PRE-WEEK LECTURE ON MERCANTILE LAW

By: Jacinto D. Jimenez

I.

Letter of Credit
A. Nature
It is not an accessory obligation but a primary separate
obligation. Purpose is to ensure certainty of payment.
B. Parties
1. Buyer, who obtains letter of credit and binds himself to
reimburse bank.
2. Issuing bank, who undertakes to pay the seller on
receipt of the draft and proper documents.
3. Seller, who ships the goods and delivers the documents
of title and draft to bank, to collect payment.
C. Basic Principles
1. Doctrine of Independence
2. Doctrine of Strict Compliance
D. Fraud Exception
1. Clear proof of fraud
2. Abuse of independence principle
3. Irreparable Injury
E. Kinds
1. Commercial letter of credit-payment for sale and goods
2. Standby letter of credit-payment of obligation

II.

Trust Receipts Law

A. Security arrangement
B. Twofold duty of entrustee
C. Rights and obligations of entrustee
1. Validity of security against creditors
2. Protection of buyer in good faith and for value
3. Exemption from liability for breach of warranty
4. Liability for force majeure
5. Lack of power to mortgage
6. Failure of entrustee to pay
7. Execution after delivery of goods

III.

Negotiable Instruments Law

A. Requirements of Negotiability

1. Payment by installments
2. Treasury warrants
3. Bearer instruments
B. Completion and Delivery
1. Incomplete but delivered instruments
2. Incomplete and undelivered instruments
3. Complete but undelivered instruments
C. Forgery
D. Holders in Due Course
1. Requisite
2. Rights
a. Personal defenses
b. Real defenses
E. Liabilities of Parties
1. Maker
2. Drawer
3. Acceptor
4. Indorser
a. Warranties of Qualified Indorser
b. Warranties of General Indorser
5. Material Alteration
1. Definition
2. Liabilities
F. Checks
1. Kinds
a. Cashiers and Managers Check
b. Crossed Check
c. Memorandum Check
2. Delay in Presentment for Payment
IV.

Insurance Code
A. Elements
1. The insured possesses pecuniary interest in the subject
matter insured
2. The insured is subject to a risk of loss
3. The insurer assumes the risk of loss
4. The assumption is part of a general scheme to
distribute actual losses among a large group of persons
bearing the same risks
5. The insured makes a ratable contribution, the premium
B. Insurable Interest
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1. Life Insurance
a. Presence of Insurable Interest
i. Life of the insured, his spouse and children
ii. A person upon whom he depends for education or
support or in whom he has pecuniary interest
iii. A person under legal obligation to him, whose
death or illness might delay or prevent performance
iv. A person on whose life and estate or interest
vested in him depends
b. Principles
i. If a person insures the life another with himself as
beneficiary and he died, his rights are vested in the
person insured, unless the policy provides otherwise
ii. The insurable interest must exist when the policy
takes effect but need not exist when the loss
occurred
iii. If a person will insure the life of another, the
consent of the person being insured is required,
unless the insured is the spouse or child
2. Property Insurance
a. Presence of insurable interest
i. An existing interest
ii. An inchoate interest founded on existing interest
iii. An expectancy, coupled with an existing interest
in that from which the expectancy arises
b. Examples
i. Owner
ii. Buyer of undelivered property
iii. Seller of undelivered property
iv. Mortgagee
v. Contractor of building
vi. Possessor
vii. Lessee
viii. Stockholder
ix. Carrier
x. Depositary
c. Principles
i. Insurable interest must exist when the policy takes
effect and when loss occurs
ii. The insurable interest need not exist in the
meanwhile
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C. Premium
1. Payment
a. Necessity of Payment for Validity of Policy
b. Exception
i. Acknowledgment in policy for payment
ii. Life Insurance
iii. Stipulation for installment payment
iv. Grant of credit extension
v. Estoppel
2. Refund
a. Right to Refund
i. Full Refund
1) Non-exposure to the peril
2) Fraud by insurer
3) Default by insured other than fraud
ii. Partial Refund
1) Surrender of policy before expiration
2) Over-insurance
iii. Absence of Right
1) Life insurance
2) Existence of peril insured against
3) Annulment of contract
4) Denial of claim because of fraud
D. Concealment
1. Requisites
a. Knowledge of the fact concealed
b. Materiality
c. Absence of warranty
d. Lack of means by ascertaining fact concealed
2. Examples
a. Serious ailments
b. Mongoloid child
E. Misrepresentation
1. Concept Failure of facts to correspond to assertion
2. Examples
a. Alcoholism
b. Drug addiction
c. Medical family history
F. Warranties
1. Scope
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a. A statement in policy of a matter relating to person

or thing insured or the risk as a fact
b. A statement of intention to do or not to do an act
which affects the risk
2. Examples
a. Failure to disclose double insurance
b. Storage of hazardous materials
c. Absence of drivers license
3. Reasonable Interpretation
4. Effect of Breach
5. Excuses for Breach
a. Loss before expiration of period for compliance
b. Illegality of performance
c. Impossibility of performance
G. Losses
1. Losses Covered
a. Loss the proximate cause of which is peril insured
against
b. Loss the immediate cause of which is the period
insured against
c. Loss caused by negligence of insured
d. Rescue from peril insured against
e. Loss caused by efforts to rescue the thing insured
from peril against
2. Losses Not Covered
a. Connivance by insured
b. Willful act of insured
c. Excepted peril
d. Gross negligence of insured
e. Peril insured as remote cause
H. Notice of Loss
1. Effect of Delay
2. Excuses
a. Non-disclosure by insurer of defect in proof
b. Act of insurer as cause
I. Double Insurance
1. Requisites
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a.
b.
c.
d.
e.

The person insured is the same

There are two or more insurers
The subject matter insured is the same
The interest insured is the same
The risk insured against is the same

2. Payment of Claims
a. The insured may claim payment from any insurers in
any order as he may select unless the policy provides
otherwise
b. Whether policy is a valued policy or not, the insured
must credit the policy with any amount received from
another policy
c. If the insured received excess payment, he must hold
it in trust for the insurers according to their right of
contribution among themselves
d. An insurer who paid is entitled to ratable contribution
from the other insurers in proportion to the amount
for which they are liable
J. Fire Insurance Policy
1. Applicability to Hostile Fire
2. Exemption from Liability
a. Alteration of Use without Consent which Increases
Risk
b. Breach of Warranty
c. Fraudulent Claim
K. Third Party Liability Insurance for Motor Vehicle
1. Exclusions
a. Member of household
b. Member of family within second degree
consanguinity or affinity
c. Employee in the course of employment

of

2. Liability of Insurer
a. Inapplicability of Requirement for Final Judgment
b. Absence of Liability as Tort-Feasor
c. No-Fault Insurance
1. Maximum Liability
2. Rules for Liability
a. Filing against one motor vehicle only
b. Claim against insurer of motor vehicle where
claimant is riding

c. Claim by pedestrian against insurer of motor

vehicle
d. Proof
i. Death
1) Police report
2) Death certificate
3) Proof of right of claimant
ii. Injuries
1) Police report
2) Medical report
3) Proof of medical expenses
e. Liability
i. Maximum amount P15,000
ii. Additional amount
f. Time Limits
i. Six months to file claim
ii. One year from denial to file claim
L. Life Insurance
1. Disqualification of Beneficiaries
a. Disqualified Beneficiaries
i. Person with whom insured is committing adultery
or concubinage
ii. Person with whom the insured committed a crime
iii. Public officer or his spouse, ascendants or
descendants by reason of public office
2. Revocable and Irrevocable Beneficiaries
3. Minor Beneficiaries
a. Dispensing with court order for act involving up to
500,000
b. Guardian
i. Parents
ii. Grandparents
iii. Eldest brother or sister at least 18 years of age
iv. Relative with actual custody
4. Incontestability Clause
a. Requisites
i. The policy is a life insurance policy
ii. It is payable on death of insured
iii. It has been in force for at least two years since its
issuance or last reinstatement
b. Available Defenses
i. Lack of insurable interest
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ii. Excepted risk as cause of death

