13. Appeal to the Supreme Court in certain cases (Section 82).

Effects of the filing of a Voluntary or Involuntary Petition of Insolvency on Proceedings against the debtor:

1. In general – the civil proceedings against the debtor, upon application by the debtor himself, any creditor or the assignee, will be stayed or suspended.

2. Secured claims already begun – actions for secured claims already begun are suspended until the assignee is elected. Upon election of the assignee, the action will be continued in the same court where it was filed.

2.1 The remedies of a secured creditor, or of one who holds a real estate mortgage, chattel mortgage and or a pledge are: (a) Rely on the security – then he will not be eligible to take part in the insolvency proceedings (b) Evaluate this security – he can ask this from the court, the balance of the loan not secured may be claimed in the insolvency proceedings (c)File a contingent claim – the creditor will file a claim in the insolvency proceedings, that in case the proceeds from the sale of the security is not enough to cover the loan, the deficiency shall be recovered in the insolvency proceedings.

These three alternatives are also available to a debt secured by a chattel mortgage with the exception of those falling of those under Art. 1484 of the Civil Code (sale of movables under installments), in which case the creditors shall only be entitled to remedies (1) and (2). The same is true with pledge as the Civil Code expressly prohibits a deficiency judgment in pledge.

3. Secured claims not yet begun – actions for secured claims may be begun while the insolvency proceedings are pending with the permission of the insolvency court. However, if the assignee in insolvency has not yet been elected, the said action will be suspended until the assignee is elected.

4. Unsecured claims already begun – actions for unsecured claims already begun are suspended except in cases where the amount due the creditor is in dispute. In such cases, the suit, by leave of the insolvency court, may proceed to judgment for the purpose of ascertaining the amount due, but execution shall be stayed. After the election of the assignee in insolvency, such unsecured claims shall be filed and allowed in the insolvency proceedings, not in the court where they were originally filed.

5. Unsecured claims not yet begun – actions for unsecured claims cannot be filed during the pendency of the insolvency proceedings but it filed, such actions will be dismissed upon motion of the assignee. Such unsecured claims shall then be filed and allowed in the insolvency proceedings, not in the court where they were originally filed.

How claims are resolved by the Assignee:

In resolving the claims of the creditor after the debtor’s assets have been liquidated, unless a composition has been agreed upon by the debtor’s creditors, obligations of the debtor shall be paid in the following order:

1. Equitable claims enumerated in Section 48 of Insolvency Law- these are the claims which are entitled to first priority in payment: (a)Paraphernal property of debtor’s wife (b)

Property held by debtor under lease or usufruct or on deposit or for administration (c)Merchandise held by debtor on commission, for forwarding or on consignment and purchase price from sales on consignment (d)Negotiable instruments sent to debtor for collection and the money collected thereby (e) Money in debtor’s possession for remittance to others (f) Merchandise bought on credit, if no delivery has been made (g) Goods wrongfully taken by the debtor.

2. Preferred claims under Articles 2241 and 2242 of the Civil Code

2.1 Article 2241-with respect to specific movable property of debtor, the following claims are preferred: (a) taxes (b) claims arising from malversation (c)vendor’s lien (d) claims secured by pledge or chattel mortgage (e)mechanic’s lien (f) lien of laborers for wages over goods manufactured (g)salvage (h)tenancy (i) carrier’s lien (j)innkeeper’s lien (k) crop loan (l)rentals for one year; and (m) property on deposit that has been wrongfully sold.

2.2 Article 2242-with respect to specific real property, the following claims shall be preferred: (a) taxes (b) unpaid price realty (c)contractor’s lien (for amounts due to laborers, or architects and engineers) (d) lien of suppliers of materials (e) mortgage credits upon registered real estate mortgages (f)reimbursable expenses for improvement and preservation of real estate (g)credits on property upon which attachments or executions have been made (h)claims of co-heirs for warranty in the partition of an immovable among them (i) claims of donors for pecuniary or other charges on the immovable donated; and (j) claims of insurers upon

insured property, for premiums not exceeding two years (repealed by new Insurance Code)

2.3 Article 2241 lists 13 claims or credits that enjoy preference with respect to specific immovable property and real rights of the debtor: (1) These claims or credits are considered as liens or mortgages or pledges, respectively, of personal or real property (Art. 2243) (2) These claims or credits shall be paid pro rata after the payment of any taxes, duties, fees and assessments, as the case may be, due the State or any subdivision thereof (3) If any excess should remain after payment of the claims or credits which enjoy preference with respect to specific property, real or personal, the same shall be added to the free property which the debtor may have for the payment of the other credits, i.e., those credits which do not enjoy preference with respect to the specific property.

3. Preferred claims under Article 2244 of the Civil Code; and

3.1 Article 2244-with respect to property other than those enumerated in Arts. 2241 and 2242, in the order named: (a)Funeral expenses of debtor and his children (b) Credits for services rendered by employees and household help (c)Expenses incurred during last illness of debtor, his spouse and children (d)Compensation due laborers in cases of labor accident or illness resulting from nature of employment (e)

Debts incurred by debtor for support of his family during the year preceding insolvency (f) Support during insolvency proceedings and for three months thereafter (g) Fines and civil indemnifications arising from crime (h)Legal and other expenses for administration of insolvent’s estate (i)Taxes due national government (j)Taxes due provincial government (k) Taxes due city or municipality government (l)Damages arising from a quasi-delict or tort (m) Gifts due to charitable institutions; and (n) Credits without special privilege appearing in a public document or resulting from a final judgment.

3.2 Article 2244 lists 14 claims or credits which enjoy preference with respect to other property of the debtor. Claims or credits with respect to this property shall be preferred, and paid, in the order named, not pro rata. Take not of No. 14 which refers to credits which, without special privilege, appear in a public instrument, or in a final judgment, if the credits have been the subject of litigation. These credits have preference among themselves in the order of priority of the dates of the instruments (more specifically, the date when they became public instruments, i.e., the date of their notarial acknowledgment) and of the judgments, respectively.

4. Ordinary claims under Section 49 of the Insolvency Law, which are claims other than the above, duly proved and allowed in the insolvency proceedings, which shall pro rata in the remainder of the debtor’s property, without any priority or preference.

4.1 Common credits, i.e., credits of any other kind or class, or by any other right or title, not included in Articles 2241, 2242, 2243 or 2244, enjoy no preference (Art. 2245). They shall be paid pro rata regardless of dates (Art. 2251[2])

CENTRAL BANK ACT

1. The law was enacted on June 14, 1993 and has for its policy the maintenance of a central monetary authority with the power: (a) function and operate as an independent and accountable body in the discharge of its responsibilities concerning money, banking and credit (b) enjoy fiscal and administrative autonomy.

1.1 A central bank is a bank that holds the cash reserves of a country’s commercial banks, performs monetary services for the government, issues bank notes, and makes funds available to commercial banks

Conservatorship

1. The appointintment by the Monetary Board of a conservator takes place whenever a bank or quasi-bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors.

1.1 It is an attempt to save the bank from bankruptcy and ultimate liquidation.

1.2 The appointed conservator is to take charge of the assets, liabilities, and the management thereof for a period not exceeding one (1) year

2. A conservator may take over a bank or quasi-bank without the need of first declaring the bank insolvent (P.D. 1937, June 27, 1984). Nonetheless, the designation of a conservator is not a precondition to the designation of a receiver (Section 30)

2.1 A conservator is the person appointed to take over the management of a bank and shall assume exclusive powers to oversee every aspect of the bank’s operation and affairs.1

3. The conservatorship is terminated when: (a) When Monetary Board is satisfied that institution can continue to operate on its own and the conservatorship is no longer necessary (b)Should Monetary Board determine that the

1 Central Bank vs. CA, 208 SCRA 652

continuance in business of the institution would involve probable loss to its depositors or creditors, in which case proceedings for receivership and liquidation shall be pursued. (Sec. 29).

Proceedings in Receivership:

1. Receivership ensues whenever the Monetary Board finds that a bank or quasi-bank: (a) Is unable to pay its liabilities as they become due in the ordinary course of business BUT:

Shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking community (b) Has insufficient realizable assets to meet its liabilities (c) Cannot continue in business without involving probable losses to its depositors or creditors; or (d) Has willfully violated a cease and desist order that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution;

1.1 In which cases, the Monetary Board may summarily and without need for prior hearing, forbid the institution from doing business in the Philippines and designate the PDIC as receiver of the banking institution.

1.2 There is no requirement that a hearing be first conducted before a banking institution may be placed under receivership. The appointment of a receiver may be made by the Monetary Board without notice and hearing but its action is subject to judicial inquiry( Rural Bank of Buhi v. Court of Appeals,162 SCRA 288)

1.3 The Central Bank, through the Monetary Board, is vested with exclusive authority to assess, evaluate and determine the condition of any bank and if it finds the condition to be one of insolvency, or its continuance in business would involve probable loss to creditors and depositors, it can forbid the bank to do business and can designate a receiver to take charge of its assets and liabilities. Sec. 29 of the Central Bank Act does not contemplate prior notice and hearing before a bank is placed under receivership. It is enough that such action is made the subject of a subsequent judicial review. “Close now and hear later” scheme under the Act is for the purpose of protecting the depositors, creditors, stockholders and general public (Central Bank v. Court of Appeals, 220 SCRA 536)

1.4 Prior notice and hearing is not required before placement of bank under receivership. Section 29 does not contemplate prior notice and hearing before a bank may be directed to stop operation and placed under receivership. When paragraph 4 (now paragraph 5 as amended by E.O. 289) provides for the filing of a case within ten (10) days after the receiver takes charge of the assets of the bank, it is unmistakable that the assailed actions should precede the filing of the

case. Plainly, the legislature could not have intended to authorize “no prior notice and hearing” in the closure of the bank and at the same time allow a suit to annul it on the basis of absence thereof (CB vs. CA, 220 SCRA 539)

1.5 Judicial review is allowed to determine the presence of arbitrariness and bad faith in placing bank under receivership. Admittedly, the mere filing of a case for receivership by Central Bank can trigger a bank run. The procedure prescribed in Section 29 is truly designed to protect the interest of all concerned, and the summary closure pales in comparison to the protection afforded public interest. At any rate, the bank is given full opportunity to prove arbitrariness and bad faith in placing the bank under receivership, in which event, the resolution may be properly nullified and the receivership lifted as the trial court may determine. Until such determination is made, the status quo shall be maintained, i.e., the bank shall continue to be under receivership.

1.6 Receivership is equivalent to an injunction to restrain in the bank officers from intermeddling with the property of the bank in any way. Thus, the appointment of a receiver operates to suspend the authority of the bank and of its directors and officers over its property and effects (Villanueva vs. CA, 244 SCRA 395)

Liquidation:

1. Liquidation shall take place is the receiver determines that the institution cannot be rehabilitated or permitted to resume business, the Monetary Board shall notify in writing the Board of Directors of its findings and direct the receiver to proceed with the liquidation of the institution.

