Mercantile Law and Taxation Syllabus Based Reviewer 2024

I. CORPORATION LAW (R.A. No. 11232, Revised Corporation Code)

A. General Principles
1. Nature and Attributes (R.A. No. 11232, Section 2)

SEC. 2. Corporation Defined. – A corporation is an artificial being created by operation of law,

having the right of succession and the powers, attributes, and properties expressly authorized
by law or incidental to its existence.

MFQ Attributes of a Corporation:

 An Artificial Being with separate and distinct personality;

 A Creature of the Law or created by operation of law;
 With a Strong Juridical Personality or has the right of Succession; and
 A Creature of Limited Powers or has powers and attributes conferred by law or
incident to its existence.

2. Nationality of Corporations

a. Control Test (Prevailing mode of determining Filipino ownership)

 Rule - Shares belonging to corporations or partnerships at least 60% of the capital which
is owned by Filipino citizens shall be considered as of Philippine nationality, but if the
percentage of Filipino ownership in the corporation or partnership is less than 60%, only
the number of shares corresponding to such percentage shall be counted as of
Philippine nationality.
 If the capital of the investing Corporation is at least 60% owned by Filipinos, then the
entire shareholdings of the investing Corporation shall be recorded as Filipino-owned
thus making both the investing and investee - corporations Philippine national.
 Corporations which are Philippine nationals
o A corporation organized under Philippine laws of which 60% of the capital stock
outstanding and entitled to vote is owned and held by Filipino citizens; or
o A corporation organized abroad and registered as doing business in the
Philippines under the (Revised) Corporation Code of which 100% of the capital
stocks entitled to vote belong to Filipinos.
 The Control Test or the "liberal rule" states that shares belonging to corporations at
least sixty percent (60%) of the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality. Under this test, there is no need to further trace
the ownership of the 60% (or more) Filipino stockholdings of an investing corporation
since a corporation which is at least 60% Filipino-owned is already considered as
Filipino.
 All covered corporations shall, at all times, observe the constitutional or statutory
ownership requirement in that the required percentage of Filipino ownership shall be
applied to both
o the total number of outstanding shares of stock entitled to vote in the election of
directors; and
o the total number of outstanding shares of stock, whether or not entitled to vote
in the election of directors

NOTE: Control test is the primary test in determining the nationality of a corporation.

b. Grandfather rule

 It is the method by which the percentage of Filipino equity in a corporation is computed

by attributing the nationality of the second or even subsequent tier of ownership to
determine the nationality of the corporate shareholder." This rule is only used when
doubt exists as to the locus of the beneficial ownership and control, as when these do
not in fact reside in the Filipino shareholders but in the foreign shareholders.
  It is the method of attributing the shareholdings of a given corporate shareholder to the
second or even the subsequent tier of ownership to determine the ultimate ownership
in a corporation. This is consistent with the rule that the "beneficial ownership" of
corporations engaged in nationalized activities must reside in the hands of Filipino
citizens. In the case of a multi-tiered corporation, the stock attribution rule must be
allowed to run continuously along the chain of ownership until it finally reaches the
individual stockholders
 It is a method of determining the nationality of a corporation which owns shares in
another corporation by breaking down the equity structure of the shareholders of the
corporation.

3. Doctrine of Separate Judicial Personality

 The doctrine of corporate juridical personality states that a corporation is a juridical

entity with legal personality separate and distinct from those acting for and, in its
behalf, and, in general, from the people comprising it.
 A corporation is an artificial entity created by fiction of law. This means that while it is
not a person, naturally, the law gives it a distinct personality and treats it as such. A
corporation, in the legal sense, is an individual with a personality that is distinct and
separate from other persons including its stockholders, officers, directors,
representatives, and other juridical entities. The law vests in corporations’ rights,
powers, and attributes as if they were natural persons with physical existence and
capabilities to act on their own. Because a corporation's existence is only by fiction of
law, it can only exercise its rights and powers through its directors, officers, or agents
who are all natural persons. A corporation cannot sue or enter into contracts.
 A separate personality shields corporate officers acting in good faith and within their
scope of authority from personal liability except for situations enumerated by law and
jurisprudence.
o Contracts - A corporation is a juridical entity with a legal personality separate
and distinct from those acting for and on its behalf, and, in general, from the
people comprising it; the obligations incurred by the corporation, acting through
its directors, officers and employees are its sole liabilities.
o Torts - A corporation is civilly liable for torts in the same manner as natural
persons, because the rules governing the liability of a principal for a tort
committed by an agent are the same whether the principal be a natural person
or a corporation, and whether the agent be a natural or artificial person.
o Crime - The directors, officers, employees or other officers thereof responsible
for the offense shall be charged and penalized for the crime, precisely because of
the nature of the crime and the penalty therefor. A corporation cannot be
arrested and imprisoned; hence, cannot be penalized for a crime punishable by
imprisonment. However, a corporation may be charged and prosecuted for a
crime if the imposable penalty is fine. Even if the statute prescribes both fine and
imprisonment as penalty, a corporation may be prosecuted and, if found guilty,
may be fined.

4. Doctrine of Piercing the Corporate Veil; Liability of Directors and Officers

 The principles of piercing the corporate veil apply with equal force to One Person
Corporations as with other corporations.”
 GENERAL RULE: A corporation will be looked upon as a legal entity; unless and until
sufficient reason to the contrary appears.
EXCEPTION: When the notion of legal entity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime, the law will regard the corporation as an
association of persons. The corporate entity may be disregarded in the interest of
justice in such cases as fraud that may work inequities among members of the
corporation internally, involving no rights of the public or third persons. In both
instances, there must have been fraud and proof of it.
 o For the separate juridical personality of a corporation to be disregarded, the
wrong-doing must be clearly and convincingly established. It cannot be
presumed.
o The main effect of disregarding the corporate fiction is that stockholders will be
held personally liable for the acts and contracts of the corporation, whose
existence, at least for the purpose of the particular situation involved, is ignored.

Remember that:

o Piercing power belongs to the courts;

o The wrongdoing cannot be presumed and must be clearly established;
o Res judicata effect – applies for “this instance” only (this particular transaction
or obligation)
o Fixes liability. May not be used for any other purpose.
 FRAUD PIERCING: When the corporate entity is used to commit a crime, to undertake
fraud or do a wrong, or that the corporate veil is used as a means to evade the
consequences of one’s criminal or fraudulent acts;
 ALTER-EGO PIERCING: When corporate entity merely a farce since the corporation is
merely the alter ego, business conduit, or instrumentality of a person or another entity;
 DEFEAT OF PUBLIC CONVENIENCE (EQUITY PIERCING): When the application of the
separate corporate personality would be inconsistent with the business purpose of the
legal fiction or would merely confuse legitimate issues, or when piercing the corporate
fiction.

ALTER-EGO PIERCING

 Control, not mere majority or complete stock control, but complete domination, not
only of finances but of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no separate
mind, will or existence of its own;
 Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiff’s legal rights; and
 The aforesaid control and breach of duty must proximately cause the injury or unjust
loss complained of.

The absence of any one of these elements prevents piercing the corporate veil.

To summarize, piercing the corporate veil based on the alter ego theory requires the
concurrence of three elements: control of the corporation by the stockholder or parent
corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage
caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any
of these elements prevents piercing the corporate veil.

5. Trust Fund Doctrine

 The trust fund doctrine enunciates a rule that the property of a corporation is a trust
fund for the payment of creditors, but such property can be called a trust fund 'only by
way of analogy or metaphor.' As between the corporation itself and its creditors it is a
simple debtor, and as between its creditors and stockholders its assets are in equity a
fund for the payment of its debts.
 The scope of the doctrine when the corporation is insolvent encompasses not only the
capital stock, but also other property and assets generally regarded in equity as a trust
fund for the payment of corporate debts.
 "The trust fund doctrine backstops the requirement of unrestricted retained earnings to
fund the payment of the shares of stocks of the withdrawing stockholders."
 Under the trust fund doctrine, "the capital stock, property, and other assets of a
corporation are regarded as equity in trust for the payment of corporate creditors,
who are preferred in the distribution of corporate assets."
  The "Trust Fund" doctrine considers this subscribed capital as a trust fund for the
payment of the debts of the corporation, to which the creditors may look for
satisfaction. Until the liquidation of the corporation, no part of the subscribed capital
may be returned or released to the stockholder (except in the redemption of
redeemable shares) without violating this principle.

B. Kinds of Corporation
1. Stock Corporation – R.A. No. 11232, Section 3

 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. All other corporations are non-stock
corporations.
 A government-owned or controlled corporations refer to any agency organized as a
stock or non-stock corporation vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the government directly or
indirectly through its instrumentalities either wholly, or where applicable as in the case
of stock corporations to the extent of at least 51% of its capital stock.

2. Non-Stock Corporation –R.A. No. 11232, Sections 86-87

 Non-stock corporations have no capital stock and/or not authorized to distribute

dividends to its members.
 A non-stock corporation may be organized for any purposes except for profit and
political ends.
 Treatment of profits - profit obtained incidental to its operations shall, whenever
necessary or proper, be used for the furtherance of the purpose/s for which it was
organized.
 Non-stock corporations are organized for charitable, religious, educational, professional,
cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade,
industry, agricultural and like chambers, or any combination thereof.

3. Close Corporation –R.A. No. 11232, Section 95

 A close corporation is one whose articles of incorporation provides that: (a) all the
corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by
not more than a specified number of persons, not exceeding twenty (20); (b) all the issued
stock of all classes shall be subject to one or more specified restrictions on transfer permitted
by law; and (c) the corporation shall not list in any stock exchange or make any public offering
of its stocks of any class. Notwithstanding the foregoing, a corporation shall not be deemed a
close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or
controlled by another corporation which is not a close corporation within the meaning of the
Revised Corporation Code.

 The pre-emptive right of stockholders in close corporations shall extend to all stock to be
issues, including reissuance of services, or in payment or corporate debts, unless the articles of
incorporation provide otherwise.

AOI may provide for:

 A classification of shares or rights, the qualifications for owning or holding the same, and
restrictions on their transfers, subject to Sec. 97;
 A classification of directors into one (1) or more classes, each of whom may be voted for
and elected solely by a particular class of stock; and
 Greater quorum or voting requirements in meetings of stockholders or directors than
those provided in this Code.
 That the business shall be managed by the stockholders rather than by a board of
directors. So long as this provision continues in effect, no meeting of stockholders need
be called to elect directors: Provided, That the stockholders of the corporation shall be
deemed to be directors for the purpose of applying the provisions of this Code, unless
 the context clearly requires otherwise: Provided, further, That the stockholders of the
corporation shall be subject to all liabilities of directors.
 That all officers or employees or that specified officers or employees shall be elected or
appointed by the stockholders, instead of by the board of directors.

Section 97 - Validity of Restrictions on Transfer of Shares must appear in the AOI, in the
ByLaws, as well as in the certificate of stock; otherwise, the same shall not be binding on any
purchaser in good faith.

 May not be Close Corporations:

o Mining or oil companies; stock exchanges; banks; insurance companies; public
utilities; educational institutions; and corporations declared to be vested with
public interest.

4. Educational Corporations –R.A. No. 11232, Section 105

 Education corporations shall be governed by special laws and by the general provisions
of this Code.
 Unless otherwise provided in the articles of incorporation or bylaws, the board of
trustees of incorporated schools, colleges, or other institutions of learning shall, as soon
as organized, so classify themselves that the term of office of one-fifth (1/5) of their
number shall expire every year. Trustees thereafter elected to fill vacancies, occurring
before the expiration of a particular term shall hold office only for the unexpired period.
Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office
for five (5) years. A majority of the trustees shall constitute a quorum for the transaction
of business. The powers and authority of trustees shall be defined in the bylaws.

5. Religious Corporation– R.A. No. 11232, Sections 107-08

 Religious corporations may be incorporated by one (1) or more persons. Such

corporations may be classified into corporation’s sole and religious societies. Religious
corporations shall be governed by this Chapter and by the general provisions on non-
stock corporations insofar as applicable.
o 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.
o Religious Societies
 Any religious society, religious order, diocese, synod, or district
organization of any religious denomination, sect or church, may, upon
written consent and/or by an affirmative vote at a meeting called for the
purpose of at least two-thirds (2/3) of its membership, incorporate for
the administration of its temporalities or for the management of its
affairs, properties, and estate by filing with the SEC, AOI verified by the
affidavit of the presiding elder, secretary, or clerk or other member of
such religious society or religious order, or diocese, synod, or district
organization of the religious denomination., sect or church.

6. One Person Corporations - corporation with a single stockholder. Only a natural person,
trust, or an estate may form a One Person Corporation.

 Capital Stock Requirement

 OPC shall not be required to have a minimum authorized capital stock except as
otherwise provided by special law.

 Articles of Incorporation and By-Laws –

 File AOI in accordance with the requirements under Section 14 of the RCC substantially
containing the following:
 o If the single stockholder is a trust or an estate, the name, nationality, and
residence of the trustee, administrator, executor, guardian, conservator,
custodian, or other person exercising fiduciary duties together with the proof of
such authority to act on behalf of the trust or estate; and
o Name, nationality, residence of the nominee and alternate nominee, and the
extent, coverage and limitation of the authority.
 Not required to submit and file corporate by-laws.
 May not be OPCs: Banks; quasi-banks; pre-need; trust; insurance; public and publicly-
listed companies; and non-chartered GOCCs, stock exchanges; Natural person licensed
to exercise a profession for the purpose of exercising such profession.

 Corporate Name - A One Person Corporation shall indicate the letters “OPC” either below or
at the end of its corporate name.

Corporate Structure and Officers

 single stockholder shall be the sole director and president;

 15 days from issuance of COI, appoint a treasurer, corporate secretary, and other
officers as it may deem necessary, and notify the SEC thereof within five (5) days from
appointment.
 single stockholder may not be appointed as the corporate secretary
 single stockholder who is likewise the self-appointed treasurer of the corporation shall
give a bond to the SEC (renewed every 2 years) in such a sum as may be required
 Corporate secretary shall (i) be responsible for maintaining the minutes book and/or
records of the corporation; (ii) notify the nominee or alternate nominee of the death or
incapacity of the single stockholder, which notice shall be given no later than five (5)
days from such occurrence; (iii) notify the SEC of the death of the single stockholder
within five (5) days from such occurrence and stating in such notice the names,
residence addresses, and contact details of all known legal heirs; and (iv) Call the
nominee or alternate nominee and the known legal heirs to a meeting and advise the
legal heirs with regard to, among others, the election of a new director, amendment of
the articles of incorporation, and other ancillary and/or consequential matters.

7. Holding/Parent and Subsidiary Corporation

 A holding company has been defined by the Commission in several opinions. It has been
aptly defined as "a corporation organized to hold the stock of another or other
corporations." Its essential feature is that it holds stock. The term "holding company" is
equivalent to a parent corporation, having such an interest in another corporation, or
power of control, that it may elect its directors and influence its management. A parent
or holding company is one that controls another as a subsidiary or affiliate by the power
to elect its management.
 Affiliates are those concerns that are subject to common control and operated as part
of a system.
 A holding company is one which holds stocks in other companies for purposes of control
rather than for mere investment.

C. Incorporation and Organization

MFQ 1. Number and Qualification of Incorporators –R.A. No. 11232, Section 10

 Corporators - those who compose a corporation, whether as stockholders in a stock

corporation or as members in a non-stock corporation.
 Incorporators - those stockholders or members mentioned in the AOI as originally
forming and composing the corporation and who are signatories thereof
 Number and Qualifications of Incorporators:
o Any person, partnership, association or corporation, singly or jointly with others
o Not more than 15 in number;
o If a natural person – of legal age
o Own at least 1 share
  A corporation with a single stockholder is considered an OPC.

2. Corporate Name –R.A. No. 11232, Section 14, 17-18

 First: That the name of said corporation shall be “_______________, Inc., Corporation or
OPC”;
 Corporate Name and Limitations on its Use
o Indistinguishable from that already reserved or registered for the use of another
corporation;
o Name is already protected by law;
o Use is contrary to existing law, rules and regulations.

SEC may summarily order the corporation to immediately cease and desist from
using such name and require the corporation to register a new one.

SEC shall also cause the removal of all visible signages, marks, advertisements,
labels, prints and other effects bearing such corporate name.

Upon the approval of the new corporate name, SEC shall issue a certificate of
incorporation under the amended name.

3. Capitalization – R.A. No. 11232, Section 12

General Rule: Stock corporations shall not be required to have a minimum capital stock
Exception: Where specifically provided by special law

4. Corporate Term – R.A. No. 11232, Section 11

a. Corporate Existence

 General Rule: Perpetual

Except: AOI provides otherwise
 General Rule: If incorporated prior to RCC, shall have perpetual existence
Except: If corporation notifies SEC that it elects to retain its specific term (election by
vote of majority of OCS)
 Corporate term for a specific period – may be extended or shortened
o BUT: No extension may be made earlier than 3 years prior to original or
subsequent expiry dates
o EXCEPT: If there are justifiable reasons for an earlier extension (as determined by
the SEC)
 Corporation whose term has expired - May apply for revival of its corporate existence
 No application for revival of corporate existence of banks, banking/quasi-banking
institutions, pre-need, insurance and trust companies, NSSLAs, pawnshops, corporations
engaged in money service business and other financial instruments shall be approved
unless accompanied by a favorable recommendation of the appropriate government
agency.

5. Classification of Shares – R.A. No. 11232, Sections 6-9

 The classification, rights, privileges, or restrictions, and their stated par value, if any,
must be indicated in the AOI.
 Doctrine of Equality: Each share shall be equal in all respects to every other share,
EXCEPT: As otherwise provided in the AOI and in the certificate of stock

All stocks issued by the corporation are presumed equal with the same privileges and liabilities,
provided that the Articles of Incorporation is silent on such differences.

Who may Classify Shares

 Incorporators – the classes and number of shares which a corporation shall issue are
first determined by the incorporators as stated in the AOI filed with the SEC;
  Board of directors and stockholders – after the corporation comes into existence,
classification of shares may be altered by the board of directors and the stockholders by
amending the AOI pursuant to Sec. 15, RCC.

 No share may be deprived of voting rights except those classified and issued as
"preferred" or "redeemable" shares
EXCEPT: As otherwise provided in the RCC
 There shall always be a class or series of shares with complete voting rights.
 Non-voting shares shall nevertheless be entitled to vote on: (a) Amendment of the
AOI; (b) Adoption and amendment of BL; (c) Sale, lease, exchange, mortgage, pledge, or
other disposition of all or substantially all of the corporate property; (d) Incurring,
creating, or increasing bonded indebtedness; (e) Increase or decrease of Authorized
Capital Stock (ACS); (f) Merger or consolidation of the corporation with another
corporation or other corporations; (g) Investment of corporate funds in another
corporation or business in accordance with the RCC; and (h) Dissolution of the
corporation.
 Par Value – shares or series of shares may or may not have a par value
 EXCEPT: banks, trust, insurance, and preneed companies, public utilities, building and
loan associations, and other corporations authorized to obtain or access funds from the
public, whether publicly listed or not, shall not be permitted to issue no-par value shares
of stock.
 No Par Value – (i) deemed fully paid and non-assessable; (ii) holder of such shares shall
not be liable to the corporation or to its creditors in respect thereto; (iii) must be issued
for a consideration of at least Five pesos (P5.00) per share; (iv) entire consideration
received by the corporation for its no-par value shares shall be treated as capital and
shall not be available for distribution as dividends
 Preferred Shares – may be issued only with a stated par value
✓ Preference as to dividends
✓ Preference as to liquidating dividends

The BOD, where authorized in the AOI, may fix the terms and conditions of preferred shares of
stock or any series thereof: Such terms and conditions shall be effective upon filing of a
certificate with the SEC.

 Redeemable Shares
(i) May be issued if expressly provided in the AOI; (ii) may be purchased by the
corporation upon the expiration of a fixed period; (iii) does not require URE
(Unrestricted Retained Earnings).
 Treasury Shares - shares of stock which have been issued and fully paid for but
subsequently reacquired by the issuing corporation. May be disposed of for a
reasonable price fixed by the BOD.
 Founders Shares – may be
✓ Given rights and privileges not enjoyed by the owners of other classes of shares
✓ If exclusive right to vote and be voted for is granted --- it must not exceed 5 years
from incorporation. --- not allowed if it violates ADL(anti-dummy law), FIA(foreign
investments act), and other pertinent laws

The BOD, where authorized in the AOI, may fix the terms and conditions of preferred shares of
stock or any series thereof: Such terms and conditions shall be effective upon filing of a
certificate with the SEC.

6. Articles of Incorporation - R.A. No. 11232, Sections 13-15

  name of the corporation;
 specific purpose or purposes for which the corporation is being formed (primary
purpose and the secondary purpose or purposes) A non-stock corporation may not
include a purpose which would change or contradict its nature as such;
 Principal office of the corporation which must be within the Philippines;
 The term for which the corporation is to exist, if the corporation has not elected
perpetual existence;
 The names, nationalities, and residence addresses of the incorporators;
 The number of directors, which shall not be more than fifteen (15) or the number of
trustees which may be more than fifteen (15);
 The names, nationalities, and residence addresses of persons who shall act as directors
or trustees until the first regular directors or trustees are duly elected and qualified in
accordance with this Code;
 If it be a stock corporation, the amount of its ACS, number of shares into which it is
divided, the par value of each, names, nationalities, and residence addresses of the
original subscribers, amount subscribed and paid by each on the subscription, and a
statement that some or all of the shares are without par value, if applicable;
 If it be a non-stock corporation, the amount of its capital, the names, nationalities; and
 residence addresses of the contributors, and amount contributed by each; and
 Such other matters consistent with law and which the incorporators may deem
necessary and convenient.

Registration, Incorporation, and Commencement of Corporate Existence

o Submit the AOI and bylaws to the SEC

o A private corporation’s commences its corporate existence and juridical
personality from the date the SEC issues the certificate of incorporation.
 Non-Amendable Items fait accompli (names of incorporators, first set of
directors/trustees)

7. By-Laws - R.A. No. 11232, Sections 45-47

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.

Adoption of By-Laws

 Majority vote of OCS(outstanding capital stock) is needed to adopt BL

 Effective only upon the issuance by the SEC of a certification that the bylaws are in
accordance with this Code

Amendments to By-Laws

(i) To amend/repeal the BL:

 Majority of the BOD/T

 Majority of the OCS/M

(ii) 2/3 of OCS/M may delegate to the BOD/T the power to amend/repeal the BL or adopt new
BL

 This delegation may be revoked by majority of OCS/M

Requisites of Valid By-Laws

 Consistent with the Revised Corporation Code and other pertinent laws and regulations
 Consistent with the Articles of Incorporation
 Must be reasonable and not arbitrary or oppressive
  It must not disturb vested rights, impair contract or property rights of
stockholders/members

Binding Effect of By-Laws

 Binding as to the stockholders/members

 Not binding as to third persons (except if they have actual knowledge)

Contents of By-Laws

 Time, place and manner of calling and conducting regular/special meetings of the
directors or trustees;
 Time and manner of calling and conducting regular/special meetings and mode of
notifying the stockholders/members;
 Quorum in meetings of stockholders/members and the manner of voting therein;
 Modes by which a stockholder, member, director, or trustee may attend meetings and
cast their votes;
 Form for proxies of stockholders and members and the manner of voting them;
 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;
 Time for holding the annual election of directors or trustees and the mode or manner of
giving notice thereof;
 Manner of election or appointment and the term of office of all officers other than
directors/trustees;
 Penalties for violation of the by-laws;
 In the case of stock corporations, the manner of issuing stock certificates; and
 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.

Optional: An arbitration agreement may be provided in the bylaws

8. Corporate Officers –R.A. No. 11232, Section 24

Directors must formally organize and elect:

 a president, who must be a director;

 treasurer, who must be a resident;
 a secretary, who must be a citizen and resident of the Philippines;
 such other officers as may be provided in the bylaws;
 a compliance officer (if the corporation is vested with public interest).

General Rule: The same person may hold two (2) or more positions concurrently.

Exception: No one shall act as president and secretary or as president and treasurer at the
same time

The officers shall manage the corporation and perform such duties as may be provided in the
bylaws and/or as resolved by the board of directors.

9. De Facto Corporation –R.A. No. 11232, Section 19

GENERAL RULE: 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.

EXCEPT: Such inquiry may be made by the Solicitor General in a quo warranto proceeding.

Requisites
  Existence of valid law under which it may be incorporated;
 good faith attempt to incorporate and colorable compliance with the requirements set
by law (filing of AOI and issuance of COI);
 assumption of corporate powers

10. Corporation by Estoppel –R.A. No. 11232, Section 20

 Persons who assume to act as a corporation knowing it to be without authority to do so:

 Liable as general partners for all debts, liabilities and damages incurred or arising as a
result thereof
 It shall not be allowed to use its lack of corporate personality as a defense when it is
sued on any transaction entered by it as a corporation or on any tort committed by it as
such,
 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.

 It exists when two or more persons assume to act as a corporation knowing it to be

without authority to do so. They are 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 as a defense its lack of corporate
personality. One who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was, in fact, no corporation.

D. Directors and Trustees

1. Qualifications and Disqualifications – R.A. No. 11232, Sections 22-26

 Board of Directors as the Repository of Corporate Powers

 Doctrine of Centralized Management -- the board of directors or trustees shall exercise

the corporate powers, conduct all business, and control all properties of the corporation
 Tenure, Qualifications, and Disqualifications of Directors

SEC OGC Opinion No. 16-04 dated 16 February 2016; Qualifications of Board Directors

o Only natural persons can be elected as directors;

o He must own at least one (1) share of the capital stock of the corporation in his
own name;
o [Under the RCC, the majority of the board are no longer required to be
residents]
o He must not have been convicted by final judgment of an offense punishable by
imprisonment for a period exceeding six (6) years, or a violation of the
Corporation Code, committed within five (5) years prior to the date of his
election;
o Other qualifications as may be prescribed in the by-laws of the corporation.

 The qualifications provided for in the law are only minimum qualifications; additional
qualifications and disqualifications can be provided for but only by proper provisions in the by-
laws of the corporation.

 DISQUALIFICATION

Disqualified if within five (5) years prior to the election or appointment as such, the person was:

 convicted by final judgment:

o Of an offense punishable by imprisonment for a period exceeding six (6) years;
o For violating the RCC; and
o For violating the SRC;
 Found administratively liable for any offense involving fraudulent acts; and
  By a foreign court or equivalent foreign regulatory authority for acts, violations or
misconduct similar to those enumerated in paragraphs (a) and (b) above.

The foregoing is without prejudice to qualifications or other disqualifications, which the SEC,
the primary regulatory agency, or the PCC may impose in its promotion of good corporate
governance or as a sanction in its administrative proceedings.

2. Elections –R.A. No. 11232, Sections 23 and 25, 91

 Election of Directors or Trustees

 Directors - term of one (1) year

 Trustees - term not exceeding three (3) years
 Tenure: Hold office until the successor is elected and qualified. A director who ceases to
own at least one (1) share of stock or a trustee who ceases to be a member of the
corporation shall cease to be such.
General Rule: Each stockholder or member shall have the right to nominate any
qualified director or trustee
Exception: If right is reserved to founders shares
 At all elections, the presence of majority of the OCS/members entitled to vote.
 Voting may be done by SH through remote communication or in absentia if
o authorized in the BL,
o authorized by a majority of the BOD
 Within 30 days after election, submit to the SEC the names, nationalities, shareholdings
of the D/T/O elected.
 If there is no election, report to the SEC such fact within 30 days from the date of the
scheduled election.
 A stockholder may:
o vote such number of shares for as many persons as there are directors to be
elected;
o cumulate said shares and give one (1) candidate as many votes as the number of
directors to be elected multiplied by the number of the shares owned; or
o distribute them on the same principle among as many candidates as may be
seen fit: Provided, That the total number of votes cast shall not exceed the
number of shares owned by the stockholders as shown in the books of the
corporation multiplied by the whole number of directors to be elected

Note: No delinquent stock shall be voted

 A member may:
o Cast as many votes as there are trustees to be elected but may not cast more
than one (1) vote for one (1) candidate. Nominees for directors or trustees
receiving the highest number of votes shall be declared elected.

3. Independent Directors –R.A. No. 11323, Section 22

 Independent Directors to constitute at least 20% of the board of:

 Corporations covered by the SRC (securities are registered with the SEC, 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)
 Banks/quasi-banks NSSLAs, pawnshops, corporations engaged in money service
business, pre-need, trust and insurance companies, and other financial intermediaries;
and
 Other corporations engaged in business vested with public interest similar to the above,
as may be determined by the SEC

Independent Director - person, who, apart from shareholdings and fees received from the
corporation, is independent of management and free from any business or other
relationship.
4. Term, Holdover, and Removal –R.A. No. 11232, Section 22 and 27

 Removal of a Director/Trustee

 D/T may be removed from office by a vote of 2/3 of the OCS/M

 Meeting called for the purpose
 Notice to SH/M of such intention to propose such removal
 Called by Corp. Sec. upon order of Pres. or written demand of majority of OCS/M
 Removal may be with/without cause (if w/o cause, should not be used to deprive
minority shareholders of right of representation)
 Filling of Vacancies

SCENARIO 1: Vacancy other than by removal by the stockholders or by expiration of term

Rules:

 May be filled by the vote of at least a majority of the remaining directors or

trustees, if still constituting a quorum
 If there is no quorum, said vacancies must be filled by the stockholders in a
regular or special meeting
 A director or trustee so elected to fill a vacancy shall be elected only or the
unexpired term of his predecessor in office.

Directors may lawfully fill vacancies occurring in the board, and such officials, as well as
the original directors, hold-over until qualification of their successors.

SCENARIO 2: Vacancy by reason of increase in the number of directors

Rule:
 Vacancy shall be filled only by an election at a regular or at a special meeting of
stockholders or members duly called for the purpose, or in the same meeting
authorizing the increase of directors or trustees if so stated in the notice of the
meeting.

SCENARIO 3: Resignation of holdover director

Rule:
 Remaining members of the BOD 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. Consequently,
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.

SCENARIO 4: Vacancy prevents the remaining directors from constituting a quorum

and emergency action is required to prevent grave, substantial, and irreparable loss or
damage to the corporation.

