I.

Letters of Credit

A. Definition and Nature of Letter of Credit

Usage and customs apply in commercial transactions in the absence of any particular provision in
the Code of Commerce, as provided in Article 2 of the same Code. Hence, the rule that all parties
concerned in documentary credit operations deal in documents and not in goods bind the parties in
a letter of credit transaction. (Bank of the Philippine Islands vs. De Reny Fabric Industries, Inc. 35
SCRA 253 (1970))

An order of the court releasing the proceeds of an irrevocable letter of credit to the applicant,
which was issued to pay for tobacco purchased from the beneficiary of the letter of credit, violates
the irrevocable nature of the letter of credit. An irrevocable letter of credit cannot, during its
lifetime, be cancelled or modified without the express permission of the beneficiary. (Philippine
Virginia Tobacco Administration vs. De Los Angeles, 164 SCRA 543 (1988))

The primary purpose of the letter of credit is to substitute for and therefore support, the agreement
of the buyer/importer to pay money under a contract or other arrangement. Hence, the failure of a
buyer/importer to open a letter of credit as stipulated amounts to a breach of contract which would
entitle the seller/exporter to claim damages for such breach. (Reliance Commodities, Inc. Vs.
Daewoo Industrial Co., Ltd., 228 SCRA 545 (1993))

In a letter of credit transaction, there are three separate and distinct relationships: a) between the
account party (buyer/importer) and the beneficiary (seller/exporter), which may be a contract of
sale or non-sale; b) between the account party and the issuing bank, where the former applies to
the latter for a specified L/C and agrees to reimburse the bank for amounts paid by it pursuant to
the L/C; and c) between the issuing bank and the beneficiary where the former, upon presentation
of stipulated documents, pays the latter the amount under the L/C. Such relationships are
interrelated but independent of one another. (Rodzssen Supply Company, Inc. vs. Far East Bank
and Trust Company, 357 SCRA 618 (2001))

Commercial letters of credit involve the payment of money under a contract of sale wherein the
seller-beneficiary presents to the issuing bank documents that would show that he has taken
affirmative steps to comply with the sales agreement. On the other hand, standby letters of credit
are used in non-sale setting where the beneficiary presents documents that would show that the
obligor has not complied with his obligation. (Transfield Philippines, Inc. vs. Luzon Hydro Corp. 443
SCRA 307 (2004))

The stay order issued by the rehabilitation court pursuant to the Interim Rules of Corporate
Rehabilitation does not apply to the beneficiary of the letter of credit against the banks that issued
it because the prohibition on the enforcement of claims against the debtor, guarantors or sureties
of the debtors does not extend to the claims against the issuing bank in a letter of credit. Letters of
credit are primary obligations and not accessory contracts and while they are security
arrangements, they are not thereby converted into contracts of guaranty. (MWSS vs. Hon. Daway,
432 SCRA 559 (2004))

B. Parties to a Letter of Credit

1. Rights and Obligations of Parties

 A buyer who applied for a letter of credit to pay for imported dyestuffs must reimburse the issuing
bank which paid the beneficiary, even if the shipment contained colored chalks. Banks are not
required to investigate if the contract underlying the letter of credit has been fulfilled or not
because in a transaction involving letter of credit, banks deal only with documents and not with
goods. (Bank of the Philippine Islands vs. De Reny Fabric Industries, Inc. 35 SCRA 253 (1970))

The issuing bank’s (IBAA) obligation under an Irrevocable Standby Letter of Credit executed to
secure a contract of loan cannot be reduced by the direct payments made by the principal debtors
to the creditor. Although a letter of credit is a security arrangement, it is not converted thereby into
a contract of guaranty; the obligation of the bank under the letter of credit is original and primary.
(Insular Bank of Asia & America vs. Intermediate Appellate Court, 167 SCRA 450 (1988))

The mere fact that a letter of credit is irrevocable does not necessarily imply that the correspondent
bank, in accepting the instructions of the issuing bank, has also confirmed the letter of credit. The
petitioner, as a notifying bank, assumes no liability except to notify the beneficiary of the existence
of the letter of credit; it does not give an absolute assurance to the beneficiary that it will undertake
the issuing bank’s obligation as its own according to the terms and conditions of the credit. (Feati
Bank & Trust Company vs. Court of Appeals, 196 SCRA 576 (1991))

Drafts drawn by the beneficiary need not be presented to the applicant for acceptance before the
issuing bank can seek reimbursement. Once the issuing bank has paid the beneficiary after the
latter’s compliance with the terms of the letter of credit, the issuing bank becomes entitled to
reimbursement. (Prudential Bank & Trust Company vs. IAC, 216 SCRA 257 (1992))

When the notifying bank entered into a discounting arrangement with the beneficiary, it acts
independently as a negotiating bank. As such, the negotiating bank has a right to recourse against
the issuer bank and until reimbursement is obtained, the beneficiary, as the drawer of the draft,
continues to assume a contingent liability thereon. (Bank of America vs. Court of Appeals, 228
SCRA 357 (1993))

A notifying or advising bank does not incur any liability arising from a fraudulent letter of credit as
its obligation is limited only to informing the beneficiary of the existence of the letter of credit.
Such notifying bank does not warrant the genuineness of the letter of credit but is bound only to
check its apparent authenticity. (Bank of America vs. Court of Appeals, 228 SCRA 357 (1993))

While a marginal deposit, a collateral security, earns no interest in favor of the applicant, the bank is
not only able to use the same for its own purposes, interest-free, but it is also able to earn interest
on the money loaned to the applicant. The buyer/importer's marginal deposit should then be set
off against his debt, for it would be onerous to compute interest and other charges on the face
value of the letter of credit which the bank issued, without first crediting or setting off the marginal
deposit which the importer paid to the bank. (Abad vs. Court of Appeals, 181 SCRA 191 (1990);
Consolidated Bank & Trust Corporation vs. Court of Appeals, 356 SCRA 671 (2001))

An issuing bank which paid the beneficiary of an expired letter of credit can recover payment from
the applicant which obtained the goods from the beneficiary to prevent unjust enrichment.
(Rodzssen Supply Company, Inc. vs. Far East Bank and Trust Company, 357 SCRA 618 (2001))

C. Basic Principles of Letter of Credit

1. Doctrine of Independence

Where the applicant entered into a contract, the performance of which is secured by a standby
letter of credit, the resort to arbitration by the applicant/contractor, in the absence of a stipulation
that any dispute must first be settled through arbitration before the beneficiay can draw on the
letter of credit, does not preclude the beneficiary to draw on the letter of credit upon its issuance of
a certificate of default. The claim of fraud will not be sufficient to support an injunction against
payment by reason of the “independence principle” which assures the beneficiary of prompt
payment independent of any breach of the main contract and precludes the issuing bank from
determining whether the main contract is actually accomplished or not. (Transfield Philippines,
Inc. vs. Luzon Hydro Corp. 443 SCRA 307 (2004))

The issuing bank is not liable for damages even if the shipment did not conform to the
specifications of the applicant. Under the “independence principle”, the obligation of the issuing
bank to pay the beneficiary arises once the latter is able to submit the stipulated documents under
the letter of credit. Hence, the bank is not liable for damages even if the shipment did not conform
to the specifications of the applicant. (Land Bank of the Philippines vs. Monet’s Export and
Manufacturing Corp., 453 SCRA 173 (2005))

Where the trial court rendered a decision finding the applicant of a letter of credit solely liable to
pay the beneficiary and omitted by inadvertence to insert in its decision the phrase ‘without
prejudice to the decision that will be made against the issuing bank,’ the bank cannot evade
responsibility based on this ground. The Independence Principle assures the seller or the
beneficiary of prompt payment independent of any breach of the originating and underlying
contract and precludes the issuing bank from determining whether the originating contract is
actually accomplished or not. (Philippine National Bank vs. San Miguel Corporation, G.R. No.
186063, January 15, 2014)

2. Fraud Exception Principle

The untruthfulness of a certificate accomplanying a demand for payment under a standy letter of
credit may qualify as fraud sufficient to support injunction against payment. However, under the
“fraud exception principle”, this must constitute fraud in relation to the independent purpose or
character of the letter of credit and not only fraud under the main agreement; moreover,
irreparable injury will be suffered if injunction will not be granted. (Transfield Philippines, Inc. vs.
Luzon Hydro Corp. 443 SCRA 307 (2004))

3. Doctrine of Strict Compliance

When the letter of credit required the submission of a certification that the applicant/buyer has
approved the goods prior to shipment, the unjust refusal of the applicant/buyer to issue said
certification is not sufficient to compel the bank to pay the beneficiary thereof. Under the doctrine
of strict compliance, the documents tendered must strictly conform to the terms of the letter of
credit, otherwise, the bank which accepts a faulty tender, acts on its own risks and may not be able
to recover from the applicant/buyer. (Feati Bank & Trust Company vs. Court of Appeals, 196 SCRA
576 (1991))
II. Trust Receipts Law

A. Definition/Concept of a Trust Receipt Transaction

1. Loan/Security Feature

The Trust Receipts Law punishes the dishonesty and abuse of confidence in the handling of money
or goods to the prejudice of another regardless of whether the latter is the owner or not. The law
does not seek to enforce payment of the loan, thus, there is no violation of the constitutional
provision against imprisonment for non-payment of debt. (People vs. Hon. Nitafan and Betty Sia
Ang, 207 SCRA 726 (1992))

Compensation shall not be proper when one of the debts consists in civil liability arising from a
penal offense; moreover, any compromise relating to the civil liability does not automatically
extinguish the criminal liability of the accused. The mere failure of the entrustee to deliver the
proceeds of the sale or the goods if not sold, constitutes a criminal offense that causes prejudice
not only to another, but more to the public interest. (Metropolitan Bank & Trust Company vs.
Tonda, 338 SCRA 254 (2000))

A trust receipt is a security transaction intended to aid in financing importers and retail dealers who
do not have sufficient funds or resources to finance the importation or purchase of merchandise,
and who may not be able to acquire credit except through utilization, as collateral of the
merchandise imported or purchased. Under a letter of credit-trust receipt arrangement, a bank
extends a loan covered by a letter of credit, with the trust receipt as a security for the loan; hence,
the transaction involves a loan feature represented by a letter of credit, and a security feature
which is in the covering trust receipt which secures an indebtedness. (Lee vs. Court of Appeals, 375
SCRA 579 (2002))

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

The transaction is a simple loan when the goods subject of the agreement had been purchased and
delivered to the supposed entrustee prior to the execution of the trust receipt agreement. The
acquisition of ownership over the goods before the execution of the trust receipt agreement makes
the contract a simple loan, regardless of the denomination of the contract. (Colinares vs. Court of
Appeals, 339 SCRA 609 (2000))

Respondent Corporation is not an importer which acquired the bunker fuel oil for re-sale; it needed
the oil for its own operations. More importantly, at no time did title over the oil pass to petitioner
bank, but directly to respondent Corporation to which the oil was directly delivered long before the
trust receipt was executed; thus, the contract executed by the parties is a simple loan and not a
trust receipt agreement. (Consolidated Bank & Trust Corp. vs. Court of Appeals, 356 SCRA 671
(2001))

In a trust receipt transaction, the entrustee has neither absolute ownership, free disposal nor the
authority to freely dispose of the articles subject of the agreement. Since the goods could not have
been subjected to a valid mortgage, there can also be no valid foreclosure especially when the
mortgagee who subsequently foreclosed and purchased the said goods were in bad faith, having
knowledge of the inclusion of such articles in a trust receipt agreement. (DBP vs. Prudential Bank,
475 SCRA 623 (2005))
B. Rights of the Entruster

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

The security interest of the entruster pursuant to the written terms of a trust receipt shall be valid
as against all creditors of the entrustee for the duration of the trust receipt agreement, including
among others, the laborers of the entrustee. The only exception to the rule is when the properties
are in the hands of an innocent purchaser for value and in good faith. (Prudential Bank vs. National
Labor Relations Commission, 251 SCRA 412 (1995))

C. Obligation and Liability of the Entrustee

Commercial invoices attached to the applications for letters of credit and of trust receipts, which
only provide for the list of items sought to be purchased and their prices will not prove delivery of
the goods to the entrustee. Hence, criminal liability will not attach and the accused should be
acquitted in the estafa cases. (Ramos vs. Court of Appeals, 153 SCRA 276 (1987))

While the presumption found under the Negotiable Instruments Law may not necessarily be
applicable to trust receipts and letters of credit, the presumption of consideration applies on the
drafts drawn in connection with the letters of credit. Hence, the drafts signed by the
beneficiary/suppliers in connection with the corresponding letters of credit proved that said
suppliers were paid by the bank (entruster) for the account of the entrustee. (Lee vs. Court of
Appeals, 375 SCRA 579 (2002))

When there is a violation of the Trust Receipts Law, what is being punished is the dishonesty and
abuse of confidence in the handling of money or goods to the prejudice of another regardless of
whether the latter is the owner. However, failure to comply with the obligations due to serious
liquidity problems and after the entrustee was placed under rehabilitation does not amount to
dishonesty and abuse of confidence, thus, the entrustee cannot be said to have violated the law.
(Pilipinas Bank vs. Ong, 387 SCRA 37 (2002))

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

When the goods subject of the transaction, such as chemicals and metal plates, were not intended
for sale or resale but for use in the fabrication of steel communication towers, the agreement
cannot be considered a trust receipt transaction but a simple loan. P.D. No. 115 punishes the
entrustee for his failure to deliver the price of the sale, or if the goods are not sold, to return them
to the entruster, which, in the present case, is absent and could not have been complied with;
therefore, the liability of the entrustee is only civil in nature. (Anthony L. Ng vs. People of the
Philippines, G.R. No. 173905, April 23, 2010)

Under the Trust Receipts Law, intent to defraud is presumed when (1) the entrustee fails to turn
over the proceeds of the sale of goods covered by the trust receipt to the entruster; or (2) when the
entrustee fails to return the goods under trust, if they are not disposed of in accordance with the
terms of the trust receipts. When both parties know that the entrustee could not have complied
with the obligations under the trust receipt without his fault, as when the goods subject of the
agreement were not intended for sale or resale, the transaction cannot be considered a trust
 receipt but a simple loan, where the liability is limited to the payment of the purchase price. (Land
Bank of the Philippines vs. Perez, G.R. No. 166884, June 13, 2012)

When both parties entered into an agreement knowing fully well that the return of the goods
subject of the trust receipt is not possible even without any fault on the part of the trustee, it is not
a trust receipt transaction penalized under Sec. 13 of PD 115 in relation to Art. 315, par. 1(b) of the
RPC, as the only obligation actually agreed upon by the parties would be the return of the proceeds
of the sale transaction. This transaction becomes a mere loan, where the borrower is obligated to
pay the bank the amount spent for the purchase of the goods. (Hur Tin Yang vs. People of the
Philippines, G.R. No. 195117, August 14, 2013)

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

A trust receipt transaction is a security agreement, pursuant to which the entruster acquires a
security interest in the goods, which are released to the possession of the entrustee who binds
himself to hold the goods in trust for the entruster and to sell or otherwise dispose of the goods or
to return them in case of non-sale. The return of the goods to the entruster however, does not
relieve the entrustee of the obligation to pay the loan because the entruster is not the factual
owner of the goods and merely holds them as owner in the artificial concept for the purpose of
giving stronger security for the loan. (Vintola vs. Insular Bank of Asia and America, 150 SCRA 140
(1987))

3. Liability for Loss of Goods, Documents or Instruments

Under the Trust Receipts Law, the loss of the goods subject of the trust receipt regardless of the
cause and period or time it occurred, does not extinguish the civil obligation of the entrustee.
Hence, the fact that the entrustee attempted to make a tender of goods to the bank and as a
consequence of the latter’s refusal, the goods were stored in the entrustee’s warehouse and
thereafter gutted by fire, the liability of the entrustee still subsists; the principle of res perit domino
will not apply to the bank which holds only a security of interest over the goods. (Rosario Textile
Mills Corp. vs. Home Bankers Savings and Trust Company, 462 SCRA 88 (2005))

4. Penal Sanctions if Offender is a Corporation

Recognizing the impossibility of imposing the penalty of imprisonment on a corporation, it was

provided that if the entrustee is a corporation, the penalty shall be imposed upon the directors,
officers, employees or other officials or persons responsible for the offense. However, the person
signing the trust receipt for the corporation is not solidarily liable with the entrustee-corporation
for the civil liability arising from the criminal offense unless he personally bound himself under a
separate contract of surety or guaranty. (Ong vs. Court of Appeals, 401 SCRA 649 (2003))

When the entrustee is a corporation, the director, officer, employee, or any person responsible for
the violation of the Trust Receipts Law is held criminally liable without prejudice to the civil liability,
which is imposed upon the entrustee-corporation. The fact that the officer signed in his official
capacity means that the corporation is the one civilly liable; however, when such officer also signed
a trust receipt in his personal capacity, he will also be held civilly liable together with the
corporation, with the scope of liability depending on whether he signed as a surety or as a
guarantor. (Tupaz IV vs. Court of Appeals, 475 SCRA 398 (2005))
 The fact that the officer who signed the trust receipt on behalf of the entrustee-corporation signed
in his official capacity without receiving the goods as he had never taken possession of such nor
committing dishonesty and abuse of confidence in transacting with the entrustor, is immaterial.
The law specifically makes the director, officer, employee or any person responsible criminally liable
precisely for the reason that a corporation, being a juridical entity, cannot be the subject of the
penalty of imprisonment. (Alfredo Ching vs. Secretary of Justice, 481 SCRA 609 (2006))

D. Remedies Available

After the infomation is filed in court, compromise of the estafa case arising from violation of the
Trust Receipts Law will not amount to novation and will not extinguish the criminal liability of the
accused. (Ong vs. Court of Appeals, 124 SCRA 578 (1983))

Although the surrender of the goods to the entruster results in the acquittal of the accused in the
estafa case, it is not a bar to the institution of a civil action for collection because of the loan
feature (civil in nature) of the trust receipt transaction, which is entirely distinct from its security
feature (criminal in nature). Accordingly, Article 31 of the New Civil Code provided that when the
civil action is based on an obligation not arising from the act or omission complained of as a felony,
such civil action may proceed independently of the criminal proceedings and regardless of the
result of the latter. (Vintola vs. Insular Bank of Asia and America, 150 SCRA 140 (1987))

The entruster’s repossession of the subject machinery and equipment, not for the purpose of
transferring ownership to the entruster but only to serve as security to the loan, cannot be
considered payment of the loan under the trust receipt and letter of credit. Payment would legally
result only after PNB had foreclosed on said securities, sold the same and applied the proceeds
thereof to TCC's loan obligation. (Philippine National Bank vs. Pineda, 197 SCRA 1 (1991))

When the entrustee defaults on his obligation, the entruster has the discretion to avail of remedies
which it deems best to protect its right. The law uses the word “may” in granting to the entruster
the right to cancel the trust and take possession of the goods; hence, the option is given to the
entruster. (South City Homes, Inc. vs. BA Finance Corporation, 371 SCRA 603 (2001))

A civil case filed by the entruster against the entrustees based on the failure of the latter to comply
with their obligation under the Trust Receipt agreement is proper because this breach of obligation
is separate and distinct from any criminal liability for misuse and/or misappropriation of goods or
proceeds realized from the sale of goods released under the trust receipts. Being based on an
obligation ex contractu and not ex delicto, the civil action may proceed independently of the
criminal proceedings instituted against the entrustees regardless of the result of the latter.
(Sarmiento vs. Court of Appeals, 394 SCRA 315 (2002))

Novation may take place either by express and unequivocal terms or when the old and new
obligations cannot stand together and are incompatible on every point. The execution of the
Memorandum of Agreement, which provided for principal conditions incompatible with the trust
agreement, extinguished the obligation under the trust receipts without prejudice to the debtor’s
civil liability. (Pilipinas Bank vs. Ong, 387 SCRA 37 (2002))

As provided under Section 7, P.D. No. 115, in the event of default of the entrustee, the entruster
may cancel the trust and take possession of the goods subject of the trust or of the proceeds
realized therefrom at any time; the entruster may, not less than five days after serving or sending of
 notice of intention to sell, proceed with the sale of the goods at public or private sale where the
entrustee shall receive any surplus but shall be liable to the entruster for any deficiency. This is by
reason of the fact that the initial repossession by the bank of the goods subject of the trust receipt
did not result in the full satisfaction of the entrustee’s loan obligation. (Landl & Company vs.
Metropolitan Bank, 435 SCRA 639 (2004))

E. Warehouseman’s Lien

Notwithstanding the right of PNB over the stocks of sugar as the endorsee of the quedans, delivery
to it shall be effected only upon payment of the storage fees. The warehouseman may demand
payment of his lien prior to the delivery of the stocks of sugar because under Section 29 of the
Warehouse Receipts Law, the warehouseman loses his lien upon the goods by surrendering
possession thereof. (Philippine National Bank vs. Se, Jr., 256 SCRA 380 (1996))

A warehouseman may enforce his lien under the following instances: 1) he may refuse to deliver
the goods until his lien is satisfied; 2) he may sell the goods and apply the proceeds thereof to the
value of the lien; and 3) by other means allowed by law to a creditor against his debtor, for the
collection from the depositor of all charges and advances which the depositor expressly or impliedly
contracted with the warehouseman; or such remedies allowed by law for the enforcement of a lien
against personal property. (Philippine National Bank vs. Sayo, Jr., 292 SCRA 202 (1998))

The refusal of the warehouseman to deliver the sugar to the endorsee of the quedans on the
ground that it has claimed ownership over the sugar by reason of non-payment of its buyer, not
being one of the remedies available to the warehouseman to enforce his lien, caused the loss of the
warehouseman’s lien. Nevertheless, the loss did not extinguish the obligation to pay the
warehouseman’s fees but merely caused the fees and charges to cease to accrue from the date of
the rejection by the warehouseman to heed the previous lawful demand for the release of the
goods. (Philippine National Bank vs. Sayo, Jr., 292 SCRA 202 (1998))

III. Negotiable Instruments Law

A. Forms and Interpretation

1. Requisites of Negotiability

When the treasury warrant bears on its face the words "payable from the appropriation for food
administration,” such instrument is not within the scope of the negotiable instrument law. It is
actually an Order for payment out of "a particular fund," and is not unconditional and does not
fulfill one of the essential requirements of a negotiable instrument. (Benjamin Abubakar vs. the
Auditor General, G.R. No. L-1405, July 31, 1948)

A check which reads “Pay to the EQUITABLE BANKING CORPORATION Order of A/C OF CASVILLE
ENTERPRISES, INC.” is not negotiable because the payee ceased to be indicated with reasonable
certainty in contravention of Section 8 of the Negotiable Instruments Law. As worded, it could be
accepted as deposit to the account of the party named after the symbols "A/C," or payable to the
Bank as trustee, or as an agent, for Casville Enterprises, Inc., with the latter being the ultimate
beneficiary. (Equitable Banking Corporation vs. the Honorable Intermediate Appellate Court and
The Edward J. Nell Co., G.R. No. 74451 May 25, 1988)
 Without the words "or order or "to the order of", the instrument is payable only to the person
designated therein and is therefore non-negotiable. Any subsequent purchaser thereof will not
enjoy the advantages of being a holder of a negotiable instrument, but will merely "step into the
shoes" of the person designated in the instrument and will thus be open to all defenses available
against the latter. (Juanita Salas vs. Hon. Court of Appeals and First Finance & Leasing Corporation,
G.R. No. 76788 January 22, 1990)

The indication of Fund 501 as the source of the payment to be made on the treasury warrants
makes the order or promise to pay "not unconditional" and the warrants themselves non-
negotiable. There should be no question that the exception on Section 3 of the Negotiable
Instruments Law is applicable in the case at bar. (Metropolitan Bank & Trust Company vs. Court Of
Appeals, Golden Savings & Loan Association, Inc., Lucia Castillo, Magno Castillo and Gloria
Castillo, G.R. No. 88866 February 18, 1991)

When the documents provide that the amounts deposited shall be repayable to the depositor, such
instrument is negotiable because it is payable to the "bearer." The documents do not say that the
depositor is Angel de la Cruz and that the amounts deposited are repayable specifically to him, but
the amounts are to be repayable to the bearer of the documents or, for that matter, whosoever
may be the bearer at the time of presentment. [Caltex (Philippines), Inc. vs. Court of Appeals and
Security Bank and Trust Company, G.R. No. 97753, August 10, 1992]

The language of negotiability which characterizes a negotiable paper as a credit instrument is its
freedom to circulate as a substitute for money. This freedom in negotiability is totally absent in a
certificate indebtedness as it merely to pay a sum of money to a specified person or entity for a
period of time. (Traders Royal Bank vs. Court of Appeals, Filriters Guaranty Assurance Corporation
and Central Bank of the Philippines, G.R. No. 93397, March 3, 1997)

Under the fictitious payee rule, a check made expressly payable to a non-fictitious and existing
person is not necessarily an order instrument if the payee is not the intended recipient of the
proceeds of the check. There is, however, a commercial bad faith exception to this rule which
provides that a showing of commercial bad faith on the part of the drawee bank, or any transferee
of the check for that matter, will work to strip it of this defense. (Philippine National Bank vs.
Erlando T. Rodriguez and Norma Rodriguez, G.R. No. 170325, September 26, 2008)

2. Kinds of Negotiable Instruments

Postal money orders are not negotiable instruments, the reason being that in establishing and
operating a postal money order system, the government is not engaged in the commercial
transactions but merely exercises a governmental power for the public benefit. t is to be noted in
this connection that some of the restrictions imposed upon money orders by postal laws and
regulations are inconsistent with the character of negotiable instruments. For instance, such laws
and regulations usually provide for not more than one endorsement; payment of money orders
may be withheld under a variety of circumstances. (Philippine Education Co., inc. vs. Mauricio A.
Soriano, et al., G.R. No. L-22405, June 30, 1971)

Bank withdrawal slips are non-negotiable and the giving of immediate notice of dishonor of
negotiable instruments does not apply in this case. Since the withdrawal slips deposited with
petitioner’s current account with Citibank were not checks, as petitioner admits, Citibank was not
bound to accept the withdrawal slips as a valid mode of deposit, but having erroneously accepted
 them as such, Citibank – and petitioner as account-holder – must bear the risks attendant to the
acceptance of these instruments. (Firestone Tire & Rubber Company of the Philippines vs. Court of
Appeals and Luzon Development Bank, G.R. No. 113236, March 5, 2001)

A check is “a bill of exchange drawn on a bank payable on demand” which may either be an order
or a bearer instrument. Under Section 9(c) of the NIL, a check payable to a specified payee may
nevertheless be considered as a bearer instrument if it is payable to the order of a fictitious or non-
existing person like checks issued to “Prinsipe Abante” or “Si Malakas at si Maganda,” who are well-
known characters in Philippine mythology. (Philippine National Bank vs. Erlando T. Rodriguez and
Norma Rodriguez, G.R. No. 170325, September 26, 2008)

B. Completion and Delivery

The 17 original checks, completed and delivered to petitioner, are sufficient by themselves to prove
the existence of the loan obligation of the respondents to petitioner. Sec. 16 of the NIL provides
that when an instrument is no longer in the possession of the person who signed it and it is
complete in its terms "a valid and intentional delivery by him is presumed until the contrary is
proved. (Ting Ting Pua vs. Spouses Benito Lo Bun Tiong and Caroline Siok Ching Teng, G.R. No.
198660, October 23, 2013)

1. Insertion of Date

2. Completion of Blanks

In any case, it is no defense that the promissory notes were signed in blank as Section 14 of the
Negotiable Instruments Law concedes the prima facie authority of the person in possession of
negotiable instruments to fill in the blanks. (Quirino Gonzales Logging Concessionaire, Quirino
Gonzales and Eufemia Gonzales vs. the Court of Appeals (CA) and Republic Planters Bank, G. R.
No. 126568, April 30, 2003)

3. Incomplete and Undelivered Instruments

4. Complete but Undelivered Instruments

As Assistant City Fiscal, the source of the salary of the payee is public funds which he receives in the
form of checks from the Department of Justice. Since the payee of a negotiable interest acquires no
interest with respect thereto until it is delivered, such checks, as a necessary consequence of being
public fund, may not be garnished because such funds do not belong to him. (Loreto D. de la
Victoria, as City Fiscal of Mandaue City and in his personal capacity as garnishee vs. Hon. Jose P.
Burgos, Presiding Judge, RTC, Br. XVII, Cebu City, and Raul H. Sesbreño, G.R. No. 111190, June 27,
1995)

C. Signature

1. Signing in Trade Name

2. Signature of Agent
 Under Section 20 of the Negotiable Instruments Law, where the instrument contains or a person
adds to his signature words indicating that he signs for or on behalf of a principal or in a
representative capacity, he is not liable on the instrument if he was duly authorized; but the mere
addition of words describing him as an agent or as filing a representative character, without
disclosing his principal, does not exempt him from personal liability. In the instant case, an
inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he
was signing as a representative of the Philippine Education Foundation Company and such failure to
disclose his principal makes him personally liable for the drafts he accepted. (The Philippine Bank
of Commerce vs. Jose M. Aruego, G.R. Nos. L-25836-37, January 31, 1981)

3. Indorsement by Minor or Corporation

4. Forgery

As a general rule, a bank or corporation who has obtained possession of a check upon an
unauthorized or forged indorsement of the payee’s signature and who collects the amount of the
check from the drawee, is liable for the proceeds thereof to the payee or other owner,
notwithstanding that the amount has been paid to the person from whom the check was obtained.
The theory of the rule is that the possession of the check on the forged or unauthorized
indorsement is wrongful and when the money had been collected on the check, the proceeds are
held for the rightful owners who may recover them. The payee ought to be allowed to recover
directly from the collecting bank, regardless of whether the check was delivered to the payee or
not. (Westmont Bank (formerly Associated Banking Corp.) vs. Eugene Ong, G.R. No. 132560,
January 30, 2002)

The weight of authority is to the effect that the possession of a check on a forged or unauthorized
indorsement is wrongful, and when the money is collected on the check, the bank can be held ‘for
moneys had and received.’ The proceeds are held for the rightful owner of the payment and may be
recovered by him. The position of the bank taking the check on the forged or unauthorized
indorsement is the same as if it had taken the check and collected without indorsement at all. The
act of the bank amounts to conversion of the check. (Associated Bank and Conrado Cruz, vs. Hon.
Court of Appeals, and Merle V. Reyes, doing business under the name and style "Melissa’s RTW,"
G.R. No. 89802, May 7, 1992)

It is a rule that when a signature is forged or made without the authority of the person whose
signature it purports to be, the check is wholly inoperative and no right to retain the instrument, or
to give a discharge therefor, or to enforce payment thereof against any party, can be acquired
through or under such signature. However, the rule does provide for an exception, namely: "unless
the party against whom it is sought to enforce such right is precluded from setting up the forgery or
want of authority." In the instant case, it is the exception that applies as the petitioner is precluded
from setting up the forgery, assuming there is forgery, due to his own negligence in entrusting to his
secretary his credit cards and checkbook including the verification of his statements of account.
(Ramon K. Ilusorio vs. Hon. Court of Appeals, G.R. No. 139130, November 27, 2002)

A forged signature is a real or absolute defense, and a person whose signature on a negotiable
instrument is forged is deemed to have never become a party thereto and to have never consented
to the contract that allegedly gave rise to it. The counterfeiting of any writing, consisting in the
signing of another’s name with intent to defraud, is forgery. (Bank of the Philippine Islands vs. Casa
Montessori Internationale and Leonardo T. Yabut, G.R. No. 149454, May 28, 2004)
 Even if the bank performed with utmost diligence, the drawer whose signature was forged may still
recover from the bank as long as he or she is not precluded from setting up the defense of forgery.
After all, Section 23 of the Negotiable Instruments Law plainly states that no right to enforce the
payment of a check can arise out of a forged signature. Since the drawer is not precluded by
negligence from setting up the forgery, the general rule should apply. (Samsung Construction
Company Philippines, Inc. vs. Far East Bank and Trust Company and Court Of Appeals, G.R. NO.
129015, August 13, 2004)

D. Consideration

A check which is regular on its face is deemed prima facie to have been issued for a valuable
consideration and every person whose signature appears thereon is deemed to have become a
party thereto for value. Thus, the mere introduction of the instrument sued on in evidence prima
facie entitles the plaintiff to recovery. Further, the rule is quite settled that a negotiable instrument
is presumed to have been given or indorsed for a sufficient consideration unless otherwise
contradicted and overcome by other competent evidence. (Travel-On, Inc. vs. Court of Appeals and
Arturo S. Miranda, G.R. No. L-56169, June 26, 1992)

In actions based upon a negotiable instrument, it is unnecessary to aver or prove consideration, for
consideration is imported and presumed from the fact that it is a negotiable instrument. The
presumption exists whether the words "value received" appear on the instrument or not. (Remigio
S. Ong vs. People of the Philippines and Court of Appeals, G.R. No. 139006, November 27, 2000)

Letters of credit and trust receipts are not negotiable instruments, but drafts issued in connection
with letters of credit are negotiable instruments. While the presumption found under the
Negotiable Instruments Law may not necessarily be applicable to trust receipts and letters of credit,
the presumption that the drafts drawn in connection with the letters of credit have sufficient
consideration applies. (Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco and
Alfonso Co vs. Court of Appeals and Philippine Bank of Communications, G.R. NO. 117913,
February 1, 2002)

When promissory notes appear to be negotiable as they meet the requirements of Section 1 of the
Negotiable Instruments Law, they are prima facie deemed to have been issued for consideration
unless sufficient evidence was adduced to show otherwise. (Quirino Gonzales Logging
Concessionaire, Quirino Gonzales and Eufemia Gonzales vs. the Court of Appeals (CA) and
Republic Planters Bank, G. R. No. 126568, April 30, 2003)

E. Accommodation Party

Section 29 of the Negotiable Instruments Law by clear mandate makes the accomodation party
"liable on the instrument to a holder for value, notwithstanding that such holder at the time of
taking the instrument knew him to be only an accommodation party." It is not a valid defense that
the accommodation party did not receive any valuable consideration when he executed the
instrument. It is not correct to say that the holder for value is not a holder in due course merely
because at the time he acquired the instrument, he knew that the indorser was only an
accommodation party. (Ang Tiong vs. Lorenzo Ting, doing business under the name & style of
Prunes Preserves MFG., & Felipe Ang, G.R. No. L-26767, February 22, 1968)
 When a promissory note which is payable to GSIS is not payable to bearer or order, such instrument
is non-negotiable. As such, third party mortgagor who mortgaged his property to secure the
obligation of another is not liable as an accommodation party but liable under Article 2085 of the
Civil Code to the effect that third persons who are not parties to the principal obligation may secure
the latter by pledging or mortgaging their own property. (GSIS vs. Court of Appeals, G.R. No. L-
40824, February 23, 1989)

When the checks are dishonored for lack of funds, the party who indorsed those checks as
accommodation endorser is liable for the payment of the checks. (People vs. Maniego, 148 SCRA
30, 1987)

When a married couple signed a promissory note in favor of a bank to enable the sister of the
husband to obtain a loan, they are considered as accommodation parties who are liable for the
payment of said loan. (Town Saving and Loan Bank, Inc. vs. Court of Appeals, 223 SCRA 459, 1993)

F. Negotiation

1. Distinguished from Assignment

If an assigned promissory note had already been extinguished because its maker is similarly
indebted to the assignor, then the defense of set-off or legal compensation could also be invoked
against the assignee of the note. The debtor’s consent is not needed to effectuate assignment of
credit and negotiation. (Sesbreno vs. Court of Appeals, 222 SCRA 466, 1993)

2. Modes of Negotiation

Where a check is made payable to the order of ’cash’, the word ‘cash’does not purport to be the
name of any person’, and hence the instrument is payable to bearer. The drawee bank need not
obtain any indorsement of the check, but may pay it to the person presenting it without any
indorsement. (Ang Tek Lian vs. the Court of Appeals, G.R. No. L-2516, September 25, 1950)

Under the Negotiable Instruments Law, an instrument is negotiated when it is transferred from one
person to another in such a manner as to constitute the transferee the holder thereof, and a holder
may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. In
case of a bearer instrument, mere delivery would suffice. [Caltex (Philippines), Inc. vs. Court of
Appeals and Security Bank and Trust Company, G.R. No. 97753, August 10, 1992]

3. Kinds of Indorsements

G. Rights of the Holder

1. Holder in Due Course

Where the payee acquired the check under circumstances that should have put it to inquiry as to
the title of the holder who negotiated the check to him, the payee has the duty to present evidence
that he acquired the check in good faith. As holder's title was defective or suspicious, it cannot be
stated that the payee acquired the check without knowledge of said defect in holder's title, and for
this reason the presumption that it is a holder in due course or that it acquired the instrument in
 good faith does not exist. (Vicente R. De Ocampo & Co. vs. Anita Gatchalian, et al., G.R. No. L-
15126, November 30, 1961)

A holder in due course holds the instrument free from any defect of title of prior parties, and free
from defenses available to prior parties among themselves, and may enforce payment of the
instrument for the full amount thereof. This being so, petitioner cannot set up against respondent
the defense of nullity of the contract of sale between her and VMS. (Juanita Salas vs. Hon. Court of
Appeals and First Finance & Leasing Corporation, G.R. No. 76788 January 22, 1990)

Possession of a negotiable instrument after presentment and dishonor, or payment, is utterly

inconsequential; it does not make the possessor a holder for value within the meaning of the law. It
gives rise to no liability on the part of the maker or drawer and indorsers. (Stelco Marketing
Corporation vs. Hon. Court of Appeals and Steelweld Corporation of the Philippines, Inc., G.R. No.
96160 June 17, 1992)

It is then settled that crossing of checks should put the holder on inquiry and upon him devolves
the duty to ascertain the indorser’s title to the check or the nature of his possession. Failing in this
respect, the holder is declared guilty of gross negligence amounting to legal absence of good faith,
contrary to Sec. 52(c) of the Negotiable Instruments Law, and as such the consensus of authority is
to the effect that the holder of the check is not a holder in due course. (Bataan Cigar and Cigarette
Factory, Inc. vs. the Court of Appeals and State Investment House, Inc., G.R. No. 93048, March 3,
1994)

The disadvantage of not being a holder in due course is that the negotiable instrument is subject to
defenses as if it were non-negotiable. One such defense is absence or failure of consideration.
(Atrium Management Corporation vs. Court of Appeals, et al., G.R. No. 109491, February 28,
2001)

The weight of authority sustains the view that a payee may be a holder in due course. Hence, the
presumption that he is a prima facie holder in due course applies in his favor. However, said
presumption may be rebutted and vital to the resolution of this issue is the concurrence of all the
requisites provided for in Section 52 of the Negotiable Instruments Law. (Cely Yang vs. Hon. Court
of Appeals, Philippine Commercial International Bank, Far East Bank & Trust Co., Equitable
Banking Corporation, Prem Chandiramani and Fernando David, G.R. No. 138074, August 15, 2003)

2. Defenses Against the Holder

H. Liabilities of Parties

1. Maker

Under the Negotiable Instruments Law, persons who write their names on the face of promissory
notes are makers and liable as such. (Republic Planters Bank vs. Court of Appeals, 216 SCRA 730,
1992)

2. Drawer

The acceptance of a check implies an undertaking of due diligence in presenting it for payment, and
if he from whom it is received sustains loss by want of such diligence, it will be held to operate as
 actual payment of the debt or obligation for which it was given. If no presentment is made at all,
the drawer cannot be held liable irrespective of loss or injury unless presentment is otherwise
excused. (Myron C. Papa vs. A.U. Valencia & Co., Inc., et al. G.R. No. 105188. January 23, 1998)

In the case of DAUD, the depositor has, on its face, sufficient funds in his account, although it is not
available yet at the time the check was drawn, whereas in DAIF, the depositor lacks sufficient funds
in his account to pay the check. Moreover, DAUD does not expose the drawer to possible
prosecution for estafa and violation of BP 22, while DAIF subjects the depositor to liability for such
offenses. (Bank of the Philippine Islands vs. Reynald R. Suarez, G.R. No. 167750, March 15, 2010)

3. Acceptor

To simplify proceedings, the payee of the illegally encashed checks should be allowed to recover
directly from the bank responsible for such encashment regardless of whether or not the checks
were actually delivered to the payee. (Associated Bank and Conrado Cruz, vs. Hon. Court of
Appeals, and Merle V. Reyes, doing business under the name and style "Melissa’s RTW," G.R. No.
89802, May 7, 1992)

As a general rule, a bank or corporation who has obtained possession of a check upon an
unauthorized or forged indorsement of the payee’s signature and who collects the amount of the
check from the drawee, is liable for the proceeds thereof to the payee or other owner,
notwithstanding that the amount has been paid to the person from whom the check was obtained.
The theory of the rule is that the possession of the check on the forged or unauthorized
indorsement is wrongful and when the money had been collected on the check, the proceeds are
held for the rightful owners who may recover them. The payee ought to be allowed to recover
directly from the collecting bank, regardless of whether the check was delivered to the payee or
not. [Westmont Bank (formerly Associated Banking Corp.) vs. Eugene Ong, G.R. No. 132560,
January 30, 2002]

If a bank pays a forged check, it must be considered as paying out of its funds and cannot charge
the amount so paid to the account of the depositor. A bank is liable, irrespective of its good faith, in
paying a forged check. (Samsung Construction Company Philippines, Inc. vs. Far East Bank and
Trust Company and Court Of Appeals, G.R. NO. 129015, August 13, 2004)

4. Indorser

Section 63 of the Negotiable Instruments Law makes "a person placing his signature upon an
instrument otherwise than as maker, drawer or acceptor" a general indorser "unless he clearly
indicates by appropriate words his intention to be bound in some other capacity." (Ang Tiong vs.
Lorenzo Ting, doing business under the name & style of Prunes Preserves MFG., & Felipe Ang,
G.R. No. L-26767, February 22, 1968)

After an instrument is dishonored by non-payment, indorsers cease to be merely secondarily liable;

they become principal debtors whose liability becomes identical to that of the original obligor.The
holder of the negotiable instrument need not even proceed against the drawer before suing the
indorser. (Maria Tuazon vs. Heirs of Bartolome Ramos, 463 SCRA 408, 2005)

5. Warranties
 The subject checks were accepted for deposit by the Bank for the account of Sayson although they
were crossed checks and the payee was not Sayson but Melissa’s RTW. The Bank stamped thereon
its guarantee that "all prior endorsements and/or lack of endorsements (were) guaranteed." By
such deliberate and positive act, the Bank had for all legal intents and purposes treated the said
checks as negotiable instruments and, accordingly, assumed the warranty of the endorser.
(Associated Bank and Conrado Cruz, vs. Hon. Court of Appeals, and Merle V. Reyes, doing
business under the name and style "Melissa’s RTW," G.R. No. 89802, May 7, 1992)

I. Presentment for Payment

The effects of crossing a check relate to the mode of its presentment for payment. Under Section 72
of the Negotiable Instruments Law, presentment for payment must be made by the holder or by
some person authorized to receive payment on his behalf. Who the holder or authorized person
depends on the face of the check. (Associated Bank and Conrado Cruz, vs. Hon. Court of Appeals,
and Merle V. Reyes, doing business under the name and style "Melissa’s RTW," G.R. No. 89802,
May 7, 1992)

1. Necessity of Presentment for Payment

Under the Negotiable Instruments Law, an instrument not payable on demand must be presented
for payment on the day it falls due. When the instrument is payable on demand, presentment must
be made within a reasonable time after its issue. In the case of a bill of exchange, presentment is
sufficient if made within a reasonable time after the last negotiation thereof. (International
Corporate Bank vs. Gueco, 351 SCRA 516, 2001)

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

The term "notice of dishonor" denotes that a check has been presented for payment and was
subsequently dishonored by the drawee bank. This means that the check must necessarily be due
and demandable because only a check that has become due can be presented for payment and
subsequently be dishonored. A postdated check cannot be dishonored if presented for payment
before its due date. (Jaime Dico vs. Hon. Court of Appeals and People of the Philippines, G.R. NO.
141669, February 28, 2005)

1. Parties to Be Notified

Notice of dishonor to the corporation, which has a personality distinct and separate from the officer
of the corporation, does not constitute notice to the latter. The absence of notice of dishonor
necessarily deprives an accused an opportunity to preclude a criminal prosecution. (Lao vs. Court
of Appeals, G.R. No. 119178, June 20, 1997)
 If the drawer or maker is an officer of a corporation, the notice of dishonor to the said corporation
is not notice to the employee or officer who drew or issued the check for and in its behalf. (Ofelia
Marigomen vs. People of the Philippines, G.R. No. 153451, May 26, 2005)

Under the Negotiable Instruments Law, notice of dishonor is not required if the drawer has no right
to expect or require the bank to honor the check, or if the drawer has countermanded payment. In
the instant case, all the checks were dishonored for any of the following reasons: "account closed",
"account under garnishment", insufficiency of funds", or "payment stopped." In the first three
instances, the drawers had no right to expect or require the bank to honor the checks, and in the
last instance, the drawers had countermanded payment. (Great Asian Sales Center Corporation
and Tan Chong Lin vs. the Court of Appeals and Bancasia Finance and Investment Corporation,
G.R. No. 105774, April 25, 2002)

