CASE OUTLINE IN MERCANTILE LAW

Dean Nilo T. Divina

I. Letters of Credit

A. Definition and Nature of Letter of Credit

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

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

An irrevocable letter of credit is not synonymous with a confirmed letter of credit. In an

irrevocable letter of credit, the issuing bank may not, without the consent of the beneficiary
and the applicant, revoke its undertaking under the letter, whereas, in a confirmed letter of
credit, the correspondent bank gives an absolute assurance to the beneficiary that it will
undertake the issuing bank’s obligation as its own according to the terms and conditions of
the credit, ibid

Mere opening of a letter of credit does not involve a specific appropriation of a sum of
money in favor of the beneficiary. Feati Bank & Trust Company vs. Court of Appeals, 196
SCRA 576. 1991)

Through a letter of credit, the bank merely substitutes its own promise to pay for the
promise to pay of one of its customers who in return promises to pay the bank the amount of
funds mentioned in the letters of credit plus credit or commitments fees mutually agreed
upon. Once the issuing bank shall have paid the beneficiary after the latter’s compliance
with the terms of the letter of credit, the issuing bank is entitled to reimbursement for the
amount it paid under the letter of credit. Presentment for acceptance to the customer/
applicant of the drafts drawn by the beneficiary is not a condition sine qua non for
reimbursement. Prudential Bank and Trust Company vs. IAC, 216 SCRA 257 (1992)

The primary purpose of the letter of credit is to substitute for and therefore support, the
agreement of the buyer/importer to pay money under a contract or other arrangement.
Hence, the failure of a buyer/importer to open a letter of credit as stipulated amounts to a
breach of contract which would entitle the seller/exporter to A letter of credit transaction is
a composite of at least three distinct but intertwined relationships, each relationship being
concretized in a contract:
a) One contract relationship links the party applying for the letter of credit (the account
party or applicant or buyer or importer) and the party for whose benefit the letter of credit is
issued (the beneficiary or seller or exporter). In this contract, the account party agrees,
among other things, and subject to the terms and conditions of the contract, to pay money
to the beneficiary

b) A second contract relationship between the account party and the issuing bank. Under
this contract,(sometimes called the Application and Agreement or the Reimbursement
Agreement), the account party, among other things, applies to the Issuing Bank for a
specified letter of credit and agrees to reimburse the bank for amounts paid by the bank
pursuant to the letter of credit.

c) The third contract relationship is established between the issuing bank and the
beneficiary to, inter alia, pay certain monies to the latterclaim damages for such breach.
Reliance Commodities, Inc., vs. Daewoo Industrial Co., Ltd., 228 SCRA 545 (1993)

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

Commercial letters of credit involve the payment of money under a contract of sale wherein
the seller-beneficiary presents to the issuing bank documents that would show that he has
taken affirmative steps to comply with the sales agreement. On the other hand, standby
letters of credit are used in non-sale setting where the beneficiary presents documents that
would show that the obligor has not complied with his obligation.

Letters of credit are also used in non-sale setting where they serve to reduce the risk of
nonperformance. Letters of credit in the non-sale settings are known as standby letters of
credit. There are significant differences between commercial and standby letters of credit:
(1) commercial credits involve the payment of money under a contract of sale. Such credits
become payable upon presentation by the seller-beneficiary of documents that show he has
taken affirmative steps to comply with the sales agreement. In the standby type, the credit is
payable upon certification of a party’s nonperformance of the agreement; (2) In standby
letter of credit, the documents that accompany the beneficiary’s draft tend to show that the
applicant has not performed. The beneficiary of a commercial letter of credit demonstrates
by documents that he has performed his contract. The beneficiary of a standby letter of
credit must certify that his obligor has not performed the contract. Transfield Philippines,
Inc.,vs. Luzon Hydro Corp. 443 SCRA 307 (2004)

The concept of guarantee vis-à-vis the concept of an irrevocable letter of credit is

inconsistent with each other. The guarantee theory destroys the independence of the bank’s
responsibility from the contract upon which it was opened and the nature of both contracts
 is mutually in conflict with each other. In contracts of guarantee, the guarantor’s obligation
is merely collateral and it arises only upon the default of the person primarily liable. On the
other hand, in an irrevocable letter of credit, the bank undertakes a primary obligation.

Letters of credit were developed for the purpose of insuring to a seller payment of a definite
amount upon the presentation of documents and is thus a commitment by the issuer that the
party in whose favor it is issued and who can collect upon it will have his credit against the
applicant of the letter, duly paid in the amount specified in the letter. They are primary
obligations and not accessory contracts and while they are security arrangements, they are
not converted thereby into contracts of guaranty. What distinguishes letters of credit from
other accessory contracts, is the engagement of the issuing bank presented to it. They are
definite undertakings to pay once the documents stipulated therein are presented.

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

A letter of credit is a separate document from a trust receipt. While the trust receipt may
have been executed as a security on the letter of credit, still the two documents involve
different undertakings and obligations. A letter of credit is an engagement by a bank or
other person made at the request of a customer that the issuer will honor drafts or other
demands for payment upon compliance with the conditions specified in the credit. By
contrast, a trust receipt transaction is one where the entruster, who holds an absolute title or
security interests over certain goods, documents or instruments, released the same to the
entrustee, who executes a trust receipt binding himself to hold the goods, documents or
instruments in trust for the entruster and to sell or otherwise dispose of the goods,
documents and instruments with the obligation to turn over to the entruster the proceeds
thereof to the extent of the amount owing to the entruster, or as appears in the trust receipt,
or return the goods, documents or instruments themselves if they are unsold, or not
otherwise disposed of, in accordance with the terms and conditions specified in the trust
receipt. Bank of Commerce vs. Serrano, 451 SCRA 484. 2005)

B. Parties to a Letter of Credit

1. Rights and Obligations of Parties

A buyer who applied for a letter of credit to pay for imported dyestuffs must reimburse
the issuing bank which paid the beneficiary, even if the shipment contained colored
chalks. Banks are not required to investigate if the contract underlying the letter of
credit has been fulfilled or not because in a transaction involving letter of credit, banks
deal only with documents and not with goods. Bank of the Philippine Islands vs. De Reny
Fabric Industries, Inc.,35 SCRA 253 (1970)
The issuing bank’s (IBAA) obligation under an Irrevocable Standby Letter of Credit
executed to secure a contract of loan cannot be reduced by the direct payments made
by the principal debtors to the creditor. Although a letter of credit is a security
arrangement, it is not converted thereby into a contract of guaranty; the obligation of
the bank under the letter of credit is original and primary. Insular Bank of Asia & America
vs. Intermediate Appellate Court, 167 SCRA 450 (1988)

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

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

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

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

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

An applicant for a letter of credit is entitled to have the marginal deposit deducted from
the principal obligation under the letter of credit and to have the interest computed
only on the balance, since it is supposed to be returned upon compliance with his
obligation. Indeed, it would be onerous to compute interest and other charges on the
face value of the letter of credit which the issuing bank issued, without first crediting or
setting off the marginal deposit which the importer paid to it. Requiring the importer to
pay interest on the entire letter of credit without deducting first his marginal deposit
would be a clear case of unjust enrichment by the bank. Abad vs. Court of Appeals, 181
SCRA 191 (1990); Consolidated Bank & Trust Corporation vs. Court of Appeals, 356
SCRA 671 (2001)
 The stay order issued by the rehabilitation court pursuant to Sec 6 (b) of Rule 4 of the
Interim Rules of Corporate Rehabilitation does not apply to the beneficiary of the letter
of credit against the banks that issued it because the prohibition under the rules is on the
enforcement of claims against the debtor, guarantors or sureties of the debtors whose
obligations are not solidary with the debtor.

Thus, the beneficiary of the standby letter of credit can draw on the letter of credit to
cover the payment of concession fees under a concessionaire agreement to manage and
operate water and sewerage services, the fulfillment of which is secured by the standby
letter of credit, despite filing of a petition for corporate rehabilitation and the issuance
of a stay order in favor of the applicant. MWSS vs. Hon. Daway, 432 SCRA 559 (2004)

Where the applicant entered into a Turnkey contract whereby it undertook to construct,
on a turnkey basis, a seventy (70)-Megawatt hydro-electric power station, the
performance of which is secured by a standby letter of credit, the resort to arbitration by
the applicant/ contractor to arbitration to determine if the latter is guilty of delay does
not preclude the beneficiary to draw on the letter of credit upon its issuance of a
certification of default because whether or not the issuance of certification of default
amounted to fraud was not raised in the lower court and the parties did not stipulate
that all dispute regarding delay should first be settled through arbitration before the
beneficiary would be allowed to call upon the letter of credit. If the drawing upon the
letter of credit was wrongful due to the non-existence of the fact of default, the right of
the applicant to seek indemnification for damages it suffered would not normally be
foreclosed pursuant to general principle of law. Transfield Philippines, Inc., vs. Luzon
Hydro Corp. 443 SCRA 307 (2004)

When the Issuing Bank of an irrevocable letter of credit paid the beneficiary because the
latter presented all the stipulated shipping documents to the Bank and after payment,
the Bank debited the account of the applicant corresponding to the amount the Bank
paid under the letter of credit, the Bank is not liable for damages even if the shipment
did not conform to the specifications of the applicant. Under the doctrine of
independence, the obligation of the issuing bank to pay the beneficiary arises once the
latter is able to submit the stipulated documents under the letter of credit regardless of
the fulfillment or non-fulfillment of the contract supporting the letter of credit. Once
the issuing bank accordingly pays, it has the right to obtain reimbursement from the
applicant regardless of any breach in the contract underlying the letter of credit. Thus,
the Bank is not liable if as a consequence of such lawful act of debiting the account of
the applicant, the latter lacked the funds to purchase raw materials to meet the orders of
various customers and orders were cancelled resulting in lost profits. (Land Bank of the
Phils., vs. Monet’s Export and Manufacturing Corp., 453 SCRA 173 (2005)

C. Basic Principles of Letter of Credit

1. Doctrine of Independence

In a contract of loan secured by a standby letter of credit, the partial payments made on
the loan cannot be added in computing the issuing bank’s liability under its own standby
letter of credit. Although these payments could result in the reduction of the actual
amount which could ultimately be collected from the issuing bank, the latter’s separate
undertaking under its letters of credit remain. This is because the letter of credit is an
absolute and primary undertaking which is separate and distinct from the contract
underlying it. Insular Bank of Asia & America vs. Intermediate Appellate Court, 167
SCRA 450 (1988)

Where there was a meeting of the minds between the buyer and the seller regarding the
sale of foundry pig iron to be paid for under a letter of credit, the failure of the buyer to
open the letter of credit did not prevent the perfection of the contract and neither did
such failure extinguish the contract. The opening of the letter of credit was not a
condition precedent for the birth of obligation of the buyer to purchase the foundry pig
iron from the seller. Where the buyer fails to open the letter of credit, as stipulated, the
seller or exporter is entitled to claim damages for such breach. Damages for failure to
open the letter of credit may include the loss of profit which the seller would have
reasonably made had the transaction been carried out. Reliance Commodities, Inc., vs.
Daewoo Industrial Co. Ltd., 228 SCRA 545 (1993)

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

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

Where the trial court rendered a decision finding the buyer solely liable to pay the seller
and omitted by inadvertence to insert in its decision the phrase “ without prejudice to
the decision that will be made against the issuing bank “ , the bank can not evade
responsibility based on this ground. The seller who is entitled to draw on the credit line
of the buyer from a bank against the presentation of sales invoices and official receipts
of the purchases and who obtained a court judgment solely against the buyer even
though the suit is against the bank and the buyer may still enforce the liability of the
same bank under a letter of credit issued to secure the credit line. The so-called
"independence principle" in a letter of credit assures the seller or the beneficiary of
prompt payment independent of any breach of the main contract and precludes the
 issuing bank from determining whether the main contract is actually accomplished or
not. Philippine National Bank vs. San Miguel Corporation, G.R. No. 186063, (2014)

2. Fraud Exception Principle

The untruthfulness of a certificate accomplanying a demand for payment under a standy

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

3. Doctrine of Strict Compliance

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

I. Trust Receipts Law

A. Definition/Concept of a Trust Receipt Transaction

1. Loan/Security Feature

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

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

Letters of credit and trust receipt are not negotiable instruments. But drafts issued in
connection with letters of credit are negotiable instruments. Hence, while the
presumption of consideration under the negotiable instruments law may not necessarily
be applicable to trust receipts and letters of credit, the presumption that the drafts
drawn in connection with the letters of credit have sufficient consideration applies.
 A trust receipt is a security transaction intended to aid in financing importers and retail
dealers who do not have sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to acquire credit except through
utilization, as collateral of the merchandise imported or purchased. Under a letter of
credit-trust receipt arrangement, a bank extends a loan covered by a letter of credit,
with the trust receipt as a security for the loan; hence, the transaction involves a loan
feature represented by a letter of credit, and a security feature which is in the covering
trust receipt which secures an indebtedness. Lee vs. Court of Appeals, 375 SCRA 579
(2002)

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

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

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

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

B. Rights of the Entruster

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

Purchaser for Value

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

C. Obligation and Liability of the Entrustee

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

The non-payment of the amount covered by a trust receipts is an act violative of the
entrustee’s obligation to pay. The penal provision of PD 115 encompasses any act violative
of an obligation covered by the trust receipt; it is not limited to the transactions in goods
which are to be sold (retailed), reshipped, stored or processed as a component of a product
ultimately sold. Thus, the entrustee could not escape criminal liability even if the goods
subject of the transaction were used in the operation of the equipment and machineries of
the corporation. Allied Banking Corporation vs. Ordonez, 192 SCRA 246 (1990)

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

Failure of the entrustee to turn over the proceeds of the sale of the goods covered by a trust
receipt to the entruster or to return the goods, if they were not disposed of, shall constitute
the crime of estafa. However, what is being punished by law is the dishonesty and abuse of
confidence in the handling the money or goods to the prejudice of another regardless pg
whether the latter is owner. No dishonesty nor abuse of confidence can be attributed to the
entrustee if the latter failed to comply with its obligation upon maturity of the trust receipt
due to serious liquidity problems and after it was placed under the control of the
management committee created by SEC which took custody of the entrustee’s assets,
including lumbers subject of the trust receipt. Clearly, it was the management committee
which could settle the entrustee’s obligations. The mala prohibita nature of the offense
notwithstanding, the entrustee’s intent to misuse or misappropriate the goods or their
proceeds has not been established based on the circumstances.

Also, the Memorandum of Agreement between the parties did not only reschedule the
entrustee’s debts, but more importantly, it provided principal conditions which are
incompatible with the trust agreement. Hence, the MOA novated and effectively
extinguished the entrustee’s obligation under the trust receipt agreement. Pilipinas Bank vs.
Ong, 387 SCRA 37 (2002)

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

Instruments

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

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

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

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

A trust receipt transaction is a security agreement, pursuant to which the entruster

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

3. Liability for Loss of Goods, Documents or Instruments

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

Where the entrustee tendered the return of the articles to the entrustee because they
did not meet its manufacturing requirements but the latter refused to accept and as a
consequence, the entruster stored them in its warehouse which was, however, gutted by
fire, the entrustee’s obligation was not extinguished despite the tender and its
invocation of the principle of res perit domino. Under the Trust Receipts law, the loss of
 the goods under trust receipt regardless of the cause and the period or time it occurred,
does not extinguish the civil obligation of the entrustee. A trust receipt has two features,
the loan and security features. The loan is brought about by the fact that the entruster
financed the importation or purchase of the goods under TR. Until and unless this loan is
paid, the obligation to pay subsists. The principle of res perit domino will not apply if
under the trust receipt, the bank is made to appear as the owner, it was but an artificial
expedient, more of legal fiction than fact, for if it were really so, it could dispose of the
goods in any manner that it wants, which it cannot do, just to give consistency with the
purpose of the trust receipt of giving a stronger security for the loan obtained by the
importer. To consider the bank as the true owner from the inception of the transaction
would be to disregard the loan feature thereof. Rosario Textile Mills Corp. vs. Home
Bankers Savings and Trust Company, 462 SCRA 88 (2005)

The clause “we jointly and severally agree and undertake” refers to the undertaking of
the two (2) parties who are to sign it or to the liability existing between themselves, and
not to the undertaking between either one or both of them with respect to the liability
described under the trust receipt. Had there been more than one signatories to the trust
receipt, the solidary liability would exist between the guarantors. Guarantor is not
entitled to the benefit of excussion when he agreed that his liability in the guaranty shall
be direct and immediate without need on the part of the bank to take any steps or
exhaust any legal remedies. Tupaz IV vs. CA, 475 SCRA 398 (2005)

4. Penal Sanctions if Offender is a Corporation

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

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

When the entrustee is a corporation, the director, officer, employee, or any person
responsible for the violation of the Trust Receipts Law is held criminally liable without
prejudice to the civil liability, which is imposed upon the entrustee-corporation. The
fact that the officer signed in his official capacity means that the corporation is the one
civilly liable; however, when such officer also signed a trust receipt in his personal
capacity, he will also be held civilly liable together with the corporation, with the scope
of liability depending on whether he signed as a surety or as a guarantor. Tupaz IV vs.
Court of Appeals, 475 SCRA 398 (2005)

The fact that the officer who signed the trust receipt on behalf of the entrustee-
corporation signed in his official capacity without receiving the goods as he had never
taken possession of such nor committing dishonesty and abuse of confidence in
transacting with the entrustor, is immaterial. The law specifically makes the director,
officer, employee or any person responsible criminally liable precisely for the reason that
a corporation, being a juridical entity, cannot be the subject of the penalty of
imprisonment. Alfredo Ching vs. Secretary of Justice, 481 SCRA 609 (2006)
D. Remedies Available

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

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

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

Acts involving the violation of trust receipt agreements occurring after 29 January 1973
(date of enactment of PD 115) would make the accused criminally liable for estafa under
paragraph 1 (b). Article 315 of the Revised Penal Code pursuant to the explicit provision of
Section 13 of PD 115. PD 115 does not violate the constitutional provision against
imprisonment for non-payment of debt because what is sought to be penalized is not the
non-payment of debt but the dishonesty and abuse of confidence in the handling of money
or goods to the prejudice of another. The law punishes the act not as an offence against
property but against public order. It is in the context of upholding public interest that the
law specifically designates the breach of a trust receipt agreement to be an act which shall
make the offender liable for estafa. People vs. Nitafan, 207 SCRA 726 (1992)

The allegation that the entrustee failed to remit the proceeds of the sale of the entrusted
goods or to return the same is not sufficient for attachment to issue. A debt is fraudulently
contracted if at the time of contracting it the debtor has a preconceived plan or intention
not to pay. Fraudulent intent not to honor the admitted obligation cannot be inferred from
the debtor’s inability to pay or to comply with the obligations. If the entrustee has made
partial payment, it cannot be said the entrustee harbored a pre-conceived plan or intention
not pay the entruster. Phil Bank of Communication vs. CA and Filipinas Textile Mills, 352
SCRA 616 (2001)

When the entrustee defaults on his obligation, the entruster has the discretion to avail of
remedies which it deems best to protect its right. The law uses the word “may” in granting
to the entruster the right to cancel the trust and take possession of the goods; hence, the
option is given to the entruster. South City Homes, Inc., vs. BA Finance Corporation, 371
SCRA 603 (2001)
 A civil case filed by the entruster against the entrustees based on the failure of the latter to
comply with their obligation under the Trust Receipt agreement is proper because this
breach of obligation is separate and distinct from any criminal liability for misuse and/or
misappropriation of goods or proceeds realized from the sale of goods released under the
trust receipts. Being based on an obligation ex contractu and not ex delicto, the civil action
may proceed independently of the criminal proceedings instituted against the entrustees
regardless of the result of the latter. Sarmiento vs. Court of Appeals, 394 SCRA 315 (2002)

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

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

E. Warehouseman’s Lien

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

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

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

A. Forms and Interpretation

1. Requisites of Negotiability

The Bank where postal money orders were deposited may debit the account of the
depositor corresponding to the amount of postal money orders deposited and
subsequently withdrawn from the depositor’s account when it turns out that such
instruments had been stolen by another but ended up being received by the depositor
as part of its sales receipts. Postal money orders are not negotiable instruments, the
reason being that in establishing and operating a postal money order system, the
government is not engaged in commercial transactions but merely exercises a
governmental power for the public benefit. Moreover, some of the restrictions imposed
upon money orders by postal laws and regulations are inconsistent with the character of
negotiable instruments. For instance, such laws and regulations usually provide for not
more than one endorsement and payment may be withheld under a variety of
circumstances. Not being negotiable instruments, the restriction which the Director of
Posts imposed that in cases of adverse claims on the money orders, the corresponding
amount will have to be refunded to the Post Master is valid against the bank in which the
warrants were deposited. Philippine Education Co., Inc.,vs. Soriano, 39 SCRA 587 (1971)

Thus, when the defendant obtained a credit accommodation from a bank to facilitate
the payment of printing costs and the cost of printing is collected by drawing a draft
against the bank but which draft is later on sent to the defendant for acceptance, the
signature of the defendant on the draft, without any additional words, is tantamount to
acceptance. Defendant’s argument that the drafts signed by him were not really bills of
exchange but mere pieces of evidence of indebtedness because payments had been
made by the bank before the defendant’s acceptance is erroneous. A commercial paper
which conforms with the definition of a bill exchange is a bill of exchange. The nature of
the acceptance is important only in the determination of liability of the parties but not
do determine whether a commercial paper is a bill of exchange or not. Philippine Bank
of Commerce vs. Aruego, 102 SCRA 530 (1981)

A check which reads “Pay to the EQUITABLE BANKING CORPORATION Order of A/C OF
CASVILLE ENTERPRISES, INC.” is not negotiable because the payee ceased to be
indicated with reasonable certainty in contravention of Section 8 of the Negotiable
Instruments Law. As worded, it could be accepted as deposit to the account of the party
named after the symbols "A/C," or payable to the Bank as trustee, or as an agent, for
Casville Enterprises, Inc., with the latter being the ultimate beneficiary. Equitable
Banking Corporation vs. the Honorable Intermediate Appellate Court and The Edward J.
Nell Co., G.R. No. 74451 May 25, 1988)

Without the words "or order or "to the order of", the instrument is payable only to the
person designated therein and is therefore non-negotiable. Any subsequent purchaser
thereof will not enjoy the advantages of being a holder of a negotiable instrument, but
will merely "step into the shoes" of the person designated in the instrument and will thus
be open to all defenses available against the latter. Juanita Salas vs. Hon. Court of
Appeals and First Finance & Leasing Corporation, G.R. No. 76788 January 22, 1990)

Treasury warrants which are stamped on their face “non-negotiable “and / or are
payable from a particular fund, to wit, Fund 501, are non-negotiable. The indication of
Fund 501 as the source of payment to be made on the treasury warrant makes the order
or promise under the NIL do not apply. Not being negotiable instruments, then the
warranties of a general endorser could not be enforced against the person who
deposited the warrants with the collecting bank when such depositor did not have any
knowledge that that the warrants had been issued without government authority.
Metropolitan Bank & Trust Company vs. Court Of Appeals, Golden Savings & Loan
Association, Inc., Lucia Castillo, Magno Castillo and Gloria Castillo, G.R. No. 88866
February 18, 1991)

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

The language of negotiability which characterizes a negotiable paper as a credit

instrument is its freedom to circulate as a substitute for money. The freedom of
negotiability is the touchstone relating to the protection of holders in due course and is
the foundation for the protection which the law thrown around a holder in due course.
This freedom in negotiability is totally absent in a certificate of indebtedness which
merely acknowledges to pay a sum of money to a specified persons or entity. Since a
certificate of indebtedness which is not payable to order or bearer but is payable to a
specific person is not negotiable, the assignee takes it subject to the defect in the title of
the assignor. Thus, when the person who signed the deed of assignment was not
authorized by the board of directors, the assignor had no title to convey to the assignee.
Traders Royal Bank vs. Court of Appeals, Filriters Guaranty Assurance Corporation and
Central Bank of the Philippines, G.R. No. 93397, March 3, 1997

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

Under the Negotiable Instruments Law, a check made payable to cash is payable to the
bearer and could be negotiated by mere delivery without the need of an indorsement.
However, the drawer of the post-dated check cannot be liable for estafa to the person
who did not acquire the instrument directly from drawer but through negotiation of
another by mere delivery. This is because the drawer did not use the check to defraud
 the holder/private complainant. People of the Philippines vs. Gilbert Reyes Wagas, G.R.
No. 157943, September 4, 2013

2. Kinds of Negotiable Instruments

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

Withdrawal slips are non-negotiable instruments. Hence, the rules governing the giving
of immediate notice of dishonor of negotiable instruments do not apply in this case. The
essence of negotiability which characterizes a negotiable paper as a credit instrument
lies in its freedom to circulate freely as a substitute for money. The withdrawal slips in
question lacked this character. In a case where a client maintained a special saving
account with his drawee bank, was allowed to withdraw funds there from through the
medium of special withdrawal slips and used the withdrawal slips in payment of certain
purchases, as if they were checks, and the creditor deposited these withdrawal slips to its
bank which in turn would send them for collection to the drawee bank, the fact that
other withdrawal slips were honored and paid by the drawee bank was no license for the
collecting bank to presume that subsequent withdrawal slips would honored and paid
immediately. And the drawee bank was under no obligation to give immediate notice
that it would make payment on the subject withdrawal slips. Firestone Tire & Rubber
Company of the Philippines vs. Court of Appeals and Luzon Development Bank, G.R. No.
113236, March 5, 2001)

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

A certificate of deposit is defined as a written acknowledgement by a bank of the receipt

of a sum of money on deposit which the bank promise to pay to the depositor or the
order of the depositor or to some other person or his order whereby the relation of
debtor and creditor between the bank and the depositor is created. A document to be
considered a certificate of deposit need not be in a specific form. Thus, a passbook of an
interest-earning deposit account issued by a bank is a certificate of deposit drawing
interest because it is considered a written acknowledgment by a bank that it has
accepted a deposit of a sum of money from a depositor. Thus, it is subject to
documentary stamp tax. Prudential Bank vs. Commissioner of Internal Revenue (CIR) G.R.
No. 180390, July 27, 2011
B. Completion and Delivery

The payee of a negotiable instrument acquires no interest with respect thereto until its
delivery to him. Thus, if a debtor, who drew two checks in payment of his obligation, never
delivered the checks to his creditor and a third party was able to collect the proceeds
thereof by forging the endorsement of the creditor as payee, the payee/creditor has no
cause of action against anyone on the basis of the checks. Since the checks were never
delivered, then the obligation of the drawer to the creditor subsists. Development Bank of
Rizal vs. Sim Wei, 219 SCRA 736 (1993)

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

1. Insertion of Date

2. Completion of Blanks

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

3. Incomplete and Undelivered Instruments

4. Complete but Undelivered Instruments

Where the checks issued in payment of the salary of an assistant city fiscal have not been
delivered to him, they cannot be garnished because the funds do not belong to him and
still have the character of public funds. Until its physical delivery, the check does not
belong to the government employee consistent with Section 16 of the NIL that every
contract on a negotiable instrument is incomplete until its delivery for the purpose of
giving effect to it. Thus, the City Fiscal, on whom the notice of garnishment meant for his
Assistant City Fiscals was served, could not be held liable for contempt for non-delivery
of the salary of the Assistant Fiscal to the judgment creditor. Loreto D. de la Victoria, as
City Fiscal of Mandaue City and in his personal capacity as garnishee vs. Hon. Jose P.
Burgos, Presiding Judge, RTC, Br. XVII, Cebu City, and Raul H. Sesbreño, G.R. No.
111190, June 27, 1995

If the post-dated check was given to the payee in payment of an obligation, the purpose
of giving effect to the instrument is evident, thus title or ownership the check was
transferred to the payee. However, if the PDC was not given as payment, then there was
no intent to give effect to the instrument and ownership was not transferred. The
 evidence proves that the check was accepted, not as payment, but in accordance with
the policy of the payee to cover the transaction (purchase of beer products) and in the
meantime the drawer was to pay for the transaction by some other means other than the
check. This being so, title to the check did not transfer to the payee; it remained with
the drawer. The second element of the felony of theft was therefore not
established. Hence, there is no probable cause for theft.- San Miguel Corporation vs.
Puzon, Jr. G.R. No. 167567, 22 September 2010

The fact that a person, other than the named payee of the crossed check, was presenting
it for deposit should have put the bank on guard. It should have verified if the payee
authorized the holder to present the same in its behalf or indorsed it to him. The bank’s
reliance on the holder’s assurance that he had good title to the three checks constitutes
gross negligence even though the holder was related to the majority stockholder of the
payee. While the check was not delivered to the payee, the suit may still prosper
because the payee did not assert a right based on the undelivered check but on quasi-
delict. Equitable Banking Corporation vs. Special Steel Products, June 13, 2012

C. Signature

1. Signing in Trade Name

2. Signature of Agent

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

3. Indorsement by Minor or Corporation

4. Forgery

A drawee bank which paid a check on which the signature of the drawer had been
forged cannot recover the payment from the collecting bank, because payment implies
acceptance and admission of the genuineness of the signature of the drawer. The
question of whether or not the endorsements have been falsified is immaterial to the
liability of the drawee for as against the drawee, the endorsement of the collecting bank
does not guarantee the signature of the drawer, since the forgery of the endorsement
was not the cause of the loss. And even assuming that the collecting bank had been
guilty of negligence in not discovering that the checks was forged, the drawee bank had
been guilty of greater negligence when it had a previous and formal notice from the
drawer that the check had been lost. Philippine National Bank vs. Court of Appeals, 25
SCRA 693 (1968)

Pursuant to its duly to ascertain the genuineness of the signature of the drawer or
depositor on the check being encashed, a bank is expected to use reasonable business
prudence in accepting and cashing a check presented to it. When a check was stolen by
a classmate and friend of the drawer who thereafter forged the latter’s signature, the
drawee bank should return the amount debited from the account of the drawer, because
the drawee was guilty of negligence in paying the check despite the forged signature
and the drawer, under the circumstance, could not be considered negligent. Philippine
National Bank vs. Quimpo, 158 SCRA 582 (1988)

Where the checks were deposited to a bank account despite the forgery of the
endorsement of the payee and the collecting bank allowed withdrawals after the checks
had been cleared, the collecting bank is not liable on the forged check where the payee
is not its depositor and where the payee was guilty of negligence by allowing a condition
in which its employees could appropriate the checks and falsify the endorsement. The
collecting bank could not be guilty of negligence because it had no way of ascertaining
the authenticity of the endorsements in the checks and because it caused the checks to
pass through the clearing house before allowing withdrawal of the proceeds thereof.
Manila Lighter Transportation, Inc., vs. Court of Appeals, 182 SCRA 251 (1990)

When the drawee bank fails to return a forged or altered check to the collecting bank
within 24-hour clearing period, the collecting bank is absolved from liability. It is true
that when an endorsement is forged, the collecting bank or last endorser, as a general
rule, bears the loss. But the unqualified endorsement of the collecting bank on the
checks should be read with the 24 hour regulation on clearing house operation. Republic
Bank vs. Court of Appeals, 196 SCRA 100 (1991)

When a bank accepted a crossed check payable to a person other than the depositor
and stamped thereon its guarantee “all prior endorsement and/or lack of endorsements
guaranteed”, the bank had for all legal intents and purposes treated the said check as a
negotiable instrument and, accordingly assumed the warranty of an endorser. Thus,
when a crossed check payable to a person other than the depositor who was not
authorized by the payee to endorse it was paid notwithstanding that the title had not
passed to the endorser, the bank did so at its peril and became liable to the payee for
the value of the check. Out of convenience, the payee may disregard the circuitous
route in determining the chain of liability and proceed directly against the collecting
bank. Associated Bank vs. Court of Appeals 208 SCRA 465 (1992)

A bank which allowed the pre-termination of a money market placement without

making verification with the client and comparing the signature in the letter pre-
terminating the money market placement with the specimen signature of the client on
file and without requiring the surrender of the promissory note evidencing the money
market placement is considered negligent, more so in this case, where the instruction
was made by a swindler who impersonated the client with a money market placement in
a bank. The bank to whom the swindler deposited the cashier’s check representing the
proceeds of the money market placement was also negligent when it approved the
opening of the account with only a tax account number as means of identification. The
drawee bank, however, whose negligence is greater and the proximate cause of the loss
should bear sixty per cent of the loss while the collecting bank should bear forty per cent
thereof. Bank of the Philippine Island vs. Court of Appeals, 216 SCRA 51 (1992)

The possession of a check on a forged or unauthorized indorsement is wrongful, and

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

Generally, a forged signature is wholly inoperative and payment made through or under
such signature is ineffective or does not discharge the instrument, except when the party
relying on the forgery is precluded from setting up the forgery or want of authority.
Where over a period of two years a depositor signed checks prepared by her book
keeper without ascertaining the correctness of their amounts, did not examine and
reconcile the bank statements and cancelled checks, failed to set- up an accounting
procedures to monitor check issuance and discovered later on that the signatures of the
payees were forgeries, and the drawee, on the other hand , violated its internal policies
against acceptance of second endorsed checks, the loss occasioned or caused by such
negligence should be divided equally between the depositor and the drawee bank.
Gempesaw vs. Court of Appeals, 218 SCRA 682 (1993)

While a drawee bank which paid several checks payable to order with forged
endorsements can recover the payment from the collecting bank because the forged
endorsement is inoperative, the drawer must share one-half of the loss when it
substantially contributed to the loss by continuing to release the check to the forger
although the drawer knew that he was no longer under the employ of the payee. The
drawee bank is also liable because it is under strict obligation to pay the check to the
order of the payee. If the drawee did not pay the holder or other person entitled to
receive payment, in effect it violated the instruction of the drawee. However, the latter
can recover from the collecting bank because in case of forgery of the payee’s
endorsement, the latter incurs liability because of its breach of warranty as an endorser.
Associated Bank vs. Court of Appeals, 252 SCRA 620 (1996)

A drawer who discovered the loss its checkbook and did not notify the bank of the loss
should bear the loss caused by the subsequent payment of the checks in which the
signature of the drawer had been forged. Security Bank and Trust Corporation vs. Triump
Lumber and Construction Corporation, 301 SCRA 537 (1999)

The drawer, which issued crossed checks to the Commissioner of Internal Revenue (CIR)
in payment for its taxes but which payment was not received by the CIR because the
checks were switched with worthless checks en route to clearing and, as a consequence,
had to pay the CIR anew, could recover the amount deducted from its account from the
drawee for the loss because it failed to ensure that the amount of the checks is paid only
to the designated payee while the collecting bank should share one-half of the loss
because its branch manager conspired in the fraud. Philippine Commercial International
Bank vs. Court of Appeals, 350 SCRA 446 (2001)

Since what is at issue is whether the depositor issued the questioned checks the essential
comparison should be between the signatures appearing on the checks and the
specimen signature appearing on the depositor’s card. Such is the normal process
followed in verifying signatures for purpose of bank withdrawals. Considering that the
depositor’s card was not presented in evidence, resort may thus be made to other
documents as would bear his authentic signature. The record is replete with documents
such as residence certificate, passport, and application forms for the current account.
However, there is no significant disparity between the signatures on the checks and
those on the abovesaid documents. Forgery, as any other mechanism of fraud, must be
proven clearly and convincingly, and the burden of proof lies on the party alleging
forgery. Chiang Yia Min vs. CA, 355 SCRA 608 (2001)

The drawer is precluded from setting up the forgery due to his own negligence when he
accorded his secretary unusual degree of trust and unrestricted access to his credit card,
passbooks, check books, bank statement including custody and possession of cancelled
checks and reconciliation of accounts, when the drawer had introduced his secretary to
the bank for purposes of reconciliation of his account, the said secretary became a
familiar figure in the bank and whenever the bank verifiers call the office of the drawer,
it is the same secretary who answers and confirms the checks. Its verifiers first verified
the drawer’s signatures thereon as against his specimen signature cards, and when in
doubt, the verifier went further, such as by referring to a more experienced verifier for
further verification. In some instances, the verifier made a confirmation by calling the
depositor by phone. It is only after taking such precautionary measures that the subject
checks were given to the teller for payment. Of course it is possible that the verifiers
might have made a mistake in failing to detect the forgery ---if indeed there was.
However, a mistake is not negligence if it was an honest mistake. Ilusorio vs. Court of
Appeals, 393 SCRA 89 (2002)

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

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

A forged signature is a real or absolute defense, and a person whose signature on a

negotiable instrument is forged is deemed to have never become a party thereto and to
have never consented to the contract that allegedly gave rise to it. The counterfeiting of
any writing, consisting in the signing of another’s name with intent to defraud, is forgery.
Bank of the Philippine Islands vs. Casa Montessori Internationale and Leonardo T. Yabut,
G.R. No. 149454, May 28, 2004

Even if the bank performed with utmost diligence, the drawer whose signature was
forged may still recover from the bank as long as he or she is not precluded from setting
up the defense of forgery. After all, Section 23 of the Negotiable Instruments Law plainly
states that no right to enforce the payment of a check can arise out of a forged
signature. Since the drawer is not precluded by negligence from setting up the forgery,
the general rule should apply. Samsung Construction Company Philippines, Inc., vs. Far
East Bank and Trust Company and Court Of Appeals, G.R. NO. 129015, August 13, 2004

As between a bank and its depositor, where the bank’s negligence is the proximate cause
of the loss and the depositor is guilty of contributory negligence, the greater proportion
of the loss shall be borne by the bank. The bank was negligent because it did not
properly verify the genuineness of the signatures in the applications for manager’s
checks while the depositor was negligent because it clothed its accountant/bookkeeper
with apparent authority to transact business with the Bank and it did not examine its
monthly statement of account and report the discrepancy to the Bank. the court
allocated the damages between the bank and the depositor on a 60-40 ratio.–Philippine
National Bank vs. FF Cruz and Company, G.R. No. 173259, July 25, 2011

While its manager forged the signature of the authorized signatories of clients in the
application for manager’s checks and forged the signatures of the payees thereof, the
drawee bank also failed to exercise the highest degree of diligence required of banks in
the case at bar. It allowed its manager to encash the Manager’s checks that were plainly
crossed checks. A crossed check is one where two parallel lines are drawn across its face
or across its corner. Based on jurisprudence, the crossing of a check has the following
effects: (a) the check may not be encashed but only deposited in the bank; (b) the check
may be negotiated only once — to the one who has an account with the bank; and (c)
the act of crossing the check serves as a warning to the holder that the check has been
issued for a definite purpose and he must inquire if he received the check pursuant to
this purpose; otherwise, he is not a holder in due course. In other words, the crossing of a
check is a warning that the check should be deposited only in the account of the payee.
When a check is crossed, it is the duty of the collecting bank to ascertain that the check
is only deposited to the payee’s account. Philippine Commercial International Bank vs.
Balmaceda, G.R. No. 158143, (2011)
D. Consideration

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

In actions based upon a negotiable instrument, it is unnecessary to aver or prove

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

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

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

Upon issuance of a negotiable check, in the absence of evidence to the contrary, it is

presumed that the same was issued for valuable consideration which may consist either in
some right, interest, profit or benefit accruing to the party who makes the contract, or some
forbearance, detriment, loss or some responsibility, to act, or labor, or service given,
suffered or undertaken by the other side. Under the Negotiable Instruments Law, it is
presumed that every party to an instrument acquires the same for a consideration or for
value. As petitioner alleged that there was no consideration for the issuance of the subject
checks, it devolved upon him to present convincing evidence to overthrow the presumption
and prove that the checks were in fact issued without valuable consideration. Petitioner,
however, has not presented any credible evidence to rebut the presumption, as well as
North Star’s assertion, that the checks were issued as payment for the US$85,000 petitioner
owed to the corporation and not to the manager who facilitate the fund transfer. - Cayanan
vs. North Star International Travel Inc.,G.R. No. 172954, October 5, 2011

E. Accommodation Party

Section 29 of the Negotiable Instruments Law by clear mandate makes the accomodation
party "liable on the instrument to a holder for value, notwithstanding that such holder at the
time of taking the instrument knew him to be only an accommodation party." It is not a valid
defense that the accommodation party did not receive any valuable consideration when he
executed the instrument. It is not correct to say that the holder for value is not a holder in
due course merely because at the time he acquired the instrument, he knew that the
indorser was only an accommodation party. Ang Tiong vs. Lorenzo Ting, doing business
under the name & style of Prunes Preserves MFG., & Felipe Ang, G.R. No. L-26767, February
22, 1968

To be entitled to recover from an accommodation party, the holder of a negotiable

instrument must be a holder in due course except for the notice of want of consideration. If
he does not quality as a holder in due course then he holds the instrument subject to the
defenses as if it were non-negotiable. A bank cannot be considered a holder in due course
when it dealt with an accommodation party knowing fully well that the latter signed the
promissory note and deed of assignment only because the said deed contains a provision
that the principal debtor would assign and convey to the bank all payments to be received
from the person who would pay the project to be undertaken by the principal debtor as
public works contractor. The approval by the bank of the direct release of payments by the
Bureau of Public Works to the project contractor which the bank should have retained and
applied to the contractor’s loan constitutes a waiver of said payments for which it cannot
charge the accommodation party which had no knowledge of nor approved such procedure.
Thus, an accommodation party can set up the defense of release from liability. The bank, in
effect, extended the term of payment of the note without the consent of the
accommodation makers who stand as sureties to the accommodated party and to all other
parties who are not holders in due course or who do not derive their right from the same.
Prudencio vs. Court of Appeals, 143 SCRA 7 (1986)

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

Where a corporate officer issued a check in behalf of the corporation to accommodate his
client who needed the check in consideration for a certain transaction and the check was
dishonored for lack of funds, the payee cannot hold the corporation liable. The rule that an
accommodation party is liable on the instrument to a holder for value does not apply to
corporations which are accommodation parties. This is because the issue or endorsement of
negotiable paper by a corporation without consideration and for the accommodation of
another is ultra vires. Hence, one who has taken the instrument with knowledge of the
accommodation nature thereof cannot recover against a corporation where it is only an
accommodation party. Since such accommodation paper cannot be enforced against the
corporation especially since it is not involved in any aspect of the corporate business or
operations, the corporate officers who executed the instruments should be held personally
liable. Crisologo Jose vs. Court of Appeals, 177 SCRA 594 (1989)

When a promissory note which is payable to GSIS is not payable to bearer or order, such
instrument is non-negotiable. As such, third party mortgagor who mortgaged his property to
secure the obligation of another is not liable as an accommodation party but liable under
Article 2085 of the Civil Code to the effect that third persons who are not parties to the
principal obligation may secure the latter by pledging or mortgaging their own property.
GSIS vs. Court of Appeals, G.R. No. L-40824, (1989)

A party who signed a promissory note as accommodation maker in favor of the payees, who
then indorsed it to a financing company, is liable to the financing company and cannot raise
the defense that he did not receive any value thereof, but he is entitled to reimbursement
from the party accommodated. The relationship of an accommodation party and the party
accommodated is in effect of one of principal and surety, such that after making payment
an accommodation party has the right to claim reimbursement from the party
accommodated. Caneda vs. Court of Appeals, 181 SCRA 762 (1990)

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

An accommodation party who acted as a co-maker of a promissory note issued in favor of a

bank cannot validly set up the defense that he did not receive any consideration therefor as
the fact that the loan was granted to the principal debtor already constitutes sufficient
consideration. The accommodation party is one who meets all the three requisites : 1) he
must be a party to the instrument, signing as maker, drawer, acceptor or indorser; 2) he must
not receive any value therefor; and 3) he must sign for the purpose of lending his name or
credit to some other person. The accommodation party is liable on the instrument to a
holder for value even though the holder, at the time of taking the instrument, knew him or
her to be merely an accommodation party, as if the contract was not for accommodation.
The relation between an accommodation party and the accommodated party is one of
principal and surety- the accommodation party being the surety. As an equivalent of a
regular party to the undertaking, a surety becomes liable to the debt and duty of the
principal obligor even without possessing a direct or personal interest in the obligation not
does he receive any benefit therefrom. XXX It is completely immaterial if the payee of the
promissory note would opt to proceed only against the accommodation party or the
accommodated party. Xxx Further, since the liability of an accommodation party remains
not only primary but also unconditional to a holder for value, even if the accommodated
party receives an extension of the period for payment without the consent of the
accommodation party, the latter is still liable for the whole obligation and such extension
does not release him because as far as a holder for value is concerned, he is a solidary
debtor. Xxx The insolvency of the accommodated party will not relieve the accommodation
party from his obligation to the payee of the note. He may obtain a security from the party
accommodated to protect himself from the danger of insolvency in the even that he is
eventually sued by the payee. But whether or not he obtains security can not affect his
liability to the payee as the said remedy is matter of concern exclusively between him and
the accommodated party. Ang vs. Associated Bank, 532 SCRA 244 (2007)

A person who signed a promissory note as a co-maker for the purpose of lending his name to
his co-maker but without receiving value on the note is an accommodation party. An
accommodation party who lends his name to enable the accommodated party to obtain
credit or raise money is liable on the instrument to a holder for value even if he receives no
part of the consideration. He assumes the obligation to the other party and binds himself to
 pay the note on its due date. By signing the note, Co thus became liable for the debt even if
he had no direct personal interest in the obligation or did not receive any benefit
therefrom.” Henry dela Rama vs. Admiral United Savings Bank, 551 SCRA 472 (2008)

While a maker who signed a promissory note for the benefit of his co-maker (who received
the loan proceeds) is considered an accommodation party, he is, nevertheless, entitled to a
written notice on the default and the outstanding obligation of the party accommodated.
There being no such written notice, the Bank is grossly negligent in terminating the credit
line of the accommodation party for the unpaid interest dues from the loans of the party
accommodated and in dishonoring a check drawn against such credit line. Gonzales vs.
Phillippine Commercial and International Bank, GR No. 180257, February 23, 2011

F. Negotiation

1. Distinguished from Assignment

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

2. Modes of Negotiation

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

Under the Negotiable Instruments Law, an instrument is negotiated when it is

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

3. Kinds of Indorsements

G. Rights of the Holder

1. Holder in Due Course

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

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

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

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

A drawer who issued two negotiable checks as security for pieces of jewelry to be sold
by the drawer on commission basis is liable to an endorsee to whom the payee
negotiated the checks even if the drawer returned the pieces of jewelry to the payee,
resulting in failure of consideration. Since the checks are negotiable instruments, the
holder thereof is presumed to be a holder in due course. As holder in due course, he
holds the instrument free from any defect of title of prior parties and from defenses
available to prior parties among themselves. Thus, the drawer of the check may not
invoke the defense of lack of consideration. The withdrawal of the money from the
drawee bank to avoid liability on the checks can not prejudice the rights of the holder
in due course. State Investment House, Inc., vs. Court of Appeals, 217 SCRA 32 (1993)

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

Where cashier’s checks were issued merely as financial assistance to the payee with
instruction that the checks were strictly endorsed for payee’s account only and not to
be further negotiated, the party in whose favor the checks were negotiated could not
qualify as a holder in due course. However, it does not follow as a legal proposition that
simply because the holder was not a holder in due course for having taken the checks
with notice that the same were for deposit only to the account of another that its was
altogether precluded from recovering on the instrument. The Negotiable Instruments
Law does not provide that a holder not in due course cannot recover on the instrument.
The disadvantage of the holder in not being a holder in due course is that the
instrument is subject to defense as if it were non-negotiable. One such defense is
absence or failure of consideration (the defense raised by the drawer since the checks
had no consideration and was issued merely as a form of financial assistance to the
 payee). Atrium Management Corporation vs. Court of Appeals, et al., G.R. No. 109491,
February 28, 2001

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

Arguing that Gutierrez is not a holder in due course, Patrimonio filed the instant
petition praying that the ruling of the CA, ordering him to pay Gutierrez, be reversed.
Ruling in favor of the Patrimonio the SC ruled that Section 52(c) of the NIL states that a
holder in due course is one who takes the instrument "in good faith and for value."
Acquisition in good faith means taking without knowledge or notice of equities of any
sort which could be set up against a prior holder of the instrument. It means that he
does not have any knowledge of fact which would render it dishonest for him to take a
negotiable paper. The absence of the defense, when the instrument was taken, is the
essential element of good faith. In this case, after having been found out that the blanks
were not filled up in accordance with the authority the Patrimonio gave, Gutierrez has
no right to enforce payment against Patrimonio, thus, the latter cannot be obliged to
pay the face value of the check. Alvin Patrimonio vs. Napoleon Guitierrez and Octavio
Marasigan, G.R. No. 187769, June 4, 2014

2. Defenses Against the Holder

H. Liabilities of Parties

1. Maker

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

2. Drawer

The drawer of the checks should pay their value to the bank who paid for them, in case
said checks were lost and thus were not debited by the drawee bank against the drawer’s
current account consistent with the doctrine of preventive unjust enrichment. Philippine
National Bank vs. Court of Appeals, 112 SCRA 553 (1982)

The acceptance of a check implies an undertaking of due diligence in presenting it for

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

When a foreign bill is dishonored by non-acceptance or non-payment, protest is

necessary to hold the drawer and endorsers liable. Failure to protest the non-
acceptance of the sight draft results in the discharge the instrument. However, liability
may subsist under a separate letter of undertaking. Liability under the letter of
undertaking is direct and primary. It is independent from the liability under the sight
draft. There is no need to prove that the provisions of the letter of credit were violated
in order to be held liable under the letter of undertaking. Velasquez v. Solidbank
Corporation, 550 SCRA 119 (2008)

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

3. Acceptor

Lapse of three months after collecting bank obtained proceeds of the checks that were
forged is not material where collecting bank acted promptly upon being informed of
forgery. Moreover, the depositor of a check as endorser warrants that it is genuine and in
all respects what it purports to be. Thus, when the checks deposited had forged
endorsements and the collecting bank, as a consequence of such forgery, was made to
pay the drawee bank, the collecting bank can debit the account of the depositor for his
breach of warranty. Jai-Alai Corporation Philippines vs. BPI, 66 SCRA 29 (1975)

Payment of checks by a foreign bank to a collecting bank without previously clearing

said checks with the drawee bank is contrary to normal or ordinary banking practice,
more so if the collecting bank had been told by the depositor not to present the check
for payment until a later date although the check was already due. Thus, the collecting
bank cannot recover from the drawer in case the check is dishonored. Banco Atlantico
vs. Auditor General, 81 SCRA 335 (1978)

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

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

Where a check is drawn payable to the order of one person (BIR) but is presented for
payment by another and purports upon its face to have been duly indorsed by the payee
of the check, it is the primary duty of the bank to know that the check was duly indorsed
by the original payee and, where it pays the amount of the check to a third person who
has forged the signature of the payee, the loss falls on such bank who cashed the checks.
Also, since one of the checks was crossed, the drawee bank was duty-bound to ascertain
the indorser’s title to the check or the nature of his possession. By encashing in favor of
unknown persons checks which were on their face payable to the BIR, a government
agency which can only act through its agents, the bank did so at its own peril and must
suffer the consequences of the unauthorized or wrongful endorsement. While it is true
that a colleting bank which indorses a check bearing a forged indorsement and presents
it to the drawee bank guarantees all prior indorsement, including the forged
indorsement itself and ultimately should be liable therefore, the drawee bank cannot
benefit from this rule if there is no proof that the checks were ever presented to and
accepted by the bank impleaded in the case. Traders Royal Bank vs. Radio Philippines
Network, 390 SCRA 608 (2002)

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

It is undisputed that the subject check was adequately funded, but that the drawee-bank
wrongfully dishonored it. The fact that another check the drawer had issued was
previously dishonored does not necessarily imply that the dishonor of a succeeding
check can no longer cause moral injury and personal hurt for which the aggrieved party
may claim moral damages. Such prior occurrence does not prove that drawer does not
have a good reputation that can be besmirched. Solidbank Corp., vs. Arrieta, 451 SCRA
711 (2005)

If a bank refuses to pay a check (notwithstanding sufficiency of funds), the payee holder
cannot sue the drawee bank- the payee should instead sue the drawer who might in turn
sue the drawee bank. Under Section 189 of the Negotiable Instruments law, a check by
itself does not operate as an assignment of any part of the funds to the credit of the
drawer with the bank, and the bank is not liable to the holder, unless and until it accepts
or certifies the check. Section 189 is sound law based on logic and established legal
principles: no privity of contract exists between the drawee –bank and the payee.
Villanueva vs. Nite 496 SCRA 459 (2006)

If instruments payable to named payees or to their order have not been indorsed in
blank, only such payees or their indorsees can be holders and entitled to receive
payment in their own right. The presumption that a negotiable instrument was given for
 a sufficient consideration will not inure to the benefit of someone who is merely the
transferee of the physical possession of the instrument. Thus, the collecting bank has the
right to deduct from such transferee’s account the amount it had previously paid upon
certain unendorsed order instruments deposited by the latter to his account after the
bank has discovered the erroneous payment to such transferee. BPI vs. Court of Appeals
512 SCRA 620 (2007)

When the drawee bank pays a person other than the payee named on the check despite
the latter’s lack of endorsement, it does not comply with the terms of the check and
violates its duty to charge the drawer’s account only for properly payable items and shall
be liable for the amount charged to the drawer. However, the drawee bank may recover
from the collecting bank. A collecting bank where a check is deposited, and which
endorses the check upon presentment with the drawee bank, is an endorser. Under
Section 66 of the Negotiable Instruments Law, an endorser warrants "that the instrument
is genuine and in all respects what it purports to be; that he has good title to it; that all
prior parties had capacity to contract; and that the instrument is at the time of his
endorsement valid and subsisting". In check transactions, the collecting bank or last
endorser generally suffers the loss because it has the duty to ascertain the genuineness
of all prior endorsements considering that the act of presenting the check for payment
to the drawee is an assertion that the party making the presentment has done its duty to
ascertain the genuineness of the endorsements. When the collecting bank stamped the
back of the check with the phrase “ all prior and/or lack of endorsements guaranteed “,
that bank had for all intents and purposes treated the check as a negotiable instrument
and accordingly assumed the warranty of an endorser. The collecting bank, on the other
hand, can obtain reimbursement from the person who deposited the check and received
the proceeds thereof, in line with the principle that no one should unjustly enrich himself
at the expense of another. Bank of America, NT and SA vs. Associated Citizens bank 588
SCRA 51 (2009). Please see also PNB vs. Rodriguez 566 SCRA 513 (2008), supra.

