MERCANTILE LAW

November 20, 2015

Private Corporations

Attributes of a Corporation

 It is an artificial being with separate personality.
 It is created by operation of law.
 It has the right of succession.
 It has the powers attributes conferred by law or
incident to its existence.
 Separate Personality

 As a consequence of its status as a distinct legal
entity, the corporation acquires property in its name.
The interest of the stockholders or members is
inchoate.
 It also incurs its own liabilities and is legally
responsible for the payment of its obligations. The
corporate debt is not the debt of the stockholders.
This protection from liability is the “principle of
limited liability.”( PNB v. Hydro Resources
Contractors Corporation, 693 SCRA 294, March 13,
2013)
 Piercing the Veil of Corporate
Fiction

 Applies when the corporation fiction is used to
defeat public convenience, justify a wrong, protect
fraud or defend a crime.
 The effect is to make stockholders or members liable
for corporate obligations.
 When it involves two or more corporations, they will
be treated as one corporation.
 Alter Ego or Instrumentality
Theory

 The theory maintains that a corporate entity is a
farce as it is the alter ego, business conduit or
instrumentality of a person or other entity.
 Its requisites are: (a) control of finances, policy and
business practices, (b) control is used to commit
fraud or wrong, and (c) the control is the proximate
cause of the injury.
 (a) is the control test, (b) is the fraud test, and (c) is
the harm test.
 Corporate Nationality

 The nationality of the corporation is governed
primarily by the place of incorporation.
 The control test is used to determine nationality in
the following instances: (a) war, (b) exploitation of
natural resoures, (c) public utilities, and (d)
investment purposes.
 For purposes of the 60% capital requirement, we
only consider shares entitled to vote. (Heirs of
Gamboa v. Teves, 682 SCRA 397, October 9, 2012)
 Grandfather Rule

 Is applied to determine the percentage of Filipino equity
in cases where corporate shareholders are present, by
attributing the nationality of the second or even
subsequent tier of ownership to determine nationality of
the corporate shareholder. If the resulting percentage is
less than 60%, only the number of shares corresponding
to such percentage shall be counted as of Philippine
nationality.
 Under the Strict Rule or Grandfather Rule Proper, the
combined totals in the Investing and Investee
corporations must be traced or “grandfathered” to
determine the total percentage of Filipino ownership.(
SEC Opinion, October 27, 2011)
 Illustration

 Assume that Corporation “A”, a corporation organized in the Philippines, wants to
pursue an activity which is limited under a statute to corporations where the equity
participation of foreigners is limited to 40% of the outstanding capital stock. Its
outstanding capital is equivalent to P10,000,000.00 divided into 1,000,000 shares.
Around 450,000 shares in “A” are owned by Corporation “B” while the rest belong to
Mr. X a Filipino. Sixty percent (60%) of the outstanding capital stock in Corporation
“B” belong to Japanese nationals while forty percent (40%) belongs to Filipinos. If the
Grandfather Rule will be strictly applied, the 450,000 shares owned by Corporation
“B” cannot be said to be entirely Filipino owned or Japanese owned. The percentage
which can be said to be Japanese owned can be determined using the formula
“Number of Shares multiplied by 60/100” or in this case 450,000.00 x
60/100=270,000.00. Thus, 270,000 shares are deemed owned by Japanese and the
balance of 180,000 are owned by Filipinos. If the 180,000 will be added to the shares
of Mr. X (550,000), then the total number of shares owned by Filipinos in Corporation
“A” is 730,000 or 73%. On the other hand, the 270,000 belong to foreigners or 27% of
the outstanding capital stock in Corporation “B”. Therefore, under the “Grandfather
Rule”, Corporation “A” can pursue the proposed activity because the limit of equity
participation of foreigners which is 40% has been exceeded.
 Filipino Corporation

 A corporation that complies with the 60-40 Filipino to foreign equity
requirement can be considered a Filipino corporation if there is no doubt as
to who has the “beneficial ownership” and “control” of the corporation. In
this case, a further investigation as to the nationality of the personalities
with the beneficial ownership and control of the corporate shareholders in
both the investing and investee corporations is necessary. “Doubt” refers to
various indicia that the “beneficial ownership” and “control” of the
corporation do not in fact reside in Filipino shareholders but in foreign
stakeholders. Even if at first glance the petitioners comply with the 60-40
Filipino to foreign equity ratio, doubt exists in the present case that gives
rise to a reasonable suspicion that the Filipino shareholders do not actually
have the requisite number of control and beneficial ownership in
petitioners Narra, Tesoro, and McArthur. Hence, the Court is correct in
using the Grandfather Rule in determining the nationality of the
petitioners. (Narra Nickel Mining & Development Corp. vs. Redmont
Consolidated Mines Inc., G.R. No. 195580, January 28, 2015)
 De Facto Corporation

 A de facto corporation is one that is so defectively
created as not be a de jure corporation, but
nevertheless is the result of a bona fide attempt to
incorporate under existing statutory authority
coupled with the exercise of corporate powers, and is
recognized by the courts as such upon grounds of
public policy in all proceedings except upon a direct
attack by the State questioning its corporate
existence.
 Corporate Existence

