Commercial Law - 6 questions

i. Corporations (kinds of corporations, including corporations sole; composition of /

membership in board of directors; powers, duties and prerogatives of boards of directors
and stockholders; and articles of incorporation and by-laws)
ii. Intra -corporate dispute (concept)
iii. Intellectual property (copyright, including fair use principle and moral rights)
iv. Insurance (what can be insured, claims for life insurance)
v. Republic Act No. 10173 (Data Privacy Act of 2012)

i. Corporations

BASIC PRINCIPLES

Corporation- It is an artificial being created by operation of law, having the right of succession and the powers,
attributes and properties especially authorized by law or incident to its existence. (Sec. 2)

ADVANTAGES OF A CORPORATION
1. It may sue and be sued, enter into contracts and acquire properties in its name and its own right.
2. The stockholders of a corporation are not liable for the debts and obligations of the corporation
beyond their unpaid subscriptions.
3. It continues to exist despite changes in ownership of the stockholdings in the corporation or even
when its members or stockholders should die.
4. Shares are transferable even without the consent of the other stockholders.
5. Management is clearly defined in a corporation and centralized through its board of directors
6. It enables greater business ventures to be undertaken because its ability to mobilize more capital
b being able to allow many individuals to contribute to its fund by the acquisition of shares.

ATTRIBUTES OF A CORPORATION
1. It is an artificial being that exists only in the contemplation of law.
2. It has a legal personality or judicial capacity or juridical capacity of its own.
3. It is created by operation of law.
4. It has the right of succession which means that the corporation continues to exist despite the death of its
stockholders or changes among the stockholders.
5. It has the powers. Attributes and properties expressly authorized by law or incident to its existence.

NOTE:
A corporation is entitled to the protection of the constitution. Thus, a corporation is entitled to immunity against
unreasonable searches and seizures. A corporation is after all, but an association of individuals under an assumed
name and with a distinct legal entity.

However, a corporation has no right to self-incrimination. Thus, an officer of the corporation can not refuse to
produce corporate records on the ground that it may incriminate him or the corporation. (Bataan Shipyard and
Engineering Co., vs. PCGG)

A corporation may be civilly liable for torts, because generally speaking, the rules governing the liability of a
principal or master for a tort committed by an agent or servant are the same whether the principal or master be a
natural person or a corporation, and whether the servant or agent be a natural or artificial person.
A corporation cannot be imprisoned, however it may be fined, but such fine is a consequence of the officers
being prosecuted for violation of law. It may also be summoned, fined or ousted by quo warranto from exercising
its powers unlawfully.

DOCTRINE OF LEGAL ENTITY OF CORPORATIONS- It means that a corporation is a juridical person with a
personality separate and distinct from that of each shareholder.

CONSEQUENCES OF THE DOCTRINE OF LEGAL ENTITY

1. The stockholders are not personally liable for the debts of the corporations and vice versa.
2. The stockholders are not the owners of corporate properties and assets.
3. The stockholders cannot sell or maintain actions in their own name in connection with corporation
affairs, business or property.

CASE:
A corporation has a personality distinct and separate from its officers who manage and run its affairs. The rule
is that obligations incurred by the corporation, acting through its directors, officers and employees, are its sole
liabilities. Thus, property belonging to a corporation cannot be attached to satisfy the debt of a stockholder and
vice versa, the latter having only an indirect interest in the assets and business of the former. (DELIMA VS.
GOIS, 554 SCRA 737)

It is settled that a corporation is clothed with a personality separate and distinct from that of its stockholders. The
mere fact one is a president of a corporation does not render the property which the corporation owns or
possesses the property of the president of the corporation since the latter, as an individual an d the corporation are
separate entities. (BOOC VS. BANTUAS, 334 SCRA 279)

BLANKET MORTGAGE CLAUSE/DRAGNET CLAUSE- It is one which secures all of past or future origins.
- It operates as a convenience and accommodation to the borrowers as it makes available additional
security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, etcetera.

NOTE:
An officer of the corporation cannot be made liable for a contract entered into in behalf of the corporation unless
the situation falls in one of the instances when an officer or director is personally liable for his acts. (BANK OF
COMMERCE VS. MARILYN NITE)

Sec. 31. Liability of directors, trustees or officers. – Directors or trustees who wilfully and knowingly vote for or
assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing
the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such
directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.

Solidary liability will then attach to the directors, officers or employees of the corporation in certain
circumstances, such as:

1. When directors and trustees or, in appropriate cases, the officers of a corporation: (a) vote for or assent to
patently unlawful acts of the corporation; (b) act in bad faith or with gross negligence in directing the corporate
affairs; and (c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members,
and other persons;
2. When a director or officer has consented to the issuance of watered stocks or who, having knowledge thereof,
did not forthwith file with the corporate secretary his written objection thereto;

3. When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and
solidarily liable with the corporation; or

4. When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate
action.

REQUISITES BEFORE A OFFICER OR DIRECTOR OF A CORPORATION MAY BE HELD

PERSONALLY LIBLE FOR CORPORATE OBLIGATIONS

(1) the complainant must allege in the complaint that the director or officer assented to patently unlawful acts of
the corporation, or that the officer was guilty of gross negligence or bad faith; and
(2) the complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith

PIERCING THE VEIL OF CORPORATE FICTION

- It means that while a corporation cannot generally be made liable for acts or liabilities of its stockholders
or members, and vice versa because a corporation has a personality separate and distinct from its
stockholders or members, however the corporate existence is disregarded under this doctrine where the
corporation is formed or used for illegitimate purposes or justify wrong or evade a just and valid
obligation.

INSTANCES WHERE PIERCING THE VEIL OF CORPORATE FICTION IS APPLIED

1. When the separate and distinct corporate personality defeats public convenience, as when the corporate
fiction is used as a vehicle for the evasion of an existing obligation.
2. In fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud, or defend a crime
3. Is used in alter ego cases, where a corporation is essentially a farce, since it is a mere alter ego or
business conduit of a person, or where the corporation is so organized and controlled and its affairs are so
conducted as to make it merel and instrumentality, agency, conduit, or adjunct of another corporation. In
the absence of malice, bad faith, such corporate officer cannot be made personally liable for corporate
liabilities

`CASE:
Any application of the doctrine oof piercing the corporate veil should be done with caution. A court should be
mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such
an extent that injustice, fraud, or crime was committed against another, in disregard of his rights. The wrong
doing must be clearly and convincingly established; it cannot be presumed. (Rand E TRANSPORT INC. VS.
LATAG)

ALTER EGO DOCTRINE/ INSTRUMENTALIT RULE

- It is where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact
a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the instrumentality
may be disregarded.

ELEMENTS:
1. Control- not mere stock control, but complete domination- not onl in finances, but of policy and business
practice in respect to the transaction attacked, must have been such 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 a wrong doing to perpetuate the
violation of a statutory or other positive legal duty, or a dishonest and unjust act in contravention of the
plaintiffs legal right.
3. Said control and breach of duty must have proximately caused the injury or unjust loss complained of.

NOTE:
The mere fact that the corporation is a non-stock corporation does not by itself preclude the application of the
equitable remedy of piercing the corporate veil. The equitable character of the remedy permits a court to look to
the substance of the organization, and its decision is not controlled by the statutory framework under which the
corporation was formed and operated.

It also applies to One person Corporation.

REVERSE PIERCING THE VEIL OF CORPORATE FICTION

- It is the opposite of the traditional corporate veil-piercing and makes the corporation liable for the debts
of the shareholder

TYPES OF REVERSE PIERCING

 Outsider reverse piercing – it occurs when a party with a claim against an individual or corporation
attempts to be repaid with assets of a corporation owned or substantially controlled by the defendant.
 Insider reverse piercing- the controlling members will attempt to ignore the corporate fiction in order to
take advantage of a benefit available to the corporation, such as interest in a lawsuit or protection of
personal assets.
CASE:
While it may appear impossible for a person to exercise ownership and control over a non-stock not for
profit corporation, a person can be held personally liable under the alter ego theory if the evidence shows that the
person controlling the corporation did inf act exercise control, even though there was no stock ownership.
The piercing of the corporate veil may apply to corporations as well as natural persons involved with
corporations. This court has held that the corporate mask may be lifted and the corporate veil may be pierced
when a corporation is just but the alter ego of a person of another corporation. (IAME VS. LITTON)

Mere ownership by a single stockholder of all or nearly all of the capital stock of a corporation is not by
itself a sufficient reason for disregarding the fiction of separate personalities. Neither is the fact that the name
“ECO” represents the first three letters of Onate’s name is sufficient reason to pierce the veil. Even if it did it did
not mean that the said corporation is merely a dummy of Onate. A corporation may assume any name provided it
is lawful. There is nothing illegal in a corporation acquiring the name or as in this case, the initials of one of its
stockholders. (ONATE VS. LBP)

 KINDS OF CORPORATIONS, INCLUDING CORPORATIONS SOLE

 Stock and Nonstock Corporations
Stock corporations are those which have capital stock divided into shares and are authorized to distribute
to the holders of such shares, dividends, or allotments of the surplus profits on the basis of the shares held.
These are the ordinary corporations created and operated for the purpose of making a profit.

 All other corporations are nonstock corporations. Non-stock corporation is one where no part of
its income is distributable as dividends to its members, trustees, or officers. Any profit which a non-stock
 corporation may obtain incidental to its operations shall, whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which the corporation was organized. (Sec. 86, RCCP)
Membership in a nonstock corporation and all rights arising therefrom are personal and
nontransferable, unless the articles of incorporation or the bylaws otherwise provide. (Sec. 89)

 One Person Corporation- It is a corporation with a single stockholder. That only a natural person,
trust, or an estate may form a One Person Corporation. (Sec. 116)

 Corporation Sole- it is formed by the chief archbishop, bishop, priest, minister, rabbi, or other
presiding elder for the purpose of administering and managing, as trustee, the affairs, property and
temporalities of any religious denomination, sect or church. It is composed of one member only.

 Corporations Aggregate - are those incorporated by more than one person.

- Corporate Aggregate and One Person Corporation

The Revised Corporation Code of the Philippines allows any person, partnership, association or
corporation to either, singly or jointly with others but not more than fifteen (15) in number to organize a
corporation. (Sec. 10, RCCP)

Changes:
1. Incorporators need not be natural persons
2. Less than five (5) may incorporate
3. Majority of incorporators need not be resident of the Philippines

 Ecclesiastical or religious – compose of members that are entirely spiritual persons and erected
for the furtherance of religion.

 Lay corporation- established for some other purposes

 Eleemosynary Corporations/charitable corporations - it is created not for private gain or profit

but for charitable purposes
 Civil Corporations- are those organized not for the purpose of public charity, but for the benefit.
Pecuniary or otherwise, of its members.

 Domestic Corp – incorporated under the Philippine Laws

 Foreign Corp.- organized under foreign laws

 Public Corp – organized for political, public or governmental purposes

 Private Corp. – are created for purposes other that those of government, or to carry out private
purposes and interest

 Close Corp. is one whose shares of stock are owned by not more than a specified number of
people not exceeding 20, subject to restrictions on transfer and not offered to the public nor listed in the
stock exchange. Any other corporation is Open corporation

Capital Stock - is the amount fixed in the articles of incorporation. If the capital stock is divided into shares with
par value, it is called Authorized Capital Stock. If the capital stock is divided into no par value shares, it is called
Stated Capital or simply Capital Stock.

