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I. Letters of Credit

A. Definition and Nature of Letter of Credit

A Letter of Credit is any arrangement, however named or described, whereby a bank, acting
upon the request of its client or on its own behalf, agrees to pay another against stipulated
documents provided that the terms of the credit are complied with.

While a Letter of Credit is a security arrangement, the liability of the bank that issued the LOC
is neither that of a surety nor a guarantor, the liability of the issuing bank is primary and
solidary. And the issuing bank is not entitled to the benefit if excussion.

A LOC is not a negotiable instrument because it does not comply with requisites of
negotiability under the Negotiable Instruments Law. For instance, a LOC does not contain an
unconditional promise or order to pay a sum certain in money. The undertaking of the bank to
pay the beneficiary is conditioned on the submission of the stipulated documents and
compliance with the terms of the credit.

B. Parties to a Letter of Credit

1. Rights and Obligations of Parties

The parties to a LOC and their respective rights and obligations are as follows:

a) Account party / Applicant

Is either the importer or the buyer in a commercial LOC or the obligor or

debtor in a standby LOC. He agrees to pay the bank that issued the LOC,
the commission or charges and to reimburse the issuing bank the
amounts duly paid under the LOC;

Has no obligation to reimburse the issuing bank if the latter pays without
the stipulated documents or in case of discrepant document; and

Has the right to have the marginal deposit deducted from the principal
obligation under the LOC and to have the interest computed only on the
balance and not on the face value thereof.

b) Issuing Bank

Undertakes to pay the beneficiary upon the latters submission of

stipulated documents or compliance with the credit despite any breach in
the main contract underlying the LOC;

After due payment, issuing bank is entitle to reimbursement as a matter

of right. Reimbursement includes debiting the bank account of the
applicant, if any;
The failure of the beneficiary to present the draft to the applicant does
not affect the right of the issuing bank to reimbursement; and

Issuing bank which paid the beneficiary of an expired LOC can recover
payment from the applicant which obtained the goods from the
beneficiary to prevent unjust enrichment.

c) The Beneficiary

Is the one entitled to payment from the issuing bank after submission of
stipulated documents and compliance with the terms of the credit;

Has a prestation to do under the main contract but his failure to fulfill hi
obligation under the main contract does not negate his right to payment
from the issuing bank as long as he is able to submit the required
documents and comply with the terms of the credit without prejudice to
his liability against the account party under the law on contract and

There can also be additional parties depending on the need to engage a

correspondent bank.

d) Advising / Notifying Bank

Determines the apparent authenticity of the LOC and notifies the

beneficiary of the LOC issuances;

Does not guarantee the genuineness or due execution of the LOC. It is

not liable for damages even if the LOC turns out to be spurious provided
that the spurious character of the LOC is not apparent on the face of the
instrument; and

Has no obligation to pay the beneficiary unless it is also the paying or

confirming bank.

e) The Confirming Bank

Lends credence to the LOC issued by a lesser known bank as if it were

the one that issued the LOC;

Its obligation is similar to the issuing bank. Thus, beneficiary may tender
documents to the confirming bank and collect payment;

Collects fees for such engagement and obtains reimbursement from the
issuing bank.

f) The Negotiating Bank

Becomes a party to the LOC transaction after it buys the draft drawn by
the beneficiary and becomes holder thereof;

As holder, it has the right to payment from the bank primarily liable on
the draft (either issuing bank or the confirming bank);
If the party primarily liable on the LOC (issuing bank or confirming
bank) refuses to honor the draft, the negotiating bank has the right to
proceed against the drawer thereof.

C. Basic Principles of Letter of Credit

1. Doctrine of Independence
Under this principle, the applicant cannot enjoin the payment of the obligation
of the issuing bank under the LOC based on any irregularity or non-performance
of an obligation.

By this doctrine, the relationship among:

The issuing bank and the beneficiary;

The issuing bank and the applicant; and
The beneficiary and the applicant

while interrelated, are separate, distinct and independent of one another.

Thus, in determining the obligation of the issuing bank to pay the beneficiary,
the issuing bank has no obligation to verify whether or not the main contract has
been fulfilled or not.

2. Fraud Exception Principle

Under this principle, the beneficiary may be enjoined from collecting on the
LOC if the following elements are present:

a. There is fraud on the part of the beneficiary;

b. Fraud must be in relation to the independent purpose or character of the
credit; and
c. Unless the beneficiary is restrained, the applicant shall suffer grave and
irreparable injury.

3. Doctrine of Strict Compliance

Under this doctrine, the documents that the beneficiary should submit to the
issuing bank or confirming bank must strictly conform to the documents

If there is discrepancy, the issuing bank is not liable to pay. If it pays despite
discrepant documents, it pays at its own risk and cannot obtain reimbursement
from the applicant.

It is not a question of whether or not it is fair or equitable to require submission

of documents, but whether or not the documents were agreed upon in which
case, all such documents must be submitted.

II. Trust Receipts Law

A. Definition/Concept of a Trust Receipt Transaction

Q: What is a Trust Receipt?

A: Trust Receipt is a transaction between the entruster and the entrustee whereby the entruster
who owns or holds absolute title or security interest over certain goods, documents and
instruments, releases the same to the possession of the entrustee upon the latters execution and
delivery of a trust receipt wherein the entrustee binds himself to hold the designated goods,
documents and instruments in trust for the entruster and to sell or otherwise dispose of the
goods or instruments with the obligation to turn over to the entruster the proceeds thereof to the
extent of the amount owing to the entruster or to return them to the entruster in case of non-

1. Loan/Security Feature

A trust receipt has loan and security features.

The entruster (bank) extends the loan to the entrustee (importer and retail
dealers) to finance the importation or acquisition of goods or instruments in
favor of the entrustee who may not be able to obtain credit except thru
utilization of the merchandise imported or purchased.

The security feature is in the covering trust receipt which secures the

Q: When is a transaction considered a loan even though denominated as a trust receipt?

A: The following are the instances when a transaction is considered a loan even though
denominated as a trust receipt:

a. If the entrustee is already the owner or in possession of the goods before

delivery of the loan and execution of the trust receipt agreement, the transaction
shall be considered a simple loan even though the parties may have denominated
the agreement as one of trust receipt. To be in the nature of the trust receipt, the
entruster should have financed the acquisition or importation of the goods. The
funds should have been delivered before or simultaneously with delivery of the

b. If the goods subject of the trust receipt are not intended for sale or resale; and

c. Sale of goods by a person in the business of selling goods, for profit, who at the
outset of the transaction has as against the buyer general property rights in such
goods and the seller agrees to hold the proceeds of the sale of such goods to his
creditor under a supposed trust receipt transaction

Q: D owns 100 sacks of rice which he sold to B. D obtained a loan from C secured by
the proceeds of the sale of the rice from B which D agrees to hold in trust for C. D and
C denominated their transaction as one of trust receipt. Is such transaction a trust receipt
within the ambit of the trust receipt law?

A: No. There is no trust receipt, notwithstanding the label, if goods offered as security
for loan accommodation are goods owned and sold by the seller who, at the outset of
the transaction, has against the buyer general property rights over such goods.

2. Ownership of the Goods, Documents and Instruments under a Trust Receipt

Entrustee is the factual owner of the goods, documents and instruments
(Prudential Bank vs. NLRC). Entruster is the real owner of the goods,
documents and instruments.

Note: Secuity Interest means a property interest in goods, documents or

instruments to secure performance of some obligations of the entrustee or of
some third persons to the entruster and includes title, whether or not expressed
to be absolute, whether such title is in substance taken or retained for security

Accordingly, in order to secure that the banker shall be repaid at the critical
point that is, when the imported goods finally reach the hands of the intended
vende the banker takes the full title to the goods at the very beginning; he
takes it as soon as the goods are bought and settled for by his payments or
acceptances in the foreign country, and he continues to hold that title as his
indispensable security until the goods are sold.

Q: Who is the owner of the goods under trust receipt?

A: The entrustee. If under the trust receipt, the bank is made to appear as owner, it was
but a legal fiction than fact for if it were really so, it could dispose of the goods in any
manner that it wants which it cannot do so. To consider the bank the owner would be to
disregard the loan feature thereof.

The entrustee, however, cannot mortgage the goods because one of the requisites of a
valid mortgage is that the mortgagor must be the absolute owner of the property
mortgaged or must have free disposal thereof. Entrustee is not the absolute owner of the
goods under trust receipt nor has free disposal therof.

The entruster likewise is not responsible as principal or vendor under any sale or
contract to sell made by the entrustee.

B. Rights of the Entruster

Q: What are the rights of the ENTRUSTER?

A: The rights of the ENTRUSTER are the following: ECS

To be entitled to the proceeds of the sale of the goods under trust receipt to the extent of
the amount owing to him or the return of the goods in case of non-sale;

To cancel the trust and take possession of the goods or of the proceeds realized
therefrom at any time upon default by the entrustee; and

To sell the goods with at least five day notice to the entrustee and apply the proceeds in
payment of the obligation. Entrustee is liable to pay deficiency, if any.

1. Validity of the Security Interest as Against the Creditors of the Entrustee/Innocent

Purchasers for Value

Q: Who has a better right over the goods subject of the trust receipt, the creditors of the
entrustee or the entruster?

A: The entrusters security interest in the goods under trust receipt shall be valid as
against all creditors of the entrustee for the duration of the trust receipt agreement.
Thus, the security interest of the entruster over the goods under the trust receipt is
superior over the monetary claims of the laborers of the entrustee.
Q: What about between the entruster and the innocent purchaser for value?

A: The innocent purchaser for value of the goods sold by the entrustee has a better right
than the entruster. He acquires title to the goods free from the security interest of the

C. Obligation and Liability of the Entrustee

Q: What are the obligations of the ENTRUSTEE?

A: The obligations of the ENTRUSTEE are the following: HIRRKO

a. To hold the goods, documents or instruments in trust for the entruster and to dispose of
them strictly in accordance with the terms of the trust receipt;

b. To insure the goods for their total value against loss from fire, theft, pilferage or other

c. To receive the proceeds in trust for the entruster and turn over the same to the entruster
to the extent of the obligation to the entruster;
d. To return the goods, documents or instruments in the event of non-sale or upon demand
of the entruster;

e. To keep said goods or proceeds thereof separate and capable of identification as

property of the entruster; and

f. To observe all other terms and conditions of the trust receipts not contrary to law.

Q: Are all obligations of the entrustee criminal in nature?

A: No, only the failure of the entrustee to deliver the proceeds of the sale of the goods or
instruments subject of the trust receipt up to the extent of the amount owing to the entruster or
failure of the entrustee to return the goods in case of non-sale. Such violation constitutes estafa.

Under recent jurisprudence, however, the penal sanction under the trust receipts law does not
apply in case the goods are not intended for sale or resale such as when they are for actual use.

1. Payment/Delivery of Proceeds of Sale or Disposition of Goods, Documents or


Q: What is the effect of payment or delivery of the proceeds of the sale or disposition of
goods, documents or instruments on the liability of the entrustee?

A: Full payment of the loan or delivery of the sale proceeds equivalent to the full
amount of the obligation extinguishes both criminal and civil liabilities of the entrustee.

2. Return of Goods, Documents or Instruments in Case of Sale

Q: What is the effect of the return of goods, documents or instruments in case of non-
sale on the liability of the entrustee?

A: The return of the goods, documents or instruments in case of non-sale extinguishes

only the criminal liability of the entrustee unless he pays in full his loan obligation. The
return of the goods and the consequent acquittal of the entrustee in the criminal case
does not bar the filing of a separate civil action to enforce the civil liability of the

Q: Who bears the risk of loss of goods, documents or instruments in a trust receipt?

A: The risk of loss shall be borne by the entrustee. Loss of the goods under trust receipt,
pending their disposition, irrespective of whether or not it was due to the fault of
negligence of the entrustee, shall not extinguish the his obligation to the entruster for
the value thereof.

The principle of res perit domino (when the thing is lost, the owner bears the loss) will
not apply against the entruster.

3. Liability for Loss of Goods, Documents or Instruments

Q: What is the effect of the loss or surrender by the entrustee or repossession by the
entruster of the goods under trust receipt?

A: The following are the effects:

a. The loss of the goods subject of the trust receipt regardless of the cause does not
extinguish the civil liability of the entrustee up to the extent of the amount
owing to the entruster;

b. The return of the goods may extinguish the criminal liability but not the civil
liability of the entrustee unless the goods are sold and proceeds thereof applied
in full payment of the loan;

c. The repossession of the goods by the entruster in case of default by the entrustee
does not extinguish the civil liability of the entrustee unless the goods are sold
and proceeds applied in payment of the obligation;

d. In all of the foregoing cases, the civil obligation of the entrustee remains until
the loan granted by the entruster to finance the acquisition of the goods is fully
paid and satisfied;

e. In one case, the Supreme Court ruled that the repossession of the goods in case
of default of the entrustee does not prevent the entruster from foreclosing any
mortgage on the property which the entrustee or surety offered as additional
security for the loan.

Q: May a civil action for the collection of the loan be instituted independently of the
criminal action for violation of the trust receipts law or after the acquittal by entrustee in
the criminal action due to his surrender of the goods to the entruster?

A: Yes, because the loan feature of a trust receipt is distinct from its security features.
What the entrustee does with the goods, as security for the loan, determines his criminal

For instance, the return of the goods may extinguish his criminal liability but until the
loan is paid, his civil obligation remains.

The civil action of the entrustee is based on ex-contractu while the criminal action is
based on ex-delictu.

The two actions may proceed independently of each other despite the failure of the
entruster to make reservation in the criminal action.
Q: What are the instances where there is no criminal liability despite execution of a
trust receipt agreement?

A: The following instances are:

a. The transaction is not a trust receipt within the contemplation of the trust receipt

b. Surrender of the goods to the entruster;

c. Non-delivery of the goods to the entrustee;

d. Compromise agreement before the filing of the criminal information for

violation of the trust receipts law;

e. Cancellation of the trust and taking of possession by the entruster; and

f. Loss of the goods due to force majeure.

4. Penal Sanction if Offender is a Corporation

Q: Upon whom does the law impose liability if the offender is a corporation?

A: If the violation is committed by a corporation, the criminal liability shall be imposed

upon the directors, officers, employees or other officials or persons therein responsible
for the offense without prejudice to civil liabilities arising from the criminal offense.

The officer of the corporation who signed a trust receipt cannot hide behind the cloak of
the separate legal personality of the corporation and cannot avoid criminal prosecution
even though he had no physical possession of the goods nor benefitted from the trust
receipt transaction. The law makes him liable for such corporate act without prejudice
to the civil liability of the corporation and/or directors/officers responsible for the

The director or officer of the corporation or an agent who signed the trust receipt in
behalf of the corporation shall be criminally liable but not civilly liable unless he
assumes personal liability.

D. Remedies Available

Q: What are the remedies available to the entruster in case of violation of the trust receipt

A: The remedies available are the following:

a. File a criminal action for estafa in case of failure of the entrustee to deliver the proceeds
of the sale of the goods under trust receipt up to the extent of his obligation to the
entruster. The civil action may be instituted in the criminal action or separately filed
independently of the criminal action. The criminal action is based on ex-delictu for
violation of the law while the civil action is based on ex-contractu for violation of the
trust receipt agreement;

b. Cancel the trust and take possession of the goods at any time upon default of the
entrustee. After repossession, the entruster may sell the goods upon at least five day
notice to the entrustee and apply the proceeds in payment of the obligation. The
entrustee is liable for deficiency or entitle to excess, if any; and
c. If a surety secures the obligation of the entrustee in addition to the trust receipt, the law
does not obligate the entuster to cancel the trust or take possession of the goods. He can
proceed against the surety. The options belong to the entruster.

E. Warehousemans Lien

Q: What is a warehousemans lien?

A: A warehousemans lien is a right of a warehouseman to retain goods until all storage charges
have been paid.

Q: What claims are included in the warehousemans lien?

A: A warehouseman shall have a lien on goods deposited or on the proceeds thereof in his
hands, for:

a. All lawful charges for storage and preservation of the goods;

b. All lawful claims for money advanced, interest, insurance, transportation, labor,
weighing, coopering and other charges and expenses in relation to such goods; and

c. All reasonable charges and expenses for notice, and advertisements of sale, and for sale
of the goods where default had been made in satisfying the warehousemans lien.

It is necessary, however, that the charges that are present at the time of the issuance of the
receipt, must be so stated in the receipt with the amounts thereof specified. If the existing
charges are not stated, the warehouseman shall have no lien thereon. He shall have a lien only
for charges for storage of goods subsequent to the date of the receipt unless the receipt
expressly enumerated other charges for which a lien is claimed.

Q: What are the properties that are subject to lien?

A: The following are the properties:

a. Against all goods, whenever deposited, belonging to the person who is liable as debtor
for the claims in regard to which the lien is asserted; and

b. Against all goods belonging to others which have been deposited at any time by the
person who is liable as debtor for the claims in regard to which the lien is asserted if
such person had been so entrusted with the possession goods that a pledge of the same
by him at the time of the deposit to one who took the goods in good faith for value
would have been valid.

Q: How can the loss of lien be effected?

A: Loss of lien can be effected:

a. By surrendering possession thereof; or

b. By refusing to deliver the goods when a demand is made with which he is bound to
III. Negotiable Instruments Law (exclude insignificant
provisions) (See Tayags Handouts)

A. Forms and Interpretation

1. Requisites of Negotiability
2. Kinds of Negotiable Instruments

B. Completion and Delivery

1. Insertion of Date
2. Completion of Blanks
3. Incomplete and Undelivered Instruments
4. Complete but Undelivered Instruments

C. Signature
1. Signing in Trade Name
2. Signature of Agent
3. Indorsement by Minor or Corporation
4. Forgery

D. Consideration

E. Accommodation Party

F. Negotiation
1. Distinguished from Assignment
2. Modes of Negotiation
3. Kinds of Indorsements

G. Rights of the Holder

1. Holder in Due Course
2. Defenses Against the Holder

H. Liabilities of Parties
1. Maker
2. Drawer
3. Acceptor
4. Indorser
5. Warranties

I. Presentment for Payment

1. Necessity of Presentment for Payment
2. Parties to Whom Presentment for Payment Should Be Made
3. Dispensation with Presentment for Payment
4. Dishonor by Non-Payment

J. Notice of Dishonor
1. Parties to Be Notified
2. Parties Who May Give Notice and Dishonor
3. Effect of Notice
4. Form of Notice
5. Waiver
6. Dispensation with Notice
7. Effect of Failure to Give Notice

K. Discharge of Negotiable Instrument

1. Discharge of Negotiable Instrument
2. Discharge of Parties Secondarily Liable
3. Right of Party Who Discharged Instrument
4. Renunciation by Holder

L. Material Alteration
1. Concept
2. Effect of Material Alteration

M. Acceptance
1. Definition
2. Manner
3. Time for Acceptance
4. Rules Governing Acceptance

N. Presentment for Acceptance

1. Time/Place/Manner of Presentment
2. Effect of Failure to Make Presentment
3. Dishonor by Non-Acceptance

O. Promissory Notes

P. Checks
1. Definition
2. Kinds
3. Presentment for Payment
a. Time
b. Effect of Delay

IV. Insurance Code (See Tayags Handouts)

A. Concept of Insurance

B. Elements of an Insurance Contract

C. Characteristics/Nature of Insurance Contracts

D. Classes
1. Marine
2. Fire
3. Casualty
4. Suretyship
5. Life
6. Compulsory Motor Vehicle Liability Insurance

E. Insurable Interest
1. In Life/Health
2. In Property
3. Double Insurance and Over Insurance
4. Multiple or Several Interests on Same Property
F. Perfection of the Contract of Insurance
1. Offer and Acceptance/Consensual
a. Delay in Acceptance
b. Delivery of Policy
2. Premium Payment
3. Non-Default Options in Life Insurance
4. Reinstatement of a Lapsed Policy of Life Insurance
5. Refund of Premiums

G. Rescission of Insurance Contracts

1. Concealment
2. Misrepresentation/Omissions
3. Breach of Warranties

H. Claims Settlement and Subrogation

1. Notice and Proof of Loss
2. Guidelines on Claims Settlement
a. Unfair Claims Settlement; Sanctions
b. Prescription of Action
c. Subrogation

V. Transportation Laws
A. Common Carriers

Concept of Common Carriers

Art. 1732, Civil Code. Common carriers are persons, corporations, firms or associations
engaged in the business of carrying or transporting passengers or goods or both, by land, water,
or air, for compensation, offering their services to the public.

