PRE-WEEK LECTURE ON MERCANTILE LAW

By: Jacinto D. Jimenez

I. Letter of Credit

A. Nature
It is not an accessory obligation but a primary separate obligation. Purpose is to
ensure certainty of payment.
Substituting undertaking of bank to pay oblig of the customer to pay under
a contract of sale

B. Parties
1. Buyer, who obtains letter of credit and binds himself to reimburse bank.
a. Usually seller asks buyer to apply for LoC so seller will be paid
2. Issuing bank, who undertakes to pay the seller on receipt of the draft and proper
documents.
a. Seller and buyer negotiate on what DOCUMENTS seller must attach to
draft to PROVE delivery of goods
i. Bill of lading
ii. Commercial Invoice
iii. Insurance
3. Seller, who ships the goods and delivers the documents of title and draft to bank,
to collect payment.
a. Delivers documents of title and draft to the bank!
b. Submits docs required in LoC

C. Basic Principles
1. Doctrine of Independence
a. Banks DO NOT DEAL WITH GOODS, THEY DEAL ONLY WITH
DOCUMENTS.
b. Bank will never agree for it to pay the seller, it will have to examine first
the goods.
c. So long as documents required by LoC were submitted, the bank will
have to pay no investigation whether seller actually complied with
obligs under contract of sale
i. Case: Importer imported certain materials for dyeing
1. Seller delivered chalk buyer refused to pay. Dye nga eh!
2. Court said No Banks deal with docs only, LoC required
invoice for dyestuff, seller complied bank was obliged to
pay so you have to reimburse
ii. Thrilla in Manila secured by LoC
1. To collect payment, Ali and Frazier had to submit a
newspaper with account of fight!
2. Doctrine of Strict Compliance
a. For bank to be obliged, the seller must submit STRICTLY the docs
required in the LoC.
b. Case somebody exported logs
i. Requirements: Certification from buyer that what was delivered
was in accordance with contract
ii. Buyer received logs and sold them refused to issue certification
iii. Seller drew draft, bank refused to pay LoC required certification
iv. Maraming certifications, but those are not the docs required
bank justified in not paying
c. Case Misspelling LoC required sales invoice for noodles
 i. Invoice submitted mentioned woodles discrepancy strictly
speaking, bank can refuse to pay
ii. Bank will write customer, may discrepancy, will u waive
discrepancy? if honest, waive, typo lang yan. If dishonest, no I
refuse to waive!

D. Fraud Exception
a. NY Case
i. Importation of certain goods LoC
ii. When crates arrived, they contained RUBBISH!
iii. Clearly out and out FRAUD! They shipped GARBAGE! Payment can
be enjoined.
b. Below are the requisites for payment to be enjoined (by buyer)
1. Clear proof of fraud (by seller)
a. Must be clear if not strictly complied lang, cannot enjoin brand new
vs. secondhand steel plates
2. Abuse of independence principle
3. Irreparable Injury

E. Kinds
1. Commercial letter of credit-payment for sale and goods most common
2. Standby letter of credit-payment of obligation
a. Ex. Some owners would insist on this
b. Bank pays the MOMENT the beneficiary submits certification that
principal of bank has defaulted
c. So if contractor under construction BREACHES, owner just has to draw
draft and attach certification
d. Remember INDEPENDENT AND ABSOLUTE OBLIGATION
i. Couple loaned from company to build their house
ii. Seller was not satisfied with a mortgage, required a standby letter
of credit bank would pay once the spouses defaulted
iii. Company submitted such bank said na there was partial
payment, so pro rata
iv. Court said NO! Its an independent and absolute oblig! Pay the
FULL VALUE of the amount
1. Bank must sue couple
2. Couple must sue Company for a REFUND

II. Trust Receipts Law usually issued along with LoC

a. Bank asks buyer to sign TR you are holding the goods in trust for us
b. If you can sell, pay us with the money!
c. If you cant, you surrender the goods to us!

A. Security arrangement
a. Entrustor is not REALLY the owner of the goods involved
b. Case of Puka Shells
i. Couple who made necklaces and bracelets but sadly the fad was
already over no one would buy the shit (except Junsi)
ii. They said aha, trust receipt! In trust for you lang! We will surrender
them to you and we are now paid
iii. Court said no you are really the owner, its a sec. arrangement
cannot compel bank to accept the puka shells as payment

B. Twofold duty of entrustee

2
 a. Use proceeds from sale of goods to pay entrustor up to extent of amount
owing the entrustor
b. Or if you cant pay, deliver the goods covered by the TR

C. Rights and obligations of entrustee

1. Validity of security against creditors
a. Case company imported goods covered by LoC and TR
i. Employee of the importer filed a case in NLRC for illegal
dismissal and got favorable judgment, when final, sheriff levied
on the goods covered by TR
ii. Court said NO! Security of Entrustor (bank) is valid as against
creditors of the Entrustee (puka shells people, for example)

2. Protection of buyer in good faith and for value

a. Car dealers sold cars to buyer but didnt give proceeds to bank
b. Bank cannot repossess the cars!
c. Buyer in good faith and for value FREE FROM LIEN of bank!
3. Exemption from liability for breach of warranty
a. What if the car was fucked up buyer says kayo owner!
b. Bank is not liable for this.
4. Liability for force majeure
a. Entrustee assumes such risk of loss (along with other risks of loss)
b. Liability NOT extinguished
c. Case Textile Mill : Signed TR imported equipment
i. Suddenly, FIRE nawala lahat
ii. Mill claims Force Majeure No, law specifically provides u are
liable
5. Lack of power to mortgage
a. Mortgage requires mortgagor has full disposal of property: entrustee
does not have such power.
6. Failure of entrustee to pay
a. Entrustee = in default
b. Trend now of decision do away with very strict imposition of criminal
liability
i. Estafa :-s
ii. Officer who signed the TR liable for estafa
c. Court has said case petroleum products delivered to buyer
i. Bank required TR, failed to pay running after him for estafa
ii. Court said no, the TR was signed long after the delivery of goods
TR had nothing to do with delivery of goods, not reason why
company agreed to deliver
d. Case entrustee used the money loaned to buy some products, couldnt
sell, no buyers offered to deliver goods to bank, but bank refused
i. Bank now running after him for estafa
ii. No! He didnt swindle you, wala lang buyers!
e. Trustee was able to sell goods, but buyer hadnt paid him no estafa! No
misappropriation, di lang sya binabayaran
f. Repeated cases contractor obtains loan to purchase materials
i. Application for loan, places purpose const. project
ii. Installed materials in the project, but owner hasnt paid contractor
iii. Contractor not liable for estafa! He used it properly, like he said
he would di pa lang sya binabayaran
7. Execution after delivery of goods

3
III. Negotiable Instruments Law

Substitute for money deliks to deal with cash

A. Requirements of Negotiability
1. Payment by installments - -valid
a. Careful! To be valid, must indicate how much each installment should be,
and WHEN each installment will be paid.
2. Treasury warrants
a. Not NI Consti no money paid out from treasury without
appropriation
b. NIL Conditional! Mentions particular fund (source of payment)
3. Bearer instruments cases where considered as payable to bearer
a. Stated as payable to bearer I promise to pay Bearer
b. Somebody or Bearer Jose Cruz or Bearer
c. Case of Caltex
i. Dela Cruz opens credit line to purchase petroleum on credit,
Caltex wants collateral, DC gives certificate of deposit, Caltex
accepts.
ii. Payable to Depositor considered payable to bearer.
d. Does not purport to be name of any person cash
e. Last indorsement = Blank order, indorsed in blank
f. Fictitious person
i. Does not mean that he is inexistent
ii. Rather, the maker did not intend the person named as payee to
actually get the money This is the Test
1. Case partnership has checking acct with bank
a. Partner issued a check payable to a corp of which
he was corpse
b. Intended to get money for himself
c. He was not authorized by corp to indorse checks
on behalf of corp he indorsed to himself, able to
collect payment
d. Partnership sues bank to get back money
e. Court said considered payable to bearer,
indorsement not needed to transfer title
2. PNB savings and loan association opened a checking
acct so they could have funds to lend
a. Issue postdated check to lender
b. Rodriguez couple borrower would indorse check
to Rodriguez, they would issue check from PNB,
borrower collects proceeds
c. Scheme checks payable to some other non-
borrowing members, then forgery occurred
d. Couple intended payee to actually get the money
they were misled! This is a case of a FORGED
INDORSEMENT, PNB should return money to
Rodriguez spouses.

B. Completion and Delivery Different Scenarios in NIL

1. Incomplete but delivered instruments
a. Person in possession of incomplete presumed authorized to be filled up
b. To be valid must be in accordance with instructions and with authority
given

4
 c. If he did NOT COMPLY, goes to HDC maker CANNOT invoke this
defense.
i. His fault! Leaving it incomplete makes it possible for person to
whom he gave it to fill it out improperly.
d. Case Patrimonio
i. Formed a joint venture issued several postdated checks in favor
of the media guy to pay for obligations of the JV
1. Instructions do not fill out without my knowledge! Must
TELL ME FIRST and get my consent
ii. After some time, JV ceases to do business, Cap closes the account
iii. Media practitioner goes to teammate Cap is building a house,
wala nang pera, need P300K!
1. I am authorized to get loan submitted as proof, the
checks. Ill fill them out and give to you
2. Teammate believes, gives 300K in cash
iv. Of course, teammate was never paid, tried to collect Account
had been closed!
v. Criminal Case against Cap for BP22
vi. Patrimonio files case against teammate and media guy for
damages
vii. Question: Is Cap liable on the checks given to his teammate?
viii. HELD: NO! Teammate is not an HDC! Not in GF/for value. No
PROOF that Cap had authorized media dude.
ix. CC on agency need SPA to borrow.
2. Incomplete and undelivered instruments
a. Even if completed, it will not bind in favor of any holder
b. Nicdao case Signed several checks left payee and amount blank
i. One of the checks ended up with somebody else! Suing for
payment
ii. Court: They were incomplete wala pang amounts and payees.
Also undelievered!
1. This person cannot collect.
3. Complete but undelivered instruments
a. Law provides contract is not binding unless it is delivered
b. Somebody got a loan from a bank issued two checks to pay this loan.
These checks were never delivered to the bank
i. Ended up being indorsed to some other person deposited the
checks in his account
ii. Bank sued included issuer of check and the depositors of the
checks, and the banks which accepted such
iii. Bank can still sue the borrower you were not paid. You cannot
sue the issuer or the depositors they were NEVER DELIVERED
TO THE BANK do not give rise to oblig in their favor
c. Bank issued a check payable to treasurer to pay for taxes due somehow
bank didnt give directly nabigay sa employee, pabigay sa treasurer
i. Employee used it himself, to pay for someone elses tax liability
ii. City running after the bank Bank: we paid na!
iii. Court NEVER DELIVERED TO THE CITY TREASURER you
remain liable.