Incorporators
- either natural or artificial persons
- not more than 15
 - owns at least 1 share of the capital stock of the corporation

Classification of Shares
 Common and Preferred
 Voting and non-voting
 Par value and no par value
 Founders’ shares
 Redeemable shares
 Treasury shares

NOTE:
- Preferences granted to preferred stockholders do not give them a lien upon the property of the
corporation nor make them creditors of the corporation, the right of the formed being always subordinate
to the latter. Dividends are payable only when there are profits earned by the corporation and as a general
rule, even if there are existing profits, the board of directors has the discretion to determine whether or
not to declare dividends.

- An incorporator cannot be changed after incorporation.

- A corporation cannot be formed for the practice of a profession because human professional qualification
for such profession cannot be possessed by a corporation.

ONE PERSON CORPORATION

- Prohibited to operate as OPC - Banks and quasi-banks, preneed, trust, insurance, public and publicly-
listed companies, and non-chartered government-owned and -controlled corporations may not
incorporate as One Person Corporations: Provided, further, That a natural person who is licensed to
exercise a profession may not organize as a One Person Corporation for the purpose of exercising such
profession except as otherwise provided under special laws.

 A One Person Corporation shall not be required to have a minimum authorized capital stock
except as otherwise provided by special law. (Sec. 117)

 Required – AOI (Sec. 119) Not required – Bylaws (Sec. 119)

 A One Person Corporation shall indicate the letters "OPC" either below or at the end of its
corporate name. (Sec. 120)

 Single Stockholder as Director, President. - The single stockholder shall be the sole director and
president of the One Person Corporation. (Sec. 121)

 Treasurer, Corporate Secretary, and Other Officers. OPC shall appoint a treasurer, corporate
secretary, and other officers as it may deem necessary. The single stockholder may not be appointed as the
corporate secretary.

 A single stockholder who is likewise the self-appointed treasurer of the corporation shall give a
bond to the Commission in such a sum as may be required: Provided, That the said stockholder/treasurer
shall undertake in writing to faithfully administer the One person Corporation's funds to be received as
treasurer, and to disburse and invest the same according to the articles of incorporation as approved by the
Commission. The bond shall be renewed every two (2) years or as often as may be required. (Sec. 122)
  Nominee and Alternate Nominee. - The single stockholder shall designate a nominee and an
alternate nominee who shall, in the event of the single stockholder's death or incapacity, take the place of the
single stockholder as director and shall manage the corporation's affairs.

 In case of death or permanent incapacity of the single stockholder, the nominee shall sit as
director and manage the affairs of the OPC until the legal heirs of the single stockholder have been lawfully
determined.

 Liability of Single Shareholder. - A sole shareholder claiming limited liability has the burden of
affirmatively showing that the corporation was adequately financed.

Where the single stockholder cannot prove that the property of the One Person Corporation is independent
of the stockholder's personal property, the stockholder shall be jointly and severally liable for the debts and
other liabilities of the One Person Corporation.

The principles of piercing the corporate veil applies with equal force to One Person Corporations as with
other corporations. (Sec. 130)

 Conversion from an Ordinary Corporation to a OPC. When a single stockholder acquires all the
stocks of an ordinary stock corporation, the later may apply for conversion into a One Person Corporation,
subject to the submission of such documents as the Commission may require. If the application for
conversion is approved, the Commission shall issue a certificate of filing of amended articles of
incorporation reflecting the conversion. The One Person Corporation converted from an ordinary stock
corporation shall succeed the later and be legally responsible for all the latter's outstanding liabilities as of
the date of conversion. (Sec. 131)

Conversion from One Person Corporation to an Ordinary Stock Corporation. –

A One Person Corporation may be converted into an ordinary stock corporation after due notice to the
Commission of such fact and of the circumstances leading to the conversion, and after compliance with all
other requirements for stock corporations under this Code and applicable rules. Such notice shall be filed
with the Commission within sixty (60) days from the occurrence of the circumstances leading to the
conversion into an ordinary stock corporation. If all requirement a have been complied with, the
Commission shall issue a certificate of filing or amended articles of incorporation reflecting the conversion.

In case of death if the single stockholder, the nominee or alternate nominee shall transfer the shares to the
duly designated legal heir or estate within seven (7) days from receipt of either an affidavit of heirship or
self-adjudication executed by a sole heir, or any other legal document declaring the legal heirs of the single
stockholder and notify the Commission of the transfer. Within sixty (60) days from the transfer of the
shares, the legal heirs shall notify the Commission of their decision to either wind up and dissolve the One
Person Corporation or convert it into an ordinary stock corporation.

The ordinary stock corporation converted from One Person Corporation shall succeed the latter and be
legally responsible for all the latter's outstanding liabilities as of the date of conversion. (Sec. 132)

 Corporation Sole. - For the purpose of administering and managing, as trustee, the affairs,
property and temporalities of any religious denomination, sect or church, a corporation sole may be formed
by the chief archbishop, bishop, priest, minister, rabbi, or other presiding elder of such religious
denomination, sect or church. (Sec. 108)

 Corporation De Jure
If a corporation is a de jure corporation, its due incorporation cannot be successfully attacked even in a
quo warranto proceeding by the State. Therefore, if such proceeding is brought against a corporation and the
 State has a prima facie case, the corporation must show that it is a de jure corporation. (VILLANUEVA,
PHILIPPINE CORPORATE LAW, P. 66 [2001 ED.])

 Corporation De facto (Sec. 19)

The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and
its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such
corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto
proceeding. (Sec. 20, RCCP)
 The due incorporation of a de facto corporation cannot be inquired into collaterally in any private
suit to which such corporation may be a party.
 But the rule disallowing collateral attacks applies only where the municipal corporation is at least
a de facto corporation. For where it is neither a corporation de jure nor de facto, but a nullity, the rule is
that its existence may be, questioned collaterally or directly in any action or proceeding by any one
whose rights or interests are affected thereby, including the citizens of the territory incorporated unless
they are estopped by their conduct from doing so. (Municipality of Malabang v. Benito, G.R. No. L-
28113, March 28, 1969)

 Requirements to Qualify as a De Facto Corporation

(a) the existence of a valid law under which it may be incorporated;
(b) an attempt in good faith to incorporate;
(c) assumption of corporate powers; and
(d) filing of articles of incorporation and issuance of the certificate of incorporation.

 An organization not registered with the Securities and Exchange Commission cannot be considered a
corporation in any concept, not even a corporation de facto. (Seventh Day Adventist Conference Church of
Southern Philippines, Inc. v. Northeastern Mindanao Mission of Seventh Day Adventist, Inc. 528 Phil. 647)

 Corporation By estoppel

All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable
as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided,
however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation
or on any tort committed by it as such, it shall not be allowed to use its lack of corporate personality as a
defense. Anyone who assumes an obligation to an ostensible corporation as such cannot resist performance
thereof on the ground that there was in fact no corporation. (Sec. 20, RCCP)

 Corporation by Estoppel Distinguished from Corporation De Facto

Corporation by estoppel Corporation de facto

Existence when persons assume to act as a exists for all practical purposes but which
corporation knowing it to be without has no legal right to such corporate
authority to do so existence
Effect Persons who constitute a corporation by Corporators in a corporation de facto may
estoppel are liable as general partners for avoid being personally liable on the de
all debts, liabilities and damages incurred facto corporation’s liability
or arising as a result of their actions

 Private and Public Corporation

Private corporations are those formed for profit or for some private purpose or benefit. They are created
by the operation of a general law, which presently refers to Republic Act No. 11232 otherwise known as the
Revised Corporation Code of the Philippines.
 Public Corporation - If the corporation is created by the State as the latter's own agency or
instrumentality to help it in carrying out its governmental functions, then that corporation is considered
public; otherwise, it is private. (Bayani Fernando v. COA, G.R. No. 237938 and 237944-45, December 4,
2018)

Charter Test
[T]he test to determine whether a corporation is government owned or controlled, or private in nature is
simple. Is it created by its own charter for the exercise of a public function, or by incorporation under the
general corporation law? Those with special charters are government corporations subject to its provisions,
and its employees are under the jurisdiction of the Civil Service Commission, and are compulsory members
of the Government Service Insurance System. (Philippine Society for the Prevention of Cruelty to Animals v.
Commission on Audit, 560 Phil. 385)
Officers and employees of government-owned or controlled corporations without original charters are
covered by the Labor Code, not the Civil Service Law. However, non-chartered government-owned or
controlled corporations are limited by law in negotiating economic terms with their employees. This is
because the law has provided the Compensation and Position Classification System, which applies to all
government-owned or controlled corporations, chartered or non-chartered. (GSIS Family Bank Employees
Union v. Sec. Villanueva, 2019, J. Leonen)

 Quasi-Public Corporation
Quasi-public corporations are private corporations that render public service, supply public wants, or
pursue other eleemosynary objectives. (Philippine Society for the Prevention of Cruelty to Animals v.
Commission on Audit, 560 Phil. 385)

 Nationality of corporations

 Domestic or Foreign
Relevance: provisions in statutes that restricts foreign ownership on certain enterprises (Constn and special
laws)
Enterprises reserved fully and wholly for the Filipinos e.g. mass media, practice of profession; Small scale
mining (not less than 2.5USD capital)
Limitation up to 20%, private radio comm;
Public utilities up to 40% (Gamboa v Teves)

Tests of the Nationality of Corporate Entity

There are three (3) recognized tests, incorporation, control and domicile tests.
a. Incorporation test – where the corporation was incorporated. If in Phils (Domestic regardless
whether the majority or all incorporators are foreign nationals) or abroad (foreign)

b. Control test
In this test, the nationality of a corporation is determined by the nationality of the controlling stockholders
or members. This test is applied in determining whether a corporation with foreign equity is allowed to
undertake certain nationalized enterprises. The one controlling is the one who has the right to elect the BOD.

Example: A corp with 5 incorporators: A, B, C, D and E where A, B, C and D are all Filipinos with 1 share
each while E is a foreigner with 96 shares. Is the corporation domestic or foreign? Who will control the
corporation?

Gamboa Case:
 PLDT shares previously owned by the Marcoses which were sequestered by the PCGG and sold by the
gov’t. Foreign corporations bid and it was alleged that it will violate Sec 11, Art XII, Const’n which states
that only up to 40% capital should be owned by foreigners in public utility companies e.g. PLDT as
shareholdings of foreigners will undoubtedly increase
Determination on who controls the corporation is based on the shareholdings.
SC clarified: need to check what kind of shares: either preferred or common. Determination of control is
not based on whoever holds the preferred shares. What was sold were preferred shares and shareholdings of
common shares are still predominantly owned by Filipinos

In the absence of any provision in the by law or in the articles of incorporation, those holding preferred
shares are non-voting shares. Common shares are shares with voting rights

NOTE:
- Presently, a corporation shall have perpetual existence unless the articles of incorporation provides
otherwise. Corps. With certificates of incorporation issued prior to the effectivity of this code, and w/c
continue to exist prior to the effectivity shall have perpetual existence, unless a corporation, upon a votes
of its stockholders representing a majority of its capital stock, notifies the Commission that it elects to
retain its specific corporate term pursuant to its AOI.