1. Diligence Required of Common Carriers

Art. 1733, Civil Code. 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.

Such extraordinary diligence in the vigilance over the goods is further expressed in
Articles 1734, 1735, and 1745, Nos. 5, 6, and 7, while the extraordinary diligence for
the safety of the passengers is further set forth in Articles 1755 and 1756.

Extraordinary diligence

a. Rendering service with the greatest skill and utmost foresight (Agbayani)

b. Carrying 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 (Art 1755)

c. Does not require common carriers to exercise all the care, skill, and diligence of
which the human mind can conceive. Nor such as will free the transportation of
passengers from all possible perils.

Note: A common carrier is not an insurer of the safety of the passengers and is not
absolutely and at all events to carry them safely and without injury.
Nature of business of common carriers and the exigencies of public policy.

2. Liabilities of Common Carriers

General rule:
a. Common carriers are responsible for the loss, destruction, or deterioration of the
goods. (Art. 1734) In fact, they are liable even in those cases where the cause of
the loss or damage is unknown. (Agbayani)
b. Cause of action: breach of contract (culpa contractual)
c. Moreover, if the goods are lost, destroyed, or deteriorated, common carriers are
presumed to have been at fault or to have acted negligently. (Art 1735)

Exceptions (common carrier not liable):

a. If loss, destruction, or deterioration of goods is due to any of the following
i. Flood, storm, earthquake, lightning, or other natural disaster or calamity;
ii. Act of the public enemy in war, whether international or civil;
iii. Act of omission of the shipper or owner of the goods;
iv. The character of the goods or defects in the packing or in the containers;
v. Order or act of competent public authority (Art. 1734).

Note: The presumption of negligence DOES NOT apply in these cases.

b. If it exercised extraordinary diligence.

General rule:

Art. 1755, Civil Code. 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.

Art. 1756, Civil Code. In case of death of or injuries to passengers, common carriers are
presumed to have been at fault or to have acted negligently, unless they prove that they
observed extraordinary diligence as prescribed in Arts 1733 and 1755.

Common carriers are also responsible for the safety of the following persons (even
though they are not passengers):

a. For the safety of members of the crew or the complement operating the carrier
since any omission, lapse, or neglect on the part of the common carrier will
certainly result to the damage, prejudice, injuries, and even death to all aboard,
passengers and crew members alike. (PAL v. CA)
b. For the safety of stevedores if their presence onboard was called for by the
contract of carriage. It is liable if it knew and consented to the stevedores
presence. (Sulpicio v. CA (1995))

Exception (common carrier not liable):

If accident was caused by force majeure AND the common carrier exercised
extraordinary diligence in safeguarding the passengers (or goods) (Bachelor Express
v. CA)


a. The liability of a carrier is contractual and arises upon breach of its obligation.
There is breach if it fails to exert extraordinary diligence according to all
circumstances of each case;
b. A carrier is obliged to carry its passenger with the utmost diligence of a very
cautious person, having due regard for all the circumstances;
c. A carrier is presumed to be at fault or to have acted negligently in case of death
of, or injury to, passengers, it being its duty to prove that it exercised
extraordinary diligence; and
d. The carrier is not an insurer against all risks of travel. (Isaac v. A.L. Ammen)


The mere proof of delivery of goods in good order to a carrier, and of their arrival at the
place of destination in bad order, makes out a prima facie case against the carrier, so
that if no explanation is given as to how the injury occurred, the carrier must be held
responsible. It is incumbent upon the carrier to prove that the loss was due to accident
or some other circumstance inconsistent with its liability. (Ynchausti Steamship v
Dexter and Unson, 1920)


A person who has been granted a certificate of public convenience allows another
person who owns motor vehicles to operate under such franchise for a fee.

Thus, for the safety of passengers and the public who may have been wronged and
deceived through the baneful kabit system, the registered owner of the vehicle is not
allowed to prove that another person has become the owner so that he may be thereby
relieved of responsibility. (Lim v. CA, 2002)

B. Vigilance over Goods

1. Exempting Causes

a. Natural disaster

1. The natural disaster must have been the proximate and only cause of the
loss (Art 1739)
2. The common carrier must exercise DUE diligence to prevent or
minimize the loss before, during and after the occurrence of the flood,
storm or natural disaster (Art 1739)
3. The common carrier must not have negligently incurred delay (Art 1740)
4. The shipment was at shippers risk (Art 361, Code of Commerce)

The master is responsible for the safe & proper stowage of the cargo, & there is
no doubt that by the general maritime law he is bound to secure the cargo safely
under deck. If the master carries goods on deck without the consent of the
shipper, he does it at his own risk. If they are damaged or lost in consequence of
their being thus exposed, he cannot protect himself from responsibility by
showing that they were damaged or lost by the dangers of the seas. But, when
the shipper consents to his goods being carried on deck, he takes the risks of any
damage or loss sustained as a consequence of their being so carried. (Martini v.
Macondray, 1919).

Fire may not be considered a natural disaster/calamity. This must be so as it

arises almost invariably from some act of man or by human means. It does not
fall within the category of an act of God unless caused by lightning or by other
natural disaster/calamity. It may even be caused by the actual fault or privity of
the carrier. (Eastern Shipping Lines v. IAC, 1987)
If between the delay or refusal of the common carrier to transport the goods and
the loss of the goods due to an act of God there intervened the shippers
negligence, thus causing a break in the chain of causation between the act of
God which caused the loss and the common carriers fault, the act of God is the
proximate cause of the loss and the carriers delay or refusal is merely the
remote cause. (Agbayani) (In this case, the natural disaster is not the only cause,
therefore, not an exempting cause)

b. Act of public enemy


1. The act of the public enemy was committed either in an international or

civil war. (Art. 1734)
2. The act of the public enemy must have been the proximate and only
cause (Art. 1739)
3. The common carrier must exercise due diligence to prevent or minimize
the loss before, during and after the act of the public enemy causing the
loss, destruction or deterioration of the goods. (Art. 1739)

c. Act or omission of shipper


The act or omission of the shipper must have been the proximate and
only cause of the loss, destruction, or deterioration of the goods (Art

If the shipper owner merely contributed to the loss, destruction or

deterioration of the goods, the proximate cause being the negligence of
the common carrier, then the common carrier shall be liable for the
damages, which shall, however, be equitably reduced. (Art 1741)

d. Character of goods

1. The loss, destruction, or deterioration of the goods is due to the character
of the goods or defects in the packing or in the containers (Art 1739)
2. The common carrier must exercise due diligence to forestall or lessen the
loss (Art 1739)


Ascertainable from package Upon receipt of goods

Not ascertainable from

Within 24 hours upon receipt

What happens if no claim has been brought after the lapse of the periods
mentioned or after payment of transportation charges? NO claim shall be
admitted against the carrier with regard to the condition in which the goods
transported were delivered. (Art 366, Code of Commerce)

If the fact of improper packing is known to the carrier or its servants or apparent
upon ordinary observation, but (the carrier) accepts the goods notwithstanding
such condition, it is not relieved of liability for loss or injury resulting
therefrom. (Southern Lines v. CA, 1962)
e. Order of competent authority


1. There must be an order or act of competent public authority (Art. 1734)

2. The said public authority must have had the power to issue the order.
(Art. 1743)

The intervention of the municipal officials was not of a character that would
render impossible the fulfillment by the carrier of the obligation. The petitioner
was not duty bound to obey the illegal order (of the mayor) to dump into the sea
the scrap iron. There is absence of sufficient proof that the issuance of the order
was attended with such force or intimidation as to completely overpower the
will of petitioners employees. The mere difficulty in the fulfillment of the
obligation is not force majeure. (Ganzon v. CA, 1988)

J. Melencio-Herrera, Dissent: Through the order or act of competent public

authority, the performance of the contractual obligation was rendered
impossible. Apparently, the seizure and destruction of the goods was done under
legal process or authority so that petitioner should be freed from responsibility.

a. Requirement of Absence of Negligence

Art. 1739, Civil Code. In order that the common carrier may be exempted from
responsibility, the natural disaster must have been the proximate and only cause
of the loss.

Loss of a ship and of its cargo, in a wreck due to accident or force majeure must,
as a general rule, fall upon their respective owners, except in cases where the
wrecking or stranding of the vessel occurred through the malice, carelessness, or
lack of skill on the part of the captain or because the vessel put to sea is
insufficiently repaired and prepared.

The carrier is exempt from liability if he is able to prove that the loss or
destruction of the merchandise was due to accident and force majeure and not to
fraud, fault, or negligence on the part of the captain or owner of the ship. (Tan
Chiong Sian v Inchausti, 1912)

b. Absence of Delay

Art. 1740, Civil Code. If the common carrier negligently incurs in delay in
transporting the goods, a natural disaster shall not free such carrier from

c. Due Diligence to Prevent or Lessen the Loss

Art. 1739, Civil Code. In order that the common carrier may be exempted from
responsibility, the natural disaster must have been the proximate and only cause
of the loss. However, the common carrier must exercise due diligence to prevent
or minimize loss before, during and after the occurrence of flood, storm or other
natural disaster in order that the common carrier may be exempted from liability
for the loss, destruction, or deterioration of the goods. The same duty is
incumbent upon the common carrier in case of an act of the public enemy
referred to in Article 1734, No. 2.

Art. 1742, Civil Code. 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.
1. For natural disasters and acts of public enemy, the common carrier must
have exercised due diligence to prevent or minimize loss, before, during
and after the occurrence of flood, storm, or other natural disaster to be
exempted from liability. (Art. 1739)
2. For faulty nature of packing or loss due to the character of the goods, the
common carrier must have exercised due diligence to forestall or lessen
the loss. (Art. 1742)

2. Contributory Negligence

Art. 1741, Civil Code. If the shipper or owner merely contributed to the loss destruction
or deterioration of the goods the proximate cause thereof being the negligence of the
common carrier the latter shall be liable in damages which however shall be equitably

3. Duration of Liability

When is the contract of transportation perfected? A contract of transportation is

consensual in nature; therefore it is perfected upon the meeting of the minds of the
(Art. 1305)

But, when does the carriers extraordinary responsibility begin? It only begins from the
time the goods are unconditionally placed in the possession of and received by the
carrier for transportation. (Art 1736)

When does carriers extraordinary responsibility terminate?

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) (Art. 1736)
When the goods are temporarily unloaded or stored in transit by reason of the
exercise of the shipper or owner of his right of stoppage in transitu.
Until the consignee has been advised of the arrival of the goods at the place of
destination and has had reasonable opportunity to remove them or dispose of
them from the warehouse of the carrier at the place of destination (Art. 1738)

a. Delivery of Goods to Common Carrier

The liability of the carrier as common carrier begins with the actual delivery of
the goods for transportation and not merely with the formal execution of a
receipt or bill of lading; the issuance of a bill of lading is not necessary to
complete delivery and acceptance. Even where it is provided by statute that
liability commences with the issuance of the bill of lading actual delivery and
acceptance are sufficient to bind the carrier. (Compania Maritima v. Insurance
Company of North America, 1964).

The liability and responsibility of the carrier commence on their actual delivery
to, or receipt by the carrier or an authorized agent, of the goods. (Cia. Maritima
v. Insurance Co. of NA)

b. Actual or Constructive Delivery

Art. 1736, Civil Code. 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.
Delivery: Unconditionally placing the goods in the possession of the carrier
AND the carrier receiving them for transportation

What if the goods are only for safekeeping? If the common carrier received the
goods not for transportation but only for safekeeping, where the goods have
already been purchased by the shipper and ready for transportation, then the
duty of extraordinary diligence has not yet started.

What does unconditionally placed in Art. 1736 mean? It means that the
shipper cannot get the goods back from the common carrier at will.

To whom should the goods be delivered?

Person who has a right to receive them includes agents, brokers, and
the like.

Delivery of the cargo to the customs authorities is not delivery to the consignee
or to the person who has a right to receive them as contemplated in Article
1736 because in such case the goods are still in the hands of the Government
and the owner cannot exercise dominion over them. However, the parties may
agree to limit the liability of the carrier considering that the goods still have to
go through the inspection of the customs authorities before they are actually
turned over to the consignee. This is a situation where we may say that the
carrier losses control of the goods because of a custom regulation and it is unfair
that it be made responsible for what may happen during the interregnum. (Lu Do
v. Binamira, 1957)

c. Temporary Unloading or Storage

Art. 1737, Civil Code. 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 transitu.

General rule: Extraordinary diligence over the goods remains even when the
goods are temporarily unloaded or stored in transit.

Exception: Shipper or owner made use of the right of stoppage in transit.

What is stoppage in transitu? Act by which the unpaid vendor of goods stops
their progress and resumes possession of them constructively while they are in
the course of transit from him to the purchaser, and not yet actually delivered to
the latter (Agbayani)

Basis: Art. 1530, Civil Code. When the buyer of the goods becomes insolvent,
the unpaid seller who has parted with the possession of the goods at any time
while they are in transit, may resume the possession of the goods as he would
have had if he had never parted with the possession.

When the right of stoppage in transitu is exercised, the common carrier holds the
goods in the capacity of an ordinary bailee or warehouseman upon the theory
that the exercise of the right of stoppage in transitu terminates the contract of
carriage. Hence, only ordinary diligence is required. (Agbayani)

4. Stipulation for Limitation of Liability

Art. 1747, Civil Code. 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.

Can limitation on liability be availed of by a common carrier which delayed the

transportation of the goods or changed the stipulated or usual route?
If with just cause, YES.
If without just cause, NO.

Art. 1748, Civil Code. An agreement limiting the common carrier's liability for delay on
account of strikes or riots is valid.

Art. 1752, Civil Code. Even when there is an agreement limiting the liability of the
common carrier in the vigilance over the goods, the common carrier is disputably
presumed to have been negligent in case of their loss, destruction or deterioration.

a. Void Stipulations

Art. 1744, Civil Code. A stipulation between the common carrier and the shipper
or owner limiting the liability of the former for the loss, destruction, or
deterioration of the goods to a degree less than extraordinary diligence shall be
valid, provided it be:
1. In writing, signed by the shipper or owner;
2. Supported by a valuable consideration other than the service rendered by
the common carrier; and
3. Reasonable, just and not contrary to public policy.

Art. 1745, Civil Code. Any of the following or similar stipulations shall be
considered unreasonable, unjust and contrary to public policy:
1. That the goods are transported at the risk of the owner or shipper;
2. That the common carrier will not be liable for any loss, destruction, or
deterioration of the goods;
3. That the common carrier need not observe any diligence in the custody
of the goods;
4. That the common carrier shall exercise a degree of diligence less than
that of a good father of a family, or of a man of ordinary prudence in the
vigilance over the movables transported;
5. That the common carrier shall not be responsible for the acts or omission
of his or its employees;
6. That the common carrier's liability for acts committed by thieves, or of
robbers who do not act with grave or irresistible threat, violence or force,
is dispensed with or diminished;
7. That the common carrier is not responsible for the loss, destruction, or
deterioration of goods on account of the defective condition of the car,
vehicle, ship, airplane or other equipment used in the contract of

Art. 1751, Civil Code. The fact that the common carrier has no competitor along
the line or route, or a part thereof, to which the contract refers shall be taken into
consideration on the question of whether or not a stipulation limiting the
common carrier's liability is reasonable, just and in consonance with public

Kinds of Stripulations Limiting Liability

(Heacock v. Macondray, 42 Phil 205)
Exempting the common carrier from any and all
liability for loss or damage occasioned by its own Void
Providing for an unqualified limitation of such
liability to an agreed stipulation

Limiting the liability of the common carrier to an

agreed valuation unless the shipper declares a higher Valid
value and pays a higher rate of freight

Stipulations on Degree of Diligence

No diligence to be observed Void

Less than Diligence of a good father of a family Void

Valid, if 3 requisites
Less than Extraordinary diligence in Art. 1744 are

b. Limitation of Liability to Fixed Amount

Art. 1749, Civil Code. 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.

Art. 1734, Civil Code. A contract fixing the sum that may be recovered by the
owner or shipper for the loss, destruction or deterioration of the goods is VALID
if it is reasonable and just under the circumstances and has been fairly and freely
agreed upon.

There are two requisites that must be fulfilled in order that the liability of PAL
be limited according to the stipulations behind the ticket stub:
1. That the contract is just and reasonable under the circumstances
2. That the contract was fairly and freely agreed upon (Art. 1750)

The fact that the conditions are printed at the back of the ticket stub in letters so
small that they are hard to read would not warrant the presumption that plaintiff
was aware of those conditions such that he had fairly and freely agreed to
those conditions. (Shewaram v. PAL, 1966)

While the passenger had not signed the plane ticket, he is nevertheless bound by
the provision thereof; such provisions have been held to be part of the contract
of carriage and valid and binding upon the passenger regardless of the latters
lack of knowledge or assent to the regulation. It is what is known as a contract
of adhesion wherein one party imposes a ready-made form of contract on the
other. The one who adheres to the contract is in reality free to reject it entirely. A
contract limiting liability upon an agreed valuation does not offend against the
policy of the law forbidding one from contracting against his own negligence.
(Ong Yiu v. CA, 1979)

c. Limitation of Liability in Absence of Declaration of Greater Value

Art. 1749, Civil Code. 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.
4. Liability for Baggage of Passengers

What is a passenger baggage? Things that a passenger will bring with him consistent
with a temporary absence from where he lives. Passenger baggage must have a direct
relationship with the passenger who is traveling.

E.g., A balikbayan box or suitcase is passenger baggage. However, 10,000 cans of

corned beef, for example, is not considered as passenger baggage. They are considered
as goods. If you carry goods with you, you cannot bring them with you as part of your
(passenger) contract of carriage. You will need to get a separate contract of carriage
(bill of lading) in order to transport them. These goods will then be transported
whether or not you are physically traveling with them. (Agbayani)

What are the kinds of passenger baggage and the laws applicable to them?
Passenger baggage in the custody of the passenger (e.g. carry-on luggage):
These are considered as necessary deposits. Arts. 1998, 2000-2003 apply.
Passenger baggage not in the custody of the passenger (e.g. checked-in
luggage): Arts. 1733-1753 on extraordinary diligence apply.

The liability is greater for baggage that is in the custody of the carrier in contrast if such
is in the possession of the passenger.

d. Checked-In Baggage

Art. 1754, Civil Code. The provisions of Articles 1733 to 1753 shall apply to the
passenger's baggage which is not in his personal custody or in that of his
employee. As to other baggage, the rules in Articles 1998 and 2000 to 2003
concerning the responsibility of hotel-keepers shall be applicable.

e. Baggage in Possession of Passengers

Art. 1998, Civil Code. 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.

Under Art. 1998, the baggage of passengers in their personal custody or in that
of their employees while being transported shall be regarded as necessary
deposits. The common carrier shall be responsible for such baggage as
depositaries (i.e. like hotel-keepers), provided that:
1. Notice was given to them or to their employees, AND that
2. The passengers take the precautions which said carriers advised relative
to the care and vigilance of their baggage. (Agbayani)

Art. 2000, Civil Code. 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.

Art. 2001, Civil Code. 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.
Art. 2002, Civil Code. 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.

Art. 2003, Civil Code. 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.

In case of loss or injury to the baggage of passengers in their personal custody or

in that of their employees while being transported:

1. The carrier is LIABLE if the loss or injury is caused by:

a. his servants OR
b. employees OR
c. strangers (Art. 2000)
d. thief or robber done without the use of arms or irresistible force
(Art 2001)
2. The carrier is NOT LIABLE, if loss or injury is caused by:
a. force majeure (Art. 2000),
b. theft or robbery by a stranger with the use of arms or irresistible
force (Art 2001),
c. the acts of the guests, his family, servants, or visitors (Art 2002)
d. the character of the things brought into the hotel (Art 2002)

C. Safety of Passengers

1. Void Stipulations

Art. 1757, Civil Code. The responsibility of a common carrier for the safety of
passengers as required in Articles 1733 and 1755 cannot be dispensed with or lessened
by stipulation by the posting of notices, by statements on tickets, or otherwise.