C. Forgery
a. Most common type signature of a party is imitated.
b. NI are contracts principles applicable to contracts also apply to Negotiable
Instruments
c. Thus! WE CAN SIMPLIFY FOUR RULES

5
 i. Person whose signature is forged is NOT LIABLE unless he is in
estoppel
1. Ex. Son steals check from dad, pays for something, payee asks
dad, dad says yes, estopped.
2. Ex. Someone forges a signature of another, issues to pay for
obligation, dishonored, such payee cannot run after owner.
Forgery, no estoppel.
ii. Person who negotiates check with forgery is LIABLE because as
indorser, warrants that instrument is genuine
1. So if sig of drawer is forged, person indorsing liablie coz of
warranties
iii. A contract is valid even if a signature is forged if it is not necessary
to acquire title.
1. Payable to bearer, for example. No indorsement is needed.
Thus forgery is immaterial.
iv. If drawee pays check where signature of drawer was forged, cannot
get back money
1. He admits genuineness of sig of drawer
2. But if the indorsement of payee is forged, drawee can get back
money
a. Collecting bank has no valid title, coz indorsement was
forged
v. Comparative Fault even if there is forgery, if fault of party is greater
than fault of bank someone has to bear loss?
1. Ex. Acct with PNB instead of ordering checkbooks from
central bank, it had checkbooks printed by private printing
press
2. PNB honored checks purportedly drawn by Manila Water,
signatures were forged
3. MW tries to get back money COURT SAYS MWs fault was
GREATER than the bank.
a. Bank is negligent, sure conclusively presumed
negligent when it honors a forged signature
b. But MW was also negligent! Di nila napansin for 3
months. MW bears the loss, mas negligent sila eh.
4. In Other cases, court splits the loss
a. Woman trusts bookkeeper blindly issued checks to
pay suppliers, bahala ka na. Sign lang nang sign
b. Over a period of years, bookkeeper was able to steal
over a million pesos.
c. Woman was NEGLIGENT! Never examined anything
split the loss w the bank.
5. Montessori asks external auditor to fix their shit someone
got access to checkbook was able to forge and steal money
a. Montessori sues, sabi ng bank negligent.
b. Court says no not an employee, independent
contractor, cannot apply quasi-delict
c. Besides, banks are getting the statement! Company
would not know what was happening
d. Bank liable.
6. Example of classmate stealing the check from checkbook
a. Sig was forged, sued the bank, bank sued to pay,
negligence daw
b. Court: No kaklase and friend! No reason to suspect
that he would steal

6
 i. Ganyan naman eh
c. Whenever forgery occurs, instrument was stolen
mere fact that maker/drawer was swindled does not
mean that he is liable for negligence.

D. Holders in Due Course law will only protect HDC

1. Requisite
a. Complete and Regular on its face
i. If amt blank, not HDC
b. Before overdue, without notice of previously dishonored
i. Someone bought steel bars, didnt pay, asked company to
accommodate him, gave a postdated check condition, only use
to guarantee an oblig and not to pay
1. Somehow it fell into possession of manufacturer of steel
bars but with stamp already na dishonored
2. Not an HDC
c. Good faith and for value
i. Patrimonio case! Not HDC because no GF.
d. At time it was negotiatied, no infirmities in instrument or defect in title
elaboration of good faith
i. When title defective?
1. Fraud/Duress
2. Fake title/consideration
3. Unlawful means/ Force and Fear
4. Illegal consideration
5. Negotation in breach of Faith
ii. Sec. 56 what is notice of such defect?
1. Actual knowledge
2. Knowledge of such facts amounting to bad faith dapat
napatanong ka.
2. Rights only immune from personal defenses, but real defenses still applicable
to HDC
a. Personal defenses
b. Real defenses
a. Forgery
b. Material Alteration
c. Does not mean that it can be invoked against everybody only
against persons to whom it is available
i. Ex. Drawee cannot invoke forgery of signature of drawer as
defense
ii. Ex. Negotiatior/indorser cannot raise forgery of previous
indorser warranties! Genuine in all respects.

E. Liabilities of Parties
1. Maker
a. He will pay PN in accordance with its tenor
b. Case Araneta
i. Borrower signs a PN didnt pay, he was sued.
ii. Defense I used money to pay for hospital expenses of daughter,
and borrower = trustee.
iii. Court says you undertook UNCONDITIONALLY to pay (nature
of PN)
2. Drawer
a. Instrument shall be paid, hell be secondarily liable

7
 b. Financing company deposited a check that was issued by drawer BPI
debits account of drawer did NOT release money to payee
irregularities, investigate daw.
c. Payee sues drawer you warranted that check will be paid. Drawer says
account was debited!
d. Court debited nga but it was not delivered, still liable.
3. Acceptor
a. Admits that instrument is genuine, cannot get back money after hes paid,
on ground of forgery.
b. Another interesting portion undertakes to pay in accordance with the
tenor of his acceptance
i. Suppose amount was altered two different opinions
1. First case bumbay buys some stuff, issues a Bill to buy
stuff worth P120K. (Bill is for P300K)
2. Jewelry store set aside the stuff, deposited the check, and
once cleared, then buyer would come back and get the
jewelry.
3. So nagdeposit, bank brought to clearinghouse, then
drawee honored it
4. But later drawee says amount was altered!!!! So they
asked the collecting bank to return the excess it did. Sued
jewelry store for reimbursement
5. Court said NO true, altered, but acceptor undertakes to
pay ACCORDING TO ACCEPTANCE when it was
honored, yung malaking amount yung inaccept
shouldnt have returned the money.
ii. Another case someone bought dollars, would pay with pesos.
Two bank accounts. Issued two Managers Checks to pay for the
dollars he tries to stop payment
1. Court said these are managers/cashiers, cannot stop
payment. Bank honored, debited account of the guy.
2. Question: What was the liability of the banks? Guy said he
was deceived, amount of the checks was altered daw.
3. Court said refused to follow ruling in bumbay case
apply provisions on alteration. If instrument is in hands of
HDC, he can enforce it according to original tenor
amount before it was altered liability of bank based on
orig amount.
4. Indorser both Q and G warrant that instrument is genuine, party had good
title, all prior parties had capacity to contract
a. Warranties of Qualified Indorser
a. Warrants : Dont know any defect instrument?
i. So if theres a defect, and he doesnt know not liable.
b. Warranties of General Indorser
a. Warrants: it will be paid, if not, hell be liable.
c. There have been cases where Court exempts Indorser from liability
a. Case cashiers check issued in US payable to bearer. He approached
a friend, wala akong dollar account, ikaw meron, please allow me to
deposit so your bank can collect. Agreed would return after check
had been cleared.
i. Bank gave him presigned withdrawal slip, but he kept
passbook
ii. Friend is able to withdraw the money eventually,
dishonored, spurious daw.

8
 iii. Bank runs after customer, citing general indorser warrants that
it shall be paid Court says bank is liable. Whyd you allow
friend to withdraw without passbook, and without the check
having been cleared?
b. Bank has a policy in case of employees
5. Material Alteration
1. Definition
a. Date/amount payable/time or place of payment is
changed/parties/currency/adds place where none
b. Test does it ALTER THE EFFECT OF THE INSTRUMENT?
c. Serial Number x material alteration drawee bank which honored
cannot ask for return of money, effects not changed
i. HOWEVER if there was a stop payment order, it becomes
material if serial number was changed, di nila masastop
payment.
2. Liabilities
a. If HDC, then he can collect from alterer and all subsequent according
to altered amount
i. Prior to alteration? He can collect the ORIGINAL amount.
b. X HDC cannot collect from prior parties
i. But can still collect from alterer and subsequent parties.

F. Checks
1. Kinds
a. Cashiers and Managers Check
a. Absolute unconditional primary obligation
b. Head office cashier signs it / Branch manager signs it Effect is
the same
c. Drawer and Drawee are one and the same treat as a PN Thats
why its a principal obligation
b. Crossed Check
a. Issued when drawer wants to make sure that payee gets the money.
b. Effects of crossed check
i. Cannot be encashed over the counter
ii. You have to deposit in order to collect.
1. Someone tried to encash, it was denied, sued, maker
warrants that hell be liable Court said, crossed
checks must be deposited!
iii. May be specific or general (as to where to deposit)
iv. Check REMAINS an NI.
v. Indorsed ONLY ONCE.
vi. To be a HDC one must inquire what is the nature and
purpose of the check, why was it issued, because you take it
subject to that purpose
1. When a crossed check was accepted, no inquiry, payee
is not an HDC coz no good faith.
2. Court has said this will not apply managers check
payable to payee himself
a. Someone offers a deal to his friend I have an
MC, we exchange MCs, then difference
between such will be our profit from this
transaction (di ko gets)
b. One of them just deposited it in his account
(payable to cash)

9
 i. Other guy sues him this is a crossed
check, di ka nag inquire!
ii. No in all those cases, it involved
indorsement to someone OTHER than
the payee. But here, payee himself! Why
will he ask kung ano nature? Payee nga
eh!
1. Payee of check can be an HDC
sheer definition payee =
holder, so if he meets sec. 52, eh
di HDC.
c. Memorandum Check
a. Not intended to be encashed.
b. Rather, replaced with cash
c. Memorandum check given to SMC, someone stole it
i. SMC sues for theft court said, title never passed kasi its a
memorandum check
2. Delay in Presentment for Payment
a. Practice 6 months, becomes stale. So what happens
b. Two sets of decisions
i. Underlying oblig no longer collected paid. Payment w check
produces effect if encashed or creditors fault impairs value. Payee
didnt present it so value impaired.
ii. Other decision oblig subsists kasi nga di pa binabayaran check
is an NI apply NIL muna before Civil Code. If there is delay in
presentment for payment, the drawer will be discharged to extent
that he was prejudiced by delay
1. In this case, walang prejudice! He remains liable since
hindi nagagalaw yung balance ng account nya.

IV. Insurance Code

A. Elements
1. The insured possesses pecuniary interest in the subject matter insured
a. If admirer of TV star, not insurable interest.
2. The insured is subject to a risk of loss
3. The insurer assumes the risk of loss
4. The assumption is part of a general scheme to distribute actual losses among a
large group of persons bearing the same risks
5. The insured makes a ratable contribution, the premium

B. Insurable Interest

1. Life Insurance
a. Presence of Insurable Interest
i. Life of the insured (him/herself), his spouse and children
ii. A person upon whom he depends for education or support or in whom he
has pecuniary interest
o Ex. Orphan, uncle is providing for him, he can insure uncles life.
iii. A person under legal obligation to him, whose death or illness
might delay or prevent performance
1. Ex. Those obliged to give support
2. Classic Ex. Debtor
3. Other Ex. Basketball player, important executive of
company these people are very valuable to the company.