Rule:
 The vacancy may be temporarily filled from among the officers of the
corporation by unanimous vote of the remaining directors or trustees.
 The action by the designated director or trustee shall be limited to the
emergency action necessary, and the term shall cease within a reasonable time
from the termination of the emergency or upon election of the replacement
director or trustee, whichever comes earlier.
 The corporation must notify the Commission within three (3) days from the
creation of the emergency board, stating therein the reason for its creation.

5. Compensation – R.A. No. 11232, Section 29

General Rule: In the absence of any provision in the by-laws fixing their compensation, the
directors shall not receive any compensation, as such directors

Exception: Reasonable per diems:

Exception to the exception: Compensation other than per diems may be granted to directors
by the vote of the stockholders representing at least a majority of the outstanding capital stock
at a regular or special stockholders' meeting.

In no case shall the total yearly compensation of directors exceed ten (10%) percent of the net
income before income tax of the corporation during the preceding year.

6. Vacancy –R.A. No. 11232, Sections 28 and 25

7. Voting Requirements

At all elections of directors or trustees:

 Presence, either in person or through a representative authorized to act by written

proxy, the owners of majority of the outstanding capital stock, or if there be no capital
stock, a majority of the members entitled to vote.
 When allowed in the bylaws or by a majority of the board of directors, the stockholders
or members may also vote through remote communication or in absentia (this right may
be exercised in corporations vested with public interest, even if the bylaws do not
provide for it).
 The election must be by ballot if requested by any voting stockholder or member.
 In stock corporations, stockholders entitled to vote shall have the right to vote the
number of shares of stock standing in their own names in the stock books of the
corporation at the time fixed in the bylaws or where the bylaws are silent, at the time of
the election.
 If no election is held, or the owners of majority of the outstanding capital stock or
majority of the members entitled to vote are not present in person, by proxy, or through
remote communication or not voting in absentia at the meeting, such meeting may be
adjourned.

Stockholders may:

 vote such number of shares for as many persons as there are directors to be elected;
 cumulate said shares and give one (1) candidate as many votes as the number of
directors to be elected multiplied by the number of the shares owned; or
 distribute them on the same principle among as many candidates as may be seen fit:
Provided, That the total number of votes cast shall not exceed the number of shares
owned by the stockholders as shown in the books of the corporation multiplied by the
whole number of directors to be elected.

Members may:

 Unless otherwise provided in the articles of incorporation or in the bylaws, members of

non-stock corporations may cast as many votes as there are trustees to be elected but
may not cast more than one (1) vote for one (1) candidate.

8. Duties and Liabilities

 Duty of Obedience (Section 23 of the RCC)

o Perform the duties enjoined on them by law and the by-laws of the corporation
(the RCC adds “rules of good corporate governance”
 Duty of Diligence (Section 30 of the RCC)
o Wilfully and knowingly vote for or assent to patently unlawful acts
o guilty of gross negligence or bad faith in directing the affairs of the corporation
o Liable jointly and severally for all damages resulting therefrom
  Duty of Loyalty (Sections 30-33 of the RCC)
o The Corporation Code was intended as a regulatory measure, not primarily as a
penal statute. Sections 31 to 34 in particular were intended to impose exacting
standards of fidelity on corporate officers and directors but without unduly
impeding them in the discharge of their work with concerns of litigation.
Considering the object and policy of the Corporation Code to encourage the use
of the corporate entity as a vehicle for economic growth, we cannot espouse a
strict construction of Sections 31 and 34 as penal offenses in relation to Section
144 in the absence of unambiguous statutory language and legislative intent to
that effect. We stress that had the Legislature intended to attach penal sanctions
to Sections 31 and 34 of the Corporation Code it could have expressly stated
such intent in the same manner that it did for Section 74 of the same Code.

Doctrine of Corporate Opportunity

 The doctrine of corporate opportunity arises out of the fundamental obligation of a

fiduciary not to allow a conflict of their duty with their own interests. The doctrine limits
the ability of those who owe a fiduciary duty to a corporation to take advantage of
business opportunities that might otherwise be available to them in the absence of the
fiduciary relationship.
 As it is now broadly understood, the doctrine of corporate opportunity governs the legal
responsibility of directors, officers and controlling shareholders in a corporation, under
the duty of loyalty, not to take such opportunities for themselves, without first
disclosing the opportunity to the board of directors of the corporation and giving the
board the option to decline the opportunity on behalf of the corporation. If the
procedure is violated and a corporate fiduciary takes the corporate opportunity anyway,
the fiduciary violates its duty of loyalty and the corporation will be entitled to a
constructive trust of all profits obtained from the wrongful transaction.
 Doctrine of Corporate Opportunity [FAQ]– the law does not permit the director/officer
to seize for him a business opportunity:
o Which the corporation is financially able to undertake;
o Which is in line with the corporation’s business and is of practical advantage to
it; and
o Which the corporation has an interest or a reasonable expectancy.

General Rule: Director/Officer seizing a corporate opportunity at the expense of the

corporation has the obligation to ACCOUNT all the profits and REFUND the profits to the
corporation. Exception: Ratification of 2/3 OCS is secured.

9. 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.
 The board of directors or trustees is the supreme authority in matters of management
of the regular and ordinary business affairs of the corporation. Their authority, however,
does not extend to the fundamental changes in the corporate charter such as
amendments or substantial changes thereof which belong to the stockholders as a
whole. The equitable principle therefore is that the stockholders may have all the profits
but shall turn over the management of the enterprise to the Board of Directors.

10. Business Judgment Rule

 Questions of 1) POLICY or 2) MANAGEMENT are left solely to the honest decision of

officers and directors of the corporation. Courts are without authority to substitute their
judgment for the judgment of the board.
General Rule: Contracts intra vires entered into by the board of directors are binding
upon the corporation and courts will not interfere unless such contracts are so
unconscionable and oppressive as to amount to wanton destruction to the rights of the
 minority, as when plaintiffs aver that the defendants (members of the board), have
concluded a transaction among themselves as will result in serious injury to the plaintiffs
stockholders.
Exception: It is elementary in corporation law that the doctrine admits of exceptions:
bad faith being one of them, gross negligence, another.

11. 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
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.

Its existence may be ascertained through:

 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
 The acquiescence in his acts of a particular nature, with actual or constructive notice
thereof, within or beyond the scope of his ordinary powers.

It requires presentation of evidence of similar act(s) 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.

12. Doctrine of Ratification or Estoppel

 Under the doctrine of estoppel, an admission or representation is rendered

conclusive upon the person making it, and cannot be denied or disproved as
against the person relying thereon. A party may not go back on his own acts and
representations to the prejudice of the other party who relied upon them. In the law
of evidence, whenever a party has, by his own declaration, act, or omission,
intentionally and deliberately led another to believe a particular thing true, to act
upon such belief, he cannot, in any litigation arising out of such declaration, act, or
omission, be permitted to falsify it.

Doctrine of Ratification

 Ratification is a voluntary and deliberate confirmation or adoption of a previous

unauthorized act.
 It converts the unauthorized act of an agent into an act of the principal.
 It cures the lack of consent at the time of the execution of the contract entered into by
the representative, making the contract valid and enforceable.
 It is, in essence, consent belatedly given through express or implied acts that are
deemed a confirmation or waiver of the right to impugn the unauthorized act.
 Ratification has the effect of placing the principal in a position as if he or she signed the
original contract.

E. Powers of Corporations; Incidental Powers; Ultra Vires Doctrine (R.A. No. 11232, Sections
35-44)

Power [FAQ] Voting Requirement and Comments

Notification Procedure
 Power to Extend or  Majority vote of the In case of term extension:
Shorten Corporate BOD + ratification of triggers appraisal right
Term 2/3 OCS
 Written notice of the
proposed action and
of the time and place
of the meeting shall
 be addressed to each
stockholder or
member at his place
of residence as shown
on the books of the
corporation and
deposited to the
addressee in the post
office with postage
prepaid, or served
personally
 Power to Increase or  Majority vote of the Non-voting shares will still
Decrease Capital BOD + ratification of have the right to vote
Stock or Incur, Create, 2/3 OCS
Increase Bonded  Written notice of the
Indebtedness [FAQ] proposed action and
of the time and place
of the meeting shall
be addressed to each
stockholder or
member at his place
of residence as shown
on the books of the
corporation and
deposited to the
addressee in the post
office with postage
prepaid, or served
personally
 Power to Deny Pre- ---- General Rule: All stockholders
Emptive Rights [FAQ] shall enjoy a pre-emptive right
to subscribe to all issues or
disposition of shares of any
class, in proportion to their
respective shareholdings
Exceptions:
 Right is denied by AOI
 Offerings in compliance
with Minimum Public
Ownership rules
 Shares in exchange for
property needed by the
corporation
 Payment of previously
contracted debt
 Power to Sell or  Majority vote of the It is a “sale of all or
Dispose of Corporate BOD + ratification of substantially all of the assets”
Assets 2/3 OCS if the corporation would be
 Written notice of the rendered incapable of
proposed action and continuing the business or
of the time and place accomplishing the purpose for
of the meeting shall which it was incorporated.
be addressed to each Computed using Net Asset
stockholder or Value as shown in the latest FS
member at his place Subject to the Phil.
of residence as shown Competition Act
on the books of the Triggers appraisal right
corporation and
 deposited to the
addressee in the post
office with postage
prepaid, or served
personally
 Power to Acquire ---- Must have Unrestricted
Own Shares [FAQ] Retained Earnings + Legitimate
Corporate Purpose
LCP could be but is not limited
to the following:
 Eliminate fractional
shares arising out of
stock dividends
 Collect/compromise an
indebtedness to the
corporation arising out
of unpaid subscription,
in a delinquency sale,
and to purchase
delinquent shares sold
during said sale
 To pay dissenting or
withdrawing
stockholders entitled to
payment for their
shares under the
provisions of this Code
 Power to Invest  Majority vote of the Non-voting shares will still
Corporate Funds in BOD + ratification of have the right to vote.
Another Corporation 2/3 OCS Triggers appraisal right.
or Business [FAQ]  Written notice of the
proposed action and
of the time and place
of the meeting shall
be addressed to each
stockholder or
member at his place
of residence as shown
on the books of the
corporation and
deposited to the
addressee in the post
office with postage
prepaid, or served
personally
 Power to Invest  Majority vote of the Non-voting shares will still
Corporate Funds in BOD + ratification of have the right to vote.
Another Corporation 2/3 OCS Triggers appraisal right.
or Business [FAQ]  Written notice of the
proposed action and
of the time and place
of the meeting shall
be addressed to each
stockholder or
member at his place
of residence as shown
on the books of the
corporation and
 deposited to the
addressee in the post
office with postage
prepaid, or served
personally
 Power to Invest  Majority vote of the Non-voting shares will still
Corporate Funds in BOD + ratification of have the right to vote.
Another Corporation 2/3 OCS Triggers appraisal right.
or Business [FAQ]  Written notice of the
proposed action and
of the time and place
of the meeting shall
be addressed to each
stockholder or
member at his place
of residence as shown
on the books of the
corporation and
deposited to the
addressee in the post
office with postage
prepaid, or served
personally

Ultra Vires Acts

 An ultra vires act is one committed outside the object for which a corporation is
created as defined by the law of its organization and therefore beyond the power
conferred upon it by law.
 A corporation may exercise its powers only within those definitions. Corporate acts that
are outside those express definitions under the law or articles of incorporation or those
"committed outside the object for which a corporation is created" are ultra vires.
 The only exception to this rule is when acts are necessary and incidental to carry out a
corporation's purposes, and to the exercise of powers conferred by the Corporation
Code and under a corporation's articles of incorporation.

Ultra Vires Doctrine

First Type: Acts done Executed Courts generally will not

beyond the powers of the interfere
corporation
Second Type: Acts done for Executory Enforcement is not
the corporation by persons available (unenforceable)
without authority
Third Type: Acts that are Partly Executed and partly Unjust enrichment principle
per se illegal executory applies

F. Stockholders and Members

1. Doctrine of Equality of Shares

 Under the doctrine of equality of shares, all stocks issued by the corporation are
presumed equal with the same privileges and liabilities, provided that the Articles of
Incorporation is silent on such differences.
 In considering the proposed dividend distribution system, the entitlement of certain
kinds of stocks to preferences and benefits must be clearly and expressly stated in the
articles of incorporation of BFDC.
2. Participation in Management; Voting Requirements

a) Fundamental Rights of a Stockholder

b) Participation in Management

(1) Proxy Stockholders/members may vote in person or by proxy in all meetings of stockholders
or members.

Proxies shall be:

 Written, signed and filed, by the stockholder/member;

 In any form authorized in the BL;
 Received by the corporate secretary within a reasonable time before the scheduled
meeting.
 Valid only for the meeting for which it is intended (unless otherwise stated in the form).
 No proxy shall be valid and effective for a period longer than five (5) years at any one
time.

Voting Trust Agreement

 a VTA confers to a trustee/trustees the right to vote and other rights pertaining to the
shares for a period not exceeding 5 years at any time (except: if required as a condition
in a loan agreement, but shall automatically expire upon full payment of the loan).
 No VTA shall be entered into for purposes of circumventing the laws against anti-
competitive agreements, abuse of dominant position, anti-competitive mergers and
acquisitions, violation of nationality and capital requirements, or for the perpetuation of
fraud.
 Unless expressly renewed, all rights granted in a VTA shall automatically expire at the
end of the agreed period.
 The voting trustee or trustees may vote by proxy or in any manner authorized under the
bylaws unless the agreement provides otherwise.

VTAs shall be:

 Written
 Notarized
 Must specify the terms and conditions thereof
 Certified copy shall be filed with the corporation and with the SEC (if not filed
accordingly, VTA is ineffective and unenforceable)
 Valid for a period not exceeding 5 years at any time (except: if required as a condition in
a loan agreement, but shall automatically expire upon full payment of the loan).

a. Rights to Dividends - R.A. No. 11232, Section 42

Right to Inspect

Keep and preserve at its principal office:

 AOI and BL (incl. amendments)

 Current ownership structure and voting rights
 Names and addresses of BOD/T and the exec. Officers
 Record of all business transactions
 Record of the BOD/T resolutions and of the SH/M
 Latest reports submitted to the SEC
 Mins. Of meetings of SH/M, or BOD/T
 Stock transfer Book or STB (for stock corporations. This may also be kept in the office of
the stock transfer agent)

Remember:
 ✓ Corporate records shall be open to inspection by any director/trustee, SH/M, or by a
representative at reasonable hours on business days.

✓ D/T/SH may demand copies of records at their expense

✓ Inspecting/reproducing party – remain bound by confidentiality rules (IPC, DPA, SRC,

RoC)

X Not a SH/M of record

X Competitor or represents interests of a competitor

b. Right to Inspect - R.A. No. 11232, Sections 73-74

 Refusal to allow inspection/reproduction – liable for damages and guilty of offense

under Sec. 161
 Defense for refusal to allow inspection/reproduction:
o Improperly used any information secured through any prior examination,
o Not acting in good faith or for a legitimate purpose
o Is a competitor, director, officer, controlling stockholder or otherwise
represents the interests of a competitor.

Remedy of aggrieved party is to report the incident to the SEC who shall conduct a
summary investigation and issue an order directing the inspection or reproduction.

c. Pre-emptive Right –R.A. No. 11232, Section 38

General Rule: All stockholders shall enjoy a pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to their respective shareholdings.
Exceptions:
 Right is denied by AOI
 Right does not extend to offerings in compliance with Minimum Public Ownership rules (See SEC
MC No. 13, Series of 2017 increasing public float to 20% for IPOs)
 Shares issued in good faith in exchange for property needed by the corporation or in payment of
a previously contracted debt, with the approval of 2/3 OCS

d. Appraisal Right –R.A. No. 1123, Sections 80-85

Appraisal Right - right to dissent and demand payment of the fair value of the shares

 Amendment to the AOI has the effect of changing or restricting the rights of any
stockholder or class of shares, or of authorizing preferences in any respect superior to
those of outstanding shares of any class, or of extending or shortening the term of
corporate existence;
 Sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in this RCC;
 Merger or consolidation; and
 In case of investment of corporate funds for any purpose other than the primary
purpose of the corporation Right is also available: change in corporate term (Sec. 11,
Sec. 36), investment of funds in another corp.

Written demand for If proposed corp. Within 60 days from Findings of the
payment of shares action is approval and FV is majority of the
(30 days from date implemented, corp. no agreed, 3 appraisers shall be
of voting) pays the SH the FV disinterested final, and their award
as of the day before appraisers will be shall be paid by the
the action was taken appointed corporation within 30
days after such award
is made
 Failure to make the demand within  1 shall be  No payment
such period shall be deemed a named by the shall be made
waiver of the appraisal right SH, unless there is
  From time of demand until  1 by the corp., URE(unrestrict
abandonment of corp. action, all  1 by the two ed retained
rights accruing to such shares, thus chosen, earnings) to
including voting and dividend rights,  Costs of cover such
shall be suspended appraisal born payment
 Within 10 days after demanding by the Corp.  SH to transfer
payment, stockholder shall submit unless FV is shares to the
the certificates of stock for notation approximately Corp. upon
that such shares are dissenting the same (SH payment
shares (failure terminates appraisal bears cost)  If unpaid
right (AR)) within 30 days
after award,
voting and
dividend rights
are restored

4. Derivative Suit/Intra-Corporate Suit

DERIVATIVE SUIT

• Object of the wrong done is the corporation itself or “the whole body of its stock and property
without any severance or distribution among individual holders”
• Where a corporation is an injured party, its power to sue is lodged in its board of directors or
board of trustees; but an individual stockholder may be permitted to institute a derivative suit
on behalf of the corporation in order to protect or vindicate corporate rights whenever the
officials of the corporation refuse to sue, or are the ones to be sued, or hold control of the
corporation. In a derivative suit, the corporation is the real party-in-interest; the suing
stockholder, on behalf of the corporation, is only a nominal party.

Requisites to be met in order for a derivative suit to prosper:

o the suit must be filed by the stockholder in behalf of the Corporation;

o Plaintiff must be a Stockholder when he filed the complaint and when the cause
of action accrued;
o Exhaustion of intra-corporate remedies;
o Not a nuisance or harassment suit; and
o Appraisal right not available.

INDIVIDUAL/REPRESENTATIVE SUIT

• The distinction between individual and class/representative suits on one hand and
derivative suits on the other is crucial. These are not discretionary alternatives. The fact
that stockholders suffer from a wrong done to or involving a corporation does not vest
in them a sweeping license to sue in their own capacity.

Individual Suit Class/Representative Suit Derivative Suit

• Filed when the • Filed when the cause • Object of the wrong
cause of action of action belongs to done is the
belongs to the a group of corporation itself or
stockholder stockholders such as “the whole body of
personally and not when the rights its stock and
to the stockholders violated belong to property without
as a group of to the preferred any severance or
corporation (denial stockholders distribution among
or right to individual holders”
inspection, denial • Where a
of dividends to corporation is an
stockholder) injured party, its
 power to sue is
lodged in its Board
of directors or
board of trustees;
but an individual
stockholder may be
permitted to
institute a
derivative suit on
behalf of the
corporation in order
to protect or
vindicate corporate
rights whenever the
officials of the
corporation refuse
to sue, or are the
ones to be sued, or
hold control of the
corporation. In a
derivative suit, the
corporation is the
real party-in-
interest, the suing
stockholder, on
behalf of the
corporation, is only
a nominal party.

• An intra-corporate dispute is understood as suit arising from intra-corporate relations,

or between or among stockholders, or between any or all of them and the corporation.
Two tests to determine whether a dispute constitutes an intra-corporate dispute
• relationship test - Under this test, the existence of any of the intra-corporate relations
was sufficient to confer jurisdiction to the SEC, regardless of the subject matter of the
dispute.
• there is an intra-corporate controversy when the conflict 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.
• Nature of the controversy test - Under this test, it is not the mere existence of an intra-
corporate relationship that gives rise to an intra-corporate controversy; to rely on the
relationship test alone will divest the regular courts of their jurisdiction for the sole
reason that the dispute involves a corporation, its directors, officers, or stockholders.
• "The controversy must not only be rooted in the existence of an intra- corporate
relationship, but must as well pertain to the enforcement of the parties' correlative
rights and obligations under the Corporation Code and the internal and intra-
corporate regulatory rules of the corporation."
• Jurisdiction should be determined by considering both the relationship of the parties as
well as the nature of the question involved.

5. Delinquency –R.A. No. 11232, Sections 67-70

Effect of Delinquency –

• May not be voted for or be entitled to vote;

• Not entitled to representation at any stockholder's meeting;
• Not entitled to any of the rights of a stockholder except right to dividends
 Notice of Sale – See Section Section 67 of the RCC

• Board resolution ordering the sale of the delinquent stock stating the amount due;
accrued interest; date, time and place of the sale - shall not be less than thirty (30) days
nor more than sixty (60) days from the date the stocks become delinquent
• Notice of sale, with a copy of the resolution, shall be sent to every delinquent
stockholder personally or by registered mail and published once a week for two (2)
consecutive weeks in a newspaper of general circulation in the province or city where
the principal office of the corporation is located.
• Auction Sale and the Highest Bidder - bidder who shall offer to pay the full amount of
the balance on the subscription together with accrued interest, costs of advertisement
and expenses of sale, for the smallest number of shares or fraction of a share
If no bidder offers to pay the balance and foregoing costs, the corporation may bid for
the same, and the total amount due shall be credited as paid in full in the books of the
corporation. Title to all the shares of stock covered by the subscription shall be vested in
the corporation as treasury shares and may be disposed of by said corporation in
accordance with the RCC.

6. Certificate of Stock –R.A. No. 11232, Sections 62 and 63

Certificate of Stock

Nature of the Certificate

• Instrument signed by the proper corporate officer acknowledging that the person
named in the document is the owner of a designated number of shares of stock. It is
prima facie evidence that the holder is a shareholder of a corporation.
• Signed by the president or vice president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall be issued in accordance with
the by-laws.
• Shares of stock so issued are personal property and may be transferred by delivery of
the certificate/s indorsed by the owner, his attorney in-fact, or any other person legally
authorized to make the transfer.
• No transfer, however, shall be valid, except as between the parties, until the transfer is
recorded in the books of the corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the certificate or certificates, and
the number of shares transferred.
• The SEC may require corporations whose securities are traded in trading markets and
which can reasonably demonstrate their capability to do so to issue their securities or
shares of stocks in uncertificated or scripless form in accordance with the rules of the
SEC.
• No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation.
• No certificate of stock shall be issued to a subscriber until the full amount of the
subscription together with interest and expenses (in case of delinquent shares), if any is
due, has been paid.

G. Mergers and Consolidations – R.A. No. 11232, Sections 75-79

Consolidation - union of two or more existing entities to form a new entity called the
consolidated corporation

• Company A + Company B = Company X

Merger - a union whereby one or more existing corporations are absorbed by another
corporation that survives and continues the combined business. (May be upstream or
downstream)

• Company A & Company B = Company B

• Upstream = Subsidiary is merged with Parent and Parent survives
• Downstream = Subsidiary is merged with Parent and Subsidiary survives
Plan of Merger or Consolidation

• Names of the corporations proposing to merge or consolidate;

• The terms of the merger or consolidation and the mode of carrying the same into effect;
• A statement of the changes, if any, in the AOI of the surviving corporation in case of
merger; and, with respect to the consolidated corporation in case of consolidation, all
the statements required to be set forth in AOI for corporations organized under this
Code; and
• Such other provisions with respect to the proposed merger or consolidation as are
deemed necessary or desirable.
• Articles of Merger or Consolidation - (Section 77 under the RCC) –
• After the stockholder approval of the plan of merger, the articles of
merger/consolidation shall be executed by each of the constituent corporations, to be
signed by the president or vice-president and certified by the secretary or assistant
secretary of each corporation setting forth:
o The plan of the merger or the plan of consolidation;
o As to stock corporations, the number of shares outstanding, or in the case of
non-stock corporations, the number of members; and
o As to each corporation, the number of shares or members voting for and against
such plan, respectively
o Carrying amounts and fair values of the assets and liabilities of the constituent
corporations as of the agreed cut-off date
o Method to be used in the merger or consolidation of accounts of the companies
o Provisional or pro-forma values as merged or consolidated using the accounting
method
o Such other information as may be prescribed by the SEC
• Procedure:
o BOD to draw up Plan of merger/consolidation
o Plan for merger/consolidation to be approved by majority vote of the BOD and
2/3 OCS (amendments to the plan shall follow same voting requirement)
o Execution of Articles of Merger/Consolidation
 signed by President/VP
 certified by Corp. Sec/Asst. Corp. Sec.
o Submitted to the SEC

Note: In the case of merger or consolidation of banks or banking institutions, loan associations,
trust companies, insurance companies, public utilities, educational institutions, and other
special corporations governed by special laws, the favorable recommendation of the
appropriate government agency shall first be obtained.

Effects of Merger or Consolidation:

• Constituent corporations shall become a single corporation.

• The separate existence of the constituent corporations shall cease, except that of the
surviving or the consolidated corporation.
• The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities and powers and shall be subject to all the duties and liabilities of a
corporation organized under the Code.
• The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities and franchises of each of the constituent corporations; and all real or
personal property, shall be deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed.
• The surviving or consolidated corporation shall be responsible and liable for all the
liabilities and obligations of each of the constituent corporations in the same manner
as if such surviving or consolidated corporation had itself incurred such liabilities or
obligations;

1. Asset Only Transfer

 • The asset-only transfer affects only the corporate seller's raw assets and properties;
the purchaser is not interested in the seller's corporate personality — its goodwill, or in
other factors affecting the business itself. In this transaction, no complications arise
affecting the employer-employee relationship, except perhaps the redundancy of
employees whose presence in the selling company is affected by the sale of the chosen
assets and properties, but this is a development completely internal to the selling
corporation.

2. Business Enterprise Transfer

• In the business enterprise level transaction, the purchaser's interest goes beyond the
assets and properties and extends into the seller corporation's whole business and
"earning capability," short of the seller's juridical personality. Thus, a whole business is
sold and purchased but the parties retain their respective juridical personalities. In this
type of transaction, employer-employee and employer liability complications arise, as
can be seen from a survey of the cases on corporate transfers that this Court has already
passed upon.
• A transaction at the equity level does not disturb the participating corporations'
separate juridical personality as both corporations continue to remain in existence; the
purchaser corporation simply buys the underlying equity of the selling corporation
which thus retains its separate corporate personality. The selling corporation continues
to run its business, but control of the business is transferred to the purchaser
corporation whose control of the selling corporation's equity enables it to elect the
members of the selling corporation's board of directors.

H. Corporate Dissolution and Liquidation (R.A. No. 11232, Sections 133-138)

Methods of Dissolution SCENARIO 1: Where No Creditors Are

• Voluntary Affected Requirements:
• Involuntary • majority vote BOD/T and resolution of
majority of the OCS
• meeting held upon call of the directors
• publication of the notice of time, place
and object of the meeting for three (3)
consecutive weeks in a newspaper
published in the place where the
principal office of said corporation is
located; (no longer required under the
RCC)
• notice to each stockholder at least
thirty 20 days
• verified request for dissolution shall be
filed with the SEC
SEC to issue certificate of dissolution and only
then will dissolution take effect.
• Voluntary SCENARIO 2: Where Creditors Are Affected
• Involuntary Step 1. Petition for dissolution shall be
• filed with the SEC
• signed by a majority BOD or other
officers having the management of its
affairs,
• verified by its president or secretary or
one of its directors
• set forth all claims and demands
against it, and that its dissolution was
resolved upon by the affirmative vote
of the stockholders representing 2/3 of
the OCS at a meeting of its
stockholders called for that purpose.
Step 2. SEC shall issue an order fixing a date
 for filing of objections (which date shall not be
less than thirty (30) days nor more than sixty
(60) days after the entry of the order)
Step 3. SEC order shall be published at least
once a week for three (3) consecutive weeks
and a similar copy shall be posted for three (3)
consecutive weeks in three (3) public places in
such municipality or city.
Step 4. Upon five (5) days’ notice, given after
the date on which the right to file objections
as fixed in the order has expired, SEC shall
hear the petition. If no objection is sufficient,
and the material allegations of the petition are
true, it shall render judgment dissolving the
corporation and direct the disposition of its
assets, and may appoint a receiver to collect
such assets and pay the debts of the
corporation
• Voluntary SCENARIO 3: Shortening of Corporate Term
• Involuntary • Done by amending the AOI (approved
by SEC)
• Upon the expiration of the shortened
term, the corporation shall be deemed
dissolved without any further
proceedings
Withdrawal of Dissolution –
• In writing,
• duly verified by any incorporator, director, trustee, shareholder, or member
• signed by the same number of incorporators, directors, trustees, shareholders, or
members necessary to request for dissolution
• submitted no later than fifteen (15) days from receipt by the SEC of the request for
dissolution.
Methods of Dissolution GROUNDS:
• Voluntary (a) Non-use of corporate charter;
• Involuntary (b) Continuous inoperation;
(c) Upon receipt of a lawful court order
dissolving the corporation;
(d) Upon finding by final judgment that the
corporation procured its incorporation
through fraud;
(e) Upon finding by final judgment that the
corporation:
• Was created for the purpose of
committing, concealing or aiding the
commission of securities violations,
smuggling, tax evasion, money
laundering, or graft and corrupt
practices;
• Committed or aided in the commission
of securities violations, smuggling, tax
evasion, money laundering, or graft
and corrupt practices, and its
stockholders knew; and
• Repeatedly and knowingly tolerated
the commission of graft and corrupt
practices or other fraudulent or illegal
acts by its directors, trustees, officers,
or employees
 If dissolved pursuant to (e) above, its assets,
after payment of its liabilities, shall, upon
petition of the SEC with the appropriate court,
be forfeited in favor of the national
government
If a corporation’s corporate existence is terminated, expires, or is annulled,

• shall remain as a body corporate for three (3) years after the effective date of
dissolution, for the purpose of prosecuting and defending suits by or against it and
enabling it to settle and close its affairs, dispose of and convey its property, and
distribute its assets, but not for the purpose of continuing the business for which it was
established.

Trustee-in-Liquidation - At any time during said three (3) years, the corporation is authorized
and empowered to convey all of its property to trustees for the benefit of stockholders,
members, creditors and other persons in interest. After any such conveyance by the
corporation of its property in trust for the benefit of its stockholders, members, creditors and
others in interest, all interest which the corporation had in the property terminates, the legal
interest vests in the trustees, and the beneficial interest in the stockholders, members,
creditors or other persons-in-interest.