2. Parties Who May Give Notice and Dishonor

When what was stamped on the check was “Payment Stopped Funded” and “DAUD” which means
drawn against uncollected deposits, the check was not issued without sufficient funds and was not
dishonored due to insufficiency of funds. Even with uncollected deposits, the bank may honor the
check at its discretion in favor of favored clients, in which case there would be no violation of B. P.
22. (Eliza T. Tan vs. People of the Philippines, G.R. No. 141466, January 19, 2001)

3. Effect of Notice

In the case of DAUD, the depositor has, on its face, sufficient funds in his account, although it is not
available yet at the time the check was drawn, whereas in DAIF, the depositor lacks sufficient funds
in his account to pay the check. Moreover, DAUD does not expose the drawer to possible
prosecution for estafa and violation of BP 22, while DAIF subjects the depositor to liability for such
offenses. (Bank of the Philippine Islands vs. Reynald R. Suarez, G.R. No. 167750, March 15, 2010)

The failure of the prosecution to prove the existence and receipt by petitioner of the requisite
written notice of dishonor and that he was given at least five banking days within which to settle his
account constitutes sufficient ground for his acquittal in a case for violation of BP 22. (James
Svendsen vs. People of the Philippines, G.R. NO. 175381, February 26, 2008)

4. Form of Notice

A notice of dishonor received by the maker or drawer of the check is thus indispensable before a
conviction for violation of BP 22 can ensue. The notice of dishonor may be sent by the offended
party or the drawee bank, and it must be in writing. A mere oral notice to pay a dishonored check
will not suffice. The lack of a written notice is fatal for the prosecution. (Jaime Dico vs. Hon. Court
of Appeals and People of the Philippines, G.R. NO. 141669, February 28, 2005)

5. Waiver

6. Dispensation with Notice

7. Effect of Failure to Give Notice

K. Discharge of Negotiable Instrument

 1. Discharge of Negotiable Instrument

In depositing the check in his name, the depositor did not become the out-right owner of the
amount stated therein. By depositing the check with the bank, depositor was, in a way, merely
designating the bank as the collecting bank. This is in consonance with the rule that a negotiable
instrument, such as a check, whether a manager’s check or ordinary check, is not legal tender. As
such, after receiving the deposit, under its own rules, the bank shall credit the amount to the
depositor’s account or infuse value thereon only after the drawee bank shall have paid the amount
of the check or the check has been cleared for deposit. The depositor’s contention that after the
lapse of the 35-day period the amount of a deposited check could be withdrawn even in the
absence of a clearance thereon, otherwise it could take a long time before a depositor could make a
withdrawal is untenable. Said practice amounts to a disregard of the clearance requirement of the
banking system. Bank of the Philippine Islands vs. Court of Appeals, 326 SCRA 641 (2000)

Mere delivery of a check does not discharge the obligation. The obligation is not extinguished and
remains suspended until the payment by commercial document is actually realized. Thus, although
the value of a check was deducted from the funds of the drawer but the funds were never delivered
to the payee because the drawee bank set off the amount against the losses it incurred from the
forgery of the drawer’s check, the drawer’s obligation to the payee remains unpaid. Cebu
International Finance Corporation vs. Court of Appeals, 316 SCRA 488 (1999)

2. Discharge of Parties Secondarily Liable

3. Right of Party Who Discharged Instrument

4. Renunciation by Holder

L. Material Alteration

1. Concept

An alteration is said to be material if it alters the effect of the instrument. It means an unauthorized
change in an instrument that purports to modify in any respect the obligation of a party or an
unauthorized addition of words or numbers or other change to an incomplete instrument relating
to the obligation of a party. In other words, a material alteration is one which changes the items
which are required to be stated under Section 1 of the Negotiable Instruments Law. (Philippine
National Bank vs. Court of Appeals, Capitol City Development Bank, Philippine Bank of
Communications, and F. Abante Marketing, G.R. No. 107508, April 25, 1996)

The serial number is not an essential requisite for negotiability under Section 1 of the Negotiable
Instrument Law and an alteration of which is not material. The alteration of the serial number does
not change the relations between the parties. (Philippine National Bank vs. Court of Appeals,
Capitol City Development Bank, Philippine Bank of Communications, and F. Abante Marketing,
G.R. No. 107508, April 25, 1996)

Alterations of the serial numbers do not constitute material alterations on the checks. Since there
were no material alterations on the checks, respondent as drawee bank has no right to dishonor
 them and return them to petitioner, the collecting bank. (The International Corporate Bank, Inc. vs.
Court of Appeals and Philippine National Bank, G.R. NO. 129910, September 5, 2006)

2. Effect of Material Alteration

Payment made under materially altered instrument is not payment done in accordance with the
instruction of the drawer. When the drawee bank pays a materially altered check, it violates the
terms of the check, as well as its duty to charge its client's account only for bona fide disbursements
he had made. Since the drawee bank, in the instant case, did not pay according to the original tenor
of the instrument, as directed by the drawer, then it has no right to claim reimbursement from the
drawer, much less, the right to deduct the erroneous payment it made from the drawer's account
which it was expected to treat with utmost fidelity. (Metropolitan Bank and Trust Company vs.
Renato D. Cabilzo, G.R. No. 154469, December 6, 2006)

M. Acceptance

1. Definition

The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer.
(Prudential Bank, Petitioner, v. Intermediate Appellate Court, Philippine Rayon Mills Inc. and
Anacleto R. Chi, G.R. No. 74886, December 8, 1992)

Indeed, "acceptance" and "payment" are, within the purview of the law, essentially different things,
for the former is "a promise to perform an act," whereas the latter is the "actual performance"
thereof. In the words of the Law, "the acceptance of a bill is the signification by the drawee of his
assent to the order of the drawer," which, in the case of checks, is the payment, on demand, of a
given sum of money. (Philippine National Bank vs. the Court of Appeals and Philippine
Commercial and Industrial Bank, G.R. No. L-26001, October 29, 1968)

2. Manner

When a check had been certified by the drawee bank, such certification is equivalent to acceptance
because it enables the holder to use it as money. Also, where a holder procures a check to be
certified, the check operates as an assignment of a part of the funds to the creditor. (New Pacific
Timber vs. Seneris, 101 SCRA 686, 1980)

Acceptance may be done in writing by the drawee in the bill itself, or in a separate instrument.
(Prudential Bank, Petitioner, v. Intermediate Appellate Court, Philippine Rayon Mills Inc. and
Anacleto R. Chi, G.R. No. 74886, December 8, 1992)

3. Time for Acceptance

4. Rules Governing Acceptance

N. Presentment for Acceptance

1. Time/Place/Manner of Presentment
 Presentment for acceptance is defined as the production of a bill of exchange to a drawee for
acceptance. Presentment for acceptance is necessary only where the bill is payable after sight or in
any other case, where presentment for acceptance is necessary in order to fix the maturity of the
instrument, or where the bill expressly stipulates that it shall be presented for acceptance, or where
the bill is drawn payable elsewhere than at the residence or place of business of the drawee.
(Prudential Bank vs. Intermediate Appellate Court, Philippine Rayon Mills Inc. and Anacleto R.
Chi, G.R. No. 74886, December 8, 1992)

2. Effect of Failure to Make Presentment

While it is true that the delivery of a check produces the effect of payment only when it is
encashed, pursuant to Art. 1249 of the Civil Code, the rule is otherwise if the debtor is prejudiced
by the creditor’s unreasonable delay in presentment. After more than ten (10) years from the
payment in part by cash and in part by check, the presumption is that the check had been
encashed, and the failure to encash for more than ten (10) years undoubtedly resulted in the
impairment of the check through unreasonable and unexplained delay on the part of the payee.
(Myron C. Papa vs. A.U. Valencia & Co., Inc., et al. G.R. No. 105188. January 23, 1998)

3. Dishonor by Non-Acceptance

O. Promissory Notes

Where an instrument containing the words ‘I promise to pay’ is signed by two or more persons,
they are deemed to be jointly and severally liable thereon. Under Section 17 (g) of the Negotiable
Instrument Law and Art. 1216 of the Civil Code, where the promissory note was executed jointly
and severally by two or more persons, the payee of the promissory note had the right to hold any
one or any two of the signers of the promissory note responsible for the payment of the amount of
the note. (Philippine National Bank vs. Concepcion Mining Company, Inc., et al., G.R. No. L-16968.
July 31, 1962.)

The buyer of a car shall be liable to pay the unpaid balance on the promissory note and not just the
installments due and payable before the said automobile was carnapped. Being the principal
contract, the promissory note is unaffected by whatever befalls the subject matter of the accessory
contract. (Perla Compania De Seguros, Inc. vs. the Court of Appeals, Herminio Lim And Evelyn Lim,
G.R. No. 96452, May 7, 1992)

When a promissory note expresses "no time for payment," it is deemed "payable on demand. (Jose
L. Ponce de leon vs. Rehabilitation Finance Corporation, G.R. No. L-24571, December 18, 1970)

When there is a discrepancy between the amount in words and the amount in figures in the check,
the rule in the Negotiable Instruments Law is that it would be the amount in words that would
prevail. (People of the Philippines vs. Martin L. Romero and Ernesto C. Rodriguez, G.R. No.
112985, April 21, 1999)

An instrument which begins with I, We, or Either of us promise to pay, when signed by two or more
persons, makes them solidarily liable. Also, the phrase ‘joint and several’ binds the makers jointly
and individually to the payee so that all may be sued together for its enforcement, or the creditor
may select one or more as the object of the suit. (Astro Electronics Corp. and Peter Roxas vs.
 Philippine Export and Foreign Loan Guarantee Corporation, G.R. No. 136729, September 23,
2003)

P. Checks

1. Definition

Settled is the doctrine that a check is the only a substitute for money and not money; hence, the
delivery of such an instrument does not, by itself, operate as payment. This is especially true in case
of post-dated check. Thus, the issuance of a post-dated check was not effective payment. It did not
comply with the cardholder’s obligation to pay his past due credit card charges. Consequently, the
card company was justified in suspending his credit card. BPI Card Corporation vs. Court of
Appeals, 296 SCRA 260 (1998)

2. Kinds

Under accepted banking practice, crossing a check is done by writing two parallel lines diagonally
on the left top portion of the checks. The crossing is special where the name of a bank or a business
institution is written between the two parallel lines, which means that the drawee should pay only
with the intervention of that company. The crossing is general where the words written between
the two parallel lines are "and Co." or "for payee’s account only," which means that the drawee
bank should not encash the check but merely accept it for deposit. (Associated Bank and Conrado
Cruz, vs. Hon. Court of Appeals, and Merle V. Reyes, doing business under the name and style
"Melissa’s RTW," G.R. No. 89802, May 7, 1992)

The effects of crossing a check are: (1) that the check may not be encashed but only deposited in
the bank; (2) that the check may be negotiated only once –– to one who has an account with a
bank; and (3) that the act of crossing the check serves as a warning to the holder that the check has
been issued for a definite purpose so that he must inquire if he has received the check pursuant to
that purpose. (State Investment House vs. IAC, 175 SCRA 310, 1989)

A memorandum check is an evidence of debt against the drawer and although may not be intended
to be presented, has the same effect as an ordinary check and if passed on to a third person, will be
valid in his hands like any other check. (People vs. Nitafan, G.R. No. 75954, October 22, 1992)

A cashier’s check is a primary obligation of the issuing bank and accepted in advance by its mere
issuance. By its very nature, a cashier’s check is the bank’s order to pay drawn upon itself,
committing in effect its total resources, integrity and honor behind the check. A cashier’s check by
its peculiar character and general use in the commercial world is regarded substantially to be as
good as the money which it represents. (Tan vs. Court of Appeals, G.R. No. 108555, December 20,
1994)

Payment in check by the debtor may be acceptable as valid, if no prompt objection to said payment
is made. Consequently, the debtor’s tender of payment in the form of manager’s check is valid.
Thus, where the seller of real property tendered the return of the reservation fee in the form of
manager’s check because the sale agreement was not fully consummated owing to the failure of
the buyer to pay the balance of the purchase price within the stipulated period, the tender of the
manager’s check was considered a valid tender of payment. When the buyer refused to accept the
 check, the consignation of the check with the court was sufficient to satisfy the obligation. (Teddy
G. Pabugais vs. Dave Sahijiwani, G.R. No. 156846, February 23, 2004)

3. Presentment for Payment

A judgment creditor cannot validly refuse acceptance of the payment of the judgment obligation
tendered in the form of a cashier’s check. A cashier’s check issued by a bank of good standing is
deemed as cash. (New Pacific Timber vs. Seneris, G.R. No. 41764, December 19, 1980)

The obligation of the judgment debtor subsists when the check issued by a judgment debtor was
made payable to the sheriff who encashed the same but failed to deliver its proceeds to the
judgment creditor. This is because a check does not produce the effect of payment until encashed.
(Philippine Airlines vs. Court of Appeals, G.R. No. 49188, January 30, 1990)

Tendering a check on the last day of the grace period to pay the purchase price is not valid and a
seller has a right to cancel the contract. A check, be it a manager’s check or ordinary check, is not
legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may
be refused by the creditor. (Bishop of Malolos vs. Intermediate Appellate Court, G.R. No. 72110,
November 16, 1990)

A check may be used for the exercise of the right of redemption, the same being a right and not an
obligation. (Fortunado vs. Court of Appeals, 196 SCRA 26, 1991)

The judgment creditor may validly refuse the tender of payment partly in check and partly in cash.
A cashier’s check tendered by the judgment debtor to satisfy the judgment debt is not a legal
tender. (Tibajia, Jr. vs. Court of Appeals, G.R. No. 100290, June 4, 1993)

A check does not constitute legal tender, but once the creditor accepted a fully funded check to
settle an obligation, he is estopped from later on denouncing the efficacy of such tender of
payment. By accepting the tendered check and converting it into money, the creditor is presumed
to have accepted it as payment and to hold otherwise would be inequitable and unfair to the
obligor. (Far East Bank & Trust Company vs. Diaz Realty, Inc., G.R. No. 138588, August 23, 2001)

A stale check is one which has not been presented for payment within a reasonable time after its
issue. It is valueless and, therefore, should not be paid. (International Corporate Bank vs. Sps.
Francis S. Gueco and Ma. Luz E. Gueco, G.R. No. 141968, February 12, 2001)

Where a manager’s check made payable to “cash” and appearing regular on its face, was presented
to another bank that immediately honors it – no faulty may be attributed to such bank in relying
upon the integrity of the check, even if payment thereon was later ordered stopped by the drawer-
bank because the one who encashed the check was actually not the intended payee. In other
words, as between the bank that honored the manager’s check and the drawer-bank, it is the latter
that should bear the loss. (Security Bank and Trust Company vs. Rizal Commercial Banking
Corporation, G.R. No. 170984, 30 January 2009)

a. Time

A check must be presented for payment within a reasonable time after its issue, and in determining
what is a “reasonable time”, regard is to be had to the nature of the instrument, the usage of trade
 or business with respect to such instruments and the facts of the particular case. The test is
whether the payee employed such diligence as a prudent man exercise in his own affairs. This is
because the nature and theory behind the use of a check points to its immediate use and payability.
(International Corporate Bank vs. Sps. Francis S. Gueco and Ma. Luz E. Gueco, G.R. No. 141968,
February 12, 2001)

b. Effect of Delay

Failure to present for payment within a reasonable time will result to the discharge of the drawer
only to the extent of the loss caused by the delay. Failure to present on time, thus, does not totally
wipe out all liability. In fact, the legal situation amounts to an acknowledgment of liability in the
sum stated in the check. In this case, the debtors have not alleged, much less shown that they or
the bank which issued the manager’s check has suffered damage or loss caused by the delay or
non-presentment. Definitely, the original obligation to pay certainly has not been erased.
(International Corporate Bank vs. Sps. Francis S. Gueco and Ma. Luz E. Gueco, G.R. No. 141968,
February 12, 2001)

IV. Insurance Code

A. Concept of Insurance

One test in order to determine whether one is engaged in insurance business is whether the
assumption of risk and indemnification of loss (which are elements of an insurance business) are
the principal object and purpose of the organization or whether they are merely incidental to its
business. If these are the principal objectives, the business is that of insurance. But if they are
merely incidental and service is the principal purpose, then the business is not insurance. In this
case, Health Maintenance Organizations (HMOs) are not insurance business. (Philippine Health
Care Providers, Inc., vs. Commissioner of Internal Revenue, G.R. No. 167330, September 18, 2009)

The contract of insurance is one of perfect good faith (uferrimal fidei) not for the insured alone, but
equally so for the insurer; in fact, it is mere so for the latter, since its dominant bargaining position
carries with it stricter responsibility. (Qua Chee Gan v. Law Union, 98 Phil 85, 1955)

Being a contract of adhesion, terms of a policy are to be construed strictly against the party which
prepared the contract - the insurer. By reason of exclusive control of insurance contract, ambiguity
must be strictly interpreted against the insurer and liberally in favor of the insured, especially to
avoid forfeiture. (Philamcare Health System vs. Court of Appeals, 379 SCRA 356, 2002)

The cardinal principle in Insurance Law is that a policy or contract of insurance is to be construed
liberally in favor of the insured and strictly as against the insurance company, yet, contracts of
insurance, like other contracts, are to be construed according to the sense and meaning of the
terms, which the parties themselves have used. (Lalican vs. Insular Life Assurance Company, Ltd.
597 SCRA 159, 2009)

Contracts of insurance, like other contracts, are to be construed according to the sense and
meaning of the terms which the parties themselves have used. If such terms are clear and
unambiguous, they must be taken and understood in their plain, ordinary and popular sense.
Accordingly, in interpreting the exclusions in an insurance contract, the terms used specifying the
 excluded classes therein are to be given their meaning as understood in common speech. (Alpha
Insurance And Surety Co. vs. Arsenia Sonia Castor, G.R. No. 198174, September 02, 2013)

B. Elements of an Insurance Contract

Under Sec. 2(a) of the Insurance Code, an insurance contract is an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or liability arising from an
unknown or contingent event, and with the following elements: 1.) Insured has an insurable
interest; 2.) Insured is subject to a risk of loss by the happening of the designated peril; 3.) Insurer
assumes risk; 4.) Such assumption of risk is part of a general scheme to distribute actual losses
among a large group of persons bearing a similar risk; and 5.) In consideration of the insurer’s
promise, the insured pays a premium. (Philamcare Health System vs. Court of Appeals, 379 SCRA
432, 1997)

C. Characteristics/Nature of Insurance Contracts

The only persons entitled to claim the insurance proceeds are either the insured, if still alive; or the
beneficiary, if the insured is already deceased, upon the maturation of the policy. The exception to
this rule is a situation where the insurance contract was intended to benefit third persons who are
not parties to the same in the form of favorable stipulations or indemnity. In such a case, third
parties may directly sue and claim from the insurer. Because no legal proscription exists in naming
as beneficiaries the children of illicit relationships by the insured, the shares of Eva in the insurance
proceeds, whether forfeited by the court in view of the prohibition on donations under Article 739
of the Civil Code or by the insurers themselves for reasons based on the insurance contracts, must
be awarded to the said illegitimate children, the designated beneficiaries, to the exclusion of heirs.
(Heirs Of Loreto c. Maramag vs. Eva Verna De Guzman Maramag, et al., G.R. No. 181132, June 5,
2009)

The insurance contract is primarily a risk-distributing device, a mechanism by which all members of
a group exposed to a particular risk contribute premiums to an insurer. From these contributory
funds are paid whatever losses occur due to exposure to the peril insured against. Each party
therefore takes a risk: the insurer being compelled upon the happening of the contingency to pay
the entire sum agreed upon; and the insured of a parting with the amount required as premium,
without receiving anything therefore in case the contingency does not happen. (Tibay vs. Court of
Appeals, 257 SCRA 126, 1996)

D. Classes

1. Marine

The evidence shows that the loss of the cargo was due to the perils of the ship; that the sinking of
the barge was due to improper loading of the logs on one side so that the barge was tilting on one
side and for that it did not navigate on even keel; that it was no longer seaworthy that was why it
developed leak. A loss which, in the ordinary course of events, results from the natural and
inevitable action of the sea, from the ordinary wear and tear of the ship, or from the negligent
failure of the ship's owner to provide the vessel with proper equipment to convey the cargo under
ordinary conditions, is not a peril of the sea but such a loss is rather due to what has been aptly
called the 'peril of the ship.' The insurer undertakes to insure against perils of the sea and similar
perils, not against perils of the ship. (Isabela Roque, doing business under the name and style of
 Isabela Roque Timber Enterprises, et al., vs. The Intermediate Appellate Court, et al., G.R. No. L-
66935, November 11, 1985)

The rusting of steel pipes in the course of a voyage is a “peril of the sea” in view of the toll on the
cargo of wind, water, and salt conditions. (Cathay Insurance Co., vs. The Court of Appeals, et al.,
G.R. No. L-76145, June 30, 1987)

Fire may not be considered a natural disaster or calamity since it almost always arises from some
act of man or by human means. It cannot be an act of God unless caused by lightning or a natural
disaster or casualty not attributable to human agency. In the case at bar, it is not disputed that a
small flame was detected on the acetylene cylinder and that by reason thereof, the same exploded
despite efforts to extinguish the fire. Verily, the cause of the fire was the fault or negligence of ESLI.
(Philippine Home Assurance Corporation vs. Court of Appeals, G.R. No. 106999, June 20, 1996)

A marine insurance policy providing that the insurance was to be “against all risks” must be
construed as creating a special insurance and extending to other risks than are usually
contemplated, and covers all losses except such as arise from the fraud of the insured. The burden
of the insured, therefore, is to prove merely that the goods he transported have been lost,
destroyed or deteriorated and thereafter, the burden is shifted to the insurer to prove that the loss
was due to excepted perils. In the present case, there being no showing that the loss was caused by
any of the excepted perils, the insurer is liable under the policy. (Filipino Merchants Insurance Co.,
Inc., vs. Court Of Appeals, et al., G.R. No. 85141, November 28, 1989)

An “all risks” provision of a marine policy creates a special type of insurance which extends
coverage to risks not usually contemplated and avoids putting upon the insured the burden of
establishing that the loss was due to peril falling within the policy’s coverage. The insurer can avoid
coverage upon demonstrating that a specific provision expressly excludes the loss from coverage
but in this case, the damage caused to the cargo has not been attributed to any of the exceptions
provided for nor is there any pretension to this effect. (Choa Tiek Seng, doing business under the
name and style of Seng’s Commercial Enterprises vs. The Court of Appeals, et al., G.R. No. 84507,
March 15, 1990)

2. Fire

As defined by Section 60 of the Insurance Code, an open policy is one in which the value of the
thing insured is not agreed upon but is left to be ascertained in case of loss. This means that the
actual loss, as determined, will represent the total indemnity due the insured from the insurer
except only that the total indemnity shall not exceed the face value of the policy. Where the actual
loss in an open policy has been ascertained, the factual determination should be respected in the
absence of proof that it was arrived at arbitrarily. (Development Insurance Corporation vs.
Intermediate Appellate Court, et al., G.R. No. L-71360, July 16, 1986)

3. Casualty

It should be noted that the insurance policy entered into by the parties is a theft or robbery
insurance policy which is a form of casualty insurance. Except with respect to compulsory motor
vehicle liability insurance, the Insurance Code contains no other provisions applicable to casualty
insurance or to robbery insurance in particular. These contracts are, therefore, governed by the
general provisions applicable to all types of insurance. Outside of these, the rights and obligations
 of the parties must be determined by the terms of their contract, taking into consideration its
purpose and always in accordance with the general principles of insurance law. (Fortune Insurance
and Surety Co., Inc. vs. Court of Appeals and Producers Bank of the Philippines, G.R. No. 115278,
May 23, 1995)

It has been aptly observed that in burglary, robbery, and theft insurance, the opportunity to defraud
the insurer—the moral hazard—is so great that insurers have found it necessary to fill up their
policies with countless restrictions, many designed to reduce this hazard. Seldom does the insurer
assume the risk of all losses due to the hazards insured against. Persons frequently excluded under
such provisions are those in the insured’s service and employment. The purpose of the exception is
to guard against liability should the theft be committed by one having unrestricted access to the
property. (Fortune Insurance and Surety Co., Inc. vs. Court of Appeals and Producers Bank of the
Philippines, G.R. No. 115278, May 23, 1995)

4. Suretyship

A surety contract is merely a collateral one, its basis is the principal contract or undertaking which it
secures. Necessarily, the stipulations in such principal agreement must at least be communicated or
made known to the surety. (First Lepanto-Taisho Insurance Corporation vs. Chevron Philippines,
Inc., G.R. No. 177839, January 18, 2012)

The surety bond must be read in its entirety and together with the contract between NPC and the
contractors. The provisions must be construed together to arrive at their true meaning. Certain
stipulations cannot be segregated and then made to control. In the case at bar, it cannot be denied
that the breach of contract in this case, that is, the abandonment of the unfinished work of the
transmission line of the NPC by the contractor FEEI was within the effective date of the contract and
the surety bond. Such abandonment gave rise to the continuing liability of the bond as provided for
in the contract which is deemed incorporated in the surety bond executed for its completion.
(National Power Corporation vs. Court of Appeals, et al., G.R. No. L-43706, November 14, 1986)

Under Section 176 of the Insurance Code, as amended, the liability of a surety in a surety bond is
joint and several with the principal obligor. Finman's bond was posted by Pan Pacific in compliance
with the requirements of Article 31 of the Labor Code in order to guarantee compliance with
prescribed recruitment procedures, rules and regulations, and terms and, conditions of
employment as appropriate. While Finman has refrained from attaching a copy of the bond it had
issued to its Petition for Certiorari, there can be no question that the conditions of the surety bond
include the POEA Rules and Regulation. It is settled doctrine that the conditions of a bond specified
and required in the provisions of the statute or regulation providing for the submission of the bond,
are incorporated or built into all bonds tendered under that statute or regulation, even though not
there set out in printer's ink. (Finman General Assurance Corporation vs. William Inocencio, et al.,
G.R. No. 90273-75, November 15, 1989)

Section 177 of the Insurance Code states that the surety is entitled to payment of the premium as
soon as the contract of suretyship or bond is perfected and delivered to the obligor. No contract of
suretyship or bonding shall be valid and binding unless and until the premium therefor has been
paid, except where the obligee has accepted the bond, in which case the bond becomes valid and
enforceable irrespective of whether or not the premium has been paid by the obligor to the surety.
A continuing bond, as in this case where there is no fixed expiration date, may be canceled only by
the obligee, which is the NFA, by the Insurance Commissioner, and by the court. By law and by the
 specific contract involved in this case, the effectivity of the bond required for the obtention of a
license to engage in the business of receiving rice for storage is determined not alone by the
payment of premiums but principally by the Administrator of the NFA. (Country Bankers Insurance
Corporation vs. Antonio Lagman, G.R. No. 165487, July 13, 2011)

5. Life

Where a GSIS member failed to state his beneficiary or beneficiaries in his application for
membership, the proceeds of the retirement benefits shall accrue to his estate and will be
distributed among his legal heirs in accordance with the law on intestate succession. (Re: Claims for
Benefits of the Heirs of the Late Mario vs. Chanliongco, Adm. Matter No. I90-RET., October 18,
1977)

A life insurance policy is no different from a civil donation insofar as the beneficiary is concerned for
both are founded upon the same consideration: liberality. A beneficiary is like a donee, because
from the premiums of the policy which the insured pays, out of liberality, the beneficiary will
receive the proceeds or profits of said insurance. As a consequence, the proscription in Article 739
of the new Civil Code should equally operate in life insurance contracts. The conviction for adultery
or concubinage is not necessary before the disabilities mentioned in Article 739 may effectuate. It
would be sufficient if evidence preponderates upon the guilt of the consort for the offense
indicated. (The Insular Life Assurance Company, Ltd., vs. Carponia t. Ebrado And Pascuala Vda. De
Ebrado, G.R. No. l-44059, October 28, 1977)

There is nothing in the policy that relieves the insurer of the responsibility to pay the indemnity
agreed upon if the insured is shown to have contributed to his own accident. Indeed, most
accidents are caused by negligence. Lim was unquestionably negligent and that negligence cost him
his own life. But it should not prevent his widow from recovering from the insurance policy he
obtained precisely against accident. (Sun Insurance Office, Ltd., vs. The Court of Appeals, G.R. No.
92383, July 17, 1992)

6. Compulsory Motor Vehicle Liability Insurance

Insurer’s liability under Third Party Liability coverage accrues immediately upon occurrence of injury
or event upon which the liability depends and does not depend on the recovery of judgment by the
injured party against the insured. Therefore, insurer can be sued and held directly liable by the
injured party to the extent of the coverage (Vda. De Maglana vs. Hon. Cosolacion, 212 SCRA 268,
1992)

The liability of the insured carrier or vehicle owner is based on tort, in accordance with the
provisions of the Civil Code; while that of the insurer arises from contract, particularly, the
insurance policy. The third-party liability of the insurer is only up to the extent of the insurance
policy and that required by law; and it cannot be held solidarily liable for anything beyond that
amount. (The Heirs of George Y. Poe vs. Malayan Insurance Company, Inc., G.R. No. 156302, April
7, 2009 14, 1996)

The main purpose of the “authorized driver” clause is that a person other than the insured owner,
who drives the car on the insured’s order, such as his regular driver, or with his permission, such as
a friend or member of the family or the employees of a car service or repair shop must be duly
licensed drivers and have no disqualification to drive a motor vehicle. The mere happenstance that
 the employee(s) of the shop owner diverts the use of the car to his own illicit or unauthorized
purpose in violation of the trust reposed in the shop by the insured car owner does not mean that
the “authorized driver” clause has been violated such as to bar recovery, provided that such
employee is duly qualified to drive under a valid driver’s license. It is the theft clause, not the
“authorized driver” clause, that applies. (Jewel Villacorta vs. The Insurance Commission, et al.,
G.R. No. 54171. October 28, 1980)

Under the “authorized driver” clause, an authorized driver must not only be permitted to drive by
the insured but it is also essential that he is permitted under the law and regulations to drive the
motor vehicle and is not disqualified from so doing under any enactment or regulation. At the time
of the accident, Stokes had been in the Philippines for more than 90 days and under the law, he
could not drive a motor vehicle without a Philippine driver’s license. He was therefore not an
“authorized driver” under the terms of the insurance policy in question, and MALAYAN was right in
denying the claim of the insured. (James Stokes, as Attorney-in-Fact of Daniel Stephen Adolfson
vs. Malayan Insurance Co., Inc., G.R. No. L-34768. February 24, 1984)

The requirement under the “authorized driver clause” that the driver be “permitted in accordance
with the licensing or other laws or regulations to drive the Motor Vehicle and is not disqualified
from driving such motor vehicle by order of a Court of Law or by reason of any enactment or
regulation in that behalf,” applies only when the driver “is driving on the insured’s order or with his
permission.” It does not apply when the person driving is the insured himself. (Andrew Palermo vs.
Pyramid Insurance Co., Inc., G.R. No. L-36480. May 31, 1988)

Where the driver’s temporary operator’s permit had expired, and the insurance policy states that a
driver with an expired Traffic Violation Receipt or expired Temporary Operator’s permit is not
considered an authorized driver within the meaning of the policy, the expiration of the same bars
recovery under the policy. In liability insurance, the parties are bound by the terms of the policy
and the right of insured to recover is governed thereby. (Agapito Gutierrez vs. Capital Insurance &
Surety Co., Inc., G.R. No. L-26827, June 29, 1984)

From a reading Section 378, the following rules on claims under the “no fault indemnity” provision,
where proof of fault or negligence is not necessary for payment of any claim for death or injury to a
passenger or a third party, are established: 1.) A claim may be made against one motor vehicle only.
2.) If the victim is an occupant of a vehicle, the claim shall lie against the insurer of the vehicle in
which he is riding, mounting or dismounting from. 3.) In any other case (i.e. if the victim is not an
occupant of a vehicle), the claim shall lie against the insurer of the directly offending vehicle. 4.) In
all cases, the right of the party paying the claim to recover against the owner of the vehicle
responsible for the accident shall be maintained. (Perla Compania De Seguros, Inc., vs. Hon.
Constante A. Ancheta, Presiding Judge of the Court of First Instance of Camarines Norte, Branch
III, et al., G.R. No. L-49699, August 8, 1988)

E. Insurable Interest

1. In Life/Health

Every person has an insurable interest in the life and health of: 1.) Himself, or his spouse and of his
children; 2.) Any person: (a) on whom he depends wholly or in part for education or support, or in
whom he has a pecuniary interest; (b) under legal obligation to him for the payment of money,
respecting property or service, of which death or illness might delay or prevent the performance;
 and (c) upon whom whose life any estate or interest vested in him depends. (Philamcare Health
System vs. Court of Appeals, 379 SCRA 356, 2002)

The existence of an insurance interest gives a person the legal right to insure the subject matter of
the policy of insurance. Section 19 of the Insurance Code states that an interest in the life or health
of a person insured must exist when the insurance takes effect, but need not exist thereafter or
when the loss occurs. (Lalican vs. Insular Life Assurance Company Ltd, 597 SCRA 159, 2009)

An employer corporation hass an insurable interest on its manager where the death of the manager
will be detrimental to the corporation’s operations. (El Oriente Fabrica de Tabacos vs. Posada, 56
Phil 147, 1931)

2. In Property

A non-life insurance policy such as the fire insurance policy taken by spouses Cha over their
merchandise is primarily a contract of indemnity. Insurable interest in the property insured must
exist at the time the insurance takes effect and at the time the loss occurs. The basis of such
requirement of insurable interest in property insured is based on sound public policy: to prevent a
person from taking out an insurance policy on property upon which he has no insurable interest
and collecting the proceeds of said policy in case of loss of the property. In such a case, the contract
of insurance is a mere wager which is void under Section 25 of the Insurance Code. (Spouses Nilo
Cha and Stella Uy Cha vs. Court of Appeals, G.R. No. 124520. August 18, 1997)

3. Double Insurance and Over Insurance

A double insurance exists where the same person is insured by several insurers separately in
respect of the same subject and interest. Since, the insurable interests of a mortgagor and a
mortgagee on the mortgaged property are distinct and separate, the two policies of the PFIC do not
cover the same interest as that covered by the policy of the private respondent, no double
insurance exists. (Armando Geagonia vs. Court of Appeals, et al., G.R. No. 114427, February 6,
1995)

By the express provision of Section 93 of the Insurance Code, double insurance exists where the
same person is insured by several insurers separately in respect to the same subject and interest.
The requisites in order for double insurance to arise are as follows: 1.) The person insured is the
same; 2.) Two or more insurers insuring separately; 3.) There is identity of subject matter; 4.) There
is identity of interest insured; and 5.) There is identity of the risk or peril insured against. In the
present case, even though the two insurance policies were issued over the same goods and cover
the same risk, there arises no double insurance since they were issued to two different
persons/entities having distinct insurable interests. Necessarily, over insurance by double insurance
cannot likewise exist. (Malayan Insurance Co., Inc., vs. Philippine First Insurance Co., Inc. and
Reputable Forwarder Services, Inc., G.R. No. 184300, July 11, 2012)

4. Multiple or Several Interests on Same Property

As to a mortgaged property, the mortgagor and the mortgagee have each an independent insurable
interest therein and both interests may be covered by one policy, or each may take out a separate
policy covering his interest, either at the same or at separate times. The mortgagor's insurable
interest covers the full value of the mortgaged property, even though the mortgage debt is
 equivalent to the full value of the property. The mortgagee's insurable interest is to the extent of
the debt, since the property is relied upon as security thereof, and in insuring he is not insuring the
property but his interest or lien thereon. (Armando Geagonia vs. Court of Appeals, et al., G.R. No.
114427, February 6, 1995)

Where a mortgagor pays insurance premium under group insurance policy (Mortgage Redemption
Insurance), making loss payable to mortgagee, the insurance is on mortgagor’s interest, and
mortgagor continues to be a party to the contract. In this type of policy insurance, mortgagee is
simply an appointee of the insurance fund, such loss-payable clause does not make mortgagee a
party to the contract (Great Pacific Life vs. Court of Appeals, 316 SCRA 677, 1999)

F. Perfection of the Contract of Insurance

1. Offer and Acceptance/Consensual

It needs not much emphasis to say that an application form does not prove that insurance was
secured. Anybody can get an application form for insurance, fill it up at home before filing it with
the insurance company. In fact, the very first sentence of the form states that it merely “forms the
basis of a contract between you and NZILife.” There was no contract yet. Furthermore, there is no
proof that the insurance company approved the proposal, no proof that any premium payments
were made, and no proof from the record of exhibits as to the date it was accomplished. It
appearing that no insurance was issued to Lam Po Chun with accused-appellant as the beneficiary,
the motive capitalized upon by the trial court vanishes. (People of the Philippines vs. Yip Wai Ming,
G.R. No. 120959, November 14, 1996)

Where the provisions in the binding deposit receipt shows that it is intended to be merely a
provisional or temporary insurance contract and the same is merely an acknowledgment, on behalf
of the company, that the latter's branch office had received from the applicant the insurance
premium and had accepted the application subject for processing by the insurance company, the
acceptance thereof is merely conditional and is subordinated to the act of the company in
approving or rejecting the application. Since Pacific Life disapproved the insurance application, the
binding deposit receipt in question never become in force at anytime since in life insurance, a
"binding slip" or "binding receipt" does not insure by itself. (Great Pacific Life Assurance Company
vs. Honorable Court of Appeals, G.R. No. L-31845. April 30, 1979)

For a valid cancellation of the policy,the following requisites must concur: 1.) There must be prior
notice of cancellation to the insured; 2.) The notice must be based on the occurrence, after the
effective date of the policy, of one or more of the grounds mentioned; 3.) The notice must be (a) in
writing, (b) mailed, or delivered to the named insured, (c) at the address shown in the policy; 4. It
must state (a) which of the grounds mentioned in Section 64 is relied upon and (b) that upon
written request of the insured, the insurer will furnish the facts on which the cancellation is based.
MICO claims it canceled the policy in question for non-payment of premium. However, there is no
proof that the notice, assuming it complied with the other requisites, was actually mailed to and
received by Pinca. (Malayan Insurance Co., Inc. vs. Gregoria Cruz Arnaldo, in her capacity as the
Insurance Commissioner, et al., G.R. No. L-67835, October 12, 1987)

a. Delay in Acceptance
b. Delivery of Policy
2. Premium Payment

By accepting the promise of Plastic Era to to pay the insurance premium within thirty (30) days from
the effective date of policy, Capital Insurance has implicitly agreed to modify the tenor of the
insurance policy and in effect, waived the provision therein that it would only pay for the loss or
damage in case the same occurs after the payment of the premium. Considering that the insurance
policy is silent as to the mode of payment, Capital Insurance is deemed to have accepted the
promissory note in payment of the premium. This rendered the policy immediately operative on the
date it was delivered. By accepting its promise to pay, Capital Insurance had in effect extended
credit to Plastic Era. Therefore, Capital Insurance did not have the right to cancel the policy for
nonpayment of the premium except by putting Plastic Era in default and giving it personal notice to
that effect. (Capital Insurance & Surety Co., Inc., vs. Plastic Era Co., Inc., et al., G.R. No. L-22375,
July 18, 1975)

It is explicit in the policy that PSIC's agreement to indemnify Woodwork for loss by fire only arises
"after payment of premium,". Compliance by the insured with the terms of the contract is a
condition precedent to the right of recovery. Since the premium had not been paid, the policy must
be deemed to have lapsed. The non-payment of premiums does not merely suspend but put, an
end to an insurance contract, since the time of the payment is peculiarly of the essence of the
contract. (Philippine Phoenix Surety & Insurance Company vs. Woodwork, Inc., G.R. No. L-25317,
August 6, 1979)

The non-payment of premium on the cover note is no cause for Pacific to lose what is due it as if
there had been payment of premium, for non-payment by it was not chargeable against its fault.
Had all the logs been lost during the loading operations, but after the issuance of the cover note,
liability on the note would have already arisen even before payment of premium. This is how the
cover note as a "binder" should legally operate otherwise, it would serve no practical purpose in
the realm of commerce, and is supported by the doctrine that where a policy is delivered without
requiring payment of the premium, the presumption is that a credit was intended and policy is
valid. (Pacific Timber Export Corporation vs. Court of Appeals, et al., G.R. No. L-38613, February
25, 1982)

It is obvious from both the Insurance Act and the stipulation of the parties that time is of the
essence in respect of the payment of the insurance premium so that if it is not paid the contract
does not take effect unless there is still another stipulation to the contrary. In the instant case, Arce
was given a grace period to pay the premium but the period having expired with no payment made,
he cannot insist that Capital is nonetheless obligated to him. (Pedro Arce vs. Capital Insurance &
Surety Co., Inc., G.R. No. L-28501, September 30, 1982)

Under Section 77 of the Insurance Code, the remedy for the non-payment of premiums is to put an
end to and render the insurance policy not binding. The non-payment of premium does not merely
suspend but puts an end to an insurance contract since the time of the payment is peculiarly of the
essence of the contract. Unless premium is paid, an insurance contract does not take effect. Since
admittedly the premiums have not been paid, the policies issued have lapsed. The insurance
coverage did not go into effect or did not continue and the obligation of Philamgen as insurer
ceased. (Arturo Valenzuela, et al. vs. Court Of Appeals, et al., G.R. No. 83122, October 19, 1990)

Section 177 of the Insurance Code states that the surety is entitled to payment of the premium as
soon as the contract of suretyship or bond is perfected and delivered to the obligor. No contract of
suretyship or bonding shall be valid and binding unless and until the premium therefor has been
paid, except where the obligee has accepted the bond, in which case the bond becomes valid and
enforceable irrespective of whether or not the premium has been paid by the obligor to the surety.
(Philippine Pryce Assurance Corporation vs. Court Of Appeals, et al., G.R. No. 107062, February
21, 1994)

Section 78 of the Insurance Code explicitly provides that an acknowledgment in a policy or contract
of insurance of the receipt of premium is conclusive evidence of its payment, so far as to make the
policy binding, notwithstanding any stipulation therein that it shall not be binding until the
premium is actually paid. This Section establishes a legal fiction of payment and should be
interpreted as an exception to Section 77. (American Homes Assurance vs. Antonio Chua, G.R.
130421, June 28, 1999)

Section 77 of the Insurance Code of 1978 provides that an insurer is entitled to payment of the
premium as soon as the thing insured is exposed to the peril insured against. The first exception is
provided by Section 77 itself, and that is, in case of a life or industrial life policy whenever the grace
period provision applies. The second is that covered by Section 78 of the Insurance Code, which
provides that any acknowledgment in a policy or contract of insurance of the receipt of premium is
conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any
stipulation therein that it shall not be binding until premium is actually paid. A third exception was
laid down in Makati Tuscany Condominium Corporation vs. Court of Appeals, wherein the Court
ruled that Section 77 may not apply if the parties have agreed to the payment in installments of the
premium and partial payment has been made at the time of loss. Tuscany has also provided a
fourth exception, namely, that the insurer may grant credit extension for the payment of the
premium. This simply means that if the insurer has granted the insured a credit term for the
payment of the premium and loss occurs before the expiration of the term, recovery on the policy
should be allowed even though the premium is paid after the loss but within the credit term.
Moreover, as a fifth exception, estoppel bars it from taking refuge under said Section, since
Masagana relied in good faith on such practice. (Ucpb General Insurance Co. Inc., vs. Masagana
Telemart, Inc., G.R. No. 137172, April 4, 2001)

FEBTC is estopped from claiming that the insurance premium has been unpaid. FEBTC induced
Maxilite and Marques to believe that the insurance premium has in fact been debited from
Maxilite’s account. However, FEBTC failed to do so. FEBTC’s conduct clearly constitutes gross
negligence in handling Maxilite’s and Marques’ accounts. As a consequence, FEBTC must be held
liable for damages pursuant to Article 2176 of the Civil Code. (Jose Marques and Maxilite
Technologies, Inc., vs. Far East Bank And Trust Company, et al., G.R. No. 171379, January 10, 2011)

In life insurance, even though insured may have obtained an endowment policy, payment of
premiums is not a debt or obligation, but an exercise of a right on the part of the insured. If insured
wants to keep policy alive, he may pay premium. But the insurer may not compel him to pay the
premium if insured desires to let the policy lapse. (Constantino vs. Asia Life, 87 Phil 248, 1950)

The age of the insured was not concealed to the insurance company for her application for
insurance coverage which was on a printed form furnished by Manila Bankers and which contained
very few items of information clearly indicated her age of the time of filing the same to be almost
65 years of age. Despite such information which could hardly be overlooked in the application form,
Manila Bankers received her payment of premium and issued the corresponding certificate of
insurance without question. As there was sufficient time (45 days) for the Manila Bankers to process
 the application and issue notice that the applicant was over 60 years of age and thereby cancel the
policy on that ground if it was minded to do so, Manila Bankers’ failure to act, is therefore either
attributable to its willingness to waive such disqualification; or, through the negligence or to the
incompetence of its employees for which it has only itself to blame. (Regina Edillon vs. Manila
Bankers Life Insurance, et al., G.R. No. L-34200, September 30, 1982)