10
 iv. A person on whose life and estate or interest vested in him
depends
1. Ex. Usufruct constituted on life of parents in law you can
insure parents life

b. Principles
i. If a person insures the life another with himself as beneficiary and he died
(predeceases the insured person), his rights [right to collect] are vested in the
person insured, unless the policy provides otherwise [someone else will
collect]
ii. The insurable interest must exist when the policy takes effect but need not
exist when the loss occurred Life!
iii. If a person will insure the life of another, the consent of the person being
insured is required, unless the insured is the spouse or child minimize the
possibility of schemes involving MURDER

2. Property Insurance
a. Presence of insurable interest
i. An existing interest
-- ownership
ii. An inchoate interest founded on existing interest
o SH insures assets of corporation
o Partner insure props of pship
iii. An expectancy, coupled with an existing interest in that from which the
expectancy arises
o Factory insures against business interruption what we would have
made has profits if factory burns
o Expectacny = profits

b. Examples
i. Owner
ii. Buyer of undelivered property
iii. Seller of undelivered property
iv. Mortgagee
v. Contractor of building
vi. Possessor
vii. Lessee
viii. Stockholder
ix. Carrier
x. Depositary

c. Principles
i. Insurable interest must exist when the policy takes effect and when loss
occurs
ii. The insurable interest need not exist in the meanwhile
o Insured car, sold it, lost, cannot collect
o Sold it, bought it back, lost can collect
Ins is SUSPENDED until union of interest and thing
o Right of redemption expires no more insurable interest. Ownership
has passed

C. Premium
1. Payment

11
 a. Necessity of Payment for Validity of Policy General Rule
b. Exception
i. Acknowledgment in policy for payment
-- Deemed paid for purposes of making policy enforceable, not for payment
of premium
ii. Life Insurance
o Subsequent premiums after the first grace period
iii. Stipulation for installment payment
o Not prohibited to agree that premiums may be paid in installment
big premiums
iv. Grant of credit extension
v. Estoppel

2. Refund
a. Right to Refund
i. Full Refund
1) Non-exposure to the peril
-- Property never exposed to the peril
-- Rice insured, but never shipped.
2) Fraud by insurer
3) Default by insured other than fraud
-- Put up firewall within 90 days didnt put up the firewall
-- Fire broke out within 60 days default, but no fraud.

ii. Partial Refund

1) Surrender of policy before expiration
2) Over-insurance
a. Ask for refund of premium paid for each, to extent of the
overinsurance
iii. Absence of Right
1) Life insurance
a. Human life is indivisible
b. Moment the insurance took effect, risk attached
2) Existence of peril insured against
a. Cannot cancel marine insurance in the middle of the voyage
moment the boat left port may risk na
3) Annulment of contract
4) Denial of claim because of fraud

D. Concealment
1. Requisites
a. Knowledge of the fact concealed
a. Ex. Insured in life insurance did not disclose that he had a kidney
problem.
b. Materiality
a. More serious ailments.
c. Absence of warranty
a. Because if matter of warranty just cite breach of warranty
d. Lack of means by ascertaining fact concealed
a. Insured wrote he was hospitalized, mentioned name of hospital and
date. But didnt say what ailment
i. Insurer cant claim concealment insured said he was
hospitalized
ii. Insurer could have checked w hospital

12
 2. Examples
a. Serious ailments
b. Mongoloid child

E. Misrepresentation
1. Concept Failure of facts to correspond to assertion

2. Examples
a. Alcoholism
b. Drug addiction
c. Medical family history
a. Family members died of diabetes, he said that they died in an
accident.

F. Warranties
1. Scope
a. A statement in policy of a matter relating to person or thing insured or the
risk as a fact
a. Ex. Sabi nya may fire alarm, fire equipment, but not true
b. A statement of intention to do or not to do an act which affects the risk
a. Ex. Said he would put up a firewall

2. Examples
a. Failure to disclose double insurance
a. Not only to policies already in force, but future policies that may
come
b. Storage of hazardous materials
c. Absence of drivers license

3. Reasonable Interpretation
a. Ex. Fire insurance policy, warrants there will be no hazardous materials.
Example gas tanks, sakto lang for delivery for a few days.
b. Ex. Furniture store, there was paint and varnish in factory that is not
breach, incidental to the business
c. Ex. Restaurant LPG gas tank. Not breach.

4. Effect of Breach
a. Even if loss not due to breach, insurer not liable
b. Increased risk beyond what insurance company was willing to accept.

5. Excuses for Breach

a. Loss before expiration of period for compliance
a. Fire before 90 day deadline for firewall liable!
b. Illegality of performance
a. Law preventing eviction of tenants
c. Impossibility of performance
a. Cement unavailable in market -- firewall

G. Losses
1. Losses Covered
a. Loss the proximate cause of which is peril insured against
a. Neighbors house caught fire, wall fell on his prop, and damage
proximate cause is fire!
b. Loss the immediate cause of which is the period insured against

13
 a. Except if prox cause is an excepted risk!
c. Loss caused by negligence of insured
d. Rescue from peril insured against
a. Firetrucks bombarded the house with water water damage -- liable
e. Loss caused by efforts to rescue the thing insured from peril against
a. Stuff saved from fire, looters steal.

2. Losses Not Covered

a. Connivance by insured
b. Willful act of insured
a. Arson
c. Excepted peril
a. Stipulated ex. Insurgency, rebellion, coup.
d. Gross negligence of insured
e. Peril insured as remote cause

H. Notice of Loss give insurer a chance to investigate (impt in fire insurance)

a. Insurance commissioner can fix deadline for filing claims regarding various
types of insurance policies

1. Effect of Delay
a. Due to act of insurer normally, insured doesnt know, he consults
insurer
i. Insurer didnt tell him what the defect was in his claim

2. Excuses
a. Non-disclosure by insurer of defect in proof
b. Act of insurer as cause

I. Double Insurance some contracts have other insurance clauses collect from
some other muna. If all insurers have that clause, cancel out each other, normal
proportionate claims.
1. Requisites
a. The person insured is the same
b. There are two or more insurers
a. If from same company, not double insurance
c. The subject matter insured is the same
a. Factory insures factory, then insures stocks in trade ibang subject
matter
d. The interest insured is the same
a. Stocks and trade insured, but then he mortgaged another insurance,
in case of loss, proceeds go to mortgagee not double insurance.
Interest is not the same
e. The risk insured against is the same
a. Factory against fire business interruption insurance [loss off profit]

2. Payment of Claims
a. The insured may claim payment from any insurers in any order as he may
select unless the policy provides otherwise
b. Whether policy is a valued policy or not, the insured must credit the policy
with any amount received from another policy
c. If the insured received excess payment, he must hold it in trust for the
insurers according to their right of contribution among themselves
a. Proportionately among the insurers

14
 d. An insurer who paid is entitled to ratable contribution from the other
insurers in proportion to the amount for which they are liable
e. Ins/Total ins * Loss

J. Fire Insurance Policy

1. Applicability to Hostile Fire
a. Escaped from place where it is intended to burn
b. Friendly fire not apply
c. Kitchen/Restaurant, fire insurance, wall in kitchen became singed and
covered with soot not fire insurance, friendly fire.

2. Exemption from Liability

a. Alteration of Use without Consent which Increases Risk
b. Breach of Warranty
c. Fraudulent Claim
a. Entire claim will be void, cannot claim ok just pay me the proper
amount
b. Fact that claim exceeds correct amount does not automatically mean
fraud. Benchmark is TWENTY PERCENT

K. Third Party Liability Insurance for Motor Vehicle

1. Exclusions
a. Member of household
b. Member of family within second degree of consanguinity or affinity
c. Employee in the course of employment

2. Liability of Insurer Liability vs. Loss insurance commission has concurrent jd

with regular courts
a. Inapplicability of Requirement for Final Judgment
a. This law is imposed police power. No need for final judgment.
Defeated if you require protracted litigation.
b. Absence of Liability as Tort-Feasor
a. Judgment ordered solidarily wrong
b. Insurance liability based on CONTRACT.
c. Another case, equal amount of liability -- solidary
c. No-Fault Insurance valid exercise of police power
a. Claim can be filed without need of proving fault or negligence.
1. Maximum Liability
a. P15K maximum NO FAULT.
i. Medical expensed P5K hanggang dyan lang
2. Rules for Liability
a. Filing against one motor vehicle only
a. Passenger files claim against insurer of the vehicle where he
was riding (even if no fault)
i. Insurer runs after insurer of other party (the one at
fault)
b. If pedestrian the one at fault
b. Claim against insurer of motor vehicle where claimant is riding
c. Claim by pedestrian against insurer of motor vehicle
d. Proof
i. Death
1) Police report
2) Death certificate
3) Proof of right of claimant
ii. Injuries

15
 1) Police report
2) Medical report
3) Proof of medical expenses
e. Liability
a. Maximum amount P15,000
i. What if you want to claim additional? Now you must
prove negligence/fault.
ii. Additional amount
f. Time Limits
i. Six months to file claim from accident
ii. One year from denial to file case in court

L. Life Insurance GR. Insured can name anyone who is beneficiary need not have
insurable interest in insureds life
1. Disqualification of Beneficiaries
a. Disqualified Beneficiaries
i. Person with whom insured is committing adultery or concubinage
ii. Person with whom the insured committed a crime
iii. Public officer or his spouse, ascendants or descendants by reason of public
office

2. Revocable and Irrevocable Beneficiaries

a. Revocable can change any time
b. Irrevocable beneficiary has vested right, insured cannot change unless
beneficiary consents
i. Insurer cannot add benefs either without consent
ii. Proceeds are tax exempt (estate tax)
iii. Amendment to IC if beneficiary is revocable, BUT insured DID
NOT change the beneficiary up to time of death, CONVERTED to
irrevocable beneficiary -- exempt

3. Minor Beneficiaries liberalized ground for getting cash surrender value/policy

loan
a. Dispensing with court order for act involving up to 500,000
b. Guardian
i. Parents
ii. Grandparents
iii. Eldest brother or sister at least 18 years of age
iv. Relative with actual custody

4. Incontestability Clause when apply?

a. Requisites
i. The policy is a life insurance policy
ii. It is payable on death of insured
iii. It has been in force for at least two years since its issuance or last
reinstatement
o Lapse plus reinstatement, two year period still applies
In a case, insured died within two years can still collect? NO! two year
period should lapse while still alive.

b. Available Defenses to Incontestability Clause IE PP - MVC

i. Lack of insurable interest
ii. Excepted risk as cause of death

16
 iii. Military or naval service during war
iv. Scheme to murder insured
c. Substitution by another for medical examination fraud of vicious kind
i. No valid contract no meeting of minds
vi. Absence of proof of death
vii. Failure to file claim on time -- prescription

5. Suicide
a. Absence of liability for suicide within 2 years from issuance or renewal of
policy
a. Presumed that he obtained with suicide in mind to give beneficiary
Insurer not liable
b. Exemption in case of insanity
a. Insurer still liable

6. Remedies in Case of Forfeiture for Non-Payment of Premium

a. Apply grace period 30 days grace period
b. Get cash surrender value
c. Apply cash surrender value as automatic loan to extend insurance
d. Get reduced paid-in insurance by applying cash surrender value
e. Apply for reinstatement if you dont go through these, not yet reinstated.
a. Pay premiums in arrears
b. Undergo medical examination
c. Get approval

M. Marine Insurance
1. Concealment unlike ordinary insurance, when the concealment is for THESE
MATTERS BELOW insurer remains liable if they arent the cause of loss.
a. National character of insured
b. Liability to capture
c. Liability to seizure for breach of foreign laws of trade
d. Want of necessary documents
e. Use of false and simulated papers

2. Implied Warranties
1. The ship is seaworthy
2. The ship will not deviate from the voyage
3. The ship will not engage in illegal ventures
4. The ship will carry the requisite documents to show the nationality or
neutrality of the ship or its cargo

3. Warranty of Seaworthiness
a. The warranty applies not only to the vessel but also to its cargo
a. Logs were loaded onto barge, fell into sea. Insurer said breach of
warranty! Court said applies also to CARGO. YOU MUST SEE TO
IT THAT VESSEL YOU ARE PICKING IS SEAWORTHY! CHOICE
OF CARRIER TO USE.
b. The warranty of seaworthiness extends not only to the condition of the
structure of the ship but also that it be properly laden and that it be provided
with a competent master, officers and seamen, and the requisite
appurtenances and equipment

4. Deviation
a. Instances

17
 i. Departure from the course ex. Paris to NY but he went to London to pick
up more shit sank! Insurer not liable deviation.
ii. Unreasonable delay
iii. Commencement of different voyage

b. Proper Deviation
i. Compliance with warranty or avoidance of peril ex. Need to repair so
changed course.
ii. Good faith belief in necessity to avoid peril Pirates waiting! Change
course.
iii. Saving human life or relieving vessel in distress humanitarian
considerations