4. Indorser

The general endorser of a check engages that if it be dishonored and the necessary
proceeding for dishonor duly be taken, he will pay the amount thereof to the holder.
However, a notice of dishonor is necessary in order to change an endorser and the right
of action against him does not accrue until the notice is given. Gullas vs. PNB, 62 PHIL
519

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

Where a person paid for certain merchandise with checks issued by the drawer and such
person signed at the back of the checks without any indication as to how she should be
bound thereby, she is deemed to be an endorser thereof and as such, is liable to pay the
instruments to the payee if the checks were dishonored for lack of funds. Sapiera vs.
Court of Appeals, 314 SCRA 370 (1999)
The Negotiable Instruments Law provides that where any person is under obligation to
indorse in a representative capacity, he may indorse in such terms as to negative
personal liability. Thus, a party who forged the signature of the president of a
corporation on a check payable to the corporation cannot raise the defense when she
was sued by the corporation that she was authorized to sign the name of the
corporation, since she did not sign her own name and failed to indicate that she was
signing as agent of the corporation. Francisco vs. Court of Appeals, 319 SCRA 354
(1999)

A corporation, which endorsed checks on a “with recourse” basis to secure a loan

obtained from a financing company, is liable in case the checks are dishonored despite
the absence of notice of dishonor to the endorser. The “with recourse “ stipulation
enlarges the liability of the endorser beyond that of a mere endorser under the
Negotiable Instruments Law. The holder has the option to enforce it, under the
Negotiable Instruments law or for breach of contract under the Civil Code of the
Philippines. Great Asian Sales Corporation vs. Court of Appeals, 381 SCRA 557 (2002)

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

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

Where the beneficiary of the letter of credit negotiated the draft payable to its order in
favor of a bank which required the execution by certain corporate officers of the
beneficiary of a surety agreement in favor of the negotiating bank, the dishonor of the
draft makes the surety liable despite the lack of notice of dishonor or protest to the
surety. The liability of a guarantor or surety is broader than that of an endorser. Unless
the bill is promptly presented for payment at maturity and due notice of dishonor given
to the endorser within a reasonable period, he will be discharged from liability thereon.
On the other hand, except where required by the provisions of the contract of
suretyship, demand or notice of default is not required to fix the surety’s liability. Allied
Banking Corporation vs. Court of Appeals 494 SCRA 467 (2006)

A bank which paid the monetary value of a foreign check as a special accommodation to
its employee on the basis of the latter’s endorsement, as well as that of her mother who
is the payee thereof, is considered an irregular endorser if one of its officers who
approved the bills purchase indicated at the back of the check “up to a certain amount
only “. Where the drawee bank refused to honor the check because of the irregular
endorsement, the collecting bank cannot pass the liability to its employee and her
mother despite their endorsement. A subsequent party which caused the defect in the
instrument cannot have any recourse against any of the prior endorsers in good faith.
Section 66 of the Negotiable Instruments Law which states that the general endorser
additionally engages that, on due presentment, the instrument shall be accepted or
paid, or both, as the case may be, according to its tenor, and that if it be dishonored and
the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to
the holder, or to any subsequent endorser who may be compelled to pay it, must be read
 in the light of the rule in equity requiring that those who come to court should come
with clean hands. The holder or subsequent endorser who tries to claim under the
instrument which had been dishonored for “irregular endorsement” must not be the
irregular endorser himself who gave cause for the dishonor. Otherwise, a clear injustice
results when any subsequent party to the instrument may simply make the instrument
defective and later claim from prior endorsers who have no knowledge or participation
in causing or introducing said defect to the instrument, which thereby caused its
dishonor. Gonzales vs. Rizal Commercial Banking Corporation 508 SCRA 459 (2006)

The collecting bank which accepted a post-dated check for deposit and sent it for
clearing and the drawee bank which cleared and honored the check are both liable to
the drawer for the entire face value of the check. Allied Banking Corporation vs. Bank of
the Philippine Islands, GR. 188363, February 27, 2013

5. Warranties

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

I. Presentment for Payment

Where instrument is payable on demand, presentment must be made within a reasonable

time after issue. Reasonable time depends upon the peculiar facts and circumstance of each
case. Where a check is presented for payment three and a half years after the date of its
maturity, the presentment is considered beyond a reasonable time and the endorser should
be deemed discharged. Far East Realty Investment, Inc.,vs. Court of Appeals, 166 SCRA 256
(1988)

The promissor cannot question the failure of the payee to exhibit to him the promissory note
when he has made an express waiver of demand, presentment, protest and notice of non-
payment of the note. Ansaldo vs. Court of Appeals, 177 SCRA 594 (1989)

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

A bank which pays a certificate of deposit payable to bearer without requiring the surrender
of the certificate of deposit remains liable to the holder. Far East Bank vs. Querimit, 373
SCRA 665 (2002)
 1. Necessity of Presentment for Payment

Presentment for acceptance is not required for sight drafts. Presentment for acceptance
is required if the draft is payable after sight or in any other case, when presentment for
acceptance is necessary to fix the maturity of the instrument or when the bill expressly so
stipulates or and when the bill is drawn payable elsewhere than at the residence or place
of business of the drawee. Prudential Bank vs. Court of Appeals, 216 SCRA 257 (1992)

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

While delivery of a check produces the effect of payment only when it is encashed, the
rule is otherwise if the debtor was prejudiced by the creditor’s unreasonable delay in
presentment. Acceptance of a check implies an undertaking of due diligence in
presenting it for payment. If no such presentment was made, the drawer cannot be held
liable irrespective of loss or injury sustained by the payee. Payment will be deemed
effected and the obligation for which the check was given as conditional payment will
be discharged. Thus, when a party issued a check in payment of the purchase price of a
property pursuant to a compromise agreement duly approved by the court, the owner
and another person who are parties to the compromise agreement could not disregard
and set aside the sale three years after the compromise agreement. The fact that the
check tendered in payment of the property was never encashed could not be invoked
against the payor. Pio Barretto Realty Development Corporation vs. Court of Appeals,
360 SCRA 127 (2001)

2. Parties to Whom Presentment for Payment Should Be Made

The effects of crossing a check relate to the mode of its presentment for payment. Under
Section 72 of the Negotiable Instruments Law, presentment for payment to be sufficient
must be made by the holder or by some person authorized to receive payment on his
behalf. Who the holder or authorized person is depends on the face of the check.
Associated Bank vs. Court of Appeals, 208 SCRA 465 (1992)

3. Dispensation with Presentment for Payment

4. Dishonor by Non-Payment

J. Notice of Dishonor

For a check to be dishonored upon presentation, on the one hand, and to be stale for not
being presented at all in time on the other hand, are incompatible developments that
naturally have variant legal consequences. Crytal vs. Court of Appeals, 71 SCRA 443 (1976)
Where a check issued by a depositor was dishonored for being drawn against an uncollected
deposit because the bank failed to send for clearing the check deposit to fund that check,
even though the check was deposited before cutoff clearing time, the bank is liable of
damage. BPI vs. IAC, 219 SCRA 644 (1993)

A bank which dishonored checks issued by a depositor for insufficiency of funds cannot be
held liable for damages even if the depositor had sufficient funds in her savings accounts to
cover the checks drawn against the current account maintained with the same bank where
there was no evidence that the depositor had an arrangement with bank for the automatic
transfer of funds. Alunan vs. Traders Royal Bank, 230 SCRA 225 (1994)

A bank which dishonored a check issued by a depositor because at the time the checks were
processed for clearing the depositor had no sufficient funds in the account after the
processing of the checks is not liable for damages. A check, as distinguished from an
ordinary bill of exchange, is supposed to be drawn against a previous deposit of funds for it
is ordinarily intended for immediate payment. The depositor must personally keep track of
his available balance in the bank and not rely on the bank to notify him of the necessity to
fund certain checks he previously issued. A bank is under no obligation to make part
payment on a check, up to the amount of the drawer’s funds. Moran vs. Court of Appeals,
230 SCRA 799 (1994)

A bank which erroneously dishonored for insufficiency of funds checks drawn by a depositor
is liable for damages to the depositor. Metrobank vs. Court of Appeals, 237 SCRA 76 (1994)

Where two checks issued by a depositor were dishonored for lack of funds because he
erroneously filled up a deposit slip for local checks for a regional check he previously
deposited and, as result, the drawee bank erroneously presented the check for clearing at
the Central Bank and the regional check was dishonored, the drawee bank is guilty of
negligence and liable for damages to the depositor. A bank cannot exculpate itself from
liability for the consequence of the use of wrong deposit slip resulting in the misrouting of a
regional check to the Central Bank. The teller should not have accepted the local deposit
slip with the cashier’s check that on its face was clearly a regional check without calling the
depositor’s attention for the mistake at the very moment it was presented to her. The bank is
not expected to be infallible, but it must bear the blame for not discovering the mistake of
its teller despite the established procedure requiring the papers and bank books to pass
through a battery of bank personnel whose duty it is to check and countercheck them for
possible errors. Tan vs. Court of Appeals, 239 SCRA 311 (1994)

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

1. Parties to Be Notified
 Notice of dishonor to the corporation, which has a personality distinct and separate from
the officer of the corporation, does not constitute notice to the latter. The absence of
notice of dishonor necessarily deprives an accused an opportunity to preclude a criminal
prosecution. Lao vs. Court of Appeals, G.R. No. 119178, June 20, 1997

If the drawer or maker is an officer of a corporation, the notice of dishonor to the said
corporation is not notice to the employee or officer who drew or issued the check for
and in its behalf. Ofelia Marigomen vs. People of the Philippines, G.R. No. 153451, May
26, 2005

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

2. Parties Who May Give Notice and Dishonor

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

3. Effect of Notice

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

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

4. Form of Notice

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

5. Waiver

6. Dispensation with Notice

Notice of dishonor is not required if the drawer has no right to expect or require the
bank to honor the check or if the drawer has countermanded payment. In the instant
case, all the checks were dishonored for any of the following reasons. “account closed”,
“account under garnishment”, “insufficiency of funds”, or “payment stopped”. In the first
three instances, the drawer had no right to except or require the bank to honor the
checks and in the last instance, the drawer had countermanded payment. Great Asian
Sales Corporation vs. Court of Appeals, 381 SCRA 557 (2002)

7. Effect of Failure to Give Notice

The holder of two checks which were dishonored because the drawer withdrew her
funds from the bank can hold the drawer liable even if no notice of dishonor was given
to the drawer, since the drawer had no right to expect that the drawee bank would
honor the checks. State Investment House, Inc.,vs. Court of Appeals, 217 SCRA 32 (1993)

The absence of a notice of dishonor necessarily deprives an accused an opportunity to

preclude a criminal prosecution. Lao vs. Court of Appeals, 274 SCRA 572 (1997)

K. Discharge of Negotiable Instrument

1. Discharge of Negotiable Instrument

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

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

While Section 119 of the Negotiable Instrument Law in relation to Article 1231 of the
Civil Code provides that one of the modes of discharging a negotiable instrument is by
any other act which will discharge a simple contract for the payment of money, such as
novation, the acceptance by the holder of another check which replaced the dishonored
bank check did not result to novation. There are only two ways which indicate the
presence of novation and thereby produce the effect of extinguishing an obligation by
another which substitutes the same. First, novation must be explicitly stated and
declared in unequivocal terms as novation is never presumed. Secondly, the old and the
new obligations must be incompatible on every point. In the instant case, there was no
express agreement that the holder’s acceptance of the replacement check will discharge
the drawer and endorser from liability. Neither is there incompatibility because both
checks were given precisely to terminate a single obligation arising from the same
transaction. Anamer Salazar vs. JY Brothers Marketing Corporation, GR no. 171998,
October 20, 2010

2. Discharge of Parties Secondarily Liable

3. Right of Party Who Discharged Instrument

4. Renunciation by Holder

L. Material Alteration

1. Concept

An alteration is said to be material if it alters the effect of the instrument. It means an

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

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

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

2. Effect of Material Alteration

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

Payment made under a materially altered instrument is not payment done in accordance
with the instructions of the drawer. Where the drawee bank pays a materially altered
check, ( as when the amount was increased from P 1,000 to P 91,000 ), it violates the
terms of the check., as well as its duty to charge its client’s account only for bona fide
disbursements he had made. Since the drawee bank did not pay according to the tenor
of the instrument, then it has no right to claim reimbursement from the drawer much less
the right to deduct the erroneous payment it made from the drawer’s account. The
drawee bank can not rely on the endorsement of the collecting bank to negate liability.
The corollary liability of such indorsement, if any, is separate and independent from the
liability of the drawee bank to the drawer. Such reliance is also offensive to the dictum
that being impressed with public interest, banks should exercise the highest degree of
diligence and should therefore lightly rely on the judgment of other banks on occasions
where its clients money were involved. Metropolitan Bank and Trust Company vs.
Cabilzo 510 SCRA 259 (2006)

When the drawee bank pays a materially altered check, it violates the terms of the
check, as well as its duty to charge its client’s account only for bona fide disbursements
he had made. If the drawee did not pay according to the original tenor of the
instrument, as directed by the drawer, then it has no right to claim reimbursement from
the drawer, much less, the right to deduct the erroneous payment it made from the
drawer’s account which it was expected to treat with utmost fidelity. The drawee,
however, still has recourse to recover its loss. The collecting banks are ultimately liable
for the amount of the materially altered check. It cannot further pass the liability back to
Cesar and Lolita absent any showing in the negligence on the part of Cesar and Lolita
which substantially contributed to the loss from alteration. Cesar V. Areza and Lolita B.
Areza vs. Express Savings Bank, Inc., and Michael Potenciano, G.R. No. 176697,
September 10, 2014

M. Acceptance

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

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

2. Manner

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

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

3. Time for Acceptance

4. Rules Governing Acceptance

N. Presentment for Acceptance

1. Time/Place/Manner of Presentment

Presentment for acceptance is defined as the production of a bill of exchange to a

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

2. Effect of Failure to Make Presentment

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

3. Dishonor by Non-Acceptance

O. Promissory Notes

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

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

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

The drawer of a check who had a balance of P1,144,760.00 in his account could not be
convicted of estafa because of the dishonor of his check for lack of funds where the
check indicated the amount of P1,000,200.00 in words and the amount of P1,200,000.00
in figure, since under Section 17 of the Negotiable Instruments Law, in case of ambiguity
between the sum denoted in words and in figures, the amount in words should in words
should prevail. However, this rule of interpretation could not be favorable to the
accused who engaged in ponzi scheme and represented to an investor that an
investment of 150,000 would become P 1,200,000 in 21 days. People of the Philippines
vs. Martin L. Romero and Ernesto C. Rodriguez, G.R. No. 112985, April 21, 1999

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

P. Checks

1. Definition

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

2. Kinds

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

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

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

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

Payment in check by the debtor may be acceptable as valid, if no prompt objection to

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

While its manager forged the signature of the authorized signatories of clients in the
application for manager’s checks and forged the signatures of the payees thereof, the
 drawee bank also failed to exercise the highest degree of diligence required of banks in
the case at bar. It allowed its manager to encash the Manager’s checks that were plainly
crossed checks. A crossed check is one where two parallel lines are drawn across its face
or across its corner. Based on jurisprudence, the crossing of a check has the following
effects: (a) the check may not be encashed but only deposited in the bank; (b) the check
may be negotiated only once — to the one who has an account with the bank; and (c)
the act of crossing the check serves as a warning to the holder that the check has been
issued for a definite purpose and he must inquire if he received the check pursuant to
this purpose; otherwise, he is not a holder in due course. In other words, the crossing of a
check is a warning that the check should be deposited only in the account of the payee.
When a check is crossed,it is the duty of the collecting bank to ascertain that the check
is only deposited to the payee’s account. Philippine Commercial International Bank vs.
Balmaceda, G.R. No. 158143, September 21, 2011

3. Presentment for Payment

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

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

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

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

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

A check does not constitute legal tender, but once the creditor accepted a fully funded
check to settle an obligation, he is estopped from later on denouncing the efficacy of
such tender of payment. By accepting the tendered check and converting it into money,
the creditor is presumed to have accepted it as payment and to hold otherwise would be
inequitable and unfair to the obligor. Far East Bank & Trust Company vs. Diaz Realty,
Inc., G.R. No. 138588, August 23, 2001
A stale check is one which has not been presented for payment within a reasonable time
after its issue. It is valueless and, therefore, should not be paid. International Corporate
Bank vs. Sps. Francis S. Gueco and Ma. Luz E. Gueco, G.R. No. 141968, February 12, 2001

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

Clearing should not be confused with acceptance. Manager’s and cashier’s checks are
still the subject of clearing to ensure that the same have not been materially altered or
otherwise completely counterfeited. However, manager’s and cashier’s checks are pre-
accepted by the mere issuance thereof by the bank, which is both its drawer and drawee.
Thus, while manager’s and cashier’s checks are still subject to clearing, they cannot be
countermanded for being drawn against a closed account, for being drawn against
insufficient funds, or for similar reasons such as a condition not appearing on the face of
the check. Long standing and accepted banking practices do not countenance the
countermanding of manager’s and cashier’s checks on the basis of a mere allegation of
failure of the payee to comply with its obligations towards the purchaser. On the
contrary, the accepted banking practice is that such checks are as good as cash.
However, in view of the peculiar circumstances of the case at bench, We are constrained
to set aside the foregoing concepts and principles in favor of the exercise of the right to
rescind a contract upon the failure of consideration thereof. Metropolitan Bank and
Trust Company vs. Wilfred N. Chiok, G.R. No. 172652, G.R. No. 175302, G.R. No.
175394, November 26, 2014

a. Time

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

b. Effect of Delay

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

Q. Other Matters

1. Negotiable instrument as mode of payment

A judgment creditor cannot validly refuse acceptance of the payment of the judgment
obligation consisting of a cashier’s check. This is because a cashier’s check issued by a
bank of good standing is deemed as cash. Moreover, since the said check had been
certified by the drawee bank, such certification is equivalent to acceptance. The object
of certifying a check, as regards both parties, is to enable the holder to use it as money.
Where the holder procures the check to be certified, the check operates as an
assignment of a part of the funds to the creditor. New Pacific Timber vs. Seneris, 101
SCRA 686 (1980) (See however, Tibajia, Jr, vs. Court of appeals, infra)

Where the check issued by a judgment debtor was made payable to the sheriff who
encashed the same but failed to deliver the proceeds thereof to the judgment creditor,
the obligation of the judgment debtor subsists. This is because a check does not produce
the effect of payment until encashed. Philippine Airlines vs. Court of Appeals, 181 SCRA
557 (1990)

Since a negotiable instrument is only a substitute for money, the delivery of such
instrument does not, by itself, operate as payment. A check whether a manager’s check
or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not
a valid tender of payment and may be refused by the creditor. Thus, the tender of a
check by the buyer on the last day of the grace period to pay the purchase price was not
valid for failure to comply with the requisite payment in legal tender or currency
stipulated. Consequently, the seller is within its right to cancel the contract. Roman
Catholic Bishop of Malolos vs. Intermediate Appelate Court, 191 SCRA 411 (1990)

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

A cashier’s check tendered by the judgment debtor to satisfy the judgment debt is not a
legal tender and as such the judgment creditor may validly refuse the tender of payment
partly in check and partly in cash. Tibajia, jr. vs. Court of Appeals, 223 SCRA 163 (1993)

A cashier’s check is a primary obligation of the issuing bank and accepted in advance by
its mere issuance. By its very nature, a cashier’s check is the bank’s order to pay drawn
upon itself, committing in effect its total resources, integrity and honor behind the
check. A cashier’s check by its peculiar character and general use in the commercial
world is regarded substantially to be as good as the money which it represents. When
the payee of a cashier’s check deposited the same with another bank, the issuing bank
created an unconditional credit in favor of the collecting bank. Thus, the payee is
entitled to damages when he issued a check which was dishonored because the cashier’s
check he deposited was not credited to his account. The fact that the payee erroneously
accomplished the deposit slip resulting in the misrouting of the check is not a valid
defense. Tan vs. Court of Appeals, 239 SCRA 310 (1994)

Where the seller to whom a check was issued as payment for a parcel of land did not
encash the check after more than ten years from issuance, the payment should be
deemed effected, because the check was impaired through the fault of the payee.
Consequently, the seller may be compelled to deliver to the buyer the title on the
property. Papa vs. A.U Valencia & Co., Inc.,vs. 284 SCRA 643 (1998)

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

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

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

A stale check is one which has not been presented for payment within a reasonable time
after its issue. It is valueless and, therefore, should not be paid. Under the Negotiable
Instruments Law, an instrument not payable on demand must be presented for payment
on the day it falls due. When the instrument is payable on demand, presentment must be
made within a reasonable time after its issue. In the case of a bill of exchange,
presentment is sufficient if made within a reasonable time after the last negotiation
thereof.
A check must be presented for payment within a reasonable time after its issue, and in
determining what is a “reasonable time”, regard is to be had to the nature of the
instrument, the usage of trade or business with respect to such instruments and the
facts of the particular case. The test is whether the payee employed such diligence as a
prudent man exercise in his own affairs. This is because the nature and theory behind the
use of a check points to its immediate use and payability. In a case, a check payable on
demand which was long overdue by about two and a half years was considered a stale
check. Also, failure of a payee to encash a check for more than 10 years undoubtedly
resulted in the check becoming stale.

In the case at the bar, however, the check involved is not an ordinary bill of exchange but
a manager’s check. A manager’s check is one drawn by the bank’s manager upon the
bank itself. It is similar to a cashier’s check both as to effect and use. A cashier’s check is a
check of the bank’s cashier on his own or another check. In effect, it is a bill of exchange
drawn by a cashier of a bank upon the bank itself, and accepted in advance by the act of
its issuance. It is really the bank’s own check and may be treated as a promissory note
with the bank as a maker. The check becomes the primary obligation of the bank which
issues it and constitutes its written promise to pay upon demand. The mere issuance of it
is considered as acceptance thereof. If treated as promissory note, the drawer would be
the maker and in which case the holder need not prove presentment for payment or
present the bill to the drawee for acceptance.

In a case where the Bank and the defendant entered into a compromise agreement to
settle the unpaid obligation of the defendant and that pursuant thereto, the defendant
delivered a manager’s check but which the Bank held because of the refusal of the
defendant to execute a joint motion to dismiss, the fact that the manager’s check had
become stale did not extinguish the obligation of the defendant. Even assuming that
presentment is needed, failure to present for payment within a reasonable time will
result to the discharge of the drawer only to the extent of the loss caused by the delay.
Failure to present on time, thus, does not totally wipe out all liability. In fact, the legal
situation amounts to an acknowledgement of liability in the sum stated in the check. In
this case, the debtors have not alleged, much less shown that they or the bank which
issued the manager’s check has suffered damage or loss caused by the delay or non
presentment. Definitely, the original obligation to pay certainly has not been erased.
International Corporate Bank vs. Gueco, 351 SCRA 516 (2001)

A check does not constitute legal tender, and that a creditor many validly refuse to
accept it if tendered as payment. In other words, the creditor has the option and the
discretion of refusing or accepting it. However, once the creditor accepted a fully
funded check after the debtor’s manifestation that it had been given to settle an
obligation, he is estopped from later on denouncing the efficacy of such tender of
payment. By accepting the tendered check and converting it into money, the creditor is
presumed to have accepted it as payment. To hold otherwise would be inequitable and
unfair to the obligor. xxx That the debtor subsequently withdrew the money from the
creditor (bank) is of no moment, because such withdrawal will not affect the efficacy or
the legal ramifications of the tender of payment duly made. There being a valid tender
of payment, the accrual of interest based on the stipulated rate should stop on the date
of the tender. Far East Bank & Trust Company vs. Diaz Realty, Inc., 363 SCRA 596 (2001)
 In general, a manager’s check is not legal tender. The creditor has the option of refusing
or accepting it. However, payment in check by the debtor may be acceptable as valid, if
no prompt objection to said payment is made. Consequently, the debtor’s tender of
payment in the form of manager’s check is valid. Thus, where the seller of real property
tendered the return of the reservation fee in the form of manager’s check because the
sale agreement was not fully consummated owing to the failure of the buyer to pay the
balance of the purchase price within the stipulated period, the tender of the manager’s
check was considered a valid tender of payment. When the buyer refused to accept the
check, the consignation of the check with the court was sufficient to satisfy the
obligation. Pabugais vs. Sahijiwani, 423 SCRA 596 (2004)

A manager’s check stands on the same footing as a certified check under the Negotiable
Instruments Law, and as such, is deemed accepted in advance by drawer-bank through
the mere act of its issuance.

Thus, where a manager’s check, made payable to “cash” and appearing regular on its
face, was presented to another bank that immediately honors it—no fault may be
attributed to such bank in relying upon the integrity of the check, even if payment
thereon was later ordered stopped by the drawer-bank because the one who encashed
the check was actually not the intended payee. In other words, as between the bank that
honored the manager’s check and the drawer-bank, it is the latter that should bear the
loss. Security Bank and Trust Company vs. Rizal Commercial Banking Corporation 577
SCRA 407 (2009)

2. Liabilities of Parties under B.P. 22

To hold a person liable under B.P. Blg. 22, it is not enough to establish that a check
issued was subsequently dishonored. It must be shown further that the person who issued
the check new “at the time of issue that he does not have sufficient funds in or credit
with the drawee bank for the payment of such check in full upon its presentment”.
Because this element involves a state of mind, Section 2 of BP Blg. 22 creates a prima
facie presumption that the issuer knew of the insufficiency of funds, it must be shown
that he or she received a notice of dishonor and, within five banking days thereafter,
failed to satisfy the amount of the check or make arrangement for its payment. If such
notice of non-payment by the drawee bank is not sent to the maker or drawer of the
bum check, or if there is no proof as to when such notice was received by the drawer,
then the presumption of prima facie evidence as provided in Section 2 of BP 22 cannot
arise, since there would simply be no way of reckoning the crucial 5-day period. Danao
vs. Court of Appeals, 358 SCRA 450 (2001)

The ninety (90) day period from due date within which the check must be presented for
payment is not among the elements of the offense under BP 22. Section 2 of BP 22 is
clear that a dishonored check presented within the ninety (90) day period creates a
prima facie presumption of knowledge of insufficiency of funds, which is an essential
element of the offense. Since knowledge involves a state of mind difficult to establish,
the statute itself creates a prima facie presumption of the existence of this element from
the fact of drawing, issuing or making a check, the payment of which was subsequently
refused for insufficiency of funds. The term prima facie evidence denotes evidence
which, if unexplained or uncontradicted, is sufficient to sustain the proposition it
supports or to establish the facts, or to counterbalance the presumption of innocence to
warrant a conviction.

The presumption in section 2 is not conclusive presumption that forecloses or precludes

the presentation of evidence to the contrary. Neither does the term prima facie
evidence precludes the presentation of other evidence that may sufficiently prove the
existence or knowledge of insufficiency of funds or lack of credit.

An endorser who passes a bad check may be held liable under BP 22, even though the
presumption of knowledge does not apply to him, if there is evidence that the time of
endorsement, he was aware of the insufficiency of funds. The presumption in Section 2
was intended to facilitate proof of knowledge and not to foreclose admissibility of other
evidence that may also prove such knowledge. Thus, the only consequence of the failure
to present the check for payment within 90-days from the dated stated is that there
arises no prima facie presump-tion of knowledge of insufficiency of funds. But the
prosecution may still prove such knowledge through other evidence. Bautista vs. Court
of Appeals, 360 SCRA 618 (2001)

The law has made the mere act of issuing bum check a malum prohibitum, an act
proscribed by the legislature for being deemed pernicious and inimical to public
welfare. The gravamen of the offence under this law is the act of issuing a worthless
check or a check that is dishonored upon its presentment for payment. Thus, even if
there had been payment, through compensation or offset or some other means, there
could still be prosecution for violation of BP 22. Tan vs. Mendez, Jr., 383 SCRA 202
(2002)

A check issued as an evidence of debt though not intended for encashment, has the
same effect like any other check and is within the contemplation of BP 22. The law does
appear to concern itself with that might actually be envisioned by the parties, its
primordial intention being to instead ensure the stability and commercial value of
checks as being virtual substitutes for currency. It is not required much less
indispensable, for the prosecution to present the drawee bank’s representative as a
witness to testify on the dishonor of the checks because of insufficiency of funds. The
prosecution may present, as it did in this case, only complainant as a witness to prove all
the elements of the offense charged. Recuerdo vs. People of the Philippines, 395 SCRA
638 (2003)

The language of BP Blg. 22 is broad enough to cover all kinds of checks, whether present
dated or postdated, or whether issued in payment of pre-existing obligations or given in
mutual or simultaneous exchange for something of value. The claim that BP Blg. 22 does
not include “postdated check” and cases of “closed accounts” has no leg to stand on. The
term “closed account“ is within the meaning of the phrase “does not have sufficient
funds in or credit with the drawee bank”. For liability to attach under BP 22, prosecution
must establish that checks were issued, the same were subsequently dishonored and that
the issuer at the time of the check’s issuance had knowledge that he did not have
enough funds or credit in the bank upon presentment thereof. The presumption that the
 issuer had knowledge of the insufficiency of funds is brought into existence only after it
is proved that the issuer had received a notice of dishonor and that within five days from
receipt thereof, he failed to pay the amount of the check or to make arrangement for its
payment. Failure of prosecution to prove that the accused given the requisite notice of
dishonor is a clear ground of acquittal. Yu Oh vs. Court of Appeals, 403 SCRA 300 (2003)

3. Clearing Rules

Under its rules and regulations, PCHC has jurisdiction over a case even if the checks
subject of litigation are admittedly non-negotiable. However, where a bank stamped its
guarantee on the back of checks and subsequently presented them for clearing, it is
estopped from raising the defense of non-negotiability, because it assumed the
liabilities of an endorser. Banco de Oro vs. Equitable Banking Corp, 157 SCRA 188 (1988)

Participants in the regional clearing operations of the Philippine Clearing House

Corporation (PCHC) cannot bypass the arbitration process laid out by the body and seek
relief directly from the courts. Home Bankers Savings and Trust Company vs. Court of
Appeals, 318 SCRA 558 (1999)

A third party complaint of one bank against another involving check cleared through the
Philippine Clearing House Corporation (PCHC) is unavailing, unless the third-party
claimant has first exhausted the arbitral authority of the PCHS Arbitration Committee
and obtained a decision from said body adverse to its claim. Allied Banking Corporation
vs. Court of Appeals, 321 SCRA 563 (1999)

A party aggrieved by an arbitral award of the PCHC may choose among any of the
following remedies: a.) filing a petition to vacate arbitral award in the Regional Trial
Court, pursuant to the Arbitration Law, b.) filing a petition for review in the Court
Appeals, under Rule 43 of the Rules of Court, and c) filing a petition for certiorari under
Rule 65 before the Court of Appeals, in case the arbitral award is impressed with grave
abuse of discretion. The filing of a petition for review with the RTC, albeit provided by
the PCHC Rules on Arbitration, is not the appropriate remedy. Since the Rules of
Procedure for Arbitration of the Philippine Clearing House Corporation (PCHC) only
came about as a result of a mere agreement between and among member banks of the
PCHC—such rules cannot validly confer jurisdiction on the Regional Trial Courts to
review arbitral awards of the former. It is a well settled principle that jurisdiction over
the subject matter can only be conferred by law, and can never be determined by
consent or acquiescence of the parties Metropolitan Bank & Trust Company vs. Court of
Appeals 579 SCRA (2009)

IV. Insurance Code

A. Concept of Insurance

In insurance law, the indemnity agreement and the pledge agreement are two different
securities. An action instituted, therefore, against the guarantors does not release or
 extinguish the lien of an insurer against the shares of stock pledged in its favor. Gidwani vs.
Domestic Insurance Company of the Philippines, 122 SCRA 732 (1983)

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

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

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

The cardinal principle in Insurance Law is that a policy or contract of insurance is to be

construed liberally in favor of the insured and strictly as against the insurance company, yet,
contracts of insurance, like other contracts, are to be construed according to the sense and
meaning of the terms, which the parties themselves have used. Lalican vs. Insular Life
Assurance Company, Ltd. 597 SCRA 159, 2009

Contracts of insurance, like other contracts, are to be construed according to the sense and
meaning of the terms which the parties themselves have used. If such terms are clear and
unambiguous, they must be taken and understood in their plain, ordinary and popular sense.
Accordingly, in interpreting the exclusions in an insurance contract, the terms used
specifying the excluded classes therein are to be given their meaning as understood in
common speech. A contract of insurance is a contract of adhesion. So, when the terms of the
insurance contract contain limitations on liability, courts should construe them in such a way
as to preclude the insurer from non-compliance with his obligation. Alpha Insurance and
Surety Co. vs. Castor, GR No. 198174, September 2, 2013

B. Elements of an Insurance Contract

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

For purposes of determining the liability of a health care provider to its members, a health
care agreement is in the nature of non-life insurance, which is primarily a contract of
indemnity. Once the member incurs hospital, medical or any other expense arising from
sickness, injury or other stipulated contingent, the health care provider must pay for the
same to the extent agreed upon under the contract. Limitations as to liability must be
distinctly specified and clearly reflected in the extent of coverage which the company
voluntary assume, otherwise, any ambiguity arising therein shall be construed in favor of the
member. Being a contract of adhesion, the terms of an insurance contract are to be
construed strictly against the party which prepared the contract - the insurer. This is equally
applicable to Health Care Agreements. The phraseology used in medical or hospital service
contracts, such as “ standard charges “, must be liberally construed in favor of the
subscriber, and if doubtful or reasonably susceptible of two interpretations the construction
conferring coverage is to be adopted, and exclusionary clauses of doubtful import should be
strictly construed against the provider. Thus, if the member, while on vacation, underwent a
procedure in the USA, the standard charges referred to in the contract should mean
standard charges in USA and not the cost had the procedure been conducted in the
Philippines. Fortune Medicare Inc.,vs. Amorin. G.R. No. 195872, March 12, 2014.

C. Characteristics/Nature of Insurance Contracts

A guarantee bond loses its force upon termination of the certificate to transact insurance
business of the issuing surety company although it does not have the effect of annulling such
bond. But considering that the bondsmen’s authority to continue doing business has been
suspended, it becomes doubtful whether the winning party can still recover on said bonds.
Santiago Syjuco, Inc.,vs. Tecson, 116 SCRA 685 (1982)

Ambiguity in words of insurance contract shall be interpreted in favor of its beneficiary.

Serrano vs. Court of Appeals, 130 SCRA 327 (1984)

Contracts of insurance are construed liberally in favor of the insured and strictly against the
insurer. National Power Corporation vs. Court of Appeals, 145 SCRA 533 (1986)

Insurer’s promise of rebate to the insured which is prohibited by law may not be enforced by
the courts. Section 361 of PD 612 prohibits insurance companies from giving or paying to
the insured any form of commission or rebate of premium. Lumibao vs. Intermediate
Appellate Court, 189 SCRA 469 (1990)

The insurance contract is primarily a risk-distributing device, a mechanism by which all

members of a group exposed to a particular risk contribute premiums to an insurer. From
these contributory funds are paid whatever losses occur due to exposure to the peril insured
against. Each party therefore takes a risk: the insurer being compelled upon the happening
of the contingency to pay the entire sum agreed upon; and the insured of a parting with the
amount required as premium, without receiving anything therefore in case the contingency
does not happen. Tibay vs. Court of Appeals, 257 SCRA 126, (1996)
 The only persons entitled to claim the insurance proceeds are either the insured, if still alive;
or the beneficiary, if the insured is already deceased, upon the maturation of the policy. The
exception to this rule is a situation where the insurance contract was intended to benefit
third persons who are not parties to the same in the form of favorable stipulations or
indemnity. In such a case, third parties may directly sue and claim from the insurer. Because
no legal proscription exists in naming as beneficiaries the children of illicit relationships by
the insured, the shares of Eva in the insurance proceeds, whether forfeited by the court in
view of the prohibition on donations under Article 739 of the Civil Code or by the insurers
themselves for reasons based on the insurance contracts, must be awarded to the said
illegitimate children, the designated beneficiaries, to the exclusion of heirs. Heirs Of Loreto
c. Maramag vs. Eva Verna De Guzman Maramag, et al., G.R. No. 181132, June 5, 2009

D. Classes

1. Marine

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

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

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

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

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

In every marine insurance policy the vessel impliedly warrants to the assurer that the
vessel is seaworthy and such warranty is as much a term of the contract as if expressly
written on the face of the policy. Hence, it becomes the obligation of the cargo owner to
look for a reliable common carrier which keeps its vessels in seaworthy condition. In
policies where the law will generally imply a warranty of seaworthiness, such warranty
can only be executed by terms in writing in the policy in the clearest language. The result
of the admission of seaworthiness by the assurer may mean one or two things: (a) that
the warranty of the seaworthiness is to be taken as fulfilled; or (b) that the risk of
unseaworthiness is assumed by the insurance company. Philippine American General
Insurance Co., Inc.,vs. Court of Appeals, 273 SCRA 262 (1997)

An “all risks” insurance policy covers all kinds of loss other than those due to willful
and fraudulent act of the insured. Filipino Merchants Co.Inc vs. Court of Appeals, 179
SCRA 638 ( 1989 ); Mayer Steel Pipe Corporation vs. Court of Appeals, 274 SCRA 42
(1997)

2. Fire

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

3. Casualty

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

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

4. Suretyship

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

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

Under Section 176 of the Insurance Code, as amended, the liability of a surety in a surety
bond is joint and several with the principal obligor. Finman's bond was posted by Pan
Pacific in compliance with the requirements of Article 31 of the Labor Code in order to
guarantee compliance with prescribed recruitment procedures, rules and regulations,
and terms and, conditions of employment as appropriate. While Finman has refrained
from attaching a copy of the bond it had issued to its Petition for Certiorari, there can be
no question that the conditions of the surety bond include the POEA Rules and
Regulation. It is settled doctrine that the conditions of a bond specified and required in
the provisions of the statute or regulation providing for the submission of the bond, are
incorporated or built into all bonds tendered under that statute or regulation, even
though not there set out in printer's ink. Finman General Assurance Corporation vs.
William Inocencio, et al., G.R. No. 90273-75, November 15, 1989
 Section 177 of the Insurance Code states that the surety is entitled to payment of the
premium as soon as the contract of suretyship or bond is perfected and delivered to the
obligor. No contract of suretyship or bonding shall be valid and binding unless and until
the premium therefor has been paid, except where the obligee has accepted the bond,
in which case the bond becomes valid and enforceable irrespective of whether or not the
premium has been paid by the obligor to the surety. A continuing bond, as in this case
where there is no fixed expiration date, may be canceled only by the obligee, which is
the NFA, by the Insurance Commissioner, and by the court. By law and by the specific
contract involved in this case, the effectivity of the bond required for the obtention of a
license to engage in the business of receiving rice for storage is determined not alone by
the payment of premiums but principally by the Administrator of the NFA. Country
Bankers Insurance Corporation vs. Antonio Lagman, G.R. No. 165487, July 13, 2011

The extent of the surety’s liability is determined by the language of the suretyship
contract or bond itself. It can not be extended by implications beyond the terms of the
contract. Having accepted the bond, the creditor is bound by the recital in the surety
bond that the terms and conditions of its distributorship contract be reduced in writing
or at the very least communicated in writing to the surety. Such non-compliance by the
creditor impacts not on the validity or legality of the surety contract but on the creditor’s
right to demand performance. First Lepanto-Taisho Insurance Corporation vs. Chevron
Philippines, GR No. 177839, January 18, 2012

5. Life

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

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

Where an agreement is made between the applicant and the agent, no liability shall
attach until the principal approves the risk and a receipt is given by the agent. The
acceptance is merely conditional, and is subordinated to the act of the company in
approving or rejecting the application. Thus, in life insurance, a “binding slip” or
“binding receipt” does not insure by itself. The binding deposit receipt in question is
merely an acknowledgment, on behalf of the company, that the latter’s branch office
had receive from the applicant the insurance premium and had accepted the application
 subject for processing by the insurance company; and that the latter will either approve
or reject the same on the basis of whether or not the applicant is “insurable on standard
rates.” Since Pacific Life disapproved the insurance application of respondent, the
binding deposit receipt in question had never become in force at any time. Great Pacific
Life Assurance Company vs. Court of Appeals, 89 SCRA 543 (1979)

The so-called “incontestability clause” preclude the insurer from raising the defenses of
false representation or concealment of material facts insofar as health and previous
diseases are concerned if the insurance has been in force at least two (2) years during the
insured’s lifetime. Tan vs. Court of Appeals, 174 SCRA 403 (1989)

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

The legitimate heirs of the insured who were not designated as beneficiaries in the life
insurance policies are considered third parties to the insurance contracts and, thus are
not entitled to the proceeds thereof. The insurance companies have no legal obligation
to turn over the insurance proceeds to them. The revocation of the common law spouse
of the insured as a beneficiary in one policy and her disqualification as such in another
are of no moment considering that the designation of the illegitimate children as
beneficiaries in the Insurance Policies remains valid. Because no legal proscription exists
in naming as beneficiaries children of illicit relationships by the insured, the shares of the
common-law spouse in the insurance proceeds, whether forfeited by the Court in view
of the prohibition on donation under Article 739 of the Civil Code or by the insurers
themselves for reasons based on the insurance contracts, must be awarded to the said
illegitimate children, the designated beneficiaries, to the exclusion of the legitimate
heirs. It is only in cases where the insured has not designated any beneficiary, or when
the designated beneficiary is disqualified by law to receive the proceeds, that the
insurance policy proceeds shall redound to the benefit of the estate of the insured. Heirs
of Loreto C. Maramag vs. Maramag, GR No. 181132, June 5, 2009

6. Compulsory Motor Vehicle Liability Insurance

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

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

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

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

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

“Own damage” coverage under a vehicle insurance policy simply meant that the insurer
had assumed to reimburse the costs for repairing the damage to the insured vehicle, as
opposed to damage to third party vehicle/property. The phrase “own damage” does not
mean damage to the insured car caused by the assured itself, instead of third parties.
Pan Malayan Insurance Corporation vs. Court of Appeals, 184 SCRA 54 (1990)

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

In a case arising from a vehicular collision where the driver, the registered owners, the
beneficial owners, and the insurer were sued, a compromise agreement entered into
between the plaintiff and the insurer resulting in the dismissal of the case as against the
insurer did not redound to the benefit of the other defendants. Imson vs. Court of
Appeals, 239 SCRA 58 (1994)

Aside from compulsory motor vehicle liability insurance, the Insurance Code contains no
other provisions applicable to casualty insurance or to robbery insurance in particular. In
burglary, robbery and theft insurance, “the opportunity to defraud the insurer” is so
great that the insurers have found it necessary to fill up their policies with countless
restrictions. Fortune Insurance and Surety Co., Inc.,vs. Court of Appeals, 244 SCRA 308
(1995)

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

E. Insurable Interest

1. In Life/Health

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

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

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

Claim of insurance company that insurance of building does not cover the elevator is
incorrect. An open policy is one in which the value of the thing insured is not agreed
upon but is left to be ascertained in case of loss. This means that the actual loss, as
determined, will represent the total indemnity due the insurer except only that the total
indemnity shall not exceed the face value of the policy. Development Insurance
Corporation vs. Intermediate Appellate Court, 143 SCRA 62 (1986)

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

With the transfer of the location of the subject properties, without notice and without
the insurer’s consent, after the renewal of the policy, the insured clearly committed
concealment, misrepresentation and a breach of a material warranty. Section 26 of the
Insurance Code provides that a neglect to communicate that which a party knows and
ought to communicate, is called a concealment.

Under Section 27 of the Insurance Code, “a concealment entitles the injured party to
rescind a contract of insurance.” Moreover, under Section 168 of the Insurance Code,
the insurer is entitled to rescind the insurance contract in case of an alteration in the use
or condition of the thing insured. Section 168 of the Insurance Code provides, as follows:
An alteration in the use or condition of a thing insured from that to which it is limited by
the policy made without the consent of the insurer, by means within the control of the
insured, and increasing the risks, entitles an insurer to rescind a contract of fire
insurance. Malayan Insurance Company vs. PAP Co. Philippine Branch), G.R. No.
2007784, August 07, 2013.

3. Double Insurance and Over Insurance

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

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

3. Multiple or Several Interests on Same Property

As to a mortgaged property, the mortgagor and the mortgagee have each an

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

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

F. Perfection of the Contract of Insurance

1. Offer and Acceptance/Consensual

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

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

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

a. Delay in Acceptance
b. Delivery of Policy

2. Premium Payment

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

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

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

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

A surety bond to guarantee payment of taxes automatically loses force and effect upon
approval of the insured’s application for tax exemption. Suretyship cannot exist without
a valid obligation. The insurance company incurred no risk from the time the insured’s
tax exemption application was approved. Consequently, any purported renewal of the
policy was void because the cause or object of said renewal did not exist at the time of
the purported transaction. The insured therefore had no obligation to pay the premium
for such purported renewals. Plaridel Surety & Insurance Company vs. Artex
Development Company, Inc., 120 SCRA 827 (1983)

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

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

Section 78 of the Insurance Code explicitly provides that an acknowledgment in a policy

or contract of insurance of the receipt of premium is conclusive evidence of its payment,
so far as to make the policy binding, notwithstanding any stipulation therein that it shall
not be binding until the premium is actually paid. This Section establishes a legal fiction
of payment and should be interpreted as an exception to Section 77. American Homes
Assurance vs. Antonio Chua, G.R. 130421, June 28, 1999
Section 77 of the Insurance Code of 1978 provides that an insurer is entitled to payment
of the premium as soon as the thing insured is exposed to the peril insured against. The
first exception is provided by Section 77 itself, and that is, in case of a life or industrial
life policy whenever the grace period provision applies. The second is that covered by
Section 78 of the Insurance Code, which provides that any acknowledgment in a policy
or contract of insurance of the receipt of premium is conclusive evidence of its payment,
so far as to make the policy binding, notwithstanding any stipulation therein that it shall
not be binding until premium is actually paid. A third exception was laid down in Makati
Tuscany Condominium Corporation vs. Court of Appeals, wherein the Court ruled that
Section 77 may not apply if the parties have agreed to the payment in installments of the
premium and partial payment has been made at the time of loss. Tuscany has also
provided a fourth exception, namely, that the insurer may grant credit extension for the
payment of the premium. This simply means that if the insurer has granted the insured a
credit term for the payment of the premium and loss occurs before the expiration of the
term, recovery on the policy should be allowed even though the premium is paid after
the loss but within the credit term. Moreover, as a fifth exception, estoppel bars it from
taking refuge under said Section, since Masagana relied in good faith on such practice.
UCPB General Insurance Co. Inc., vs. Masagana Telemart, Inc., G.R. No. 137172, April 4,
2001

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

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

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

4. Reinstatement of a Lapsed Policy of Life Insurance

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

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

5. Refund of Premiums

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

G. Rescission of Insurance Contracts

1. Concealment

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

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

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

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

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

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

2. Misrepresentation/Omissions

When the insured signed the pension plan application, he adopted as his own the
written representations and declarations embodied in it. It is clear from these
representations that he concealed his chronic heart ailment and diabetes. He cannot
sign the application and disown the responsibility for having it filled up. Thus, the
insurance company had every right to act on the faith of that certification. Ma. Lourdes s.
Florendo vs. Philam Plans, Inc., et al., G.R. No. 186983, February 22, 2012
 By virtue of the “incontestability clause”, the insurer has two years from the date of
issuance of the insurance contract or of its last reinstatement within which to contest the
policy, whether or not, the insured still lives within such period. After two years, the
defenses of concealment or misrepresentation, no matter how patent or well founded,
no longer lie. Considering that the insured died before the two-year period had lapsed,
Phil-Am Insurance is not, therefore, barred from proving that the policy is void ab initio
by reason of the insured’s fraudulent concealment or misrepresentation. Emilio Tan vs.
The Court of Appeals, G.R. No. 48049. June 29, 1989

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

The incontestability clause precludes the insurer from disowning liability under the
policy it issued on the ground of concealment or misrepresentation regarding the health
of the insured after a year of its issuance. Since insured died on the 11th month following
the issuance of his plan, the incontestability period has not yet set in. Consequently, the
insurer was not barred from questioning the beneficiary’s entitlement to the benefits of
the pension plan. Florendo vs. Philam Plans, GR. No 186983, February 22, 2012

3. Breach of Warranties

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

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

H. Claims Settlement and Subrogation

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

The right of subrogation accrues simply upon payment by the insurance company of the
insurance claim. When it is not disputed that the insurance company indeed paid, then there
is valid subrogation in its favor. Malayan Insurance Co vs. Alberto, GR No. 194320, February
1, 2012

1. Notice and Proof of Loss

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

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

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

2. Guidelines on Claims Settlement

a. Unfair Claims Settlement; Sanctions
b. Prescription of Action

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

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

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

The prescriptive period for the insured’s action for indemnity should be reckoned
from the "final rejection" of the claim. "Final rejection" simply means denial by the
insurer of the claims of the insured and not the rejection or denial by the insurer of
the insured’s motion or request for reconsideration. A perusal of the letter dated
April 26, 1990 shows that the GSIS denied Hollero Construction’s indemnity claims.
The same conclusion obtains for the letter dated June 21, 1990 denying Hollero
Construction’s indemnity claim. Holler's causes of action for indemnity respectively
accrued from its receipt of the letters dated April 26, 1990 and June 21, 1990, or the
date the GSIS rejected its claims in the first instance. Consequently, given that it
allowed more than twelve (12) months to lapse before filing the necessary complaint
before the RTC on September 27, 1991, its causes of action had already prescribed.
H.H. Hollero Construction Inc., vs. Government Service Insurance System and Pool
of Machinery Insurers., G.R. No. 152334, September 24, 2014
c. Subrogation

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

St. Paul, as insurer, after paying the claim of the insured for damages under the
insurance, is subrogated merely to the rights of the assured. As subrogee, it can
recover only the amount that is recoverable by the latter. Since the right of the
assured, in case of loss or damage to the goods, is limited or restricted by the
provisions in the bill of lading, a suit by the insurer as subrogee necessarily is subject
to like limitations and restrictions. St. Paul Fire & Marine Insurance Co. vs.
Macondray & Co., Inc., et al., G.R. No. L-27796, March 25, 1976

When Manila Mahogany executed a release claim discharging San Miguel

Corporation from all actions, claims, demands and rights of action arising out of or as
a consequence of the accident after the insurer had paid the proceeds of the policy,
the insurer is entitled to recover from the insured the amount of insurance money
paid. Since the insurer can be subrogated to only such rights as the insured may have,
should the insured, after receiving payment from the insurer, release the wrongdoer
who caused the loss, the insurer loses his rights against the wrongdoer. But in such a
case, the insurer will be entitled to recover from the insured whatever it has paid to
the latter, unless the release was made with the consent of the insurer. Manila
Mahogany Manufacturing Corporation vs. Court of Appeals, G.R. No. L-52756,
October 12, 1987

Payment by the insurer to the assured operates as an equitable assignment to the

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

The proximate cause of the sinking of the vessel was her condition of
unseaworthiness arising from her having been top-heavy when she departed from
the Port of Zamboanga. Since the vessel was unseaworthy with reference to the
 cargo, there was therefore a breach of warranty of seaworthiness that rendered the
assured not entitled to the payment of its claim under the policy. Hence, when
PhilAmGen paid the claim of the bottling firm there was in effect a “voluntary
payment” and no right of subrogation accrued in its favor. In other words, when
PhilAmGen paid it did so at its own risk. The Philippine American General Insurance
Company, Inc., vs. Court of Appeals, et al., G.R. No. 116940, June 11, 1999

The presentation in evidence of the marine insurance policy is not indispensable

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

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

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

I. Other Matters

1. Liability of Insurer

Delay of insured in reporting the loss must be objected to promptly by insurer. Sending
of insurance adjuster to assess the loss amounts to waiver of delay in giving notice of
loss. Pacific Timer export Corporation vs. Court of Appeals, 112 SCRA 199 (1982)

When a surety a bond is executed, it does not guarantee that the plaintiff’s cause of
action is meritorious, and that it will be responsible for all the costs that may be
adjudicated against its principal incase the action fails. The extent of the surety’s
 liabilities is determined by the clause of the contract of surety ship. Increase of surety’s
liability beyond the maximum of the bond by making it liable to pay interest is justified
only if the surety failed to pay its obligation on demand. Zenith Insurance Corporation
vs. Court of Appeals, 119 SCRA 485 (1982)

Adjuster’s report should have been given equal weight and evidence having been
offered by the insurance company itself, which constitutes an admission of its liability up
to the amount recommended. Adjuster’s report is in the nature of an admission against
the interest. Noda vs. Cruz-Arnaldo, 151 SCRA 227 (1987)

While it is true that where the insurance contract provides for indemnity against the
liability to third persons, such third persons can directly sue the insurer, however, the
direct liability does not mean the insurer can be held solidarily liable with the insured
and/or the other parties found at fault. The liability of the insurer is based on contracts;
that of the insured is based on tort. Where insurance policy insures directly against
liability, the insurer’s liability accrues immediately upon the occurrence of the injury or
event upon which the liability depends, and does not depend upon the recovery of
judgment by the injured party against the insured. Vda, De Maglana vs.Consolacion, 212
SCRA 268 (1992)

The insured or the heirs of a deceased victim of a vehicular accident may sue directly the
insurer of the vehicle for indemnity, but the insurer’s liability is only up to the extent of
the insurance policy and those required by law. GSIS vs. CA, 308 SCRA 559 (1999)

An insurer in an indemnity contract for third party liability is directly liable to the injured
party up to the extent specified in the agreement but it cannot be held solidarily liable
beyond that amount. Tiu vs. Arriesgado, 437 SCRA 426 (2004)

2. Insurance Agent

Receipt of compensation is essential for a person to be considered an insurance agent.