 A corporation commences to have existence from the
issuance by the SEC of a certificate of incorporation
under its official seal. The effect of which is to
constitute its stockholders or members and their
successors as a Body Politic and Corporate under the
name and for the term stated in the Articles.
Meaning of Formal Organization

 In the Articles of 3D Corporation, 11 members were named to
constitute the board. The 11 members elected a secretary-
treasurer but did not elect a president. The board proceeded to
transact business, which was done through the secretary-
treasurer. Will an action to forfeit its charter prosper on the
ground of failure to organize as no president was elected?
 No, the corporation is considered to formally organized.
Organize or organization as used in reference to corporations
has a well understood meaning, which is election of officers,
providing for subscriptions and payment of capital stock, the
adoption of by-laws and such other similar steps .In this case,
the corporation has a governing board directing its affairs and
had functioned and engaged in the business for which it was
organized.
 Board Qualification

 It would not be acceptable, however, if the by-laws
will provide that the qualifications or
disqualifications shall be subject to the judgment or
determination of the board, what is required is that
the same be expressly spelled out in the by-laws.
Absent a provision, a corporation cannot require
additional qualifications other than that prescribed
by law. (SEC Opinion, June 16, 1995)
 Age Requirement

 While no age requirement has been provided by law,
a stipulation allowing a minor to be elected as a
member of the board is not sound corporate practice
as they have limited capacity to act.
 It has also been said that since incorporators are
required to be of legal age, the same requirement
should be applied to subsequent directors.
 Three Fold Duties

 They must be diligent. Compliance with the duty of
diligence requires the exercise of reasonable care,
prudence, adequate knowledge and skill.
 They must be loyal by keeping the interest of the
corporation above personal motives. Compliance with
this duty requires that the director act in manner
characterized by transparency, accountability and
fairness.
 They must be obedient by keeping within the powers of
the corporation. The duty of obedience simply means
that directors are bound to observe the limits of their
authority.
 Ultra Vires Acts

 No corporation under this Code shall possess or
exercise any corporate powers except those
conferred by this Code in its articles of incorporation
and except such as are necessary or incidental to the
exercise of the powers so conferred.
 Personal Liability

 A director may be held to be personally liable if he: (a)
willfully and knowingly assents or votes to a patently
unlawful act of the corporation (b) he is guilty of gross
negligence or bad faith in directing the affairs of the
corporation. Example is illegal dismissal of employees
when attended by bad faith or malice, where they will be
solidarily liable with the corporation (c) acquisition of
any personal or pecuniary interest in conflict with his
duty in respect to a matter reposed in him in confidence,
(d) consents to the issuance of watered stock or having
knowledge of the issuance of watered stock does not
notify the corporate secretary in writing of the fact of
issuance (e) agrees to be personally liable (f) is made
liable by specific provision of law.
Business Judgment Rule

 The “Business Judgment Rule” maintains that
questions of policy or of management are left solely
to the honest decisions of officers and directors of a
corporation, and so long as they are in good faith,
their orders are not reviewable by courts.
 Derivative Suit

 The Court has recognized that a stockholder’s right to
institute a derivative suit is not based on any express
provision of the Corporation Code, or even the Securities
Regulation Code, but is impliedly recognized when the
said laws make corporate directors or officers liable for
damages suffered by the corporation and its stockholders
for violation of their fiduciary duties. In effect, the suit is
an action for specific performance of an obligation, owed
by the corporation to the stockholders, to assist its rights
of action when the corporation has been put in default by
the wrongful refusal of the directors or management to
adopt suitable measures for its protection. (Villamor vs.
Umale, G.R. Nos. 172843 & 172881, September 24, 2014)
 Dividends

 Dividends refer to that part or portion of the profits
of a corporation, set aside, declared and ordered by
the Board to be paid ratably to stockholders. As
distinguished from profits, profits are the source of
dividends but not all profits are dividends until so
declared or set aside.
Voting Trust Agreement

 A voting trust agreement is an agreement in writing
whereby one or more stockholders of a stock
corporation transfer their share to any person/s or
corporation having authority to act as a trustee for
the purpose of vesting in such person voting or other
rights pertaining to the shares for a certain period
not exceeding that fixed in the Code and upon terms
and conditions stated in the agreement.
 Stock Certificate

 A stock certificate is not essential to the creation of a
stockholder relationship as regards the corporation in the
absence of a statute or agreement. (First Philippine
Holdings vs. Sandiganbayan, 253 SCRA 30)
 Stock certificates are in the nature of personal property.
Transfers may be effected by delivery and
indorsement. However, no transfer shall be valid
between the parties unless it is recorded in the books of
the corporation.
 Right of Appraisal

 The right of appraisal is the right of stockholder to
demand payment of the fair value of his shares after
dissenting from a proposed corporate action
involving a fundamental change in the corporation
in the cases provided for by law.
Mergers/Consolidations