- A corporation whose term has expired may apply for revival in the Commission. However, No
application for revival of certificate of incorporation of banks, banking and quasi-banking institutions,
preneed, insurance and trust companies, non-stock savings and loan associations (NSSLAs), pawnshops,
corporations engaged in money service business, and other financial intermediaries shall be approved by
the Commission unless accompanied by a favorable recommendation of the appropriate government
agency. (Sec.11)

- The requirement of BP Blg. 68 that the paid up capital shall in no case be less than P5000 has been
eliminated in the present law. There is no minimum capital stock required of a stock corporation, there
are also no minimum amount subscribed and paid up capital required.

- Domicile of the corporation is the place where its principal office or place of business is situated. It is the
state of incorporation.

Corporate names that cannot be allowed:

1. Not distinguishable from a name already reserved or registered for the use of another corporation
2. Already protected by law
3. Contrary to law, rules and regulations

Doctrine of Secondary Meaning- a word or phrase originally incapable of exclusive appropriation with
reference to an article on the market because geographically or otherwise descriptive, might nevertheless, have
been used so long and so exclusively by one producer with reference to the article that said word or phrase has
come to a mean that the article was his product.

- Corporate name must first be submitted by the incorporator to the commission to be allowed for its
verification.
- A private corporation formed or organized commences to have existence and juridical personality and is
deemed incorporated from the date the SEC issues a certificate of incorporation.

 COMPOSITION OF / MEMBERSHIP IN BOARD OF DIRECTORS

A. Repository of Corporate Powers
Doctrine of Centralized Management
Unless otherwise provided in this Code, the board of directors or trustees shall exercise the corporate
powers, conduct all business, and control all properties of the corporation (Sec. 22).

Powers of the Board of Directors

General Rule: The Board of Directors ALONE exercises the powers of the corporation.
Exceptions: Other persons or groups within the corporation may do so similarly:
a) If (1) there is a management contract and (2) powers are delegated by majority of the board to an
executive committee;
b) Corporate officers (e.g. the President) via authority from (1) law, (2) corporate by-laws; and (3)
authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the
general course of business;
c) A corporate agent in transactions with third persons to the extent of the authority to do so has been
conferred upon him;
d) Those with apparent authority (doctrine of apparent authority).

Theories on Source of Board Power

a. Directly-Vested / Original Power
Pursuant to Section 22, the source of power of the Board of Directors is primarily and directly-vested by
law; it is not a delegated power from the stockholders or members of the corporation
b. Delegated Powers from Stockholders
The Board of Directors is a creation of the stockholders and controls and directs the affairs of the
corporation by delegation of the stockholders. By drawing to themselves the powers of the corporation, they
occupy positions of trusteeship in relation to the stockholders.

Doctrine of Ratification
The corporation may ratify the unauthorized acts of its corporate officer. The substance of the doctrine is
confirmation after conduct, amounting to a substitute for a prior authority. Ratification can be made either
expressly or impliedly like silence or acquiescence and acceptance of benefits (Yasuma v. Heirs of Cecilio De
Villa, G.R. No. 150350, 2006). But illegal acts cannot be ratified.

Doctrine of Apparent Authority

If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an
apparent authority, it holds him out to the public possessing the power to so do those acts; and thus, the
corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from
denying the agent’s authority. (Francisco v. GSIS, G.R. No. L-18287, 1963)

Apparent authority may be ascertained through:

a. The general manner in which the corporation holds out an officer or agent as having the power to act or,
in other words, the apparent authority to act in general, with which it clothes him; or
b. The acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof,
whether within or beyond the scope of his ordinary powers.
If a private corporation intentionally or negligently clothes its officers or agents with apparent power to
perform acts for it, the corporation will be estopped to deny that the apparent authority is real as to innocent third
persons dealing in good faith with such officers or agents.
Note:
It requires presentation of evidence of similar acts executed either in its favor or in favor of other parties.
It is not the quantity of similar acts which establishes apparent authority, but the vesting of a corporate officer
with the power to bind the corporation (People’s Aircargo and Warehousing Co., Inc. v. CA., G.R. No. 117847,
1998).
When the officers or agents of a corporation exceed their powers in entering into contracts or doing other
acts, the corporation, when it has knowledge thereof, must promptly disaffirm the contract or act and allow the
other party or third persons to act in the belief that it was authorized or has been ratified. If it acquiesces, with
knowledge of the facts, or fails to disaffirm, ratification will be implied or else it will be estopped to deny
ratification (Premiere Development Bank vs. CA, G.R. No. 159352, 2004).
Efren was Bonanza’s General Property Manager while Miguel was the President. Bonanza leased the lot
to Efren but eventually notified the latter about the rescission of lease. Using the Doctrine of Apparent Authority,
Bonanza was estopped from denying the existence and enforceability of Lease Contract after it effectively
ratified the lease by accepting proceeds throughout several years. Also, while it is true that the doctrine cannot be
invoked by one who is not a third party, an officer of a corporation can actually be a third person in contract with
the corporation. (Quesada, et al. v. Bonanza Restaurants, Inc., G.R. No. 207500, 2016)

B. Tenure, Qualifications and Disqualifications of Directors

Term of Office (Sec. 22)
● Directors shall be elected for a term of one (1) year from among the holders of stocks registered in the
corporation’s books
● Trustees shall be elected for a term not exceeding three (3) years from among the members of the corporation.
Each director/trustee shall hold office until the successor is elected and qualified.

Qualifications of Directors
a. Must own at least one (1) share of the capital stock of the corporation in his own name or must be a member in
the case of non-stock corporations
i. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation
of which he is a director shall thereby cease to be a director. (Sec. 22)
b. He must not be disqualified under the RCC (Sec. 26)
c. He must possess other qualifications as may be prescribed in the by-laws of the corporation. (Gokongwei, Jr. v.
SEC, G.R. No. L-45911, 1979)
d. He must be of legal age

Disqualifications of Directors, Trustees, or Officers (Sec. 26)

A person shall be disqualified from being a director, trustee, or officer of any corporation if, within five
(5) years prior to the election or appointment as such, the person was:
a) Convicted by final judgment:
i. Of an offense punishable by imprisonment for a period exceeding six (6) years;
ii. For violating this Code; and
iii. For violating “The Securities Regulation Code”;
b) Found administratively liable for any offense involving fraud acts; and
c) By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct similar to
those enumerated in paragraphs (a) and (b) above.

Grounds not exclusive

The foregoing is without prejudice to qualifications or other disqualifications, which the SEC or the
Philippine Competition Commission may impose in its promotion of good corporate governance or as a sanction
in its administrative proceedings. (Sec. 26)
By-law provisions that prohibit directors who have interests in competitor corporations are reasonable in order to
protect the interests of the company (Gokongwei v. SEC, G.R. No. L-45911, 1979)

Hold-Over Principle
Directors/Trustees may continue to hold office despite the lapse of one year until their successors are
elected and qualified.
Remaining members of the board of directors cannot elect another director to fill in a vacancy caused by
the resignation of a hold-over director. The hold-over period is not part of the term of office of a member of the
board of directors. (Valle Verde Country Club v. Africa, G.R. No. 151969, 2009)
Thus, when during the holdover period, a director resigns from the board, the vacancy can only be filled-
up by the stockholders, since there is no term left to fill-up pursuant to the provisions of Section 29 which
mandates that a vacancy occurring in the board of directors caused by the expiration of a member’s term shall be
filled by the corporation’s stockholders. (Valle Verde Country Club v. Africa, G.R. No. 151969, 2009)
 A director continuing to serve after one year from his election (on a holdover capacity), cannot be
considered as extending his term. This hold-over period is not part of his term, which, as declared, had already
expired. (Valle Verde Country Club v. Africa, G.R. No. 151969, 2009)

C. Requirement of Independent Directors (Sec. 22)

An independent director is a person who, apart from shareholdings and fees received from the
corporation, is independent of management and free from any business or other relationship which could, or
could reasonably be perceived to materially interfere with the exercise of independent judgment in carrying out
the responsibilities as a director.
Requirements:
Independent directors must be:
1) independent of management and free from any relationship which could materially interfere with the
exercise of independent judgment as a director
2) a shareholder and receive fees from the corporation
3) elected by the shareholders present or entitled to vote in absentia during the election of directors.
4) subject to rules and regulations governing their qualifications, disqualifications, voting requirements,
duration of term and term limit, maximum number of board memberships and other requirements that
the SEC will prescribe.

Corporations required to have Independent Directors

The board of the following corporations vested with public interest shall have independent directors constituting
at least twenty percent (20%) of such board:
a) Corporations covered by “The Securities Regulation Code”, namely:
i. those whose securities are registered with the SEC,
ii. corporations listed with an exchange or with assets of at least Fifty million pesos
(P50,000,000.00) and having two hundred (200) or more holders of shares, each holding at least one hundred
(100) shares of a class of its equity shares;
b) Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service business, pre-need, trust
and insurance companies, and other financial intermediaries; and
c) Other corporations engaged in business vested with public interest similar to the above, as may be determined
by the SEC, considering such factors:
i. such as the extent of minority ownership,
ii. type of financial products or securities issued or offered to investors,
iii. public interest involved in the nature of business operations, and
iv. other analogous factors.

 powers, duties and prerogatives of boards of directors and stockholders

By the Board of Directors
The Board of Directors is the main agency by which all corporate powers and authority are exercised
General rule: Majority vote of the Board is needed in the following instances:
a. Extension or shortening of the corporate term
b. Increase or decrease of capital stock or the creation of bonded indebtedness
c. Sale or other disposition corporate assets
d. Sale or other dispositions of all or substantially all corporate assets (with 2/3 stockholders or
members authorization, Sec 39)
e. Acquisition of its own shares
f. Investment of corporate funds in any corporation or business or for any purpose other than its
primary purpose (with 2/3 stockholders ratification, Sec. 41)
g. Declaration of cash, property, and stock dividends (if stock dividends, it must be joined with 2/3
vote of shareholders, sec. 42)
h. Entering into management contracts (accompanied by the approval of the shareholders or members,
Sec. 43)

 articles of incorporation and by-laws

Nature and Function of Articles
The Articles of Incorporation is a basic contract document in Corporate Law which defines the charter of
the corporation. Section 13 of the Corporation Code provides that the Articles of Incorporation do not become
binding as the charter of the corporation unless they have been filed with and registered with the SEC.
Note: The Articles of Incorporation defines the contractual relationships between the State and the
corporation, the stockholders and the State, and between the corporation and its stockholders (Lanuza v. CA,
G.R. No. 131394, 2005).
i. Contents (Sec. 13)
All corporations shall file with the SEC articles of incorporation in any of the official languages, duly
signed and acknowledged or authenticated, in such form and manner as may be allowed by the SEC, containing
substantially the following matters, except as otherwise prescribed by this Code or by special law:
a. The name of the corporation;
b. The specific purpose or purposes for which the corporation is being incorporated. Where a
corporation has more than one stated purpose, the articles of incorporation shall state which is the
primary purpose and which is/are the secondary purpose or purposes: Provided, That a non-stock
corporation may not include a purpose which would change or contradict its nature as such;
c. The place where the principal office of the corporation is to be located, which must be within the
Philippines;
d. The term for which the corporation is to exist, IF not elected the perpetual existence;
e. The names, nationalities and residences of the incorporators;
f. The number of directors or trustees, which shall not more than fifteen (15);
g. The names, nationalities and residences of persons who shall act as directors or trustees until the first
regular directors or trustees are duly elected and qualified in accordance with the Corporation Code;
h. 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;
i. If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of
the contributors and the amount contributed by each; and
j. Such other matters as are not inconsistent with law and which the incorporators may deem necessary
and convenient.