3. Non-Default Options in Life Insurance

4. Reinstatement of a Lapsed Policy of Life Insurance

The stipulation in a life insurance policy giving the insured the privilege to reinstate it upon written
application within three years from the date it lapses and upon of evidence of insurability
satisfactory to the insurance company and the payment of all overdue premiums and any other
indebtedness to the company, does not give the insured absolute right to such reinstatement by the
mere filing of an application therefor. The company has the right to deny the reinstatement if it is
not satisfied as to the insurability of the insured and of the latter does not pay all overdue
premiums and all other indebtedness to the company. After the death of the insured the insurance
company cannot be compelled to entertain an application for reinstatement of the policy because
the conditions precedent to reinstatement can no longer be determined and satisfied. (James
McGuire v. The Manufacturers Life Insurance Co., G.R. No. L-3581. September 21, 1950)

Where a life insurance policy lapsed, and as compliance with the conditions for reinstatement of
the policy, the insured paid only part of the overdue premium, the failure to pay the balance of the
overdue premium prevented the reinstatement said policy and thereafter the recovery therefrom.
(Andres vs. Crown Life Ins. Co., G.R. No. L-10875, January 28, 1958)

5. Refund of Premiums

Great Pacific should have informed Cortez of the deadline for paying the first premium before or at
least upon delivery of the policy to him, so he could have complied with what was needful and
would not have been misled into believing that his life and his family were protected by the policy,
when actually they were not. And, if the premium paid by Cortez was unacceptable for being late, it
was the company's duty to return it. By accepting his premiums without giving him the
corresponding protection, Great Pacific acted in bad faith and since his policy was in fact
inoperative or ineffectual from the beginning, the company was never at risk, hence, it is not
entitled to keep the premium. (Great Pacific Life Insurance Corporation vs. Court of Appeals, et al.,
G.R. No. L-57308, April 23, 1990)

G. Rescission of Insurance Contracts

a. Concealment

Where the applicant, in apparent bad faith, withheld the fact material to the risk to be assumed by
the insurance company, the latter is entitled to rescind the contract of insurance. The contract of
insurance is one of perfect good faith, not for the insured alone but equally so for the insurer.
Where there is concealment or a neglect to communicate that which a party knows and ought to
communicate, whether intentional or unintentional, rescission is available as a remedy to the
insurer. (Great Pacific Life Assurance Company vs. Honorable Court of Appeals, G.R. No. L-31845.
April 30, 1979)
Concealment exists where the assured had knowledge of a fact material to the risk, and honesty,
good faith, and fair dealing requires that he should communicate it to the assurer, but he
designedly and intentionally withholds the same. In the absence of evidence that the insured had
sufficient medical knowledge as to enable him to distinguish between "peptic ulcer" and "a tumor",
his statement that said tumor was "associated with ulcer of the stomach, " should be construed as
an expression made in good faith of his belief as to the nature of his ailment and operation. (Ng
Gan Zee vs. Asian Crusader Life Assurance Corporation, G.R. No. L-30685, May 30, 1983)

Where the insured is specifically required to disclose to the insurer any other insurance and its
particulars which he may have effected on the same subject matter, the knowledge of such
insurance by the insurer's agents, even assuming the acquisition thereof by the former, is not the
"notice" that would estop the insurers from denying the claim. Obligations arising from contracts
have the force of law between the contracting parties and should be complied with in good faith.
(New Life Enterprises and Julian Sy vs. Court of Appeals, et al., G.R. No. 94071, March 31, 1992)

Where the insured is specifically required to disclose to the insurer matters relating to his health,
the insured's failure to disclose the fact that he was hospitalized for two weeks prior to filing his
application for insurance, raises grave doubts about his bona fides. Materiality is to be determined
not by the event, but solely by the probable and reasonable influence of the facts upon the party to
whom communication is due, in forming his estimate of the disadvantages of the proposed contract
or in making his inquiries. (Sunlife Assurance Company of Canada vs. The Court of Appeals, et al.,
G.R. No. 105135, June 22, 1995)

In group insurance, there is no medical examination required. But if in group insurance an

application form requires an answer to previous sickness, and that is falsely denied, then there is
concealment. (Saturnino v. Phil-Am Life, 7 SCRA 316, 1963)

One who solicits insurance is an underwriter and not an agent of the insurance company. If insurer
appoints a general agent, then such agent can bind the company by virtue of the written
appointment. On the other hand, an underwriter who fills up a policy with false answers and later
insured signs the policy, the false answers become the insured’s own answer because he signed the
policy. (Soliman v. U.S. Life, 104 Phil. 1046, 1958)

b. Misrepresentation/Omissions

When the insured signed the pension plan application, he adopted as his own the written
representations and declarations embodied in it. It is clear from these representations that he
concealed his chronic heart ailment and diabetes. He cannot sign the application and disown the
responsibility for having it filled up. Thus, the insurance company had every right to act on the faith
of that certification. (Ma. Lourdes s. Florendo vs. Philam Plans, Inc., et al., G.R. No. 186983,
February 22, 2012)

By virtue of the “incontestability clause”, the insurer has two years from the date of issuance of the
insurance contract or of its last reinstatement within which to contest the policy, whether or not,
the insured still lives within such period. After two years, the defenses of concealment or
misrepresentation, no matter how patent or well founded, no longer lie. Considering that the
insured died before the two-year period had lapsed, Phil-Am Insurance is not, therefore, barred
 from proving that the policy is void ab initio by reason of the insured’s fraudulent concealment or
misrepresentation. (Emilio Tan vs. The Court of Appeals, G.R. No. 48049. June 29, 1989)

The "Incontestability Clause" under Section 48 of the Insurance Code provides that an insurer is
given two years – from the effectivity of a life insurance contract and while the insured is alive – to
discover or prove that the policy is void ab initio or is rescindible by reason of the fraudulent
concealment or misrepresentation of the insured or his agent. After the two-year period lapses, or
when the insured dies within the period, the insurer must make good on the policy, even though
the policy was obtained by fraud, concealment, or misrepresentation. (Manila Bankers Life
Insurance Corporation vs. Cresencia p. Aban, G.R. No. 175666, July 29, 2013)

c. Breach of Warranties

The insurance company is barred by waiver (or rather estoppel) to claim violation of the so-called
fire hydrants warranty, for the reason that knowing fully all that the number of hydrants demanded
therein never existed from the very beginning, the insurance company nevertheless issued the
policies in question subject to such warranty, and received the corresponding premiums. It would
be perilously close to conniving at fraud upon the insured to allow insurance company to claim now
as void ab initio the policies that it had issued to the plaintiff without warning of their fatal defect,
of which it was informed, and after it had misled the defendant into believing that the policies were
effective. (Qua Chee Gan v. Law Union, 98 Phil 85, 1955)

An alteration in the use or condition of a thing insured from that to which it is limited by the policy
made without the consent of the insurer, by means within the control of the insured, and increasing
the risks, entitles an insurer to rescind a contract of fire insurance. (Malayan Insurance Company,
Inc. vs. Pap Co., Ltd., G.R. No. 200784, August 7, 2013)

H. Claims Settlement and Subrogation

Where the insurance policy clearly and categorically placed PCSI's liability for all damages arising
out of death or bodily injury sustained by one person as a result of any one accident at P12,000.00
and under the law prevailing, P.D. 612, the minimum liability is P12,000 per passenger, the
stipulation regarding PCSI’s liability under the insurance contract not being less than P12,000.00,
and therefore not contrary to law, morals, good customs, public order or public policy, must be
upheld as effective, valid and binding as between the parties. (Perla Compania De Seguros, Inc. vs.
Court of Appeals, G.R. No. 78860, May 28, 1990)

1. Notice and Proof of Loss

The Insurance Code provides that a policy may declare that a violation of specified provisions
thereof shall avoid it. Thus, in fire insurance policies, which contain provisions such as Condition No.
15 of the insurance policy, a fraudulent discrepancy between the actual loss and that claimed in the
proof of loss voids the insurance policy. Mere filing of such a claim will exonerate the insurer.
(United Merchants Corporation vs. Country Bankers Insurance Corporation, G.R. No. 198588, July
11, 2012)

A perusal of the records shows that Usiphil Incorporated, after the occurrence of the fire,
immediately notified Finman Gen. Assurance thereof. Thereafter, Usiphil Incorporated submitted
the following documents: (1) Sworn Statement of Loss and Formal Claim and; (2) Proof of Loss. The
 submission of these documents, constitutes substantial compliance. Indeed, as regards the
submission of documents to prove loss, substantial, not strict as urged by Finman Gen. Assurance,
compliance with the requirements will always be deemed sufficient. (Finman Gen. Assurance vs.
Court of Appeals, 361 SCRA 214, 2001)

Plaintiff's verified claim totalled P31,860.85, of which, in accordance with the terms of the policy,
three-fourths was asked, or P23,895.64. Dependant's inventory of the goods found after the fire
came to P13,113. The difference between plaintiff's claim and defendant's estimate of the loss,
which was confirmed in the trial court, was P18,747.85. In connection with these figures plaintiff
suggests too low a valuation by the representatives of the defendant. Computed at plaintiff's
valuation, the goods inventoried by the defendant's committee would amount to P19,346.30. There
would, however, still remain a considerable void between the two amounts, of P12.514.55. In this
case, the difference under one hypothesis is about 50 per cent, and under another hypothesis,
about 25 per cent. Still that constitutes a serious discrepancy between the true value of the
property and that sworn to in the proofs of loss, and is an outstanding fact to be considered as
bearing upon the presence of fraud. It is more than an honest misstatement, more than
inadvertence or mistake, more than a mere error in opinion, more than a slight exaggeration, and in
connection with all the surrounding circumstances, discloses a material overvaluation made
intentionally and willfully. The insured cannot therefore recover. (Tan It v. Sun Insurance, 51 Phil.
212, 1927)

2. Guidelines on Claims Settlement

a. Unfair Claims Settlement; Sanctions

b. Prescription of Action

There is absolutely nothing in the law which mandates that the two periods prescribed in Section
384 of the Insurance Code—that is, the six-month period for filing the notice of claim and the one-
year period for bringing an action or suit must always concur. On the contrary, it is very clear that
the one-year period is only required “in proper cases.” The one-year period should instead be
counted from the date of rejection by the insurer as this is the time when the cause of action
accrues. Since in the case at hand, there has yet been no accrual of cause of action, prescription has
not yet set in. This is because, before such final rejection, there was no real necessity for bringing
suit. (Summit Guaranty And Insurance Company, Inc. vs. Hon. Jose C. De Guzman, in his capacity
as Presiding Judge of Branch III, CFI of Tarlac, et al., G.R. No. L-50997, June 30, 1987)

In case the claim was denied by the insurer but the insured filed a petition for reconsideration, the
prescriptive period should be counted from the date the claim was denied at the first instance by
the insurance company and not from the denial of the reconsideration (Sun Life Office, Ltd. vs.
Court of Appeals, GR. No. 89741, Mar 13, 1991)

Where the delay in bringing the suit against the insurance company was not caused by the insured
or its subrogee but by the insurance company itself, it is unfair to penalize the insured or its
subrogee by dismissing its action against the insurance company on the ground of prescription. To
prevent the insurance company from evading its responsibility to the insured through this clever
scheme, and to protect the insuring public against similar acts by other insurance companies, the
one-year period under Section 384 should be counted not from the date of the accident but from
the date of the rejection of the claim by the insurer. It is only from the rejection of the claim by the
insurer that the insured’s cause of action accrued since a cause of action does not accrue until the
party obligated refuse, expressly or impliedly, to comply with its duty. (Country Bankers Insurance
Corp., vs. The Travellers Insurance and Surety Corp., et al., G.R. No. 82509, August 16, 1989)

c. Subrogation

Payment by the insurer to the assured operates as an equitable assignment to the former of all
remedies which the latter may have against the third party whose negligence or wrongful act
caused the loss. There are a few recognized exceptions to this rule. For instance, if the assured by
his own act releases the wrongdoer or third party liable for the loss or damage, from liability, the
insurer’s right of subrogation is defeated. Similarly, where the insurer pays the assured the value of
the lost goods without notifying the carrier who has in good faith settled the assured’s claim for
loss, the settlement is binding on both the assured and the insurer, and the latter cannot bring an
action against the carrier on his right of subrogation . And where the insurer pays the assured for a
loss which is not a risk covered by the policy, thereby effecting “voluntary payment”, the former has
no right of subrogation against the third party liable for the loss. (Pan Malayan Insurance
Corporation vs. Court Of Appeals, et al., G.R. No. 81026, April 3, 1990)

The payment by the insurer to the assured operates as an equitable assignment of all remedies the
assured may have against the third party who caused the damage. Subrogation is not dependent
upon, nor does it grow out of, any privity of contract or upon written assignment of claim. It accrues
simply upon payment of the insurance claim by the insurer. (Aboitiz Shipping Corporation v.
Insurance Company Of North America, G.R. No. 168402, August 6, 2008; Malayan Insurance Co.,
Inc., vs. Rodelio Alberto, et al., G.R. No. 194320, February 1, 2012)

The proximate cause of the sinking of the vessel was her condition of unseaworthiness arising from
her having been top-heavy when she departed from the Port of Zamboanga. Since the vessel was
unseaworthy with reference to the cargo, there was therefore a breach of warranty of
seaworthiness that rendered the assured not entitled to the payment of its claim under the policy.
Hence, when PhilAmGen paid the claim of the bottling firm there was in effect a “voluntary
payment” and no right of subrogation accrued in its favor. In other words, when PhilAmGen paid it
did so at its own risk. (The Philippine American General Insurance Company, Inc., vs. Court of
Appeals, et al., G.R. No. 116940, June 11, 199)

As the insurer, Fireman's Fund is entitled to go after the person or entity that violated its
contractual commitment to answer for the loss insured against.. Upon payment of the loss, the
insurer is entitled to be subrogated pro tanto to any right of action which the insured may have
against the third person whose negligence or wrongful act caused the loss. When the insurance
company pays for the loss, such payment operates as an equitable assignment to the insurer of the
property and all remedies which the insured may have for the recovery thereof. (Fireman’s Fund
Insurance Copany vs. Jamila & Company, Inc., G.R. No. L-27427, April 7, 1976)

St. Paul, as insurer, after paying the claim of the insured for damages under the insurance, is
subrogated merely to the rights of the assured. As subrogee, it can recover only the amount that is
recoverable by the latter. Since the right of the assured, in case of loss or damage to the goods, is
limited or restricted by the provisions in the bill of lading, a suit by the insurer as subrogee
necessarily is subject to like limitations and restrictions. (St. Paul Fire & Marine Insurance Co. vs.
Macondray & Co., Inc., et al., G.R. No. L-27796, March 25, 1976)
 When Manila Mahogany executed a release claim discharging San Miguel Corporation from all
actions, claims, demands and rights of action arising out of or as a consequence of the accident
after the insurer had paid the proceeds of the policy, the insurer is entitled to recover from the
insured the amount of insurance money paid. Since the insurer can be subrogated to only such
rights as the insured may have, should the insured, after receiving payment from the insurer,
release the wrongdoer who caused the loss, the insurer loses his rights against the wrongdoer. But
in such a case, the insurer will be entitled to recover from the insured whatever it has paid to the
latter, unless the release was made with the consent of the insurer. (Manila Mahogany
Manufacturing Corporation vs. Court of Appeals, G.R. No. L-52756, October 12, 1987)

The presentation in evidence of the marine insurance policy is not indispensable before the insurer
may recover from the common carrier the insured value of the lost cargo in the exercise of its
subrogatory right. The subrogation receipt, by itself, is sufficient to establish not only the
relationship of American Home as insurer and Caltex, as the assured shipper of the lost cargo of
industrial fuel oil, but also the amount paid to settle the insurance claim. The right of subrogation
accrues simply upon payment by the insurance company of the insurance claim. (Delsan Transport
Lines, Inc. vs. Court of Appeals, et al., G.R. No. 127897, November 15, 2001)

The insurer, upon happening of the risk "insured" against and after payment to the insured, is
subrogated to the rights and cause of action of the latter. As such, the insurer has the right to seek
reimbursement for all the expenses paid. However, in a contract of carriage involving the shipment
of knock-down auto parts of Nissan motor vehicles which were allegedly lost and destroyed, the
insurer was not properly subrogated because of the non-presentation of any marine insurance
policy. The submission of a marine risk note instead of the insurance policy doesn't satisfy the
requirement for subrogation. The marine risk note is not an insurance policy. It is only an
acknowledgment or declaration of the insurer confirming the specific shipment covered by its
marine open policy, the evaluation of the cargo and the chargeable premium. (Eastern Shipping
Lines, Inc. vs. Prudential Guarantee and Assurance, Inc., G.R. No. 174116, September 11, 2009)

V. Transportation Laws

I. Transportation Laws

A. Common Carriers

There is no doubt that FPIC is a common carrier. It is engaged in the business of transporting or
carrying goods, i.e. petroleum products, for hire as a public employment. It undertakes to carry for all
persons indifferently, that is, to all persons who choose to employ its services, and transports the
goods by land and for compensation. The fact that FPIC has a limited clientele does not exclude it
from the definition of a common carrier. (First Philippine Industrial Corporation vs. Court of Appeals,
G.R. No. 125948, 29 December 1989)

Article 1732 makes no distinction between one whose principal business activity is the carrying of
persons or goods or both, and one who does such carrying only as an ancillary activity (in local Idiom
as "a sideline"). It also carefully avoids making any distinction between a person or enterprise offering
transportation service on a regular or scheduled basis and one offering such service on an occasional,
episodic or unscheduled basis. Neither does it distinguish between a carrier offering its services to the
"general public," i.e., the general community or population, and one who offers services or solicits
 business only from a narrow segment of the general population. (Pedro De Guzman vs. Court of
Appeals, G. R. No. L-47822, 22 December 1988).

Article 1732 does not distinguish between one whose principal business activity is the carrying of
goods and one who does such carrying only as an ancillary activity. The contention of Sanchez
Brokerage that it is not a common carrier but a customs broker whose principal function is to prepare
the correct customs declaration and proper shipping documents as required by law is bereft of merit.
It suffices that Sanchez Brokerage undertakes to deliver the goods for pecuniary consideration. (A.F.
Sanchez Brokerage Inc. vs. The Hon. Court of Appeals, G.R. No. 147079, 21 December 2004)

There is no dispute that Cebu Salvage was a common carrier. At the time of the loss of the cargo, it
was engaged in the business of carrying and transporting goods by water, for compensation, and
offered its services to the public. Cebu Salvage was the one which contracted with MCCII for the
transport of the cargo. It had control over what vessel it would use. All throughout its dealings with
MCCII, it represented itself as a common carrier. The fact that it did not own the vessel it decided to
use to consummate the contract of carriage did not negate its character and duties as a common
carrier. The MCCII (respondent’s subrogor) could not be reasonably expected to inquire about the
ownership of the vessels which petitioner carrier offered to utilize. As a practical matter, it is very
difficult and often impossible for the general public to enforce its rights of action under a contract of
carriage if it should be required to know who the actual owner of the vessel is. In fact, in this case, the
voyage charter itself denominated Cebu Salvage as the "owner/operator" of the vessel. (Cebu Salvage
Corporation vs. Philippine Home Assurance Corporation, G.R. No. 150403, January 25, 2007)

Much of the distinction between a “common or public carrier” and a ”private or special carrier” lies in
the character of the business, such that if the undertaking is an isolated transaction, not a part of the
business or occupation, and the carrier does not hold itself out to carry the goods for the general
public or to a limited clientele, although involving the carriage of goods for a fee, the person or
corporation providing such service could very well be just a private carrier. (Philippine American
General Insurance Company vs. Pks Shipping Company, G.R. No. 149038, 9 April 2003)

In a contract of private carriage, the parties may validly stipulate that responsibility for the cargo rests
solely on the charterer, exempting the shipowner from liability for loss of or damage to the cargo
caused even by the negligence of the ship captain. Pursuant to Article 1306 of the Civil Code, such
stipulation is valid because it is freely entered into by the parties and the same is not contrary to law,
morals, good customs, public order, or public policy. Unlike in a contract involving a common
carrier, private carriage does not involve the general public. Hence, the stringent provisions of the
Civil Code on common carriers protecting the general public cannot justifiably be applied to a ship
transporting commercial goods as a private carrier. (Valenzuela Hardwood And Industrial Supply, Inc.
vs. Court of Appeals, G.R. No. 102316, 30 June 1997)

1. Diligence Required of Common Carriers

Under Article 1733 of the 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 passengers transported by them according to all circumstances of each case.
Thus, under Article 1735 of the same Code, in all cases other than those mentioned in Article 1734
thereof, the common carrier shall be presumed to have been at fault or to have acted negligently,
unless it proves that it has observed the extraordinary diligence required by law. More importantly,
common carriers cannot limit their liability for injury or loss of goods where such injury or loss was
 caused by its own negligence. Otherwise stated, the law on averages under the Code of Commerce
cannot be applied in determining liability where there is negligence. (American Home Assurance
Company vs. The Court of Appeals, G.R. No. 94149, 5 May 1992)

Article 1736 of the Civil Code imposes upon common carriers the duty to observe extraordinary
diligence from the moment the goods are unconditionally placed in their possession "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. However, in the bills of lading issued for the cargoes in question, the parties
agreed to limit the responsibility of the carrier for the loss or damage by inserting a stipulation stating
that the carrier shall not be responsible for loss or damage to shipments billed 'owner's risk' unless
such loss or damage is due to negligence of carrier. Since such stipulation is valid, and there is nothing
therein that is contrary to law, morals or public policy, the absence of negligence on the part of its
employees exempt the carrier from liability for loss of goods due to fire. (Amparo C. Servando, Clara
Uy Bico vs. Philippine Steam Navigation Co., G.R. No. L-36481-2, 23 October 1982)

A common carrier is presumed at fault in the absence of a satisfactory explanation on how the
airplane crash occured. (Vda. De Abeto vs. Philippine Air Lines, Inc. 115 SCRA 489, 1982)

2. Liabilities of Common Carriers

If a railroad company maintains a signaling device at a crossing to give warning of the approach of a
train, the failure of the device to operate is generally held to be evidence of negligence, which may be
considered with all the circumstances of the case in determining whether the railroad company was
negligent as a matter of fact. (Victorino Cusi and Pilar Pobre vs. Philippine National Railways, G.R.
No. L-29889, 31 May 1979).

For a vessel to be seaworthy, it must be adequately equipped for the voyage and manned with a
sufficient number of competent officers and crew. The failure of a common carrier to maintain in
seaworthy condition its vessel involved in a contract of carriage is a clear breach of its duty prescribed
in Article 1755 of the Civil Code. (Loadstar Shipping Co., Inc. vs. Court of Appeals, G.R. No. 131621,
September 28, 1999)

The foundation of LRTA’s liability is the contract of carriage and its obligation to indemnify the victim
arises from the breach of that contract by reason of its failure to exercise the high diligence required
of the common carrier. In the discharge of its commitment to ensure the safety of passengers, a
carrier may choose to hire its own employees or avail itself of the services of an outsider or an
independent firm to undertake the task. In either case, the common carrier is not relieved of its
responsibilities under the contract of carriage. (Light Rail Transit Authority & Rodolfo Roman vs.
Marjorie Navidad, G.R. No. 145804, 6 February 2003)

The "kabit system" is an arrangement whereby a person who has been granted a certificate of
convenience allows another person who owns motors vehicles to operate under such franchise for a
fee. A certificate of public convenience is a special privilege conferred by the government. Although
not outrightly penalized as a criminal offense, the "kabit system" is invariably recognized as being
contrary to public policy and, therefore, void and inexistent under Article 1409 of the Civil Code. (Lita
Enterprises, Inc. vs. Intermediate Appellate Court, G.R. No. L-64693, 27 April 1984)

It is settled in our jurisprudence that only the registered owner of a public service vehicle is
responsible for damages that may arise from consequences incident to its operation, or maybe
caused to any of the passengers therein. (Victor Juaniza vs. Eugenio Jose, G.R. No.L-50127-28, 30
March 1979)

In dealing with vehicles registered under the Public Service Law, the public has the right to assume
that the registered owner is the actual or lawful owner thereof. It would be very difficult and often
impossible as a practical matter, for members of the general public to enforce the rights of action that
they may have for injuries inflicted by the vehicles being negligently operated if they should be
required to prove who the actual owner is. (Ma. Luisa Benedicto vs. Hon. Intermediate Appellate
Court, G.R. No. 70876, 19 July 1990)

While the registered owner or operator of a passenger vehicle is jointly and severally liable with the
driver of the said vehicle for damages incurred by passengers or third persons as a consequence of
injuries or death sustained in the operation of the said vehicle, the registered owner or operator has
the right to be indemnified by the real or actual owner of the amount that he may be required to pay
as damage for the injury caused. The right to be indemnified being recognized, recovery by the
registered owner or operator may be made in any form-either by a cross-claim, third-party complaint,
or an independent action. (Angel Jereos vs. Hon. Court of Appeals, G.R. No. L-48747, 30 September
1982)

In an action based on quasi delict, the registered owner of a motor vehicle is solidarily liable for the
injuries and damages caused by the negligence of the driver, in spite of the fact that the vehicle may
have already been the subject of an unregistered Deed of Sale in favor of another person. Unless
registered with the Land Transportation Office, the sale -- while valid and binding between the parties
-- does not affect third parties, especially the victims of accidents involving the said transport
equipment. (Equitable Leasing Corporation vs. Lucita Suyom et al., G.R. No. 143360, 5 September
2002)

The principle of last clear chance only applies in a suit between the owners and drivers of two
colliding vehicles. It does not arise where a passenger demands responsibility from the carrier to
enforce its contractual obligations, for it would be inequitable to exempt the negligent driver and its
owner on the ground that the other driver was likewise guilty of negligence. (William Tiu, doing
business under the name and style of “D’ Rough Riders,” vs. Pedro A. Arriesgado, G.R. No. 138060,
1 September 2004)

When an airline issues a ticket to a passenger confirmed on a particular flight, on a certain date, a
contract of carriage arises, and the passenger has every right to expect that he would fly on that flight
and on that date. If he does not, then the carrier opens itself to a suit for breach of contract of
carriage. Where an airline had deliberately overbooked, it took the risk of having to deprive some
passengers of their seats in case all of them would show up for the check in. For the indignity and
inconvenience of being refused a confirmed seat on the last minute, said passenger is entitled to an
award of moral damages. (Spouses Cesar & Suthira Zalamea vs. Court of Appeals, G.R. No. 104235
November 18, 1993)

In an action for breach of contract of carriage, the aggrieved party does not have to prove that the
common carrier was at fault or was negligent. All that is necessary to prove is the existence of the
contract and the fact of its non-performance by the carrier. (Singapore Airlines Limited vs.
Fernandez, G.R. No. 142305, December 10, 2003)
 It is PAL’s duty to provide assistance to Spouses Miranda and, for that matter, any other passenger
similarly inconvenienced due to delay in the completion of the transport and the receipt of their
baggage. Therefore, its unilateral and voluntary act of providing cash assistance is deemed part of its
obligation as an air carrier, and is hardly anything to rave about. (Philippine Airlines, Inc., vs. Court of
Appeals, G.R. No. 119641, May 17, 1996)

Assuming arguendo that the airline passengers have no vested right to these amenities in case a flight
is cancelled due to force majeure, what makes PAL liable for damages in this particular case and under
the facts obtaining herein is its blatant refusal to accord the so-called amenities equally to all its
stranded passengers who were bound for Surigao City. No compelling or justifying reason was
advanced for such discriminatory and prejudicial conduct. The refund of hotel expenses was
surreptitiously and discriminatorily made by PAL since the same was not made known to everyone,
except through word of mouth to a handful of passengers. This is a sad commentary on the quality of
service and professionalism of an airline company, which is the country’s flag carrier at that. The
discriminatory act of PAL against Pantejo ineludibly makes the former liable for moral damages under
Article 21 in relation to Article 2219 (10) of the Civil Code. (Philippine Airlines, Inc. vs. Court of
Appeals, G.R. No. 120262, July 17, 1997)

Cathay’s contention that there was no contract of carriage that was breached because Singson’s ticket
was open-dated is untenable. To begin with, the round trip ticket issued by the carrier to the
passenger was in itself a complete written contract by and between the carrier and the passenger. It
had all the elements of a complete written contract, to wit: (a) the consent of the contracting parties
manifested by the fact that the passenger agreed to be transported by the carrier to and from Los
Angeles via San Francisco and Hongkong back to the Philippines, and the carrier’s acceptance to bring
him to his destination and then back home; (b) cause or consideration, which was the fare paid by the
passenger as stated in his ticket; and, (c) object, which was the transportation of the passenger from
the place of departure to the place of destination and back, which are also stated in his ticket. Clearly
therefore Singson was not a mere "chance passenger with no superior right to be boarded on a
specific flight," as erroneously claimed by Cathay and sustained by the Court of Appeals. (Carlos
Singson vs. Court of Appeals, G.R. No. 119995, November 18, 1997)

Spouses Vazquez had every right to decline the upgrade and insist on the Business Class
accommodation they had booked for and which was designated in their boarding passes. They
clearly waived their priority or preference when they asked that other passengers be given the
upgrade. It should not have been imposed on them over their vehement objection. By insisting on
the upgrade, Cathay breached its contract of carriage with Spouses Vazquez. (Cathay Pacific Airways,
Ltd., vs. Spouses Daniel Vazquez And Maria Luisa Madrigal Vazquez, G.R. No. 150843, March 14,
2003)

When an airline issues a ticket to a passenger, confirmed for a particular flight on a certain date, a
contract of carriage arises. The passenger has every right to expect that he be transported on that
flight and on that date, and it becomes the airline’s obligation to carry him and his luggage safely to
the agreed destination without delay. If the passenger is not so transported or if in the process of
transporting, he dies or is injured, the carrier may be held liable for a breach of contract of carriage.
(Philippine Airlines Inc. vs. Court of Appeals, G.R. No. 123238, September 22, 2008)

B. Vigilance over Goods

1. Exempting Causes
a. Requirement of Absence of Negligence

It is a well known physical fact that cars may skid on greasy or slippery roads, as in the instant case,
without fault on account of the manner of handling the car. Skidding means partial or complete loss
of control of the car under circumstances not necessarily implying negligence. It may occur without
fault. (Saturnino Bayasen vs. Court of Appeals, G.R. No.L-25785, 26 February 1981)

A fortuitous event is possessed of the following characteristics: (a) the cause of the unforeseen and
unexpected occurrence, or the failure of the debtor to comply with his obligations, must be
independent of human will; (b) it must be impossible to foresee the event which constitutes the caso
fortuito, or if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be such as to
render it impossible for the debtor to fulfill his obligation in a normal manner; and (d) the obligor
must be free from any participation in the aggravation of the injury resulting to the creditor. Under
the circumstances of this case, the explosion of the new tire may not be considered a fortuitous
event. There are human factors involved in the situation. The fact that the tire was new did not imply
that it was entirely free from manufacturing defects or that it was properly mounted on the
vehicle. Neither may the fact that the tire bought and used in the vehicle is of a brand name noted
for quality, resulting in the conclusion that it could not explode within five days’ use. (Alberta Yobido
vs. Court of Appeals, G.R. No. 113003, 17 October 1997)

In order that a common carrier may be absolved from liability in case of force majeure, it is not
enough that the accident was caused by force majeure. The common carrier must still prove that it
was not negligent in causing the injuries resulting from such accident. Considering that the bus driver
did not immediately stop the bus at the height of the commotion; the bus was speeding from a full
stop; the victims fell from the bus door when it was opened or gave way while the bus was still
running; the conductor panicked and blew his whistle after people had already fallen off the bus; and
the bus was not properly equipped with doors in accordance with law - it is clear that Bachelor and
Rivera have failed to overcome the presumption of fault and negligence found in the law governing
common carriers. (Bachelor Express, Incorporated vs. The Honorable Court of Appeals (Sixth
Division), G.R. No. 85691, 31 July 1990)

Mechanical defects in the carrier are not considered a caso fortuito that exempts the carrier from
responsibility. Even granting arguendo that the engine failure was a fortuitous event, when the vessel
finally left the port of Cebu, there was no longer any force majeure that justified by-passing a port of
call. The "interruption" was caused by the captain upon instruction of management, hence, the
owner of the vessel and the ship agent shall be civilly liable for the acts of the captain. (Sweet Lines,
Inc. vs. The Honorable Court of Appeals, Micaela b. Quintos, et al., G.R. No. L-43640, 28 April 1983)

A mishap caused by defective brakes can not be consideration as fortuitous in character. Certainly, the
defects were curable and the accident preventable. (Vicente Vergara vs. The Court of Appeals, G.R.
No. 77679, 30 September 1987)

The intervention of the municipal officials was not In any case, of a character that would render
impossible the fulfillment by the carrier of its obligation. Ganzon was not duty bound to obey the
illegal order to dump into the sea the scrap iron. Moreover, there is absence of sufficient proof that
the issuance of the same order was attended with such force or intimidation as to completely
overpower the will of the petitioner's employees. The mere difficulty in the fulfillment of the
 obligation is not considered force majeure. (Mauro Ganzon vs. Court of Appeals, G.R. no. L-48757, 30
May 1988)

Despite the report of Philippine Constabulary agent Generalao that the Maranaos were going to
attack its buses, Fortune took no steps to safeguard the lives and properties of its passengers. The
seizure of the bus of the Fortune was foreseeable and, therefore, was not a fortuitous event which
would exempt petitioner from liability. (Fortune Express, Inc. vs. Court of Appeals, G.R. No. 119756,
18 March 1999)

Indeed, the typhoon was an inevitable occurrence, yet, having been kept posted on the course of the
typhoon by weather bulletins at intervals of six hours, the captain and crew were well aware of the
risk they were taking as they hopped from island to island. In so doing, they failed to observe that
extraordinary diligence required of them explicitly by law. (Pedro Vasquez, et al., vs. The Court of
Appeals, G.R. No. L-42926, 13 September 1985)

Loadstar was at fault or negligent in not maintaining a seaworthy vessel and in having allowed its
vessel to sail despite knowledge of an approaching typhoon. In any event, it did not sink because of
any storm that may be deemed as force majeure, inasmuch as the wind condition in the area where it
sank was determined to be moderate. Since it was remiss in the performance of its duties, Loadstar
cannot hide behind the “limited liability” doctrine to escape responsibility for the loss of the vessel
and its cargo. (Loadstar Shipping Co., Inc. vs. Court of Appeals, G.R. No. 131621, 28 September
1999)

Negligence is conduct that creates undue risk of harm to another. It is the failure to observe that
degree of care, precaution and vigilance that the circumstances justly demand, whereby that other
person suffers injury. Petitioner’s vessel was carrying chemical cargo—alkyl benzene and methyl
methacrylate monomer. While knowing that their vessel was carrying dangerous inflammable
chemicals, its officers and crew failed to take all the necessary precautions to prevent an accident.
Petitioner was, therefore, negligent. (Smith Bell Dodwell Shipping Agency Corporation vs. Catalino
Borja, G.R. No. 143008. June 10, 2002)

b. Absence of Delay

The oft-repeated rule regarding a carrier's liability for delay is that in the absence of a special
contract, a carrier is not an insurer against delay in transportation of goods. When a common carrier
undertakes to convey goods, the law implies a contract that they shall be delivered at destination
within a reasonable time, in the absence, of any agreement as to the time of delivery. But where a
carrier has made an express contract to transport and deliver property within a specified time, it is
bound to fulfill its contract and is liable for any delay, no matter from what cause it may have arisen.
This result logically follows from the well-settled rule that where the law creates a duty or charge, and
the party is disabled from performing it without any default in himself, and has no remedy over, then
the law will excuse him, but where the party by his own contract creates a duty or charge upon
himself, he is bound to make it good notwithstanding any accident or delay by inevitable necessity
because he might have provided against it by contract. Whether or not there has been such an
undertaking on the part of the carrier to be determined from the circumstances surrounding the case
and by application of the ordinary rules for the interpretation of contracts. (Aniceto Saludo, Jr. vs.
Hon. Court of Appeals, G.R. No. 95536, March 23, 1992).
 Petitioner's late delivery of the baggage for eleven (11) days was not motivated by ill will or bad faith.
In fact, it immediately coordinated with its Central Baggage Services to trace private respondent's
suitcase and succeeded in finding it. Under the circumstances, considering that petitioner's actuation
was not attendant with bad faith, the award of moral damages is unfair. (Philippine Air Lines vs.
Florante Miano, G.R. No. 106664, March 8, 1995).

c. Due Diligence to Prevent or Lessen the Loss

The rule is that if the improper packing or, in this case, the defect/s in the container, is/are known to
the carrier or his employees or apparent upon ordinary observation, but he nevertheless accepts the
same without protest or exception notwithstanding such condition, he is not relieved of liability for
damage resulting therefrom. In this case, Calvo accepted the cargo without exception despite the
apparent defects in some of the container vans. Hence, for failure of Calvo to prove that she exercised
extraordinary diligence in the carriage of goods in this case or that she is exempt from liability, the
presumption of negligence as provided under Art. 1735 holds. (Virgines Calvo doing business under
the name and style Transorient Container Terminal Services, Inc. vs. Ucpb General Insurance Co.,
Inc., G.R. No. 148496, 19 March 2002)

While it may be true that the tire that blew-up was still good because the grooves of the tire were still
visible, this fact alone does not make the explosion of the tire a fortuitous event. No evidence was
presented to show that the accident was due to adverse road conditions or that precautions were
taken by the Camoro to compensate for any conditions liable to cause accidents. The sudden blowing-
up, therefore, could have been caused by too much air pressure injected into the tire coupled by the
fact that the jeepney was overloaded and speeding at the time of the accident. (Roberto Juntilla vs.
Clemente Fontanar, G.R. No. L-45637, 31 May 1985)

Immediately before the collision, Llamoso was actually violating the following traffic rules and
regulations. Thus, a legal presumption arose that Llamoso was negligent, a presumption KBL was
unable to overthrow. (Kapalaran Bus Line vs. Angel Coronado, G.R. No. 85331, 25 August 1989)

Even if the weather encountered by the ship is to be deemed a natural disaster under Article 1739 of
the Civil Code, Central Shipping failed to show that such natural disaster or calamity was the
proximate and only cause of the loss. Human agency must be entirely excluded from the cause of
injury or loss. In other words, the damaging effects blamed on the event or phenomenon must not
have been caused, contributed to, or worsened by the presence of human participation. Hence, if a
common carrier fails to exercise due diligence - or that ordinary care that the circumstances of the
particular case demand, to prevent or minimize the loss before, during and after the occurrence of
the natural disaster, the carrier shall be deemed to have been negligent. (Central Shipping Company,
Inc., vs. Insurance Company of North America, G.R. No. 150751, September 20, 2004)

2. Contributory Negligence

Where he contributes to the principal occurrence, as one of its determining factors, he can not
recover. Where, in conjunction with the occurrence, he contributes only to his own injury, he may
recover the amount that the defendant responsible for the event should pay for such injury, less a
sum deemed a suitable equivalent for his own imprudence. (M. H. Rakes vs. The Atlantic Gulf and
Pacific Company, G.R. No. 1719, January 23, 1907).