5. Liability
a. All-Risk Insurance
i. Insured must prove loss need not prove why
ii. Insurer has burden to prove excluded risk, fraud, or willful misconduct

b. Perils of the Sea

i. There is unusual violence or extraordinary action of the winds and waves
or other extraordinary causes connected with navigation

ii. The peril is connected with navigation

6. Loss
a. Actual Loss
i. Total destruction
ii. Irretrievable loss by sinking or being broken up
iii. Damage which renders property valueless to the owner for purpose
intended wet palay/injured racehorse
iv. Deprivation of possession at port of destination

b. Constructive Total Loss

i. Loss is more than three-fourths of value
ii. In case of cargoes loaded separately on barges but insured with single
policy, the value of the loss should be based on all cargoes

V. Transportation Laws

A. Civil Code Requirement of Extraordinary Diligence

1. Concept of Common Carriers
a. This dude would bring stuff for people to Manila on his truck. Tapos he
was hijacked. Common Carrier?
b. Yes even if no regular schedule, only catering to companies in his area,
he is still a common carrier. The fact that he has no franchise does not
make him a non-common carrier.
c. Ex. School bus CC even if only limited clientele
d. Customs brokers bring goods to premises of customer acting as
common carrier

2. Vigilance over Goods

a. Exempting causes Carrier not liable
i. Natural calamity
ii. Act of public enemy in war

18
 o Goods seized as prizes of war
iii. Act or omission of owner
iv. Character of goods or defect in packing
v. Order of competent authority order must be LAWFUL.
vi. He exercised extraordinary diligence.

b. Requirements
i. Absence of Concurring Negligence on part of Carrier
ex. Steel coils, became rusty because of negligence
ii. Absence of Delay
iii. Due diligence to prevent or mitigate loss

c. Presumption of Negligence when damage/injury/death occurs

d. Cases
i. Liability
1) Fire not caused by lightning always by negligence
2) Rustiness of coils because open hatch was not tightly sealed
3) Delay in delivery of pharmaceutical product delivered to wrong
place owner can refuse to take delivery
4) Mechanical defects in vehicle not a valid defense!
5) Illegal order of mayor to dump cargoes
ii. Diminished Liability because of contributory negligence not EXEMPTED
1) Under declaration of weight of payloader to be transported owner
was negligent, but carrier shouldnt have accepted! Shouldve
checked na super bigat. Negligent! Only MITIGATED.
2) Acceptance for shipment of rice contained in bags with holes and
broken strings again, whyd you accept?
iii. Exemption from liability
1) Hijacking by armed robbers Fortuitous event beyond what you
can ask from a common carrier
2) Damage to imported equipment due to collapse of middle flooring of
the crate during unloading carrier not liable couldnt have seen it.

e. Stipulation of Limitation of Liability

i. Complete exemption void CC not liable at all -- VOID
ii. Limitation of liability to fixed amount void
iii. Limitation of liability to fixed amount unless the shipper declares a
higher value and pays higher freight VALID.

f. Duration of Liability
i. Commencement
1) Unconditional delivery of goods to common carrier for transportation
2) Loading of goods on lighter as preparatory step to loading on vessel
Carrier is liable part of the contract of carriage
ii. Continuation of Liability
1) Temporary unloading
2) Storage in warehouse of common carrier
iii. Termination of Liability as Common Carrier
1) Actual or constructive delivery at destination
a. Constructive consignee was given notice and he failed to claim
within reasonable time, liability of carrier is now a depositary
no longer needed extraordinary diligence

19
 2) Liability of common carriers during unloading by stevedore or
arrastre operator STILL liable: ACTUAL or constructive CC
should supervise stevedore/arrastre operatro
3) Flowing back to sea of petroleum being pumped to storage tank
because mooring line was cut

g. Baggage of Passenger
i. Extraordinary diligence for checked-in baggage
ii. Due diligence of good of family for hand-carried luggage

h. Conflict of Law Rule

Applicability of law of country of destination in determining liability
Steel bars shipped from Phils to SF Manila Davao SF. Bars rusted
during voyage. consignee refused to accept. CC argued it is law of Cali that
should be applied court said NO: Duty to deliver steel bars was up to
DAVAO. (ibang ship na ung papunta SF) So as far as youre concerned,
DAVAO destination, Phil Law.

3. Safety of Passenger
a. Principles
i. Requirement of extraordinary diligence
ii. Unavailability of diligence in selection and supervision of
employees as defense this is a defense for quasi delict, but not for breach of
contract

b. Presumption of negligence

c. Duration of Liability
i. Commencement
1) Stepping on platform of bus/hailed a bus
2) Waiting in train station for train paid fee, was where he was
supposed to be CC shouldve ensured his safety
3) Stranding of passenger
ii. Termination
1) Arrival at destination
2) Reasonable opportunity to leave
iii. Acts of Employees
iv. Acts of Other Passengers review in sundiang
1) Absence of liability to passengers injured by explosion of fireworks in
box carried by another passenger before New Year
2) Liability for failure to stop bus when another passenger ran amuck
3) Liability for death of passenger killed by other passengers for failure
to frisk passengers despite warning by authority to common carrier
v. Acts of Strangers
Absence of liability to passenger stoned by-stander
i. Damages Recoverable
1) Physical injuries
a) Lost income
b) Injury to business standing or commercial credit
c) Medical expenses
d) Moral damages in case of gross negligence amounting
to bad faith heavy rain, speeding bus
e) Exemplary damages in case of wanton or reckless
conduct

20
 f) Attorneys fees in case of bad faith in refusing to pay
claims
2) Deaths
a) P50,000.00 for death
b) Loss of income
a) Formula
Life expectancy of 80 years minus age of
deceased multiplied by annual income
Deduct one-third for living expenses
c) Moral damages ALWAYS: death
d) Medical expenses prior to death
e) Actual or temperate damages for funeral expenses
f) Exemplary damage in case of wanton or reckless
conduct
g) Attorneys fees in case of bad faith in refusing to pay
claim
3) Reduction of Damages in case of Contributory
Negligence

B. Code of Commerce

1. Bills of Lading
a. Nature
i. Contract
ii. Receipt
iii. Symbol of goods

b. Refusal of Consignee to Take Deliver

i. Absence of Basis Discrepancy in goods ordered cannot refuse to take
delivery CoC =/= contract of sale. Cannot invoke to breach CoC
ii. Valid Ground refusal to take delivery
1) Partial non-delivery which renders parts delivered useless
2) Damage which renders the goods useless for sale or
consumption for destined purpose
3) Delay through fault of common carrier pharma comp, wrong
destination

c. Valid Delivery without Surrender of Bill of Lading

i. Delivery to actual consignee
ii. Instruction of seller to deliver goods without requiring bill of lading

d. Period for Filing Claims X COGSA

i. Damage apparent from external part of package Upon receipt
APPARENT FILE UPON RECEIPT
ii. Damage ascertainable upon opening of package 24 hours from
receipt

2. Liability of Shipowner and Shipping Agent

a. Instances
i. Acts of the captain
ii. Obligations contracted by the captain to repair, equip, and provision
the vessel
iii. Indemnities in favor of third parties due to conduct of captain in care
of their goods
iv. Damages to third parties for quasi-delict committed by captain

21
 v. Collision due to fault, negligence or lack of skill of captain or crew

b. Limited Liability
i. Since the liability of the shipowner and the shipping agent is limited to
their interest in the vessel, their liability is extinguished in case of loss of
the vessel SHIPOWNER and SHIPPING AGENT liab attaches to
VESSEL and not OWNER Hypothecary nature of maritime commerce,
liab attaches to the RES, the THING, and not the owner.
ii. The limited liability applies to loss of goods and death or injury to
passengers

c. Exceptions not extinguished by loss of vessel

i. The shipowner or shipping agent is at fault or negligent
1) This occurs when the vessel is not seaworthy
2) The limited liability does not apply if it was the captain who
was negligent
ii. The vessel was insured
1) The proceeds of the insurance will take the place of the vessel
2) The proceeds should be pro-rated among the claimant
a. So all claims must first be decided.
iii. The liability for repairs of the vessel before its loss is not extinguished
iii. The liability of a party who entered into a bareboat charter
charterer becomes owner pro hac vice [all rights and obligs
of shipowner] -- with the shipowner for the loss of the vessel
through his fault is not extinguished
1. Is his liab extinguished? NO ONLY TO SHIPOWENR
except him from liab to cargo owners and passengers
2. Youre NOT SHIPOWNER, cannot invoke

3. Charter Parties for lease of vessel

a. Kinds
i. In bareboat charter, the shipowner turns over possession of the vessel to
the charterer, who undertakes to provide a crew, victuals, supplies and fuel for
the vessel for the duration of the vessel
ii. A time charter is a contract for the use of the vessel for a specific
period of time or for the duration of one or more specified voyages
iii. A voyage charter is a contract of affreightment, a contract for the
carriage of goods from one or more parts of loading to one or more parts of
unloading, on one or on a series of voyages

b. Rights and Obligations

i. Bareboat charter
1) The charterer assumes the rights and obligations of the
shipowner to third parties who deal with the vessel pro hac vice
pays salaries. Liable for collision. Liable to cargo owners.
2) If the vessel is common carrier, it becomes a private carrier
3) The shipowner has no lien on cargoes if the charterer does not
pay him no privity of contract between shipowner and cargo
owners
ii. Time Charter and voyage Charter
1) The shipowner retains possession and control of the vessel
2) If the vessel is a common carrier, it remains a common carrier
3) The shipowner assumes liabilities to third parties contracting
with the charterer

22
4. General Average
a. Requisites
i. There was a common danger
ii. Part of the vessel or cargoes or both are sacrificed deliberately for the
common safety
iii. The sacrifice resulted in success in saving the vessel and the cargoes
iv. The expenses or the damages were incurred or inflicted after taking
legal steps and authority entered into logbook protest conferred
consultation with owner of cargo
Stranded on shore no general average kasi walang danger. Fair weather
Ship ran into a pier negligence lang. No general average.

5. Collision quasi delict provisions will not apply

a. Rules
i. If a vessel collides with another through its fault, it shall bear its own
losses and shall be responsible for the losses and damages of the other
vessel ONE vessel at fault

ii. If two vessels collide, both through their faults, they will bear their
own losses and damages and shall be solidarily liable for the losses and
damages to their cargoes BOTH at fault

iii. If it cannot be determined which of the two vessels is at fault, the rule
shall be the same as when they are both at fault CANT BE
DETERMINED bear own losses, solidarily liable to cargo owners

iv. If a vessel should be forced by a third vessel to collide with another,

the owner of the third vessel shall bear all the losses and damages caused
THIRD VESSEL at fault

v. If a vessel should collide with another through a force majeure, each

vessel and the cargo shall bear its own damages

b. Inapplicable Principles of Civil Law

i. Last clear chance
ii. Contributory negligence
iii. Comparative fault
iv. Due diligence in selection and supervision of employees

c. Carriage of Goods by Sea Act

1. Application
a. This law applies to the international carriage of goods by sea to or
from ports of the Philippines
b. The law applies up to the final port of destination even if the
transshipment was made by an inter-island vessel
-- ex. Tokyo Manila Cebu transshipment also covered by
COGSA
c. The parties may stipulate to apply it to domestic shipping not
against public policy

2. Claim
Claim is not required as a condition for bringing suit action may be
filed even if no claim
SC has applied the claim rule immediately/24 hours depending on
apparent Jack says just apply cogsa to international shipping

23
 3. One-Year Prescriptive Period
a. Computation
i. From last day of delivery
-- ex. Delivery made from Mon Wed start counting on Wed
ii. From day of departure of vessel in case of non-delivery [last
day it had a chance to make delivery]
iii. Non-suspension by written letter of demand
iv. Non-suspension by negotiation for compromise

b. Application of Prescriptive Period ONE YEAR

i. Delivery of goods in damaged condition
ii. Non-delivery
iii. Action by insurer for subrogation steps into shoes of the
insured. So if the claim is barred by presc, so too is the insurers claim. proper rule: insurer x
liable, because action of insured prejudiced insurer.

c. Inapplicability of Prescriptive Period

i. Misdelivery goods were delivered to wrong party
ii. Conversion crewmember stole for own use
iii. Agreement of parties to extension
iv. Delay in delivery of wearing apparel which were not damaged
but were delivered off-season and this resulted in reduction of
selling price here, when delay resulted in reduction of selling
price, what should apply in Civil Code and NOT COGSA.

d. Nullity of Stipulation Reducing One-Year Prescriptive Period

VOID.