iii. Military or naval service during war
iv. Scheme to murder insured
v. Substitution by another for medical examination
vi. Absence of proof of death
vii. Failure to file claim on time
5. Suicide
a. Absence of liability for suicide within 2 years from
issuance or renewal of policy
b. Exemption in case of insanity
6. Remedies in Case of Forfeiture for Non-Payment of
Premium
a. Apply grace period
b. Get cash surrender value
c. Apply cash surrender value as automatic loan to
extend insurance
d. Get reduced paid-in insurance by applying cash
surrender value
e. Apply for reinstatement
a. Pay premiums in arrears
b. Undergo medical examination
c. Get approval
M. Marine Insurance
1. Concealment
a. National character of insured
b. Liability to capture
c. Liability to seizure for breach of foreign laws of trade
d. Want of necessary documents
e. Use of false and simulated papers
2. Implied Warranties
1. The ship is seaworthy
2. The ship will not deviate from the voyage
3. The ship will not engage in illegal ventures
4. The ship will carry the requisite documents to show
the nationality or neutrality of the ship or its cargo
3. Warranty of Seaworthiness
a. The warranty applies not only to the vessel but also
to its cargo
b. The warranty of seaworthiness extends not only to
the condition of the structure of the ship but also that
it be properly laden and that it be provided with a
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competent master, officers and seamen, and the

requisite appurtenances and equipment
4. Deviation
a. Instances
i. Departure from the course
ii. Unreasonable delay
iii. Commencement of different voyage
b. Proper Deviation
i. Compliance with warranty or avoidance of peril
ii. Good faith belief in necessity to avoid peril
iii. Saving human life or relieving vessel in distress
5. Liability
a. All-Risk Insurance
i. Insurer must prove loss
ii. Insurer has burden to prove excluded risk, fraud,
or willful misconduct
b. Perils of the Sea
i. There is unusual violence or extraordinary action of
the winds and waves or other extraordinary causes
connected with navigation
ii. The peril is connected with navigation
6. Loss
a. Actual Loss
i. Total destruction
ii. Irretrievable loss by sinking or being broken up
iii. Damage which renders property valueless to the
owner for purpose intended
iv. Deprivation of possession at port of destination
b. Constructive Total Loss
i. Loss is more than three-fourths of value
ii. In case of cargoes loaded separately on barges but
insured with single policy, the value of the loss
should be based on all cargoes
V.

Transportation Laws
A. Civil Code Requirement of Extraordinary Diligence
1. Concept of Common Carriers
2. Vigilance over Goods
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a. Exempting causes
i. Natural calamity
ii. Act of public enemy in war
iii. Act or omission of owner
iv. Character of goods or defect in packing
v. Order of competent authority
b. Requirements
i. Absence of Concurring Negligence
ii. Absence of Delay
iii. Due diligence to prevent or mitigate loss
c. Presumption of Negligence
d. Cases
i. Liability
1) Fire not caused by lightning
2) Rustiness of coils because open hatch was not
tightly sealed
3) Delay in delivery of pharmaceutical product
4) Mechanical defects in vehicle
5) Illegal order of mayor to dump cargoes
ii. Diminished Liability because of contributory
negligence
1) Under declaration of weight of payloader to be
transported
2) Acceptance for shipment of rice contained in
bags with holes and broken strings
iii. Exemption from liability
1) Hijacking by armed robbers
2) Damage to imported equipment due to collapse
of middle flooring of the crate during unloading
e. Stipulation of Limitation of Liability
i. Complete exemption void
ii. Limitation of liability to fixed amount void
iii. Limitation of liability to fixed amount unless the
shipper declares a higher value and pays higher
freight
f. Duration of Liability
i. Commencement
1) Unconditional delivery of goods to common
carrier for transportation

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2) Loading of goods on lighter as preparatory step

to loading on vessel
ii. Continuation of Liability
1) Temporary unloading
2) Storage in warehouse of common carrier
iii. Termination of Liability as Common Carrier
1) Actual or constructive delivery at destination
2) Liability of common carriers during unloading by
stevedore or arrastre operator
3) Flowing back to sea of petroleum being pumped
to storage tank because mooring line was cut
g. Baggage of Passenger
i. Extraordinary diligence for checked-in baggage
ii. Due diligence of good of family for hand-carried
luggage
h. Conflict of Law Rule
Applicability of law of country of destination
3. Safety of Passenger
a. Principles
i. Requirement of extraordinary diligence
ii. Unavailability of diligence in selection and
supervision of
employees as defense
b. Presumption of negligence
c. Duration of Liability
i. Commencement
1) Stepping on platform of bus
2) Waiting in train station for train
3) Stranding of passenger
ii. Termination
1) Arrival at destination
2) Reasonable opportunity to leave
iii. Acts of Employees
iv. Acts of Other Passengers
1) Absence of liability to passengers injured by
explosion of fireworks in box carried by another
passenger before New Year
2) Liability for failure to stop bus when another
passenger ran amuck

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3) Liability for death of passenger killed by other

passengers for failure to frisk passengers
despite warning by authority to common carrier
v. Acts of Strangers
Absence of liability to passenger stoned bystander
i. Damages Recoverable
1) Physical injuries
a) Lost income
b) Injury to business standing or
commercial credit
c) Medical expenses
d) Moral damages in case of gross
negligence amounting to bad faith
e) Exemplary damages in case of
wanton or reckless conduct
f) Attorneys fees in case of bad faith in
refusing to pay claims
2) Deaths
a) P50,000.00 for death
b) Loss of income
a) Formula
Life expectancy of 80 years
minus age of deceased multiplied
by annual income
Deduct one-third for living
expenses
c) Moral damages
d) Medical expenses prior to death
e) Actual or temperate damages for
funeral expenses
f) Exemplary damage in case of wanton
or reckless conduct
g) Attorneys fees in case of bad faith in
refusing to pay claim
3) Reduction of Damages in case of
Contributory
Negligence
B. Code of Commerce
1. Bills of Lading
a. Nature
i. Contract
ii. Receipt
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iii. Symbol of goods

b. Refusal of Consignee to Take Deliver
i. Absence of Basis Discrepancy in goods ordered
ii. Valid Ground
1) Partial non-delivery which renders parts
delivered useless
2) Damage which renders the goods useless
for sale or consumption for destined
purpose
3) Delay through fault of common carrier
c. Valid Delivery without Surrender of Bill of Lading
i. Delivery to actual consignee
ii. Instruction of seller to deliver goods without
requiring bill of lading
d. Period for Filing Claims
i. Damage apparent from external part of package
Upon receipt
ii. Damage ascertainable upon opening of package
24 hours from receipt
2. Liability of Shipowner and Shipping Agent
a. Instances
i. Acts of the captain
ii. Obligations contracted by the captain to repair,
equip, and provision the vessel
iii. Indemnities in favor of third parties due to
conduct of captain in care of their goods
iv. Damages to third parties for quasi-delict
committed by captain
v. Collision due to fault, negligence or lack of skill
of captain or crew
b. Limited Liability
i. Since the liability of the shipowner and the
shipping agent is limited to their interest in the
vessel, their liability is extinguished in case of loss
of the vessel
ii. The limited liability applies to loss of goods and
death or injury to passengers
c. Exceptions
i. The shipowner or shipping agent is at fault or
negligent
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1) This occurs when the vessel is not