3. Duration of Liability
a. Delivery of Goods to Common Carrier

By the said act of delivery, the scraps were unconditionally placed in the possession and control of the
common carrier, and upon their receipt by the carrier for transportation, the contract of carriage was
deemed perfected. Consequently, the petitioner-carrier's extraordinary responsibility for the loss,
destruction or deterioration of the goods commenced. Pursuant to Art. 1736, such extraordinary
responsibility would cease only upon the delivery, actual or constructive, by the carrier to the
consignee, or to the person who has a right to receive them. The fact that part of the shipment had
not been loaded on board the lighter did not impair the said contract of transportation as the goods
remained in the custody and control of the carrier, albeit still unloaded. (Mauro Ganzon vs. Court of
Appeals, G.R. No. L-48757, May 30, 1988)

b. Actual or Constructive Delivery

Delivery to the customs authorities is not the delivery contemplated by Article 1736, supra, in
connection with second paragraph of Article 1498, supra, because, in such a case, the goods are then
still in the hands of the Government and their owner could not exercise dominion whatever over
them until the duties are paid. (Lu Do & Lu YM Corporation v. I.V. Binamira, G.R. No. L-9840, April 22,
1957)

The receipt of goods by the carrier has been said to lie at the foundation of the contract to carry and
deliver, and if actually no goods are received there can be no such contract. The liability and
responsibility of the carrier under a contract for the carriage of goods commence on their actual
delivery to, or receipt by, the carrier or an authorized agent and delivery to a lighter in charge of a
vessel for shipment on the vessel, where it is the custom to deliver in that way, is a good delivery and
binds the vessel receiving the freight, the liability commencing at the time of delivery to the lighter
and, similarly, where there is a contract to carry goods from one port to another, and they cannot be
loaded directly on the vessel and lighters are sent by the vessel to bring the goods to it, the lighters
are for the time its substitutes, so that the bill of landing is applicable to the goods as soon as they are
placed on the lighters. (Compañia Maritima vs. Insurance Company of North America, G.R. No. L-
18965, October 30, 1964)

c. Temporary Unloading or Storage

4. Stipulation for Limitation of Liability

a. Void Stipulations

Condition No. 14 printed at the back of the passage tickets should be held as void and unenforceable
for first, it is not just and fair to bind passengers to the terms of the conditions printed at the back of
the passage tickets, and second, Condition No. 14 subverts the public policy on transfer of venue of
proceedings of this nature, since the same will prejudice rights and interests of innumerable
passengers in different parts of the country who, under Condition No. 14, will have to file suits against
Sweet Lines only in the City of Cebu. (Sweet Lines, Inc. vs. Hon. Bernardo Teves, Presiding Judge, CFI
of Misamis Oriental, Branch VII, G.R. No. L-37750, 19 May 1978)
b. Limitation of Liability to Fixed Amount

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

The stipulation in the bill of lading limiting the common carrier's liability to the value of the goods
appearing in the bill, unless the shipper or owner declares a greater value, is valid and binding. This
limitation of the carrier's liability is sanctioned by the freedom of the contracting parties to establish
such stipulations, clauses, terms, or conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs and public policy. A stipulation fixing or limiting the sum that
may be recovered from the carrier on the loss or deterioration of the goods is valid, provided it is (a)
reasonable and just under the circumstances, and (b) has been fairly and freely agreed upon. In the
case at bar, the shipper and consignee are, therefore, bound by such stipulations. (St. Paul Fire &
Marine Insurance Co., vs. Macondray & Co, Inc., et al., G.R. No. L-27796, 25 March 1976)

A stipulation in a contract of carriage that the carrier will not be liable beyond a specified amount
unless the shipper declares the goods to have a greater value is generally deemed to be valid and will
operate to limit the carrier's liability, even if the loss or damage results from the carrier's negligence.
Pursuant to such provision, where the shipper is silent as to the value of his goods, the carrier's
liability for loss or damage thereto is limited to the amount specified in the contract of carriage and
where the shipper states the value of his goods, the carrier's liability for loss or damage thereto is
limited to that amount. Under a stipulation such as this, it is the duty of the shipper to disclose, rather
than the carrier's to demand the true value of the goods and silence on the part of the shipper will be
sufficient to limit recovery in case of loss to the amount stated in the contract of carriage. (Eastern
and Australian Steamship Co., Ltd. vs. Great American Insurance Co., G.R. No. L-37604 October 23,
1981)

5. Liability for Baggage of Passengers

a. Checked-In Baggage

Where airline passenger’s luggage was left at airline’s fault in Manila and passenger was not
adequately or properly given assistance in Hawaii to locate his luggage an award of moral damages is
proper (Pan American World Airways, Inc. vs. Intermediate Appellate Court, G.R. No. 68988. June
21, 1990)

b. Baggage in Possession of Passengers

C. Safety of Passengers

A common carrier is bound to carry its passengers safely as far as human care and foresight can
provide, using the utmost diligence of very cautious persons, with due regard to all the circumstances.
In a contract of carriage, it is presumed that the common carrier was at fault or was negligent when a
passenger dies or is injured. Unless the presumption is rebutted, the court need not even make an
express finding of fault or negligence on the part of the common carrier. This statutory presumption
may only be overcome by evidence that the carrier exercised extraordinary diligence. (Victory Liner,
Inc. vs. Rosalito Gammad, G.R. No. 159636, November 25, 2004)
 The petitioner has the obligation to transport its passengers to their destinations and to observe
extraordinary diligence in doing so. Death or any injury suffered by any of its passengers gives rise to
the presumption that it was negligent in the performance of its obligation under the contract of
carriage. (Philippine National Railways vs. The Honorable Court of Appeals, G.R. No. L-55347.
October 4, 1985)

But while petitioner failed to exercise extraordinary diligence as required by law, it appears that the
deceased was chargeable with contributory negligence. Since he opted to sit on the open platform
between the coaches of the train, he should have held tightly and tenaciously on the upright metal
bar found at the side of said platform to avoid falling off from the speeding train. Such contributory
negligence, while not exempting the PNR from liability, nevertheless justified the deletion of the
amount adjudicated as moral damages. (Philippine National Railways vs. The Honorable Court of
Appeals, G.R. No. L-55347. October 4, 1985)

It is a matter of common knowledge and experience about common carriers like trains and buses that
before reaching a station or flagstop they slow down and the conductor announces the name of the
place. It is also a matter of common experience that as the train or bus slackens its speed, some
passengers usually stand and proceed to the nearest exit, ready to disembark as the train or bus
comes to a full stop. This is especially true of a train because passengers feel that if the train resumes
its run before they are able to disembark, there is no way to stop it as a bus may be stopped. It was
negligence on the conductor’s part to announce the next flag stop when said stop was still a full three
minutes ahead. That the announcement was premature and erroneous is shown by the fact that
immediately after the train slowed down, it unexpectedly accelerated to full speed. The negligence of
petitioner-appellant in prematurely and erroneously announcing the next flag stop was the proximate
cause of the deaths of Martina Bool and Emelita Gesmundo. Any negligence of the victims was at
most contributory and does not exculpate the accused from criminal liability. (Clemente Briñas vs.
The People of the Philippines, G.R. No. L-30309. November 25, 1983)

1. Void Stipulations

2. Duration of Liability

a. Waiting for Carrier or Boarding of Carrier

A public utility bus, once it stops, is in effect making a continuous offer to bus riders. Hence, it
becomes the duty of the driver and the conductor, every time the bus stops, to do no act that would
have the effect of increasing the peril to a passenger while he was attempting to board the same. The
premature acceleration of the bus in this case was a breach of such duty. Pedrito, by stepping and
standing on the platform of the bus, is already considered a passenger and is entitled all the rights
and protection pertaining to such a contractual relation. Hence, it has been held that the duty which
the carrier passengers owes to its patrons extends to persons boarding cars as well as to those
alighting therefrom. (Dangwa Transportation Co., Inc. vs. Court of Appeals, G.R. No. 95582, 7
October 1991)
b. Arrival at Destination

Anacleto Viana was still a passenger at the time of the incident. When the accident occurred, the
victim was in the act of unloading his cargoes, which he had every right to do, from Aboitiz's vessel. A
carrier is duty bound not only to bring its passengers safely to their destination but also to afford
them a reasonable time to claim their baggage. (Aboitiz Shipping Corporation vs. Hon. Court of
Appeals, Eleventh Division, G.R. No. 884458, 6 November 1989)

It has been recognized as a rule that the relation of carrier and passenger does not cease at the
moment the passenger alights from the carrier's vehicle at a place selected by the carrier at the point
of destination, but continues until the passenger has had a reasonable time or a reasonable
opportunity to leave the carrier's premises. And, what is a reasonable time or a reasonable delay
within this rule is to be determined from all the circumstances. In the present case, the father
returned to the bus to get one of his baggages which was not unloaded when they alighted from the
bus. Raquel, the child that she was, must have followed the father. However, although the father was
still on the running board of the bus awaiting for the conductor to hand him the bag or bayong, the
bus started to run, so that even he (the father) had to jump down from the moving vehicle. It was at
this instance that the child, who must be near the bus, was run over and killed. In the circumstances,
it cannot be claimed that the carrier's agent had exercised the "utmost diligence" of a "very cautions
person" required by Article 1755 of the Civil Code to be observed by a common carrier in the
discharge of its obligation to transport safely its passengers. (La Mallorca vs. Honorable Court of
Appeals, G.R. No. L-20761, July 27, 1966)

3. Liability for Acts of Others

a. Employees

The misconduct on the part of the carrier’s employees toward a passenger gives the latter an action
for damages against the carrier. (Sabena Belgian World Airlines vs. Honorable Court of Appeals G.R.
No. 82068. March 31, 1989)

The negligence of the employee gives rise to the presumption of negligence on the part of the
employer. This is the presumed negligence in the selection and supervision of the employee. The
theory of presumed negligence, in contrast with the American doctrine of respondent superior, where
the negligence of the employee is conclusively presumed to be the negligence of the employer, is
clearly deducible from the last paragraph of Article 2180 of the Civil Code which provides that the
responsibility therein mentioned shall cease if the employers prove that they observed all the
diligence of a good father of a family to prevent damages. (Leopoldo Poblete vs. Donato Fabros, G.R.
No. L-29803, 14 September 1979)

It must be emphasized that a contract to transport passengers is quite different in kind and degree
from any other contractual relations, and this is because of the relation, which an air carrier sustains
with the public. Its business is mainly with the travelling public. It invites people to avail [themselves]
of the comforts and advantages it offers. The contract of air carriage, therefore, generates a relation
attended with a public duty. Neglect or malfeasance of the carrier’s employees naturally could give
 ground for an action for damages. (Collin A. Morris vs. Court of Appeals, G.R. No. 127957. February
21, 2001)

The basis of the carrier's liability for assaults on passengers committed by its drivers rests either on
(1) the doctrine of respondeat superior or (2) the principle that it is the carrier's implied duty to
transport the passenger safely. Under the first, which is the minority view, the carrier is liable only
when the act of the employee is within the scope of his authority and duty. It is not sufficient that the
act be within the course of employment only. Under the second view, upheld by the majority and also
by the later cases, 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. As can be gleaned from Art. 1759, the
Civil Code of the Philippines evidently follows the rule based on the second view. At least three very
cogent reasons underlie this rule: (1) the special undertaking of the carrier requires that it furnish its
passenger that full measure of protection afforded by the exercise of the high degree of care
prescribed by the law, inter alia from violence and insults at the hands of strangers and other
passengers, but above all, from the acts of the carrier's own servants charged with the passenger's
safety; (2) said liability of the carrier for the servant's violation of duty to passengers, is the result of
the formers confiding in the servant's hands the performance of his contract to safely transport the
passenger, delegating therewith the duty of protecting the passenger with the utmost care prescribed
by law; and (3) as between the carrier and the passenger, the former must bear the risk of wrongful
acts or negligence of the carrier's employees against passengers, since it, and not the passengers, has
power to select and remove them. (Antonia Maranan vs. Pascual Perez, et al, G.R. No. L-22272, June
26, 1967)

b. Other Passengers and Strangers

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. (Jose Pilapil vs. Hon. Court of Appeals, G.R.
No. 52159, 22 December 1989)

4. Extent of Liability for Damages

It is well-settled that when death occurs as a result of the commission of a crime (reckless
imprudence), the following items of damages may be recovered: (1) an indemnity for the death of the
victim; (2) an indemnity for loss of earning capacity of the deceased; (3) moral damages; (4)
exemplary damages; (5) attorney’s fees and expenses of litigation, and (6) interest in proper cases.
(Clemente Briñas vs. The People of the Philippines, G.R. No. L-30309. November 25, 1983)

Article 1764 in relation to Article 2206 of the Civil Code, holds the common carrier in breach of its
contract of carriage that results in the death of a passenger liable to pay the following: (1) indemnity
for death, (2) indemnity for loss of earning capacity, and (3) moral damages. (Victory Liner, Inc. vs.
Rosalito Gammad, G.R. No. 159636, November 25, 2004)
The Civil Code, in Article 1764 thereof, expressly makes Article 2206 applicable "to the death of a
passenger caused by the breach of contract by a common carrier." Accordingly, a common carrier is
liable for actual or compensatory damages under Article 2206 in relation to Article 1764 of the Civil
Code for deaths of its passengers caused by the breach of the contract of transportation. (Sulpicio
Lines, Inc. vs. The Honorable Court of Appeals, G.R. No. 113578, 14 July 1995)

Under Article 1764 and Article 2206 (1) of the Civil Code, the award of damages for death is
computed on the basis of the life expectancy of the deceased, not of his beneficiary. (Philippine
Airlines, Inc. vs. Hon. Court of Appeals, G.R. No. 54470. May 8, 1990)

Article 2220 of the Civil Code says that moral damages may be awarded in “breaches of contract
where the defendant acted fraudulently or in bad faith.” So, proof of infringement of an agreement by
a party, standing alone, will not justify an award of moral damages. There must, in addition, as the
law points out, be competent evidence of fraud of bad faith by that party. If the plaintiff, for instance,
fails to take the witness stand and testify as to his social humiliation, wounded feelings, anxiety, etc.,
moral damages cannot be recovered. The rules applies, of course, to common carriers. (Pan American
World Airways, Inc. vs. Intermediate Appellate Court, G.R. No. 68988. June 21, 1990)

In awarding moral damages for breach of contract of carriage, the breach must be wanton and
deliberately injurious or the one responsible acted fraudulently or with malice or bad faith. Where in
breaching the contract of carriage the defendant airline is not shown to have acted fraudulently or in
bad faith, liability for damages is limited to the natural and probable consequences of the breach of
obligation which the parties had foreseen or could have reasonably foreseen. In that case, such
liability does not include moral and exemplary damages. Moral damages are generally not
recoverable in culpa contractual except when bad faith had been proven. However, the same
damages may be recovered when breach of contract of carriage results in the death of a passenger.
The award of exemplary damages has likewise no factual basis. It is a requisite that the act must be
accompanied by bad faith or done in wanton, fraudulent or malevolent manner—circumstances
which are absent in this case. In addition, exemplary damages cannot be awarded as the requisite
element of compensatory damages was not present. (Collin A. Morris vs. Court of Appeals, G.R. No.
127957. February 21, 2001)

The rule is that moral damages are recoverable in a damage suit predicated upon a breach of contract
of carriage only where (a) the mishap results in the death of a passenger and (b) it is proved that the
carrier was guilty of fraud and bad faith even if death does not result. For having arrived at the
airport after the closure of the flight manifest, respondent’s employee could not be faulted for not
entertaining petitioners’ tickets and travel documents for processing, as the checking in of passengers
for SAS Flight SK 893 was finished. There was no fraud or bad faith as would justify the court’s award
of moral damages. (Collin A. Morris vs. Court of Appeals, G.R. No. 127957. February 21, 2001)

The law distinguishes a contractual breach effected in good faith from one attended by bad faith.
Where in breaching the contract, the defendant is not shown to have acted fraudulently or in bad
faith, liability for damages is limited to the natural and probable consequences of the breach of the
obligation and which the parties had foreseen or could reasonably have foreseen; and in that case,
such liability would not include liability for moral and exemplary damages. Under Article 2232 of the
Civil Code, in a contractual or quasi-contractual relationship, exemplary damages may be awarded
only if the defendant had acted in “a wanton, fraudulent, reckless, oppressive or malevolent manner.”
(China Airlines Limited vs. Court of Appeals, 211 SCRA 897, 1992)
 Exemplary damages may be allowed only in cases where the defendant acted in a wanton, fraudulent,
reckless, oppressive or malevolent manner, There being no evidence of fraud, malice or bad faith on
the part of petitioner, the grant of exemplary damages should be discarded. (Philippine National
Railways vs. The Honorable Court of Appeals, G.R. No. L-55347. October 4, 1985)

D. Bill of Lading

A bill of lading is a written acknowledgment of the receipt of goods and an agreement to transport
and to deliver them at a specified place to a person named or on his or her order. It operates both as
a receipt and as a contract. It is a receipt for the goods shipped and a contract to transport and
deliver the same as therein stipulated. As a receipt, it recites the date and place of shipment,
describes the goods as to quantity, weight, dimensions, identification marks, condition, quality, and
value. As a contract, it names the contracting parties, which include the consignee; fixes the route,
destination, and freight rate or charges; and stipulates the rights and obligations assumed by the
parties. (Unsworth Transport International Phils., Inc. vs. Court of Appeals, G.R. No. 166250, July 26,
2010)

The bill of lading defines the rights and liabilities of the parties in reference to the contract of
carriage. Stipulations therein are valid and binding in the absence of any showing that the same are
contrary to law, morals, customs, public order and public policy. Where the terms of the contract are
clear and leave no doubt upon the intention of the contracting parties, the literal meaning of the
stipulations shall control. In light of the foregoing, there can be no question about the validity and
enforceability of Stipulation No. 7 in the bill of lading. The twenty-four hour requirement under the
said stipulation is, by agreement of the contracting parties, a sine qua non for the accrual of the right
of action to recover damages against the carrier. (Provident Insurance Corp., vs. Court of Appeals,
G.R. No. 118030, January 15, 2004)

The holding in most jurisdictions has been that a shipper who receives a bill of lading without
objection after an opportunity to inspect it, and permits the carrier to act on it by proceeding with
the shipment is presumed to have accepted it as correctly stating the contract and to have assented
to its terms. In other words, the acceptance of the bill without dissent raises the presumption that all
the terms therein were brought to the knowledge of the shipper and agreed to by him and, in the
absence of fraud or mistake, he is estopped from thereafter denying that he assented to such terms.
This rule applies with particular force where a shipper accepts a bill of lading with full knowledge of
its contents and acceptance under such circumstances makes it a binding contract. (Magellan
Manufacturing Marketing Corporation vs. Court of Appeals, G.R. No. 95529, August 22, 1991)

1. Three-Fold Character

A bill of lading serves two functions: First, it is a receipt for the goods shipped; Second, it is a contract
by which three parties, namely, the shipper, the carrier, and the consignee undertake specific
responsibilities and assume stipulated obligations. A bill of lading delivered and accepted constitutes
the contract of carriage even though not signed, because the acceptance of a paper containing the
terms of a proposed contract generally constitutes an acceptance of the contract and of all its terms
and conditions of which the acceptor has actual or constructive notice (Keng Hua Paper Products Co.,
Inc. vs. Court of Appeals, 286 SCRA 257, 1998).

A bill of lading, aside from being a contract and a receipt, is also a symbol of the goods covered by
 it. A bill of lading which has no notation of any defect or damage in the goods is called a “clean bill of
lading.” A clean bill of lading constitutes prima facie evidence of the receipt by the carrier of the
goods as therein described. (Lorenzo Shipping Corp. vs. Chubb and Sons, Inc., G.R. No. 147724, June
8, 2004)

2. Delivery of Goods

a. Period of Delivery

b. Delivery Without Surrender of Bill of Lading

The surrender of the original bill of lading is not a condition precedent for a common carrier to be
discharged of its contractual obligation. If surrender of the original bill of lading is not possible,
acknowledgment of the delivery by signing the delivery receipt suffices. This is what respondent did.
(National Trucking and Forwarding Corporation vs. Lorenzo Shipping Corporation, G.R. No. 153563,
February 07, 2005)

c. Refusal of Consignee to Take Delivery

3. Period for Filing Claims

The twenty-four-hour period prescribed by Art. 366 of the Code of Commerce within which claims
must be presented does not begin to run until the consignee has received such possession of the
merchandise that he may exercise over it the ordinary control pertinent to ownership. In other words,
there must be delivery of the cargo by the carrier to the consignee at the place of destination.
(Lorenzo Shipping Corp. vs. Chubb and Sons, Inc., G.R. No. 147724, June 8, 2004)

In order that the condition therein provided in Article 366 of the Code of Commerce may be
demanded there should be a consignment of goods, through a common carrier, by a consignor in one
place to a consignee in another place. And said article provides that the claim for damages must be
made "within twenty-four hours following the receipt of the merchandise" by the consignee from the
carrier. In other words, there must be delivery of the merchandise by the carrier to the consignee at
the place of destination. In the instant case, the consignor is the branch office of Lee Teh & Co., Inc.,
at Catarman, Samar, which placed the cargo on board the ship Jupiter, and the consignee, its main
office at Manila. The cargo never reached Manila, its destination, nor was it ever delivered to the
consignee, the office of the shipper in Manila, because the ship ran aground upon entering Laoang
Bay, Samar on the same day of the shipment. Such being the case, it follows that the aforesaid article
366 does not have application because the cargo was never received by the consignee. (New Zealand
Insurance Co., Ltd., vs. Adriano Choa Joy, Etc., G.R. No. L-7311, September 30, 1955)

Under the Code of Commerce, the notice of claim must be made within twenty four (24) hours from
receipt of the cargo if the damage is not apparent from the outside of the package. For damages that
are visible from the outside of the package, the claim must be made immediately. Provisions
specifying a time to give notice of damage to common carriers are ordinarily to be given a reasonable
and practical, rather than a strict construction. Understandably, when the goods were delivered, the
necessary clearance had to be made before the package was opened. Upon opening and discovery of
the damaged condition of the goods, a report to this effect had to pass through the proper channels
before it could be finalized and endorsed by the institution to the claims department of the shipping
company. The call to Aboitiz was made two days from delivery, a reasonable period considering that
 the goods could not have corroded instantly overnight such that it could only have sustained the
damage during transit. Moreover, Aboitiz was able to immediately inspect the damage while the
matter was still fresh. In so doing, the main objective of the prescribed time period was
fulfilled. Thus, there was substantial compliance with the notice requirement in this case. (Aboitiz
Shipping Corporation vs. Insurance Company of North America, G.R. No. 168402, August 6, 2008)

4. Period for Filing Actions

In this jurisdiction, the filing of a claim with the carrier within the time limitation therefor actually
constitutes a condition precedent to the accrual of a right of action against a carrier for loss of or
damage to the goods. The shipper or consignee must allege and prove the fulfillment of the
condition. If it fails to do so, no right of action against the carrier can accrue in favor of the
former. The aforementioned requirement is a reasonable condition precedent; it does not constitute
a limitation of action. The requirement of giving notice of loss of or injury to the goods is not an
empty formalism. The fundamental reasons for such a stipulation are (1) to inform the carrier that the
cargo has been damaged, and that it is being charged with liability therefor; and (2) to give it an
opportunity to examine the nature and extent of the injury. “This protects the carrier by affording it
an opportunity to make an investigation of a claim while the matter is fresh and easily investigated so
as to safeguard itself from false and fraudulent claims.” (Federal Express Corporation vs. American
Home Assurance Company, G.R. No. 150094, August 18, 2004)

The Court has construed the 24-hour claim requirement as a condition precedent to the accrual of a
right of action against a carrier for loss of, or damage to, the goods. The shipper or consignee must
allege and prove the fulfillment of the condition. Otherwise, no right of action against the carrier can
accrue in favor of the shipper or consignee. (Ucpb General Insurance Co., Inc., vs. Aboitiz Shipping
Corporation, et. Al., G.R. No. 168433, February 10, 2009)

The bills of lading unequivocally prescribes a time frame of thirty (30) days for filing a claim with the
carrier in case of loss of or damage to the cargo and sixty (60) days from accrual of the right of action
for instituting an action in court, which periods must concur. As the requirements in Article 366,
restated with a slight modification in the assailed paragraph 5 of the bills of lading, are reasonable
conditions precedent, they are not limitations of action. Being conditions precedent, their
performance must precede a suit for enforcement and the vesting of the right to file spit does not
take place until the happening of these conditions. (Philippine American General Insurance Co., Inc.
and Tagum Plastics, Inc., vs. Sweet Lines, Inc., G.R. No. 87434 August 5, 1992)

E. Maritime Commerce

1. Charter Parties

a. Bareboat/Demise Charter

b. Time Charter

c. Voyage/Trip Charter
It bears stressing that subject Letter of Agreement is considered a Charter Party. A charter party is
classified into (1) “bareboat” or “demise” charter and (2) contract of affreightment. Subject contract
is one of affreightment, whereby 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. Under such
contract the ship 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.
(National Food Authority vs. Court of Appeals, G.R. No. 96453, August 4, 1999)

A charter party is a contract by which an entire ship, or some principal part thereof, is let by the
owner to another person for a specified time or use; a contract of affreightment is one by which the
owner of a ship or other vessel lets the whole or part of her to a merchant or other person for the
conveyance of goods, on a particular voyage, in consideration of the payment of freight. A contract of
affreightment may be either time charter, wherein the leased vessel is leased to the charterer for a
fixed period of time, or voyage charter, wherein the ship is leased for a single voyage. In both cases,
the charter-party provides for the hire of the vessel only, either for a determinate period of time or
for a single or consecutive voyage, the ship owner to supply the ship’s store, pay for the wages of the
master of the crew, and defray the expenses for the maintenance of the ship. Under a demise or
bareboat charter on the other hand, the charterer mans the vessel with his own people and
becomes, in effect, the owner for the voyage or service stipulated, subject to liability for damages
caused by negligence. If the charter is a contract of affreightment, which leaves the general owner in
possession of the ship as owner for the voyage, the rights and the responsibilities of ownership rest
on the owner. The charterer is free from liability to third persons in respect of the ship. It is only when
the charter includes both the vessel and its crew, as in a bareboat or demise that a common carrier
becomes private, at least insofar as the particular voyage covering the charter-party is
concerned. (Caltex Philippines, Inc. vs. Sulpicio Lines, Inc., et. al., G.R. No. 131166, September 30,
1999)

A bareboat or demise charter is where the ship owner turns over possession of his vessel to the
charterer, with the latter undertaking to provide the crew, victuals, supplies, and fuel during the term
of the charter. In a time charter, the ship owner retains possession and control of his vessel through
the master and crew who remain in his employ. A voyage charter is simply a contract of affreightment
where the master and crew remain in the employ of the ship owner. In a demise or bareboat charter,
the charterer who is treated ass owner pro hac vice, and not the general owner, is liable for expenses
of the voyage including wages of seamen. (Lintonjua Shipping Company, Inc. vs. National Seamen
Board, 176 SCRA 189)

Cebu Salvage and MCCII entered into a "voyage charter," also known as a contract of affreightment
wherein the ship was leased for a single voyage for the conveyance of goods, in consideration of the
payment of freight. Under a voyage charter, the shipowner 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 freight. An owner who retains possession of the ship remains liable as carrier and
 must answer for loss or non-delivery of the goods received for transportation. (Cebu Salvage
Corporation vs. Philippine Home Assurance Corporation, G.R. No. 150403, January 25, 2007)

2. Liability of Ship Owners and Shipping Agents

The real and hypothecary nature of maritime law simply means that the liability of the carrier in
connection with losses related to maritime contract is confined to the vessel, which is hypothecated
for such obligations or which stands as the guaranty for their settlement. The only time the Limited
Liability Rule does not apply is when there is an actual finding of negligence on the part of the vessel
owner or agent. (Aboitiz Shipping Corporation vs. General Accident Fire and Life Assurance
Corporation Ltd., 217 SCRA 359, 1993)

In case of collision of vessels, in order to avail of the benefits of Article 837 of the Code of Commerce
the shipowner or agent must abandon the vessel. In such case the civil liability shall be limited to the
value of the vessel with all the appurtenances and freight earned during the voyage. However, where
the injury or average is due to the ship-owner's fault as in this case, the shipowner may not avail of
his right to limited liability by abandoning the vessel. (Luzon Stevedoring Corporation vs. Court of
Appeals, G.R. No. L-58897, 3 December 1987)

The term "ship agent" as used in the foregoing provision is broad enough to include the ship owner.
Pursuant to said provision, therefore, both the ship owner and ship agent are civilly and directly liable
for the indemnities in favor of third persons, which may arise from the conduct of the captain in the
care of goods transported, as well as for the safety of passengers transported. However, under the
same Article, this direct liability is moderated and limited by the ship agent's or ship owner's right of
abandonment of the vessel and earned freight. The most fundamental effect of abandonment is the
cessation of the responsibility of the ship agent/owner. The ship owner's or agent's liability is merely
co-extensive with his interest in the vessel such that a total loss thereof results in its extinction. "No
vessel, no liability" expresses in a nutshell the limited liability rule. The total destruction of the vessel
extinguishes maritime liens as there is no longer any res to which it can attach. (Chua Yek Hong vs.
Intermediate Appellate Court, G.R. No. 74811, 30 September 1988)
a. Liability for Acts of Captain

b. Exceptions to Limited Liability

The limited liability rule, however, is not without exceptions, namely: (1) where the injury or death to
a passenger is due either to the fault of the ship owner, or to the concurring negligence of the ship
owner and the captain (Manila Steamship Co., Inc. vs. Abdulhaman supra); (2) where the vessel is
insured; and (3) in workmen's compensation claims (Abueg vs. San Diego, supra). In this case, there is
nothing in the records to show that the loss of the cargo was due to the fault of the private
respondent as shipowners, or to their concurrent negligence with the captain of the vessel. (Chua Yek
Hong vs. Intermediate Appellate Court, G.R. No. 74811, 30 September 1988)

The international rule is not to the effect that the right of abandonment of vessels, as a legal
limitation of a ship owner’s liability, does not apply to cases where injury or average was occasioned
by the shipowner’s fault. Where the ship owner is likewise to be blamed, Article 587 of the Code of
Commerce will not apply, and such situation will be governed by the provision of the Civil Code on
common carriers (Philippine American General Insurance Co. vs. Court of Appeals, 273 SCRA 262,
1997).
3. Accidents and Damages in Maritime Commerce

a. General Average

b. Collisions

In American jurisprudence that there is a presumption of fault against a moving vessel that strikes a
stationary object such as a dock or navigational aid. In admiralty, this presumption does more than
merely require the ship to go forward and produce some evidence on the presumptive matter. The
moving vessel must show that it was without fault or that the collision was occasioned by the fault of
the stationary object or was the result of inevitable accident. It has been held that such vessel must
exhaust every reasonable possibility which the circumstances admit and show that in each, they did
all that reasonable care required. In the absence of sufficient proof in rebuttal, the presumption of
fault attaches to a moving vessel which collides with a fixed object and makes a prima facie case of
fault against the vessel. (Far Eastern Shipping Company vs. Court of Appeals, G.R. No. 130068,
October 1, 1998)

4. Carriage of Goods by Sea Act

a. Application

The law of the country to which the goods are to be transported governs the liability of the common
carrier in case of their loss, destruction or deterioration" (Article 1753, Civil Code). Thus, the rule was
specifically laid down that for cargoes transported from Japan to the Philippines, the liability of the
carrier is governed primarily by the Civil Code and in all matters not regulated by said Code, the rights
and obligations of common carrier shall be governed by the Code of commerce and by laws (Article
1766, Civil Code). Hence, the Carriage of Goods by Sea Act, a special law, is merely suppletory to the
provision of the Civil Code. (National Development Company vs. The Court of Appeals, G.R. No. L-
49469, August 19, 1988)

Inasmuch as neither the Civil Code nor the Code of Commerce states a specific prescriptive period on
the matter, the Carriage of Goods by Sea Act (COGSA) — which 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. This one-year prescriptive period also applies to the insurer of the
goods. (Loadstar Shipping Co., Inc., vs. Court of Appeals, G.R. No. 131621 September 28, 1999)

It is to be noted that the Civil Code does not of itself limit the liability of the common carrier to a fixed
amount per package although the Code expressly permits a stipulation limiting such liability. Thus, the
COGSA which is suppletory to the provisions of the Civil Code, steps in and supplements the Code by
establishing a statutory provision limiting the carrier's liability in the absence of a declaration of a
higher value of the goods by the shipper in the bill of lading. The provisions of the Carriage of Goods
by.Sea Act on limited liability are as much a part of a bill of lading as though physically in it and as
much a part thereof as though placed therein by agreement of the parties. (Eastern Shipping Lines,
Inc., vs. Intermediate Appellate Court, G.R. No. L-69044 May 29, 1987)

It is settled in maritime law jurisprudence that cargoes while being unloaded generally remain under
the custody of the carrier. In the instant case, the damage or losses were incurred during the
discharge of the shipment while under the supervision of the carrier. Consequently, the carrier is
 liable for the damage or losses caused to the shipment. Section 2 of the COGSA provides that under
every contract of carriage of goods by sea, the carrier in relation to the loading, handling, stowage,
carriage, custody, care, and discharge of such goods, shall be subject to the responsibilities and
liabilities and entitled to the rights and immunities set forth in the Act. Section 3 (2) thereof which
states that among the carriers’ responsibilities are to properly and carefully load, handle, stow, carry,
keep, care for, and discharge the goods carried. (Philippine First Insurance Co. Inc., vs. Wallem Phils.
Shipping, Inc., G.R. No. 165647, 26 March 2009)

Carriage of Goods by Sea Act is applicable up to the final port of destination and that the fact that
transshipment was made on an interisland vessel did not remove the contract of carriage of goods
from the operation of said Act. (Sea-Land Service, Inc.,vs. Intermediate Appellate Court, G.R. No.
75118 August 31, 1987)

As defined in the Civil Code and as applied to Section 3 (6) paragraph 4 of the Carriage of Goods by
Sea Act, "loss" contemplates merely a situation where no delivery at all was made by the shipper of
the goods because the same had perished, gone out of commerce, or disappeared that their
existence is unknown or they cannot be recovered. It does not include a situation where there was
indeed delivery — but delivery to the wrong person, or a misdelivery, as alleged in the complaint in
this case. (Domingo Ang vs. American Steamship Agencies, Inc., G.R. No. L-22491, January 27, 1967)

“Loss” refers to the deterioration or disappearance of goods. Conformably with this concept of what
constitutes “loss” or “damage,”the deterioration of goods due to delay in their transportation
constitutes “loss” or “damage” within the meaning of §3(6) of the Carriage of Goods by the Sea Act,
so that as suit was not brought within one year the action was barred. (Mitsui O.S.K. Lines Ltd. vs.
Court of Appeals, G.R. No. 119571, March 11, 1998)

b. Notice of Loss or Damage

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. As stated earlier, prior to unloading
the cargo, an Inspection Report as to the condition of the goods was prepared and signed by
representatives of both parties. Moreover, 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. (Belgian
Overseas Chartering and Shipping N.V. vs. Philippine First Insurance Co., Inc., G.R. No. 143133, June
5, 2002)

c. Period of Prescription

The one-year period of limitation is designed to meet the exigencies of maritime hazards. In a case
where the goods shipped were neither lost nor damaged in transit but were, on the contrary,
delivered in port to someone who claimed to be entitled thereto, the situation is different, and the
special need for the short period of limitation in cases of loss or damage caused by maritime perils
does not obtain. (Mitsui O.S.K. Lines Ltd., represented by Magsaysay Agencies, Inc. vs. Court of
Appeals, G.R. No. 119571, March 11, 1998)

The one-year period within which the consignee should sue the carrier is computed from "the
delivery of the goods or the date when the goods should have been delivered". The sensible and
practical interpretation is that delivery within the meaning of section 3(6) of the Carriage of Goods by
Sea Law means delivery to the arrastre operator. That delivery is evidenced by tally sheets which
show whether the goods were landed in good order or in bad order, a fact which the consignee or
shipper can easily ascertain through the customs broker. To use as basis for computing the one-year
period the delivery to the consignee would be unrealistic and might generate confusion between the
loss or damage sustained by the goods while in the carrier's custody and the loss or damage caused
to the goods while in the arrastre operator's possession. (Union Carbide Philippines, Inc. vs. Manila
Railroad Co., G.R. No. L-27798, June 15, 1977)

An action based on misdelivery of the cargo which should be distinguished from loss thereof. The
one-year period provided for in section 3 (6) of the Carriage of Goods by Sea Act refers to loss of the
cargo. What is applicable in case of misdelivery of the cargo is the four-year period of prescription for
quasi-delicts prescribed in article 1146 (2) of the Civil Code or ten years for violation of a written
contract as provided for in article 1144 (1) of the same Code. As Ang filed the action less than three
years from the date of the alleged misdelivery of the cargo, it has not yet prescribed. Ang, as indorsee
of the bill of lading, is a real party in interest with a cause of action for damages. (Domingo Ang vs.
Compania Maritima, Maritime Company of the Philippines)

The one-year prescription period under the COGSA applies to 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. This could not have been the intention of the law which has also for its purpose
the protection of the carrier and the ship from fraudulent claims by having "matters affecting
transportation of goods by sea be decided in as short a time as possible" and by avoiding incidents
which would "unnecessarily extend the period and permit delays in the settlement of questions
affecting the transportation. (Filipino Merchants Insurance Company, Inc. vs. Honorable Jose
Alejandro, Presiding Judge of Branch XXVI of the Court of First Instance of Manila, G.R. No. L-54140,
October 14, 1986)

Section 3(6) of the Carriage of Goods by Sea Act states that the carrier and the ship shall be
discharged from all liability for loss or damage to the goods if no suit is filed within one year after
delivery of the goods or the date when they should have been delivered. Under this provision, only
the carrier's liability is extinguished if no suit is brought within one year. But the liability of the insurer
is not extinguished because the insurer's liability is based not on the contract of carriage but on the
contract of insurance. A close reading of the law reveals that the Carriage of Goods by Sea Act
governs the relationship between the carrier on the one hand and the shipper, the consignee and/or
the insurer on the other hand. It defines the obligations of the carrier under the contract of carriage.
It does not, however, affect the relationship between the shipper and the insurer. The latter case is
governed by the Insurance Code. The Filipino Merchants case is different from the case at bar. In
Filipino Merchants, it was the insurer which filed a claim against the carrier for reimbursement of the
amount it paid to the shipper. In the case at bar, it was the shipper which filed a claim against the
insurer. The basis of the shipper's claim is the "all risks" insurance policies issued by private
respondents to petitioner Mayer. The ruling in Filipino Merchants should apply only to suits against
the carrier filed either by the shipper, the consignee or the insurer. When the court said in Filipino
Merchants that Section 3(6) of the Carriage of Goods by Sea Act applies to the insurer, it meant that
the insurer, like the shipper, may no longer file a claim against the carrier beyond the one-year period
provided in the law. But it does not mean that the shipper may no longer file a claim against the
insurer because the basis of the insurer's liability is the insurance contract. An insurance contract is a
contract whereby one party, for a consideration known as the premium, agrees to indemnify another
 for loss or damage which he may suffer from a specified peril. (Mayer Steel Pipe Corporation vs.
Court of Appeals, G.R. No. 124050 June 19, 1997)

The general provisions of the new Civil Code (Art. 1155 providing for the interruption of the
prescriptive period) cannot be made to apply in a case under COGSA, as such application would have
the effect of extending the one-year period of prescription fixed in the law. It is desirable that matters
affecting transportation of goods by sea be decided in as short a time as possible; the application of
the provisions of Article 1155 of the new Civil Code would unnecessarily extend the period and
permit delays in the settlement of questions affecting transportation, contrary to the clear intent and
purpose of the law. (Dole Philippines, Inc. vs. Maritime Company of the Philippines, G.R. No. L-
61352 February 27, 1987)

d. Limitation of Liability

Lastly, as to the liability of the carrier, it was reduced to to US$500 per package as provided in the Bill
of Lading and by Section 4(5) of COGSA. Stipulation in the bill of lading limiting to a certain sum the
common carrier's liability for loss or destruction of a cargo -- unless the shipper or owner declares a
greater value -- is sanctioned by law. There are, however, two conditions to be satisfied: (1) the
contract is reasonable and just under the circumstances, and (2) it has been fairly and freely agreed
upon by the parties.The rationale for this rule is to bind the shippers by their agreement to the value
(maximum valuation) of their goods. (Belgian Overseas Chartering and Shipping N.V. vs. Philippine
First Insurance Co., Inc., G.R. No. 143133, June 5, 2002)

F. The Warsaw Convention

1. Applicability

2. Limitation of Liability

The Warsaw Convention however denies to the carrier availment "of the provisions which exclude or
limit his liability, if the damage is caused by his willful misconduct or by such default on his part as, in
accordance with the law of the court seized of the case, is considered to be equivalent to willful
misconduct," or "if the damage is (similarly) caused by any agent of the carrier acting within the
scope of his employment." The Hague Protocol amended the Warsaw Convention by removing the
provision that if the airline took all necessary steps to avoid the damage, it could exculpate itself
completely, and declaring the stated limits of liability not applicable "if it is proved that the damage
resulted from an act or omission of the carrier, its servants or agents, done with intent to cause
damage or recklessly and with knowledge that damage would probably result." The same deletion
was effected by the Montreal Agreement of 1966, with the result that a passenger could recover
unlimited damages upon proof of willful misconduct. (Alitalia vs. Intermediate Appellate Court, G.R.
No. 71929, December 4, 1990)

a. Liability to Passengers

In its ordinary sense, "delay" means to prolong the time of or before; to stop, detain or hinder for a
time, or cause someone or something to be behind in schedule or usual rate of movement in
progress. "Bumping-off," which is the refusal to transport passengers with confirmed reservation to
their planned and contracted destinations, totally forecloses said passengers' right to be transported,
whereas delay merely postpones for a time being the enforcement of such right. Consequently,
 Section 2, Article 30 of the Warsaw Convention which does not contemplate the instance of
"bumping-off" but merely of simple delay, cannot provide a handy excuse for Lufthansa as to
exculpate it from any liability to Antiporda. (Lufthansa German Airlines vs. Court of Appeals, G.R. No.
83612, November 24, 1994)

b. Liability for Checked Baggage

While the Warsaw Convention has the force and effect of law in the Philippines, being a treaty
commitment by the government and as a signatory thereto, the same does not operate as an
exclusive enumeration of the instances when a carrier shall be liable for breach of contract or as an
absolute limit of the extent of liability, nor does it preclude the operation of the Civil Code or other
pertinent laws. The acceptance in due course by PAL of Mejia’s cargo as packed and its advice against
the need for declaration of its actual value operated as an assurance to Mejia that in fact there was
no need for such a declaration. Mejia can hardly be faulted for relying on the representations
of PAL’s own personnel. In other words, Mejia could and would have complied with the conditions
stated in the air waybill, i.e., declaration of a higher value and payment of supplemental
transportation charges, entitling her to recovery of damages beyond the stipulated limit of US$20 per
kilogram of cargo in the event of loss or damage, had she not been effectively prevented from doing
so upon the advice of PAL’s personnel for reasons best known to themselves. Even if the claim for
damages was conditioned on the timely filing of a formal claim, under Article 1186 of the Civil Code
that condition was deemed fulfilled, considering that the collective action of PAL’s personnel in
tossing around the claim and leaving it unresolved for an indefinite period of time was tantamount to
“voluntarily preventing its fulfillment.” On grounds of equity, the filing of the baggage freight claim,
which sufficiently informed PAL of the damage sustained by private respondent’s cargo, constituted
substantial compliance with the requirement in the contract for the filing of a formal claim.
(Philippine Airlines Inc. vs. Court of Appeals, G.R. No. 119706, March 14, 1996)

The nature of an airline’s contract of carriage partakes of two types, namely: a contract to deliver a
cargo or merchandise to its destination and a contract to transport passengers to their destination. A
business intended to serve the travelling public primarily, it is imbued with public interest, hence, the
law governing common carriers imposes an exacting standard. Neglect or malfeasance by the carrier’s
employees could predictably furnish bases for an action for damages. American jurisprudence
provides that an air carrier is not liable for the loss of baggage in an amount in excess of the limits
specified in the tariff which was filed with the proper authorities, such tariff being binding on the
passenger regardless of the passenger’s lack of knowledge thereof or assent thereto. This doctrine is
recognized in this jurisdiction. (British Airways vs. Court of Appeals, G.R. No. 121824, January 29,
1998)

Article 19 of the Warsaw Convention provides for liability on the part of a carrier for “damages
occasioned by delay in the transportation by air of passengers, baggage or goods.” Article 24 excludes
other remedies by further providing that “(1) in the cases covered by articles 18 and 19, any action for
damages, however founded, can only be brought subject to the conditions and limits set out in this
convention.” Therefore, a claim covered by the Warsaw Convention can no longer be recovered
 under local law, if the statute of limitations of two years has already lapsed. Nevertheless, the Court
notes that jurisprudence in the Philippines and the United States also recognizes that the Warsaw
Convention does not “exclusively regulate” the relationship between passenger and carrier on an
international flight. The Court finds that the present case is substantially similar to cases in which the
damages sought were considered to be outside the coverage of the Warsaw Convention. (Philippine
Airlines Inc. vs. Hon. Adriano Savillo, et. al., G.R. No. 149547, July 4, 2008)

In United Airlines v. Uy, the Court distinguished between the (1) damage to the passenger’s baggage
and (2) humiliation he suffered at the hands of the airline’s employees. The first cause of action was
covered by the Warsaw Convention which prescribes in two years, while the second was covered by
the provisions of the Civil Code on torts, which prescribes in four years. Had the present case merely
consisted of claims incidental to the airlines’ delay in transporting their passengers, Griño’s Complaint
would have been time-barred under Article 29 of the Warsaw Convention. (Philippine Airlines Inc.
vs. Hon. Adriano Savillo, et. al., G.R. No. 149547, July 4, 2008)

c. Liability for Handcarried Baggage

3. Willful Misconduct

The Warsaw Convention however denies to the carrier availment ‘of the provisions which exclude or
limit his liability, if the damage is caused by his willful misconduct or by such default on his part as, in
accordance with the law of the court seized of the case, is considered to be equivalent to willful
misconduct,’ or ‘if the damage is similarly caused by any agent of the carrier acting within the scope
of his employment.’ Under domestic law and jurisprudence (the Philippines being the country of
destination), the attendance of gross negligence (given the equivalent of fraud or bad faith) holds the
common carrier liable for all damages which can be reasonably attributed, although unforeseen, to
the non-performance of the obligation, including moral and exemplary damages. (Sabena World
Airlines vs. Court of Appeals, G.R. No. 104685, March 14, 1996)

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, B.P. 68)

2. Attributes of the Corporation

When the petitioner has represented in his dealings with another that one corporation (Guess?
Footwear or B & R Footwear Distributors, Inc.) is the same with his sole proprietorship (B & R
Sportswear Enterprises), the petitioner is the proper defendant in a case because his sole
 proprietorship has no juridical personality apart from him. (Benny Y. Hung vs. BPI Card Finance
Corp., G.R. No. 182398, July 20, 2010)

If the title over the land where the Hidden Valley Springs Resort is located is registered in the name
of the corporation, the heirs of a stockholder who occupy houses built at the expense of the
corporation cannot claim ownership over said properties. A stockholder is not the owner of any
part of the capital of the corporation and is not entitled to the possession of any definite portion of
its property or assets. (Rebecca Boyer-Roxas and Guillermo Roxas vs. Hon. Court of Appeals and
Heirs of Eugenia V. Roxas, Inc., G.R. No. 100866, July 14, 1992)

When negotiations ensued in light of a planned takeover of company and the counsel of the buyer
advised the stockholder through a letter that he may take the machineries he brought to the
corporation out with him for his own use and sale, the stockholder cannot recover said machineries
and equipment because these properties remained part of the capital property of the corporation.
It is settled that the property of a corporation is not the property of its stockholders or members.
(Ryuichi Yamamoto vs. Nishino Leather Industries, Inc. and Ikuo Nishino, G.R. No. 150283, April
16, 2008)

B. Classes of Corporations

By its failure to submit its by-laws on time, the AIIBP may be considered a de facto corporation
whose right to exercise corporate powers may not be inquired into collaterally in any private suit to
which such corporation may be a party. A corporation which has failed to file its by-laws within the
prescribed period does not ipso facto lose its powers as such. The SEC Rules on
Suspension/Revocation of the Certificate of Registration of Corporations, details the procedures and
remedies that may be availed of before an order of revocation can be issued. There is no showing
that such a procedure has been initiated in this case. (Sappari K. Sawadjaanvs. the Honorable
Court of Appeals, the Civil Service Commission and Al-amanah Investment Bank of the
Philippines, G.R. No. 141735, June 8, 2005)

Where persons associate themselves together under articles to purchase property to carry on a
business, and their organization is so defective as to come short of creating a corporation within the
statute, they become in legal effect partners inter se, and their rights as members of the company
to the property acquired by the company will be recognized. However, such a relation does not
necessarily exist, for ordinarily persons cannot be made to assume the relation of partners, as
between themselves, when their purpose is that no partnership shall exist, and it should be implied
only when necessary to do justice between the parties; thus, one who takes no part except to
subscribe for stock in a proposed corporation which is never legally formed does not become a
partner with other subscribers who engage in business under the name of the pretended
corporation, so as to be liable as such in an action for settlement of the alleged partnership and
contribution. (Pioneer Insurance & Surety Corporation vs. the Hon. Court of Appeals, Border
Machinery & Heavy Equipment, Inc., (BORMAHECO), Constancio M. Maglana and Jacob S. Lim,
G.R. No. 84197, July 28, 1989)

The plan of the parties to consolidate their respective jeepney drivers' and operators' associations
into a single common association, if not yet approved by the SEC, neither had its officers and
members submitted their articles of consolidation in accordance with Sections 78 and 79 of the
Corporation Code, is a mere proposal to form a unified association. Any dispute arising out of the
election of officers of said unified association is therefore not an intra-corporate dispute. (Reynaldo
M. Lozano vs. Hon. Eliezer R. De los Santos, Presiding Judge, RTC, Br. 58, Angeles City; and
Antonio Anda, G.R. No. 125221, June 19, 1997)

Where there is no third person involved and the conflict arises only among those assuming the
form of a corporation, who therefore know that it has not been registered, there is no corporation
by estoppel. (Reynaldo M. Lozano vs. Hon. Eliezer R. De los Santos, Presiding Judge, RTC, Br. 58,
Angeles City; and Antonio Anda, G.R. No. 125221, June 19, 1997)