2. The following are the mandatory requirements to be complied with before a bank found to be insolvent can be ordered close: (1) an examination shall be conducted by the appropriate CB department as to the condition of the bank (2) disclosed in the examination is that the condition of the bank is one of insolvency (3) the director shall inform the Monetary Board in writing of such fact, and (4) the Monetary Board shall find the statement of the department to be true (Banco Filipino vs. Monetary Board, 204 SCRA 767)

3. The test of insolvency laid down in Section 29 of the Central Bank Act (now Section 30 of the New Central Bank Act) is measured by determining whether the realizable assets, realizable within a reasonable time by a reasonably prudent person of a bank are less than its liabilities, not considering capital stock and surplus which are not liabilities for such purpose. (Ibid)

4. Upon liquidation, the receiver shall then: (a) File ex parte with Regional Trial Court, and without the requirement of prior notice or any other action, a petition for assistance in the liquidation of the institution pursuant to a liquidation plan adopted by PDIC (b) Upon acquiring jurisdiction, RTC shall, upon motion by the institution, assist the enforcement of individual liabilities of the stockholders, directors and officers, and decide on other issues as may be material to implement the liquidation plan adopted (c)Convert the assets of the institution to money, dispose of the same to creditors and other parties, for the purpose of paying the debts of such institution in accordance with the rules on concurrence and preference of credit under the Civil Code (d) Institute such actions as may be necessary to collect and recover accounts and assets of, or defend any action against, the institution

Selected Issues involving Receivership and Liquidation:

1. If the Central Bank (now Bangko Sentral) through its Monetary Board has promised to rehabilitate the distressed bank, and the stockholders on said assurance proceeded to mortgage their real properties to guarantee CB promised loan advances to said bank, CB cannot renege on said promise, under the doctrine of promissory estoppel, and cannot insist in its liquidation (Ramos vs. CB, 41 SCRA 565)

2. Where the Central Bank, in the course of the rehabilitation of a commercial bank, extended loans and advances, but subsequently the bank was forced by CB to close, and subsequently allowed to reopen, interest due on said loans and advances, cannot be collected because it should be deemed read into every contract of deposit with a bank that the obligation to pay interest on a deposit ceases from the moment the operation of the bank is completely suspended by the duly constituted authority the Central Bank (Ibid,; Overseas Bank vs. CA, 105 SCRA 49)

3. The prescriptive period to institute the foreclosure proceeding was legally interrupted when the mortgagee-bank was placed under receivership with express prohibition from transacting business, a circumstance considered as force majeure (Provident vs. CA, 222 SCRA 125)

4. While the closure and liquidation of a bank may be considered an exercise of police power, the validity of its exercise is subject to judicial determination, and could be set aside, if it is capricious, discriminatory, whimsical, arbitrary, unjust or a denial of the due process and equal protection clauses of the Constitution (CB vs. CA, 106 SCRA 143)

5. A deposit in a distressed bank already forbidden by CB to do business does not become a preferred credit simply because some depositors went to court and were able to secure judgments against the bank (CB vs. Morfe, 63 SCRA 114)

6. Where in the course of bank’s distressed condition, the Central Bank gave financial assistance to restore the bank’s viability, but that inspite of these moves, the bank was closed by CB on August 1968, and allowed to reopen on January 8, 1981, under a new name, Commercial Bank of Manila, the obligation by the bank to pay interest on the CB advances remained suspended during the whole period of its closure, following the ruling in OBM vs. CA and Tapia (105 SCRA 49). Hence, the interest obligation starts to run from the date of the reopening of the bank on January 8, 1981 (Ramos vs. CB, 137 SCRA 685)

GENERAL BANKING LAW

1. The policy of the State is the promotion and maintenance of a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy.

2. Banks are entities engaged in the lending of funds obtained in the form of deposits.

2.1 The definition under Section 2 of the old General Banking Law:2 banks are entities duly authorized by the Monetary Board to engage in the business of regularly lending funds obtained regularly from the public through the receipt of deposits of any kind. Thus, entities which lend funds obtained from the public but not as deposits but rather as debts for their own account, whether done regularly or not, and those which regularly lend funds obtained through the occasional receipt of deposits, would not be considered as banks.

2.2 An entity that is engaged in the business of buying accounts receivables and is funding their business from bonds sold to the public from time to time is not a bank as it does not accept deposits, instead it buys receivables.

Classification of Banks:

1. Banks are classified under the General Banking Law as follows:

(a) Universal banks- these are those that used to be called expanded commercial banks and whose operations are now primarily governed by the GBL. They can exercise the powers of an investment house and invest in non-

2 RA 337

allied enterprises. They have the highest capitalization requirement.

An investment house is a company that earns income solely or primarily by holding and investing in securities issued by other companies or by government agencies.

(b) Commercial banks- these are ordinary or regular commercial banks, as distinguished from a universal bank. They have a lower capitalization requirement than universal banks and cannot exercise the powers of an investment house and invest in non-allied enterprises.

(c) Thrift banks-these are savings and mortgage banks, stock savings and loan associations, and private development banks which are governed primarily by the Thrift Banks Act.3

(d) Rural banks-these are mandated to make needed credit available and readily accessible in the rural areas on reasonable terms and which are governed primarily by the Rural Banks Act of 1992.4

(e) Cooperative banks-these are banks organized primarily to make financial and credit services available to cooperative banks and are governed primarily by the Cooperative Code.5

(f) Islamic banks-these are banks whose business dealings and activities are subject to the basic principles and rulings of Islamic Shari’a, such as the Al Amanah Islamic Investment Bank of the Philippines which was created by the Republic Act No. 6848; and

(g) Other classifications of banks as determined by the Monetary Board.

Incorporation and Organization of Banks

1. The minimum conditions that a prospective bank must comply with before it may be authorized by the BSP to be organized as a bank are:

1.1 That the entity must be organized as a stock corporation;

1.2 That its funds must be obtained from the public, i.e., 20 or more persons; and

1.3 That the minimum capital requirement prescribed by the Monetary Board for each category of banks are satisfied.

2. The SEC cannot register the the articles of incorporation of any bank, or any amendment thereto, unless accompanied by a certificate of

3 RA 79064 RA 73535 RA 6938

authority issued by the Monetary Board, under its seal. Such certificate shall not be issued by the Monetary Board unless it is satisfied from the evidence submitted to it:

3. In organizing the bank, it can only issue par value stocks only.

Supervision and Regulation of Banks:

1. The entity that has supervisory and regulatory powers over banks is the BSP and such extends to all banks, quasi-banks, trust entities, and other financial institutions.

2. This power of the BSP is found in Section 25 of the BSP Law which mandates the conduct of periodic or special examinations, to include those of its subsidiaries and affiliates engaged in allied activities, but such shall be possible only in the in the course of its examination of such bank.

2.1 A subsidiary corporation is one more than 50% of whose voting stock is owned by the bank or quasi-bank.

2.2 An affiliate corporation is one less than 50% of whose voting stock is owned by the bank or quasi-bank or which is related or linked to such bank or quasi-bank through common stockholders or such factors as may be determined by the Monetary Board.6

Management of a Bank:

1. The principle that since a bank is a juridical person that its powers are to be exercised, its business is to be conducted, and that its properties are to be held by a board as provided for by Section 23 of the Corporation Code obtains.

2. However, an independent director, who is a person other than an officer or employee of the bank, its subsidiaries or affiliates or related interests must be elected to the board. Note that the term “independent director” is also used in the Securities Regulation Code7 to refer to a person other than an officer or employee of the corporation, its parent or subsidiaries, or any other individual having a relationship with the corporation, which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

3. There must also be adherence to the fit and proper rule 8 which provides that to maintain the quality of bank management and afford better protection to depositors and the public in general, the Monetary Board shall:

6 Section 25, NCBA7 Section 38, Par. 16.258 Section 16, GBL, BSP Circular No. 296

3.1 prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed bank directors or officers and disqualify those found unfit; or

3.2 After due notice to the board of directors of the bank, the Monetary Board may disqualify, suspend or remove any bank director or officer who commits or omits an act which render him unfit for the position.

3.3 In determining whether an individual is fit and proper to hold the position of a director or officer of a bank, regard shall be given to his integrity, experience, education, training, and competence.

4. An elective or appointive public official cannot serve as an officer of a private bank , whether full-time or part-time shall at the same time serve as officer of any private bank, save in cases where such service is incident to financial assistance provided by the government or a government-owned or controlled corporation to the bank or unless otherwise provided under existing laws.

4.1 The Rural Banks Act9, allows an elected or appointive public official to serve as director, officer, consultant or in any other capacity in a rural bank.

5. A bank is required to have a board composed of 5 no more than 15 directors, two of whom must be independent directors.10

5.1 In case of a merger or consolidation between banks, the number of directors shall not exceed 21.11

5.2 Non Filipino citizens may become members of the board to the extent of the foreign participation in its equity.12

Limitations imposed on Banking Operations:

1. Single Borrower Limit Rules13- these rules regulate the total amount of loans, credit accommodations and guarantees that may be extended by a bank to any person, partnership, association, corporation or other entity.

1.1 The rules seek to protect a bank from making excessive loans to a single borrower by prohibiting it from lending beyond a specified ceiling. The current limit is 25% of the net worth of the bank concerned.14

9 Section 5, RA 735310 Section 15, GBL11 Section 17, GBL12 Section 15, Par. (2), GBL13 Section 35, GBL14 BSP Circular No. 425

1.2 The ceiling is subject to possible increase by an additional 10% provided the additional liabilities of any borrower are adequately secured by trust receipts, shipping documents, warehouse receipts or other similar documents transferring or securing title covering readily marketable, non-perishable goods which must be fully covered by insurance.

2. DOSRI Rules15- these are rules promulgated by the BSP, upon the authority of Section 36 of the GBL, which regulate the amount of credit accommodations that a bank may extend to its directors, officers, stockholders and their related interests, thus the term, DOSRI.

2.1 Generally, a bank’s credit accommodations to its DOSRI must be in the regular course of business and on terms not less favorable to the bank than those offered to non-DOSRI borrowers.