Art. 1758, Civil Code. When a passenger is carried gratuitously, a stipulation limiting
the common carrier's liability for negligence is valid, but not for willful acts or gross

The reduction of fare does not justify any limitation of the common carrier's liability.

General rule: Stipulations limiting liability are void.

Exception: Gratuitous carriage except for willful acts or gross negligence.

Under Art. 1758, the common carrier and the passenger may validly stipulate to limit
the carriers liability for negligence in cases of gratuitous carriage, but the parties
cannot stipulate to entirely eliminate liability of common carrier. (Agbayani)

2. Duration of Liability

Art. 17, Warsaw Convention. The carrier is liable for damage sustained in the event of
the death or wounding of a passenger or any other bodily injury suffered by a passenger,
if the accident which caused the damage so sustained took place on board the aircraft or
in the course of any of the operations of embarking or disembarking.

Art. 698, Code of Commerce. In case a voyage already begun should be interrupted, the
passengers shall be obliged to pay the fare in proportion to the distance covered,
without right to recover for losses and damages if the interruption is due to fortuitous
event or to force majeure, but with a right to indemnity if the interruption should have
been caused by the captain exclusively. If the interruption should be caused by the
disability of the vessel, and a passenger should agree to await the repairs, he may not be
required to pay any increased price of passage, but his living expenses during the stay
shall be for his own account. In case of delay in the departure of the vessel, the
passengers have the right to remain on board and to be furnished with food for the
account of the vessel unless the delay is due to fortuitous events or to force majeure. If
the delay should exceed ten days, passengers requesting the same shall be entitled to the
return of the fare; and if it is due exclusively to the fault of the captain or ship agent,
they may also demand indemnity for losses and damages. A vessel exclusively devoted
to the transportation of passengers must take them directly to the port or ports of
destination, no matter what the number of passengers may be, making all the stops
indicated in its itinerary.

Does the duty of extraordinary diligence occur right at the perfection of the contract of
transportation? The perfection of the contract of carriage does not necessarily coincide
with the commencement of the duty of extraordinary diligence. It may occur at the same
time or later.

a. Waiting for Carrier or Boarding of Carrier

It is the duty of common carriers of passengers to stop their conveyances at a

reasonable length of time in order to afford passengers an opportunity to board
and enter, and they are liable for injuries suffered by boarding passengers
resulting from the sudden starting up or jerking of their conveyances while they
are doing so. (Dangwa Transportation v. CA (1991)

A person boarding a moving car must be taken to assume the risk of injury from
boarding the car under the conditions open to his view, but he cannot fairly be
held to assume the risk that the motorman, having the situation in view, will
increase the peril by accelerating the speed of the car before he is planted safely
on the platform.

The duty that the carrier of passengers owes to its patrons extends to persons
boarding the cars as well as those alighting therefrom. (Del Prado v. Manila
Railroad, 1929)

b. Arrival at Destination

When does relationship of common carrier and passenger terminate? It does not
cease at the moment that the passenger alights from the common carriers
vehicle at a place selected by the carrier at the point of destination, but continues
until the passenger has had reasonable time or a reasonable opportunity to leave
the carriers premises. What is a reasonable time or a reasonable delay within
this rule is to be determined from all the circumstances. (La Mallorca v. CA,

The reasonableness of time should be made to depend on the attending

circumstances of the case, such as the kind of common carrier, the nature of its
business, the customs of the place, and so forth, and therefore precludes a
consideration of the time element per se without taking into account such other
factors. The primary factor to be considered is the existence of a reasonable
cause as will justify the presence of the victim on or near the petitioners vessel.

It is of common knowledge that by the very nature of petitioner's business as a

shipper, the passengers of vessels are allotted a longer period of time to
disembark from the ship than other common carriers such as a passenger bus.
Such vessels are capable of accommodating a bigger volume of both passenger
and baggage as compared to the capacity of a regular commuter bus (as in the
La Mallorca case). Consequently, a ship passenger will need at least an hour as
is the usual practice, to disembark from the vessel and claim his baggage
whereas a bus passenger can easily get off the bus and retrieve his luggage in a
very short period of time. (Aboitiz v. CA)

Does the duty of extraordinary diligence get interrupted? What we said in one
case once again must be stressed, i.e., the relation of carrier and passenger
continues until the latter has been landed at the port of destination and has left
the carrier's premises. Hence, PAL necessarily would still have to exercise
extraordinary diligence in safeguarding the comfort, convenience and safety of
its stranded passengers until they have reached their final destination. (PAL v

3. Liability for Acts of Others

a. Employees

Art. 1759, Civil Code. Common carriers are liable for the death of or injuries to
passengers through the negligence or willful 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.

Art. 1760, Civil Code. The common carrier's responsibility prescribed in the
preceding article cannot be eliminated or limited by stipulation, by the posting
of notices, by statements on the tickets or otherwise.

It is enough that the assault happens within the course of the employee's duty. It
is no defense for the carrier that the act was done in excess of authority or in
disobedience of the carrier's orders. The carrier's liability here is absolute in the
sense that it practically secures the passengers from assaults committed by its
own employees. (Note: The employee must be on duty at the time of the act.)

Accordingly, it is the carriers strict obligation to select its drivers and similar
employees with due regard not only to their technical competence and physical
ability, but also, no less important, to their total personality, including their
patterns of behavior, moral fibers, and social attitude. (Maranan v. Perez, 1967)

Reason for making the common carrier liable for acts of employees: The servant
is clothed with delegated authority and charged with the duty to execute the
carriers undertaking to carry the passenger safely. (Agbayani)

Diligence in the selection and supervision of employees: NOT a defense.

Liability is based on culpa contractual.

What is the common carriers responsibility for acts of employees? The common
carrier is responsible even beyond the scope of authority and in violation of
orders, different from the rule in quasi-delicts under Art. 2180, which exempts
the employer if it was done outside of employment. However, there must be a
reasonable connection between the act and the contract of carriage.

b. Other Passengers and Strangers

Art. 1763, Civil Code. A common carrier is responsible for injuries suffered by a
passenger on account of the willful acts or negligence of other passengers or of
strangers, if the common carrier's employees through the exercise of the
diligence of a good father of a family could have prevented or stopped the act or
Notice that the law speaks of injuries suffered by the passenger but not his death.
However, there appears to be no reason why the common carrier should not be
held liable under such circumstances. The word injuries should be interpreted
to include death. (Agbayani)

In consideration of the right granted to it by the public to engage in the business

of transporting passengers and goods, a common carrier does not give its
consent to become an insurer of any and all risks to passenger and goods. It
merely undertakes to perform certain duties to the public as the law imposes,
and holds itself liable for any breach thereof.

Under Art. 1763, a tort committed by a stranger which causes injury to a

passenger does not accord the latter a cause of action against the carrier. The
negligence for which a common carrier is held responsible is the negligent
omission by the carrier's employees to prevent the tort from being committed
when the same could have been foreseen and prevented by them. Further, when
the violation of the contract is due to the willful acts of strangers, as in the
instant case, the degree of care essential to be exercised by the common carrier
for the protection of its passenger is only that of a good father of a family.
(Pilapil v. CA, 1989)

What is the common carriers responsibility for acts of strangers? In Pilapil v.

CA (1989), referring to the act of a stranger causing the death of a passenger, the
standard of diligence is only ordinary diligence. In Bachelor Express v. CA
(1990), the Court held that the common carrier has a duty of extraordinary
diligence for the injury caused by the act of a co-passenger.

Culpa Aquiliana
Culpa Contractual
Art. 1759 Art. 2180

Carrier and employee are solidarily

Carrier is directly and primarily liable
joint tortfeasors

No defense of due diligence in the selection and Defense of due diligence in the sel
supervision of employees supervision of employees is available

4. Extent of Liability for Damages

Art. 1761, Civil Code. The passenger must observe the diligence of a good father of a
family to avoid injury to himself.

Art. 1762, Civil Code. 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

When a passenger dies or is injured, the presumption is that the common carrier is at
fault or that it acted negligently (Article 1756). This presumption is only rebutted by
proof on the carrier's part that it observed the "extraordinary diligence" required in
Article 1733 and the "utmost diligence of very cautious persons" required in Article
1755 (Article 1756). (Spouses Landingin v. PANTRANCO, 1970)
It is negligence per se for a passenger on a railroad voluntarily or inadvertently to
protrude his arm, hand, elbow, or any other part of his body through the window of a
moving car beyond the outer edge of the window or outer surface of the car, so as to
come in contact with objects or obstacles near the track; no recovery can be had for an
injury which but for such negligence would not have been sustained. (Isaac v. A. L.
Ammen Transportation, 1975)

While the carrier is not an insurer of the safety of the passengers, it should nevertheless
be held answerable for the flaws of its equipment, if such flaws were discoverable. The
rationale for the common carriers liability for manufacturing defects is the fact that the
passenger has neither choice nor control over the carrier in the selection and use of the
equipment and appliances in use by the carrier. Having no privity whatever with the
manufacturer or vendor of the defective equipment, the passenger has no remedy
against him. (Necesito v. Paras, 1958)

Art. 1764, Civil Code. Damages in cases comprised in this Section shall be awarded in
accordance with Title XVIII of this Book, concerning Damages. Article 2206 shall also
apply to the death of a passenger caused by the breach of contract by a common carrier.

D. Bill of Lading

Definition: It is a written acknowledgement, signed by the master of a vessel or other

authorized agent of the carrier, that he has received the described goods from the shipper, to be
transported on the expressed terms to the described place of destination, and to be delivered
there to the designated consignee or parties. (70 Am Jur 2d 924)

It is not indispensable for the creation of a contract of carriage. (Compania Maritima v.

Insurance Company of North America, 12 SCRA 213)

When effective: Usually upon its delivery to and acceptance by the shipper (Aquino, Essentials
of Transportation & Public Utilities Law)

It is presumed that the stipulations of the bill are, in the absence of fraud, concealment, or
improper conduct, known to the shipper, and he is generally bound by his acceptance whether
he reads the bill or not. (Magellan Mfg. Marketing Corp. v. CA (1991))

1. Three-Fold Character

a. Receipt as to the quantity and description of the goods shipped;

b. Contract to transport and deliver the goods to the consignee or other person therein designated,
on the terms specified in such instrument; and
c. Document of title, which makes it a symbol of the goods

2. Delivery of Goods

The goods should be delivered to the consignee or any other person to whom the bill of
lading was validly transferred or negotiated.

a. Period of Delivery

Rule: Period fixed for the delivery of the goods as stipulated in the Bill of
Lading. (Art. 370, Code of Commerce)

If there is no stipulation:
1. Within a reasonable time (Art. 370, Code of Commerce)
2. Carrier is bound to forward the goods in the first shipment of the same or
similar goods which he may make to the point of delivery (Art. 358,
Code of Commerce)
Effect of non-compliance: The carrier shall pay the indemnity agreed upon in the
bill of lading. If no indemnity is fixed, the carrier shall be liable for the damages
which may have been caused by the delay. (Art. 370, Code of Commerce)

b. Delivery Without Surrender of Bill of Lading

If in case of loss or for any other reason whatsoever, the consignee cannot
return, upon receiving the merchandise, the bill of lading subscribed by the
carrier, he shall give said carrier a receipt for the goods delivered, this receipt
producing the same effects as the return of the bill of lading. (Art. 353. (2) (3),
Code of Commerce)

c. Refusal of Consignee to Take Delivery

When consignee may refuse to receive goods?

1. When the consignee proves that he cannot make use of the goods without
the others (partial delivery) (Art. 363, Code of Commerce)
2. When goods are rendered useless for purposes of sale or consumption in
the use for which they are properly destined. (Effect: consignee may
demand payment of the goods at current market prices) (Art. 365, Code
of Commerce)
3. In case part of the goods is in good condition, the consignee may refuse
to receive only the damaged goods if separation is possible. (Art. 365,
Code of Commerce)
4. Where the delay is through the fault of the carrier. (Art. 371, Code of

In case of dispute as to the condition of the goods, the same shall be examined
by experts appointed by the parties, and the third one, in case of disagreement,
appointed by the judicial authority.

If the persons interested should not agree with the report, said judicial authority
shall order the deposits of the merchandise in a safe warehouse, and the parties
interested shall make use of their rights in the proper manner. (Art. 367, Code of

3. Period for Filing Claims

Damage When to Claim

Claim for damages must be made upon rece
Patent damage (Ascertainable from package)
of delivery (oral or written)

Latent damage (Only upon opening the Claim for damages may be made within
package) hours upon receipt of delivery.

After such periods OR transportation charges have been paid, no more claims for
damages will be entertained. (Art. 366, Code of Commerce)

Non-filing of the claim bars recovery. (Aquino)

Art. 366 is limited to cases of claims for damage to goods actually turned over by the
carrier and received by the consignee. It does not apply to misdelivery of goods.
Purpose: The rule protects the carrier by affording it an opportunity to make an
investigation of a claim while the matter is still fresh and easily investigated so as to
safeguard itself from false and fraudulent claims. (UCPB General Insurance Co., Inc.
vs. Aboitiz Shipping, 2009)

The period prescribed in Art. 366 may be subject to modification by agreement of the
parties. (PHILAMGEN v. Sweetlines, Inc.)

Commencement of period: Upon delivery of cargo to the consignee at the place of

destination. (Aquino)

4. Period for Filing Actions


The general rule under the Civil Code on extinctive prescription applies. Action for
damages must be filed in court:
a. Within 6 years, if bill of lading was not issued (Art. 1145, Civil Code)
b. Within 10 years, if bill of lading was issued (Art. 1146, Civil Code)


In any event, the carrier and the ship shall be discharged from all liability in respect of
loss or damage unless suit is brought within one year after delivery of the goods or the
date when the goods should have been delivered.

The absence of a notice shall not affect or prejudice the right of the shipper to bring suit
within one year after the delivery of the goods or the date when the goods should have
been delivered. (Sec. 3 (6), Carriage of Goods by Sea Act)

The period for filing the claim is one year, in accordance with the Carriage of Goods by
Sea Act. This was adopted and embodied by our legislature in Com. Act No. 65 which,
as a special law, prevails over the general provisions of the Civil Code on prescription
of actions. (Maritime Agencies & Services, Inc. v. CA)

E. Maritime Commerce

1. Charter Parties

What is a charter party? A charter party is a contract by virtue of which the owner or
agent of a vessel binds himself to transport merchandise or persons for a fixed price.

It is a contract by which the owner or agent of the vessel leases for a certain price the
whole or portion of a vessel for the transportation of the goods or persons from one port
to another.

Is towage considered a charter party? Towage is not a charter party. It is a contract for
the hire of services by which a vessel is engaged to tow another vessel from one port to
another for consideration.

A contract whereby the whole or part of the ship is let by the owner to a merchant or
other person for a specified time or use for the conveyance of goods, in consideration of
the payment of freight. (Caltex v. Sulpicio Lines, 1999)
a. Bareboat/Demise Charter

In a bareboat or demise charter, the shipowner leases to the charterer the whole
vessel, transferring to the latter the entire command, possession and consequent
control over the vessel's navigation, including the master and the crew, who
thereby become the charterer's "servants." (Aquino)

To create a demise, the owner of a vessel must completely and exclusively

relinquish possession, command and navigation thereof to the charterer,
anything short of such a complete transfer is a contract of affreightment (time or
voyage charter party) or not a charter party at all. (Puromines v. CA)

Although a charter party may transform a common carrier into a private one, the
same however is not true in a contract of affreightment on account of the
distinctions between a contract of affreightment and a demise or bareboat
charter. (Puromines, Inc. v. Court of Appeals)

Note: In a bareboat or demise charter, the common carrier is converted to private


Owner Pro Hac Vice demise charter to whom the owner of the vessel has
completely and exclusively relinquished possession, command and navigation of
the vessel. In this kind of charter, the charterer mans and equips the vessel and
assumes all responsibility for navigation, management and operation. He thus
acts as the owner of the vessel in all important aspects during the duration of the

b. Time Charter

A time charter is a contract for the use of a vessel for a specified period of time
or for the duration of one or more specified voyages.

In this case, the owner of a time-chartered vessel retains possession and control
through the master and crew, who remain his employees. What the time
charterer acquires is the right to utilize the carrying capacity and facilities of the
vessel and to designate her destinations during the term of the charter. (Litonjua
Shipping Co., Inc. vs. National Seamen Board (1989))

c. Voyage/Trip Charter

In a voyage charter, the vessel is leased for a single or particular voyage. The
master and crew remain the employ of the owner of the vessel. (Litonjua
Shipping Co., Inc. vs. National Seamen Board)

Note: Both time and voyage charters are said to be contracts of affreightment.

A contract of affreightment is one in which the owner of the vessel leases part or
all of its space to haul goods for others. It is a contract for special service to be
rendered by the owner of the vessel and under such contract the general owner
retains the possession, command and navigation of the ship, the charterer or
freighter merely having use of the space in the vessel in return for his payment
of the charter hire. (Puromines vs. CA)

Note: In a contract of affreightment, the common carrier is NOT converted into

a private carrier.
2. Liability of Ship Owners and Shipping Agents

The shipowner has possession, control and management of the vessel and the
consequent right to direct her navigation and receive freight earned and paid, while his
possession continues; he is the person who is primarily liable for damages sustained in
the operation of the vessel, based on the provisions of the Code of Commerce. (Aquino)

Ship agent is the person entrusted with the provisioning of a vessel, or who represents
her in the port in which she happens to be. (Art. 595, Code of Commerce)

Extent of Liability: The ship agent, even though he is not the owner, is liable in every
way to the creditor for losses and damages, without prejudice to his right against the
owner, the vessel and its equipment and freight. (Aquino)

a. Liability for Acts of Captain

1. The owner of a vessel and the agent shall be civilly liable for the acts of
the captain and for the obligations contracted by the latter to repair,
equip, and provision the vessel. (Art. 586, Code of Commerce)
2. The agent shall also be civilly liable for the indemnities in favor of third
persons which arise from the conduct of the captain in the care of the
goods which the vessel carried.
3. Damages to vessel and to cargo due to lack of skill and negligence.
4. Losses, fines, and confiscations imposed an account of violation of
customs, police, health, and navigation laws and regulations.
5. Those caused by the misuse of the powers.
6. For those arising by reason of his voluntarily entering a port other than
that of his destination.
7. For those arising by reason of non-observance of the provisions
contained in the regulations on situation of lights and maneuvers for the
purpose of preventing collisions. (Art. 618)

Exception: Abandonment of the vessel (Art. 587, Code of Commerce)

Note: The owner or agent shall not be liable for the obligations contracted by the
captain if the latter exceeds his powers and privileges. However, if the amounts
claimed were made use of for the benefit of the vessel, the owner or agent shall
be liable. (Art. 588, Code of Commerce)

b. Exceptions to Limited Liability

Doctrine of limited liability (Hypothecary Rule)

The real and hypothecary nature of maritime law simply means that the liability
of the carrier in connection with losses related to maritime contracts is confined
to the vessel, which is hypothecated for such obligations or which stands as the
guaranty for their settlement.

It has its origin by reason of the conditions and risks attending maritime trade in
its earliest years when such trade was replete with innumerable and unknown
hazards since vessels had to go through largely uncharted waters to ply their
trade. It was designed to offset such adverse conditions and to encourage people
and entities to venture into maritime commerce despite the risks and the
prohibitive cost of shipbuilding.

Thus, the liability of the vessel owner and agent arising from the operation of
such vessel were confined to the vessel itself, its equipment, freight, and
insurance, if any, which limitation served to induce capitalists into effectively
wagering their resources against the consideration of the large profits attainable
in the trade. (Aboitiz Shipping Corp. vs. General Accident Fire and Life
Assurance Corp. (1993))

Applicable in the following cases: The agent shall be civilly liable for the
indemnities in favor of third persons which arise from the conduct of the captain
in the care of the goods which the vessel carried; but he may exempt himself
therefrom by abandoning the vessel with all her equipment and the freight he
may have earned during the voyage. (Art. 587, Code of Commerce)

The owners of a vessel shall be civilly liable in the proportion of their

contribution to the common fund, for the results of the acts of the captain,
referred to in Article 587.