The criminal information charging a person of insurance solicitation must state is was for
compensation, otherwise no conviction is warranted. Aisporna vs. Court of Appeals, 113
SCRA 459 (1982)

An insurance company has two classes of agents who sell its insurance polices. They are:
(1) salaried employees who keep definite hours and work under the control and
supervision of the company; and (2) registered representatives who work on commission
basis. Great Pacific Life Assurance Corporation vs. Judico, 180 SCRA 445 (1989)

The Insurance Code may govern the licensing requirements and other particular duties
of insurance agents but it does not bar the application of the Labor code with regard to
labor standards and labor relations. Great Pacific Life Assurance Corporation vs.
National Labor Relations Commission 187 SCRA 694 (1990)

In group insurance policies, the employer is the agent of the insurer. Pineda vs. Court of
Appeals, 226 SCRA 754 (1993)
 Where the contract of agency entered into is not included within the meaning of an
insurance business, Section 2 of the Insurance Code cannot be invoked. Quasi-judicial
power of the Insurance Commissioner does not cover the relationship affecting the
insurance company and its agent but is limited to adjudicating claims and complaints
filed by the insured against the Insurance company. There are two classes of agents who
sell insurance policies, to wit: (1) salaried employees who keep definite hours and work
under the control and supervision of the company; (2) registered representative, who
works on commission basis. Salaried employees are governed by their Contract of
Employment and the Labor Code while registered representatives are governed by the
Contract of Agency and the Civil Code provision on Agency. Philippine American Life
Insurance Company vs. Ansaldo, 234 SCRA 509 (1994)

An insurer which delivers to an insurance agent or insurance broker an insurance policy

shall be deemed to have authorized such agent to receive on its behalf payment of any
premium which is due on such policy. South Sea Surety and Insurance Co., Inc.,vs. Court
of Appeals, 244 SCRA 744 (1995)

A settling agent acting within the scope of its authority cannot be held personally liable
and /or solidarily liable for the obligations of the disclosed principal. A resident agent, as
a representative of the foreign insurance company, is tasked only to receive legal
processes on behalf of its principal and not to answer personally for any insurance claims.
Smith, Bell & Co., Inc.,vs. Court of Appeals, 267 SCRA 530 (1997)

3. Reinsurance

The general rule in the law of reinsurance is that the reinsurer is entitled to avail itself of
every defense which the re-insured might urge in an action by the person originally
insured. The rights of the insurer can be fully protected in a separate action against him
by the reinsured. The clause in the reinsurance contract that the reinsurer is obliged “to
pay as may be paid thereon” (referring to the original policies), does not automatically
make the reinsurer liable to pay the reinsured once the latter pays the original insured.
This clause does not preclude the reinsurer from insisting upon proper proof that a loss
strictly within the terms of the original policy has taken place. Gibson vs. Revilla, 92
SCRA 219 (1979)

A reinsurance company is not doing business in a certain state merely because the
property or lives which are insured by the original insurer company are located in that
State. Avon Insurance PLC vs. Court of Appeals 278 SCRA 312 (1997)

4. Documentary Stamp Tax on Insurance Policy

Life and non-life insurance policies are subject to documentary stamp taxes by their
mere issuance, and the fact that the policies have not become effective for non-payment
of the corresponding premiums cannot affect the insurance company’s liability for
payment of documentary stamp taxes. Philippine Home Assurance Corp. vs. Court of
Appeals, 301 SCRA 443 (1999)
 The payment of documentary stamp taxes is done at the time the act is done or
transaction had and the tax base for the computation of documentary stamp taxes on
life insurance policies under Sec. 183 of the Insurance Code is the amount fixed in the
policy, unless the interest of the person insured is susceptible of exact pecuniary
measurement. The amount fixed in the policy is the figure written on its face and
whatever increases will take effect in the future by reason of any “automatic increase
clause” embodied in the policy without the need of another contract. The amount
insured by the policy at the time of its issuance necessarily includes the additional sum
covered by the automatic increase clause because it is already determinate at the time
the transaction is entered into and forms part of the policy. Commissioner of Internal
Revenue vs. Lincoln Philippine Life Insurance Co., Inc., 379 SCRA 423 (2002)

V. Transportation Laws

A. Common Carriers

A certificate of public convenience is not a requisite for incurring liability under the Civil
Code provisions governing common carriers.

A common carrier is responsible even for acts of strangers like thieves or robbers except
where such thieves or robbers acted with grave or irresistible threat, violence or force.

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

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

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

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

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

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

A freight forwarder’s liability is limited to damages arising from its own negligence,
including negligence in choosing the carrier; however, where the forwarder contracts to
deliver goods to their destination instead of merely arranging for their transportation, it
becomes liable as a common carrier for loss or damage to goods. A freight forwarder
assumes the responsibility of a carrier, which actually executes the transport, even though
the forwarder does not carry the merchandise itself.–Unsworth Transport International (
Phils. vs. Court of Appeals ,G.R. No. 166250, 26 July 2010

A customs broker whose services were engaged for the release and withdrawal of the
cargoes from the pier and their subsequent delivery to the consignee’s warehouse and the
owner of the delivery truck whom the customs broker contracted to transport the cargoes to
the warehouse are both common carriers. The latter is considered a common carrier in the
absence of indication that it solely and exclusively rendered services to the customs broker.
Thus, when the truck failed to deliver one of the cargoes, both the broker and owner of the
truck are liable. Being both common carriers, they are mandated from the nature of their
business and for reasons of public policy, to observe the extraordinary diligence in the
vigilance over the goods transported by them according to all the circumstances of such
case. Thus, in case of loss of the goods, the common carrier is presumed to have been at fault
or to have acted negligently. Loadmasters Customs Services, Inc.,vs. Glodel Brokerage
Corporation, GR No. 179446, January 10, 2011

Persons engaged in the business of transporting students from their respective residences to
their school and back are considered common carrier. Despite catering to a limited
clientele, they operated as a common carrier because they held themselves out as a ready
transportation indiscriminately to the students of a particular school living within or near
where they operated the service and for a fee. Spouses Perena vs. Spouses Nicolas, GR No.
157917, August 29, 2012

1. Diligence Required of Common Carriers

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

A common carrier is presumed at fault in the absence of a satisfactory explanation on

how the airplane crash occured. Vda. De Abeto vs. Philippine Air Lines, Inc.,115 SCRA
489, 1982

Under Article 1733 of the Civil Code, common carriers from the nature of their business
and for reasons of public policy are bound to observe extraordinary diligence in the
vigilance over the goods and for the safety of passengers transported by them according
to all circumstances of each case. Thus, under Article 1735 of the same Code, in all cases
other than those mentioned in Article 1734 thereof, the common carrier shall be
presumed to have been at fault or to have acted negligently, unless it proves that it has
observed the extraordinary diligence required by law. More importantly, common
carriers cannot limit their liability for injury or loss of goods where such injury or loss was
caused by its own negligence. Otherwise stated, the law on averages under the Code of
Commerce cannot be applied in determining liability where there is negligence.
American Home Assurance Company vs. The Court of Appeals, G.R. No. 94149, 5 May
1992
 The occurrence of a fortuitous event did not terminate PAL’s contract with its passengers
who must still necessarily have to exercise extraordinary diligence in safeguarding the
stranded passengers until they have reached their final destination. Philippines Airlines,
Inc.,vs. Court of Appeals, 226 SCRA 423 (1993)

The extraordinary responsibility of common carriers lasts until actual or constructive

delivery of the cargo to the consignee or to the person who has a right to receive them.
Macam vs. Court of Appeals, 313 SCRA 77 (1999)

MT Vector fits the definition of a common carrier under Article 1732 of the New Civil
Code; they are obliged to exercise extra ordinary diligence. However, MT Vector was
unseaworthy at the time of the mishap, that the said vessel was allowed to set sail when
it was, to everyone in the group’s knowledge, not fit to do so translates into rashness and
imprudence. Thus, they failed to discharge the obligation imposed upon by law. Vector
Shipping Corp. and Francisco Soriano vs. Adelfo B. Macasa 559 SCRA 97 (2008)

When a bus hit a tree and house due to the fast and reckless driving of the bus driver
resulting in injury to one of its passengers, the bus owner is liable and such liability does
not cease even upon proof that he exercised all the diligence of a good father of family
in the selection and supervision of its employees. R Transport Corporation vs. Pante, GR
No. 162104, September 15, 2009

Though it is true that common carriers are presumed to have been at fault or to have
acted negligently if the goods transported by them are lost, destroyed, or deteriorated,
and that the common carrier must prove that it exercised extraordinary diligence in
order to overcome the presumption, the plaintiff must still, before the burden is shifted
to the defendant, prove that the subject shipment suffered actual shortage. This can only
be done if the weight of the shipment at the port of origin and its subsequent weight at
the port of arrival have been proven by a preponderance of evidence, and it can be seen
that the former weight is considerably greater than the latter weight, taking into
consideration the exceptions provided in Article 1734 of the Civil Code. Asian Terminals,
Inc vs. Simon Enterprises, Inc., G.R. No. 177116, February 27, 2013

There is no dispute that the custody of the goods was never turned over to the consignee
or his agents but was lost into the hands of unauthorized persons who secured possession
thereof on the strength of falsified documents. When the goods shipped are either lost
or arrived in damaged condition, a presumption arises against the carrier of its failure to
observe that diligence, and there need not be an express finding of negligence to hold it
liable. To overcome the presumption of negligence, the common carrier must establish
by adequate proof that it exercised extraordinary diligence over the goods. In the
present case, Nedlloyd failed to prove that they did exercise the degree of diligence
required by law over the goods they transported, it failed to adduce sufficient evidence
they exercised extraordinary care to prevent unauthorized withdrawal of the shipments.
Nedlloyd Lijnen B.V. Rotterdam and the East Asiatic Co., LTD., vs. Glow Laks Enterprises,
LTD., G.R. No. 156330, November 19, 2014

2. Liabilities of Common Carriers

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

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

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

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

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

A certificate of public convenience is included in the term “property” in the broad sense
of the term and can be sold by the holder thereof because it has considerable material
value and is considered a valuable asset. Cogeo Cubao Operators and Drivers
Association vs. Court of Appeals, 207 SCRAA 243 (1992)

When an airline issues a ticket to a passenger confirmed on a particular flight, on a

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

It is PAL’s duty to provide assistance to Spouses Miranda and, for that matter, any other
passenger similarly inconvenienced due to delay in the completion of the transport and
the receipt of their baggage. Therefore, its unilateral and voluntary act of providing cash
assistance is deemed part of its obligation as an air carrier, and is hardly anything to rave
about. Philippine Airlines, Inc., vs. Court of Appeals, G.R. No. 119641, May 17, 1996)

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

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

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

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

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

In an action for breach of contract of carriage, the aggrieved party does not have to
prove that the common carrier was at fault or was negligent. All that is necessary to
prove is the existence of the contract and the fact of its non-performance by the carrier.
Singapore Airlines Limited vs. Fernandez, G.R. No. 142305, December 10, 2003

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

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

When an airline issues a ticket to a passenger, confirmed for a particular flight on a

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

It was established that the primary cause of the death of the passenger of the jeepney
was the negligence of the driver of the truck which collided with the passenger jeepney.
Thus, the truck owner is liable for this failure to rebut the presumption of negligence in
hiring and supervision of his employee. Whenever an employee’s negligence causes
damage or injury to another, there instantly arises a presumption juris tantum that the
employer failed to exercise diligentissimi patris families in the selection or supervision of
his employee. Thus, in the selection of prospective employees, employers are required to
 examine them as to their qualification, experience and service record. With respect to
the supervision of employees, employers must formulate standard operating procedures,
monitor their implementation, and impose disciplinary measures for breaches thereof.
These facts must be shown by concrete proof. The Heirs of the late Ruben Reinoso, Sr.
vs. Court of Appeals, GR No. 116121, July 18, 2011

In a contract of carriage, it is presumed that the common carrier is at fault or is negligent

when a passenger dies or is injured. In fact, there is even no need for the court to make
an express finding of fault or negligence on the part of the common carrier. This
statutory presumption may only be overcome by evidence that the carrier exercised
extraordinary diligence. Unfortunately, the common carrier miserably failed to
overcome this presumption as the accident which led to the passenger’s death was due
to the reckless driving and gross negligence of its driver. Heirs of Josemaria Ochoa vs.
G&S Transport Corporation, March 19, as affirmed in the July 16, 2012 decision

Under the Code of Commerce, if the goods are delivered but arrived at the destination
in damaged condition, the remedies to be pursued by the consignee depend on the
extent of damage on the goods. If the effect of damage on the goods consisted merely
of diminution in value, the carrier is bound to pay only the difference between its price
on that day and its depreciated value as provided under Article 364. Malayan, as the
insurer of PASAR, neither stated nor proved that the goods are rendered useless or unfit
for the purpose intended by PASAR due to contamination with seawater. Hence, there is
no basis for the goods’ rejection under Article 365 of the Code of Commerce. Clearly, it
is erroneous for Malayan to reimburse PASAR as though the latter suffered from total
loss of goods in the absence of proof that PASAR sustained such kind of loss. Loadstar
Shipping Company, Inc., and Loadstar International Shipping Co., Inc., vs. Malayan
Insurance Co., Inc., G.R. No. 185565, November 26, 2014

B. Vigilance over Goods

1. Exempting Causes

a. Requirement of Absence of Negligence

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

Mechanical defects in the carrier are not considered a caso fortuito that exempts the
carrier from responsibility. Even granting arguendo that the engine failure was a
fortuitous event, when the vessel finally left the port of Cebu, there was no longer any
force majeure that justified by-passing a port of call. The "interruption" was caused by
the captain upon instruction of management, hence, the owner of the vessel and the
ship agent shall be civilly liable for the acts of the captain. Sweet Lines, Inc., vs. The
Honorable Court of Appeals, Micaela b. Quintos, et al., G.R. No. L-43640, 28 April
1983)
Indeed, the typhoon was an inevitable occurrence, yet, having been kept posted on
the course of the typhoon by weather bulletins at intervals of six hours, the captain
and crew were well aware of the risk they were taking as they hopped from island to
island. In so doing, they failed to observe that extraordinary diligence required of
them explicitly by law. Pedro Vasquez, et al., vs. Court of Appeals, G.R. No. L-42926,
13 September 1985)

A mishap caused by defective brakes cannot be consideration as fortuitous in

character. Certainly, the defects were curable and the accident preventable. Vicente
Vergara vs. The Court of Appeals, G.R. No. 77679, 30 September 1987)

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

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

A fortuitous event is possessed of the following characteristics: (a) the cause of the
unforeseen and unexpected occurrence, or the failure of the debtor to comply with
his obligations, must be independent of human will; (b) it must be impossible to
foresee the event which constitutes the caso fortuito, or if it can be foreseen, it must
be impossible to avoid; (c) the occurrence must be such as to render it impossible for
the debtor to fulfill his obligation in a normal manner; and (d) the obligor must be
free from any participation in the aggravation of the injury resulting to the creditor.
Under the circumstances of this case, the explosion of the new tire may not be
considered a fortuitous event. There are human factors involved in the situation. The
fact that the tire was new did not imply that it was entirely free from manufacturing
defects or that it was properly mounted on the vehicle. Neither may the fact that the
tire bought and used in the vehicle is of a brand name noted for quality, resulting in
the conclusion that it could not explode within five days’ use. Alberta Yobido vs. Court
of Appeals, G.R. No. 113003, 17 October 1997
Despite the report of Philippine Constabulary agent Generalao that the Maranaos
were going to attack its buses, Fortune took no steps to safeguard the lives and
properties of its passengers. The seizure of the bus of the Fortune was foreseeable
and, therefore, was not a fortuitous event which would exempt petitioner from
liability. Fortune Express, Inc., vs. Court of Appeals, G.R. No. 119756, 18 March 1999)

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

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

b. Absence of Delay

The oft-repeated rule regarding a carrier's liability for delay is that in the absence of
a special contract, a carrier is not an insurer against delay in transportation of goods.
When a common carrier undertakes to convey goods, the law implies a contract that
they shall be delivered at destination within a reasonable time, in the absence, of any
agreement as to the time of delivery. But where a carrier has made an express
contract to transport and deliver property within a specified time, it is bound to
fulfill its contract and is liable for any delay, no matter from what cause it may have
arisen. This result logically follows from the well-settled rule that where the law
creates a duty or charge, and the party is disabled from performing it without any
default in himself, and has no remedy over, then the law will excuse him, but where
the party by his own contract creates a duty or charge upon himself, he is bound to
make it good notwithstanding any accident or delay by inevitable necessity because
he might have provided against it by contract. Whether or not there has been such
an undertaking on the part of the carrier to be determined from the circumstances
surrounding the case and by application of the ordinary rules for the interpretation
of contracts. Aniceto Saludo, Jr. vs. Hon. Court of Appeals, G.R. No. 95536, March
23, 1992

Petitioner's late delivery of the baggage for eleven (11) days was not motivated by ill
will or bad faith. In fact, it immediately coordinated with its Central Baggage
 Services to trace private respondent's suitcase and succeeded in finding it. Under the
circumstances, considering that petitioner's actuation was not attendant with bad
faith, the award of moral damages is unfair. Philippine Air Lines vs. Florante Miano,
G.R. No. 106664, March 8, 1995

c. Due Diligence to Prevent or Lessen the Loss

The duty of common carrier, like PAL, to exercise the highest degree of diligence
extends to passengers and crewmembers. Co-pilot who sustained brain injury due to
the crash landing of a PAL plane which was negligently handled by the pilot is
entitled to compensatory and moral damages. Such negligence is a case of quasi-
delict and even if construed as a matter of employer-employee relationship, the
resulting injury to claimant can be traced to the bad faith of the employer justifying
an award of moral damages under Article 2220 and Article 19 of the Civil Code.
Philippine Air Lines, Inc., vs. Court of Appeals, 106 SCRA 391 (1981)

Carrier is liable over goods discharged by it in bad order condition, and the arrastre
operator for goods damaged under its custody. Metro Port Service, Inc.,vs. Court of
Appeals, 131 SCRA 365 (1984)

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

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

“Route observance” of the International Rules of the Road will not relieve a vessel
from responsibility if the collision could have been avoided by proper care and skill
on her part or even by departure from the rules. Mecenas vs. Court of Appeals, 180
SCRA 83 (1989)

Failure of ship’s owner to install radar equipment to enable ship to know presence of
typhoon shows lack of extraordinary diligence. Heirs of Amparo de los Santos vs.
Court of Appeals, 186 SCRA 649 (1990)

Clearance issued by the Coast Guard is entitled to much weight as it was issued by an
agency of the government charged with the sea worthiness of vessels. The clearance
to sale issued by the Coast Guard is proof of compliance with the requirements of
Section 1019 of the Philippine Merchant Marine Rules and Regulations. Western
Shipping Agency, Inc., vs. National Labor Relations Commission, 253 SCRA 405
(1996)

Carrying a deck cargo raised the presumption of unseaworthiness unless it can be

shown that the deck cargo will not interfere with the proper management of the
ship. Philippine General Insurance, Co. Inc.,vs. Court of Appeals, 273 SCRA 262
(1997)

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

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

To be seaworthy, a vessel “must have that degree of fitness which an ordinary,

careful and prudent owner would require his vessel to have at the commencement of
her voyage, having regard to all the probable circumstances of it.” Thus, the degree
of seaworthiness varies in relation to the contemplated voyage. In examining what is
meant by seaworthiness we must bear in mind the dual nature of the carrier’s
obligations under a contract of affreightment. To satisfy these duties the vessel must
(a) be efficient as an instrument of transport and (b) as a storehouse for her cargo.
The latter part is referred to as cargo worthiness. A ship is efficient as an instrument
of transport if its hull, tackle and machinery are in a state of good repair, if she is
sufficiently provided with fuel and ballast, and is manned by an efficient crew. And a
vessel is cargo worthy if it is sufficiently strong and equipped to carry, and her cargo
must be so loaded that it is safe for her to proceed on her voyage. A mere right given
to the charterer to inspect the vessel before loading and to satisfy himself that she
was fit for the contracted cargo does not free the shipowner from his obligation to
provide a cargo worthy ship. Santiago Lighterage Corp. vs. Court of Appeals, 432
SCRA 492 (2004)
 The shipment received by the ATI from the vessel of COCSCO was found to have
sustained loss and damages. An arrastre operator’s duty is to take good care of the
goods and to turn them over to the party entitled to their possession. It must prove
that the losses were not due to its negligence or to that of its employees. The Court
held that ATI failed to discharge its burden of proof. ATI blamed COSCO but when
the damages were discovered, the goods were already in ATI’s custody for two
weeks. Witnesses also testified that the shipment was left in an open area exposed to
the elements, thieves and vandals. Asian Terminals Inc., vs. First Lepanto-Taisho
Insurance Corporation, G.R. No. 185964, June 16 2014

2. Contributory Negligence

Where he contributes to the principal occurrence, as one of its determining factors, he

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

3. Duration of Liability

Under a general poll partnership agreement, the ticket-issuing airline is the principal in
a contract of carriage while the endorsee-airline is the agent. The obligation of the
ticket-issuing airline remained and does not cease to exist, regardless of the fact that
another airline had undertaken to carry the passengers to one of their destinations.
China Airlines vs. Chiok, 407 SCRA 432 (2003)

a. Delivery of Goods to Common Carrier

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

Mere proof of delivery of the goods in good order to a common carrier and of their
arrival in bad order at their destination constitutes a prima facie case of fault or
negligence against the carrier. If no adequate explanation is given as to how the
deterioration, loss, or destruction of the goods happened, the transporter shall be
held responsible. In this case, the fault is attributable to ESLI. Eastern Shipping Lines,
Inc., vs. BPI/MS Insurance Corporation and Mitsui Insurance Co., Ltd., G.R. No.
 182864, January 12, 2015

b. Actual or Constructive Delivery

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

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

The liability of a common carrier does not cease by mere transfer of custody of the
cargo to the arrastre operator. Like the duty of seaworthiness, the duty of care of the
cargo is non-delegable and the carrier is accordingly responsible for the acts of the
master, the crew, the stevedore and his other agents. The fact that a consignee is
required to furnish persons to assist in unloading a shipment may not relieve the
carrier of its duty as to such unloading. It is settled in maritime law jurisprudence that
cargoes while being unloaded generally remain under the custody of the carrier.
Since the damage to the cargo was incurred during the discharge of the shipment
and while under the supervision of the carrier, the latter is liable for the damage
caused to the cargo.

The arrastre operator is likewise liable. The functions of an arrastre operator involve
the handling of cargo deposited on the wharf or between the establishment of the
consignee or shipper and the ship’s tackle. Being the custodian of the goods
discharged from a vessel, an arrastre operator’s duty is to take good care of the
goods and to turn them over to the party entitled to their possession. While it is true
that an arrastre operator and a carrier may not be held solidarily liable at all times,
the facts of these cases show that apart from the stevedores of the arrastre operator
being directly in charge of the physical unloading of the cargo, its foreman picked
the cable sling that was used to hoist the packages for transfer to the dock.
Moreover, the fact that the packages were unloaded with the same sling unharmed
is telling of the inadequate care with which the stevedore handled and discharged
the cargo. Westwind Shipping Corporation vs. UCPB General Insurance Co., GR no.
2002289, November 25, 2013
 c. Temporary Unloading or Storage

4. Stipulation for Limitation of Liability

a. Void Stipulations

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

A passenger is bound by the provisions of his plane ticket even though he did not
sign the same. Pan American World Airways, Inc., vs. Intermediate Appelate Court,
164 SCRA 268. (1988)

The Philippine Ports Authority cannot abrogate the rates fixed and leave the fixing of
rates for pilotage service to the contracting parties as this constitutes jettisoning a
government policy and changing it to laissez-faire, something which only the
legislature, or whoever is vested with lawmaking authority could do. Philippine
Interisland Shipping Association of the Philippines vs. Court of Appeals, 266 SCRA
489 (1997)

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

b. Limitation of Liability to Fixed Amount

The nature of an airline’s contract of carriage partakes of two types, namely: a

contract to deliver a cargo or merchandise to its destination or a contract to
transport passengers to their destination. An air carrier is not liable for the loss of
baggage in an amount in excess of the limits specified in the tariff which was filed
with proper authorities, such tariff being binding on the passenger regardless of the
passenger’s lack of knowledge thereof or assent thereto. British Airways vs. Court of
Appeals, 258 SCRA 450 (1996)

Common carriers, as a general rule, are presumed to have been at fault or negligent
if the goods they transported deteriorated or got lost or destroyed. That is, unless
they prove that they exercised extraordinary diligence in transporting the goods. In
 order to avoid responsibility for any loss or damage, therefore, they have the burden
of proving that they observed such diligence. As the carrier of the subject shipment,
HEUNG-A was bound to exercise extraordinary diligence in conveying the same and
its slot charter agreement with DONGNAMA did not divest it of such
characterization nor relieve it of any accountability for the shipment. However, the
liability of HEUNG-A is limited to $500 per package or pallet because in case of the
shipper’s failure to declare the value of the goods in the bill of lading, Section 4,
paragraph 5 of the COGSA provides that neither the carrier nor the ship shall in any
event be or become liable for any loss or damage to or in connection with the
transportation of goods in an amount exceeding $500 per package. Philam
Insurance Company vs. Heung Ah Shipping Corporation and Wallem Shipping Inc.,
G.R. No. 1877l and G.R. No. 187812, July 23, 2014

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

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

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

5. Liability for Baggage of Passengers

a. Checked-In Baggage

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

b. Baggage in Possession of Passengers

C. Safety of Passengers

A common carrier is bound to carry its passengers safely as far as human care and foresight
can provide, using the utmost diligence of very cautious persons, with due regard to all the
circumstances. In a contract of carriage, it is presumed that the common carrier was at fault
or was negligent when a passenger dies or is injured. Unless the presumption is rebutted, the
court need not even make an express finding of fault or negligence on the part of the
common carrier. This statutory presumption may only be overcome by evidence that the
carrier exercised extraordinary diligence. Victory Liner, Inc.,vs. Rosalito Gammad, G.R. No.
159636, November 25, 2004

The petitioner has the obligation to transport its passengers to their destinations and to
observe extraordinary diligence in doing so. Death or any injury suffered by any of its
passengers gives rise to the presumption that it was negligent in the performance of its
obligation under the contract of carriage. Philippine National Railways vs. The Honorable
Court of Appeals, G.R. No. L-55347. October 4, 1985

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

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

1. Void Stipulations

2. Duration of Liability
a. Waiting for Carrier or Boarding of Carrier

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

When the private respondents purchased their tickets, they were instantaneously
bound by the conditions of the contract of carriage particularly the check-in time
requirement. Philippine Airlines, Inc.,vs. Ramos, 207 SCRA 461, (1992)

Failure of a passenger to take the standard procedure for any passenger with a two-
day stop-over in a foreign city to confirm the availability of a seat on his next flight
out of the city, the air carrier cannot now be faulted for the passenger’s omission or
negligence. Sarreal, Sr. vs. Japan Airlines Co. Ltd., 207 SCRA 359, (1992)

b. Arrival at Destination

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

Petitioner airline committed a breach of contract when it failed to secure immediate

flight connection for private respondent after the latter missed her connecting light
to Los Angeles due to petitioner’s delayed departure from Manila. China Airline, Ltd.
vs. Intermediate Appelate Court, 169 SCRA 226, (1989)
 Anacleto Viana was still a passenger at the time of the incident. When the accident
occurred, the victim was in the act of unloading his cargoes, which he had every right
to do, from Aboitiz's vessel. A carrier is duty bound not only to bring its passengers
safely to their destination but also to afford them a reasonable time to claim their
baggage. Aboitiz Shipping Corporation vs. Hon. Court of Appeals, Eleventh Division,
G.R. No. 884458, 6 November 1989

3. Liability for Acts of Others

a. Employees

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

The negligence of the employee gives rise to the presumption of negligence on the
part of the employer. This is the presumed negligence in the selection and
supervision of the employee. The theory of presumed negligence, in contrast with
the American doctrine of respondent superior, where the negligence of the
employee is conclusively presumed to be the negligence of the employer, is clearly
deducible from the last paragraph of Article 2180 of the Civil Code which provides
that the responsibility therein mentioned shall cease if the employers prove that they
observed all the diligence of a good father of a family to prevent damages. Leopoldo
Poblete vs. Donato Fabros, G.R. No. L-29803, 14 September 1979
 The misconduct on the part of the carrier’s employees toward a passenger gives the
latter an action for damages against the carrier. Sabena Belgian World Airlines vs.
Honorable Court of Appeals G.R. No. 82068. March 31, 1989

An airline cannot be held liable for negligence of employee of its ticketing agent
(another airline). PAL, as the ticketing agent of CAL, is liable for negligence of its
own employee. China Airlines, Inc., vs. Court of Appeals, 185 SCRA 449 (1990)

An agent is also responsible for any negligence in the performance of its function
and is liable for damages which the principal may suffer by reason of its negligent
act. Member airlines of the International Air Transport Association (IATA) are
regarded as agents of each other in the issuance of the tickets and other measures
pertaining to their relationship. British Airways vs. Court of Appeals, 258 SCRA 450
(1996)

It must be emphasized that a contract to transport passengers is quite different in

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

The operator of a bus company cannot renege on the obligation brought about by
collision of vehicles by claiming that she is not the true owner of the bus. In case of
collision of motor vehicles, the person whose name appears in the certificate of
registration shall be considered the employer of the person driving the vehicle and
shall be directly and primarily liable with the driver under the principle of vicarious
liability. Mariano C. Mendoza and Elvira Lim vs. Spouses Leonora J. Gomez and
Gabriel V. Gomez, G.R. No. 160110, June 18, 2014

b. Other Passengers and Strangers

A tort committed by a stranger which causes injury to a passenger does not accord
the latter a cause of action against the carrier. The negligence for which a common
carrier is held responsible is the negligent omission by the carrier's employees to
prevent the tort from being committed when the same could have been foreseen
and prevented by them. Jose Pilapil vs. Hon. Court of Appeals, G.R. No. 52159, 22
December 1989

4. Extent of Liability for Damages

Where plaintiff in action for damages based on breach of contract of carriage for
negligence of common carrier assigned his rights to recoverable damages to another
during the pendency of the case, his death thereafter will not result in death of action for
damages. The transferee should be instituted as party plaintiff. Del Castillo vs. Jaymalin,
112 SCRA 629 (1982)
Subsidiary liability of an employer under Article 103, Revised Penal Code, is enforceable
in the same criminal case where judgment for employee’s civil liability was rendered. The
institution of separate and independent action to enforce employer’s liability is
unnecessary as it will prolong the agony of the victim’s heir. Judgment of conviction
sentencing a defendant employee to pay indemnity is conclusive upon the employer in
an action for enforcement of employer’s subsidiary liability not only with regard to civil
liability but also with regard to its amount. Vda. De Paman vs. Señeris, 115 SCRA 709.
1982)

Award of exemplary damages is not proper where there is no showing that the company
acted in a wanton or malevolent manner for the death of some passengers abroad the
ferryboat. Sarkies Tours Philippines, Inc.,vs. Intermediate Appellate Court, 124 SCRA
588. (1983)

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

Exemplary damages may be allowed only in cases where the defendant acted in a
wanton, fraudulent, reckless, oppressive or malevolent manner, There being no evidence
of fraud, malice or bad faith on the part of petitioner, the grant of exemplary damages
should be discarded. Philippine National Railways vs. The Honorable Court of Appeals,
G.R. No. L-55347. October 4, 1985

Private respondent, who was not allowed to board the plane because her seat had
already been given to another passenger despite fact that she has a confirmed ticket, is
entitled to damages. Korean Airlines Co., vs. Court of Appeals, 154 SCRA 211 (1987)

Mere refusal to accede to the passenger’s wishes does not necessarily translate into
damage in the absence of bad faith. Air France vs. court of Appeals, 171 SCRA 399
(1989)

With respect to moral damages, the rule is that the same are recoverable in a damage
suit predicated upon a breach of contract of carriage only where (1) the mishap results in
the death of a passenger and (2) it is proved that the carrier is guilty of fraud and bad
faith, even if death does not result. Sabena Belgian World Airlines vs. Court of Appeals,
171 SCRA 620 (1989)

The award of damages for death is computed on the basis of the life expectancy of the
deceased, not of his beneficiary. Philippine Airlines, Inc.,vs. Court of Appeals, 185 SCRA
110 (1990)

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

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

The law distinguishes a contractual breach effected in good faith from one attended by
bad faith. Where in breaching the contract, the defendant is not shown to have acted
fraudulently or in bad faith, liability for damages is limited to the natural and probable
consequences of the breach of the obligation and which the parties had foreseen or
could reasonably have foreseen; and in that case, such liability would not include liability
for moral and exemplary damages. Under Article 2232 of the Civil Code, in a contractual
or quasi-contractual relationship, exemplary damages may be awarded only if the
defendant had acted in “a wanton, fraudulent, reckless, oppressive or malevolent
manner.” (China Airlines Limited vs. Court of Appeals, 211 SCRA 897, (1992)

The Civil Code, in Article 1764 thereof, expressly makes Article 2206 applicable "to the
death of a passenger caused by the breach of contract by a common carrier."
Accordingly, a common carrier is liable for actual or compensatory damages under
Article 2206 in relation to Article 1764 of the Civil Code for deaths of its passengers
caused by the breach of the contract of transportation. Sulpicio Lines, Inc., vs. The
Honorable Court of Appeals, G.R. No. 113578, 14 July 1995

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

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

Factors in determining reasonableness of damages awarded under Art. 1764 and 2206 of
the Civil Code are: (a) life expectancy (considering the health of the victim and the
mortality table which is deemed conclusive) and loss of earning capacity; (b) pecuniary
loss, loss of support and service; and (c) moral and mental sufferings. Net income is the
one used in the computation of the award for loss of income. When there is no showing
that the living expenses constituted a smaller percentage of the gross income, the living
expenses are fixed at half of the gross income. A person’s demise earlier that the
estimated life span is of no moment for purposes of determining loss of earning capacity,
life expectancy remains at 80. Smith Bell Dodwell Shipping Agency Corp. vs. 383 SCRA
341 (2002)

Article 1764 in relation to Article 2206 of the Civil Code, holds the common carrier in
breach of its contract of carriage that results in the death of a passenger liable to pay the
following: (1) indemnity for death, (2) indemnity for loss of earning capacity, and (3)
moral damages. Victory Liner, Inc.,vs. Rosalito Gammad, G.R. No. 159636, November 25,
2004

D. Bill of Lading

A shipper may be liable for freightage on bills of lading signed by another person where the
shipper appears as shipper or consignee, bills of lading where persons other than the former
(herein defendant) appear as shipper, and bills of lading not signed by the shipper where the
testimonial evidence shows that goods shipped actually belong to him as shipper. Where the
original bill of lading has been lost or destroyed, evidence of freightage due may be taken
from carbon copy thereof and the ship’s cargo manifest. Compania Maritima vs. Limson, 141
SCRA 407. (1986)

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

A bill of lading is a written acknowledgment of the receipt of goods and an agreement to

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

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

1. Three-Fold Character

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

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

2. Delivery of Goods

a. Period of Delivery

In the absence of an undertaking by a common carrier to deliver at a given date or

time, delivery of shipment or cargo should at least be made within a reasonable time.
Maersk Line vs. Court of Appeals, 222 SCRA 108 (1993)

b. Delivery Without Surrender of Bill of Lading

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

c. Refusal of Consignee to Take Delivery

3. Period for Filing Claims

A stipulation reducing the one-year period for filing the action for recovery on lost or
damaged cargo is null and void. Loadstar Shipping Co., Inc.,vs. Court of Appeals, 315
SCRA 339 (1999)

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

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

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

The notice or claim that is required to be made against the carrier under Article 366 of
the Code of Commerce is a condition precedent to the accrual of a right of action
against the latter for loss of, or damage to, the goods transported. Without such prior
notice or claim having been made within the time allowed, no right of action against the
carrier can rise in favor of the shipper or consignee. UCPB General Insurance Co., Inc.,vs.
Aboitiz Shipping Corporation 578 SCRA 251 (2009)

4. Period for Filing Actions

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

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

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

E. Maritime Commerce

1. Charter Parties
Under a contract of affreightment, the ship owner retains the possession, command and
navigation of the ship, the charterer or freighter merely having use of the space in the
vessel in return for his payment of the charter hire.

Dead freight is the amount paid by or recoverable from a charterer of a ship for the
portion of the ship’s capacity the latter contracted but failed to occupy. Demurrage is
the sum fixed in a charter party as remuneration to the owner of the ship for the
detention of his vessel beyond the number of days allowed to the charter party for
loading or unloading or for sailing. The shipper or charterer is liable for the payment of
demurrage claims when he exceed the period for loading or unloading as agreed upon
or the agreed “laydays”. NFA vs. Court of Appeals, 311 SCRA 700 (1999)

a. Bareboat/Demise Charter

A bareboat or demise charter is where the ship owner turns over possession of his
vessel to the charterer, with the latter undertaking to provide the crew, victuals,
supplies and fuel during the term of the charter. In a time charter, the ship owner
retains possession and control of his vessel through the master and crew who remain
in his employ. A voyage charter is simply a contract of affreightment where the
master and crew remain in the employ of the ship owner. In a demise or bareboat
charter, the charterer who is treated as owner pro hoc vice, and not the general
owner, is liable for expenses of the voyage including wages of seamen. Petitioner, as
agent of the charterer, is liable to private respondent for the latter’s claims arising
from his unjust dismissal and for breach of contract of his employment. Litonjua
Shipping Company, Inc., vs. National Seamen Board, 176 SCRA 189 (1989)

b. Time Charter

Where the agreement executed by the parties was a time charter where the
possession and control of the barge was retained by the owner, the latter is,
therefore, a common carrier legally charged with extraordinary diligence in the
vigilance over the goods transported by him. The sinking of the vessel created a
presumption of negligence and/or unseaworthiness which the barge owner failed to
overcome and gave rise to his liability for the charterer lost cargo despite the latter’s
failure to insure the same. Oceaneering Contractrors (Phils), Inc., vs. Nestor Barreto,
doing business as NNB Lighterage , GR No. 184215, February 9, 2011

c. Voyage/Trip Charter

It bears stressing that subject Letter of Agreement is considered a Charter Party. A

charter party is classified into (1) “bareboat” or “demise” charter and (2) contract of
affreightment. Subject contract is one of affreightment, whereby the owner of the
vessel leases part or all of its space to haul goods for others. It is a contract for
special service to be rendered by the owner of the vessel. Under such contract the
ship owner retains the possession, command and navigation of the ship, the
charterer or freighter merely having use of the space in the vessel in return for his
payment of the charter hire. National Food Authority vs. Court of Appeals, G.R. No.
96453, August 4, 1999)
 A charter party is a contract by which an entire ship, or some principal part thereof, is
let by the owner to another person for a specified time or use; a contract of
affreightment is one by which the owner of a ship or other vessel lets the whole or
part of her to a merchant or other person for the conveyance of goods, on a
particular voyage, in consideration of the payment of freight. A contract of
affreightment may be either time charter, wherein the leased vessel is leased to the
charterer for a fixed period of time, or voyage charter, wherein the ship is leased for
a single voyage. In both cases, the charter-party provides for the hire of the vessel
only, either for a determinate period of time or for a single or consecutive voyage,
the ship owner to supply the ship’s store, pay for the wages of the master of the crew,
and defray the expenses for the maintenance of the ship. Under a demise or
bareboat charter on the other hand, the charterer mans the vessel with his own
people and becomes, in effect, the owner for the voyage or service stipulated,
subject to liability for damages caused by negligence. If the charter is a contract of
affreightment, which leaves the general owner in possession of the ship as owner for
the voyage, the rights and the responsibilities of ownership rest on the owner. The
charterer is free from liability to third persons in respect of the ship. It is only when
the charter includes both the vessel and its crew, as in a bareboat or demise that a
common carrier becomes private, at least insofar as the particular voyage covering
the charter-party is concerned. Caltex Philippines, Inc.,vs. Sulpicio Lines, Inc., et. al.,
G.R. No. 131166, September 30, 1999)

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

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

2. Liability of Ship Owners and Shipping Agents

In case of collision of vessels, in order to avail of the benefits of Article 837 of the Code
of Commerce the ship owner or agent must abandon the vessel. In such case, the civil
liability shall be limited to the value of the vessel with all the appurtenances and freight
earned during the voyage. However, where the injury or average is due to the ship
owner’s fault, the ship owner may not avail of his right to limited liability by abandoning
the vessel. Hence, the rule is that in case of collision there should be abandonment of the
vessel by the ship owner or agent in order to enjoy the limited liability provided for
under Art. 837. The exception to this rule is when the vessel is totally lost in which case
there is no vessel to so abandonment is not required. Because of such total loss, the
liability of the ship owner or agent for damages is extinguished. Nevertheless, the ship
owner or agent is personally liable for claims under the Workmen’s Compensation Act
and for repairs of the vessel before its loss. In case of illegal or of the captain the liability
of the ship owner or agent is subsidiary. In such instance, the ship owner or agent may
avail of the provisions of Art. 837 by abandoning the vessel. However, if the injury or
damage is caused by the ship owner’s fault as where he engages the services of an
inexperienced and unlicensed captain or engineer, he cannot avail of the provisions of
Art. 837 of the Code by abandoning the vessel. He is personally liable for the damages
arising thereby. Luzon Stevedoring Corporation vs. Court of Appeals, G.R. No. L-58897, 3
December 1987

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

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

The relationship between the consignee and the arrastre operator is much akin to that
existing between the consignee or owner of shipped goods and the common carrier, or
that between a depositor and warehouseman. In the performance of its job, an arrastre
operator is bound by the management contract it had executed with the Bureau of
Customs which is a sort of a stipulation pour autrui which is also binding on the
consignee (and the insurer, as successor-in-interest of the consignee) indeed, upon
taking delivery of the cargo, a consignee tacitly accepts the provisions of the
management contract, including those which are intended to limit the liability of the
arrastre operator. Summa Insurance Corporation vs. Court of Appeals, 253 SCRA 175
(1996)

Even if the consignee is not a signatory to the contract of carriage between the shipper
and the carrier, the consignee can still be bound by the contract. When the consignee
formally claims reimbursement for the missing goods from the common carrier and
subsequently files a case against the latter based on the very same bill of lading, it
accepts the provisions of the contract and thereby makes itself a party there. Everett
Steamship Corporation vs. Court of Appeals, 297 SCRA 496 (1998)

Article 586 of the Code of Commerce states that a ship agent is “the person entrusted
with provisioning or representing the vessel in the port in which it may be found.” Hence,
whether acting as agent of the owner of the vessel or as agent of the charterer,
petitioner will be considered as the ship agent and may be held liable as such, as long the
latter is the one that provisions or represents the vessel. Macondray & Co., Inc.,vs.
Provident Insurance Corp., 445 SCRA 644. (2004)

Article 627 of the Code of Commerce defines the Chief Mate, also called Chief Officer or
Sailing Mate, as “the second chief of the vessel, and unless the agent orders otherwise,
shall take the place of the captain in cases of absence, sickness, or death, and shall then
assume all his powers, duties, and responsibilities.” A Chief Officer, therefore, is second
in command, next only to the captain of the vessel. The exercise of discretion and
judgment in directing a ship’s course is as much managerial in nature as decisions arrived
at in the confines of the more conventional board room or executive office. Important
functions pertaining to the navigation of the vessel like assessing risks and evaluating the
vessel’s situation are managerial in nature. Thus, a Chief Officer is a managerial
employee; hence, substantial evidence is needed to establish the claim that there was
breach of trust and confidence. Centennial Transmarine, Inc.,et al. vs. Ruben G. Dela
Cruz 563 SCRA 210, (2008)

The LIMITED LIABILITY RULE cannot be availed of by the charterers/sub-charterer in

order to escape from their liability. The Code of Commerce is clear on which indemnities
may be confined or restricted to the value of the vessel and these are the – “indemnities
in favor of third persons which may arise from the conduct of the captain in the care of
the goods which he loaded on the vessel.” Thus, what is contemplated is the liability to
third persons who may have dealt with the SHIPOWNER, the AGENT or even the
CHARTERER in case of demise or bareboat charter.