 Indubitably, it is clear that no merger took place between
Bancommerce and TRB as the requirements and procedures for
a merger were absent. A merger does not become effective
upon the mere agreement of the constituent corporations. All
the requirements specified in the law must be complied with in
order for merger to take effect. Here, Bancommerce and TRB
remained separate corporations with distinct corporate
personalities. What happened is that TRB sold and
Bancommerce purchased identified recorded assets of TRB in
consideration of Bancommerce’s assumption of identified
recorded liabilities of TRB including booked contingent
accounts. There is no law that prohibits this kind of transaction
especially when it is done openly and with appropriate
government approval. (Bank of Commerce vs. Radio
Philippines Network, G.R. No. 195615, April 21, 2014)
 Close Corporations

 A close corporation is a corporation whose articles
provide that: (a)All the corporation’s issued stock of
all classes, exclusive of treasury shares, shall be held
of record by not more than a specified of persons not
to exceed 20, (b) All issued stock of all classes shall
be subject to one or more specified restrictions on
transfer, and (c) The corporation must not list in any
stock exchange or make any public offering of any of
its stock of any class.
 Dissolution

 The effects of dissolution are: (a) legal title to
corporate property is vested in shareholders (b)
corporation ceases as a body politic to continue the
business for which it was organized (c) it cannot be
revived (d) dissolution does not by itself imply the
diminution or extinguishment of rights (e) upon
expiration of the winding up period of 3 years, the
corporation ceases, it can no longer sue or be sued.
 Doing Business

 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)
 Arbitral Award Enforcement

 A foreign corporation not licensed to do business in
the Philippines, but which collects royalties from
entities in the Philippines, can sue here to enforce a
foreign arbitral award. This right must be respected
not because it is favored over domestic laws and
procedures, but because RA 9285 has erased any
conflict of law question.( Tuna Processing, Inc. v.
Philippine Kingford, Inc. G.R. No. 185582, February
29, 2012)
 Scope of Suspension Order

 Corporate rehabilitation proceedings apply only to
corporations, partnerships or associations. Private
individuals-stockholders who have mortgaged their
properties to secure the debt of a corporation cannot
claim that a foreclosure of their properties is within
the coverage of a suspension order. (Lee v. Bangkok
Bank Public Company, Ltd. G.R. No. 173349, 642
SCRA 447, February 9, 2011)
 Reinstatement

 An order of the NLRC for actual reinstatement or
payroll reinstatement can be said to have been
restrained by a receivership. While reinstatement
pending appeal aims to avert the continuing threat
or danger to the survival and even the life of the
dismissed employee and his family, it does not
contemplate the period when the employer-
corporation itself is similarly in a judicially
monitored state of being resuscitated in order to
survive. (Garcia v. PAL, G.R. No. 164856, January 20,
2009)
 Serious Situation Test

 The test maintains that in appointing a receiver, the
court should consider whether the company’s
financial situation is so serious and whether there is
a clear and imminent danger that it will lose its
corporate assets if a receiver is not appointed. (Pryce
Corporation v. CA, G.R. No. 172302, February 4,
2008)
Securities Regulation

 Intracorporate Dispute

 For an intra-corporate dispute to exist there must be
an intra-corporate relationship and the controversy
must arise from the said relationship. The
controversy must be intrinsically connected with the
regulation of the internal affairs of the corporation.
 Security

 Shares, Participation or Interest (SPI) in a
Corporation or in a Commercial enterprise or Profit-
making venture (CCP) and evidenced by a
Certificate, Contract; Instrument, whether written or
electronic in character (CCI).
 Investment Contracts

 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 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. Properity.Com, Inc., G.R.
No. 164197, January 25, 2012)
 Tender Offer

 A Tender Offer is a public offer to purchase a specified
number of shares from shareholders usually at a
premium in an attempt to gain control of the issuing
company.
 A Tender Offer disclosure will be required if a person
(Including a partnership, limited partnership, syndicate,
corporation or any other group) intends to acquire at least
15% or at least 30% over a period of twelve months any
class of equity security of a listed corporation or any class
of equity security of a corporation with assets of at least
50 million and having 200 or more stockholders with at
least 100 shares each.
 Public Company

 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 at
least 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
Exchange Commission, G.R. No. 191995, August 3, 2011)
 Insider Trading

 Insider Trading occurs when an insider sells or buys
a security of the issuer, while in possession of
material information with respect to the issuer or the
security that is not generally available to the public.
Negotiable Instruments

 Negotiability

 The requisites of a negotiable instrument are: (a) It
must be in writing, (b) It must be signed by maker or
drawer, (c) It must contain an unconditional promise
or order to pay a sum certain in money, (d) It must
be payable on demand, or at a fixed or determinable
future time, (e) It must be payable to order or to
bearer, and (f) Where it is a bill of exchange, drawee
must be named or otherwise indicated therein with
reasonable certainty.
 Authority to Complete

 While under the law, the one in possession had a prima
facie authority to complete the check, such prima facie
authority does not extend to its use (i.e., subsequent
transfer or negotiation) once the check is completed. In
other words, only the authority to complete the check is
presumed. Further, the law used the term “prima facie” to
underscore the fact that the authority which the law
accords to a holder is a presumption juris tantum only;
hence, subject to contrary proof. Thus, evidence that there
was no authority or that the authority granted has been
exceeded may be presented by the maker in order to
avoid liability under the instrument. (Patrimonio v.
Gutierrez, G.R. No. 187769, 04 June 2014)
 Accommodation Party