2.2 Related Interests shall include the following: (a) Spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, of a director, officer or stockholder of the bank; (b) Partnership of which a director, officer or stockholder or his spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, is a general partner; (c) Co-owner with the director, officer, stockholder or his spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, of the property or interest or right mortgaged, pledged or assigned to secure the loans or credit accommodations, except when the mortgage, pledge or assignment covers only said co-owner’s undivided interest; (d) Corporation, association, or firm of which a director or officer of such corporation, association or firm, except (1) where the securities of such corporation, association or firm are listed and traded in the big board or commercial and industrial board of domestic stock exchanges less than fifty percent (50%) of the voting stock thereof is owned by any one person or by persons related to each other within the third degree of consanguinity or affinity; or (2) where the director, officer or stockholder of the lending bank sits as a representative of the bank in the board of directors of such corporation: Provided, That the bank representative shall not have any equity interest in the borrower corporation except for the minimum shares required by law, rules and regulations, or by the by-laws of the corporation: Provided, further, That the borrowing corporation under (1) or (2) is not among those mentioned in Items (e) and (f) hereof; (e) Corporation, association or firm of which any or a group of directors, officers, stockholders of the lending bank and/or their spouses or relatives within the first degree of consanguinity or

15 Section 36, GBL

affinity, or relative by legal adoption hold/own more than twenty percent (20%) of the subscribed capital of such corporation, or of the equity of such association or firm; (f) Corporation, association of firm wholly or majority-owned or controlled by any related entity or a group of related entities mentioned in Items (b), (d) and (e) hereof.

2.3 A bank may allow a DOSRI to: (a) borrow from the bank; (b) become a guarantor, indorser or surety for loans from such bank to others; (c) be an obligor; or (d) incur any contractual liability with the written approval of the majority of all the directors of the bank, excluding the director concerned. 16 However, the written approval shall not be required for loans, other credit accommodations and advances granted to officers under a fringe benefit plan approved by the BSP.

2.4 Consequently, any director or officer who may wish to borrow from the bank must observe the following formalities: (a) The borrowing must be in accordance with the Arms Length Rule, or which must be upon terms not less favorable to the bank than those offered to others ,must be with the written approval of a majority of the bank’s board of directors, excluding the director concerned (b)Such approval must be entered upon the records of the bank, i.e., the minutes of the board meeting in which the approval was given; and (c) A copy of the entry of such approval shall be transmitted forthwith to the appropriate supervising department of the BSP.

2.5 The other conditions are: (a) The DOSRI borrower is required to waive the secrecy of his/her deposits of whatever nature in all banks in the Philippines17 and (b) The ceiling/limitation as to loans are followed.

2.6 The amount of the borrowing is limited to the amount equivalent to their unencumbered deposits and book value of their paid in capital contribution, unless they are: (a) secured by assets considered by the Monetary Board as non risk (b) under a fringe benefit plan approved by the BSP, or is (c) extended by a cooperative bank to its cooperative stockholders;

2.7 Should there be a violation of the DOSRI rules, after due notice to the board of directors of the bank, the office of any bank director or officer who violated the rules may be declared vacant and the director or officer shall be subject to the penal provisions of NCBA.

2.8 Loans, credit accommodations or guarantees extended by a bank to DOSRI are also termed as “Insider Lending.”

16 Section 36, GBL17 Section 26, NCBA

Bank Deposits and Bank Responsibility to Depositors

1. As to nature, all kinds of deposits whether fixed or current are to be treated as loans and are to be covered by the law on loan.18

1.1 They are also considered in the nature of irregular deposits, they are really loans because they earn interest.19 Considering a deposit involves the delivery of a thing for safekeeping with the obligation to return the very same thing upon demand20 and a loan is a contract whereby one of the parties delivers to another money or other consumable thing upon the condition that the same amount of the same kind and quality shall be paid.21

1.2 Banks may use the money deposited with them as money deposited in banks, whether fixed, savings and current, are really loans to a bank because the bank can use the same for its ordinary transactions and for banking business in which it is engaged.22

1.3 In fact banks are not obligated to return exactly the money deposited in the same denomination as it was deposited. While the banks have the obligation to return the amount deposited, they have no obligation to return or deliver the same money deposited. Thus, estafa will not prosper.23

1.4 A bank’s failure to honor a deposit is failure to pay its obligation as debtor and not a breach of trust arising from a depository’s failure to return the subject matter of deposit

2. The relation created between the bank and depositor is that of a creditor and debtor with the bank as debtor and the depositor as creditor.24

2.1 The relationship is fiduciary in nature.25

The bank assumes to act as an agent for another and the other reposes confidence in him, although there is no written contract or nor contract at all.

3. A bank should exercise its functions and treat the accounts of their clients not only with the diligence of a good father of a family but it should do so with the highest degree of care

18 People vs. Ong, 204 SCRA 94219 BPI vs. Court of Appeals, 232 SCRA 30220 Article 1962, Civil Code21 Article 1933, Civil Code22 Tan Tiong Tick vs. Americal Apothecaries, 65 Phil 41723 Guingona vs. City Fiscal, 128 SCRA 57724 Serrano vs. Court of Appeals, 96 SCRA 9625 PBCom vs. Court of Appeals, 269 SCRA 695, BPI vs. IAC, 206 SCRA 408

considering the fiduciary nature of their relationships with their depositors.26

3.1 The depositor expects the bank to treat his account with utmost fidelity, whether such account consists only of a few hundred pesos or millions. This is especially true since the bank is engaged in business impressed with public interest and it is its duty to protect in return many clients, and depositors who transact business with it.27

3.2 The bank is under obligation to treat the accounts of its depositors with meticulous care always having in mind the fiduciary nature of their relationship.

3.3 However, the highest degree of diligence is not expected to be exerted by banks in commercial transactions that do not involve their fiduciary relationship with their depositors.28

3.4 In case of negligence in handling the deposit of its clients on account of a bank officer’s gross negligence which causes inconvenience, humiliation and embarrassment to a depositor entitles the latter to an award of damages.29 This notwithstanding the absence of malice and bad faith as if the negligence, nevertheless caused serious anxiety, embarrassment and humiliation to the depositors.30 As long as the bank has committed a serious mistake and the bank’s negligence was a result of lack of due care and caution required of managers and employees of a firm engaged in so sensitive and demanding business as banking, it is liable for moral damages.31

3.5 In view of the fiduciary nature of the relationship of banks and its clients and because banking is imbued with public interest, a bank was also made liable for damages in the following instances: (a) Failure to honor/pay a check of a merchant/trader when the deposit is sufficient.32

Conversely, a bank is not liable for its refusal to pay a check on account of insufficient funds, notwithstanding the fact that a deposit may be made later in the day. Before a depositor may maintain a suit to recover a specific amount from his bank, he must first show that he had on deposit sufficient deposits to meet his demand. (b) When a bank teller validates an incomplete duplicate deposit slip that lacks the name of the account holder.33 (c) When the deposit of PPH 31,500.00 to cover six postdated checks was not credited to the account of the depositor because of the omission of one “zero”

26 BPI vs. Court of Appeals, 326 SCRA 64127 Citytrust Banking vs. IAC, 232 SCRA 55928 Reyes vs. Court of Appeals, GR No. 118492, August 15, 200129 Go vs. IAC, 197 SCRA 2230 BPI vs. IAC, 206 SCRA 40831 Prudential Bank vs. Court of Appeals, 328 SCRA 26432 Moran vs. Court of Appeals, 230 SCRA 79933 Philbank vs. Court of Appeals, 269 SCRA 695

in the account number.34 (d) The bank allowed an impostor to negotiate treasury checks.35 (e) The new accounts teller erroneously used the old account of a depositor instead of the newly opened joined account of the depositor and his spouse, leading to the dishonor of two checks issued by the depositor.36

3.6 The defense of diligence in the selection and supervision of employees is not a valid defense to escape or at least mitigate a bank’s liability. A bank’s liability is not merely vicarious but primary; the defense of exercise of due diligence in the selection and supervision of its employees is of no moment. By the very nature of the work of banks, the degree of responsibility, care and trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees. Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees. 37

3.7 Malice and bad faith need not be proven sufficiently to make a bank liable for moral damages due to the error or negligence of a bank employee as long as the bank has committed a serious mistake and the bank’s negligence was a result of lack of due care and caution required of managers and employees of a firm engaged in so sensitive and demanding business as banking, it is liable for moral damages.38

4. A bank cannot prohibit a borrower from prepaying his loan as a borrower may at any time prior to the agreed maturity date prepay, in whole or in part, the unpaid balance of any bank loan and other credit accommodation, subject to such reasonable terms and conditions (such as the payment of a prepayment fee) as may be agreed upon between the bank and borrower.

PHILIPPINE DEPOSIT INSURANCE CORPORATION (PDIC)

1. The Philippine Deposit Insurance Corporation Act created the Philippine Deposit Insurance Corporation which is a government corporation promoting and safeguarding the interests of the depositing public by providing permanent and continuing insurance coverage on all insured deposits.

2. It insures the deposit liability of all banks to a maximum deposit insurance coverage (MDIC) of P500,000 per depositor in consideration of a premium paid by the bank to the said corporation.(As per RA 9576)

34 Citytrust vs. IAC, 232 SCRA 55935 Go vs. IAC, 197 SCRA 2236 BPI vs. IAC, 206 SCRA 40837 PCIBank vs. Court of Appeals, 350 SCRA 44638 Prudential Bank vs. Court of Appeals, 328 SCRA 264

3. The risk insured against is the closure of a bank.

3.1. The nature of the coverage is compulsory as the law provides that the deposit liabilities of any bank or banking institution which is engaged in the business of receiving deposits or which thereafter may engage in the business or receiving deposits, shall be insured with PDIC.

3.2 Deposits that are covered are savings accounts, current account, time deposits and deposits in acceptable foreign currencies pursuant to Foreign Currency Deposit Act.

3.3 Exempted though from the coverage of the law are trust funds as it was was expressly excluded from the term “deposit” under R.A. 7400 and money market placement as it is not included in the term “deposit”

DETERMINATION OF THE AMOUNT DUE THE DEPOSITOR

1. Insured deposits under the law means the net amount due the depositor for any deposits in the insured bank after deducting any offsets but should not exceed PHP 500,000.00.

2. Hence, if a depositor has two or more accounts maintained in the same right and capacity, the coverage of PHP 500,000.00 shall be held to apply to the sum of all such accounts.

3. A joint account (whether “and/or, “or”, “and” shall be insured separately from any individual-owned account. If held by a juridical person or entity with a natural person, the account shall be presumed to belong to the juridical person.

3.1 Accounts under joint ownership is considered equally shared among co-depositors unless otherwise indicated in the deposit document.

TRUTH IN LENDING

Declared Policy of the State

1. The law, which is to be implemented by the Monetary Board of the Bangko Sentral ng Pilipinas declares that it is 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.