The Charterer cannot use the said Rule because it does not completely and absolutely
step into the shoes of the shipowner or even the ship agent because there remains
conflicting rights between the former and the real shipowner as derived from their
charter agreement. Therefore, even if the contract is for a bareboat or demise charter
where possession, free administration and even navigation are temporarily surrendered
to the charterer, dominion over the vessel remains with the shipowner. Ergo, the
charterer or the sub-charterer, whose rights cannot rise above that of the former, can
never set up the Limited Liability Rule against the very owner of the vessel. Dela Torre vs.
Court of Appeals, GR No. 160088, July 13, 2011
 a. Liability for Acts of Captain

b. Exceptions to Limited Liability

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

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

3. Accidents and Damages in Maritime Commerce

Despite loss of the subject cargo due to fire, the District Collector of Customs did not
lose jurisdiction over the abandonment proceedings. The loss of the cargo did not
extinguish his incipient jurisdiction in the aid proceedings, nor render functus officio her
declaration that the subject shipment had been abandoned and ipso facto belonged to
the government. R.V. Marvan Freight, Inc., vs. Court of Appeals, 424 SCRA 596 (2004)

a. General Average

b. Collisions

In American jurisprudence that there is a presumption of fault against a moving

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

4. Carriage of Goods by Sea Act

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

Inasmuch as neither the Civil Code nor the Code of Commerce states a specific
prescriptive period on the matter, the Carriage of Goods by Sea Act (COGSA) —
which provides for a one-year period of limitation on claims for loss of, or damage to,
cargoes sustained during transit — may be applied suppletorily to the case at bar.
This one-year prescriptive period also applies to the insurer of the goods. Loadstar
Shipping Co., Inc., vs. Court of Appeals, G.R. No. 131621 September 28, 1999

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

It is settled in maritime law jurisprudence that cargoes while being unloaded

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

Carriage of Goods by Sea Act is applicable up to the final port of destination and
that the fact that transshipment was made on an interisland vessel did not remove
the contract of carriage of goods from the operation of said Act. Sea-Land Service,
Inc.,vs. Intermediate Appellate Court, G.R. No. 75118 August 31, 1987
 As defined in the Civil Code and as applied to Section 3 (6) paragraph 4 of the
Carriage of Goods by Sea Act, "loss" contemplates merely a situation where no
delivery at all was made by the shipper of the goods because the same had perished,
gone out of commerce, or disappeared that their existence is unknown or they
cannot be recovered. It does not include a situation where there was indeed delivery
— but delivery to the wrong person, or a misdelivery, as alleged in the complaint in
this case. Domingo Ang vs. American Steamship Agencies, Inc., G.R. No. L-22491,
January 27, 1967

“Loss” refers to the deterioration or disappearance of goods. Conformably with this

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

b. Notice of Loss or Damage

COGSA provides that the notice of claim need not be given if the state of the goods,
at the time of their receipt, has been the subject of a joint inspection or survey. As
stated earlier, prior to unloading the cargo, an Inspection Report as to the condition
of the goods was prepared and signed by representatives of both parties. Moreover,
failure to file a notice of claim within three days will not bar recovery if it is
nonetheless filed within one year. This one-year prescriptive period also applies to
the shipper, the consignee, the insurer of the goods or any legal holder of the bill of
lading. Belgian Overseas Chartering and Shipping N.V. vs. Philippine First Insurance
Co., Inc., G.R. No. 143133, June 5, 2002

Under Section 3 (6) of the COGSA, notice of loss or damages must be filed within
three days of delivery. Under the same provision, however, a failure to file a notice of
claim within three days will not bar recovery if a suit is nonetheless filed within one
year from delivery of the goods or from the date when the goods should have been
delivered. The filing of an amended pleading does not retroact to the date of the
filing of the original. It is true that, as an exception, an amendment which merely
supplements and amplifies facts originally alleged in the complaint relates back to
the commencement of the action and is not barred by the statute of limitations
which expired after the service of the original complaint. The exception, however,
would not apply to the party impleaded for the first time after the service of the
amended complaint. In this case, petitioner was not impleaded as a defendant in the
original complaint filed on March 11, 1993. It was only on June 7, 1993 that the
Amended Complaint, impleading petitioner as defendant, was filed. Considering this
circumstances, clearly, the suit against the petitioner was filed beyond the
prescriptive period of the filing of claims as provided in the COGSA. Wallem
Philippines Shipping vs. SR Farms, GR No. 161849, July 9, 2010

In any event the carrier and the ship shall be discharged from all liability in respect of
loss or damage unless suit is brought within one year after delivery of the goods or
the date when the goods should have been delivered: Provided, That if a notice of
 loss or damage, either apparent or concealed, is not given as provided for in this
section, that fact shall not affect or prejudice the right of the shipper to bring suit
within one year after the delivery of the goods or the date when the goods should
have been delivered. Asian Terminals Inc., v. Philam Insurance Co. G.R. NO. 181262 ,
July 24, 2013

c. Period of Prescription

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

Failure of provisional claim to state the value of the goods is not fatal to the claim.
Filipro, Inc., Manila Railroad Company, 97 SCRA 257 (1980)

An action based on misdelivery of the cargo which should be distinguished

from loss thereof. The one-year period provided for in section 3 (6) of the Carriage of
Goods by Sea Act refers to loss of the cargo. What is applicable in case of misdelivery
of the cargo is the four-year period of prescription for quasi-delicts prescribed in
article 1146 (2) of the Civil Code or ten years for violation of a written contract as
provided for in article 1144 (1) of the same Code. As Ang filed the action less than
three years from the date of the alleged misdelivery of the cargo, it has not yet
prescribed. Ang, as indorsee of the bill of lading, is a real party in interest with a
cause of action for damages. Ang vs. Compañia Maritima, 133 SCRA 600 (1984)

The one-year prescription period under the COGSA applies to the insurer of the
goods. Otherwise, what the Act intends to prohibit after the lapse of the one-year
prescriptive period can be done indirectly by the shipper or owner of the goods by
simply filing a claim against the insurer even after the lapse of one year. This could
not have been the intention of the law which has also for its purpose the protection
of the carrier and the ship from fraudulent claims by having "matters affecting
transportation of goods by sea be decided in as short a time as possible" and by
avoiding incidents which would "unnecessarily extend the period and permit delays
in the settlement of questions affecting the transportation. Filipino Merchants
Insurance Company, Inc., vs. Honorable Jose Alejandro, Presiding Judge of Branch
XXVI of the Court of First Instance of Manila, G.R. No. L-54140, October 14, 1986

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

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

The one-year period of limitation is designed to meet the exigencies of maritime

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

Notwithstanding the fact that the case was filed beyond the one-year prescriptive
period provided under the COGSA, the suit (against the insurer) will not be dismissed
of the delay was not due the claimant’s fault. Had the insurer processed and
examined the claim promptly, the claimant or the insurer itself, as subrogee, could
have taken the judicial action on time. By making an unreasonable demand for an
 itemized list of damages which caused delay, the insurer should bear the loss with
interest, New World International Development Corporation vs. NYK-FilJapan
Shipping Corporation, GR No. 171468, August 24, 2011

The term “ carriage of goods “ covers the period from the time when the goods are
loaded to the time when they are discharged from the ship; thus, it can be inferred
that the period of time when the goods have been discharged from the ship and
given to the custody of the arrastre operator is not covered by the COGSA. Under
the COGSA, the carrier and the ship may put up the defense of prescription if the
action for damages is not brought within one year after delivery of the goods or the
date when the goods should have been delivered. However, the COGSA does not
mention than an arrastre operator may invoke the prescriptive period; hence, it does
not cover the arrastre operator. The arrastre operator’s responsibility and liability for
losses and damages are set forth in the contract for cargo handling services executed
between the Philippine Ports Authority and Marina Port Services. Insurance
Company of North America vs. Asian Terminals, Inc., G.R. No. 180784, February 15,
2012

d. Limitation of Liability

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

F. The Warsaw Convention

1. Applicability

Effect of provision in passage ticket that carriage by successive air carriers “is to be
regarded as a single operation” is to make ticket issuing carrier liable for tortuous
conduct of other carriers. KLM, as the ticket-issuing carrier, can be held liable for the
refusal of Aer Lingus to transport respondents. KLM cannot take refuge under Article 30
of the Warsaw Convention on International Transportation, which provides that a
passenger can take action only against the specific air carrier who incurred delay. It does
not apply to a case where an airplane refuses to transport a passenger with confirmed
reservation. An air carrier is charged with responsibility of informing its customers of
conditions limiting its liability to its passenger. KLM Royal Dutch Airlines vs. Court of
Appeals, 65 SCRA 237 (1975)

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

Under Article 28 ( 1 ) of the Warsaw Convention, the plaintiff may bring the action for
damages before: 1) the court where carrier is domiciled; 2 ) the court where the carrier
has its principal place of business; 3 ) the court where the carrier has an establishment
by which the contract has been made; or 4 ) the court of the place of destination. In this
case, it is not disputed that respondent is a British corporation domiciled in London,
United Kingdom with London as its principal place of business. Hence, under the first
and second jurisdictional rules, the petitioner may bring her case before the courts of
London in the United Kingdom. In the passenger ticket and baggage check presented
by both the petitioner and respondent, it appears that the ticket was issued in Rome,
Italy. Consequently, under the third jurisdictional rule, the petitioner has the option to
bring her case before the courts of Rome in Italy. Finally, both the petitioner and
respondent aver that the place of destination is Rome, Italy, which is properly
designated given the routing presented in the said passenger ticket and baggage
check. Accordingly, petitioner may bring her action before the courts of Rome,
Italy. Thus, the RTC of Makati correctly ruled that it does not have jurisdiction over the
case filed by the petitioner even though it was based on tort and not on breach of
contract. Lhuillier vs. British Airways, G.R. No. 171092, March 15, 2010.

a. Liability to Passengers

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

b. Liability for Checked Baggage

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

The nature of an airline’s contract of carriage partakes of two types, namely: a

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

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

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

c. Liability for Handcarried Baggage

3. Willful Misconduct

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

G. Other Matters

1. Motor Vehicles

The owner of a car which was bumped by a jeep after the latter was bumped from
behind by a truck may still file a civil action for damages against the truck driver and its
owner even after the truck driver was adjudged guilty in the criminal case filed by the
jeepney driver, and the jeepney driver was acquitted in the criminal case filed by the car
owner on the ground that there is no identity of cause of action between the civil case in
question and the criminal case against the truck driver. Mendoza vs. Arrieta, 91 SCRA 13
(1979)

There is nothing in the law that requires a license to use a public highway to make the
vehicle a “motor vehicle” within the definition given such term in the Anti-Carnapping
Law. If a vehicle uses streets with or without the required license, same comes within the
protection of the law, for severity of the offense is not to be measured by what kind of
streets or highways the same is used on; but by the very nature of the very vehicle itself
and the use to which it is devoted. Izon vs. People, 107 SCRA 118 (1981)
The registered owner or operator of record is the one liable for damages caused by a
vehicle regardless of any alleged sale or lease made thereon. MYC Agro-Industrial
Corporation vs. Vda. De Caldo, 132 SCRA 10 (1984)

If the properties covered by a franchise is transferred or leased to another without the

requisite approval of the Public Service Commission, the transfer is not binding upon the
public and third persons. The registered owner/operator of a public service vehicle is
jointly and severally liable with the driver from damages incurred by the passenger or
third persons as a consequence of injuries sustained in the operation of said vehicle.
Gelisan vs. Alday, 154 SCRA 388 (1987)

Under Presidential Decree No. 1605, removal and confiscation of license plate of any
illegally parked vehicle is not among the specified penalties. License plate is strictly
speaking not a property right and it does not follow that it may be removed or
confiscated without lawful cause. Metropolitan Traffic Command west Traffic District vs.
Gonong, 187 SCRA 432 (1990)

A registered owner who has already sold or transferred a vehicle has the recourse to a
third-party complaint, in the same action brought against him to recover for the damage
or injury done, against the vendee or transferee of the vehicle. BA Finance Corporation
vs. Court of Appeals, 215 SCRA 715 (1992)

Where no allegations were made as to whether or not it took the steps necessary to
determine or ascertain the driving of proficiency and history of its employee to whom it
gave full and unlimited use of a company car, said company, based on the principle of
bonus pater familias, ought to be jointly and severally liable with the former for the
injuries caused to third persons. Valenzuela vs. Court of Appeals, 253 SCRA 303 (1996)

Kerosene lamp or torch at the edge of the road, near the rear portion of the truck to
serve as an early warning device substantially complies with Section 34(g) of the Land
Transportation and Traffic Code. Baliwag Transit, Inc.,vs. Court of Appeals, 256 SCRA 746
(1996)

Drivers of vehicles who bump the rear of another vehicle are presumed to be the cause
of the accident, unless contradicted by other evidence. Raynera vs. Hiceta, 306 SCRA
102 (1999)

Under Art. 2180 an employer may be held solidarily liable for the negligent act of his
employee. Indeed, to exempt from liability for acts of the driver the owner of a public
vehicle who operates it under the “boundary system” on the ground that he is a mere
lessor would be not only to abet flagrant violations of the Public Service Law, but also to
place the riding public at the mercy of reckless and irresponsible drivers. Sps. Hernandez
vs. Sps. Dolor, 435 SCRA 668 (2004)

The principle of last clear chance is inapplicable in a case for breach of contract of
carriage filed by a passenger against the common carrier, as it only applies in a suit
between the owners and drivers of two colliding vehicles. It does not arise where a
passenger demands responsibility from the carrier to enforce its contractual obligations,
 for it would be inequitable to exempt the negligent driver and its owner on the ground
that the other driver was likewise guilty of negligence. Tiu vs. Arriesgado, 437 SCRA 426
(2004)

Whether the driver is authorized or not by the actual owner is irrelevant to determining
the liability of the registered owner who, the law holds primarily and directly responsible
for any accident, injury or death caused by the operation of the vehicle in the streets and
highways. To require the driver of the vehicle to be authorized by the actual owner
before the registered owner can be held liable is to defeat the very purpose why motor
vehicle legislations are enacted in the first place. Villanueva vs. Domingo, 438 SCRA
485 (2004)

The registered owner of a motor vehicle is primarily and directly responsible for the
consequences of its operation, including the negligence of the driver, with respect to the
public and all third persons. In contemplation of law, the registered owner of a motor
vehicle is the employer of its driver, with the actual operator and employer, such as a
lessee, being considered as merely the owner's agent. This being the case, even if a sale
has been executed before a tortuous incident, the sale, if unregistered, has no effect as
to the right of the public and third persons to recover from the registered owner. The
public has the right to conclusively presume that the registered owner is the real owner,
and may sue accordingly. Since a lease, unlike a sale, does not even involve a transfer of
title or ownership, but the mere use or enjoyment of property, there is more reason,
therefore, in this instance to uphold the policy behind the law, which is to protect the
unwitting public and provide it with a definite person to make accountable for losses or
injuries suffered in vehicular accidents. PCI Leasing & Finance Inc., vs. UCPB General
Insurance Co. Inc.,557 SCRA 141 (2008)

In the case of Villanueva v. Domingo the Court said that the policy behind vehicle
registration is the easy identification of the owner who can be held responsible in case of
accident, damage or injury caused by the vehicle. This is so as not to inconvenience or
prejudice a third party injured by one whose identity cannot be secured. Therefore, since
the Ford Fiera was still registered in Atty. Cadiente’s name at the time when the
misfortune took place, he cannot escape liability for the permanent injury it caused
Macas, who had since stopped schooling and is now forced to face life with nary but two
remaining limbs. Mercado AG. Cadiente vs. Bithuel Macas 571 SCRA 105 (2008)

2. Arrastre Services

The 15-day period within which notice of loss or damages to cargo should be given to
the arrastre contractor does not apply where the consignee learns of the damages or loss
after the expiration of the 15-day period stipulated in the arrastre contracts. In such a
case the 15-day period should be counted from the knowledge of said loss or damages.
A provisional claim filed before the delivery of the cargo; in anticipation of any possible
loss or damages while the cargo is in the arrastre operator’s custody was held to be
premature and speculative. American Insurance Company of Network vs. Manila Port
Service, 72 SCRA 18. 1976)
Stipulation in management contract for liability of arrastre operator to consignee is a
pour autrui. Shell Chemical Company (Phils.), Inc., vs. Manila Port Service, 72 SCRA 35
(1976)

Arrastre comprehends the handling of cargo on the wharf or between the establishment
of the consignee or shipper and the ship’s tackle. Stevedoring refers to the handling of
the cargo in the holds of the vessel or between the ship’s tackle and the holds of the
vessel. Compania Maritima vs. Allied Free Workers Union, 77 SCRA 24. 1977)

The Bureau of Customs, in operating the arrastre service, does so as an incident of a

prime governmental function and as such may not be sued and the same holds true with
the Republic of the Philippines. The consignee’s remedy is to file a claim with the
Commission on Audit as contemplated in Act No. 3083 and Commonwealth Act No. 327.
Wise & Company, Inc.,vs. Customs Arrastre Service, 77 SCRA 345. (1977)

The customs arrastre service of the Bureau of Customs are parts of the machinery of
Government and immune from suits for damages on account of loss of cargo. Shell
Company of the Philippines vs. Nedlloyd Lines, 84 SCRA 143 (1978)

Filing of provisional claim against the arrastre operator by the consignee within 15 days
from discharge of goods though the values of lost articles were not stated, is sufficient
compliance with the “Management Contract” executed by arrastre contractors. If
consignee was informed of a shortage or damage to goods before last package is
unloaded, a provisional claim may already be presented even before discharge of last
package even though the Management Contract states claim should be filed after
discharge of goods. Arrastre operator is responsible not just for the invoice value of
goods damaged or lost, but also for all damages that may be suffered by the consignee
on account of their loss, destruction or injury. Malayan Insurance Co., Inc., vs. Manila
Port Service, 85 SCRA 320. (1978)

Arrastre operator is without liability when loss of contents of cargo occurred while goods
are no longer in its custody. Hartford Fire Insurance Co. vs. E. Razon, Inc., 88 SCRA 759
(1979)

A claim, though dubbed “provisional”, for loss of goods handled by an arrastre operator
is sufficient compliance with the 15-day requirement for filing claims against the arrastre
operator. It is not necessary that a provisional claim should state a detailed list of the loss
or damages suffered by the shipments. What is important is that the claim has served the
purpose of giving the arrastre operator reasonable opportunity to check the validity of
the claim while the facts are still fresh in the minds of the persons who took part in the
transaction and while the pertinent documents are still available. The reason behind this
is that the determination and preparation of the specific amount of damages claimed
should be done carefully and without haste, and these can be done practically only in a
formal claim which can be filed even long after a provisional claim has been filed. Esso
Standard Eastern, Inc., vs. Manila Railroad Co., 93 SCRA 305. (1979)

In order to hold the arrastre operator liable for goods lost or damaged, the claimant
should take two steps: (1) he must file with the operator a claim for the value of said
 goods within 15 days from the date of discharge of the last package from the carrying
vessel, and (2) suits should be brought in the court of proper jurisdiction within one year
from the date of discharge of the goods or from the date when the claim for the value of
such goods has been rejected or denied. Hence, the claimant has two periods within
which to file its action in court, namely: (1) one year from the date of discharge of the
goods, and (2) one year from the rejection or denial of its claim for the value thereof. In
case of inaction on the part of the arrastre operator, he shall be deemed to have
rejected or denied the importer’s claim upon the expiration of one year from the date
when the last packages were discharged and that the period within which to file suit
shall then begin to run. Filipro, Inc., vs. Manila Railroad Company, 97 SCRA 629. (1980)

A request for bad order examination given to arrastre operator operates as a formal
claim and tolls running of prescriptive period. New Zealand Insurance Company, Inc.,vs.
Intermediate Appellate Court, 131 SCRA 482. (1984)

The filing of the claim for loss against the arrastre operator within the 15-day period is in
the nature of a prescriptive period for bringing an action and is a condition precedent to
holding the arrastre operator liable. The 15-day period for filling claims should be
counted from the date the consignee learns of the loss, damage or misdelivery of goods.
International Container Terminal Services, Inc., vs. Prudential Guarantee & Assurance
Co., Inc., 320 SCRA 244. (1999)

3. Public Utilities

The law authorizing the Philippine Ports Authority to take over arrastre and stevedoring
services in government-owned ports and cancel permits issued to private operators is a
valid exercise of police power. The authority granted to Philippine Ports Authority to
take over port operations does not violate due process of law. The exercise of police
power is paramount over right against non-impairment of contracts. Pernito Arrastre
Services, Inc.,vs. Mendoza, 146 SCRA 431 (1986)

Public Service Commission is empowered to approve provisionally rates of utilities

without prior hearing. The reason is easily discerned from the fact that provisional rates
are by their nature temporary and subject to adjustment in conformity with the
definitive rates approved after final hearing. Radio Communication of the Philippines vs.
National Telecommunications Commissions, 184 SCRA 517 (1990)

Public hearing is mandatory in cases of petitioners for increases in toll rates. Philippine
National Construction Corporation vs. Republic, 188 SCRA 775. 1990)

Transfers of shares of Public Utility Corporation need only National Telecommunications

Commission approval, not congressional authorization. Philippine Long Distance
Company vs. National Telecommunications Commission, 190 SCRA 717 (1990)

MERALCO‘s right to disconnect the electric service of a delinquent customer is an

absolute one, subject only to the requirement that the customer be given a written
notice of disconnection 48 hour in advance. While the general rule is regard to the
discontinuance of service for the non-payment of charges is subject to exception or
qualification if there is a bona fide dispute over the correctness of the bill rendered, it
has been held that if a customer concedes a certain amount to be due, and fails to
tender such amount, his service or supply may be discontinued. Ceniza vs. Court of
Appeals, 218 SCRA 390 (1993)

Since a franchise is personal in nature, any transfer or lease thereof should be notified to
the Public Service Commission so that the latter may take proper safeguards to protect
the interest of the public. There being no prior Board of Transportation’s approval in the
transfer of property, transferee only held the property as agent. Transferee of vehicles
cannot prevent levy by asserting ownership because as far as the law is concerned, the
one in whose name the vehicle is registered remains to be the owner and the transferee
merely holds the vehicles for the registered owner. Y Transit Co., Inc., vs. National Labor
Relations Commissions, 229 SCRA 508. 1994)

The grant of a franchise for the operation of a public utility is subject to enactment,
alteration or repeal by Congress when the common good so requires. Tolentino vs.
Secretary of Finance, 235 SCRA 630. 1994)

The certificate of public convenience (CPC) is an authorization granted by the Land

Transportation Franchising & Regulatory Board for the operators of land transportation
services for public use as required by law. The requisites before a certificate of public
service convenience (CPC) may be granted are: (1) the applicant must be a citizen of the
Philippines, or a corporation or co-partnership, association or point-stock company
constituted and organized under the laws of the Philippines, at least 60 per centum of its
stock or paid-up capital must belong entirely to citizens of the Philippines; (2) the
applicant must be financially capable of undertaking the proposed service and meeting
and responsibilities incident to its operation; and (3) the applicant must prove that the
operation of public service proposed and the authorization to do business will promote
the public interest in a proper and suitable manner. The existence or non-existence of
public convenience and necessity is a question of fact that must be established by
evidence in public hearing conducted for that purpose. Kilusang Mayo Uno Labor Center
vs. Garcia, Jr., 239 SCRA 386 (1994)

The Legislature has delegated to the defunct Public Service Commission, Presently the
Land Transportation Franchising & Regulatory Board, and the power of fixing the rates of
public service. The authority given by the LTFRB to the provincial bus operators to set a
fare range over and above the authorized the existing fare, is illegal and invalid as it is
tantamount to an undue delegation of legislative authority. Kilusang Mayo Uno Labor
Center, ibid.

What private respondent own are the rail tracks, rolling stocks like the coaches, rail
stations, terminals and the power plant, not a public utility. While a franchise is needed
to operate these facilities to serve the public, they do not by themselves constitute a
public utility. What constitutes a public utility is not their ownership but their use to
serve the public. The Constitution does not require a franchise before one can own
facilities needed to operate a public utility so long at it does not operate to serve the
public. In law, there is a clear distinction between the “operator “of a public utility and
the ownership of the facilities and equipment used to serve the public. The right to
operate a public utility may exist independently and separately from the ownership of
the facilities therefor. Mere owner and lessor of the facilities used by a public utility are
not a public utility. Mere formation of a public utility corporation does not ipso facto
characterize the corporation as one operating a public utility. The moment for
determining the requisite Filipino nationality is when the entity applies for a franchise,
certificate or any other form of authorization for that purpose. Tatad vs. Garcia, Jr., 243
SCRA 436 (1995)

Build-operate-and-transfer (BOT) scheme is defined as one where the contractor

undertakes the construction and financing of an infrastructure facility, and operates and
maintains the same. In build-and-transfer (BT) scheme, contractor undertakes the
construction and financing of the facility, but after completion, ownership and operation
thereof are turned over to the government. Under the BOT scheme, owner of the
infrastructure facility must comply with the citizenship requirement of the Constitution
on the operation of a public utility. No such requirement is imposed in the BT scheme.
There is no mention in the BOT Law that the BOT and BT schemes bar any other
arrangement for the payment by the government of the project cost. The BLT (Build-
Lease-Transfer) scheme in the challenged agreements is but a variation of the BT scheme
under the law. Under the BLT scheme, private respondent EDSA LRT III Corp. undertakes
the construction of the EDSA LRT III project. Upon completion of the project, private
respondent, as lessor, will turn over the EDSA LRT III to DOTC, as lessee, for the latter to
operate the system and pay rentals for said use. At the end of 25 years and when full
payment shall have been made to private respondent, it shall transfer the project to
DOTC. Tatad, ibid

The Civil Aeronautics Board is expressly authorized by Republic Act No. 776 to issue a
temporary operating permit or Certificate of Public Convenience and Necessity, and
nothing contained in the said law negates the power to issue said permit before the
completion of the applicant’s evidence and that of the oppositor thereto on the main
petition. Philippine Airlines, Inc., vs. Civil Aeronautics Board, 270 SCRA 538. 1997)

Failure of MERALCO to make a reasonable and proper inspection of its apparatus and
equipment to ensure that they do not malfunction and the due diligence to discover and
repair the defects therein constitutes negligence. The presence of a conspicuous defect
which has existed for a considerable length of time will create a presumption of
constructive notice thereof. As a public utility, MERALCO has the obligation to discharge
its functions with utmost care and diligence. Ridjo Tape & Chemical Corporation vs.
Court of Appeals, 286 SCRA 544 (1998)

The requirements of notice and publication of the application for Certificate of Public
Convenience and Necessity filed by a telecommunications firm are no longer necessary
where the application is a mere revival of an application which has already been
published earlier. Republic vs. Express Telecommunications Co., Inc., 373 SCRA 316
(2002)

Under Anti-Electricity and Electric Transmission Lines / Material Pilferage Act of 1994
(RA 7832), the prima facie presumption that will authorize disconnection will arise only
upon the satisfaction of certain requisites, one of which is the personal witnessing and
attestation by an officer of the law or by an authorized ERB representative when the
discovery was made. That an ERB representative was allegedly present when the meter
was examined in the Meralco laboratory will not cure the defect that he was not around
when the discovery of illegal use of electricity was made. Quisumbing vs. Manila Electric
CO., 380 SCRA 195. (2002)

Section 1 of PD 1818 expressly deprives courts of jurisdiction to issue injunctive writs

against the implementation or contracts for the operation of a public utility. G & S
Transport Corp. vs. Court of Appeals, 382 SCRA 262 (2002)

The rates prescribed by the State must be one that yields a fair return on the public
utility upon the value of the property performing the service and one that is reasonable
to the public for services rendered. The ERB correctly ruled that income tax should not
be included in the computation of operating expenses of a public utility. By its nature,
income tax payments of a public utility are not expenses which contribute to or are
incurred in connection with the production of profit of a public utility. Republic vs.
Manila Electric Co., 391 SCRA 700 (2002)

While PAGCOR is allowed under its charter to enter into operator’s and / or
management contracts, it is not allowed under the same charter to relinquish or share its
franchise, much less grant a veritable franchise to another entity such as SAGE. PAGCOR
cannot delegate its power in view of the legal principle of delegata potestas delegare
non potest, inasmuch as there is nothing in the charter to show that it has been expressly
authorized to do so. Jaworski vs. Philippine Amusement and Gaming Corporation, 419
SCRA 317 (2003)

The provisions of the Public Service Act and E.O. No. 172 which relate to the power of
the regulatory body to approve provisional rates continue to have full force and effect,
and the power was transferred to the Energy Regulatory Commission by virtue of Section
80 in relation to Section 44 of the EPIRA (Electric power Industry Reform Act of 2001).
Said provisions are not inconsistent with the EPIRA except the directives therein
dispensing with the need for prior hearing. They are deemed modified to the extent that
the EPIRA imposes a publication requirement and, through the IRR, assures the
customers affected the opportunity to oppose or comment on the application for
provisional rate adjustment before it is acted upon by the ERC. Freedom from Debt
Coalition vs. Energy Regulatory Commission, 432 SCRA 157 (2004)

The new order on electric power rate adjustments is as follows:

1. The application must file with the ERC a verified application or petitioner for
rate adjustment. It must indicate that a copy thereof was received by the legislative
body of the LGU concerned. It must also include a certification of the notice of
publication thereof in a newspaper of general circulation in the same locality.

2. Within 30 days from receipt of the application/petitioner or the publication

thereof, any consumer affected by the proposed rate adjustment or the LGU
concerned may file its comment on the application/petitioner, as well as on the
motion for provisional rate adjustment.
 3. If such comment is filed, the ERC must consider it in its action on the motion for
provisional rate adjustment, together with the documents submitted by the
applicant in support of its application / petitioner. If no such comment is filed
within the 30-day period, then and only then may the ERC resolve the motion of
provisional rate adjustment on the basis of the documents submitted by the
applicant.

4. However, the ERC need not conduct a hearing on the motion for provisional rate
adjustment. It is sufficient that it consider the written comment, if there is any.

5. The ERC must resolve the motion for provisional rate adjustment within 75 days
from the filing of the application / petition.

6. Thereafter, the ERC must conduct a full-blown hearing on the

application/petitioner not later than 30 days from the date of issuance of the
provisional order and must resolve the application/petition not later than 12
months from the issuance of the provisional order. Effectively, this provisional
limits the lifetime of the provisional order to only 12 months. Freedom from debt
Coalition, ibid.

Neither Congress nor the NTC can grant an exclusive franchise, certificate or any other
form of authorization to operate a public utility. The Constitution is quite empathic that
the operation of a public utility shall not be exclusive. Thus, the Constitution mandates
that the franchise cannot be exclusive in nature. Easter Telecommunications Phils., Inc.,
vs. International Communication Corp., 435 SCRA 55 (2004)

There is no legal basis under the Public Telecommunications Act (PTA) or the
memorandum circulars promulgated by the NTC to denominate SMS (Short Message
Service or “text”) as VAS (Value-Added Service) which requires prior approval from NTC
before they can offer to the public. Any subsequent determination by NTC or whether
SMS is VAS should be made with proper regard for due process and in conformity with
the PTA. Consequently, NTC’s assailed Order directing Smart and Globe to secure NTC
approval to provide SMS violates due process for failure to sufficiency explain the reason
for the decision rendered, for being unsupported by substantial evidence, and for
imputing violation to, and issuing a fine, on Globe despite the absence of due notice and
hearing which would have afforded Globe the right to present evidence an its behalf.
Globe Telecom, Inc.,vs. National Telecommunications Commission 435 SCRA 110 (2004)

Under EO 436, the regulation and supervision of the CATV industry shall remain vested
“solely” in the NTC. The logical conclusion therefore is that the NTC exercises regulatory
power over CATV operators to the exclusion of other bodies. But nothing herein should
be interpreted as to strip the LGUs of their general power to prescribe regulations under
the general welfare clause of the Local Government Code. When EO 436 decrees that
the “regulatory power” shall be vested solely in the NTC, it pertains to the regulatory
power over those matters which are peculiarly within NTC’s competence, such as, the:
(1) determination of rates, (2) issuance of certificates of authority, (3) establishments of
areas of operation, (4) examination and assessment of the legal, technical and financial
 qualifications of applicant operators, (5) granting of permits for the use of frequencies,
(6) regulation of ownership and operation, (7) adjudication of issues arising from its
functions, and (8) other similar matters. But like any other enterprise, CATV operation
may be regulated by LGUs under the general welfare clause. This is primarily because
the CATV system commits the indiscretion of crossing public properties (It uses public
properties in order to reach subscribers). The physical realties of constructing CATV
system-the use of public streets, rights of ways, the founding of structures and the
parceling of large regions- allow an LGU a certain degree of regulation over CATV
operators. This is the same regulation it exercise over all private enterprises within its
territory. Batangas CATV, Inc., vs. Court of Appeals, 439 SCRA 326 (2004)

Under the original charter of the MIAA, the latter was given blanket authority to adjust
its fees, charges and rates. However, E.O. No. 903 limited such authority to a mere
recommendatory power. It directly vests the power to determine revision fees, charges
and rates in the “ministry head” and even requires approval of the Cabinet. As an
attached agency of the DOTC, the “ministry head” being referred to as the DOTC
Secretary. Furthermore, MIAA is governed by the administrative Code of 1987 which
specifically requires notice and public hearing in the fixing of rates. Therefore, MIAA’s
resolutions which increased the airport fees, charges and rates without the required
prior notice and hearing as well as the approval of the DOTC Secretary are null and void.
Manila International Airport Authority vs. Airspan Corp., 445 SCRA 471 (2004)

VI. The Corporation Code

A. Corporation

1. Definition

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

succession and the powers, attributes and properties expressly authorized by law or
incident to its existence. Sec. 2, B.P. 68

2. Attributes of the Corporation

When the corporation (BB Sportswear, Inc.) which the plaintiff erroneously impleaded in
a collection case was not the party to the actionable agreement and turned out to be not
registered with the Securities and Exchange Commission, the judgment may still be
enforced against the corporation (BB Footwear, Inc.) which filed the answer and
participated in the proceedings, as well as its controlling shareholder who signed the
actionable agreement in his personal capacity and as a single proprietorship doing
business under the trade name and style of BB Sportswear Enterprises. Benny Hung vs.
BPI Finance Corporation, G.R. No. 182398, 20 July 2010

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

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

B. Classes of Corporations

The Philippine National Bank is not governed, as a rule, by the Corporation Code, but its
Charter. Thus, the right of a stockholder to examine corporate books under the
Corporation Code does not apply to PNB since under its Charter, the records of PNB can
only be accessed by specified individuals. Gonzales vs. Philippine National Bank, 122
SCRA 489 (1983)

Where someone convinced other parties to contribute funds for the formation of a
corporation which was never formed, there is no partnership among them, and the latter
cannot be held liable to share in the losses of the proposed corporation. Pioneer Surety
& Insurance Corporation vs. Court of Appeal, 175 SCRA 668 (1989)

The test to determine whether a corporation is government owned or controlled or

private in nature is simple. It is created by its own character for the exercise of a public
function, or by incorporation under the general corporation law? Those with special
characters like the Philippine National Red Cross are government corporations subject
to its provisions and its employees under the supervision of the Civil Service Commission.
Baluyot vs. Holganza, 325 SCRA 248 (2000)

( Please see however the case of Liban vs. Richard Gordon 593 SCRA 68 (2009) where the
Supreme Court held that the PNRC Charter violates the constitutional proscription
against the creation of private corporation by special law because PNRC is neither
owned nor controlled by the government. It is instead a private corporation performing
public functions)

Congress cannotenact a law creating a private corporation with a special charter. Such
legislation would be unconstitutional. Private corporations may exist only under a
general law. If the corporation is private, it must necessarily exist under a general law.
Feliciano vs. Commission on Audit, 464 Philippine 439 (2004)

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

Where persons associate themselves together under articles to purchase property to

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

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

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

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

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

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

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

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

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

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

Corporation by estoppel results when a corporation represented itself to the public as

such despite its not being incorporated. A corporation by estoppel may be impleaded as
a party defendant considering that it possesses attributes of a juridical person,
otherwise, it cannot be held liable for damages and injuries it may inflict to other
persons. Macasaet vs. Francisco, G.R. No. 156759, June 5, 2013

C. Nationality of Corporations

1. Place of Incorporation Test

In times of war, the nationality of a private corporation is determined by the character or

citizenship of its controlling stockholders. The corporation was considered an enemy
 because majority of its stockholders were German nationals. Filipinas Compañia De
Segurosvs. Christern, Huenefeld and Co., Inc., G.R. No. L-2294, May 25, 1951

2. Control Test

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

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

3. Grandfather Rule

The Grandfather Rule is a method to determine the nationality of the corporation by

making reference to the nationality of the stockholders of the investor corporation.
Based on a SEC Rule and DOJ Opinion, the Grandfather Rule or the second part of the
SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e.,
in cases where the joint venture corporation with Filipino and foreign stockholders with
less than 60% Filipino stockholdings [or 59%] invests in other joint venture corporation
which is either 60-40% Filipino-alien or the 59% less Filipino). Stated differently, where
the 60-40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will
not apply. . Narra Nickel Mining and Development Corporation, et al., vs. Redmont
Consolidated Mines Corporation, G.R. No. 199580, April 21, 2014

A corporation that complies with the 60-40 Filipino to foreign equity requirement can
be considered a Filipino corporation if there is no doubt as to who has the “beneficial
ownership” and “control” of the corporation. In this case, a further investigation as to the
nationality of the personalities with the beneficial ownership and control of the
corporate shareholders in both the investing and investee corporations is necessary.
“Doubt” refers to various indicia that the “beneficial ownership” and “control” of the
corporation do not in fact reside in Filipino shareholders but in foreign stakeholders.
Even if at first glance the petitioners comply with the 60-40 Filipino to foreign equity
ratio, doubt exists in the present case that gives rise to a reasonable suspicion that the
Filipino shareholders do not actually have the requisite number of control and beneficial
ownership in petitioners Narra, Tesoro, and McArthur. Hence, the Court is correct in
using the Grandfather Rule in determining the nationality of the petitioners. Narra
Nickel Mining and Development Corporation, et al., vs. Redmont Consolidated Mines
Corporation, G.R. No. 199580, January 28, 2015
D. Corporate Juridical Personality

1. Doctrine of Separate Juridical Personality

When a real estate corporation extra-judicially rescinded a contract to sell but failed to
comply with the conditions for extra-judicial rescission and as such, is required to fulfill
its obligation under same contract to deliver a substitute lot or refund the purchase
price, the president of the corporation cannot be held personally liable even where he
appears to be the controlling stockholder absent sufficient proof that he used the
corporation to defraud defaulting lot buyer. Mere ownership by a single stockholder or
by another corporation of all or nearly all capital stock of corporation is not sufficient
ground for disregarding the legal personality of the corporation. Palay, Inc.,vs. Clave,
124 SCRA 638 (1983)

It is well-settled doctrine both in law and in equity that as a legal entity, a corporation
has a personality distinct and separate from its individual stockholders or members. The
mere fact that the one is the president of a corporation does not render the property he
owns or possesses the property of the corporation, since the president, as an individual,
and the corporation are separate entities. A sheriff who enforced a judgment against the
President of the corporation when it is directed against the corporation is liable
administratively. By choosing to “pierce the veil” of corporate entity, the sheriff usurped
a power that belongs to the court and assumed improvidently that since the complainant
is owner and president of the judgment creditor, they are one and the same. Cruz vs.
Dalisay, 152 SCRA 482 (1987)

The mere fact that the director voted for the approval of a resolution authorizing the
purchase of trucks does not justify disregarding the separate juridical personality of the
corporation and holding him personally liable for the payment of the price. While not in
fact and in reality a person, the law treats a corporation as though it were a person by
process of fiction or by regarding it as artificial person distinct and separate from its
individual stockholders. Remo vs. Intermediate Appellate Court, 172 SCRA 405 (1989)

A company manager acting in good faith within the scope of his authority in terminating
the services of certain employees and transferring some of them to other positions
cannot be held personally liable for damages. In this particular case, the complainants
did not allege or show that the officers of the corporation deliberately and maliciously
designed to evade the financial obligation of the corporation in such exercise of
management prerogatives as a means to perpetrate an illegal act or as a vehicle for the
evasion of existing obligations, the circumvention of statutes or to confuse legitimate
issues. Therefore, the doctrine of separate legal personality applies. Pabalan vs. National
Labor Relations Commission, 184 SCRA 495 (1990)

In a case where an insurance company issued a bond to secure payment of the price for a
tractor sold by another company and the insurance company foreclosed the real estate
mortgage constituted to secure payment to be made under the bond, and thereafter
sold the mortgaged land to another corporation, the separate juridical personalities of
the seller of the tractor, the insurance company and the buyer of the land cannot be
disregarded in an action to annul the foreclosure sale. Piercing the veil of corporate
entity is not the proper remedy in order that the foreclosure proceedings may be
declared a nullity under the circumstances obtaining. The legal corporate entity is
disregarded only if it is sought to hold the officers and stockholders liable for the
corporate debt or obligation. The declaration of the nullity of the foreclosure sale is a
relief which may be obtained without having to disregard the aforesaid corporate fiction
attaching to the corporations. There is also no showing that the corporations were
formed and thereafter transacted with the petitioner with the sole intention of
defrauding the latter. The mere fact that the businesses of two or more corporations are
interrelated is not a justification for disregarding their separate personalities absent
sufficient showing that the corporate entity was purposely used as a shield to defraud
creditors and third persons of their rights. Umali vs. Court of Appeals, 189 SCRA 529
(1990)

The fact that the businesses of two corporations are related, as one manufactures yarns
while the other sells the same product; some employees of one are the same persons
manning and providing for auxiliary services to the other, and the physical plants, offices
and facilities are situated in the same compound, are not sufficient to justify the piercing
of the corporate veil of either corporation. The legal corporate entity is disregarded only
if it is sought to hold the officers and stockholders directly liable for a corporate debt or
obligation and not when the only issue is whether or not the rank and file employees
working at the second corporation should be recognized as a part of and/ or within the
scope of the bargaining unit of the first corporation. Indophil Textile Mill Workers Union
PTGWO vs. Calica, 205 SCRA 697 (1992)

The president of corporation cannot be held solidarily liable with the corporation for
breach of contract in the construction of a library absent evidence of malicious acts by
the former since a corporation has a personality separate and distinct from its officers
and stockholders. The same conclusion cannot be altered even though the president is
the controlling stockholder of the corporation because mere ownership by a single
stockholder or by another corporation of all or nearly all of the capital stock of a
corporation is not of itself a sufficient ground for disregarding the separate corporate
personality. The fact that the president resisted the claims of the client does not
demonstrate malice or bad faith to make him personally liable. EPG Construction
Company, Inc., vs. Court of Appeals 210 SCRA 230 (1992)

Properties registered in the name of the corporation are owned by it as an entity

separate and distinct from its members. While shares of stock constitute personal
property, they do not represent property of the corporation. The corporation has
property of its own. A share of stock only typifies an aliquot part of the corporation’s
property, or the right to share in its proceeds to that extent when distributed according
to law and equity but its holder is not the owner of any part of the capital of the
corporation. Nor is he entitled to the possession of any definite portion of its property or
assets. The stockholder is not a co-owner or tenant in common of the corporate
property. A corporation can therefore sue to recover real property being occupied by its
former president (who was also a significant stockholder) for it has a juridical personality
separate and distinct from its stockholders even though in the past the corporation
allowed the president to enjoy the possession of the property. Boyer Roxas vs. Court of
Appeals, 211 SCRA 470 (1992)
An assignee of a promissory note cannot enforce payment thereof if the same had
already been extinguished by compensation as when the maker of the note and the
assignor thereof are mutually indebtedness to each other. The mere fact that two
corporations have a common director is not a sufficient basis for disregarding their
separate juridical personalities. Sesbreno vs. Court of Appeals, 222 SCRA 466 (1993)

Where a corporation engaged in security services was incorporated before the single
proprietorship owned by one of its incorporators engaged in the same business ceased
to operate, the incorporator in question owned the least number of shares, and the
assets of the single proprietorship were not transferred to the corporation, its separate
juridical personality cannot be disregarded. The doctrine of piercing the corporate veil
has no application to this case where the purpose is not to hold the individual
stockholders liable for the obligation to the corporation but on the contrary to hold the
corporation liable for the obligations of stockholders. Thus, the security guards of the
single proprietorship cannot be considered employees of the corporation. Robledo vs.
National Labor Relations Commission, 238 SCRA 52 (1994)

Mere substantial identity of the incorporators and similarity of business of two

corporations do not necessarily imply fraud nor warrant the piercing of the veil of
corporate fiction. In the absence of evidence that the second corporation was
established and later on closed to defeat the rights of the workers of the first
corporation and that the corporate personalities of the two corporations were used to
perpetrate fraud or circumvent the law, the said corporations should be treated as
distinct and separate from each other. Thus, the laborers of the first corporation whose
employment ceased because of the closure cannot enforce their claims against the
second corporation. Laguio vs. National Labor Relations Commission, 262 SCRA 709
(1996)

The liability of a single proprietorship for encroaching on the timber concession area of
another cannot be enforced against a corporation simply because the proprietor, who is
the controlling stockholder of the corporation, transferred all her rights, interest and
ownership in the Timber License to the corporation for and in consideration of shares of
stock of the latter. The alleged control of the proprietor in the assignee corporation was
not evident in any particular corporate acts of the corporation wherein the proprietor,
using the corporation, executed acts and powers directly involving the corporation. For
the separate juridical personality of a corporation to be disregarded, the wrongdoing
must be clearly and convincingly established. Matuguina Wood Products, Inc.,vs. Court
of Appeals, 263 SCRA 490 (1996)

In an action against a person, whether natural or juridical, that wholly owns or controls
another corporation and uses this wholly-owned or controlled corporation to evade his
or its obligation or liability xxxx to hide the ill-gotten wealth of any or all of the persons
impleaded therein, a judgment against any or all of the impleaded defendants may be
enforced against any or all of the said corporations which have not been formally
impleaded as defendants in the case. On the other hand, the shareholders who were
neither charged nor impleaded as defendants are innocent until found guilty by a court
of competent jurisdiction. Consequently, even if the corporate veil of the corporation is
pierced, they can never be divested of their shares of stock until shown to have engaged
in allicit activities in acquiring those shares. At the very least, they have to be impleaded
in a complaint for recovery thereof. Republic vs. Sandiganbayan, 266 SCRA 515 (1997)

The corporate separateness of two corporations should be maintained if other than the
allegation that one is 90% owned by the other, there is nothing else which could lead the
court under the circumstances to disregard their corporate personalities. Thus, where a
certificate of indebtedness issued to a corporation was assigned to another corporation
without authority and the assignee, in turn, transferred the same instrument with the
obligation to repurchase but failed to redeem it from the second assignee, the infirmity
of the first assignment cannot be glossed over simply because the registered owner of
the instrument is 90% owned by the second assignor. Traders Royal Bank vs. Court of
Appeals, 269 SCRA 15 (1997)

The separate juridical personality of a corporation cannot be disregarded simply

because its officers bound themselves as surety to the corporate obligations. Thus, the
doctrine of piercing the veil of corporate fiction cannot be applied to justify the filing by
the individual officers of the corporation of a petition for suspension of payments with
the SEC as the latter has jurisdiction only over corporations and partnerships registered
with it. Union Bank of the Philippines vs. Court of Appeals, 290 SCRA 198 (1998)

Where there is nothing on record to indicate that the president and majority
stockholders of a corporation had acted in bad faith or with malice in carrying out the
retrenchment program of the company, the president cannot be held solidarily and
personally liable with the corporation . Asionics Philippines, Inc.,vs. National Labor
Relations Commission, 290 SCRA 164 (1998)

The lawyer of the stockholder of a corporation in an estate case cannot sue the
corporation for payment of his attorney’s fee nor apply such legal fees in payment of the
purchase price of a vehicle he bought from the corporation. The obligation of the
stockholder is not the liability of the corporation since the two have separate juridical
personalities. Francisco Motors Corporation vs. Court of Appeals, 309 SCRA 72 (1999)

When the business operations of the corporation ceased because of losses and labor
dispute and its customers transferred their orders for delivery of electronic products to
another corporation engaged in the same line of business, the displaced workers of the
first corporation cannot apply the doctrine of piercing the corporate veil to enforce their
monetary claims against the second corporation simply because the two corporations
have the same controlling stockholders, common president, engaged in the same line of
business and the latter hired some of the displaced workers since it is established that
the second corporation was an independent company organized even prior to the labor
dispute in the first corporation. The union failed to show that the primary reason for the
closure of the establishment was due to the union activities of the employees. Complex
Electronics Employees Association vs. National Labor Relations Commission, 310 SCRA
403 (1999)

In as much as the real properties included in the inventory of the estate of a deceased
stockholders are in the possession of and registered in the name of the corporations,
which under the law has a personality separate and distinct from their stockholders, and
in the absence of any basis to shred the veil of corporate fiction, the presumption of
conclusiveness of said titles in favor of said corporations should stand undisturbed. Thus,
the inclusion in the estate of the deceased stockholder properties under the name of
various corporations was erroneous even though the corporations were owned and
controlled by the deceased stockholder during his lifetime. Lim vs. CA, 323 SCRA 102
(2000)

The suit against certain shareholders cannot ipso facto be a suit against the unimpleaded
corporation itself without violating the fundamental principle that a corporation has a
legal personality distinct and separate from its stockholders. Presidential Commission in
Good Government vs. Sandiganbayan, 290 SCRA 639 (1998); Presidential Commission
on Good Government vs. Sandiganbayan, 365 SCRA 538 (2001)

Not because two foreign companies came from the same country and closely worked
together on certain projects would the conclusion arise that one was the conduit of
another, thus piercing the veil of corporate fiction. To disregard the separate juridical
personality of a corporation, the wrong doing must be clearly and convincingly
established. It cannot be presumed. Marubeni Corporation vs. Lirag, 362 SCRA 620
(2001)

The mere fact that Oñate owned the majority of the shares of ECO is not a ground to
conclude that Oñate and ECO are one and the same. Mere ownership by a single
stockholder of all or nearly all of the capital stock of a corporation is not by itself
sufficient reason for disregarding the fiction of separate corporate personalities. Neither
is the fact that the name “ECO” represents the first 3 letters of Oñate’s name a sufficient
reason to pierce the veil. A corporation may assume a name provided it is lawful. There is
nothing illegal in a corporation acquiring the name or as in this case, the initials of one
of its shareholders. Land Bank of the Philippines vs. Court of Appeals, 364 SCRA 375
(2001)

If used to perform legitimate functions, a subsidiary’s separate existence may be

respected and the liability of the parent corporation as well as the subsidiary will be
confined to those arising in their respective businesses. When a borrower failed to pay
credit accommodations granted by a subsidiary of a banking corporation, the suit
against the parent company to direct it to re-compute the rescheduling of the interest to
be paid and to enjoin the foreclosure initiated by the parent company as attorney-in-
fact of the subsidiary will not prosper because the two corporations are separate and
distinct from each other. Aside from the fact that the lender is a wholly-owned
subsidiary, there is no showing that it is a mere instrumentality of the parent company.
The parent-subsidiary relationship between the two corporations is not the significant
relationship involved in this case since the parent company was not sued because it is the
parent company of the lender. Rather, it was sued because it acted as attorney-in-fact of
the lender in initiating the foreclosure proceedings. A suit against an agent cannot
without compelling reasons, be considered a suit against the principal. PNB vs. Ritratto
Group, Inc., 362 SCRA 216 (2001)
FBCI’s acquisition of the “substantial and controlling shares of stocks” of Esses and Tri-
Star does not create a substantial change in the rights or relations of the parties that
would entitle FBCI to possession of the Calatagan Property, a corporate property of Esses
and Tri-Star. Esses and Tri-Star, just like FBCI, are corporations. A corporation has a
personality distinct from that of its stockholders. Properties registered in the name of
the corporation are owned by it as an entity separate and distinct from its members.
Ricardo S. Silverio, Jr., Esses Development Corporation, and Tri-Star Farms, Inc.,vs.
Filipino Business Consultants, Inc., G.R. No. 143312, August 12, 2005)

The inclusion of the parent company as party defendant in an action for specific
performance filed against its subsidiary is not proper if the parent company does not
exercise complete control over the subsidiary and no management agreement exists
between the two. The existence of interlocking directors, corporate officers and
shareholders is not enough justification to pierce the corporate veil. Jardine Davis,
Inc.,vs. JRB Realty, Inc.,463 SCRA 555 (2005)

A corporation could not be made a party defendant to a collection case simply because
summons could not be served on the debtor corporation on the mere grounds that the
businesses of the two corporations are interrelated and they have common directors
absent sufficient showing that the corporate entity was purposely used as a shield to
defraud creditors and third persons of their rights.

Likewise, the acquisition of some of the machineries and equipment of the seller -
corporation was not proof that the buyer-corporation was formed to defraud creditor of
the seller-corporation. No merger took place between the seller and the buyer. What
took place was a sale of the assets of the former to the latter. Merger is legally distinct
from a sale of assets. Thus, where one corporation sells or otherwise transfers all its
assets to another corporation for value, the latter is not, by that fact alone, liable for the
debts and liabilities of the transferor. China Banking Corporation vs. Dyne-Sem
Electronics Corporation 494 SCRA 493 (2006)

When an investor has a claim against a subsidiary of another corporation which

subsequently became the acquired corporation in a merger, the claim against the
subsidiary can not be enforced against the surviving corporation even though the latter
corporation by virtue of the merger acquired all the shares of the absorbed corporation.
This is because the fact that a corporation owns almost all of the stocks of another
corporation, taken alone, is not sufficient to justify their being treated as one entity.
Spouses Ramon Nisce vs. Equitable PCI Bank 516 SCRA 231 (2007)

A corporation can still sue, notwithstanding the fact that its certificate of registration is
suspended or pending revocation. The suspension of corporate franchise and eventual
revocation will not invalidate the action for ejectment filed by the corporation for as
long as the suit was initiated during its lifetime. Pasricha v. Don Luis Dison Realty, Inc.,
548 SCRA 273 (2008)

Where the lawyer of the controlling stockholder of the corporation advised another
stockholder that he could obtain possession of certain corporate properties by way of
return for his equity investment but the lawyer acted without board approval, the advice
is not binding on the corporation even though it had the approval of the controlling
stockholder.The doctrine of piercing the veil of corporate fiction can not be invoked on
the sole ground that the presence of other stockholders in the corporation was only for
the purpose of complying with the statutory minimum requirements on number of
directors. Ryuichi Yamamoto vs. Nishino Leather Industries, Inc.,and Ikuo Nishino 551
SCRA 447 (2008)

The vehicle principally used in the business of the corporation but registered under the
name of its President can not be garnished to satisfy the debt of the corporation. The
rule is that obligations incurred by the corporation, acting through its directors, officers
and employees, are its sole liabilities. Thus, property belonging to a corporation cannot
be attached to satisfy the debt of a stockholder and vice versa, the latter having only an
indirect interest in the assets and business of the former. Virgilio S. Delima vs. Susan
Mercaida Gois 554 SCRA 731 (2008)

While a director or corporate officer may be held liable for corporate debts if he
assented or consented to a patently unlawful act or in case of bad faith or gross
negligence in conducting the affairs of the corporation, the bad faith or wrongdoing of
the director or officer must be established clearly and convincingly. Bad faith is not
presumed. Thus, if the lease agreement is between two corporations, the president or
officer of the defaulting corporation cannot be made liable for the debt of the
corporation. Seaoil Petroleum Corporation v. Autocorp Group, et al. G.R. No. 164326,
569 SCRA 387 (2008)

A suit seeking to enforce the contractual rights of a single proprietorship, that is,
collection of receivables arising from a construction agreement, must be brought in the
name of the proprietor himself. Such suit cannot be brought either in the name of a
corporation organized by the proprietor in view of the separate personality of a
corporation there being no showing that the proprietor assigned the receivables to the
corporation, or even in the registered name of the single proprietorship as a sole
proprietorship is not vested with any juridical personality to file or defend an action).
Excellent Quality Apparel, Inc., vs. Win Multi-Rich Builders, Inc.,578 SCRA (2009)

The laborers of the Pantranco North Express Inc (PNEI), a corporation which had ceased
operations, can not enforce their claims against PNB just because it acquired PNEI at a
time it was suffering financial reverses nor against PNB Madecor just because it is the
owner of PNEI properties and a subsidiary of PNB nor against Mega Prime just because
the latter acquired the shares of PNB over PNB- Madecor, PNB. PNB-Madecor and
Mega Prime are corporations with personalities separate and distinct from that of PNEI.
The general rule is that a corporation has a personality separate and distinct from those
of its stockholders and other corporations to which it may be connected. Moreover,
these corporations are registered as separate entities and, absent any valid reason, their
separate identities should be maintained and should not be treated as one. Neither
can the legal personality of PNEI be merged with PNB simply because the latter
acquired the former. Settled is the rule that where one corporation sells or otherwise
transfers all its assets to another corporation for value, the latter is not, by that fact
alone, liable for the debts and liabilities of the transferor. The execution sale on the
Pantranco properties to satisfy the laborers’ claims is null and void. However, only PNB-
Madecor or its successors or assigns has the right to annul the sale. PNB is not a real
party in interest to question the sale just because Mega Prime is indebtedness to it.
PNB’s right over the Pantraco properties is only inchoate which could ripen to
substantial interest only if Mega does not pay its indebtedness to PNB. PEA-PTGWO vs.
NLRC 581 SCRA 598 (2009)

Stockholders cannot claim ownership over corporate properties by virtue of the Minutes
of a Stockholder’s meeting which merely evidence a loan agreement between the
stockholders and the corporation. As such, there interests over the properties are merely
inchoate. Philippine National Bank vs. Merelo B. Aznar, G.R. No. 171805, May 30, 2011

The personality of a corporation is distinct and separate from the personalities of its
stockholders. Hence, its stockholders are not themselves the real parties in interest to
claim and recover compensation for the damages arising from the wrongful attachment
of its assets. Only the corporation is the real party in interest for that purpose.
Stronghold Insurance Company, Inc., vs. Tomas Cuenca, et. al., G.R. No. 173297, March
6, 2013

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

In order for the Court to hold the officer of the corporation personally liable alone for
the debts of the corporation and thus pierce the veil of corporate fiction, the Court has
required that the bad faith of the officer must first be established clearly and
convincingly. Petitioner, however, has failed to include any submission pertaining to any
wrongdoing of the general manager. Necessarily, it would be unjust to hold the latter
personally liable. Moreso, if the general manager was never impleaded as a party to the
case. Mercy Vda. de Roxas, represented by Arlene C. Roxas-Cruz, in her capacity as
substitute appellant-petitioner v. Our Lady's Foundation, Inc., G.R. No. 182378, March 6,
2013.