 An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose
of lending his name to some other person. Such a
person is liable on the instrument to a holder for
value, notwithstanding such holder, at the time of
taking the instrument, knew him to be only an
accommodation party.
 Forgery

 The effects of a forgery are: (a) The instrument is not
declared totally void nor are the genuine signatures
thereon rendered inoperative. It is only the forged
signature that is declared inoperative. Hence: rights still
exist and may be enforced by virtue of the instrument as
between parties whose signatures were not forged, and
(b) A forged instrument just prevents any subsequent
party from acquiring any rights as against any party
whose name appears prior to the forgery. There is no
right to retain the instrument, or to give discharge or to
enforce payment. However, rights will exist and may be
enforced as between subsequent parties but no one can
acquire a right as against parties prior to the forgery, who
also have rights and may enforce them as against each
other.
 Bank Payment on a Forged
Check

 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
the check.
 Forgery Exception

 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. (Ilusorio
vs. CA, G.R. No. 139130, November 27, 2002)
 Post-Dated Check

 The collecting bank which accepted a post-dated
check for deposit and sent it to clearing and the
drawee bank cleared and honored the check are both
liable to the drawer for the entire face value of the
check. (Allied Banking Corporation v. BPI, G.R. No.
188363, February 27, 2013)
 Material Alteration

 Is any alteration which changes: (a)The date (b)The sum
payable, either for principal or interest (c) The time
or place of payment (d) The number of the relations of the
parties (e)The medium or currency in which payment is
to be made (f) Or which adds a place of payment
where no place of payment is specified, or any other
change or addition which alters the effect of the
instrument in any respect. Where a negotiable instrument
is materially altered without the assent of all parties liable
thereon, it is avoided, except as against a party who has
himself made, authorized, or assented to the alteration
and subsequent indorsers.
 Alteration of Serial Numbers

 Alterations of serial numbers do not constitute
material alterations on the checks, respondent as
drawee bank has no right to dishonor them and
return them to the petitioner, the collecting bank.
(International Corporate Bank v. CA, G.R. No.
129910, September 5, 2006)
 Holder in Due Course

 A holder in due course is a holder who has taken the
instrument under the following conditions:(a)That it
is complete and regular upon its face;(b)That he
became the holder of it before it was overdue, and
without notice that it had been previously
dishonored, if such was the fact; (c) That he took it in
good faith and for value; (d)That at the time it was
negotiated to him he had no notice of any infirmity
in the instrument or defect in the title of the person
negotiating it.
 Shelter Rule

 The Shelter Rule maintains that a holder who is not a
holder in due course, and who himself is not a party
to any fraud or illegality affecting the instrument,
has all the rights of such former holder in respect of
all parties prior to the latter.
 Discharge

 One of the modes of discharging a negotiable instrument is by
an act which will discharge a simple contract for the payment of
money, such as novation…There are only two ways which
indicate the presence of novation and thereby producing the
effect of extinguishing an obligation by another which
substitutes the same. First, novation must be explicitly stated
and declared in unequivocal terms as it is never presumed.
Secondly, the old and new obligations must be incompatible on
every point. In this case, there was no express agreement that
the acceptance of the replacement check will discharge the
drawer and endorser from liability. Neither is there
incompatibility because both checks were given precisely to
terminate a single obligation arising from the same transaction.
(Salazar v. JY Brothers Marketing Corporation, G.R. No. 171998,
October 10, 2010)
Transportation

 Common Carrier

 Persons engaged in the business of transporting
students from their respective residences to their
school and back are considered as common carriers.
Despite catering to a limited clientele, they operate
as a common carrier because the hold themselves out
as ready transportation indiscriminately to the
students of a particular school living within or near
where they operated the service and for a fee. (Sps.
Perena v. Sps. Nicolas, G.R. No. 157917, August 29,
2012)
 Presumption of Negligence

 Though it is true that common carriers are presumed
to have been at fault or to have acted negligently if
the goods transported by them are lost, destroyed or
deteriorated and that the common carrier must
prove it exercised extraordinary diligence in order to
overcome the presumption, the plaintiff must still,
before the burden is shifted to the defendant, prove
that the subject shipment suffered an actual shortage.
(Asian Terminals, Inc. v. Simon Enterprises, Inc.,
G.R. No. 177116, February 27, 2013)
 Acts of the Driver

 The basis of the carrier’s liability for assaults on
passengers rests on the principle that it is the implied
duty of the carrier to transport the passenger
safely…As between the carrier and the passenger,
the former must bear the risk of wrongful acts and
negligence of the carrier’s employees aganst
passengers, since it, not the passengers have the
power to select and remove them. (Maranan v.
Pascual Perez, G.R. No. L-22272, June 26, 1967)
 Acts of a Stranger

 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.(Pilapil v.
CA, G.R. No. 52159, December 22, 1989)
 Overbooking