seaworthy
2) The limited liability does not apply if it was
the captain who was negligent
ii. The vessel was insured
1) The proceeds of the insurance will take the
place of the vessel
2) The proceeds should be pro-rated among
the claimant
iii. The liability for repairs of the vessel before its
loss is not extinguished
iv. The liability of a party who entered into a
bareboat charter with the shipowner for the loss of
the vessel through his fault is not extinguished
3. Charter Parties
a. Kinds
i. In bareboat charter, the shipowner turns over
possession of the vessel to the charterer, who
undertakes to provide a crew, victuals, supplies and fuel
for the vessel for the duration of the vessel
ii. A time charter is a contract for the use of the
vessel for a specific period of time or for the duration of
one or more specified voyages
iii. A voyage charter is a contract of affreightment,
a contract for the carriage of goods from one or more
parts of loading to one or more parts of unloading, on
one or on a series of voyages
b. Rights and Obligations
i. Bareboat charter
1) The charterer assumes the rights and
obligations of the shipowner to third parties
who deal with the vessel
2) If the vessel is common carrier, it becomes
a private carrier
3) The shipowner has no lien on cargoes if
the charterer does not pay him
ii. Time Charter and voyage Charter
1) The shipowner retains possession and
control of the vessel
2) If the vessel is a common carrier, it
remains a common carrier
3) The shipowner assumes liabilities to third
parties contracting with the charterer
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4. General Average
a. Requisites
i. There was a common danger
ii. Part of the vessel or cargoes or both are
sacrificed deliberately for the common safety
iii. The sacrifice resulted in success in saving the
vessel and the cargoes
iv. The expenses or the damages were incurred or
inflicted after taking legal steps and authority
5. Collision
a. Rules
i. If a vessel collides with another through its fault,
it shall bear its own losses and shall be responsible
for the losses and damages of the other vessel
ii. If two vessels collide, both through their faults,
they will bear their own losses and damages and
shall be solidarily liable for the losses and
damages to their cargoes
iii. If it cannot be determined which of the two
vessels is at fault, the rule shall be the same as
when they are both at fault
iv. If a vessel should be forced by a third vessel to
collide with another, the owner of the third vessel
shall bear all the losses and damages caused
v. If a vessel should collide with another through a
force majeure, each vessel and the cargo shall
bear its own damages
b. Inapplicable Principles of Civil Law
i. Last clear chance
ii. Contributory negligence
iii. Comparative fault
iv. Due diligence in selection and supervision of
employees
c. Carriage of Goods by Sea Act
1. Application
a. This law applies to the international carriage
of goods by sea to or from ports of the
Philippines
b. The law applies up to the final port of
destination even if the transshipment was made
by an inter-island vessel

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c. The parties may stipulate to apply it to

domestic shipping
2. Claim
Claim is not required as a condition for bringing
suit
3. One-Year Prescriptive Period
a. Computation
i. From last day of delivery
ii. From day of departure of vessel in case of
non-delivery
iii. Non-suspension by written letter of
demand
iv. Non-suspension by negotiation for
compromise
b. Application of Prescriptive Period
i. Delivery of goods in damaged condition
ii. Non-delivery
iii. Action by insurer for subrogation
c. Inapplicability of Prescriptive Period
i. Misdelivery
ii. Conversion
iii. Agreement of parties to extension
iv. Delay in delivery of wearing apparel which
were not damaged but were delivered offseason and this resulted in reduction of
selling price

d. Nullity of Stipulation Reducing One-Year

Prescriptive Period
4. Amount of Liability
a. $500 per package
i. Package means carton and not container
van
ii. Nullity of stipulation reducing amount
b. Higher amount
i. Declaration of higher amount in bill of
ladding
ii. Declaration of higher amount by reference
in bill of lading to invoice
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C. Warsaw Convention
1. Applicability
a. It applies to international transportation of person,
baggage or goods performed by aircraft
b. International transportation means the place of
departure and the place of destination are within
territories of contracting parties even if there is a break
in the transportation
c. International transportation includes transportation
where the place of departure and the place of
destination were within the same contracting party
even if there is a stop-over in another country which is
not contracting party
d. Transportation to be performed by several air carriers
shall be considered as a single operation. An airline
company which issued a ticket which covered various
legs to be flown by different airline companies is liable
for breach of contract committed by the other airline
companies on their own flights
2. Liability to Passengers
a. The liability of airline companies to each passenger is
limited to 125,000 francs
b. The limitation will not apply in case of willful
misconduct.
This means a reckless act with the
knowledge that harm will occur
3. Liability for Checked-In Baggage
a. Amount
i. The liability of airline companies is limited to 250
francs per kilogram
ii. The limitation will not apply if the passenger
declared a higher value and paid the required
additional amount
iii. The limitation will not apply in case of willful
misconduct
1) The baggage of a passenger who was not
able to deliver his paper in an international
conference was lost and was not recovered
till her return
2) The luggage of a passenger was lost and
was recovered only after the trial of the
case, and the airline company ignored the
follow-ups
4. Liability for Hand-Carried Baggage
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a. The liability of the airline company is limited to 5,000

francs per passenger
b. A claim for loss of contents must be made within 3
days from receipt of the baggage or at the latest 14
days from its receipt
VI.

Corporation Code
A. Juridical Personality
1. Separate Personality
a. Contracts
b. Properties
c. Taxation
d. Lawsuits
e. Rights
2. Moral Damages
a. No right to moral damages as a general rule
b. Moral damages for besmirched reputation as
exception
3. Piercing Corporate Veil
a. Stockholders
i. Insufficiency of mere majority control
ii. Inapplicability to minority stockholders
b. Unavailability for invocation for corporate
benefit
c. Grounds
i. Use to defeat public convenience, justify
wrong, protect fraud, or defend crime
ii. Alter ego
1) Control, not merely of shares of stock,
but also complete domination of
finances, policy business practice
2) Use of control to commit fraud or wrong
in violation of right of plantiff
3) Injury proximately caused by control and
breach of duty
iii. Disregard of separate personality in
internal dealings

B. Incorporation
1. Incorporators
a. 5 to 15
b. Of legal age
c. Philippine residence of majority
d. Ownership of at least one share of stock
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2. Subscription Requirements
a. Subscription to at least 25% of authorized
capital stock
b. Payment of at least 25% of the subscription
3. Corporate Name
a. The corporate name should not be identical or
confusingly similar to that of an existing
corporation
b. They are engaged in the same line of business
c. A corporation has no exclusive right to use a
generic word as part of its name, e.g., Lyceum,
which means an educational institution
4. Limitations on Classification of Shares of Stock
a. Only preferred and redeemable shares may be
denied voting rights
b. There must always be a class of shares with
complete voting rights
c. Preferred shares of stock must be par value
shares
d. Banks, trust, companies, insurance companies,
public utilities and building and loan associations
cannot issue no par value shares
e. Preferred shares cannot be given preference
ahead of creditors in case of dissolution
C. By-Laws
1. Adoption and Amendment
a. Majority of Stockholders
b. Board of Directors Majority Vote
i. Delegation of power by at least two-thirds
of stockholders
ii. Repeal of delegation by majority vote of
stockholders
2. Binding Effect
By-laws do not bind third parties who have no
actual knowledge of them
D. Corporate Powers
1. Denial of Right of Pre-emption
a. Denial by articles of incorporation
b. Issuance of shares in compliance with law requiring
public offering
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c. Issuance with
in exchange
purposes
d. Issuance with
in payment of

approval of two-thirds of stockholders

for property needed for corporate
approval of two-thirds of stockholders
previously contracted debt