Each part owner may exempt himself from this liability by the abandonment
before a notary of the part of the vessel belonging to him. (Art. 590, Code of

In case of collision, the liability of the shipowner shall be understood as limited

to the value of the vessel with all her appurtenances and all the freight earned
during the voyage. (Art. 837, Code of Commerce)

Liability for wages of the captain and the crew and for advances made by the
ship agent if the vessel is lost by shipwreck or capture (Art. 643, Code of

If the shipowner or agent may in any way be held civilly liable at all for injury
to or death of passengers arising from the negligence of the captain in cases of
collisions or shipwrecks, his liability is merely co-extensive with his interest in
the vessel such that a total loss thereof results in its extinction. In arriving at this
conclusion, the fact is not ignored that the ill-fated S.S. Negros, as a vessel
engaged in interisland trade, is a common carrier, and that the relationship
between the petitioner and the passengers who died in the mishap rests on a
contract of carriage. But assuming that petitioner is liable for a breach of
contract of carriage, the exclusively "real and hypothecary nature" of maritime
law operates to limit such liability to the value of the vessel, or to the insurance
thereon, if any. In the instant case it does not appear that the vessel was insured.
(Yangco v. Laserna et al., 1941)

Exceptions to the Doctrine of Limited Liability

1. Claims under the Workmens Compensation (Abueg vs. San Diego)

2. Expenses for repairing, provisioning and equipping the vessel
3. There is an actual finding of negligence on the part of the vessel owner
or agent (Aboitiz Shipping vs. General Accident Fire and Life Assurance
4. Vessel is insured (Vasquez vs. CA)
5. Vessel is not abandoned or there was no total loss.
6. Collision between two negligent vessels

8. Accidents and Damages in Maritime Commerce


The following shall be considered averages:

All extraordinary or accidental expenses incurred during the navigation for the
preservation of the vessel or cargo, or both.
All damages or deterioration the vessel may suffer from the time she puts to sea
from the port of departure until she casts anchor in the port of destination, and
those suffered by the merchandise from the time it is loaded in the port of
shipment until it is unloaded in the port of consignment. (Art. 806, Code of


Particular or Simple Average

Gross or General Average

c. General Average


Particular or simple Averages shall include all damages and expenses caused to
the vessel or cargo that did not inure to the common benefit and profit of all
persons interested in the vessel and her cargo. (Art. 809, Code of Commerce)

The owner of the goods which gave rise to the expense or suffered the damage
shall bear this average. (Art. 810, Code of Commerce)


General or gross averages shall include all the damages and expenses which are
deliberately caused in order to save the vessel, her cargo, or both at the same
time, from a real and known risk. (Art. 811, Code of Commerce)

Requisites for general average

1. There must be a common danger. This means, that both the ship and the
cargo, after it has been loaded, are subject to the same danger, whether
during the voyage, or in the port of loading or unloading, that the danger
arises from the accidents of the sea, dispositions of the authority, or
faults of men, provided that the circumstances producing the peril should
be ascertained and imminent or may rationally be said to be certain and
imminent. This last requirement excludes measures undertaken against a
distant peril.
2. That for the common safety, part of the vessel or of the cargo or both is
sacrificed deliberately.
3. That from the expenses or damages caused follows the successful saving
of the vessel and cargo.
4. That the expenses or damages should have been incurred or inflicted
after taking proper legal steps and authority. (Magsaysay, Inc. v. Agan,

The gross or general average shall be borne by those who benefited from the
sacrifice. These include the shipowner and the owners of the cargoes that were
saved. Contribution may also be imposed on the insurers of the vessel or cargoes
that were saved, as well as lenders on bottomry or respondentia. (PD 1460, as

Cases of general average

1. The goods or cash invested in the redemption of the vessel or cargo
captured by enemies, privateers, or pirates, and the provisions, wages,
and expenses of the vessel detained during the time the arrangement or
redemption is taking place.
2. The goods jettisoned to lighten the vessel, whether they belong to the
vessel, to the cargo, or to the crew, and the damage suffered through said
act by the goods kept.
3. The cables and masts which are cut or rendered useless, the anchors and
the chains which are abandoned in order to save the cargo, the vessel, or
4. The expenses of removing or transferring a portion of the cargo in order
to lighten the vessel and place her in condition to enter a port or
roadstead, and the damage resulting therefrom to the goods removed or
5. The damage suffered by the goods of the cargo through the opening
made in the vessel in order to drain her and prevent her sinking.
6. The expenses caused through floating a vessel intentionally stranded for
the purpose of saving her.
7. The damage caused to the vessel which it is necessary to break open,
scuttle, or smash in order to save the cargo.
8. The expenses of curing and maintaining the members of the crew who
may have been wounded or crippled in defending or saving the vessel.
9. The wages of any member of the crew detained as hostage by enemies,
privateers, or pirates, and the necessary expenses which he may incur in
his imprisonment, until he is returned to the vessel or to his domicile,
should he prefer it.
10. The wages and victuals of the crew of a vessel chartered by the month
during the time it should be embargoed or detained by force majeure or
by order of the Government, or in order to repair the damage caused for
the common good.
11. The loss suffered in the value of the goods sold at arrivals under stress in
order to repair the vessel because of gross average.
12. The expenses of the liquidation of the average. (Art. 811, Code of
13. If in lightening a vessel on account of a storm, in order to facilitate her
entry into a port or roadstead, part of her cargo should be transferred to
lighters or barges and be lost, the owner of said part shall be entitled to
indemnity, as if the loss has originated from a gross average (Art. 817,
Code of Commerce)
14. If, as a necessary measure to extinguish a fire in a port; roadstead; creek,
or bay, it should be decided to sink any vessel, this loss shall be
considered gross average, to which the vessels saved shall contribute.

Procedure for recovery

1. Assembly and deliberation with the sailing mate and other officers
2. Resolution of the captain adopted
3. Hearing of the persons interested. In case an interested person should not
be heard, he shall not contribute to the gross average. (Art. 813, Code of
4. Resolution to be entered in the log book, stating the motives and reasons
therefore as well as the votes and reason for disagreement. (Art. 814,
Code of Commerce)
5. Minutes to be signed by all the persons present or in urgent cases, the
6. Captain shall deliver one copy of the minutes to the maritime judicial
authority of the first port he may make within 24 hours (Art. 814, Code
of Commerce)
7. Captain shall ratify the minutes under oath. (Art. 814, Code of

d. Collisions

Collision is an impact or sudden contact between two moving vessels. (Aquino)

Allision is the striking of a moving vessel against one that is stationary.

Zones in collision

1. First Division covers all the time up to the moment when the risk of
collision may be said to have begun. Here, each vessel is free to direct its
course as it deems best.
2. Second Division covers the time between the moment when the risk of
collision begins and the moment when it has become a practical
certainty. Burden is on the vessel required to keep away and avoid the
3. Third Division covers the time of actual contact. The vessel which has
forced the privileged vessel into danger is responsible even if the
privileged vessel has committed an error within that zone. (A. Urrutia &
Co. vs. Baco River Plantation Co.)

NOTE: Liability in collision cases is negligence-based. The person who caused

the injury is both civilly and criminally liable. (Aquino)

Specific rules under the Code of Commerce

1. One vessel at fault. The owner of the vessel at fault shall indemnify the
losses and damages suffered, after an expert appraisal. (Art. 826, Code of
2. Both vessels at fault. Each shall suffer its own damages, and both shall
be solidarily responsible for the losses and damages occasioned to their
cargoes. (Art. 826, Code of Commerce)
3. Inscrutable fault. (If it cannot be decided which of the two vessels was
the cause of the collision). Each shall bear his own damage and both
shall be jointly responsible for the losses and damages suffered by their
cargoes. (Art. 828, Code of Commerce) (Asked in the 97)
4. Due to fortuitous event. Each vessel and its cargo shall bear its own
damages. (Art. 830, Code of Commerce)
5. By reason of fortuitous event, vessel properly anchored and moored
collides with another. The injury occasioned shall be looked upon as
particular average to the vessel run into. (Article 832, Code of
6. Third vessel at fault. The owner of the third vessel shall indemnify the
losses and damages caused, the captain thereof being civilly liable to said
owner. (Art. 831, Code of Commerce)

What is arrival under stress? Arrival under stress is the arrival of a vessel at the
nearest and most convenient port instead of the port of destination, if during the
voyage the vessel cannot continue the trip to the port of destination.

It is lawful when the inability to continue voyage is due to lack of provisions,

well-founded fear of seizure, privateers, pirates, or accidents of the sea disabling
it to navigate. (Art. 819, Code of Commerce)

It is unlawful when:

1. Lack of provisions due to negligence to carry according to usage and

2. Risk of enemy not well known or manifest
3. Defect of vessel due to improper repair; and
4. Malice, negligence, lack of foresight or skill of captain. (Art. 820, Code
of Commerce)
What is shipwreck? Shipwreck denotes loss/wreck of a vessel at sea as a
consequence of running against another vessel or thing at sea or on coast where
the vessel is rendered incapable of navigation.

If the wreck was due to malice, negligence or lack of skill of the captain, the
owner of the vessel may demand indemnity from said captain. (Art. 841)

5. Carriage of Goods by Sea Act

a. Application

COGSA is a special law that governs all contracts of carriage of goods by sea
between or to and from the Philippine ports.

Application of laws

1. If the common carrier is coming to the Philippines:

First: Civil Code
Second: COGSA (in foreign trade)
Third: Code of Commerce
2. If the private carrier is coming to the Philippines:
First: COGSA
Second: Code of Commerce
Third: Civil Code (excluding rules on common carriers)
3. If the private or common carrier is from the Philippines to a foreign
country: Apply the law of the foreign country (Art. 1753, CC) UNLESS
the parties make COGSA applicable.

Hierarchy of laws

1. Art. 1766, CC (COGSA as only in matters not regulated by this Code)

this notwithstanding the fact that COGSA is a special law. Goods in a
foreign country shipped to the Philippines are governed by the Civil
2. Art. 1753, CC

b. Notice of Loss or Damage

Notice of claim and the general nature of the loss or damage must be given in
writing to the carrier or his agent at the port of discharge before or at the time of
the removal of the goods. (Sec. 3 (6), COGSA)

If damage is not patent or cannot be ascertained from the package, the shipper
should file the claim with the carrier within three days from delivery (compare
with Code of Commerce rules, see discussion on Period for Filing Claims

First, the provision of COGSA provides that the notice of claim need not be
given if the state of the goods, at the time of their receipt, has been the subject of
a joint inspection or survey. Prior to unloading the cargo, an Inspection Report
as to the condition of the goods was prepared and signed by representatives of
both parties. Second, as stated in the same provision, a failure to file a notice of
claim within three days will not bar recovery if it is nonetheless filed within one
year. This one-year prescriptive period also applies to the shipper, the consignee,
the insurer of the goods or any legal holder of the bill of lading. "Inasmuch as
the neither the Civil Code nor the Code of Commerce states a specific
prescriptive period on the matter, the COGSAwhich provides for a one-year
period of limitation on claims for loss of, or damage to, cargoes sustained during
transit-- may be applied suppletorily to the case at bar." (Belgian Overseas v.
Philippine First Insurance, 2002)
c. Period of Prescription

In any event the carrier and the ship shall be discharged from all liability in
respect of loss or damage unless suit is brought within one year after delivery of
the goods or the date when the goods should have been delivered.

The absence of a notice shall not affect or prejudice the right of the shipper to
bring suit within one year after the delivery of the goods or the date when the
goods should have been delivered. (Sec. 3 (6))

Clearly, the coverage of the Act includes the insurer of the goods. Otherwise,
what the Act intends to prohibit after the lapse of the one-year prescriptive
period can be done indirectly by the shipper or owner of the goods by simply
filing a claim against the insurer even after the lapse of one year. (Filipino
Merchants Insurance, Inc. v. Alejandro, 1986):

The period for filing the claim is one year, in accordance with the Carriage of
Goods by Sea Act. This was adopted and embodied by our legislature in Com.
Act No. 65 which, as a special law, prevails over the general provisions of the
Civil Code on prescription of actions. (Maritime Agencies & Services, Inc. v.
CA, 1990)

d. Limitation of Liability

Under Sec. 4(5), the limit is set at a maximum of $500 per package or customary
freight unit.

The declaration made by the shipper stating an amount bigger than $500 per
package will make the carrier liable for such bigger amount, but only if the
amount so declared is the real value of goods. (Aquino)

Under the Sec. 4(5), the liability limit is set at $500 per package or customary
freight unit unless the nature and value of such goods is declared by the shipper.
This is deemed incorporated in the bill of lading even if not mentioned in it.
(Eastern Shipping vs. IAC, 150 SCRA 463).

The Civil Code does not limit the liability of the common carrier to a fixed
amount per package. In all matters not regulated by the Civil Code, the right and
the obligations of common carriers shall be governed by the Code of Commerce
and special laws. Thus, the COGSA, which is suppletory to the provisions of the
Civil Code, supplements the latter by establishing a statutory provision limiting
the carrier's liability in the absence of a shipper's declaration of a higher value in
the bill of lading. In the case before us, there was no stipulation in the Bill of
Lading limiting the carrier's liability. Neither did the shipper declare a higher
valuation of the goods to be shipped. Petitioners' liability should be computed
based on US$500 per package and not on the per metric ton price declared in the
Letter of Credit. (Belgian Overseas v. Philippine First Insurance, 2002)

F. The Warsaw Convention

1. Applicability

a. All international carriage of persons, baggage, or cargo performed by aircraft for

b. Gratuitous carriage by aircraft performed by an air transport undertaking (Art. 1,
No. 1, WC)


Transportation by air between points of contact of two high contracting parties, or those
countries that have acceded to the Convention, wherein the place of departure and the
place of destination are situated:

a. Within the territories of two High Contracting Parties regardless of whether or

not there be a break in the transportation or a transshipment; OR
b. Within the territory of a single High Contracting Party if there is an agreed
stopping place within a territory subject to the sovereignty, mandate or authority
of another power, even though the power is not a party to the Convention. (Sec.
1, No. 2, WC)

A carriage to be performed by several successive air carriers is deemed, for the

purposes of this Convention, to be one undivided carriage, if it has been regarded by the
parties as a single operation, whether it had been agreed upon under the form of a single
contract or of a series of contracts. (Sec. 1, No. 3, WC)


The period during which the baggage or goods are in charge of the carrier, whether in an
airport or on board an aircraft, or, in the case of a landing outside an airport, in any
place whatsoever. (Sec. 18, WC)


a. Death or injury of a passenger if the accident causing it took place

i. on board the aircraft,
ii. in the course of the operations of embarking,
iii. in the course of disembarking, or
iv. when there was delay (Sec. 17 and 19, WC);

b. Destruction, loss, or damage to any baggage or goods that are checked in, if
damage occurred
i. during the transportation by air, or
ii. when there was delay (Sec. 18 and 19, WC)

Transportation by air is the period during which the baggage or goods are in the
charge of the carrier whether in an airport or on board an aircraft, or in case of a
landing outside an airport, in any place whatsoever. (Sec. 18, WC)

c. Delay in the transport by air of passengers, baggage or goods.

2. Limitation of Liability

a. Liability to Passengers

General rule: 250,000 francs per passenger

Exception: Agreement to a higher limit (Art. 22(1), WC)

b. Liability for Checked Baggage

General rule: 250 francs per kg

Exception: In case of special declaration of value and payment of a
supplementary sum by consignor, carrier is liable to not more than the declared
sum unless it proves the sum is greater than actual value. (Art. 22(2), WC)

c. Liability for Handcarried Baggage

General rule: 5,000 francs per passenger (Art. 22(3), WC)

1. An agreement relieving the carrier from liability or fixing a lower limit is

null and void. (Art. 23, WC)
2. Carrier is not entitled to the foregoing limit if the damage is caused by
willful misconduct or default on its part. (Art. 25)
3. The right to damages under the WC is extinguished after 2 years from
the date of arrival at the destination or from the date on which the aircraft
ought to have arrived, or from the date on which the carriage stopped.
(Art. 29(1), WC)

Note: The Guatemala Protocol of 1971 increased the limit for passengers to
$100,000 and $1,000 for baggage. However, the Supreme Court noted in Santos
III v. Northwest Orient Airlines, G.R. No. 101538, June 23, 1992, that the
Guatemala Protocol is still ineffective. (Sundiang and Aquino)

The WC should be deemed a limit of liability only in those cases where the
cause of death or injury to person, or destruction, loss or damage to property or
delay in its transport is not attributable to or attended by any willful misconduct,
bad faith, recklessness, or otherwise improper conduct on the part of any official
or employee for which the carrier is responsible; and there is otherwise no
special or extraordinary form of resulting injury. (Alitalia v. CA)

4. Willful Misconduct

When can a common carrier not avail itself of this limitation?

a. Willful misconduct (Art. 25, WC)
b. Default amounting to willful misconduct (Art. 25, WC)
c. Accepting passengers without ticket (Art. 3, No. 2, WC)
d. Accepting goods without airway bill or baggage without baggage check.
Carrier guilty of willful misconduct cannot avail of the provisions limiting
liability but may still invoke other provisions of the WC. (see Art. 25)

Receipt by the person entitled to the delivery of baggage or cargo without complaint is
prima facie evidence that the same have been delivered in good condition and in
accordance with the document of carriage. (Art. 26, WC).

VI. The Corporation Code

A. Corporation

1. Definition

A corporation is an artificial being created by operation of law, having the right of

succession and the powers, attributes, and properties expressly authorized by law or
incident to its existence. (Sec. 2, unless otherwise indicated, all sections cited herein are
from B.P. 68, or the Corporation Code)
2. Attributes of the Corporation


A corporation exists by fiction of law. Hence, it can act only through its directors,
officers and employees.

Being only a juridical entity, the physical acts of the corporation, like the signing of
documents, can be performed only by natural persons duly authorized for the purpose
by corporate by-laws or by a special act of the Board of Directors (Shipside, Inc. v.
Court of Appeals, 2001).

a. Moral Damages cannot be awarded in favor of corporations because they do
not have feelings and mental state. They may not even claim moral damages for
besmirched reputation (NAPOCOR v. Philipp Brothers Oceanic,
2001).However, a corporation can recover moral damages under Art 2219 (7) if
it was the victim of defamation (Pilipinas Broadcasting Network v. Ago Medical
and Educational Center, 2005).

b. Criminal Liability Since a corporation as a person is a mere legal fiction, it

cannot be proceeded against criminally because it cannot commit a crime in
which personal violence or malicious intent is required. Criminal action is
limited to the corporate agents guilty of an act amounting to a crime and never
against the corporation itself (West Coast Life Ins. Co. v. Hurd [1914], Time Inc.
v. Reyes, 1971)

c. Doctrine of Separate Personality: A corporation, upon coming into existence, is

invested by law with a personality separate and distinct from those persons
composing it as well as from any other legal entity to which it may be related.
(Yutivo Sons Hardware v. CTA, 1961)


Mere consent of the parties to form a corporation is not sufficient. The State must give
its consent either through a special law (in case of government corporations) or a
general law (i.e., Corporation Code in case of private corporations).

A corporation comes into existence upon the issuance of the certificate of incorporation.
Then and only then will it acquire juridical personality to sue and be sued, enter into
contracts, hold or convey property or perform any legal act in its own name (Ladia)


Its continued existence during its stated term cannot be affected by any change in the
members or stockholders or by any transfer of shares by a stockholder to a 3rd person.



A corporation has no power except those expressly conferred on it by the Corporation

Code and by its articles of incorporation, those which may be incidental to such
conferred powers, those that are implied from its existence, and those reasonably
necessary to accomplish its purposes. In turn, a corporation exercises said powers
through its Board of Directors and/or its duly authorized officers and agents. (Monfort
Hermanos Agricultural Dev. Corp. v. Monfort III, 2004).
B. Classes of Corporations

STOCK CORPORATION (Asked in 2001 and 2004)

Corporations which have capital stock divided into shares and are authorized to distribute to the
holders of such shares dividends or allotments of the surplus profits on the basis of shares held
(Sec. 3)

It is organized for profit.

The governing body of a stock corporation is usually the Board of Directors (except in certain
instances, e.g. close corporations).


All other corporations are non-stock corporations (Sec. 3)

One where no part of the income is distributable as dividends to its members, trustees, or
officers, subject to the provisions of the Code on dissolution(Sec. 87).

Not organized for profit.

Its governing body is usually the Board of Trustees.