• By the Corporation Itself

• Conveyance to a Trustee Within a Three-Year Period
• By Management Committee or Rehabilitation Receiver
• Liquidation after Three Years

I. Foreign Corporations –R.A. No. 11232, Sections 140-153

1. Personality to Sue and Suability

Necessity of a License to Do Business

• if a foreign corporation does business without a license, it cannot sue before Philippine
courts;
• if a foreign corporation is not doing business in the Philippines, it needs no license to sue
before Philippine courts on an isolated transaction or on a cause of action entirely
independent of any business transaction;
• if a foreign corporation does business in the Philippines without a license, a Philippine
citizen or entity which has contracted with said corporation may be estopped from
challenging the foreign corporation’s corporate personality in a suit brought before the
Philippine courts; and
• if a foreign corporation does business in the Philippines with the required license, it can
sue before Philippine courts on any transaction

Doing Business License Ability to Bring Suit

YES NONE CANNOT SUE (but other
contracting party may be
estopped from challenging)
YES YES MAY SUE
NO -- MAY SUE
2. Foreign Investments Act (R.A. No. 7042, as amended by R.A. No. 11647)

a. “Doing Business in the Philippines”

SEC-OGC OPINION NO. 24-09 Re: Doing Business in the Philippines, [April 24, 2024] Section 3 (d)
of the FIA of 1991, as amended, and its IRR, provide that the phrase "doing business" shall
include:

• soliciting orders, service contracts, opening offices, whether called "liaison" offices or
branches;
 • appointing representatives or distributors domiciled in the Philippines or who in any
calendar year stay in the country for a period or periods totalling one hundred eighty
(180) days or more;
• participating in the management, supervision or control of any domestic business, firm,
entity or corporation in the Philippines; and
• any other act or acts that imply a continuity of commercial dealings or arrangements
and contemplate the performance of acts or works, or the exercise of some of the
functions normally incident to, and in progressive prosecution of, commercial gain or of
the purpose and object of the business organization.

The phrase "doing business" shall not be deemed to include:

• mere investment as a shareholder by a foreign entity in domestic corporations duly

registered to do business, and/or the exercise of rights as such investor;
• having a nominee director or officer to represent its interests in such corporation;
• appointing a representative or distributor domiciled in the Philippines which transacts
business in its own name and for its own account.

SEC-OGC OPINION NO. 24-09 Re: Doing Business in the Philippines, [April 24, 2024] Twin
Characterization Test

The ultimate test of doing business is that laid down in the landmark case of The Mentholatum
Co., Inc., et al. v. Mangiliman called the Twin Characterization Test where a foreign corporation
is considered as "doing business" in the following instances:

• SUBSTANCE TEST. When the foreign corporation is continuing the body or substance of
the business or enterprise for which it was organized or whether it has substantially
retired from it and turned it over to another; and
• CONTINUITY TEST. When the foreign corporation is engaged in activities which imply a
continuity of commercial dealings and arrangements, and contemplates, to that extent,
the performance of acts or works or the exercise of some of the functions normally
incident to, and in the progressive prosecution of the purpose and object of its
organization.

The Twin Characterization Test has since become the hallmark of what constitutes doing
business in the Philippines. What is determinative of doing business is not really the number or
quantity of the transactions, but more importantly, the intention of an entity to continue the
body of its business in the country. The number and quantity of transactions are merely
evidence of such intention.

SEC-OGC OPINION NO. 24-09 Re: Doing Business in the Philippines, [April 24, 2024]

The SEC stated that it needed the following information to categorically answer the question
of whether the company is doing business in the PH.

• Place of perfection or consummation of the contract;

• Duration of the service agreement;
• Nature of the services provided and the specific business the company is engaged in;
• Regularity of the services performed;
• Source of income, i.e., whether or not the company will derive income from the
performance of the services, support and maintenance mentioned in the letter; and
• Performance of services auxiliary to an existing isolated contract which are not on a
continuing basis.

b. Registration Requirement– Section 5, RA 7042, as amended

Non-PH national may register

• Up to 100% of the capital in a domestic market enterprise

• Not otherwise disqualified by law
• Registration with the SEC or the DTI in the case of single proprietorships

c. Nationalized Activities and the Negative List

 LIST A LIMITED BY MANDATE OF THE LIST B LIMITED FOR REASONS OF SECURITY,
CONSTITUTION AND SPECIFIC LAWS DEFENSE, RISK TO HEALTH AND MORALS AND
PROTECTION OF SMEs
No Foreign Equity Up to 40%
• Mass media, • Manufacture, repair, storage, and/or
• Practice of professions, distribution of products and/or ingredients
• Retail trade enterprises with paid-up requiring PNP clearance,
capital of less than PhP25M, • Manufacture and distribution of
• Cooperatives, dangerous drugs,
• Organization and operation of private • Sauna and steam bathhouses, massage
detective, watchmen or security guards, clinics and other like activities regulated by
• Small-scale mining, law,
• Utilization of marine resources in • All forms of gambling,
archipelagic waters, territorial sea and EEZ, • Micro and small DMEs with paid in equity
as well as small-scale utilization of natural capital of less than the equivalent of
resources in rivers, lakes, bays and US$200K,
lagoons, • Micro and small DMEs:
• Ownership, operation and management of (i) that involve advance technology as
cockpits, determined by the Department of Science
• Manufacture, repair, stockpiling and/or and Technology (DOST); or
distribution of nuclear weapons, (ii) are endorsed as start-up or start-up
• Manufacture, repair, stockpiling and/or enablers by the lead host agencies, namely
distribution of biological, chemical and the DTI, DICT, or DOST; or
radiological weapons and anti-personnel (iii) with a majority of their direct
mines, employees as Filipinos, but in no case shall
• Manufacture of firecrackers and other the number of Filipino employees be less
pyrotechnic devices than 15, with paid-in equity capital of less
Up to 25% than the equivalent of US$100K
• Private recruitment,
• Construction contracts of defense-related
structures
Up to 30%
• Advertising
Up to 40%
• Procurement of infra projects,
• EDU of natural resources,
• Ownership of private,
• Operation of public utilities
• Educational institutions
• Culture, production, milling, processing,
trading except retailing, of rice and corn
and acquiring, by barter, purchase or
otherwise, rice and corn and the by-
products thereof subject to period of
divestment
• Contracts for the supply of materials,
goods and commodities to GOCCs,
company, agency or municipal corporation
• Operation of deep sea commercial fishing
vessels
• Ownership of condominium units
• Private radio communications network

II. PARTNERSHIP
A. General Provisions

1. Definition –Civil Code, Article 1767

• By the contract of partnership two or more persons bind themselves to contribute

money, property, or industry to a common fund, with the intention of dividing the
profits among themselves.
 • Two or more persons may also form a partnership for the exercise of a profession.

In order to constitute a partnership inter sese there must be:

• an intent to form the same;

• generally participating in both profits and losses; and
• such a community of interest, as far as third persons are concerned enables each party
to make contract, manage the business, and dispose of the whole property.

Attributes of a Partnership:

• Contractual in nature
• Separate juridical personality
• Delectus personae
o “right to select the person”
o No admission into the partnership without the other partners’ consent.
o The doctrine of delectus personae allows the partners to have the power,
although not necessarily the right to dissolve the partnership
• Mutual agency
o Any partner can generally represent the partnership in its business affairs
o When the manner of management has not been agreed upon, all the partners
shall be considered agents and whatever any one of them may do alone shall
bind the partnership, without prejudice to the provisions of article
• Personal liability of partners for partnership debts
o All partners, including industrial ones, shall be liable pro rata with all their
property and after all the partnership assets have been exhausted, for the
contracts entered into in the name and for the account of the partnership. A
contrary stipulation is void.
Exception: Limited partners

2. Rules to Determine Existence – Civil Code, Articles 1769

• Persons who are not partners as to each other are not partners as to third persons.
EXCEPT: Art. 1825 (represents oneself as partner by words or by conduct);
• Co-ownership or co-possession does not of itself establish a partnership.
• Sharing of gross returns does not of itself establish a partnership.
• Receipt of a share of the profits of a business is prima facie evidence that he is a
partner in the business
EXCEPT: if such profits were received in payment as:
o A debt;
o Wages or rent to a landlord;
o Annuity to a widow or representative of a deceased partner;
o Interest on a loan;
o Consideration for the sale of a goodwill of a business or other property

3. Separate personality – Civil Code, Articles 1768

• The partnership has a juridical personality separate and distinct from that of each of the
partners, even in case of failure to comply with the requirements of article 1772, first
paragraph.
• Article 1772 – A contract of partnership with 3k capital
o should appear in a public instrument
o should register with the SEC
• A partnership for the practice of law, constituted in accordance with the Civil Code
provisions on partnership, acquires juridical personality by operation of law. Having a
juridical personality distinct and separate from its partners, such partnership is the real
party-in-interest in a suit brought in connection with a contract entered into in its name
and by a person authorized to act on its behalf.
 • Although a partnership is based on delectus personae or mutual agency, whereby any
partner can generally represent the partnership in its business affairs, it is non sequitur
(it does not follow) that a suit against the partnership is necessarily a suit impleading
each and every partner. It must be remembered that a partnership is a juridical entity
that has a distinct and separate personality from the persons composing it.

4. Partnership by Estoppel – Civil Code, Article 1825

• A partnership by estoppel is a doctrine or a legal concept that allows a court to provide

a remedy to a plaintiff such as awarding him monetary damages. Essentially, this
doctrine requires a plaintiff to prove that a defendant’s conduct caused the plaintiff to
believe that defendant was in a partnership, which resulted in the plaintiff’s damages.
Originally, a partnership by estoppel came from judicial decisions or the common law.
Eventually, some jurisdictions enacted laws codifying this doctrine. In other words, a
legislative body passed a law defining the legal elements of a partnership by estoppel.
• While an unregistered commercial partnership has no juridical personality, nevertheless,
where two or more persons, attempt to create a partnership failing to comply with all
the legal formalities, the law considers them as partners and the association is a
partnership in so far as it is favorable to third persons, by reason of the equitable
principle of estoppel.
• A partner by estoppel is when an individual represents himself as a partner, either by
words written or spoken or by conduct. He is said to be liable to all those who, relying
on such a representation, advance money to the firm.

5. Kinds of Partnership – Civil Code, Articles 1776- 1785

• Manner of Creation (Art. 1771) (any form)

o Oral
o Private Instrument
o Public Instrument – necessary where immovable property or real rights are
contributed
o SEC-Registered (Art. 1772) - capital of PhP3,000.00 or more, in money or
property (failure to comply does not affect liability to 3rd persons)
• As to Object (Art. 1776)
o Universal (Art. 1777) - all the present property or to all the profits.
o Particular (Art. 1783) - determinate things, their use or fruits, or specific
undertaking, or the exercise of a profession or vocation
• Liability
o General – consists of GPS who are liable pro rata with all of their property after
all the partnership property is exhausted for contracts entered into by the
partnership.
o Limited – consists of GP and at least one LP. LP is not liable for the obligations of
the partnership and is not entitled to participate in the management and control
of the business.
• Duration
o Fixed term
o Specific purpose (until achieved)/specific period
o Partnership at will – no
• Representation
o Ordinary
o By estoppel

B. Obligations of Partners Among Themselves - Civil Code, Articles 1784-1809

Partner to the Partnership Partners to the other Partnership to the Partners

 Partners
 Partner is a debtor of  In case of an imminent  Partnership begins
the partnership for loss of the business, from the moment of
whatever he may have partner who refuses to the execution of the
promised to contribute an contract, unless it is
contribute additional share to the otherwise stipulated.
capital, (except an
industrial partner), to
save the venture, shall
sell his interest to the
other partners (unless
otherwise agreed).
 Partner with regard to  The Losses and profits  Partnership shall be
specific/determinate shall be distributed in responsible to every
things he contributed conformity with the partner for the
is bound for agreement. If only the amounts he may have
(i) warranty in case of share of each partner disbursed on behalf of
eviction , in the profits has been the partnership and
(ii) fruits thereof from agreed upon, the for the corresponding
the time they should share of each in the interest, from the time
have been delivered losses shall be in the the expense are made;
(without need of same proportion. In it shall also answer to
demand) the absence of each partner for the
stipulation, the share obligations he may
of each partner in the have contracted in
profits and losses shall good faith in the
be in proportion to interest of the
what he may have partnership business,
contributed, but the and for risks in
industrial partner shall consequence of its
not be liable for the management.
losses. As for the
profits, the industrial
partner shall receive
such share as may be
just and equitable
under the
circumstances. If
besides his services he
has contributed
capital, he shall also
receive a share in the
profits in proportion to
his capital.
 Partners shall  Partners shall render  Any partner shall have
contribute equal on demand true and the right to a formal
shares to the capital of full information of all account as to
the partnership things affecting the partnership affairs:
(unless otherwise partnership to any (1) If he is wrongfully
stipulated). partner or the legal excluded from the
representative of any partnership business
deceased partner or of or possession of its
any partner under property by his
legal disability copartners;
(2) If the right exists
under the terms of any
agreement;
(3) As provided by
 article 1807;
(4) Whenever other
circumstances render
it just and reasonable
 Industrial partner --  If the things
cannot engage in contributed are
business for himself, fungible, or cannot be
unless the partnership kept without
expressly permits him deteriorating, or if
to do so (if violated, they were contributed
capitalist partners may to be sold, the risk
exclude IP from the shall be borne by the
firm or avail partnership.
themselves of the
benefits obtained by
IP, plus damages in
either case).
 A partner who fails to --  In the absence of
contribute a sum of stipulation, the risk of
money that he the things brought and
promised to appraised in the
contribute becomes a inventory, shall also be
debtor for the interest borne by the
and damages from the partnership, and in
time he should have such case the claim
complied with his shall be limited to the
obligation. The same value at which they
rule applies to any were appraised.
amount he may have
taken from the
partnership coffers,
and his liability shall
begin from the time he
converted the amount
to his own use.
 The capitalist partners --  When the capital or a
cannot engage for part thereof which a
their own account in partner is bound to
any operation which is contribute consists of
of the kind of business goods, their appraisal
in which the must be made in the
partnership is manner prescribed in
engaged, unless there the contract of
is a stipulation to the partnership. In the
contrary absence of stipulation,
it shall be made by
experts chosen by the
partners, and
according to current
prices, the subsequent
changes thereof being
for account of the
partnership
 If a partner authorized -- --
to manage collects a
demandable sum
which was owed to
him by a debtor who is
 also a debtor of the
partnership, the sum
collected shall be
applied to the two
credits pro-rata. If
receipt was given for
the account of the
partnership credit, the
amount shall be fully
applied to the latter.
 No compensation of damages caused by a partner to the partnership against the
benefits such partner may receive from the partnership as a consequence of his
industry. The courts may equitably lessen this responsibility if through the partner's
extraordinary efforts unusual profits have been realized.
 Every partner must account to the partnership for any benefit, and hold as trustee for it
any profits derived by him without the consent of the other partners from any
transaction connected with the formation, conduct, or liquidation of the partnership or
from any use by him of its property.
 A partner, who has received, his share of a partnership credit, when the other partners
have not collected theirs, shall bring to the partnership capital what he received if the
debtor should thereafter become insolvent.
 The risk of specific/determinate things contributed to the partnership so that only their
use and fruits may be for the common benefit, shall be borne by the partner who owns
them.
 When a partnership for a fixed term/particular undertaking is continued after the
termination of such without any express agreement, the rights and duties of the
partners remain the same as they were at such termination, so far as is consistent with a
partnership at will.
 A continuation of the business by the partners or such of them as habitually acted
therein during the term, without any settlement or liquidation of the partnership affairs,
is prima facie evidence of a continuation of the partnership.
 If the partners have agreed to intrust to a third person the designation of the share of
each one in the profits and losses, such designation may be impugned only when it is
manifestly inequitable. In no case may a partner who has begun to execute the decision
of the third person, or who has not impugned the same within a period of 3 months
from the time he had knowledge thereof, complain of such decision. The designation of
losses and profits cannot be intrusted to one of the partners.
 A stipulation which excludes one or more partners from any share in the profits or
losses is void.
 The partner who has been appointed manager in the articles of partnership may
execute all acts of administration despite the opposition of his partners, unless he
should act in bad faith; and his power is irrevocable without just or lawful cause. The
vote of the partners representing the controlling interest shall be necessary for such
revocation of power.
 A power granted after the partnership has been constituted may be revoked at any
time.
 When a partnership for a fixed term or particular undertaking is continued after the
termination of such term or particular undertaking without any express agreement, the
rights and duties of the partners remain the same as they were at such termination, so
far as is consistent with a partnership at will.
 A continuation of the business by the partners or such of them as habitually acted
therein during the term, without any settlement or liquidation of the partnership affairs,
is prima facie evidence of a continuation of the partnership.
When the manner of management has not been agreed upon, the following rules shall be
observed:
 All the partners shall be considered agents and whatever any one of them may do alone
shall bind the partnership, without prejudice to the provisions of article 1801.
 None of the partners may, without the consent of the others, make any important
 alteration in the immovable property of the partnership, even if it may be useful to the
partnership. But if the refusal of consent by the other partners is manifestly prejudicial
to the interest of the partnership, the court's intervention may be sought.
 The partnership books shall be kept, subject to any agreement between the partners, at
the principal place of business of the partnership, and every partner shall at any
reasonable hour have access to and may inspect and copy any of them.
 Every partner may associate another person with him in his share, but the associate
shall not be admitted into the partnership without the consent of all the other partners,
even if the partner having an associate should be a manager
 In case it should have been stipulated that none of the managing partners shall act
without the consent of the others, the concurrence of all shall be necessary for the
validity of the acts, and the absence or disability of any one of them cannot be alleged,
unless there is imminent danger of grave or irreparable injury to the partnership.

C. Property Rights of Partners – Civil Code, Articles 1810-1814

➢Property rights of a partner:

 Rights in specific partnership property;

 Interest in the partnership (meaning, profits and surplus); and
 Participation in the management

➢A partner is co-owner with his partners of specific partnership property.

 Incidents of this co-ownership:

o Equal right with his partners to possess specific partnership property for
partnership purposes. No right to possess such property for any other purpose
without the consent of his partners;
o Right in specific partnership property is not assignable except in connection with
the assignment of rights of all the partners in the same property;
o Right in specific partnership property is not subject to attachment or execution,
except on a claim against the partnership.
o A partner's right in specific partnership property is not subject to legal support.
 Conveyance by a partner of his whole interest in the partnership
o Does not of itself dissolve the partnership, or,
o Merely entitles the assignee to receive in accordance with his contract the
profits to which the assigning partner would otherwise be entitled.
o In case of fraud in the management of the partnership, the assignee may avail
himself of the usual remedies.
o In case of dissolution of the partnership, assignee is entitled to receive his
assignor's interest and may require an account from the date only of the last
account agreed to by all the partners.

D. Obligations of Partnership/Partners to Third Persons –Civil Code, Articles 1815-1827

 Partnership name:
o Every partnership shall operate under a firm name.
o Firm name may or may not include the name of one or more of the partners.
o Those who, not being members of the partnership, include their names in the firm
name, shall be subject to the liability of a partner.

 Pro-rata liability
o All partners, including IP, shall be liable pro rata with all their property and after all the
partnership assets have been exhausted, for the partnership contracts. Any stipulation
to the contrary shall be void, except as among the partners.
 Ability to bind the partnership:
o Every partner is an agent of the partnership for the purpose of its business. The act of
every partner, for apparently carrying on in the usual way the business of the
partnership binds the partnership, unless he has in fact no authority to act for the
 partnership in the particular matter, and the person with whom he is dealing knew of
such fact.
o An act of a partner which is not apparently for the carrying on of business of the
partnership in the usual way does not bind the partnership unless authorized by the
other partners.
o Except when authorized by the other partners or unless they have abandoned the
business, one or more but less than all the partners have no authority to:
 Assign the partnership property in trust for creditors or on the assignee's
promise to pay the debts of the partnership;
 Dispose of the good-will of the business;
 Do any other act which would make it impossible to carry on the ordinary
business of a partnership;
 Confess a judgment;
 Enter into a compromise concerning a partnership claim or liability;
 Submit a partnership claim or liability to arbitration;
 Renounce a claim of the partnership.
o No act of a partner in contravention of a restriction on authority shall bind the
partnership to persons having knowledge of the restriction.

Title to real property in the name of Effect of conveyance

The partnership  When executed by a partner, in his own
name, passes the equitable interest of the
partnership, provided the act is one within
the authority of the partner
 By any partner, may convey title to such
property but the partnership may recover
such property unless the partner's act
binds the partnership or unless such
property has been conveyed by the
grantee or a person claiming through such
grantee to a holder for value without
knowledge that the partner, in making the
conveyance, has exceeded his authority
One or more but not all the partners (and the  By partners in whose name the title
record does not disclose the right of the stands, may convey title to such property,
partnership) but the partnership may recover such
property if the partners' act does not bind
the partnership unless the purchaser or his
assignee, is a holder for value, without
knowledge.
One or more or all the partners or a third person  By a partner in the partnership name, or in
(trustee for the partnership his own name, passes the equitable
interest of the partnership, provided the
act is one within the authority of the
partner
All the partners  By all the partners, passes all their rights in
such property

 Admission/representation by any partner concerning partnership affairs within the

scope of his authority is evidence against the partnership.
 Notice to any partner relating to a matter of partnership affairs operate as notice to or
knowledge of the partnership, except in the case of fraud on the partnership,
committed by or with the consent of that partner.
 Where, by any wrongful act or omission of any partner acting in the ordinary course of
the business of the partnership or with the authority of his co-partners, loss or injury is
caused to any person, not being a partner in the partnership, or any penalty is incurred,
the partnership is liable therefor to the same extent as the partner so acting or omitting
to act.
 The partnership is bound to make good the loss:
 o A partner acting within the scope of his apparent authority receives money or
property of a third person and misapplies it; and
o The partnership in the course of its business receives money or property of a
third person which is misapplied by any partner while it is in the custody of the
partnership.
 All partners are liable solidarily with the partnership for everything chargeable to the
partnership under Article 1822-1823.
 When a person represents or consents to another representing him to anyone, as a
partner (in an existing partnership or with one or more persons not actual partners), he
is liable to any such persons to whom such representation has been made, who has, on
the faith of such representation, given credit to the actual or apparent partnership, and
if he has made such representation or consented to its being made in a public manner
he is liable to such person, whether the representation has or has not been made or
communicated to such person so giving credit by or with the knowledge of the apparent
partner making the representation or consenting to its being made:
o When a partnership liability results, he is liable as though he were an actual
member of the partnership;
o When no partnership liability results, he is liable pro rata with the other persons,
if any, so consenting to the contract or representation as to incur liability,
otherwise separately.
 When a person has been represented to be a partner (in an existing partnership, or with
one or more persons not actual partners), he is an agent of the persons consenting to
such representation to bind them to the same extent and in the same manner as though
he were a partner in fact, with respect to persons who rely upon the representation.
When all the members of the existing partnership consent to the representation, a
partnership act or obligation results; but in all other cases it is the joint act or obligation
of the person acting and the persons consenting to the representation.
 A person admitted as a partner into an existing partnership is liable for all the
obligations of the partnership arising before his admission as though he had been a
partner when such obligations were incurred, except that this liability shall be satisfied
only out of partnership property, unless there is a stipulation to the contrary.
 The creditors of the partnership shall be preferred to those of each partner as regards
the partnership property.
 The private creditors of each partner may ask the attachment and public sale of the
share of the latter in the partnership assets.

DIFFERENCES OF A CORPORATION VS A PARTNERSHIP

MATTER CORPORATION PARTNERSHIP

Manner of creation  Certificate of  By agreement of the
Incorporation/Passage parties
of special law
Number of organizers  Not more than 15  At least 2
Powers  Creature of limited  Subject to agreement
powers of the partners
Authority to act  Centralized  Mutual agency
management
Transfer of interest  Free transferability  Delectus personae
(subject to (consent of all
stipulations) partners needed)
Succession  Existence continues  Death of a partner
even if the persons ends the partnership
who compose it
change
 E. Dissolution and Winding Up – Civil Code, Articles 1827-1842

 Dissolution - change in the relation of the partners caused by any partner ceasing to be
associated in the carrying on as distinguished from the winding up of the business.
 The partnership is not terminated until the winding up of affairs is completed.
 Effect is to terminate all authority of any partner to act for the partnership:

Dissolution Winding Up Termination

- Settlement/liquidation of - Point when all

- Change in the relations partnership affairs partnership affairs are
within the partnership completely wound up and
- Includes payment of finally settled.
(new partners, departure
previous obligations and
of partners, arrival of the
collection of assets - Partnership ceases to
specific period)
previously demandable exist

GROUNDS:

 Without violation of the PA (Partnership Agreement)

o termination of the definite term/particular undertaking;
o express will of any partner (must act in good faith, when no definite term or
particular is specified);
o express will of all the partners who have not assigned their interests or suffered
them to be charged for their separate debts, either before or after the
termination of any specified term or particular undertaking.
o expulsion of any partner in good faith and in accordance with the power
conferred by the PA
 In contravention of the PA, by the express will of any partner at any time
 Any event making it unlawful for the business of the partnership to be carried on;
 A specific thing which a partner had promised to contribute, perishes before the
delivery;
 Death of any partner;
 Insolvency
o of any partner or
o of the partnership;
 Civil interdiction of any partner;
 Court decree under Article 1831.

NOTE: LP may have the partnership dissolved and wound up (i) unsuccessful demand of the
return of LP’s contribution, (ii) other liabilities of the partnership have not been paid, or the
partnership property is insufficient for their payment and the limited partner would otherwise
be entitled to the return of his contribution.

When court may decree dissolution:

 On application by or of the partner

o Insanity of a partner declared in any judicial proceeding or is shown to be of
unsound mind;
o Incapability of a partner to perform his part of the partnership contract;
o Conduct of a partner which tends to prejudice the carrying on of the business;
o Wilful or persistent breach by a partner of the PA, or conducts himself in
matters relating to the partnership business that it is not reasonably practicable
to carry on the business in partnership with him;
o Business can only be carried on at a loss;
o Other circumstances render a dissolution equitable.
 On application of the purchaser of the partner’s interest
 o After the termination of the specified term or particular undertaking;
o At any time if the partnership was a partnership at will when the interest was
assigned or when the charging order was issued.

F. Limited Partnership – Civil Code, Articles 1843-1867

 A limited partnership is one formed by two or more persons having as members one or
more GENERAL partners AND one or more LIMITED partners, the latter not being
personally liable for partnership debts.
 The limited partners as such shall not be bound by the obligations of the partnership.
 Only general partners are to be involved in the management of the partnership. Should
the limited partner be involved in the management, the limited partner shall be liable as
a general partner.
 Formation of a Limited Partnership:
Two or more persons desiring to form a limited partnership shall substantially comply in
good faith with the following:
o Sign and swear to a certificate which shall state the stipulation provided provide
for under Article 1844.
o File or record the certificate in the Office of the Securities and Exchange
Commission.

Note: a limited partnership is not formed if there is no substantial compliance with the
above stated requirements.

 Contributions of Limited Partners

o Cash; or
o Other property.
o Note: Services is not part of the contributions of a limited partner. Should a
limited partner also contribute his services with the knowledge of his co-
partners, such limited partner becomes a general and limited partner at the
same time. In such case, he will be exposed to all the liabilities of a general
partner.
 Requisites for Admission of Additional Limited Partners:
o A limited partnership is FORMED
o The AMENDED certificate is signed and sworn to by all members;
o The amended certificate is signed and sworn to by the member to be
SUBSTITUTED or added; and
o When a limited partner is to be substituted, the amendment shall also be signed
by the ASSIGNING limited partner.
 Instances when the consent or ratification of the limited partner is necessary:
o A general partner shall have the rights and powers and be subject to all the
restrictions and liabilities of a partner in a partnership without limited partners.
o A general partner in a limited partnership however has no authority, without the
written consent or ratification of ALL limited partners to:
 Do any act in CONTRAVENTION of the certificate;
 Do any act which would make it IMPOSSIBLE to carry on the ordinary
business of the partnership;
 CONFESS a judgment against the partnership;
 POSSESS partnership property, or assign their rights in specific
partnership property, for other than a partnership purpose;
 ADMIT a person as a general partner;
 ADMIT a person as a limited partner, unless the right to do so is given in
the certificate; and
 CONTINUE the business of the partnership property on the death,
retirement, insanity, civil interdiction or insolvency of a general partner,
unless the right to do so is given in the certificate.

The above acts are acts of strict dominion, which are beyond the scope of authority of a
general partner.
 Rights of a Limited Partner
o To have the partnership BOOKS kept at the principal place of business of the
partnership;
o To INSPECT, at a reasonable hour, partnership books and copy any of them;
o To demand true and FULL INFORMATION of the things affecting the partnership;
o To demand a FORMAL ACCOUNT of the partnership affairs, whenever
circumstances render it just and reasonable;
o To ask for DISSOLUTION and winding up by decree of court;
o To RECEIVE a share in the profits or other compensation by way of income
provided that the partnership assets are in excess of partnership liabilities after
such payment;
o To receive the RETURN of his contribution, provided:
 All liabilities of the partnership, except liabilities to general partners and
to limited partners on account of their contribution, have been paid or
partnership assets are sufficient to pay partnership liabilities;
 The consent of all members (general and limited partners) has been
obtained; and
 The certificate is cancelled or so amended as to set forth the withdrawal
or reduction.

 Right of Limited Partner to Cash in Return for Contribution

A limited partner, regardless of the nature of his contribution, has only the right to
demand and receive cash.

The foregoing rule applies, except when there is a STIPULATION to the contrary, or
where all the partners CONSENT to the return other than in the form of cash.