Where two banks foreclosed mortgages on certain properties of a mining company and
resumed business operations thereof by organizing a different company to which the
banks transferred the foreclosed assets, the banks are not liable to a contractor which
was engaged by the re-organized mining company even though the latter is wholly-
owned by the two banks and they have interlocking directors, officers and stockholders.
While ownership by one corporation of all or a great majority of stocks of another
corporation and their interlocking directorates may serve as indicia of control, by
themselves and without more, however, these circumstances are insufficient to establish
an alter ego relationship or connection between the two banks and the new mining
company on the other hand, that will justify the puncturing of the latter’s corporate
cover. Mere ownership by a single stockholder or by another corporation of all or nearly
all of the capital stock of a corporation is not of itself sufficient ground for disregarding
the separate corporate personality. Likewise, the existence of interlocking directors,
corporate officers and shareholders is not enough justification to pierce the veil of
corporate fiction in the absence of fraud or other public policy considerations.
Development Bank of the Philippines vs. Hydro Resources Contractors Corporation, GR.
No. 167603, March 13, 2013

The fact that an employee of the corporation was made to resign and not allowed to
enter the workplace does not necessarily indicate bad faith on the part of the employer
corporation if a sufficient ground existed for the latter to actually proceed with the
termination. Abbot Laboratories vs. Alacaraz, G.R. No. 192571, July 23, 2013

Other than mere ownership of capital stock, circumstances showing that the corporation
is being used to commit fraud or proof of existence of absolute control over the
corporation have to be proven. In short, before the corporate fiction can be disregarded,
alter-ego elements must first be sufficiently established. The mere fact that the same
controlling stockholder/officer signed the loan document on behalf of the corporation
does not prove that he exercised control over the finances of the corporation. Neither is
the absence of a board resolution authorizing him to contract the loan nor the
Corporation’s failure to object thereto support this conclusion. While he is the signatory
of the loan and the money was delivered to him, the proceeds of the loan were intended
for the business plan of the corporation. That the business plan did not materialize is also
not a sufficient proof to justify a piercing, in the absence of proof that the business plan
was a fraudulent scheme geared to secure funds from the lender. Nuccio Saverios vs.
Puyat, G.R. No. 186433, November 27, 2013

URC and Oilink had the same Board of Directors and Oilink was 100% owned by URC.
The Court held that the doctrine of piercing the corporate veil has no application here
because the Commissioner of Customs did not establish that Oilink had been set up to
avoid the payment of taxes or duties, or for purposes that would defeat public
convenience, justify wrong, protect fraud, defend crime, confuse legitimate legal or
judicial issues, perpetrate deception or otherwise circumvent the law. Commissioner of
Customs vs. Oilink International Corporation, G.R. 161759, July 2, 2014

A corporation, as a juridical entity, may act only through its directors, officers and
employees. Obligations incurred as a result of the directors’ and officers’ acts as
corporate agents, are not their personal liability but the direct responsibility of the
corporation they represent. As a rule, they are only solidarily liable with the corporation
for the illegal termination of services of employees if they acted with malice or bad faith.

To hold a director or officer personally liable for corporate obligations, two requisites
must concur: (1) it must be alleged in the complaint that the director or officer assented
to patently unlawful acts of the corporation or that the officer was guilty of gross
negligence or bad faith; and (2) there must be proof that the officer acted in bad faith.
Girly G. Ico vs. Systems Technology Institute Inc, et al., G.R. 185100, July 9, 2014

The writ of sequestration issued against the assets of the corporation is not valid because
the suit in the civil case was against the shareholder in the corporation and is not a suit
against the latter. Thus, the failure to implead these corporations as defendants and
merely annexing a list of such corporations to the complaints is a violation of their right
to due process for it would be, in effect, disregarding their distinct and separate
personality without a hearing.

Furthermore, the sequestration order issued against the corporation is deemed

automatically lifted due to the failure of the Republic to commence the proper judicial
action or to implead them therein within the period under the Constitution. Palm
Avenue Holding Co., Inc and Palm Avenue Realty and Development Corporation vs.
Sandiganbayan, G.R. No. 173082, August 6, 2014

OCWD and Subic Water are two separate and different entities. Subic Water clearly
demonstrated that it was a separate corporate entity from OCWD. OCWD is just a ten
percent (10%) shareholder of Subic Water. As a mere shareholder, OCWD’s juridical
personality cannot be equated nor confused with that of Subic Water. It is basic
incorporation law that a corporation is a juridical entity vested with a legal personality
separate and distinct from those acting for and in its behalf and, in general, from the
people comprising it. Under this corporate reality, Subic Water cannot be held liable for
OCWD’s corporate obligations in the same manner that OCWD cannot be held liable for
the obligations incurred by Subic Water as a separate entity. The corporate veil should
not and cannot be pierced unless it is clearly established that the separate and distinct
personality of the corporation was used to justify a wrong, protect fraud, or perpetrate a
deception. Olongapo City vs. Subic Water and Sewerage Co., Inc., G.R. No. 171626,
August 6, 2014

BF Corporation filed a collection complaint with the Regional Trial Court against
Shangri-La and the members of its board of directors. A corporation’s representatives
are generally not bound by the terms of the contract executed by the corporation. They
are not personally liable for obligations and liabilities incurred on or in behalf of the
corporation. Gerardo Lanuza Jr. and Antonio O. Olbes vs. BF Corporation, et al., G.R. No.
17438, October 1, 2014

A corporation is a juridical entity with legal personality separate and distinct from those
acting for and in its behalf and, in general, from the people comprising it. The general
rule is that, obligations incurred by the corporation, acting through its directors, officers
and employees, are its sole liabilities.

A director or officer shall only be personally liable for the obligations of the corporation,
if the following conditions concur: (1) the complainant alleged in the complaint that the
director or officer assented to patently unlawful acts of the corporation, or that the
officer was guilty of gross negligence or bad faith; and (2) the complainant clearly and
convincingly proved such unlawful acts, negligence or bad faith.

In the present case, the respondents failed to show the existence of the first requisite.
They did not specifically allege in their complaint that Rana and Burgos willfully and
knowingly assented to the petitioner's patently unlawful act of forcing the respondents
to sign the dubious employment contracts in exchange for their salaries. The
respondents also failed to prove that Rana and Burgos had been guilty of gross
negligence or bad faith in directing the affairs of the corporation. FVR Skills and
Services Exponents, Inc., et al., vs. Jovert Seva et al., G.R. No. 200857, October 22, 2014
a. Liability for Torts and Crimes

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

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

The powers to increase capitalization and to offer or give collateral to secure

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

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

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

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

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

b. Recovery of Moral Damages

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

The award of moral damages cannot be granted in favor of a corporation because

being an artificial person and having an existence only in legal contemplation, it has no
feelings, no emotions and no senses. It cannot therefore experience physical suffering
and mental anguish which can be experienced only by one having a nervous system.
The statement in People vs. Manero and Mambulao Lumber vs. PNB that a corporation
may recover moral damages if it has a good reputation that is debased, resulting in
social humiliation is only an obiter dictum. ABS-CBN Broadcasting vs. Court of
Appeals, 301 SCRA 342; (1999)

Moral damages may be awarded to a corporation whose reputation has been

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

Moral damages are not, as general rule, granted to a corporation. While it is true that
besmirched reputation is included in moral damages, it cannot cause mental anguish
to a corporation unlike in the case of a natural person for a corporation has no
reputation in the sense that an individual has and besides it is inherently impossible for
a corporation to suffer mental anguish. National Power Corporation vs. Philipp
Brothers Oceanic, Inc., 369 SCRA 629 (2001)

A juridical person is generally not entitled to moral damages because, unlike a natural
person, it cannot experience physical suffering or such sentiments as wounded
feelings, serious anxiety, mental anguish or moral shock. Nevertheless, AMEC’s claim
for moral damages falls under item 7 of Article 2219 of the Civil Code which expressly
authorizes the recovery of moral damages in cases of libel, slander or any other form of
defamation. Article 2219(7) does not qualify whether the plaintiff is a natural or
juridical person. Therefore, a juridical person such as a corporation can validly
complain for libel or any other form of defamation and claim for moral damages.
Filipinas Broadcasting Network, Inc.,vs. AGO Medical And Educational Center-Bicol
Christian College of Medicine, (AMEC-BCCM) and Angelita F. Ago, G.R. No. 141994,
January 17, 2005
 As a rule, a corporation is not entitled to moral damages because, not being a natural
person, it cannot experience physical suffering or sentiments like wounded feelings,
serious anxiety, mental anguish and moral shock. The only exception to this rule is
when the corporation has a reputation that is debased, resulting in its humiliation in
the business realm. But in such a case, it is essential to prove the existence of the
factual basis of the damage and its causal relation to petitioner's acts. Thus, where the
records are bereft of evidence that the name or reputation of the corporation has
been debased as a result of Meralco’s act (which in this case is the disconnection
without written notice of the disconnection of the electricity supply to the building of
the corporation due to alleged meter tampering), the corporation is not entitled to
moral damages. Manila Electric Company vs. T.E.A.M. Electronics Corporation,
Technology Electronics Assembly and Management Pacific Corporation; and Ultra
Electronics Instruments, Inc., G.R. No. 131723, December 13, 2007

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

2. Doctrine of Piercing the Corporate Veil

The court must first acquire jurisdiction over the corporation or corporations involved
before its or their separate personalities are disregarded; and the doctrine of piercing
the veil of corporate entity can only be raised during a full-blown trial over a cause of
action duly commenced involving parties duly brought under the authority of the court
by way of service of summons or what passes as such service. Kukan
International Corporation vs. Hon. Judge Amor Reyes, G.R. No. 182729, 29 September
2010

However, in another case involving an action for breach of contract of carriage resulting
to the death of one of the passengers , Supreme Court ruled that if the RTC had
sufficient factual basis to conclude that the two corporations are one and the same
entity as when they have the same President and controlling shareholder and it is
generally known in the place where they do business that both transportation companies
are one, the third party claim filed by the other corporation was set aside and the levy on
its property held valid even though the latter was not made a party to the case . The
judgment may be enforced against the other corporation to prevent multiplicity of suits
and save the parties unnecessary expenses and delay. Gold Line Tours vs. Heirs of Maria
Concepcion Lacsa, GR No. 159108, 18 June 2012
The doctrine of piercing the veil of corporate fiction is applicable not only to
corporations but also to a single proprietorship as when the corporation transferred its
employees to the company owned by the controlling stockholder of the corporation and
yet despite the transfer, the employees’ daily time records, reports, daily income
remittances and schedule of work were all made, performed, filed and kept in the
corporation. The corporation is clearly hiding behind the supposed separate and distinct
personality of the company. As such, the corporation and the company should be
solidarily liable for the claims of the illegally dismissed employees. Prince Transport,
Inc.,vs. Garcia, GR No. 167291, January 12, 2011

Although the corporate veil between two corporations can not be pierced for lack of
legal basis, it does not necessarily mean that the corporate officers of such corporations
are exempt from liability. Section 31 of the Corporation Code makes a director or officer
personally liable if he is guilty of bad faith or gross negligence in directing the affairs of
the corporation. In this case, the officers of the corporation who maliciously terminated
the employment of certain employees without any valid ground and in order to suppress
their right to self-organization, having acted in bad faith in directing the affairs of the
corporation, are solidarily liable with the corporation for the unlawful dismissal. Park
Hotel vs. Soriano, GR No. 171118, September 10, 2012

Where the court rendered judgment against a stock brokerage firm directing the latter
to return shares of stock which it sold without authority, but the writ of execution was
returned unsatisfied, an alias writ of execution could not be enforced against its parent
company because the court has not acquired jurisdiction over the latter and while the
parent company owns and controls the brokerage firm, there is no showing that the
control was used to violate the rights of the plaintiff. Pacific Rehouse Corporation vs.
Court of Appeals, GR. No. 199687, March 24, 2014

a. Grounds for Application of Doctrine

When an operator of a bus transportation sold his two certificates of public

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

Aggravating RANSOM's clear evasion of payment of its financial obligations is the

organization of a "run-away corporation," ROSARIO, in 1969 at the time the unfair
labor practice case was pending before the CIR by the same persons who were the
officers and stockholders of RANSOM, engaged in the same line of business as
RANSOM, producing the same line of products, occupying the same compound,
using the same machineries, buildings, laboratory, bodega and sales and accounts
departments used by RANSOM, and which is still in existence. This is another
instance where the fiction of separate and distinct corporate entities should be
disregarded as the second corporation seeks the protective shield of a corporate
fiction whose veil in the present case could, and should, be pierced as it was
deliberately and maliciously designed to evade its financial obligation to its
employees. A.C. Ransom Labor Union-CCLU vs. National Labor Relations
Commission, et al., G.R. No. L-69494, May 29, 1987

Where an employee was not given any separation pay when a corporation
transferred him to its sister company, the separate juridical personality of the first
corporation may be disregarded. Indino vs. National Labors Relations Commission,
178 SCRA 168 (1989)

The fact that the businesses of private respondent and Acrylic are related, that some
of the employees of the private respondent are the same persons manning and
providing for auxilliary services to the units of Acrylic, and that the physical plants,
offices and facilities are situated in the same compound, it is the Court’s considered
opinion that these facts are not sufficient to justify the piercing of the corporate veil
of Acrylic. Hence, the Acrylic not being an extension or expansion of private
respondent, the rank-and-file employees working at Acrylic should not be
recognized as part of, and/or within the scope of the petitioner, as the bargaining
representative of private respondent. Indophil Textile Mill Workers Union-PTGWO
vs. Voluntary Arbitrator Teodorico P. Calica and Indophil Textile Mills, Inc., G.R. No.
96490, February 3, 1992

Where the production division that manufactures leather products of a corporation

engaged in department store business was organized into a separate corporation
but its incorporators and directors except for one are major stockholders of the
department store, and the latter is the exclusive buyer of the leather products
produced by the separate corporation, with the two corporations housed in the same
building and using the same payrolls, their separate juridical personalities may be
disregarded. Thus, where the separate corporation was closed, the separation
benefits of its affected employees may be claimed from the department store. They
cannot be ordered reinstated though or absorbed into the pool of employees of the
department store considering the diversity in skills, experience and orientation
between its employees and that of the separate corporation. Shoemart, Inc.,vs.
National labor Relations Commission, 225 SCRA 311 (1993)

Where the sale of the apartment was executed by the controlling stock-holder of a
corporation who is also its president, treasurer and general manager and the
corporation is classified as a close corporation, the separate juridical personality of
the corporation may be disregarded and the validity of the sale upheld despite the
lack of board resolution authorizing the sale of the subject property. Manuel R.
Dulay Enterprises, Inc.,vs. Court of Appeals, 225 SCRA 678 (1993)

Where three companies are owned by one family, such that majority of the officers
of these companies are the same, the companies are located in the one building and
use the same messengerial services, and there was no showing that the employee
was paid separation pay when he resigned from one company and then, transferred
to the other, the separate juridical personalities of the three companies may be
disregarded. Guatson International Travel & Tours, Inc., vs. national Labor Relations
Commission, 230 SCRA 815 (1994)

The separate juridical personality of a corporation may be disregarded where the

majority stockholder filed a derivative suit in behalf of the corporation to declare the
sale as unenforceable against the corporation despite the fact that the trial court in
another case had already ruled that the contract of sale between the corporation
and its buyer was deemed perfected. There is forum shopping where the
stockholders, in a second case, and in representation of the corporation, seek to
accomplish what the corporation itself failed to do in the original case. First
Philippine International Bank vs. Court of Appeals, 252 SCRA 259 (1996)

Where it appears that three business enterprises are owned, conducted and
controlled by the same family which were all engaged in the construction business
and which used the same equipment, services and workers, both law and equity will,
when necessary to protect the rights of third persons, disregard the legal fiction that
the (three) corporations are distinct entities, and treat them as identical. Tomas Lao
Construction vs. National Labor Relations Commission, 278 SCRA 716 (1997)

The defense of separateness will be disregarded where the business affairs of a

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

When the corporation is the mere alter ego or business conduit of a person, the
separate personality of the corporation may be disregarded. This is commonly
referred to as the “instrumentality rule” or the “alter ego doctrine “, which the courts
have applied in disregarding the separate juridical personality of corporations.
Where the owner of a business operating as a single proprietorship authorized her
daughter to constitute a mortgage on the proprietor’s property to secure a loan and
the single proprietorship was eventually formed into a corporation, the loans
incurred by the single proprietorship should be considered obligations of the
corporation where the proprietor and her husband are the majority shareholders of
the corporation; both firms were managed by their daughter, engaged in the
garment business and held office in the same building owned by the spouses; the
business operations of the corporations were so merged with the spouses; the
corporate funds were held by the latter with the corporation itself having no visible
assets; and that the latter benefited from the loans secured from the Bank to finance
their business both locally and abroad, then the corporation should be treated as a
conduit of and having merely succeeded the single proprietorship. Thus, the
obligations under the mortgage contract secured under the name of the corporation
cannot be evaded on the pretext that it was signed for the benefit of the and under
the name of the single proprietorship only. Lipat vs. Pacific Banking Corp., 402 SCRA
339 (2003)

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

The liaison office of a foreign corporation is solidarily liable with the latter if the
former has been constituted as the former’s representative and its fully subsidized
extension office in the Philippines. As such, the extension office can be charged for
the liabilities incurred by the parent company in the country. And if the extension
office can be so charged, there is no rhyme nor reason why it cannot be adjudged, as
solidarily liable with head office. Mavest (USA) Inc., v. Sampaguita Garment
Corporation 470 SCRA 440 (2005)

When two corporations, one engaged in the coconut plantation and the other into
operation of leisure resorts, have basically the same incorporators and directors; are
headed by the same official; used only one office and payroll; are under one
management and their laborers interchanged work in the two corporations and are
under the supervision and control of a common managing director of both
corporations, any attempt to make the two corporations appear as two separate
entities, insofar as the workers are concerned, should be viewed as a devious but
obvious means to defeat the ends of the law. The employees of the leisure resort
corporation could enforce their claims against the plantation company even though
the latter was not impleaded as a party defendant because the two corporations are
to be treated as one. It would certainly be unjust to prejudice the claims of the
workers because of the misleading actions of their employer. Pamplona Plantation
Company, Inc., vs. Tinghil, 450 SCRA 421 (2005)

Where the terms of a mining claim prohibit the assignment thereof except in favor
of an agent and the corporation, as holder of the mining claim, transferred its right
to a wholly-owned subsidiary, the separate legal personality of the subsidiary
cannotbe pierced so that the latter shall be considered a mere conduit or agent of
the parent company to legitimize the prohibited transfer. The doctrine of piercing
the corporate veil cannot be used as a vehicle to commit prohibited acts because
these acts are the ones which the doctrine seeks to prevent. To allow the subsidiary
to avail itself of this doctrine and to approve the validity of the assignment is
tantamount to sanctioning illegal act which is what the doctrine precisely seeks to
forestall. Apex Mining Co., Inc.,vs. Southeast Mindanao Gold Mining Corp. 492 SCRA
355 (2006)

Commonality of directors, officers and stockholders and even sharing of office

between GCC and EQUITY; certain financing and management arrangements
between the two, allowing GCC to handle the funds of the latter; the virtual
domination if not control wielded by GCC over the finances, business policies and
practices of EQUITY; and the establishment of EQUITY by GCC to circumvent CB
rules are circumstances which justify the conclusion that Equity is just an
instrumentality of GCC. Thus, Alsons could enforce payment of the promisorry note
of Equity even against GCC. GCC v. Alsons Development and Investment
Corporation 513 SCRA 225 (2007)

The sale of agricultural land covered by the agrarian reform law by the owner to a
corporation owned and controlled by the same owner and his family is null and void.
The corporate vehicle cannotbe used to shield the owner from the agricultural
claims of the tenant-beneficiary. The veil of corporate fiction ought to be pierced
when it is used to subvert public policy. Sta. Monica Industrial And Development
Corporation vs. The Department Of Agrarian Reform Regional Director For Region
III, et al. 555 SCRA 97 (2008)

The President of a family-owned corporation who committed fraud in selling its

vehicle to a customer and collected down payment from the latter knowing fully well
that the vehicle was already sold to another cannothide behind the separate
corporate personality of the corporation to escape from liability. Sps. Pedro and
Florencia Violago vs. BA Finance Corporation and Avelino Violago 559 SCRA 69
(2008)

Generally, the stockholders and officers are not personally liable for the obligations
of the corporation except only when the veil of corporate fiction is being used as a
cloak or cover for fraud or illegality, or to work injustice. Thus, when there is no
agreement that Mr. Bautista shall be held liable for the corporation’s obligations in
his personal capacity, he cannot be held civilly liable for the value of the two checks
issued in payment for the corporation’s obligation. Claude P. Bautista vs. Auto Plus
Traders Inc.,561 SCRA 223 (2008)

In order to pierce the veil of corporate fiction, for reasons of negligence by the
director, trustee or officer in the conduct of the transactions of the corporation, such
negligence must be gross. Gross negligence is one that is characterized by the want
of even slight care, acting or omitting to act in a situation where there is a duty to
act, not inadvertently but willfully and intentionally with a conscious indifference to
consequences insofar as other persons may be affected. Parenthetically, gross or
willful negligence could amount to bad faith. Thus, the President’s casual manner,
insouciance and nonchalance, nay, indifference, to the predicament of the distressed
corporation, as gleaned from his court testimony, glaringly exhibited a lackadaisical
attitude from a top office of a corporation, a conduct totally abhorrent in the
corporate world constitute gross negligence that will impute liability to the
corporate officer for corporate obligations. Thus, under the circumstances, the
investor who made placement with the corporation could recover the same from the
grossly negligent officer. Lucia Magaling, et al. vs. Peter Ong 562 SCRA 152 (2008)

When two corporations are characterized by oneness of operations vested in the

person of their common president and unity in the keeping and maintenance of their
corporate books and records through their common accountant and bookkeeper,
loans obtained by these corporations together with their controlling shareholder
 shall be treated as one. Thus, even though the mortgagor of record is only of the
corporations, their properties may be foreclosed to answer for all the loan
obligations of the two corporations, their common president/controlling
shareholder and even the latter’s common law spouse who received certain amount
of the loan for the account of the former. Siain Enterprises, Inc., vs. Cupertino Realty
Corporation, Inc.,et. al. 590 SCRA 435 (2009)

Piercing the veil of corporate fiction is warranted when a corporation ceased to exist
only in name as it re-emerged in the person of another corporation, for the purpose
of evading its unfulfilled financial obligation under a compromise agreement. Thus,
if the judgment for money claim could not be enforced against the employer
corporation, an alias writ may be obtained against the other corporation considering
the indubitable link between the closure of the first corporation and incorporation of
the other. Livesey vs. Binswanger Philippines, GR No. 177493, March 19, 2014

The corporate existence may be disregarded where the entity is formed or used for
non-legitimate purposes, such as to evade a just and due obligation, or to justify a
wrong, to shield or perpetrate fraud or to carry out similar or inequitable
considerations, other unjustifiable aims or intentions, in which case, the fiction will
be disregarded and the individuals composing it and the two corporations will be
treated as identical. In the case at bar, when petitioner Arco Pulp and Paper’s
obligation to Lim became due and demandable, she not only issued an unfunded
check but also contracted with a third party in an effort to shift petitioner Arco Pulp
and Paper’s liability. She unjustifiably refused to honor petitioner corporation’s
obligations to respondent. These acts clearly amount to bad faith. In this instance,
the corporate veil may be pierced, and petitioner Santos may be held solidarily liable
with petitioner Arco Pulp and Paper. Arco Pulp and Paper Co., Inc., and Candida
Santos vs. Dan T. Lim, doing business under the name and style of Quality Papers &
Plastics Products Enterprises, G.R. No. 206806, June 25, 2014

When an officer owns almost all of the stocks of a corporation, it does not ipso facto
warrant the application of the principle of piercing the corporate veil unless it is
proven that the officer has complete dominion over the corporation. WPM
International Trading Inc., and Warlito Manlapaz vs. Fe Corazon Labayen, G.R. No.
182770, September 17, 2014

The Court agrees with the petitioners that there is no need to pierce the corporate
veil. Respondent failed to substantiate her claim that Mancy and Sons Enterprises,
Inc., and Manuel and Jose Marie Villanueva are one and the same. She based her
claim on the SSS form wherein Manuel Villanueva appeared as employer. However,
this does not prove, in any way, that the corporation is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, or when it is made as a
shield to confuse the legitimate issues, warranting that its separate and distinct
personality be set aside. Hacienda Cataywa/Manuel Villanueva vs. Rosario Lorenzo,
G.R. No. 179640, March 18, 2015

b. Test in Determining Applicability

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

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

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

The doctrine of piercing the corporate veil applies only in three (3) basic areas,
namely: 1) defeat of public convenience as when the corporate fiction is used as a
vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate
entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego
cases, where a corporation is merely a farce since it is a mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation.

In this connection, case law lays down a three-pronged test to determine the
application of the alter ego theory, which is also known as the instrumentality theory,
namely:

1. Control, not mere majority or complete stock control, but complete domination,
not only of finances but of policy and business practice in respect to the transaction
 attacked so that the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiff’s legal right; and;

3. The aforesaid control and breach of duty must have proximately caused the injury
or unjust loss complained of.

The first prong is the "instrumentality" or "control" test. This test requires that the
subsidiary be completely under the control and domination of the parent. It inquires
whether a subsidiary corporation is so organized and controlled and its affairs are so
conducted as to make it a mere instrumentality or agent of the parent corporation
such that its separate existence as a distinct corporate entity will be ignored. In
addition, the control must be shown to have been exercised at the time the acts
complained of took place.

The second prong is the "fraud" test. This test requires that the parent corporation’s
conduct in using the subsidiary corporation be unjust, fraudulent or wrongful. It
examines the relationship of the plaintiff to the corporation. It recognizes that
piercing is appropriate only if the parent corporation uses the subsidiary in a way
that harms the plaintiff creditor. As such, it requires a showing of "an element of
injustice or fundamental unfairness."

The third prong is the "harm" test. This test requires the plaintiff to show that the
defendant’s control, exerted in a fraudulent, illegal or otherwise unfair manner
toward it, caused the harm suffered. A causal connection between the fraudulent
conduct committed through the instrumentality of the subsidiary and the injury
suffered or the damage incurred by the plaintiff should be established. The plaintiff
must prove that, unless the corporate veil is pierced, it will have been treated
unjustly by the defendant’s exercise of control and improper use of the corporate
form and, thereby, suffer damages. Development Bank of the Philippines vs. Hydro
Resources Contractors Corporation, GR. No. 167603, March 13, 2013

E. Incorporation and Organization

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

Since the paid-up capital is the portion of the capital which has been subscribed and paid,
the assets transferred to and the loans extended to a corporation should not be considered
in computing the paid-up capital of the corporation. Not all funds or assets received by the
corporation can be considered paid-up capital for this term has a technical signification in
Corporation Law. Such must form part of the authorized capital stock of the corporation,
subscribed and then actually paid up. The same test should also be applied in determining if
the paid-up capital of the Corporation has been impaired so as to quality it for exemption
from the increase in the minimum wage. MISCI-NACUSIP Local Chapter vs. National Wages
and Productivity Commission, 269 SCRA 173 (1997)

A juridical person cannot be considered essentially a formal party to a case where it was not
duly represented by its legitimate governing board. It cannotbe said that the corporation is
represented by a legitimate board in an action involving the validity of the sale of its
corporate property when the corporation has two sets of board of directors both claiming to
be the legitimate board and the issue on who is the legitimate board is still pending at the
time of the sale. Any decision in a court suit does not become not final and executory insofar
as the corporation is concerned because it was effectively denied its day in court for want of
legitimate representation. Islamic Directorate of the Philippines vs. Court of Appeals, 272
SCRA 454 (1997)

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

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

1. Promoter

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

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

2. Number and Qualifications of Incorporators

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

3. Corporate Name — Limitations on Use of Corporate Name

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

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

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

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

A change in the corporate name does not make a new corporation, whether effected by
a special act or under a general law. It has no effect on the identity of the corporation, or
on its property, rights, or liabilities because the corporation upon such change in its
name, is in no sense a new corporation, nor the successor of the original corporation.
P.C. Javier & Sons, Inc., et al. vs.Paic Savings & Mortgage Bank, Inc., et al., G.R. No.
129552, June 29, 2005
 The mere change in the corporate name is not considered under the law as the creation
of a new corporation; hence, the renamed corporation remains liable for the illegal
dismissal of its employee separated under that guise. Verily, the amendments of the
articles of incorporation of Zeta to change the corporate name to Zuellig Freight and
Cargo Systems, Inc.,did not produce the dissolution of the former as a corporation.
Zuellig Freight and Cargo Systemsvs. National Labor Relations Commission, et al., G.R.
No. 157900, July 22, 2013

4. Corporate Term

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

5. Minimum Capital Stock and Subscription Requirements

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

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

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

not only to voting control of the corporation but also to the beneficial ownership of the
corporation, it is therefore imperative that such requirement applies uniformly and
across the board to all classes of shares, regardless of nomenclature and category,
 comprising the capital of a corporation. Since a specific class of shares may have rights
and privileges or restrictions different from the rest of the shares in a corporation, the
60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the
Constitution must apply not only to shares with voting rights but also to shares without
voting rights. Heirs of Wilson P. Gamboa vs. Finance Secretary Margarito B. Teves, et al.,
G.R. No. 176579, October 9, 2012

6. Articles of Incorporation

a. Nature and Function of Articles

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

b. Contents

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

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

c. Amendment

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

d. Non-Amendable Items

7. Registration and Issuance of Certificate of Incorporation

8. Adoption of By-Laws

a. Nature and Functions of By-Laws

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

Corporate powers may be directly conferred upon corporate officers or agents by

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

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

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

In order to be bound, a third party must have acquired knowledge of the pertinent
by-laws at the time the transaction or agreement was entered into. Thus, a provision
in the by-laws of a country club granting it a preferred lien over the share of stock of
 a member for unpaid dues is not binding on the pledgee of the same share of stock if
the latter had no actual knowledge of it. China Banking Corporation vs. Court of
Appeals, 270 SCRA 503 (1997)

Conformably with Section 25 of the Corporation Code, a position must be expressly

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

The relevant provisions of the articles of incorporation and the by-laws of Forest Hills
governed the relations of the parties as far as the issues between them were
concerned. Indeed, the articles of incorporation of Forest Hills defined its charter as
a corporation and the contractual relationships between Forest Hills and the State,
between its stockholders and the State, and between Forest Hills and its stockholder;
hence, there could be no gainsaying that the contents of the articles of incorporation
were binding not only on Forest Hills but also on its shareholders. On the other hand,
the by-laws were the self-imposed rules resulting from the agreement between
Forest Hills and its members to conduct the corporate business in a particular way. In
that sense, the by-laws were the private “statutes” by which Forest Hills was
regulated, and would function. The charter and the by-laws were thus the
fundamental documents governing the conduct of Forest Hills’ corporate affairs;
they established norms of procedure for exercising rights, and reflected the purposes
and intentions of the incorporators. Until repealed, the by-laws were a continuing
rule for the government of Forest Hills and its officers, the proper function being to
regulate the transaction of the incidental business of Forest Hills. The by-laws
constituted a binding contract as between Forest Hills and its members, and as
between the members themselves. Every stockholder governed by the by-laws was
entitled to access them. The by-laws were self-imposed private laws binding on all
members, directors and officers of Forest Hills. The prevailing rule is that the
provisions of the articles of incorporation and the by-laws must be strictly complied
with and applied to the letter. Forest Hills Golf and Country Club Inc., vs. Gardpro
Inc., G.R. No. 164686, October 22, 2014

b. Requisites of Valid By-Laws

A provision in the by-laws of the corporation stating that of the 15 members of its
Board of Directors, only 14 members would be elected while the remaining member
would be the representative of an educational institution located in the village of the
homeowners, is invalid for being contrary to law. The fact that for fifteen years it has
not been questioned or challenged but, on the contrary, appears to have been
implemented by the members of the association cannot forestall a later challenge to
its validity because, if it is contrary to law, it is beyond the power of the members of
the association to waive its invalidity. Grace Christian High Schoolvs.the Court Of
Appeals, Grace Village Association, Inc., Alejandro G. Beltran, and Ernesto L. Go, G.R.
No. 108905, 23 October 1997
 The Corporation does not necessarily prohibit the transfer of proprietary shares by its
members when its amended Articles of Incorporation provides that: "No transfer
shall be valid except between the parties, and shall be registered in the Membership
Book unless made in accordance with these Articles and the By-Laws." The authority
granted to a corporation to regulate the transfer of its stock does not empower it to
restrict the right of a stockholder to transfer his shares by means of by-laws
provisions, but merely authorizes the adoption of regulations as to the formalities
and procedure to be followed in effecting transfer. Marsh Thomson vs. Court of
Appeals and the American Champer of Commerce of the Philippines, Inc,, G.R. No.
116631, October 28, 1998

c. Binding Effects

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

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

d. Amendment or Revision

When an amendment to a provision in the Amended By-Laws requiring the

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

F. Corporate Powers

1. General Powers, Theory of General Capacity

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

A corporation cannot enter into a partnership contract but my engage in a joint venture
with other. Aurbach vs. Sanitary Wares Manufacturing Corporation, 180 SCRA 130
(1989)

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

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

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

Particular partnership distinguished from a joint venture, to wit:

(a) a joint venture (an American concept similar to our joint accounts) is a sort of informal
partnership, with no firm name and no legal personality. In a joint account, the
participating merchants can transact business under their own name, and can be
individually liable thereof.

Usually, but necessarily a joint venture is limited to a SINGLE TRANSACTION, although

the business of pursuing to a successful termination may continue for a number of years;
a partnership generally relates to continuing business of various transactions of certain
kind. Heirs of Tang Eng Kee vs. Court of Appeals and Benguet Lumber Company, 341
SCRA 740 (2000)

The lawyer who signed the pleading, verification and certification against non-forum
shopping must be specifically authorized by the Board of Directors of the Corporation to
make his actions binding on his principal. Maranaw Hotels and Resort Corporation v.
Court of Appeals, 576 SCRA 463 (2009)

If the real party in interest is a corporate body, an officer of the corporation can sign the
certification against forum shopping so long as he has been duly authorized by a
resolution of its board of directors. The court did not commit grave abuse of discretion in
dismissing the petition for lack of authority of authority of the officer who signed the
certification of non-forum shopping in representation of petitioner corporation. San
Miguel Bukid Homeowners Association, Inc.,vs. City of Mandaluyong, et al, GR
no.153653, October 2, 2009; Republic of the Philippines vs. Coalbrine International
Philippines, et al GR No. 161838, April 7, 2010

The power of a corporation to sue and be sued is exercised by the board of directors. The
physical acts of the corporation, like the signing of documents, can be performed only by
natural persons duly authorized for the purpose by corporate bylaws or by a specific act
of the board. Absent the said board resolution, a petition may not be given due course.
Ligaya Esguerra, et al. vs. Holcim Philippines, Inc., G.R. No. 182571, September 2, 2013

The following officers may sign the verification and certification against non-forum
shopping on behalf of the corporation even in the absence of board resolution,

A.) Chairperson of the Board of Directors

B.) President
C.) General Manager
D.) Personnel Officer
E.) Employment Specialist in labor case

These officers are in the position to verify the truthfulness and correctness of the
allegations in the petition. Mid Pasig Land and Development Corporation v. Tablante,
G.R. No. 162924, February 4, 2010; PNCC Skyway Traffic Management and Security
Division Workers Organization vs. PNCC Skyway Corporation, GR No. 171231, February
17, 2010

The general rule is that a corporation can only exercise its powers and transact its
business through its board of directors and through its officers and agents when
authorized by a board resolution or its bylaws. The power of a corporation to sue and be
sued is exercised by the board of directors. The physical acts of the corporation, like the
signing of documents, can be performed only by natural persons duly authorized for the
purpose by corporate bylaws or by a specific act of the board. Absent the said board
resolution, a petition may not be given due course. Esguerra vs. Holcim Philippines G.R.
No. 182571, September 2, 2013
 In a complaint for nullification of mortgage and foreclosure with damages against the
mortgagee-bank, the plaintiff can not compel the officers of the bank to appear and
testify as plaintiff’s initial witnesses unless written interrogatories are first served upon
the bank officers. This is in line with the Rules of Court provision that calling the adverse
party to the witness stand is not allowed unless written interrogatories are first served
upon the latter. This is because the officers of a corporation are considered adverse
parties as well in a case against the corporation itself based on the principle that
corporations act only through their officers and duly authorized agents. Spouses
Afulugencia vs. Metropolitan Bank and Trust Co. G.R. No. 185145, February 05, 2014

2. Specific Powers, Theory of Specific Capacity

a. Power to Extend or Shorten Corporate Term

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

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

Indebtedness

No stockholders’ meeting or approval is necessary for the issuance of unsubscribed

portion of the capital stock. Datu Tagoranao Benito vs. Securities & Exchange
Commission, 123 SCRA 722 (1983)

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

c. Power to Deny Pre-Emptive Rights

d. Power to Sell or Dispose of Corporate Assets

The sale or disposition of all or substantially all properties of the corporation

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

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

e. Power to Acquire Own Shares

The requirement of unrestricted retained earnings to cover the shares is based on

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

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

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

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

g. Power to Declare Dividends

The dividends received by a corporation from corporate investments in other

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

Dividends cannot be declared for preferred shares which were guaranteed a

quarterly dividend if there are no unrestricted retained earnings. "Interest bearing
 stocks", on which the corporation agrees absolutely to pay interest before dividends
are paid to common stockholders, is legal only when construed as requiring payment
of interest as dividends from net earnings or surplus only. Republic Planters Bank vs.
Hon. Enrique A. Agana, Sr., as Presiding Judge, Court of First Instance of Rizal,
Branch XXVIII, Pasay City, Robes-Francisco Realty & Development Corporation and
Adalia F. Robes, G.R. No. 51765, March 3, 1997

h. Power to Enter Into Management Contract

i. Ultra Vires Acts

i. Applicability of Ultra Vires Doctrine

ii. Consequences of Ultra Vires Acts

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

Where two parties forcibly took over the management of a corporation by virtue
of a writ of preliminary injunction issued on the basis of their claim that they
were stockholders, their hiring of new employees to replace the original
employees (who were validly hired by the board of directors) cannot bind the
corporations, as the act was done without authority from the board of directors.
The claim of illegal dismissal by the new employees is without merit as they were
not hired by the corporation or its duly authorized officers or agents. Visayan vs.
National Labor Relations Commission, 196 SCRA 410 (1991)

A contract to sell cement signed by the president and chairman of the

corporation is not binding upon it where they were not authorized by the board
of directors to enter into a contract and the company board of directors
disapproved the contract and the by-laws conferred the power to manage the
business of the corporation upon the general manager. Yao Ka Sin Trading vs.
Court of Appeals, 209 SCRA 763 (1992)

The assignment of certificates of indebtedness belonging to a corporation made

without the authorization of the board of directors does not bind the
corporation. Traders Royal Bank vs. Court of Appeals, 269 SCRA 19 (1997)

A mortgage on corporate property accepted by a bank as basis for restructuring

a personal loan cannot be annulled even though it could not have been
 authorized by the board of directors ( for lack of quorum ) where the bank relied
on the secretary’s certificate attesting to the existence of a board resolution
approving the mortgage. Metropolitan Bank & Trust Co. vs. Quilts & All, Inc., 222
SCRA 480 (1993); See also Lee vs. Court of Appeals, 345 SCRA 579 (2000)

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

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

3. How Exercised

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

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

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

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

c. By the Officers

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

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

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

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

Although a branch manager, within his field and as to third persons, is the general
agent and is in general charge of the corporation, with apparent authority
 commensurate with the ordinary business entrusted him and the usual course and
conduct thereof, yet the power to modify or nullify corporate contracts remains
generally in the board of directors. Being a mere branch manager alone is
insufficient to support the conclusion that he has been clothed with “apparent
authority” to verbally alter terms of written contracts, especially when viewed
against the telling circumstances of this case: the unequivocal provision in the
mortgage contract; the corporation’s vigorous denial that any agreement to release
the mortgage was ever entered into by it; and, the fact that the purported
agreement was not even reduced into writing considering its legal effects on the
parties’ interests. Banate vs. Philippine Countryside Rural Bank (Liloan, Cebu),
Inc., G.R. No. 163825, July 13, 2010

A corporation cannot deny the authority of lawyer when they clothed him with
apparent authority to act in their behalf such as when he entered his appearance
accompanied by the corporation’s general manager and the corporation never
questioned his acts and even took time and effort to forward all the court documents
to him. The lawyer may not have been armed with a board resolution but the
doctrine of apparent authority imposes liability not as a result of contractual
relationship but rather because of the actions of the principal or an employer in
somehow misleading the public that the relationship or the authority exists. Megan
Sugar Corporation vs. RTC of Ilo-ilo Br. 68, GR no. 170352, June 1, 2011

The doctrine of apparent authority provides that a corporation will be estopped from
denying the agent’s authority if it knowingly permits one of its officers or any other
agent to act within the scope of an apparent authority, and it holds him out to the
public as possessing the power to do those acts.

Apparent authority is derived not merely from practice. Its existence may be
ascertained through (1) the general manner in which the corporation holds out an
officer or agent as having the power to act or, in other words the apparent authority
to act in general, with which it clothes him; or (2) the acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof, within or beyond
the scope of his ordinary powers. It is not the quantity of similar acts which
establishes apparent authority, but the vesting of a corporate officer with the power
to bind the corporation. When the sole management of the corporation was
entrusted to two of its officers/incorporators with the other officers never had
dealings with the corporation for 14 years and that the board and the stockholders
never had its meeting, the corporation is now estopped from denying the officers’
authority to obtain loan from the lender on behalf of the corporation under the
doctrine of apparent authority. Advance Paper Corporation vs. Arma Traders
Corporation , G.R. No 176897, December 11, 2013.

4. Trust Fund Doctrine

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

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

G. Board of Directors and Trustees

1. Doctrine of Centralized Management

Where a department store entered into a contract with a concessionaire who sold fake
Louis Vitton items in the department store, the executive vice president of the
department store cannot be convicted for entering into a contract which enabled the
concessionaire to engage in acts allegedly amounting to unfair competition, for the
corporation has a legal personality separate from its officers and the power to enter into
contracts is vested in the board of directors. Louis Vitton, S.A. vs. Villanueva , 216 SCRA
121 (1992)

The power to sue and be sued in any court by a corporation is lodged in the board of
directors that exercises its corporate powers and not in the president or officer thereof.
A derivative suit should not prosper if it is filed by a person who is not authorized by the
corporate share for whose benefit the shares are held. Bitong vs. Court of Appeals, 292
SCRA 503 (1998)

There are three (3) levels of control in a corporation, to wit: (1) the board of directors,
which is responsible for corporate policies and the general management of the business
affairs of the corporation; (2) the officers, who in theory execute the policies laid down
by the board, but in practice often have wide latitude in determining the course of
business operations; and (3) the stockholders who have the residual power over
fundamental corporate changes, like amendments of the articles of incorporation. xxx
Board resolution authorizing a lawyer to represent the corporation during the pre-trial
is not necessary if the officer who is expressly authorized under the by-laws of the
corporation to make the appointment had in fact made such appropriate appointment
in favor of the handling lawyer. Citibank, N.A. vs. Chua, 220 SCRA 75. 1993

2. Business Judgment Rule

Where the corporation sold its shares to an investment house on the condition that the
same shall be sold to the public through stockbrokers in block of 1 million shares per
buyer and the condition was not fulfilled, the sale is, nevertheless, presumed to be valid
unless set aside by a competent court. Thus, the buyer, as a stockholder, cannot be
deprived of his right to vote his shares as it is a right inherent to ownership. The
stockholder may be deprived of the right to vote only upon clear showing of its lawful
denial under the articles of incorporation or by-laws of a corporation. Furthers, issues
relating to the directive of the board of directors of the issuing corporation to issue a
stock certificate in favor of the buyer are questions of policy or management and are left
solely to the honest decision of officers and directors of a corporation, and so long as
they act in good faith, their orders are not reviewable by the courts. Sales vs. Securities
and Exchange Commission, 169 SCRA 109 (1989)

A stockholder cannot invalidate the sale of corporate properties for failure to comply
with Section 40 of the Corporation Code, where the buyer relied on the secretary’s
certificate that the sale had been authorized by resolution of the board of directors and
of the stockholders. Being regular on its face, a Secretary’s Certificate is sufficient for a
third party to reply on. It does not have to investigate the truth of the facts contained in
such certification, otherwise business transaction of corporations would become
tortuously slow and unnecessarily hampered. Esguerra vs. Court of Appeals, 267 SCRA
380 (1997)

Contracts or acts of a corporation must be made either by the board of directors or by a

corporate agent duly authorized by the board. Absent such valid delegation /
authorization, the rule is that the declaration of an individual director relating to the
affairs of the corporation, but not in the course of, or connected with, the performance
of authorized duties of such director, are held not binding on the corporation. Thus,
where a director was not authorized by the board to sell corporate property, its sale is
not binding on the corporation. The sale cannot be ratified despite acceptance by the
corporation of partial payment if what is involved is sale of land. Considering that the
officers who represented and acted as agents in behalf of the corporation were not
authorized, the contract of sale is null and avoid under Art.1874 of the Civil Code. Being
a void contract, it is not susceptible to ratification. A.F realty & Development, Inc.,vs.
Dieselman Freight services Company, 373 SCRA 385 (2002)

The determination of the necessity for additional offices and/or positions in a

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

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

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

3. Tenure, Qualifications and Disqualifications of Directors or Trustees

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

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

4. Elections

a. Cumulative Voting/Straight Voting

b. Quorum

5. Removal

6. Filling of Vacancies

When an incumbent member of the board of directors continues to serve in a holdover

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

The proscription against granting compensation to directors/trustees of a corporation is

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

8. Fiduciary Duties and Liability Rules

The board members of the corporation who purport to act for and in behalf of the
corporation within the lawful scope of their authority and act in good faith do not
become liable whether civilly or otherwise for the consequences of their acts. But when
the directors abolished the benefits and eventually dismissed in bad faith and without
procedural due process the general manager who tried to implement remedial measures
to prevent unwarranted payment of per diem and other allowances to the board
members and other irregularities, they are guilty of bad faith and personally liable for
damages. Benguet Electric Cooperative, Inc., vs. National Relations Commission, 209
SCRA 55 (1992)

The Board of Directors is liable for damages under the abuse of right provision of the
Civil Code and Article 31 of the Corporation Code for disapproving the application for
proprietary membership on the basis of an amendment to the by-laws requiring the
unanimous vote of the directors present at a special or regular meeting but which was
not printed on the application form. What was printed thereon was the original
provision which was silent on the required number of votes needed for admission of an
applicant as a proprietary member. The explanation that failure to print was due to
economic reasons is flimsy and unconvincing considering that the amendment was
introduced almost twenty (20) years ago. Cebu Country Club Inc., et al., v. Elizagaque
542 SCRA 65 (2008)

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

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

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

The execution of a document by a bank manager called “pagares” which guaranteed

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

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

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

Obligations incurred as a result of the directors’ and officers’ acts as corporate agents,
are not their personal liability but the direct responsibility of the corporation they
represent. As a rule, they are only solidarily liable with the corporation for the illegal
termination of services of employees if they acted with malice or bad faith.

To hold a director or officer personally liable for corporate obligations, two requisites
must concur: (1) it must be alleged in the complaint that the director or officer assented
to patently unlawful acts of the corporation or that the officer was guilty of gross
negligence or bad faith; and (2) there must be proof that the officer acted in bad faith.
The fact that the corporation ceased its operations the day after the promulgation of the
SC resolution finding the corporation liable does not prove bad faith on the part of the
incorporator of the corporation. Polymer Rubber Corporation vs. Ang, G.R. No. 185160.
July 24, 2013
 Although joint and solidary liability for money claims and damages against a corporation
attaches to its corporate directors and officers under R.A. 8042, it is not automatic. To
make them jointly and solidarily liable, there must be a finding that they were remiss in
directing the affairs of the corporation, resulting in the conduct of illegal activities.
Absent any findings regarding the same, the corporate directors and officers cannot be
held liable for the obligation of the corporation against the judgment debtor. Elizabeth
M. Gaguivs. Simeon Dejeroand TeodoroPermejo, G.R. No. 196036, October 23, 2013

9. Responsibility for Crimes and Damages

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

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

10. Inside Information

11. Contracts

a. By Self-Dealing Directors with the Corporation

b. Between Corporations with Interlocking Directors

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

c. Management Contracts

12. Executive Committee

13. Meetings
A resolution is distinct and different from the minutes of the meeting. A board
resolution is a formal action by a corporate board of directors or other corporate body
authorizing a particular act, transaction, or appointment. It is ordinarily special and
limited in its operation, applying usually to some single specific act or affair of the
corporation; or to some specific person, situation or occasion. On the other hand,
minutes are a brief statement not only of what transpired at a meeting, usually of
stockholders/members or directors/trustees, but also at a meeting of an executive
committee. The minutes are usually kept in a book specially designed for that purpose,
but they may also be kept in the form of memoranda or in any other manner in which
they can be identified as minutes of a meeting.