There are two elements for a stock corporation to exist:

a. Capital stock divided into shares, and

b. An authority to distribute to the holders of such shares, dividends or allotments of the

surplus profits on the basis of shares held. (Test of WON a stock corporation)

Even if there is a statement of capital stock, the corporation is still NOT a stock corporation if
dividends are NOT supposed to be declared, that is, there is no distribution of retained earnings.
(CIR v. Club Filipino de Cebu, 1962)

Note: Under Sec. 43 of the Corporation Code, a corporation is deemed to have the power to
declare dividends. Thus, so long as the corporation has capital stock and there is no prohibition
in its Articles of Incorporation or in its by-laws for it to declare dividends, such corporation is a
stock corporation.



One formed or organized for the government of a portion of the state. Its purpose is for the
general good and welfare (Sec. 3, Act 1456).

Beyond cavil, a government-owned and controlled corporation has a personality of its own,
distinct and separate from that of the government, and the intervention in a transaction of the
Office of the President through the Executive Secretary does not change the independent
existence of a government entity as it deals with another government entity (Polytechnic
University of the Phils. V. Court of Appeals, 2001).


One formed for some private purpose, benefit, aim or end (Sec. 3, Act 1456); it may be either
stock or non-stock, government-owned or controlled or quasi-public.
The test to determine whether a corporation is government owned or controlled, or private in
nature, is if a corporation is created by its own charter for the exercise of a public function, or
by incorporation under the general corporation law (Baluyot v. Holganza, 2000).


One whose articles of incorporation provide that: (1) All the corporation's issued stock of all
classes, exclusive of treasury shares, shall be held of record by not more than a specified
number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be
subject to one or more specified restrictions on transfer permitted by this Title; and (3) The
corporation shall not list in any stock exchange or make any public offering of any of its stock
of any class (see Sec. 96).

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 this Code.


One organized for educational purposes (Sec. 106).


Corporation sole is one formed for the purpose of administering and managing, as trustee, the
affairs, property and temporalities of any religious denomination, sect, or church, by the chief
archbishop, bishop, priest, rabbi, or other presiding elder of such religious denomination, sect
or church (Sec.110)

A corporation sole has no nationality (Roman Catholic Apostolic, etc v. Register of Deeds of
Davao City, 1957).

Corporation aggregate is a religious corporation incorporated by more than one person.


One organized for a charitable purpose


One formed, organized, or existing under the laws of the Philippines.


One formed, organized or existing under any laws other than those of the Philippines and
whose law allows Filipino citizens and corporations to do business in its own country and state
(Sec. 123).


Corporations which are governed primarily by the provisions of the special law or charter
creating them. Corporation Code has suppletory application. (Sec. 4)


One in which control, usually in the form of ownership of majority of its shares, is in another
corporation (the parent corporation).

Its control lies in its power, directly or indirectly, to elect the subsidiarys directors thus
controlling its management policies.


A corporation organized in accordance with the requirements of the law.


A corporation where there exists a flaw in its incorporation

Rule on De Facto Corporations

The due incorporation of any corporation claiming in good faith to be a corporation under this
Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any
private suit to which such corporation may be a party. Such inquiry may be made by the
General in a quo warranto proceeding (Sec. 20).

Grant of juridical personality is an exercise of State power and not a matter of private affair.
Consequently, under the de facto corporation doctrine, the defect in the juridical personality of
a corporation cannot be inquired into by private individuals, much less used as a defense to
avoid claims, except in quo warranto proceedings brought on behalf of the State where the
main action is to question the validity or existence of such juridical personality (Villanueva)

Requisites of De Facto Corporation

a. Organized under a valid law
b. Bona fide compliance with formalities of law
c. User of corporate powers
d. SEC issuance of certificate of incorporation (Hall v. Piccio, 86 Phil 603 [1950])


Where a group of persons misrepresent themselves as a corporation, they are subsequently

estopped from claiming lack of corporate life in order to avoid liability.

All persons who assume to act as a corporation knowing it to be without authority to do so shall
be liable as general partners for all debts, liabilities and damages incurred or arising as a result

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 (Sec. 21).

C. Nationality of Corporations
1. Place of Incorporation Test

The corporation is a national of the country under whose laws it is organized or

incorporated (Sec. 123).

Domestic corporations organized and governed under and by Philippine laws

Foreign Corporations organized under laws other than those of the Philippines and can
operate only in the territory of the state under whose laws it was formed. However, they
may be licensed to do business here (Campos).

2. Control Test

A corporation shall be considered a Filipino corporation if the Filipino ownership of its

capital stock is at least 60%, and where the 60-40 Filipino-alien equity ownership is
NOT in doubt (SEC Opinion dated 6 November 1989; DOJ Opinion No. 18, s. 1989).

Therefore, its shareholdings in another corporation shall be considered to be of Filipino

nationality when computing the percentage of Filipino equity of that second corporation
(SEC Opinion dated 23 November 1993).

Control test is applied in the following:

a. Exploitation of natural resources - Only Filipino citizens or corporations whose

capital stock are at least 60% owned by Filipinos can qualify to exploit natural
resources. (Sec. 2, Art. XII, Consti.)

b. Public Utilities - xxx 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 60% of whose capital is owned by such citizens.
(Sec. 11, Art. XII, Consti.)

Note: In the recently decided case of Gamboa vs. Teves (G.R. No. 176579, June 28,
2011), the SC ruled as follows:

The term "capital" in Section 11, Article XII of the 1987 Constitution refers only to
shares of stock entitled to vote in the election of directors, and thus in the present case
only to common shares, and not to the total outstanding capital stock (common and non-
voting preferred shares).

The 60 percent of the "capital" assumes, or should result in, "controlling interest" in the
corporation. Compliance with the required Filipino ownership of a corporation shall be
determined on the basis of outstanding capital stock whether fully paid or not, but only
such stocks which are generally entitled to vote are considered.

For stocks to be deemed owned and held by Philippine citizens or Philippine nationals,
mere legal title is not enough to meet the required Filipino equity. Full beneficial
ownership of the stocks, coupled with appropriate voting rights is essential. Thus,
stocks, the voting rights of which have been assigned or transferred to aliens cannot be
considered held by Philippine citizens or Philippine nationals.

Individuals or juridical entities not meeting the aforementioned qualifications are

considered as non-Philippine nationals.

In the later 2012 case of Gamboa v. Teves, (G.R. No. 176579, October 9, 2012) The SC
reversed the previous ruling and held that:

Since the constitutional requirement of at least 60 percent Filipino ownership applies

not only to voting control of the corporation but also to the beneficial ownership of the
corporation, it is therefore imperative that such requirement apply uniformly and across
the board to all classes of shares, regardless of nomenclature and category, comprising
the capital of a corporation. Under the Corporation Code, capital stock consists of all
classes of shares issued to stockholders, that is, common shares as well as preferred
shares, which may have different rights, privileges or restrictions as stated in the articles
of incorporation.

Since a specific class of shares may have rights and privileges or restrictions different
from the rest of the shares in a corporation, the 60-40 ownership requirement in favor of
Filipino citizens in Section 11, Article XII of the Constitution must apply not only to
shares with voting rights but also to shares without voting rights. Preferred shares,
denied the right to vote in the election of directors, are anyway still entitled to vote on
the eight specific corporate matters mentioned above under Section 6 of the Corporation
Code. Thus, if a corporation, engaged in a partially nationalized industry, issues a
mixture of common and preferred non-voting shares, at least 60 percent of the common
shares and at least 60 percent of the preferred nonvoting shares must be owned by
Filipinos. Of course, if a corporation issues only a single class of shares, at least 60
percent of such shares must necessarily be owned by Filipinos.

In short, the 60-40 ownership requirement in favor of Filipino citizens must apply
separately to each class of shares, whether common, preferred non-voting, preferred
voting or any other class of shares. This uniform application of the 60-40 ownership
requirement in favor of Filipino citizens clearly breathes life to the constitutional
command that the ownership and operation of public utilities shall be reserved
exclusively to corporations at least 60 percent of whose capital is Filipino-owned.
Applying uniformly the 60-40 ownership requirement in favor of Filipino citizens to
each class of shares, regardless of differences in voting rights, privileges and
restrictions, guarantees effective Filipino control of public utilities, as mandated by the

3. Grandfather Rule

Method used to determine the nationality of a corporation, in cases where corporate

shareholders are present in the situation, by which the percentage of Filipino equity in a
corporation engaged in nationalized and/or partly nationalized areas of activities, is
computed by attributing the nationality of second or even subsequent tier ownership to
determine the nationality of the corporate shareholder (Villanueva).

It involves the computation of Filipino ownership of a corporation in which another

corporation of partly Filipino and partly foreign equity owns capital stock. The
percentage of shares held by the second corporation in the first is multiplied by the
latters own Filipino equity, and the product of these percentages is determined to be the
ultimate Filipino ownership of the subsidiary corporation (SEC Opinion re; Silahis Intl
Hotel May 4, 1987).

The Grandfather Rule must be applied to accurately determine the actual participation,
both direct and indirect, of foreigners in a corporation engaged in a nationalized activity
or business.

Compliance with the constitutional limitation(s) on engaging in nationalized activities

must be determined by ascertaining if 60% of the investing corporations outstanding
capital stock is owned by Filipino citizens, or as interpreted, by natural or individual
Filipino citizens. If such investing corporation is in turn owned to some extent by
another investing corporation, the same process must be observed. One must not stop
until the citizenships of the individual or natural stockholders of layer after layer of
investing corporations have been established, the very essence of the Grandfather Rule
(Redmont Consolidated Mines, Corp v. McArthur Mining, Inc., et al., 2010).

D. Corporate Juridical Personality

A private corporation formed or organized under this code commences to have corporate
existence and juridical personality and is deemed incorporated from the date the SEC issues a
certificate of incorporation under its official seal (Sec. 19)

1. Doctrine of Separate Juridical Personality

Concept: A corporation has a personality separate and distinct from that of its
stockholders and members and is not affected by the personal rights, obligations, and
transactions of the latter.

Merely a legal fiction for purposes of convenience and to sub-serve the ends of justice

Property: SHs have no claim on corporate property as owners, but mere expectancy or
inchoate right to the same upon dissolution of the corporation after all corporate
creditors have been paid. Such right is limited only to their equity interest (doctrine of
limited liability). Although a stockholders interest in the corporation may be attached
by his personal creditor, corporate property cannot be used to satisfy his claim (Wise &
Co. v. Man Sun Lung, 1940).

a. Liability for Torts and Crimes

As a separate juridical personality, a corporation can be held liable for torts

committed by its officers for corporate purpose (PNB v. CA, 1978).

b. Recovery of Moral Damages

General rule: A corporation has the power to sue in its corporate name. (Sec.

Exception: Moral Damages cannot be awarded in favor of corporations because

they do not have feelings and mental state. They may not even claim moral
damages for besmirched reputation (NAPOCOR v. Philipp Brothers Oceanic,

However, a corporation can recover moral damages under Art 2219 (7) if it was
the victim of defamation (Pilipinas Broadcasting Network v. Ago Medical and
Educational Center, 2005).

Constitutional rights: Corporate entities are entitled to due process, equal

protection, and protection against unreasonable searches and seizures. However,
a corporation is not entitled to the privilege against self-incrimination
(Bataan Shipyard &Engg Co. v. PCGG, 1987)

2. Doctrine of Piercing the Corporate Veil

Piercing the veil of corporate entity is merely an equitable remedy, and may be granted
only in cases when the corporate fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime (Yutivo Sons v. CTA, 1961) or where the
corporation is a mere alter ego or business conduit of a person. (Koppel Phil v. Yatco)

a. Grounds for Application of Doctrine

i. If done to defraud the government of taxes due it.

ii. If done to evade payment of civil liability.
iii. If done by a corporation which is merely a conduit or alter ego of another corporation.
iv. If done to evade compliance with contractual obligations.
v. If done to evade financial obligation to its employees.
Only in these and similar instances may the veil be pierced and disregarded: to
ward off a judgment credit, to avoid inclusion of corporate assets as part of the
estate of the decedent, to escape liability arising from a debt, or to perpetuate
fraud and/or confuse legitimate issues either to promote or to shield unfair
objectives to cover up an otherwise blatant violation of the prohibition against
forum shopping (PNB v. Andrada Electric & Engineering Co., 2002).

Q: Is a corporation liable for the individual acts of its stockholders or members?

Is there an exception to the general rule?

A: It is settled that a corporation has a personality separate and distinct from its
individual stockholders or members, and is not affected by the personal rights,
obligations and transactions of the latter. The corporation may not be held liable
for the obligations of the persons composing it, and neither can its stockholders
be held liable for its obligation. Of course, this Court has recognized instances
when the corporations separate personality may be disregarded. However, we
have also held that the same may only be done in cases where the corporate
vehicle is being used to defeat public convenience, justify wrong, protect fraud,
or defend crime. Moreover, the wrongdoing must be clearly and convincingly
established. It cannot be presumed. (Seaoil vs Autocorp Group, 2008, Nachura)

b. Test in Determining Applicability

General rule: The mere fact that a corporation owns all or substantially all of the
stocks of another corporation is NOT sufficient to justify their being treated as
one entity.

Exception: The subsidiary is a mere instrumentality of the parent corporation.

Circumstances rendering subsidiary an instrumentality (PNB v. Ritratto Group,
i. The parent corporation owns all or most of the subsidiarys capital stock.
ii. The parent and subsidiary corporations have common directors or officers.
iii. The parent corporation finances the subsidiary.
iv. The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes
its incorporation.
v. The subsidiary has grossly inadequate capital.
vi. The parent corporation pays the salaries and other expenses or losses of the subsidiary.
vii. The subsidiary has substantially no business except with the parent corporation or no assets
except those conveyed to or by the parent corporation.
viii. In the papers of the parent corporation or in the statements of its officers, the subsidiary is
described as a department or division of the parent corporation or its business or financial
responsibility is referred to as the parent corporations own.
ix. The parent corporation uses the property of the subsidiary as its own.
x. The directors or executives of the subsidiary do not act independently in the interest of the
subsidiary but take their orders from the parent corporation in the latters interest.
xi. The formal ledger requirements of the subsidiary are not observed.

E. Incorporation and Organization

1. Promoter

Promoters are persons who, acting alone or with others, take initiative in founding and
organizing the business or enterprise of the issuer and receives consideration therefor
(RA 8799, The Securities Regulation Code).

a. Liability of Promoter
General rule: The promoter binds himself PERSONALLY & assumes the
responsibility of looking to the proposed corporation for reimbursement.

(1) Express or implied agreement to the contrary
(2) Novation, not merely adoption or ratification of the contract

b. Liability of Corporation for Promoters Contracts

General rule: A corporation is NOT bound by the contract. A corporation, until

organized, has no life and no legal existence. It could not have had an agent (the
promoter) who could legally bind it. (Cagayan Fishing Development Co., Inc. v.

Exceptions: A corporation may be bound by the contract if it makes the contract

its own by:

(1) Adoption or ratification of the ENTIRE contract after incorporation.

(a) Power of the corporation to adopt a contract must be understood to be
limited to such contracts as the corporation itself, after its organization,
would be authorized to make. (Builders Duntile Co. v. Dunn Mfg. Co.)

(b) Novation or the intent to novate the original contract is required to

adopt or ratify the pre-incorporation contract. (Campos, 1990)

(2) Acceptance of benefits under the contract with knowledge of the terms
(3) Performance of its obligation under the contract.

2. Number and Qualifications of Incorporators

(1) Natural Persons

(2) Any number from 5-15
(3) Majority are residents of the Philippines
(4) Each incorporator must own or be a subscriber to at least 1 share of the capital stock
of the corporation (Sec. 10)

3. Corporate Name Limitations on Use of Corporate Name

a. Must not be identical or deceptively or confusingly similar to that of any existing corporation
or to any other name already protected by law
b. Not patently deceptive, confusing or contrary to existing laws

Required by law to include the word Corporation or Inc. (Campos, 1990)

Change of corporate name requires the amendment of the AOI: majority vote of the
board and the vote or written assent of stockholders holding 2/3 of the outstanding
capital stock (Sec. 16).

Amendment of a corporations AOI changing its corporate name does not extinguish the
personality of the original corporation. It is the same corporation with a different name,
and its character is not changed. Consequently, the new corporation is still liable for
the debts and obligations of the old corporation. Republic Planters Bank v. CA (1992)

c. After the submission of the AOI to the SEC.

4. Corporate Term

General rule: A corporation shall exist for a period not exceeding 50 years from the
date of incorporation.

a. Sooner dissolved
b. Period extended

i. For periods not exceeding 50 years in any single instance by an amendment of the AOI

ii. Extensions may not be made earlier than 5 years prior to the original or subsequent expiry
date(s) EXCEPT if the SEC determines that there are justifiable reasons for an earlier extension

Rationale: Corporations are creatures of the law through the State legislature, the State
is therefore concerned that this privilege be enjoyed by corporations only under the
conditions and not beyond the period that it sees fit to grant; and particularly, that it not
be abused in fraud and to the detriment of other parties; and for this reason, it has been
ruled that the limitation to a definite period is an exercise of control in the interest of the
public. (Benguet Consolidated Mining Co. v. Pineda98 Phil. 711 Smith v. Eastwood
Wine Manufacturing Co., 43 Atl. 568 cited in Lopez, 1994)

5. Minimum Capital Stock and Subscription Requirements


Stock corporations incorporated under the Corporation Code shall not be required to
have a minimum authorized capital stock

Exception: As provided for by special law and subject to the provisions of Sec. 13


The amount of capital stock to be subscribed and paid for the purposes of incorporation
(Sec. 13):

a. At the time of incorporation, at least 25% of the authorized capital stock stated
in the AOI should be subscribed;

b. At least 25% of the said 25% above, must be paid upon subscription;

c. The balance to be payable on

i. Dates fixed in the subscription contract or

ii. Upon call by the BOD in the absence of fixed dates

d. The paid-up capital can in no case be lower than P5,000.00

6. Articles of Incorporation

a. Nature and Function of Articles

i. Constitutes the charter of the corporation and sets forth the rules and conditions upon which the
association or corporation is founded.

ii. Defines the contractual relationships between the State and the corporation, the stockholders
and the State, and the corporation and the stockholders
The Articles must be filed with the SEC for the issuance of the Certificate of

b. Contents

1. Corporate Name
a. Must not be identical or deceptively or confusingly similar to that
of any existing corporation or to any other name already
protected by law
b. Not patently deceptive, confusing or contrary to existing laws

Required by law to include the word Corporation or Inc. (Campos,


Change of corporate name requires the amendment of the AOI: majority

vote of the board and the vote or written assent of stockholders holding
2/3 of the outstanding capital stock (Sec. 16).

Amendment of a corporations AOI changing its corporate name does not

extinguish the personality of the original corporation. It is the same
corporation with a different name, and its character is not changed.
Consequently, the new corporation is still liable for the debts and
obligations of the old corporation. (Republic Planters Bank v. CA,

2. Purpose Clause
a. Must indicate the PRIMARY and SECONDARY purposes if
there is more than one purpose, which should not contradict or
change the nature of the corporation (Sec. 14(2)
b. Must not be patently unconstitutional, illegal, immoral, and
contrary to government rules and regulations (Sec. 17 (2)).
c. Must not be for the purpose of practicing a profession (People v.
United Medical Service, 200 N.E. 157, cited in Campos)

3. Principal Office
a. Must be within the Philippines (Sec. 14 (3))
b. AOI must specify both province or city or town where it is
c. A specific address is now required; Metro Manila is no longer
allowed (Sundiangand Aquino citing SEC Circular No. 3-2006).

Important for:

a. determining venue in an action by or against the corporation, and

b. determining the province where a chattel mortgage of shares
should be registered (Chua Gan vs. Samahang Magsasaka, 1935).

4. Corporate Term
a. Maximum life of 50 years.
b. Extendible for a period not exceeding 50 years at any one
instance. No extension, however, can be made earlier than 5 years
before the end of the term. (Sec. 11)
Extension requires an amendment of the AOI subject to the
exercise of appraisal right by the dissenting stockholder (Sec.