Under the law on estoppel, those acting on behalf of a corporation and those benefited by it,
knowing it to be without valid existence, are held liable as general partners. Technically, it is true
that petitioner did not directly act on behalf of the corporation. However, having reaped the
benefits of the contract entered into by persons with whom he previously had an existing
relationship, he is deemed to be part of said association and is covered by the scope of the doctrine
of corporation by estoppel. (Lim Tong Lim vs. Philippine Fishing Gear Industries, Inc., G.R. No.
136448, 3 November 1999)

When the petitioner is not trying to escape liability from the contract but rather the one claiming
from the contract, the doctrine of corporation by estoppel is not applicable. This doctrine applies to
a third party only when he tries to escape liability on a contract from which he has benefited on the
irrelevant ground of defective incorporation. (International Express Travel & Tour Services, Inc. vs.
Hon. Court of Appeals, Henri Kahn, Philippine Football Federation, G.R. No. 119002, October 19,
2000)

The persons who illegally recruited workers for overseas employment by representing themselves
to be officers of a corporation which they knew had not been incorporated are liable as general
partners for all debts, liabilities and damages incurred or arising as a result thereof. (People of the
Philippines vs. Engr. Carlos Garcia y Pineda, Patricio Botero y Vales, Luisa Miraples (at large) &
Patricio Botero y Vales, G.R. No. 117010, 18 April 1997)

A Local Water District is a GOCC with an original charter and is not a private corporation because it
is not created under the Corporation Code. A law enacted by Congress creating a private
corporation with a special charter is unconstitutional because private corporations may exist only
under a general law. (Engr. Ranulfo C. Feliciano, in his capacity as General Manager of the Leyte
Metropolitan Water District (LMWD), Tacloban City vs. Commission on Audit, Chairman CELSO D.
GANGAN, Commissioners Raul C. Flores and Emmanuel M. Dalman, and Regional Director of COA
Region VIII, G.R. No. 147402, 14 January 2004)

The Philippine National Red Cross (PNRC) can neither be classified as an instrumentality of the
State, so as not to lose its character of neutrality as well as its independence, nor strictly as a
private corporation since it is regulated by international humanitarian law and is treated as an
auxiliary of the State. The PNRC enjoys a special status as an important ally and auxiliary of the
government in the humanitarian field in accordance with its commitments under international law.
(Dante V. Liban, Reynaldo M. Bernardo and Salvador M. Viari vs. Richard J. Gordon, G. R. No.
175352, January 18, 2011)

It is clear that a corporation is considered a government-owned or -controlled corporation only

when the Government directly or indirectly owns or controls at least a majority or 51% share of the
capital stock. Consequently, RPN was neither a government-owned nor a controlled corporation
because of the Government’s total share in RPN’s capital stock being only 32.4%. (Antonio M.
 Carandang vs. Honorable Aniano A. Desierto, Office of the Ombudsman, G.R. No. 153161, January
12, 2011)

Corporation by estoppel results when a corporation represented itself to the reading public as such
despite its not being incorporated. The non-incorporation of AbanteTonite with the Securities and
Exchange Commission was of no consequence for, otherwise, whoever of the public who suffer any
damage from the publication of the articles in the pages of its tabloids would be left without
recourse. (Allen A. Macasaet, et al. vs. Francisco R. Co, Jr., G.R. No. 156759, June 5, 2013)

C. Nationality of Corporations

1. Place of Incorporation Test

In times of war, the nationality of a private corporation is determined by the character or citizenship
of its controlling stockholders. The corporation was considered an enemy because majority of its
stockholders were German nationals. (Filipinas Compañia De Segurosvs. Christern, Huenefeld and
Co., Inc.,G.R. No. L-2294, May 25, 1951)

2. Control Test

A corporation organized under the laws of the Philippines of which at least 60% of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines, is considered a
Philippine National. As such, the corporation may acquire disposable lands in the Philippines.
(Marissa R. Unchuan vs. Antonio J.P. Lozada, Anita Lozada and the Register of Deeds of Cebu City,
G.R. No. 172671, April 16, 2009)

The fact that the religious organization has no capital stock does not suffice to escape the
Constitutional inhibition, since it is admitted that its members are of foreign nationality. The
purpose of the sixty per centum requirement is obviously to ensure that corporations or
associations allowed to acquire agricultural land or to exploit natural resources shall be controlled
by Filipinos; and the spirit of the Constitution demands that in the absence of capital stock, the
controlling membership should be composed of Filipino citizens. (Register of Deeds vs. Ung Sui Si
Temple, G.R. No. L-6776, May 21, 1955)

3. Grandfather Rule

D. Corporate Juridical Personality

1. Doctrine of Separate Juridical Personality

FBCI’s acquisition of the “substantial and controlling shares of stocks” of Esses and Tri-Star does not
create a substantial change in the rights or relations of the parties that would entitle FBCI to
possession of the Calatagan Property, a corporate property of Esses and Tri-Star. Esses and Tri-Star,
just like FBCI, are corporations. A corporation has a personality distinct from that of its stockholders.
Properties registered in the name of the corporation are owned by it as an entity separate and
distinct from its members. (Ricardo S. Silverio, jr., Esses Development Corporation, and Tri-Star
Farms, Inc. vs. Filipino Business Consultants, Inc., G.R. No. 143312, August 12, 2005)
The personality of a corporation is distinct and separate from the personalities of its stockholders.
Hence, its stockholders are not themselves the real parties in interest to claim and recover
compensation for the damages arising from the wrongful attachment of its assets. Only the
corporation is the real party in interest for that purpose. (Stronghold Insurance Company, Inc. vs.
Tomas Cuenca, et. al., G.R. No. 173297, March 6, 2013)

A corporation has its own legal personality separate and distinct from those of its stockholders,
directors or officers. Hence, absent any evidence that they have exceeded their authority, corporate
officers are not personally liable for their official acts. Corporate directors and officers may be held
solidarily liable with the corporation for the termination of employment only if done with malice or
in bad faith.(Rolando DS. Torres v. Rural Bank of San Juan, Inc. et al., G.R. No. 184520, March 13,
2013)

a. Liability for Torts and Crimes

A corporation is civilly liable in the same manner as natural persons for torts, because the rules
governing the liability of a principal or master for a tort committed by an agent or servant are the
same whether the principal or master be a natural person or a corporation, and whether the
servant or agent be a natural or artificial person. A corporation is liable, therefore, whenever a
tortious act is committed by an officer or agent under express direction or authority from the
stockholders or members acting as a body, or, generally, from the directors as the governing body.
(Philippine National Bank vs. Court of Appeals, et al., G.R. No. L-27155, May 18, 1978)

To the extent that the stockholders are actively engaged in the management or operation of the
business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to
each other and among themselves. Said stockholders shall be personally liable for corporate torts
unless the corporation has obtained reasonably adequate liability insurance. (Sergio F. Naguiat,
doing business under the name and style Sergio F. NaguiatEnt., Inc., & Clark Field Taxi, Inc. vs.
National Labor Relations Commission (Third Division), National Organization Of Workingmen and
its members, Leonardo T. Galang, et al., G.R. No. 116123, March 13, 1997)

The powers to increase capitalization and to offer or give collateral to secure indebtedness are
lodged with the corporation’s board of directors. However, this does not mean that the officers of
the corporation other than the board of directors cannot be made criminally liable for their criminal
acts if it can be proven that they participated therein. (Gregorio Singian, Jr. vs. the Honorable
Sandiganbayan and the Presidential Commission on Good Government, G.R. Nos. 160577-94,
December 16, 2005)

An employee of a company or corporation engaged in illegal recruitment may be held liable as

principal, together with his employer, if it is shown that he actively and consciously participated in
illegal recruitment, because the existence of the corporate entity does not shield from prosecution
the corporate agent who knowingly and intentionally causes the corporation to commit a crime.
The corporation obviously acts, and can act, only by and through its human agents, and it is their
conduct which the law must deter. (The Executive Secretary, et al. vs. Court of Appeals, et al., G.R.
No. 131719, May 25, 2004)

The Trust Receipts Law recognizes the impossibility of imposing the penalty of imprisonment on a
corporation. Hence, if the entrustee is a corporation, the law makes the officers or employees or
other persons responsible for the offense liable to suffer the penalty of imprisonment. (Edward C.
Ong, vs. the Court of Appeals and the People of the Philippines, G.R. No. 119858, April 29, 2003)

Though the entrustee is a corporation, nevertheless, the law specifically makes the officers,
employees or other officers or persons responsible for the offense, without prejudice to the civil
liabilities of such corporation and/or board of directors, officers, or other officials or employees
responsible for the offense. The rationale is that such officers or employees are vested with the
authority and responsibility to devise means necessary to ensure compliance with the law and, if
they fail to do so, are held criminally accountable; thus, they have a responsible share in the
violations of the law. (Alfredo Ching vs. the Secretary of Justice, et al., G. R. No. 164317, February
6, 2006)

b. Recovery of Moral Damages

A corporation whose checks were dishonored by the drawee bank despite availability of funds and
because of the negligence of the bank employees can recover moral damages for besmirched
reputation. The standing of the corporation was reduced in the business community because of the
bank’s negligence.(Simex International, Incorporated vs. Court of Appeals, G.R. No. 88013 March
19, 1990)

Moral damages may be awarded to a corporation whose reputation has been besmirched. In the
instant case, FEMSCO has sufficiently shown that its reputation was tarnished after it immediately
ordered equipment from its suppliers on account of the urgency of the project, only to be canceled
later by the counterparty in the contract. (Jardine Davies, Inc. vs. Court of Appeals and Far East
Mills Supply Corporation, G.R. No. 128066, June 19, 2000)

A juridical person is generally not entitled to moral damages because, unlike a natural person, it
cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety,
mental anguish or moral shock. Nevertheless, AMEC’s claim for moral damages falls under item 7 of
Article 2219 of the Civil Code which expressly authorizes the recovery of moral damages in cases of
libel, slander or any other form of defamation. Article 2219(7) does not qualify whether the plaintiff
is a natural or juridical person. Therefore, a juridical person such as a corporation can validly
complain for libel or any other form of defamation and claim for moral damages. [Filipinas
Broadcasting Network, Inc. vs. AGO Medical And Educational Center-Bicol Christian College of
Medicine, (AMEC-BCCM) and Angelita F. Ago, G.R. No. 141994, January 17, 2005]

As a rule, a corporation is not entitled to moral damages because, not being a natural person, it
cannot experience physical suffering or sentiments like wounded feelings, serious anxiety, mental
anguish and moral shock. The only exception to this rule is when the corporation has a reputation
that is debased, resulting in its humiliation in the business realm. But in such a case, it is essential to
prove the existence of the factual basis of the damage and its causal relation to petitioner's acts.
(Manila Electric Company vs. T.E.A.M. Electronics Corporation, Technology Electronics Assembly
and Management Pacific Corporation; and Ultra Electronics Instruments, Inc., G.R. No. 131723,
December 13, 2007)

While the Court may allow the grant of moral damages to corporations, it is not automatically
granted; there must still be proof of the existence of the factual basis of the damage and its causal
relation to the defendant’s acts. This is so because moral damages, though incapable of pecuniary
estimation, are in the category of an award designed to compensate the claimant for actual injury
 suffered and not to impose a penalty on the wrongdoer. In this case, there being no wrongful or
unjust act on the part of BPI in demanding payment from the spouses and in seeking the
foreclosure of the chattel and real estate mortgages, there is no lawful basis for award of damages
in favor of the spouses. (Herman C. Crystal, et al. vs. Bank of the Philippine Islands, G.R. No.
172428, November 28, 2008)

2. Doctrine of Piercing the Corporate Veil

As stated in the RTC decision, William Ching disclosed during the trial of the case that defendant
Travel & Tours Advisers, Inc., of which he is an officer, is operating sixty (60) units of Goldline buses.
If the RTC had sufficient factual basis to conclude that the two corporations (Travel and Tours
Advisers, Inc. and Gold Line Tours, Inc.) are one and the same entity, the judgment may be enforced
against the other corporation to prevent multiplicity of suits and save the parties from unnecessary
expenses and delay. (Gold Line Tours, Inc. vs. Heirs of Maria Concepcion Lacsa, G.R. no. 159108,
June 18, 2012)

The trial court cannot, after the judgment against Kukan, Inc. has attained finality, execute its
judgment against the property of KIC by piercing the veil of corporate fiction. The court must first
acquire jurisdiction over the corporation or corporations involved before its or their separate
personalities are disregarded; and the doctrine of piercing the veil of corporate entity can only be
raised during a full-blown trial over a cause of action duly commenced involving parties duly
brought under the authority of the court by way of service of summons or what passes as such
service. (Kukan International Corporation vs. Hon. Amor Reyes, in her capacity as Presiding Judge
of the Regional Trial Court of Manila, Branch 21, and ROMEO M. MORALES, doing business under
the name and style “RM Morales Trophies and Plaques,” G.R. No. 182729, September 29, 2010)

a. Grounds for Application of Doctrine

When an operator of a bus transportation sold his two certificates of public convenience to another
corporation with the condition, among others, that he shall not for a period of 10 years from the
date of the sale, apply for any TPU service identical or competing with the buyer, the organization of
a corporation barely 3 months after the sale with the wife of operator and his brother and sister-in-
law as the incorporators is a clear violation of the condition. A seller or promisor may not make use
of a corporate entity as a means of evading the obligation of his covenant. Where the Corporation is
substantially the alter ego of the covenantor to the restrictive agreement, it can be enjoined from
competing with the covenantee. (Villa Rey Transit, Inc. vs. Eusebio E. Ferrer, Pangasinan
Transportation Co., Inc. and Public Service Commission, G.R. No. L-23893, October 29, 1968)

Aggravating RANSOM's clear evasion of payment of its financial obligations is the organization of a
"run-away corporation," ROSARIO, in 1969 at the time the unfair labor practice case was pending
before the CIR by the same persons who were the officers and stockholders of RANSOM, engaged in
the same line of business as RANSOM, producing the same line of products, occupying the same
compound, using the same machineries, buildings, laboratory, bodega and sales and accounts
departments used by RANSOM, and which is still in existence. This is another instance where the
fiction of separate and distinct corporate entities should be disregarded as the second corporation
seeks the protective shield of a corporate fiction whose veil in the present case could, and should,
be pierced as it was deliberately and maliciously designed to evade its financial obligation to its
employees. (A.C. Ransom Labor Union-CCLU vs. National Labor Relations Commission, et al., G.R.
No. L-69494, May 29, 1987)
The fact that the businesses of private respondent and Acrylic are related, that some of the
employees of the private respondent are the same persons manning and providing for auxilliary
services to the units of Acrylic, and that the physical plants, offices and facilities are situated in the
same compound, it is the Court’s considered opinion that these facts are not sufficient to justify the
piercing of the corporate veil of Acrylic. Hence, the Acrylic not being an extension or expansion of
private respondent, the rank-and-file employees working at Acrylic should not be recognized as part
of, and/or within the scope of the petitioner, as the bargaining representative of private
respondent. (Indophil Textile Mill Workers Union-PTGWO vs. Voluntary Arbitrator Teodorico P.
Calica and Indophil Textile Mills, Inc., G.R. No. 96490, February 3, 1992)

The defense of separateness will be disregarded where the business affairs of a subsidiary
corporation are so controlled by the mother corporation to the extent that it becomes an
instrument or agent of its parent. But even when there is dominance over the affairs of the
subsidiary, the doctrine of piercing the veil of corporate fiction applies only when such fiction is
used to defeat public convenience, justify wrong, protect fraud or defend crime. (Bibiano O.
Reynoso, IV vs. Hon. Court of Appeals and General Credit Corporation, G.R. Nos. 116124-25,
November 22, 2000)

The sale of Times’ franchise as well as most of its bus units to a company owned by Rondaris’
daughter and family members, right in the middle of a labor dispute, is highly suspicious. It is
evident that the transaction was made in order to remove Times’ remaining assets from the reach
of any judgment that may be rendered in the unfair labor practice cases filed against it. (Times
Transportation Company, Inc. vs. Santos Sotelo, et al., G.R. No. 163786, February 16, 2005)

The mere fact that the stockholder signed the Memorandum of Agreement in behalf of the
corporation is not sufficient to prove that he exercised control over the corporation’s finances.Mere
ownership by a single stockholder or by another corporation of all or nearly all of the capital stocks
of the corporation is not, by itself, a sufficient ground for disregarding the separate corporate
personality as the alter-ego alter-ego elements must first be sufficiently established.
(NuccioSaverioand NS International, Inc. vs. Alfonso Puyat, G.R. No. 186433, November 27, 2013)

Piercing the veil of corporate fiction is warranted when a corporation ceased to exist only in name,
as it re-emerged in the person of another corporation, for the purpose of evading its unfulfilled
financial obligation under a compromise agreement. Under the doctrine of Piercing the veil of
corporate fiction, the corporate existence may be disregarded where the entity is formed or used
for non-legitimate purposes, such as to evade a just and de obligation, to justify a wrong, to shield
or perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable aims or
intentions, in which case, the fiction will be disregarded and the individuals composing it and the
two corporations will be treated as identical.(Eric Godfrey Stanley Liveseyvs. Binswanger
Philippines, Inc. and Keth Elliot, G.R. No. 177493, March 19, 2014)

b. Test in Determining Applicability

The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as
follows: 1.) Control, not mere majority or complete stock control, but complete domination, not
only of finances but of policy and business practice in respect to the transaction attacked so that
the corporate entity as to this transaction had at the time no separate mind, will or existence of its
own; 2.) Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in
contravention of plaintiff’s legal rights; and 3.) The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of. (Concept Builders, Inc. vs. the National
Labor Relations Commission, et al., G.R. No. 108734, May 29, 1996)

Concept Builders ceased its business operations in order to evade the payment to private
respondents of backwages and to bar their reinstatement to their former positions. It is very
obvious that the second corporation seeks the protective shield of a corporate fiction whose veil in
the present case could, and should, be pierced as it was deliberately and maliciously designed to
evade its financial obligation to its employees. (Ibid.)

Under a variation of the doctrine of piercing the veil of corporate fiction, when two business
enterprises are owned, conducted and controlled by the same parties, both law and equity will,
when necessary to protect the rights of third parties, disregard the legal fiction that two
corporations are distinct entities and treat them as identical or one and the same. While the
conditions for the disregard of the juridical entity may vary, the following are some probative
factors of identity that will justify the application of the doctrine of piercing the corporate veil, as
laid down in Concept Builders, Inc. v NLRC: (1) Stock ownership by one or common ownership of
both corporations; (2) Identity of directors and officers; (3) The manner of keeping corporate books
and records, and (4) Methods of conducting the business. (Heirs of Fe Tan Uy, represented by her
heir, Mauling Uy Lim vs. International Exchange Bank, G.R. No. 166282 & 83, February 13, 2013)

Piercing the corporate veil based on the alter ego theory requires the concurrence of three
elements: control of the corporation by the stockholder or parent corporation, fraud or
fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the
fraudulent or unfair act of the corporation.While ownership by one corporation of all or a great
majority of stocks of another corporation and their interlocking directorates may serve as indicia of
control, by themselves and without more, however, these circumstances are insufficient to establish
an alter ego relationship between DBP and PNB on the one hand and NMIC on the other hand as
nothing in the records shows that the corporate finances, policies and practices of NMIC were
dominated by DBP and PNB in such a way that NMIC could be considered to have no separate mind,
will or existence of its own. (Philippine National Bank v. Hydro Resources Contractors Corp., G.R.
Nos. 167530, 167561, 16760311, March 13, 2013)

The court cannot have jurisdiction over both the parent corporation and its wholly-owned
subsidiary where service of summons was only made upon the parent corporation. The alter ego
doctrine is inapplicable where fraudulent intent is lacking, ascontrol, by itself, does not mean that
the controlled corporation is a mere instrumentality or a business conduit of the mother company.
(Pacific Rehouse Corporationvs. CAand Export and Industry Bank, Inc., G.R. Nos. 199687 &
201537, March 24, 2014)

Ownership by Export Bank of great majority or all of stocks of E-Securities and the existence of
interlocking directorates may serve as badges of control, but ownership of another corporation, per
se, without proof of actuality of the other conditions are insufficient to establish an alter ego
relationship or connection between the two corporations, which will justify the setting aside of the
cover of corporate fiction. The existence of interlocking directors, corporate officers, and
shareholders is not enough justification to pierce the veil of corporate fiction in the absence of
fraud or other public policy considerations.(Pacific Rehouse Corporationvs. CAand Export and
Industry Bank, Inc., G.R. Nos. 199687 & 201537, March 24, 2014)
E. Incorporation and Organization

When the President of a non-existent principal entered into a contract and failed to pay its
obligation, he shall be the one liable to the aggrieved party. A person acting as a representative of a
non-existent principal is the real party to the contract sued upon, being the one who reaped the
benefits resulting from it.(Mariano A. Albert vs. University Publishing Co., Inc., G.R. No. L-19118,
January 30, 1965)

Where a national sports association which is not created by a special law or a general enabling act,
through its president, secured airline tickets for the trips of its athletes and officials to the South
East Asian Games and later on failed to pay the obligation, the president shall be personally liable. It
is a settled principle in corporation law that any person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges and becomes personally liable for
contract entered into or for other acts performed as such agent.(International Express Travel &
Tour Services, Inc. vs. Hon. Court of Appeals, Henri Kahn, Philippine Football Federation, G.R. No.
119002, October 19, 2000)

A corporation created and organized for the purpose of conducting the business of selling optical
lenses or eyeglasses is not engaged in the practice of optometry because the determination of the
proper lenses to sell to private respondent's clients entails the employment of optometrists who
have been precisely trained for that purpose. Private respondent's business, rather, is the buying
and importing of eyeglasses and lenses and other similar or allied instruments from suppliers
thereof and selling the same to consumers. (Samahanng Optometrists saPilipinas, Ilocos Sur-Abra
Chapter, et al. vs. Acebedo International Corporation and the Hon. Court of Appeals, G.R. No.
117097, 21 March 1997)

1. Promoter

a. Liability of Promoter
b. Liability of Corporation for Promoter’s Contracts

As a general rule, a corporation should have a full and complete organization and existence as an
entity before it can enter into any kind of a contract or transact any business. This is subject to the
exception that a contract made by the promoters of a corporation on its behalf may be adopted,
accepted or ratified by the corporation when organized. (Rizal Light & Ice Co., Inc. vs.the
Municipality of Morong, Rizal and the Public Service Commission,G.R. No. L-20993, September
28, 1968)

2. Number and Qualifications of Incorporators

It is possible for a business to be wholly owned by one individual because the validity of its
incorporation is not affected when such individual gives nominal ownership of only one share of
stock to each of the other four incorporators. As between the corporation on the one hand, and its
shareholders and third persons on the other, the corporation looks only to its books for the purpose
of determining who its shareholders are. (Nautica Canning Corporation, et al. vs. Roberto C.
Yumul,G.R. No. 164588, October 19, 2005)

3. Corporate Name — Limitations on Use of Corporate Name

 A change in the name of the corporation does not make it a new corporation and does not affect its
properties, right and liabilities. It is the same corporation with a different name, and its character is
in no respect changed. (Republic Planters Bank vs. Court of Appeals, G.R. No. 93073, December
21, 1992)

The Court cannot impose on a bank that changes its corporate name to notify a debtor of such
change absent any law, circular or regulation requiring it as such act would be judicial legislation.
Unless there is a law, regulation or circular from the SEC or BSP requiring the formal notification of
all debtors of banks of any change in corporate name, such notification remains to be a mere
internal policy that banks may or may not adopt. (P.C. Javier & Sons, Inc., et al. vs.Paic Savings &
Mortgage Bank, Inc., et al., G.R. No. 129552, June 29, 2005)

To fall within the prohibition under Section 18 of the Corporation Code, two requisites must be
proven, to wit: 1.) that the complainant corporation acquired a prior right over the use of such
corporate name; and 2.) the proposed name is either: (a) identical, or (b) deceptively or confusingly
similar to that of any existing corporation or to any other name already protected by law; or (c)
patently deceptive, confusing or contrary to existing law. Petitioner’s corporate name which is
“Industrial Refractories Corp. of the Phils.” and respondent’s corporate name which is “Refractories
Corp. of the Phils.” obviously contain the identical words “Refractories”, “Corporation” and
“Philippines;” hence, petitioner’s corporate name clearly falls within the prohibition. (Industrial
Refractories Corporation of the Philippines vs. Court of Appeals, Securities and Exchange
Commission and Refractories Corporation of the Philippines, G.R. No. 122174, October 3, 2002)

It is the SEC’s duty to prevent confusion in the use of corporate names not only for the protection of
the corporations involved but more so for the protection of the public, and it has authority to de-
register at all times and under all circumstances corporate names which in its estimation are likely
to generate confusion. Clearly therefore, the present case falls within the ambit of the SEC’s
regulatory powers.(Ibid.)

A change in the corporate name does not make a new corporation, whether effected by a special
act or under a general law. It has no effect on the identity of the corporation, or on its property,
rights, or liabilities because the corporation upon such change in its name, is in no sense a new
corporation, nor the successor of the original corporation.(P.C. Javier & Sons, Inc., et al. vs.Paic
Savings & Mortgage Bank, Inc., et al., G.R. No. 129552, June 29, 2005)

The mere change in the corporate name is not considered under the law as the creation of a new
corporation; hence, the renamed corporation remains liable for the illegal dismissal of its employee
separated under that guise. Verily, the amendments of the articles of incorporation of Zeta to
change the corporate name to Zuellig Freight and Cargo Systems, Inc. did not produce the
dissolution of the former as a corporation. (Zuellig Freight and Cargo Systemsvs. National Labor
Relations Commission, et al., G.R. No. 157900, July 22, 2013)

4. Corporate Term

The State and its officers also have an obvious interest in the term of life of associations, since the
conferment of juridical capacity upon them during such period is a privilege that is derived from
statute. And the State is naturally interested that this privilege be enjoyed only under the
conditions and not beyond the period that it sees fit to grant; and, particularly, that it be not
 abused in fraud and to the detriment of other parties; and for this reason it has been ruled that the
limitation (of corporate existence) to a definite period is an exercise of control in the interest of the
public. (Benguet Consolidated Mining Co. vs. Mariano Pineda, in his capacity as Securities and
Exchange Commissioner, G.R. No. L-7231, March 28, 1956)

When the period of corporate life expires, the corporation ceases to be a body corporate for the
purpose of continuing the business for which it was organized, but it shall nevertheless be
continued as a body corporate for three years after the time when it would have been so dissolved,
for the purpose of prosecuting and defending suits by or against it and enabling it gradually to settle
and close its affairs, to dispose of and convey its property and to divide its assets. There is no need
for the institution of a proceeding for quo warranto to determine the time or date of the dissolution
of a corporation because the period of corporate existence is provided in the articles of
incorporation. (Philippine National Bank vs.the Court of First Instance of Rizal, Pasig, et al.,G.R.
No. 63201, May 27, 1992)

5. Minimum Capital Stock and Subscription Requirements

The submission of the Board that the value of the assets of Asturias Sugar Central, Inc. transferred
to MSCI, as well as the loans or advances made by MTII to MSCI should have been taken into
consideration in computing the paid-up capital of MSCI is unmeritorious, at best, and betrays the
Board's sheer lack of grasp of a basic concept in Corporation Law, at worst. Not all funds or assets
received by the corporation can be considered paid-up capital, for this term has a technical
signification in Corporation Law which is the portion of the authorized capital stock of the
corporation, subscribed and then actually paid up. (MSCI-NACUSIP Local Chapter vs. National
Wages and Productivity Commission and Monomer Sugar Central, Inc., G.R. No. 125198, March 3,
1997)

In short, the term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock
that can vote in the election of directors. To construe broadly the term “capital” as the total
outstanding capital stock, including both common and non-voting preferred shares, grossly
contravenes the intent and letter of the Constitution that the “State shall develop a self-reliant and
independent national economy effectively controlled by Filipinos.” A broad definition unjustifiably
disregards who owns the all-important voting stock, which necessarily equates to control of the
public utility. (Wilson P. Gamboa vs. Finance Secretary Margarito B. Teves, et al., G.R. No. 176579,
June 28, 2011)

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. 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. (Heirs of Wilson P. Gamboa vs. Finance Secretary Margarito B. Teves, et al.,
G.R. No. 176579, October 9, 2012)

6. Articles of Incorporation

a. Nature and Function of Articles

 The best proof of the purpose of a corporation is its articles of incorporation and by-laws, and in the
case at bar, a perusal of the Articles of Incorporation of Ellice and Margo shows no sign of the
allegedly illegal purposes that petitioners are complaining of. It is well to note that, if a
corporation’s purpose, as stated in the Articles of Incorporation, is lawful, then the SEC has no
authority to inquire whether the corporation has purposes other than those stated, and mandamus
will lie to compel it to issue the certificate of incorporation.(Alicia E. Gala, et al.vs. Ellice Agro-
Industrial Corporation, et al., G.R. No. 156819, December 11, 2003)

b. Contents

The fact that it maintains branch offices in some parts of the country does not mean that it can be
sued in any of these places because to allow an action to be instituted in any place where a
corporate entity has its branch offices would create confusion and inconvenience to the
corporation. The residence of a corporation is the place where its principal office is established.
(Clavecillia Radio System vs. Hon. Agustin Antillon, as City Judge of the Municipal Court of
Cagayan de Oro City and New Cagayan Grocery, G.R. No. L-22238, February 18, 1967)

The venue in this case was improperly laid because the principal office of Hyatt as stated in the
Articles of Incorporation is in Makati but the case was filed in Mandaluyong where Hyatt transferred
its operations. Since the principal place of business of a corporation determines its residence or
domicile, then the place indicated in petitioner’s articles of incorporation becomes controlling in
determining the venue for the filing of a case. (Hyatt Elevators and Escalators Corporation vs.
Goldstar Elevators Phils., Inc., G.R. No. 161026, October 24, 2005)

c. Amendment

The Corporation does not necessarily prohibit the transfer of proprietary shares by its members
when its amended Articles of Incorporation provides that: "No transfer shall be valid except
between the parties, and shall be registered in the Membership Book unless made in accordance
with these Articles and the By-Laws." The authority granted to a corporation to regulate the transfer
of its stock does not empower it to restrict the right of a stockholder to transfer his shares, but
merely authorizes the adoption of regulations as to the formalities and procedure to be followed in
effecting transfer. (Marsh Thomson vs. Court of Appeals and the American Champer of Commerce
of the Philippines, Inc,, G.R. No. 116631, October 28, 1998)

d. Non-Amenable Items

7. Registration and Issuance of Certificate of Incorporation

8. Adoption of By-Laws

a. Nature and Functions of By-Laws

Every corporation has the inherent power to adopt by-laws 'for its internal government, and to
regulate the conduct and prescribe the rights and duties of its members towards itself and among
themselves in reference to the management of its affairs. Under section 21 of the Corporation Law,
a corporation may prescribe in its by-laws the qualifications, duties and compensation of directors,
officers and employees. (John Gokongwei, Jr. vs. Securities and Exchange Commission, et al., G.R.
No. L-45911, April 11, 1979)

Corporate powers may be directly conferred upon corporate officers or agents by statute, the
articles of incorporation, the by-laws or by resolution or other act of the board of directors. Since
the by-laws are a source of authority for corporate officers and agents of the corporation, a
resolution of the Board of Directors of Citibank appointing an attorney in fact to represent and bind
it during the pre-trial conference of the case at bar is not necessary because its by-laws allow its
officers, the Executing Officer and the Secretary Pro-Tem - to execute a power of attorney to a
designated bank officer, William W. Ferguson in this case, clothing him with authority to direct and
manage corporate affairs. (Citibank, N.A. vs. Hon. Segundino G. Chua, et al., G.R. No. 102300,
March 17, 1993)

Since the SEC will grant a license only when the foreign corporation has complied with all the
requirements of law, it follows that when it decides to issue such license, it is satisfied that the
applicant's by-laws, among the other documents, meet the legal requirements. Therefore,
petitioner bank's by-laws, though originating from a foreign jurisdiction, are valid and effective in
the Philippines. (Citibank, N.A. vs. Hon. Segundino G. Chua, et al., G.R. No. 102300, March 17,
1993)

Non-filing of the by-laws will not result in automatic dissolution of the corporation. Under Section
6(I) of PD 902-A, the SEC is empowered to ‘suspend or revoke, after proper notice and hearing, the
franchise or certificate of registration of a corporation’ on the ground inter alia of ‘failure to file by-
laws within the required period.’ (Loyola Grand Villas Homeowners (South) Association, Inc. vs.
Hon. Court of Appeals, Home Insurance And Guaranty Corporation, Emden Encarnacion and
Horatio Aycardo, G.R. No. 117188, August 7, 1997)

Where a corporate office is not specifically indicated in the roster of corporate offices in the by-laws
of a corporation, the board of directors may also be empowered under the by-lawsto create
additional officers as may be necessary. As petitioner’s appointment as comptroller required the
approval and formal action of the Board of Directors to become valid, it is clear therefore that
petitioner is a corporate officer whose dismissal may be the subject of an intra-corporate
controversy. (DilyDanyNacpil vs. Intercontinental Broadcasting Corporation, G.R. No. 144767,
March 21, 2002)

Conformably with Section 25 of the Corporation Code, a position must be expressly mentioned in
the By-Laws in order to be considered as a corporate office. Thus, the creation of an office pursuant
to or under a By-Law enabling provision is not enough to make a position a corporate office.
(Matling Industrial and Commercial Corporation, et al. vs. Ricardo R. Coros, G.R. No. 157802,
October 13, 2010)

b. Requisites of Valid By-Laws

A provision in the by-laws which stressed that “in the event of a contest or the pendency of an
action regarding ownership of such certificate or certificates of stock allegedly lost, stolen or
destroyed, the issuance of a new certificate or certificates would await the final decision by a court
regarding the ownership thereof," cannot be invoked to overturn an order of a court of law for the
corporation to issue new certificates of stock in lieu of those which were physically outside of
Philippine jurisdiction. It would be most highly unorthodox if a corporate by-law would be accorded
such a high estate in the jural order that a court must not only take note of it but yield to its alleged
controlling force. (Testate Estate of Idonah Slade Perkins vs.Benguet Consolidated, Inc., G.R. No. L-
23145, November 29, 1968)

A provision in the by-laws of the corporation stating that of the 15 members of its Board of
Directors, only 14 members would be elected while the remaining member would be the
representative of an educational institution located in the village of the homeowners, is invalid for
being contrary to law. The fact that for fifteen years it has not been questioned or challenged but,
on the contrary, appears to have been implemented by the members of the association cannot
forestall a later challenge to its validity because, if it is contrary to law, it is beyond the power of the
members of the association to waive its invalidity(Grace Christian High Schoolvs.the Court Of
Appeals, Grace Village Association, Inc., Alejandro G. Beltran, and Ernesto L. Go, G.R. No. 108905,
23 October 1997)

The Corporation does not necessarily prohibit the transfer of proprietary shares by its members
when its amended Articles of Incorporation provides that: "No transfer shall be valid except
between the parties, and shall be registered in the Membership Book unless made in accordance
with these Articles and the By-Laws." The authority granted to a corporation to regulate the transfer
of its stock does not empower it to restrict the right of a stockholder to transfer his shares by
means of by-laws provisions, but merely authorizes the adoption of regulations as to the formalities
and procedure to be followed in effecting transfer. (Marsh Thomson vs. Court of Appeals and the
American Champer of Commerce of the Philippines, Inc,, G.R. No. 116631, October 28, 1998)

c. Binding Effects

CBC is not bound by the provision in the by-laws of the VGCCI granting the VGCCI a preferred lien
over the share of stock of a member for unpaid dues. The by-law restricting the transfer of shares
cannot have any effect on the transferee of the shares in question as he had no knowledge of such
by-law when the shares were assigned to him. (China Banking Corporation vs. Court of Appeals,
and Valley Golf and Country Club, Inc., G.R. No. 117604, March 26, 1997)

PMI College alleged that the employment contract entered into between the school and Galvan is
invalid because the signatory thereon was not the Chairman of the Board as required by its by-laws.
However, since by-laws operate merely as internal rules among the stockholders, they cannot affect
or prejudice third persons who deal with the corporation, unless they have knowledge of the same.
(PMI Colleges vs. the National Labor Relations Commission and Alejandro Galvan, G.R. No.
121466, 15 August 1997)

d. Amendment or Revision

When an amendment to a provision in the Amended By-Laws requiring the unanimous vote of the
directors present at a special or regular meeting was not printed on the application form for
proprietory membership, and what was printed thereon was the original provision which was silent
on the required number of votes needed for admission of an applicant as a proprietary member,
the Board of Directors committed fraud and evident bad faith in disapproving respondent’s
application under Article 31 of the Corporation Code. The explanation given by the petitioner that
the amendment was not printed on the application form due to economic reasons is flimsy and
unconvincing because such amendment, aside from being extremely significant, was introduced
 way back in 1978 or almost twenty (20) years before respondent filed his application. (Cebu
Country Club, Inc., et al. vs. Ricardo F. Elizagaque, G.R. No. 160273, January 18, 2008)

F. Corporate Powers

1. General Powers, Theory of General Capacity

The stevedoring services which involve the unloading of the coal shipments into the NPC pier for its
eventual conveyance to the power plant are incidental and indispensable to the operation of the
plant. A corporation is not restricted to the exercise of powers expressly conferred upon it by its
charter, but has the power to do what is reasonably necessary or proper to promote the interest or
welfare of the corporation. (National Power Corporation vs. Honorable Abraham P. Vera, Presiding
Judge, Regional Trial Court, National Capital Judicial Region, Branch 90, Quezon City and Sea Lion
International Port Terminal Services, Inc., G.R. No. 83558, February 27, 1989)

It would seem that under Philippine law, a joint venture is a form of partnership and should thus be
governed by the law of partnerships. The Supreme Court has however recognized a distinction
between these two business forms, and has held that although a corporation cannot enter into a
partnership contract, it may however engage in a joint venture with others. (WolrgangAurbach,
John Griffin, David P. Whittinghamand Charles Chamsay vs. Sanitary Wares Manufacturing
Corporatoin, Ernesto V. Lagdameo, Ernesto R. Lagdameo, Jr., Enrique R. Lagdameo, George F. Lee,
Raul A. Boncan, Baldwin Young and Avelino V. Cruz, G.R. No. 75875, December 15, 1989)

Providing gratuity pay is one of the express powers of the corporation under the Corporation Code
and therefore, resolutions passed by the board approving the grant of gratuity pay to the
employees of the corporation during a meeting where one of the directors was not notified thereof
are not ultra vires. The grant of gratuity pay does not require shareholders’ approval as it is not
tantamount to the sale, lease, exchange or disposition of all or substantially all of the
corporation's assets.(Lopez Realty, Inc., and Asuncion Lopez Gonzales vs. FlorentinaFontecha, et
al., and the National Labor Relations Commission, G.R. No. 76801 August 11, 1995)

“Lideco Corporation” had no personality to intervene since it had not been duly registered as a
corporation. If petitioner “Laureano Investment & Development Corporation” legally and truly
wanted to intervene, it should have used its corporate name as the law requires and not another
name which it had not registered.(Laureano Investment & Development Corporation vs. the
Honorable Court of Appeals and BORMAHECO, Inc., G.R. No. 100468, May 6, 1997)

The power of a corporation to sue and be sued is exercised by the board of directors. 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 bylaws or by a specific act of the board. Absent the
said board resolution, a petition may not be given due course.(LigayaEsguerra, et al. vs. Holcim
Philippines, Inc., G.R. No. 182571, September 2, 2013)

2. Specific Powers, Theory of Specific Capacity

a. Power to Extend or Shorten Corporate Term

Section 11 of Corporation Code provides that a corporation shall exist for a period not exceeding
fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is
extended. Upon the expiration of the period fixed in the articles of incorporation in the absence of
compliance with the legal requisites for the extension of the period, the corporation ceases to exist
and is dissolved ipso facto.(Philippine National Bank vs. the Court of First Instance of Rizal, Pasig,
et al.,G.R. No. 63201, May 27, 1992)

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

Prior to the approval by the Securities and Exchange Commission of the increase in the authorized
capital stock, such payments cannot as yet be deemed part of a corporation’s paid-up capital,
technically speaking, because its capital stock has not yet been legally increased. Such payments
constitute deposits on future subscriptions, money which the corporation will hold in trust for the
subscribers until it files a petition to increase its capitalization and a certificate of filing of increase
of capital stock is approved and issued by the SEC. (Central Textile Mills, Inc.vs. National Wages
and Productivity Commission, et al., G.R. No. 104102, August 7, 1996)

c. Power to Deny Pre-Emptive Rights

d. Power to Sell or Dispose of Corporate Assets

The sale or disposition of all or substantially all properties of the corporation requires, in addition to
a proper board resolution, the affirmative votes of the stockholders holding at least two-thirds (2/3)
of the voting power in the corporation in a meeting duly called for that purpose.No doubt, the
questioned resolution was not confirmed at a subsequent stockholders meeting duly called for the
purpose by the affirmative votes of the stockholders holding at least two-thirds (2/3) of the voting
power in the corporation. (Rosita Peña vs. the Court of Appeals, Spouses Rising T. Yap and Catalina
Yap, Pampanga Bus Co., Inc., Jesus Domingo, Joaquin Briones, Salvador Bernardez, Marcelino
Enriquez and Edgardo A. Zabat, G.R. No. 91478, February 7, 1991)

Where an asset constitutes the only property of the corporation, its sale to a third-party is a sale or
disposition of all the corporate property and assets of said corporation falling squarely within the
contemplation of Section 40 of the Corporation Code. Hence, for the sale to be valid, the majority
vote of the legitimate Board of Trustees, concurred in by the vote of at least 2/3 of the bona fide
members of the corporation should have been obtained.(Islamic Directorate of the Philippines,
Manuel F. Perea and Securities & Exchange Commission,vs. Court of Appeals And Iglesia Ni Cristo,
G.R. No. 117897, May 14, 1997)

e. Power to Acquire Own Shares

The requirement of unrestricted retained earnings to cover the shares is based on the trust fund
doctrine which means that the capital stock, property and other assets of a corporation are
regarded as equity in trust for the payment of corporate creditors. The reason is that creditors of a
corporation are preferred over the stockholders in the distribution of corporate assets. (Boman
Environmental Development Corporation vs. Hon. Court of Appeals and Nilcar Y. Fajilan, G.R. No.
77860, November 22, 1988)

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

A corporation, under the Corporation Code, has only such powers as are expressly granted to it by
law and by its articles of incorporation, those which may be incidental to such conferred powers,
those reasonably necessary to accomplish its purposes and those which may be incident to its
existence. In the case at bar, a company engaged in the practice of lending money is categorically
prohibited from “engaging in pawnbroking as defined under PD 114.”(Pilipinas Loan Company, Inc.
vs. Hon. Securites and Exchange Commission and Filipinas Pawnshop, Inc., G.R. No. 104720, April
4, 2001)

A mining corporation cannot engage in the highly speculative business of urban real estate
development, and could not have validly acquired real estate property. ((Heirs of Antonio Pael and
Andrea Alcantara and CrisantoPael vs. Court of Appeals, Jorge H. Chin and Renato B. Mallari, G.R.
No. 133547, February 10, 2000)

g. Power to Declare Dividends

The dividends received by a corporation from corporate investments in other companies are
corporate earnings. As such shareholder, the dividends paid to it were its own money, which may
then be available for wage increments. (Madrigal & Company, Inc. vs. Hon. Ronaldo B. Zamora, et
al., G.R. NO. L-48237, June 30, 1987)

Dividends cannot be declared for preferred shares which were guaranteed a quarterly dividend if
there are no unrestricted retained earnings. "Interest bearing stocks", on which the corporation
agrees absolutely to pay interest before dividends are paid to common stockholders, is legal only
when construed as requiring payment of interest as dividends from net earnings or surplus only.
(Republic Planters Bank vs. Hon. Enrique A. Agana, Sr., as Presiding Judge, Court of First Instance
of Rizal, Branch XXVIII, Pasay City, Robes-Francisco Realty & Development Corporation and Adalia
F. Robes, G.R. No. 51765, March 3, 1997)

h. Power to Enter Into Management Contract

i. Ultra Vires Acts

i. Applicability of Ultra Vires Doctrine

ii. Consequences of Ultra Vires Acts

While as a rule an ultra vires act is one committed outside the object for which a corporation is
created as defined by the law of its organization and therefore beyond the powers conferred upon
it by law, there are however certain corporate acts that may be performed outside of the scope of
the powers expressly conferred if they are necessary to promote the interest or welfare of the
corporation such as the establishment of the local post office which is a vital improvement in the
living condition of the employees and laborers who came to settle in a mining camp which is far
removed from the postal facilities. The term ultra vires should be distinguished from an illegal act
for the former is merely voidable which may be enforced by performance, ratification, or estoppel,
while the latter is void and cannot be validated. (Republic of the Philippines vs. Acoje Mining
Company, Inc., G.R. No. L-18062, February 28, 1963)

The act of issuing the checks was well within the ambit of a valid corporate act, for it was for
securing a loan to finance the activities of the corporation, hence, not an ultra vires act. (Atrium
Management Corporation vs. Court of Appeals, et al., G.R. No. 109491, February 28, 2001)