In a criminal case involving a lease-purchase agreement allegedly disadvantageous to

the government, the Sandiganbayan erred in concluding that there was no such
agreement entered into and thus negating criminal liability since only three members
out of seven signed the minutes of the meeting. The non-signing by the majority of the
members of the Board of Trustees of the said minutes does not necessarily mean that the
supposed resolution was not approved by the Board. The signing of the minutes by all
the members of the board is not required. There is no provision in the Corporation Code
of the Philippines that requires that the minutes of the meeting should be signed by all
the members of the board. The proper custodian of the books, minutes and official
records of a corporation is usually the corporate secretary. Being the custodian of
corporate records, the corporate secretary has the duty to record and prepare the
minutes of the meeting. The signature of the corporate secretary gives the minutes of
the meeting probative value and credibility. Moreover, the entries contained in the
minutes are prima facie evidence of what actually took place during the meeting. People
of the Philippines vs. Hermenegildo Dumlao y Castiliano and Emilio La'o y Gonzales, G.R.
No. 168918, March 2, 2009

The petitioner assails the validity of sale of shares of stocks to the respondents claiming
that there was no compliance with the requirement of prior notice to the Board of
Directors when the Board Resolution authorizing the sale to the respondent spouses
were promulgated. The Supreme Court ruled that the general rule is that a corporation,
through its board of directors, should act in the manner and within the formalities, if any,
prescribed by its charter or by the general law. However, the actions taken in such a
meeting by the directors or trustees may be ratified expressly or impliedly. Lopez Realty
Inc,m and Asuncion Lopez-Gonzales vs. Spouses Reynaldo Tanjangco and Maria Luisa
Arguelles-Tanjangco, G.R. No. 154291, November 12, 2014

a. Regular or Special

i. When and Where

ii. Notice

b. Who Presides

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

d. Rule on Abstention

H. Stockholders and Members

1. Rights of a Stockholder and Members

a. Doctrine of Equality of Shares

2. Participation in Management

a. Proxy

Under Section 20.1, the solicitation of proxies must be in accordance with rules and
regulations issued by the SEC, such as AIRR-SRC Rule 4. And by virtue of Section
53.1, the SEC has the discretion "to make such investigations as it deems necessary to
determine whether any person has violated" any rule issued by it, such as AIRR-SRC
Rule 4. The investigatory power of the SEC established by Section 53.1 is central to
its regulatory authority, most crucial to the public interest especially as it may
pertain to corporations with publicly traded shares. For that reason, we are not keen
on pursuing private respondents' insistence that the GSIS complaint be viewed as
rooted in an intra-corporate controversy solely within the jurisdiction of the trial
courts to decide. It is possible that an intra-corporate controversy may animate a
disgruntled shareholder to complain to the SEC a corporation's violations of SEC
rules and regulations, but that motive alone should not be sufficient to deprive the
SEC of its investigatory and regulatory powers, especially so since such powers are
exercisable on a motu proprio basis. The power of the SEC to investigate violations of
its rules on proxy solicitation is unquestioned when proxies are obtained to vote on
matters unrelated to the cases enumerated under Section 5 of Presidential Decree
No. 902-A. However, when proxies are solicited in relation to the election of
corporate directors, the resulting controversy, even if it ostensibly raised the
violation of the SEC rules on proxy solicitation, should be properly seen as an
election controversy within the original and exclusive jurisdiction of the trial courts
by virtue of Section 5.2 of the SRC in relation to Section 5(c) of Presidential Decree
No. 902-A.
 The conferment of original and exclusive jurisdiction on the regular courts over such
controversies in the election of corporate directors must be seen as intended to
confine to one body the adjudication of all related claims and controversy arising
from the election of such directors. For that reason, the aforequoted Section 2, Rule
6 of the Interim Rules broadly defines the term “election contest” as encompassing
all plausible incidents arising from the election of corporate directors, including: (1)
any controversy or dispute involving title or claim to any elective office in a stock or
nonstock corporation, (2) the validation of proxies, (3) the manner and validity of
elections and (4) the qualifications of candidates, including the proclamation of
winners. If all matters anteceding the holding of such election which affect its
manner and conduct, such as the proxy solicitation process, are deemed within the
original and exclusive jurisdiction of the SEC, then the prospect of overlapping and
competing jurisdictions between that body and the regular courts becomes
frighteningly real. From the language of Section 5(c) of Presidential Decree No. 902-
A, it is indubitable that controversies as to the qualification of voting shares, or the
validity of votes cast in favor of a candidate for election to the board of directors are
properly cognizable and adjudicable by the regular courts exercising original and
exclusive jurisdiction over election cases. Government Service Insurance System vs.
the Hon. Court of Appeals, G.R. No. 183905, April 16, 2009

b. Voting Trust
c. Cases When Stockholders’ Action is Required

i. By a Majority Vote
ii. By a Two-Thirds Vote
iii. By Cumulative Voting

3. Proprietary Rights

a. Right to Dividends
b. Right of Appraisal

A corporation cannot purchase the shares of a stockholder if it has no unrestricted

retained earnings to cover for the payment of the shares. This requirement is based
on the trust fund doctrine which means that the capital stock, property and other
assets of the corporation are regarded as equity in trust for the payment of corporate
creditors. Boman Environmental Development Corporations vs. Court of Appeals,
167 SCRA 540 (1988)

The interest of shareholders in corporate property is purely inchoate; and this purely
inchoate interest will not entitle them to intervene in a litigation involving corporate
property. Thus, in a judgment based on a compromise agreement between the
creditor and the debtor corporation, the terms of which were violated by the
judgment debtor, the stockholders of the judgment debtor cannot intervene. The
compromise will not prejudice them because their rights to corporate assets are at
 most inchoate, prior to the dissolution of the corporation. Saw vs. Court of Appeals,
195 SCRA 797. (1991)

In order to give rise to any obligation to pay on the part of the corporation, the
dissenting stockholder should first make a valid demand that the corporation refused
to pay despite having unrestricted retained earnings. Otherwise, the corporation
could not be said to be guilty of any actionable omission that could sustain the action
to collect. The collection suit filed by the dissenting stockholder to enforce payment
of the fair value of his shares is premature if at the time of demand for payment, the
corporation had no surplus profit. The fact that the Corporation subsequent to the
demand for payment and during the pendency of the collection case posted surplus
profit did not cure the prematurity of the cause of action. Turner vs. Lorenzo
Shipping Corporation, G.R. No. 157479, November 24, 2010

c. Right to Inspect

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

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

Stockholder has the duty of showing good motive or purposes for demanding an
examination of corporate books. One who acquired one share of stock of a bank to
be able to examine its books can hardly be said to have been motivated with good
faith or proper purpose in demanding inspection of the bank’s transactions before he
became a stockholder. Gonzales vs. Philippine National Bank, 122 SCRA 489. (1983)

The burden of proof is on the corporation to show that stockholder’s action in

seeking examination of the corporate records was moved by unlawful or ill
motivated design which could properly call for judicial protection against the
exercise of such right. Republic vs. Sandiganbayan, 199 SCRA 39 (1991)

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

The books and records of a corporation are not conclusive even against the
corporation but are prima facie evidence only – parol evidence may be admitted to
supply omissions in the records, explain ambiguities or show what transpired when
no records were kept, or in cases where such records were contradicted. Bitong vs.
Court of Appeals, 292 SCRA 503 (1998)

A criminal action based on the violation of a stockholder's right to examine or

inspect the corporate records and the stock and transfer hook of a corporation under
the second and fourth paragraphs of Section 74 of the Corporation Code can only he
maintained against corporate officers or any other persons acting on behalf of such
corporation. The complaint and the evidence Quiambao and Sumbilla submitted
during preliminary investigation do not establish that Quiambao and Pilapil were
acting on behalf of STRADEC. Violations of Section 74 contemplates a situation
wherein a corporation, acting thru one of its officers or agents, denies the right of
any of its stockholders to inspect the records, minutes and the stock and transfer
book of such corporation. Thus, the dismissal is valid. Aderito Z. Yujuico and
Bonifacio C. Sumbilla vs. Cezar T. Quiambao and Eric C. Pilapil, G.R. No. 180416,
June 02, 2014

d. Pre-Emptive Right

The issuance of shares referred to in Benito vs. SEC (July 25, 1983) which was cited in
the case of Dee vs. SEC, July 16, 1991 (where the Supreme Court ruled that
stockholders are not entitled to pre-emptive right to additional shares to be issued
from existing authorized capital stock before offering them to third parties)occurred
under the old Corporation Law (Act No. 1459, as amended) where the pre-emptive
right of existing stockholders to subscribe to new issuances is not expressly provided.
In the present law, the Corporation Code (BP Blg. 68) the grant of pre-emptive right
is made mandatory except in those situations falling under the exceptions
enumerated therein. Unless denied in the articles of incorporation or except in cases
where the issuance falls under any of the exceptions enumerated in the above cited
provision, all issuances or disposition of shares by a corporation after the effectivity
of the Corporation Code shall be subject to Section 39 of the Corporation Code. SEC
Letter-Opinion Dated March 10, 2000

Even if pre-emptive right does not exist either because the issue comes within the
exceptions in Section 39 of the Corporation Code or because it is denied in the
articles of incorporation, an issue of shares may still be objectionable if the directors
acted in breach of trust and their primary purpose is to perpetuate or shift control of
the corporation or to “ freeze out” the minority interest. The issuance of unissued
shares out of the original authorized capital stock pursuant to a rehabilitation plan
the propriety and validity of which was on question by the minority stockholders and
subsequently disapproved by the court amounts to unlawful dilution of the minority
 shareholdings. Majority of Stockholders of Ruby Industrial Corporation vs. Lim, GR
No. 165887, June 6, 2011

e. Right to Vote
f. Right to Dividends

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

The filing of a collection suit against a stockholder does not preclude a stockholder
from selling his shares during the pendency of the case, since it is his right to dispose
of his shares at any time. Remo vs. Intermediate Appellate Court, 172 SCRA 405
(1989)

Dividends are distributed to stockholders pursuant to their right to share in

corporate profits. When a dividend is declared, it belongs to the person who is the
substantial and beneficial owner of the stock at the time regardless of when the
distribution profit was earned. Nora A. Bitong vs. Court of Appeals, et al., G.R. No.
123553, July 13, 1998)

g. Right of First Refusal

Stockholders may be given right of first refusal if so stipulated in the articles of

incorporation. If the right is required to be exercised within 30 days of written notice
of intended sale, the stockholder cannotcomplain of violation of his right if it did not
exercise such right within the same period from actual knowledge of the intended
sale. Republic vs. Sandiganbayan, 346 SCRA 760 (2000)

A joint venture agreement giving to the shareholders the right to purchase the
shares of their co-shareholder before they are offered to a third party does not
constitute a violation of the provisions of the Constitution limiting land ownership to
Filipinos and Filipino corporations. If the corporation still owns the land, the right of
first refusal can be validly assigned to a qualified Filipino entity in order to maintain
the 60%-40% ratio. This transfer, by itself, does not amount to a violation of the Anti-
Dummy Law, absent proof of any fraudulent intent. The transfer could be made
either to a nominee or such other party which the holder of the right of first refusal
feels it can comfortably do business with. Alternatively, the corporation may divest of
its landholdings, in which case the foreign shareholder, in exercising its right of first
refusal, can exceed 40% of the corporation’s allowable foreign equity participation.
In fact, it can even be said that if the foreign shareholdings of a landholding
corporation exceed 40%, it is not the foreign stockholders' ownership of the shares
which is adversely affected but the capacity of the corporation to own land — that is,
the corporation becomes disqualified to own land. This finds support under the
basic corporate law principle that the corporation and its stockholders are separate
juridical entities. In this vein, the right of first refusal over shares pertains to the
shareholders whereas the capacity to own land pertains to the corporation. J.G.
Summit Holdings, Inc.,vs. Court of Appeals, et al. G.R. No. 124293, January 31, 2005
4. Remedial Rights

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

Where corporate directors are guilty of breach of trust, a stockholder may institute a
suit in behalf of himself and other stockholders and for the benefit of the
corporation, to bring about a redress of the wrong inflicted directly upon the
corporation and indirectly upon the stockholders. Reyes vs. Tan, 3 SCRA 198. (1961)

An individual stockholder may institute a derivative suit on behalf of the corporation,

wherein he holds stock, in order to protect corporate rights, whenever the officials of
the corporation refuse to sue, or are the ones to be sued or hold the control of the
corporation. Republic Bank vs. Cuaderno, 19 SCRA 671. (1967)

Since a stockholder filing a derivative suit is not suing in his own behalf but in behalf
of the corporation, the fact that his shareholding is significant does not preclude him
from filing the suit. It is also not necessary that a stockholder be a director to be
entitled to file a derivative suit. San Miguel Corporation vs. Kahn, 176 SCRA 448
(1989)

The complaint is one of derivative suit if it avers diversion of corporate income by the
President and the relief prayed for is the recovery of a sum of money in favor of the
corporation. Commart (Phils.) Inc., vs. Securities & Exchange Commission, 198 SCRA
73 (1991)

For a derivative suit to prosper, it is required that the minority shareholder who is
suing for and on behalf of the corporation must allege in his complaint before the
proper forum that he is suing on a derivative course of action on behalf of the
corporation and all other shareholders similarly situated who wish to join. Thus, the
appeal of a minority stockholder from the decision of the trial court in criminal cases
for falsification and estafa against the directors for allegedly falsifying a resolution
granting compensation to the officers and to order them to refund the
compensation cannot be considered a derivative suit, since he is not suing on a
derivative cause of action on behalf of the corporation. Western Institute of
Technology, Inc.,Vs. Salas, 278 SCRA 216 (1997)

A person who is merely holding in trust the shares of stock in her name cannot file a
derivative suit, since she is not a stockholder in her own right. And where the date of
the issuance of a stock certificate was antedated, the stockholder cannot file a
derivative suit to question transaction before the true date of its issuance. Bitong vs.
Court of Appeals, 292 SCRA 503 (1998)

A suit to enforce preemptive rights in a corporation is not a derivative suit because it

was not filed for the benefit of the corporation. Lim vs. Lim-Yu, 352 SCRA 216 (2001)
A suit to enforce pre-emptive right in a corporation is not a derivative suit because it
was not filed for the benefit of the coporation. The petitioner was suing on her own
behalf, and was merely praying that she be allowed to subscribe to the additional
issuances of stocks in proportion to her shareholdings to enable her to preserve her
percentage of ownership in the corporation. Gilda C. Lim, Wilhelmina V. Joven and
Ditas A. Lerios, vs. Patricia Lim-Yu, in her capacity as a minority stockholder of
Limpan Investment Corporation, G.R. No. 138343, February 19, 2001

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

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

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

The stockholder filing a derivative suit should have exerted all reasonable efforts to
exhaust all remedies available under the articles of incorporation, by-laws, laws or
rules governing the corporation to obtain the relief he desires and to allege such fact
with particularity in the complaint. The allegation that the suing stockholder talked
to the other stockholder regarding the dispute hardly constitutes “ all reasonable
efforts to exhaust all remedies available “. The complaint should also allege the fact
that there was no appraisal right available under for the acts complained of and that
the suit was not a nuisance or harassment suit. The fact that the corporation involved
is a family corporation should not in any way exempt the suing stockholder from the
requirements and formalities for filing a derivative suit. Yu vs. Yukayguan, 588 SCRA
589 (2009)
A derivative action is a suit by a shareholder to enforce a corporate cause of action.
Under the Corporation Code, where a corporation is an injured party, its power to
sue is lodged with its board of directors or trustees. But an individual stockholder
may be permitted to institute a derivative suit on behalf of the corporation in order
to protect or vindicate corporate rights whenever the officials of the corporation
refuse to sue, or are the ones to be sued, or hold control of the corporation. In such
actions, the corporation is the real party-in-interest while the suing stockholder, on
behalf of the corporation, is only a nominal party.

Further, while it is true that the complaining stockholder must satisfactorily show
that he has exhausted all means to redress his grievances within the corporation;
such remedy is no longer necessary where the corporation itself is under the
complete control of the person against whom the suit is being filed. The reason is
obvious: a demand upon the board to institute an action and prosecute the same
effectively would have been useless and an exercise in futility.

Where a minority stockholder alleged in his petition that earnest efforts were made
to reach a compromise among family members/stockholders before he filed the case
and that the Board of Directors did nothing to rectify the unauthorized loan and
mortgage by the corporation, the derivative suit is proper. The action to annul the
real estate mortgage should only be seen as incidental to the derivative suit. The RTC
of the city where the principal office of the corporation is located has jurisdiction
even though the mortgaged properties are situated in different jurisdiction. Hi-
Yield, Inc.,vs. Court of Appeals GR 168863 590 SCRA 548 (2009)

Petitioners seek the nullification of the election of the Board of Directors composed
of herein respondents, who pushed through with the election even if petitioners had
adjourned the meeting allegedly due to lack of quorum. Petitioners are the injured
party, whose rights to vote and to be voted upon were directly affected by the
election of the new set of board of directors. The party-in-interest are the petitioners
as stockholders, who wield such right to vote. The cause of action devolves on
petitioners, not the condominium corporation, which did not have the right to
vote. Hence, the complaint for nullification of the election is a direct action by
petitioners, who were the members of the Board of Directors of the
corporation before the election, against respondents, who are the newly-elected
Board of Directors. Under the circumstances, the derivative suit filed by petitioners
in behalf of the condominium corporation is improper. Legaspi Towers 300, Inc., vs.
Muer G.R. No. 170783, June 18, 2012

A derivative suit is an action brought by a stockholder on behalf of the corporation

to enforce corporate rights against the corporation’s directors, officers or other
insiders. Under Sections 23 and 36 of the Corporation Code, the directors or officers,
as provided under the by-laws, have the right to decide whether or not a corporation
should sue. Since these directors or officers will never be willing to sue themselves or
impugn their wrongful and fraudulent decisions, stockholders are permitted by law
to bring an action in the name of the corporation to hold these directors and officers
accountable. In derivative suits, the real party in interest is the corporation while the
stockholder is only a nominal party.
Section 1, Rule 8 of the Interim Rules imposes the following requirements for
derivative suits:

(1) The person filing the suit must be a stockholder or member at the time
the acts or transactions subject of the action occurred and the time the
action was filed;

(2) He must have exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available under the
articles of incorporation, by-laws, laws or rules governing the corporation or
partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit.

The complaint filed by a stockholder to compel another stockholder to settle his

share of the loan because this will affect the financial viability of the corporation can
not be considered as a derivative suit because the loan was not a corporate
obligation but a personal debt of the stockholders. The fact that the stockholders
attempted to constitute a mortgage over “ their “ share in a corporate asset can not
affect the corporation where the wordings of the mortgage agreement reveal that it
was signed by the stockholders in their personal capacity as the owners of the pro-
indiviso share in the corporate property and not on behalf of the corporation. Ang,
for and in behalf of Sunrise Marketing (Bacolod), Inc., vs. Spouses Ang., G.R. No.
201675, June 19, 2013

A derivative suit cannot prosper without first complying with the legal requisites for
its institution. Thus, a complaint which contained no allegation whatsoever of any
effort to avail of intra-corporate remedies allows the court to dismiss it, even motu
proprio. Indeed, even if petitioners thought it was futile to exhaust intra-corporate
remedies, they should have stated the same in the Complaint and specified the
reasons for such opinion. The requirement of this allegation in the Complaint is not a
useless formality which may be disregarded at will. Nestor Ching and Andrew
Wellington vs. Subic Bay Golf and Country Club Inc., et al., G.R. No. 174353,
September 10, 2014

The Court has recognized that a stockholder's right to institute a derivative suit is not
based on any express provision of the Corporation Code, or even the Securities
Regulation Code, but is impliedly recognized when the said laws make corporate
directors or officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties. In effect, the suit is an action for
specific performance of an obligation, owed by the corporation to the stockholders,
to assist its rights of action when the corporation has been put in default by the
wrongful refusal of the directors or management to adopt suitable measures for its
protection. Alfredo Villamor Jr. vs. John S. Umale in Substitution of Hernando
Balmores, G.R. No. 172843, September 24, 2014,
 5. Obligation of a Stockholder

Stockholders may be sued by a corporate creditor to the extent of their unpaid

subscription. Edward A. Keller & Co., Ltd. vs. COB Group Marketing, Inc., 141 SCRA 86
(1986)

A stockholder and a corporate secretary act in bad faith in assigning to others and in
recording the said transfers in dispute in the stock and transfer book certificates of stock
whose beneficial ownership belongs to some other persons, more so if the assignees did
not pay any consideration for the same shares of stock. Neugene Marketing, Inc.,vs.
Court of Appeals, 303 SCRA 295 (1999)

6. Meetings

a. Regular or Special
i. When and Where
ii. Notice

b. Who Calls the Meetings

c. Quorum

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

d. Minutes of the Meetings

I. Capital Structure

1. Subscription Agreements

When a subscriber assigned properties and infused capital to the corporation upon
invitation of a majority stockholder and in exchange for shares of stock under a pre-
subscription agreement, the agreement cannot be rescinded since subject matter of the
contract was the unissued shares of the Corporation allocated to the subscriber. Since
these were unissued shares, the Pre-Subscription Agreement was in fact a subscription
contract as defined under Section 60, Title VII of the Corporation Code: “Any contract
for the acquisition of unissued stock in an existing corporation or a corporation still to be
formed shall be deemed a subscription within the meaning of this Title, notwithstanding
the fact the parties refer to it as a purchase or some other contract.”

A subscription contract necessarily involves the corporation as one of the contracting

parties since the subject matter of the transaction is property owned by the corporation
 – its shares of shock. Thus, the subscription contract was one between the subscriber and
the corporation and not between the stockholders.

Also, although one subscriber was adversely affected by the actions of the other
shareholder, rescission due to breach of contract is the wrong remedy for personal
grievances. The Corporation Code, SEC rules and even the Rules of Court provide for
appropriate and adequate intra-corporate remedies, other than rescission. Rescission is
certainly not one of them, especially if the party asking for it has no legal personality to
do so and the requirements of the law have not been met. A contrary doctrine will tread
on dangerous ground because it will allow just any stockholder, for just about any real or
imaged offense, to demand rescission of his subscription and call for the distribution of
some part of the corporate assets to him without complying with the requirements of the
Corporation Code.

Rescission cannot also be deemed as a petition to decrease capital stock because such
action never complied with the formal requirements for decrease of capital stock under
Section 38 of the Corporation Code. No majority vote of the board of directors was ever
taken. Neither was there any stockholders’ meeting at which the approval of
stockholders owning at least two-thirds of the outstanding capital stock was secured.
Ong Yong, et al. vs. David S. Tiu, et al., G.R. No. 144476 & G.R. No. 144629, April 8, 2003

2. Consideration for Stocks

3. Shares of Stock

a. Nature of Stock

While shares of stock constitute personal property, they do not represent property of
the corporation. A share of stock only typifies an aliquot part of the corporation’s
property or the right to share in its proceeds to that extent when distributed
according to law and equity. A certificate of liquidation which results in the transfer
and distribution of the assets of the corporation to the shareholder is in the nature of
a conveyance. Stockholders of F. Guanson vs. Register of Deeds of Manila, 6 SCRA
373. (1962)

A corporation has no power to release an original subscriber from paying for his
shares without a valuable consideration for such release. This is because
subscriptions to the capital of the corporation constitute a fund to which creditors
have a right to look for satisfaction of their claims and that an assignee in insolvency
can maintain an action upon any unpaid stock subscription in order to realize assets
for the payment of debts. Philippine National Bank vs. Bitulok Sawmill, Inc., 23 SCRA
1366 (1968)

Mandamus will not lie where the shares of stock are not indorsed by the registered
owner who is specifically objecting to the registration thereof in the corporate
books. Rivera vs. Florendo, 144 SCRA 643 (1986)
A stockholder acquires voting rights only when the shares of stock to be voted are
registered in his name in the books of the corporation. Until registration is
accomplished, the transfer though valid between the parties cannot be effective
against the corporation. De Erguiga vs. Court of Appeals, 178 SCRA 1 (1989)

Where the seller indorsed the stock certificates but did not deliver them, ownership
of the shares cannot be transferred to the buyer. For an effective transfer of shares of
stock, the mode and manner of transfer as prescribed by law should be followed.
Embassy Farms, Inc., vs. Court of Appeals, 188 SCRA 492 (1990)

Where the stockholders sold his shares of stock and was paid thereof and a new
stock certificate has been issued to the buyer but the stockholder did not return the
stock certificate when it was sent him for endorsement, the cancellation of the stock
certificate is valid despite the lack of endorsement on the stock certificate. Tan vs.
Securities and Exchange Commission, 206 SCRA 740 (1992)

In order for a transfer of stock certificate to be effective, the certificate must be

properly indorsed and that title to such certificate of stock is vested in the transferee
by the delivery of the duly indorsed certificate of stock. Thus, where an incorporator
organized a corporation and certain number of shares was issued to a stockholder
but the certificate of stock covering said shares was in the possession of the
incorporator who refused to deliver the same to the heir of the stockholder after the
latter died, the stockholder of record should be considered the owner of the shares
since he did not indorse the certificate in favor of the incorporator. The allegation
that it was delivered to him by the stockholder because he was the one who paid for
it does not hold. Razon vs. Intermediate Appellate Court, 207 SCRA 234 (1992)

Where a stockholder executed a special power of attorney in favor of his wife who,
pursuant to the SPA, sold the shares but after the sale, the stockholder died, the
corporation cannot refuse to register the shares in favor of the assignee on the
pretext that upon death of the stockholder, his shares of stock became the property
of the estate which should be settled and liquidated first before any distribution
could be effected. It is the ministerial duty of a corporation to register the shares of
stock which were assigned in the name of assignees even if there is a pending action
in court questioning the validity of the assignment. Rural Bank of Salinas, Inc.,vs.
Court of Appeals, 210 SCRA 510 (1992)

Since the secretary is the custodian of the corporate records, the entries made by the
controlling stockholder in the stock and transfer of book of his assignment of shares
of stock to five persons are not valid and did not qualify them to be directors. Torres
vs. Court of Appeals, 270 SCRA 493 (1997)

The provision in Section 63 of the Corporation Code that no share of stock against
which the corporation holds any unpaid claim shall be transferable refers to unpaid
claim arising from subscription and not to any indebtedness arising from another
transaction, such as monthly dues. China Banking Corporation vs. Court of Appeals,
270 SCRA 503 (1997)
A mere typewritten statement advising a stockholder of the extent of his ownership
in a corporation without qualification and / or authentication cannot be considered
a formal certificate of stock. Bitong vs. Court of Appeals, 292 SCRA 503 (1998)

Authority granted to a corporation to regulate the transfer of it stock does not

empower it to restrict the right of a stockholder to transfer his shares, but merely
authorizes the adoption of regulations on the formalities and procedure to be
followed in effecting transfer. Thomson vs. Court of Appeals, 298 SCRA 280 (1998)

Section 63 of the Corporation Code provides that no transfer shall be valid except as
between the parties, until the transfer is recorded in the books of the corporation
showing the names of the parties to the transaction, the date of the transfer, the
number of certificate or certificates and the number of shares transferred. Said
provision of law strictly requires the recording of the transfer in the books of the
corporation and not elsewhere, to be valid as against third parties. The unrecorded
transfer of a propriety ownership certificate is not valid as against the judgment
creditor of the transferor who can therefore levy the shares pursuant to a judgment
despite the unrecorded transfer. Garcia vs. Jomouad, 323 SCRA 424 (2000)

For a valid transfer of stocks, there must be strict compliance with the mode of
transfer prescribed by law. The requirements are: (a) There must be delivery of the
stock certificate; (b) The certificate must be endorsed by the owner or his attorney-
in-fact or other persons legally authorized to make the transfer; and (c) To be valid
against third parties, the transfer must be recorded in the books of the corporation.
A deed of assignment of shares without requisite endorsement and delivery is only
valid between the parties. It does not necessarily make the transfer effective as
against the corporation. Consequently, the assignees cannotenjoy the status of a
stockholder, cannotvote nor be voted for and will not be entitled to dividends
insofar as the assigned shares are concerned. Parenthetically, the assignors can not,
as yet, be deprived of their rights as stockholders, until and unless the issue of
ownership and transfer of the shares in question are resolved with finality. Rural Bank
of Lipa City, Inc., vs. Court of Appeals, 366 SCRA 188 (2001) . See also Batangas
Laguna Tayabas Bus Company, Inc., et al., vs. Benjamin Bitanga, et al., 362 SCRA 635
(2001)

Pursuant to Section 63 of the Corporation Code, a transfer of shares of stocks not

recorded in the stock and transfer book of the corporation is non-existent as far as
the corporation is concerned. Without such recording, the transferee may not be
regarded by the corporation as one among its stockholders and the corporation may
legally refuse the issuance of stock certificates in the name of the transferee even
when there has been compliance with the requirements of Section 64 of the
Corporation Code. The situation would be different if the petitioner was himself the
registered owner of the stock which he sought to transfer to a third party, for then he
would be entitled to the remedy of mandamus. It has been made clear that before a
transferee may ask for the issuance of stock certificates, he must first cause the
registration of the transfer and thereby enjoy the status of a stockholder insofar as
the corporation is concerned. A corporate secretary may not be compelled to
register transfer of shares on the basis merely of an indorsement of stock certificates.
With more reason a corporate secretary may not be compelled to issue stock
certificates without such registration. Ponce vs. Alsons Cement Corporation, 393,
SCRA 602 (2002)

PCGG cannot vote sequestered shares, except when there are demonstrably weighty
and defensible grounds or when essential to prevent disappearance or wastage of
corporate property. The Court developed the “two-tiered test” in determining
whether the PCGG may vote sequestered shares: (1) whether there is prima facie
evidence showing that the said shares are ill-gotten and thus belong to the State;
and (2) whether there is an immediate danger of dissipation thus necessitating their
continued sequestration and voting by the PCGG while the main issue pends with the
Sandiganbayan. The two-tiered test, however, does not apply in cases involving
funds of “public character”. In such cases, the government is granted the authority to
vote said shares, namely: (1) where government shares are taken over by private
persons or entities who/which registered them in their own names; and (2) where the
capitalization or shares that were acquired with public funds somehow landed in
private hands. In sum, when sequestered shares registered in the names of private
individuals or entities are shown, prima facie, to have been (1) originally government
shares, or (2) purchased with public funds or those affected with public interest, then
the two-tiered test does not apply. Rather, the public character exception prevails,
that is, the government shall vote the shares. Republic of the Philippine (PCGG) vs.
Sandiganbayan and Victor Africa, 402 SCRA 84 (2003)

Although a stock certificate is sometimes regarded as quasi-negotiable, in the sense

that it may be transferred by delivery, it is well-settled that the instrument is non-
negotiable, because the holder thereof takes it without prejudice to such rights or
defenses as the registered owner or creditor may have under the law, except in so far
as such rights or defenses are subject to the limitations imposed by the principles
governing estoppel. That the PCGG found the stock certificates endorsed in blank
does not necessarily make it the owner of the shares represented therein. Their true
ownership has to be ascertained in a proper proceeding. Republic of the Phils.
PCGG) vs. Sandiganbayan, ibid.

The fact that the stock certificates covering the shares registered in the names of
certain persons were found in the possession of another does not necessarily prove
that the latter owned the shares. A stock certificate is merely a tangible evidence of
ownership of shares of stock. Its presence or absence does not affect the right of the
registered owner to dispose of the shares covered by the stock certificates. Republic
vs. Estate of Hans Menzi, 476 SCRA (2005)

It is possible for a business to be wholly owned by one individual. The validity of its
incorporation is not affected when such individual gives nominal ownership of only
one share of stock to each of the other four incorporators. This is not necessarily
illegal. But, this is valid only between or among the incorporators privy to the
agreement. It does bind the corporation which, at the time the agreement is made,
was non-existent. Thus, incorporators continue to be stockholders of a corporation
unless, subsequent to the incorporation, they have validly transferred their
subscriptions to the real parties in interest. As between the corporation on the one
hand, and its shareholders and third persons on the other, the corporation looks only
to its books for the purpose of determining who its shareholders are.

A person is considered a stockholder if the Articles of Incorporation and By-laws, as

well as the General Information Sheet filed with the SEC indicated that such person
was an incorporator and subscriber of one share. Even granting that there was an
agreement that he is holding the share only in trust for another, the same is binding
only as between the parties. As such, he can exercise his right of inspection under
the Corporation Code. Nautica Canning Corporation v. Yumul 473 SCRA 415 (2005)

The registered owner of the shares of a corporation, even if they are sequestered by
the government through the PCGG, exercises the right and the privilege of voting on
them. The PCGG as a mere conservator cannot, as a rule, exercise acts of dominion
by voting these shares. The registered owner of sequestered shares may only be
deprived of these voting rights, and the PCGG authorized to exercise the same, only
if it is able to establish that (1) there is prima facie evidence showing that the said
shares are ill-gotten and thus belong to the State; and (2) there is an imminent
danger of dissipation, thus necessitating the continued sequestration of the shares
and authority to vote thereupon by the PCGG while the main issue is pending before
the Sandiganbayan.

Clearly, the existence of the writ of sequestration alone would not legally justify
barring the stockholder from voting its shares. Such preclusion may only occur if
there is prima facie evidence showing that the said shares are ill-gotten and there is
an imminent danger of dissipation. However, even though the stockholder was not
allowed to vote the shares which would have been enough to elect a board seat, the
option of annulling the entire election is too drastic a step in light of the fact that
only one of the 15 seats should be necessarily affected upon the seating of the
stockholder’s nominee to the Board of Directors. The more prudent step is to declare
that one nominee or representative of the stockholder is entitled to be seated
immediately on the Board of Directors, and to direct the Board of the Directors and
Corporate Secretary of the corporation to admit and recognize said nominee or
representative of the stockholder to the Board of Directors in place of the person
who was elected to the Board at the annual stockholders' meeting had the
stockholder not been disallowed to vote its shares. Trans Middle East (Phils.), vs.
Sandiganbayan. 490 SCRA 455 (2006)

Shares originally owned by a sequestered corporation controlled by the nominees of

PCGG remain to be privately owned until such time when the court declares that the
subject shares were acquired through government funds. The PCGG, as a mere
conservator, does not automatically become the owner of a sequestered property in
behalf of the government. There must be a final determination by the courts if the
property is in fact “ill-gotten” and was acquired by using government funds. Even on
the assumption that the subject shares are government assets, the sale of the subject
shares through the stock exchange is valid and binding, as there is no law which
mandates that listed shares which are owned by the government be sold only
through public bidding. Thus, the transferee/assignee has the right to have the
stocks transferred to his name, this being an inherent right flowing from his
ownership of the stocks. The duty of the corporation to transfer is a ministerial one
and if it refuses to make such transaction without good cause, it may be compelled
to do so by mandamus. The only limitation imposed by Section 63 of the
Corporation Code is when the corporation holds any unpaid claim against the shares
intended to be transferred. Pacific Basin Securities v. Oriental Petroleum 531 SCRA
667 (2007)

In a religious corporation, the Court upheld the expulsion of church members

despite the absence of any provision on prior notice in the by-laws, stating that the
members had “waived such notice by adhering to those by-laws[,] became members
of the church voluntarily[,] entered into its covenant and subscribed to its rules [and
by] doing so, they are bound by their consent. However, a distinction should be
made between membership in a religious corporation, which ordinarily does not
involve the purchase of ownership shares, and membership in a non-stock
corporation where the purchase of an ownership share is a condition sine qua non.
Termination of membership due to non-payment of dues and assessments may be
allowed in a non-stock non profit corporation if so provided in the articles of
incorporation or the by-laws. However, when the loss of membership in a non-stock
corporation also entails the loss of property rights, the manner of deprivation of such
property right should not only be in accordance with the Corporation Code but also
in accordance with substantial justice. The Corporation acted in clear bad faith when
it sent the final notice to the stockholder under the pretense they believed him to be
still alive, when in fact they had very well known that he had already died. By
pretending to assume that stockholder was then still alive, the Corporation would
have been able to capitalize on his previous unresponsiveness to their notices and
proceed in feigned good faith with the sale of the Golf Share for non-payment of
dues and assessments.

The arrangement provided for in the by-laws of the Corporation whereby a lien is
constituted on the membership share to answer for subsequent obligations to the
corporation finds applicable parallels under the Civil Code. Membership shares are
considered as movable or personal property, and they can be constituted as security
to secure a principal obligation, such as the dues and fees. There are at least two
contractual modes under the Civil Code by which personal property can be used to
secure a principal obligation. The first is through a contract of pledge, while the
second is through a chattel mortgage. If the stockholder had not signed any
document that manifests his agreement to constitute his Golf Share as security in
favor of the Corporation to answer for his obligations to the club and there is no
document that it is substantially compliant with the form of chattel mortgages, the
by-laws could not suffice for that purpose since it is not designed as a bilateral
contract between the stockholder and the Corporation or a vehicle by which the
stockholder expressed his consent to constitute his Share as security for his account
with the Corporation. Valley Golf and Country Club, Inc., vs. Vda. De Caram 585
SCRA 218 (2009)

The six month limitation to file an action to nullify the sale of delinquent shares
under Section 69 of the Corporation Code applies only to sale of delinquent stocks
due to non-payment of the subscription price for the share of the stock itself. In case
of termination of membership in a non-stock corporation, due to non-payment of
dues of the member, the grounds and procedures for membership termination under
the articles or by-laws should apply. It must also conform to the requirements of
substantial justice. The Corporation is clearly in bad faith when it sent the notices of
sale to the postal office box of the stockholder knowing fully well that the box had
already been closed.. Calatagan Golf Club, Inc., vs. Clemente, Jr. 585 SCRA 300
(2009)

Upon the death of a shareholder, the heirs do not automatically become

stockholders of the corporation and acquire the rights and privileges of the
deceased as shareholder of the corporation. The stocks must be distributed first to
the heirs in estate proceedings, and the transfer of the stocks must be recorded in
the books of the corporation. Joselito Musni Puno vs. Puno Enterprises, Inc.,
represented by Jesusa Puno, G.R. No. 177066, September 11, 2009

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

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

The arrangement provided for in the by-laws of the Corporation whereby a lien is
constituted on the membership share to answer for dues, assessments and
subsequent obligations to the corporation cannot be upheld unless coupled by a
corresponding pledge or chattel mortgage agreement. Valley Golf and Country
Club, Inc.,v. Vda. De Caram, 585 SCRA 218 (2009)

A stock corporation is expressly granted the power to issue or sell stocks. The power
to issue stocks is lodged with the Board of Directors and no stockholders meeting is
required to consider it because additional issuances of stock (unlike increase in
capital stock ) does not need approval of the stockholders. What is only required is
the board resolution approving the additional issuance of shares. The corporation
shall also file the necessary application with the SEC to exempt these from the
registration requirements under the SRC. Majority of Stockholders of Ruby Industrial
Corporation vs. Lim, GR No. 165887, June 6, 2011
 Under the two-tiered test, the government, thru PCGG, may vote sequestered shares
if there is a prima facie evidence that the shares are ill-gotten and there is imminent
danger of dissipation of assets while the case is pending. However, the two- tiered
test contemplates a situation where the registered stockholders were in control and
had been dissipating company assets and the PCGG wanted to vote the sequestered
shares to save the company. It does not apply when the PCGG had voted the shares
and is in control of the sequestered corporation . Africa vs. Hon. Sandiganbayan , G.R.
Nos. 172222/G.R. No. 174493/ G.R. No. 184636, November 11, 2013

Since the law does not prescribe a period for registration of shares in the books of
the corporation, the action to enforce the right to have it done does not begin until a
demand for it had been made and was refused. Africa vs. Hon. Sandiganbayan, ibid.

b. Subscription Agreements

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

c. Consideration for Shares of Stock

d. Watered Stock

i. Definition
ii. Liability of Directors for Watered Stocks
iii. Trust Fund Doctrine for Liability for Watered Stocks

e. Situs of the Shares of Stock

f. Classes of Shares of Stock

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

a. Call by Board of Directors

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

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

ii. Call by Resolution of the Board of Directors

An obligation arising from non-payment of stock subscription to a corporation

cannot be offset against a money claim of an employee against the employer. xxx
Unpaid subscriptions are not due and payable until a call is made by the
corporation for payment through a board resolution and the contract of
subscription does not specify the due date of payment. Apocada vs. National
Labor Relations Commission, 172 SCRA 442. (1989)

iii. Notice of Sale

iv. Auction Sale and the Highest Bidder

5. Certificate of Stock

a. Nature of the Certificate

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

A certificate of stock is the paper representative or tangible evidence of the stock

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

The certificate of stock itself once issued is a continuing affirmation or

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

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

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

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

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

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

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

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

Section 63 of the Corporation Code provides that shares of stock so issued are
personal property and may be transferred by delivery of the certificate or certificates
indorsed by the owner or his attorney-in-fact or other person legally authorized to
make the transfer. The failure of the stockholder to deliver the stock certificate to
the buyer within a reasonable time the shares covered by the stock certificate should
have been delivered is a substantial breach that entitles the buyer to rescind the sale
under Article 1191 of the Corporation Code . It is not entirely correct to say the sale
had already been consummated as the buyer already enjoyed the rights a
shareholder can exercise. The enjoyment of these rights will not suffice where the
law, by its express terms, requires a specific form to transfer ownership. Fil-Estate
Golf and Development vs. Vertex Sales and Trading Inc., G.R. No. 202079, June 10,
2013

The Corporation whose shares of stock are the subject of a transfer transaction
(through sale, assignment, donation, or any other mode of conveyance) need not be
a party to the transaction, as may be inferred from the terms of Section 63 of the
Corporation Code. However, to bind the corporation as well as third parties, it is
necessary that the transfer is recorded in the books of the corporation. In a share
purchase transaction, the parties are the seller and buyer of the shares. Not being a
party to the sale, the Corporation is in no position to appeal the ruling rescinding
the sale of the shares. If the Seller of the shares filed no appeal against the court
decision declaring the rescission of the sale, then the rescission is deemed final
despite any appeal by the corporation whose shares of stock are the subject of the
transfer transaction. Forest Hills Golf & Country Club vs. Vertex Sales and Trading
Inc.G.R. No. 202205, March 6, 2013

d. Issuance

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

ii. Payment Pro-Rata

e. Lost or Destroyed Certificates

6. Stock and Transfer Book

a. Contents

A stock and transfer book is necessary as a measure of precaution, expediency and

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

b. Who May Make Valid Entries

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

7. Disposition and Encumbrance of Shares

a. Allowable Restrictions on the Sale of Shares

b. Sale of Partially Paid Shares
c. Sale of a Portion of Shares Not Fully Paid
d. Sale of All of Shares Not Fully Paid
e. Sale of Fully Paid Shares
f. Requisites of a Valid Transfer
g. Involuntary Dealings with Shares

J. Dissolution and Liquidation

The removal of a stockholder (in this case a majority stockholder) from the management of
the corporation and / or the dissolution of a corporation is a suit filed by minority
stockholders is a drastic measure. It should be resorted to only when the necessity is clear.
Chase vs. Buencamino, 136 SCRA 365 (1985)
Winding up is the sole activity of a dissolved corporation that does not intend to incorporate
anew. If it does, however, it is not unlawful for the old board of directors to negotiate and
transfer the assets of the dissolved corporation to the new corporation intended to be
created as long as the stockholders have given their consent. Chung Ka Bio vs. Intermediate
Appellate Court, 163 SCRA 534 (1988)

An action to correct entries in the General Information Sheet of the Corporation; to be

recognized as a stockholder and to inspect corporate documents is an intra-corporate
dispute which does not constitute a continuation of corporate business. As such, pursuant to
Section 145 of the Corporation Code, this action is not affected by the subsequent
dissolution of the corporation. The dissolution of the corporation simply prohibits it from
continuing its business. However, despite such dissolution, the parties involved in the
litigation are still corporate actors. The dissolution does not automatically convert the
parties into total strangers or change their intra-corporate relationships. Neither does it
change or terminate existing causes of action, which arose because of the corporate ties
between the parties. Thus, a cause of action involving an intra-corporate controversy
remains and must be filed as an intra-corporate dispute despite the subsequent dissolution
of the corporation.“ Aguirre vs. FQB +7, Inc, GR No. 170770, January 9 2013

ADC filed its complaint not only after its corporate existence was terminated but also
beyond the three-year period allowed by Section 122 of the Corporation Code. To allow
ADC to initiate the subject complaint and pursue it until final judgment, on the ground that
such complaint was filed for the sole purpose of liquidating its assets, would be to
circumvent the provisions of Section 122 of the Corporation Code. Thus, it is clear that at the
time of the filing of the subject complaint petitioner lacks the capacity to sue as a
corporation. Alabang Development Corporation vs. Alabang Hills Village Association and
Rafael Tinio, G.R. No. 187456, June 02, 2014

1. Modes of Dissolution

a. Voluntary

i. Where No Creditors Are Affected

A resolution approved by the Board of Directors is not sufficient to dissolve a

corporation. The Corporation Code establishes the procedure and other formal
requirements a corporation needs to follow in case it elects to dissolve and
terminate its structure voluntarily and where no rights of creditors may possibly
be prejudiced under Section 118 which should have been strictly complied with
by the members of the club. Teodoro B. Vesagas and Wilfred D. Asis vs. the
Honorable Court of Appeals and DelfinoRaniel and HelendaRaniel, G.R. No.
142924, December 5, 2001

ii. Where Creditors Are Affected

iii. By Shortening of Corporate Term

b. Involuntary
 i. By Expiration of Corporate Term

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

ii. Failure to Organize and Commence Business Within 2 Years from Incorporation
iii. Legislative Dissolution
iv. Dissolution by the SEC on Grounds under Existing Laws

2. Methods of Liquidation

a. By the Corporation Itself

b. Conveyance to a Trustee within a Three-Year Period

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

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

c. By Management Committee or Rehabilitation Receiver

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

The appointment of a receiver operates to suspend the authority of a corporation

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

Management committees and receivers are appointed when the corporation is in

imminent danger of (1) dissipation, loss, wastage or destruction of assets or other
properties; and (2) paralysation of its business operations that may be prejudicial to'
the interest of the minority stockholders, parties-litigants, or the general public."
Applicants for the appointment of a receiver or management committee need to
establish the confluence of these two requisites. This is because appointed receivers
and management committees will immediately take over the management of the
corporation and will have the management powers specified in law.

The Court of Appeals has no power to appoint a receiver or management committee.

The Regional Trial Court has original and exclusive jurisdiction to hear and decide
intra-corporate controversies, including incidents of such controversies. These
incidents include applications for the appointment of receivers or management
committees. Alfredo Villamor Jr. vs. John S. Umale in Substitution of Hernando
Balmores, G.R. No. 172843, September 24, 2014

d. Liquidation after Three Years

In the absence of a statutory provision to the contrary, pending actions by or against a

corporation are abated upon the expiration of the period allowed by law for the
liquidation of its affairs. –Mambulao Lumber Company vs. Philippine National Bank, 22
SCRA 359 (1968) . National Abaca & Other Fibers Corporation vs. Pore, 2 SCRA 989
(1961). See, however, Gelano and Reburiano cases, infra

A corporation that has a pending action and which cannot be terminated within the
three year period after its dissolution is authorized under Sec. 122 of the Corporation
Law to convey all its property to a trustee to enable it to prosecute and defend suits by
or against the corporation beyond the three year period. The trustee may commence a
suit which can proceed to final judgment even beyond the three-year period. The
directors may be permitted to continue as trustees to complete the liquidation.
Clemente vs. Court of Appeals, 242 SCRA 717 (1995) . See also Reburiano vs. Court of
Appeals, 301 SCRA 342 (1999)
 A assignee in insolvency can maintain an action upon any unpaid stock subscription in
order to realize its assets for its debt. – Philippine National Bank vs. Bitulok Sawmill
Inc., SCRA 269.

Although the cancellation of a corporation’s certificate of registration puts an end to

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

To allow a creditor’s case to proceed independently of the liquidation case, a

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

The executed releases, waivers and quitclaims are valid and binding upon the parties
notwithstanding the fact that these documents were signed six years after the
Corporation’s revocation of the Certificate of Incorporation. These documents are thus
proof that the employees had received their claims from their employer-corporation in
whose favor the release and quitclaim were issued. The revocation of the corporation
does not mean the termination of its liabilities to these employees. Section 122 of the
Corporation Code provides for a three-year winding up period for a corporation whose
charter is annulled by forfeiture or otherwise to continue as a body corporate for the
purpose, among others, of settling and closing its affairs As such, these liabilities are
obligations of the dissolved corporation and not of the corporation who contracted
the services of the dissolved corporation. Vigilla vs. Philippine College of Criminology,
GR No. 200094, June 10, 2013

K. Other Corporations

1. Close Corporations

a. Characteristics of a Close Corporation

If a corporation is classified as a close corporation, a board resolution authorizing the

sale or mortgage of the corporate property is not necessary to bind the corporation for
 the action of its president. Manuel R. Dulay Enterprises, Inc.,vs. Court of Appeals, 225
SCRA 678 (1993)

A corporation does not become a close corporation just because a man and his wife
own 98.86% of its subscribed capital stock; So too, a narrow distribution of ownership
does not, by itself, make a close corporation. The features of a close corporation under
the Corporation Code must be embodied in the Articles of Incorporation. San Juan
Structural and Steel Fabricators, Inc.,vs. Court of Appeals, Motorich Sales Corporation,
Nenita Lee Gruenberg, ACL Development Corp. and JNM Realty and Development
Corp., G.R. No. 129459, September 29, 1998

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

b. Validity of Restrictions on Transfer of Shares

c. Issuance or Transfer of Stock in Breach of Qualifying Conditions
d. When Board Meeting is Unnecessary or Improperly Held

When a corporation is classified as a close corporation, a board resolution

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

e. Pre-Emptive Right
f. Amendment of Articles of Incorporation
g. Deadlocks

2. Non-Stock Corporations

a. Definition
b. Purposes
c. Treatment of Profits
d. Distribution of Assets upon Dissolution

A member of a country club who failed to pay his monthly dues on time can be
suspended. Litonjua vs. Court of Appeals, 286 SCRA 136 (1998)
A member of a religious corporation who commits any of the causes for expulsion
under its by-laws may be expelled by the board of directors, through a resolution,
even without giving that erring member any notice prior to his expulsion, if so
provided for in the by-laws. It may sound unusual and objectionable as there is no
requirement of prior notice but that is how peculiar the nature of a religious
corporation is vis-à-vis an ordinary corporation organized for profit. The basis of the
relationship between a religious corporation and its members is the latter’s
adherence to a common religious or spiritual belief. Once this basis ceases,
membership in the corporation also ceases. Long vs. Basa, 366 SCRA 113 (2001)

Section 89 of the Corporation Code pertaining to non-stock corporations provides

that "(t)he right of the members of any class or classes (of a non-stock corporation)
to vote may be limited, broadened or denied to the extent specified in the articles of
incorporation or the by-laws." This is an exception to Section 6 of the same code
where it is provided that "no share may be deprived of voting rights except those
classified and issued as 'preferred' or 'redeemable' shares, unless otherwise provided
in this Code." The stipulation in the By-Laws providing for the election of the Board
of Directors by districts is a form of limitation on the voting rights of the members of
a non-stock corporation as recognized under the aforesaid Section 89. Section 24,
which requires the presence of a majority of the members entitled to vote in the
election of the board of directors, applies only when the directors are elected by the
members at large, such as is always the case in stock corporations by virtue of
Section 6. Ao-As vs. CA 491 SCRA 339 (2006)

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

Section 89 of the Corporation Code pertaining to non-stock corporations which

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

4. Foreign Corporations

a. Bases of Authority over Foreign Corporations

i. Consent
ii. Doctrine of “Doing Business” (related to definition under the Foreign
Investments Act, R.A. No. 7042)

A foreign corporation cannot unilaterally declare that it is not doing business in

the Philippines when in fact it has installed different products in several
Philippine corporations, registered its tradename with the Philippine Patents
Office and has made it known that it has a designated distributor in the
Philippines. Wang Laboratories, Inc., vs. Mendoza, 156 SCRA 44 (1987)

A casual activity in the Philippines by a foreign shipping company such as loading

cargoes once in 1963 and another in 1964 does not amount to engaging in trade
or business in the Philippines for income tax purposes, for the transactions were
isolated. N. V. Reederij Amsterdam vs. Commissioner on International Revenue,
162 SCRA 487 (1988)

A foreign firm which does business though the middlemen acting in their own
names such as indentors, commercial brokers or commission merchants shall not
be deemed as doing business. But such indentors, commercial brokers or
commission merchants corporation shall be the ones deemed doing business in
the Philippines. Schmid & Oberly Inc.,vs. RJL Martinez Fishing Corporation, 166
SCRA 493 (1988)

A foreign corporation which solicited orders, purchase or service contracts

through its Manila branch are doing business in the Philippines and may be sued
in the Philippines. Marubeni Nederland B.V. vs. Tensuan, 190 SCRA 105 (1990)

A foreign corporation doing business in the Philippines may sue in the Philippine
courts although it has no license to do business here against a Philippine citizen
who had contracted with and been benefited by said corporation where such
party is aware that the foreign corporation is doing business in the Philippines
without license and received benefits from transacting business with it, under the
principle of estoppel. Merrill Lynch Futures, Inc., vs. Court of Appeals, 211 SCRA
824 (1992)

Foreign corporation not engaged in business in the Philippines may maintain a

cause for infringement Philip Morris, Inc., vs. Court of Appeals, 224 SCRA 576
(1993)

For purposes of acquiring jurisdiction by way of service of summons, there is no

need to prove first the fact that defendant is doing business in the Philippines.
Where a complaint alleges that defendant has an agent in the Philippines,
summons can validly be served thereto even without prior evidence of the truth
of such factual allegation. If in fact a foreign corporation does not do business
here, that is a matter that should be ventilated in the trial on the merits but not in
a motion to dismiss. Signetics Corporation vs. Court of Appeals, 225 SCRA 737
(1993)

A foreign corporation performing acts pursuant to its primary purpose and

functions as regional / area headquarters for its home office is clearly doing
business in the country. It can therefore sue an employee for non- payment of
loan. George Grotjahn GBBH & Co. vs. Isnani, 235 SCRA 216 (1994)

When a single act or transaction of a foreign corporation is not merely incidental

or casual but is of such character as distinctly to indicate a purpose on the part of
the foreign corporation to do other business in the state, such act will be
considered as considered as constituting doing business. Thus, a foreign
corporation engaged in the manufacture of uniforms and which purchased
thousands of soccer jerseys from the Philippines is doing business in the
Philippines, since the purchase was within its ordinary course of business. Litton
Mill, Inc., vs. Court of Appeals, 256 SCRA 696 (1996)

Where a foreign corporation engaged in the manufacture and sale of electronic

products appointed a local electronics firm to be its local technical
representative and to create a service center for the former’s products sold
locally and the latter was obliged to provide the foreign corporation with
monthly report detailing the failure and repair of the products and to requisition
monthly the materials and components needed to replace stock consumed, the
foreign corporation was deemed to be doing business in the Philippines. The
arrangements with the local entity indicate the foreign corporation’s purpose to
bring about the situation among its customers and the general public that they
are dealing with the foreign corporation. The provisions of the agreement are
also highly restrictive in nature thus reducing the local firm to a mere extension
or instrument of the foreign corporation. Nevertheless, the local firm is estopped
to challenge the personality of the foreign corporation after having
acknowledged the same by entering into a contract with it. Thus, the foreign
corporation may file an action to enjoin the local firm form selling or attempting
to sell products and equipments which have been copied or manufactured in like
manner similar to the products of the foreign corporation. Communication
Materials and Design, Inc., vs. Court of Appeals, 260 SCRA 673. (1996)

A foreign corporation which owns the copyright to foreign films and exclusive
distribution rights in the Philippines and appointed an attorney-in-fact to file
criminal cases is not doing business in the Philippines, if the contracts are
consummated abroad, as the hiring of the attorney-in-fact is merely for the
protection of its property rights. Doing business implies a continuity of
commercial dealings and arrangement, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally
incident to or in progressive prosecution of the purpose of the and subject of its
organization. Columbia Pictures, Inc vs. Court of Appeals, 261 SCRA 144 (1996)
A foreign corporation engaged in the manufacture of cars (BMW) which
appointed a Philippine distributor who merely transmitted to the foreign
corporation its orders from buyers, received the payment from the buyers
directly, and shipped the cars directly to the buyers is doing business in the
Philippines. Hahn vs. Court of Appeals, 266 SCRA 537 (1997)

The grant and extension of 90-day credit terms by a foreign corporation to a

domestic corporation over a period of seven months for every purchase made
unarguably shows an intention to continue transacting with the latter since in the
usual course of commercial transaction, credit is extended only to customers in
good standing or to those on whom there is an intention to maintain long-term
relationship. Under the circumstances, the foreign corporation is considered
doing business in the Philippines and cannot sue the buyer to enforce payment if
it has no license to do business. Eriks Pte., Ltd. vs. Court of Appeals, 267 SCRA
567 (1997)

A reinsurance company is not doing business in a certain state merely because

the property or lives which are insured by the original insurer are located in that
state. The reason for this is that a contract of reinsurance is generally a separate
and distinct arrangement from the original contract of insurance. Thus, a foreign
reinsurance company which accepted reinsurance from a domestic insurance
company cannot be sued in the Philippines, since it is not doing business in the
Philippines. Avon Insurance PLC. Vs. Court of Appeals, 278 SCRA 312 (1997)

There is no general rule or governing principle laid down as to what constitutes

“doing” or “engaging in” or “transacting” business in the Philippines. Each case
must be judged in the light its peculiar substances. Thus, it has often been held
that a single act or transaction may be considered as “doing business” when a
corporation performs acts for which it was created or exercises some of the
functions for which it was organized. The amount or volume of the business is of
no moment, for even a singular act cannot be merely incidental or casual if it
indicates the foreign corporation’s intention to do business. Participating in the
bidding process constitutes “doing business” because it shows the foreign
corporation’s intention to engage in business here. Hutchison Ports Philippines
Limited vs. Subic Bay Metropolitan Authority, 339 SCRA 34 (2000)

Mere ownership by a corporation of a property in a certain state, unaccompanied

by its active use in furtherance of the business for which it was formed, is
insufficient in itself to constitute doing business. A foreign corporation which
becomes the assignee of mining properties, facilities and equipment and
assumes the loan obligation of its subsidiary cannotbe automatically considered
as doing business in the Philippines even if its subsidiary was doing business in
the Philippines. MR Holdings, Ltd, vs. Bajar, 380 SCRA 617 (2002)

It does not follow that the insurer, as subrogee, has also no capacity to sue in this
jurisdiction simply because the insured party (which is a foreign corporation) has
no legal capacity to sue in the Philippines. The rights inherited by the insurer
pertain only to the payment it made to the insured and which amount it now
seeks to recover from the shipping company which caused the loss sustained by
the insured. Capacity to sue is a right personal to its holder. It is conferred by law
and not by parties. The insurer has satisfactorily proven its capacity to sue, after
having shown that is not doing business in the Philippines, but is suing only under
an isolated transaction, i.e under the one marine insurance policy issued in favor
of the consignee/insured.