 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 date. If he does
not, then the carrier opens itself to a suit for breach of the
contract of carriage. Where an airline has deliberately
overbooked, it took the risk of having to deprive some
passengers of their seats in case all of them would show
up for check in. The indignity and inconvenience of being
refused a confirmed seat at the last minute entitles the
passenger to an award of moral damages. (Sps. Zalamea
v. CA, G.R. No. 104235, November 18, 1993)
 Upgrade

 The Sps. Vasquez have every right to decline the
upgrade and insist on the business class
accommodation they had booked and which were
designated in their boarding passes. They clearly
waived their priority and preference when they
asked other passengers to be given the upgrade. It
should not have been imposed upon them despite
their objection. By insisting on the upgrade, Cathay
breached its contract of carriage with the Sps.
Vasquez. (Cathay Pacific Airways, Ltd. V. Sps.
Vasquez, G.R. No. 150843, March 14, 2003)
 Bill of Lading

 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, the shipper, the carrier and the consignee
undertake specific responsibilities and duties. A bill of
lading delivered and accepted constitutes the contract of
carriage even though not signed, because the acceptance
of the paper containing the terms of a proposed contract
generally constitutes acceptance of the contract and of all
terms and conditions of which the acceptor has actual or
constructive notice. (Keng Hua Paper Products Co. v. CA,
286 SCRA, 1998)
 Conversion

 Concept of Conversion: Where property in the hands of a carrier is not
delivered within a reasonable time after it has reached its destination, the
carrier in the absence of any legal exemption and after demand has been
made and delivery refused, is liable for a conversion of the property.

 The consignee may waive title to the property and sue for conversion and
is entitled to the value of the goods at the time they should have been
delivered to him. Subsequent tender of the goods by the carrier is not
available as a defense.

 If there has been demand and the carrier tenders the goods, the consignee
cannot refuse to receive the goods and sue for conversion. His sole remedy
is an action for damages on account of the delay. There can only be
conversion if there has been demand and the carrier refuses delivery.
 Time to Make a Claim

 Within 24 hours following the receipt of the
merchandise, a claim may be brought against the
carrier on account of damage or average found
therein on opening the packages, provided that the
signs of the damage or average giving rise to the
claim may not be known from the exterior part of the
packages, and in case that they may be so
ascertained, said claim shall only be admitted at the
time of the receipt of the packages.
 Limited Liability Rule

 The Limited Liability Rule cannot be availed of by
the charterers/subcharterer in order to escape from
their liability. The Code of Commerce is clear on
which indemnities may be confined or restricted to
the value of the vessel and these are the-”indemnities
in favor of third persons which may arise from the
conduct of the captain the care of the goods which he
loaded on the vessel.” Thus, what is contemplated is
the liability to third persons who may have dealt
with the shipowner, the agent or even the charterer
in case of demise or bareboat charter.
 Collisions

 (a) Fortuitous when the vessels collide with each other though fortuitous
event or force majeure . Each vessel and each cargo shall bear its own
damages or a vessel which is properly anchored and moored may collide
with those nearby by reason of a storm or other cause of force majeure –
vessel run into suffers its own damages (b)Culpable when the collision is
due to the fault, negligence or lack of skill of the captain or the complement
of the vessel – owner of the vessel at fault shall be liable for the losses and
damages or due to fault of both vessels – each vessel suffers its own losses
regardless of degree of fault, hence rules on contributory negligence does
not apply, with regard to the owners of the cargo, both vessels shall be
jointly and severally liable even if their cause of actions may be different or
2 vessels may collide with each other without their fault but by reason of
the fault of a 3rd vessel – owner of the 3rd vessel will be liable (c)
Inscrutablewhere it cannot be determined which of the 2 vessels is at fault
– each vessel suffers its own losses and damages; both will be solidarily
liable for losses and damages caused to their cargoes. Hence the effect is
that you treat it as a culpable collision.
 COGSA

 In any event, the carrier and the ship shall be
discharged from all liability in respect to loss or
damage unless suit is brought within one year after
delivery of the goods or the date when the goods
should have been delivered. Provided, that if a
notice of loss or damage, either apparent or
concealed, is not given, that fact shall not affect or
prejudice the right of the shipper to bring suit within
one year after delivery or the date the goods should
have been delivered. (Asian Terminals, Inc. v.
Philam Insurance, G.R. No. 181262, July 24, 2013)
 Warsaw Convention

 It applies to international air carriage or transportation
under any of two categories: (a) That where the place of
departure and place of destination are situated within the
territories of two High Contracting Parties regardless of
whether or not there be a break in transportation or
transhipment, and (b) That where the place of departure
and the place of destination are within the territory of a
single High Contracting Party if there is an agreed
stopping place within the territory subject to the
sovereignty, mandate or authority of another power, even
though the power is not party to the Convention.
 It limits liability unless there is willful misconduct.
Insurance

 Insurable Interest

 Insurable interest will exist when the insured has
such a relation or connection with, or concern in,
such subject matter that he will derive pecuniary
benefit or advantage from its preservation or will
suffer pecuniary loss or damage from its destruction,
termination, or injury by the happening of the event
insured against.
 Risk Distributing