Unlike illegal acts which contemplate the doing of an act that is contrary to law, morals, or public
policy or public duty, and are void, ultra vires acts are those which are not illegal but are merely not
within the scope of the articles of incorporation and by-laws. They are merely voidable and may
 become binding and enforceable when ratified by the stockholders. (Maria Clara Pirovana, et
al.vs.the De La Rama Steamship Co., G.R. No. L-5377, December 29, 1954)

3. How Exercised

a. By the Shareholders
b. By the Board of Directors

The general rule is that a corporation, through its board of directors, should act in the manner and
within the formalities, if any, prescribed by its charter or by the general law. Directors must act as a
body in a meeting called pursuant to the law or the corporation's by-laws, otherwise, any action
taken therein may be questioned by any objecting director or shareholder; but an action of the
board of directors during a meeting, which was illegal for lack of notice, may be ratified either
expressly, by the action of the directors in subsequent legal meeting, or impliedly, by the
corporation's subsequent course of conduct.(Lopez Realty, Inc., and Asuncion Lopez Gonzales vs.
FlorentinaFontecha, et al., and the National Labor Relations Commission, G.R. No. 76801 August
11, 1995)

By the express mandate of the Corporation Code (Section 26), all corporations duly organized
pursuant thereto are required to submit within the period therein stated (30 days) to the Securities
and Exchange Commission the names, nationalities and residences of the directors, trustees and
officers elected. In determining whether the filing of a suit was authorized by the board of directors,
the list of directors in the latest general information sheet filed with the Securities and Exchange
Commission is controlling.(Premium Marble Resources, Inc.vs. the Court of Appeals, G.R. No.
96551. November 4, 1996)

Under Section 36 of the Corporation Code, read in relation to Section 23,it is clear that where a
corporation is an injured party, its power to sue is lodged with its board of directors or trustees. In
this case, the petitioner failed to show any proof that he was authorized or deputized or granted
specific powers by the corporation’s board of director to sue Victor AngSiong for and on behalf of
the firm, and therefore he had no such power or authority to sue on Concord’s behalf.(Tam Wing
Takvs. Hon. Ramon P. Makasiar, G.R. No. 122452, January 29, 2001)

c. By the Officers

When the practice of the corporation has been to allow its general manager to negotiate and
execute contracts in its copra trading activities for and in behalf of the corporation without prior
board approval, the board itself, by its acts and through acquiescence, practically laid aside the by-
law requirement of prior approval. Settled jurisprudence has it that where similar acts have been
approved by the directors as a matter of general practice, custom, and policy, the general manager
may bind the company without formal authorization of the board of directors. (The Board of
Liquidators, representing the Government of the Republic of the Philippines vs.Heirs of Maximo
M. Kalaw, Juan Bocar, Estate of the deceased Casimiro Garcia, and Leonor Moll,G.R. No. L-18805,
August 14, 1967)

When a bank, by its acts and failure to act, has clearly clothed its manager with apparent authority
to sell an acquired asset in the normal course of business, it is legally obliged to confirm the
transaction by issuing a board resolution to enable the buyers to register the property in their
names. It has a duty to perform necessary and lawful acts to enable the other parties to enjoy all
 benefits of the contract which it had authorized. (Rural Bank Of Milaor (Camarines Sur) vs.
Francisca Ocfemia, Rowena Barrogo, Marife O. Niño, FelicisimoOcfemia, Renato Ocfemia Jr., and
Winston Ocfemia, G.R. No. 137686, February 8, 2000)

If a corporation consciously lets one of its officers, or any other agent, to act within the scope of an
apparent authority, it will be estopped from denying such officer’s authority. Since the records show
that Calo, who was an Account Officer, was the one assigned to transact on petitioner’s behalf
respecting the loan transactions and arrangements of Inland as well as those of Hanil-Gonzales and
Abrantes, it is presumed that he had authority to sign for the bank in the Deed of Assignment.
(Westmont Bank (formerly Associated Citizens Bank and now United Overseas Bank, Phils.) And
The Provincial Sheriff of Rizal vs. Inland Construction and Development Corp., G.R. No. 123650,
March 23, 2009)

Accordingly, the authority to act for and to bind a corporation may be presumed from acts of
recognition in other instances, wherein the power was exercised without any objection from its
board or shareholders. Undoubtedly, petitioner had previously allowed Atty. Soluta to enter into the
first agreement without a board resolution expressly authorizing him; thus, it had clothed him with
apparent authority to modify the same via the second letter-agreement. It is not the quantity of
similar acts which establishes apparent authority, but the vesting of a corporate officer with the
power to bind the corporation. (Associated Bank vs. Spouses Rafael and MonalizaPronstroller,
G.R. No. 148444, 14 July 2008)

The Court would be unduly stretching the doctrine of apparent authority were it would consider
the power to undo or nullify solemn agreements validly entered into as within the doctrine’s ambit.
Although a branch manager, within his field and as to third persons, is the general agent and is in
general charge of the corporation, with apparent authority commensurate with the ordinary
business entrusted him and the usual course and conduct thereof, yet the power to modify or
nullify corporate contracts remains generally in the board of directors.(VioletaTudtudBanate, Mary
Melgrid M. Cortel, BonifacioCortel, RosendoMaglasang, and PatrociniaMonilar vs., G.R. No.
163825, July 13, 2010)

Apparent authority is derived not merely from practice. Its existence may be ascertained though (1)
the general manner in which the corporation holds out an officer or agent as having the power to
act or, in other words the apparent authority to act in general, with which it clothes him; or (2) the
acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof,
within or beyond the scope of his ordinary powers. Thus, the authority of the president and
treasurer who were given broad powers by allowing them to transact with third persons without
the necessary written authority from the non-performing board of directors cannot be denied by
the corporation who failed to take precautions to prevent its own corporate officers from abusing
their powers.(Advance Paper Corporation and George Haw, in his capacity as President of
Advance Paper Corporationvs. Arma Traders Corporation, et al., G.R. No. 176897, December 11,
2013)

4. Trust Fund Doctrine

In the instant case, the rescission of the Pre-Subscription Agreement will effectively result in the
unauthorized distribution of the capital assets and property of the corporation, thereby violating
the Trust Fund Doctrine and the Corporation Code, since rescission of a subscription agreement is
not one of the instances when distribution of capital assets and property of the corporation is
 allowed. The Trust Fund Doctrine provides that subscriptions to the capital stock of a corporation
constitute a fund to which the creditors have a right to look for the satisfaction of their claims. (Ong
Yong, et al. vs. David S. Tiu, et al., G.R. No. 144476 & G.R. No. 144629, 8 April 2003)

When negotiations ensued in light of a planned takeover of company and the counsel of the buyer
advised the stockholder through a letter that he may take the machineries he brought to the
corporation out with him for his own use and sale, the previous stockholder cannot recover said
machineries and equipment because these properties remained part of the capital property of the
corporation. Under the trust fund doctrine, the capital stock, property, and other assets of a
corporation are regarded as equity in trust for the payment of corporate creditors which are
preferred over the stockholders in the distribution of corporate assets. (Ryuichi Yamamoto vs.
Nishino Leather Industries, Inc. and Ikuo Nishino, G.R. No. 150283, April 16, 2008)

G. Board of Directors and Trustees

1. Doctrine of Centralized Management

2. Business Judgment Rule

The determination of the necessity for additional offices and/or positions in a corporation is a
management prerogative which courts are not wont to review in the absence of any proof that such
prerogative was exercised in bad faith or with malice.Indeed, it would be an improper judicial
intrusion into the internal affairs of Filport for the Court to determine the propriety or impropriety
of the creation of offices therein and the grant of salary increases to officers thereof. (Filipinas Port
Services, Inc., represented by stockholders, Eliodoro C. Cruz and Mindanao Terminal and
Brokerage Services, Inc. vs. Victoriano S. Go, et al., G.R. No. 161886, March 16, 2007)

The Board of Directors of Matling could not validly delegate the power to create a corporate office
to the President, in light of Section 25 of the Corporation Code requiring the Board of Directors
itself to elect the corporate officers. Verily, the power to elect the corporate officers was a
discretionary power that the law exclusively vested in the Board of Directors, and could not be
delegated to subordinate officers or agents. (Matling Industrial and Commercial Corporation, et al.
vs. RICARDO R. COROS, G.R. No. 157802, October 13, 2010)

Under section 21 of the Corporation Law, a corporation may prescribe in its by-laws the
qualifications, duties and compensation of directors, officers and employees. A provision in the by-
laws of the corporation that no person shall qualify or be eligible for nomination for elections to the
board of directors if he is engaged in any business which competes with that of the Corporation is
valid, as long as due process is observed. (John Gokongwei, Jr. vs. Securities and Exchange
Commission, et al., G.R. No. L-45911, April 11, 1979)

3. Tenure, Qualifications and Disqualifications of Directors or Trustees

The board of directors of corporations must be elected from among the stockholders or members.
Thus, a provision in the by-laws of the corporation stating that of the fifteen members of its Board
of Directors, only 14 members would be elected while the remaining member would be the
representative of an educational institution located in the village of the homeowners, is invalid for
being contrary to law as it violates the one-year term limit of the directors. (Grace Christian High
 Schoolvs.the Court Of Appeals, Grace Village Association, Inc., Alejandro G. Beltran, and Ernesto
L. Go, G.R. No. 108905, 23 October 1997)

Both under the old and the new Corporation Codes there is no dispute as to the most immediate
effect of a voting trust agreement on the status of a stockholder who is a party to its execution —
from legal titleholder or owner of the shares subject of the voting trust agreement, he becomes the
equitable or beneficial owner. Any director who executes a voting trust agreement over all his
shares ceases to be a stockholder of record in the books of the corporation and therefore ceases to
be a director.(Ramon C. Lee and Antonio DM. Lacdao vs. the Hon. Court of Appeals, Sacoba
Manufacturing Corp., Pablo Gonzales, Jr. and Thomas Gonzales, G.R. No. 93695, 4 February 1992)

4. Elections

a. Cumulative Voting/Straight Voting

b. Quorum

5. Removal

6. Filling of Vacancies

When an incumbent member of the board of directors continues to serve in a holdover capacity, it
implies that the office has a fixed term, which has expired, and the incumbent is holding the
succeeding term. A vacancy resulting from the resignation of an officer in a hold-over capacity, by
the terms of Section 29 of the Corporation Code, must be filled by the stockholders in a regular or
special meeting called for the purpose.(Valle Verde Country Club, Inc., et al. vs. Victor Africa, G.R.
No. 151969, 4 September 2009)

7. Compensation

The proscription against granting compensation to directors/trustees of a corporation is not a

sweeping rule as worthy of note is the clear phraseology of Section 30 which states: “xxx [T]he
directors shall not receive any compensation, as such directors, xxx.” The unambiguous implication
is that members of the board may receive compensation, in addition to reasonable per diems,
when they render services to the corporation in a capacity other than as directors/trustees.
(Western Institute of Technology, Inc., et al. vs.Ricardo T. Salas, et al., G.R. No. 113032, 21 August
1997)

8. Fiduciary Duties and Liability Rules

Before a director or officer of a corporation can be held personally liable for corporate obligations,
the following requisites must concur: (1) the complainant must allege in the complaint that the
director or officer assented to patently unlawful acts of the corporation, or that the officer was
guilty of gross negligence or bad faith; and (2) the complainant must clearly and convincingly prove
such unlawful acts, negligence or bad faith. In this case, petitioners are correct to argue that it was
not alleged, much less proven, that Uy committed an act as an officer of Hammer that would permit
the piercing of the corporate veil as what the complaint simply stated is that she, together with her
errant husband Chua, acted as surety of Hammer, as evidenced by her signature on the Surety
Agreement which was later found by the RTC to have been forged.(Heirs of Fe Tan Uy, represented
by her heir, Mauling Uy Lim vs. International Exchange Bank, G.R. No. 166282 & 83, February 13,
2013)

Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable for
the debts of the corporation. The governing law on personal liability of directors for debts of the
corporation is still Section 31 of the Corporation Code.(Alert Security and Investigation Agency, Inc.
and/or Manuel D. Dasig vs. SaidaliPasawilan, WilfredoVercelesand MelchorBulusan, G.R. No.
182397, September 14, 2011)

The rule is still that the doctrine of piercing the corporate veil applies only when the corporate
fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime. Neither
Article 212[e] nor Article 273 (now 272) of the Labor Code expressly makes any corporate officer
personally liable for the debts of the corporation.(Antonio C. Carag vs. National Labor Relations
Commission, et al., G.R. No. 147590, April 2, 2007)

The lawyer acting for the corporation must be specifically authorized to sign pleadings for the
corporation. Specific authorization could only come in the form of a board resolution issued by the
Board of Directors that specifically authorizes the counsel to institute the petition and execute the
certification, to make his actions binding on his principal, i.e., the corporation. This Court has not
wavered in stressing the need for strict adherence to procedural requirements. (Maranaw Hotels
and Resort Corp. vs. Court of Appeals, Sheryl Oabeland Manila Resource Development Corp., G.R.
No. 149660, January 20, 2009)

The following officials or employees of the company who can sign the verification and certification
without need of a board resolution are: (1) the Chairperson of the Board of Directors, (2) the
President of a corporation, (3) the General Manager or Acting General Manager, (4) Personnel
Officer, and (5) an Employment Specialist in a labor case.It is thus clear that the failure to attach the
Secretary’s Certificate, attesting to the General Manager’s authority to sign the Verification and
Certification of Non-Forum Shopping, should not be considered fatal to the filing of the petition.
(Mid-Pasig Land Development Corporation vs. Mario Tablante, doing business under the name
and style ECRM Enterprises; Rockland Construction Company; Laurie Litam; and Mc Home Depot,
Inc., G.R. No. 162924, 4 February 2010)

The execution of a document by a bank manager called “pagares” which guaranteed purchases on
credit by a client is contrary to the General Banking law which prohibits bank officers from
guaranteeing loans of bank clients. In this case, it is plain from the guarantee Grey executed that he
was acting for himself, not in representation of UCPB; hence, UCPB cannot be bound by Grey’s
above undertaking since he appears to have made it in his personal capacity. (United Coconut
Planters Bank vs. Planters Products, Inc., Janet Layson and Gregory Grey, G.R. No. 179015, June
13, 2012)

To hold the general manager personally liable alone for the debts of the corporation and thus pierce
the veil of corporate fiction, it is required that the bad faith of the officer be established clearly and
convincingly. Petitioner, however, has failed to include any submission pertaining to any wrongdoing
of the general manager. Necessarily, it would be unjust to hold the latter personally liable. (Mercy
Vda. de Roxas vs. Our Lady's Foundation, Inc., G.R. No. 182378, March 6, 2013)

A corporation has its own legal personality separate and distinct from those of its stockholders,
directors or officers. Hence, absent any evidence that they have exceeded their authority, corporate
 officers are not personally liable for their official acts. Corporate directors and officers may be held
solidarily liable with the corporation for the termination of employment only if done with malice or
in bad faith.(Rolando DS. Torres v. Rural Bank of San Juan, Inc. et al., G.R. No. 184520, March 13,
2013)

To hold a director or officer personally liable for corporate obligations, two requisites must concur:
(1) it must be alleged in the complaint that the director or officer assented to patently unlawful acts
of the corporation or that the officer was guilty of gross negligence or bad faith; and (2) there must
be proof that the officer acted in bad faith.In the absence of a finding that he acted with malice or
bad faith, Ang is merely one of the incorporators of Polymer and to single him out and require him
to personally answer for the liabilities of Polymer is without basis. (Polymer Rubber Corporation
and Joseph Angvs. BayoloSalamuding, G.R. No. 185160, July 24, 2013)

Although joint and solidary liability for money claims and damages against a corporation attaches to
its corporate directors and officers under R.A. 8042, it is not automatic. To make them jointly and
solidarily liable, there must be a finding that they were remiss in directing the affairs of the
corporation, resulting in the conduct of illegal activities. Absent any findings regarding the same,
the corporate directors and officers cannot be held liable for the obligation of the corporation
against the judgment debtor.(Elizabeth M. Gaguivs. Simeon Dejeroand TeodoroPermejo, G.R. No.
196036, October 23, 2013)

9. Responsibility for Crimes

The Trust Receipts Law recognizes the impossibility of imposing the penalty of imprisonment on a
corporation. Hence, if the entrustee is a corporation, the law makes the officers or employees or
other persons responsible for the offense liable to suffer the penalty of imprisonment. (Edward C.
Ong, vs. the Court of Appeals and the People of the Philippines, G.R. No. 119858, April 29, 2003)

Though the entrustee is a corporation, nevertheless, the law specifically makes the officers,
employees or other officers or persons responsible for the offense, without prejudice to the civil
liabilities of such corporation and/or board of directors, officers, or other officials or employees
responsible for the offense. The rationale is that such officers or employees are vested with the
authority and responsibility to devise means necessary to ensure compliance with the law and, if
they fail to do so, are held criminally accountable; thus, they have a responsible share in the
violations of the law. (Alfredo Ching vs. the Secretary of Justice, et al., G. R. No. 164317, February
6, 2006)

10. Inside Information

11. Contracts

a. By Self-Dealing Directors with the Corporation

b. Between Corporations with Interlocking Directors

When a mortgagee bank foreclosed the mortgage on the real and personal property of the debtor
and thereafter assigned the properties to a corporation it formed to manage the foreclosed assets,
the unpaid seller of the debtor cannot complain that the assignment is invalid simply because the
mortgagee and the assignee have interlocking directors.There is no bad faith on the part of DBP by
its creation of Nonoc Mining, Maricalum and Island Cement as the creation of these three
 corporations was necessary to manage and operate the assets acquired in the foreclosure sale lest
they deteriorate from non-use and lose their value.(Development Bank of the Philippines vs.
Honorable Court of Appeals and Remington Industrial Sales Corporation , G.R. No. 126200,
August 16, 2001)

c. Management Contracts

12. Executive Committee

13. Meetings

The non-signing by the majority of the members of the GSIS Board of Trustees of the minutes of the
meeting does not necessarily mean that the supposed resolution was not approved by the board.
The signing of the minutes by all the members of the board is not required because it is the
signature of the corporate secretary gives the minutes of the meeting probative value and
credibility.(People of the Philippines vs. Hermenegildo Dumlao y Castiliano and Emilio La'o y
Gonzales, G.R. No. 168918, March 2, 2009)

a. Regular or Special
i. When and Where
ii. Notice
b. Who Presides
c. Quorum

Under Section 25 of the Corporation Code of the Philippines, the articles of incorporation or by-laws
of the corporation may fix a greater number than the majority of the number of board members to
constitute the quorum necessary for the valid transaction of business. When only three (3) out of
five (5) members of the board of directors of PAMBUSCO convened on November 19, 1974 by virtue
of a prior notice of a special meeting,there was no quorum to validly transact business since, under
Section 4 of the amended by-laws hereinabove reproduced, at least four (4) members must be
present to constitute a quorum in a special meeting of the board of directors of PAMBUSCO.(Rosita
Peña vs. the Court of Appeals, Spouses Rising T. Yap and Catalina Yap, Pampanga Bus Co., Inc.,
Jesus Domingo, Joaquin Briones, Salvador Bernardez, Marcelino Enriquez and Edgardo A. Zabat,
G.R. No. 91478, February 7, 1991)

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

When proxies are solicited in relation to the election of corporate directors, the resulting
controversy, even if it ostensibly raised the violation of the SEC rules on proxy solicitation, should be
 properly seen as an election controversy within the original and exclusive jurisdiction of the trial
courts by virtue of Section 5.2 of the SRC in relation to Section 5(c) of Presidential Decree No. 902-
A. From the language of Section 5(c) of Presidential Decree No. 902-A, it is indubitable that
controversies as to the qualification of voting shares, or the validity of votes cast in favor of a
candidate for election to the board of directors are properly cognizable and adjudicable by the
regular courts exercising original and exclusive jurisdiction over election cases. (Government
Service Insurance System vs. the Hon. Court of Appeals, G.R. No. 183905, April 16, 2009)

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

In order to give rise to any obligation to pay on the part of the respondent, the petitioners should
first make a valid demand that the respondent refused to pay despite having unrestricted retained
earnings. Otherwise, the respondent could not be said to be guilty of any actionable omission that
could sustain their action to collect. (Philip Turner and Elnora Turner vs. Lorenzo
ShippingCorporation, G.R. No. 157479, November 24, 2010)

c. Right to Inspect

Considering that the foreign subsidiary is wholly owned by the corporation and, therefore, under its
control, it would be more in accord with equity, good faith and fair dealing to construe the statutory
right of a stockholder to inspect the books and records of the corporation as extending to books
and records of such wholly subsidiary which are in the corporation's possession and control.(John
Gokongwei, Jr. vs. Securities and Exchange Commission, et al., G.R. No. L-45911, April 11, 1979)

The stockholder's right of inspection of the corporation's books and records is based upon their
ownership of the assets and property of the corporation. It is, therefore, an incident of ownership
of the corporate property, whether this ownership or interest be termed an equitable ownership, a
beneficial ownership, or a ownership.(John Gokongwei, Jr. vs. Securities and Exchange
Commission, et al., G.R. No. L-45911, April 11, 1979)

The only express limitation on the right of inspection, according to the Court, is that (1) the right of
inspection should be exercised at reasonable hours on business days; (2) the person demanding the
right to examine and copy excerpts from the corporate records and minutes has not improperly
used any information secured through any previous examination of the records of such corporation;
and (3) the demand is made in good faith or for a legitimate purpose. (Victor Africa vs. Presidential
Commission on Good Government, et al., G.R. No. 83831, January 9, 1992)

d. Pre-Emptive Right
e. Right to Vote
 f. Right to Dividends

Stock dividends cannot be issued to one who is not a stockholder of a corporation for payment of
services rendered.(Nielson & Company, Inc. vs.Lepanto Consolidated Mining Company, G.R. No. L-
21601, December 17, 1966)

Dividends are distributed to stockholders pursuant to their right to share in corporate profits.
When a dividend is declared, it belongs to the person who is the substantial and beneficial owner of
the stock at the time regardless of when the distribution profit was earned. (Nora A. Bitongvs.
Court of Appeals, et al., G.R. No. 123553, July 13, 1998)

g. Right of First Refusal

A joint venture agreement giving to the shareholders the right to purchase the shares of their co-
shareholders before they are offered to a third party does not violate the provision of the
Constitution limiting land ownership to Filipinos and Filipino corporations. If the corporation still
owns the land, the right of first refusal can be validly assigned to a qualified Filipino entity in order
to maintain the 60% - 40% ratio.(J.G. Summit Holdings, Inc. vs. Court of Appeals, et al. G.R. No.
124293, January 31, 2005)

4. Remedial Rights

a. Individual Suit
b. Representative Suit
c. Derivative Suit

A suit to enforce pre-emptive right in a corporation is not a derivative suit because it was not filed
for the benefit of the coporation. The petitioner was suing on her own behalf, and was merely
praying that she be allowed to subscribe to the additional issuances of stocks in proportion to her
shareholdings to enable her to preserve her percentage of ownership in the corporation. (Gilda C.
Lim, Wilhelmina V. Joven and Ditas A. Lerios, vs. Patricia Lim-Yu, in her capacity as a minority
stockholder of Limpan Investment Corporation, G.R. No. 138343, February 19, 2001)

The personal injury suffered by the spouses cannot disqualify them from filing a derivative suit on
behalf of the corporation. It merely gives rise to an additional cause of action for damages against
the erring directors.(Virginia O. Gochan, et al. vs. Richard G. Young, et al., G.R. No. 131889, March
12, 2001)

For a derivative suit to prosper, it is required that the minority stockholder suing for and on behalf
of the corporation must allege in his complaint that he is suing on a derivative cause of action on
behalf of the corporation and all other stockholders similarly situated who may wish to join him in
the suit. A public prosecutor, by the nature of his office, is under no compulsion to file a criminal
information where no clear legal justification has been shown, and no sufficient evidence of guilt
nor prima facie case has been presented by the petitioner. (Tam Wing Tak vs. Hon. Ramon P.
Makasiar, G.R. No. 122452, January 29, 2001)

The bare claim that the complaint is a derivative suit will not suffice to confer jurisdiction on the
RTC (as a special commercial court) if he cannot comply with the requisites for the existence of a
derivative suit. These requisites are: a.) the party bringing suit should be a shareholder during the
 time of the act or transaction complained of, the number of shares not being material; b.) the party
has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors
for the appropriate relief, but the latter has failed or refused to heed his plea; andc.) the cause of
action actually devolves on the corporation; the wrongdoing or harm having been or being caused
to the corporation and not to the particular stockholder bringing the suit.(Oscar C. Reyes vs. Hon.
Regional Trial Court of Makati, Branch 142, Zenith Insurance Corporation, and Rodrigo C. Reyes,
G.R. No. 165744, 11 August 2008)

The stockholder filing a derivative suit should have exerted all reasonable efforts to exhaust all
remedies available under the articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires; and to allege such fact with particularity
in the complaint.The allegation of respondent Joseph in his Affidavit of his repeated attempts to talk
to petitioner Anthony regarding their dispute hardly constitutes "all reasonable efforts to exhaust
all remedies available" as respondents did not refer to or mention at all any other remedy under
the articles of incorporation or by-laws of Winchester, Inc., available for dispute resolution among
stockholders, which respondents unsuccessfully availed themselves of.(Anthony S. Yu, et al. vs.
Joseph S. Yukayguan, et al., G.R. No. 177549, June 18, 2009)

A complaint for nullification of the election is a direct action by petitioners, who were the members
of the Board of Directors of the corporation before the election, against respondents, who are the
newly-elected Board of Directors. The corporation is not the injured party as it has no right to vote.
(Legaspi Towers 300, Inc., et al. vs. Amelia P. Muer, et al., G.R. No. 170783, June 18, 2012)

5. Obligation of a Stockholder

6. Meetings

a. Regular or Special
i. When and Where
ii. Notice
b. Who Calls the Meetings
c. Quorum

Quorum is based on the totality of the shares which have been subscribed and issued, whether it
be founders’ shares or common shares. There is no gainsaying that the contents of the articles of
incorporation are binding, not only on the corporation, but also on its shareholders. (Jesus V.
Lanuza, et al.vs. Court of Appeals, et al., G.R. No. 131394, March 28, 2005)

d. Minutes of the Meetings

I. Capital Structure

1. Subscription Agreements

A subscription contract necessarily involves the corporation as one of the contracting parties since
the subject matter of the transaction is property owned by the corporation – its shares of stock.
Hence, a stockholder cannot, by himself, rescind a pre-subscription contract. (Ong Yong, et al. vs.
David S. Tiu, et al., G.R. No. 144476 & G.R. No. 144629, April 8, 2003)
2. Consideration for Stocks

3. Shares of Stock

a. Nature of Stock

Upon the death of a shareholder, the heirs do not automatically become stockholders of the
corporation and acquire the rights and privileges of the deceased as shareholder of the corporation.
The stocks must be distributed first to the heirs in estate proceedings, and the transfer of the stocks
must be recorded in the books of the corporation.(JoselitoMusni Puno vs. Puno Enterprises, Inc.,
represented by Jesusa Puno, G.R. No. 177066, September 11, 2009)

The authority granted to a corporation to regulate the transfer of its stock does not empower it to
restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of
regulations as to the formalities and procedure to be followed in effecting transfer. (Marsh
Thomson vs. Court of Appeals and the American Champer of Commerce of the Philippines, Inc,,
G.R. No. 116631, October 28, 1998)

The registered owner of the shares of a corporation, even if they are sequestered by the
government through the PCGG, exercises the right and the privilege of voting on them. The PCGG as
a mere conservator cannot, as a rule, exercise acts of dominion by voting these shares. The
registered owner of sequestered shares may only be deprived of these voting rights, and the PCGG
authorized to exercise the same, only if it is able to establish that (1) there is prima facie evidence
showing that the said shares are ill-gotten and thus belong to the State; and (2) there is an
imminent danger of dissipation, thus necessitating the continued sequestration of the shares and
authority to vote thereupon by the PCGG while the main issue is pending before the
Sandiganbayan. (Trans Middle East (Phils.) vs.Sandiganbayan, G.R. No. 172556, June 9, 2006)

b. Subscription Agreements

A corporation has no power to release an original subscriber to its capital stock from the obligation
of paying for his shares, without a valuable consideration for such release; and as against creditors a
reduction of the capital stock can take place only in the manner and under the conditions
prescribed by the statute or the charter or the articles of incorporation. Subscriptions to the capital
of a corporation constitute a fund to which creditors have a right to look for satisfaction of their
claims and that the assignee in insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its debt. (Philippine National Bank
vs.Bitulok Sawmill, Inc., et al., G.R. Nos. L-24177-85, June 29, 1968)

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
 "Interest bearing stocks", on which the corporation agrees absolutely to pay interest before
dividends are paid to common stockholders, is legal only when construed as requiring payment of
interest as dividends from net earnings or surplus only. Clearly, the respondent judge, in compelling
the petitioner to redeem the shares in question and to pay the corresponding dividends, committed
grave abuse of discretion amounting to lack or excess of jurisdiction in ignoring both the terms and
conditions specified in the stock certificate, as well as the clear mandate of the law.(Republic
Planters Bank vs. Hon. Enrique A. Agana, Sr., as Presiding Judge, Court of First Instance of Rizal,
Branch XXVIII, Pasay City, Robes-Francisco Realty & Development Corporation and Adalia F.
Robes, G.R. No. 51765, March 3, 1997)

4. Payment of Balance of Subscription

a. Call by Board of Directors

b. Notice Requirement
c. Sale of Delinquent Shares
i. Effect of Delinquency

At the root of the sale of delinquent stock is the non-payment of the subscription price for the
share of stock itself. The stockholder or subscriber has yet to fully pay for the value of the share or
shares subscribed. In this case, Clemente had already fully paid for the share in Calatagan and no
longer had any outstanding obligation to deprive him of full title to his share. (Calatagan Golf Club,
Inc. vs. Sixto Clemente, Jr., G.R. No. 165443, April 16, 2009)

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

While shares of stock constitute personal property, they do not represent property of the
corporation. A share of stock only typifies an aliquot part of the corporation's property, or the right
to share in its proceeds to that extent when distributed according to law and equity, but its holder is
not the owner of any part of the capital of the corporation.(Stockholders of F. Guanzon and Sons,
Inc. vs.Register of Deeds of Manila, G.R. No. L-18216, October 30, 1962)

A certificate of stock is the paper representative or tangible evidence of the stock itself and of the
various interests therein. The certificate is not stock in the corporation but is merely evidence of the
holder's interest and status in the corporation, his ownership of the share represented thereby, but
is not in law the equivalent of such ownership. It expresses the contract between the corporation
and the stockholder, but is not essential to the existence of a share in stock or the nation of the
relation of shareholder to the corporation. (Alfonso S. Tan vs. Securities And Exchange
Commission, G.R. No. 95696 March 3, 1992)

The certificate of stock itself once issued is a continuing affirmation or representation that the stock
described therein is valid and genuine and is at least prima facie evidence that it was legally issued
in the absence of evidence to the contrary. A mere typewritten statement advising a stockholder of
the extent of his ownership in a corporation without qualification and/or authentication cannot be
considered as a formal certificate of stock.(Nora A. Bitongvs. Court of Appeals, et al., G.R. No.
123553, July 13, 1998)

b. Uncertificated Shares
c. Negotiability
i. Requirements for Valid Transfer of Stocks

The law is clear that in order for a transfer of stock certificate to be effective, the certificate must be
properly indorsed and that title to such certificate of stock is vested in the transferee by the delivery
of the duly indorsed certificate of stock. Since the certificate of stock covering the questioned 1,500
shares of stock registered in the name of the late Juan Chuidian was never indorsed to the
petitioner, the inevitable conclusion is that the questioned shares of stock belong to Chuidian.
(Enrique Razon vs. Intermediate Appellate Court and Vicente B. Chuidian, in his capacity as
Administrator of the Estate of the Deceased Juan T. Chuidian, G.R. No. 74306, 16 March 1992)

Where a stockholder executed a Special Power of Attorney in favor of his wife who, by virtue of said
SPA, sold the shares, the corporation cannot refuse to register the shares in favor of the assignee on
the ground that upon the death of the stockholder, the shares of stock became the property of his
estate which should be settled and liquidated first before any distribution could be made. For the
petitioner Rural Bank of Salinas to refuse registration of the transferred shares in its stock and
transfer book, which duty is ministerial on its part, is to render nugatory and ineffectual the spirit
and intent of Section 63 of the Corporation Code. (Rural Bank of Salinas, Inc. vs. Securities and
Exchange Commission, et al., G.R. No. 96674, June 26, 1992)

Section 63 of the Corporation Code which provides that "no shares of stock against which the
corporation holds any unpaid claim shall be transferable in the books of the corporation" does not
include monthly dues. The term "unpaid claim" refers to "any unpaid claim arising from unpaid
subscription, and not to any indebtedness which a subscriber or stockholder may owe the
corporation arising from any other transaction."(China Banking Corporation vs. Court of Appeals,
and Valley Golf and Country Club, Inc., G.R. No. 117604, March 26, 1997)

Section 63 of the Corporation Code strictly requires the recording of the transfer in the books of the
corporation, and not elsewhere, to be valid as against third parties. Thus, the transfer of the subject
certificate made by Dico to petitioner was not valid as to the spouses Atinon, the judgment
creditors, as the same still stood in the name of Dico, the judgment debtor, at the time of the levy
on execution. (Nemesio Garcia vs. Nicolas Jomouad, Ex-Officio Provincial Sheriff of Cebu, and
Spouses Jose Atinon& Sally Atinon, G.R. No. 133969, 26 January 2000)

For a valid transfer of stocks, there must be strict compliance with the mode of transfer prescribed
by law. The requirements are: (a) There must be delivery of the stock certificate; (b) The certificate
must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make
the transfer; and (c) To be valid against third parties, the transfer must be recorded in the books of
the corporation. A deed of assignment of shares without endorsement and delivery is binding only
on the parties and does not necessarily make the transfer effective as against the corporation.(The
Rural Bank of Lipa City, Inc., et al.vs. Honorable Court of Appeals, G.R. No. 124535, September
28, 2001)

Without such recording, the transferee may not be regarded by the corporation as one among its
stockholders and the corporation may legally refuse the issuance of stock certificates in the name of
 the transferee even when there has been compliance with the requirements of Section 64 of the
Corporation Code. The situation would be different if the petitioner was himself the registered
owner of the stock which he sought to transfer to a third party, for then he would be entitled to the
remedy of mandamus.(Vicente C. Ponce vs. Alsons Cement Corporation, and Francisco M. Giron,
Jr., G.R. No. 139802, December 10, 2002)

The corporation whose shares of stock are the subject of a transfer transaction (through sale,
assignment, donation, or any other mode of conveyance) need not be a party to the transaction, as
may be inferred from the terms of Section 63 of the Corporation Code. However, to bind the
corporation as well as third parties, it is necessary that the transfer is recorded in the books of the
corporation. (Forest Hills Golf & Country Club vs. Vertex Sales and Trading, Inc., G.R. No. 202205,
March 6, 2013)

The physical delivery of the shares of stock thru the stock certificate is necessary to transfer
ownership of stocks. Failure of the seller to deliver the shares of stock constituted substantial
breach of their contract which gave rise to a right on the part of the purchaser to rescind the sale.
(Fil-Estate Golf and Development, Inc. and Fil-estate Land, Inc. vs. Vertex Sales and Trading, Inc.,
G.R. No. 2012079, June 10, 2013)

d. Issuance
i. Full Payment

When a stockholder in a stock corporation subscribes to a certain number of shares but does not
pay the full amount for such shares, a certificate of stock shall still be issued to him and he shall be
entitled to vote the shares even though they are not fully paid. (Irineo S. Baltazar vs. Lingayen Gulf
Electric Power, Co., Inc., G.R. No. L-16236, June 30, 1965)

ii. Payment Pro-Rata

e. Lost or Destroyed Certificates

6. Stock and Transfer Book

a. Contents

A stock and transfer book is necessary as a measure of precaution, expediency and convenience
since it provides the only certain and accurate method of establishing the various corporate acts
and transactions and of showing the ownership of stock and like matters. However, a stock and
transfer book, like other corporate books and records, is not in any sense a public record, and thus
is not exclusive evidence of the matters and things which ordinarily are or should be written
therein. (Jesus V. Lanuza, et al.vs. Court of Appeals, et al., G.R. No. 131394, March 28, 2005)

b. Who May Make Valid Entries

In the absence of any provision to the contrary, the corporate secretary is the custodian of
corporate records. The transferor, even though he may be the controlling stockholder cannot take
the law into his hands and cause himself the recording of the transfers of the qualifying shares to
 his nominee-directors in the stock and transfer book of the corporation.(Manuel A. Torres, Jr.,
(Deceased), et al. vs. Court of Appeals, et al., G.R. No. 120138, September 5, 1997)

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

The dissolution does not automatically convert the parties into total strangers or change their intra-
corporate relationships. Neither does it change or terminate existing causes of action, which arose
because of the corporate ties between the parties. Thus, a cause of action involving an intra-
corporate controversy remains and must be filed as an intra-corporate dispute despite the
subsequent dissolution of the corporation.(Vitaliano N. Aguirre II and Fidel N. Aguirre vs. FQB+7,
Inc., Nathaniel D. Bocobo, PriscilaBocoboand Antonio de Villa, G.R. No. 170770, January 9, 2013)

Section 145 of the Corporation Code protects, among others, the rights and remedies of corporate
actors against other corporate actors. The statutory provision assures an aggrieved party that the
corporation's dissolution will not impair, much less remove, his/her rights or remedies against the
corporation, its stockholders, directors or officers.(Vitaliano N. Aguirre II and Fidel N. Aguirre vs.
FQB+7, Inc., Nathaniel D. Bocobo, PriscilaBocoboand Antonio de Villa, G.R. No. 170770, January
9, 2013)

1. Modes of Dissolution

a. Voluntary

i. Where No Creditors Are Affected

A resolution approved by the Board of Directors is not sufficient to dissolve a corporation. The
Corporation Code establishes the procedure and other formal requirements a corporation needs to
follow in case it elects to dissolve and terminate its structure voluntarily and where no rights of
creditors may possibly be prejudiced under Section 118 which should have been strictly complied
with by the members of the club. (Teodoro B. Vesagas and Wilfred D. Asis vs. the Honorable Court
of Appeals and DelfinoRaniel and HelendaRaniel, G.R. No. 142924, December 5, 2001)

ii. Where Creditors Are Affected

iii. By Shortening of Corporate Term

b. Involuntary

i. By Expiration of Corporate Term

 Upon the expiration of the period fixed in the articles of incorporation in the absence of compliance
with the legal requisites for the extension of the period, the corporation ceases to exist and is
dissolved ipso facto. There is no need for the institution of a proceeding for quo warranto to
determine the time or date of the dissolution of a corporation because the period of corporate
existence is provided in the articles of incorporation. (Philippine National Bank vs.the Court of First
Instance of Rizal, Pasig, et al.,G.R. No. 63201, May 27, 1992)

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

The word "trustee" as used in the corporation statute must be understood in its general concept
which could include the counsel to whom was entrusted in the instant case, the prosecution of the
suit filed by the corporation. The purpose in the transfer of the assets of the corporation to a
trustee upon its dissolution is more for the protection of its creditor and stockholders. (Carlos
Gelano and Guillermina Mendoza De Gelano vs. the Honorable Court of Appeals and Insular
Sawmill, Inc., G.R. No. L-39050 February 24, 1981)

The trustee (of a dissolved corporation) may commence a suit which can proceed to final judgment
even beyond the three-year period of liquidation. No reason can be conceived why a suit already
commenced by the corporation itself during its existence, not by a mere trustee who, by fiction,
merely continues the legal personality of the dissolved corporation, should not be accorded similar
treatment – to proceed to final judgment and execution thereof. Indeed, the rights of a corporation
that has been dissolved pending litigation are accorded protection by Section 145 of the
Corporation Code which provides “no right or remedy in favor of or against any corporation, its
stockholders, members, directors, trustees, or officers, nor any liability incurred by any such
corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired
either by the subsequent dissolution of said corporation or by any subsequent amendment or
repeal of this Code or of any part thereof.” (Rene Knecht and Knecht, Inc. vs. United Cigarette
Corp., represented by Encarnacion Gonzales Wong, and Eduardo Bolima, Sheriff, Regional Trial
Court, Branch 151, Pasig City, G.R. No. 139370, July 4, 2002)

c. By Management Committee or Rehabilitation Receiver

During rehabilitation receivership, the assets are held in trust for the equal benefit of all creditors to
preclude one from obtaining an advantage or preference over another by the expediency of an
attachment, execution or otherwise. For what would prevent an alert creditor, upon learning of the
receivership, from rushing posthaste to the courts to secure judgments for the satisfaction of its
claims to the prejudice of the less alert creditors. (Alemar'sSibal& Sons, Inc. vs. Honorable Jesus M.
Elbinias, in his capacity as the Presiding Judge of Regional Trial Court, National Capital Region,
Branch CXLI (141), Makati, and G.A. Yupangco& Co., Inc., G.R. No. 75414 June 4, 1990)

The appointment of a receiver operates to suspend the authority of a corporation and its directors
and officers over its property and effects, such authority being reposed in the receiver. Thus, a
 corporate officer had no authority to condone a debt. (Victor Yam &Yek Sun Lent, doing business
under the name and style of Philippine Printing Works vs. the Court of Appeals and Manphil
Investment Corporation, G.R. No. 104726, February 11, 1999)

d. Liquidation after Three Years

Although the cancellation of a corporation’s certificate of registration puts an end to its juridical
personality, Sec. 122 of the Corporation Code, however provides that a corporation whose
corporate existence is terminated in any manner continues to be a body corporate for three years
after its dissolution for purposes of prosecuting and defending suits by and against it and to enable
it to settle and close its affairs. Thus, corporations whose certificate of registration was revoked by
the SEC may still maintain actions in court for the protection of its rights which includes the right to
appeal. (Paramount Insurance Corp. vs. A.C. Ordoñez Corporation and Franklin Suspine, G.R. No.
175109, August 6, 2008)

To allow a creditor’s case to proceed independently of the liquidation case, a possibility of favorable
judgment and execution thereof against the assets of the distressed corporation would not only
prejudice the other creditors and depositors but would defeat the very purpose for which a
liquidation court was constituted as well. The requirement that all claims against the bank be
pursued in the liquidation proceedings filed by the Central Bank is intended to prevent multiplicity
of actions against the insolvent bank and designed to establish due process and orderliness in the
liquidation of the bank, to obviate the proliferation of litigations and to avoid injustice and
arbitrariness. (Lucia Barramedavda. de Ballesteros vs. Rural Bank of Canaman,
Inc., represented by its liquidator, the Philippine Deposit Insurance Corporation, G.R. No. 176260,
November 24, 2010)

Even if releases, waivers and quitclaims were executed in 2009, six (6) years after MBMSI’s
dissolution in 2003, the same are still valid and binding upon the parties and the dissolution will not
terminate the liabilities incurred by the dissolved corporation pursuant to Sections 122 and 145 of
the Corporation Code. Section 145 of the Corporation Code clearly provides that "no right or
remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or
officers, nor any liability incurred by any such corporation, stockholders, members, directors,
trustees, or officers, shall be removed or impaired either by the subsequent dissolution of said
corporation." (Benigno M. Vigilla, et al. vs. Philippine College of Criminology, Inc. and/or Gregory
Alan F. Bautista, G.R. No. 200094, June 10, 2013)

K. Other Corporations

1. Close Corporations

a. Characteristics of a Close Corporation

A corporation does not become a close corporation just because a man and his wife own 98.86% of
its subscribed capital stock; So too, a narrow distribution of ownership does not, by itself, make a
close corporation. The features of a close corporation under the Corporation Code must be
embodied in the Articles of Incorporation.(San Juan Structural and Steel Fabricators, Inc. vs. Court
of Appeals, Motorich Sales Corporation, Nenita Lee Gruenberg, ACL Development Corp. and JNM
Realty and Development Corp., G.R. No. 129459, September 29, 1998)
 To the extent that the stockholders are actively engaged in the management or operation of the
business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to
each other and among themselves. Said stockholders shall be personally liable for corporate torts
unless the corporation has obtained reasonably adequate liability insurance. (Sergio F. Naguiat,
doing business under the name and style Sergio F. NaguiatEnt., Inc., & Clark Field Taxi, Inc. vs.
National Labor Relations Commission (Third Division), National Organization Of Workingmen and
its members, Leonardo T. Galang, et al., G.R. No. 116123, 13 March 1997)

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

When a corporation is classified as a close corporation, a board resolution authorizing the sale or
mortgage of the subject property is not necessary to bind the corporation for the action of its
president. At any rate, corporate action taken at a board meeting without proper call or notice in a
close corporation is deemed ratified by the absent director unless the latter promptly files his
written objection with the secretary of the corporation after having knowledge of the meeting
which, in this case, petitioner failed to do. (Manuel R.Dulay Enterprises, Inc., VirgilioE. Dulay
AndNepomucenoRedovanvs. the Honorable Court of Appeals, G.R. No. 91889 August 27, 1993)