 Liabilities of a Limited Partner

A limited partner is not liable as a general partner, unless:
o He takes part in the control and MANAGEMENT of the partnership;
o In the ABSENCE of registration of the limited partnership with the SEC;
o He becomes a general partner by ESTOPPEL;
o He is ERRONEOUSLY designated as a general partner and fails to correct such
error;
o He is a general partner at the SAME TIME; and
o When his SURNAME appears in the firm name subject to the exception provided
by Article 1846 of the New Civil Code.
Since limited partners are not principals in the transaction of a partnership, their
liability, as a rule, is to the partnership, not to the creditors of the partnership
 A person who has contributed to the capital of a business conducted by a person or
partnership, erroneously believing that he has become a limited partner in a limited
partnership, is not, by reason of his exercise of right of a limited partner, a general
partner with the person or in the partnership carrying on the business, or bound by the
obligations of such person or partnership, provided, that on ascertaining the mistake, he
promptly renounces his interest in the profits of the business, or other compensation by
way of income.
 Assignment of Interest
A limited partner’s interest is assignable. However, the assignee may or may not
become a substituted limited partner.
 Substitute Limited Partner
A substitute limited partner is a person admitted to all the rights of a limited
partner who has died or has assigned his interest in a partnership.
An assignee shall have the right to become a substitute limited partner if: 1) all
the members consent thereto; or 2) if the assignor, being thereunto empowered by the
certificate, gives the assignee that right.
 The substituted limited partner, however, shall not be subject to the liabilities of
his assignor for liabilities of which he was ignorant at the time he became a limited
partner and which could not be ascertained from the certificate.
 Dissolution of a Limited Partnership
At the instance of a general partner:
o The retirement, death, insolvency, insanity or civil interdiction of a general
partner dissolves the partnership.
o As exceptions, the partnership is not dissolved if the business is continued by the
remaining general partners:
 Under a right to do so, stated in the CERTIFICATE; or
 With the CONSENT of all members.

At the instance of a limited partner:

o A limited partner may have the partnership dissolved and its affairs wound up
when:
 He rightfully but unsuccessfully demands the RETURN of his contribution;
or
 The OTHER LIABILITIES of the partnership have not been paid, or the
partnership property is insufficient for their payment as required by the
previous paragraph, and the limited partner would otherwise be entitled
to return of his contribution.
 Preference of Credits
The liabilities of the limited partnership shall be entitled to payment in the following
order:
o Those to creditors, in the order of priority as provided by law, except those to
limited partners on account of their contributions, and to general partners;
o Those to limited partners in respect to their share of the profits and other
compensation by way of income on their contributions;
o Those to limited partners in respect to the capital of their contributions;
o Those to general partners other than for capital and profits;
o Those to general partners in respect to profits;
o Those to general partners in respect to capital.

Subject to any statement in the certificate or to subsequent agreement, limited partners

share in the partnership assets in respect to their claims for capital, and in respect to
their claims for profits or for compensation by way of income on their contribution
respectively, in proportion to the respective amounts of such claims.

III. INSURANCE LAW (P.D. No. 612, as amended by R.A. No. 10607)
Contract of Insurance

It is an agreement whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event.

A contract of insurance, to be binding from the date of application, must have been a completed
contract.

Thus, it must have all the essential elements of a valid contract: (SM-Co-Me)

 Subject Matter in which the insured has an insurable interest;

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

A. Concept of Insurance –R.A. No. 10607, Sections 2-9

What may be insured
 Any contingent or unknown event, whether past or future, which may damnify a person
having an insurable interest, or create a liability against him, may be insured against,
subject to the provisions of this chapter.
 The consent of the spouse is not necessary for the validity of an insurance policy taken
out by a married person on his or her life or that of his or her children.
 All rights, title and interest in the policy of insurance taken out by an original owner on
the life or health of the person insured shall automatically vest in the latter upon the
death of the original owner, unless otherwise provided for in the policy.

B. Insurable Interest –R.A. No. 10607, Sections 10-25

In life/health
 Scope of insurable interest - Every person has an insurable interest in the life and
health:
o Of himself, of his spouse and of his children;
o Of any person on whom he depends wholly or in part for education or support,
or in whom he has a pecuniary interest;
o 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
o Of any person upon whose life any estate or interest vested in him depends.
 Revocability - The insured shall have the right to change the beneficiary he designated
in the policy, unless he has expressly waived this right in said policy. Notwithstanding
the foregoing, in the event the insured does not change the beneficiary during his
lifetime, the designation shall be deemed irrevocable.
 Forfeiture of insurable interest
o The interest of a beneficiary in a life insurance policy shall be forfeited when the
beneficiary is the principal, accomplice, or accessory in wilfully bringing about
the death of the insured.
o In such a case, the share forfeited shall pass on to the other beneficiaries, unless
otherwise disqualified. In the absence of other beneficiaries, the proceeds shall
be paid in accordance with the policy contract.
o If the policy contract is silent, the proceeds shall be paid to the estate of the
insured.
In property
 Concept - 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.
 Scope of insurable interest - An insurable interest in property may consist in:
o An existing interest;
o An inchoate interest founded on an existing interest; or
o An expectancy, coupled with an existing interest in that out of which the
expectancy arises.
 Additional rules
o 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.
o 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.
o The measure of an insurable interest in property is the extent to which the
insured might be damnified by loss or injury thereof.
o 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.
o 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.
 C. Concealment – R.A. No. 10607, Sections 26-35, 51

A neglect to communicate that, which a party knows and ought to communicate, is called
concealment. In relation to this, the law provides that a policy of insurance must specify:

 The parties between whom the contract is made;

 The amount to be insured except in the cases of open or running policies;
 The premium, or if the insurance is of a character where the exact premium is only
determinable upon the termination of the contract, a statement of the basis and rates
upon which the final premium is to be determined;
 The property or life insured;
 The interest of the insured in property insured, if he is not the absolute owner thereof;
 The risks insured against; and
 The period during which the insurance is to continue.

Concealment applies only with respect to material facts. That is, those facts which by their
nature would clearly, unequivocally, and logically be known by the insured as necessary for the
insurer to calculate the proper risks. Each party to a contract of insurance must communicate to
the other, in good faith, all facts within his knowledge which are material to the contract and as
to which he makes no warranty, and which the other has not the means of ascertaining.

Proof of fraudulent intent in unnecessary for the rescission of an insurance contract on account
of concealment.

A concealment whether intentional or unintentional entitled the injured party to rescind a

contract of insurance.

Misrepresentation or concealment in insurance is an affirmative defense, which the insurer

must establish by convincing evidence if it is to avoid liability.

Requisites of Concealment: (Ne-D-NoW-NoM-Ma)

 A party knows a fact which he Neglects to communicate or disclose to the other party;
 Such party concealing is Duty bound to disclose such fact to the other;
 Such party concealing makes No Warranty as to the fact concealed;
 The other party has No Means of ascertaining the fact concealed; and
 The fact must be Material.

Test of Materiality

It is determined not by the event, but solely by the probable and reasonable influence of the
facts upon the party to whom the communication is due, in forming his estimate of the
disadvantages of the proposed contract, or in making his inquiries.

NOTE: As long as the facts concealed are material, concealment, whether intentional or not,
entitles the injured party to rescind.

Facts not conveyed to the insurer raises presumption that the failure of the insured to
communicate must have been intentional rather than inadvertent. Good faith is not a defense
because of the Uberrimae Fidei Doctrine.

Rules on Concealment

 If there is concealment under Sec. 27, the remedy of the insurer is rescission since
concealment vitiates the contract of insurance;
 The party claiming the existence of concealment must prove that there was knowledge
of the fact concealed on the part of the party charged with concealment;
 Good faith is NOT a defense in concealment. Concealment, whether intentional or
unintentional entitles the injured party to rescind the contract of insurance;
 The matter concealed need not be the cause of loss; and
 To be guilty of concealment, a party must have knowledge of the fact concealed at the
time of the effectivity of the policy.
Matters that Need NOT be Disclosed: (O-W-K-E-R-I)

GR: The parties are not bound to communicate information of the following matters:

 Those which, in the exercise of ordinary care, the other Ought to know and of which,
the former has no reason to suppose him ignorant;
 Those of which the other Waives communication;
 Those which the other Knows;
 Those which prove or tend to prove the Existence of a risk excluded by a warranty, and
which are not otherwise material;
 Those which Relate to a risk excepted from the policy and which are not otherwise
material; and
 The nature or amount of the Interest of one insured, except if he is not the owner of the
property insured.
 XPN: In answer to inquiries of the other.
 NOTE: Neither party is bound to communicate, even upon inquiry, information of his
own judgment, because such would add nothing to the appraisal of the application.
Matters that Must be Disclosed Even in the Absence of Inquiry: (Mat-No-No)
 Those Material to the contract;
 Those which the other has No means of ascertaining; and
 Those as to which the party with the duty to communicate makes No warranty.

D. Representation –R.A. No. 10607, Sections 36-48, 51

A representation is:

 An oral statement;
 Affirmative or promissory;
 Made at the time of or prior to the issuance of the policy; and
 Related to the risk to be insured.

Misrepresentation

It occurs when the facts fail to correspond with its assertions or stipulations. Misrepresentation
is an affirmative defense. To avoid liability, the insurer has the duty to establish such a defense
by satisfactory and convincing evidence.

Requisites of Misrepresentation: (U-K-Ma)

 The insured stated a fact which is Untrue;

 Such fact was stated with Knowledge that it is untrue and with intent to deceive or
which he states positively as true without knowing it to be true and which has a
tendency to mislead; and
 Such fact in either case is Material to the risk.

A representation cannot qualify an express provision in a contract of insurance, but it may

qualify an implied warranty.

Test of Materiality

It is to be determined not by the event, but solely by the probable and reasonable influence of
the facts upon the party to whom the representation is made, in forming his estimates of the
disadvantages of the proposed contract or in making his inquiries.

Effects of Misrepresentation

 It renders the insurance contract voidable at the option of the insurer, although the
policy is not thereby rendered void ab initio. The injured party entitled to rescind from
the time when the representation becomes false; and
 When the insurer accepted the payment of premium with the knowledge of the ground
for rescission, there is waiver of right of rescission.
Concealment vs. Misrepresentation

CONCEALMENT MISREPRESENTATION
As to their Definition
 The insured withholds the information  The insured makes erroneous
of material facts from the insurer. statements of facts with the intent of
inducing the insurer to enter into the
insurance contract.
As to Kind of Act
 Concealment is a negative act,  Misrepresentation is a positive act as
meaning the neglect to communicate the insured volunteers such fact.
information as to material facts known
to the insured.
As to When Made
 Concealment usually occurs prior to  Misrepresentation may be made at the
the making of the insurance contract. time of, or prior, to the issuance of the
insurance policy.
As to Necessity of Proof of Fraudulent Intent
 Not necessary in rescission due to  Necessary in case of rescission due to
concealment misrepresentation
NOTE: While there are distinctions between the two, concealment has the same effect as
misrepresentation in terms of entitling the insurer to rescind the insurance policy.

Application of Concealment and Misrepresentation in case of Loss or Death

GR: If the concealment or misrepresentation is discovered before loss or death, the insurer can
cancel the policy. If the discovery is after loss or death, the insurer can refuse to pay.

XPN: The incontestability clause under Sec. 48(2) of the IC.

Remedy of the Injured Party in case of Misrepresentation

If there is misrepresentation, the injured party is entitled to rescind from the time when the
representation becomes false.

E. Policy –R.A. No. 10607, Sections 49-66

Definition

 The written instrument, in which a contract of insurance is set forth, is called a policy of
insurance.
 The policy shall be in printed form which may contain blank spaces; and any word,
phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete
the contract of insurance shall be written on the blank spaces provided therein.
 Any rider, clause, warranty or endorsement purporting to be part of the contract of
insurance and which is pasted or attached to said policy is not binding on the insured,
unless the descriptive title or name of the rider, clause, warranty or endorsement is also
mentioned and written on the blank spaces provided in the policy.
 Unless applied for by the insured or owner, any rider, clause, warranty or endorsement
issued after the original policy shall be countersigned by the insured or owner, which
countersignature shall be taken as his agreement to the contents of such rider, clause,
warranty or endorsement.
 Notwithstanding the foregoing, the policy may be in electronic form subject to the
pertinent provisions of Republic Act No. 8792, otherwise known as the ‘Electronic
Commerce Act’ and to such rules and regulations as may be prescribed by the
Commissioner.
 A policy of insurance must specify:
o The parties between whom the contract is made;
o The amount to be insured except in the cases of open or running policies;
 o The premium, or if the insurance is of a character where the exact premium is
only determinable upon the termination of the contract, a statement of the basis
and rates upon which the final premium is to be determined;
o The property or life insured;
o The interest of the insured in property insured, if he is not the absolute owner
thereof;
o The risks insured against; and
o The period during which the insurance is to continue.
 A contract of insurance, being a contract of adhesion, par excellence, any ambiguity
therein should be resolved against the insurer; in other words, it should be construed
liberally in favor of the insured and strictly against the insurer.

F. Warranties –R.A. No. 10607, Sections 67-76

 A warranty is a collateral undertaking in a sale of either real or personal property,

express or implied; that if the property sold does not possess certain incidents or
qualities, the purchaser may either consider the sale void or claim damages for breach
of warranty. A warranty is either expressed or implied.
 An express warranty pertains to any affirmation of fact or any promise by the seller
relating to the thing, the natural tendency of which is to induce the buyer to purchase
the same. It includes all warranties derived from the language of the contract, so long as
the language is express-it may take the form of an affirmation, a promise or a
representation. On the other hand, an implied warranty is one which the law derives by
application or inference from the nature of transaction or the relative situation or
circumstances of the parties, irrespective of any intention of the seller to create it. In
other words, an express warranty is different from an implied warranty in that the
former is found within the very language of the contract while the latter is by operation
of law.
 Purpose of Warranties
To eliminate potentially increasing moral or physical hazards which may either be due to
the acts of the insured or to the change of the condition of the property.

 Basis of Warranties
The insurer took into consideration the condition of the property at the time of
effectivity of the policy.

Effects of Breach of Warranty

 Material
GR: Violation of material warranty or of material provision of a policy will entitle the
other party to rescind the contract.
XPN: (with regard to “promissory” warranties)
o Loss occurs before the time of performance of the warranty;
o The performance becomes unlawful at the place of the contract; or
o Performance becomes impossible.
 Immaterial
GR: It will not avoid the policy.
XPN: When the policy expressly provides, or declares that a violation thereof will avoid
it.
For instance, an “Other Insurance Clause” which is a condition in the policy requiring
the insured to inform the insurer of any other insurance coverage of the property. A
violation of the clause by the insured will not constitute a breach unless there is an
additional provision stating that the violation thereof will avoid the policy.

Effect of a Breach of Warranty without Fraud

The policy is avoided only from the time of breach and the insured is entitled:

 To the return of the premium paid at a pro rata from the time of breach or if it occurs
after the inception of the contract; or
  To all premiums if it is broken during the inception of the contract.

Effect of Breach of Warranty with Fraud

 Policy is avoided ab initio and never became binding.

 Insured is not entitled to the return of the premium.

G. Premium –R.A. No. 10607, Sections 77-84

Insurance Premium

It is the amount of money a person pays for an insurance policy, in consideration for the
assumption by the insurance of the risk of loss as a result of the happening of the designated
peril.

Payment of Premiums

The burden is on an insured to keep a policy in force by the payment of premiums, rather than
on the insurer to exert every effort to prevent the insured from allowing a policy to elapse
through a failure to make premium payments. The continuance of the insurer's obligation is
conditional upon the payment of premiums, so that no recovery can be had upon a lapsed
policy, the contractual relation between the parties having ceased.

Acceptance of Premium

Acceptance of premium within the stipulated period for payment thereof, including the agreed
grace period, merely assures continued effectivity of the insurance policy in accordance with its
terms.

Payment of the premium to agent of the insurance company is binding on it.

NOTE: An insurance company which delivers a policy to an insurance broker is deemed to have
authorized the latter to receive the payment of the premium.

Premium vs. Assessment

PREMIUM ASSESSMENT
As to their Purpose
 Levied and paid to meet anticipated  Collected to meet actual losses.
losses.
As to whether it is a debt or not
 Premium is not a debt.  Assessment when properly levied is a
debt, unless otherwise expressly
agreed.

“Cash and Carry” Rule

GR: No policy or contract of insurance issued by an insurance company is valid and binding
unless and until the premium thereof has been paid. Any agreement to the contrary is void.

XPNs: (I-C-E G-A-P)

A policy is valid and binding even when there is non-payment of premium:

 When there is an agreement allowing the insured to pay the premium in Installments
and partial payment has been made at the time of loss.
 When there is an agreement to grant the insured Credit extension for the payment of
the premium and loss occurs before the expiration of the credit term.
 When Estoppel bars the insurer to invoke non-recovery on the policy.
 In case of life or industrial life policy whenever the Grace period provision applies, or
whenever under the broker and agency agreements with duly licensed intermediaries, a
ninety (90)-day credit extension is given. No credit extension to a duly licensed
intermediary should exceed ninety (90) days from date of issuance of the policy.
  When there is Acknowledgment in a policy of a receipt of premium, which the law
declares to be conclusive evidence of payment, even if there is stipulation therein that it
shall not be binding until the premium is actually paid. This is without prejudice however
to right of insurer to collect corresponding premium.
 When the Public interest so requires, as determined by the Insurance Commissioner.
Example: In compulsory motor vehicle insurance, if the policy was issued without
payment of premium by the vehicle owner, the insurer will still be held liable. To rule
otherwise would prejudice the 3rd party victim.

Non-payment of Premiums

Non-payment of the premium will not entitle the insured to recover the premium from the
insurer. The continuance of the insurer’s obligation is conditioned upon the payment of the
premium, so that no recovery can be had upon a lapsed policy, the contractual relation
between the parties having ceased. If the peril insured against had occurred, the insurer would
have had a valid defense against recovery under the policy.

Non-payment of the first premium prevents the contract from becoming binding
notwithstanding the acceptance of the application or the issuance of the policy, unless waived.
But non-payment of the balance of the premium due does not produce the cancellation of the
contract.

With respect to subsequent premiums, non-payment does not affect the validity of the
contracts unless, by express stipulation, it is provided that the policy shall in that event be
suspended or shall lapse.

Non-payment of Premiums by reason of the Circumstances or Conduct of the Insurer

GR: Non-payment of premiums does not merely suspend but put an end to an insurance
contract since the time of the payment is peculiarly of the essence of the contract.

XPNs: (I-W-W)

 The insurer has become Insolvent and has suspended business, or has refused without
justification a valid tender of premiums;
 Failure to pay was due to the Wrongful conduct of the insurer; or
 The insurer has Waived his right to demand payment.

Fortuitous events will not prevent forfeiture of the policy when the premium remains unpaid.
Hence, non-payment of premium by reason of a fortuitous event is not an excuse.

Non-payment of premiums occasioned by war causes complete abrogation of the insurance.

Hence, war does not excuse non-payment.

H. Loss –R.A. No. 10607, Sections 85-89

In an insurance contract, loss is defined as the injury or damage sustained by the insured in
consequence of the happening of one or more of the accidents or misfortunes against which
the insurer, in consideration of the premium, has undertaken to indemnify the insured.

I. Notice and Proof of Loss – R.A. No. 10607, Sections 90-94

Notice and Proof of Loss
 In case of loss upon an insurance against fire, an insurer is exonerated, if written notice
thereof be not given to him by an insured, or some person entitled to the benefit of the
insurance, without unnecessary delay. For other non-life insurance, the Commissioner
may specify the period for the submission of the notice of loss.
 When a preliminary proof of loss is required by a policy, the insured is not bound to give
such proof as would be necessary in a court of justice; but it is sufficient for him to give
the best evidence which he has in his power at the time.
 If the policy requires, by way of preliminary proof of loss, the certificate or testimony of
a person other than the insured, it is sufficient for the insured to use reasonable
 diligence to procure it, and in case of the refusal of such person to give it, then to
furnish reasonable evidence to the insurer that such refusal was not induced by any just
grounds of disbelief in the facts necessary to be certified or testified.

J. Double Insurance; Overinsurance– R.A. No. 10607, Sections 95-96

Double Insurance

Double insurance exists where the same person is insured by several insurers separately, in
respect to the same subject and interest.

Requisites of Double Insurance: (S-T-R-I-P)

 Subject matter is the same;

 Two (2) or more insurers insuring separately;
 Risk or peril insured against is the same;
 Interest insured is the same; and
 Person insured is the same.

There is no double insurance even though two policies were both issued over the same subject
matter, and both covered the same peril insured against if the two policies were issued to two
different entities which have separate and distinct insurable interest over the said subject
matter.

GR: Not Prohibited.

XPN: Other Insurance Clause.

Over-insurance - There is over-insurance if the insured takes out an insurance over the
property insured in an amount which is in excess of the value of his insurable interest.

Effects of double insurance and over-insurance

 The insured, unless the policy otherwise provides, may claim payment from the insurers in such
order as he may select, up to the amount for which the insurers are severally liable under their
respective contracts;
 Where the policy under which the insured claims is a valued policy, any sum received by him
under any other policy shall be deducted from the value of the policy without regard to the
actual value of the subject matter insured;
 Where the policy under which the insured claims is an unvalued policy, any sum received by him
under any policy shall be deducted against the full insurable value, for any sum received by him
under any policy;
 Where the insured receives any sum in excess of the valuation in the case of valued policies, or
of the insurable value in the case of unvalued policies, he must hold such sum in trust for the
insurers, according to their right of contribution among themselves;
 Each insurer is bound, as between himself and the other insurers, to contribute ratably to the
loss in proportion to the amount for which he is liable under his contract.

Double Insurance vs. Over Insurance

DOUBLE INSURANCE OVER INSURANCE

As to the Amount of Insurance
 There may be no over insurance as  When the amount of the insurance is
when the sum total of the amounts of beyond the value of the insured’s
the policies issued does not exceed the insurable interest.
insurable interest of the insured.
As to the Number of Insurers
 There are two (2) or more insurers  There may be only one (1) insurer, with
insuring the same subject matter. whom the insured takes insurance
beyond the value of his insurable
interest.
Rules when the Insured in a Policy Other than Life is Over Insured by Double Insurance

 The insured, unless the policy otherwise provides, may claim payment from the insurers
in such order as he may select, up to the amount which the insurers are severally liable
under their respective contracts;
 Where the policy under which the insured claims is a valued policy, any sum received by
him under any other policy shall be deducted from the value of the policy without
regard to the actual value of the subject matter insured;
 Where the policy under which the insured claims is an unvalued policy, any sum
received by him under any policy shall be deducted against the full insurable value, for
any sum received by him under any policy;
 Where the insured receives any sum in excess of the valuation in the case of valued
policies, or of the insurable value in the case of unvalued policies, he must hold such
sum in trust for the insurers, according to their right of contribution among themselves;
and
 Each insurer and the other insurers, to contribute ratably to the loss in proportion to the
amount for which he is liable under his contract.

K. Reinsurance –R.A. No. 10607, Sections 97-100

A contract of reinsurance is one by which an insurer procures a third person to insure him
against loss or liability by reason of such original insurance.

Where an insurer obtains reinsurance, except under automatic reinsurance treaties, he must
communicate all the representations of the original insured, and also all the knowledge and
information he possesses, whether previously or subsequently acquired, which are material to
the risk.

A reinsurance is presumed to be a contract of indemnity against liability, and not merely against
damage.

L. Classes of Insurance

a. Casualty –R.A. No. 10607, Section 176

 Casualty Insurance is an insurance covering loss or liability arising from accident or

mishap, excluding certain types of loss which by law or custom are considered as falling
exclusively within the scope of other types of insurance such as fire or marine. It
includes, but is not limited to employer's liability insurance, motor vehicle liability
insurance, plate glass insurance, burglary and theft insurance, personal accident and
health insurance as written by non-life insurance companies, and other substantially
similar kinds of insurance.

b. Suretyship – R.A. No. 10607, Sections 177-180

 Suretyship is an agreement whereby a party called the surety guarantees the

performance by another party called the principal or obliger of an obligation or
undertaking in favor of a third party called the obligee. It includes official recognizances,
stipulations, bonds, or undertakings issued by any company by virtue of and under the
provisions of Act No. 536, as amended by Act No. 2206.

c. Life Insurance – R.A. No. 10607, Sections 181-186

 Life Insurance is an insurance on human lives and insurance appertaining thereto or

connected therewith.
Every contract or undertaking for the payment of annuities including contracts for the
payment of lump sums under a retirement program where a life insurance company
 manages or acts as a trustee for such retirement program shall be considered a life
insurance contract for purposes of this Code.

d. Compulsory Motor Vehicle Liability Insurance –R.A. No. 10607, Sections 386-402

 Compulsory Motor Vehicle Liability Insurance refers to a contract of insurance on

passenger and third-party liability for death or bodily injuries and damage to property
arising from motor vehicle accidents.
It provides compensation for the death or bodily injuries suffered by innocent third
parties or passengers as a result of a negligent operation and use of motor vehicles.

IV. TRANSPORTATION LAW

A. General Principles of Common Carriers – Civil Code, Article 1732

Contract of Carriage

 Object of the Contract: Transportation of goods and passengers

 Parties: Common carrier and the (a) passenger, or (b) shipper.
 Consideration: fare or freight
Who is a common carrier?

Common carriers are persons, corporations, firms or associations engaged in the business of
carrying or transporting passengers or goods or both, by land, water, or air, for compensation,
offering their services to the public.

Elements:

 engaged in the business of transporting goods or passengers, whether regular or on a

scheduled basis, whether principal or ancillary business; and whether offered to the
general public, or limited clientele;
 for a fee;
 holding itself out to the public as such; and
 control.
1) Test to Determine if Common Carrier

Jurisprudential Test: Two-pronged test

 General Business Test: Is the undertaking part of the business engaged in by the
carrier?

If yes --- common carrier

If no ---- private carrier

 Representation Test: Did the person hold himself out to the public as undertaking to
engage in the activity of carrying persons or cargo as a business of occupation?

If yes --- common carrier

If no ---- private carrier

Jurisprudential Test: Four-Fold Test

  He must be engaged in the business of carrying goods for others as a public
employment, and must hold himself out as ready to engage in the transportation of
goods for person generally as a business;
 He must undertake to carry goods of the kind to which his business is confined;
 He must undertake to carry by the method by which his business is conducted and over
his established roads; and
 The transportation must be for hire.

Characteristics:

 Broad concept of common carrier: A person may be regarded as common carrier

whether carriage of goods or passenger is:
o regular/scheduled basis, or on occasional, episodic, or unscheduled;
o principal or ancillary (or side-line);
o offered to the general public, or limited clientele.
 Means of transport: No distinction as to the means of transport, so long as it is by land,
water, or air. The Civil Code does not provide that it must be by motor vehicle.
 Certificate of Public Convenience: A common carrier has the obligation to secure a
certificate of public convenience. But, the lack of it does not mean that the transporter
is not a common carrier.
 Lack of Route: A person or entity can be a common carrier even if it has no publicly
known route, no terminal, and no ticket.
 Not a public transport: An entity need not be engaged in the business of public
transportation to become common carrier.

Element of Fee or Consideration

 Stowaway (not a passenger): One who secures passage by fraud or stealth.

 A passenger is still considered a passenger even if he is being carried gratuitously or on a
reduced fare. If carried gratuitously, a stipulation limiting liability will be valid.
 Resort operator which does not charge a separate fee for its ferry services is of no
moment.

Element of Control

 The effect of a charter party: A bareboat charter transforms a common carrier into a
private carrier as the charter includes both the vessel and the crew, thereby relieving
the control of the ship from the ship owner to the charterer.
 In land transportation, where boundary system is implemented, the carrier cannot
escape liability by claiming that the driver is a lessee.
2) Common Carrier v. Private Carriers

Common Carriers:

 Resort operators who operate, or includes, ferry services to and from the resort.
 A person engaged in the business of shipping and lighterage, offering its barges to the
public, despite its limited clientele, for carrying or transporting goods by water for
compensation.
 A custom broker if part of the services it offers is the delivery of the goods to their
respective consignees.
 Operators of school bus service.
 Persons who are engaged in the transportation of goods as a “sideline”.
 A bus whose main business is to transport children to their school, but which was hired
to transport a group of persons.
 Transport Network Vehicle Service.

Not Common Carriers:

 • Travel agency.
 Transport Network Companies.
Private carrier:

 A person who agrees to carry a person to the airport using his privately-owned car that
is meant for personal use is a private carrier. The person carried is an “accommodation
passenger”, and the duty to him is ordinary diligence of a good father.

When is contract of carriage perfected

 A preparatory contract to carry whereby the parties agree to carry a passenger or

transport goods at some future time, is perfected by mere consent;
 A contract of carriage is perfected when the facilities of the carrier are used.

As to goods:

 The extraordinary responsibility of the common carrier lasts from the time the goods
are unconditionally placed in the possession of, and received by the carrier for
transportation until the same are delivered, actually or constructively, by the carrier
to the consignee, or to the person who has a right to receive them, without prejudice
to the provisions of article 1738.
This includes receipt by authorized agent

As to passenger: When does a person becomes a “passenger”?

A person does not become a passenger by mere purchase of a ticket. A person becomes a
passenger when he/she presents himself/herself at the proper place and in a proper manner to
be transported.

 Aircraft: passenger checked-in at the departure counter, passed through immigration,

boarded the shuttle to the ramp, and baggage loaded.
 Buses, jeepneys, and street cars: once vehicle stops, it is making a continuing offer to
riders, it is accepted once the passenger is already attempting to board the conveyance.
 Train or LRT: purchase of ticket and he/she presents himself/herself at the proper place
designated for boarding the train, with the intention of riding the oncoming train.

When will the contract of carriage terminate?

As to goods:

 Goods in transit: The common carrier's duty to observe extraordinary diligence over the
goods remains in full force and effect even when they are temporarily unloaded or
stored in transit, unless the shipper or owner has made use of the right of stoppage in
transit.
 While unloading: It is settled in maritime law jurisprudence that cargoes while being
unloaded generally remain under the custody of the carrier.
 Reasonable opportunity to remove: The extraordinary liability of the common carrier
continues to be operative even during the time the goods are stored in a warehouse of
the carrier at the place of destination, until the consignee has been advised of the arrival
of the goods and has had reasonable opportunity thereafter to remove them or
otherwise dispose of them.
 There is actual delivery in contracts for the transport of goods when possession has
been turned over to the consignee or to his duly authorized agent and a reasonable
time is given him to remove the goods, and the delivery has been completed.

As to passenger:

Reasonable opportunity to exit from the facilities of the common carrier:

 A person, who after alighting a train, walks along the station platform is still a passenger.
 A person who is still retrieving his baggage is still within the responsibility of the carrier.
What are the duties of common carriers?

 As to goods: (a) duty to accept the goods without discrimination, unless for some
sufficient reason; (b) duty to deliver the goods seasonably or within reasonable time; (c)
deliver the goods to the proper person; and (d) exercise extraordinary diligence.
 As to passengers: A common carrier is bound to carry the passengers safely as far as
human care and foresight can provide, using the utmost diligence of very cautious
persons, with a due regard for all the circumstances.
3) Diligence Required – Civil Code, Article 1733

What is the diligence required of common carriers?