2. Specifically, it: (a) aims to protect a debtor from the effects of misrepresentation or concealment (b) permits him to fully appreciate

and evaluate the real cost of his borrowing (c) avoid the circumvention of usury laws

Coverage of the Law

1. As used in the law, the term “credit” means: (a) loan, mortgage, deed of trust; advance or discount (b) conditional sales contract (c)contract to sell or contract of sale of property or services (d)rental-purchase contract (e)contract for hire, bailment or leasing of property (f) option, demand, lien, pledge or other claim against or for the delivery of property or money (g)purchase of acquisition of any credit upon security of any obligation arising out of any of the above (h) any transaction with similar purpose

2. The provisions of the law apply to creditors, who is defined by law as: any person engaged in the business of extending credit, including any person who as a regular business practice makes loans or sells or rents property or services on a time, credit or installment basis either as principal or agent, who requires as an incident to the extension of credit the payment of a finance charge.

2.1 The application of the law is compulsory for (a) banks (b) non-bank financial intermediaries authorized to engage in quasi-banking are required strictly to adhere to the law. Banks and non-bank financial intermediaries authorized to engage in quasi-banking functions are required to strictly adhere to the provisions of the “Truth in Lending Act” and shall make the true and effective cost of borrowing an integral part of every loan contract (Consolidated vs. CA, 246 SCRA 195)

3. The provisions of the law does not apply to the following credit transactions:

a. those that do not involve the payment of any finance charge by the debtor; and

b. those in which the debtor is the one specifying a definite and fixed set of credit terms such as bank deposits, insurance contracts, sale of bonds, etc.

3.1 Finance charges (Sec. 3[3]; Sec. 2[h], CB Circular 158) are the amounts to be paid by the debtor incident to the extension of credit such as interests, discounts, collection fees, credit investigation fees and attorney’s fees.

3.2 Non Finance charges (Sec. 2[f], CB Circular 158) are the amounts advanced by a creditor for items normally associated with the ownership of property or the availment of the services purchased which are not incident to the extension of credit. For example, when a debtor purchases a car on credit, the creditor may

advance the insurance premium as well as the registration fee for the account of the debtor.

4. To accomplish the policy of the law to protect citizens from a lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost, a creditor or lender is obliged to provide the debtor or borrower with a statement in writing, before perfection of the contract containing the following: (a) Cash price of property or service to be acquired (b)

Amount credited as down payment and or trade-in(c) Charges paid or to be paid not incident to the extension of credit (d) Charges paid or to be paid not incident to the extension of credit (e)Total amount to be financed (f)

Finance charge; and (g)Percentage of finance charge to total amount to be financed.

4.1 The disclosure must be made in a separate document, and not one that is merely incorporated in a document by the statement that the transaction subjects the debtor to a finance charge.

4.2 The failure to comply does not render the principal contract invalid or unenforceable, but would entitle the debtor to recover any interest payment made.

4.3 A violation of the law may subject the violator to: (a) a civil action brought within one year to recover from the seller/lender an amount of P100.00 or double the finance charge imposed, whichever is greater, but not to exceed P2,000.00, plus attorney’s fees and costs, and (b) a criminal action against the seller/lender who if convicted may be imposed a fine ranging from P1,000 to P5,000 or imprisoned from 6 months to 1 year or both. Note that a final judgment that may be rendered in any criminal proceeding to the effect that the defendant has willfully violated the act shall be prima facie evidence against such defendant in an action or proceeding brought by any other party against such defendant under the Act as to all matters respecting which said judgment would be estoppel as between the parties thereto.

THE ‘INSIDE STORY’ ON THE ‘SECRECY OF BANK DEPOSITS’ LAW

Atty. Renato S. RondezPartner, Law Firm of Rondez & PartnersProfessor, College of Law University of the Cordilleras

________________________________QUESTIONS AND ANSWERS ON SECRECY OF BANK DEPOSITS-RA 1405 AND RELATED LAWS

1) What is the purpose of the law?

The purpose of the law is to encourage people to deposit their money in banks and, thereby, discourage private hoarding so that the banks may lend out the money and assist in the economic development of the country39.

2) What does the law prohibit?

(a) The examination and inquiry or looking into all deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government or its political subdivisions and instrumentalities by any person, government official, bureau or office40; and

(b) The disclosure by any official or employee of any banking institution to any unauthorized person of any information concerning said deposits.

Note that the law is applicable to trust accounts or an account that has been set up as an inter vivos or testamentary trust as Section 2 has been held to cover not only money that has been deposited but also to money which has been invested although no creditor-debtor relationship is created between the bank and the client.41

The law does not apply to money market placements as they are not deposits, rather, they are trades in short term negotiable instruments such as securities or treasury bills.

3) What disclosures or inquiries into deposits are not prohibited?

a) Upon written permission of the depositor;b) In cases of impeachment;c) Upon order of a competent court in cases

of bribery or dereliction of duty of public officials;

d) In cases where the money deposited or invested is the subject matter of litigation42;

39 Sec. 1, RA 1405.40 Sec. 2, RA 1405.41 Ejercito vs. Sandiganbayan, GR Nos. 157294-95, November 30, 200642 Sec. 2, RA 1405.

e) Upon order of the court or subpoena issued by the Ombudsman in cases of unexplained wealth43; This is subject to the following requisites: (1) only an in-camera inspection is allowed (2) there must be a pending case before a court of competent jurisdiction (3) account is clearly identified (4) examination is limited to account subject of the court case, and (5) bank personnel and the account holder must be notified to be present during the inspection.

f) Upon order of the Commissioner of Internal Revenue in respect of the bank deposit’s of a decedent for the purpose of determining such decedent’s gross estate44;

g) Upon order of the Commissioner of Internal Revenue when a taxpayer files an application to compromise his tax liability by reason of financial incapacity45;

h) Upon examination made in the course of a special or general audit of a bank as authorized by the Monetary Board after being satisfied that there is reasonable ground to believe that a bank fraud or irregularity is being committed and it has become necessary to look into the deposit to establish the same;

i) Upon examination of a bank’s independent auditor, the result of which are for the exclusive use of the bank;

j) In case of suspicious transactions under the Anti-Money Laundering Law46;

k) Under the Anti-Money Laundering Law where banks are required to report to the Anti-Money Laundering Council any transaction in cash or other equivalent monetary instrument in excess of P500,000 in any one day47;

l) Also under the Money-Laundering Law, the Anti-Money Laundering Council may inquire into a deposit or investment maintained with any financial institution upon order of a competent court, in cases of violation of the Act, when there is probable cause that the deposit or investment is in any way related to an unlawful activity as defined in the Act or a money laundering offense under the Act48;

m) When a director, officer, stockholder, and related interest (DOSRI) obtains a loan from his bank or its subsidiaries, or with related controlling interests of more than 5% of the capital or surplus of the bank, it shall constitute a waiver of secrecy of all his deposits of whatever nature in all banks in the Philippines; and

43 Sec. 6, RA 3019; PNB vs Gancayco, 15 SCRA 91, Marquez vs. Disierto, 399 SCRA 77244 Sec. 6, NIRC.45 Sec. 6, NIRC.46 Sec. 3 (b-1) , RA 9160.47 Sec. 3 (b), RA 9160.48 Sec. 1, RA 9160.

n) Under the Unclaimed Balances Law49.o) The examination of a bank account under

Section 10, Rule 57 in relation to the examination of a party whose property is attached and persons indebted to a defendant or controlling his property.50

4) Who are primarily liable for violations of the law?

The persons primarily liable for a violation of the law would be a bank employee or officer and the person, government officer, agency or office looking into the deposit when not authorized by any of the exceptions to the law.

Note also, that since investigations by the Monetary Board and the Bureau of Internal Revenue are confidential in nature, any disclosure in violation of the confidentiality will create liability.

5) Will the garnishment of a bank deposit violate the law?

No, garnishment of a bank deposit will not violate the law. If the existence of the deposit is disclosed, the same is considered as purely incidental to the execution process51.

What is to be disclosed only is the existence of the deposit, particularly whether or not it is sufficient to satisfy the garnishment. Hence, a disclosure of the balance may constitute a violation of the law.

6) Is a depositor with a safety deposit box protected by the law?

No, the deposits made by a depositor in a safety deposit box are not the deposits contemplated by the law as the bank is never in possession or control of the contents of the safety deposit box in this instance, the depositor is merely leasing the deposit box from the bank.

Prevailing jurisprudence is that the ensuing relationship between the bank renting out the safety deposit box and the client with respect to the contents of the box is that of bailor-bailee, the bailment being for hire and mutual benefit. The bank would be liable for loss of the contents of the box if it is guilty of fraud, negligence or delay or contravention of the tenor of the agreement.52

NOTE: Without order of a court of competent jurisdiction, disclose to any authorized person any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity; Provided, that with respect to bank

49 RA 3936.50 Onate vs. Abrogar, 230 SCRA 18151 China Banking Corp. vs Court of Appeals, 193 SCRA 45452 Sia vs. Court of Appeals, 222 SCRA 24

deposits, the provisions of existing laws shall prevail53.

7) Would the examination of the bank deposits of another person in connection with an inquiry into illegally acquired property of the defendant in anti-graft cases violate the law?

The permitted inquiry into illegally acquired property in anti-graft cases extends to instances where such property is concealed by being held by or recorded in the name of other persons.

8) In a case where the money deposited or invested is the subject matter of the litigation, could an inquiry into the whereabouts of the amount extend to the deposits held in the name of persons other that the one responsible?

Even in cases not involving prosecution under Anti-Graft and Corrupt Practices Act, an inquiry into the whereabouts of the amount converted necessarily extends to whatever is concealed, held or recorded in the name of persons other than the one responsible inasmuch as the case is aimed at recovering the amount converted.

9) Are foreign currency deposits covered by the law?

While the law does not cover foreign currency deposits, they however are absolutely confidential and cannot be disclosed pursuant to Republic Act No. 6426, otherwise known as the Foreign Currency Deposit Act, the only exception to disclosure being upon the written consent of the depositor54.

An additional exemption has been provided by the Anti Money Laundering Law when it has been established that there is probable cause that the deposits involved are in any way related to the offense of money laundering.55

10) Will an unlawful examination of a bank account render the information obtained inadmissible?

There is nothing in the law that provides that an unlawful examination shall render the evidence obtained therefrom to be inadmissible.

11) What is the penalty for a violation of the law?

Upon conviction, a violator may be sentenced to imprisonment of not more than 5

53 Sec. 55.1(b), RA 8791.54 Sec. 8, RA 6426.55 Sec. 11, RA 9160

years of a fine of not more than P200,000.00, or both at the discretion of the court.

INTELLECTUAL PROPERTY CODE

R.A. No. 8293

INTELLECTUAL PROPERTIES

Those property rights which result from the physical manifestation of an original thought.(Ballantine’s Law Dictionary)

Purpose: to strengthen the intellectual and industrial property system in the Philippines as mandated by the country’s accession to the Agreement establishing the World Trade Organization (Mirpuri vs. CA GR no 114508)

COVERAGE -intellectual property rights consists of:

a) Copyrights and related rights;b) Trademarks and service marks;c) Geographic indications;d) Industrial designs;e) Patents;f) Layout-designs (Topographies) of

Integrated Circuits; andg) Protection of Undisclosed Information.