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

The second paragraph of Section 108 of the Corporation Code, although setting the term of the
members of the Board of Trustees at five years, contains a proviso expressly subjecting the duration
to what is otherwise provided in the articles of incorporation or by-laws of the educational
corporation. In AUP’s case, its amended By-Laws provided that members of the Board of Trustees
were to serve a term of office of only two years; and the officers, who included the President, were
to be elected from among the members of the Board of Trustees during their organizational
meeting, which was held during the election of the Board of Trustees every two years. Naturally, the
officers, including the President, were to exercise the powers vested by Section 2 of the amended
By-Laws for a term of only two years, not five years. (PetroniloJ. Barayuga vs. Adventist University
of the Philippines, through its Board of Trustees, represented by its Chairman, Nestor D. Dayson,
G.R. No. 168008, August 17, 2011)

Section 89 of the Corporation Code pertaining to non-stock corporations which provides that "the
right of the members of any class or classes (of a non-stock corporation) to vote may be limited,
broadened or denied to the extent specified in the articles of incorporation or the by-laws," is an
exception to Section 6 of the same code where it is provided that "no share may be deprived of
voting rights except those classified and issued as ‘preferred’ or ‘redeemable’ shares, unless
otherwise provided in this Code." The stipulation in the By-Laws providing for the election of the
 Board of Directors by districts is a form of limitation on the voting rights of the members of a non-
stock corporation as recognized under the aforesaid Section 89. (Rev. Luis Ao-as, et al. vs. Hon.
Court of Appeals, G.R. No. 128464, June 20, 2006)

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)

A foreign company that merely imports goods from a Philippine exporter, without opening an office
or appointing an agent in the Philippines, is not doing business in the Philippines. Since the contract
between petitioner and NMC involved the purchase of molasses by petitioner from NMC, it was
NMC, the domestic corporation, which derived income from the transaction and not petitioner.To
constitute “doing business,” the activity undertaken in the Philippines should involve profit-making.
(Cargill, Inc. vs. Intra Strata Assurance Corporation, G.R. No. 168266, March 15, 2010)

Participating in the bidding process constitutes “doing business” because it shows the foreign
corporation’s intention to engage in business in the Philippines. The bidding for the concession
contract is but an exercise of the corporation’s reason for creation or existence. (Hutchison Ports
Philippines Limitedvs.Subic Bay Metropolitan Authority, International Container Terminal
Services Inc., Royal Port Services, Inc. and the Executive Secretary, G.R. No. 131367, August 31,
2000)

b. Necessity of a License to Do Business

The primary purpose of the license requirement is to compel a foreign corporation desiring to do
business within the Philippines to submit itself to the jurisdiction of the courts of the state and to
enable the government to exercise jurisdiction over them for the regulation of their activities in this
country. If a foreign corporation operates a business in the Philippines without a license, and thus
does not submit itself to Philippine laws, it is only just that said foreign corporation be not allowed
to invoke them in our courts when the need arises. (Ibid.)

i. Requisites for Issuance of a License

ii. Resident Agent

A contract entered into by a foreign corporation not licensed to do business in the Philippines is not
void even as against the erring foreign corporation. The lack of capacity at the time of the execution
of the contracts was cured by the subsequent registration. (The Home Insurance Company
vs.Eastern Shipping Lines, G.R. No. L-34382 July 20, 1983)

The appointment of a distributor in the Philippines is not sufficient to constitute “doing business”
unless it is under the full control of the foreign corporation. If the distributor is an independent
entity which buys and distributes products, other than those of the foreign corporation, for its own
name and its own account, the latter cannot be considered to be doing business in the Philippines.
(Steelcase, Inc. vs. Design International Selections, Inc., G.R. No. 171995, April 18, 2012)
 c. Personality to Sue

The following principles governing a foreign corporation’s right to sue in local courts have long been
settled, to wit: a) if a foreign corporation does business in the Philippines without a license, it
cannot sue before the Philippine courts; b) if a foreign corporation is not doing business in the
Philippines, it needs no license to sue before Philippine courts on an isolated transaction or on a
cause of action entirely independent of any business transaction; and c) if a foreign corporation
does business in the Philippines with the required license, it can sue before Philippine courts on any
transaction. Apparently, it is not the absence of the prescribed license but the “doing (of)
business” in the Philippines without such license which debars the foreign corporation from access
to our courts. (MR Holdings, Ltd.vs. Sheriff Carlos P. Bajar, Sheriff Ferdinand M. Jandusay,
Solidbank Corporation, and Marcopper Mining Corporation, G.R. No. 138104, April 11, 2002)

A party is estopped from challenging the personality of a corporation after having acknowledged
the same by entering into a contract with it. The principle is applied to prevent a person contracting
with a foreign corporation from later taking advantage of its noncompliance with the statutes,
chiefly in cases where such person has received the benefits of the contract. (Global Business
Holdings, Inc. vs. Surecomp Software, B.V., G.R. No. 173463, October 13, 2010)

d. Suability of Foreign Corporations

e. Instances When Unlicensed Foreign Corporations May Be Allowed to Sue Isolated Transactions

A foreign corporation doing business in the Philippines may sue in Philippine Courts although not
authorized to do business in the Philippines against a Philippine citizen or entity who had
contracted with and benefited by said corporation. (Steelcase, Inc. vs. Design International
Selections, Inc., G.R. No. 171995, April 18, 2012)

f. Grounds for Revocation of License

L. Mergers and Consolidations

1. Definition and Concept

In the merger of two or more existing corporations, one of the combining corporations survives and
continues the combined business, while the rest are dissolved and all their rights, properties and
liabilities are acquired by the surviving corporation. (Associated Bank vs. Court of Appeals and
Lorenzo Sarmiento, Jr., G.R. No. 123793, June 29, 1998)

Generally where one corporation sells or otherwise transfers all of its assets to another corporation,
the latter is not liable for the debts and liabilities of the transferor, except: (1) where the purchaser
expressly or impliedly agrees to assume such debts; (2) where the transaction amounts to a
consolidation or merger of the corporations; (3) where the purchasing corporation is merely a
continuation of the selling corporation; and (4) where the transaction is entered into fraudulently in
order to escape liability for such debts. (The Edward J. Nell Company vs.Pacific Farms, Inc., G.R.
No. L-20850, November 29, 1965)

2. Constituent vs. Consolidated Corporation

 In consolidation, all the constituents are dissolved and absorbed by the new consolidated
enterprise, while in merger, all constituents, except the surviving corporation, are dissolved. The
surviving or consolidated corporation assumes automatically the liabilities of the dissolved
corporations, regardless of whether the creditors have consented or not to such merger or
consolidation. (John F. McLeod vs.National Labor Relations Commission (First Division), et al., G.R.
No. 146667, January 23, 2007)

3. Plan of Merger or Consolidation

4. Articles of Merger or Consolidation

5. Procedure

6. Effectivity

A merger is not effective unless it has been approved by the Securities and Exchange Commission.
(Philippine National Bank & National Sugar Development Corporation vs. Andrada Electric &
Engineering Company, G.R. No. 142936, April 17, 2002)

The issuance of the certificate of merger is crucial because not only does it bear out SEC’s approval
but it also marks the moment when the consequences of a merger take place. By operation of law,
upon the effectivity of the merger, the absorbed corporation ceases to exist but its rights and
properties, as well as liabilities, shall be taken and deemed transferred to and vested in the
surviving corporation.(Mindanao Savings and Loan Association, Inc., represented by its Liquidator,
the Philippine Deposit Insurance Corporation vs. Edward Willkom; Gilda Go; RemediosUy;
MalayoBantuas, in his capacity as the Deputy Sheriff of Regional Trial Court, Branch 3, Iligan City;
and the Register of Deeds of Cagayan de Oro City, G.R. No. 178618, October 11, 2010)

7. Limitations

8. Effects

Although there is a dissolution of the absorbed corporations, there is no winding up of their affairs
or liquidation of their assets, because the surviving corporation automatically acquires all their
rights, privileges and powers, as well as their liabilities. The fact that the promissory note was
executed after the effectivity date of the merger does not militate against petitioner because the
agreement itself clearly provides that all contracts -- irrespective of the date of execution -- entered
into in the name of the absorbed corporation shall be understood as pertaining to the surviving
bank, herein petitioner. (Associated Bank vs. Court of Appeals and Lorenzo Sarmiento, Jr.,G.R. No.
123793, June 29, 1998)

It is more in keeping with the dictates of social justice and the State policy of according full
protection to labor to deem employment contracts as automatically assumed by the surviving
corporation in a merger, even in the absence of an express stipulation in the articles of merger or
the merger plan. By upholding the automatic assumption of the non-surviving corporation’s existing
employment contracts by the surviving corporation in a merger, the Court strengthens judicial
protection of the right to security of tenure of employees affected by a merger and avoids
confusion regarding the status of their various benefits which were among the chief objections of
 our dissenting colleagues. (Bank of the Philippine Islands vs. BPI Employees Union-Davao Chapter-
Federation Of Unions In Bpi Unibank, G.R. No. 164301, October 19, 2011)

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

A. State Policy, Purpose

The rise and fall of stock market indices reflect to a considerable degree the state of the economy.
Securities transactions are impressed with public interest, and are thus subject to public regulation;
in particular, the laws and regulations requiring payment of traded shares within specified periods
are meant to protect the economy from excessive stock market speculations, and are thus
mandatory. (Abacus Securities Corporation vs. Ruben Ampil, G.R. No. 160016, February 27, 2006)

B. Securities Required to be Registered

The issuance of checks for the purpose of securing a loan to finance the activities of the corporation
is well within the ambit of a valid corporate act. It is one thing for a corporation to issue checks to
satisfy isolated individual obligations, and another for a corporation to execute an elaborate
scheme where it would comport itself to the public as a pseudo-investment house and issue
postdated checks instead of stocks or traditional securities to evidence the investments of its
patrons. (Betty Gabionza and Isabelita Tan vs. Court of Appeals, G.R. No. 161057, September 12,
2008)

Corporate registration is just one of the several requirements before a corporation may deal with
timeshares. Prior to fulfillment of all the other requirements under the Securities Regulation Code,
a corporation is absolutely proscribed from dealing with unregistered timeshares. (Timeshare
Realty vs. Cesar Lao, G.R. No. 158941, February 11, 2008)

For an investment contract to exist, the following elements, referred to as the Howey test must
concur: (1)a contract, transaction, or scheme; (2)an investment of money; (3)investment is made in
a common enterprise; (4) expectation of profits; and (5)profits arising primarily from the efforts of
others. Network marketing, a scheme adopted by companies for getting people to buy their
products where the buyer can become a down-line seller, who earns commissions from purchases
made by new buyers whom he refers to the person who sold the product to him, is not an
investment contract. (Securities and Exchange Commission vs. Prosperity.Com, Inc., G.R. No.
164197, January 25, 2012)

A person is liable for violation of Section 28 of the SRC where, acting as a broker, dealer or salesman
is in the employ of a corporation which sold or offered for sale unregistered securities in the
Philippines. The transaction initiated by the investment consultant of a corporation is an investment
contract or participation in a profit sharing agreement that falls within the definition of law—an
investment in a common venture premised on a reasonable expectation of profits to be derived
from the entrepreneurial or managerial efforts of others. (Securities and Exchange Commission vs.
Oudine Santos, G.R. No. 195542, March 19, 2014)

1. Exempt Securities

The exemption from registration of the securities issued by banking or financial institutions
provided under the law does not imply that petitioner as a listed corporation, is also exempt from
 complying with the reportorial requirements. (Union Bank of the Philippines vs. Securities and
Exchange Commission, G.R. No. 138949, June 6, 2001)

2. Exempt Transactions

Under the ruling issued by the SEC, an issuance of previously authorized but still unissued capital
stock may, in a particular instance, be held to be an exempt transaction by the SEC under Section
6(b) so long as the SEC finds that the requirements of registration under the Revised Securities Act
are "not necessary in the public interest and for the protection of the investors" by reason, inter
alia, of the small amount of stock that is proposed to be issued or because the potential buyers are
very limited in number and are in a position to protect themselves. (Nestle Philippines, Inc. vs.
Court of Appeals, G.R. No. 86738, November 13, 1991)

C. Procedure for Registration of Securities

D. Prohibitions of Fraud, Manipulation and Insider Trading

The trading contract signed by the parties is a contract for the sale of products for future delivery, in
which either seller or buyer may elect to make or demand delivery of goods agreed to be bought
and sold, but where no such delivery is actually made. The written trading contract in question is
not illegal but the transaction between the parties purportedly to implement the contract is in the
nature of a gambling agreement; it is not buying and selling and is illegal as against public policy.
(Onapal Philippines Commodities, Inc. vs. Court of Appeals, G.R. No. 90707, February 1, 1993)

1. Manipulation of Security Prices

2. Short Sales

3. Fraudulent Transactions

4. Insider Trading

The term “insiders” now includes persons whose relationship or former relationship to the issuer
gives or gave them access to a fact of special significance about the issuer or the security that is not
generally available, and one who learns such a fact from an insider knowing that the person from
whom he learns the fact is such an insider. Insiders have the duty to disclose material facts which
are known to them by virtue of their position but which are not known to persons with whom they
deal and which, if known, would affect their investment judgment. (Securities and Exchange
Commission vs. Interport Resources Corporation, et. al., G.R. No. 135808, October 6, 2008)

E. Protection of Investors

A “public company,” as contemplated by the SRC is not limited to a company whose shares of stock
are publicly listed; even companies whose shares are offered only to a specific group of people, are
considered a public company, provided they fall under Subsec. 17.2 of the SRC, which provides:
“any corporation with a class of equity securities listed on an Exchange or with assets of atleast Fifty
Million Pesos (P50,000,000.00) and having two hundred (200) or more holders, at least two
hundred (200) of which are holding at least one hundred (100) shares of a class of its equity
securities.” Philippine Veterans Bank meets the requirements and as such, is subject to the
 reportorial requirements for the benefit of its shareholders. (Philippine Veterans Bank v. Callangan,
in her capacity Director of the Corporation Finance Department of the Securities and Exchange
Commission and/or the Securities and Ex-change Commission, G.R. No. 191995, August 3, 2011)

1. Tender Offer Rule

A tender offer is an offer by the acquiring person to stockholders of a public company for them to
tender their shares; it gives the minority shareholders the chance to exit the company under
reasonable terms, giving them the opportunity to sell their shares at the same price as those of the
majority shareholders. The mandatory tender offer is still applicable even if the acquisition, direct
or indirect, is less than 35% when the purchase would result in ownership of over 51% of the total
outstanding equity securities of the public company. (Cemco Holdings, Inc. vs. National Life
Insurance Company of the Philippines, G.R. No. 171815, August 7, 2007)

2. Rules on Proxy Solicitation

The right of stockholder to vote by proxy is generally established by the Corporation Code,
but it is the SRC which specifically regulates the form and use of proxies, more particularly proxy
solicitation, a procedure that antecedes proxy validation. When proxies are solicited in relation to
the election of corporate directors, the resulting controversy, even if it ostensibly raised the
violation of the SEC rules on proxy solicitation, should be properly seen as an election controversy
within the original and exclusive jurisdiction of the trial courts. (GSIS vs. Court of Appeals, G.R. No.
183905, April 16, 2009)

3. Disclosure Rule

Section 27 (SRC) penalizes an insider’s misuse of material and non-public information about the
issuer, for the purpose of protecting public investors; Section 26 widens the coverage of punishable
acts, which intend to defraud public investors through various devices, misinformation and
omissions. Section 23 imposes upon (1) a beneficial owner of more than ten percent of any class of
any equity security or (2) a director or any officer of the issuer of such security, the obligation to
submit a statement indicating his or her ownership of the issuer’s securities and such changes in his
or her ownership thereof. (Securities and Exchange Commission vs. Interport Resources
Corporation, et. al., G.R. No. 135808, October 6, 2008)

Under the law, what is required to be disclosed is a fact of “special significance” which may be (a) a
material fact which would be likely, on being made generally available, to affect the market price of
a security to a significant extent, or (b) one which a reasonable person would consider especially
important in determining his course of action with regard to the shares of stock. (Securities and
Exchange Commission vs. Interport Resources Corporation, et. al., G.R. No. 135808, October 6,
2008)

F. Civil Liability

Under Section 62 of the SRC, no action shall be maintained to enforce any liability created under
Section 56 of the SRC ( False registration statement ) and Section 57 ( sale of unregistered security
and liabilities arising in connection with prospectus, communication and other reports ) unless
brought within two ( 2 ) years after discovery of the untrue statement or omission or after the viola-
tion upon which it is based but not more than five ( 5 ) years after the security was bona fide
 offered to the public or more than 5 years after the sale, respectively. The prescriptive periods
under the mentioned sections pertain only to the civil liability in cases of violations of the SRC and
not to criminal liability under the same violations. (Citibank N.A. vs. Tanco-Gabaldon, et al. G.R.
No. 198444, September 4, 2013)

Civil suits falling under the SRC (like liability for selling unregistered securities ) are under the
exclusive original jurisdiction of the RTC and hence, need not be first filed before the SEC, unlike
criminal cases wherein the latter body exercises primary jurisdiction. (Jose U. Pua vs. Citibank, N. A.
G.R. No. 180064, September 16, 2013)

VIII. Banking Laws

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

1. State Policies

2. Creation of the Bangko Sentral ng Pilipinas (BSP)

3. Responsibility and Primary Objective

The BSP, through the Monetary Board, is the government agency charged with the responsibility of
administering the monetary, banking and credit system of the country and is granted the power of
supervision and examination over banks and non-bank financial institutions performing quasi-
banking functions, including savings and loan associations. It is empowered to conduct
investigations and examine the records of savings and loan associations where, upon discovery of
any irregularity, the Monetary Board may impose appropriate sanctions. (Romeo Busuego vs. Court
of Appeals, G.R. No. 95326, March 11, 1999)

The Bangko Sentral shall have supervision over, and conduct periodic or special examinations of,
banking institutions and quasi-banks, including their subsidiaries and affiliates engaged in allied
activities. When the complaint filed by a stockholder of the bank pertains to the bank’s alleged
engaging in unsafe, unsound, and fraudulent banking practices, more particularly, acts that violate
the prohibition on self-dealing, it is clear that the acts complained of pertain to the conduct of
banking business, hence, jurisdiction lies with the BSP (Monetary Board). (Ana Maria Koruga vs.
Teodoro Arcenas, Jr., G.R. No. 168332/ G.R. No. 169053, June 19, 2009)

4. Monetary Board—Powers and Functions

The Monetary Board, is vested with exclusive authority to assess, evaluate and determine the
condition of any bank, and finding such condition to be one of insolvency, or that its continuance in
business would involve a probable loss to its depositors or creditors, forbid bank or non-bank
financial institution to do business in the Philippines; and shall designate an official of the BSP or
other competent person as receiver to immediately take charge of its assets and liabilities. When
the complaint filed by a stockholder of the bank pertains to the alleged unsafe and unsound
banking practices, the authority to determine the existence of such is with the Monetary Board.
(Ana Maria Koruga vs. Teodoro Arcenas, Jr., G.R. No. 168332/ G.R. No. 169053, June 19, 2009)

The actions of the Monetary Board under Sec. 29 and 30 of RA 7653, which pertain to the power to
appoint a conservator or a receiver for a bank, may not be restrained or set aside by the court
 except on petition for certiorari on the ground that the action taken was in excess of jurisdiction or
with such grave abuse of discretion as to amount to lack or excess of jurisdiction. Hence, the
issuance by the RTC of writs of preliminary injunction is an unwarranted interference with the
powers of the Monetary Board. (BSP Monetary Board vs. Hon. Antonio-Valenzuela, G.R. No.
184778, October 2, 2009)

5. How the BSP handles Banks in Distress

a. Conservatorship

The Monetary Board, upon finding that the bank failed to put up the required capital to restore its
solvency, prohibited a bank from doing business and instructed the Acting Superintendent of Banks
to take charge of the assets of the bank. When by reason of this prohibition, only a portion of the
loan approved by the bank was released to its debtor, it also follows that the bank, in exercising its
right to foreclose the real estate mortgage, can only foreclose up to the extent of the amount it
released. (Central Bank of the Philippines vs. Court of Appeals, G.R. No. L-45710 October 3, 1985)

The following requisites must be present before the order of conservatorship may be set aside by a
court: 1) The appropriate pleading must be filed by the stockholders of record representing the
majority of the capital stock of the bank in the proper court; 2) Said pleading must be filed within
ten (10) days from receipt of notice by said majority stockholders of the order placing the bank
under conservatorship; and 3) There must be convincing proof, after hearing, that the action is
plainly arbitrary and made in bad faith. (Central Bank of the Philippines vs. Court of Appeals, G.R.
No. 88353, May 8, 1992)

The authority of the conservator under the Central Bank Law is limited to acts of administration;
the conservator merely takes the place of the bank’s board of directors and as such, the former
cannot perform acts the latter cannot do. Hence, the conservator cannot revoke a contract of sale
of a property acquired by the bank entered into by a bank officer even though the price agreed
upon is no longer reflective of the fair market value of the property by reason of its appreciation of
value over time. (First Philippine International Bank vs. Court of Appeals, G.R. No. 115849,
January 24, 1996)

b. Closure

The express representations made by the Central Bank that it would support the bank and avoid its
liquidation if the latter’s stockholders would execute a voting trust agreement turning over the
management of the bank to the CB and mortgage or assign their properties to CB should not be
disregarded. Under the rule of promissory estoppel, the Central Bank cannot thereafter refuse to
comply with its representations after the undertaking has been complied with by the bank.
(Emerito Ramos vs. Central Bank of the Philippines, G.R. No. L-29352, October 4, 1971)

The closure and liquidation of a bank may be considered an exercise of police power. Nonetheless,
the validity of such exercise of police power is subject to judicial inquiry and could be set aside if it
is either capricious, discriminatory, whimsical, arbitrary, unjust, or a denial of due process and equal
protection clauses of the Constitution. (Central Bank vs. Court of Appeals, G.R. L-50031-32, July
27, 1981)
The claim that the Central Bank, by suspending the banking operations, had made it impossible for
the bank to pay its debts, or the further claim that it had fallen into a "distressed financial
situation," cannot in any sense excuse it from its obligation to remit the time deposits of its
depositors which matured before the bank’s closure. (Overseas Bank of Manila vs. Court of
Appeals, G.R. No. L-45866, April 19, 1989)

The Central Bank Act vests authority upon the Central Bank and Monetary Board to take charge and
administer the monetary and banking system of the country and this authority includes the power
to examine and determine the financial condition of banks for purposes provided for by law, such as
for the purpose of closure on the ground of insolvency stated in Section 29 of the Central Bank Act.
Nonetheless, the authority given must not be exercised arbitrarily such as to prematurely conclude
that a bank is insolvent if the basis for such conclusion is lacking and insufficient. (Banco Filipino
Savings and Mortgage Bank vs. Central Bank, G.R. No. 70054, December 11, 1991)

Under R.A. No. 265, an examination is required to be made before the Monetary Board could issue
a closure order; however, under R.A. No. 7653, prior notice and hearing are no longer required and
a report made by the head of the supervising and examining department suffices for a bank to be
closed and placed under receivership. The purpose of the law is to make the closure of the bank
summary and expeditious for the protection of the public interest. (Rural Bank of San Miguel vs.
Monetary Board, G.R. No. 150886, February 16, 2007)

Under the “close now, hear later” principle, the BSP can impose the sanction of closure upon a bank
even without prior notice and hearing, which is grounded on practical and legal considerations to
prevent unwarranted dissipation of the bank’s assets and as a valid exercise of police power to
protect the depositors, creditors, stockholders, and the general public. The remedy of the closed
bank is a subsequent one, which will determine whether the closure of the bank was attended by
grave abuse of discretion. (BSP Monetary Board vs. Hon. Antonio-Valenzuela, G.R. No. 184778,
October 2, 2009)

c. Receivership

The Monetary Board, upon finding that the bank failed to put up the required capital to restore its
solvency, prohibited a bank from doing business and instructed the Acting Superintendent of Banks
to take charge of the assets of the bank. When by reason of this prohibition, only a portion of the
loan approved by the bank was released to its debtor, it also follows that the bank, in exercising its
right to foreclose the real estate mortgage, can only foreclose up to the extent of the amount it
released. (Central Bank of the Philippines vs. Court of Appeals, G.R. No. L-45710, October 3,
1985)

As a rule, the execution of a judgment cannot be stayed. However, in the present case, the
respondent bank was placed under receivership and to execute the judgment would unduly deplete
the assets of respondent bank; moreover, the assets of the insolvent banking institution are held in
trust for the equal benefit of all creditors, and after its insolvency, one cannot obtain an advantage
or a preference over another by an attachment, execution or otherwise. (Spouses Romeo Lipana
and Milagros Lipana vs. Development Bank of Rizal, G.R. No. 73884, September 24, 1987)

When a bank is placed under receivership, the appointed receiver is tasked to take charge of the
bank’s assets and properties and the scope of the receiver’s power is limited to acts of
administration. The receiver’s act of approving the exclusive option to purchase granted by the
bank’s president is beyond the authority of the former and as such, it cannot be considered a valid
approval. (Abacus Real Estate Development Center, Inc. vs. Manila Banking Corp., G.R. No.
162270, April 06, 2005)

The Monetary Board may forbid a bank from doing business and place it under receivership without
prior notice and hearing it the MB finds that a bank: (a) is unable to pay its liabilities as they
become due in the ordinary course of business; (b) has insufficient realizable assets to meet
liabilities; (c) cannot continue in business without involving probable losses to its depositors and
creditors; and (d) has willfully violated a cease and desist order of the Monetary Board for acts or
transactions which are considered unsafe and unsound banking practices and other acts or
transactions constituting fraud or dissipation of the assets of the institution. (Alfeo D. Vivas, vs.
Monetary Board and PDIC, G.R. No. 191424, August 7, 2013)

d. Liquidation

Resolutions of the Monetary Board with regard to handling banks in distress such as appointing a
receiver to take charge of the bank's assets and liabilities; or determining whether the banking
institutions may be rehabilitated, or should be liquidated and appointing a liquidator towards this
end are by law final and executory. Nonetheless, the same may be set aside by the court upon
proof that the action is plainly arbitrary and made in bad faith, which may be asserted as an
affirmative defense or a counterclaim in the proceeding for assistance in liquidation. (Apollo M.
Salud vs. Central Bank of the Philippines, G.R. No. L-17620, August 19, 1986)

The pendency of the case questioning the validity of foreclosure did not diminish thepowers and
authority of the designated liquidator to effectuate and carry on the administration of the bank. As
such, the liquidator has the authority to resist or defend suits instituted against the bank by its
debtors and creditors; it likewise has the authority to bring actions for foreclosure of mortgages
executed by debtors in favor of the bank. (Banco Filipino Savings and Mortgage Bank vs. Central
Bank, G.R. No. 70054, December 11, 1991)

The court shall have jurisdiction in the same proceedings to adjudicate disputed claims against the
bank and enforce individual liabilities of the stockholders and do all that is necessary to preserve
the assets of such institution and to implement the liquidation plan approved by the Monetary
Board. Hence, all claims against the insolvent bank should be filed in the liquidation proceeding
and it is not necessary that a claim be initially disputed in a court or agency before it is filed with
the liquidation court. (Jerry Ong vs. Court of Appeals, G.R. No. 112830, February 1, 1996)

The rule that all claims against a bank must be filed in the liquidation proceedings does not apply to
actions filed by the bank itself for the preservation of its assets and protection of its property, such
as a petition for the issuance of a Writ of Possession instituted by the bank itself. Moreover, a bank
ordered closed by the Monetary Board retains its personality which can sue and be sued through its
liquidator. (Domingo Manalo vs. Court of Appeals, G.R. No. 141297, October 8, 2001)

A bank, which is previously declared in default for failing to file an answer in a case filed by another
bank cannot rely on the rule that a bank placed under receivership is not liable to pay interest and
penalty on its loan accounts with another bank. By not bothering to file a motion for
reconsideration, the bank is now precluded from relying on the rule with regard to payment of
interests when a bank has been placed under receivership because to do so would render nugatory
 the order of default issued by the court. (Rural Bank of Sta. Catalina vs. Land Bank of the
Philippines, G.R. No. 148019, July 26, 2004)

As a rule, bank deposits are not preferred credits. However, when the deposits covered by a
cashier’s check were purchased from a bank at the time when it was already insolvent, the
purchase is entitled to preference in the assets of the bank upon its liquidation by reason of the
fraud in the transaction. (Leticia G. Miranda vs. Philippine Deposit Insurance Corporation, G.R. No.
169334, September 8, 2006)

6. How the BSP Handles Exchange Crisis

a. Legal Tender Power

b. Rate of Exchange

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

1. Purpose

R.A. No. 1405 hopes to discourage private hoarding and at the same time encourages the people to
deposit their money in banking institutions, so that it may be utilized by way of authorized loans
and thereby assist in economic development. The absolute confidentiality rule in R.A. No. 1405
actually aims to give protection from unwarranted inquiry or investigation if the purpose of such
inquiry or investigation is merely to determine the existence and nature, as well as the amount of
the deposit in any given bank account. (BSB Group, Inc. vs. Sally Go, G.R. No. 168644, February 16,
2010)

2. Prohibited Acts

In a case where the money paid by an insurance company for treasury bills was deposited in a bank
account, the examination of the said bank account is prohibited under R.A. No. 1405 by reason of
the fact that the subject matter of the action filed by the insurance company against the seller of
the treasury bills is the failure to deliver the treasury bills, not the money deposited. (Oñate vs.
Abrogar, G.R. No. 107303, February 23, 1995)

When a collecting bank sued the drawee bank because the latter had erroneously undercoded the
amount of the check it presented for clearing, the collecting bank cannot be allowed to examine the
account of the drawer of the check absent any showing that the money in the said account is the
subject matter of litigation. The action filed by the collecting bank is not for the recovery of the
money contained in the deposit but for the recovery of the money from the drawee bank as a result
of the latter’s alleged failure to inform the former of the discrepancy. (Union Bank of the
Philippines vs. Court of Appeals, G.R. No. 134699, December 23, 1999)

3. Deposits Covered

When the account subject of the complaint is in the foreign currency, such complaint filed for
violation of R.A. No. 1405 did not toll the running of the prescriptive period to file the appropriate
complaint for violation of R.A. No. 6426. The Law on Secrecy of Bank Deposits (R.A. No. 1405)
covers deposits under the Philippine Currency; a separate and distinct law governs deposits under
 the foreign currency (R.A. No. 6426). (Intengan vs. Court of Appeals, G.R. No. 128996, February 15,
2002)

The “deposits” covered by the law on secrecy of bank deposits should not be limited to those
creating a creditor-debtor relationship; the law must be broad enough to include “deposits of
whatever nature” which banks may use for authorized loans to third persons. R.A. No. 1405
extends to funds invested such as those placed in a trust account which the bank may use for loans
and similar transactions. (Ejercito vs. Sandiganbayan, G.R. Nos. 157294-95, November 30, 2006)

4. Exceptions

When pursuant to a court order garnishing the depositor’s funds, a bank complied by delivering in
check the amount garnished to the sheriff, the bank cannot be held liable to its depositor. There is
no violation of the law on secrecy of bank deposits when the bank had no choice but to comply
with the court order for delivery of the garnished amount. (RCBC vs. De Castro, G.R. No. L-34548,
November 29, 1988)

One of the exceptions under R.A. No. 1405 is when a court order is issued for the disclosure of bank
deposits in a case where the money deposited is the subject matter of litigation. When the subject
matter is the money the bank transmitted by mistake, an inquiry to the whereabouts of the
amount extends to whatever concealed by being held or recorded in the name of the persons other
than the one responsible for the illegal acquisition. (Mellon Bank, N.A. vs. Magsino, G.R. No.
71479, October 18, 1990)

The law on secrecy of bank deposits cannot be used to preclude the bank deposits from being
garnished for the satisfaction of a judgment. There is no violation of R.A. No. 1405 because the
disclosure is purely incidental to the execution process and it was not the intention of the
legislature to place bank deposits beyond the reach of the judgment creditor. (PCIB vs. Court of
Appeals, G.R. No. 84526, January 28, 1991)

In a case for violation of the Anti-Graft and Corrupt Practices Act, the Ombudsman can only
examine bank accounts upon compliance with the following requisites: there is a pending case
before a court of competent jurisdiction; the account must be clearly identified, and the inspection
must be limited to the subject matter of the pending case; the bank personnel and the account
holder must be informed of the examination; and such examination must be limited to the account
identified in the pending case. If there is no pending case yet but only an investigation by the
Ombudsman, any order for the examination of the bank account is premature. (Marquez vs.
Desierto, G.R. No. 135882, June 27, 2001; Office of the Ombudsman vs. Ibay, G. R. No. 137538,
September 3, 2001)

One of the exceptions under R.A. 1405 is when the inquiry into the bank deposits is premised on
the fact that the money deposited in the account is itself the subject of the action. Such is not the
case when the respondent was charged with qualified theft and when the attempt of inquiry serves
no other purpose but to establish the existence of such account, its nature and the amount kept in
it. (BSB Group, Inc. vs. Sally Go, G.R. No. 168644, February 16, 2010)

In case the bank complies with the provisions of the law and the unclaimed balances are eventually
escheated to the Republic, the bank shall not thereafter be liable to any person for the same.
However, when the manager’s check was never negotiated or presented for payment to the bank,
 the procurer of the check retained ownership of the funds; hence, proper notice should have been
given to the latter for compliance with the law. (Rizal Commercial Banking Corporation vs. Hi-Tri
Development Corporation, 672 SCRA 514 (2012))

5. Garnishment of Deposits, Including Foreign Deposits

The law on secrecy of bank deposits cannot be used to preclude the bank deposits from being
garnished for the satisfaction of a judgment. There is no violation of R.A. No. 1405 because the
disclosure is purely incidental to the execution process and it was not the intention of the
legislature to place bank deposits beyond the reach of the judgment creditor. (PCIB vs. Court of
Appeals, G.R. No. 84526, January 28, 1991)

A foreign transient who raped a minor, escaped and was made liable for damages to the victim
cannot invoke the exemption from court process of foreign currency deposits under R.A. No. 6426.
The garnishment of his foreign currency deposit should be allowed by reason of equity and to
prevent injustice; moreover, the purpose of the law is to encourage foreign currency deposits and
not to benefit a wrongdoer. (Salvacion vs. Central Bank of the Philippines, G.R. No. 94723, August
21, 1997)

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

1. Definition and Classification of Banks

When a corporation loans out the money obtained from almost 60,000 savings account deposits
opened by the public with the said corporation, it is clear that these transactions partake the nature
of banking, as defined by the law. Accordingly, the corporation has violated the law by engaging in
banking without securing the administrative authority required in R.A. No. 337. (Republic of the
Philippines vs. Security Credit and Acceptance Corporation, G.R. No. L-20583, January 23, 1967)

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

Transactions involving purchase of receivables at a discount, well within the purview of investing,
reinvesting or trading in securities, which as investment company is authorized to perform, does
not constitute a violation of the General Banking Act. In this case, the funds supposedly lent have
not been shown to have been obtained from the public by way of deposits, hence, it cannot be said
that the investment company was engaged in banking. (Teodoro Bañas vs. Asia Pacific Finance
Corporation, G.R. No. 128703, October 18, 2000)

R.A. No. 8791 or the General Banking Law of 2000 provided that banks shall refer to entities engaged in the
lending of funds obtained in the form of deposits. Financial intermediaries, on the other hand, are defined as
persons or entities whose principal functions include the lending, investing or placement of funds or evidences
of indebtedness or equity deposited with them, acquired by them, or otherwise coursed through them, either
for their own account or for the account of others; pawnshops fall under this category. (First Planters
Pawnshop, Inc. vs. Commissioner of Internal Revenue, G.R. No. 174134, July 30, 2008)

3. Bank Powers and Liabilities

a. Corporate Powers
 An alien-owned commercial bank is allowed to purchase and hold real estate conveyed to it in
satisfaction of debts previously contracted in the course of its dealings such as loans and other
similar transactions. The civil liability arising from the criminal offense committed by the bank’s
former employee is not a debt contracted in the course of a bank’s dealings and thus, the transfer
made by the employee is not allowed. (Register of Deeds of Manila vs. China Banking Corporation,
4 SCRA 1145 (1962))

Banks are entities engaged in the lending of funds obtained through deposits from the public and it
is for this reason that their viability depends largely on their ability to return those deposits on
demand. In this case, when the borrower is proven to have committed fraud by altering and
falsifying its financial statements in order to obtain its credit facilities, the bank has the right to
annul any credit accommodation or loan, and demand the immediate payment thereof. (Banco de
Oro-EPCI, Inc. vs. JAPRL Development Corporation, G.R. No. 179901, April 14, 2008)

b. Banking and Incidental Powers

An investment management agreement, which created a principal-agent relationship between

petitioners as principals and respondent as agent for investment purposes, is not a trust or an
ordinary bank deposit; hence, no trustor-trustee-beneficiary or even borrower-lender relationship
existed. Banks may legally exercise investment management activities but the Monetary Board
may regulate such operations to insure that said operations do not endanger the interests of the
depositors and other creditors of the banks. (Spouses Raul and Amalia Panlilio vs. Citibank, N.A.,
G.R. No. 156335, November 28, 2007)

4. Diligence Required of Banks—Relevant Jurisprudence

In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether
such account consists only of a few hundred pesos or of millions; the bank must record every single
transaction accurately, down to the last centavo, and as promptly as possible. When the bank’s
negligence caused the dishonor of the checks issued by its client, which eventually resulted to the
latter’s embarrassment and financial loss, the bank should be held liable for damages. (Simex
International (Manila) Inc. vs. Court of Appeals, 183 SCRA 360 (1990))

In the absence of any stipulation, the depositary’s responsibility for the safekeeping of the objects
deposited would require the diligence of a good father of a family; hence, any stipulation exempting
the depositary from any liability arising from the loss of the things deposited on account of fraud,
negligence or delay would be void for being contrary to law and public policy. The bank’s
negligence in failing to notify the depositor aggravated the injury or damage to the stamp collection
which was inundated by floodwaters, thus, the bank should be held liable. (Luzan Sia vs. Court of
Appeals, G.R. No. 102970, May 13, 1993)

The degree of diligence required of banks, which should be more than that of a good father of a
family is grounded on the fiduciary nature of the relationship between the bank and its depositors
on account of the bank’s obligation as a depositary of its clients’ deposits. Nevertheless, in a sale
and issuance of foreign exchange demand draft, the same degree of diligence is not required
because the nature of the transaction does not involve the bank’s fiduciary relationship with its
depositors. (Gregorio Reyes vs. Court of Appeals, G.R. No. 118492, August 15, 2001)
When the bank teller has failed to return the passbook to its owner or to the authorized
representative of the depositor, the bank is presumed to have failed to exercise and observe a
higher degree of diligence required of it, which makes it liable for the damage done to the
depositor. However, the bank’s liability can be mitigated by the depositor’s contributory negligence
when the latter allowed a signed withdrawal slip to fall into the hands of an unauthorized person.
(Consolidated Bank and Trust Corporation vs. Court of Appeals, G.R. No. 138569, September 11,
2003)

Allowing the pretermination of the account despite noticing discrepancies in the signature and
photograph of the person claiming to be the depositor, accompanied by the failure to surrender the
original certificate of time deposit, amounted to negligence on the part of the bank. A bank that
fails to exercise the degree of diligence required of it becomes liable for damages. (Citibank, N.A.
vs. Spouses Luis & Carmelita Cabamongan, G.R. No. 146918, May 2, 2006)

No less than the highest degree of diligence is required of banks by reason of the fact that the
banking business is impressed with public interest. Banks are expected to treat the accounts of its
depositors with meticulous care, hence, when checks are encashed by the employees of the bank
without the necessary documents, any loss resulting from the transactions should be borne by the
bank by reason of its negligence. (Philippine Savings Bank vs. Chowking Food Corporation, G.R.
No. 177526, July 4, 2008)

A bank that regularly processes checks that are neither payable to the customer nor duly indorsed
by the payee is apparently grossly negligent in its operations. The degree of responsibility, care and
trustworthiness expected of the banks’ employees and officials is far greater than those of ordinary
clerks and employees; thus, the banks are expected to exercise the highest degree of diligence in
the selection and supervision of their employees. (Philippine National Bank vs. Erlando T.
Rodriguez, et. al., G.R. No. 170325, September 26, 2008)

The fiduciary relationship between the bank and the depositor means that the bank’s obligation to
observe high standards of integrity and performance is deemed written into every deposit
agreement between a bank and its depositor. When the bank failed to perform a routine
verification of the signature affixed in the cash transfer slip, the bank should be held liable for a
withdrawal made by an unauthorized agent of the depositor. (Central Bank of the Philippines vs.
Citytrust Banking Corporation, G.R. No. 141835, February 4, 2009)

When the drawee bank pays a person other than the payee named on the check, it does not
comply with the terms of the check and violates its duty to charge the drawer’s accounts only for
properly payable items. In disregarding established banking rules and regulations, the bank was
clearly negligent, thus, should be made liable. (Bank of America, NT and SA vs. Associated Citizens
Bank, G.R. No. 141018, May 21, 2009)

The premature debiting of the postdated check by the bank which resulted to insufficiency of funds
that brought about the dishonor of two checks, which caused the electric supply to be cut-off and
affected business operations, indicates the negligence of the bank. For its failure to exercise extra-
ordinary diligence, which is required of banks, it should be made liable. (Equitable PCI Bank vs.
Arcelito B. Tan, G.R. No. 165339, August 23, 2010)

A banking institution serving as an originating bank for the Unified Home Lending Program (UHLP)
of the Government owes a duty to observe the highest degree of diligence and a high standard of
 integrity and performance in all its transactions with its clients because its business is imbued with
public interest. (Comsavings Bank vs. Spouses Danilo and Estrella Capistrano, G.R. No. 170942,
August 28, 2013)

As a business affected with public interest and by reason of the nature of its functions, the bank is
under obligation to treat the accounts of its depositors with meticulous care, always having in mind
the fiduciary nature of their relationship. A bank that mismanages the trust accounts of its client
cannot benefit from the inaccuracies of the reports resulting therefrom; it cannot impute the
consequence of its negligence to the client which resulted to miscrediting of funds. (Land Bank of
the Philippines vs. Emmanuel Oñate, G.R. No. 192371, January 15, 2014)

The mortgagee, as a banking institution, owed it to Guariña Corporation to exercise the highest
degree of diligence, as well as to observe the high standards of integrity and performance in all its
transactions because its business was imbued with public interest. The bank failed in its duty by
prematurely foreclosing the mortgages and unwarrantedly causing the foreclosure sale of the
mortgaged properties despite the mortgagor not being yet in default. (Development Bank of the
Philippines vs. Guariña Agricultural and Realty Development Corporation, G.R. No. 160758,
January 15, 2014)

5. Nature of Bank Funds and Bank Deposits

The fiduciary nature of a bank-depositor relationship does not convert the contract between the
bank and its depositors from a simple loan to a trust agreement, whether express or implied;
hence, failure by the bank to pay the depositor is failure to pay a simple loan, and not a breach of
trust. The law simply imposes on the bank a higher standard of integrity and performance in
complying with its obligations under the contract of simple loan, beyond those required of non-
bank debtors under a similar contract of simple loan. (Consolidated Bank and Trust Corporation vs.
Court of Appeals, G.R. No. 138569, September 11, 2003)

6. Stipulation on Interests

A banking institution which has been declared insolvent and subsequently ordered closed by the
Central Bank of the Philippines cannot be held liable to pay interest on bank deposits which accrued
during the period when the bank is actually closed and non-operational. However, the bank is still
liable for the interest on bank deposits which accrued up to the date of its closure. (Fidelity Savings
and Mortgage Bank vs. Hon. Pedro Cenzon, G.R. No. L-46208, April 5, 1990)

When the stipulation on the interest rate is void, it is as if there was no express contract thereon;
hence, courts may reduce the interest rate as reason and equity demand, which would depend on
the circumstances of each case. In the present case, the fact that petitioner made partial payments
makes the stipulated penalty charge of 3% per month or 36% per annum, in addition to regular
interests, iniquitous and unconscionable. (Ileana Macalinao vs. Bank of the Philippine Islands, G.R.
No. 175490, September 17, 2009)

Section 78 of the General Banking Act requires payment of the amount fixed by the court in the
order of execution, with interest thereon at the rate specified in the mortgage contract, which shall
be applied for the one-year period reckoned from the date of registration of the certificate of sale.
Nonetheless, when the period to exercise the right of redemption was effectively extended beyond
one year, it is only fair and just to require the payment of 12% interest per annum beyond the one-
 year period up to the date of consignment of the redemption price with the RTC. (Heirs of Estelita
Burgos-Lipat namely: Alan B. Lipat and Alfredo B. Lipat, Jr. vs. Heirs of Eugenio D. Trinidad
namely: Asuncion R. Trinidad, et. al., G.R. No. 185644, March 2, 2010)