An arbitration agreement may be provided in the articles of incorporation pursuant to Section 181 of this
Code.
Note: The articles of incorporation and applications for amendments thereto may be filed with the SEC in
the form of an electronic document, in accordance with the SEC’s rules and regulations on electronic filing.

Amendments
Requirement for Amending Articles of Incorporation (Sec. 15)
a. A legitimate purpose for the amendment;
b. Majority vote of directors or trustees and the vote or written assent of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal right of dissenting
stockholders if available, or if it be a non-stock corporation, two-thirds (2/3) of the members.
c. The original and amended articles together shall contain all provisions required by law to be set out in the
articles of incorporation.
d. Indication in the articles, by underscoring, the change or changes made.
e. A copy of amended articles duly certified under oath by the corporate secretary and a majority of the
directors or trustees stating the fact that said amendment or amendments have been duly approved by the required
vote of stockholders or members, as the case may be.
When would take effect:
a. The amendments shall take effect upon their approval by the SEC or
b. From the date of filing with the said Commission, if not acted upon within six (6) months from the date of
filing for a cause not attributable to the corporation.
Grounds for Rejecting Incorporation or Amendment to Articles of Incorporation (Sec. 16)
a. Not in prescribed form;
b. Illegal purpose;
c. False Treasurer’s affidavit; and
d. Non-compliance with required Filipino stock ownership.

The SEC shall give the corporation a reasonable time to correct or modify objectionable portions.
Note: A favorable recommendation of the appropriate government agency to the effect that such article
or amendment is in accordance with law is required in the following types of corporation:
● Banks, banking and quasi-banking institutions,
● Preneed, insurance and trust companies,
● Non-stock savings and loan associations (NSSLAS),
● Pawnshops, and
● Other financial intermediaries

ii. Non-Amendable Items:

1) Names of incorporators
2) Names of incorporating directors/trustees
3) Names of original subscribers to capital stock and subscribed and paid-up capital
4) Treasurer-in-trust elected by original subscribers
5) Members who contributed to the initial capital of non-stock corporation
6) Witnesses and acknowledgments

Adoption of By-Laws
By-laws
Relatively permanent and continuing rules of action adopted by the corporation for its own government
and of the individuals composing it and those having direction, management and control of its affairs, in whole or
in part, in the management and control of its affairs and activities.
Regulations, ordinances, rules or laws adopted by an association or corporation or the like for its internal
governance, including rules for routine matters such as calling meetings and the like (San Miguel Corp. v.
Mandaue Packing Products Plants Union-FFW, G.R. No. 152356, 2005).
By-laws are intended merely for the protection of the corporation, and prescribe regulation, not
restrictions, they are always subject to the charter of the corporation (Rural Bank of Salinas v. CA, GR No.
96674, 1992).

Requisites of Valid By-Laws:

a. It must be consistent with the Corporation Code, other pertinent laws and regulations.
b. It must be consistent with the Articles of Incorporation.
c. It must be reasonable and not arbitrary or oppressive.
d. It must not disturb vested rights, impair contract or property rights of stockholders or members or create
obligations unknown to law.

Binding Effects
The by-laws of the corporation are its own private laws that have the same effect as the laws of the
corporation. They are deemed written into the charter. Thus, they become part of the fundamental laws of the
corporation which are binding upon the corporation and its officers, and the litigating parties who are not part of
the corporation in accordance with their terms (Peña v. CA, G.R. No. 91478, 1991; Forest Hills Golf Club v.
Gardpro Inc., G.R. No. 164686, 2014).

Procedure on Adoption of By-Laws (Sec. 45)

a. After Incorporation:
i. Approval by the majority of outstanding shares/members
ii. By-laws must be signed by stockholders/members voting for them
iii. Kept in the principal office of the corporation
 iv. Subject to inspection by stockholders or members
v. Certified copy signed by majority of directors, countersigned by the corporate secretary, filed w/
SEC and attached to original Articles of Incorporation
b. Prior to Incorporation:
i. such by-laws shall be approved and signed by all the incorporators and
ii. submitted to the SEC, together with the articles of incorporation.

Note: A certification of the appropriate government agency to the effect that such bylaws or amendments are in
accordance with law is required before he SEC shall accept for filing the bylaws or any amendment thereto of the
following:
1) Bank,
2) Banking institution,
3) Building and loan association,
4) Trust company,
5) Insurance company,
6) Public utility,
7) Educational institution, or
8) Other special corporations governed by special laws

Failure to Adopt and Maintain the By laws Now Specifically Criminally Punishable and Subject to SEC’s
Contempt Power (Sec. 161)
Common Law Limitations on By-Laws
● By-laws cannot be contrary to law and articles of incorporation

A by-law provision granting to a stockholder a permanent representation in the Board of Directors is

contrary to the Corporation Code requiring all members of the Board to be elected by the stockholders or
members. Even when the members of the association may have formally adopted the provision, their action
would be of no avail because no provision of the by-laws can be adopted if it is contrary to law (Grace Christian
High School v. CA, G.R. No. 108905 , 1997).
Although the right to amend by-laws lies solely in the discretion of the employer, this being in the
exercise of management prerogative or business judgment, such right cannot impair the obligation of existing
contracts or rights or undermine the right to security of tenure of a regular employee. Otherwise, it would enable
an employer to remove any employee from employment by the simple expediency of amending its by-laws and
providing the position shall cease to exist upon occurrence of a specified event (Salafranca v. Philamlife
(Pamplona) Village Homeowners Association, Inc., G.R. No. 121791, 1998)
By-laws that prohibit directors who have interests in competitor corporations are reasonable in order to
protect the interests of the company (Gokongwei v. SEC, G.R. No. L-45911, 1979)

● By-laws cannot be unreasonable or be contrary to the nature of by-laws (GPI v. El Hogar Filipino, G.R. No. L-
26649, 1927).

Authority granted to a corporation to regulate the transfer of its stock does not empower corporation to
restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the
formalities and procedure to be followed in effecting transfer (Thomson v. CA, G.R. No. 116631, 1998).
By-laws are intended merely for the protection of the corporation, and prescribe regulation, not
restrictions; they are always subject to the charter of the corporation (Rural Bank of Salinas, Inc. v. CA, 1992;
quoting from Thompson on Corporation Sec. 4137, cited in Fleischer v. Nolasco, G.R. No. L-23241, 1925).

● By-law provisions cannot discriminate among its stockholders or members

i. Contents of by-laws (Sec. 46)

A private corporation may provide the following in its bylaws:
a) The time, place and manner of calling and conducting regular or special meetings of the directors or
trustees;
 b) The time and manner of calling and conducting regular or special meetings and mode of notifying the
stockholders or members thereof;
c) The required quorum in meetings of stockholders or members and the manner of voting therein;
d) The modes by which a stockholder, member, director, or trustee may attend meetings and cast their
votes;
e) The form for proxies of stockholders and members and the manner of voting them;
f) The directors’ or trustees’ qualifications, duties and responsibilities, the guidelines for setting the
compensation of directors or trustees and officers, and the maximum number of other board representations that
an independent director or trustee may have which shall, in no case, be more than the number prescribed by the
SEC;
g) The time for holding the annual election of directors or trustees and the mode or manner of giving notice
thereof;
h) The manner of election or appointment and the term of office of all officers other than directors or
trustees;
i) The penalties for violation of the bylaws;
j) In the case of stock corporations, the manner of issuing stock certificates; and
k) Such other matters as may be necessary for the proper or convenient transaction of its corporate affairs
for the promotion of good governance and anti-graft and corruption measures.

Note: An arbitration agreement may be provided in the bylaws pursuant to Section 181 of this Code.

ii. Binding effect of by-laws:

● As to the corporation and its components – Binding not only upon the corporation but also on its stockholder,
members and those having direction, management and control of its affairs. They have the force of contract
between the members/stockholders.
● As to third persons – Not binding unless there is actual knowledge. Third persons are not even bound to
investigate the content because they are not bound to know the by-laws which are merely provisions for the
government of a corporation and notice to them will not be presumed (China Banking Corp. v. CA, G.R. No.
118332 1997).

iii. Amendment or Revision (Sec. 47)

1) With stockholders or members approval
- Majority vote of the members of the Board; and
- Majority of the outstanding capital stock or majority of the members in case of non- stock corporation, in a
meeting duly called for the purpose
2) The board may be delegated to have the power to amend or repeal any by- laws or adopt new by- laws, by a
vote of:
- 2/3 of the shareholders representing the outstanding capital stock; or
- 2/3 of the members in a non- stock corporation.

Such power of the Board may be revoked by majority vote of the outstanding capital stock or majority of
the members in a non- stock corporation
Note: The power to adopt the first original by- laws cannot be delegated to the board of directors or trustees; only
the power to amend or repeal any by- laws or adopt new by- laws that will supplant the old by- laws can be
validly delegated.

Filing and Effectivity

Whenever the bylaws are amended or new bylaws are adopted, the corporation shall file with the SEC
a) amended or new bylaws and,
b) if applicable, the stockholders’ or members’ resolution authorizing the delegation of the power to amend
and/or
adopt new bylaws, duly certified under oath by the corporate secretary and a majority of the directors or trustees.
The amended or new by-laws shall only be effective upon the issuance by the SEC of a certification that the same
is in accordance with this Code and other relevant laws.

ii. Intra -corporate dispute (concept)

On Jurisdiction of RTC in Intra-Corporate Disputes:

Section 5 of the Securities Regulation Code transferred the jurisdiction of the (SEC) over intra-corporate
disputes to RTCs designated by the Supreme Court as commercial courts. The existence of an intra-corporate
dispute must be clearly alleged in the complaint.

Two tests to determine existence of intra-corporate dispute

Relationship Test
A dispute is intracorporate if it is:
1. Between the corporation, partnership or association and the public;
2. Between the corporation, partnership or association and the state insofar as its franchise, permit or
license to operate is concerned;
3. Between the corporation, partnership or association and its stockholders, partners, members or
officers; and
4. Among the stockholders, partners or associates themselves (Philippine Communications Satellite
Corp. v. Sandiganbayan, G.R. No. 203023, 2015)

Nature of the Controversy Test

The dispute itself must be intrinsically connected with the regulation of the corporation, partnership or
association.
The controversy "must not only be rooted in the existence of an intracorporate relationship, but must also
refer to the enforcement of the parties' correlative rights and obligations under the Corporation Code as well as
the internal and intracorporate regulatory rules of the corporation." (Dy Teban Trading Inc. v. Dy, G.R. No.
161803, 2008)

The following are within the jurisdiction of the RTC:

1. Fraudulent devices and schemes employed by
directors detrimental to the public interest and
to other firms
2. Intra-corporate dispute and with the state in relation to their franchise and right to exist
3. Controversies in election, appointment of directors or trustees and petition to be
a. declared in the state of suspension of payments.
2. Appointment of Rehabilitation Receiver or Management Committee
 i. Intellectual property (copyright, including fair use principle and moral rights)

Intellectual property rights" have furthermore been defined under Section 4 of the Code to consist of:
a) Copyright and Related Rights;
b) Trademarks and Service Marks;
c) Geographic Indications;
d) Industrial Designs;
e) Patents;
f) Layout-Designs (Topographies) of Integrated Circuits; and
g) Protection of Undisclosed Information.