(Sec. 4)

ROMA DRUG vs. RTC OF GUAGUA, PAMPANGA (G.R. No. 149907, April 16, 2009)

FACTS: NBI operatives and inspectors of the BFAD conducted a raid on Roma Drug. The raiding team seized several imported medicines. The seized medicines, which were manufactured by SmithKline, were imported directly from abroad and not purchased through the local SmithKline, the authorized Philippine distributor of these products. The NBI subsequently filed a complaint against Rodriguez for violation of Section 4 (in relation to Sections 3 and 5) of Republic Act No. 8203, also known as the Special Law on Counterfeit Drugs (SLCD). In this case, there is no doubt that the subject seized drugs are identical in content with their Philippine-registered counterparts. There is no claim that they were adulterated in any way or mislabeled at least. Their classification as "counterfeit" is based solely on the fact that they were imported from abroad and not purchased from the Philippine-registered owner of the patent or trademark of the drugs.

ISSUE: May Rodriguez, the proprietor of Roma Drug, be prosecuted under the RA 8203?

HELD: No. The issue has been mooted with the passage in 2008 of Republic Act No. 9502, also known as the "Universally Accessible Cheaper and Quality Medicines Act of 2008".

Section 7 of Rep. Act No. 9502 amends Section 72 of the Intellectual Property Code in that the later law unequivocally grants third persons the right to import drugs or medicines whose patent were registered in the Philippines by the owner of the product.

The challenged provisions of the SLCD apparently proscribe a range of constitutionally permissible behavior. It is laudable that with the passage of Rep. Act No. 9502, the State has reversed course and allowed for a sensible and compassionate approach with respect to the importation of pharmaceutical drugs urgently necessary for the people’s constitutionally-recognized right to health.

STATE POLICY IN RESPECT OF INTELLECTUAL

PROPERTY RIGHTS (IPR)

-There is a declaration of State Policy that, among others, the State recognizes that an effective intellectual and industrial property system is vital to the development of domestic and creative activity, facilitates transfer of technology, attracts foreign investments and ensures market access for our products, hence it shall protect and secure exclusive rights of scientists, inventors, artists, and other gifted citizens to their intellectual property and creations. (Sec. 2)

INTERNATIONAL CONVENTION AND RECIPROCITY

-any person who is a national or who is domiciled or has a real and effective industrial establishment in a country which:

1) is a party to any convention, treaty, or agreement relating to intellectual property rights or the repression of unfair competition to which the Philippines is also a party, or

2) extends reciprocal rights to nationals of the Philippines by law,

Shall be entitled to benefits to the extent necessary to give effect to any provision of such convention, treaty, or reciprocal law, in addition to the rights to which any owner of an intellectual property right is otherwise provided by law. (Sec. 3)

REVERSE RECIPROCITY OF FOREIGN LAWS

– makes reciprocally enforceable on nationals of a foreign state within Philippine jurisdiction all conditions, restrictions, limitations, diminutions, requirements or penalties that may be imposed by such foreign state on a Filipino national seeking intellectual property protection in that country. (Section 231)

TECHNOLOGY TRANSFER ARRANGEMENTS

-contracts or agreements involving the transfer of systematic knowledge for the manufacture of a product, the application of a process, or rendering of a service including management contracts; and the transfer, assignment or licensing of all forms of intellectual property rights, including licensing of computer software except computer software developed for mass market. (Sec. 4)

PRESCRIPTIVE PERIOD OF ACTIONS FOR DAMAGES UNDER THE IPC

-No damages may be recovered after four (4) years from the time the cause of action arose (Sec. 226)

JURISDICTION OVER DISPUTES UNDER IPCA. Original Jurisdiction

1) Director General (IPO)-has original jurisdiction to resolve disputes relating to the terms of a license involving the author’s right to public performance or other communication of his work.

2) Bureau of Legal Affairs-has jurisdiction over the ff:i. Opposition to applications for

registration of marks;ii. Cancellation of trademarks;iii. Cancellation of patents, utility models

and industrial designs;iv. Petition for compulsory licensing of

patents;v. Administrative Complaints for

violations of laws involving IPR where the total damages claimed is not less than P200,000.00

3) Documentation, Information and Technology Transfer Bureau-has jurisdiction to settle disputes involving technology transfer payments

4) Regular Courts

B. Appellate Jurisdiction1) Director General

-over all decisions rendered by the ff: Dir. of Legal Affairs Dir. of Patents Dir. of Trademarks Dir. of the Documentation,

Information and Technology Transfer

2) Court of Appeals-over decisions of the Director General in the exercise of his appellate jurisdiction over the decisions of the:

Dir. of Legal Affairs Dir. of Patents Dir. of Trademarks

3) Secretary of Trade and Industry-over decisions of the Director General on the exercise of his appellate jurisdiction of the Director of Documentation, Information and Technology Transfer; AND-over decisions of the Director General in the exercise of his original jurisdiction relating to the terms of license involving the author’s right.

ADMINISTRATIVE PENALTIES IMPOSED FOR VIOLATIONS OF LAWS INVOLVING IPR

-The Director for Legal Affairs may impose the ff:a) Issuance of a cease and desist order (CDO);b) Acceptance of voluntary assurance compliance

(VAC) or voluntary assurance of discontinuance (VAD);

c) Condemnation or seizure of products subject of the offense;

d) Forfeiture of properties used in the commission of the offense;

e) Imposition of administrative fines;f) Cancellation of permit, license, authority or

registration;g) Withholding of permit, license, authority or

registration;h) Assessment of damages;i) Censure;j) Analogous penalties or sanctions (Sec. 10.2 [b])

IN-N-OUT BURGER vs. SEHWANI, (G.R. No. 179127, December 24, 2008)

FACTS: On 2 June 1997, petitioner filed trademark and service mark applications with the Bureau of Trademarks (BOT) of the IPO for “IN-N-OUT” and “IN-N-OUT Burger & Arrow Design.” Petitioner later found out, through the Official Action Papers issued by the Intellectual Property Office (IPO) on 31 May 2000, that respondent Sehwani, Incorporated had already obtained Trademark Registration for the mark “IN N OUT (the inside of the letter “O” formed like a star).” By virtue of a licensing agreement, BenitaFrites, Inc. was able to use the registered mark of respondent Sehwani, Incorporated.

Petitioner eventually filed on 4 June 2001 before the Bureau of Legal Affairs (BLA) of the IPO an administrative complaint against respondents for unfair competition and cancellation of trademark registration.

The CA held that the IPO Director for Legal Affairs and the IPO Director General had no jurisdiction over the administrative proceedings to rule on issue of unfair competition, because Section 163 of the Intellectual Property Code confers jurisdiction over particular provisions in the law on trademarks on regular courts exclusively.

ISSUES:1. W/N the CA was correct in ruling that the IPO

Director for Legal Affairs and the IPO Director General had no jurisdiction over the administrative proceedings to rule on issue of unfair competition?

2. W/N there was an unfair competition?

HELD: The Court of Appeals erroneously reasoned that Section 10(a) of the Intellectual Property Code, conferring upon the BLA-IPO jurisdiction over administrative complaints for violations of intellectual property rights, is a general provision, over which the specific provision of Section 163 of the same Code, found under Part III thereof particularly governing trademarks, service marks, and trade names, must prevail. Proceeding therefrom, the Court of Appeals incorrectly concluded that all actions involving trademarks, including charges of unfair competition, are under the exclusive jurisdiction of civil courts.

Such interpretation is not supported by the provisions of the Intellectual Property Code. While Section 163 thereof vests in civil courts jurisdiction over cases of unfair competition, nothing in the said section states that the regular courts have sole jurisdiction over unfair competition cases, to the exclusion of administrative bodies. On the contrary, Sections 160 and 170, which are also found under Part III of the Intellectual Property Code, recognize the concurrent jurisdiction of civil courts and the IPO over unfair competition cases.

On the issue of unfair competition.

The essential elements of an action for unfair competition are (1) confusing similarity in the general appearance of the goods and (2) intent to deceive the public and defraud a competitor. The confusing similarity may or may not result from similarity in the marks, but may result from other external factors in the packaging or presentation of the goods. The intent to deceive and defraud may be inferred from the similarity of the appearance of the goods as offered for sale to the public. Actual fraudulent intent need not be shown.

MERRIAM SCHOOL AND OFFICE SUPPLIES CORP vs. CA (G.R. No. L-48413 June 30, 1980)

FACTS: National Book Store was awarded the right to reprint the book entitled The Head Nurse: Her Leadership Role. This, notwithstanding, Merriam School and Office Supplies Corporation violated National's reprinting right by printing two thousand copies of the said book, and, in concert with Webster School and Office Supplies, Inc., have sold and distributed the reprinted copies.

HELD: It appears that National Book Store, Inc. had complained to the Reprinting Committee about the supposed violation of the Presidential Decree No. 285 by the Merriam and Webster firms. Acting on that complaint, the Reprinting Committee, through its staff attorney, informed National bookstore, Inc. in a letter dated October 19, 1976 that its complaint about the printing distribution of the book in question by the Merriam and Webster firms, which were not authorized by the committee, is not the conflict or claim contemplated in section 4 and is thereof, outside the Committee's jurisdiction.The Reprinting Committee opined that the Merriam firm, not being awardees, did not have any claim or right which was in conflict with the right of National Book Store, Inc. and which should be adjudicated by the Committee under section 4. Without prejudging Civil Case No. 109414 for injunction and damages, we hold that the Court of First Instance has jurisdiction over the case and that there is no merit in petitioners, contention that National Book Store, Inc. did not exhaust its administrative remedies.

LAW ON PATENTS

PATENT – an exclusive right acquired over an invention, to sell, use, and make the same whether for commerce or industry.(2005 2006 bar exams)

PATENTABLE INVENTIONS-any technical solution of a problem in any

field of human activity which is (a.)NEW(NOVELTY), involves an (b).INVENTIVE STEP and is (c).INDUSTRIALLY APPLICABLE shall be patentable. ( Elidad Kho s C, March 19,2002)The patentable invention may be, or may relate to, a product, or process, or an improvement of any of the foregoing. (Sec. 21)

Requirements:

1.Technical solution of a problem in any field of human activity

2.Novelty – that which does not form part of a prior art. (Section 23)

Prior Arts:a. that which has been made available to the

public anywhere in the world before the filing date or the priority date of the application

b. that which forms part of an application whether for patent, utility or industrial design, effective in the Philippines, provided that:

i. the inventors or applicants are not the sameii. The contents of the application are published

in accordance with the requirements of patent application rules.

iii. The filing date of the prior art is earlier.