The General Banking Act applies insofar as the redemption price is concerned, when the mortgagee
is a bank and the latter cannot dictate or alter the terms of redemption by imposing additional
charges and including other loans. The foreclosure and sale of the mortgaged property extinguishes
the mortgage indebtedness; hence, the bank can no longer invoke its provisions or even refer to the
18% annual interest charged in the promissory note, an obligation allegedly covered by the terms of
the Contract. (Asia Trust Development Bank vs. Carmelo H. Tuble, G.R. No. 183987, July 25, 2012)

The CB Circular No. 905 merely suspended the effectivity of the Usury Law, thereby allowing the
parties to freely stipulate on the rate of interest. Nonetheless, the lifting of the ceilings for interest
rates does not authorize stipulations charging excessive, unconscionable, and iniquitous interest.
(Advocates for Truth in Lending vs. BSP, G.R. No. 192986, January 15, 2013)

7. Grant of Loans and Security Requirements

a. Ratio of Net Worth to Total Risk Assets

b. Single Borrower’s Limit
c. Restrictions on Bank Exposure to DOSRI (Directors, Officers, Stockholders and their Related
Interests

Under the law on DOSRI transactions, the following elements must be present to constitute a
violation: 1) the offender is a director or officer of any banking institution; 2) the offender, either
directly or indirectly, for himself or as representative or agent of another, borrows from the bank,
becomes a guarantor, indorser, or surety or becomes in any manner an obligor for money borrowed
from bank or loaned by it; 3) the offender has performed any of such acts without the written
approval of the majority of the directors of the bank, excluding the offender, as the director
concerned. The language of the law is broad enough to encompass either the act of borrowing or
guaranteeing, or both. (Jose C. Go vs. BSP, G.R. No. 178429, October 23, 2009)

The law on DOSRI transactions imposes three restrictions: a) the approval requirement, which
refers to the written approval of the majority of the bank’s board of directors, excluding the director
concerned; b) the reportorial requirement, which mandates that the approval should be entered
upon the records of the corporation, and a copy of the entry be transmitted to the appropriate
supervising department; and c) the ceiling requirement, which limits the amount of credit
accommodations to an amount equivalent to the respective outstanding deposits and book value of
the paid-in capital contribution in the bank. Failure to observe the three requirements constitutes
commission of three separate and different offenses. (Jose C. Go vs. BSP, G.R. No. 178429, October
23, 2009)

The rule on DOSRI transactions covers loans by a bank director or officer which are made either: (1)
directly, (2) indirectly, (3) for himself, (4) or as the representative or agent of others. The bank
officer’s act of indirectly securing a fraudulent loan application by using the name of an
unsuspecting person and without prior compliance with the requirements of the law would make
the officer liable not only for violation of the law on DOSRI transactions but also for estafa through
falsification of commercial documents. (Hilario P. Soriano vs. People of the Philippines, et. al., G.R.
No. 162336, February 1, 2010)
 There must be competent evidence to establish that the loans granted were in the nature of DOSRI
or were issued in violation of the Single Borrower’s Limit; nonetheless, even assuming that they
were of such nature, the loans would not be void for that reason. Instead, the bank or the officers
responsible for the approval and grant of the DOSRI loan would be subject to sanctions under the
law. (Republic of the Philippines vs. Sandiganbayan, et. al., G.R. No. 166859/G.R. No. 169203/G.R.
No. 180702, April 12, 2011)

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

A trademark is any visible sign capable of distinguishing the goods (trademark) or services (service
mark) of an enterprise and shall include a stamped or marked container of goods; a trade name
refers to the name or designation identifying or distinguishing an enterprise. Copyright is confined
to literary and artistic works which are original intellectual creations in the literary and artistic
domain protected from the moment of their creation. On the other hand, patentable inventions
refer to any technical solution of a problem in any field of human activity which is new, involves an
inventive step and is industrially applicable. (Pearl & Dean (Phil.), Inc. vs. Shoemart, Inc., G.R. No.
148222, August 15, 2003)

3. Technology Transfer Arrangements

B. Patents

1. Patentable Inventions

A utility model is a technical solution to a problem in any field of human activity which is new and
industrially applicable; it may be, or may relate to, a product, or process, or an improvement of any
of the aforesaid. Being plain automotive spare parts that must conform to the original structural
design of the components they seek to replace, the Leaf Spring Eye Bushing and Vehicle Bearing
Cushion are not ornamental; they lack the decorative quality or value that must characterize
authentic works of applied art and in actuality, they are utility models, useful articles, albeit with no
artistic design or value. (Jessie Ching vs. William Salinas, et. al., G.R. No. 161295, June 29, 2005)

2. Non-Patentable Inventions

3. Ownership of a Patent

a. Right to a Patent

When petitioner never secured a patent for the light boxes, it therefore acquired no patent rights
which could have protected its invention. The ultimate goal of a patent system is to bring new
designs and technologies into the public through disclosure; hence, ideas, once disclosed to the
 public without protection of a valid patent, are subject to appropriation without significant
restraint. (Pearl & Dean (Phil.), Inc. vs. Shoemart, Inc., G.R. No. 148222, August 15, 2003)

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

The tiles produced from respondent’s process are suitable for construction and ornamentation,
which previously had not been achieved by tiles made out of the old process of tile making;
therefore, the said invention having brought about a new and useful kind of tile, the patent is
legally issued. With this, the act of making, using and selling tiles embodying said patented
invention constitute infringement. (Domiciano Aguas vs. Conrado De Leon, G.R. No. L-32160,
January 30, 1982)

The validity of the patent issued by the Philippine Patent Office and the question over the
inventiveness, novelty and usefulness of the improved model of the LPG burner are matters which
are better determined by the Patent Office. There is a presumption that the Philippine Patent
Office has correctly determined the patentability of the model and such action must not be
interfered with in the absence of competent evidence to the contrary. (Manzano vs. Court of
Appeals, G.R. No. 113388, September 5, 1997)

There can be no infringement of a patent until a patent has been issued, since whatever right one
has to the invention covered by the patent arises alone from the grant of patent. A patent gives the
inventor the right to exclude all others from making, using or selling his invention. (Creser Precision
Systems, Inc. vs. Court of Appeals, G.R. No. 118708, February 2, 1998)

When the language of its claims is clear and distinct, the patentee is bound thereby and may not
claim anything beyond them. the language of Letter Patent No. 14561 fails to yield anything at all
regarding Albendazole and no extrinsic evidence had been adduced to prove that Albendazole
inheres in petitioner’s patent in spite of its omission therefrom or that the meaning of the claims of
the patent embraces the same. (Smith Kline Beckman Corporation vs. Court of Appeals, G.R. No.
126627, August 14, 2003)

The patent law has a three-fold purpose: first, it seeks to foster and reward invention; second, it
promotes disclosure of inventions to stimulate further innovation and to permit the public to
practice the invention once the patent expires; and third, the stringent requirements for patent
protection seek to ensure that ideas in the public domain remain there for the free use of the public
and it is only after an exhaustive examination by the patent office that patent is issued. Not having
gone through the arduous examination for patents, petitioner cannot exclude others from the
manufacture, sale or commercial use of the light boxes on the sole basis of its copyright certificate
over the technical drawings. (Pearl & Dean (Phil.), Inc. vs. Shoemart, Inc., G.R. No. 148222, August
15, 2003)
 A patentee shall have the exclusive right to make, use and sell the patented machine, article or
product, and to use the patented process for the purpose of industry or commerce, throughout the
territory of the Philippines for the term of the patent; and such making, using, or selling by any
person without the authorization of the patentee constitutes infringement of the patent. The
patentee’s exclusive rights exist only during the term of the patent, hence, after the cut-off date,
the exclusive rights no longer exist and the temporary restraining order can no longer be issued in
its favor. (Phil. Pharmawealth, Inc. vs. Pfizer, Inc., G.R. No. 167715, November 17, 2010)

7. Limitations of Patent Rights

a. Prior User
b. Use by the Government

8. Patent Infringement

a. Tests in Patent Infringement

i. Literal Infringement

To determine whether the particular item falls within the literal meaning of the patent claims, the
court must juxtapose the claims of the patent and the accused product within the overall context of
the claims and specifications, to determine whether there is exact identity of all material elements.
Viewed from any perspective or angle, the power tiller of the defendant is identical and similar to
that of the turtle power tiller of plaintiff in form, configuration, design, appearance, and even in the
manner of operation. (Pascual Godines vs. Court of Appeals, G.R. No. 97343, September 13, 1993)

ii. Doctrine of Equivalents

Under the doctrine of equivalents, there is infringement if two devices do the same work in
substantially the same way, and accomplish substantially the same result, even though they differ in
name, form, or shape. The reason for the doctrine of equivalents is that to permit the imitation of a
patented invention which does not copy any literal detail would be to convert the protection of the
patent grant into a hollow and useless thing. (Pascual Godines vs. Court of Appeals, G.R. No.
97343, September 13, 1993)

The doctrine of equivalents provides that an infringement takes place when a device appropriates a
prior invention by incorporating its innovative concept and, although with some modification and
change, performs substantially the same function in substantially the same way to achieve
substantially the same result; it requires satisfaction of the function-means-and-result test. In this
case, while both compounds have the effect of neutralizing parasites in animals, identity of result
does not amount to infringement of patent unless Albendazole operates in substantially the same
way or by substantially the same means as the patented compound, even though it performs the
same function and achieves the same result. (Smith Kline Beckman Corporation vs. Court of
Appeals, G.R. No. 126627, August 14, 2003)

b. Defenses in Action for Infringement

An invention must possess the essential elements of novelty, originality and precedence and for the
patentee to be entitled to protection, the invention must be new to the world. When a patent is
 sought to be enforced, the questions of invention, novelty or prior use, and each of them, are open
to judicial examination; in cases of infringement of patent no preliminary injunction will be granted
unless the patent is valid and infringed beyond question and the record conclusively proves the
defense is sham. (Rosario Maguan vs. Court of Appeals, G.R. L-45101, November 28, 1986)

9. Licensing

a. Voluntary
b. Compulsory

10. Assignment and Transmission of Rights

C. Trademarks

A "trademark" is any word, name, symbol, emblem, sign or device or any combination thereof
adopted and used by a manufacturer or merchant to identify his goods and distinguish them from
those manufactured, sold or dealt in by others; it is any visible sign capable of distinguishing goods.
The trademark is not merely a symbol of origin and goodwill; it is often the most effective agent for
the actual creation and protection of goodwill. (Pribhdas J. Mirpuri vs. Court of Appeals, G.R. No.
114508, November 19, 1999)

1. Definition of Marks, Collective Marks, Trade Names

2. Acquisition of Ownership of Mark

The name and container of a beauty cream product are proper subjects of a trademark inasmuch as
the same falls squarely within its definition. In order to be entitled to exclusively use the same in
the sale of the beauty cream product, the user must sufficiently prove that she registered or used it
before anybody else did. The petitioner’s copyright and patent registration of the name and
container would not guarantee her the right to the exclusive use of the same for the reason that
they are not appropriate subjects of the said intellectual rights. (Elidad C. Kho, doing business
under the name and style of KEC Cosmetics Laboratory vs. Court of Appeals, et. al., G.R. No.
115758, March 19, 2002)

Even if the registration of a mark is prevented with the filing of an earlier application for
registration, this must not, however, be interpreted to mean that ownership should be based upon
an earlier filing date. While RA 8293 removed the previous requirement of proof of actual use prior
to the filing of an application for registration of a mark, proof of prior and continuous use is
necessary to establish ownership of a mark, which constitutes sufficient evidence to oppose the
registration of a mark. (E.Y. Industrial Sales vs. Shien Dar Electricity and Machinery Co. , G.R. No.
184850, 20 October 2010)

The cancellation of registration of a trademark has the effect of depriving the registrant of
protection from infringement from the moment the judgment or order of cancellation has become
final. Accordingly, a distributor has no right to the registration of the disputed trademarks since the
right to register a trademark is based on ownership. An exclusive distributor who employs the
trademark of the manufacturer does not acquire proprietary rights of the manufacturer, and a
registration of the trademark by the distributor as such belongs to the manufacturer, provided the
fiduciary relationship does not terminate before application for registration is filed. (Superior
 Commercial Enterprises, Inc. vs. Kunnan Enterprises Ltd. and Sports Concept & Distributor, Inc.,
G.R. No. 169974, April 20, 2010)

It is not the application or registration of a trademark that vests ownership thereof, but it is the
ownership of a trademark that confers the right to register the same. Registration merely creates a
prima facie presumption of the validity of the registration, of the registrant’s ownership of the
trademark, and of the exclusive right to the use thereof; it is rebuttable, thus, it must give way to
evidence to the contrary. (Birkenstock Orthopaedie Gmbh and Co. Kg vs. Philippine Shoe Expo
Marketing Corporation, G.R. No. 194307, November 20, 2013)

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

Both Berris’ (“D-10 80 WP”) and Abyadang’s mark (“NS D-10 PLUS”) have “D-10” as a common
component, which also happened to be the dominant feature of Berris’ mark. In applying both the
dominancy test and holistic test, the likelihood of confusion is present considering the fact that
both marks pertain to the same type of goods; both products use the same type of material for the
packaging and have identical color schemes. Considering these striking similarities, the buyers of
both products, mainly farmers, may be misled into thinking that “NS D-10 PLUS” could be an
upgraded formulation of the “D-10 80 WP”; hence, Berris properly opposed Abyadang’s application
for registration. (Berris Agricultural Co., Inc. vs. Norvy Abyadang, G.R. No. 183404, October 13,
2010)

A resort to either the Dominancy Test or the Holistic Test shows that colorable imitation exists
between respondent's "Gold Toe" and petitioner's "Gold Top." An examination of the products in
question shows that their dominant features are gold checkered lines against a predominantly black
background and a representation of a sock with a magnifying glass; in addition, both products use
the same type of lettering; both also include a representation of a man's foot wearing a sock and
the word "linenized" with arrows printed on the label; lastly, the names of the brands are similar --
"Gold Top" and "Gold Toe." (Amigo Manufacturing, Inc. vs. Cluett Peabody Co., Inc., G.R. No.
139300, March 14, 2001)

a. Dominancy Test

The word MASTER, the dominant feature of the opposer’s mark, is neither generic nor descriptive
and as such, it cannot be invalidated as a trademark. When the term “MASTER” has acquired a
certain connotation to mean the coffee products MASTER ROAST and MASTER BLEND produced by
Nestle, the use by the CFC of the term “MASTER” in the trademark for its coffee product FLAVOR
MASTER is likely to cause confusion or mistake or even deception of the ordinary purchasers.
(Societe Des Produits Nestle, S.A. vs. Court of Appeals and CFC Corporation, G.R. No. 112012,
April 4, 2001)

Respondents have adopted in "Big Mak" not only the dominant but also almost all the features of
"Big Mac." Applied to the same food product of hamburgers, with both marks aurally and visually
the same, it will likely result in confusion in the public mind. (McDonald’s Corporation vs. L.C. Big
Mak Burger, Inc., G.R. No. 143993, August 18, 2004)

With the predominance of the letter "M," and prefixes "Mac/Mc" found in both marks, the
inevitable conclusion is there is confusing similarity between the trademarks Mc Donald’s marks
and "MACJOY AND DEVICE" especially considering the fact that both marks are being used on
almost the same products falling under Classes 29 and 30 of the International Classification of
Goods i.e. Food and ingredients of food. In this case, the common awareness or perception of
customers that the trademarks McDonalds mark and MACJOY & DEVICE are one and the same, or
an affiliate, or under the sponsorship of the other is not far-fetched. (McDonald’s Corporation vs.
Macjoy Fastfood Corporation, G.R. No. 166115, February 2, 2007)

Both the words PYCNOGENOL and PCO-GENOLS have the same suffix “GENOL” which appears to be
merely descriptive and furnish no indication of the origin of the article and hence, open for
trademark registration by the plaintiff thru combination with another word or phrase such as
PYCNOGENOL. Although there were dissimilarities in the trademark due to the type of letters used
as well as the size, color and design employed on their individual packages/bottles, still the close
relationship of the competing products’ name in sounds as they were pronounced, clearly indicates
that purchasers could be misled into believing that they are the same and/or originates from a
common source and manufacturer. (Prosource International, Inc. vs. Horphag Research
Management SA, G.R. No. 180073, November 25, 2009)

In applying the dominancy test, both confusion of goods and confusion of business were apparent
in both trademarks as the mark “Dermaline Dermaline, Inc.” is confusingly similar with the
registered trademark “Dermalin”. Dermaline’s stance that its product belongs to a separate and
different classification from Myra’s products with the registered trademark does not eradicate the
possibility of mistake on the part of the purchasing public to associate the former with the latter,
especially considering that both classifications pertain to treatments for the skin. (Dermaline, Inc.
Vs. Myra Phamaceuticals, Inc., G.R. No. 190065, August 1, 2010)

“NANNY” is confusingly similar to “NAN,” the prevalent feature of Nestle’s line of infant powdered
milk products which is is written in bold letters and used in all products. The first three letters of
“NANNY” are exactly the same as the letters of “NAN” and when “NAN” and “NANNY” are
pronounced, the aural effect is confusingly similar. (Soceite Des Produits Nestle, S.A. vs. Dy, Jr.,
G.R. No. 172276, August 8, 2010)

The Dominancy Test focuses on the similarity of the prevalent or dominant features of the
competing trademarks that might cause confusion, mistake, and deception in the mind of the
purchasing public. Respondent’s use of the stylized “S” in its Strong rubber shoes infringes on the
mark of the petitioner as it is the dominant feature of the latter’s trademark; the likelihood of
confusion is present as purchasers may associate the respondent’s product as connected with
petitioner’s business. (Sketchers USA vs. Inter Pacific Industrial Trading Corporation, GR No.
164321, March 28, 2011)

b. Holistic Test

The similarities of the competing trademarks in this case are completely lost in the substantial
differences in the design and general appearance of their respective hang tags. The trademarks
FRUIT OF THE LOOM and FRUIT FOR EVE do not resemble each other as to confuse or deceive an
 ordinary purchaser, who must be thought of as having, and credited with, at least a modicum of
intelligence to be able to see the obvious differences between the two trademarks in question.
(Fruit of the Loom, Inc. vs. Court of Appeals, G.R. No. L-32747, November 29, 1984)

In applying the holistic test, petitioner’s trademark, “STYLISTIC MR. LEE,” which pertains to jeans,
should be considered as a whole. The test of fraudulent simulation is to be found in the likelihood
of the deception of some persons in some measure acquainted with an established design and
desirous of purchasing the commodity with which that design has been associated. When the
casual buyer is predisposed to be more cautious in his purchase, as in this case where the products
concerned are not inexpensive, the likelihood of confusion is absent. (Emerald Garment
Manufacturing Corporation vs. Court of Appeals, G.R. No. 100098, December 29, 1995)

The application of the holistic test entails a consideration of the entirety of the marks as applied to
the products, including the labels and packaging, in determining confusing similarity. Although the
perceived offending word “MARK” is itself prominent in petitioner’s trademarks “MARK VII” and
“MARK TEN,” the entire marking system should be considered as a whole and not dissected,
because a discerning eye would focus not only on the predominant word but also on the other
features appearing in the labels; only then would such discerning observer draw his conclusion
whether one mark would be confusingly similar to the other and whether or not sufficient
differences existed between the marks. (Philip Morris, Inc. vs. Fortune Tobacco Corporation, G.R.
No. 158589, June 27, 2006)

The gravamen of the offense of infringement of a registered trademark is the likelihood of

confusion. In applying the Holistic Test, confusion was remote because the jeans made and sold by
Levi’s Philippines were not only very popular but also quite expensive, as opposed to Diaz’s tailored
jeans which were acquired on a “made-to-order” basis; moreover, since the jeans are expensive,
the casual buyer is predisposed to be more cautious and discriminating in and would prefer to mull
over his purchase. (Victorio Diaz vs. People of the Philippines, G.R. No. 180677, February 18,
2013)

7. Well-Known Marks

Respondent’s BARBIZON as well as its BARBIZON and Bee Design and BARBIZON and Representation
of a Woman trademarks qualify as well-known trademarks entitled to protection. Hence,
“Barbizon” cannot be registered as a trademark for ladies’ underwear. (Pribhdas J. Mirpuri vs.
Court of Appeals, G.R. No. 114508, November 19, 1999)

The Paris Convention for the Protection of Industrial Property does not automatically exclude all
countries of the world which have signed it from using a tradename which happens to be used in
one country. “GALLO” cannot be considered a “well-known” mark within the contemplation and
protection of the Paris Convention in this case since GALLO wines and GALLO cigarettes are neither
the same, identical, similar nor related goods. (Mighty Corporation and La Campana Fabrica De
Tabaco, Inc. vs. E. & J. Gallo Winery and the Andresons Group, Inc., G.R. No. 154342, July 14,
2004)

The scope of protection under Article 6bis of the Paris Convention, wherein both the United States
and the Philippines are signatories, extends to a well-known mark, which should be protected in a
country even if the mark is neither registered nor used in that country. Respondent, the owner of a
well-known mark, has the legal capacity to sue petitioners for the latter’s use of the IN-N-OUT
 Burger trademark for the name of their restaurant and for the identical or confusingly similar mark
for their hamburger wrappers and french-fries receptacles, which effectively misrepresent the
source of the goods and services. (Sehwani, Inc. vs. In-N-Out Burger, Inc., G.R. No. 171053,
October 15, 2007)

The essential requirement under the Paris Convention (and the Intellectual Property Code) is that
the trademark to be protected must be “well-known” in the country where protection is sought and
the power to determine whether a trademark is well-known lies in the competent authority of the
country of registration or use. “Harvard” is a well-known name and mark not only in the United
States but also internationally, including the Philippines; as such, even before Harvard University
applied for registration of the mark “Harvard” in the Philippines, the mark was already protected
under the Paris Convention. (Fredco Manufacturing Corporation vs. President and Fellows of
Harvard College, GR No. 185917, June 1, 2011)

8. Rights Conferred by Registration

Emphasis should be on the similarity of the products involved and not on the arbitrary classification
or general description of their properties or characteristics. The mere fact that one person has
adopted and used a trademark on his goods does not prevent the adoption and use of the same
trademark by others on unrelated articles of a different kind. (Hickok Manufacturing, Co., Inc. vs.
Court of Appeals, G.R. No. L-44707, August 31, 1982)

The adoption and use of a trademark on one’s goods does not prevent the adoption and use of the
same trademark by others for products which are of different description. The registered owner of
the trademark “Brut” for toilet articles such as after shave lotion and deodorant cannot oppose the
registration of the trademark “Brute” for briefs, since the two products are unrelated,
notwithstanding the former’s pending application for registration. (Faberge, Inc. vs. Intermediate
Appellate Court, G.R. No. 71189, November 4, 1992)

One who has adopted and used a trademark on his goods does not prevent the adoption and use of
the same trademark by others for products which are of a different description. The GALLO
trademark registration certificates in the Philippines and in other countries expressly state that they
cover wines only, without any evidence or indication that registrant Gallo Winery expanded or
intended to expand its business to cigarettes. (Mighty Corporation and La Campana Fabrica De
Tabaco, Inc. vs. E. & J. Gallo Winery and the Andresons Group, Inc., G.R. No. 154342, July 14,
2004)

Section 147 of R.A. No. 8293 provides for the exclusive right of the owner of a registered mark to
prevent third parties not having the owner’s consent from using in the course of trade identical or
similar signs or containers for goods or services which are identical or similar to those in respect of
which the trademark is registered where such use would result in a likelihood of confusion. Berris,
as a prior user and prior registrant, is the owner of the mark “D-10 80 WP”; hence, it has acquired
the rights conferred under the law. (Berris Agricultural Co., Inc. vs. Norvy Abyadang, G.R. No.
183404, October 13, 2010)

9. Use by Third Parties of Names, etc. Similar to Registered Mark

10. Infringement and Remedies

In upholding the right of the petitioner to maintain a suit for unfair competition or infringement of
trademarks of a foreign corporation before the Philippine courts, the duties and rights of foreign
states under the Paris Convention for the Protection of Industrial Property to which the Philippines
and France are parties are upheld. (Melbarose R. Sasot and Allandale R. Sasot vs. People of the
Philippines, G.R. No. 143193, June 29, 2005)

It is not evident whether the single registration of the trademark “Dockers and Design” confers on
the owner the right to prevent the use of a fraction thereof in the course of trade and it is also
unclear whether the use without the owner’s consent of a portion of a trademark registered in its
entirety constitutes material or substantial invasion of the owner’s right. Injunction will not lie when
the petitioners’ right to injunctive relief has not been clearly and unmistakably demonstrated and
when the right has yet to be determined. (Levi Strauss & Co., Levi Strauss (Phils.), Inc. vs. Clinton
Apparelle, Inc., G.R. No. 138900, September 20, 2005)

San Miguel claims that it has invested hundreds of millions over a period of 170 years to establish
goodwill and reputation now being enjoyed by the “Ginebra San Miguel” mark such that the full
extent of the damage cannot be measured with reasonable accuracy. Nonetheless, a writ of
preliminary injunction cannot be issued in favor of San Miguel when it failed to prove the
probability of irreparable injury which it will stand to suffer if the sale of “Ginebra Kapitan” is not
enjoined. Moreover, the right to the exclusive use of the word “Ginebra” has yet to be determined
in the main case. (Tanduay Distillers, Inc. vs. Ginebra San Miguel, Inc., G.R. No. 164324, August 14,
2009)

a. Trademark Infringement

The question is not whether the two articles are distinguishable by their label when set side by side
but whether the general confusion made by the article upon the eye of the casual purchaser who is
unsuspicious and off his guard, is such as to likely result in his confounding it with the original. It is
not difficult to see that the Sunshine label is a colorable imitation of the Del Monte trademark; the
predominant colors used in the Del Monte label are green and red-orange, the same with Sunshine;
the word "catsup" in both bottles is printed in white and the style of the print/letter is the same;
and although the logo of Sunshine is not a tomato, the figure nevertheless approximates that of a
tomato. (Del Monte Corporation and Philippine Packing Corporation vs. Court of Appeals, G.R.
No. L-78325, January 25, 1990)

The fact that the words pale pilsen are part of ABI's trademark does not constitute an infringement
of SMC's trademark: SAN MIGUEL PALE PILSEN, for "pale pilsen" are generic words descriptive of
the color ("pale"), of a type of beer ("pilsen"), which is a light bohemian beer with a strong hops
flavor that originated in the City of Pilsen in Czechoslovakia and became famous in the Middle Ages.
Moreover, ABI’s use of the steinie bottle, similar but not identical to the SAN MIGUEL PALE PILSEN
bottle, is not unlawful as SMC did not invent but merely borrowed the steinie bottle from abroad
and it has not claimed neither patent nor trademark protection for that bottle shape and design.
(Asia Brewery, Inc. vs. Court of Appeals and San Miguel Corporation, G.R. No. 103543, July 5,
1993)

One who has adopted and used a trademark on his goods does not prevent the adoption and use of
the same trademark by others for products which are of a different description. Assuming arguendo
that "Poster Ads" could validly qualify as a trademark, the failure of Pearl & Dean to secure a
trademark registration for specific use on the light boxes meant that there could not have been any
 trademark infringement since registration was an essential element thereof. (Pearl & Dean (Phil.),
Inc. vs. Shoemart, Inc., G.R. No. 148222, August 15, 2003)

When a trademark is used by a party for a product in which the other party does not deal, the use
of the same trademark on the latter’s product cannot be validly objected to. There is no
infringement when the trademark “CANON” is used by the petitioner for paints, chemical products,
toner and dyestuff while it is used by the private respondent for footwear (sandals). (Canon
Kabushiki Kaisha vs. Court of Appeals, G.R. No. 120900, July 20, 2004)

Mere unauthorized use of a container bearing a registered trademark in connection with the sale,
distribution or advertising of goods or services which is likely to cause confusion, mistake or
deception among the buyers/consumers can be considered as trademark infringement. The
petitioners, as directors/officers of MASAGANA, are utilizing the latter in violating the intellectual
property rights of Petron and Pilipinas Shell; thus, petitioners collectively and MASAGANA should
be considered as one and the same person for liability purposes. (William C. Yao, Sr., et. al. vs.
People of the Philippines, G.R No. 168306, June 19, 2007)

The trademark “ Marlboro “ is not only valid for being neither generic nor descriptive, it was also
exclusively owned by PMPI, as evidenced by the certificate of registration issued by the Intellectual
Property Office. Infringement of trademark clearly lies since the counterfeit cigarettes not only
bore PMPI’s trademark, but they were also packaged almost exactly as PMPI’s products. (Ong vs.
People of the Philippines, GR No. 169440, November 23, 2011)

The mere unauthorized use of a container bearing a registered trademark in connection with the
sale, distribution or advertising of goods or services which is likely to cause confusion among the
buyers or consumers can be considered as trademark infringement. Petitioners’ act of refilling,
without the respondents’ consent, the LPG containers bearing the registered marks of the
respondents will inevitably confuse the consuming public, who may also be led to believe that the
petitioners were authorized refillers and distributors of respondent’s LPG products. (Republic Gas
Corporation (REGASCO), et. al. vs. Petron Corporation, et. al., G.R. No. 194062, June 17, 2013)

The Rules on the Issuance of the Search and Seizure in Civil Actions for Infringement of Intellectual
Property Rights are not applicable in a case where the search warrants were applied in anticipation
of criminal actions for violation of intellectual property rights under RA 8293. Rule 126 of the
Revised Rules of Court would apply and a warrant shall be validly issued upon finding the existence
of probable cause. (Century Chinese Medicine Co., et. al. vs. People of the Philippines, G.R. No.
188526, November 11, 2013)

b. Damages
c. Requirement of Notice

11. Unfair Competition

Mere similarity in the shape and size of the container and label does not constitute unfair
competition. SMC cannot claim unfair competition arising from the fact that ABI's BEER PALE PILSEN
is sold, like SMC's SAN MIGUEL PALE PILSEN in amber steinie bottles absent any showing that the
BEER PALE PILSEN is being passed off as SAN MIGUEL PALE PILSEN. (Asia Brewery, Inc. vs. Court of
Appeals and San Miguel Corporation, G.R. No. 103543, July 5, 1993)
 The essential elements of an action for unfair competition are (1) confusing similarity in the general
appearance of the goods, and (2) intent to deceive the public and defraud a competitor. The
confusing similarity may or may not result from similarity in the marks, but may result from other
external factors in the packaging or presentation of the goods. In this case, the intent to deceive
and defraud may be inferred from the fact that there was actually no notice (on their plastic
wrappers) to the public that the “Big Mak” hamburgers are products of “L.C. Big Mak Burger,
Inc.”(McDonald’s Corporation vs. L.C. Big Mak Burger, Inc., G.R. No. 143993, August 18, 2004)

Hoarding does not relate to any patent, trademark, trade name or service mark that the
respondents have invaded, intruded into or used without proper authority from the petitioner nor
are the respondents alleged to be fraudulently “passing off” their products or services as those of
the petitioner. The respondents are not also alleged to be undertaking any representation or
misrepresentation that would confuse or tend to confuse the goods of the petitioner with those of
the respondents, or vice versa. What in fact the petitioner alleges is an act foreign to the Code, to
the concepts it embodies and to the acts it regulates; as alleged, hoarding inflicts unfairness by
seeking to limit the opposition’s sales by depriving it of the bottles it can use for these sales. (Coca-
Cola Bottlers Philippines, Inc. (CCBPI), Naga Plant vs. Quintin Gomez, et, al., G.R. No. 154491,
November 14, 2008)

Unfair competition has been defined as the passing off (or palming off) or attempting to pass off
upon the public of the goods or business of one person as the goods or business of another with
the end and probable effect of deceiving the public. The mere use of the LPG cylinders for refilling
and reselling, which bear the trademarks "GASUL" and "SHELLANE" will give the LPGs sold by
REGASCO the general appearance of the products of the petitioners. (Republic Gas Corporation
(REGASCO), et. al. vs. Petron Corporation, et. al., G.R. No. 194062, June 17, 2013)

12. Trade Names or Business Names

The ownership of a trademark or tradename is a property right which the owner is entitled to
protect since there is damage to him from confusion or reputation or goodwill in the mind of the
public as well as from confusion of goods. By appropriating the word "CONVERSE," respondent's
products are likely to be mistaken as having been produced by petitioner. The risk of damage is not
limited to a possible confusion of goods but also includes confusion of reputation if the public could
reasonably assume that the goods of the parties originated from the same source. (Converse
Rubber Corporation vs. Universal Rubber Products, Inc., G.R. No. L-27906, January 8, 1987)

A trade name previously used in trade or commerce in the Philippines need not be registered with
the IPO before an infringement suit may be filed by its owner against the owner of an infringing
trademark. Nonetheless, respondent does not have the right to the exclusive use of the geographic
word “San Francisco” or the generic word “coffee.” It is only the combination of the words “SAN
FRANCISCO COFFEE,” which is respondent’s trade name in its coffee business, that is protected
against infringement on matters related to the coffee business to avoid confusing or deceiving the
public. (Coffee Partners vs. San Francisco Coffee and Roastery, Inc., G.R. No. 169504, 3 March
2010)

The Philippines is obligated to assure nationals of countries of the Paris Convention that they are
afforded an effective protection against violation of their intellectual property rights in the
Philippines in the same way that their own countries are obligated to accord similar protection to
Philippine nationals. Thus, under Philippine law, a trade name of a national of a State that is a party
 to the Paris Convention, whether or not the trade name forms part of a trademark, is protected
“without the obligation of filing or registration.” (Fredco Manufacturing Corporation vs. President
and Fellows of Harvard College, GR No. 185917, June 1, 2011)

Under the Paris Convention to which the Philippines is a signatory, a trade name of a national of a
State that is a party to the Paris Convention, whether or not the trade name forms part of a
trademark, is protected without the obligation of filing or registration. It follows then that the
applicant for registration of trademark is not the lawful owner thereof and is not entitled to
registration if the trademark has been in prior use by a national of a country which is a signatory to
the Paris Convention. (Ecole De Cuisine Manille (Cordon Bleu of the Philippines), Inc. vs. Renaus
Cointreau & Cie and Le Cordon Bleu Int’l, B.V., G.R. No. 185830, June 5, 2013)

13. Collective Marks

D. Copyrights

At most, the certificates of registration and deposit issued by the National Library and the Supreme
Court Library serve merely as a notice of recording and registration of the work but do not confer
any right or title upon the registered copyright owner or automatically put his work under the
protective mantle of the copyright law; it is not a conclusive proof of copyright ownership. Hence,
when there is sufficient proof that the copyrighted products are not original creations but are
readily available in the market under various brands, as in this case, validity and originality will not
be presumed. (Manly Sportwear Manufacturing, Inc. vs. Dadodette Enterprises and/or Hermes
Sports Center, G.R. No. 165306, September 20, 2005)

1. Basic Principles, Sections 172.2, 175 and 181

2. Copyrightable Works

a. Original Works
b. Derivative Works

3. Non-Copyrightable Works

The format or mechanics of a television show is not included in the list of protected works in Sec. 2
of P.D. No. 49, which is substantially the same as Sec. 172 of the Intellectual Property Code (R.A. No,
8293). For this reason, the protection afforded by the law cannot be extended to cover them.
(Francisco Joaquin, Jr. vs. Franklin Drilon, et. al., G.R. No. 108946, January 28, 1999)

Pearl & Dean’s copyright protection extended only to the technical drawings and not to the light
box itself as the latter does not fall under the category of “prints, pictorial illustrations, advertising
copies, labels, tags and box wraps.” The light box was not a literary or artistic piece which could be
copyrighted under the copyright law; and no less clearly, neither could the lack of statutory
authority to make the light box copyrightable be remedied by the simplistic act of entitling the
copyright certificate issued by the National Library as "Advertising Display Units.” (Pearl & Dean
(Phil.), Inc. vs. Shoemart, Inc., G.R. No. 148222, August 15, 2003)

4. Rights of Copyright Owner

5. Rules on Ownership of Copyright

6. Limitations on Copyright

Under Sec. 184.1 (h), the use made of a work by or under the direction or control of the
Government, by the National Library or by educational, scientific or professional institutions
where such use is in the public interest and is compatible with fair use will not constitute
copyright infringement. The carriage of ABS-CBN’s signals by virtue of the must-carry rule is
under the direction and control of the government through the NTC. The imposition of the
must-carry rule is within the NTC’s power to promulgate rules and regulations, as public
safety and interest may require, to encourage a larger and more effective use of
communications, radio and television broadcasting facilities, and to maintain effective
competition among private entities in these activities whenever the Commission finds it
reasonably feasible. (ABS-CBN Broadcasting Corporation vs. Philippine Multi-Media
System, Inc., G.R. Nos. 175769-70, January 19, 2009)

PMSI cannot be said to be infringing upon the exclusive broadcasting rights of ABS-CBN under the IP
Code for PMSI does not perform the functions of a broadcasting organization, thus, it cannot be
said that it is engaged in rebroadcasting Channels 2 and 23. PMSI is not the origin nor does it claim
to be the origin of the programs broadcasted by the ABS-CBN; the former did not make and
transmit on its own but merely carried the existing signals of the latter and when PMSI’s subscribers
view ABS-CBN’s programs in Channels 2 and 23, they know that the origin thereof was the latter.
ibid

a. Doctrine of Fair Use

b. Copyright Infringement

For the playing and singing the musical compositions involved, the combo was paid as independent
contractors; it is therefore obvious that the expenses entailed thereby are either eventually charged
in the price of the food and drinks or to the overall total of additional income produced by the
bigger volume of business which the entertainment was programmed to attract. Consequently, it is
beyond question that the playing and singing of the combo in defendant-appellee's restaurant
constituted performance for profit contemplated by the Copyright Law. (Filipino Society of
Composers, Authors and Publishers, Inc. vs. Benjamin Tan, G.R. No. L-36402, March 16, 1987)

Infringement of a copyright is a trespass on a private domain owned and occupied by the owner of
the copyright, and, therefore, protected by law, and infringement of copyright, or piracy, which is a
synonymous term in this connection, consists in the doing by any person, without the consent of
the owner of the copyright, of anything the sole right to do which is conferred by statute on the
owner of the copyright. Failure to comply with registration and deposit does not deprive the
copyright owner of the right to sue for infringement but merely limits the remedies available to him
because the copyright for a work is granted from the moment of creation. (Columbia Pictures, Inc.,
et. al. vs. Court of Appeals, G.R. No. 110318, August 28, 1996)

To constitute infringement, it is not necessary that the whole or even a large portion of the work
shall have been copied; if so much is taken that the value of the original is sensibly diminished, or
the labors of the original author are substantially and to an injurious extent appropriated by
another, that is sufficient in point of law to constitute piracy. The injury is sustained when
respondent lifted from petitioners’ book materials that were the result of the latter’s research work
 and compilation and misrepresented them as her own, even circulating the book DEP for
commercial use without acknowledging petitioners as her source. (Pacita Habana, et. al. vs.
Felicidad Robles and Goodwill Trading Co., Inc., G.R. No. 131522, July 19, 1999)

The gravamen of copyright infringement is not merely the unauthorized “manufacturing” of

intellectual works but rather the unauthorized performance of any of the rights exclusively granted
to the copyright owner. Hence, any person who performs any of such acts without obtaining the
copyright owner’s prior consent renders himself civilly and criminally liable for copyright
infringement. (NBI-Microsoft Corporation vs. Judy Hwang, et. al., G.R. No. 147043, June 21, 2005)

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

2. Covered Institutions

3. Obligations of Covered Institutions

4. Covered Transactions

5. Suspicious Transactions

6. When is Money Laundering Committed

7. Unlawful Activities or Predicate Crimes

Since the account of Glasgow in CSBI was (1) covered by several suspicious transaction reports and
(2) placed under the control of the trial court upon the issuance of the writ of preliminary
injunction, the conditions provided in Section 12(a) of RA 9160, as amended, were satisfied. A
criminal conviction for an unlawful activity is not a prerequisite for the institution of a civil forfeiture
proceeding. A finding of guilt for an unlawful activity is not an essential element of civil forfeiture.
(Republic of the Philippines vs. Glasgow Credit and Collection Services, Inc., G.R. No. 170281,
January 18, 2008)

Section 11 allows the AMLC to inquire into bank accounts without having to obtain a judicial order
in cases where there is probable cause that the deposits or investments are related to kidnapping
for ransom, certain violations of the Comprehensive Dangerous Drugs Act of 2002, hijacking and
other violations under R.A. No. 6235, destructive arson and murder. Absent any of the mentioned
predicate crimes, a court order is necessary to inquire into bank deposits. (Republic of the
Philippines vs. Hon. Antonio Eugenio, G.R. No. 174629, February 14, 2008)
 NOTE: By virtue of R.A. No. 10168, Financing of Terrorism is now included as one of the predicate
crimes where a court order is not necessary to examine or inquire into bank deposits.

8. Anti-Money Laundering Council

9. Functions

10. Freezing of Monetary Instrument or Property

The amendment by RA 9194 of RA 9160 erased any doubt on the jurisdiction of the Court of
Appeals over the extension of freeze orders. It is solely the CA which has the authority to issue a
freeze order as well as to extend its effectivity; it also has the exclusive jurisdiction to extend
existing freeze orders previously issued by the AMLC vis-à-vis accounts and deposits related to
money-laundering activities. (Republic of the Philippines vs. Cabrini Green & Ross, Inc., G.R. No.
154522, May 5, 2006)

The primary objective of a freeze order is to temporarily preserve monetary instruments or

property that are in any way related to an unlawful activity or money laundering, by preventing the
owner from utilizing them during the duration of the freeze order. The effectivity of the freeze
order was limited to a period not exceeding six months, which may be extended by the CA should it
become completely necessary. Nonetheless, when the Republic has not offered any explanation
why it took six years before a civil forfeiture case was filed in court, it can only be concluded that
the continued extension of the freeze order beyond the six-month period violated the party’s right
to due process. (Ret. Lt. Gen. Jacinto Ligot, et. al. vs. Republic of the Philippines, G.R. No. 176944,
March 6, 2013)

11. Authority to Inquire Into Bank Deposits

A bank inquiry order for violation of the Anti-Money Laundering law may be issued by the court
even without a pending case for such violation. Nonetheless, unlike a freeze order which may be
issued ex-parte, a bank inquiry order can only be issued upon notice to the owner of the account to
give him the opportunity to contest the issuance of such order. (Republic of the Philippines vs.
Hon. Antonio Eugenio, G.R. No. 174629, February 14, 2008)

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

1. Policy of the Law

2. Definition of Terms

a. Foreign Investment
b. “Doing Business” in the Philippines

Under Sec 3 (d) of the Foreign Investments Act of 1991, the phrase "doing business" shall include
appointing representatives or distributors domiciled in the Philippines or who in any calendar year
stay in the country for a period or periods totalling one hundred eighty (180) days or more. Thus,
the phrase includes "appointing representatives or distributors in the Philippines" but not when the
representative or distributor independently transacts business in its name and for its own account.
(Alfred Hahn vs. Court of Appeals, G.R. No. 113074, January 22, 1997)
 Whether a foreign corporation is "doing business" does not necessarily depend upon the frequency
of its transactions, but more upon the nature and character of the transactions. “Doing business”
covers 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. (Eriks Pte. Ltd. vs. Court of Appeals, G.R. No. 118843,
February 6, 1997)

To constitute "doing business", the activity to be undertaken in the Philippines is one that is for
profit-making. When the activities of the foreign corporation were confined to (1) maintaining a
stock of goods in the Philippines solely for the purpose of having the same processed by the
respondent domestic corporation; and (2) consignment of equipment with the respondent to be
used in the processing of products for export, the foreign corporation cannot be deemed to be
"doing business" in the Philippines. (Agilent Technologies Singapore (Pte.) Ltd. vs. Integrated
Silicon Technology Philippines Corporation, G.R. No. 154618, April 14, 2004)

The appointment of a distributor in the Philippines is not sufficient to constitute “doing business”
unless it is under the full control of the foreign corporation. In the present case, the distributor is
an independent entity which buys and distributes products, other than those of the foreign
corporation, for its own name and its own account; hence, the latter cannot be considered to be
doing business in the Philippines. (Steelcase, Inc. vs. Design International Selections, Inc., G.R. No.
171995, April 18, 2012)

c. Export Enterprise
d. Domestic Market Enterprise

3. Registration of Investments on Non-Philippine Nationals

4. Foreign investments in Domestic Market Enterprise

5. Foreign Investment Negative List

The Foreign Investments Act is the basic law governing foreign investments in the Philippines,
irrespective of the nature of business and area of investment. The concept of a negative list or the
Foreign Investments Negative List provides for two components: List A, which enumerates the areas
of activities reserved to Philippine nationals by mandate of the Constitution and specific laws; and
List B, which enumerates the areas of activities and enterprises regulated pursuant to law. (Heirs of
Wilson Gamboa vs. Finance Secretary Margarito Teves, G.R. No. 176579, October 9, 2012)