 Insurance is a risk distributing device and not a risk
shifting device. Risk distributing means that the
party assuming the risk distributes his potential
liability, in part, among others, while risk shifting
means that one party shifts his risk of loss to another.
 Perfection

 A contract of insurance is consensual. It is perfected
by the meeting of the minds with respect to the
object and consideration of the contract. Specifically,
it is perfected the minute the offeror learns of the
acceptance of his offer by the offeree. It must be
assented to by both parties, either in person or
through their agents and so long as an application
for insurance has not been either accepted or
rejected, it is merely a proposal or an offer to make a
contract.
 The Insured

 When a person has dual citizenship, what will be material
is his choice of allegiance. Dual citizenship, arises as a
result of the concurrent application of different laws, a
person is simultaneously considered a national of the said
states. Dual allegiance, which is declared inimical to
national interest under Article IV, Section 5 of the
Constitution, arises when a person simultaneously owes,
by some positive act, loyalty to two or more states. In this
sense, dual citizenship can be said to be involuntary,
while dual allegiance is a result of the exercise of volition.
Hence, if he opts for allegiance to the country which the
Philippines is at war with, he is not insurable.
 Prohibited Beneficiaries

 In life insurance, anyone, except those who are
prohibited by law to receive donations from the
insured. Under Article 739 of the Civil Code, the
following cannot be designated as beneficiaries (a)
those made between persons guilty of adultery or
concubinage at the time of the designation (b) those
found guilty of the same criminal offense in
consideration thereof (c) those made to a public
officer or his wife, descendants / ascendants by
reason of his office.
 Incontestability Clause

 This is a clause in a policy of life insurance that is
payable on the death of the insured which will
prevent the insurer from claiming the the policy is
void ab initio or is subject to rescission by reason of a
fraudulent concealment or misrepresentation of the
insured or his agent if it shall have been in force
during the lifetime of the insured for a period of 2
years from the date of issue or its last reinstatement.
 Filing of an Action

 There can be an agreement as to the period for the
filing of an action provided the period agreed upon
should not be less than one year. If period agreed
upon is less than one year, the agreement is void.
 The period so agreed shall be considered as having
commenced from the time the cause of action
accrues. Usually, the cause of action accrues from the
date of the insurer’s rejection of the claim of the
beneficiary or of the insured, since prior to the same
there is no necessity to bring suit.
 Payment of Premium

 As a rule, the obligation to pay the premium when
due is considered an indivisible obligation.
Consequently, forfeiture is not prevented by a part
payment unless payment by installment has been
agreed upon or is the established practice.
 Alteration

 An alteration is a change 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 risk, which entitles the insurer to
rescind the contract of insurance.
 Subrogation

 The right of subrogation is not dependent upon, nor does
it grow out of, any privity of contract-it accrues simply
upon payment by the insurance company of the insurance
claim. (Keppel Cebu Shipyard, Inc. vs. Pioneer Insurance
and Surety Corporation, 601 SCRA 96)
 There is no subrogation when: (a) the insured by his own
act releases the party at fault from liability, (b) when the
insurer pays the insured without notifying the carrier
who has in good faith settled the insured’s claim for loss,
(c) when the insurer pays for a loss excepted from the
policy, and (d) in life insurance.
 Non-Default Options

 To prevent a life insurance policy from lapsing, the
following devices are used: (a) grace period, (b)
automatic policy loan, (c) paid-up insurance, (d)
reinstatement.
Banking Laws

 Summary Bank Closure

 Under RA 7653, prior notice and hearing are no
longer required and a report by the head of the
supervising and examining department suffices for a
bank to be closed and put 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 v.
Monetary Board, G.R. No. 150886, February 16, 2007)
 Receivership

 The Monetary Board may forbid a bank from doing
business and place it under receivership without prior
notice and hearing if it finds that the bank: (a) is unable to
pay its liabilities as they become due in the ordinary
course of business, (b) has insuffcient realizable assets to
meet liabilities, (c) cannot continue in business without
involving probable loss to its depositors and creditors,
and (d) has wilfully violated a cease and desist order of
the Board for acts which are considered unsafe and
unsound banking practice and other acts constituting
fraud or dissipation of the assets of the bank.(Vivas v.
Monetary Board, PDIC, G.R. No. 191424, August 7, 2013)
 Obligations of a Bank

 As a business affected with public interest and by
reason of the nature of its function, 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 clients 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 v. Onate, G.R. No.
192371, January 15, 2014)
 Interest

 Where 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 demands. In the case, the fact
that petitioner made partial payments makes the stipulated
penalty charge of 3% per month, in addition to regular interest,
iniquitous and unconscionable. (Macalinao v. BPI, G.R. No.
175490, September 17, 2009)
 CB Circular No. 905 merely suspended the effectivity of the
Usury Law allowing parties to freely stipulate on the rate of
interest but did not authorize stipulations charging excessive,
unconscionable and iniquitous interest. (Advocates for Truth in
Lending v. BSP, G.R. No. 192986, Jnauary 15, 2013)
 DOSRI