Non-prejudicial Disclosures-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 (includes any person who, at the filing date of application, had the right to the patent);(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. (Section 25)

1.)Inventiveness/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 of the time of the filing date or priority date of the application claiming the invention. (Sec. 26)

2.)Industrial Applicability-an invention that can be produced and used in any industry. (Sec. 27)

NON-PATENTABLE INVENTIONSThe following shall be excluded from patent protection:

a) Discoveries, Scientific Theories and Mathematical Methods;

b) Schemes, rules and methods of performing mental acts, playing games or doing business, and programs for computer;

c) Methods for treatment of the human or animal body by surgery or therapy and diagnostic methods practiced on the human or animal body;

d) Plant varieties or animal breeds of essentially biological process for the production of plants or animals;

e) Aesthetic creations;f) Anything which is contrary to public order or

morality (Sec. 22)

RIGHT TO A PATENTThe right to a patent belongs:

a) to the inventor, his heirs, or assignsb) when 2 or more persons have made the invention separately and independently – to them jointlyc) if two (2) or more persons have made the invention separately and independently of each other – to the person who filed an application for such invention (FIRST TO FILE RULE)d) where 2 or more applications are filed for the same invention – to the applicant who has the earliest filing date or the earliest priority date (FIRST TO FILE RULE) (Sec. 29)e)In case of inventions created pursuant to a commission – to the person who commissions the work UNLESS agreed otherwise.

f) in case an employee made the invention in the course of his employment, the patent shall belong to:

the employee – if invention not part of his regular duties even if he uses the time, facilities and materials of the employer; OR

The employer – if the invention is the result of the performance of his regularly assigned duties unless agreed otherwise.

Right to Priority-an application for patent filed by any person who has previously applied for the same invention in another country which by treaty, convention, or law affords similar privileges to Filipino citizens, shall be considered as filed as of the date of filing the foreign application Requisites:

(a) The local application expressly claims priority;(b) It is filed within twelve (12) months from the date the earliest foreign application was filed; and,(c) A certified copy of the foreign application together with an English translation is filed within six (6) months from the date of filing in the Philippines. (Sec. 15, R.A. No. 165a)

RIGHTS ACQUIRED BY THE PATENTEEThe patentee acquires the following rights

under his patent:a. 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;

b. 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 or offering for sale, or importing any product obtained directly or indirectly from such process;

c. to assign, or transfer by succession the patent, and to conclude licensing contracts for the same (Sec. 71)

CONTENTS OF PATENT APPLICATIONA patent application shall contain:

1) a request for the grant of patent;2) a description of the invention;-the disclosure of the invention must be in

a manner sufficiently clear and complete for it to be carried out by a skilled in the art.

3) Drawings necessary for the understanding of the invention;

4) One or more claims5) An abstract (Sec. 32)

must contain relevant information as to the identity of the person (no anonymous person)

if the applicant is not the inventor; he must show proof of authority to seek application for registration

UNITY OF INVENTION-every application for patent registration

must contain an application over a single invention or several inventions but must form part of a single general inventive concept

PROCEDURE FOR THE GRANT OF PATENTa) According a filing date to the application

(Sec. 41);b) Examination of compliance by applicant

with the formal requirements specified in Sec. 32, i.e., contents of application (Sec. 42);

c) Classification of application and search for prior art (Sec. 43)

d) Publication of patent application in the IPO Gazette (Sec. 44);

e) Inspection of the application documents by any interested party and written observations by any third party concerning the patentability of the invention (Sec. 44.2 and 47);

f) Written request by the applicant, within 6 months from the date of publication of his patent application, for the substantive examination by the IPO of his application. (Sec 48);

g) Grant of the patent (Sec. 50), or refusal of the examiner to grant the patent (Sec. 51); in the latter case, the refusal may be appealed to the Director of the Bureau of Patents;

h) Publication of the grant of patent in the IPO Gazette (Sec. 52)

TERM OF A PATENT, UTILITY MODEL, INDUSTRIAL DESIGNa) Patent – 20 yrs from the filing date of application,

without renewalb) Utility model – 7 yrs, w/out renewalc) Industrial design – 5 yrs, renewable twiceUtility Models

-models of implement or tools of any industrial product even if not possessed of the quality of invention but which is of “practical utility”

Industrial Design-any composition of lines or colors or any

three-dimensional form, whether or not associated with lines or colors provided that such composition or form gives a special appearance to and can serve as pattern for an industrial product or handicraft.

CANCELLATION OF PATENTS1. Who may file?

any person IPO motu proprio

2. Groundsa) That the patent is invalid (Sec.

81);b) That what is claimed as the

invention is not new or patentable;

c) That the patent does not disclose the invention in a manner sufficiently clear and complete for it to be carried out by any person skilled in the art; or

d) That the patent is contrary to public order or morality. (Sec. 61)

e) failure to make payments of annual fees or dues

3. Where to file? BLA – if in violation of IPC

(administrative) RTC – otherwise

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. (Sec. 76)Test of Patent Infringement

1) Literal Infringement – resort is had to the “words” of the claim.

2) Doctrine of Equivalents – if two devices do the same work in substantially the same way, the same result, and produce substantially the same result, they are the same even though they differ in name, form, or shape.

REMEDIES IN CASE OF INFRINGEMENTA) File civil case for the following purposes:

1. To recover from the infringer such damages as the court may award considering the circumstances of the case provided it shall not exceed 3 times the amount of the actual damages sustained plus attorney’s fees and other expenses of litigation;

2.To secure an injunction for the protection of his rights;3.To receive a reasonable royalty, if the damages are inadequate or cannot be readily ascertained with reasonable certainty;

4. To have the infringing goods, materials and implements predominantly used in the infringement disposed of outside the channels of commerce, or destroyed without compensation;

5. To hold the contributory infringer jointly and severally liable with the infringer.

B) File criminal case -within 3 years from date of commission of the

crime for repetition of infringement, without prejudice to the right for damages(Sec. 84)

1995 &2004 BARX Corporation commissioned W to paint the Mayon Volcano on the lobby of the new building of X Corp. for a price of P1M. Who owns the painting? Who owns the copyright of the painting?X Corporation owns the painting but the copyright belongs to W unless there is a written stipulation to the contrary. (Sec.178.4)

ABS-CBN vs. PHILIPPINE MULTI-MEDIA SYSTEM, INC. ( G.R. Nos. 175769-70, January 19, 2009)

FACTS: PMSI is the operator of Dream Broadcasting System. ABS-CBN contends that PMSI’s unauthorized rebroadcasting of Channels 2 and 23 is an infringement of its broadcasting rights and copyright under the Intellectual Property Code (IP Code); that the Court of Appeals’ interpretation of the must-carry rule violates Section 9 of Article IIIof the Constitution because it allows the taking of property for public use without payment of just compensation.

Respondents, on the other hand, argue that PMSI’s rebroadcasting of Channels 2 and 23 is sanctioned by Memorandum Circular No. 04-08-88; that the must-carry rule under the Memorandum Circular is a valid exercise of police power.

ISSUES:

1. W/N PMSI rebroadcasts Channels 2 and 23 of ABS-CBN thus, infringing the broadcasting rights and copyrights of the latter.

2. W/N the must-carry rule violates the rights of ABS-CBN under the IPL.

HELD: The Director-General of the IPO correctly found that PMSI is not engaged in rebroadcasting and thus cannot be considered to have infringed ABS-CBN’s broadcasting rights and copyright.

ABS-CBN creates and transmits its own signals; PMSI merely carries such signals which the viewers receive in its unaltered form. PMSI does not produce, select, or determine the programs to be shown in Channels 2 and 23. Likewise, it does not pass itself off as the origin or author of such programs. Insofar as Channels 2 and 23 are concerned, PMSI merely retransmits the same in accordance with Memorandum Circular 04-08-88. With regard to its premium channels, it buys the channels from content providers and transmits on an as-is basis to its viewers. Clearly, PMSI does not perform the functions of a broadcasting organization; thus, it cannot be said that it is engaged in rebroadcasting Channels 2 and 23.

Thus, while the Rome Convention gives broadcasting organizations the right to authorize or prohibit the rebroadcasting of its broadcast, however, this protection does not extend to cable retransmission. The retransmission of ABS-CBN’s signals by PMSI – which functions essentially as a cable television – does not therefore constitute rebroadcasting in violation of the former’s intellectual property rights under the IP Code.

2.The “must-carry rule” under the Memorandum Circular 04-08-88 requires all cable television system operators operating in a community within Grade “A” or “B” contours to carry the television signals of the authorized television broadcast stations (Ex: broadcasting organizations with free-to-air signals such as GMA-7, RPN-9, ABC-5, and IBC-13)

The carriage of ABS-CBN’s signals by virtue of the must-carry rule in Memorandum Circular No. 04-08-88 is under the direction and control of the government though the NTC which is vested with exclusive jurisdiction to supervise, regulate and control telecommunications and broadcast services/facilities in the Philippines. The imposition of the must-carry rule is within the NTC’s power to promulgate rules and regulations, as public safety and interest may require, to encourage a larger and more effective use of communications, radio and television broadcasting facilities, and to maintain effective competition among private entities in these activities whenever the Commission finds it reasonably feasible. As correctly observed by the Director-General of the IPO:

Accordingly, the “Must-Carry Rule” under NTC Circular No. 4-08-88 falls under the foregoing category of limitations on copyright.

LAW ON TRADEMARKS

DEFINITIONSTrademark – anything which is adopted and used to identify the source of origin of goods, and which is capable of distinguishing them from goods emanating from a competitor

In Society Des Products Nestle vs. CA April 4, 2001, trademark is defined as any word, name symbol or devise adopted and used by a manufacturer or merchant to identify his goods and distinguish them from those manufactured and sold by other.

Service Mark – distinguishes the services of an enterprise from the service of other enterprises. It performs for services what a trademark does for goods.

Collective Mark – 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 and services of different enterprises which use the sign under the control of the registered owner of the collective mark (Sec. 121.2)

Trade Name – the person (whether natural or juridical) who does business and produces the goods or the services is designated by a trade name.-Under the law, there is no need to register trade names in order to secure protection for them.

Trade Dress– involves the total image of a product, including such features as size, shape, color or color combinations, texture, and/or graphics.