4. Amount of Liability
a. $500 per package
i. Package means carton and not container van
ii. Nullity of stipulation reducing amount VOID CANNOT GO
LESS UNDER COGSA
b. Higher amount
i. Declaration of higher amount in bill of ladding
ii. Declaration of higher amount by reference in bill of lading to
invoice

C. Warsaw Convention
1. Applicability goal: preclude application of municipal law
a. It applies to international transportation of person, baggage or goods
performed by aircraft
b. International transportation means the place of departure and the place of
destination are within territories of contracting parties even if there is a break
in the transportation
c. International transportation includes transportation where the place of
departure and the place of destination were within the same contracting party
even if there is a stop-over in another country which is not contracting party
d. Transportation to be performed by several air carriers shall be considered as a
single operation. An airline company which issued a ticket which covered
various legs to be flown by different airline companies is liable for breach of
contract committed by the other airline companies on their own flights

24
 -- KLM issues ticket, passenger boards from Rome Paris [X KLM]. Airline
company did not accommodate passenger. Sued KLM Held: KLM Liable, he
issued ticket.

2. Liability to Passengers
a. The liability of airline companies to each passenger is limited to 125,000 francs
b. The limitation will not apply in case of willful misconduct. This means a
reckless act with the knowledge that harm will occur

3. Liability for Checked-In Baggage

a. Amount
i. The liability of airline companies is limited to 250 francs per kilogram
ii. The limitation will not apply if the passenger declared a higher value
and paid the required additional amount
iii. The limitation will not apply in case of willful misconduct
1) The baggage of a passenger who was not able to deliver his
paper in an international conference was lost and was not
recovered till her return
1) Airline guilty of RECKLESNESS cannot invoke limited
liability
2) The luggage of a passenger was lost and was recovered only
after the trial of the case, and the airline company ignored the
follow-ups

4. Liability for Hand-Carried Baggage

a. The liability of the airline company is limited to 5,000 francs per passenger
b. A claim for loss of contents must be made within 3 days from receipt of the
baggage or at the latest 14 days from its receipt

VI. Corporation Code

A. Juridical Personality
1. Separate Personality SH cannot be held liable for corporate breach of cntract
a. Contracts
b. Properties belong to corp and not SHs
c. Taxation corp taxed on profits, and when distributes, the profits in
the form of dividends SHs are taxed separately.
d. Lawsuits SH cannot file a case involving CoA of Corp (exc.
Derivative suit)
e. Rights no right to have notice of lis pendens on corp prop by SHs.

2. Moral Damages no feelings to be hurt

a. No right to moral damages as a general rule
b. Moral damages for besmirched reputation as exception

3. Piercing Corporate Veil disregard separate juridical personality in certain

instances
a. Stockholders
i. Insufficiency of mere majority control
-- must be control PLUS something else.
-- Piercing ONLY invoked against the majority, not against
minority stockholders.
ii. Inapplicability to minority stockholders
b. Unavailability for invocation for corporate benefit underlying
principle corporate veil used for fraud. NOT FOR BENEFIT OF CORP.
c. Grounds

25
 i. Use to defeat public convenience, justify wrong, protect fraud,
or defend crime ex. Tax evasion
ii. Alter ego ex. Holding company : alter ego
1) Control, not merely of shares of stock, but also complete
domination of finances, policy business practice
2) Use of control to commit fraud or wrong in violation of
right of plantiff
3) Injury proximately caused by control and breach of duty
iv. Disregard of separate personality in internal dealings SHs
were not treating the corp as having separate personality
1. Never held board meeting. Never elected directors.
2. Commingled funds with corp and personal

B. Incorporation
1. Incorporators
a. 5 to 15
b. Of legal age
c. Philippine residence of majority
d. Ownership of at least one share of stock

2. Subscription Requirements
a. Subscription to at least 25% of authorized capital stock
b. Payment of at least 25% of the subscription not EVERY subscription.
Basta total.

3. Corporate Name
a. The corporate name should not be identical or confusingly similar to
that of an existing corporation
b. They are engaged in the same line of business
c. A corporation has no exclusive right to use a generic word as part of its
name, e.g., Lyceum, which means an educational institution

4. Limitations on Classification of Shares of Stock

a. Only preferred and redeemable shares may be denied voting rights
b. There must always be a class of shares with complete voting rights
c. Preferred shares of stock must be par value shares
d. Banks, trust, companies, insurance companies, public utilities and
building and loan associations cannot issue no par value shares certain
other corps authorized by special law minimum paid up capital.
Determine using PV shares
e. Preferred shares cannot be given preference ahead of creditors in case
of dissolution violation of TRUST FUND DOCTRINE cap stock and
assets are trust fund for creditors.

C. By-Laws
1. Adoption and Amendment
a. Majority of Stockholders
b. Board of Directors Majority Vote
i. Delegation of power by at least two-thirds of stockholders
ii. Repeal of delegation by majority vote of stockholders
May contain other provisions not provided for in Corp Code. ex. Must own
x number of shares to be a director.

2. Binding Effect

26
 By-laws do not bind third parties who have no actual knowledge of them
at time of transaction

D. Corporate Powers
1. Denial of Right of Pre-emption [preserve equity percentage in corp ALL KINDS
of conveyance of shares]
a. Denial by articles of incorporation
b. Issuance of shares in compliance with law requiring public offering
c. Issuance with approval of two-thirds of stockholders in exchange for
property needed for corporate purposes
d. Issuance with approval of two-thirds of stockholders in payment of
previously contracted debt

2. Sale of all or substantially all of properties and assets with approval of at least
two-thirds of stockholders considered such if: no longer able to continue
primary purpose for which it was incorporated.

3. Acquisition of Own Shares of Stock

a. Elimination of fractional shares because of stock dividends
b. Collection of payment for unpaid subscription auctions shares of stock,
corp buys it instead.
c. Payment to dissenting stockholders exercising appraisal right

4. Investment in Another Corporation or Business

a. Approval by at least two-thirds of stockholders for purpose different from
primary purposes
b. Approval by majority of board of directors for investment needed for
primary purpose SH approval not needed.
i. Acquisition of another brewery by a brewery
ii. Acquisition by sugar mill of factory for making sugar bags

5. Declaration of Dividends
a. Kinds
i. Cash Board of Directors
ii. Property, e.g., treasury shares Board of Directors
Treasury: issued by corp, later on acquired.
iii. Stock Dividend Board of Directors and at least two-thirds of
Stockholders

b. Compulsory Declaration of Dividends

i. Accumulation of retained earnings in excess of 100 per cent of paid-in
capital fined by SEC and assessed by BIR
ii. Exceptions
1) Requirement of definite corporate expansion projects
a. Sec will require minutes of board meeting PROVE the reality
of such projects
2) Lack of consent from creditor prohibiting declaration without its
consent
3) Need for special reserves for probable contingencies ex. Labor union
stages strike baka matalo! Must maintain reserves

6. Ultra Vires Acts

1. Ratification
a. Ratifiable by stockholders if outside corporate powers
b. Not ratifiable if contrary to public policy

27
 a. If contrary: VOID cannot be ratified.

2. Enforcement
a. It cannot be enforced if neither party has performed
b. It can be enforced by a party if he has performed his obligation
E. Trust Fund Doctrine
1. The trust fund doctrine means that the capital stock and the assets of a
corporation constitute a trust fund for payment of creditors
2. A stockholder cannot invoke his appraisal rights if the corporation has no
retained earnings to pay him

F. Directors and Officers

1. Identification of Officers
a. Officers mentioned in Corporation Code
b. Officers mentioned in By-Laws
c. Officers appointed to positions created by Board of Directors by virtue of
authority given and specified by by-laws authority must DEFINE the
offices which they can create

2. Election
a. Qualification
i. A director must own at least one share of stock corp may require more in
By Laws when it ceases: automatically ceases to be a director [time of
election already must be SHolder]
ii. It is sufficient if he has legal title by virtue of a voting trust even if the
beneficial ownership is vested in somebody else
iii. The by-laws can require ownership of more than one share of stock
iv. Philippine residence of majority

b. Disqualification
The by-laws can impose additional disqualifications, such as, being officer of
a competitor

c. Modus of Election devices to enable minority to get seat in board

i. Proxy voting
ii. Cumulative voting

d. Tenure
a. One year with right of hold-over until election of successors
i. Cannot fill up vacancy like if you were still a director.
Holdover ka na, replacement must be ELECTED
ii. Directors may be dismissed with or without cause
iii. A director representing minority stockholders may be removed only for
cause

3. Compensation directors cannot grant to themselves

a. Amount fixed in by-laws
b. Reasonable per diem
c. Other compensation granted by stockholders
d. Limited to 10 per cent of net income before income tax during the preceding
year

4. Personal Liability
a. Business Judgment Rule

28
 Courts will not review and substitute its judgment for that of the board of
directors of a corporation unless they assented to a patently unlawful act,
acted with gross negligence or bad faith, or were involved in a conflict of
interest
b. Personal Liability of Directors and Officers
i. Assent to patently unlawful act
ii. Guilt for bad faith or gross negligence
iii. Conflict of interest
iv. Consent to issuance of watered stock or failure to file written objections
with corporate secretary
-- Stock Cert given when not paid in full.
v. Agreement to bind themselves solidarily liable with corporation
vi. Law making them solidarily liable

c. Cases
i. Declaration of dividends despite insolvency of corporation
ii. Collecting payments for accounts assigned to bank as security for loan and
fraudulently failing to remit them
iii. Allowing violations of labor standards
iv. Feigning losses as pretext for dismissal of employees
v. Passing resolution acknowledging validity of prescribed debt and
assigning all corporate assets as payment in compromise in the collection case

5. Contracts
a. Directors or Officers and Corporation
i. Conditions for Validity
1) Presence of director was not necessary for quorum in meeting where
the contract was approved
2) Vote of director was not necessary for approval of contract
3) The contact was fair and reasonable
4) In case of an officer, the contract was previously authorized by the
board of directors
b. Cure for Absence of Any of First Two Requisites
1) Ratification by at least two-thirds of stockholders
2) Full disclosure of adverse interest of director
3) Fairness and reasonableness of contract
c. Annulment of Contract
i. A director cannot enforce distributorship contract with a corporation
which manufactures cement which provided for a fixed price, because it
is not fair
ii. Only the corporation can annul the contract
d. Corporations with Interlocking Directors
i. Exceptions to Validity of Contract
1) There was fraud
2) It was not fair or reasonable
ii. Requirements if interlocking director owns more than 20 per cent of the
shares of stock in one corporation and nominal shares of stock in other
corporation
1) Ratification by at least two-thirds of stockholders of
corporation in which the director owns nominal shares
2) A creditor of the corporation cannot have the contract
annulled
G. Stockholders
1. General Principles

29
 a. All shares of stock are presumed equal unless otherwise provided in articles
of incorporation
b. Stockholders whose subscriptions are not fully paid are entitled to all rights
unless they are delinquent
c. Non-Voting shares of stock are entitled to vote in matters requiring
stockholder approval FUNDAMENTAL MATTERS ex. Going to different
line of business
d. A stipulation granting the right of first refusal in case of sale is valid
e. Cannot stipulate that a stockholder cannot dispose of his share right to
dispose of prop is part of ownership

2. Subscription
a. A contract between the existing stockholder and new stockholder for
investment in the corporation is a subscription agreement and cannot be
annulled by previous stockholders because of the trust fund doctrine
b. In case of conflict between the articles of incorporation and the stock and
transfer book as to who are the stockholders, the former prevails, because it is
the contract with the corporation
a. Case ito they were trying to figure out quorum. AOI PREVAILS!
c. Unregistered sale of shares of stock bind the parties only and does not bind
the corporation and third parties
a. STB MUST BE THE CORPSEC [parang minutes]
b. Ex. Dividends given to seller, but holds in trust for buyer [of shares]
d. Sale of shares with stock certificate require indorsement and delivery of stock
certificate quasi negotiable
e. A subscription agreement is an indivisible contract
i. The stockholder cannot ask for a stock certificate corresponding to the
number of shares which will be fully paid if the down payment will be
applied pro rata
ii. The stockholder who has not fully paid for his subscription cannot sell a
portion of his subscription
iii. A stockholder can sell his subscription even if it is not fully paid, but the
consent of the board of directors is required. This involves novation by
substitution of debtors THIS REFERS TO ALL THE SHARES again, if not
fully paid, cannot sell PART of the subscription. SUBSCRIPTION
AGREEMENT IS INDIVISIBLE.