2. Sale of all or substantially all of properties and assets

with approval of at least two-thirds of stockholders
3. Acquisition of Own Shares of Stock
a. Elimination of fractional shares because of stock
dividends
b. Collection of payment for unpaid subscription
c. Payment to dissenting stockholders exercising
appraisal right
4. Investment in Another Corporation or Business
a. Approval by at least two-thirds of stockholders for
purpose different from primary purposes
b. Approval by majority of board of directors for
investment needed for primary purpose
i. Acquisition of another brewery by a brewery
ii. Acquisition by sugar mill of factory for making
sugar bags
5. Declaration of Dividends
a. Kinds
i. Cash Board of Directors
ii. Property, e.g., treasury shares Board of Directors
iii. Stock Dividend Board of Directors and at least
two-thirds of Stockholders
b. Compulsory Declaration of Dividends
i. Accumulation of retained earnings in excess of 100
per cent of paid-in capital
ii. Exceptions
1) Requirement of definite corporate expansion
projects
2) Lack of consent from creditor prohibiting
declaration without its consent
3) Need for special reserves for probable
contingencies
6. Ultra Vires Acts
1. Ratification

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a. Ratifiable by stockholders if outside corporate

powers
b. Not ratifiable if contrary to public policy
2. Enforcement
a. It cannot be enforced if neither party has
performed
b. It can be enforced by a party if he has performed
his obligation
E. Trust Fund Doctrine
1. The trust fund doctrine means that the capital stock
and the assets of a corporation constitute a trust fund
for payment of creditors
2. A stockholder cannot invoke his appraisal rights if the
corporation has no retained earnings to pay him
F. Directors and Officers
1. Identification of Officers
a. Officers mentioned in Corporation Code
b. Officers mentioned in By-Laws
c. Officers appointed to positions created by Board of
Directors by virtue of authority given and specified
by by-laws
2. Election
a. Qualification
i. A director must own at least one share of stock
ii. It is sufficient if he has legal title by virtue of a
voting trust even if the beneficial ownership is vested
in somebody else
iii. The by-laws can require ownership of more than
one share of stock
iv. Philippine residence of majority
b. Disqualification
The by-laws can impose additional disqualifications,
such as, being officer of a competitor
c. Modus of Election
i. Proxy voting
ii. Cumulative voting
d. Tenure
i. One year with right of hold-over until election of
successors
ii. Directors may be dismissed with or without cause
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iii. A director representing minority stockholders may

be removed only for cause
3. Compensation
a. Amount fixed in by-laws
b. Reasonable per diem
c. Other compensation granted by stockholders
d. Limited to 10 per cent of net income before income
tax during the preceding year
4. Personal Liability
a. Business Judgment Rule
Courts will not review and substitute its judgment for
that of the board of directors of a corporation unless
they assented to a patently unlawful act, acted with
gross negligence or bad faith, or were involved in a
conflict of interest
b. Personal Liability of Directors and Officers
i. Assent to patently unlawful act
ii. Guilt for bad faith or gross negligence
iii. Conflict of interest
iv. Consent to issuance of watered stock or failure to
file written objections with corporate secretary
v. Agreement to bind themselves solidarily liable with
corporation
vi. Law making them solidarily liable
c. Cases
i. Declaration of dividends despite insolvency of
corporation
ii. Collecting payments for accounts assigned to bank
as security for loan and fraudulently failing to remit
them
iii. Allowing violations of labor standards
iv. Feigning losses as pretext for dismissal of
employees
v. Passing resolution acknowledging validity of
prescribed debt and assigning all corporate assets as
payment in compromise in the collection case
5. Contracts
a. Directors or Officers and Corporation
i. Conditions for Validity
1) Presence of director was not necessary for
quorum in meeting where the contract was
approved
22

2) Vote of director was not necessary for approval

of contract
3) The contact was fair and reasonable
4) In case of an officer, the contract was previously
authorized by the board of directors
b. Cure for Absence of Any of First Two Requisites
1) Ratification by at least two-thirds of
stockholders
2) Full disclosure of adverse interest of director
3) Fairness and reasonableness of contract
c. Annulment of Contract
i. A director cannot enforce distributorship contract
with a corporation which manufactures cement
which provided for a fixed price, because it is not
fair
ii. Only the corporation can annul the contract
d. Corporations with Interlocking Directors
i. Exceptions to Validity of Contract
1) There was fraud
2) It was not fair or reasonable
ii. Requirements if interlocking director owns more
than 20 per cent of the shares of stock in one
corporation and nominal shares of stock in other
corporation
1) Ratification by at least two-thirds of
stockholders of corporation in which the
director owns nominal shares
2) A creditor of the corporation cannot have
the contract annulled
G. Stockholders
1. General Principles
a. All shares of stock are presumed equal unless
otherwise provided in articles of incorporation
b. Stockholders whose subscriptions are not fully paid
are entitled to all rights unless they are delinquent
c. Non-Voting shares of stock are entitled to vote in
matters requiring stockholder approval
d. A stipulation granting the right of first refusal in case
of sale is valid
2. Subscription
a. A contract between the existing stockholder and new
stockholder for investment in the corporation is a
subscription agreement and cannot be annulled by

23

b.

c.

d.
e.

previous stockholders because of the trust fund

doctrine
In case of conflict between the articles of
incorporation and the stock and transfer book as to
who are the stockholders, the former prevails,
because it is the contract with the corporation
Unregistered sale of shares of stock bind the parties
only and does not bind the corporation and third
parties
Sale of shares with stock certificate require
indorsement and delivery of stock certificate
A subscription agreement is an indivisible contract
i. The stockholder cannot ask for a stock certificate
corresponding to the number of shares which will be
fully paid if the down payment will be applied pro
rata
ii. The stockholder who has not fully paid for his
subscription cannot sell a portion of his subscription
iii. A stockholder can sell his subscription even if it is
not fully paid, but the consent of the board of
directors is required.
This involves novation by
substitution of debtors

3. Maturity of Payment of Balance of Subscription

a. Instances
i. Stipulation regarding payment of balance
ii. Call by board of directors
iii. Suit by creditor of corporation against stockholder
on his unpaid subscription
b. Effect of Delinquency
i. Maturity of entire balance
ii. Payment of interest if stipulated
iii. Suspension of all rights of stockholders
iv. Public auction sale with award to bidder offering
least number of shares for his bid
4. Derivative Suits
a. Requirements
i. There must be a cause of action which calls for this
kind of relief, such as, the commission of the board of
directors of fraud, mismanagement, dissipation of
funds, breach of trust, and unlawful acts
1) An action by a stockholder for his pre-emptive
right is not proper for a derivative suit

24

2) The claim of a stockholder that his co-heirs

fraudulently transferred the shares of stock in his
name is not proper for a derivative suit
3) The action filed by stockholders to invoke their
right to vote is not proper for a derivative suit
ii. The stockholder must have been such at the time
of the occurrence of the acts complained unless they
continued and are injurious to him
1) A stockholder can file a derivative suit because
the directors were appropriating corporate funds
for themselves to depress the value of the shares
of stock even if he included himself as co-plaintiff,
because the acts complained of violated the rights
of both the corporation and the minority
stockholders
2)
A
stockholder
whose
shareholding
is
insignificant can file a derivative suit, because the
cause of action pertains to the corporation
3) A stockholder who is merely holding in trust the
shares of stock in her name cannot file a
derivative suit, because she is not a stockholder in
her own right
iii. The stockholder must have exhausted all intracorporate remedies by applying to the board of
directors and the stockholders unless to do so is
excused
1) The stockholder need not appeal to the
directors if they were the ones who committed
the wrongs complained of
2) The stockholder need not appeal to the
stockholders if there are numerous stockholders
and they are scattered all over the world
iv. The action must be brought in the name and for
the benefit of the corporation
v. There are no appraisal rights available for the acts
complained of
vi. The action is not a nuisance or harassment suit
b. Governing Principles
i. The board of directors or the majority stockholders
cannot have the case dismissed
ii. The decision in the case will be res juridicata upon
the corporation
iii. The reliefs granted by the court should accrue to
the corporation
25