HOW MARKS ARE ACQUIRED-Under RA 8293, the rights in a mark shall be

acquired through registration made validly in accordance with its provisions. (Sec. 122)

-This proposition of law, however, may not be converted for it is not true that where there is no registration, there is no protection.Acquisition through use

Whether or not a registered trademark is employed, when a person has identified in the mind of the public the goods he manufactures or deals in his business or services from those of others, such a person has a property right in the goodwill of said goods or services which will be protected in the same manner as other property rights (Sec. 168.1)

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. (Sec. 147)

DURATION-the certificate of registration of a trademark

shall be ten (10) years from the filing date of application provided the registrant shall file a declaration of actual use within a year from the 5 th

anniversary of registration date (Sec. 145)-renewable for another 10 yrs. (Sec. 146)

NON-REGISTRABLE TRADEMARKS, TRADE NAMES AND SERVICE MARK

A mark cannot be registered if it:a) 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;

b) 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;

c) 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 window;

d) Is identical with a registered mark belonging to a different proprietor or a mark with an earlier filing or priority date, in respect of:

(i) The same goods or services, or(ii) Closely related goods or services, or(iii) If it nearly resembles such a mark as to be likely to deceive or cause confusion;

e) 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;

f) 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 trademark: Provided further that the interests of the owner of the registered mark are likely to be damaged by such use;

g) Is likely to mislead the public, particularly as to the nature, quality, characteristics or geographical origin of the goods or services;

h) Consists exclusively of signs that are generic for the goods or services that they seek to identify;

i) Consists exclusively of signs or of indications that have become customary or usual to designate the goods or services in everyday language or in a bonafide and established trade practice;

j) Consists exclusively of signs or 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;

k) 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;

l) Consists of color alone, unless defined by a given form; or

m) Is contrary to public order or morality (Sec. 123)

FILING DATE OF AN APPLICATION

-The filing date of an application shall be the date on which the office received the following indications and elements in English or Filipino:

a) An express or implicit indication that the registration of a mark is sought;

b)Indications sufficient to contact the applicant or his representative, if any;

c) Indications sufficient to contact the applicant or his representative, if any;

d)A reproduction of the mark where registration is sought; and

e) The list of the goods or services for which the registration is sought. (Sec. 127.1)

NO filing date shall be accorded until the required fee is paid (Sec. 127.2)

PROCEDURE FOR REGISTRATIONa) Examination to determine whether the

application satisfies the requirements for the grant of a filing date.

b) Examination to determine whether the application meets the requirements of Sec. 124 and the mark is registrable under Sec. 123.

c) Denial of the application or amendment thereof or publication of the application;

d) Opposition to the application; notice; hearing; decision by examiner; appeal to the Director of Bureau of Trademarks; appeal to the IPO Director General; appeal to the CA;

e) Issuance of Certificate of registrationf) Publication in the IPO Gazette of the fact

of registration

CANCELLATION OF TRADEMARK OR TRADENAME1. Who may file?

- any person who believes that he is and will be damaged by the registration of a mark

2. Where to file?- BLA

3. Grounds:a) Mark becomes generic for goods for

which it is registered;b) Abandonment of the mark;c) Registration obtained fraudulently or

contrary to provisions of RA 8293;d) Mark used by, or with permission of,

registrant;e) Failure to use the mark within the

Philippines for 3 uninterrupted years or longer.

EFFECTS OF NON-USE May be excused if caused by

circumstances arising independently of the will of the trademark owner, such as military coup, or political changes that impede commerce

Registration is an administrative act declaratory of a pre-existing right that does not, of itself, perfect a trademark, for what it does is actual use

Non-use is a ground for removing a mark from the register

DOCTRINE OF SECONDARY MEANING-While a generic, indicative or descriptive

mark will, as a general rule, be denied registration, there is a circumstance that will allow it to be

registered. Under the doctrine of secondary meaning, when a mark has become distinctive of the applicant’s goods in commerce and, in the mind of the public, indicates a single source of consumers, it may be registered.

WHAT CONSTITUTES AN INFRINGEMENT-Under RA 8293, any person 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 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 for infringement. (Sec. 155)

TEST OF TRADEMARK INFRINGEMENT1) Dominancy Test – consists in seeking out

the main, essential or dominant features of a mark.

2) Holistic Test – takes stock of the other features of a mark, taking into consideration the entirety of the marks.

DIFFERENTIATED FROM UNFAIR COMPETITION1) Cause of action: in infringement, the

cause of action is the unauthorized use of a registered trademark; in unfair competition, it is the passing off of one’s goods as those of another merchant.

2) Fraudulent intent is not necessary in infringement, but necessary in UC.

3) Registration of trademarks: in infringement, it is a pre-requisite; in UC, it is not required.

4) Class of goods involved: in infringement, the goods must be of similar class; in UC, the goods need not be of the same class.

infringement is a form of unfair competition

REMEDIES AVAILABLE IN CASE OF INFRINGEMENT OF A REGISTERED MARK

a) Sue for damages (Sec. 156.1);b) Have the infringing goods impounded

(Sec. 156.2);c) Ask for double damages (Sec. 156.3)d) Ask for injunction (156.4)e) Have the infringing goods disposed of

outside the channels of commerce (Sec. 157.1)

f) Have the infringing goods destroyed (Sec. 157.1)

g) File criminal action (Sec. 170);h) Administrative Sanctions

UNFAIR COMPETITION-any person who shall employ deception or

any other means contrary to good faith by which he shall pass off the goods manufactured by him or in which he deals, or his business, or services for those of the one having established such goodwill, or who shall commit any acts calculated to produce said result, shall be guilty of unfair competition.

How Committeda) Making one’s goods appear as the

goods of another;b) Use of artifice or device to induce the

false belief that one’s goods are those of another;

c) False statements in the course of trade; or

d) Any act contrary to good faith calculated to discredit another’s goods

TEST OF UNFAIR COMPETITION-The test is whether certain goods have been

clothed with an appearance likely to deceive the ordinary purchaser exercising ordinary care.

REMEDIES IN CASE OF UNFAIR COMPETITIONa) Damages which may either be: reasonable profit which would have been realized, or actual profits collected by the defendant, or a certain percentage over the gross sales of defendant in case of the measure of damages cannot be readily ascertained;b) Damages may be doubled in cases where actual intent to mislead the public or to defraud the complaint is shown;c) Impounding of sales invoices and other documents evidencing sales;d) Injunctione) Destruction of goods found to be infringing, and all paraphernalia.

TAÑADA vs. ANGARA (G.R. No. 118295, May 2, 1997)

The Constitution did not intend to pursue an isolationist policy. It did not shut out foreign investments, goods and services in the development of the Philippine economy. While the Constitution does not encourage the unlimited entry of foreign goods, services and investments into the country, it does not prohibit them either. In fact, it allows an exchange on the basis of equality and reciprocity, frowning only on foreign competition that is unfair.

Moreover, GATT itself has provided built-in protection from unfair foreign competition and trade practices including anti-dumping measures, countervailing measures and safeguards against import surges. Where local businesses are jeopardized by unfair foreign competition, the Philippines can avail of these measures. There is hardly therefore any basis for the statement that under the WTO, local industries

and enterprises will all be wiped out and that Filipinos will be deprived of control of the economy. Quite the contrary, the weaker situations of developing nations like the Philippines have been taken into account; thus, there would be no basis to say that in joining the WTO, the respondents have gravely abused their discretion. True, they have made a bold decision to steer the ship of state into the yet uncharted sea of economic liberalization. But such decision cannot be set aside on the ground of grave abuse of discretion, simply because we disagree with it or simply because we believe only in other economic policies. As earlier stated, the Court in taking jurisdiction of this case will not pass upon the advantages and disadvantages of trade liberalization as an economic policy. It will only perform its constitutional duty of determining whether the Senate committed grave abuse of discretion.

COPYRIGHT – system of legal protection an author enjoys in the form of expression of ideas(2004,2006,2007,2009 bar exams)

BASIC PRINCIPLES Works are protected by the sole fact of

their creation, irrespective of their mode or form of expression, as well as their content, quality or purpose (Sec. 172.2)

Protection extends only to the expression of the idea, not to the idea itself or to any procedure, system, method or operation, concept or principle, discovery or mere data.

The copyright is distinct from property in the material object subject to it.

Copyright, in the strict sense, is purely statutory right. Being mere statutory right are limited to what the statute confers. It may be obtained and enjoyed only with respect to the subjects and by the persons , and on terms and conditions specified in the statute. Accordingly, it can cover only works falling within the statutory enumeration or description (Pearl & Dean Vs shoemart GR 148222 August 15,2003).

CREATION OF A WORKA copyright work is created when the two (2) requirements are met:

1) Originality – does not mean novelty or ingenuity, neither uniqueness nor creativity. It simply means that the work “owes its origin to the author”

2) Expression – there must be “fixation.” To be “fixed”, a work must be embodied in a medium sufficiently: permanent; or stable

To permit it to be perceived, reproduced, or otherwise communicated for a period of more than transitory duration.

-if it is not required that the medium be visible as long as there is a possibility of retrieval, then there is fixation

-it is fixation that defines the time from when copyright subsists. Before fixation, there can be no infringement.

WORKS PROTECTED BY COPYRIGHT

A. Original Work - Literary and artistic works are original intellectual creations in the literary and artistic domain protected from the moment of their creation, irrespective of their mode or form of expression, as well as of their content, quality and purpose, and shall include in particular:

a) Books, pamphlets, articles and other writings

b) Periodicals and newspapersc) Lectures, sermons, addresses,

dissertations prepared for oral delivery, whether or not reduced in writing or other material form

d) Letterse) Dramatic or dramatico-musical

compositions; choreographic works or entertainment in dumb shows

f) Musical compositions, with or without words

g) Works of drawing, painting, architecture, sculpture, engraving, lithography or other works of art; models or designs for works of art

h) Original ornamental designs or models for articles of manufacture, whether or not registrable as an industrial design, and other works of applied art.

i) Illustrations, maps, plans, sketches, charts and three-dimensional works relative to geography, topography, architecture or science

j) Drawings or plastic works of a scientific or technical character

k) Photographic works including works produced by a process analogous to photography; lantern slides

l) Audiovisual works and cinematographic or any process for making audio-visual recordings

m) Pictorial illustrations and advertisementsn) Computer programso) Other literary, scholarly, scientific and

artistic works (Sec. 172)

B. Derivative Works – the following derivative works shall also be protected:

a) Dramatizations, translations, adaptations, abridgments, arrangements, and other alterations of literary works

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

WORKS NOT PROTECTEDThe following works are not protected:

1) Any idea, procedure, system, method or operation, concept, principle, discovery or mere data as such, even if expressed, explained, illustrated, or embodied in a work;

2) News of the day and other facts having the character of mere items of press information;

3) Any official text of a legislative, administrative or legal nature, as well as any official translation thereof. (Sec. 175)

4) Any work of the Government of the Philippines. (Sec. 176)

-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

5) Pleadings;6) Decisions of courts and tribunals.

-this pertains to the “original decisions” not to the SCRA published in volumes since these are protected under derivative works.

RIGHTS OF AN AUTHOR(Author – a natural person who has created the work.)

A. Economic Rights (Sec. 177)-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, abridgement, 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 copy of the work;

6. Public performance of the work; and7. Other communication to the public of the

work

B. Moral Rights (Sec. 193)1) Right of attribution or paternity right

To require that the authorship of the works be attributed to him, in a prominent way on the copies, and with the public use of the work;

2) Right of alteration or non-publication

3) Right to preservation of integrityTo 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; and4) Right not to be identified with work

of others or with distorted work.