3. Maturity of Payment of Balance of Subscription

a. Instances
i. Stipulation regarding payment of balance
ii. Call by board of directors
iii. Suit by creditor of corporation against stockholder on his unpaid
subscription Unpaid subscription is an ASSET of the corporation.
b. Effect of Delinquency
i. Maturity of entire balance
ii. Payment of interest if stipulated
iii. Suspension of all rights of stockholders cash dividend not given, but
APPLIED to payment to subscription. Stock div, not given to him
iv. Public auction sale with award to bidder offering least number of shares
for his bid

4. Derivative Suits not expressly mentioned, remedy for minority stockholders

a. Requirements

30
 i. There must be a cause of action which calls for this kind of relief, such as,
the commission of the board of directors of fraud, mismanagement,
dissipation of funds, breach of trust, and unlawful acts
1) An action by a stockholder for his pre-emptive right is not proper for a
derivative suit
2) The claim of a stockholder that his co-heirs fraudulently transferred the
shares of stock in his name is not proper for a derivative suit
3) The action filed by stockholders to invoke their right to vote is not
proper for a derivative suit
ii. The stockholder must have been such at the time of the occurrence of the
acts complained unless they continued and are injurious to him
1) A stockholder can file a derivative suit because the directors were
appropriating corporate funds for themselves to depress the value of the
shares of stock even if he included himself as co-plaintiff, because the acts
complained of violated the rights of both the corporation and the
minority stockholders
2) A stockholder whose shareholding is insignificant can file a derivative
suit, because the cause of action pertains to the corporation He is not
enforcing own rights, but those of the Corporation.
3) A stockholder who is merely holding in trust the shares of stock in her
name cannot file a derivative suit, because she is not a stockholder in
her own right stock certs issued after acts complained of.
iii. The stockholder must have exhausted all intra-corporate remedies by
applying to the board of directors and the stockholders unless to do so is
excused
1) The stockholder need not appeal to the directors if they were the ones
who committed the wrongs complained of would be useless to
appeal to them.
2) The stockholder need not appeal to the stockholders if there are
numerous stockholders and they are scattered all over the world
iv. The action must be brought in the name and for the benefit of the
corporation
v. There are no appraisal rights available for the acts complained of
vi. The action is not a nuisance or harassment suit

b. Governing Principles
i. The board of directors or the majority stockholders cannot have the case
dismissed
ii. The decision in the case will be res juridicata upon the corporation
Another stockholder cannot file same issue.
iii. The reliefs granted by the court should accrue to the corporation not to
SH who brought the case.

5. Inspection Rights
a. It is presumed that a stockholder is entitled to inspect corporate records
a. Right of directors broader than that of SHs.
b. Litigation in Case of Refusal
a. Remedies
i. Petition for mandamus with prayer for damages
ii. Criminal prosecution under Section 144 of Corporation Code
b. Defendants corp should not be the defendant. It is wrong.
i. Corporate Secretary
ii. Officers who ordered refusal
c. Grounds for Denial

31
 i. The stockholder improperly used information secured through a
previous examination, e.g., insider trading
ii. He was not acting in good faith or for a legitimate purpose
iii. The subject involves trade secrets
iv. The demand was made to pressure the corporation to write off his
debt, to transfer ownership of a building to him, and to increase his
allowance

6. Appraisal Rights
a. Grounds
i. Amendment of articles of incorporation restricting rights of stockholders or
authorizing preferences superior to those of outstanding shares of stock
Amendment MUST AFFECT RIGHTS OF THE STOCKHOLDER!
ii. Disposition of all or substantially all of corporate assets
iii. Merger or consolidation
iv. Investment in business other than the primary purpose
v. Extending or shortening corporate existence
vi. Demand of stockholder in close corporation

b. Requirements
1. Vote against amendment attended meeting and voted against it.
2. Written demand within 30 days
3. Availability of unrestricted retained earnings except in case of close
corporation if none, would prejudice creditors. TF Doctrine.
-- Close Corps: If SH wants to be bought out, he must be paid even if no
URE.

H. Merger and Consolidation

1. Definition
a. Merger Two or more corporation are merged with one of the constituent
corporations surviving MERON PA!
b. Consolidation Two or more corporation are consolidated in a new single
corporation KASAMA NA!

2. Requirements
a. Approval by at least two-thirds of the stockholders of each corporation and
majority of the board of directors
b. Approval by the Securities and Exchange Commission

3. Effects
1. The absorbed corporations shall cease to exist
2. The surviving corporation shall acquire all the rights, powers, obligations
and liabilities of the absorbed corporations
a. Surviving bank could sue debtors of nonsurviving banks.

I. Dissolution
1. Modes
a. Voluntary
i. No creditors affected
1) Approval by at least two-thirds of stockholders
2) Submission to Securities and Exchange Commission of resolution
certified by majority of directors and verified by corporate secretary
ii. Creditors Affected
1) Approval by at least two-thirds of stockholders

32
 2) Submission to Securities and Exchange Commission of petition signed
by majority of directors and verified by president, corporate secretary
or director
3) Publication of order setting case for hearing of objections
4) Judgment of dissolution
iii. Shortening of corporate term
1) Amendment of articles of incorporation by vote of at least two-thirds
of stockholders and majority of directors
2) Submission to Securities and Exchange Commission of original
articles of incorporation and amended articles of incorporation
certified by corporate secretary and majority of directors

b. Involuntary
i. Expiration of corporate term
ii. Failure to commence business within two years form incorporation
iii. Continuous inoperation for at least five years 2 year/5 year x apply if
there is valid reason
iv. Legislative dissolution
v. Dissolution by Securities and Exchange Commission under various
existing laws

2. Consequences
a. The corporation ceases to be a going concern
b. It will continue to exist for the purpose of winding up x enter into new
contracts

3. Persons in Charge of Winding Up

a. Board of Directors
b. Trustee appointed by the Board of Directors
c. Management Committee or Rehabilitation Receiver

4. Deadlines for Winding Up

a. If the winding up will be handled by a trustee, or a management committee,
or a rehabilitation receiver, the three-year deadline will not apply creditors
can sue: 10 years based on written contract
b. Pending cases will continue until their termination
c. Claims can be filed within the applicable period of prescription
d. If the winding up will be handled by the board of directors, upon expiration
of three years all pending cases, regardless of their status and of the position
of the corporation as party, should be dismissed
e. The dismissal of pending cases has been remedied by Supreme Court
decisions by converting the directors or the lawyer handling the cases as
trustees

J. Foreign Corporations
1. Need for a License to Do Business in the Philippines and authorization from
Regulatory Agencies like Bangko Sentral ng Pilipinas and Insurance Commission

2. Concept of Doing Business

1. General Principles
a. The corporation must habitually be doing business in the Philippines and
not merely engaged in an isolated transaction, unless the transaction is
indicative of intention to engage in business of the Philippine

33
 b. The contracts involves pursuit of the ordinary business of the foreign
corporation, e.g., the hiring of a Filipino cook for the vessel of a foreign
common carrier does not constitute doing business in the Philippines
c. The transaction must be consummated in the Philippines, e.g., foreign
producers of motion pictures are not doing business when they authorize
Filipino distributors to show their motion pictures here

2. Specific Cases
a. Doing Business
i. Soliciting orders negotiating, not advertising
ii. Service contracts
iii. Opening offices
iv. Appointing distributor who merely forwarded orders to the foreign
corporation, who in turn fixed the price received the payment, and
shipped the product to the buyer
v. Participating in the management or control of domestic business
vi. Participating in bidding for projects
b. Not Doing Business
i. Investment in domestic corporations, including having a director or
officers in the board
ii. Appointing a distributor who transacts business in its name and for its
own account
iii. Publication of advertisement
iv. Maintaining goods for processing and consignment of equipment for
the purpose like garments and electronic components
v. Collecting information
vi. Performing services auxiliary to an isolated contract of sale
vii. Purchase of molasses

3. Validity of Contracts Entered into by Foreign Corporation without License

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

5. Amenability to Suit
a. Doing business with a license
b. Doing business without a license

6. Non-Amenability to Suit
a. Not doing business in the Philippines
b. Resort to action quasi in rem if property in the Philippines can be attached
VII. Securities Regulation Code apply even if outside the stock market

A. Definition enumeration not exclusive

Securities are shares, participation or interests in a corporation, commercial
enterprise, or profit-making venture. It includes:
1. Shares of stock, bonds, debentures, notes, evidence of indebtedness, asset-backed
securities
2. Investment contracts, certificates of interest or participation in a profit-sharing
agreement, certificates of deposits for a future subscription
3. Fractional undivided interest in oil, gas or other mineral rights

34
 4. Derivatives like option and warrants a financial instrument whose value
depends on the fluctuation of the value of another financial instrument.
a. Unlimited kinds: creativity of human mind
b. Example: Someone placed an order to buy $10K at rate of P47 per dollar
to be delivered 60 days from today. If on that day, P49 per dollar, seller
has to deliver at P47. Pero kung P46, buyer lost money.
5. Certificates of assignment, certificates of participation, trust certificates, voting
trust certificates or similar instruments
6. Proprietary or nonproprietary membership certificates in corporations
7. Other instruments as may be determined by the Securities and Exchange
Commission (Sec. 3.1)

B. Securities Exempt from Registration

1. Security issued or guaranteed by the Government of the Philippines
2. Security issued or guaranty by the government of a country with diplomatic
relations with the Philippines
3. Certificates issued by a receiver or by a trustee in bankruptcy approved by the
proper adjudication body
4. Security whose sale is regulated by the Insurance Commission, Housing and
Land Use Regulatory Board, or Bureau of Internal Revenue
5. Security issued by a bank except its own shares of stocks
6. Any security added by the Securities and Exchange Commission. (Sec. 9)

C. Exempt Transactions
1. Judicial sale, or sale by an executor, administrator, guardian, receiver or trustee
in insolvency referring to securities here
a. Foreclosure on shares of stock

2. Sale by a pledgee or mortgagee or other lien holder selling to liquidate the debt

3. Isolated transaction

4. Stock dividend

5. Sale of capital stock to stockholders of a corporation

a. BoD says we need more capital, offered to SHs portions of unissued

shares exempt coz SHs know financial position.