Case:
(Coca-Cola Bottlers, Phils., Inc. vs. Quintin J. Gomez, et al., G.R. No. 154491, November 14, 2008)
Patents Trade Marks Copyrights
Grant issued by the A tool used that differentiates Copyright is the legal protection
government through the goods and services from each extended to the owner of the
Intellectual Property Office of other. It is a very important rights in an original work.
the Philippines (IP Phils). It is marketing tool that makes the “Original work” refers to every
an exclusive right granted for a public identify goods and production in the literary,
p roduct, process or an services. A trademark can be scientific and artistic domain.
improvement of a product or one word, a group of words, Among the literary and artistic
process which is new, inventive sign, symbol, logo, or a works enumerated in the IP
and useful. This exclusive right combination of any of these. Code includes books and other
gives the Inventor the right to Generally, a trademark refers writings, musical works, films,
exclude others from making, to both trademark and service paintings and other works, and
using, or selling the product of mark, although a service mark computer programs.
his invention during the life of is used to identify those marks
the patent. used for services only.
A patent has a term of protection In the Philippines, a trademark The term of protection of
of twenty (20) years providing can be protected through copyright for original and
an inventor significant registration. Registration gives derivative works is the life of
commercial gain. In return, the the trademark owner the the author plus fifty (50) years
patent owner must share the full exclusive right to use the after his death. The Code
description of the invention. This mark and to prevent others specifies the terms of protection
information is made from using the same or similar for the different types of works.
available to the public in the marks on identical or related
form of the Intellectual Property goods and services.
Official Gazette and can be The trademark protection
utilized as basis for future granted by IP Philippines
research and will in turn protects your mark only in the
promote innovation and Philippines. If you want your
development. mark protected outside the
country, you will need to file
 applications in the
countries where you
want your mark registered.

COPYRIGHT

Copyright is the legal protection extended to the owner of the rights in an original work.
“Original work” refers to every production in the literary, scientific and artistic domain. Among the literary
and artistic works enumerated in the IP Code includes books and other writings, musical works, films,
paintings and other works, and computer programs.
Works are protected by the sole fact of their creation, irrespective of their mode or form of
expression, as well as their content, quality and purpose. Thus, it does not matter if, in the eyes of some
critics, a certain work has little artistic value. So long as it has been independently created and has a
minimum of creativity, the same enjoys copyright protection.
Section 172 of the IP Code lists the works covered by copyright protection from the moment of their
creation.

There are two types of rights under copyright:

1. economic rights, so-called because they enable the creator to obtain remuneration from the exploitation of his
works by third parties, and
2. moral rights, which makes it possible for the creator to undertake measures to maintain and protect the
personal connection between himself and the work.

■ Economic rights include:

 Reproduction
 Transformation First public distribution
 Rental
 Public display
 Public performance
 Other communication to the public of the work.

■ Moral rights include:

 Right of Attribution
 Right of Alteration
 Right of Integrity (object to any prejudicial distortion)
 Right to restrain use of his name.
LIMITATIONS ON COPYRIGHT
A. Fair Use
The fair use of a copyrighted work for criticism, comment, news reporting, teaching including limited number
of copies for classroom use, scholarship, research, and similar purposes is not an infringement of copyright.
In determining whether the use made of a work in any particular case is fair use, the factors to be considered
shall include: [PuCha-Nat-Su-E]
1. The purpose and character of the use, including whether such use is of a commercial nature or is for non-profit
educational purposes;
The purpose and character requirement is important in view of copyright’s goal to promote creativity and
encourage creation of works. Hence, commercial use of the copyrighted work can be weighed against fair use.
The “transformative test” is generally used in reviewing the purpose and character of the usage of the
copyrighted work. Courts must look into whether the copy of the work adds “new expression, meaning or message” to
transform it into something else. (ABS-CBN Corp. v. Gozon, G.R. No. 195956, 2015)

2. The nature of the copyrighted work;

If the nature of the work is more factual than creative, then fair use will be weighed in favor of the user. (ABS-
CBN Corp. v. Gozon, G.R. No. 195956, 2015)

3. The amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
An exact reproduction of a copyrighted work, compared to a small portion of it, can result in the conclusion that
its use is not fair.
However, there may also be cases where, though the entirety of the copyrighted work is used without consent,
its purpose determines that the usage is still fair. For example, a parody using a substantial amount of copyrighted work
may be permissible as fair use as opposed to a copy of a work produced purely for economic gain. (ABS-CBN Corp. v.
Gozon, G.R. No. 195956, 2015)

4. The effect of the use upon the potential market for or value of the copyrighted work. (Sec. 185.1, IP Code)
If a court finds that the use had or will have a negative impact on copyrighted work's market, then the use is
deemed unfair. (ABS-CBN Corp. v. Gozon, G.R. No. 195956, 2015)
Note: That a work is unpublished shall not by itself bar a finding of fair use if such finding is made upon consideration
of all the above factors. (Sec. 185.2, IP Code)

Doctrine of Fair Use

Fair use is a privilege to use the copyrighted material in a reasonable manner without the consent of the
copyright owner or as copying the theme or ideas rather than their expression. Fair use is an exception to the copyright
owner’s monopoly of the use of the work to avoid stifling the very creativity which that law is designed to foster.
(ABS-CBN Corp. v. Gozon, G.R. No. 195956, 2015)
No question of fair or unfair use arises, however, if no copying is proved to begin with. This is in consonance
with the principle that there can be no infringement if there was no copying. It is only where some form of copying has
been shown that it becomes necessary to determine whether it has been carried to an “unfair,” that is, illegal, extent.
(Habana v. Robles, G.R. No. 131522, 1999)

COPYRIGHT INFRINGEMENT
Any person infringes a right protected under the IP Code when one:
a. Directly commits an infringement (direct infringement);
b. Benefits from the infringing activity of another person who commits an infringement if the person benefiting has
been given notice of the infringing activity and has the right and ability to control the activities of the other person
(vicarious infringement); or
c. With knowledge of infringing activity, induces, causes or materially contributes to the infringing conduct of another
(direct infringement). (Sec. 216, IP Code)
Also includes the act of any person who at the time when copyright subsists in a work has in his possession an
article which he known, or ought to know, to be an infringing copy of the work for the purpose of:
a. Selling, letting for hire, or by way of trade offering or exposing for sale, or hire, the article
b. Distributing the article for purpose of trade, or for any other purpose to an extent that will prejudice the rights of the
copyright owner in the work; or
c. Trade exhibit of the article in public. (Sec. 217.3, IP Code)

Copyright Infringement
Infringement of a copyright is a trespass on a private domain owned and occupied by the owner of the
copyright, and, therefore, protected by law, and infringement of copyright, or piracy, which is a synonymous term in
this connection, consists in the doing by any person, without the consent of the owner of the copyright, of anything the
sole right to do which is conferred by statute on the owner of the copyright. (Columbia Pictures, Inc. v. Court of
Appeals, G.R. No. 110318, 1996)

Gravamen of Copyright Infringement

The gravamen of copyright infringement is not merely the unauthorized “manufacturing” of intellectual works
but rather the unauthorized performance of any of the acts covered by Sec. 177 (economic rights). Hence, any person
who performs any of the acts thereunder without obtaining the copyright owner’s prior consent renders himself civilly
and criminally liable for copyright infringement. (NBI - Microsoft Corp. v. Hwang, G.R. No. 147043, 2005)

When Committed
By any person who shall use original literary or artistic works, or derivative works, without the copyright
owner’s consent in such a manner as to violate the foregoing copy and economic rights. For a claim of copyright
infringement to prevail, the evidence on record must demonstrate:
a. Ownership of a validly copyrighted material by the complainant; and
b. Infringement of the copyright by the respondent. (Olano v. Eng Co, G.R. No. 195835, 2016)
The Intellectual Property Code is malum prohibitum and prescribes a strict liability for copyright infringement.
Good faith, lack of knowledge of the copyright, or lack of intent to infringe is not a defense against copyright
infringement. (ABS-CBN Corp. v. Gozon, G.R. No. 195956, 2015)

Remedies
Any person infringing a right protected under the IP Code shall be liable:
a. To an injunction restraining such infringement.
The court may also order the defendant to desist from an infringement to prevent the entry into the channels
of commerce of imported goods that involve an infringement, immediately after customs clearance of such
goods.
b. To pay to the copyright proprietor or his assigns or heirs such actual damages, including legal costs and other
expenses, as he may have incurred due to the infringement as well as the profits the infringer may have
made due to such infringement.

Note: In proving profits, the plaintiff shall be required to prove sales only and the defendant shall be required to prove
every element of cost which he claims or, in lieu of actual damages and profits, such damages which, to the court, shall
appear to be just and shall not be regarded as penalty.
The amount of damages to be awarded shall be doubled against any person who:
1. Circumvents effective technological measures; or
2. Having reasonable grounds to know that it will induce, enable, facilitate or conceal the infringement, remove or alter
any electronic rights management information from a copy of a work
c. Deliver under oath, for impounding during the pendency of the action, upon such terms and conditions as the
court may prescribe, sales invoices and other documents evidencing sales, all articles and their packaging
alleged to infringe a copyright and implements for making them.
d. Deliver under oath for destruction without any compensation all infringing copies or devices, as well as all
plates, molds, or other means for making such infringing copies as the court may order.
e. Such other terms and conditions, including the payment of moral and exemplary damages, which the court
may deem proper, wise and equitable and the destruction of infringing copies of the work even in the event
of acquittal in a criminal case.

Statutory Damages
The copyright owner may elect, at any time before final judgment is rendered, to recover instead of actual
damages and profits, an award of statutory damages for all infringements involved in an action in a sum equivalent to
the filing fee of the infringement action but not less than P50,000.00.
 In awarding statutory damages, the court may consider the following factors:
1. The nature and purpose of the infringing act;
2. The flagrancy of the infringement;
3. Whether the defendant acted in bad faith;
4. The need for deterrence;
5. Any loss that the plaintiff has suffered or is likely to suffer by reason of the infringement; and
6. Any benefit shown to have accrued to the defendant by reason of the infringement. (Sec. 216.1, IP Code)

Criminal Penalties
The copyright owner can file a criminal, civil or administrative action for copyright infringement.
Where Filed
Criminal Case Filed in the court situated in the place where the violation
occurred
Administrative Case Filed at the Bureau of Legal Affairs at the Intellectual Property
Office of the Philippines
Civil Case Filed in the appropriate court located at the place where the
defendant resides/is located, or where the plaintiff resides/is
located, at the option of the plaintiff

ii. Insurance (what can be insured, claims for life insurance)

What may be insured?