5. Names, citizenship and residences of incorporators

6. Number, names, citizenship and residences of directors/trustees (Asked
in 2005 and 2008)
Stock corporations: Directors
Non-stock corporations: Trustees

General rule: Not less than 5 but not more than 15 directors/ trustees

Exception: Non-stock corporations whose articles or bylaws may provide

for more than 15 trustees (Sec. 92)

Educational non-stock corporations:

a. trustees may NOT be less than 5 NOR exceed 15
b. number of trustees shall be in multiples of 5 (Sec. 108)

Nationalized or partially-nationalized industries:

Aliens may be directors but only in such number as may be proportional
to their allowable ownership of shares

7. If stock corporation
a. authorized capital stock in lawful money of the Philippines
b. the number of shares into which the ACS is divided
c. if with par value shares, the par value of each share (Sec. 14(8),
Sec. 15(7)).
d. names, citizenship and residences of original subscribers
e. amount subscribed and paid on each subscription
f. fact that some or all shares are without par value

8. If non-stock corporation
a. amount of capital
b. names, nationalities & residences of contributors
c. amount contributed by each
9. Amount paid by each subscriber on their subscription, which shall not be
less than 25% of subscribed capital and shall not be less than P5,000
(Sec. 15 (8 & 9)
10. Name of treasurer elected by the subscribers (Sec. 15 (10)
11. Other matters
a. Classes of shares, as well as preferences or restrictions on any
such class (Sec. 6).
b. Denial or restriction of pre-emptive right (Sec.39).
c. Prohibition against transfer of stock which would reduce stock
ownership to less than the required minimum in the case of a
nationalize business or activity (Sec. 15 (11)).

c. Amendment

Amendment of the Articles of Incorporation

Any provision or matter stated in the articles of incorporation may be amended

1. By a majority vote of the board of directors or trustees
2. And the vote or written assent of:
a. 2/3 of the outstanding capital stock, without prejudice to the
appraisal right of dissenting stockholders in accordance with the
provisions of this Code,
b. 2/3 of the members if it be a non-stock corporation. (Sec. 16)


1. Cannot effect amendment when it will contravene any provision of

requirement imposed by the Code or by special laws
2. The amendment must be for a legitimate purpose
3. Must be approved by the directors/trustees and the
stockholders/members through the vote requirement
4. Appraisal Right
5. Both the original and the amended articles together must contain all the
provisions required by law to be set out in the articles.
6. If the corporation is governed by a special law the amended articles must
be accompanied by a favorable recommendation of the appropriate
government agency to the effect that such amendment is in accordance
with law (Lopez, 2004)
7. Will take effect only
a. Upon their approval by the SEC by the issuance of a certificate of
amended articles
b. Or from the date of filing with the SEC if not acted upon within 6
months from the date of filing for a cause not attributable to the

1. The original and amended articles together shall contain all provisions
required by law to be set out in the articles of incorporation
2. The articles, as amended shall be indicated by underscoring the change
or changes made
3. A copy shall be submitted to the SEC
a. Duly certified under oath by the corporate secretary and a
majority of the directors or trustees
b. Stating the fact that the amendment or amendments have been
duly approved by the required vote of the stockholders or

The following items are amendable under Sec. 16:

1. Change of name of the Corporation
2. Adding to or changing the purpose/s
3. Change of principal office
4. Change in the number of directors or trustees
5. Increase or decrease in authorized capital stock (subject to Sec. 38)

d. Non-Amenable Items

The following items state accomplished facts, therefore, cannot be amended:

1. The names, nationalities and residences of the incorporators (Otherwise,
an amendment would go against the definition of incorporators in Sec.
2. First set of directors or trustees
3. Original stock subscriptions and paid-in capital
4. Treasurer-in-trust
5. Place and date of execution
6. Witnesses (De Leon)
Notes: AOI must be accompanied by Treasurers sworn statement of compliance
with Sec. 13 on amount of capital to be subscribed and paid for the purposes of
incorporation; otherwise, SEC shall not accept the AOI. (Sec. 14)

12. Registration and Issuance of Certificate of Incorporation


Documents to be filed with SEC (Asked in 2002): [BAT-LaNG]
a. Articles of Incorporation
b. Treasurers Affidavit certifying that 25% of the total authorized capital stock
has been subscribed and at least 25% of such has been fully paid in cash or
c. Bank certificate covering the paid-up capital.(Note: Current SEC rules no
longer require this if payment for shares is made in cash)
d. Letter authority authorizing the SEC to examine the bank deposit and other
corporate books and records to determine the existence of paid-up capital.
e. Undertaking to change the corporate Name in case there is another person or
entity with same or similar name that was previously registered.
f. Certificate of authority from proper Government agency whenever appropriate
like BSP for banks and Insurance Commission for insurance corporations.
(Sundiang and Aquino)


Effect: Commencement of corporate existence and juridical personality (Sec. 19)

Revocation of certificate of incorporation: If incorporators are found guilty of fraud in

procuring the same after due notice and hearing (Sec. 6(i), PD 902-A)


a. AOI does not SUBSTANTIALLY comply with the form prescribed
b. Purpose is patently unconstitutional, illegal, immoral, contrary to government
rules and regulations
c. Treasurers Affidavit concerning the amount of capital subscribed and or paid is
d. Required percentage of ownership of Filipino citizens has not been complied

Remedy in case of rejection of AOI: Petition for review in accordance with the Rules of
Court (Sec. 6, last par., PD 902-A)

SEC shall give the incorporators reasonable time to correct or modify objectionable
portions of the articles or amendment (Sec. 17).

13. Adoption of By-Laws


a. Prior to incorporation approved and signed by all the incorporators &

submitted to SEC together with AOI

b. After incorporation within 1 month after receipt of official notice of the

issuance of its certificate of incorporation by the SEC


Does not imply the "demise" of the corporation. By-laws may be required by law for an
orderly governance and management of corporations but they are not essential to
corporate birth. Therefore, failure to file them within the period required by law by no
means tolls the automatic dissolution of a corporation (Loyola Grand Villas
Homeowners Assn. v. CA (1997)

Note: Section 22 on the effect of failure to formally organize within 2 years from
incorporation, the corporations corporate powers cease and the corporation is deemed
dissolved. Organization includes: the filing & approval of by-laws with the SEC and the
election of directors and officers (Campos).

g. Nature and Functions of By-Laws

1) Product of agreement of the stockholders/members and establish the
rules for internal government of the corporation (Campos
2) A rule or law of a corporation for its government (13 Am. Jur., 283)
3) Mere internal rules among stockholders and cannot affect or prejudice
3rd persons who deal with the corporation unless they have knowledge
of the same (China Banking Corp v CA, 1997)
4) According to its function, by-laws may be defined as the rules and
regulations or private laws enacted by the corporation to regulate,
govern and control its own actions, affairs and concerns and its
stockholders or members and directors and officers with relation
thereto and among themselves in their relation to it. (9 Fletcher Cyc.
Corp., 1963 rev. ed., Sec. 4166 at 622 cited in Lopez, 1994)

h. Requisites of Valid By-Laws

1) Must be approved by the affirmative vote of the stockholders
representing MAJORITY of the outstanding capital stock or majority
of members (If filed pre-incorporation: must be approved and signed
by all incorporators)
2) Must be kept in the principal office of the corporation, subject to
inspection of stockholders or members during office hours (Sec. 74)

i. Binding Effects

ONLY from date of issuance of SEC of certification that bylaws are not
inconsistent with the Code

Pending approval, they CANNOT bind stockholders or corporation

j. Amendment or Revision

Effected by: Majority vote of the members of the Board and majority vote of
the owners of the OCS or members, in a meeting duly called for the purpose.

Delegation to the BOD of the power to amend or repeal by-laws: by vote of

stockholders representing 2/3 of the OCS or 2/3 of the members

How delegation is revoked: Any power delegated to the board of directors or

trustees to amend or repeal any by-laws or adopt new by-laws shall be
considered as revoked whenever stockholders owning or representing a
majority of the outstanding capital stock or a majority of the members in non-
stock corporations, shall so vote at a regular or special meeting.

F. Corporate Powers
1. General Powers, Theory of General Capacity
a. Sue and be sued in its corporate name;
b. Succession;
c. Adopt and use a corporate seal;
d. Amend its Articles of Incorporation;
e. Adopt by-laws;
f. For stock corporations - issue or sell stocks to subscribers and sell treasury stocks; for non-
stock corporation - admit members to the corporation;
g. Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal
with such real and personal property, pursuant to its lawful business;
h. Enter into merger or consolidation with other corporations as provided in the Code;
i. Make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided, no corporation, domestic or foreign,
shall give donations in aid of any political party or candidate or for purposes of partisan
political activity;
j. Establish pension, retirement, and other plans for the benefit of its directors, trustees, officers
and employees; and
k. Exercise such other powers as may be essential or necessary to carry out its purposes

Note: The Corporation has implied powers which are deemed to exist because of the
following provisions:
a. Except such as are necessary or incidental to the exercise of the powers so
conferred (Sec. 45)
b. Such powers as are essential or necessary to carry out its purpose or purposes
as stated in the AOI catch-all phrase (Sec. 36(11)).

2. Specific Powers, Theory of Specific Capacity

a. Power to Extend or Shorten Corporate Term
i. Must be approved by majority vote of the Board of Directors/ Board of
Trustees (BOD/BOT)
ii. Ratified at a meeting by 2/3 of SH representing the outstanding capital
stock/ 2/3 of members of non-stock corporations
iii. Written notice of meeting (includes proposed action, time and place of
meeting) shall be addressed to each SH/member at his place of residence
and deposited to the addressee in the post office, or served personally
iv. In case of extension of corporate term, appraisal right may be exercised
by the dissenting stockholder

b. Power to Increase or Decrease Capital Stock or Incur, Create, Increase Bonded


1) Same requirements above from 1-3

2) A certificate in duplicate must be signed by a majority of the directors
of the corporation (countersigned by the chairman and the secretary of
the SH meeting), setting forth:
a) That requirements of this section have been complied with
b) The amount of the increase or diminution of the capital stock
c) In case of increase,
i. the amount of capital stock or number of shares of no-par
stock actually subscribed
ii. names, nationalities and residences of the persons
iii. the amount of no-par stock subscribed by each
iv. the amount paid by each on his subscription, or the
amount of capital stock or number of shares of no-par
stock allotted to each stockholder if such increase is for
the purpose of making effective stock dividend

d) any bonded indebtedness to be incurred, created or increased

e) the actual indebtedness of the corporation on the day of the
f) the amount of stock represented at the meeting
g) the vote authorizing the increase or diminution of the capital
stock, or the incurring, creating or increasing of any bonded

3) prior approval of SEC is required

4) duplicate certificates shall be kept on file in the office of the corporation
and the other shall be filed with the SEC, attached in the original
articles of incorporation.
a) From and after approval of the SEC of its certificate of filing, the
capital stock shall stand increased or decreased and the incurring,
creating or increasing of any bonded indebtedness authorized
b) SEC shall not accept for filing any certificate of increase unless
accompanied by the sworn statement of the treasurer of the
corporation showing:
i. That at least 25% of such increased capital stock have
been subscribed and
ii. that at least 25% of the amount subscribed has been paid
or that there has been transferred to the corporation
property the value is equivalent to 25% of the

c) SEC shall not approve any decrease in the capital stock if its
effect shall prejudice the rights of corporate creditors

5) Bonds issued by a corporation shall be registered with the SEC

c. Power to Deny Pre-Emptive Rights

1) All SH of a Stock Corporation have preemptive right to subscribe to all

issues or disposition of shares of any class, in proportion to their
respective shareholdings
2) Except if such right is denied by the AOI or an amendment thereto
3) Pre-emptive right shall not extend to:
a) shares to be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public
b) shares to be issued in good faith with the approval of 2/3 of the
stockholders representing outstanding capital stock, in exchange
for property needed for corporate purposes or in payment of a
previously contracted debt

d. Power to Sell or Dispose of Corporate Assets

1) Same requirements from 1-3 as Sec. 37 above

2) Any dissenting SH may exercise his appraisal right
3) Deemed to cover substantially all the corporate property and assets
4) After authorization by the SH/members, the BOD/BOT may abandon
such sale, lease, exchange, mortgage, pledge or other disposition,
subject to the rights of third parties under any contract relating thereto,
without further action or approval by the SH/ members
5) Corporation is not restricted in its power to dispose assets:
a) if the same is necessary in the usual and regular course of
business of the corporation or
b) if the proceeds of the sale will be appropriated for the conduct of
its remaining business

e. Power to Acquire Own Shares

1) For a legitimate corporate purpose/s, including but not limited to the
a) To eliminate fractional shares arising out of stock dividends
b) To collect or compromise an indebtedness to the corporation,
arising out of unpaid subscription, in a delinquency sale, and to
purchase delinquent shares sold during said sale; and
c) To pay dissenting or withdrawing stockholders

2) Provided there are unrestricted retained earnings (URE) in the corporate

books to cover the shares purchased or acquired

f. Power to Invest Corporate Funds in Another Corporation or Business

1) Same requirements from 1-3 as Sec. 37 above

2) Any dissenting SH shall have appraisal right
3) Where the investment is reasonably necessary to accomplish the
corporations primary purpose, the approval of the SH/ members is not

a) If it is for the same purpose, or incidental, or related to its
PRIMARY purpose, the board can invest the corporate fund
WITHOUT the consent of the stockholders. No appraisal right.
b) If the investment is in another corporation of different business or
purpose BUT in pursuance of the SECONDARY purpose, the
affirmative vote of majority of the board consented by
stockholders/ members is required.
c) If the investment is OUTSIDE the purpose/s for which the
corporation was organized, AOI must be amended first, otherwise
it will be an Ultra Vires act.

g. Power to Declare Dividends

1) Out of URE
2) Payable in cash, in property, or in stock to all SH on the basis of
outstanding stock held by them
3) Any cash dividend due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and expenses
4) Stock dividends shall be withheld from the delinquent stockholder until
his unpaid subscription is fully paid
5) Should be approved by 2/3 of SH representing the outstanding capital
stock at a regular/special meeting called for that purpose
6) Stock corporations- prohibited from retaining surplus profits in excess of
100% of their paid-in capital stock, except:
a) When justified by definite corporate expansion projects or
programs approved by the BOD
b) When the corporation is prohibited under any loan agreement
with any financial institution or creditor from declaring dividends
without its consent, and such consent has not yet been secured
c) When it can be clearly shown that such retention is necessary
under special circumstances obtaining in the corporation

h. Power to Enter Into Management Contract

1) Should be approved by the BOD and by SH owning at least the majority

of the outstanding capital stock or at least a majority of the members of
both the managing and the managed corporation at a meeting duly called
for that purpose
2) Should be approved by the 2/3 of stockholders owning outstanding
capital stock/members of the managed corporation when:
a) A stockholder or stockholders representing the same interest of
both the managing and managed corporations own more than 1/3
of the total outstanding capital stock entitled to vote of the
managing corporation; or
b) A majority of the members of the BOD of the managing
corporation also constitute a majority of the BOD of the managed

3) No management contract shall be entered into for a period longer than 5

years for any one term
4) 1-3 above applies to any contract whereby a corporation undertakes to
manage or operate all or substantially all of the business of another
corporation, whether such are called service contracts, operating
agreements or otherwise
5) Service contracts or operating agreements which relate to exploration,
development, exploitation or utilization of natural resources may be
entered into for such periods as may be provided in the pertinent laws
and regulations

Notes: Two general restrictions on the power of the corporation to acquire

and hold properties:
a) property must be reasonably and necessarily required by the business
b) that the power shall be subject to the limitations prescribed by other
special laws and the Constitution (corporation may not acquire more
than 30% of voting stocks of a bank; corporations are restricted from
acquiring public lands except by lease of not more than 1000

i. Ultra Vires Acts

Definition: Ultra vires acts are those acts which a corporation is not empowered
to do or perform because they are not conferred by its AOI or by the Corporation
Code, or not necessary or incidental to the exercise of the powers so conferred
(Sec. 45).

Types of ultra vires Acts:

1) Acts done beyond the powers of the corporation as provided in the law
or its articles of incorporation;
2) Acts or contracts entered into in behalf of a corporation by persons who
have no corporate authority (Note: This is technically ultra vires acts of
officers and not of the corporation);
3) Acts or contracts, which are per se illegal as being contrary to law.

i. Applicability of Ultra Vires Doctrine

It is a question, therefore, in each case of the logical relation of the act to

the corporate purpose expressed in the charter. If that act is one which is
lawful in itself, and not otherwise prohibited, is done for the purpose of
serving corporate ends, and is reasonably tributary to the promotion of
those ends, in a substantial, and not in a remote and fanciful sense, it
may fairly be considered within the charter powers. The test to be
applied is whether the act in question is in direct and immediate
furtherance of the corporations business, fairly incident to the express
powers and reasonably necessary to their exercise. If so, the corporation
has the power to do it; otherwise, not. (Montelibano v. Bacolod-Murcia
Milling Co., Inc., G.R. No. 15092, May 18, 1962)

ii. Consequences of Ultra Vires Acts

1) Executed contract courts will not set aside or interfere with

such contracts;
2) Executory contracts no enforcement even at the suit of either
party (void and unenforceable);
3) Partly executed and partly executory principle of no unjust
enrichment at expense of another shall apply;
4) Executory contracts apparently authorized but ultra vires
the principle of estoppel shall apply.

Ultra Vires Acts Illegal Acts

Not necessarily unlawful, but outside the powers Unlawful; against law, mora
of the corporation and public order

Can be ratified Cannot be ratified

Can bind the parties if wholly Cannot bind the parties
or partly executed

An ultra vires act is distinguished from illegal act, the former being
voidable which may be enforced by performance ratification, or
estoppel, while the latter is void and cannot be validated. (Seaoilvs.
Autocorp Group, 2008, Nachura)

3. How Exercised
a. By the Shareholders
b. By the Board of Directors
c. By the Officers
4. Trust Fund Doctrine

G. Board of Directors and Trustees

1. Doctrine of Centralized Management
2. Business Judgment Rule
3. Tenure, Qualifications and Disqualifications of Directors or Trustees
4. Elections
a. Cumulative Voting/Straight Voting
b. Quorum
5. Removal
6. Filling of Vacancies
7. Compensation
8. Fiduciaries Duties and Liability Rules
9. Responsibility for Crimes
10. Inside Information
11. Contracts
a. By Self-Dealing Directors with the Corporation
b. Between Corporations with Interlocking Directors
c. Management Contracts
12. Executive Committee
13. Meetings
a. Regular or Special
i. When and Where
ii. Notice
b. Who Presides
c. Quorum
d. Rule on Abstention

H. Stockholders and Members

1. Rights of a Stockholder and Members
a. Doctrine of Equality of Shares
2. Participation in Management
a. Proxy
b. Voting Trust
c. Cases When Stockholders Action is Required
i. By a Majority Vote
ii. By a Two-Thirds Vote
iii. By Cumulative Voting
3. Proprietary Rights
a. Right to Dividends
b. Right of Appraisal
c. Right to Inspect
d. Pre-Emptive Right
e. Right to Vote
f. Right to Dividends
g. Right of First Refusal
4. Remedial Rights
a. Individual Suit
b. Representative Suit
c. Derivative Suit
5. Obligation of a Stockholder
6. Meetings
a. Regular or Special
i. When and Where
ii. Notice
b. Who Calls the Meetings
c. Quorum
d. Minutes of the Meetings

I. Capital Structure
1. Subscription Agreements
2. Consideration for Stocks
3. Shares of Stock
a. Nature of Stock
b. Subscription Agreements
c. Consideration for Shares of Stock
d. Watered Stock
i. Definition
ii. Liability of Directors for Watered Stocks
iii. Trust Fund Doctrine for Liability for Watered Stocks
e. Situs of the Shares of Stock
f. Classes of Shares of Stock
4. Payment of Balance of Subscription
a. Call by Board of Directors
b. Notice Requirement
c. Sale of Delinquent Shares
i. Effect of Delinquency
ii. Call by Resolution of the Board of Directors
iii. Notice of Sale
iv. Auction Sale and the Highest Bidder
5. Certificate of Stock
a. Nature of the Certificate
b. Uncertificated Shares
c. Negotiability
i. Requirements for Valid Transfer of Stocks
d. Issuance
i. Full Payment
ii. Payment Pro-Rata
e. Lost or Destroyed Certificates
6. Stock and Transfer Book
a. Contents
b. Who May Make Valid Entries
7. Disposition and Encumbrance of Shares
a. Allowable Restrictions on the Sale of Shares
b. Sale of Partially Paid Shares
c. Sale of a Portion of Shares Not Fully Paid
d. Sale of All of Shares Not Fully Paid
e. Sale of Fully Paid Shares
f. Requisites of a Valid Transfer
g. Involuntary Dealings with Shares