Common carriers, from the nature of their business and for reasons of public policy, are
bound to observe extraordinary diligence in the vigilance over the goods and for the safety
of the passengers transported by them, according to all the circumstances of each case.

If duties are breached, what happens?

Presumption of negligence: Any injury that might be suffered by the passenger is right away
attributable to the fault or negligence of the carrier. Court need not make an express finding
of fault or negligence on the part of the carrier.

What are the defenses of common carriers against the attribution of negligence?

 First Line of Defense: Exculpatory defenses:

o exercise of extraordinary diligence; and
o proximate cause.
 Second Line of Defense: Exempting causes under Article 1734, New Civil Code
 Third Line of Defense: Limitation of Liability

First Line of Defense: Exercise of Extraordinary Diligence

 There is no hard and fast rule. The law does not prescribe formula. A common
carrier binds itself to carry passengers (and goods) as far as human care and
foresight can provide, using the utmost diligence of a very cautious man, with due
regard for all the circumstances.

Defense of Extraordinary Diligence Failed

 Mechanical defects are not force majeure;

Explosion of tires;
 Improper overtaking in violation of traffic rules;
 Warning of a plot to burn all busses plying the route;
 Warning of a typhoon;
 Playing of mahjong prior to collision of vessel;
 Placing a person whose navigational skills are questionable;
 Plane did not take the designated route.

Proximate Cause

 In case the negligence of the shipper or the passenger is the proximate and only
cause, the carrier should not be made liable. There must be no concurring
negligence on the part of the common carrier.

The following are not exculpatory defenses in a suit for breach of common carrier’s contract:

 Last clear chance stated broadly, is that the negligence of the plaintiff does not preclude a
recovery for the negligence of the defendant where it appears that the defendant, by
exercising reasonable care and prudence, might have avoided injurious consequences to the
plaintiff notwithstanding the plaintiff’s negligence. The doctrine necessarily assumes
negligence on the part of the defendant and contributory negligence on the part of the
plaintiff, and does not apply except upon that assumption. Stated differently, the
antecedent negligence of the plaintiff does not preclude him from recovering damages
 caused by the supervening negligence of the defendant, who had the last fair chance to
prevent the impending harm by the exercise of due diligence. Moreover, in situations where
the doctrine has been applied, it was defendant’s failure to exercise such ordinary care,
having the last clear chance to avoid loss or injury, which was the proximate cause of the
occurrence of such loss or injury.;
 Assumption of risk;
 Diligence in the selection and supervision of employees.

Second Line of Defense: Exempting Causes falling under Article 1734 (FANCO)

 Fortuitous event (independent of the human will, impossible to foresee or avoid,

impossible to fulfil obligation in a normal manner, no participation of the obligor);
 Acts of public enemy;
 Negligence of the shipper or owner;
 Character of the goods or defects in the packaging or in the container;
 Order or act of public authority.

The cases under 1734 must be the sole and proximate cause, no delay and under any of these
circumstances, the common carrier must exercise diligence to minimize the loss, hence:

 Fire is not always fortuitous;

 In case of typhoon, it must be the proximate and only cause of the accident
(without any concurring negligence) in order to be exempt from liability.

Third Line of Defense: limitation of liability based on law and stipulation Three types of
stipulations limiting liability (over goods):

 Type 1: Exempting the carrier from all liability for loss or damage occasioned by its
negligence (VOID);
 Type 2: Unqualified limitation of liability agreed by the parties (VOID);
 Type 3: Limiting liability to an agreed valuation, unless shipper declares higher value
or pays higher freight (VALID).

Type 1: Exempting the carrier from all liability for loss or damage occasioned by its negligence
(VOID)

 Owner assumes the risk;

 Liability for loss, destruction or deterioration is dispensed with;
 Diligence in the custody of goods not required;
 Diligence required is less than ordinary diligence;
 Not liable for acts of its employees;
 In case of robbers who do not act with grave or irresistible force, liability is
dispensed with or diminished;
 Common carriers not responsible for loss or damage despite defective vehicle and
equipment used in the carriage.

Type 2: Unqualified limitation of liability agreed by the parties (VOID)

Stipulation Reducing Diligence Over Goods: Parties may stipulate that the diligence to be
exercised is less than extraordinary diligence (but not less than ordinary diligence) provided:

 In writing, signed by the shipper or owner;

 Supported by a valuable consideration other than the service rendered by the
common carrier; and
 Reasonable, just and not contrary to public policy.

Fixing damages that may be recovered (over goods):

Valid, provided:
  It is reasonable and just under the circumstances; and
 has been fairly and freely agreed upon.

Limiting liability for delay (over goods): Valid on account of strikes and riots.

Type 3: Limiting liability to an agreed valuation, unless shipper declares higher value
or pays higher freight (VALID)

 Purpose: For common carrier (a) to take cover by taking up insurance; and (b)
protect itself from unscrupulous shipper.
Hence, a stipulation that the common carrier's liability is limited to the value of the
goods appearing in the bill of lading, unless the shipper or owner declares a greater
value, is binding.
Limitation of liability cannot be invoked:
 if there is delay;
 if there is deviation.
4) Vigilance over Goods – Civil Code, Articles 1744-1754
General rule on vigilance over goods - Common carriers are responsible for the loss,
destruction, or deterioration of the goods.
Exceptions:
 Flood, storm, earthquake, lightning, or other natural disaster or calamity;
 Act of the public enemy in war, whether international or civil;
 Act or omission of the shipper or owner of the goods;
 The character of the goods or defects in the packing or in the containers;
 Order or act of competent public authority.

Exempting causes

 Requirement of absence of negligence - In all cases other than those mentioned in

Nos. 1, 2, 3, 4, and 5 of Article 1734, if the goods are lost, destroyed or deteriorated,
common carriers are presumed to have been at fault or to have acted negligently,
unless they prove that they observed extraordinary diligence as required in Article
1733.
 Absence of delay
o If the common carrier negligently incurs in delay in transporting the goods, a
natural disaster shall not free such carrier from responsibility.
o If the common carrier, without just cause, delays the transportation of the
goods or changes the stipulated or usual route, the contract limiting the
common carrier's liability cannot be availed of in case of the loss,
destruction, or deterioration of the goods.
o Due diligence to prevent or lessen the loss - Even if the loss, destruction, or
deterioration of the goods should be caused by the character of the goods,
or the faulty nature of the packing or of the containers, the common carrier
must exercise due diligence to forestall or lessen the loss.
 Duration of liability
 Delivery of goods to common carriers - The extraordinary responsibility of the
common carrier lasts from the time the goods are unconditionally placed in the
possession of, and received by the carrier for transportation until the same are
delivered, actually or constructively, by the carrier to the consignee, or to the person
who has a right to receive them, without prejudice to the provisions of Article 1738.
 Actual or constructive delivery
o The extraordinary responsibility of the common carrier lasts from the time
the goods are unconditionally placed in the possession of, and received by
the carrier for transportation until the same are delivered, actually or
constructively, by the carrier to the consignee, or to the person who has a
right to receive them, without prejudice to the provisions of Article 1738.
 The extraordinary liability of the common carrier continues to be operative even
during the time the goods are stored in a warehouse of the carrier at the place of
destination, until the consignee has been advised of the arrival of the goods and has
 had reasonable opportunity thereafter to remove them or otherwise dispose of
them.
 Temporary unloading or storage - The common carrier's duty to observe
extraordinary diligence over the goods remains in full force and effect even when
they are temporarily unloaded or stored in transit, unless the shipper or owner has
made use of the right of stoppage in transit.
 Liability for baggage of passengers
o Checked-in baggage - The provisions of Articles 1733 to 1753 shall apply to
the passenger's baggage which is not in his personal custody or in that of his
employee.
o Baggage in possession of passengers
 As to other baggage, the rules in Articles 1998 and 2000 to 2003
concerning the responsibility of hotel-keepers shall be applicable.
 The deposit of effects made by the travellers in hotels or inns shall
also be regarded as necessary. The keepers of hotels or inns shall be
responsible for them as depositaries, provided that notice was given
to them, or to their employees, of the effects brought by the guests
and that, on the part of the latter, they take the precautions which
said hotel-keepers or their substitutes advised relative to the care and
vigilance of their effects.
 The responsibility referred to in the two preceding articles shall
include the loss of, or injury to the personal property of the guests
caused by the servants or employees of the keepers of hotels or inns
as well as strangers; but not that which may proceed from any force
majeure. The fact that travellers are constrained to rely on the
vigilance of the keeper of the hotels or inns shall be considered in
determining the degree of care required of him.
 The act of a thief or robber, who has entered the hotel is not deemed
force majeure, unless it is done with the use of arms or through an
irresistible force.
 The hotel-keeper is not liable for compensation if the loss is due to
the acts of the guest, his family, servants or visitors, or if the loss
arises from the character of the things brought into the hotel.
 The hotel-keeper cannot free himself from responsibility by posting
notices to the effect that he is not liable for the articles brought by
the guest. Any stipulation between the hotel-keeper and the guest
whereby the responsibility of the former as set forth in articles 1998
to 2001 is suppressed or diminished shall be void.
5) Safety of Passengers – Civil Code, Articles 1755-1763

A common carrier is bound to carry the passengers safely as far as human care and
foresight can provide, using the utmost diligence of very cautious persons, with a due
regard for all the circumstances.

Who are NOT Considered Passengers: (W-A-M-U)

 One who has boarded a Wrong vehicle, has been properly informed of such fact,
and on alighting, is injured by the carrier;
 Invited guests and Accommodation passengers;
 One who attempts to board a Moving vehicle, although he has a ticket, unless the
attempt be with the knowledge and consent of the carrier; and
 One who remains on a carrier for an Unreasonable length of time after he has been
afforded every safe opportunity to alight.

The carrier is thus NOT obliged to exercise extraordinary diligence but only ordinary diligence in
these instances.

Stipulations Considered Void in a Contract of Carriage for Passengers

  Stipulation where the responsibility of the common carrier for the safety of its
passengers is dispensed with or lessened by stipulation, by the posting of notices, by
statements on the ticket, or otherwise; and
 Stipulation limiting the liability for wilful acts or gross negligence.

Stipulations Limiting the Liability of Common Carrier in case of Injury or Death

 GR: The responsibility of a common carrier for the safety of passengers cannot be
dispensed with or lessened by stipulation, by posting of notices, by statements on
tickets, or otherwise.
XPN: When a passenger is carried gratuitously, a stipulation limiting the common
carrier’s liability for negligence is valid.
Note: The passenger must be carried gratuitously. If it is only a reduction of fare,
then any limitation of the common carrier’s liability is not justified.
XPN to the XPN: Notwithstanding the exception, common carriers will be liable
nevertheless for wilful acts or gross negligence.

DURATION OF LIABILITY

Observance of extraordinary diligence in transportation of goods commences from the

moment the person who purchases the ticket from the carrier presents himself at the
proper place and in a proper manner to be transported and continues until the
passenger has been landed at the port of destination and has left the vessel owner’s
dock or premises.

Waiting for Carrier or Boarding of Carrier

A proper person whom the carrier would be bound to accept who enters upon the
carrier’s premises such as a station, ticket office, or waiting room, with the intention of
becoming a passenger, will ordinarily be viewed as assuming the status of a passenger.

Trains

 The carrier is supposed to exercise extraordinary diligence although the passenger is

still waiting for a coach on the platform of the train station.
However, there is no obligation on the part of a street railway company to stop its
cars to let on intending passengers at other points than those appointed for
stoppage.

6. Sources of Liability

 Common carriers are responsible for the loss, destruction, or deterioration of the
goods, unless the same is due to any of the following causes only:
o Flood, storm, earthquake, lightning, or other natural disaster or calamity;
o Act of the public enemy in war, whether international or civil;
o Act or omission of the shipper or owner of the goods;
o The character of the goods or defects in the packing or in the containers;
o Order or act of competent public authority.
 Common carriers are liable for the death of or injuries to passengers through the
negligence or wilful acts of the former’s employees, although such employees may
have acted beyond the scope of their authority or in violation of the orders of the
common carriers.
This liability of the common carriers does not cease upon proof that they exercised
all the diligence of a good father of a family in the selection and supervision of their
employees.
 Except in cases expressly specified by the law, or when it is otherwise declared by
stipulation, or when the nature of the obligation requires the assumption of risk, no
person shall be responsible for those events which could not be foreseen, or which,
though foreseen, were inevitable.
  The contributory negligence of the passenger does not bar recovery of damages for
his death or injuries, if the proximate cause thereof is the negligence of the common
carrier, but the amount of damages shall be equitably reduced.

B. Maritime Law

1. Limited Liability Rule; Exceptions; Abandonment (Code of Commerce, Articles 587, 590,
643, 837)

 Limited Liability Rule limits the liability of vessel owners and agents to the value of the
vessel, its equipment, and the freight earned during the voyage.
 Also called the “no vessel, no liability doctrine,” it provides that liability of ship owner is
limited to ship owner’s interest over the vessel. Consequently, in case of loss, the ship
owner’s liability is also extinguished. Limited liability likewise extends to ship’s
appurtenances, equipment, freightage, and insurance proceeds. The ship owner’s or
agent’s liability is merely co-extensive with his interest in the vessel, such that a total
loss of the vessel results in the liability’s extinction. The vessel’s total destruction
extinguishes maritime liens because there is no longer any res to which they can attach.
Exceptions to the doctrine of limited liability:
o Repairs and provisioning of the vessel before the loss of the vessel;
o Insurance proceeds. If the vessel is insured, the proceeds will go to the persons
entitled to claim from the ship owner;
o Workmen’s Compensation cases;
o When the ship owner is guilty of fault or negligence;
Note: But if the captain is the one who is guilty, doctrine may still be invoked,
hence, abandonment is still an option.
o Private carrier; or
o Voyage is not maritime in character.

2. Charter Parties

 A charter party must be drawn in duplicate and signed by the contracting parties,
and when either does not know how or cannot do so, by two witnesses at their
request.
 The freight should be received without the charter party having been signed, the
contract shall be understood as executed in accordance with what appears in the
bill of lading, which shall be the only instrument with regard to the freight to
determine the rights and obligations of the owner, of the captain, and of the
charterer.
 Charter parties executed by the captain in the absence of the agent shall be valid
and efficient, even though in executing them he should have acted in violation of
the orders and instructions of the agent or ship owner; but the latter shall have a
right of action against the captain to recover damages.

3. Collisions; Rules on Liability (Code of Commerce, Articles 826-832, 837)

 If a vessel should collide with another through the fault, negligence, or lack of
skill of the captain, sailing mate, or any other member of the complement, the
owner of the vessel at fault shall indemnify the losses and damages suffered, after
an expert appraisal.
 If both vessels may be blamed for the collision, each one shall be liable for his
own damages, and both shall be jointly responsible for the losses and damages
suffered by their cargoes.
 The provisions of the foregoing article are applicable to the case in which it
cannot be decided which of the two vessels was the cause of the collision.
 In the cases above mentioned the civil action of the owner against the person
liable for the damage is reserved, as well as the criminal liabilities which may be
proper.
 If a vessel should collide with another by reason of an accident or through force
majeure, each vessel and her cargo shall be liable for their own damage.
 If a vessel should be forced to collide with another one by a third vessel, the
owner of the third vessel shall indemnify for the losses and damages caused, the
captain thereof being civilly liable to said owner.
 If, by reason of a storm or other cause of force majeure, a vessel which is properly
anchored and moored should collide with those in her immediate vicinity,
causing them damage, the injury occasioned shall be looked upon as particular
average to the vessel run into.
 The civil liability contracted by the ship owners in the cases prescribed in this
section, shall be understood as limited to the value of the vessel with all her
appurtenances and all the freight earned during the voyage.

4. Arrival under Stress (Code of Commerce, Articles 819-825)

 If the captain during the navigation should believe that the vessel cannot
continue the voyage to the port of destination on account of the lack of
provisions, well-founded fear of seizure, privateers or pirates, or by reason of any
accident of the sea disabling her to navigate, he shall assemble the officers and
shall call the persons interested in the cargo who may be present, and who may
attend the meeting without the right to vote; and if, after examining the
circumstances of the case, the reasons should be considered well founded, it shall
be decided to make the nearest and most convenient port drafting and entering in
the log book the proper minutes, which shall be signed by all.
The captain shall have the deciding vote and the persons interested in the cargo
may make the objections and protests they may deem proper, which shall be
entered in the minutes in order that they may make use thereof in the manner
they may consider advisable.
 The arrival under stress shall not be considered legal in the following cases:
o If the lack of provisions should arise from the failure to take the necessary
provisions for the voyage, according to usage and custom, or if they should
have been rendered useless or lost through bad stowage or negligence in
their care.
o If the risk of enemies, privateers, or pirates should not have been well
known, manifest, and based on positive and justifiable facts.
o If the injury to the vessel should have been caused by reason of her not
being repaired, rigged, equipped, and arranged in a convenient manner for
the voyage, or by reason of some erroneous order of the captain.
o Whenever malice, negligence, want of foresight, or lack of skill on the part
of the captain is the reason for the act causing the damage.
 The expenses caused by the arrival under stress shall always be for the account of
the ship owner or agent, but the latter shall not be liable for the damage which
may be caused the shippers by reason of the arrival under stress, provided the
latter is legitimate.
Otherwise, the ship owner or agent and the captain shall be jointly liable.
 If in order to make repairs to the vessel or because there should be danger of the
cargo suffering damage it should be necessary to unload, the captain must
request authorization of the judge or court of competent jurisdiction to lighten
the vessel, and do so with the knowledge of the person interested or
representative of the cargo, should there be one.
In a foreign port, it shall be the duty of the Spanish * consul, where there is one,
to give the authorization.
In the first case, the expenses shall be defrayed by the ship agent or owner, and in
the second, they shall be for the account of the owners of the merchandise, for
whose benefit the act took place.
If the unloading should take place for both reasons, the expenses shall be
defrayed in proportion to the value of the vessel and that of the cargo.
 The care and preservation of the cargo which has been unloaded shall be in
charge of the captain, who shall be responsible for the same, except in cases of
force majeure.
 If the entire cargo or part thereof should appear to be damaged, or there should
be imminent danger of its being damaged, the captain may request of the judge
or court of competent jurisdiction or the consul, in a proper case, the sale of all or
of part of the former, and the person taking cognizance of the matter shall
authorize it after an examination and declaration of experts, advertisements, and
other formalities required by the case and an entry in the book, in accordance
with the provisions of Article 624.
The captain shall, in a proper case, justify the legality of the procedure, under the
penalty of answering to the shipper for the price the merchandise would have
brought if it should have arrived at the port of its destination in good condition.
 The captain shall answer for the damages caused by his delay, if the reason for
the arrival under stress having ceased, he should not continue the voyage.
If the reason for said arrival should have been the fear of enemies, privateers, or
pirates, before sailing, a discussion and resolution of a meeting of the officers of
the vessel and persons interested in the cargo who may be present shall take
place, in accordance with the provisions contained in Article 819.
5. Shipwreck (Code of Commerce, Articles 840-845)
 The losses and deteriorations suffered by a vessel and her cargo by reason of
shipwreck or stranding shall be individually for the account of the owners, the
part of the wreck which may be saved belonging to them in the same proportion.
 If the wreck or stranding should arise through the malice, negligence, or lack of
skill of the captain, or because the vessel put to sea insufficiently repaired and
prepared, the owner or the freighters may demand indemnity of the captain for
the damages caused to the vessel or cargo by the accident, in accordance with the
provisions contained in Articles 610, 612, 614, and 621.
 The goods saved from the wreck shall be especially liable for the payment of the
expenses of the respective salvage, and the amount thereof must be paid by the
owners of the former before they are delivered to them, and with preference to
any other obligation, if the merchandise should be sold.
6. Prescription (CA No. 65, Section 6; Code of Commerce, Article 366)
 Within the twenty-four hours following the receipt of the merchandise a claim
may be brought against the carrier on account of damage or average found
therein on opening the packages, provided that the indications of the damage or
average giving rise to the claim cannot be ascertained from the exterior of said
packages, in which case said claim would only be admitted on the receipt of the
packages.
After the periods mentioned have elapsed, or after the transportation charges
have been paid, no claim whatsoever shall be admitted against the carrier with
regard to the condition in which the goods transported were delivered.
7. Salvage Law (Act No. 2616)
 When in case of shipwreck, the vessel or its cargo shall be beyond the control of the
crew, or shall have been abandoned by them, and picked up and conveyed to a safe
place by other persons, the latter shall be entitled to a reward for the salvage. Those
who, not being included in the above paragraph, assist in saving a vessel or its cargo
from shipwreck, shall be entitled to a like reward.
 If the captain of the vessel, or the person acting in his stead, is present, no one shall take
from the sea, or from the shores or coast merchandise or effects proceeding from a
shipwreck or proceed to the salvage of the vessel, without the consent of such captain
or person acting in his stead.
 He who shall save or pick up a vessel or merchandise at sea, in the absence of the
captain of the vessel, owner, or a representative of either of them, they being unknown,
shall convey and deliver such vessel or merchandise, as soon as possible, to the
Collector of Customs, if the port has a collector, and otherwise to the provincial
treasurer or municipal mayor.
 C. The Montreal Convention
1. Applicability
 The CONVENTION FOR THE UNIFICATION OF CERTAIN RULES FOR INTERNATIONAL
CARRIAGE BY AIR better known as Montreal Convention 1999 or just MC99 applies to all
international carriage of persons, baggage or cargo performed by aircraft for reward. It
applies equally to gratuitous carriage by aircraft performed by an air transport
undertaking.
2. Extent of Liability of Air Carrier
a. Passenger
 The carrier is liable for damage sustained in case of death or bodily injury of a passenger
upon condition only that the accident which caused the death or injury took place on
board the aircraft or in the course of any of the operations of embarking or
disembarking.
b. Baggage
 The carrier is liable for damage sustained in case of destruction or loss of, or of damage
to, checked baggage upon condition only that the event which caused the destruction,
loss or damage took place on board the aircraft or during any period within which the
checked baggage was in the charge of the carrier. This rule also applies in case a
passenger dies or suffers injury while on board the aircraft.
 However, the carrier is not liable if and to the extent that the damage resulted from the
inherent defect, quality or vice of the baggage. In the case of unchecked baggage,
including personal items, the carrier is liable if the damage resulted from its fault or that
of its servants or agents. If the carrier admits the loss of the checked baggage, or if the
checked baggage has not arrived at the expiration of twenty-one days after the date on
which it ought to have arrived, the passenger is entitled to enforce against the carrier
the rights which flow from the contract of carriage.
c. Limitations to Liability
Stipulations limiting liability (over passengers):
 Stipulation reducing diligence over passengers is NOT VALID. Extraordinary diligence
over passengers is ABSOLUTE.
 Stipulation limiting liability is generally not allowed (even if on reduced fare) except
when a passenger is carried gratuitously, but not for willful acts and gross negligence
on the part of common carrier.
Stipulations limiting liability (over baggage):
Baggage includes whatever articles a passenger usually takes with him/her, either as:
 checked-in baggage (delivered to the common carrier)– considered as “goods”,
apply the rules on goods that are being shipped, extraordinary diligence;
 hand carried luggage (remains in the possession of the passenger)– considered as
“necessary deposit”, apply the rules on deposit of effects in hotels or inns, ordinary
diligence.
3. Liability for Delay
 The carrier’s liability shall also extend in case there is delay in the carriage by air of
passengers, baggage or cargo. Nevertheless, the carrier shall not be liable for damage
occasioned by delay if it proves that it and its servants and agents took all measures that
could reasonably be required to avoid the damage or that it was impossible for it or
them to take such measures.

V. BANKING LAWS
A. The New Central Bank Act

1. Banks in Distress –R.A. No. 7653, as amended, Sections 29-30

Sec. 5 (t), R.A. 3591 (PDIC Charter):

The term risk-based assessment system pertains to an insured bank’s:

 Quality and concentration of assets;

 Categories and concentration of liabilities, both insured and uninsured, contingent and
non-contingent;
 Capital position
 Liquidity position;
 Management and governance; and
 Other factors relevant to assessing such probability, as may be determined by the
Corporation:

The Banko Sentral ng Pilipinas (“BSP”) handles banks in distress through:

 A bank placed under conservatorship, remains open but under the management of the
conservator.
 On the other hand, when a bank is ordered closed by the Monetary Board, the
Philippine Deposit Insurance Corporation (PDIC), it is taken over by the PDIC as statutory
“receiver”, is directed to proceed with the liquidation (Sec. 30[d], NCBA and Sec. 12,
PDIC Charter).
 Before the amendments to the PDIC Charter and NCBA, there was a distinct 90-day
period of receivership after closure and before a final order of liquidation by the
Monetary Board to determine whether the bank can still be rehabilitated. PDIC now
takes over the assets of the closed bank for purposes of liquidation.

LIQUIDITY → CONSERVATORSHIP

 Ability to pay off obligations when they fall due. An institution which fails to pay its
matured obligations or meet the normal demands of withdrawals for deposits due to
insufficient cash, or resorts to intermittent/staggered payments or withdrawals may
be considered as suffering from liquidity problems.

INSOLVENCY → CLOSURE and RECEIVERSHIP

There are two tests for insolvency:

 “Balance sheet test” – where the realizable assets of the bank is insufficient to meet its
liabilities.
 “Equity test” – inability to pay liabilities as they become due in the ordinary course of
business.

CONSERVATORSHIP

 A tool in restoring the viability of a bank or quasi-bank through measures to address its
state of illiquidity.

Appointment of Conservator

 A conservator is appointed based on a report submitted to the Monetary Board by the

appropriate supervising or examining department showing that the bank or quasi-bank
is in a state of illiquidity which is not adequate to protect the interest of depositors and
creditors.
 The Monetary Board has exclusive power to designate the conservator.

Duration of Conservatorship

 Shall not exceed 1 year

Qualifications of a Conservator
 The conservator should be competent and knowledgeable in bank operations and
management.
 Powers of a Conservator:

 To take charge of the assets, liabilities, and the management thereof;

 Reorganize the management;
 Collect all monies and debts due said institution;
 Exercise all powers necessary to restore its viability;
 Report and be responsible to the Monetary Board; and
 Where necessary, overrule or revoke the actions of the previous management and
board of directors of the bank or quasi-bank.
 A bank conservator appointed by the BSP has no power to unilaterally rescind contracts
entered into by the previous management. Since the conservator merely takes the place
of the bank’s board of directors, it cannot do what the board cannot do—repudiating a
contract validly entered into, otherwise they would infringe against the non-impairment
clause of the Constitution.
The law merely gives the conservator the power to file court actions to revoke
contracts that are defective – void, voidable, unenforceable, or rescissible.

REMUNERATION OF A CONSERVATOR

General Rule: The conservator shall receive remuneration in an amount not to exceed 2/3 of
the salary of the president of the institution (i.e. the bank under conservatorship) in 1 year,
payable in 12 equal monthly payments

 EXCEPT if the conservator is a BSP employee who is not entitled to receive any
remuneration or emolument
 If at any time within one-year period, the conservatorship is terminated on the ground
that the institution can operate on its own, the conservator shall receive the balance of
the remuneration which he would have received up to the end of the year.
 But if the conservatorship is terminated on other grounds, the conservator shall not be
entitled to such remaining balance.

Expenses

 The expenses attendant to the conservatorship shall be borne by the bank or quasi-bank
concerned.

2. Remedy of Closed Banks - R.A. No. 7653, as amended, Section 30

 Sec. 30. Proceedings in Receivership and Liquidation – The actions of the Monetary Board
taken under this section or under Section 29 of this Act shall be final and executory and may
not be restrained or set aside by the court except on petition for certiorari on the ground that
the action taken was in excess of jurisdiction or with such grave abuse of discretion as to
amount to lack or excess of jurisdiction. The petition for certiorari may only be filed by the
stockholders of record representing the majority of the capital stock within ten (10) days from
receipt by the board of directors of the institution of the order directing receivership,
liquidation or conservatorship.

 Objections Based on Substantial Grounds for Closure;

 Objections Based On Observance of Procedural Remedies;

CLOSURE

“Close Now, Hear Later.”

 The Monetary Board shall notify in writing, through the PDIC, the board of directors of
the closed bank of its decision.
 Summary closure and appointment of receiver without prior notice and hearing is for
the protection of public interest. Subsequent hearing may be made if there is sound
basis for closure and until such determination is made, the bank shall continue under
receivership.
  A petition for certiorari may only be filed by the stockholders of the majority of the
capital stock, which must be filed within ten (10) days from directing receivership,
liquidation or conservatorship.
 Whenever a bank is ordered closed by the Monetary Board, PDIC shall be designated as
receiver and it shall proceed with the takeover and liquidation of the closed bank which
SHALL NO LONGER BE REHABILITATED.
 Receivership is a condition in which a receiver is appointed for the protection of an
entity’s assets for their sale or distribution to creditors. The receiver (PDIC) takes
charge of the assets and liabilities of the bank that has been forbidden to do business
for the benefit of creditors.
The appointment of a receiver operates to suspend the authority of the bank and of its
directors and officers over its property and effects.

GROUNDS for Receivership (Section 30):

When the Monetary Board finds that a bank or quasi bank:

 Notified the BSP or publicly announced a unilateral closure;

 Has been dormant for at least sixty (60) days;
 In any manner suspended the payment of its deposit or deposit substitute liabilities
(The requirement of continuously for more than 30 days under Sec. 53 of the GBL
removed).
 Is unable to pay its liabilities as they become due in the ordinary course of business
(“Equity test”). Except: Inability to pay caused by extraordinary demands induced by
financial panic in the banking community (bank run) ;
 Has insufficient realizable assets to meet its liabilities (balance sheet test); (
 Cannot continue business without involving probable losses to its depositors and
creditors;
 Has wilfully violated a cease-and-desist order under NCBA, Sec. 37 (Administrative
Sanctions) that has become final and involves acts or transactions which amount to
fraud or a dissipation of assets;
 If a bank persists in conducting its business in an unsafe or unsound manner.