Any contingent or unknown 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, Insurance Code)
An insurance for or against the drawing of any lottery, or for or against any chance or ticket in a lottery
drawing a prize is NOT allowed. (section 4, Insurance Code)
■ Consent of the husband is not necessary for the validity of an insurance policy taken out by a married
woman on her life and that of her children.
■ A minor of 18 years or more may contract for life, health and accident insurance, provided that the
insurance is taken on his own life and the beneficiary is the minor’s father, mother, husband, wife, child, brother or
sister.
■ All rights, title and interest in the policy of insurance taken out by an original owner on the life or health of
a minor shall automatically vest in the minor upon the death of the original owner.

■ 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.

■ Beneficiary acquires a vested right in the policy.

SECTION 181. A policy of insurance upon life or health may pass by transfer, will or succession to any person,
whether he has an insurable interest or not, and such person may recover upon it whatever the insured might
have recovered.
Note Articles 43 (4), 50 and 64 of the Family Code – Innocent spouse may revoke the designation of the other
spouse who acted in bad faith as beneficiary, even if such designation be stipulated as irrevocable.

Rules in case beneficiary predeceases insured

■ Irrevocable designation of Beneficiary – Beneficiary has acquired vested right; Legal representatives are
 entitled to the proceeds as assets of his estate; Unless, the proceeds were made payable to the beneficiary only if
living.

■ Revocable – Proceeds past to the estate of the insured

All rights, title and interest in the policy of insurance taken out by an original owner on the life or health of a minor
shall automatically vest in the minor upon the death of the original owner, unless otherwise provided for in the
policy.
SECTION 10. Every person has an insurable interest in the life and health:
(a.) Of himself, of his spouse and of his children;
(b.) Of any person on whom he depends wholly or in part for education or support, or in whom he has a
pecuniary interest;
(c.) Of any person under a legal obligation to him for the payment of money, or respecting property or services,
of which death or illness might delay or prevent the performance; and
(d.) Of any person upon whose life any estate or interest vested in him depends.
■ An insurable interest is one of the most basic and essential requirements in an insurance contract. In general, an
insurable interest is that interest which a person is deemed to have in the subject matter insured, where
he has a relation or connection with or concern in it, such that the person will derive pecuniary benefit or
advantage from the preservation of the subject matter insured and will suffer pecuniary loss or damage from its
destruction, termination, or injury by the happening of the event insured against.

3. The existence of an insurable interest gives a person the legal right to insure the subject matter of the policy of
insurance. Section 10 of the Insurance Code indeed provides that every person has an insurable interest in his own
life. Section 19 of the same code also states that an interest in the life or health of a person insured must exist when
the insurance takes effect but need not exist thereafter or when the loss occurs.

Insurable Interest in Life

■ General Rule : Must exist when the insurance takes effect, but need not exist thereafter or when the loss occurs.
(section 19, Insurance Code)
Exceptions:
1. When the insurance is taken by the creditor on the life of the debtor, the creditor is required to have insurable
interest not only at the contract but also at the time of the debtor’s death.
2. When the insurance is taken by the employer on the life of the employee.

Insurable Interest in Property

SECTION 13. 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 14. An insurable interest in property may consist in:
(a.) An existing interest;
(b.) An inchoate interest founded on an existing interest; or
(c.) An expectancy, coupled with an existing interest in that out of which the expectancy arises.
SECTION 15. A carrier or depository of any kind has an insurable interest in a thing held by him as such, to the
extent of his liability but not to exceed the value thereof.
SECTION 16. A mere contingent or expectant interest in anything, not founded on an actual right to the thing, nor
upon any valid contract for it, is not insurable.
 SECTION 17. The measure of an insurable interest in property is the extent to which the insured might be
damnified by loss or injury thereof.
SECTION 18. No contract or policy of insurance on property shall be enforceable except for the benefit of some
person having an insurable interest in the property insured.
SECTION 19. An interest in property insured must exist when the insurance takes effect, and when the loss occurs,
but need not exist in the meantime; and interest in the life or health of a person insured must exist when the
insurance takes effect but need not exist thereafter or when the loss occurs.
• Existing Interest – May be legal title or equitable title (e.g. Trustee / Mortgagor / Lessor / Mortgagee)
• Inchoate Interest - Stockholder’s inchoate interest in properties of the corporation
Inchoate – a legal right or entitlement that is only partial and incomplete, which may later develop into a
full property right.

Change of Interest
Sections 20 – 24, Insurance Code
Rules when insurable interest changes during the course of an insurance policy
What may be transferred or assigned:
1. Thing insured (section 20)
2. The Policy itself (section 58)
3. The claim itself (section 83)
SECTION 20. Except in the cases specified in the next four sections, and in the cases of life, accident, and health
insurance, a change of interest in any part of a thing insured unaccompanied by a corresponding change of interest
in the insurance, suspends the insurance to an equivalent extent, until the interest in the thing and the interest in the
insurance are vested in the same person.
SECTION 21. A change in interest in a thing insured, after the occurrence of an injury which results in a loss,
does not affect the right of the insured to indemnity for the loss.

Doctrine of Subrogation in Insurance

Subrogation is the substitution of one person by 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. This
principle covers a situation wherein an insurer has paid a loss under the 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 that the creditor could employ to enforce payment. Payment by the insurer to the insured operates as an
equitable assignment to the insurer of all the remedies that the insured may have against the third party whose
negligence or wrongful act caused the loss. (Keppel Cebu Shipyard Inc.., vs. Pioneer Insurance and Surety
Corporation, GR no. 180880-81, September 25, 2009)

(2017 BAR)
Q: What is insurable interest?
A: Insurable interest is that interest which a person is deemed to have in the subject matter of the insured where
he has a relation or connection to it such that the person will derive pecuniary benefit or advantage from the
preservation of the subject matter or will suffer pecuniary loss or damage from its destruction, termination or injury by
the happening of the event insured against it. (44 CJS 870)

(2017 BAR)
Q: The newly restored Ford Mustang muscle car was just released from the car restoration shop to its owner,
Seth, an avid sportsman. Given his passion for sailing, he needed to go to a round-the-world voyage with his
crew on his brand-new 180-meter yacht. Hearing about his coming voyage, Sean, his bosom friend, asked Seth if
he could borrow the car for his net roadshow. Sean, who had been in the business of holding motor shows and
promotions, proposed to display the restored car of Seth in major cities of the country. Seth agreed and lent the
Ford Mustang to Sean. Seth further expressly allowed Sean to use the car even for his own purposes on special
occasions during his absence from the country.
Seth and Sean then went together to Bayad Agad Insurance Co. (BAIC) to get separate policies for the
car in their respective names. BAIC consults you as its lawyer on whether separate policies could be issued to
Seth and Sean in respect of the same car. Do Seth and Sean have separate insurable interests? Explain briefly
your answer.

A: YES. Seth and Sean have separate insurable interests. Seth’s insurable interest is his legal and and/or
equitable interest over the vehicle as an owner while Sean’s insurable interest is the safety of the vehicle which may
become the basis of liability in case of loss or damage to the vehicle. (Malayan Insurance vs. Philippine First
Insurance Co., 676 SCRA 268)

(2014 BAR)
Q: A person is said to have an insurable interest in the subject matter insured where he has a relation or
connection with, or concern in it that he will derive pecuniary benefit or advantage from its preservation. Which
among the following subject matters is not considered insurable?
a. A partner in a firm on its future profits.
b. A general creditor on the debtor’s property
c. A judgment creditor on debtor’s property
d. A mortgage creditor on debtor’s mortgaged property.

A: a. A partner in a firm on its future profits.

(2002 BAR)
Q: Distinguish insurable interest in property insurance from insurable interest in life insurance.
A:
1. In property insurance, the expectation of benefit must have a legal basis. In life insurance, the expectation of benefit
to be derived from the continued existence of a life need not have any legal basis.

2. In property insurance, the actual value of the interest therein is the limit of the insurance that can validly be placed
thereon. In life insurance, there is no limit to the amount of insurance that may be taken upon life.
3. In property insurance, an interest in the insured must exist when the insurance takes effect and when the loss occurs
but need not exist in the meantime. In life insurance, it is enough that insurable interest exists at the time when the
contract is made but it need not exist at the time of loss.

(1987 BAR)
Q: Blanco took out a P1M life insurance policy naming his friend and creditor, Montenegro, as his beneficiary.
When Blanco died, his outstanding loan obligation to Montenegro was only P50,000.
Blanco’s executor contended that only P50,000 out of the insurance proceeds should be paid to Montenegro and
the balance of P950,000 should be paid to Blanco’s estate. Is the executor’s contention correct? Reason out your
answer.

A: The contention of the executor is incorrect. The beneficiary of a life insurance need not have any insurable
interest in the life of the insured.

ALTERNATIVEANSWER: The contention of the executor is incorrect because it was Blanco himself who took out
the life insurance policy on his own life, naming only Montenegro as the beneficiary. It would have been different if it
was Montenegro, as creditor, who took out a life insurance policy on the life of Blanco, as a debtor. In that case,
Montenegro’s insurable interest in the life of Blanco would be only to the extent of P50,000, which is the amount of his
credit.
(1987 BAR)
Q: On July 14, 1985, X, a homosexual, took an insurance policy on the life of his boyfriend, Y. In the insurance
application, X misrepresented that Y was in perfect health although he knew all the time that Y was afflicted
with AIDS. On October 18, 1987, Y died in a motor accident. Shortly thereafter, X filed his insurance claim.
Should the insurer pay? Reasons.

A: The insurer is not obliged to pay. Friendship alone is not the insurable interest contemplated in life
insurance. Insurable interest in the life of others (other than one’s own life, spouses or children) is merely to the extent
of the pecuniary interest in that life.
Assuming that such pecuniary interest exists, an insurer would be liable despite concealment or misrepresentation if the
insurance had been in effect for more than 2 years (incontestability clause).
(1990 BAR)
Q: Luis was the holder of an accident insurance policy effective November 1, 1988 to October 31, 1989. At a
boxing contest held on January 1, 1989 and sponsored by his employer, he slipped and was hit on the face by his
opponent so he fell and his head hit one of the posts of the boxing ring. He was rendered unconscious and was
dead on arrival at the hospital due to “intracranial hemorrhage.”
Can his father, who is a beneficiary under said insurance policy, successfully claim indemnity from the insurance
company? Explain your answer.

A: YES, the father, who is a beneficiary under the accident insurance, can successfully claim indemnity for the
death of the insured. Clearly, the proximate cause of the death was the boxing contest. Death is sustained in a boxing
contest is an accident.

(2014 BAR)
Q: Carlo and Bianca met in the La Boracay festivities. Immediately, they fell in love with each other and got
married soon after. They have been cohabiting blissfully as husband and wife, but they did not have any
offspring. As the years passed by, Carlo decided to take out an insurance on Bianca’s life for P1M with him
(Carlo) as sole beneficiary, given that he did not have a steady source of income and he always depended on
Bianca both emotionally and financially. During the term of the insurance, Bianca died of what appeared to be a
mysterious cause so that Carlo immediately requested for an autopsy to be conducted. It was established that
Bianca died of a natural cause. More than that, it was also established that Bianca was a transgender all along—
a fact unknown to Carlo. Can Carlo claim the insurance benefit?

A: YES. Carlo can claim the insurance benefit. If a person insures the life or health of another person with
himself as beneficiary, all his rights, title and interests in the policy shall automatically vest in the person insured. Carlo,
as the husband of Bianca, has an insurable interest in the life of the latter. Also, every person has an insurable interest in
the life and health of any person on whom he depends wholly or in part for support. The insurable interest in the life of
the person insured must exist when the insurance takes effect but need not exist when the loss occurs. Thus, the
subsequent knowledge of Carlo, upon the death of Bianca, that the latter is a transgender does not destroy his insurable
interest on the life of the insured.