J. Dissolution and Liquidation

1. Modes of Dissolution
a. Voluntary
i. Where No Creditors Are Affected
ii. Where Creditors Are Affected
iii. By Shortening of Corporate Term
b. Involuntary
i. By Expiration of Corporate Term
ii. Failure to Organize and Commence Business Within 2 Years from Incorporation
iii. Legislative Dissolution
iv. Dissolution by the SEC on Grounds under Existing Laws
2. Methods of Liquidation
a. By the Corporation Itself
b. Conveyance to a Trustee within a Three-Year Period
c. By Management Committee or Rehabilitation Receiver
d. Liquidation after Three Years

K. Other Corporations
1. Close Corporations
a. Characteristics of a Close Corporation
b. Validity of Restrictions on Transfer of Shares
c. Issuance or Transfer of Stock in Breach of Qualifying Conditions
d. When Board Meeting is Unnecessary or Improperly Held
e. Pre-Emptive Right
f. Amendment of Articles of Incorporation
g. Deadlocks
2. Non-Stock Corporations
a. Definition
b. Purposes
c. Treatment of Profits
d. Distribution of Assets upon Dissolution
3. Religious Corporations Exclude
4. Foreign Corporations
a. Bases of Authority over Foreign Corporations
i. Consent
ii. Doctrine of Doing Business (related to definition under the Foreign Investments Act,
R.A. No. 7042)
b.Necessity of a License to Do Business
i. Requisites for Issuance of a License
ii. Resident Agent
c.Personality to Sue
d.Suability of Foreign Corporations
e.Instances When Unlicensed Foreign Corporations May Be Allowed to Sue Isolated
f. Grounds for Revocation of License

L. Mergers and Consolidations

1. Definition and Concept
2. Constituent vs. Consolidated Corporation
3. Plan of Merger or Consolidation
4. Articles of Merger or Consolidation
5. Procedure
6. Effectivity
7. Limitations
8. Effects

VII. Securities Regulation Code (R.A. No. 8799) (See

Tayags Handouts)

A. State Policy, Purpose

B. Securities Required to Be Registered

a. Exempt Securities
b. Exempt Transactions

C. Procedure for Registration of Securities

D. Prohibitions on Fraud, Manipulation and Insider Trading

a. Manipulation of Security Prices
b. Short Sales
c. Fraudulent Transactions
d. Insider Trading

E. Protection of Investors
a. Tender Offer Rule
b. Rules on Proxy Solicitation
c. Disclosure Rule

F. Civil Liability

VIII. Banking Laws

A. The New Central Bank Act (R.A. No. 7653)

1. State Policies

The State shall maintain a central monetary authority that shall function and operate as
an independent and accountable body corporate in the discharge of its mandated
responsibilities concerning money, banking and credit.
2. Creation of the Bangko Sentral ng Pilipinas (BSP)

Nature of the BSP

a. A central monetary authority;

b. An independent and accountable body; and
c. A government-owned corporation but enjoys fiscal and administrative autnomy.

The BSP shall have a capitalization of P50B to be fully subscribed by the Government.

3. Responsibility and Primary Objective

Q: What are the responsibility and primary objectives of the Monetary Board?

A: The following are the responsibility and primary objectives of the Monetary Board:

a. It shall provide policy directions in the areas of money, banking and credit.
b. It shall have supervision over banks and exercise regulatory powers over finance
companies and non-bank financial institutions performing quasi-banking
c. It is mandated to maintain price stability conducive to a balance and sustainable
growth of the economy.
d. It shall promote and maintain monetary stability and the convertibility of the

All powers, duties and functions vested by law in the Central Bank of the Philippines
not inconsistent with the NCBA shall be deemed transferred to the BSP. All references
to the Central Bank of the Philippines in any law or special charters shall be deemed to
refer to the BSP.

However, if the issue is whether or not the act of a bank or a non-bank financial
intermediary is ultra vires, the same fall within the jurisdiction of the SEC and not the

4. Monetary BoardPowers and Functions

Monetary Board thenbody through which the powers and functions of the Bangko
Sentral are exercised.

Q: What are the Powers and Functions of the Monetary Board?

A: The following are the Powers and Functions of the Monetary Board:

a. Issue rules and regulations it considers necessary for the effective discharge of
the responsibilities and exercise of the powers vested in it;
b. Direct the management, operations, and administration of Bangko Sentral,
organize its personnel and issue such rules and regulations as it may deem
necessary or desirable for this purpose;
c. Establish a human resource management system which governs the selection,
hiring, appointment, transfer, promotion, or dismissal of all personnel;
d. Adopt an annual budget for and authorize such expenditures by Bangko Sentral
as are in the interest of the effective administration and operations of Bangko
Sentral in accordance with the applicable laws and regulations; and
e. Indemnify its members and other officials of Bangko Sentral, including
personnel of the departments performing supervision and examination functions,
against all costs and expenses reasonably incurred by such persons in connection
with any civil or criminal action, suit or proceeding, to which any of them may
be made a party by reason of the performance of his functions or duties, unless
such members or other officials is found to be liable for negligence or

5. Of How the BSP Handles Banks in Distress

a. Conservatorship

Whenever on the basis of the report of the appropriate supervising and

examining department, the Monetary Board (MB) finds that a bank or quasi-
bank is in a state of continuing inability or unwillingness to maintain a condition
of liquidity deemed adequate to protect its depositors and creditors, the MB may
appoint a conservator to take charge of the assets, liabilities and management

Period and termination

1. Period: shall not exceed 1 year
2. The expenses attendant to the conservatorship shall be borne by the bank
or quasi-bank concerned
3. Grounds for termination of conservatorship by MB:
a. When it is satisfied that the institution can continue to operate on
its own and the conservatorship is no longer necessary
b. When, on the basis of the report of the conservator or of its own
findings, the MB determines that the continuance in business of
the institution would involve probable loss to its depositors or
creditors (the bank or quasi-bank would then be placed under

Effects of Conservatorship

1. Bank/Quasi-bank retains juridical personality

2. Not a precondition to the designation of a receiver; and
3. Perfected transactions cannot be repudiated

b. Receivership

The MB may appoint a receiver if the MB finds that a bank or quasi-bank:

Is unable to pay its liabilities as they become due in the ordinary course
of business provided that this shall not include inability to pay caused by
extraordinary demands induced by financial panic in the banking
Has insufficient realizable assets, as determined by the BSP, to meet its
liabilities; or
Cannot continue in business without involving probable losses to its
depositors and creditors; or
Has willfully violated a cease and desist order that has become final
involving transactions which amount to fraud or dissipation of bank
assets, the MB may summarily and without need for prior hearing forbid
the institution from doing business in the Philippines and designate the
PDIC as the receiver of the bank.

Q: What is the nature of the functions of the: conservator; receiver?


Both conservator and receiver can only perform acts of administration and
not acts of dominion.
While they have the power to revoke the actions of the previous
management and the Board of Directors, they cannot revoke a valid contract.
Neither can they approve an option to purchase real property.
Once the bank is placed under receivership, its officers are no longer
authorized to transact business in connection with the banks assets and

Q: Does the court have the authority to appoint a receiver for a bank in financial
A: The court has no authority to appoint a receiver for a bank if the latter will
function as such under the BSP law. The power to appoint belongs to BSP.

Q: Who is the Statutory Receiver for close banks?

A: The PDIC under the charter that created it is considered the receiver of closed
banks. If a quasi-bank, any person of recognized competence in banking or finance.

Q: Is the resolution of the BSP appointing a receiver or conservator or closing a

bank subject to declaratory relief?
A: No, it is not. The power to determine the propriety of appointing a
receiver/conservator or closing a bank has been expressly lodged by law upon the

Q: What do you mean by the Close Now Hear Later doctrine?

It is the rule that allows BSP to order the closure of the bank even without
prior hearing.
BSP may rely on the report of either the conservator, receiver or the head of
the supervising and examining department.
It is not required to conduct a thorough audit of the bank before ordering its

Q: Does injunction lie against the authority of BSP to appoint a conservator/receiver

or order the closure of a bank?
No. The authority of BSP to place a bank under conservatorship,
receivership or order its closure is a valid exercise of police power.
It is final and executory and not subject to injunction. However, such orders
are subject to judicial scrutiny.
They may be set aside if they were arbitrary and appear to have been issued
with grave abuse of discretion.

Q: What are the requisites to assail the order of BSP appointing a

receiver/conservator or closing a bank?
A: The order of conservatorship, receivership or closure may be assailed:
By the stockholders representing at least majority of the outstanding capital
Within 10 days from receipt by the board of directors of the order;
Thru a petition for certiorari on the ground that the action taken by BSP was
in excess of jurisdiction or with grave abuse of discretion as to amount to
lack of jurisdiction.

c. Closure/Liquidation

Q: State the rules on liquidation

a. If the bank cannot be restored to its financial health upon
recommendation of the conservator or receiver or head of the supervising
and examining department, BSP shall file the petition with the RTC for
assistance in liquidation.
b. In liquidation proceedings, the claims against the bank shall be
determined and passed upon and then paid based on the rules on
concurrence and preference of credit. The residual assets are then
distributed to the stockholders.
c. The liquidation of a bank may be carried out despite lack of tax
clearance unlike a voluntary dissolution of a corporation under the
Corporation Code.
d. All claims against the insolvent bank should be filed in the liquidation
proceeding. This rule, however, does not apply to petition for issuance of
a writ of possession for foreclosed property filed by the bank because
such petition is not in the nature of a disputed claim against the bank.
e. Bank deposits are not preferred credits except when the deposits are
covered by a cashiers check purchased from the bank when the bank
officers knew or ought to have known that the bank is insolvent.
f. Any final judgment against the bank which has been ordered closed
should be stayed as to execute the judgment would unduly deplete the
assets of the bank to the prejudice of other creditors.

Q: Once liquidation proceedings have been initiated, can the majority

stockholders of the bank still file a separate action/petition to assail the order of
A: No. Instead, issues on validity of closure should be raised as affirmative
defenses in the liquidation proceeding. This is necessary to prevent multiplicity
of suits or conflicting resolutions.

6. How the BSP Handles Exchange Crisis

a. Legal Tender Power

All notes and coins issued by the BSP shall be fully guaranteed by the
Government of the Republic of the Philippines and shall be legal tender in the
Philippines for all debts, both public and private. However, with respect to coins,
they have legal tender power only for the following amounts:
One peso coins and coins of higher peso value are legal tender for
obligations not exceeding P1,000.
Twenty five cents and coins of lower value are legal tender for
obligations not exceeding P100.

Notes, regardless of denomination, are legal tender for any amount.

Coins which show signs of filing, clipping or perforation and notes

which have lost more than 2/5s of their surface or all of the signatures
inscribed therein, shall be withdrawn from circulation and demonetized
without compensation to the bearer.

Q: Are notes and coins withdrawn from circulation still legal tender?
Notes and coins called in for replacement shall remain legal tender for a
period of one year from date of call.
After this period, they shall cease to be legal tender but during the
following year or such longer period as the MB may determine, they
may be exchanged at par.
After expiration of this latter period, the notes and coins which have not
been exchanged shall cease to be the liability of the BSP
b. Rate of Exchange

The MB shall:
1. Determined the exchange rate policy of the country;
2. Determine the rates at which the Bangko Sentral shall buy and sell spot
3. Establish deviation limits from the effective exchange rate or rates as it
may deem proper;
4. Determine the rates for other types of foreign exchange transactions by
the BSP, including purchases and sales of foreign notes and coins.

Limitation: The margins between the effective exchange rates and the rates
established by the MB may not exceed the corresponding margins for spot
exchange transactions by more than the additional costs or expenses involved in
each type of transactions.

B. Law on Secrecy of Bank Deposits (R.A. No. 1405, as amended)

1. Purpose

Q: What is the purpose of the law?

A: To give encouragement to the people to deposit their money in banks and 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.

The absolute confidentiality rule in RA No. 1405 actually aims at protection from
unwarranted inquiry or investigation is merely to determine the existence and nature, as
well as the amount of the deposit in any given bank account.

2. Prohibited Acts

Q: What are the prohibited acts under RA 1405?

A: It shall be unlawful for any official or employee of a bank to disclose or allow the
examination or inquiry by any person other than those excepted by law any information
concerning Philippine currency bank deposits of whatever nature and kind, as well as
investment in government securities.

Q: Who are covered by the prohibition?

Bank officials and employees.
Non-bank official or employee is not covered by the prohibition.
Disclosure by a bank official or employee of information about bank deposit in
favor of a co-employee in the course of the performance of his duties is not
covered by the prohibition.

3. Deposits Covered

Q: What are the items covered by the prohibition against unauthorized disclosure under
RA 1405?
a. All Philippine currency bank deposits of whatever nature with banks, including
investment in bonds issued by the government of the Philippines, its political
subdivisions and instrumentalities.
b. Trust funds and any sum of money invested in the bank which the bank may use
for loans and similar transaction are now included in the term deposits.
c. Deposits are thus no longer limited to those governed by the law on loans giving
rise to creditor-debtor relationship.

4. Exceptions
Q: In what cases may information on Philippine Currency Bank Deposits, as well as
Investment in Government Securities, be disclosed, examined or looked into without
violating the law?
a. Written permission of the depositor

b. In case of impeachment

c. In case of order of a competent court in any of the following cases:

In case of bribery or dereliction of duty of public officials
Where the subject matter of litigation is the money deposited
Prosecution for unexplained wealth (plunder is akin to unexplained
Prosecution for violation of the anti-graft and corrupt practices act
In case of prima facie violation of the anti-money laundering law

Note: Disclosure can only be made to the anti-money laundering council.

Bank inquiry order is not necessary if the predicate crime is kidnapping,
hijacking, arson, murder and violation of the dangerous drugs law or

Garnishment of bank deposits

d. The BIR may inquire into bank deposits for the purpose of computing the tax
due on the estate of the deceased depositor.
Note: The bank cannot disclose to the heirs of the deceased depositor but
only to the BIR
e. The BIR may also inquire into bank deposits if there is an offer of compromise
of tax liability on account of financial incapacity to verify such representation of
the taxpayer
f. Under the Unclaimed Balances Law, the bank may disclose to the National
Treasurer Information concerning dormant deposits for the purpose of initiating
escheat proceedings.
g. In case the law is repealed, superseded or modified by any law to the contrary.

5. Garnishment of Deposits, including Foreign Deposits

Q: May the bank disclose information about the Philippine currency bank deposits
pursuant to a Writ of Garnishment?
The bank may disclose information about Philippine currency bank deposits
pursuant to a writ of garnishment. The disclosure in this case is only incidental
to the execution process. There is nothing in the records of Congress that would
show the intention of legislature to place Philippine currency bank deposits
beyond the reach of judgment creditor.

Foreign currency deposits, however, are exempt from garnishment or any court
or administrative process. However, the exemption of foreign currency deposits
from court order and administrative processes cannot be invoked in case of
violation of the anti-money laundering law, or if property or funds are related to
financing of terrorism or acts of terrorism or by a person who is not the owner of
the FCDU account or against a co-owner of the account or by a transient for any
purpose contrary to that intended by law, which is to encourage foreign currency
deposits to beef up our international reserves.

C. General Banking Law of 2000 (R.A. No. 8791)

1. Definition and Classification of Banks

Q: What is a BANK?
A BANK is an entity engaged in the (1) lending of funds (2) obtained from the
public in the (3) form of deposits.

A transaction involving not a loan but purchase of receivables at a discount

within the purview of investing, reinvesting, or trading in securities which an
investment company to lend funds obtained from the public through receipts of
deposit which is a banking function.

Q: How are banks classified?

A: Banks are classified under Sec. 3.2 of the General Banking Law into:

a. Universal Banks banks that authority to exercise, in addition to the

powers and functions of commercial banks, powers of an investment house
and the power to invest in non-allied enterprises. Capitalization: P10B.

b. Commercial Banks banks that are given all such power necessary to
engage in commercial banking in addition to general corporate powers;
commercial banking includes the power to accept drafts, issue letters of
credit, discounting and negotiation of negotiable instruments and evidence of
debt, accept and create demand deposits and the like. Capitalization: P4B.

c. Thrift Banks composed of savings and mortgage bank, stock savings and
loan association and private development bank. May issue standby letter of
credit only. Capitalization: P1B.

d. Rural Banks banks that are created to make needed credit available and
readily accessible in the rural areas for the purpose of promoting
comprehensive rural development.

e. Cooperative Banks banks that primarily provide financial, banking and

credit services to cooperative organizations and their members

f. Islamic Bank banks that the business dealings and activities of which are
subject to the basic principles and ruling of Islamic Sharia. The Al Amanah
Islamic Investment Bank of the Philippines, which was created by RA 6848,
is the only Islamic bank in the country at this time

g. Other banks as may be classified by the BSP

2. Distinction of Banks from Quasi-Banks and Trust Entities

Q: How do you distinguish banks from quasi-banks and trust entities?

A bank obtains funds from the public in the form of deposit while quasi-banks
refer to entities engaged in the borrowing of funds through the issuance,
endorsement or assignment with recourse or acceptance of deposit substitutes
for purposes of relending or purchasing of receivables.
Only deposits are insured with PDIC. Funds obtained by quasi-bank and trust
entities are not insured with PDIC. Unlike deposits or funds obtained through
quasi-banking, there is no creditor and debtor relationship in trust.

3. Bank Powers and Liabilities

Apart from its general powers as a stock corporation, it can:

Exercise all the powers as may be necessary to carry on the business of
commercial banking, such as accepting drafts and issuing letters of credit;
discounting and negotiating promissory notes, drafts, bills of exchange, and
other evidences of debt; accepting or creating demand deposits; receiving other
types of deposits and deposit substitutes; buying and selling foreign exchange
and gold or silver bullion; acquiring marketable bonds and other debt securities;
and extending credit, subject to such rules as the Monetary Board may
promulgate. These rules may include the determination of bonds and other debt
securities eligible for investment, the maturities and aggregate amount of such

A universal bank shall have the authority to exercise in addition to the powers of
a commercial bank the power of an investment house and the power to invest in
the equities of allied and non-allied enterprises.

A commercial bank cannot perform the function of an investment house and can
only invest in the equity of allied enterprises.

a. Corporate Powers

Q: What are the Corporate Powers of the bank?

Being a stock corporation, a bank shall have the general powers of a
It can only acquire real property when: it is needed for business
(Business); in settlement of debt incurred in the course of its business
(Dacion); property as may be mortgaged to it to secure a debt in good
faith (Foreclosure); and property it may acquire during execution sale to
satisfy a judgment (Execution Sale). Bank cannot acquire real property
in settlement of a civil liability arising from a crime.
A universal bank and commercial bank can both invest in equity but only
universal bank allowed to invest in equity of non-allied enterprises.

Foreign bank cannot acquire real property.

b. Banking and Incidental Powers

All such powers as may be necessary to carry on the business of commercial

Accepting drafts by accepting a draft, a bank creates a bankers
acceptance, which is a negotiable time draft or bill of exchange drawn
on and accepted by a commercial bank. This is different from trade
acceptance, which is accepted by the buyer.
Issuing letters of credit
Discounting and negotiating promissory notes, drafts, bills of
exchange, and other evidence of debt
Accepting or creating demand deposits

Q: What are the services that the bank may render?

Receive in custody funds, documents and other valuable objects;
Act as financial agent and buy and sell for the account securities;
Make collections and payments for the account of others and perform
such other services not incompatible with banking business and upon
prior approval of BSP, acts as manager adviser of investment
management account and rent out safety deposit box.
In Sia vs. CA, the court ruled that safety deposit box is a special kind of

4. Diligence Required of Banks Relevant Jurisprudence

Q: What is the kind of diligence required of banks?

The diligence required of banks is more than that of a good father of a family
where the fiduciary nature of their relationship with their depositors is
concerned. The highest degree of diligence is based on the General Banking
Law which requires of banks the highest standards of integrity and performance.
But the same degree of diligence is not expected to be exerted by banks in
commercial transactions that do not involve their fiduciary relationship with
depositors, such as sale and issuance of demand draft.