6. Issuance of bonds or notes secured by a mortgage where the mortgage and all
the bonds or notes are sold to a single purchaser at a single sale

7. Issue of security in exchange for other security pursuant to a right of conversion

if the security surrendered was registered or exempt from registration

8. Brokers transactions, executed upon customers orders, on a registered exchange

9. Subscription for shares of stock prior to incorporation or in pursuance of an

increase in an authorized capital stock

10. Exchange of securities by the issuer with the existing security holders

11. Sale of securities to less than 20 persons during a twelve-month period

35
 12. Sale of Securities to the following:
a. Bank
b. Registered investment house
c. Insurance company
d. Pension fund or retirement plan maintained by the Government or managed
by a bank or trust company
e. Investment company
f. Other buyers determined by the Securities and Exchange Commission as
qualified

13. Other transactions exempted by the Securities and Exchange Commission (Sec.
10)

D. Tender Offers scenario: group of persons who want to acquire shares of a corp
usually, at a premium. Tender offer: make that available to all the SHs.
1. Any person or group of persons who intend to acquire:
a. At least 15% of any class of equity security of a listed corporation
b. At least 15% of any equity of corporations with assets of at least P50 million
and at least 200 stockholders with at least 100 shares each
c. At least 35% of such equity over twelve months shall make a tender offer to
the holders of such security

Shall make a tender offer to stockholders

2. If the securities offered exceed that which a person or group of persons is willing
to take up, the securities that are subject of the tender offer shall be taken up pro
rata. (Sec. 19(d))

E. Insider Trading
1. It is unlawful for an insider to sell or buy a security while in possession of
material information with respect to the issuer or the security that is not
generally available to the public unless the insider proves:
a. The information was not gained from his insider relationship; or
b. If the other party is identified, that:
i. He disclosed the information to him; or
ii. He had reason to believe the other party is in possession of the information

2. Insider mean:
a. The issuer
b. A director or officer or person controlling the issuer
c. A person whose relationship to the issuer gave him access to material
information not generally available to the public
d. Government employee, or director or officer of an exchange, clearing agency
or self-regulation organization who has access to material information not
generally available to the public
e. A person who learns of such information by communication from any of the
foregoing

3. Information is material:
a. If it has not been generally disclosed to the public and will likely affect the
market price of the security after being disseminated to the public; or
b. If it will be considered by a reasonable person important in determining his
course of action whether to buy, sell, or hold a security

36
 F. Validity of Contracts
1. Any provision binding a person to waive compliance with any provision of the
Securities Regulation Code, any rule under it, or any rule of an exchange
required by it, is void

2. Every contract made in violation of any provision of the Securities Regulation

Code or any rule under it is void:
a. As regards the rights of any person who, in violation of it, made such
contract; and
b. As regards the right of any person who, not being a party to such contract,
acquired any right under it with knowledge of the violation

VIII. Law on Secrecy of Bank Accounts

A. Law on Secrecy of Bank Deposits

1. Scope
a. Deposits
b. Investments in bonds issued by the government, its political subdivisions and
instrumentalities
c. Trust accounts

2. Exceptions
a. The depositor has given his written consent
b. The examination is made in connection with an impeachment case
c. There is an order from a competent court in cases of bribery or dereliction of
duty of public officials
d. The money deposited or invested is the subject matter of the litigation:

3. Proper Cases
a. In a criminal case for plunder, the bank accounts can be inquired into,
because they are included in the subject matter of the litigation
b. In a special proceeding to settle the estate of deceased depositor, his bank
deposits are the subject matter of the case, because all his assets are supposed
to be collated

4. Improper Case
In order that the Ombudsman may inspect a bank deposit, there must be a case
pending in court, the account must be clearly identified, the inspection must be
limited to the subject matter of the pending case, the inspection may cover only the
account identified, and the bank personnel and the account holder must be notified
to be present during the inspection

5. Garnishment

The prohibition against the examination of a bank deposit does not preclude its
garnishment to satisfy a judgment against the depositor. Examination =/=
Garnishment

B. Foreign Currency Deposit Act

1. Secrecy of Foreign Currency Deposits
a. All foreign currency deposits are absolutely confidential
b. Foreign currency deposits shall be exempt from attachment, garnishment or any
other order or process of any court, legislative body, government agency or
administrative body.

2. Only Exception Based on Law Written Consent of Depositor

37
 3. Exceptions Based on Jurisprudence
a. Where the funds deposited in a joint foreign currency savings account belonged
exclusively to one of the depositors and were held in trust for him by the other
depositor and the other depositor unilaterally closed the joint account and
transferred the funds to her personal account, the depositor who owned the
funds can have her enjoined from making withdrawals from her personal
account. She cannot invoke the exemption of her personal account from court
processes, because the funds did not belong to her. (Van Twest vs. Court of
Appeals, 230 SCRA 42.)
b. A father who sued his daughter for illegally withdrawing funds from his foreign
currency deposit and transferring them to another bank in the name of her sister,
can inquire into the deposit of the sister, because the money deposited belongs to
him. (China Banking Corporation vs. Court of Appeals, 511 SCRA 110.)

C. General Banking Act (Republic Act No. 8-791.)

1. Secrecy of Bank Transactions
No director, officer, employee, or agent of any bank shall without order of a
court, disclose to any unauthorized person any information relative to the funds
or properties in the custody of the bank belonging to private individuals,
corporations, or any other entity. (Section 55.1 (b))

2. Scope
a. The disclosure to an authorized person is permitted
b. The prohibition does not apply to the funds or properties of public officials.
(Section 55.1 (b)) TRANSACTIONS

IX. New Central Bank Act

A. Distressed Banks
A. Conservatorship: Solvent But Not Liquid
1. If based on the report of the supervising and examining department, the
Monetary Board finds that a bank or a quasi-bank is in a state of continuing
inability or unwillingness to maintain a condition of liquidity adequate to
protect the interest of depositors and creditors, the Monetary Board may
appoint a conservator

2. The conservator has power to overrule or revoke the actions of the previous
management and board of directors, but cannot revoke valid contracts

3. The conservatorship shall not exceed one year

4. The Monetary Board shall terminate the conservatorship:

a. When it is satisfied that the institution can operate on its own
b. When it determines the continuation in business or the institution will
involve probable loss to its depositors or creditors

B. Receivership: Insolvent
1. The Monetary Board may designate the Philippine Deposit Insurance
Corporation as receiver of a bank and any person of recognized competence
in banking or finance as receiver of a quasi-bank when it finds that the
institution:

38
 a. Is unable to pay its liabilities as they become due in the ordinary course of
business when the inability to pay is caused by extraordinary demands
caused by financial panic in the banking community;
b. Has insufficient realizable assets to meet its liabilities;
c. Cannot continue in business without involving probable losses to its
depositors or creditors; or
d. Has willfully violated a cease and desist order under Section 37 that has
become final, involving acts or transactions anointing to fraud or a
dissipation of the assets of the institution

2. Conservatorship is not a precondition to the designation of a receiver

3. Subject to prior approval of the Monetary Board, the receiver shall determine
within 90 days from take-over whether the institution may be rehabilitated or
placed in such condition so that it may resume business with safety to its
depositors, creditors and the general public

C. Liquidation
1. If the receiver determines that the institution cannot be rehabilitated, the
Monetary Board shall notify the board of directors and direct the receiver to
proceed with its liquidation

2. The receiver shall file ex-parte with the Regional Trial Court and without
need to prior notice or any other action a petition for assistance in the
liquidation of the institution

3. The receiver shall convert the assets of the institution to money, dispose of
the money to creditors and other parties to pay the debts of the institution

4. The receiver may file actions to collect and recover accounts and assets of the
institution or defend any action against it

D. Judicial Review
1. The action of the Monetary Board shall be final and executory and may not
be restrained or set aside by the court except on petition for certiorari

2. The petition for certiorari may be filed only by the stockholders of record
representing the majority of the capital stocks within 10 days from receipt by
the board of directors of the order of the Monetary Board

E. Instruments of Bangko Sentral Action

1. To achieve price stability, the Monetary Board shall rely on its moral
influence. (Sec. 68)

2. The Bangko Sentral may buy and sell gold

3. The Bangko Sentral may buy and sell foreign notes and coins. (Sec. 70)

4. Emergency Restrictions

39
 In time of exchange crisis or national emergency, with the concurrence of 5
members of the Monetary Board and the approval of the President, the Monetary
Board may:
a. Temporarily suspend or restrict sales of foreign exchange by the Bangko
Sentral
b. Subject all transactions in gold and foreign exchange to license
c. Require any foreign exchange obtained by anyone in the Philippines be
delivered to any bank at the effective exchange rate. (Sec. 72)

F. Reserve Requirements
A. To control the volume of money created by the lending operations of banks,
all banks are required to maintain reserves against their deposit liabilities,
funds held in trust, and deposit substitutes.

X. General Banking Law

A. Definition
1. Banks refer to entities engaged in the lending of funds obtained in the form of
deposits

2. Quasi-banks refer to entities engaged in the borrowing of funds through the

issuance, endorsement or assignment with recourse or acceptance of deposit
substitutes as defined in Section 95 of the New Central Bank Act of purposes of
relending or purchasing of receivables and other obligations

B. Diligence Required of Banks

Because of the fiduciary nature of banking, banks must act in accordance with the
highest standards of integrity and performance. In handling the funds of the clients,
they must observe extraordinary diligence

C. Relationship between Depositor and Bank

The relationship between a depositor and a bank is that of creditor and debtor

D. Interest Rates
1. While the ceiling on interest rates has been lifted, the interest should not
unconscionable. An interest of more than 30 per cent a year is unconscionable

2. A bank cannot increase the rate of interest without the consent of and notice to
the borrower because of the principle of mutuality of contracts

E. Single borrower limit

1. Limits
a. The total amount of loans, credit accommodations and guarantees that may
be extended by a bank to a single borrower: 25% of the net worth of the bank
b. Liabilities secured by trust receipts, shipping documents, warehousing
receipt or other similar covering goods which are readily marketable, non-
perishable and fully insured: additional 10%

2. Exclusions
a. Loans secured by obligations of the Bangko Sentral or of the government
b. Loans fully guaranteed by the government
c. Loans covered by assignment of deposits in the lending bank and held in the
Philippines
d. Letters of credit covered by margin deposits

40
 e. Non-risk items specified by the Monetary Board (Sec. 35.5)

F. Loans to Directors, Officers, Stockholders and Related Interest

1. Procedural requirements
a. Written approval of majority of all directors, excluding the director
concerned
b. Entry of approval in bank records
c. Transmission of copy of entry to the Bangko Sentral

2. Conditions and limitations

a. The terms shall not be less favorable than those offered to others
b. The loans shall be limited to an amount equivalent to their unencumbered
deposits and book value of their paid-in capital in the bank
c. Loans secured by non-risk assets determined by the Monetary Board shall be
excluded

3. Violation
The mere failure to comply with any of the requirements for granting the loan is
sufficient to constitute a violation

XI. ANTI-MONEY LAUNDERING ACT

A. Money Laundering
1. Definition
Money laundering is committed by any person who, knowing that any monetary
instrument or property represents, involves, or relates to the proceeds of any
unlawful activity:
a. transacts said monetary instrument or property;
b. converts, transfers, disposes of, moves, acquires, possesses or uses said
monetary instrument or property;
c. conceals or disguises the true nature, source, location, disposition, movement
or ownership of or rights with respect to said monetary instrument or
property;
d. attempts or conspires to commit money laundering offenses referred to in
paragraphs (a), (b) or (c);
e. aids, abets, assists in or counsels the commission of the money laundering
offenses referred to in paragraphs (a), (b) or (c) above; and
f. performs or fails to perform any act as a result of which he facilitates the
offense of money laundering referred to in paragraphs (a), (b) or (c) above.