(2019 BAR)
Q: Define Insurable interest in property.
A: Insurable interest in property is 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 indirectly damnify the insured. It may
consist of an existing interest, an inchoate interest founded on an existing interest, or an expectancy coupled with an
existing interest in that out of which the expectancy arises. (Sections 13 and 14, Insurance Code)

Q: In a civil suit, the Court ordered Benjie to pay Nat P500,000. To execute the judgment, the sheriff levied upon
Benjie’s registered property (a parcel of land and the building thereon), and sold the same at public auction to
Nat, the highest bidder. The latter, on March 18, 1992, registered with the Register of Deeds the certificate of
sale issued to him by the sheriff. Meanwhile, on January 27, 1993, Benjie insured with Garapal Insurance for
P1M the same building that was sold at public auction to Nat. Benjie failed to redeem the property by March 18,
1993.
 On March 19, 1993, a fire razed the building to the ground. Garapal Insurance refused to make good its
obligation to Benjie under the insurance contract.
a. Is Garapal Insurance legally justified in refusing payment to Benjie?
b. Is Nat entitled to collect on the insurance policy? (1994 BAR)
A:
a. YES. At the time of the loss, Benjie was no longer the owner of the property insured as he failed to redeem
the property. The law requires in property insurance that a person can recover the proceeds of the policy if he has
insurable interest at the time of the issuance of the policy and also at the time when the loss occurs. At the time of fire,
Benjie no longer had insurable interest in the property insured.

b. NO. While at the time of the loss he has insurable interest in the building, as he was the owner thereof, Nat
did not have any interest in the policy. There was no automatic transfer clause in the policy that would give him such
interest in the policy.

(1991 BAR)
Q: A piece of machinery was shipped to Mr. Pablo on the basis of C&F, Manila. Mr. Pablo insured said
machinery with the Talaga Merchants Insurance Corp. (TAMIC) for loss or damage during the voyage. The
vessel sank en route to Manila. Mr. Pablo then filed a claim with TAMIC which was denied for the reason that
prior to delivery, Mr. Pablo had no insurable interest. Decide the case.

A: Mr. Pablo had an existing insurable interest on the piece of machinery he bought. The purchase of goods
under a perfected contract of sale already vested equitable interest on the property in favor of the buyer even while it is
pending delivery.

(1987 BAR)
Q: On February 3, 1987, while Jose Palacio was in the hospital preparatory to a heart surgery, he called his only
son, Boy Palacio, and showed the latter a will naming the son as sole heir to all the father’s estate including the
family mansion in Forbes Park. The following day, Boy Palacio took out a fire insurance policy on the Forbes
Park mansion. One week later, the father died. After his father’s death, Boy Palacio moved his wife and children
to the family mansion which he inherited. On March 30, 1987, a fire occurred razing the mansion to the ground.
Boy Palacio then proceeded to collect on the fire insurance he took earlier on the house. Should the insurance
company pay? Reasons.

A: NO. In property insurance, insurable interest must exist both at the time of the taking of the insurance and at
the time the risk insured against occurs. The insurable interest must be an existing interest. The fact alone that Boy
Palacio was the expected sole heir of his father’s estate does not give the prospective heir any existing interest prior to
the death of the decedent.

(2000 BAR)
Q: IS, is an elderly bachelor with no known relatives, obtained life insurance coverage for P250,000 from
Starbrite Insurance Corporation, an entity licensed to engage in the insurable business under the Insurance
Code of the Philippines. He also insured his residential house for twice that amount with the same corporation.
He immediately assigned all his rights to the insurance proceeds to BX, a friend-companion living with him. 3
years later, IS died in a fire that gutted his insured house 2 days after he had sold it. There is no evidence of
suicide or arson or involvement of BX in these events. BX demanded payment of the insurance proceeds from
the 2 policies, the premiums for which IS had been faithfully paying during all the time he was alive. Starbrite,
refused payment, contending that BX had no insurable interest and therefore was not entitled to receive the
proceeds from IS’ insurance coverage on his life and also on his property. Is Starbrite’s contention valid?
Explain.

A: Starbrite is correct with respect to the insurance coverage on the property of IS. The beneficiary in the
property insurance policy or the assignee thereof must have insurable interest in the property insured. BX, a mere
friend-companion of IS, has no insurable interest in the residential house of IS. BX is not entitled to receive the
proceeds from IS’ insurance on his property. As to the insurance coverage on the life of IS, BX is entitled to receive the
proceeds. There is no requirement that BX should have insurable interest in the life of IS. It was IS himself who took
the insurance on his own life.
(2001 BAR)
Q: JQ, owner of a condominium unit, insured the same against fire with XYZ Insurance Co., 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?

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.

(2009 BAR)
Q: Ciriaco leased a commercial apartment from SBC. One of the provisions of the 1- year lease contract states:
“18. x x x The LESSEE shall not insure against fire the chattels, merchandise, textiles, goods and effects placed
at any stall or store or space in the leased premises without first obtaining the written consent of the LESSOR. If
the LESSEE obtains five insurance coverage without the consent of the LESSOR, the insurance policy is deemed
assigned and transferred to the LESSOR for the latter’s benefit.”
Notwithstanding the stipulation in the contract, without the consent of SBC, Ciriaco insured the
merchandise inside the premises against loss by fire in the amount of P500,000 with FUIC. A day before the lease
contract expired, fire broke out inside the leased premises, damaging Ciriaco’s merchandise. Having learned of
the insurance earlier procured by Ciriaco, SBC demanded from FUIC that the proceeds of the insurance policy
be paid directly to it, as provided in the lease contract. Who is legally entitled to receive the insurance proceeds?
Explain.

A: Ciriaco is entitled to receive the proceeds of the insurance policy. The stipulation that the policy is deemed
assigned and transferred to SBC is void, because SBC has no insurable interest in the merchandise of Ciriaco.

(2015 BAR)
Q: Novette entered into a contract for the purchase of certain office supplies. The goods were shipped. While in
transit, the goods were insured by Novette. Does she have an insurable interest over the goods even before
delivery of the same to her? Explain.

A: YES, Novette has an insurable interest in the goods. The contract of sale was already perfected and
Novette acquired interest thereon although the goods have yet to be delivered.

Life Insurance
The proceeds shall be paid immediately upon the maturity of the policy (survival benefits) if there is such a
maturity date.
If the policy matures by the death of the insured, within sixty (60) days after presentation of the claim and filing
of the proof of the death of the insured.

Nature of Condition for Filing Claim

The condition contained in the insurance policy that claims must be presented within one year after rejection is
not merely a procedural requirement. The condition is an important matter, essential to a prompt settlement of claims
against insurance companies, as it demands that insurance suits be brought by the insured while the evidence as to the
origin and cause of destruction have not yet disappeared.
It is in the nature of a condition precedent to the liability of the insurer, or in other terms, a resolutory cause, the
purpose of which is to terminate all liabilities in case the action is not filed by the insured within the period stipulated.
(Sun Insurance v. CA, G.R. No. 8974, 1991)

Time to Commence Actions

If there is a stipulation in the policy: The stipulation in the policy, if not contrary to Sec. 63, will prevail. (Teal
Motor v. Orient Insurance, G.R. No. 39797, 1934)
If there is no express stipulation in the policy
 As the policy is a written contract, the action prescribes in 10 years. (Civil Code, Art. 1144)

Limitation to Period to File Claim

A condition, stipulation, or agreement in any policy of insurance, limiting the time for commencing an action
thereunder to a period of less than one year from the time when the cause of action accrues, is void. (Insurance Code,
Sec. 63)
Note: In Industrial life insurance, the period cannot be less than 6 years after the cause of action accrues. (Insurance
Code, Sec. 231[d])

When does the insured’s cause of action begin to run?

The prescriptive period for an insured’s action for indemnity should be reckoned from the “final rejection” of
the claim (H.H. Hollero Construction v. GSIS, G.R. No. 152334, 2014).
Rationale: Before such final rejection, there is no real necessity for bringing suit (Eagle Star v. Chia Yu, G.R. No. L-
5915, 1955).
Action or suit must be brought in proper cases, with Commission or the courts within one year from the denial
of the claim, otherwise, the claimant’s right of action shall prescribe (Jacqueline Jimenez Vda. De Gabriel v. CA, G.R.
No. 103883, 1996).

Compulsory Third Party Liability Insurance

The claim must be filed within 6 months from the date of accident, otherwise, the claim shall be deemed waived.
Action or suit for recovery of damage due to loss or injury must be brought, in proper cases, with the Commissioner or
the courts within one (1) year from denial of the claim, otherwise, the claimant’s right of action shall prescribe.
(Insurance Code, Sec. 397)

(1989 BAR)LIFE INSURANCE

Q: Manpower Company obtained a group life insurance policy for its employees from Phoenix Insurance
Company. The master policy issued by Phoenix on June 1, 1986 contained a provision that eligible employees for
insurance coverage were all full time employees of Manpower regularly working at least 30 hours per week. The
policy had also an incontestable clause.
Beforehand, Phoenix sent enrollment cards to Manpower for distribution to its eligible employees. X filled out
the card which contained a printed clause: “I request the insurance for which I may become eligible under said
Group Policy.” The cards were then sent to Phoenix and X was among the employees of Manpower who was
issued a certificate of coverage by Phoenix.
On July 3, 1988, X was killed on the occasion of a robbery in their house. While processing the claim of X’s
beneficiary, Phoenix found out that X was not an eligible employee as defined in the group policy since he has
not been employed 30 hours a week by Manpower. Phoenix refused to pay. May X’s beneficiary invoke the
incontestability clause against Phoenix? Reasons.

A: YES, the beneficiary of X may validly invoke the incontestability clause. If the incontestability clause can
apply even to cases of intentional concealment and misrepresentation, there would be no cogent reason for denying such
application where the insured had not been guilty thereof. When X filled out the card containing the printed clause “I
request the insurance for which I may become eligible under said Group Policy”, it behooved the insurer to look into
the qualifications of X whether he can thus be covered or not by the group life insurance policy. In issuing the
certificate of coverage to X, Phoenix may, in fact, be said to have waived the 30-hour per week requirement.

(1991 BAR)
Q: The policy of insurance upon his life, with a face value of P100,000, was assigned by Jose, a married man with
2 legitimate children, to his nephew, Y, as security for a loan of P50,000. He did not give the insurer any written
notice of such assignment despite the explicit provision to that effect in the policy. Jose died. Upon the claim on
the policy by the assignee, the insurer refused to pay on the ground that it was not notified of the assignment.
Upon the other hand, the heirs of Jose contended that Y is not entitled to any amount under the policy because
the assignment without due notice to the insurer was void. Resolve the issues.
A: A life insurance is assignable. A provision, however, in the policy stating that written notice of such an
assignment should be given to the insurer is valid. The failure of the notice of assignment would thus preclude the
assignee from claiming rights under the policy. The failure of notice did not, however, avoid the policy; hence, upon the
death of Jose, the proceeds would, in the absence of a designated beneficiary, go to the estate of the insured. The estate,
in turn, would be liable for the loan of P50,000 owing in favor of Y.