 The rule on DOSRI transactions cover loans by a bank
director or officer which are made either: (a) directly, (b)
indirectly, (c) for himself, and (d) or as a 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 a violation of the law on DOSRI
transactions but also for estafa through falsification of
commercial documents. (Soriano v. People, G.R. No.
162336, February 1, 2010)
 DOSRI Requirements

 Any director or officer who may wish to borrow from the bank
must observe the following formalities: (a) The borrowing must be
in accordance with the Arms Length Rule, or which must be upon
terms not less favorable to the bank than those offered to others
,must be with the written approval of a majority of the bank’s
board of directors, excluding the director concerned (b)Such
approval must be entered upon the records of the bank, i.e., the
minutes of the board meeting in which the approval was given;
and (c) A copy of the entry of such approval shall be transmitted
forthwith to the appropriate supervising department of the BSP.

 Other conditions are: (a) The DOSRI borrower is required to waive

the secrecy of his/her deposits of whatever nature in all banks in
the Philippines and (b) The ceiling/limitation as to loans are
followed.
 Banks

 Banks are entities engaged in the lending of funds
obtained in the form of deposits.
 Foreign banks are allowed to operate in the
Philippines under the Foreign Banks Liberalization
Act by either: (a) acquiring or owning up to 60% of
an existing bank (b) investing up to 60% of the
voting stock of a new local banking subsidiary, or (c)
establishing branches with full banking authority.
 Allocation of Damages

 Where the bank’s negligence is the proximate cause
of the loss and the depositor is guilty of contributory
negligence, damages are allocated between the bank
and depositor on a 60-40 ratio. ( PNB v. FF Cruz &
Co., 654 SCRA 333)
 Single Borrower Limit

 Single Borrower Limit regulate the total amount of loans, credit
accommodations and guarantees that may be extended by a
bank to any person, partnership, association, corporation or
other entity. The rules seek to protect a bank from making
excessive loans to a single borrower by prohibiting it from
lending beyond a specified ceiling. The current limit is 25% of
the net worth of the bank concerned.

 The ceiling is subject to possible increase by an additional 10%

provided the additional liabilities of any borrower are
adequately secured by trust receipts, shipping documents,
warehouse receipts or other similar documents transferring or
securing title covering readily marketable, non-perishable
goods which must be fully covered by insurance.
 Nature of Deposits

 As to nature, all kinds of deposits whether fixed or
current are to be treated as loans and are to be covered by
the law on loan.

 They are also considered in the nature of irregular

deposits, they are really loans because they earn interest.
Considering a deposit involves the delivery of a thing for
safekeeping with the obligation to return the very same
thing upon demand and a loan is a contract whereby one
of the parties delivers to another money or other
consumable thing upon the condition that the same
amount of the same kind and quality shall be paid.
 Bank Secrecy

 If the money deposited under an account may be
used by banks for authorized loans to third persons,
then such account, regardless of whether it creates a
creditor-debtor relationship between the depositor
and the bank, falls under the category of accounts
which the law precisely seeks to protect for the
purpose of boosting the economic development of
the country. (Ejercito vs. Sandiganbayan (Special
Division), 509 SCRA 190)
 AMLC Inquiry

 The AMLC can inquire into bank deposits only upon
order of the court when there is probable cause that
the bank deposits are related to a crime or unlawful
activities. However, there is no violation of the law
on secrecy and no court order is required when the
offense or unlawful activity is: (a) kidnap for ransom,
(b) violation of the dangerous drugs law, or (c)
hijacking, destructive arson and murder, including
those perpetrated by terrorists against non-
combatants and similar targets.
 AMLA Freeze Order

 The primary objective of a freeze order is to temporarily
preserve monetary instruments or property that are in a way
related to an unlawful activity or money laundering, by
preventing the owner from utilizing them during the duration
of the freeze order. The six month effectivity period may be
extended by the CA should it be necessary. Nonetheless, when
the Republic has not offered any explanation why it took six
years before a civil forfeiture case was filed, it can only be
concluded that the continued extension of the freeze order
beyond the six months period violated a party’s right to due
process. (Ligot v. Republic, G.R. No. 176944, March 6, 2013)
 No restraining order or injunction can be issued by a court
other than the Supreme Court.
LETTERS OF CREDIT

 Independence and Strict
Compliance Doctrines

 Independence Doctrine-a bank, in determining
compliance with the terms of a letter of credit is
required to examine only the shipping documents
presented by the seller and is precluded from
determining whether the main contract is actually
accomplished or not.
 Strict Compliance Doctrine-the documents tendered
by the seller or beneficiary must strictly conform to
the terms of the letter of credit.
 Fraud Exception

 The fraud exception maintains that despite the bank’s
unconditional obligation to pay the seller upon
presentation of the required documents, the issuing bank
is not bound to pay when there has been fraud by the
seller. The test is whether, standing in the shoes of the
paying bank at the time of payment, the fraud was clear
and obvious. If [the] fraud was clear and obvious, the
bank pays the beneficiary at its own peril and it is not
entitled to reimbursement. But if [the] fraud is not clear
and obvious, then it is not for a bank to question why the
parties involved had chosen to conduct their business in
any particular way.
TRUST RECEIPTS