5. Inspection Rights
a. It is presumed that a stockholder is entitled to
inspect corporate records
b. Litigation in Case of Refusal
a. Remedies
i. Petition for mandamus with prayer for damages
ii. Criminal prosecution under Section 144 of
Corporation Code
b. Defendants
i. Corporate Secretary
ii. Officers who ordered refusal
c. Grounds for Denial
i. The stockholder improperly used information
secured through a previous examination, e.g.,
insider trading
ii. He was not acting in good faith or for a
legitimate purpose
iii. The subject involves trade secrets
iv. The demand was made to pressure the
corporation to write off his debt, to transfer
ownership of a building to him, and to increase his
allowance
6. Appraisal Rights
a. Grounds
i. Amendment of articles of incorporation restricting
rights of stockholders or authorizing preferences
superior to those of outstanding shares of stock
ii. Disposition of all or substantially all of corporate
assets
iii. Merger or consolidation
iv. Investment in business other than the primary
purpose
v. Extending or shortening corporate existence
vi. Demand of stockholder in close corporation
b. Requirements
1. Vote against amendment
2. Written demand within 30 days
3. Availability of unrestricted retained
except in case of close corporation

earnings

H. Merger and Consolidation

1. Definition

26

a. Merger Two or more corporation are merged with

one of the constituent corporations
b. Consolidation Two or more corporation are
consolidated in a new single corporation
2. Requirements
a. Approval by at least two-thirds of the stockholders of
each corporation and majority of the board of
directors
b. Approval
by
the
Securities
and
Exchange
Commission
3. Effects
1. The absorbed corporations shall cease to exist
2. The surviving corporation shall acquire all the rights,
powers, obligations and liabilities of the absorbed
corporations
I. Dissolution
1. Modes
a. Voluntary
i. No creditors affected
1) Approval by at least two-thirds of stockholders
2) Submission to Securities and Exchange
Commission of resolution certified by majority of
directors and verified by corporate secretary
ii. Creditors Affected
1) Approval by at least two-thirds of stockholders
2) Submission
to
Securities and Exchange
Commission of petition signed by majority of
directors and verified by president, corporate
secretary or director
3) Publication of order setting case for hearing of
objections
4) Judgment of dissolution
iii. Shortening of corporate term
1) Amendment of articles of incorporation by vote
of at least two-thirds of stockholders and
majority of directors
2) Submission
to
Securities and Exchange
Commission of original articles of incorporation
and amended articles of incorporation certified
by corporate secretary and majority of directors
b. Involuntary
i. Expiration of corporate term
27

ii. Failure to commence business within two years

form incorporation
iii. Continuous in operation for at least five years
iv. Legislative dissolution
v.
Dissolution
by
Securities
and
Exchange
Commission under various existing laws
2. Consequences
a. The corporation ceases to be a going concern
b. It will continue to exist for the purpose of winding up
3. Persons in Charge of Winding Up
a. Board of Directors
b. Trustee appointed by the Board of Directors
c. Management Committee or Rehabilitation Receiver
4. Deadlines for Winding Up
a. If the winding up will be handled by a trustee, or a
management committee, or a rehabilitation receiver,
the three-year deadline will not apply
b. Pending cases will continue until their termination
c. Claims can be filed within the applicable period of
prescription
d. If the winding up will be handled by the board of
directors, upon expiration of three years all pending
cases, regardless of their status and of the position of
the corporation as party, should be dismissed
e. The dismissal of pending cases has been remedied
by Supreme Court decisions by converting the
directors or the lawyer handling the cases as trustees
J. Foreign Corporations
1. Need for a License to Do Business in the Philippines and
authorization from Regulatory Agencies like Bangko
Sentral ng Pilipinas and Insurance Commission
2. Concept of Doing Business
1. General Principles
a. The corporation must habitually be doing business
in the Philippines and not merely engaged in an
isolated transaction, unless the transaction is
indicative of intention to engage in business of the
Philippine
b. The contracts involves pursuit of the ordinary
business of the foreign corporation, e.g., the hiring
of a Filipino cook for the vessel of a foreign
28

common carrier does not constitute doing

business in the Philippines
c. The transaction must be consummated in the
Philippines, e.g., foreign producers of motion
pictures are not doing business when they
authorize Filipino distributors to show their motion
pictures here
2. Specific Cases
a. Doing Business
i. Soliciting orders
ii. Service contracts
iii. Opening offices
iv. Appointing distributor who merely forwarded
orders to the foreign corporation, who in turn fixed
the price received the payment, and shipped the
product to the buyer
v. Participating in the management or control of
domestic business
vi. Participating in bidding for projects
b. Not Doing Business
i. Investment in domestic corporations, including
having a director or officers in the board
ii. Appointing a distributor who transacts business
in its name and for its own account
iii. Publication of advertisement
iv. Maintaining goods for processing and
consignment of equipment for the purpose like
garments and electronic components
v. Collecting information
vi. Performing services auxiliary to an isolated
contract of sale
vii. Purchase of molasses
3. Validity of Contracts Entered
Corporation without License

into

by

Foreign

4. Personality to Sue
a. Capacity to sue if not doing business in the
Philippines
b. Capacity to sue if doing business in the Philippines
with a license
c. Capacity to sue if other party is estopped by
benefiting from contract with knowledge foreign
corporation had no license

29

5. Amenability to Suit
a. Doing business with a license
b. Doing business without a license
6. Non-Amenability to Suit
a. Not doing business in the Philippines
b. Resort to action quasi in rem if property in the
Philippines can be attached
VII. Securities Regulation Code
A. Definition
Securities are shares, participation or interests in a
corporation, commercial enterprise, or profit-making
venture. It includes:
1. Shares of stock, bonds, debentures, notes, evidence of
indebtedness, asset-backed securities
2. Investment contracts, certificates of interest or
participation in a profit-sharing agreement, certificates
of deposits for a future subscription
3. Fractional undivided interest in oil, gas or other mineral
rights
4. Derivatives like option and warrants
5. Certificates of assignment, certificates of participation,
trust certificates, voting trust certificates or similar
instruments
6. Proprietary or nonproprietary membership certificates
in corporations
7. Other instruments as may be determined by the
Securities and Exchange Commission (Sec. 3.1)
B. Securities Exempt from Registration
1. Security issued or guaranteed by the Government of
the Philippines
2. Security issued or guaranty by the government of a
country with diplomatic relations with the Philippines
3. Certificates issued by a receiver or by a trustee in
bankruptcy approved by the proper adjudication body
4. Security whose sale is regulated by the Insurance
Commission, Housing and Land Use Regulatory Board,
or Bureau of Internal Revenue
5. Security issued by a bank except its own shares of
stocks
6. Any security added by the Securities and Exchange
Commission. (Sec. 9)
C. Exempt Transactions
30

1. Judicial sale, or sale by an executor, administrator,

guardian, receiver or trustee in insolvency
2. Sale by a pledgee or mortgagee or other lien holder
selling to liquidate the debt
3. Isolated transaction
4. Stock dividend
5. Sale of capital stock to stockholders of a corporation
6. Issuance of bonds or notes secured by a mortgage
where the mortgage and all the bonds or notes are sold
to a single purchaser at a single sale
7. Issue of security in exchange for other security
pursuant to a right of conversion if the security
surrendered was registered or exempt from registration

8. Brokers transactions, executed

orders, on a registered exchange

upon

customers

9. Subscription for shares of stock prior to incorporation or

in pursuance of an increase in an authorized capital
stock
10.
Exchange of securities by the issuer with the
existing security holders
11.
Sale of securities to less than 20 persons during a
twelve-month period
12.
a.
b.
c.
d.