AUTHORITIES OF A RECEIVER

 The receiver is authorized to adopt and implement, without need of consent of the
stockholders, board of directors, creditors or depositors of the closed bank, the
following modes of liquidation:
o Conventional liquidation; and
o Purchase of assets and/or assumption of liabilities.
 In addition to the powers of a receiver, he is empowered to:
o Represent and act for and on behalf of the closed bank;
o Gather and take charge of all the assets, records and affairs of the closed bank,
and administer the same for the benefit of its creditors;
o Convert the assets of the closed bank to cash or other forms of liquid assets;
o Bring suits to enforce liabilities of the directors, officers, employees, agents of
the closed bank and other entities related or connected to the closed bank or to
collect,
 Upon placement by the Monetary Board of a bank under liquidation, it shall continue as
a body corporate until the termination of the winding-up period. Such continuation as a
body corporate shall only be for the purpose of liquidating, settling, and closing its
affairs and for the disposal, conveyance, and distribution of its assets.
In no case shall a bank be reopened and permitted to resume banking business after
being placed under liquidation.

B. Secrecy of Bank Deposits (R.A. No. 1405, and R.A. No. 6426, as amended)
Purpose

 To give encouragement to the people to deposit their money in banking institutions;

 To discourage private hoarding so that the same may be properly utilized by banks in authorized
loans to assist in the economic development of the country.

1. Prohibited Acts

 Examines, inquires, or looks into all bank deposits of whatever nature including government
bonds, which are absolutely confidential, by any person, government official, or office.
 Disclose to any person any information concerning deposits by a bank official or employee.

Deposits Covered

Section 2. All deposits of whatever nature with banks or banking institutions in the Philippines including
investments in bonds issued by the Government of the Philippines, its political subdivisions and its
instrumentalities, are hereby considered as of an absolutely confidential nature and may not be
examined, inquired or looked into by any person, government official, bureau or office, except upon
written permission of the depositor, or in cases of impeachment, or upon order of a competent court in
cases of bribery or dereliction of duty of public officials, or in cases where the money deposited or
invested is the subject matter of the litigation.

Expanded definition of deposits includes money “invested” in trust accounts.

 All deposits of whatever nature with banks or banking institutions in the Philippines
 Investments in bonds issued by the Government of the Philippines, its political subdivisions and
its instrumentalities.
 All foreign currency deposits as well as foreign currency deposits authorized under P.D 1034

Presumption of Confidentiality

 If there are doubts in upholding the absolutely confidential nature of bank deposits against
affirming the authority to inquire into such accounts, such doubt must be resolved in favor of
confidentiality.

2. Exceptions from Coverage

 When there is written permission of the depositor or investor;

o A waiver of rights must not only be voluntary, but must have been made knowingly,
intelligently, and with sufficient awareness of the relevant circumstances and likely
consequences. There must be persuasive evidence to show an actual intention to
relinquish the right. Mere silence on the part of the holder of the right should not be
construed as surrender thereof.
 In cases of impeachment (The Gerry Leal contempt case);
o Order issued by the impeachment court or by its authorized officer to allow examination
For impeachment of President, VP. SC members, Con Com members, Ombudsman For
violation of Constitution, treason, bribery, graft & corruption, other high crimes, or
betrayal of public trust.
 Upon order of a competent court in cases of bribery or dereliction of duty of public officials;
 Unexplained wealth under Anti-Graft and Corrupt Practices Act.
o Extends to dummies, spouse and children
o In Gancayco and Purisima cases, government prosecutors can access deposits and the
Tanodbayan may issue subpoena duces tecum.
 Plunder;
 Upon order of the court, cases filed by the Ombudsman. There must be a pending case, account
identified subject of the case, bank personnel and account holder notified.
 Bank accounts of the debtor by the Rehabilitation Receiver under FRIA, with performance
bond;
 Garnishment;
  Subject matter of litigation. Money deposited is the subject matter of dispute. Investigation of
money trail; in order to solve the crime, follow the money;
 Commissioner of Internal Revenue (Estate, Compromise, Treaty, Distraint/Levy)
 COA with respect to government deposits;
 Unclaimed Balances Act (dormant accounts for 10 years), subject to escheat;
 Without need for court order, if the Anti-Money Laundering Council (AMLC) determines a
deposit/investment is related to dangerous drugs (Comprehensive Dangerous Drugs Act),
kidnapping for ransom, hijacking, destructive arson, murder, terrorism. facilitating and financing
of terrorism;
 With court order, AMLC determines probable cause that deposit/investment related to unlawful
activities or money laundering offense;
 Upon order of CA, Human Security Act for predicate crimes of piracy, rebellion, coup d’etat,
murder, kidnapping, highway robbery, illegal firearms and ammunition, toxic substances, arson,
hijacking, crimes of destruction. A person charged or suspected of terrorism. Member of
terrorist groups;
 BSP (and PDIC)’s inquiry into deposit/investment for unsafe and unsound banking practices and
for failure of Prompt Corrective Action. BSP’s conduct of annual testing to determine the
existence and identity of owners of numbered accounts;
 PCGG investigation into ill-gotten wealth;
 Equity, to serve the ends of “justice.” Pro hac vice or sui generis;
 Records of closed banks, which is no longer a bank.

3. Garnishment of Deposits

Garnishment of Deposits, including Foreign Deposits

 Court does not order disclosure but merely to inform the court if there is deposit so account
can be held intact so debtors may not evade payment. Legislative intent does not extend to
garnishment.
 Deposits maintained by banks with the BSP as part of their reserve requirements shall be
exempt from attachment, garnishments, or any other order or process of any court,
government agency, or any other administrative body issued to satisfy the claim of a party
other than the Government, or its political subdivisions, or instrumentalities.
 The foreign currency deposits shall be exempt from attachment, garnishment, or any
other order or process of any court, legislative body, government agency or any
administrative body whatsoever.
Foreign Currency Deposits may not be garnished under R.A. No. 6426, except:

 Written permission of depositor;

 PCGG;
 Prevent miscarriage of justice;
 AMLA;
 Taxation (short of waiver for tax compromises);
 Examination of BSP/PDIC in unsafe and unsound banking practices and failure of prompt
corrective action.

Section 2, Republic Act No. 6426 speaks of deposit with such Philippine banks in good standing, as
maybe designated by the Central Bank for the purpose. The criminal cases filed against petitioners for
violation of Circular No. 960 involve foreign currency accounts maintained in foreign banks, not
Philippine banks.

C. General Banking Law (R.A. No. 8791)

1. Nature of Bank Funds and Bank Deposits

→ Simple loan and covered by the law on loans. There is creditor-debtor relationship

Fixed, savings, and current deposits of money in banks and similar institutions shall be governed
by the provisions concerning simple loans.
How do you characterize the legal relationship between a commercial bank and its safety
deposit box client?

The Relationship between a commercial bank and its safety deposit box client is that of a bailee
and a bailor, the bailment being for hire and mutual benefit.

Effects of Deposits as Simple Loans – Bank as Debtor

 Bank acquires ownership of money deposited; obligation to pay amount, but no

obligation to return the same money
 Payment to proper party-depositor
 Deposits are not preferred credits.
 Bank has the right to set-off or compensation.

2. Required Diligence of Banks

HIGHEST DEGREE OF DILIGENCE

 Banks are expected to exercise the highest degree of diligence in the selection and
supervision of their employees. By the very nature of their work, the degree of
responsibility, care and trustworthiness expected of their employees and officials is
far greater than those of ordinary clerks and employees.
 As a business affected with public interest and because of the nature of its functions,
the bank is under obligation to treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of their relationship.
 The bank which allows the payment on a check where the signature is forged is
liable to the depositor-drawer.
The drawee-bank is expected to use reasonable business prudence to ascertain well
the genuineness of the signatures of its client-depositors. In case it fails to do so, it
must restore the account of its depositor.
 While a drawee bank which paid several checks payable to order with forged
endorsements can recover the payment from the collecting bank because the forged
endorsement is inoperative, the drawer must share one-half of the loss where the
drawer substantially contributed to the loss by continuing to release the check to
the forger although it knew the forger was no longer the cashier of the drawer.
 Where the endorsements on a check presented by a collecting bank for clearing are
forged, the drawee bank can recover the payment. Since, it is the duty of the
collecting bank to see to it that the endorsements are genuine.
 In case the amount of a check has been altered; the drawee bank has 24 hours to
return to the collecting bank. Should the drawee bank fail to do so the collecting
back is absolved from liability.

SINGLE BORROWER’S LIMIT

To prevent a bank from making excessive loans and other credit accommodations to a single
borrower or corporate group:

 25% Total Loan Portfolio

 Additional 10% for exceptional cases/transactions transferring title or
marketable/non-perishable goods that require insurance (ex. trust receipts, shipping
documents, warehouse receipts)

“INSIDER TRADING”

 Aggregate Limit: 15% of the total loan portfolio,

 or 100 % of the net worth, whichever is LOWER
 Individual Limit: Limited to an amount equivalent to DOSRI’s unencumbered
deposits and book value of their paid-in capital contribution to the bank
 Distinction must be made between “related parties” which banks may internally
define and expand from “related interest” which is defined by law and mandatorily
subject to DOSRI limits. Note that limits apply to subsidiaries and affiliates.
3. Prohibited Transactions by Bank Directors and Officers

No director, officer, employee, or agent of any bank shall

 Make false entries in any bank report or statement or participate in any fraudulent
transaction, thereby affecting the financial interest of, or causing damage to, the bank
or any person;
 Without order of a court of competent jurisdiction, disclose to any unauthorized person
any information relative to the funds or properties in the custody of the bank belonging
to private individuals, corporations, or any other entity: Provided, That with respect to
bank deposits, the provisions of existing laws shall prevail;
 Accept gifts, fees, or commissions or any other form of remuneration in connection
with the approval of a loan or other credit accommodation from said bank;
 Overvalue or aid in overvaluing any security for the purpose of influencing in any way
the actions of the bank or any bank; or
 Outsource inherent banking functions.

RESTRICTIONS ON BANK EXPOSURE TO DOSRI

Stockholder of record in the

Directors of the Bank Officers of the Bank bank holding 1% or more of the
total subscribed capital stock

General Policy: Dealings with any of the Bank’s DOSRI,

Related Interest referring to subsidiaries and affiliates shall be in the regular course of
individuals and entities business and shall at all times be kept at arm’s length. No
connected to DOS abuse of position or special treatment for borrowing from
banks.

WHO IS A RELATED INTEREST?

 Spouse or relative within first degree of consanguinity or affinity or relative by legal

adoption of a DOS;
 Partnership of which a DOS is a general partner;
 Co-owner with the DOS;
 Corp, assoc, firm of a group of DOS;
 Corp, assoc, firm majority-owned or controlled by related entity or group;
 Corp, assoc, firm which owners control at least 20% of the capital of a substantial
stockholder of the lending bank or which controls majority interest of the bank.
 Corp, assoc firm with exiting management contract with the parent of the lending bank;
 NGO/foundations engaged in retail microfinance incorporated by any DOS of related
banks.

STIPULATION ON INTERESTS

No interest shall be due unless stipulated in writing.

If interest becomes iniquitous or unconscionable, it becomes void for becoming contrary to

morals.

D. Anti-Money Laundering Act (R.A. No. 9160, as amended by R.A. No. 9194, 10167, 10365,
10927, and 11521)

1. Policy –R.A. No. 9160, as amended, Section 2

 To protect the integrity and confidentiality of bank accounts

 To ensure that the Philippines shall not be used as a money laundering site for the
proceeds of any unlawful activity.
  Consistent with its foreign policy, the Philippines shall extend cooperation in
transnational investigations and prosecutions of persons involved in money laundering
activities wherever committed.

2. Covered Institutions and their Obligations –R.A. No. 9160, as amended, Section 3

 Covered Persons Supervised/Regulated by BSP:

o Banks;
o Offshore banking units;
o Quasi-banks;
o Trust entities;
o Non-stock savings and loan associations;
o Pawnshops;
o Foreign exchange dealers;
o Money changers;
o Money remittance or transfer companies;
o Electronic money issuers; and
o All other persons and their subsidiaries and affiliates supervised or regulated by
the BSP.

BSP Authority to check compliance with the AMLA, as amended, and these Rules.

BSP may inquire into or examine:

 Bank accounts, including customer identification, account opening

 And transaction documents
 For the purpose of checking compliance by covered persons with AMLA requirements
Covered Persons Supervised/Regulated by IC

 Insurance companies, pre-need companies and all other persons supervised or

regulated by the IC.
 Securities dealers, brokers, salesmen, investment houses and other similar persons
managing securities or rendering services as investment agent, advisor, or consultant;
 Mutual funds, close-end investment companies, common trust funds, and other similar
persons; and
 Other entities administering or otherwise dealing in currency, commodities or financial
derivatives based thereon, valuable objects, cash substitutes and other similar
monetary instruments or property supervised or regulated by the SEC.

Designated Non-Financial Businesses and Professions (DNFBPs)

 Jewelry dealers in precious metals, who, as a business, trade in precious metals;

 Jewelry dealers in precious stones, who, as a business, trade in precious stones;
 Company service providers which, as a business, provide any of the following services
to third parties who are not capable of doing or do not want to do so directly due to
financial or operational reasons, or business judgment:
o Acting as a formation agent of juridical persons;
o Acting as (or arranging for another person to act as) a director or corporate
secretary of a company, a partner of a partnership, or a similar position in
relation to other juridical persons;
o Providing a registered office, business address or accommodation,
correspondence or administrative address for a company, a partnership or any
other legal person or arrangement; and
o Acting as (or arranging for another person to act as) a nominee shareholder for
another person
  Persons who provide any of the following services:
o Managing of client money, securities or other assets;
o Management of bank, savings or securities accounts;
o Organization of contributions for the creation, operation or management of
companies; and
o Creation, operation or management of juridical persons or arrangements, and
buying and selling business entities.
 Casinos, including internet-based casinos and ship-based casinos, with respect to their
casino cash transactions related to gaming operations;
 Real Estate Brokers and Developers;
 Offshore Gaming Operators, as well as their service providers, supervised, accredited or
regulated by PAGCOR or any AGA.

OBLIGATIONS

PRIMARY Duties of Covered Persons

 Covered persons shall, comply with all the requirements under the AMLA and other
AMLC issuances. They shall have the duty to cooperate with the AMLC, and protect their
businesses or professions from being used in ML/TF activities.
 The covered persons’ board of directors, partners or sole proprietors shall be
ultimately responsible for the covered persons’ compliance with AMLC issuances.

3. Covered Transactions - R.A. No. 9160, as amended, Section 3

 A transaction in cash or other equivalent monetary instrument in excess of P500,

000.00.

4. Suspicious Transactions - R.A. No. 9160, as amended, Section 3

A transaction, regardless of the amount involved, where any of the following

circumstance exist:

 No underlying legal or trade obligation, purpose or economic justification;

 Client is not properly identified;
 Amount involved is not commensurate with the business or financial capacity of the
client;
 Client’s transactions are structured in order to avoid being the subject of reporting
requirements;
 Any circumstance relating to the transaction which is observed to deviate from the
profile of the client or client’s past transactions;
 Transaction is in any way related to an unlawful activity or any money laundering
activity or offense under the AMLA that is about to be, is being or has been committed;
 Any transaction that is similar, analogous or identical to any of the foregoing;

5. Safe Harbor Provision - R.A. No. 9160, as amended, Section 9

 Prohibition on communicating directly or indirectly, in any manner or by any means, to any

person or entity, the media, the filing of Covered Transaction Report (CTR)/Suspicious
Transaction Report (STR) including its contents.
 Immunity from administrative, criminal or civil proceedings of any person acting in good faith or
in the regular performance of duties.

6. Money Laundering

a. How Committed - R.A. No. 9160, as amended, Section 4

 Money laundering is committed by any person who, knowing that any monetary instrument or
property represents, involves, or relates to the proceeds of any unlawful activity:
o transacts said monetary instrument or property;
o converts, transfers, disposes of, moves, acquires, possesses or uses said monetary
instrument or property;
 o conceals or disguises the true nature, source, location, disposition, movement or
ownership of or rights with respect to said monetary instrument or property;
o attempts or conspires to commit money laundering offenses referred to in
paragraphs(a),(b) or (c);
o aids, abets, assists in or counsels the commission of the money laundering offenses
referred to in paragraphs (a), (b) or (c) above; and
o performs or fails to perform any act as a result of which he facilitates the offense of
money laundering referred to in paragraphs (a), (b) or (c) above.
 Money laundering is also committed by any covered person who, knowing that a covered or
suspicious transaction is required under this Act to be reported to the Anti-Money Laundering
Council (AMLC), fails to do so.

b. Predicate Crimes - R.A. No. 9160, as amended, Section 3

Unlawful Activity (Predicate Offense)

 Any act or omission or series or combination thereof involving or having direct relation to the
following:
o Kidnapping for ransom;
o Drug Trafficking and other violations of the Comprehensive Dangerous Drugs Act of
2002;
o Graft and Corruption (RA No. 3019, as amended);
o Plunder (RA No. 7080, as amended);
o Robbery and Extortion under the RPC;
o Jueteng and Masiao (PD 1602);
o Piracy (RPC & PD532);
o Qualified Theft under Art. 310, RPC, as amended
o Swindling under Art. 315, RPC;
o Smuggling under RA Nos. 455 & 1937;
o Violations of Electronic Commerce Act of 2000 (RA No. 8792);
o Hijacking, destructive arson and murder, including those perpetrated by terrorists
against non-combatant persons and similar targets;
o Terrorism and conspiracy to commit terrorism (RA No. 9372);
o Financing of Terrorism and other offenses (RA No. 10168);
o Bribery and Corruption of Public Officers, RPC;
o Frauds and Illegal Exactions and Transactions, RPC;
o Malversation of Public Funds and Property, RPC;
o Forgeries and Counterfeiting, RPC, as amended;
o Violations of Sections 4 to 6, Anti-Trafficking in Persons Act (RA No. 9208);
o Violations of the Anti-Carnapping Act of 2002, RA No. 6539;
o Violations of Sections 78 to 79 of Chapter IV, The Revised Forestry Code (PD No. 705);
o Violations of Sections 86 to 106 of Chapter VI, The Philippine Fisheries Code of 1998 (RA
8550);
o Violations of Sections 101 to 107, and 110, The Philippine Mining Act of 1995 (RA 7942);
o Violations of Section 7(b), The National Caves and Cave Resources Management
Protection Act (RA No. 9072);
o Violations of PD No. 1866 (Illegal Dealing in Firearms, Explosives, and Ammunitions);
o Violation of the Anti-Fencing Law, PD 1612;
o Violations of Section 6, the Migrant Workers and Overseas Filipinos Act of 1995, RA no.
8042, as amended;
o Violations of Intellectual Property Code of the Philippines, RA No. 8293;
o Fraudulent practices and other violations of the Securities and Regulation Code of
2000, RA 8799;
o Violations of Section 4, the Anti-Child Pornography Act of 2009, RA 9775;
o Violations of Sec. 4 of Anti-Photo and Video Voyuerism Act of 2009, RA No. 9995;
o Violations of Sections 5, 7, 8, 9, 10(c), (d), and (e), 11, 12 and 14 of The Special
Protection of Children against Abuse, Exploitation and Discrimination, RA No. 7610;
o Felonies or offenses of a similar nature that are punishable under the penal laws of
other countries;
o Violations of Section 254 of Chapter II, Title X of NIRC, where the deficiency basic tax
due in the final assessment is in excess of P25 Million per taxable year, and there has
been a finding of fraud, willful misrepresentation or malicious intent.
Money Laundering Offense and Penalties

OFFENSE

 Covered persons, its directors, officers or personnel who knowingly participated in the
commission of money laundering

PENALTY

 4 to 7 yrs. Imprisonment and a fine corresponding to not more than 200 percent of the value of
the MI or property laundered.

Other Specific AMLA violations

 Failure to keep records for five (5) years from the dates of transactions or customer records.
 Malicious reporting or filing, with malice or bad faith, completely unwarranted or false
information.
 Breach of Information Security and Confidentiality.

Administrative Sanctions – AMLC

 Comprised of monetary penalties (not >P500k), non-monetary (warning or reprimand)

 Imposed against Covered Persons, its directors, officers employees or any other person
for
o violation AML laws and IRRs;
o failure or refusal to comply with AMLC orders, resolutions and other issuances.
 Imposed after due notice and hearing by AMLC

Authority to Inquire into Deposits

RA No. 9194

 “To ensure compliance with this Act, the BSP may inquire into or examine any deposit or
investment with any banking institution or non-bank financial institution when the
examination is made in the course of a periodic or special examination, in accordance
with the rules of examination of the BSP.”

RA No. 10167

 “To ensure compliance with this Act, the BSP may, in the course of periodic or special
examination, check the compliance of a covered institution with the requirements of the
AMLA and its IRR.”

Duties of the Covered Persons upon Receipt of Bank Inquiry Order.

 Upon receipt of the court order or AMLC Resolution, give the AMLC and/or its
Secretariat full access to all information, documents or objects pertaining to the
deposit, investment, account and/or transaction.
 Certified true copies of the documents pertaining to deposit, investment, account
and/or transaction subject of the bank inquiry shall be submitted to the AMLC
Secretariat, within 5 working days from receipt of the court order or AMLC Resolution.

FREEZE ORDER (FO)

 Verified ex-parte petition filed with CA

 CA to act on the petition within 24 hours
 Immediately effective for period not > 6 months
 Ipso facto lifted if no case is filed
 Motion to lift FO to be resolved before expiration of the FO
  Only SC can stop implementation of FO
 Freeze Related Accounts

Prohibition against Issuance of Freeze Orders against candidates for an electoral office during
election period

 No prior criminal charge, pendency of case, or conviction for unlawful activity or ML

offense is necessary to commence freeze order.
 Rule 10.b. Definition of Probable Cause. - Probable cause includes such facts and
circumstances which would lead a reasonably discreet, prudent or cautious man to
believe that an unlawful activity and/or a money laundering offense is about to be, is
being or has been committed and that the account or any monetary instrument or
property sought to be frozen is in any way related to said unlawful activity and/or
money laundering offense.

Duties of Covered Persons and Concerned Government Agencies upon Receipt of Freeze
Order.

 Implement Freeze Order. - Upon receipt of the notice of the freeze order, immediately
freeze the monetary instrument or property subject thereof, and immediately desist
from and not allow any transaction.
 Freeze Related Accounts. - Upon verification that there are accounts related to the
monetary instrument or property, immediately freeze these related accounts wherever
these may be found.
 If the related accounts cannot be determined 24 hours from receipt of the freeze order
due to the volume and/or complexity of the transactions, or any other justifiable
factors, the covered person shall effect the freezing of the related accounts within a
reasonable period and submit a supplemental return to the CA and AMLC within 24
hours.

FORFEITURE OF ASSETS

General Rules on Asset Forfeiture. Three NOs

 No prior criminal charge, pendency of a case, or conviction for an unlawful activity or ML

offense is necessary for the commencement or the resolution of a petition for civil
forfeiture.
 No asset shall be attached or forfeited to the prejudice of a candidate for an electoral
office during an election period.
 No court shall issue a temporary restraining order or a writ of injunction against any
provisional asset preservation order or asset preservation order, except the CA or SC.

Petition for Civil Forfeiture

 Upon determination that probable cause exists that any monetary instrument or
property is in any way related to an unlawful activity or ML offense, the AMLC shall file
with the RTGC through the Office of the Solicitor General, a verified petition for civil
forfeiture.
 The petition for civil forfeiture shall include other monetary instrument or property of
equal value, in cases where the monetary instrument or property that should be subject
of forfeiture:
o cannot be located despite due diligence;
o has been substantially altered, destroyed, diminished in value or otherwise
rendered worthless by any act or omission;
o has been concealed, removed, converted, or otherwise transferred;
o is located outside the Philippines or has been placed or brought outside the
jurisdiction of the court; or
o has been commingled with other monetary instrument or property belonging to
either the offender himself or a third person or entity, thereby rendering the
same difficult to identify or be segregated for purposes of forfeiture.
Asset Preservation Order

 After determination that probable cause exists that any monetary instrument or
property is in any way related to an unlawful activity, RTC may issue an asset
preservation order which shall be effective immediately, forbidding any transaction,
withdrawal, deposit, transfer, removal, conversion, concealment or other disposition of
the subject monetary instrument or property.

Motion to Discharge

 If an asset preservation order is imposed on an account of a covered person that it uses

for payment of salary, rent, suppliers, and/or taxes in the ordinary course of a legitimate
business, the covered person may submit a bond or other acceptable securities of equal
value to the amount or value subject of the asset preservation order.

Where there is conviction for ML, the court shall issue a judgment of forfeiture in favor of the
Government of the Philippines with respect to the monetary instrument or property found to
be proceeds of or related to an unlawful activity.

The court may, instead of enforcing the order of forfeiture of the monetary instrument or
property or part thereof or interest therein, order the convicted offender to pay an amount
equal to the value of said monetary instrument or property.

VI. INTELLECTUAL PROPERTY CODE OF THE PHILIPPINES (R.A. No. 8293)

A. Patents –R.A. No. 8293, Section 21

1. Patentable vs. Non-patentable Inventions –R.A. No. 8293, Section 22

 Patentable invention - Any technical solution of a problem in any field of human activity
which is new, involves an inventive step and is industrially applicable shall be
patentable. It may be, or may relate to, a product, or process, or an improvement of any
of the foregoing.
 Non-patentable invention - The following shall be excluded from patent protection:
o Discoveries, scientific theories and mathematical methods, and in the case of
drugs and medicines, the mere discovery of a new form or new property of a
known substance which does not result in the enhancement of the known
efficacy of that substance, or the mere discovery of any new property or new use
for a known substance, or the mere use of a known process unless such known
process results in a new product that employs at least one new reactant.
For the purpose of this clause, salts, esters, ethers, polymorphs, metabolites,
pure form, particle size, isomers, mixtures of isomers, complexes, combinations,
and other derivatives of a known substance shall be considered to be the same
substance, unless they differ significantly in properties with regard to efficacy;
o Schemes, rules and methods of performing mental acts, playing games or doing
business, and programs for computers;
o Methods for treatment of the human or animal body by surgery or therapy and
diagnostic methods practiced on the human or animal body. This provision shall
not apply to products and composition for use in any of these methods;
o Plant varieties or animal breeds or essentially biological process for the
production of plants or animals. This provision shall not apply to micro-
organisms and non-biological and microbiological processes.
Provisions under this subsection shall not preclude Congress to consider the
enactment of a law providing sui generis protection of plant varieties and animal
breeds and a system of community intellectual rights protection;
o Aesthetic creations; and
o Anything which is contrary to public order or morality.

2. Ownership of a Patent –R.A. No. 8293, Sections 28-30

Right to a Patent
  The right to a patent belongs to the inventor, his heirs, or assigns. When two (2) or
more persons have jointly made an invention, the right to a patent shall belong to them
jointly.

First to File Rule

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

Invention created pursuant to a commission

 The person who commissions the work shall own the patent, unless otherwise provided
in the contract.
In case the employee made the invention in the course of his employment contract, the
patent shall belong to:
o The employee, if the inventive activity is not a part of his regular duties even if
the employees uses the time, facilities and materials of the employer.
o The employer, if the invention is the result of the performance of his regularly-
assigned duties, unless there is an agreement, expresses or implied, to the
contrary.

3. Rights and Limitations of Patent Owner –R.A. No. 8293, Sections 71-77

A patent shall confer on its owner the following exclusive rights:

 Where the subject matter of a patent is a product, to restrain, prohibit and prevent any
unauthorized person or entity from making, using, offering for sale, selling or importing
that product;
 Where the subject matter of a patent is a process, to restrain, prevent or prohibit any
unauthorized person or entity from using the process, and from manufacturing, dealing
in, using, selling or offering for sale, or importing any product obtained directly or
indirectly from such process.
 Right of priority - An application for patent filed by any person who has previously
applied for the same invention in another country which by treaty, convention, or law
affords similar privileges to Filipino citizens, shall be considered as filed as of the date of
filing the foreign application: Provided, That:
o The local application expressly claims priority;
o It is filed within 12 months from the date the earliest foreign application was
filed; and
o A certified copy of the foreign application together with an English translation is
filed within 6 months from the date of filing in the Philippines.

Prior User

 Any prior user, who, in good faith was using the invention or has undertaken serious
preparations to use the invention in his enterprise or business, before the filing date or
priority date of the application on which a patent is granted, shall have the right to
continue the use thereof as envisaged in such preparations within the territory where
the patent produces its effect.
The right of the prior user may only be transferred or assigned together with his
enterprise or business, or with that part of his enterprise or business in which the use or
preparations for use have been made.

Use of Invention by Government

 A Government agency or third person authorized by the Government may exploit the
invention even without agreement of the patent owner where:
o The public interest, in particular, national security, nutrition, health or the
development of other sectors, as determined by the appropriate agency of the
government, so requires; or
 o A judicial or administrative body has determined that the manner of
exploitation, by the owner of the patent or his license, is anti-competitive.

Patent owners shall also have the right to assign, or transfer by succession the patent, and to
conclude licensing contracts for the same.

Limitations of Patent Rights

The owner of a patent has no right to prevent third parties from performing, without his
authorization in the following circumstances:

 Using a patented product which has been put on the market on the Philippines by the
owner of the product, or with his express consent, insofar as such use is performed after
that product has been so put on the said market;
 Where the act is done privately and on a non-commercial scale or for a non-commercial
purpose: Provided, That it does not significantly prejudice the economic interest of the
owner of the patent;
 Where the act consist of making or using exclusively for the purpose of experiments that
relate to the subject matter of the patented invention;
 Where the act consists of the preparation for individual cases, in a pharmacy or by a
medical professional, of a medicine in accordance with a medical prescription or acts
concerning the medicine so prepared;
 Where the invention is used in any ship, vessel, aircraft, or land vehicles of any other
country entering the territory of the Philippines temporarily or accidentally: Provided,
that such invention is used exclusively for the needs of the ship, vessel aircraft, or land
vehicle and not used for the manufacturing of anything to be sold within the Philippines.

4. Patent Infringement - R.A. No. 8293, Sections 76-84

 The making, using, offering for sale, selling, or importing a patented product or a
product obtained directly or indirectly from a patented process, or the use of a patented
process without the authorization of the patentee constitutes patent infringement.
 Any patentee, or anyone possessing any right, title or interest in and to the patented
invention, whose rights have been infringed, may bring a civil action before a court of
competent jurisdiction, to recover from the infringer such damages sustained thereby,
plus attorney’s fees and other expenses of litigation, and to secure an injunction for the
protection of his rights.

Tests in patent infringement

 Doctrine of Equivalents
It provides that an infringement also takes place when a device appropriates a prior
invention by incorporating its innovative concept and, although with some modification
and change, performs substantially the same function in substantially the same way to
achieve substantially the same result.