 Essence of a Trust Receipt
Transaction

In all trust receipt transactions, both obligations on the part
of the (en)trustee exist in the alternative- the return of the
proceeds of the sale or the return or recovery of the goods,
whether raw or processed. When both parties enter into an
agreement knowing 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; 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. (Land Bank of the Philippines v. Lamberto C.
Perez, et.al., G.R. No. 166884, 672 SCRA 117, June 13, 2012)
 Loan and Security Features

 The loan feature of a trust receipt transaction lies in
the manner it facilitates the importation or purchase
of merchandise by the extension of credit.
 The security feature of a trust receipt lies in the fact
that the imported or purchased merchandise will
serve as collateral for the credit extended and that
the obligation of the entrustee is to deliver the
proceeds of their sale or return them if not sold.
 Validity of Security Interest

 The security interest if the entruster pursuant to the
written terms of the 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 a purchaser for value and in good faith.
(Prudential Bank v. NLRC, 251 SCRA 412, 1995)
 Intent to Defraud

 Under the law, intent to defraud is presumed when the
(a) entrustee fails to turn over the proceeds of the sale of
the goods to the entruster, or (b) when the entrustee fails
to return the goods is they are not disposed of in
accordance with the trust receipt.
 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 as the
only obligation actually agreed by the parties would be a
return of the proceeds of the sale transaction. It is a mere
loan where the borrower is obligated to pay the bank the
amount spent to purchase the goods. (Hur Tin Yang v.
People, G.R. No. 195117, August 14, 2013)
Intellectual Property

 Duration of IP Rights

 Trademarks: 10 years subject to indefinite renewal of
10 years each time.
 Patents: 20 years from the date of the filing of the
application.
 Copyrights: During the lifetime of the author and 50
years after death.
 Fair Use

 The Fair Use Doctrine contemplates that the use of
the copyrighted work for criticism, comment, news
reporting, teaching and classroom use, scholarship,
research and similar purposes is not an infringement.
 The determining factors are: (a) purpose and
character of the use, (b) nature of the work, (c)
amount and substantiality of the portion used in
relation to the whole, and (d) effect of the use on
potential market or value of the work.
Trademark Infringement

 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)
 Dominancy v. Holistic

 Test of Dominancy: Focuses on the similarity of the
competing trademarks which might cause confusion
or deception.
 Holistic Test: Mandates that the entirety of the marks
in question must be considered in determining
confusing similarity.
 Goods v. Business

 Confusion of goods: The ordinarily prudent purchaser
would be induced to purchase one product in the belief
that he was purchasing the other.
 Confusion of business: Though the goods of the parties
are different, the defendant’s (infringer’s) product is such
as might reasonably be assumed to originate with the
plaintiff (trademark owner), and the public would then be
deceived either into that belief or into the belief that there
is some connection between the plaintiff (trademark
owner) and defendant (infringer) which, in fact, does not
exist.
 Patent Doctrines

 First to File Rule: If two or more persons have made
the invention separately and independently of each
other, the right to the patent shall belong to the
person who first filed an application for such
invention.
 Doctrine of Equivalents: Provides that infringement
takes place when a device appropriates prior
invention by incorporating innovative concept, and
the function, means and result of these inventions
are substantially the same.
 Owner of Patent

 The person who commissions the invention owns the
patent unless otherwise provided in the agreement.
 As between the employer and the employee in the
course of his employment: (a) the employee, if the
inventive activity is not part of his regular duties,
even if he uses the time, facilities and materials of the
employer, (b) the employer, if the the invention is a
result of his regularly assigned duties, unless there is
an agreement, express or implied, to the contrary.
Foreign Investment Act

 Foreign Investments

 A foreign investment is an equity investment made by non-
Philippine national in the form of foreign exchange and/or
other assets actually transferred to the Philippines and duly
registered with the Central Bank which shall assess and
appraise the value of such assets other than foreign exchange.
 An export enterprise is an enterprise wherein a manufacturer,
processor or service (including tourism) enterprise exports sixty
percent (60%) or more of its output, or wherein a trader
purchase products domestically and exports sixty percent (60%)
or more of such purchases.
 A domestic market enterprise is an enterprise which produces
goods for sale, or renders services to the domestic market
entirely or if exporting a portion of its output fails to
consistency export at least 60% thereof.
 Negative Lists

 The Negative List is the list containing areas of investment that foreigners
cannot invest in or requires the listing of foreign ownership. The list is not
permanent as it is subject to amendment every two years.
 List A enumerates the areas of economic activities reserved for Philippine
nationals by mandate of the constitution and specific laws. These include
exploitation of natural resources, operation of public utilities, educational
institutions, mass media, labor recruitment and the retail trade.
 List B enumerates those activities where foreign ownership is limited to 40% for
reasons of security, defense, risk to health and morals and protection of small
and medium scale enterprise. These include defense-related activities such as
the manufacture and distribution of firearms and explosives including the
manufacture and distribution of dangerous drugs, gambling, nightclubs,
bathhouse, massage parlors and other similar activities.