It is also not correct to say that the insurer is not suing under an isolated
transaction because the steel pipes, subject of this case, are covered by two bills
of landing; hence, two transactions. The fact remains that these two bills of
lading spawned from the single marine insurance policy that the insurer issued in
favor of the consignee. The Court has not construed the term “isolated
transaction” to literally mean “one” or a mere single act. The phrase “isolated
transaction” has a definite and fixed meaning, i.e., a transaction or series of
transaction set apart from the common business of a foreign enterprise in the
sense that there is no intension to engage in a progressive pursuit of the purpose
and object of the business organization. Lorenzo Shipping Corp., vs. Chubb and
Sons, 431 SCRA 266 (2004)

The resident agent of a foreign corporation doing business in the Philippines is

not necessarily authorized to execute the requisite certification against forum
shopping. Under the Corporation Code, the resident agent was not specifically
authorized to execute a certificate of non-forum shopping as required by Section
5, Rule 7 of the Rules of Court. This is because while a resident agent may be
aware of actions filed against his principal, such resident agent may not be aware
of actions initiated by its principal, whether in the Philippines, against a domestic
corporation or private individual, or in the country where such corporation was
organized and registered, against a Philippine registered corporation or a
Filipino citizen. Expertravel & Tours, Inc., vs. CA. 459 SCRA 147 (2005)

The mere act of exporting from one’s own country, without doing any specific
commercial act within the territory of the importing country cannotbe deemed
as doing business in the importing country. B. Van Zuiden Bros Ltd vs. GTVL
Manufacturing Industries 523 SCRA 233, (2007)

An unlicensed foreign corporation is nonetheless permitted to bring suit in the

Philippines if it is suing on an isolated transaction. Thus, the ascertainment of
whether a foreign corporation is merely suing on an isolated transaction or is
actually doing business in the Philippines requires the elicitation of at least a
preponderant set of facts. It simply cannot be answered through conjectures or
acceptance of unsubstantiated allegations. Rimbunan Hijau Group Of
Companies v. Oriental Wood Processing Corporation, 470 SCRA 650 (2005)

A foreign corporation not licensed to do business in the Philippines is not

absolutely incapacitated from filing a suit in local courts. Only when that foreign
corporation is “transacting” or “doing business” in the country will a license be
necessary before it can institute suits. It may, however, bring suits on isolated
 business transactions, which is not prohibited under Philippine law. Thus, a
foreign insurance company may sue in Philippine courts upon the marine
insurance policies issued by it abroad to cover international-bound cargoes
shipped by a Philippine carrier, even if it has no license to do business in this
country. It is the act of engaging in business without the prescribed license, and
not the lack of license per se, which bars a foreign corporation from access to our
courts. Aboitiz Shipping Corp. vs. Insurance Co. of North America , 561 SCRA 262
(2008)

A foreign company that merely imports goods from a Philippine exporter,

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

Participating in the bidding process constitutes “doing business” because it

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

A contract entered into by a foreign corporation not licensed to do business in

the Philippines is not void even as against the erring foreign corporation. The
lack of capacity at the time of the execution of the contracts was cured by the
subsequent registration. The Home Insurance Company vs.Eastern Shipping
Lines, G.R. No. L-34382 July 20, 1983

The appointment of a distributor in the Philippines is not sufficient to constitute

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

b. Necessity of a License to Do Business

The primary purpose of the license requirement is to compel a foreign corporation

desiring to do business within the Philippines to submit itself to the jurisdiction of
the courts of the state and to enable the government to exercise jurisdiction over
them for the regulation of their activities in this country. If a foreign corporation
operates a business in the Philippines without a license, and thus does not submit
itself to Philippine laws, it is only just that said foreign corporation be not allowed to
 invoke them in our courts when the need arises. Steelcase, Inc.,vs. Design
International Selections, Inc., G.R. No. 171995, April 18, 2012

Where the three transactions indicate no intent by the foreign corporation to

engage in a continuity of transactions, as the contract was modified twice principally
because of the failure of the seller to deliver, the foreign corporation, is not doing
business in the Philippines and can sue the seller even if has no license to do business
in the Philippines. Foreign corporation not doing business in the Philippines is not
required to obtain a license to do business to have capacity to sue. Antam
Consolidated, Inc., vs. Court of Appeals, 143 SCRA 534 (1986)

i. Requisites for Issuance of a License

ii. Resident Agent

c. Personality to Sue

A foreign corporation not engaged in business in the Philippines can file an action
before Philippine courts for isolated transaction. Thus, it can sue a domestic shipping
company for failure to deliver goods shipped to it. Bulakhidas vs. Navarro, 142 SCRA
1 (1986)

Foreign corporation not doing business in the Philippines may sue here even if not
licensed in order to protect intellectual property rights. Converse Rubber
Corporation vs. Universal Rubber Products Inc., 147 SCRA 154 (1987)

A foreign corporation which licensed a domestic corporation to manufacture and

market its products and equipments is doing business in the Philippines and cannot
sue the domestic corporations if it has no license to do business in the Philippines.
For being in pari delicto, the domestic corporation cannot ask the courts to prohibit
the foreign corporation from terminating its contract and giving the license to
produce and market its products to another. Top-Weld Manufacturing, Inc.,vs. Eced,
S.A., 138 SCRA 118. See also Granger Associates vs. Microwave Systems, Inc., 189
SCRA 631 (1990)

The following principles governing a foreign corporation’s right to sue in local courts
have long been settled, to wit: a) if a foreign corporation does business in the
Philippines without a license, it cannot sue before the Philippine courts; b) if a
foreign corporation is not doing business in the Philippines, it needs no license to sue
before Philippine courts on an isolated transaction or on a cause of action entirely
independent of any business transaction; and c) if a foreign corporation does
business in the Philippines with the required license, it can sue before Philippine
courts on any transaction. Apparently, it is not the absence of the prescribed license
but the “doing (of) business” in the Philippines without such license which debars the
foreign corporation from access to our courts. MR Holdings, Ltd.vs. Sheriff Carlos P.
Bajar, Sheriff Ferdinand M. Jandusay, Solidbank Corporation, and Marcopper Mining
Corporation, G.R. No. 138104, April 11, 2002
 A party is estopped from challenging the personality of a corporation after having
acknowledged the same by entering into a contract with it. The principle is applied
to prevent a person contracting with a foreign corporation from later taking
advantage of its noncompliance with the statutes, chiefly in cases where such person
has received the benefits of the contract. Global Business Holdings, Inc., vs.
Surecomp Software, B.V., G.R. No. 173463, October 13, 2010

d. Suability of Foreign Corporations

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

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

f. Grounds for Revocation of License

L. Mergers and Consolidations

1. Definition and Concept

Generally where one corporation sells or otherwise transfers all of its assets to another
corporation, the latter is not liable for the debts and liabilities of the transferor, except:
1) where the purchaser expressly or impliedly agrees to assume such debts; 2) where the
transaction amounts to a consolidation or merger of the corporations; 3) where the
purchasing corporation is merely a continuation of the selling corporation; and 4) where
the transaction is entered into to fraudulently to escape liability for such debts. –Edward
J. Nell Company vs. Pacific Farms, Inc., 15 SCRA 415 (1965)

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

There are two types of corporate acquisitions: asset sales and stock sales. In asset sales,
the corporate entity sells all or substantially all of its assets to another entity. In stock
sales, the individual or corporate shareholders sell a controlling block of stock to new or
existing shareholders.

In asset sales, the rule is that the seller in good faith is authorized to dismiss the affected
employees, but is liable for the payment of separation pay under the law. The buyer in
good faith, on the other hand, is not obliged to absorb the employees affected by the
sale, nor is it liable for the payment of their claims. The most that it may do, for reasons
of public policy and social justice, is to give preference to the qualified separated
personnel of the selling firm.
 In contrast with asset sales, in which the assets of the selling corporation are transferred
to another entity, the transaction in stock sales takes place at the shareholder level.
Because the corporation possesses a personality separate and distinct from that of its
shareholders, a shift in the composition of its shareholders will not affect its existence
and continuity.

Thus, notwithstanding the stock sale, the corporation continues to be the employer of its
people and continues to be liable for the payment of their just claims. Furthermore, the
corporation or its new majority shareholders are not entitled to lawfully dismiss
corporate employees absent a just or authorized cause.

The fact that there was a change in the composition of its shareholders did not affect the
employer-employee relationship between the employees and the corporation, because
an equity transfer affects neither the existence nor the liabilities of a corporation. Thus,
the corporation continued to be the employer of the corporation’s employees
notwithstanding the equity change in the corporation. This outcome is in line with the
rule that a corporation has a personality separate and distinct from that of its individual
shareholders or members, such that a change in the composition of its shareholders or
members would not affect its corporate liabilities.

In this case, the corporate officers and directors who induced the employees to resign
with the assurance that they would be rehired by the new management are personally
liable to the employees who were not actually rehired. However, the officer who did not
participate in the termination of employment and persons who participated in the
unlawful termination of employment but are not directors and officers of the
corporation are not personally liable. SME Bank Inc., vs. Gaspar, G.R. No. 186641,
October 8, 2013

Where the purchase and sale of identified assets between two companies under a
Purchase and Sale Agreement does not constitute a merger, the seller and the purchaser
are considered entities different from one another. Thus, the purchaser company cannot
be held liable for the payment of deficiency documentary stamp tax against the seller
company. Commission of Internal Revenue vs., Bank of Commerce, GR No. 180529,
November 25, 2013

Indubitably, it is clear that no merger took place between Bancommerce and TRB as the
requirements and procedures for a merger were absent. A merger does not become
effective upon the mere agreement of the constituent corporations. All the
requirements specified in the law must be complied with in order for merger to take
effect. Here, Bancommerce and TRB remained separate corporations with distinct
corporate personalities. What happened is that TRB sold and Bancommerce purchased
identified recorded assets of TRB in consideration of Bancommerce’s assumption of
identified recorded liabilities of TRB including booked contingent accounts. There is no
law that prohibits this kind of transaction especially when it is done openly and with
appropriate government approval. Bank of Commerce vs. Radio Philippines Network
Inc., et al., G.R. No. 195615, April 21, 2014

2. Constituent vs. Consolidated Corporation

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

3. Plan of Merger or Consolidation

4. Articles of Merger or Consolidation

5. Procedure

6. Effectivity

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

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

7. Limitations

8. Effects

Although there is dissolution of the absorbed corporations, there is no winding up of

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

A bank which merged with another bank can sue a debtor of the absorbed bank because
it acquired the rights of the latter. Novation (because of the change of creditor) is not a
valid defense because it is settled that in a merger of two existing corporations, one of
 the corporations survives and continues the business, while the other is dissolved and all
its rights, properties and liabilities are acquired by the surviving corporation. Babst vs.
Court of Appeals, 350 SCRA 341 (2001)

The surviving or consolidated corporation assumes automatically the liabilities of the

dissolved corporations regardless of whether the creditors have consented or not to such
merger or consolidation. Xxx. As a rule, the corporation that purchases the assets of
another will not be liable for the debts of the selling corporation, provided the former
acted in good faith and paid adequate consideration for such assets or unless the
purchase of the assets amounts to merger or consolidation. Omictin vs. Court of Appeals
512 SCRA 70 (2007)

When an investor has a claim against a subsidiary of another corporation which

subsequently became the acquired corporation in a merger, the claim against the
subsidiary cannot be enforced against the surviving corporation even though the latter
corporation by virtue of the merger acquired all the shares of the absorbed corporation.
This is because the fact that a corporation owns almost all of the stocks of another
corporation, taken alone, is not sufficient to justify their being treated as one entity.
Spouses Ramon Nisce vs. Equitable PCI Bank 516 SCRA 231 (2007)

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

Citytrust, therefore, upon service of the notice of garnishment and its acknowledgment
that it was in possession of defendants' deposit accounts became a "virtual party" to or a
"forced intervenor" in the civil case. As such, it became bound by the orders and
processes issued by the trial court despite not having been properly impleaded therein.
Consequently, by virtue of its merger with BPI, the latter, as the surviving corporation,
effectively became the garnishee, thus the "virtual party" to the civil case. Bank of
Philippine Islands v. Lee, G.R. No. 190144, August 1, 2012

M. Other Matters

1. Corporate Officers

A corporate officer, entrusted with the general management and control of its business,
has implied authority to make any contract or to do any other act which is necessary or
appropriate to the conduct of the ordinary business of the corporation. The general
manager of the corporation who entered into contracts for the sale of copra products
could not be held personally liable for losses incurred because of said contracts despite
the fact that sthe did not obtain prior approval of the Board if based on customs and
practices within the company and given the speculative nature of the contracts which
required on the spot decision , the Board had previously allowed him to enter into
similar contracts without prior board approval . Board of Liquidators vs. Kalaw, 20 SCRA
987 (1967)

The employment of a corporate officer who under the by-laws holds office at the
pleasure of the Board of Directors, may be terminated at any time once said trust and
confidence cease. The ouster of such corporate officer is not one of removal but
expiration of term. De Tavera vs. Philippine Tuberculosis Society, Inc., 112 SCRA 243.
(1982)

An officer of a corporation can be held criminally liable for acts or omissions done in
behalf of the corporation only where he is made by specific provision of law to
personally answer for his corporate action. Sia vs. People, 121 SCRA 655. (1983)

If the records do not clearly identify the “officer or officers” directly responsible for the
payment of monetary benefits to the employees, the president of a corporation, as the
responsible officer of corporation, may be ordered to respond personally in case of
closure of the corporation. AC Ransom Labor Union vs. NLRC 142 SCRA 269 (1986);
Villanueva vs. Adre 172 SCRA 876 (1989).

The board of directors may expressly delegate specific powers to its president or any of
its officers. In the absence of such express delegation, a contract entered into by its
president, on behalf of the corporation, may still be binding on the corporation if the
board should ratify the same expressly or impliedly. Furthermore, even in the absence
thereof, the President, as such, may, as a general rule, bind the corporation by a contract
in the ordinary course of business, provided the same is reasonable under the
circumstances. These rules apply where the president or other officer, purportedly
acting for the corporation, is dealing with a third person, i.e., a person outside the
corporation. A different rule obtains in case the contract is between the corporation and
its directors which is voidable unless certain requirements are met, specifically, that the
contract is fair and reasonable under the circumstance. A director of a corporation which
manufactures white cement cannot enforce a five-year distributorship agreement
executed by the chairman and president on behalf of the corporation when the contract
provided for a fixed price, because the contract is not fair, since the price of cement
fluctuates and is expected to rise. Prime White Cement Corporation vs. Intermediate
Appellate Court, 220 SCRA 103 (1993)

Since a corporate director or officer is personally liable only when he assents to a

patently unlawful act of the corporation, is guilty of bad faith or gross negligence in
directing its affairs, guilty of conflict of interest, consents to the issuance of watered
stock or having knowledge of its does not file with the corporate secretary his written
objection, agrees to hold himself solidarily liable with the corporation or is made by
specific provision of law to personally answer for his corporate action, then a president
cannot be held personally liable for the payment of the price of a tractor the corporation
purchased. Tramart Mercantile, Incl. vs. Court of Appeals, 238 SCRA 14 (1994)
A general manager who implemented the decision to cease operations and to terminate
the services of the employees is liable to the latter where he sold the assets of the
corporation and applied the proceeds thereof to satisfy his own claims to the prejudice
of the employees. Such act does not amount to set-off since it was done without
deference to the legitimate claims of the other employees and creditors, in
contravention of the provisions on concurrence and preference of credit. De Guzman vs.
National Labor Relations Commission, 253 SCRA 46 (1996)

There having been no quorum present during the meeting where his authority was
supposed to have been given, the filing of a petition for the reconstitution of the owner’s
duplicate of a transfer certificate of title by a branch manager is unauthorized. The
doctrine of apparent authority cannot apply because being a mere branch manager, he
could not be looked upon as a corporate officer clothed with the implied or “apparent”
power to file the suit and the unauthorized action was hidden from it. New Durawood
Company Inc., vs. Court of Appeals, 253 SCRA 740 (1996)

The president, vice president, secretary and treasurer are commonly regarded as the
principal or executive officers of a corporation but other offices are sometimes created
by the charter or by-laws of corporation, or the board of directors may be empowered
under the by-laws of a corporation to create additional offices as may be necessary. It
has been held that an “office” is created by the charter of the corporation and the officer
is elected by the directors or stockholders. On the other hand, an “employee” usually
occupies no office and generally is employed not by action of the directors or
stockholders but by the managing officer of the corporation who also determines the
compensation to be paid to such employee. Since the petitioner, unlike an ordinary
employee, was appointed by the corporation’s Board of Trustees, she is deemed an
officer of the corporation. A corporate officer’s dismissal is always a corporate act, or an
intra-corporate controversy, and the nature is not altered by the reason or wisdom with
which the Board of Directors may have in taking such action. Tabang vs. National Labor
Relations Commission, 266 SCRA 462 (1997)

The president of a closed corporation, who actively managed the business of the
corporation is considered an employer under Article 212 of the Labor Code and may be
held solidarily liable with the corporation for the separation pay due the employees
upon closure of the business. Naguiat vs. National Labor Relations Commission, 269
SCRA 564 (1997)

Lack of involvement in the negotiation for the transaction is not a defense to a treasurer
of the corporation who signed a check in his capacity as an officer of the corporation.
Llamdo vs. Court of Appeals, 270 SCRA 423 (1997)

The corporate officers who were aware that the corporation was violating the provisions
of labor standards but did not correct the violations and closed the corporation without
paying the employees their separation benefits are solidarily liable with the corporation
for the claims of the employees. Reahs Corporation vs. National Labor Relations
Commission, 271 SCRA 247 (1997)
Corporate directors and officers are solidarily liable with the corporation for the
termination of employment of corporate employees done with malice or in bad faith.
Directors who signed the board resolution retrenching the employees on the feigned
ground of serious business losses that had no basis are guilty of bad faith and can held
solidarily liable with the corporation. Uichico vs. National Labor Relations Commission,
273 SCRA 35 (1997)

It is the corporate secretary’s duty and obligation to register valid transfers of stocks and
if said corporate officer refuses to comply, the transferor-stockholder may rightfully
bring suit to compel performance. But, the transferor, even though he may be the
controlling stockholder of the corporation, cannottake the law into his own hands and
cause himself the recording of the transfers of qualifying shares to his nominee-directors
in the stock and transfer books of the corporation. Torres, Jr. vs. Court of Appeals, 278
SCRA 793 (1997)

Unless duly authorized, a treasurer whose powers are limited cannot bind the
corporation in a sale of its assets. Selling is obviously foreign to a corporate treasurer’s
functions, which generally has been described as to receive and keep the funds of the
corporation and to disburse them in accordance with the authority given by the board or
the properly authorized officers. When the corporate officers exceed their authority,
their actions cannot bind the corporation unless it has ratified such acts or is estopped
from disclaiming them. A receipt of the payment of the price for a parcel land belonging
to a corporation which was sold by the treasurer without authority does not constitute
ratification of the sale, since the receipt was not issued by the corporation but is only the
handwritten note of its treasurer. San Juan Structure and Steel Fabricators, Inc.,vs. Court
of Appeals, 296 SCRA 631 (1998)

The authority of certain individuals to bind the corporation is generally derived from law,
corporate by-laws or authorization from the board, either expressly or impliedly by
habit, custom or acquiescence in the general course of business. In the absence of a
charter or by-law provision to the contrary, the president is presumed to have the
authority to act within the domain of the general objectives of its business and within the
scope of his usual duties. And even if a certain contract is outside the usual powers of the
president, the corporation’s ratification of the same and acceptance of the benefits
make it binding. Thus, where the president of a corporation hired a consultant to
prepare an operations manual in connection with the corporation’s application for
license as a bonded warehouse, the corporation accepted the operations manual and
allowed the contractor to conduct a seminar for its employees, the contract is binding on
the corporation even though there was no written authorization from the board which is
deemed to have ratified the contact. People’s Aircagro and Warehousing Company,
Inc.,Court of Appeals, 297 SCRA 170 (1998)

An exception to the rule that officers and members of a corporation are not personally
liable for acts done in the performance of their duties is when the employer corporation
is no longer existing and is unable to satisfy the judgment in favor of the employee. The
officers in this case should be liable for acting on behalf of the corporation. Restaurante
Las Conchas vs. Llego, 314 SCRA 24. 1999) (Please see, however, decisions to the
contrary in Carag vs. NLRC and Macleod vs. NLRC, infra)
The employer’s acts of conducting audits and investigation on the alleged irregularities
committed by an employee and in re-assigning him to another place of work pending
the results of the investigation are valid and do not amount to constructive dismissal.
However, the officers who knew and allowed the withholding of the salaries and bonuses
of an employee pending his investigation but without being placed under preventive
suspension are solidarily liable with corporation despite the valid dismissal of the
employee. Consolidated Food Corporation vs. National Labor Relations, 315 SCRA 129
(1999)

When a bank, by its acts and omission, has clearly clothed its manager with apparent
authority to sell an acquired asset in the normal course of business, it is legally obliged to
confirm the transaction by issuing a board resolution to enable the buyers to register the
property in their names. It has a duty to perform necessary and lawful acts to enable the
other parties to enjoy all the benefits of the contract which it had authorized. Rural Bank
of Milaor ( Camarines Sur) vs. Ocfemia, 325 SCRA 99 (2000); Soler vs., Court of Appeals,
358 SCRA 57 (2001)

The officer of the corporation who signed the criminal complaint for estafa against a
sales agent cannot be held liable for malicious prosecution if his acts were done in
pursuance of an authority. Lao vs. CA, 325 SCRA 694 (2000)

A corporation exercises its powers through its board of directors and / or any of its
authorized agents / officers. All acts within the powers of the corporation may be
performed by agents of its selection except those limited / restricted by its charter, by-
laws or the law. Thus, for natural persons, the parties themselves must sign the certificate
of non-forum shopping. However, in the case of a corporation, the latter can do so only
through its officers or authorized agents, like its lawyer. BA Savings Bank vs. Court of
Appeals, 336 SCRA 484 (2000)

It is a common banking practice to require the JSS (joint and solidary signature) of a
major stockholder or corporate officer, as an additional security for loans granted to
corporations. However, there was no reason for the corporation to assume that the
officer who signed as surety would still agree to act as surety in the restructuring
agreement (which is a new contract) because at that time, he is no longer an officer of
the corporation. The restructuring agreement novated, not merely extended the period
of, the old contract in view of the express provision to “liquidate” the principal and
interest of the earlier indebtedness. Hence, while the indemnity (surety) agreement,
which was an accessory contract to the first loan agreement merely extended the first
loan, the officer is still released from liability because an extension granted by the
creditor to the debtor without the consent of the guarantor extinguishes the guaranty
(Art 2079, NCC). Security Bank and Trust Co. vs. Cuenca, 341 SCRA 781 (2000)

Personal liability of a corporate director, trustee or officer along (although not

necessarily) with the corporation may so validly attach only when:
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or
gross negligence in directing its affairs, or (c) conflict of interest, resulting in damages to
the corporation, its stockholders or other persons;

2. He consents to the issuance of watered down stocks or who, having knowledge

thereof, does not forthwith file with the corporate secretary his written objection
thereto;

3. He agrees to hold himself personally and solidarily liable with the corporation; or

4. He is made, by specific provision of law, to personally answer for his corporate action.

Where the corporate treasurer falsely certified to the endorsee that the negotiated
crossed check was issued as payment for petroleum products, the treasurer should be
made personally liable when the drawer subsequently dishonored the check because the
negotiation was unauthorized. Atrium Management Corp. vs. Court of Appeals, 353
SCRA 23 (2001)

The acts of an agent beyond the scope of his authority do not bind the principal unless
the latter ratifies the same expressly or impliedly. When the third person knows that the
agent was acting beyond his power or authority, the principal cannot be held liable for
the acts of the agent. If the said third person is aware of such limits of authority, he is to
blame and is not entitled to recover damages from the agent, unless the latter
undertook to secure the principal’s ratification. When the President entered into a
contract (for speculative trading of oil) with another corporation without securing Board
consummation, such that there was no occasion at all for ratification, the counterparty
cannot enforce such contract. The board of directors, not the president, exercises
corporate power. Safic Alcan & Cie vs. Imperial Vegetable Co., Inc., 355 SCRA 559
(2001)

Where a corporate office is not specifically indicated in the roster of corporate offices in
the by-laws of the corporation, the board of directors may also be empowered under the
laws to create additional officers as may be necessary. And where the by-laws authorized
the directors to create office, the directors may create the office comptroller. Since the
appointment as comptroller required the formal action of the board, petitioner is a
corporate officer whose dismissal may be subject of intra-controversy cognizable by the
SEC under Sec. 5 (c) of PD 902-A (now the Regional Trial Court). Nakpil vs.
Intercontinental Broadcasting Corporation, 379 SCRA 653 (2002)

A board resolution authorizing a corporate officer to obtain a loan includes the authority
to assign the receivables to secure the loan if the resolution also empowers the officer to
agree to the terms and conditions of the loan and sign implementing documents. The
officer who signed the deed of assignment is, however, not personally liable if he
indicated in the deed that he was signing in behalf of the corporation. Great Asian Sales
Center Corporation vs. Court of Appeals, 381 SCRA 557 (2002)

The signature of the branch manager appearing below the typewritten word "NOTED" at
the bottom of the offer to purchase is a clear indication that there is no perfected
contract of sale to speak of. The representation of the clerk that the manager had
already approved the sale, even if true, cannot bind the bank to a contract of sale, it
being obvious that such a clerk is not among the bank officers upon whom such putative
authority may be reposed by a third party. There is, thus, no legal basis to bind the bank
into any valid contract of sale with the supposed buyer given the absolute absence of any
approval or consent by any responsible officer of the bank. DBP vs. Sps. Francisco and
Leticia Ong, 460 SCRA 170 (2005)

The property of a corporation may not be sold without express authority from the board
of directors. Physical acts, like the offering of the properties of the corporation for sale,
or the acceptance of a counter-offer of prospective buyers of such properties and the
execution of the deed of sale covering such property, can be performed by the
corporation only by officers or agents duly authorized for the purpose by corporate by-
laws or by specific acts of the board of directors. Absent such valid
delegation/authorization, the rule is that the declarations of an individual director
relating to the affairs of the corporation, but not in the course of or connected with, the
performance of authorized duties of such director, are not binding on the corporation.

While a corporation may appoint agents to negotiate for the sale of its real properties,
the final say will have to be with the board of directors through its officers and agents as
authorized by a board resolution or by its by-laws. An unauthorized act of an officer of
the corporation is not binding on it unless the latter ratifies the same expressly or
impliedly by its board of directors. Any sale of real property of a corporation by a person
purporting to be an agent thereof but without written authority from the corporation is
null and void. The declarations of the agent alone are generally insufficient to establish
the fact or extent of his/her authority. Litonjua, Jr. vs. Eternity Corporation 490 SCRA 204
(2006)

“Corporate officers” in the context of PD 902-A are those officers of a corporation who
are given that character either by the Corporation Code or by the corporation’s by-laws.
Under Section 25 of the Corporation Code, the “corporate officers” are the president,
secretary, treasurer and such other officers as may be provided for in the by-laws.

The burden of proof is on the party who makes the allegation that the person whose
removal was the subject of the controversy was a corporate officer whose position was
provided in the by-laws. Where the petitioner merely alleged that respondent was a
corporate officer but failed to prove that its by-laws provided for the office of “vice
president for nationwide expansion, then the petitioner failed to satisfy the burden of
proof that was required of it. Thus, its claim that respondent was a “corporate officer”
whose removal was cognizable by the SEC under PD 902-A (now by the RTC) and not by
the NLRC under the Labor Code cannotbe sanctioned.

An “office” is created by the charter of the corporation and the officer is elected by the
directors or stockholders. On the other hand, an employee occupies no office and
generally is employed not by the action of the directors or stockholders but by the
managing officer of the corporation who also determines the compensation to be paid
to such employee.
In this case, respondent was appointed vice president for nationwide expansion by the
petitioner’s general manager, not by the board of directors of petitioner. It was also the
General Manager who determined the compensation package of respondent. Thus,
respondent was an employee, not a “corporate officer. Easycall Communications Phils.,
Inc., vs. Edward King 478 SCRA 102 (2005)

The corporate officers cannot be held liable for the obligations incurred by the
corporation, especially where the corporate officer was not even shown to have had a
direct hand in the dismissal of the employee. However, if the records do not clearly
identify the “officer or officers” directly responsible for the payment of monetary
benefits to the employees, the president of a corporation, as the responsible officer of
the corporation, may be ordered to respond personally in case of closure of the
corporation. The president, who actively managed the business of the corporation, may
be held solidarily liable with the corporation for the separation pay due the employees
upon closure of the business. But, extending help to the employees by the mother of the
officers of the corporation does not automatically vest upon her the position of
President of the corporation. Elcee Farms, Inc.,vs. NLRC 512 SCRA 602 (2007)

When the corporation obtained loans in consideration for the exclusive right by the
lender to market the products of the borrower corporation but the corporate
shareholders who are also key officers prevented the implementation of the marketing
agreement by not accepting the prices offered by the buyers of the lender even though
such prices were competitive and fair enough, the controlling stockholders may be held
personally liable for such loans on account of their bad faith in carrying out the business
of the corporation. Aratea v. Suico, 518 SCRA 501 (2007)

Article 212(e) does not state that corporate officers are personally liable for the unpaid
salaries or separation pay of employees of the corporation. The liability of corporate
officers for corporate debts remains governed by Section 31 of the Corporation Code. A
director is not personally liable for the debts of the corporation, which has a separate
legal personality of its own. A director is personally liable for corporate debts only if he
wilfully and knowingly votes for or assents to patently unlawful acts of the corporation or
he is guilty of gross negligence or bad faith in directing the affairs of the corporation.
However, to hold a director personally liable for debts of the corporation, and thus
pierce the veil of corporate fiction, the bad faith or wrongdoing of the director must be
established clearly and convincingly. Bad faith is never presumed. Moreover, bad faith
does not automatically arise just because a corporation fails to comply with the notice
requirement of labor laws on company closure or dismissal of employees. The failure to
give notice is not an unlawful act because the law does not define such failure as
unlawful. Such failure to give notice is a violation of procedural due process but does
not amount to an unlawful or criminal act. Patently unlawful acts are those declared
unlawful by law which imposes penalties for commission of such unlawful acts. There
must be a law declaring the act unlawful and penalizing the act. Carag v. NLRC 520
SCRA 28 (2007)

Under Section 25 of the Corporation Code, three officers are specifically provided for
which a corporation must have: president, secretary, and treasurer. The law, however,
does not limit corporate officers to these three. Section 25 gives corporations the
 widest latitude to provide for such other offices, as they may deem necessary. The by-
laws may and usually do provide for such other officers, e.g., vice-president, cashier,
auditor, and general manager. In this case, there is no basis from which it may be
deduced that the manager of petitioner is also a corporate officer such that he may be
held liable for the money claims awarded in favor of respondents. Even assuming that he
is a corporate officer, still, there is no showing that he acted with evident malice and bad
faith. The manager may have signed and approved the payrolls; nevertheless, it does not
follow that he had a direct hand in determining the amount of respondents’
corresponding salaries and other benefits. The manager, therefore, should not have
been held liable together with the employer corporation. Pamplona Plantation Company
vs. Ramon Acosta et al. 510 SCRA 249 (2006)

The signature of the corporate secretary gives the minutes of the meeting probative
value and credibility. People of the Philippines vs. Hermenegildo Dumlao and Emilio
La’o 580 SCRA (2009)

In the B.P. Blg. 22 case, what the trial court should determine is whether or not the
signatory had signed the check with knowledge of the insufficiency of funds or credit in
the bank account, while in the civil case the trial court should ascertain whether or not
the obligation itself is valid and demandable. The litigation of both questions could, in
theory, proceed independently and simultaneously without being ultimately conclusive
on one or the other.

It might be argued that under the current rules, if the signatory were made liable for the
amount of the check by reason of the B.P. Blg. 22 case, such signatory would have the
option of recovering the same amount from the corporation. Yet that prospect does not
ultimately satisfy the ends of justice. If the signatory does not have sufficient assets to
answer for the amount of the check — a distinct possibility considering the occasional
large-scale transactions engaged in by corporations — the corporation would not be
subsidiarily liable to the complainant, even if it in truth the controversy, of which the
criminal case is just a part, is traceable to the original obligation of the corporation.
While the Revised Penal Code imposes subsidiary civil liability to corporations for
criminal acts engaged in by their employees in the discharge of their duties, said
subsidiary liability applies only to felonies, and not to crimes penalized by special laws
such as B.P. Blg. 22. And nothing in B.P. Blg. 22 imposes such subsidiary liability to the
corporation in whose name the check is actually issued. Clearly then, should the check
signatory be unable to pay the obligation incurred by the corporation, the complainant
would be bereft of remedy unless the right of action to collect on the liability of the
corporation is recognized and given flesh. James U. Gosiaco vs. Leticia Ching and Edwin
Casta 585 SCRA 471 (2009)

2. Doctrine of Corporate Negligence

Under the doctrine of corporate negligence, the hospital’s failure to supervise its
resident physicians and nurses and to take an active step in order to remedy their
negligence renders it directly liable. The duty of providing quality medical service is no
longer the sole prerogative and responsibility of the physician. This is because the
modern hospital now tends to organize a highly-professional medical staff whose
 competence and performance need also to be monitored by the hospital commensurate
with its inherent responsibility to provide quality medical care. Such responsibility
includes the proper supervision of the members of its medical staff. Accordingly, the
hospital has the duty to make a reasonable effort to monitor and oversee the treatment
prescribed and administered by the physicians practicing in its premises. The hospital is
liable where the doctor who performed surgical operation on a patient left a gauze
inside the patient’s body and the hospital did not bother conducting an investigation
despite the report of the nurses on missing pieces of gauzes right after the operation.
Professional Services, Inc., v. CA 544 SCRA 170 (2008)

3. Authority to sign certification against non-forum shopping

It is not correct to say that a corporation cannot possibly comply with the requirement of
signing the certificate of non-forum shopping. If this were so, it would have been
impossible for the corporation to do anything. This is the reason why corporations have
officers and directors, to represent it in its transaction with others. The same is true for
certification against forum shopping. Digital Microwave Corp. vs. Court of Appeals, 328
SCRA 289 (2000)

A corporation exercises its powers through its board of directors and / or any of its
authorized agents / officers. All acts within the powers of the corporation may be
performed by agents of its selection except those limited / restricted by its charter, by-
laws or the law. Thus, for natural persons, the parties themselves must sign the certificate
of non-forum shopping. However, in the case of a corporation, the latter can do so only
through its officers or authorized agents, like its lawyer. BA Savings Bank vs. Court of
Appeals, 336 SCRA 484 (2000)

The rule that the lack of certification against forum shopping is generally not curable by
the submission thereof after filling of the petition applies to certifications against forum
shopping signed by a person on behalf of a corporation which are unaccompanied by
proof that said signatory is authorized to file the petition on behalf of the corporation.
Belated submission, however, may be allowed if there are special circumstances or
compelling reasons that justify relaxation of the rule. Shipside Incorporation vs. Court of
Appeals, 352 SCRA 334 (2001)

A petition which did not indicate that the person who signed the
verification/certification on non-forum shopping was authorized to do so and that the
corporation merely relied on the alleged inherent power of its chief financial officer to
represent the corporation in all matters regarding its finances including, among others,
the filing of suits to defend or protect it from assessments and to recover erroneously
paid taxes is considered not properly verified and was to be treated as an unsigned
pleading subject to dismissal. San Pablo Manufacturing Corporation vs. Commissioner of
Internal Revenue 492 SCRA 192 (2006)

As a juridical entity, Philippine Rabbit may only exercise its right to file a suit by a
specific act of its board of directors or any duly authorized officer or agent. The counsel
handling the case cannot certify against non-forum shopping unless he is duly
empowered by the Board of Directors of the corporation to do so. Philippine Rabbit Bus
Lines, Inc., vs. Aladdin Transit Corp. 494 SCRA 358 (2006)

In a slew of cases, however, the Court recognized the authority of some corporate
officers to sign the verification and certification against forum shopping. In Mactan-
Cebu International Airport Authority v. CA (G.R. No. 139495, November 27, 2000, 346
SCRA 126, 132-133), the Court recognized the authority of a general manager or acting
general manager to sign the verification and certificate against forum shopping; in Pfizer
v. Galan (G.R. No. 143389, May 25, 2001, 358 SCRA 240, 246-248), the Court upheld the
validity of a verification signed by an “employment specialist” who had not even
presented any proof of her authority to represent the company; in Novelty Philippines,
Inc.,v. CA (G.R. No. 146125, September 17, 2003, 411 SCRA 211, 217-220), the Court
ruled that a personnel officer who signed the petition but did not attach the authority
from the company is authorized to sign the verification and non-forum shopping
certificate; and in Lepanto Consolidated Mining Company v. WMC Resources
International Pty. Ltd (Lepanto) (G.R. No. 153885, September 24, 2003, 412 SCRA 101,
109), the Court ruled that the Chairperson of the Board and President of the Company
can sign the verification and certificate against non-forum shopping even without the
submission of the board’s authorization.

In sum, the Court held that the following officials or employees of the company can sign
the verification and certification without need of a board resolution: (1) the Chairperson
of the Board of Directors, (2) the President of a corporation, (3) the General Manager or
Acting General Manager, (4) Personnel Officer, and (5) an Employment Specialist in a
labor case.

While the above cases do not provide a complete listing of authorized signatories to the
verification and certification required by the rules, the determination of the sufficiency
of the authority was done on a case-to-case basis. The rationale applied in the foregoing
cases is to justify the authority of corporate officers or representatives of the corporation
to sign the verification or certificate against forum shopping, being “in a position to
verify the truthfulness and correctness of the allegations in the petition.” Cagayan Valley
Drug Corporation v. CIR 545 SCRA 10 (2008)

An individual signing a certificate of non-forum shopping on behalf of a corporation,

must be armed with specific authorization from the latter to do so. Such specific
authorization could only come from a Board Resolution issued by the corporation’s
board of directors, which specifically authorizes the signatory to execute the
certification on behalf of the corporation. Maranaw Hotels & Resort Corporation vs.
Court of Appeals 576 SCRA 463 (2009)

4. Teleconferencing

In this age of modern technology, the courts may take judicial notice that persons in the
Philippines may have a teleconference with a group of persons in South Korea relating
to business transactions or corporate governance. However, a court cannot take judicial
notice of any fact which, in part, is dependent on the existence or non-existence of a fact
of which the court has no constructive knowledge. The allegation of a foreign
 corporation that its board of directors conducted a teleconference and approved the
resolution authorizing its resident agent to file the complaint and execute the certificate
against forum shopping, is incredible, given the additional fact that no such allegation
was made in the complaint. If the resolution had indeed been approved, long before the
complaint was filed, the foreign corporation should have incorporated it in its complaint,
or at least appended a copy thereof. Expertravel & Tours, Inc.,vs. CA 459 SCRA 147
(2005)

5. Condominium Corporation

A condominium corporation is not engaged in business. The word “business” itself is

defined under Section 131(d) of the Code as “trade or commercial activity regularly
engaged in as a means of livelihood or with a view to profit.” This definition of “business”
takes on importance, since Section 143 allows local government units to impose local
taxes on businesses other than those specified under the provision. The Supreme Court
can elicit from the Condominium Act that a condominium corporation is precluded by
statute from engaging in corporate activities other than the holding of the common
areas, the administration of the condominium project, and other acts necessary,
incidental or convenient to the accomplishment of such purposes. Neither the
maintenance of livelihood, nor the procurement of profit, fall within the scope of
permissible corporate purposes of a condominium corporation under the Condominium
Act. Yamane vs. BA Lepanto Condominium Corporation 474 SCRA 258 (2005)

6. Interest in Investment

Equity investment is not a loan or forbearance of money and the closure of the
corporation did not constitute a breach of obligation. The guidelines enunciated in
Eastern Shipping Lines (234 SCRA 78) do not apply. CB Circular No. 416, which imposes
the rate of 12% per annum on loans and forbearance of money, is likewise inapplicable.
Article 2209 of the Civil Code, which provides for 6% interest per annum when there is a
delay in the payment of a sum of money, does not find application either. However, upon
the finality of the Order of the Liquidation Court ordering the return of the investment,
the award representing said equity investment became a judgment. As such, it shall bear
an interest of 12% per annum from the finality of the Order until its full satisfaction. The
President of PDIC as Liquidator of Pacific Banking Corporation vs. Reyes 460 SCRA 473
(2005)

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

A. State Policy, Purpose

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

The issuance by a corporation of previously authorized but unissued capital stock to existing
stockholders is not automatically exempt from registration and requires an application from
exemption with the Securities and Exchange Commission. Nestle Philippines, Inc.,vs. Court
of Appeals, 203 SCRA 504) (Under the Rules and Regulations Implementing the SRC,
however, notice of confirmation of exemption and payment of the fee in case of exempt sale
transactions are sufficient)

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

An investment contract is defined in the Amended Implementing Rules and Regulations of

RA 8799 as a “contract, transaction or scheme whereby a person invests his money in a
common enterprise and is led to expect profits primarily from the efforts of others.” Thus, a
corporation allowing a principal investor to enroll in its program by paying a certain amount,
which in turn entitles him to be paid a certain amount if the recruit was able to get a
minimum recruitment of four (4) investors, is engaged in the sale or distribution of an
investment contract. It must be registered with SEC before its sale or offer for sale or
distribution to the public, otherwise the SEC cannot protect the investing public from
fraudulent securities. The strict regulation of securities is founded on the premise that the
capital markets depend on the investing public’s level of confidence in the system. Power
Homes Unlimited Corporation v. SEC 546 SCRA 567 (2008)

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

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

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

1. Exempt Securities

The SRC exempts from registration the securities issued by banking or financial
institutions mentioned in the law. Nowhere does it state or even imply that the Bank, as
a listed corporation, is exempt from complying with the reports required by the assailed
RSA Implementing Rules. The exemption from the registration requirement enjoyed by
a bank does not necessarily connote that it is exempted from the reportorial
requirements. Having confined the exemption enjoyed by the bank merely to the initial
requirement of registration of securities for public offering, and not to the subsequent
filing of various periodic reports, the SEC, as the regulatory agency, is able to exercise its
power of supervision and control over corporations and over corporations and over the
securities market as a whole. Otherwise, the objectives of the “Full Material Disclosure”
policy would be defeated since petitioner corporation and its dealings would be totally
beyond the reach of the Commission and the investing public. Union Bank of the
Philippines vs. Securities and Exchange Commission, G.R. No. 138949, June 6, 2001

2. Exempt Transactions

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

C. Procedure for Registration of Securities

D. Prohibitions of Fraud, Manipulation and Insider Trading

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

1. Manipulation of Security Prices

2. Short Sales

3. Fraudulent Transactions
 4. Insider Trading

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

E. Protection of Investors

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

1. Tender Offer Rule

A tender offer is an offer by the acquiring person to stockholders of a public company

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

2. Rules on Proxy Solicitation

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

The power of the SEC to investigate violations of its rules on proxy solicitation is
unquestioned when proxies are obtained to vote on matters unrelated to the cases
enumerated under Section 5 of Presidential Decree No. 902-A. However, when proxies
are solicited in relation to the election of corporate directors, the resulting controversy,
even if it ostensibly raised the violation of the SEC rules on proxy solicitation, should be
properly seen as an election controversy within the original and exclusive jurisdiction of
the trial courts by virtue of Section 5.2 of the SRC in relation to Section 5 (c) of
Presidential Decree No. 902-A

Indeed, the validation of proxies in this case relates to the determination of the
existence of a quorum. Nonetheless, it is a quorum for the election of the directors, and,
as such, which requires the presence – in person or by proxy – of the owners of the
majority of the outstanding capital stock of Omico. Also, the fact that there was no
actual voting did not make the election any less so, especially since Astra had never
denied that an election of directors took place. Securities and Exchange Commission vs.
Court of Appeals et al., G.R. No. 187702, October 22, 2014

3. Disclosure Rule

Section 27 (SRC) penalizes an insider’s misuse of material and non-public information

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

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

F. Civil Liability
 While Section 5 of PD 902-A was amended by Sec. 5.2 of RA 8799, there is no repeal of
Section 6 thereof declaring that prosecution under the Decree, or any Act, law, rules and
regulations enforced and administered by the SEC shall be without prejudice to any liability
for violation of any provision of the Revised Penal Code.

Therefore, the fraudulent devices, schemes or representations which, originally the

Prosecution and Enforcement Department of the SEC would exclusively investigate and
prosecute, are those in violation of any law or rules and regulation administered and
enforced by the SEC and shall be without prejudice to any liability for violation of the
Revised Penal Code. Hence, if the fraudulent act is punished under the RPC, like estafa
under Art. 315, the responsible person may be criminally prosecuted before the regular
courts in addition to proceedings before the branches of the RTC designated by the
Supreme Court to try and decide intra-corporate controversies.

Therefore, since the alleged fraudulent acts committed by petitioner pertaining to the non-
liquidation of cash advances constitute the offense of estafa under Art. 315 of the RPC, the
criminal case may be prosecuted independently and simultaneously with the corporate /
civil case that may be filed for violation of Sec.5 of PD 902-A, as amended by RA 8799.

In light of the amendment brought about by RA 8799, the doctrine of primary jurisdiction no
longer precludes the simultaneous filing of the criminal case with the corporate / civil case.
Fabia vs. Court of Appeals, 388 SCRA 574 (2002)

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

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

G. Securities and Exchange Commission

The authority of the SEC and the manner by which it can issue cease and desist orders are
provided in Section 64 of the SRC. The law is clear on the point that a cease and desist order
may be issued by the SEC motu proprio, it being unnecessary that it results from a verified
complaint from an aggrieved party. A prior hearing is also not required whenever the
Commission finds it appropriate to issue a cease and desist order that aims to curtail fraud or
grave or irreparable injury to investors. It is beyond dispute that Primasa plans were not
registered with the SEC. Primanila was then barred from selling and offering for sale the said
plan product. A continued sale by the company would operate as fraud to its investors, and
 would cause grave or irreparable injury or prejudice to the investing public, grounds which
could justify the issuance of a cease and desist order under Section 64 of the SRC.
Primamanila Plans Inc., herein represented by Eduardo S. Madrid vs. Securities and
Exchange Commission, G.R. No. 193791, August 6, 2014

As an administrative agency with both regulatory and adjudicatory functions, the SEC was
given the authority to delegate some of its functions to, inter alia, its various operating
departments, such as the SECCFD, the Enforcement and Investor Protection Department,
and the Company Registration and Monitoring Department. In this case, the Court disagrees
with the findings of both the SEC En Banc and the CA that the Revocation Order emanated
from the SEC En Banc. Rather, such Order was merely issued by the SEC-CFD as one of the
SEC’s operating departments. In other words, the Revocation Order is properly deemed as a
decision issued by the SEC-CFD as one of the Operating Departments of the SEC, and
accordingly, may be appealed to the SEC En Banc, as what Cosmos properly did in this case.
Perforce, the SEC En Banc and the CA erred in deeming Cosmos’s appeal as a motion for
reconsideration and ordering its dismissal on such ground. Cosmos Bottling Corporation vs.
Commission En Banc of the SEC and Justine Callangan in her capacity as Director of
Corporate Finance Department of the SEC, G.R. No. 199028, November 12, 2014

H. Other matters

1. Cases under the old rules where the SEC had jurisdiction over intra-corporate disputes

In order of refusal of a corporation to issue replacement of stock certificates to a

stockholder who alleged that he has not yet received the original certificates which were
lost, jurisdiction over the dispute belongs exclusively to the Securities and Exchange
Commission, not the Court of First Instance even if there is a prayer for damages. Philex
Mining Corporation vs. Reyes, 118 SCRA 602 (1982)

In order that the SEC can take cognizance of a case, the controversy must pertain to any
of the following relationships: (a) between the corporation, partnership or association
and the public; (b) between the corporation, partnership or association and its
stockholders, partners, members, or officers; (c) between the corporation, partnership or
association and the state in so far as its franchise, permit or license to operate is
concerned; and (d) among the stockholders, partners or associates themselves. Union
Glass & Container Corporation vs. Securities & Exchange Commission, 126 SCRA 21
(1983). See also Magalad vs. Premier Financing Corporation, 209 SCRA 260 (1992)

Issue of the election of directors, officers or managers of a corporation, the relation

between them and the corporation, which is intra-corporate in nature, and the issue of
the ouster of Executive Vice President of the corporation, fall within the jurisdiction of
the Securities and Exchange Commission. Philippine School of Business Administration
vs. Leano, 127 SCRA 778 (1984)

An action against a corporation to collect on a contractual obligation payable in cash

and partly in shares of stock without averment of fraud or misrepresentation, falls within
jurisdiction of ordinary courts, not Securities and Exchange Commission. DMRC
Enterprises vs. Este Del Sol Mountain Reserve, Inc., 132 SCRA 293 (1984)
An action for rescission of an agreement to bail out a corporation which is essentially an
action to recover control of corporation’s management falls under SEC jurisdiction, not
the regular courts. Development Bank of the Philippines vs. Ilustre, Jr., 138 SCRA 11
(1985)

Where party litigants are not shareholders of a corporation, the money received by the
corporation is not considered payment of subscription of shares of the corporation but in
the nature of investments of the petitioners, and the collection case cannot be a
controversy arising out of intra-corporate relations between and among the investors
and the corporation. Banez vs. Dimensional Construction Trade and Development
Corporation, 140 SCRA 249 (1985)

It is no hindrance to Securities and Exchange Commission jurisdiction that a person

raises in his complaint the issues that he was illegally dismissed and asks for
remuneration where complainant is not a mere employee but a stockholder and officer
of the corporation. Dy vs. The National Labor Relations Commission, 145 SCRA 211
(1986)

Filing of action for rescission and annulment of sale of stock before the Regional Trail
Court will in no way deprive the Securities and Exchange Commission of its primary and
exclusive jurisdiction to grant or not the writ of mandamus ordering the registration of
shares so transferred. Abejo vs. Dela Cruz, 149 SCRA 654 (1987)

Respondent’s asking for an accounting and distribution of shares and dividends of their
father in the corporation is in the nature of intra-corporate conflicts in view of the
corporation’s denial of said demands and the Securities and Exchange Commission has
exclusive jurisdiction. Malayan Intergrated Industries Corporation vs. Mendoza, 154
SCRA 548. 1987) Please see Reyes vs. RTC of Makati, infra.