Sale of Securities to the following:

Bank
Registered investment house
Insurance company
Pension fund or retirement plan maintained by the
Government or managed by a bank or trust company
e. Investment company
f. Other buyers determined by the Securities and
Exchange Commission as qualified

31

13.
Other transactions exempted by the Securities and
Exchange Commission (Sec. 10)
D. Tender Offers
1. Any person or group of persons who intend to acquire:
a. At least 15% of any class of equity security of a listed
corporation
b. At least 15% of any equity of corporations with
assets of at least P50 million and at least 200
stockholders with at least 100 shares each
c. At least 35% of such equity over twelve months shall
make a tender offer to the holders of such security
Shall make a tender offer to stockholders
2. If the securities offered exceed that which a person or
group of persons is willing to take up, the securities that
are subject of the tender offer shall be taken up pro
rata. (Sec. 19(d))
E. Insider Trading
1. It is unlawful for an insider to sell or buy a security
while in possession of material information with respect
to the issuer or the security that is not generally
available to the public unless the insider proves:
a. The information was not gained from his insider
relationship; or
b. If the other party is identified, that:
i. He disclosed the information to him; or
ii. He had reason to believe the other party is in
possession of the information
2. Insider mean:
a. The issuer
b. A director or officer or person controlling the issuer
c. A person whose relationship to the issuer gave him
access to material information not generally
available to the public
d. Government employee, or director or officer of an
exchange,
clearing agency
or
self-regulation
organization who has access to material information
not generally available to the public
e. A person who learns of such information by
communication from any of the foregoing
3. Information is material:
32

a. If it has not been generally disclosed to the public

and will likely affect the market price of the security
after being disseminated to the public; or
b. If it will be considered by a reasonable person
important in determining his course of action
whether to buy, sell, or hold a security
F. Validity of Contracts
1. Any provision binding a person to waive compliance
with any provision of the Securities Regulation Code,
any rule under it, or any rule of an exchange required
by it, is void
2. Every contract made in violation of any provision of the
Securities Regulation Code or any rule under it is void:
a. As regards the rights of any person who, in violation
of it, made such contract; and
b. As regards the right of any person who, not being a
party to such contract, acquired any right under it
with knowledge of the violation
VIII. Law on Secrecy of Bank Accounts
A. Law on Secrecy of Bank Deposits
1. Scope
a. Deposits
b. Investments in bonds issued by the government, its
political subdivisions and instrumentalities
c. Trust accounts
2. Exceptions
a. The depositor has given his written consent
b. The examination is made in connection with an
impeachment case
c. There is an order from a competent court in cases of
bribery or dereliction of duty of public officials
d. The money deposited or invested is the subject matter
of the litigation:
3. Proper Cases
a. In a criminal case for plunder, the bank accounts can
be inquired into, because they are included in the
subject matter of the litigation
b. In a special proceeding to settle the estate of
deceased depositor, his bank deposits are the

33

subject matter of the case, because all his assets are

supposed to be collated
4. Improper Case
In order that the Ombudsman may inspect a bank deposit,
there must be a case pending in court, the account must
be clearly identified, the inspection must be limited to the
subject matter of the pending case, the inspection may
cover only the account identified, and the bank personnel
and the account holder must be notified to be present
during the inspection
5. Garnishment
The prohibition against the examination of a bank deposit
does not preclude its garnishment to satisfy a judgment
against the depositor.
B. Foreign Currency Deposit Act
1. Secrecy of Foreign Currency Deposits
a. All foreign currency deposits are absolutely confidential
b. Foreign currency deposits shall be exempt from
attachment, garnishment or any other order or process
of any court, legislative body, government agency or
administrative body.
2. Only Exception Based on Law Written Consent of
Depositor
3. Exceptions Based on Jurisprudence
a. Where the funds deposited in a joint foreign currency
savings account belonged exclusively to one of the
depositors and were held in trust for him by the other
depositor and the other depositor unilaterally closed
the joint account and transferred the funds to her
personal account, the depositor who owned the funds
can have her enjoined from making withdrawals from
her personal account.
She cannot invoke the
exemption of her personal account from court
processes, because the funds did not belong to her.
(Van Twest vs. Court of Appeals, 230 SCRA 42.)
b. A father who sued his daughter for illegally withdrawing
funds from his foreign currency deposit and transferring
them to another bank in the name of her sister, can
inquire into the deposit of the sister, because the
34

money deposited belongs to him.

(China Banking
Corporation vs. Court of Appeals, 511 SCRA 110.)
C. General Banking Act (Republic Act No. 8-791.)
1. Secrecy of Bank Transactions
No director, officer, employee, or agent of any bank
shall without order of a court, 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.
(Section 55.1 (b))
2. Scope
a. The disclosure to an authorized person is permitted
b. The prohibition does not apply to the funds or
properties of public officials. (Section 55.1 (b))
IX. New Central Bank Act
A. Distressed Banks
A. Conservatorship: Solvent But Not Liquid
1. If based on the report of the supervising and
examining department, the Monetary Board finds
that a bank or a quasi-bank is in a state of continuing
inability or unwillingness to maintain a condition of
liquidity adequate to protect the interest of
depositors and creditors, the Monetary Board may
appoint a conservator
2. The conservator has power to overrule or revoke the
actions of the previous management and board of
directors, but cannot revoke valid contracts
3. The conservatorship shall not exceed one year
4. The
Monetary
Board
shall
terminate
the
conservatorship:
a. When it is satisfied that the institution can operate
on its own
b. When it determines the continuation in business or
the institution will involve probable loss to its
depositors or creditors
B. Receivership: Insolvent
1. The Monetary Board may designate the Philippine
Deposit Insurance Corporation as receiver of a bank
35

and any person of recognized competence in banking

or finance as receiver of a quasi-bank when it finds
that the institution:
a. Is unable to pay its liabilities as they become due
in the ordinary course of business when the
inability to pay is caused by extraordinary
demands caused by financial panic in the banking
community;
b. Has insufficient realizable assets to meet its
liabilities;
c. Cannot continue in business without involving
probable losses to its depositors or creditors; or
d. Has willfully violated a cease and desist order
under Section 37 that has become final, involving
acts or transactions anointing to fraud or a
dissipation of the assets of the institution
2. Conservatorship is not
designation of a receiver

precondition

to

the

3. Subject to prior approval of the Monetary Board, the

receiver shall determine within 90 days from takeover whether the institution may be rehabilitated or
placed in such condition so that it may resume
business with safety to its depositors, creditors and
the general public
C. Liquidation
1. If the receiver determines that the institution cannot
be rehabilitated, the Monetary Board shall notify the
board of directors and direct the receiver to proceed
with its liquidation
2. The receiver shall file ex-parte with the Regional Trial
Court and without need to prior notice or any other
action a petition for assistance in the liquidation of
the institution
3. The receiver shall convert the assets of the
institution to money, dispose of the money to
creditors and other parties to pay the debts of the
institution