Term of moral right-lifetime of the author and 50

years after his death

Waiver of moral right1) by a written instrument (Sec.

195)2) by contribution to a collective

work unless expressly reserved (Sec. 196)

PRINCIPLE OF AUTOMATIC PROTECTIONUnder the Berne Convention, the enjoyment

and exercise of copyright, including moral rights, shall not be the subject of any formality.

OWNERSHIP OF COPYRIGHT1. Single creator – copyright belongs to the

author of the work, his heirs or assigns.2. Joint creation – copyright belongs to the co-

authors jointly as co-owners. But if the work consists of identifiable parts, the author of each part owns the part that he has created.

3. Employee’s creation – copyright belongs to the employee if the creation is not part of his regular duties even if he uses the time, facilities and materials of the employer; otherwise it belongs to the employer

4. Commissioned work – the work belongs to the person commissioning but the copyright remains with the creator unless there is a written stipulation to the contrary.

5. Cinematographic works – the producer has copyright for purposes of exhibition; for all other purposes, the producer, the author of the scenario, the composer, the film director, the author of the work are the creators.

6. Anonymous and pseudonymous works – the publishers shall be deemed the representative of the author unless:

a. the contrary appearsb. the pseudonyms or adopted name

leaves no doubt as to the author’s identity or

c. If the author discloses his identity (Sec. 179).

7. Collective works – the contributor is deemed to have waived his right unless he expressly reserves it. (Sec. 196)Collective Work – a work created by two or more 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 the contributions of natural persons will not be identified. (Sec. 171.2)

8. In case of transfers, the transferee shall own one or more or all the economic rights transferred provided:

a. the assignment, if inter vivos, be in writing (Sec. 180.2)

b. The assignment be filed with the National Library upon payment of the prescribed fee. (Sec. 182)

DURATION OF COPYRIGHT Literary artistic works and derivative

works of a SINGLE CREATOR - lifetime of the creator and for 50 years after his death

Joint creation – lifetime of last surviving co-creator and for 50 years after his death.

Anonymous or a work under a pseudonym not identifiable with the true name of the creator – 50 years after the date of their first publication.

Except where, before the expiration of said period, the author's identity is revealed or is no longer in doubt, the rule for single and joint creation shall apply

Photographic works – 50 years from the publication of the work, or from making the same term is given to audiovisual works produced by photography or analogous processes.

Work of Applied Art – 25 years from the date of making

Newspaper Article – lifetime of the author and 50 years after his death

A pure news report will no longer find protection under the new law, BUT a column or published comment will.

The work of performers not incorporated in RECORDING, PRODUCTS OF SOUND IMAGE RECORDINGS, and BROADCASTS – protected for periods of 50 years, 50 years, and 20 years, respectively, counted from the end of the year of performance, recording, or broadcasts, respectively.

The term of protection shall be counted from the first day of January of the year following the death of the author or of last publication (Sec. 214)

LIMITATIONS TO THE RIGHTS ON COPYRIGHT1) Private performance, private and personal

use – applicable only “when a work has been lawfully made accessible to the public.”

Personal Use-making a single reproduction, adaptation,

arrangement or other transformation of another’s work exclusively for one’s own individual use in such cases as personal research, learning or amusement

Private Use-making a reproduction, adaptation or other

transformation of it, in a single person as in the case of “personal use” but also for a common purpose by a specific circle of persons only.

2) Fair Use of a Copyrighted WorkFair Use - a privilege in persons other than

the owner of the copyright to use the copyrighted material in a reasonable manner without its consent, notwithstanding the monopoly granted to the owner by the copyright.

-the doctrine of fair use is meant to balance the monopolies enjoyed by the copyright owner with interests of the public and of society.

CRITERIA TO DETERMINE WHETHER USE IS FAIR OR NOT

a) Purpose and the character of the useb) Nature of the copyrighted workc) Amount and substantially of the portions usedd) Effect of the use upon the potential market of the copyrighted work (Sec. 185)

THE “FAIR-USES” OF PROTECTED MATERIAL ARE Criticizing, commenting, and news reporting; Using for instructional purposes including

producing multiple copies of classroom use, for scholarship, research and similar purposes (Sec. 185)

3) Working of Architecture (Sec. 186)-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 or in any form recognizably derived from the original; Provided, that the copyright in any such work shall not include the right to control the reconstruction, or

rehabilitation in the same style as the original of a building to which that copyright relates

4) Reproduction of Published Work -exclusively for research and private study.

5)Reprographic 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.

6)Reproduction of Computer Programs-allowed on the ff. conditions:a) only one copy is made;b) lawful owner made the copy;c) purpose of which the reproduction is made is legal like: use to which the program is made and for which it was purchased demand the reproduction of a copy; or the reproduction of a copy is necessary to guarantee against loss or destruction (Sec. 189.1)

5) Importation for Personal Purposes-the importation of a copy of

a work by an individual for his personal purposes shall be permitted without the authorization of the author of, or other owner of copyright in, the work under the following circumstances:a)Copies of the work are not available in the Philippines and:i. not more than one copy at one time is imported for strict individual use;ii. importation is by authority and for the use of Philippine Government; oriii. Religious, charitable, or educational society imported not more than 3 copies per title provided they are not for sale.b) 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 three (3). (Sec. 190)

REMEDIES IN CASE OF INFRINGEMENT1) Injunction to prevent infringement2) Damages assessed on the basis of the proof

alleged by the plaintiff of sales made by the defendant of the infringing work minus whatever costs the defendant may be able to prove and appreciated by the court.

3) Delivery under oath of all implements employed in the production of the infringing products themselves and the infringing items, for impounding or destruction as the court may order.

4) Payment of moral and exemplary damages under the discretion of court.

5) Criminal Action

DESTILERIA AYALA, INC. vs. TAN TAY & CO. (G.R. No. L-48793 August 6, 1943)

FACTS: By reason of shortage of bottles of its own, defendant Tan Tay & Co. in selling wine similar to that of the plaintiff, had, prior to this action, been using bottles registered in the name of the plaintiff but with the word "Ayala" generally erased or obliterated therefrom, leaving only the word "Destileria" legible on said bottles.

Plaintiff prays that the respondent be inhibited from using glass receptacles duly registered by former.HELD: To make the use of such containers illegal, it is not essential that they be used by other persons with the distinctive name, mark or design engraved thereon. If the containers originally conformed to the description contained in the certificate of registration and it appears that they are the same containers being used by the other persons, the use is illegal regardless of whether or not their distinctive name, mark or design is partly or entirely erased therefrom. If the illegality of the use may be removed by erasing or obliterating from the containers their distinctive name, mark or design, the protection of the law would become useless. In other words, it is the use of the containers themselves - not merely the use of the trade-mark engraved thereon - that is prohibited by law.

A.M. No. 04-7-06-SC RE: CONDITIONS ON THE COMMERCIAL

EXPLOITATIONOF SUPREME COURT DECISIONS RESOLUTIONa. The person compiling and selling the decisions shall provide the Supreme Court Library twenty (20) free copies of the compiled decisions in the format the compilation is sold to the public; b. If the compilation is in printed copies, the Supreme Court Library shall have the right to digitize the compilation for exclusive use for research purposes by Justices, Judges and court attorneys of the Judiciary; c. If the compilation is in digitized format, the Supreme Court Library shall have the right to make available the digitized compilation for exclusive use for research purposes by Justices, Judges and court attorneys of the Judiciary. The person compiling shall submit to the Supreme Court Library a text-file digitized copy of the compilation;d. The Court shall have the right to purchase copies of the compilation at cost, that is, by paying only the cost of reproducing the compilation, the cost of installation, and the cost of any accompanying software license. Such copies shall be used exclusively by Justices, Judges and court attorneys of the Judiciary and shall not be re-sold by the Court;e. The compilation shall bear the notice “Compiled for sale to the public with the permission of the Supreme Court”;f. These conditions apply to any updating of the compilation

Copyright Patent MarkDefinition

It is that system of legal protection an author enjoys in he form of expression of ideas (World Intellectual Property Organization [WIPO].)

Refers to either the grant of rights, or the instrument (sometimes called letters patent) containing the grant, giving an inventor a monopoly on the inventor’s invention for a limited period.

Any visible sign capable of distinguishing the goods of an enterprise (trademark) or the services of an enterprise (service mark), and includes a stamped or marked container of goods (Sec.121.1).

Purposes

1. To stimulate artistic creativity for the general public good; and

2. To promote the progress of science and useful arts.

1. Not only to reward the individual, but the advancement of the arts and sciences;

2. To add to the sum of useful knowledge; and

3. To encourage dissemination of information concerning discoveries and inventions.

1. To indicate origin or ownership of articles to which they are attached;

2. To guarantee that those articles come up to a certain kind of quality;

3. To advertise articles they symbolizes;

4. To assure the public that they are producing genuine article; and

5. To protect the manufacturer against substitution and sale of an inferior and different article.

Requirements

1. Originality and 2. Expression

Any technical solution of a problem in any field of human activity which is:

1. New or novel2. Insensitive; and3. Industrially applicable (Sec.21)

1. Upon application:Must be registrable (Sec.123.1): a. Absolutely non-

registrable- (a-1) & (m) of Sec.123.1

b. Qualifiedly registrable- (j), (k), (l) of Sec.123.1; Doctrine of Secondary meaning (Sec.123.2).

2. Within 3 years from application:

Declaration and evidence of actual use (Sec.124.2).

Term

Single/Joint Creator – lifetime of the creator/last surviving co-creator and 50 years after his deathAnonymous/Pseudonym - 50 years after date of first publicationPhotographic Works - 50 years from publication/makingWork of Applied Art - 25 years from date of makingNewspaper Article (Column/Published Comment) – lifetime of the author and 50 years after his deathWork of performers not incorporated in RECORDING, PRODUCTS OF SOUND IMAGE RECORDINGS, and BROADCASTS – protected for periods of 50 years, 50 years, and 20 years, respectively, counted from the end of the year of performance, recording, or broadcasts

Patent - 20 years from the filing date of the application (Sec.54).

Utility Model – 7 years without renewal

Industrial Design – 5 years renewable twice

10 years from the filing date of the application, provided the registrant shall file a declaration of actual use within a year from the 5th anniversary of registration date (Sec.145) and renewable for another 10 years (Sec.146).

How Created/ Acquired

From the moment of creation (fixation)

First-to-file system Valid Registration

General limitation

1. Duration /temporal- the owner is limited by the terms of their property rights.2. Territorial /geographical- the owner is protected by the law of the country where the violation is committed.3. For violations in another country, resort must be made to the law of the other country, subject to the principle of

reciprocity in Sec.3