Literal Infringement

 It occurs when every element and limitation of a patent claim is present exactly in the
accused product or process. This means that the accused product or process is identical
to what is described in the patent claim.
 In the case of drugs and medicines, there is a national emergency or other circumstance
of extreme urgency requiring the use of the invention; or
 In the case of drugs and medicines, there is public non-commercial use of the patent by
the patentee, without satisfactory reason; or
 In the case of drugs and medicines, the demand for the patented article in the
Philippines is not being met to an adequate extent and on reasonable terms, as
determined by the Secretary of the Department of Health.

5. Remedies for Infringement –R.A. No. 8293, Sections 79-80

  No damages can be recovered for acts of infringement committed more than four (4)
years before the institution of the action for infringement.
 Damages cannot be recovered for acts of infringement committed before the infringer
had known, or had reasonable grounds to know of the patent. It is presumed that the
infringer had known of the patent if on the patented product, or on the container or
package in which the article is supplied to the public, or on the advertising material
relating to the patented product or process, are placed the words “Philippine Patent”
with the number of the patent.

6. Cancellation –R.A. No. 8293, Sections 61-66

Grounds for Cancellation a Patent

Any interested person may, upon payment of the required fee, petition to cancel the patent or
any claim thereof, or parts of the claim, on any of the following grounds:

 That what is claimed as the invention is not new or patentable;

 That the patent does not disclose the invention in a manner sufficiently clear and
complete for it to be carried out by any person skilled in the art: or
 That the patent is contrary to public order or morality

Where the grounds for cancellation relate to some of the claims or parts of the claim,
cancellation may be effected to such extent only.

The petition for cancellation shall be in writing, verified by the petitioner or by any person in his
behalf who knows the facts, specify the grounds upon which it is based, include a statement of
the facts to be relied upon, and filed with the Office. Copies of printed publications or of
patents of other countries, and other supporting documents mentioned in the petition shall be
attached thereto, together with the translation thereof in English, if not in the English language.

The rights conferred by the patent or any specified claim or claims cancelled shall terminate.
Notice of the cancellation shall be published in the IPO Gazette. Unless restrained by the
Director General, the decision or order to cancel by Director of Legal Affairs shall be
immediately executory even pending appeal.

7. Compulsory Licensing –R.A. No. 8793, Sections 93-102

Concept: These cover situations where licenses are awarded against the will of the patent
owner. The basis for this compulsion is related to the State policies on intellectual property
rights.

“Grounds. The Director General of the IPO may grant a license to exploit a patented invention,
even without the agreement of the patent owner, in favor of any person who has shown
capability to exploit the invention, under the ff. circumstances:

 National emergency or other circumstances of extreme urgency;

 Public interest, national security, nutrition, health or development of other vital sectors
of national economy as determined by the appropriate government agency;
 Where manner of exploitation is anti-competitive as determined by judicial or
administrative body;
 In case of public non-commercial use of the patent by the patentee;
 If the patented invention is not being worked in the Philippines on a commercial scale;
 Where demand for patented drugs and medicines is not being met to an adequate
extent and on reasonable terms as determined by the Secretary of the Department of
Health.

The license will only be granted after the petitioner has made efforts to obtain authorization
from the patent owner on reasonable commercial terms and conditions but such efforts have
not been successful within a reasonable period of time.

 Where the petition for compulsory license seeks to remedy a practice determined after
judicial or administrative process to be anti-competitive;
  In situations of national emergency or other circumstances of extreme urgency;
 In cases of public non-commercial use; and
 In cases where the demand for the patented drugs and medicines in the Philippines is
not being met to an adequate extent and on reasonable terms, as determined by the
Secretary of the Department of Health.

8. Voluntary Licensing – R.A. No. 8793, Sections 85-92

Voluntary License Contract

Concept: An inventor grants authority to enterprises that can commercially exploit the
invention, either by manufacturing, distribution or retail selling.

“To encourage the transfer and dissemination of technology, prevent or control practices and
conditions that may in particular cases constitute an abuse of intellectual property rights having
an adverse effect on competition and trade.”

The Director of the Documentation, Information and Technology Transfer Bureau shall exercise
quasi-judicial jurisdiction in the settlement of disputes between parties to a technology transfer
arrangement arising from technology transfer payments, including the fixing of appropriate
amount or rate of royalty.

The following provisions shall be included in voluntary license contracts:

 That the laws of the Philippines shall govern the interpretation of the same and in the
event of litigation, the venue shall be the proper court in the place where the licensee
has its principal office;
 Continued access to improvements in techniques and processes related to the
technology shall be made available during the period of the technology transfer
arrangement;
 In the event the technology transfer arrangement shall provide for arbitration, the
Procedure of Arbitration of the Arbitration Law of the Philippines or the Arbitration
Rules of the United Nations Commission on International Trade Law (UNCITRAL) or the
Rules of Conciliation and Arbitration of the International Chamber of Commerce (ICC)
shall apply and the venue of arbitration shall be the Philippines or any neutral country;
and
 The Philippine taxes on all payments relating to the technology transfer arrangement
shall be borne by the licensor.

B. Trademarks –R.A. No. 8293, Section 121

Trademarks – any visible sign capable of distinguishing the goods or services of an enterprise
and shall include stamped or marked container of goods.

It must be distinctive in order to identify the goods/services it seeks to differentiate from

another.

Collective Marks – visible sign capable of distinguishing the origin or any other common
characteristic, including the quality of goods or services of different enterprises which use the
sign under the control of the registered owner of the collective mark.

Trade Names or Business Names – the name or designation identifying or distinguishing an

enterprise.

1. Marks vs. Collective Marks vs. Trade Names –R.A. No. 8293, Section 121

Trademarks Collective Marks Trade Names

 Visible sign  Visible sign  Visible/not visible sign
 Capable of distinguishing  Capable of distinguishing  Capable of
goods or services quality of goods or distinguishing/
 Individual or entity services identifying an enterprise
(big/small)  Organization or  Individual or entity
 Registration necessary Association  Registration not
 for protection  Registration necessary necessary for protection
 Rules on registrability for protection  Rules on registrability
provided in Sec.123 IP  Rules on registrability provided in Sec.165 IP
Code provided in Sec.123 IP Code
Code

2. Non-Registrable Marks –R.A. No. 8293, Section 123

A mark cannot be registered if it:

 Consists of immoral, deceptive or scandalous matter, or matter which may disparage or

falsely suggest a connection with persons, living or dead, institutions, beliefs, or
national symbols, or bring them into contempt or disrepute;
 Consists of the flag or coat of arms or other insignia of the Philippines or any of its
political subdivisions, or of any foreign nation, or any simulation thereof;
 Consists of a name, portrait or signature identifying a particular living individual except
by his written consent, or the name, signature, or portrait of a deceased President of the
Philippines, during the life of his widow, if any, except by written consent of the widow;
 Is identical with a registered mark belonging to a different proprietor or a mark with an
earlier filing or priority date , in respect of :
o The same goods or services , or
o Closely related goods or services , or
o If it nearly resembles such a mark as to be likely to deceive or cause confusion ;
 Is identical with, or confusingly similar to, or constitutes a translation of a mark which
is considered by the competent authority of the Philippines to be well-known
internationally and in the Philippines, whether or not it is registered here, as being
already the mark of a person other than the applicant for registration, and used for
identical or similar goods or services;
* Knowledge of the relevant sector of the public, including in the Philippines
 Is identical with, or confusingly similar to, or constitutes a translation of a mark
considered well-known in accordance with the preceding paragraph, which is registered
in the Philippines with respect to goods or services which are not similar to those with
respect to which registration is applied for;
* Use of the contending mark would indicate a connection between the goods and
services and the owner of the registered mark; damage
 Is likely to mislead the public, particularly as to the nature, quality, characteristics or
geographical origin of the goods or services;
 Consists exclusively of signs that are generic for the goods or services that they seek to
identify;
 Consists exclusively of signs or of indications that have become customary or usual to
designate the goods or services in everyday language or in bona fide and established
trade practice;
 Consists exclusively of signs or of indications that may serve in trade to designate the
kind, quality, quantity, intended purpose, value, geographical origin, time or production
of the goods or rendering of the services, or other characteristics of the goods or
services;
 Consists of shapes that may be necessitated by technical factors or by the nature of the
goods themselves or factors that affect their intrinsic value;
 Consists of color alone; and
Exceptions:
o defined by a given form
o acquired secondary meaning
 Is contrary to public order or morality.

3. Ownership and Registration –R.A. No. 8293, Section 152

The rights in a mark shall be acquired through registration made validly in accordance with the
provisions of this law.
“A certificate of registration of a mark shall be prima facie evidence of the registration, the
registrant’s ownership of the mark, and of the registrant’s exclusive right to use the same in
connection, with the goods or services and those that related thereto specified in the
certificate.”

The following are the rebuttable evidence:

 registration in bad faith (knowledge of prior creation, use and registration)

 registered but subsequently lost the same due to no-use or abandonment
 becomes a generic mark
 contrary to IP Code
 misrepresentation as to source of goods or use of the mark

Registration

The application for the registration of the mark shall be in Filipino or in English and shall contain
the following:

 A request for registration;

 The name and address of the applicant;
 The name of a State of which the applicant is a national or where he has
domicile; and the name of a State in which the applicant has a real and effective
industrial or commercial establishment, if any;
 Where the applicant is a juridical entity, the law under which it is organized and
existing;
 The appointment of an agent or representative, if the applicant is not domiciled
in the Philippines;
 Where the applicant claims the priority of an earlier application, an indication of:
o The name of the State with whose national office the earlier application
was filed or if filed with an office other than a national office, the name of
that office,
o The date on which the earlier application was filed, and
o Where available, the application number of the earlier application;
 Where the applicant claims color as a distinctive feature of the mark, a
statement to that effect as well as the name or names of the color or colors
claimed and an indication, in respect of each color, of the principal parts of the
mark which are in that color;
 Where the mark is a three-dimensional mark, a statement to that effect;
 One or more reproductions of the mark, as prescribed in the Regulations;
 A transliteration or translation of the mark or of some parts of the mark, as
prescribed in the Regulations;
 The names of the goods or services for which the registration is sought, grouped
according to the classes of the Nice Classification, together with the number of
the class of the said Classification to which each group of goods or services
belongs; and
 A signature by, or other self-identification of, the applicant or his representative.

4. Rights and Limitations of Trademark Owner – R.A. No. 8293, Section 147

Rights Conferred to the Owner of a Registered Mark

 The owner of a registered mark shall have the exclusive right to:
o Use the mark for one’s own goods or services;
o Prevent third parties from using, without his consent, signs or containers which
are identical or similar to the registered trademark where such use would result
in a likelihood of confusion.
In case of the use of an identical sign for identical goods or services, a likelihood of
confusion shall be presumed.
Trademark owners enjoy protection in product and market areas that are the normal
potential expansion of his business.
Limitations

 Except in cases of importation of drugs and medicines allowed under Sec. 72.1 of the IPC
and of off- patent drugs and medicines, the owner of a registered mark shall have the
exclusive right to prevent all third parties not having the owner’s consent from using in
the course of trade identical or similar signs or containers for goods or services which
are identical or similar to those in respect of which the trademark is registered where
such use would result in a likelihood of confusion. In case of the use of an identical sign
for identical goods or services, a likelihood of confusion shall be presumed.
 There shall be no infringement of trademarks or trade names of imported or sold
patented drugs and medicines allowed under Sec. 72.1 of the IPC, as well as imported or
sold off-patent drugs and medicines; Provided, That said drugs and medicines bear the
registered marks that have not been tampered, unlawfully modified, or infringed upon,
under Sec. 155 of the IPC.
 Registration of the mark shall not confer on the registered owner the right to preclude
third parties from using bona fide their names, addresses, pseudonyms, a geographical
name, or exact indications concerning the kind, quality, quantity, destination, value,
place of origin, or time of production or of supply, of their goods or services: Provided,
That such use is confined to the purposes of mere identification or information and
cannot mislead the public as to the source of the goods or services.

When the Rights Terminate

 The rights conferred by trademark registration end upon cancellation of the certificate
of registration by the IPO in the cases allowed by law.

5. Trademark Infringement – R.A. No. 8293, Section 155

Elements of Trademark Infringement (Re-Re-Use-Co-Co)

 The trademark being infringed is Registered in the Intellectual Property Office;

 The trademark is Reproduced, counterfeited, copied, or colorably imitated by the
infringer;
 The infringing mark is Used in connection with the sale, offering for sale, or advertising
of any goods, business, or services; or the infringing mark is applied to labels, signs,
prints, packages, wrappers, receptacles or advertisements intended to be used upon or
in connection with such goods, business or services;
 The use or application of the infringing mark is likely to cause Confusion or mistake or to
deceive purchasers or others as to the goods or services themselves or as to the source
or origin of such goods or services or the identity of such business; and
 The use or application of the infringing mark is without the Consent of the trademark
owner or the assignee thereof.

6. Unfair Competition – R.A. No. 8293, Section 168

Elements of Unfair Competition

 The offender gives his goods the general appearance of the goods of another
manufacturer or dealer;
 The general appearance is shown in the:
o goods themselves, or in the
o wrapping of their packages, or in the
o device or words therein, or in
o any other feature of their appearance;
 The offender offers to sell or sells those goods or gives other persons a chance or
opportunity to do the same with a like purpose; and
 There is actual intent to deceive the public or defraud a competitor.
Please note that “intent to deceive” is what separates unfair competition from
infringements.

The essential elements to hold a person liable for Unfair Competition are:
  Confusing similarity in the general appearance of the goods; and intent to deceive the
public and/defraud a competitor.
 Confusing similarity may or may not result from similarity in the marks, but may result
from external factors in the packaging or presentation of the goods. The element of
intent to deceive and to defraud may be inferred from the similarity of the appearance
of the goods as offered for sale to the public.

INFRINGEMENT UNFAIR COMPETITION

 Unauthorized use of a trademark  Passing off of one’s goods as those
 Fraudulent intent is unnecessary of another
 GR: Prior registration of the trademark  Fraudulent is essential
is a prerequisite to the action.  Prior registration is not a
XPN: Well-known marks. prerequisite to the action
7. Cancellation – R.A. No. 8293, Sections 151-15

 Exclusive jurisdiction of the Bureau of Legal Affairs

 May be filed by any person who believes that he is or will be damaged by the
registration of a mark:
o within 5 years from date of registration of a mark
o at any time if the registered mark becomes a generic name, abandoned or fails
to use within 3 years, use to misrepresent the source or if contrary to IP Code
 May refer to cancellation of registration of trademarks, patents, utility model and/or
industrial design.
 The courts or BLA with jurisdiction to hear and adjudicate either Infringement or Unfair
Competition shall also determine whether a registered mark may be cancelled. This will
exclude the filing of cancellation case in BLA. But the earlier filing of petition of
cancellation with the BLA shall not constitute a prejudicial question that must be
resolved before an action to enforce the rights may be decided.

C. Copyrights – R.A. No. 8293, Section 172

It is the legal protection extended to the owner of the rights in an original work that one has
created.

How is copyright acquired?

Works are protected by the sole fact of their creation, irrespective of the mode or form of
expression, as well as their content, quality and purpose.

Therefore, registration of copyrightable works does not prove ownership.

 Ideas; Procedure; System; Method of operation; Concept; Unprotected subject matter;

Principle; Discovery; Mere data; News and other miscellaneous facts; Official text and
any official translation

Copyright and Material Object:

 Copyright is distinct from the property in the material object subject to it.
 The transfer or assignment of the copyright shall not constitute a transfer of the
material object.
 Nor shall a transfer or assignment of the sole copy or of one or several copies of the
work imply transfer or assignment of the copyright.

How long does the protection last?

 Original or Derivative Works Life + 50 years after death

 Works of joint authorship  Life of last surviving author + 50 years after death
 Anonymous or Pseudonymous works  50 years from publication or making

1. Copyrightable Works –R.A. No. 8293, Sections 172-173

Original Works - Literary and Artistic Works

 Books, pamphlets, articles and other writings;

 Periodicals and newspapers;
 Lectures, sermons, addresses, dissertations prepared for oral delivery, whether or not
reduced in writing or other material form;
 Letters;
 Dramatic or dramatico-musical compositions; choreographic works or entertainment in
dumb shows;
 Musical compositions, with or without words;
 Works of drawing, painting, architecture, sculpture, engraving, lithography or other
works of art; models or designs for works of art;
 Original ornamental designs or models for articles of manufacture, whether or not
registrable as an industrial design, and other works of applied art;
 Illustrations, maps, plans, sketches, charts and three-dimensional works relative to
geography, topography, architecture or science;
 Drawings or plastic works of a scientific or technical character;
 Photographic works including works produced by a process analogous to photography;
lantern slides;
 Audio-visual works and cinematographic works and works produced by a process
analogous to cinematography or any process for making audio-visual recordings;
 Pictorial illustrations and advertisements;
 Computer programs; and
 Other literary, scholarly, scientific and artistic works.

The following derivative works shall also be protected by copyright:

 Dramatizations, translations, adaptations, abridgments, arrangements, and other

alterations of literary or artistic works; and
 Collections of literary, scholarly or artistic works, and compilations of data and other
materials which are original by reason of the selection or coordination or arrangement
of their contents.

2. Non-Copyrightable Works –R.A. No. 8293, Section 175-176

 Idea, procedure, system, method or operation, concept, principle, discovery, or mere

data as such, even if they are expressed, explained, illustrated or embodied in a work;
 News of the day and other items of press information;
 Any official text of a legislative, administrative, or legal nature, as well as any official
translation thereof;
 Any work of the Government of the Philippines;
GR: Conditions imposed prior the approval of the government agency or office wherein
the work is created shall be necessary for exploitation of such work for profit. Such
agency or office, may, among other things, impose as condition the payment of
royalties.
XPN: No prior approval or conditions shall be required for the use of any purpose of
statutes, rules and regulations, and speeches, lectures, sermons, addresses, and
dissertations, pronounced, read, or rendered in courts of justice, before administration
agencies, in deliberative assemblies and in meetings of public character.
 Statutes, rules and regulations, and speeches made in courts of justice, administrative
agencies and in meetings of public character.
NOTE: The author of the works mentioned shall have the exclusive right of making a
collection of his works.
 TV programs, format of TV programs; and
 Systems of bookkeeping.

3. Rights Conferred by Copyright –193-199 R.A. No. 8293, Section 177

Economic Rights Moral Rights

 Reproduction  Attribution
  Rental  Alterations or withhold publication
 Dramatization, translation, adaptation,  Object to distortion
arrangement, transformation  Restrain use of name
 Sale
 Perform in public
 Communication to the public

4. Ownership of a Copyright –R.A. No. 8293, Section 178

Idea – Expression Dichotomy

Only the expression of an idea is protected by copyright, not the idea itself.

Who owns the copyright?

TYPE OF WORK COPYRIGHT OWNER

Original and literary works  Author
Works of joint authorship  Co-authors shall be co-owners of the
copyright unless otherwise stipulated;
However, if the work consists of parts
that can be used separately and the
author of each part can be identified,
then the author of each part shall own
the copyright thereto.
Works created by an employee during  Employee – if the creation of the work
and in the course of employment is not a part of his regular duties even
if he uses the time, facilities and
materials of the employer
 Employer – if the work was created by
the employee as a part of his regular
duties, unless there is an express or
implied agreement to the contrary
Works commissioned by a person who  Author owns the copyright to the work
is: 1. Not an employer; (unless there is written contrary
2. Pays for it; and stipulation), but commissioner owns
3. The work is made pursuant to such the work itself
commission
Audio-visual work Co-owned among:
 Producer (sole owner of right to
exhibit work in any manner)
 Scriptwriter
 Music Composer
 Film Director
 Author of Adapted Work
Letters  Writer owns the copyright to the
contents of the letter
 Recipient owns the physical letter itself

5. Limitations on Copyright –R.A. No. 8293, Sections 184-185

 Performances made accessible to the public if done privately and free of charge, or for
religious or charitable institution or society
 Reproduction or communication by mass media to the public of current political, social,
economic, religious topics, current events for information purposes
 Ephemeral recordings by broadcasting organization using its facilities for its broadcast
 Use of work for judicial proceedings or for professional advice
 Use of work under the control or supervision of the Government
 All others compatible with fair use
Fair Use Doctrine

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

Decompilation may be considered Fair Use

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

Fair Use Factors

 The PURPOSE and character of the USE;

 The NATURE of the copyrighted work;
 The amount and SUBSTANTIALITY of the portion USED in relation to the copyrighted
work as a whole; and
 The effect of the USE upon the POTENTIAL MARKET for or value of the copyrighted
work.

6. Copyright Infringement –R.A. No. 8293, Section 216

A person infringes a right protected under this Act whenone:

 Directly commits an infringement;

 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 abilityto control the activities of the other person;
 With knowledge of infringing activity, induces, causes or materially contributes to the
infringing conduct of another.

Remedies for copyright infringement

CIVIL CRIMINAL ADMINISTRATIVE

Injunction  1st offense: 1-3 yrs  Cease & Desist Order /
Damages imprison + 50K-  Takedown Notice
 actual 150K fine; Voluntary assurance of
 moral  2nd offense: 3 yrs & compliance
 exemplary 1 day - 6 yrs  Condemnation or seizure
statutory Impounding imprison + 150K- of products
Destruction 500K fine;  Forfeiture of
 3rd & subsequent paraphernalia
offenses: 6 yrs & 1  Administrative fine
day - 9 yrs imprison Cancellation/withholding
+ 500K-1.5 M fine of permit/license/
Subsidiary registration
imprisonment in  Damages, censure, other
cases of insolvency. analogous penalties
7. Art Forgery Act (R.A. No. 9105, Section 4)

Section 4. Art Authentication Panel; Creation and Composition - There is hereby

created a panel to be known as the Art Authentication Panel to replace and
assume the power and functions of the panel of experts for fine arts provided for
in R.A. No. 4846, as amended by P.D. 374. The Panel shall be composed by three
(3) members who shall be chosen and appointed by the National Museum Board
of Trustees from a list submitted by the Search Committee created under Section
8 of this Act.
VII. DATA PRIVACY ACT OF 2000 (R.A. No. 10173)

Data Privacy Act is a law that seeks to protect all forms of information, be it private, personal,
or sensitive.

It is meant to cover both natural and juridical persons involved in the processing of personal
information.

Covered Information

 Personal Information
 Sensitive Personal Information
 Privileged Information

Who is a data subject?

 Data subject is an individual person whose personal data information is processed.

Personal Information Controller (PIC)

 refers to a person or organization who controls the collection, holding, processing or use
of personal information, including a person or organization who instructs another
person or organization to collect, hold, process, use, transfer or disclose personal
information on his or her behalf.
 Each personal information controller is responsible for personal information under its
control or custody, including information that have been transferred to a third party for
processing.

Personal Information Processor (PIP)

 refers to any natural or juridical person qualified to act as such under this Act to whom a
personal information controller may outsource the processing of personal data
pertaining to a data subject.

A. Personal vs. Sensitive Personal Information; Scope – R.A. No. 10173, Section 3

Personal Information

 Any information whether recorded in material form or not

 from which the identity of an individual is apparent or can be reasonably and directly
ascertained by the entity holding the information
 or when put together with other information would be directly and certainly identify an
individual.

Sensitive Personal Information

Refers to the following personal information of an individual:

 Race
 ethnic origin
 marital status
 age
 color
 religious, philosophical or political affiliations.
 Health
 Education
 Genetic
 Sexual Life
 Information in any civil, administrative or criminal proceeding
 Any proceeding for any offense
 o Committed
o Alleged to be committed
o Disposal of such proceeding or the
o Sentence of any court in such proceeding
 Issued by government agencies:
o social security number
o previous or current health record
o licenses or denials of issuance
o suspension or revocation of licenses
o tax returns
 Specifically established by an executive order or an act of Congress to keep classified

Sensitive Personal Information vs Personal Information

 Stricter guidelines on the Processing of Sensitive Personal Information.

 Higher penalties in cases where sensitive personal information was breached.

B. Processing of Personal and Sensitive Personal Information; Lawful Basis – R.A. No. 10173,
Sections 12-13

Consent of the Data Subject

 Consent is not the only lawful basis for processing personal information. Section 12 of
the DPA provides for the various criteria for lawful processing.
 Personal information of Data Subjects may be processed without their consent if the
criterion provided for in the DPA is met.

Criteria for Lawful Processing of Personal Information

 The data subject has given his or her consent;

 The processing of personal information is necessary and is related to the fulfilment of a
contract;
 The processing is necessary for compliance with a legal obligation to which the
personal information controller is subject;
 The processing is necessary to protect vitally important interests of the data subject,
including life and health;
 The processing is necessary in order to respond to national emergency, to comply with
the requirements of public order and safety, or to fulfill functions of public authority
which necessarily includes the processing of personal data for the fulfillment of its
mandate; or
 The processing is necessary for the purposes of the legitimate interests pursued by the
personal information controller.

Criteria for Lawful Processing of Sensitive Personal Information

The processing of sensitive personal information and privileged information shall be prohibited,
except in the following cases:

 The data subject has given his or her consent, specific to the purpose prior to the
processing;
 The processing of the same is provided for by existing laws and regulations;
 The processing is necessary to protect the life and health of the data subject or another
person, and the data subject is not legally or physically able to express his or her
consent prior to the processing;
 The processing is necessary to achieve the lawful and non-commercial objectives of
public organizations and their associations;
 The processing is necessary for purposes of medical treatment ;
 The processing concerns such personal information as is necessary for the protection of
lawful rights and interests of natural or legal persons in court proceedings, or the
establishment, exercise or defense of legal claims, or when provided to government or
public authority.
Exclusions from the DPA

 (a) Information about any individual who is or was an officer or employee of a

government institution that relates to the position or functions of the individual,
including:  (1) The fact that the individual is or was an officer or employee of the
government institution;  (2) The title, business address and office telephone number of
the individual;  (3) The classification, salary range and responsibilities of the position
held by the individual; and  (4) The name of the individual on a document prepared by
the individual in the course of employment with the government;
 Information about an individual who is or was performing service under contract for a
government institution that relates to the services performed, including the terms of
the contract, and the name of the individual given in the course of the performance of
those services;
 Information relating to any discretionary benefit of a financial nature such as the
granting of a license or permit given by the government to an individual, including the
name of the individual and the exact nature of the benefit;
 Personal information processed for journalistic, artistic, literary or research purposes;
 Information necessary in order to carry out the functions of public authority which
includes the processing of personal data for the performance by the independent,
central monetary authority and law enforcement and regulatory agencies of their
constitutionally and statutorily mandated functions.
 Information necessary for banks and other financial institutions under the jurisdiction
of the independent, central monetary authority or Bangko Sentral ng Pilipinas to comply
with Republic Act No. 9510, and Republic Act No. 9160, as amended, otherwise known
as the Anti-Money Laundering Act and other applicable laws; and
 Personal information originally collected from residents of foreign jurisdictions in
accordance with the laws of those foreign jurisdictions, including any applicable data
privacy laws, which is being processed in the Philippines.

C. General Data Privacy Principles –R.A. No. 10173, Section 11

 Transparency
 Legitimate Purpose
 Proportionality

Transparency

 Data subject must be aware of the nature, purpose and extent of the processing of
information;
 Risks and safeguards involved;
 identity of the personal information controller;
 rights of the data subject;
 how the rights may be exercised

Legitimate Purpose

The processing of personal information must be with a declared and specified purpose, which
must not be contrary to law, morals or public policy.

Processing based on legitimate interest requires the fulfillment of the following conditions:

 the legitimate interest is established;

 the processing is necessary to fulfill the legitimate interest that is established; and
 the interest is legitimate or lawful and it does not override fundamental rights and
freedoms of data subjects.
Proportionality

Processing is deemed proportional when

 processing is adequate, relevant, and necessary to the declared and specified purpose;
and
 the means by which processing is performed is the least intrusive means available.

D. Rights of Data Subject – R.A. No. 10173, Section 16

(File-PARODIE)

 Right to be informed;
 Right to access;
 Right to object;
 Right to erasure and blocking;
 the right to rectify;
 the right to file a complaint;
 the right to damages;
 the right to data portability

Death or Incapacity of the Data Subject

In case of death or incapacity of the data subject, the lawful heirs and assigns may invoke the
rights of the data subject.

Right to be informed

 Means that the data subject has the right to know when his or her personal data shall
be, are being, or have been processed.
 Any collection or processing of data done without the consent of the data subject is
illegal.
 Data subject must be informed in case of breach.

Right to Access

 Data Subject has the right to demand from entity possessing any personal data to
provide the data subject with a description of such data in its possession, as well as the
purposes for which they are to be or are being processed

Right to Object

The data subject has the

 choice of refusing to consent,

 as well as the choice to withdraw consent, as regards collection and processing.

Right to Erasure or Blocking

Allows the data subject to

 suspend,
 withdraw or
 order the blocking,
 removal,
 destruction of his or her personal information
from the personal information controller’s filing system upon discovery and substantial
proof that the personal information are incomplete, out dated, false, unlawfully
obtained, used for unauthorized purposes or are no longer necessary for the purposes
for which they were collected.
Right to Rectify

 Allows the data subject to dispute any inaccuracy or error in the personal information
processed, and to have the personal information controller correct it immediately.

Right to Data Portability

Enables the data subject to obtain and electronically move, copy, transfer personal data for
further use.

Right to File a Complaint

With the National Privacy Commission

Affords a remedy to any data subject who “[feels] that [his or her] personal information has
been misused, maliciously disclosed, or improperly disposed

Right to Damages

 Entitles the aggrieved data subject to be indemnified for any damages sustained due to
inaccurate, incomplete, outdated, false, unlawfully obtained or unauthorized use of
his or her personal information.

VIII. SECURITIES REGULATION CODE (R.A. No. 8799)

 To protect investors from brokers and salesmen in selling worthless securities or

securities which have no basis.
 The SRC provides a system of registration, regulation of brokers, prohibitions against
manipulations.
Securities
 Shares, participation, interest in a corporation or commercial enterprise or profit-
making venture and evidenced by a certificate, contract, instruments, whether written
or electronic in character.

A. Framework for Regulating of Securities Trading – R.A. No. 8799, Sections 8-10

Securities shall not be sold or offered for sale or distribution within the Philippines, without a
registration statement duly filed with and approved by the Securities and Exchange
Commission. (Commission). Prior to such sale, information on the securities, in such form and
with such substance as the Commission may prescribe, shall be made available to each
prospective purchaser.