36

4. The receiver may file actions to collect and recover

accounts and assets of the institution or defend any
action against it
D. Judicial Review
1. The action of the Monetary Board shall be final and
executory and may not be restrained or set aside by
the court except on petition for certiorari
2. The petition for certiorari may be filed only by the
stockholders of record representing the majority of
the capital stocks within 10 days from receipt by the
board of directors of the order of the Monetary Board
E. Instruments of Bangko Sentral Action
1. To achieve price stability, the Monetary Board shall
rely on its moral influence. (Sec. 68)
2. The Bangko Sentral may buy and sell gold
3. The Bangko Sentral may buy and sell foreign notes
and coins. (Sec. 70)
4. Emergency Restrictions
In time of exchange crisis or national emergency, with
the concurrence of 5 members of the Monetary Board
and the approval of the President, the Monetary Board
may:
a. Temporarily suspend or restrict sales of foreign
exchange by the Bangko Sentral
b. Subject all transactions in gold and foreign exchange
to license
c. Require any foreign exchange obtained by anyone in
the Philippines be delivered to any bank at the
effective exchange rate. (Sec. 72)
F. Reserve Requirements
A. To control the volume of money created by the
lending operations of banks, all banks are required to
maintain reserves against their deposit liabilities,
funds held in trust, and deposit substitutes.
X. General Banking Law

37

A. Definition
1. Banks refer to entities engaged in the lending of funds
obtained in the form of deposits
2. Quasi-banks refer to entities engaged in the borrowing
of funds through the issuance, endorsement or
assignment with recourse or acceptance of deposit
substitutes as defined in Section 95 of the New Central
Bank Act of purposes of relending or purchasing of
receivables and other obligations
B. Diligence Required of Banks
Because of the fiduciary nature of banking, banks must
act in accordance with the highest standards of integrity
and performance. In handling the funds of the clients,
they must observe extraordinary diligence
C. Relationship between Depositor and Bank
The relationship between a depositor and a bank is that of
creditor and debtor
D. Interest Rates
1. While the ceiling on interest rates has been lifted, the
interest should not unconscionable. An interest of more
than 30 per cent a year is unconscionable
2. A bank cannot increase the rate of interest without the
consent of and notice to the borrower because of the
principle of mutuality of contracts
E. Single borrower limit
1. Limits
a. The total amount of loans, credit accommodations
and guarantees that may be extended by a bank to a
single borrower: 25% of the net worth of the bank
b. Liabilities secured by trust receipts, shipping
documents, warehousing receipt or other similar
covering goods which are readily marketable, nonperishable and fully insured: additional 10%
2. Exclusions
a. Loans secured by obligations of the Bangko Sentral
or of the government
b. Loans fully guaranteed by the government
c. Loans covered by assignment of deposits in the
lending bank and held in the Philippines
38

d. Letters of credit covered by margin deposits

e. Non-risk items specified by the Monetary Board (Sec.
35.5)
F. Loans to Directors, Officers, Stockholders and Related
Interest
1. Procedural requirements
a. Written approval of majority of all directors,
excluding the director concerned
b. Entry of approval in bank records
c. Transmission of copy of entry to the Bangko Sentral
2. Conditions and limitations
a. The terms shall not be less favorable than those
offered to others
b. The loans shall be limited to an amount equivalent to
their unencumbered deposits and book value of their
paid-in capital in the bank
c. Loans secured by non-risk assets determined by the
Monetary Board shall be excluded
3. Violation
The mere failure to comply with any of the
requirements for granting the loan is sufficient to
constitute a violation
XI. ANTI-MONEY LAUNDERING ACT
A. Money Laundering
1. Definition
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:
a. transacts said monetary instrument or property;
b. converts, transfers, disposes of, moves, acquires,
possesses or uses said monetary instrument or
property;
c. conceals or disguises the true nature, source,
location, disposition, movement or ownership of or
rights with respect to said monetary instrument or
property;
d. attempts or conspires to commit money laundering
offenses referred to in paragraphs (a), (b) or (c);

39

e. aids, abets, assists in or counsels the commission of

the money laundering offenses referred to in
paragraphs (a), (b) or (c) above; and
f. 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, fails to do so.
(Section 4)
2. Institutions Covered
a. banks, non-banks, quasi-banks, trust entities, foreign
exchange dealers, pawnshops, money changers,
remittance and transfer companies and other similar
entities and all other persons and their subsidiaries
and affiliates supervised or regulated by the Bangko
Sentral ng Pilipinas;
b. insurance companies, pre-need companies and all
other persons supervised or regulated by the
Insurance Commission;
c. (i) securities dealers, brokers, salesmen, investment
houses and other similar persons managing
securities or rendering services as investment agent,
advisor, or consultant, (ii) mutual funds, close-end
investment companies, common trust funds, and
other similar persons, and (iii) 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
Securities
and
Exchange
Commission;
d. jewelry dealers in precious metals, who, as a
business, trade in precious metals, for transactions in
excess of P1,000,000.00;
e. jewelry dealers in precious stones, who, as a
business, trade in precious stones, for transactions in
excess of P1,000,000.00;
f. company service providers which, as a business,
provide any of the following services to third parties:
(i) acting as a formation agent of juridical persons;
(ii) acting as (or arranging for another person to act
40

as) a director or corporate secretary of a company, a

partner of a partnership, or a similar position in
relation to other juridical persons; (iii) 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 (iv) acting as (or
arranging for another person to act as) a nominee
shareholder for another person; and
g. persons who provide any of the following services:
i. managing of client money, securities or other
assets;
ii. management of bank, savings or securities
accounts;
iii. organization of contributions for the creation,
operation or management of companies; and
iv. creation, operation or management of juridical
persons or arrangements, and buying and selling
business entities.
3. Exclusions
The term covered persons excludes lawyers and
accountants acting as independent legal professionals
in relation to information concerning their clients or
where disclosure of information will compromise client
confidences or the attorney-client relationship. (Section
3(a))
4. Covered Transactions
A transaction in cash or other equivalent monetary
instrument involving a total of more than P500,000.00
in one banking day is covered. (Section 3(b))
5. Suspicious Transactions
Suspicious transactions are transactions with covered
institutions, regardless of amount, where any of the
following circumstances exists:
a. There is no underlying legal or trade obligations,
purpose or economic justification
b. The client is not properly identified
c. The amount involved is not commensurate with the
business or financial capacity of the client
d. It may be perceived that the transaction is structured
to avoid being the subject of reporting requirements

41

e. Any circumstance which deviates from the profile of

the client or the clients past transactions with the
covered institution
f. The transaction is related to an unlawful activity
g. The transaction is similar or analogous to any of the
foregoing. (Section 3 (b-1))
B. Anti-Money Laundering Council
1. Composition
1. Governor of the Bangko Sentral ng Pilipinas
2. Insurance Commissioner
3. Chairman of the Securities and Exchange Commission
2. Requirement for Discharge of Function: - Unanimity
3. Important Functions
a. To require and receive covered or suspicious transaction
reports from covered institutions
b. To issue orders to the Supervising Authority or covered
institution to determine the true identity of the owner of
any monetary investment or property subject of a
covered transaction or suspicious transaction report or
requested for assistance from a foreign state, or
believed on the basis of substantial evidence be the
proceeds of an unlawful activity
c. To institute civil forfeiture proceedings and all other
remedial proceedings through the Office of the Solicitor
General
d. To cause the filing of complaints with the Department of
Justice or the Ombudsman for the prosecution of money
laundering offense
e. To investigate suspicious transactions and covered
transactions deemed suspicious after an investigation,
money laundering activities, and other violations of this
Act
f. To apply before the Court of Appeals ex parte for the
freezing of any monetary instrument or property
alleged to be proceeds from or used in or intended for
use in any unlawful activity.
C. Authority to Freeze
The Court of Appeals, upon ex-parte petition by the AntiMoney Laundering Council, and after determination that
42

probable cause exists that any monetary instrument or

property is related to an unlawful activity may issue a
freeze order effectively immediately and not exceed six
(6) months. The Court of Appeals should act on the
petition within 24 hours from its filing. If no case is filed
within the period determined by the Court of Appeals, the
freeze order shall be automatically lifted.
A person whose account has been frozen may move to lift
the freeze order and the court must resolve it before the
expiration.
Only the Supreme Curt can issue a temporary restraining
order or a writ of injunction against any freeze order
V.