5. Nature of Bank Funds and Bank Deposits

Q: Describe the nature of bank funds and bank deposits?

Bank deposits are governed by the law on loans.
Creditor and debtor relationship is created between the bank and its depositors.
The fiduciary nature of a bank-depositor relationship does not convert the
contract between the bank and its depositors from a loan to trust agreement.
Failure by the bank to pay the depositor is failure to apy a simple loan and not a
breach of trust

6. Stipulation on Interests

Q: Is stipulation on interest valid?

CB Circular 905 (1982) lifted the ceiling on interest rate. The bank and its
depositors are therefore free to stipulate on the rate of interest for loans.
Nevertheless, if the interest rate is unconscionable, it may be nullified on
grounds of equity.
If the parties agreed on the payment of interest but silent as to rate, the legal rate
is 6% regardless of the nature or kind of obligation breached.

7. Grant of Loans and Security Requirements

a. Ratio of Net Worth to Total Risk Assets

Q: What do you mean by Risk Based Capital?

Answer: It means that the capital of the bank must be sufficient to withstand
risks arising from bank operations like granting of loans and investment in
equity. The risk assets of a commercial bank shout not exceed 10% of its capital.

A bank must not be allowed to expand the volume of its loans and investments
in a manner that is disproportionate to its net worth.

b. Single Borrowers Limit

Q: What do you mean by the Single Borrowers Limit?

Unless otherwise prescribed by the MB, the total amount of loans, credit
accommodations and guarantees that may be extended by a bank to a
single borrower shall not exceed 25% of the net worth of such bank.
The amount may be increased by additional 10% of the banks net worth
provided that the additional liabilities are adequately secured by
documents of title covering readily marketable and non-perishable

To prevent the bank from making excessive loans and other credit
accommodations to a single borrower or corporate group, including guarantees
for the account of such borrower or group. The bank is prohibited from placing
many eggs in the basket of one client. It is a damage-control mechanism and a
device for risk amelioration.

Q: What are the rules on loan values of properties offered to the bank as
collateral or security for loan accommodations?
Except as the MB may otherwise prescribe, loans and credit
accommodations against real estate shall not exceed 75% of the
appraised value of the respective real estate security plus 60% of the
appraised value of the insured improvements while loans on the security
of chattels and intangible properties shall not exceed 75% of the
appraised value of the security.

Q: What is the redemption period if the mortgagee of a real property is a bank?


If the mortgagee is a bank and the mortgagor is a juridical person and

the mode of foreclosure is extra-judicial, the redemption period is 3
months from the date of foreclosure or registration whichever comes
If the mortgagee is a bank but the mortgagor is a natural person, the
redemption period is 1 year from registration of sale.
If the mortgagee is a bank and the mode of foreclosure is judicial, the
mortgagor, on top of his equity of redemption, has 1 year from
registration of the order confirming the sale to redeem the property.

Q: What is the Redemption price if the mortgagee is a bank?

The outstanding obligation plus interest stipulated in the mortgage
agreement plus costs and expenses incurred during foreclosure less any
income derived from the property except if the mortgagor is an
accommodation mortgagor in which case the redemption price is the bid
price plus 12% interest per annum.

c. Restrictions on Bank Exposure to DOSRI (Directors, Officers, Stockholders and their

Related Interests)

Q: What are the rules governing transactions where DOSRI (Directors, Officers,
Stockholders and their Related Interests) may incur contractual obligation with
their banks?
No director or officer of any bank shall, directly or indirectly, for himself
or as the representative or agent of others, borrow from such bank nor
shall become a guarantor, indorser or surety for loans from such bank to
others, or in any be an obligor or incur any contractual liability to the
bank except with the written approval of at least majority of all the
directors of the bank excluding the director concerned. The required
approval shall be entered upon the records of the bank and a copy of
such entry shall be transmitted forthwith to the appropriate supervising
and examining department of BSP.
The outstanding loans, credit accommodations and guarantees which a
bank may extend to the DOSRI shall be limited to an amount equivalent
to their respective unencumbered deposits and book value of their paid-
in capital contribution to the Bank.
Loans which are considered non-risk, as well as loans in the form of
fringe benefits under a fringe benefit program duly approved by BSP are
excluded from the limits.

A DOSRI borrower is required to waive the secrecy of his deposits of whatever

nature in all banks in the Philippines

The general policy behind DOSRI rules is to level the lending field between the
insiders and the outsiders. The objective is to prevent the bank from
becoming a captive source of finance for DOSRI.

Q: What is the nature of the loan that does not comply with the rules on DOSRI
and/or Single Borrowers limit?
Answer: The loan transaction is valid but without prejudice to criminal
prosecution against the erring DOSRI

[EXCLUDE: All laws on special banks (no reference as to creation of special banks)]

IX. Intellectual Property Code (Exclude Implementing

Rules & Regulations)

A. Intellectual Property Rights in General

1. Intellectual Property Rights
2. Differences between Copyrights, Trademarks and Patent
3. Technology Transfer Arrangements

B. Patents
1. Patentable Inventions
2. Non-Patentable Inventions
3. Ownership of a Patent
a. Right to a Patent
b. First-to-File Rule
c. Inventions Created Pursuant to a Commission d. Right of Priority
4. Grounds for Cancellation of a Patent
5. Remedy of the True and Actual Inventor
6. Rights Conferred by a Patent
7. Limitations of Patent Rights
a. Prior User
b. Use by the Government
8. Patent Infringement
a. Tests in Patent Infringement
i. Literal Infringement
ii. Doctrine of Equivalents
b. Defenses in Action for Infringement
9. Assignment and Transmission of Rights
1. Licensing (voluntary and compulsory)
2. Special laws]

C. Trademarks
1. Definition of Marks, Collective Marks, Trade Names
2. Acquisition of Ownership of Mark
3. Acquisition of Ownership of Trade Name
4. Non-Registrable Marks
5. Prior Use of Mark as a Requirement
6. Tests to Determine Confusing Similarity between Marks
a. Dominancy Test
b. Holistic Test
7. Well-Known Marks
8. Rights Conferred by Registration
9. Use by Third Parties of Names, etc. Similar to Registered Mark
10. Infringement and Remedies
a. Trademark Infringement
b. Damages
c. Requirement of Notice
11. Unfair Competition
12. Trade Names or Business Names
13. Collective Marks

D. Copyrights
1. Basic Principles, Sections 172.2, 175 and 181
2. Copyrightable Works
a. Original Works
b. Derivative Works
3. Non-Copyrightable Works
4. Rights of Copyright Owner
5. Rules on Ownership of Copyright
6. Limitations on Copyright
a. Doctrine of Fair Use
b. Copyright Infringement

E. Rules of Procedure for Intellectual Property Rights Cases (A.M. No. 10-3-10-SC)

X. Special Laws

A. The Chattel Mortgage Law and Real Estate Mortgage Law [Excluded and made a part of
Civil Law coverage]

B. Anti-Money Laundering Act (R.A. No. 9160, as amended by R.A. No. 9194)

1. Policy of the Law

To protect and preserve the integrity and confidentiality of bank accounts and to ensure
that the Philippines shall not be used as a money laundering site for the proceeds of any
unlawful activity.

2. Covered Institutions

Q: Who are the covered institution/persons under the Anti-Money Laundering Law?
a. Institutions supervised or regulated by BSP;

b. Institutions supervised and regulated by the Insurance Commission; and

c. Entities dealing in currency, commodities or financial derivatives based thereon

valuable objects, cash substitutes and regulated by the Securities and Exchange

d. (4) jewelry dealers in precious metals, who, as a business, trade in precious

metals, for transactions in excess of One million pesos (P1,000,000.00);

e. (5) jewelry dealers in precious stones, who as a business, trade in precious

stones, for transactions in excess of one million pesos (P1,000,000.00);

f. (6) 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 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;
iv. Acting as (or arranging for another person to act as) a nominee shareholder for another person;

g. (7) 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.

Notwithstanding to foregoing, the term covered persons shall exclude

lawyers and accountants acting as independent legal professionals in
relation to information concerning their clients or where disclosure of
information would compromise client confidences or the attorney-client
relationships: Provided, that these lawyers and accountants are
authorized to practice in the Philippines and shall continue to be subject
to the provisions of their respective codes of conduct and/or professional
responsibility or any of its amendments.

3. Obligations of Covered Institutions

Q: What are the obligations of covered institutions/persons?

a. Customer identification
b. Record keeping (records should be kept and safety stored for five years from
date of the transaction)
c. Reporting of covered and suspicious transactions

4. Covered Transactions

Q: Transaction in cash or other equivalent monetary instrument involving the total

amount in excess of the P500,000 within one banking day.

5. Suspicious Transactions

Q: What are suspicious transactions?

There is no underlying legal or trade obligation, purpose or economic
The client is not properly identified;
The amount involved is not commensurate with the business or financial
capacity of the client;
The clients transaction is so 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 and/or his past transaction with the covered institution;
Transaction is in any way related to an unlawful activity or offense that is about
to be, being, or has been committed;
Any transaction analogous to the foregoing

6. When Is Money Laundering Committed

Q: When is money laundering committed?

Money laundering is a crime whereby the proceeds of an unlawful activity are
transacted thereby making them appear to have originated from legitimate
sources. It is committed by the following:

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) attempt or conspires to commit money laundering offenses referred
to in paragraphs (a), (b) or (c);
(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)

7. Unlawful Activities or Predicate Crimes

Unlawful activity' refers to any act or omission or series or combination thereof

involving or having direct relation to the following:

a. Kidnapping for ransom under Article 267 of Act No. 3815, otherwise known as
the Revised Penal Code, as amended;

b. Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16 of Republic Act No. 9165,
otherwise known as the Comprehensive Dangerous Drugs Act of 2002;

c. Section 3 paragraphs B, C, E, G, H and I of Republic Act No. 3019, as amended;

otherwise known as the Anti-Graft and Corrupt Practices Act;

d. Plunder under Republic Act No. 7080, as amended;

e. Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and 302 of
the Revised Penal Code, as amended;
f. Jueteng and Masiao punished as illegal gambling under Presidential Decree No.

g. Piracy on the high seas under the Revised Penal Code, as amended and
Presidential Decree No. 532;

h. Qualified theft under Article 310 of the Revised Penal Code, as amended;

i. Swindling under Article 315 of the Revised Penal Code, as amended;

j. Smuggling under Republic Act Nos. 455 and 1937;

k. Violations under Republic Act No. 8792, otherwise known as the Electronic
Commerce Act of 2000;

l. Hijacking and other violations under Republic Act No. 6235; destructive arson
and murder, as defined under the Revised Penal Code, as amended, including
those perpetrated by terrorists against non-combatant persons and similar

m. Fraudulent practices and other violations under Republic Act No. 8799,
otherwise known as the Securities Regulation Code of 2000;

n. Felonies or offenses of a similar nature that are punishable under the penal laws
of other countries. (Sec. 3[i], RA 9160)

8. Anti-Money Laundering Council

Q: What is the principal government agency tasked to implement the anti-money

laundering laws?
The government body tasked to carry out the implementation of the Anti-Money
Laundering Law is the Anti-Money Laundering Council which is composed of
the Governor of the Bangko Sentral ng Pilipinas as chairman, the Commissioner
of the Insurance Commission and the Chairman of the Securities and Exchange
Commission as members.

9. Functions

It is authorized to impose administrative sanctions for the violation of the law,

rules and regulations issued pursuant to the Anti-Money Laundering Law.
It may freeze monetary instrument or property alleged to be the proceeds of
unlawful activity upon approval of the court.
It is also authorized to inquire into bank funds, deposits or investments,
regardless of currency but it needs a bank inquiry order. The AMLC shall apply
for a bank inquiry order with any competent court. Such competent court is the
RTC and the Court of Appeals.

10. Freezing of Monetary Instrument or Property

Q: What court has the power to issue freeze order?

Answer: The Court of Appeals upon application ex-parte by the AMLC and after
determination that probable cause exists that any monetary instrument or property is in
an way related to an unlawful activity, may issue a freeze order which shall be effective
immediately. The freeze order shall be for a period not exceeding six (6) months
depending upon the circumstances of the case. No court can issue a temporary
restraining order or a writ of injunction against any freeze order, except the Supreme
11. Authority to Inquire Into Bank Deposits

Q: May a bank inquiry order and ex-parte order be granted ex-parte?

Answer: Yes.

The AMLC may inquire into or examine any particular bank deposit or investment with
any banking institution or non-bank financial institution upon order of any competent
court in cases of violation of this Act when it has been established that there is probable
cause that the deposits or investments involved are in any way related to an unlawful
activities. Provided, that this provision shall not apply to deposits and investments made
prior to the effectivity of this Act.

C. Foreign Investments Act (R.A. No. 7042)

1. Policy of the Law

It is the policy of the State to attract, promote and welcome productive investments
from foreign individuals, partnerships, corporations, and governments, including their
political subdivisions, in activities which significantly contribute to national
industrialization and socio-economic development to the extent that foreign investment
is allowed in such activity by the Constitution and relevant laws. Foreign investments
shall be encouraged in enterprises that significantly expand livelihood and employment
opportunities for Filipinos; enhance economic value of farm products; promote the
welfare of Filipino consumers; expand the scope, quality and volume of exports and
their access to foreign markets; and/or transfer relevant technologies in agriculture,
industry and support services. Foreign investments shall be welcome as a supplement to
Filipino capital and technology in those enterprises serving mainly the domestic market.

As a general rule, there are no restrictions on extent of foreign ownership of export

enterprises. In domestic market enterprises, foreigners can invest as much as one
hundred percent (100%) equity except in areas included in the negative list. Foreign
owned firms catering mainly to the domestic market shall be encouraged to undertake
measures that will gradually increase Filipino participation in their businesses by taking
in Filipino partners, electing Filipinos to the board of directors, implementing transfer
of technology to Filipinos, generating more employment for the economy and
enhancing skills of Filipino workers. (Sec. 2, RA 7092)

2. Definition of Terms

a. Foreign Investment

Foreign investment shall mean an equity investment made by a non-Philippine

national in the form of foreign exchange and/or other assets actually transferred
to the Philippines and duly registered with the Central Bank which shall assess
and appraise the value of such assets other than foreign exchange; (Sec. 3[c], RA

b. Doing Business in the Philippines

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 totaling 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 to that extent the performance of acts or works, or the exercise of
some of the functions normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business organization:
Provided, however, That 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; nor having a nominee director or officer to represent its interests in
such corporation; nor appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its own account;
(Sec. 3[d], RA 7092)

c. Export Enterprise

Export enterprise shall mean an enterprise wherein a manufacturer, processor

or service (including tourism) enterprise exports sixty percent (60%) or more of
its output, or wherein a trader purchases products domestically and exports sixty
percent (60%) or more of such purchases; (Sec. 3[e], RA 7092)

d. Domestic Market Enterprise

Domestic market enterprise shall mean an enterprise which produces goods

for sale, or renders services to the domestic market entirely or if exporting a
portion of its output fails to consistently export at least sixty percent (60%)
thereof; (Sec. 3[e], RA 7092)

3. Registration of Investments on Non-Philippine Nationals

Without need of prior approval, a non-Philippine national, as that term is defined in

Section 3 a), and not otherwise disqualified by law may, upon registration with the
Securities and Exchange Commission (SEC), or with the Bureau of Trade Regulation
and Consumer Protection (BTRCP) of the Department of Trade and Industry in the case
of single proprietorships, do business as defined in Section 3 d) of this Act or invest in a
domestic enterprise up to one hundred percent (100%) of its capital, unless participation
of non-Philippine nationals in the enterprise is prohibited or limited to a smaller
percentage by existing law and/or under the provisions of this Act. The SEC or BTRCP,
as the case may be, shall not impose any limitations on the extent of foreign ownership
in an enterprise additional to those provided in this Act: Provided, however, that any
enterprise seeking to avail of incentives under the Omnibus Investment Code of 1987
must apply for registration with the Board of Investments (BOI), which shall process
such application for registration in accordance with the criteria for evaluation prescribed
in said Code: Provided, finally, That a non-Philippine national intending to engage in
the same line of business as an existing joint venture, in which he or his majority
shareholder is a substantial partner, must disclose the fact and the names and addresses
of the partners in the existing joint venture in his application for registration with SEC.
During the transitory period as provided in Section 15 hereof, SEC shall disallow
registration of the applying non-Philippine national if the existing joint venture
enterprise, particularly the Filipino partners therein, can reasonably prove they are
capable to make the investment needed for the domestic market activities to be
undertaken by the competing applicant. Upon effectivity of this Act, SEC shall effect
registration of any enterprise applying under this Act within fifteen (15) days upon
submission of completed requirements. (Sec. 5, RA 7092)

4. Foreign Investments in Export Enterprise

Foreign investment in export enterprises whose products and services do not fall within
Lists A and B of the Foreign Investment Negative List provided under Section 8 hereof
is allowed up to one hundred percent (100%) ownership. Export enterprises which are
non-Philippine nationals shall register with BOI and submit the reports that may be
required to ensure continuing compliance of the export enterprise with its export
requirement. BOI shall advise SEC or BTRCP, as the case may be, of any export
enterprise that fails to meet the export ratio requirement. The SEC or BTRCP shall
thereupon order the non-complying export enterprise to reduce its sales to the domestic
market to not more than forty percent (40%) of its total production; failure to comply
with such SEC or BTRCP order, without justifiable reason, shall subject the enterprise
to cancellation of SEC or BTRCP registration, and/or the penalties provided in Section
14 hereof. (Sec. 6, RA 7092)

5. Foreign Investments in Domestic Market Enterprise

Non-Philippine nationals may own up to one hundred percent (100%) of domestic

market enterprises unless foreign ownership therein is prohibited or limited by the
Constitution existing law or the Foreign Investment Negative List under Section 8
hereof. (Sec. 7, RA 7092, as amended by R.A. 8179)

6. Foreign Investment Negative List

The Foreign Investment Negative List shall have two (2) components lists; A, and B.
a. List A shall enumerate the areas of activities reserved to Philippine nationals by mandate of the
Constitution and specific laws
b. List B shall contain the areas of activities and enterprises regulated pursuant to law:
i. which are defense-related activities, requiring prior clearance and authorization from
Department of National Defense (DND) to engage in such activity, such as the manufacture,
repair, storage and/or distribution of firearms, ammunition, lethal weapons, military ordinance,
explosives, pyrotechnics and similar materials; unless such manufacturing or repair activity is
specifically authorized, with a substantial export component, to a non-Philippine national by
the Secretary of National Defense; or
ii. which have implications on public health and morals, such as the manufacture and distribution
of dangerous drugs; all forms of gambling; nightclubs, bars, beerhouses, dance halls; sauna and
steam bathhouses and massage clinics.

Small and medium-sized domestic market enterprises, with paid-in equity

capital less than the equivalent two hundred thousand US dollars (US$200,000)
are reserved to Philippine nationals, Provided that if: (1) they involve advanced
technology as determined by the Department of Science and Technology or (2)
they employ at least fifty (50) direct employees, then a minimum paid-in capital
of one hundred thousand US dollars (US$100,000.00) shall be allowed to non-
Philippine nationals.

Amendments to List B may be made upon recommendation of the Secretary of

National Defense, or the Secretary of Health, or the Secretary of Education,
Culture and Sports, endorsed by the NEDA, approved by the President, and
promulgated by a Presidential Proclamation.

Transitory Foreign Investment Negative List established in Sec. 15 hereof

shall be replaced at the end of the transitory period by the first Regular Negative
List to be formulated and recommended by NEDA, following the process and
criteria provided in Sections 8 of this Act.

The first Regular Negative List shall be published not later than sixty (60) days
before the end of the transitory period provided in said section, and shall become
immediately effective at the end of the transitory period. Subsequent Foreign
Investment Negative Lists shall become effective fifteen (15) days after
publication in a newspaper of general circulation in the Philippines: Provided,
however, that each Foreign Investment Negative List shall be prospective in
operation and shall in no way affect foreign investment existing on the date of
its publication.

Amendments to List B after promulgation and publication of the first Regular

Foreign Investment Negative List at the end of the transitory period shall not be
made more often than once every two (2) years. (Sec. 8, RA 7092, as amended
by R.A. 8179)