 The Commission may conditionally approve the registration statement under such terms
as it may deem necessary.
 The Commission may specify the terms and conditions under which any written
communication, including any summary prospectus, shall be deemed not to constitute
an offer for sale under Sec. 8 of RA 8799.
 A record of the registration of securities shall be kept in Register Securities in which shall
be recorded orders entered by the Commission with respect such securities. Such
register and all documents or information with the respect to the securities registered
therein shall be open to public inspection at reasonable hours on business days.
 The Commission may audit the financial statements, assets and other information of
firm applying for registration of its securities whenever it deems the same necessary to
insure full disclosure or to protect the interest of the investors and the public in general.

B. Concept of Securities; Howey Test – R.A. No. 8799, Section 3

Howey Test
Test to determine if a transaction is an “investment contract” (ICE-P)

 Investment of money
 In a common enterprise
 With expectation of profits
 Primarily from the efforts of others

Registration of Securities

Requirement of Registration

All securities are required to be registered with the SEC before they can be sold to the public.

Kinds of Securities

 Non-Exempt
 Exempt
 Sold on Exempt transactions
Exempt Securities Can be Sold without Registration (GoCoBaRSS)

 Issued by the Government of the Philippines

 Issued by the Government of another Country which maintains diplomatic relations
with the Philippines
 Certificates issued by a receiver (PDIC) or trustee in bankruptcy approved by the proper
adjudicatory body (Monetary Board)
 Issued by a bank except its own stocks Others added by the SEC
 Under supervision of IC, HLURB, BIR
Exempt Transactions (JEBS DiviL BlesS IP)

 Judicial Sale
 Exchange of securities by issuer with existing security holders
 Broker’s transactions on any registered Exchange
 Sale of pledged security for liquidation of debt
 Distribution of Stock Dividends
 Issuance of security in exchange for any other security of the same issuer pursuant to
right of conversion
 Sale on isolated transaction by owner
 Pre-Incorporation subscription and subscription to increase ACS
 Issuance of bonds or notes secured by mortgage upon real estate or tangible personal
property, where the entire mortgage are sold to a single purchaser at a single sale.
 Sale to less than 20 persons during any 12 month period (private placements)
 Sale of securities to banks or other persons authorized by the BSP to engage in trust
functions.
 IX. ELECTRONIC COMMERCE ACT (R.A. No. 8792)

A. Legal Recognition of Electronic Data Messages – R.A. No. 8792, Sections 8-11

Electronic Document

Information or the representation of information, data, figures, symbols or other modes of

written expression, described or however represented, by which:

 a right is established or
 an obligation extinguished, or
 by which a fact may be proved and affirmed, which is received, recorded, transmitted,
stored, processed, retrieved or produced electronically.

Electronic Document vs Paper-based Document

 What differentiates them is the manner by which the information is processed.

 If the information contained in an electronic document is received, recorded,
transmitted, stored, processed, retrieved or produced electronically – it is considered
an electronic document.
 If the signature of a person is affixed manually, it could not be considered as
information electronically received, recorded, transmitted, stored, processed, retrieved
or produced. Thus, it is not an electronic document.
 Facsimile transmission is not an electronic document.

Electronic Signature

An electronic signature on the electronic document shall be equivalent to the signature of a

person on a written document if the signature is an electronic signature and proved by showing
that a prescribed procedure, not alterable by the parties interested in the electronic document:

 method is used to identify the party sought to be bound and to indicate said party’s
access to the electronic document necessary for his consent or approval through the
electronic signature;
 Said method is reliable and appropriate for the purpose for which the electronic
document was generated or communicated, in the light of all circumstances, including
any relevant agreement;
 It is necessary for the party sought to be bound, in order to proceed further with the
transaction, to have executed or provided the electronic signature; and
 The other party is authorized and enabled to verify the electronic signature and to
make the decision to proceed with the transaction authenticated by the same.

Presumptions Relating to Electronic Signatures

 The electronic signature is the signature of the person to whom it correlates; and
 The electronic signature was affixed by that person with the intention of signing or
approving the electronic document unless the person relying on the electronically
signed electronic document knows or has notice of defects in or unreliability of the
signature or reliance on the electronic signature is not reasonable under the
circumstances.

Legal Recognition of Electronic Document

 Information shall not be denied validity or enforceability solely on the ground that it is
in the form of an electronic data message purporting to give rise to such legal effect, or
that it is merely incorporated by reference in that electronic data message.
B. Obligation of Confidentiality - R.A. No. 8792, Section 32

 Any person, who obtained access to any electronic key, electronic data message or
electronic document, book, register, correspondence, information, or other material
pursuant to any powers conferred under this Act, shall not convey to or share the same
with any other person.

X. ACCESS DEVICES REGISTRATION ACT (R.A. No. 8484)

A. Access Devices – R.A. No. 8484, Section 3

Access Device

 Any card, plate, code, account number, electronic serial number, personal
identification number, or other telecommunications service, equipment, or
instrumental identifier, or other means of account access that can be used to obtain
money, good, services, or any other thing of value or to initiate a transfer of funds
(other than a transfer originated solely by paper instrument);

B. Prohibited Acts – R.A. No. 8484, Section 9

 Unauthorized use, production, or possession of access devices

 Fraudulent use of access devices
 Possession of counterfeit access devices or related paraphernalia
 Use, production, or possession of device-making or altering equipment
 Inducing another to produce, use, traffic in counterfeit access devices, unauthorized
access devices or access devices fraudulently applied for
 multiple imprinting (double swipe)
 disclosing any information imprinted on the access device
 obtaining money or anything of value through the use of an access device, with intent
to defraud, with intent to gain and fleeing thereafter
 having in one's possession a copy of the access device without the consent of the
owner
 writing or causing to be written on sales slips, approval numbers if there is no approval
from the merchant.
 Alteration of any amount or other information written on the sales slip;
 effecting transaction with an access device issued to another person
 Without authorization from the issuer, soliciting a person for the purpose of:
o offering an access device; or
o selling information regarding or an application to obtain an access device; or
 without the authorization of the credit card system member or its agent, causing or
arranging for another person to present to the member or its agent, for payment, one
or more evidence or records of transactions made by credit card.
 Skimming with intent of accessing
 Possession of skimming device
 Accessing online banking account, credit card, ATM, debit card in a fraudulent manner
 Hacking

The law punishes: consummated, frustrated, attempted, conspiracy and accessories.

C. Frustrated and Attempted Access Device Fraud – R.A. No. 8484, Section 12

 Any person who performs all the acts of execution which would produce any of the unlawful
acts enumerated in Section 9 the Access Devices Registration Act, as amended, but which
nevertheless does not produce it by reason of causes independent of the will of said person,
shall be punished with two-thirds (2/3) of the fine and imprisonment provided for the
consummated offenses listed in said section. Any person who commences the commission of
any of the unlawful acts enumerated in Section 9 of the Access Devices Registration Act, as
amended, directly by overt acts and does not perform all the acts of execution which would
produce the said acts by reason of some cause or accident other than said person's own
spontaneous desistance, shall be punished with one-half (1/2) of the fine and imprisonment
provided for the consummated offenses listed in the said section.
 XI. PHILIPPINE COMPETITION ACT (R.A. No. 10667)

Prohibited Acts

 Anti-Competitive Agreements
 Abuse of Dominant Position
 Anti-Competitive Mergers and Acquisition

Ways to Deter Anti-Competitive Conduct

 Criminal Sanctions
 Civil Sanctions
 Administrative
 Public Authority Intervention in the Marketplace

Public Authority Intervention

Intervention of the Philippine Competition Commission

 Identifies prohibited Acts

 Compulsory Notification
 Administrative and Criminal Complaints
Coverage of the PCA

 Local trade, industry and commerce

 International trade with foreseeable effects in any trade industry and commerce in the
Philippines

Relevant Market Rule

Prohibition on:

 Anti-Competitive Agreements
 Abuse of Dominant Position
 Anti-Competitive Mergers and Acquisitions within the same relevant market.
Relevant Product Market

 Comprises all goods and services which are regarded as interchangeable and
substitutable by consumer by reason of the goods/services’ characteristics, their prices
and their intended use.

Single Economic Unit Rule

 Entities that control or are controlled, have common interests and are not able to act
independently of each other are not competitors.

A. Anti-Competitive Agreements – R.A. No. 10667, Section 14

Anti-Competitive Agreements

 Any type or form of contract or agreement, understanding, collective recommendation,

or concerted action, whether formal or informal, explicit or tacit, written or oral.

Horizontal Agreements (Between Competitors)

Per se prohibited

 Restricting competition as to price, or components thereof, or other terms of trade

 Fixing price at an auction or in any form of bidding including cover bidding, bid
suppression, bid rotation and market allocation and other analogous practices of bid
manipulation.

Price Fixing

 When competitors agree on the prices of the goods or services, rather than
independently setting their respective prices.

Bid-rigging

 Fixing prices at an auction or any form of bidding. It is when the parties participating in a
tender coordinate their bids rather than submit independent proposals.

Output Restriction

 Prohibited if the purpose or effect is to prevent and lessen competition Businesses

agree to limit production by:
 Restricting Quotas
 Setting Quotas
 Creating an artificial shortage in the market that subsequently drives up prices.

Supply Restriction

 Agreement between competing businesses to set or limit production levels to create an

artificial supply shortage, thereby raising prices.

Market Sharing

 Competing businesses enter into agreement to divide the market.

 Not limited to division of territory, includes division of customers, volume of sales, and
type of goods or services, among other considerations.

Other Agreements

 Agreements other than those specified which have the object or effect of substantially
preventing, restricting or lessening competition shall also be prohibited.

B. Abuse of Dominant Position – R.A. No. 10667, Section 15

 Dominant Position – position of economic strength that an entity or entities hold which
makes it capable of controlling the relevant market independently from any
combination of the following: competitors, customers, suppliers, or consumers.

Examples of Abuse of Dominant Position

 Predatory Pricing– pricing of goods or services at a low level that other supplier cannot
compete and are forced to leave the market to drive out the competition.
 Price Discrimination- selling strategy that charges customers different prices for the
same product or service based on what the seller thinks they can get the customer to
agree to.
 Tying/Bundling – an illegal arrangement where in order to buy one product, the
customer must purchase another product that exists in a separate market.
 Imposing barrier to entry or preventing competitors from growing within the market in
an anti-competitive manner.

Imposing Unreasonable Conditions

 Imposing unreasonable conditions: making a transaction subject to acceptance by the

other parties of other obligations which, by their nature or according to commercial
usage, have no connection with the transaction.
  Music streaming users typically weren’t able to pay for their Spotify subscriptions
directly through their iPhone apps. They couldn’t even be informed by email of
subscription prices, promos and offers by Spotify or other music streaming services.
That’s because Apple puts tight restrictions on apps that compete with its own Apple
Music service

Refusal to Deal

 imposing restrictions on the lease or contract for sale or trade of goods or services
concerning where, to whom, or in what forms goods or services may be sold or traded,
such as fixing prices, giving preferential discounts or rebate upon such price, or
imposing conditions not to deal with competing entities, where the object or effect of
the restrictions is to prevent, restrict or lessen competition.

Monopsony

 Directly or indirectly imposing unfairly low purchase prices for the goods or services of,
among others, marginalized producers or providers.

C. Mergers and Acquisitions – R.A. No. 10667, Sections 16-22

Anti-Competitive Mergers and Acquisitions

 If the merger or acquisition agreement substantially prevents, restricts, or lessens the

competition in the relevant market or in the market for goods and services as may be
determined by the PCC.

Thresholds for Compulsory Notifications of Mergers and Acquisitions

 Size of Entity Test – Aggregate annual gross revenues exceeds 7 billion

 Size of Transaction Test – the value of the Transaction exceeds 2.4 billion
 BOTH TESTS must APPLY for the COMPULSORY Notification to the PCC to exist.
 Failure to give notice when required: Agreement is Void and there is a penalty for
failure to notify PCC.

Creeping Transaction

 Series of transactions that become a covered transaction if their totality is covered

under the law. They are mergers and acquisitions consisting of successive transactions
which shall take place within a one-year period.
 Notification shall be from the binding preliminary agreement.

XII. PUBLIC SERVICE ACT (C.A. No. 146, as amended by R.A. No. 11659)

1987 Constitution, ARTICLE XII National Economy and Patrimony

SECTION 11. No franchise, certificate, or any other form of authorization for the operation of a
public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least sixty per centum of whose
capital is owned by such citizens, nor shall such franchise, certificate, or authorization be
exclusive in character or for a longer period than fifty years. xxx

A. Public Service as Public Utility – C.A. No. 146, as amended, Section 13

Public Utility refers to a public service that operates, manages or controls for public use any of
the following: (STraP PWD)

 Distribution of Electricity;
 Transmission of Electricity;
 Petroleum and Petroleum Products Pipeline Transmission Systems;
 Water Pipeline Distribution Systems and Wastewater Pipeline Systems, including
sewerage pipeline systems;
 Seaports; and
  Public Utility Vehicles.

Distribution of Electricity

 Conveyance of electric power by a distribution utility.

Examples:

o MERALCO
o CANORECO
o CASURECO
o SORECO

Transmission of Electricity

 Conveyance of electricity through high voltage backbone system.

Example:

o National Grid Corporation Philippines – NGCP

“Transmission is the highway of the grid, distribution is the city street”

Petroleum and Petroleum Products Pipeline Transmission System

 Operation and maintenance of the Petroleum and Petroleum Products pipeline

transmission system.
 Does not include petroleum pipeline systems operated exclusively for private use or
incidental to the operations of a distinct business.

Water pipeline Distribution system, Wastewater Pipeline System

 Water Pipeline Distribution - operation and maintenance of water pipeline distribution

systems to ensure uninterrupted supply of potable water.

Examples:

o MWSS
o Naga City Water District
 Wastewater Pipeline System- operation and maintenance of sewerage pipeline system.

Seaports

 Place where ships may anchor or tie up for the purpose of shelter, repair, loading or
discharge of passengers or cargo, or for other such activities.

Examples:

o Port of Manila
o Port of Cebu
o Port of Subic
o Port of Bulan

Public Utility Vehicles

 Internal combustion engine vehicles that carry passengers for a fee, offering services to
the public.

Examples:
 o Trucks-for-hire
o UV Express service
o Public Utility Buses (PUBs)
o Public Utility Jeepneys
o Tricycles
o Filcabs
o Taxis

Public Service vs Public Utility

All Public Utilities are Public Service BUT not all Public Services are Public Utilities

Domestic Corporation vs Foreign Corporation

 Domestic Corporations are those which are formed, organized or existing under
Philippine laws (RCCP).
 Foreign Corporations are those which are formed, organized or existing under any laws
other than Philippine laws.
 Only domestic corporations can operate public services and public utilities.
 But foreign corporations may engage in other businesses here in the Philippines except
Public Service.

B. Critical Infrastructure – R.A. No. 11659, Section 2(e)

Any public service which owns, uses, or operates systems and assets, whether physical or
virtual, so vital to the Republic of the Philippines that the incapacity or destruction of such
systems or assets would have a detrimental impact on national security, such as:

 Telecommunication
 Other such vital services as may be declared by the President of the Philippines

Entity Controlled by Foreign Government

 An entity controlled by or acting on behalf of the foreign government or foreign state-

owned enterprises shall be prohibited from owning capital in any public service
classified as public utility or critical infrastructure.
 Prospective Application: that the prohibition shall apply only to investments made after
the effectivity of this Act: Provided, further, That foreign state owned enterprises which
own capital prior to the effectivity of this law are prohibited from investing in
additional capital upon the effectivity of this Act.

C. Powers of the President – R.A. No. 11659, Section 23

Powers of the President to Suspend or Prohibit Transaction or Investment

 In the interest of national security, the President, after review, evaluation and
recommendation of the relevant government department or Administrative Agency,
may, within sixty (60) days from the receipt of such recommendation, suspend or
prohibit any proposed merger or acquisition transaction, or any investment in a public
service that effectively results in the grant of control, whether direct or indirect, to a
foreigner or a foreign corporation.
 The Philippine Competition Commission (PCC) may be consulted on all matters relating
to mergers and acquisitions.

D. Reciprocity – R.A. No. 11659, Section 25

Reciprocity Clause

 Foreign nationals shall not be allowed to own more than fifty percent (50%) of the
capital of entities engaged in the operation and management of critical infrastructure
unless the country of such foreign national accords reciprocity to Philippine Nationals as
may be provided by foreign law, treaty or international agreement.
Foreign Ownership in entities engaged in the Operation of Critical Infrastructure

 With reciprocity: more than 50%

 Without reciprocity: less than 50% only

XIII. NEGOTIABLE INSTRUMENTS LAW (Act No. 2031)

A. Requisites for Negotiability

 It must be in writing and signed by the maker or drawer;

 Must contain an unconditional promise or order to pay a sum certain in money;
 Must be payable on demand, or at a fixed or determinable future time;
 Must be payable to order or to bearer; and
 Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.

Note: Do not be confused with the word “order” under “b” and “d”

 Must be in writing, signed by the maker or drawer;

o Otherwise it cannot be a substitute for money.
o Signature may be in any form like initial or mark. No particular location.
 Must contain an unconditional promise or order to pay a sum certain in money;
Certainty of sum payable
The sum payable is a sum certain although it is to be paid:
o With interest; or
o By stated installments; or
o By stated installments, with a provision that, upon default in payment of any
installment or of interest, the whole shall become due; or
o With exchange, whether at a fixed rate or at the current rate; or
o With costs of collection or an attorney's fee, in case payment shall not be made
at maturity.

Interest stipulated but not specified – legal interest.

Interest not stipulated – legal interest will be paid when the debtor incurs in

Interest due shall earn legal interest from the time it is judicially demanded

Note: NI need not be payable in legal tender.

 When promise or order unconditional

An unqualified order or promise to pay is unconditional though coupled with:
o An indication of a particular fund out of which reimbursement is to be made or a
particular account to be debited with the amount; or
o A statement of the transaction which gives rise to the instrument.
Mere acknowledgment insufficient. An order or promise to pay out of a particular fund
is not unconditional because, in effect, it is subject to the condition that the fund is
sufficient.
 Payable on demand or at a fixed or determinable future time;
Certainty of time of payment
An instrument is payable at a determinable future time which is expressed to be
payable:
o At a fixed period after date or sight; or
o On or before a fixed or determinable future time specified therein; or
o On or at a fixed period after the occurrence of a specified event which is certain
to happen, though the time of happening is uncertain.
After sight means after the drawee has seen the NI upon presentment for acceptance.
The event must necessarily happen. If conditional, not negotiable.
 An instrument payable upon a contingency is not negotiable, and the happening of the
event does not cure the defect.
A promise to pay “when able,” “as soon as I can”, etc., without specification of an
absolute date is not negotiable. However, there is a difference of opinion as to whether
it is a conditional promise or an absolute promise to pay at an unreasonable time:
o Under the first view, negotiability is destroyed both by the condition and by
want of a fixed time for payment;
o Under the second view, by the general principle that a promise to pay within a
reasonable time is not so certain as to render an instrument negotiable.
 Payable to order or to bearer
a. When payable to order
The instrument is drawn payable:
o To the order of a specified person or
o To him or his order
The payee must be named or otherwise indicated therein with reasonable certainty
It may be drawn payable to the order of:
o A payee who is not maker, drawer, or drawee; or
o The drawer or maker; or
o The drawee; or
o Two or more payees jointly (“AND”); or
o One or some of several payees (“OR”); or
o The holder of an office for the time being.

b. When payable to bearer

o When it is expressed to be so payable; or

o When it is payable to a person named therein or bearer; or
o When it is payable to the order of a fictitious or non-existing person, and such fact was
known to the person making it so payable; or
o When the name of the payee does not purport to be the name of any person; or
o When the only or last endorsement is an endorsement in blank.

Fictitious Payee Rule

 If an actual, existing and living payee is not the intended recipient of the proceeds of the check,
the payee is considered a “fictitious” payee and the check is a bearer instrument. Hence, even if
the signature of the payee was forged, the collecting bank and drawee bank are relieved of
liability.
 Theory: One cannot expect a fictitious payee to indorse. Hence, the issuer must have intended
for the NI to be negotiated by mere delivery.
 The loss falls on the drawer.
 Burden: The check is presumed to be an order instrument and it is up to the person making the
contrary allegation to prove otherwise.

B. Form and Interpretation – Act No. 2031, Sections 1-12

SECTION 1. Form of negotiable instrument.—An instrument to be negotiable must conform to

the following requirements:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.
SEC. 2. Certainly as to sum ; what constitutes.—The sum payable sum is a sum certain within
the meaning of this Act, although it is to be paid—

(a) With interest; or

(b) By stated installments^ or
(c) By stated installments, with a provision that upon default in payment of any installment or
of interest the whole shall become due; or
(d) With exchange, whether at a fixed rate or at the current rate; or
(e) With costs of collection or an attorney's fee, in case payment shall not be made at
maturity.
SEC. 3. When promise is unconditional.—An unqualified order or promise to pay is
unconditional within the meaning of this Act, though coupled with—

(a) An indication of a particular fund out of which reimbursement is to be made, or a particular

account to be debited with the amount; or
(b) A statement of the transaction which gives rise to the instrument.
But an order or promise to pay out of a particular fund is not unconditional.

SEC. 4. Determinable future time; what constitutes.—An instrument is payable at a

determinable future time, within the meaning of this Act, which is expressed to be payable—

(a) At a fixed period after date or sight; or

(b) On or before a fixed or determinable future time specified therein; or
(c) On or at a fixed period after the occurrence of a specified event, which is certain to happen,
though the time of happening be uncertain.
An instrument payable upon a contingency is not negotiable, and the happening of the event
does not cure the defect.

SEC. 5. Additional provisions not affecting negotiability.—An instrument which contains an

order or promise to do any act in f addition to the payment of money is not negotiable. But
the negotiable character of an instrument otherwise negotiable is not affected by a provision
which—

(a) Authorizes the sale of collateral securities in case the instrument be not paid at maturity; or
(b) Authorizes a confession of judgment if the instrument be not paid at maturity; or
(c) Waives the benefit of any law intended for the advantage or protection of the obligor; or
(d) Gives the holder an election to require something to be done in lieu of payment of money.
But nothing in this section shall validate any provision or stipulation otherwise illegal.

SEC. 6. Omissions; seal; particular money.—The validity and negotiable character of an

instrument are not affected by the fact that—

(a) It is not dated; or

(b) Does not specify the value given, or that any value has been given therefor; or
(c) Does not specify the place where it is drawn or the place where it is payable; or
(d) Bears a seal; or
(e) Designates a particular kind of current money in which payment is to be made.
But nothing in this section shall alter or repeal any statute requiring in certain cases the nature
of the consideration to be stated in the instrument.

SEC. 7. When payable on demand.—An instrument is payable on demand—

(a) Where it is expressed to be payable on demand, or at sight, or on presentation; or

(b) In which no time for payment is expressed.
Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person
so issuing, accepting, or indorsing it, payable on demand.

SEC. 8. When payable to order.—The instrument is payable to order where it is drawn payable
to the order of a specified person or to him or his order. It may be drawn payable to the order
of—

(a) A payee who is not maker, drawer, or drawee; or

(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order the payee must be named or otherwise indicated
therein with reasonable certainty.

SEC. 9. When payable to bearer.—The instrument is payable to bearer—

(a) When it is expressed to be so payable; or

(b) When it is payable to a person named therein or bearer; or (c) When it is payable to the
order of a fictitious or person, and such fact was known to the person making it so payable; or
(d) When the name of the payee does not purport to be the name of any person; or
(e) When the only or last indorsement is an indorsement in blank, sufficient terms.
SEC. 10. Terms, when sufficient.—The instrument need not follow the language of this Act, but
any terms are sufficient which clearly indicate an intention to conform to the requirements
hereof.

SEC. 11. Date, presumption as to.—Where the instrument or an acceptance or any indorsement
thereon is dated, such date is deemed prima facie to be the true date of the making, drawing,
acceptance, or indorsement, as the case may be.

SEC. 12. Antedated and postdated.—The instrument is not invalid for the reason only that it is
antedated or postdated, provided this is not done for an illegal or fraudulent purpose. The
person to whom an instrument so dated is delivered acquires the title thereto as of the date of
delivery.
C. Types of Negotiable Instruments

 Promissory Note (PN) – an unconditional promise in writing made by one person to another,
signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a
sum certain in money to order or to bearer.
 Bill of Exchange (BE) - an unconditional order in writing addressed by one person to another,
signed by the person giving it, requiring the person to whom it is addressed to pay on demand
or at a fixed or determinable future time a sum certain in money to order or to bearer.
 Check - a bill of exchange drawn on a bank payable on demand.

Kinds:

o Manager’s / Cashier’s Check – drawn by a bank on itself and therefore, it is a primary

obligation of the bank.
 It is accepted in advance by the act of its issuance and is not subject to
countermand by the payor after indorsement.
 The bank’s manager signs manager’s check while cashier’s check is signed by the
bank cashier.
o Memorandum Check – it is like an ordinary check except that the word
“memorandum,” “mem” or “memo” is written upon the face of the check, signifying
that the drawer engages to pay the bona fide holder absolutely, and not upon a
condition to pay upon presentment at maturity and if due notice of the presentment
and non- payment should be given. This check is not to be presented for payment, but
will be redeemed by the drawer himself.
o Certified Check – one drawn by a depositor upon funds to his credit in a bank which a
proper officer of the bank certifies will be paid when duly presented for payment.
o Traveller’s check – one upon which the purchaser’s signature must appear twice – at
the time he buys it and also at the time he uses it. It has the characteristics of a cashier’s
check of the issuer.
o Crossed check – when 2 parallel lines are drawn across its face or across a corner
thereof. If the name of a bank appears between the parallel lines, the check is said to be
specially crossed, and payment should be made only if presented by the named bank. If
no name appears between the parallel lines, the check is said to be generally crossed,
and payment should be made only upon presentment by some bank.

Effects of crossing a check:

  That the check may not be encashed but only deposited in the bank;
 That the check may be negotiated only once to one who has an account with a
bank; and
 That the act of crossing the check serves as a warning to the holder that the
check has been issued for a definite purpose so that he must inquire if he has
received the check pursuant to that purpose.
o Stale check – one which has not been presented for payment within a reasonable time
after its issue Stale check – one which has not been presented for payment within a
reasonable time after its issue.

Iron Clad Rule: Prohibits the countermanding of payment of certified checks. But the holder
must be a HIDC.

Bills in Set: one composed of several parts, each part numbered and containing a reference
to the other parts, the whole of the parts constituting but one bill.

Other Forms of Negotiable Instruments

 Certificate of deposit issued by banks, payable to the depositor or his order, or to bearer
 Trade acceptance
 Bonds, which are in the nature of promissory notes
 Drafts, which are bills of exchange drawn by one bank upon another

All of these must comply with Sec. 1, NIL

Note: Postal Money Order, Treasury Warrant, Certificate of Stock, Letter of Credit, Bill of Lading and
Warehouse Receipts are not negotiable instruments.

D. Liabilities of the Parties – Act No. 2031, Sections 60-69

SEC. 60. Liability of maker.— The maker of a negotiable instrument by making it engages that
he will pay it according to its tenor, and admits the existence of the payee and his then capacity
to indorse.

SEC. 61. Liability of drawer.— The drawer by drawing the instru-ment admits the existence of
the payee and his then capacity to indorse; and engages that on due presentment the
instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored,
and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to
the holder, or to any subsequent indorser who may be compelled to pay it. But the drawer may
insert in the instrument an express stipulation negativing or limiting his own liability to the
holder.

SEC. 62. Liability of acceptor.— The acceptor by accepting the instrument engages that he will
pay it according to the tenor of his acceptance; and admits—

(a) The existence of the drawer, the genuineness of his signature, and his capacity and
authority to draw the instrument; and

(b) The existence of the payee and his then capacity to indorse.

SEC. 63. When person deemed indorser.— A person placing his signature upon an instrument
otherwise than as maker, drawer, or acceptor is deemed to be an indorser, unless he clearly
indicates by appropriate words his intention to be bound in some other capacity.

SEC. 64. Liability of irregular indorser.— Where a person, not otherwise a party to an
instrument, places thereon his signature in blank before delivery, he is liable as indorsee in
accordance with the following rules:

(a) If the instrument is payable to the order of a third person, he is liable to the payee and to all
subsequent parties.

(b) If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he
is liable to all parties subsequent to the maker or drawer.
(c) If he signs for the accommodation of the payee, he is liable to all parties subsequent to the
payee.

SEC 65. Warranty where negotiation by delivery, and so forth.—

Every person negotiating an instrument by delivery or by a qualified indorsement warrants—

(a) That the instrument is genuine and in all respects what it purports to be;

(b) That he has a good title to it;

(c) That all prior parties had capacity to contract;

(d) That he has no knowledge of any fact which would impair the validity of the instrument or
render it valueless.

But when the negotiation is by delivery only, the warranty extends in favor of no holder other
than the immediate transferee.

The provisions of subdivision (c) of this section do not apply to persons negotiating public or
corporation securities, other than bills and notes.

SEC. 66. Liability of general indorser.—Every indorser who indorses without qualification,
warrants to all subsequent holders in due course—

(a) The matters and things mentioned in subdivisions (a), (&), and (c) of the next preceding
section; and

(b) That the instrument is at the time of his indorsement valid and subsisting.

And, in addition, he engages that on due presentment, it shall be accepted or paid, or both, as
the case may be, according to its tenor, and that if it be dishonored, and the necessary
proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any
subsequent indorser who may be compelled to Pay it.

SEC. 67. Liability of indorser where paper negotiable by delivery.— Where a person places his
indorsement on an instrument negotiable by delivery he incurs all the liabilities of an indorser.

SEC. 68. Order in which endorsers are liable.— As respects one another, indorsers are liable
prim a facie in the order in which they indorse; but evidence is admissible to show that as
between or among themselves they have agreed otherwise. Joint payees or joint indorsees
who indorse are deemed to indorse jointly and severally.

SEC. 69. Liability of an agent or broker.— Where a broker or other agent negotiates an
instrument without indorsement, he incurs all the liabilities prescribed by section sixty-five of
this Act, unless he discloses the name of his principal and the fact that he is acting only as
agent.
E. Defenses – Forgery, Want of Delivery, and Material Alteration