Inquiry into Bank Deposits

The Anti-Money Laundering Council may inquire into any

deposit or investment, including related accounts, with any
banking institution upon order of a court on ex-parte
application in cases of violation of this Act if there is
probable cause that it is related to an unlawful activity or a
money laundering activity but no court order is required in
cases involving unlawful activities in Section 3 (i) (1) (2) and
12), i. e. kidnapping for ransom, violation of the
Comprehensive Dangerous Drugs Act, hijacking, destructive
arson and murder, and offenses similar to those offenses
which are punishable under the penal laws of other
countries, and terrorism and conspiracy to commit terrorism.
Related accounts refers to accounts the funds and sources of
which originated from or are materially linked to investments
or properties subject of the freeze order.
A court order ex-parte must first be obtained provided that
the same procedure for the principal account shall be the
same with that of related accounts. (Section 11)
XII. Intellectual Property Code
A. Patents
1. Patentable Inventions
a. Useful machine
b. Product
c. Process
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d. Improvement of machine, product or process

e. Micro-organisms
f. Non-biological and microbiological process
2. Non-Patentable Inventions
a. Discoveries,
scientific
theories,
mathematical
methods, and discovery of new form or new property
of a substance in medicines or new use for unless it
results in new product that employs a new reactant
b. Schemes, rules and methods of performing mental
acts, playing games or doing business, and computer
program
c. Methods for treatment of human or animal body
d. Plant varieties or animal breeds
e. Aesthetic creations
f. Anything contrary to public order or morality
3. Conditions of Patentability
a. Novelty
b. Inventive step
c. Industrial applicability
4. Ownership
a. Inventor
b. Person who commissioned work
c. Employer of employee who made invention as part of
duties
d. First to file application in case of two or more
independent persons
e. Person deprived of patent without his consent or
through fraud
5. Grounds for Cancellation of Patent
a. It is not new or patentable
b. Patent does not disclose the invention in a manner
sufficient to enable skilled person to carry it out
c. It is contrary to law and morality
d. It includes matter outside of disclosure in application
6. Rights of Owner of Patent
a. To prevent unauthorized person from making and
using, selling or importing the patented product, but
drugs and medicines are exempted from prohibition
against importation
b. To prohibit any and unauthorized person from using
the patented process or manufacturing, using, or
44

selling or importing product obtained from the

process, but drugs and medicines are exempted from
prohibition against importation
c. To assign or transfer by succession the patent and to
conclude licensing grounds
7. Limitations of Rights
a. Prior user in good faith before filing of application can
continue its use
b. Use by government in case of public interest, use of
patent in anti-competitive manner, national security
in case of drugs and medicines, non-commercial use
of drugs and medicines, failure to meet demand for
drugs and medicines
8. Infringement: Violation of Exclusive Rights of Owner
a. Literal Infringement
Challenged matter falls within the words of the claim
b. Doctrine of Equivalents
Challenged matter performs substantially the same
function in substantially the same to achieve
substantially the same result
c. Contributory Infringement
B. Trademarks
1. Acquisition of Ownership
a. Use
b. Prior use not required for registration
c. Priority in registration
2. Confusingly Similar Trademarks
a. Dominancy Test
Competing trademark contains the main features of
another trademark because of which confusion is
likely to result
b. Holistic Test
The dominant features and other features also are
considered
c. Principles
a. Colorable imitation means such a close imitation
as is calculated to deceive ordinary buyers giving
the attention a buyer usually gives
b. Well-known trademarks are protected even if not
registered in the Philippines
c. Protection extends to closely related products

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3. Rights Conferred by Registration

a. Exclusive right to prevent third parties from using
without consent of owner identical or similar
trademarks in course of trade which will result in
likelihood of confusion
4. Infringement
a. Acts
i. Use in commerce of similar, counterfeit, copy or
colorable imitation of registered trademark or same
container or dominant feature and use is likely to
cause confusion or to deceive
ii. Reproduction, counterfeiting, copying or colorably
imitating registered trademark or dominant features
in labels, containers or advertisements
b. Remedies
i. Recovery of damages for lost profits
1) Need of proof of knowledge of likelihood of
confusion
2) Presumption of knowledge by using the words
Registered Mark or letter R
ii. Injunction
iii. Destruction of infringing materials
5. Unfair Competition
a. Acts
a. Passing off ones goods for the goods of another
b. Passing off ones services for those of another
c. Making a false statement or committing an act
contrary to good faith to discredit the goods or
services of another
b. Trade Name
1. Ownership is acquired through priority of adoption
2. Generic words are excluded
3. Geographical names cannot be appropriated
4. Trade name contrary to public order or morals
cannot be used
C. Copyright
1. Ownership
a. Commissioned work
i. Work belongs to the one who commissioned
ii. Copyright belongs to creator
D. Rights of Copyright Owner

46

a. Economic Rights: Exclusive Rights to Carry Out,

Authorize or Prevent:
i. Reproduction of work or substantial portions
ii.
Dramatization,
translation,
adaptation,
abridgment, arrangement or other transformation
iii. First public distribution of original and each
copy of work
iv. Rental of original or copy of work
v. Public display of original or copy of work
vi. Public performance of work
vii. Other communication of work to public
b. Moral Rights
i. Perpetual requirement of attribution of
authorship of work
ii. Alteration of work or withholding from
publication
iii. Objection to distortion or modification of work
or derogatory action
iv. Restraint of use of his name for work not of his
own creation or distorted version
c. Droit de Suite
Right of painter, writer or composer to get 5 per
cent of proceeds of sale or lease for his lifetime
and 50 years after his death
E. Copyright-literary, scholarly, scientific and artistic work
1. Principles
a. Works are protected by the mere fact of
creation
b. They are protected from the moment of creation
c. Copyright is distinct from the ownership of
material object subject to it
2. Unprotected works
a. Idea
b. Procedure
c. System
d. Method
e. Operation
f. Concept
g. Principle
h. Discovery
i. Data
j. News of the day
47

k. Items of press information

l. Official text of legislative, administrative or legal
nature, as well as any translation
3. Originality: Not copied but independent creation
4. Derivative Works
a. Dramatizations,
translation,
adaptation,
abridgements,
arrangements,
and
other
alterations
b. Collection of literacy, scholarly or artistic works,
and compilations of data and other materials
original because of selection, coordination or
arrangement
5. Ownership
a. Author
b. Joint authors
c. Work created by employee
i. Employee if not part of his work
ii. Employer if part of regular duties
6. Fair Use
a. Purpose and character of use, whether
commercial or non-profit
b. Nature of copyrighted work
c. Amount and substantiality of portions used
d. Effect upon potential market
7. Infringement
a. Concept
Doing without the consent of the owner of
anything the sole right of which belongs to the
owner
a. Acts
i. Directly infringing
ii. Benefiting from direct infringement with
notice of infringement and ability to control
direct infringer
iii. With knowledge of infringement, inducing,
causing or materially contributing to it

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49