Money laundering is also committed by any covered person who, knowing that a
covered or suspicious transaction is required under this Act to be reported to the
Anti-Money Laundering Council, fails to do so. (Section 4)

2. Institutions Covered
a. banks, non-banks, quasi-banks, trust entities, foreign exchange dealers,
pawnshops, money changers, remittance and transfer companies and other
similar entities and all other persons and their subsidiaries and affiliates
supervised or regulated by the Bangko Sentral ng Pilipinas;
b. insurance companies, pre-need companies and all other persons supervised
or regulated by the Insurance Commission;
c. (i) securities dealers, brokers, salesmen, investment houses and other similar
persons managing securities or rendering services as investment agent,
advisor, or consultant, (ii) mutual funds, close-end investment companies,
common trust funds, and other similar persons, and (iii) other entities

41
 administering or otherwise dealing in currency, commodities or financial
derivatives based thereon, valuable objects, cash substitutes and other similar
monetary instruments or property supervised or regulated by the Securities
and Exchange Commission;
d. jewelry dealers in precious metals, who, as a business, trade in precious
metals, for transactions in excess of P1,000,000.00;
e. jewelry dealers in precious stones, who, as a business, trade in precious
stones, for transactions in excess of P1,000,000.00;
f. company service providers which, as a business, provide any of the following
services to third parties: (i) acting as a formation agent of juridical persons;
(ii) acting as (or arranging for another person to act as) a director or corporate
secretary of a company, a partner of a partnership, or a similar position in
relation to other juridical persons; (iii) providing a registered office, business
address or accommodation, correspondence or administrative address for a
company, a partnership or any other legal person or arrangement; and (iv)
acting as (or arranging for another person to act as) a nominee shareholder
for another person; and
g. persons who provide any of the following services:
i. managing of client money, securities or other assets;
ii. management of bank, savings or securities accounts;
iii. organization of contributions for the creation, operation or management of
companies; and
iv. creation, operation or management of juridical persons or arrangements,
and buying and selling business entities.

3. Exclusions
The term covered persons excludes lawyers and accountants acting as
independent legal professionals in relation to information concerning their
clients or where disclosure of information will compromise client confidences or
the attorney-client relationship. (Section 3(a))

4. Covered Transactions
A transaction in cash or other equivalent monetary instrument involving a total
of more than P500,000.00 in one banking day is covered. (Section 3(b))

5. Suspicious Transactions
Suspicious transactions are transactions with covered institutions, regardless of
amount, where any of the following circumstances exists:
a. There is no underlying legal or trade obligations, purpose or economic
justification
b. The client is not properly identified
c. The amount involved is not commensurate with the business or financial
capacity of the client
d. It may be perceived that the transaction is structured to avoid being the
subject of reporting requirements
e. Any circumstance which deviates from the profile of the client or the clients
past transactions with the covered institution
f. The transaction is related to an unlawful activity
g. The transaction is similar or analogous to any of the foregoing. (Section 3 (b-
1))

B. Anti-Money Laundering Council

1. Composition
1. Governor of the Bangko Sentral ng Pilipinas

42
 2. Insurance Commissioner
3. Chairman of the Securities and Exchange Commission

2. Requirement for Discharge of Function: - Unanimity

3. Important Functions
a. To require and receive covered or suspicious transaction reports from covered
institutions
b. To issue orders to the Supervising Authority or covered institution to determine
the true identity of the owner of any monetary investment or property subject of
a covered transaction or suspicious transaction report or requested for assistance
from a foreign state, or believed on the basis of substantial evidence be the
proceeds of an unlawful activity
c. To institute civil forfeiture proceedings and all other remedial proceedings
through the Office of the Solicitor General
d. To cause the filing of complaints with the Department of Justice or the
Ombudsman for the prosecution of money laundering offense
e. To investigate suspicious transactions and covered transactions deemed
suspicious after an investigation, money laundering activities, and other
violations of this Act
f. To apply before the Court of Appeals ex parte for the freezing of any monetary
instrument or property alleged to be proceeds from or used in or intended for
use in any unlawful activity.

C. Authority to Freeze

The Court of Appeals, upon ex-parte petition by the Anti-Money Laundering

Council, and after determination that probable cause exists that any monetary
instrument or property is related to an unlawful activity may issue a freeze order
effectively immediately and not exceed six (6) months. The Court of Appeals should
act on the petition within 24 hours from its filing. If no case is filed within the period
determined by the Court of Appeals, the freeze order shall be automatically lifted.

A person whose account has been frozen may move to lift the freeze order and the
court must resolve it before the expiration.

Only the Supreme Curt can issue a temporary restraining order or a writ of
injunction against any freeze order

V. Inquiry into Bank Deposits

The Anti-Money Laundering Council may inquire into any deposit or investment,
including related accounts, with any banking institution upon order of a court on ex-
parte application in cases of violation of this Act if there is probable cause that it is
related to an unlawful activity or a money laundering activity but no court order is
required in cases involving unlawful activities in Section 3 (i) (1) (2) and 12), i. e.
kidnapping for ransom, violation of the Comprehensive Dangerous Drugs Act,
hijacking, destructive arson and murder, and offenses similar to those offenses which
are punishable under the penal laws of other countries, and terrorism and conspiracy to
commit terrorism.

Related accounts refers to accounts the funds and sources of which originated from or
are materially linked to investments or properties subject of the freeze order.

43
 A court order ex-parte must first be obtained provided that the same procedure for the
principal account shall be the same with that of related accounts. (Section 11)

XII. Intellectual Property Code

A. Patents
1. Patentable Inventions
a. Useful machine
b. Product
c. Process
d. Improvement of machine, product or process
e. Micro-organisms
f. Non-biological and microbiological process

2. Non-Patentable Inventions
a. Discoveries, scientific theories, mathematical methods, and discovery of new
form or new property of a substance in medicines or new use for unless it
results in new product that employs a new reactant
b. Schemes, rules and methods of performing mental acts, playing games or
doing business, and computer program
c. Methods for treatment of human or animal body
d. Plant varieties or animal breeds
e. Aesthetic creations
f. Anything contrary to public order or morality

3. Conditions of Patentability
a. Novelty
b. Inventive step
c. Industrial applicability

4. Ownership
a. Inventor
b. Person who commissioned work
c. Employer of employee who made invention as part of duties
d. First to file application in case of two or more independent persons
e. Person deprived of patent without his consent or through fraud

5. Grounds for Cancellation of Patent

a. It is not new or patentable
b. Patent does not disclose the invention in a manner sufficient to enable skilled
person to carry it out
c. It is contrary to law and morality
d. It includes matter outside of disclosure in application

6. Rights of Owner of Patent

a. To prevent unauthorized person from making and using, selling or
importing the patented product, but drugs and medicines are exempted from
prohibition against importation
b. To prohibit any and unauthorized person from using the patented process or
manufacturing, using, or selling or importing product obtained from the
process, but drugs and medicines are exempted from prohibition against
importation
c. To assign or transfer by succession the patent and to conclude licensing
grounds

44
 7. Limitations of Rights
a. Prior user in good faith before filing of application can continue its use
b. Use by government in case of public interest, use of patent in anti-
competitive manner, national security in case of drugs and medicines, non-
commercial use of drugs and medicines, failure to meet demand for drugs
and medicines

8. Infringement: Violation of Exclusive Rights of Owner

a. Literal Infringement
Challenged matter falls within the words of the claim
b. Doctrine of Equivalents
Challenged matter performs substantially the same function in substantially
the same to achieve substantially the same result
c. Contributory Infringement

B. Trademarks
1. Acquisition of Ownership
a. Use
b. Prior use not required for registration
c. Priority in registration

2. Confusingly Similar Trademarks

a. Dominancy Test
Competing trademark contains the main features of another trademark
because of which confusion is likely to result
b. Holistic Test
The dominant features and other features also are considered
c. Principles
a. Colorable imitation means such a close imitation as is calculated to
deceive ordinary buyers giving the attention a buyer usually gives
b. Well-known trademarks are protected even if not registered in the
Philippines
c. Protection extends to closely related products

3. Rights Conferred by Registration

a. Exclusive right to prevent third parties from using without consent of owner
identical or similar trademarks in course of trade which will result in
likelihood of confusion

4. Infringement
a. Acts
i. Use in commerce of similar, counterfeit, copy or colorable imitation of
registered trademark or same container or dominant feature and use is likely
to cause confusion or to deceive
ii. Reproduction, counterfeiting, copying or colorably imitating registered
trademark or dominant features in labels, containers or advertisements
b. Remedies
i. Recovery of damages for lost profits
1) Need of proof of knowledge of likelihood of confusion
2) Presumption of knowledge by using the words Registered Mark or
letter R
ii. Injunction
iii. Destruction of infringing materials

5. Unfair Competition

45
 a. Acts
a. Passing off ones goods for the goods of another
b. Passing off ones services for those of another
c. Making a false statement or committing an act contrary to good faith to
discredit the goods or services of another
b. Trade Name
1. Ownership is acquired through priority of adoption
2. Generic words are excluded
3. Geographical names cannot be appropriated
4. Trade name contrary to public order or morals cannot be used

C. Copyright
1. Ownership
a. Commissioned work
i. Work belongs to the one who commissioned
ii. Copyright belongs to creator

D. Rights of Copyright Owner

a. Economic Rights: Exclusive Rights to Carry Out, Authorize or Prevent:
i. Reproduction of work or substantial portions
ii. Dramatization, translation, adaptation, abridgment, arrangement or
other transformation
iii. First public distribution of original and each copy of work
iv. Rental of original or copy of work
v. Public display of original or copy of work
vi. Public performance of work
vii. Other communication of work to public

b. Moral Rights
i. Perpetual requirement of attribution of authorship of work
ii. Alteration of work or withholding from publication
iii. Objection to distortion or modification of work or derogatory action
iv. Restraint of use of his name for work not of his own creation or
distorted version

c. Droit de Suite
Right of painter, writer or composer to get 5 per cent of proceeds of sale
or lease for his lifetime and 50 years after his death

E. Copyright-literary, scholarly, scientific and artistic work

1. Principles
a. Works are protected by the mere fact of creation
b. They are protected from the moment of creation
c. Copyright is distinct from the ownership of material object subject to
it

2. Unprotected works
a. Idea
b. Procedure
c. System
d. Method
e. Operation
f. Concept
g. Principle
h. Discovery

46
 i. Data
j. News of the day
k. Items of press information
l. Official text of legislative, administrative or legal nature, as well as
any translation

3. Originality: Not copied but independent creation

4. Derivative Works
a. Dramatizations, translation, adaptation, abridgements, arrangements,
and other alterations
b. Collection of literacy, scholarly or artistic works, and compilations of
data and other materials original because of selection, coordination or
arrangement

5. Ownership
a. Author
b. Joint authors
c. Work created by employee
i. Employee if not part of his work
ii. Employer if part of regular duties

6. Fair Use
a. Purpose and character of use, whether commercial or non-profit
b. Nature of copyrighted work
c. Amount and substantiality of portions used
d. Effect upon potential market

7. Infringement
a. Concept
Doing without the consent of the owner of anything the sole right of
which belongs to the owner
a. Acts
i. Directly infringing
ii. Benefiting from direct infringement with notice of infringement
and ability to control direct infringer
iii. With knowledge of infringement, inducing, causing or
materially contributing to it

47