(1995 BAR)
Q: Sun-Moon Insurance issued a Personal Accident Policy to Henry Dy with a face value of P500,000. A
provision in the policy states that “the company shall not be liable in respect of bodily injury consequent upon
the insured person attempting to commit suicide or willfully exposing himself to needless peril except in an
attempt to save human life.” Six (6) months later, Henry died of a bullet wound in his head. Investigation showed
that one evening Henry was in a happy mood although he was not drunk. He was playing with his handgun from
which he had previously removed its magazine. He pointed the gun at his sister who got scared. He assured her it
was not loaded. He then pointed the gun at his temple and pulled the trigger. The gun fires and Henry slumped
dead on the floor. Henry’s wife, Beverly, as the designated beneficiary, sought to collect under the policy. Sun-
Moon rejected her claim on the ground that the death of Henry was not accidental. Beverly sued the insurer.
Decide. Discuss fully.

A: Beverly can recover the proceeds of the policy from the insurer. The death of the insured was not due to
suicide or willful exposure to needless peril which are the excepted risks. The insured’s act was purely an act of
negligence which is covered by the policy and for which the insured got the insurance for his protection. In fact, he
removed the magazine from the gun and when he pointed the gun to his temple he did so because he thought that it was
safe for him to do so. He did so to assure his sister that the gun was harmless. There is none in the policy that would
relieve the insurer of liability for the death of the insured since the death was an accident.

(1993 BAR)
Q: S Insurance Company issued a Personal Accident Policy to Bob Tan with a face value of P500,000.
In the evening of September 5, 1992, after his birthday party, Tan was in a happy mood but not drunk. He was
playing with his handgun, from which he previously removed the magazine. As his secretary was watching
television, he stood in front of her and pointed the gun at her. She pushed it aside and said that it may be loaded.
He assured her that it was not and then pointed it at his temple. The next moment, there was an explosion and
Tan slumped to the floor lifeless. The wife of the deceased sought payment on the policy but her claim was
rejected.
The insurance company agreed that there was no suicide. However, it was the submission of the insurance
company that there was no accident. In support thereof, it contended (a) that there was no accident when a
deliberated act was performed unless some additional, unexpected, independent and unforeseen happening
occur which produces or brings about the injury or death; and (b) that the insured willfully exposed himself to
needless peril and thus removed himself from the coverage of the insurance policy. Are the two contentions of
the insurance company tenable? Explain.
A: NO. These 2 contentions of the insurance company are not tenable. The insurer is liable for injury or death
even due to the insured’s gross negligence. The fact that the insured removed the magazine from the handgun means
that the insured did not willfully expose himself to needless peril. At most, the insured is only guilty of negligence.

(1998 BAR)
Q: Juan de la Cruz was issued Policy No. 8888 of the Midland Life Insurance Co. on a whole life plan for
P20,000 on August 19, 1989. Juan is married to Cynthia with whom he has three legitimate children. He,
however, designated Purita, his common-law wife, as the revocable beneficiary. Juan referred to Purita in his
application and policy as the legal wife. Three (3) years later, Juan died. Purita filed her claim for the proceeds
of the policy as the designated beneficiary therein. The widow, Cynthia, also filed a claim as the legal wife. To
whom should the proceeds of the insurance policy be awarded?

A: The estate is entitled to claim for the proceeds of the insurance policy. As a general rule, the insured
may designate anyone he wishes to be his/her beneficiary. However, Art. 2012 of the Civil Code, which applies
suppletorily to the Insurance Code, provides that any person who is forbidden from receiving any donation under Art.
739 cannot be named beneficiary of a life insurance policy by the person who cannot make any donation to him.
Art. 739 specifically bars the donations as between persons who were guilty of adultery or concubinage. Since Purita is
a common-law wife of Juan, she falls squarely into this category, therefore she is disqualified to receive insurance
proceeds and when this happens, the estate of the deceased is the one entitled to the proceeds. ( Insular Life Assurance
Company, Ltd. v. Capronia Ebrado, G.R. No. L-44059, Oct. 28, 1977)

(2005 BAR)
Q: Jacob obtained a life insurance policy for P1M 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?

A: NO. Jacob 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.

(2005 BAR)
Q: What are the effects of an irrevocable designation of a beneficiary under the Insurance Code?
A: The irrevocable beneficiary is deemed to have acquired a vested interest in the policy so much so that the
insured or policy owner cannot exercise any right or benefit under the policy, like changing or adding a new
beneficiary, obtaining a policy loan or making a partial or full withdrawal of the cash surrender value, without the
express written consent of the irrevocable beneficiary.
(2008 BAR)
Q: On January 1, 2000, Antonio Rivera secured a life insurance from SOS Insurance Corp. for P1M 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.

A: NO. SOS cannot avoid liability under the policy. While Gemma’s interest as beneficiary in the policy is
considered forfeited since she is an accessory to the killing of Antonio, the proceeds of the policy should be paid to the
nearest relative of Antonio (if not otherwise disqualified). The Insurance Code provides that 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.

(2014 BAR)
Q: On July 3, 1993, Delia Sotero took out a life insurance policy from Ilocos Life designating Aban, her niece, as
her beneficiary. Ilocos Life issued Policy No. 747, with a face value of P100,000, in Sotero’s favor on August 30,
1993, after the requisite medical examination and payment of the premium. On April 10, 1996, Sotero died.
Aban filed a claim for the insurance proceeds on July 9, 1996. Ilocos Life conducted an investigation into the
claim and came out with the following findings:
1. Sotero did not personally apply for insurance coverage, as she was illiterate.
2. Sotero was sickly since 1990.
3. Sotero did not have the financial capability to pay the premium on the policy.
4. Sotero did not sign the application for insurance.
5. Aban was the one who filed the insurance application and designated herself as the beneficiary.

For the above reasons and claiming fraud, Ilocos Life denied Aban’s claim on April 16, 1997, but refunded the
premium paid on the policy.
a. May the incontestability period set in even in cases of fraud as alleged in this case?
b. Is Aban entitled to claim the proceeds under the policy?

A:
a. YES. The “incontestability clause” is a provision in law that after a policy of life insurance made 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 its issue or of its last reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindable by
reason of fraudulent concealment or misrepresentation of the insured or his agent.
In this case, the policy was issued on August 30, 1993, and the insured died on April 10, 1996. The insurance
policy was thus in force for a period of 3 years, 7 months, and 24 days. Considering that the insured died after the 2-
year period, Ilocos is, therefore, barred from proving that the policy is void ab initio by reason of the insured’s
fraudulent concealment or misrepresentation or want of insurable interest on the part of the beneficiary.

b. YES. Aban is entitled to claim the proceeds. After the 2-year period lapse, or when the insured dies within
the period, the insurer must make good on the policy, even though the policy was obtained by fraud, concealment, or
misrepresentation, as in this case, when the insured did not personally apply for the policy as she was illiterate and that
it was the beneficiary who filled up the insurance application designating herself as beneficiary.

(2017 BAR)
Q: TRUE or FALSE. The law on life insurance prohibits double insurance.
A: FALSE, double insurance only applies to property insurance.

(2018 BAR)
Q: Shortly after Yin and Yang were wed, they each took out separate life insurance policies on their lives, and
mutually designated one another as sole beneficiary. Both life insurance policies provided for a double indemnity
clause, the cost for which was added to the premium rate. During the last 10 years of their marriage, the spouses
had faithfully paid for the annual premiums over the life policies from both their salaries.
Unfortunately, Yin fell in love with his officemate, Yessel, and they carried on an affair. After two years,
their relationship bore them a daughter named Yinsel. Without the knowledge of Yang, Yin changed the
designation of the beneficiary to an "irrevocable designation" of Yinsel and Yessel jointly. When Yang learned
of the affair, she was so despondent that, having chanced upon Yin and Yessel on a date, she rammed them down
with the car she was driving, resulting in Yin's death and Yessel's complete loss of mobilization. Yang was sued
for parricide, and while the case was pending, she filed a claim on the proceeds of the life insurance of Yin as
irrevocable beneficiary, or at least his legal heir, and opposed the claims on behalf of Yessel and her daughter
Yinsel. Yang claimed that her designation as beneficiary in Yin's life insurance policy was irrevocable, in the
nature of one "coupled with interest," since it was made in accordance with their mutual agreement to designate
one another as sole beneficiary in their respective life policies. She also claimed that the beneficiary designation
of Yessel and the illegitimate minor child Yinsel was void being the product of an illicit relationship, and
therefore without "insurable interest."
a. Is Yang correct in saying that her designation as beneficiary was irrevocable?
b. Do Yessel and Yinsel have “insurance interest” on the life of Yin?

A:
a. Yang is not correct. The insured shall have the right to change the beneficiary he designated in the policy,
unless he has expressly waived this right in the policy. There is nothing in the life insurance policy taken by Yang
which indicated that the designation of Yin is irrevocable. As such, it is deemed to be revocable.

b. Yessel has no insurable interest on the life of Yin, because she cannot be lawfully designated as beneficiary.
Persons who are proscribed to become donees under the rules on donation cannot be designated as beneficiary in life
insurance. These include persons in illicit relations as in the case of Yin and Yessel. Yinsel, however, has insurable
interest on the life of Yin. There is no proscription in naming an illegitimate child as a beneficiary (Heirs of Loreta
Maramag v. Maramag, G.R. No. 181132, June 5, 2009)

(2019 BAR)
Q: In January 2016, Mr. H was issued a life insurance policy by XYZ Insurance Co., wherein his wife, Mrs. W,
was designated as the sole beneficiary. Unbeknownst to XYZ Insurance Co., however, Mr. H had been
previously diagnosed with colon cancer, the fact of which Mr. H had concealed during the entire time his
insurance policy was being processed.
In January 2019, Mr. H unfortunately committed suicide. Due to her husband's death, Mrs. W, as beneficiary,
filed a claim with XYZ Insurance Co. to recover the proceeds of the late Mr. H's life insurance policy. However,
XYZ Insurance Co. resisted the claim, contending that: (1) the policy is void ab initio because Mr. H
fraudulently concealed or misrepresented his medical condition, i.e., his colon cancer; and (2) as an insurer in a
life insurance policy, it cannot be held liable in case of suicide.
Rule on each of XYZ Insurance Co.’s contentions
 A: The first contention is not tenable. Under the incontestability clause, after a policy of life insurance made
payable upon the death of the insured shall have been in force during the lifetime of the insured for a period of two
years from the issuance of the policy or last reinstatement, the insurer must make good on the policy even though the
policy was obtained through fraud, concealment or misrepresentation (Section 48 Insurance Code; Manila Bankers v.
Aban, G.R. No. 175666, July 29, 2013; Sun Life of Canada v. Sibya, G.R. No. 211212, June 08, 2016) Even if Mr. H
had concealed or misrepresented that he was previously diagnosed with colon cancer, XYZ can no longer rescind the
policy since it has been in force already for three years.
On the second contention, XYZ Insurance is liable despite the suicide of Mr. H. Under the Insurance Code, the
insurer is liable when suicide is committed after the policy has been in force for a period of two years from the date of
issue or its last reinstatement. (Section 180-A, Insurance Code) In this case, Mr. H committed suicide three years after
issuance of the policy; thus, XYZ should be liable to the beneficiary of Mr. H.