A suit filed by stockholders against the corporation to enforce the latter’s promissory
notes or to compel the corporation to pay for his shareholdings is cognizable by the
Securities and Exchange Commission alone. Boman Environmental Corp. vs. Court of
Appeals, 167 SCRA 540 (1988)

A complaint filed by a corporate executive vice-president for alleged dismissal resulting

from a board resolution dismissing him as such officer falls within the jurisdiction of the
Securities and Exchange Commission. Fortune Cement Corporation vs. National Labor
Relations Commission, 193 SCRA 391 (1991)

Fact that the same corporate acts also give rise to civil liability for damages, does not
follow that the case is taken out of the jurisdiction of the Securities and Exchange
Commission. Andaya vs. Abadia, 228 SCRA 705. (1993)

To determine which body has jurisdiction over a case would be to consider not only the
relationship of the parties but also the nature of the question that is the subject of their
controversy. Torio vs. Court of Appeals, 230 SCRA 626 (1994)
 A complaint for illegal dismissal arising from a Board of Director’s action demanding
vacant all corporate position except that of Chairman and president, and from the non-
election of the former Executive Vice President during the ensuing election of officers is
not cognizable by the NLRC. Pearson & George, (S.E. Asia), Inc., vs. National Labor
Relations Commission, 253 SCRA 136 (1996)

Jurisdiction pertains to the Securities and Exchange Commission even if the complaint
by a corporate officer includes money claims since such claims are actually part of the
prerequisites of his position, and therefore interlinked with his relations with the
corporation. Ongkingco vs. National Labor Relations Commission, 270 SCRA 613 (1997)

A corporate officer's dismissal or removal is always a corporate act and/or an intra-

corporate controversy, over which the Securities and Exchange Commission [SEC] (now
the Regional Trial Court) has original and exclusive jurisdiction.

Before a dismissal or removal could properly fall within the jurisdiction of the SEC, it has
to be first established that the person removed or dismissed was a corporate officer.
"Corporate officers" in the context of Presidential Decree No. 902-A are those officers
of the corporation who are given that character by the Corporation Code or by the
corporation's by-laws. There are three specific officers whom a corporation must have
under Section 25 of the Corporation Code. These are the president, secretary and the
treasurer. The number of officers is not limited to these three. A corporation may have
such other officers as may be provided for by its by-laws like, but not limited to, the vice-
president, cashier, auditor or general manager. Thus, one who is included in the by-laws
of a corporation in its roster of corporate officers is an officer of said corporation and
not a mere employee. The petitioner is a considered a corporate officer of the
Corporation because his position as Vice President for Business Support Services and
Human Resources is included in the by-laws. Being a corporate officer, his removal is
deemed to be an intra-corporate dispute cognizable by the SEC (now RTC) and not by
the Labor Arbiter. Garcia vs. Eastern Telecommunications Philippines, Inc 585 SCRA 450
(2009)

2. Cases under the new rule that the RTC exercises jurisdiction over intra-corporate
disputes

An RTC, not designated as a special commercial court, hearing on an intra-corporate

dispute regarding the authority of certain persons to assume the office and act as the
board of directors and officers of a corporation did not have the requisite authority or
power to order the transfer of the case to another branch of the Regional Trial Court.
The only action that such RTC could take on the matter was to dismiss the petition for
lack of jurisdiction. Calleja vs. Panday 483 SCRA 680 (2006)

It is unequivocal that the jurisdiction to try and decide cases originally assigned to the
SEC under Section 5 of PD 902-A has been transferred to the Regional Trial Courts.
Orendain vs. BF Homes, Inc., 506 SCRA 348 (2006)

Upon the enactment of RA 8799, the jurisdiction of the SEC over intra-corporate
controversies and other cases enumerated in Section 5 of PD 902-A has been transferred
to the courts of general jurisdiction or the appropriate Regional Trial Court.
Concomitant to the power of the RTC to hear and decide intra-corporate controversies
is the authority to issue orders necessary or incidental to the carrying out of the powers
expressly granted to it, including in appropriate cases, the holding of a special
stockholders’ meeting. Yujuico vs. Quiambao 513 SCRA 243 (2007)

Initially, the main consideration in determining whether a dispute constitutes an intra-

corporate controversy was limited to a consideration of the intra-corporate relationship
existing between or among the parties. The existence of any of the above intra-
corporate relations was sufficient to confer jurisdiction to the SEC, regardless of the
subject matter of the dispute. This came to be known as the relationship test.

However, in the 1984 case of DMRC Enterprises v. Esta del Sol Mountain Reserve, Inc.,
the Supreme Court introduced the nature of the controversy test. The Court declared in
this case that it is not the mere existence of an intra-corporate relationship that gives
rise to an intra-corporate controversy. Under the nature of the controversy test, the
incidents of that relationship must also be considered for the purpose of ascertaining
whether the controversy itself is intra-corporate. The controversy must not only be
rooted in the existence of an intra-corporate relationship, but must as well pertain to the
enforcement of the parties’ correlative rights and obligations under the Corporation
Code and the internal and intra-corporate regulatory rules of the corporation. If the
relationship and its incidents are merely incidental to the controversy or if there will still
be conflict even if the relationship does not exist, then no intra-corporate controversy
exists.

The Supreme Court has combined the two tests and declared that jurisdiction should be
determined by considering not only the status or relationship of the parties, but also the
nature of the question under controversy. Thus, under the relationship test, the transfer
of title by means of succession, though effective and valid between the parties involved
(i.e., between the decedent’s estate and her heirs), does not bind the corporation and
third parties. The transfer must be registered in the books of the corporation to make
the transferee-heir a stockholder entitled to recognition as such both by the corporation
and by third parties. Therefore, each of the decedent’s heirs holds only an undivided
interest in the shares. This interest is still inchoate and subject to the outcome of a
settlement proceeding; the right of the heirs to specific, distributive shares of
inheritance will not be determined until all the debts of the estate of the decedent are
paid. Insofar as the subject shares of stock are concerned – the heir of the deceased
stockholder cannot be considered a stockholder of the corporation. Applying the nature
of the controversy test, an accounting of the funds and assets of the corporation to
determine the extent and value of the decedent’s shareholdings will be undertaken by a
probate court and not by a special commercial court is completely consistent with the
probate court’s limited jurisdiction. Hence, no intra-corporate dispute exists. In other
words, the case is not considered intra-corporate controversy even if the dispute is
among stockholders if the issue is determination and distribution of successional rights
to the shareholdings of a deceased shareholder. Reyes vs. RTC of Makati, 561 SCRA 593
(2008)
 Nowhere in said decree (PD 902-A) do we find even so much as an [intimation] that
absolute jurisdiction and control is vested in the Securities and Exchange Commission in
all matters affecting corporations. Be that as it may, this point has been rendered moot
by Republic Act No. 8799, also known as the Securities Regulation Code. This law, which
took effect in 2000, has transferred jurisdiction over intra corporate disputes to the RTC.
Unlad Resources Dev’t., Corp., et al. vs. Renato P. Dragon, 560 SCRA 63 (2008)

Upon the enactment of Republic Act No. 8799, the jurisdiction of the SEC over intra-
corporate controversies and the other cases enumerated in Section 5 of P.D. No. 902-A
was transferred to the Regional Trial Court. The jurisdiction of the Sandiganbayan has
been held not to extend even to a case involving a sequestered company
notwithstanding that the majority of the members of the board of directors were PCGG
nominees. Roberto L. Abad, et al vs. Philippine Communications Satellite Corporation,
G.R. No. 200620, March 18, 2015

3. Regulatory Jurisdiction

Presidential Decree No. 902-A does not confer jurisdiction to SEC over all matters
affecting corporations. Peneyra vs. Intermediate Appellate Court, 181 SCRA 244
(1990)

To constitute a violation of the Revised Securities Act that can warrant an imposition of
fine, fraud or deceit, not mere negligence on the part of the offender must be
established. Securities and Exchange Commission vs. Court of Appeals, 246 SCRA 738
(1995)

Notwithstanding the regulatory power of the Securities and Exchange Commission

(SEC) over the Philippine Stock Exchange (PSE), and resultant authority to reverse the
PSE’s decision in matters of application for listing in the market, the SEC may exercise
such power only if the PSE’s judgment is attended by bad faith. Thus, the stock
exchange cannot be required to allow the sale of shares of a corporation where there
are serious questions regarding the ownership of the shares and that properties of the
corporation belong to naval and forest reserves. Philippine Stock Exchange vs.
Securities & Exchange Commission, 281 SCRA 232 (1997)

SEC has jurisdiction over corporations organized pursuant to the Corporation Code
even if the majority or controlling shares are owned by the government. Hence, it can
competently order the holding of a shareholders’ meeting for the purpose of electing
the corporate board of directors. While the SEC may not have authority over
government corporations with original charters or those created by special law. It does
have jurisdiction over “acquired asset corporation “under Administrative Order 59.
Acquired asset corporation is a corporation which is under private ownership, the
voting or outstanding shares of which were conveyed to the government is satisfaction
of debts whether by foreclosure or otherwise. Philippine National Construction
Corporation vs. Pabion, 320 SCRA 188. 1999)

There is no requirement that a stockholder of a corporation must be a registered one

in order that the SEC may take cognizance of a suit seeking to enforce his rights as
such stockholder. This is because the SEC by express mandate has absolute jurisdiction,
supervision and control over all corporations and is called upon to enforce the
provisions of the Corporation Code, among which is the stock purchaser’s right to
secure the corresponding certificate in his name under the provisions of Section 63 of
the Code. Needless to say, any problem encountered in securing the certificates of
stock representing the investment made by the buyer must be expeditiously dealt with
through administrative mandamus proceedings with the SEC, rather than through the
usual tedious court procedure.” TCL Sales Corporation vs. Court of Appeals, 349 SCRA
35 (2001)

When the thrust of a complaint in on the ultra vires act of a corporation, that is, that
the complained act of a corporation is contrary to its declared corporate purposes, the
SEC has jurisdiction to entertain the complaint before it. Thus, when the corporation
engaged in pawnbroking even though its articles if incorporation does not allow it, the
complaint should be treated as a violation of the corporate franchise. The jurisdiction
of the SEC is not affected even if the authority to operate a certain specialized activity
is withdrawn by the appropriate regulatory body other than the SEC. With more reason
that we cannot sustain the submission of the petitioner that a declaration by the
Central Bank that it violated PD 114 (law on pawnshop) is a condition precedent
before the SEC can take cognizance of the complaint against the petitioner. Pilipinas
Loan Company, Inc.,vs. Securities and Exchange Commission, 356 SCRA 193 (2001)

The filing of the civil / intra-corporate case with the SEC does not preclude the
simultaneous and concomitant filing of a criminal action before the regular courts;
such that a fraudulent act may give rise to liability for violation of the rules and
regulations of the SEC cognizable by the SEC itself, as well as criminal liability for
violation of the Revised Penal Code cognizable by the regular courts, both charges to
be filed and proceeded independently, and may be simultaneously, with the other.

It is settled that the jurisdiction of the court in criminal cases is determined by the
allegations of the complaint or Information and not by the findings based on the
evidence of the court after trial. Based on the material allegations of the Informations
in the three cases, the court a quo had exclusive jurisdiction over the crimes charged.
The bare fact that the Umezawa was the president and general manager of the
corporation when the crimes charged were allegedly committed and was then a
stockholder thereof does not in itself deprive the court a quo of its exclusive
jurisdiction over the crimes charged. Mobilia Products, Inc., vs. Umezawa 452
SCRA736 (2005)

An ordinary civil case seeking to enforce rights arising from an account opening form
between an investor and a stock broker is within the jurisdiction of the RTC and
determination of whether the parties fulfilled their obligations in no way deprives the
SEC of its authority to determine willful violations of the RSA and impose appropriate
sanctions therefor. Abacus Securities vs. Ampil 483 SCRA 315 (2006)

There are two essential requirements that must be complied with by the SEC before it
may issue a cease and desist order-first, it must conduct proper investigation or
verification and second there must be a finding that the act or practice, unless
restrained, will operate as fraud on investors or is otherwise likely to cause grave and
irreparable injury or prejudice to the investing public. The act of the SEC in referring
to the BSP whether or not the business activities amount to foreign exchange trading is
an essential part of the investigation and verification process. In fact, such referral
indicates that SEC concedes to the BSP’s expertise in determining the nature of
respondent’s business. It bears stressing, however, that such investigation and
verification, to be proper, must be conducted by the SEC before, not after, issuing the
Cease and Desist Order in question. The issuance of such order even before BSP could
finish its investigation and verification on respondent’s business activity obviously
contravenes the rule on issuance of cease and desist order under Section 64 of R.A. No.
8799. Securities and Exchange Commission vs. Performance Foreign Exchange
Corporation 495 SCRA 579 (2006)

Charging exorbitant processing fees could discourage many small prospective

investors and curtail the infusion of money into the capital market and hamper its
growth. The regulatory and supervisory powers of the Commission under Section 40 of
the then Revised Securities Act were broad enough to include the power to regulate
securities-related organization’s fees. Thus, the SEC’s authority to issue the cease-and-
desist order is indubitable under Section 47 in relation to Section 40 of the then
Revised Securities Act, and there being no showing that it committed grave abuse of
discretion in finding basis to issue the order enjoining Philippine Association of Stock
Transfer and Registry Agencies, Inc., from increasing its fees, the order must be upheld.
Philippine Association of Stock Transfer and Registry Agencies, Inc.,v. CA et al. 539
SCRA 61 (2007)

The determination as to who among the shareholders of a corporation is the true

owner of the shares Eustacio Atwel, et al. vs. Conception Progressive Association, Inc.,
551 SCRA 272 (2008).

A criminal complaint for violation of any law or rule administered by the SEC must first
be filed with the latter and if the Commission finds that there is probable cause, then it
should refer the case to the Department of Justice. If there is failure to comply with
this procedural requirement, the DOJ cannot be said to have gravely abuse its
discretion in dismissing the complaint. A criminal charge for violation of the Securities
Regulation Code is a specialized dispute. Hence, it must first be referred to an
administrative agency of special competence, i.e., the SEC. Under the doctrine of
primary jurisdiction, courts will not determine a controversy involving a question
within the jurisdiction of the administrative tribunal, where the question demands the
exercise of sound administrative discretion requiring the specialized knowledge and
expertise of said administrative tribunal to determine technical and intricate matters
of fact. The Securities Regulation Code is a special law. Its enforcement is particularly
vested in the SEC. Hence, all complaints for any violation of the Code and its
implementing rules and regulations should be filed with the SEC. Where the
complaint is criminal in nature, the SEC shall indorse the complaint to the DOJ for
preliminary investigation and prosecution as provided in Section 53.1 earlier quoted.
Baviera vs. Standard Chartered Bank, et al. 515 SCRA 170 (2007)
The coverage of the tender offer rule covers not only direct acquisition but also
indirect acquisition or any type of acquisition. Whatever may be the method by which
control of a public company is obtained either through the direct purchase of its stocks
or through an indirect means, mandatory tender offer rule applies. Cemco Holdings vs.
National Life Insurance Company, 529 SCRA 355 (2007)

As the administrative agency responsible for the registration and monitoring of STBs, it
is the body cognizant of the STB registration procedures, and in possession of the
pertinent files, records and specimen signatures of authorized officers relating to the
registration of STBs. The evaluation of whether a STB was authorized by the SEC
primarily requires an examination of the STB itself and the SEC files. This function
necessarily belongs to the SEC as part of its regulatory jurisdiction. The issue of which
of the two Stock and Transfer Books is valid is considered as intra-corporate dispute.
Considering that the SEC, after due notice and hearing, has the regulatory power to
revoke the corporate franchise -- from which a corporation owes its legal existence --
the SEC must likewise have the lesser power of merely recalling and canceling a STB
that was erroneously registered. Provident International Resources Corp., et al. vs.
Joaquin T. Venus, et al. 554 SCRA 540 (2008)

Sections 8, 30 and 36 of the Revised Securities Act (on the rules against insider trading)
do not require the enactment of the implementing rules to make them binding and
effective. The Securities and Exchange Commission retained the jurisdiction to
investigate violations of the Revised Securities Act, reenacted in the Securities
Regulation Code despite the abolition of the Prosecution and Enforcement
Department. Securities and Exchange Commission vs. Interport Resources Corporation
567 SCRA 354 (2008)

There are three distinct bases for the issuance by the SEC of the cease and desist order
( CDO ). The first, allocated by Section 5(i) of the SRC, is predicated on a necessity “to
prevent fraud or injury to the investing public”. No other requisite or detail is tied to
this CDO authorized under Section 5(i).

The second basis, found in Section 53.3, involves a determination by the SEC that “any
person has engaged or is about to engage in any act or practice constituting a
violation of any provision of this Code, any rule, regulation or order thereunder, or any
rule of an Exchange, registered securities association, clearing agency or other self-
regulatory organization.” The provision additionally requires a finding that “there is a
reasonable likelihood of continuing [or engaging in] further or future violations by
such person.” The maximum duration of the CDO issued under Section 53.3 is ten (10)
days.

The third basis for the issuance of a CDO is Section 64. This CDO is founded on a
determination of an act or practice, which unless restrained, “will operate as a fraud on
investors or is otherwise likely to cause grave or irreparable injury or prejudice to the
investing public”. Section 64.1 plainly provides three segregate instances upon which
the SEC may issue the CDO under this provision: (1) after proper investigation or
verification, (2) motu proprio, or (3) upon verified complaint by any aggrieved party.
While no lifetime is expressly specified for the CDO under Section 64, the respondent
 to the CDO may file a formal request for the lifting thereof, which the SEC must hear
within fifteen (15) days from filing and decide within ten (10) days from the hearing.

It appears that the CDO under Section 5(i) is similar to the CDO under Section 64.1.
Both require a common finding of a need to prevent fraud or injury to the investing
public. At the same time, no mention is made whether the CDO defined under Section
5(i) may be issued ex-parte, while the CDO under Section 64.1 requires “grave and
irreparable” injury, language absent in Section 5(i). Notwithstanding the similarities
between Section 5(i) and Section 64.1, it remains clear that the CDO issued under
Section 53.3 is a distinct creation from that under Section 64.

The CDO as contemplated in Section 53.3 or in Section 64, may be issued “ ex-parte”
(under Section 53.3) or “without necessity of hearing” (under Section 64.1). Nothing in
these provisions impose a requisite hearing before the CDO may be issued thereunder.
Nonetheless, there are identifiable requisite actions on the part of the SEC that must
be undertaken before the CDO may be issued either under Section 53.3 or Section 64.
In the case of Section 53.3, the SEC must make two findings: (1) that such person has
engaged in any such act or practice, and (2) that there is a reasonable likelihood of
continuing, (or engaging in) further or future violations by such person. In the case of
Section 64, the SEC must adjudge that the act, unless restrained, will operate as a
fraud on investors or is otherwise likely to cause grave or irreparable injury or
prejudice to the investing public.”

A singular CDO could not be founded on Section 5.1, Section 53.3 and Section 64
collectively. At the very least, the CDO under Section 53.3 and under Section 64 have
their respective requisites and terms. It is an error on the part of the SEC in granting
the CDO without stating which kind of CDO as it is an act that contravenes due process
of law.

Also, the fact that the CDO was signed, much less apparently deliberated upon, by only
by one commissioner likewise renders the order fatally infirm.The SEC is a collegial
body composed of a Chairperson and four (4) Commissioners. In order to constitute a
quorum to conduct business, the presence of at least three (3) Commissioners is
required. GSIS vs. Court of Appeals 585 SCRA 679 (2009)

4. Corporate Rehabilitation

The objective of suspending all actions against a distressed corporation when a

management committee or rehabilitation receiver is appointed is to enable such
management committee or rehabilitation receiver to effectively exercise its powers free
from any judicial or extra-judicial interference that might unduly hinder or prevent the
rescue of the distressed company. However, this purpose can no longer be effectively
met in the present case as the proceedings herein have already been pending for almost
ten years and have already reached the Supreme Court. The management committee
has been unduly burdened enough, its time and resources wasted by the proceedings
that took place before the RTC and the appellate court. Hence, to decree the
annulment of the previous proceedings in the lower courts will only result in further
delay.
Besides, the other object of suspending all actions against a distressed corporation,
which is to treat all of its creditors on equal footing, is defeated by the fact that the
assailed judgment of the METC has already been implemented through a writ of
execution. Tyson’s Super Concrete, Inc., v. Court of Appeals 461 SCRA 69 (2005)

The complaint for rescission of contract of sale of a real property with damages with the
HLRUB is a claim which should be suspended within the upon issuance of a stay order.
The purpose for the suspension of the proceedings is to prevent a creditor from
obtaining an advantage or preference over another and to protect and preserve the
rights of party litigants as well as the interest of the investing public or creditors.

As between creditors, the key phrase is “equality is equity.” When a corporation

threatened by bankruptcy is taken over by a receiver, all the creditors should stand on
equal footing. Not anyone of them should be given any preference by paying one or
some of them ahead of the others. This is precisely the reason for the suspension of all
pending claims against the corporation under receivership. Instead of creditors vexing
the courts with suits against the distressed firm, they are directed to file their claims with
the duly appointed receiver. Spouses Sobrejuanite v. ASB Development Corporation 471
SCRA 763 (2005)

For a minority stockholder to obtain the appointment of a management committee, he

must do more than merely make a prima facie showing of a denial of his right to share in
the concerns of the corporation; he must show that the corporate property is in danger
of being wasted and destroyed; that the business of the corporation is being diverted
from the purpose for which it has been organized; and that there is serious paralyzation
of operations all to its detriment. A management committee or receiver will not be
appointed merely because of things done or attempted at a past time when the present
situation and the prospects for the future are not such as to warrant taking the control of
the property out of the hands of its owners. Sy Chim vs. Sy Siy Ho & Sons, Inc.,480 SCRA
465 (2006)

Refusal to allow stockholders (or members of a non-stock corporation) to examine books

of the company is not a ground for appointing a receiver (or creating a management
committee) since there are other adequate remedies, such as a writ of mandamus.
Similarly, bad judgment by directors, or even unauthorized use and misapplication of the
company's funds, will not justify the appointment of a receiver for the corporation if
appropriate relief can otherwise be had. Ao-As vs. CA 491 SCRA 339 (2006)

Having the power to create a management committee, it follows that the RTC can order
the reorganization of the existing management committee. Knowing that the deadlock
among the members of the committee (appointed by the SEC) may lead to the
paralyzation of the school's business operations, the RTC could remove the said members
and appoint new ones. Danilo G. Punongbayan vs. Perfecto G. Punongbayan, Jr. 491
SCRA 581 (2006)

The dismissal of the petition for rehabilitation is correct if titles to the petitioner’s
properties have already passed on to the respondent bank and the petitioner has no
more assets to speak of. This is true despite the pendency of an action for the annulment
of the foreclosure proceedings. New Frontier Sugar Corporation v. RTC of Ilo-ilo and
Equitable PCI Bank, 513 SCRA 601 (2007)

All decisions and final orders in cases falling under the Interim Rules of Corporate
Rehabilitation and the Interim Rules of Procedure Governing Intra-Corporate
Controversies under RA 8799 shall be appealed to the Court of Appeals through a
petition for review under Rule 43 of the Rules of Court to be filed within 15 days from
notice of decision or final order of the RTC., ibid

The actions that are suspended in case of appointment of a rehabilitation receiver and
appointment of a management committee cover all claims against a distressed
corporation whether for damages founded on a breach of contract, carriage, labor cases
(See also Lingkod Manggagawa sa Rubberworld vs. Rubberworld Philippines January 29,
2007) collection suits or any other claims of a pecuniary nature Philippine Airlines vs.
Zamora 514 SCRA 584 (2007)

Although the petitioner admitted that it had sufficient assets to cover its duly liabilities,
it also alleged that it had foreseen its inability to pay its obligations within a period of
one year. This is the very definition of technical insolvency: the inability of the
petitioning corporation to pay, although temporarily, for a period longer than one year
from the filing of the petition. As a technically insolvent corporation, the debtor can
seek recourse from the SEC ( now RTC ) through a Petition for Rehabilitation. Union Bank
of the Philippine vs. ASB Devt. Corp G.R. No. 172895 560 SCRA 578 (2008)

The forced transfer of properties and the diminution of the rights of secured creditors to
enforce their lien on the mortgaged properties under the rehabilitation plan does not
violate their constitutional right against impairment of contracts and right to due
process. There is no impairment of contracts because the approval of the Rehabilitation
Plan and the appointment of a rehabilitation receiver merely suspend the action for
claims against the debtor and the secured creditors may still enforce their preference
when the assets of the debtor will be liquidated. But if the rehabilitation is found to be
no longer feasible, then the claims against the distressed corporation would have to be
settled eventually and the secured creditors shall enjoy preference over the unsecured
ones. Further, the approval of the plan and the appointment of a receiver merely
suspends actions and claims that may be raised against the distressed debtor. They do
not, in any manner, obliterate the mortgagee’s status as a preferred secured creditor
China Banking Corporation v. ASB Holdings, Inc.,575 SCRA 247 (2008)

While the order of reinstatement issued by the labor arbiter is immediately executory
pending appeal of the dismissal case before the National Labor Relations Commission
(NLRC)—the suspension of claims consequent to rehabilitation proceedings, constitutes
a legal justification for a distressed employer-corporation to not comply with the
reinstatement order. Hence, when the reason why an employer-corporation failed to
comply with the reinstatement order of the labor arbiter was because it was placed
under rehabilitation, such employer may be excused from paying the salary of the
dismissed employee for the period the dismissal case was pending before the NLRC.
Garcia vs. Philippine Airlines. G.R. No. 164856 576 SCRA 479 (2009)
The claim for reimbursement of the amount the surety company released to NLRC to
satisfy the judgment rendered against the employer corporation is deemed suspended
upon issuance of a stay order even if the claim arose after the latter was placed under a
management committee.

The interim rules define a claim as referring to all claims or demands, of whatever nature
or character against a debtor or its property, whether for money or otherwise. The
definition is all-encompassing as it refers to all actions whether for money or otherwise.
There are no distinctions or exemptions.

The suspension of action for claims against a corporation under rehabilitation receiver or
management committee embraces all phases of the suit, be it before the trial court or
any tribunal or before this Court. Otherwise stated, what are automatically stayed or
suspended are the proceedings of an action or suit and not just the payment of claims.
Furthermore, the actions that are suspended cover all claims against a distressed
corporation whether for damages founded on a breach of contract of carriage, labor
cases, collection suits or any other claims of a pecuniary nature.The indiscriminate
suspension of actions for claims is intended to expedite the rehabilitation of the
distressed corporation.

As long as the corporation is under a management committee or a rehabilitation

receiver, all actions for claims against it --- for money or otherwise --- must yield to the
greater imperative of corporate rehabilitation, excepting only, as already mentioned,
claims for payment of obligations incurred by the corporation in the ordinary course of
business. Enforcement of writs of execution issued by judicial or quasi-judicial tribunals,
since such writs emanate from “actions for claims,” must, likewise, be suspended.

If the reimbursement action is allowed to proceed, it would be in a position to assert a

preference over other creditors. Worse, the corporation would be compelled to dispose
of its properties in order to satisfy the claim of petitioner. It would in effect be a clear
defiance of the proscription set forth in the Interim Rules on “selling, encumbering,
transferring, or disposing in any manner any of its (respondent’s) properties except in the
ordinary course of business.” Certainly, petitioner’s claim for reimbursement did not
arise from the usual operations of the corporation’s business. Neither is it an ordinary
expense for the conduct of its operations. Malayan Insurance Company, Inc.,vs. Victorias
Milling Company, Inc.,586 SCRA 45 (2009)

PALI filed petition for rehabilitation due to impossibility of meeting its debts and
obligations. The issue is whether or not such dismissal of petition by the CA is valid. The
court ruled that The validity of PALI’s rehabilitation was already raised as an issue by
PWRDC and resolved with finality by the Court in its November 25, 2009 Decision in
G.R. No. 180893 (consolidated with G.R. No. 178768). The Court sustained therein the
CA’s affirmation of PALI’s Revised Rehabilitation Plan, including those terms which its
creditors had found objectionable, namely, the 50% "haircut" reduction of the principal
obligations and the condonation of accrued interests and penalty charges. Puerto Azul
Land Inc., vs. Pacific Wide Realty Development Corporation, G.R. No. 184000,
September 17, 2014
 Under Rule 3, Section 5 of the Rules of Procedure on Corporate Rehabilitation, the
review of any order or decision of the rehabilitation court or on appeal therefrom shall
be in accordance with the Rules of Court, unless otherwise provided. In the case at bar,
TIDCORP’s Petition for Review sought to nullify the pari passu sharing scheme directed
by the trial court and to grant preferential and special treatment to TIDCORP over other
WGC creditors, such as RBC. This being the case, there is no visible objection to RBC’s
participation in said case, as it stands to be injured or benefited by the outcome of
TIDCORP’s Petition for Review – being both a secured and unsecured creditor of WGC.
Robinson’s Bank Corporation vs. Hon. Samuel H. Gaerlan, G.R. No. 195289, September
24, 2014

A material financial commitment becomes significant in gauging the resolve,

determination, earnestness and good faith of the distressed corporation in financing the
proposed rehabilitation plan. This commitment may include the voluntary undertakings
of the stockholders or the would-be investors of the debtor-corporation indicating their
readiness, willingness and ability to contribute funds or property to guarantee the
continued successful operation of the debtor corporation during the period of
rehabilitation. In this case, the financial commitments presented by Basic Polyprinters
were insufficient for the purpose of rehabilitation. Thus, its petition for corporate
rehabilitation must necessarily fail. Philippine Bank of Communications vs. Basic
Polyprinters and Packaging Corporation, G.R. No. 187581, October 20, 2014

While the voice and participation of the creditors is crucial in the determination of the
viability of the rehabilitation plan, as they stand to benefit or suffer in the
implementation thereof, the interests of all stakeholders is the ultimate and prime
consideration. Marilyn Victorio-Aquino vs. Pacific Plans Inc., and Mamareto A. Marcelo
Jr., G.R. No. 193108, December 10, 2014

It is well to emphasize that the remedy of rehabilitation should be denied to

corporations that do not qualify under the Rules. Neither should it be allowed to
corporations whose sole purpose is to delay the enforcement of any of the rights of the
creditors, which is rendered obvious by: (a) the absence of a sound and workable
business plan; (b) baseless and unexplained assumptions, targets, and goals; and (c)
speculative capital infusion or complete lack thereof for the execution of the business
plan. In this case, not only has the petitioning debtor failed to show that it has formally
began its operations which would warrant restoration, but also it has failed to show
compliance with the key requirements under the Rules, the purpose of which are vital in
determining the propriety of rehabilitation. Thus, for all the reasons hereinabove
explained, the Court is constrained to rule in favor of BPI Family and hereby dismiss
SMMCI’s Rehabilitation Petition. BPI Family Sacings Bank Inc., vs. St. Michael Medical
Center, Inc., G.R. No. 205469, March 25, 2015

VIII. Banking Laws

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

1. State Policies

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

3. Responsibility and Primary Objective

It does not appear from the law that only the Central Bank or its officials can cause the
prosecution of violations of banking laws. Since banking laws violations constitute a
public offense, the prosecution of which is matter of public interest, anyone even
private individuals can denounce such violations before the prosecuting officers. Perez
vs. Monetary Board, 20 SCRA 592 (1967)

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

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

4. Monetary Board—Powers and Functions

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

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

5. How the BSP handles Banks in Distress

a. Conservatorship

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

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

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

b. Closure

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

The closure and liquidation of a bank may be considered an exercise of police power.
Nonetheless, the validity of such exercise of police power is subject to judicial inquiry
and could be set aside if it is either capricious, discriminatory, whimsical, arbitrary,
unjust, or a denial of due process and equal protection clauses of the
Constitution. (Central Bank vs. Court of Appeals, G.R. L-50031-32, July 27, 1981

A bank which approved a loan application but was able to release only a portion of the
loan because it was prohibited by the Monetary Board from continuing to operate is
guilty of breach of contract and can foreclose the real estate mortgage executed to
secure the loan only up to the extent of the amount it released. Central Bank of the
Philippines vs. Court of Appeals, 139 SCRA 46 (1985)

After the Monetary Bank has declared that a bank is insolvent and has ordered it to
cease operations, the assets of the insolvent bank are held in trust for the equal benefit
of all creditors. One cannot obtain an advantage or preference over another by
attachment, execution or otherwise. The final judgment against the bank should be
stayed as to execute the judgment would unduly deplete the assets of the bank to the
obvious prejudice of other depositors and creditors. Lipana vs. Development Bank of
Rizal, 154 SCRA 257 (1987)

The claim that the Central Bank, by suspending the banking operations, had made it
impossible for the bank to pay its debts, or the further claim that it had fallen into a
"distressed financial situation," cannot in any sense excuse it from its obligation to
remit the time deposits of its depositors which matured before the bank’s closure.
Overseas Bank of Manila vs. Court of Appeals, G.R. No. L-45866, April 19, 1989)

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

Even if the bank is questioning the validity of its closure, during the pendency of the
case the liquidator can continue prosecution suits for collection and foreclosure of
mortgages, as they are acts done in the usual course of administration of the bank,
ibid.

The following requisites must be present before the order of conservatorship may be
set aside by a court: 1. The appropriate pleading must be filed by the stockholders of
record representing at least majority of the capital stock of the bank: 2. Said pleading
must be filed within ten (10) days from receipt of notice of said majority stockholders
of the order placing the bank under conservatorship; and 3. There must be convincing
proof, after hearing that the action is plainly arbitrary and made in bad faith. Central
Bank of the Philippines vs. Court of Appeals, 208 SCRA 652 (1992)

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

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

c. Receivership

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

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

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

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

d. Liquidation

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

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

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

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

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

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

There are substantial differences in the procedure for involuntary dissolution and
liquidation of a corporation under the Corporation Code and that of a bank under the
New Central Bank Act so that the requirements in one cannot simply be imposed in the
other. In Re : Petition for Assistance in the Liquidation in the Rural Bank of Bokod
(Benguet), PDIC vs. Bureau of Internal Revenue, 511 SCRA 123 (2006)

6. How the BSP Handles Exchange Crisis

a. Legal Tender Power

b. Rate of Exchange

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

1. Purpose

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

2. Prohibited Acts

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

A stipulation that a bank will not be liable for damages in case of error or delay in
transmitting a telegraphic transfer is void, because it is against public policy.
Philippine Commercial International Bank vs. Court of Appeals, 255 SCRA 299 (1996)

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

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

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

4. Exceptions

Since cases of unexplained wealth are similar to cases of bribery, dereliction of duty,
no reason is seen why it cannot be excepted from the rule making bank deposits
confidential. In this connection, inquiry into illegally acquired property in anti-graft
cases extends to cases where such property is concealed by being held by or recorded
in the name of other persons. This is also because under the Anti-Graft and Corrupt
Practices Act bank deposits shall be taken into consideration in determining whether
of not a public offer has acquired property manifestly out of the proportion with his
lawful income. PNB vs. Gancayco, 15 SCRA 91 (1965); Banco Filipino Saving and
Mortgage Bank vs. Purisima, 161 SCRA 576 (1988)

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

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

The law on secrecy of bank deposits cannot be used to preclude the bank deposits
from being garnished for the satisfaction of a judgment. There is no violation of R.A.
No. 1405 because the disclosure is purely incidental to the execution process and it
was not the intention of the legislature to place bank deposits beyond the reach of the
judgment creditor. PCIB vs. Court of Appeals, G.R. No. 84526, January 28, 1991
Where the foreign currency deposits belonged to one of the depositors and were held
in trust for him by the other depositor who unilaterally closed the joint account and
transferred the funds to her personal account, the latter cannot invoke the exemption
from court process under RA 6426 because she is not the owner of the deposit in the
account. Consequently, the depositor who owned the funds can have her enjoined
from making withdrawals from her personal account. Van Twest vs. Court of Appeals,
230 SCRA 42 (1994)

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

When a foreign currency deposit account is co-owned by two payees one of whom
withdrew the funds exclusively owned by the other, the latter is entitled to hearing on
the whereabouts of the funds even over the objection of the former and such inquiry
does not violate the law on secrecy of foreign currency deposits. China Bank
Corporation vs. Court of Appeals 511 SCRA 110 (2006)

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

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

Section 2 of R.A. No. 1405, the Law on Secrecy of Bank Deposits, provides for
exceptions when records of deposits may be disclosed. These are under any of the
following instances: (a) upon written permission of the depositor, (b) in cases of
impeachment, (c) upon order of a competent court in the case of bribery or dereliction
of duty of public officials or, (d) when the money deposited or invested is the subject
matter of the litigation, and (e) in cases of violation of the Anti-Money Laundering Act,
the Anti-Money Laundering Council may inquire into a bank account upon order of
any competent court. The Joint Motion to Approve Agreement was executed by BPI
 and TIDCORP only. There was no written consent given by Doña Adela or its
representative that it is waiving the confidentiality of its bank deposits.It is clear
therefore that Doña Adela is not bound by the said provision since it was without the
express consent of Doña Adela who was not a party and signatory to the said
agreement. Dona Adela Export International Inc., vs. Trade and Investment
Development Corporation and the Bank of the Philippine Islands, G.R. No. 201931,
February 11, 2015

5. Garnishment of Deposits, Including Foreign Deposits

The mere garnishment of funds belonging to a party upon order of the court does not
have the effect of delivering the money garnished to the sheriff or to the party in
whose favor the garnishment was issued. Therefore, where an amount of P71,533.99 of
the bank deposits of a party to a case was garnished but only the sum of P31,535.57
was paid to the sheriff on execution of judgment, the owner of the funds garnished
cannot demand that the party in whose favor the garnishment was issued pay 6%
interest on the difference between the total sum actually garnished and the sum
actually obtained in the final judgment, because the garnished funds were still
retained by the garnishee as the person holding the money for the owner. De la Rama
vs. Villarosa, 8 SCRA 413 (1963)

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

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

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

1. Definition and Classification of Banks

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

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

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

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

3. Bank Powers and Liabilities

a. Corporate Powers

An alien-owned commercial bank is allowed to purchase and hold real estate

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

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

b. Banking and Incidental Powers

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

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

4. Diligence Required of Banks—Relevant Jurisprudence

Where a bank officer ordered the premature foreclosure of a pledge after he had
given an indefinite extension of time for the payment of the loan, the officer and the
bank were liable for damages arising from quasi-delict, because the foreclosure of the
pledge was an act of bad faith. Pacific Bank vs. Hart, 173 SCRA 102 (1989)

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

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

The degree of diligence required of banks, which should be more than that of a good
father of a family is grounded on the fiduciary nature of the relationship between the
bank and its depositors on account of the bank’s obligation as a depositary of its
clients’ deposits. Nevertheless, in a sale and issuance of foreign exchange demand
draft, the same degree of diligence is not required because the nature of the
transaction does not involve the bank’s fiduciary relationship with its depositors.
Gregorio Reyes vs. Court of Appeals, G.R. No. 118492, August 15, 2001

The fiduciary nature of a bank-depositor relationship does not convert the contract
between the banks and its depositors from a simple loan to a trust agreement. Failure
by the bank to pay the depositor is failure to pay a simple loan, and not a breach of
trust.

Banks must exercise a high degree of diligence in insuring that they return the
passbook only to the depositor or his authorized representative. The tellers should
know that the rules on savings account provide that any person in possession of the
passbook is presumptively its owner. If the teller gives the passbook to the wrong
person, facilitating unauthorized withdrawals by that person. For failing to return the
passbook to the authorized representative of the depositor, the Bank presumptively
failed to observe such high degree of diligence in safeguarding the passbook and in
insuring its return to the party authorized to receive the same. However, the Bank’s
liability is mitigated by the depositor’s contributory negligence in allowing a
withdrawal slip signed by its authorized signatories to fall into the hands of an
impostor. Consolidated Bank and Trust Corporation vs. Court of Appeals, G.R. No.
138569, September 11, 2003
Allowing the pretermination of the account despite noticing discrepancies in the
signature and photograph of the person claiming to be the depositor, accompanied by
the failure to surrender the original certificate of time deposit, amounted to
negligence on the part of the bank. A bank that fails to exercise the degree of
diligence required of it becomes liable for damages. Citibank, N.A. vs. Spouses Luis &
Carmelita Cabamongan, G.R. No. 146918, May 2, 2006

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

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

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

The bank should be held liable for a withdrawal made by an unauthorized agent of the
depositor because it was made possible by the bank’s failure to perform a routine
verification of the signature affixed by such agent in the cash transfer slip. Central
Bank of the Philippines vs. Citytrust Banking Corporation, 578 SCRA 27 (2009)

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

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

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

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

The mortgagee, as a banking institution, owed it to Guariña Corporation to exercise

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

5. Nature of Bank Funds and Bank Deposits

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

The filing of an intra-corporate case before the RTC and a complaint with the BSP ( to
compel a bank to disclose its stockholdings ) invoking BSP’s supervisory powers over
banking operations which does not amount to judicial proceeding does not constitute
forum shopping. Suan vs. Gonzales, 518 SCRA 82 (2007)

6. Stipulation on Interests

A bank lends money, engages in international transactions, acquires foreclosed

mortgaged properties or their proceeds and generally engages in other banking and
financing activities in order that it can derive income therefrom. Therefore, unless a
bank can engage in those activities from which it can derive income, it is inconceivable
how it can carry on as a depositor obligated to pay interest on money deposited with
 it. Thus, a bank forbidden by Central bank to do business has no obligation to pay
interest on deposit.

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

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

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

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

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

7. Grant of Loans and Security Requirements

a. Ratio of Net Worth to Total Risk Assets

b. Single Borrower’s Limit
c. Restrictions on Bank Exposure to DOSRI (Directors, Officers, Stockholders and
their Related Interests
If the bank finds that the borrower has not employed the funds borrowed for the
purpose agreed upon between the bank and the borrower, the bank may terminate the
loan and demand immediate payment. Banco de Oro vs. Bayuga, 93 SCRA 443 (1979)

Where it is established that a depositor had been granted overdraft or drawn against
uncollected deposit privileges, no criminal fraudulent intent can be inferred from her
deposit of her personal check in one bank which were drawn payable to the order of
cash against the depositor’s current account at another bank. People vs. Jalandoni, 122
SCRA 588 (1983)

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

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

The rule on DOSRI transactions covers loans by a bank director or officer which are
made either: (1) directly, (2) indirectly, (3) for himself, (4) or as the representative or
agent of others. The bank officer’s act of indirectly securing a fraudulent loan
application by using the name of an unsuspecting person and without prior
compliance with the requirements of the law would make the officer liable not only for
violation of the law on DOSRI transactions but also for estafa through falsification of
commercial documents. Hilario P. Soriano vs. People of the Philippines, et. al., G.R. No.
162336, February 1, 2010

There must be competent evidence to establish that the loans granted were in the
nature of DOSRI or were issued in violation of the Single Borrower’s Limit; nonetheless,
even assuming that they were of such nature, the loans would not be void for that
reason. Instead, the bank or the officers responsible for the approval and grant of the
DOSRI loan would be subject to sanctions under the law. Republic of the Philippines vs.
Sandiganbayan, et. al., G.R. No. 166859/G.R. No. 169203/G.R. No. 180702, April 12,
2011
 In the present case, however, nothing in the documents presented by Calinico would
arouse the suspicion of PAB to prompt a more extensive inquiry. When the Ilogon
spouses applied for a loan, they presented as collateral a parcel of land evidenced by
an OCT issued by the Office of the Register of Deeds… and registered in the name of
Calinico. This document did not contain any inscription or annotation indicating that
Contreras was the owner or that he has any interest in the subject land. In fact, he
admitted that there was no encumbrance annotated on Calinico’s title at the time of
the latter’s loan application. Any private arrangement between Calinico and him
regarding the proceeds of the loan was not the concern of PAB, as it was not a privy to
this agreement. If Calinico violated the terms of his agreement with Contreras on the
turn-over of the proceeds of the loan, then the latter's proper recourse was to file the
appropriate criminal action in court. Philippine Amanah Bank (Now Al-Amanah Islamic
Investment Bank of the Philippines, also known as Islamic Bank) vs. Evangelista
Contreras, G.R. No. 173168, September 29, 2014

D. Other matters

1. Philippine Deposit Insurance Company

Where no deposit as defined in Section 3(f) of Republic Act No. 3591 came into
existence, PDIC cannot be held liable for the value of time deposit certificates. The
liability of Philippine Deposit Insurance Corporation (PDIC) for insured deposits is
statutory and under Republic Act no. 3591, as amended, such liability rests upon the
existence with the insured bank, not on the negotiability or non-negotiability of the
certificates evidencing these deposits. The term “deposit” means the unpaid balance
of money or equivalent received by a bank in the usual course of business and for
which it has given or is obliged to give credit to a commercial, checking, savings, time
or thrift account or which is evidenced by passbook, check and/or certificate of
deposit printed or issued in accordance with Central bank rules and regulations and
other applicable laws, together with such other obligations of a bank which, consistent
with banking usage and practices, the board of directors shall determine and prescribe
by regulations to be deposit liabilities of the Bank. Philippine Deposit Insurance
Corporation vs. Court of Appeals, 283 SCRA 462. 1998

Under its charter (RA 3591), PDIC is liable only for deposits received by a bank “in the
usual course of business”. Even though a bank was prohibited by CB from doing further
business on the ground of insolvency, the bank and its clients could be given the
benefit of the doubt that they were not aware that the Monetary Board resolution had
been passed, given the necessity of confidentiality of placing a banking institution
under receivership. If on the next banking day following the issuance of the Monetary
Board Resolution, the depositor pre-terminated his time deposits and re-deposited the
funds into smaller denominations; said deposits were still for a consideration and
covered by the PDIC insurance coverage. PDIC vs. Court of Appeals, 402 SCRA 194
(2003)

2. Truth in Lending
Banks and non-bank financial intermediaries authorized to engage in quest-banking
functions are required to strictly adhere to the provisions of the “Truth in Lending Act”.
Where the promissory note signed by the borrowers do not contain any stipulation on
the payment of handling charges, the bank cannotcollect the same even though a CB
Circular 504 authorized banks to collect handling charges on loans over P500,000.
Consolidated Bank and Trust Company vs. Court of Appeals, 246 SCRA 193 (1995)

Section 1 of R.A. No. 3765 provides that prior to the consummation of a loan
transaction, the bank, as creditor, is obliged to furnish a client with a clear statement,
in writing, setting forth, to the extent applicable and in accordance with the rules and
regulations prescribed by the Monetary Board of the Central Bank of the Philippines,
the following information:

1. The cash price or delivered price of the property or service to be acquired;

2. The amounts, if any, to be credited as down payment and/or trade-in;
3. The difference between the amounts set forth under clauses 1 and 2;
4. The charges, individually itemized which are paid or to be paid by such person in
connection with the transaction but which are not incident to the extension of
credit;
5. The total amount to be financed;
6. The finance charges expressed in terms of pesos and centavos;
7. The percentage that the finance charge bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the obligation.

If the borrower is not duly informed of the data required by R. A. No. 3765 prior to the
consummation of the availment or drawdown, the lender will have no right to collect
such charge or increases thereof, even if stipulated in the promissory note. However,
such failure shall not affect the validity or enforceability of any contract or transaction.
Development Bank of the Philippines vs. Arcilla Jr., 462 SCRA 599 (2005)

A promissory note which grants the creditor the power to unilaterally fix the interest
rate means that the promissory note does not contain a clear statement in writing of
the finance charge. Such provision is illegal not only because it violates the provisions
of the Civil Code on mutuality of contracts but also because it violates the Truth in
Lending Law. The penalty for the violation of the law is P100.00 or an amount equal to
twice the finance charge required by such creditor in connection with such transaction,
whichever is greater, except that such liability shall not exceed P 2,000 on any credit
transaction. The action to recover the penalty should be brought within one year from
the date of the occurrence of the violation. As the penalty depends on the finance
charge required of the borrower, the borrower’s cause of action would only accrue
when such finance charge is required. The action to recover the penalty may be
instituted by the aggrieved private person separately and independently from the
criminal case for the same offense. UCPB vs. Spouses Beluso, 530 SCRA 567 (2007)

Plainly, with the subject credit agreement, the element of consent or agreement by the
borrower is now completely lacking, which makes [PNB’s] unlawful act all the more
reprehensible. Accordingly, [Spouses Silos] are correct in arguing that estoppels
should not apply to them, for estoppels cannot be predicated on an illegal act. As
 between the parties to a contract, validity cannot be given to it by estoppels if it is
prohibited by law or public policy. It appears that by its acts, PNB violated the Truth in
Lending Act or Republic Act No. 3765 which was enacted to protect citizens from a
lack of awareness of the true cost of credit to the use by using a full disclosure of such
cost with a view of preventing the uninformed use of credit to the detriment of the
national economy. Spouses Eduardo and Lydia Silos vs. Philippine National Bank, G.R.
No. 181945, July 2, 2014

IX. Intellectual Property Code (Exclude Implementing Rules & Regulations)

A. Intellectual Property Rights in General

1. Intellectual Property Rights

2. Differences between Copyrights, Trademarks and Patent

A trademark is any visible sign capable of distinguishing the goods (trademark) or

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

3. Technology Transfer Arrangements

B. Patents

1. Patentable Inventions

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

2. Non-Patentable Inventions

3. Ownership of a Patent

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

b. First-to-File Rule
c. Inventions Created Pursuant to a Commission
d. Right of Priority

4. Grounds for Cancellation of a Patent

5. Remedy of the True and Actual Inventor

6. Rights Conferred by a Patent

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

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

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

Any new model of implements or tools of any industrial product even if not possessed
of the quality of invention but which is of practical utility is entitled to patent for utility
model. The decision of the Director of Patents in granting the patent is always
presumed to be correct. In view of this presumption, the holder of a utility patent for
an improved audio equipment known as the sing-along system is entitled to a writ of
preliminary injunction to enjoin the use and sale of a sing-along system which is
substantially identical to it and accomplishes the same result. Del Rosario vs. Court of
Appeals, 255 SCRA 152 (1996)

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

The patent law has a three-fold purpose: first, it seeks to foster and reward invention;
second, it promotes disclosure of inventions to stimulate further innovation and to
permit the public to practice the invention once the patent expires; and third, the
stringent requirements for patent protection seek to ensure that ideas in the public
domain remain there for the free use of the public and it is only after an exhaustive
examination by the patent office that patent is issued. Not having gone through the
arduous examination for patents, petitioner cannot exclude others from the
manufacture, sale or commercial use of the light boxes on the sole basis of its
copyright certificate over the technical drawings. Pearl & Dean (Philippine), Inc.,vs.
Shoemart, Inc., G.R. No. 148222, August 15, 2003

A patentee shall have the exclusive right to make, use and sell the patented machine,
article or product, and to use the patented process for the purpose of industry or
commerce, throughout the territory of the Philippines for the term of the patent; and
such making, using, or selling by any person without the authorization of the patentee
constitutes infringement of the patent. The patentee’s exclusive rights exist only
during the term of the patent, hence, after the cut-off date, the exclusive rights no
longer exist and the temporary restraining order can no longer be issued in its favor.
Philippine Pharmawealth, Inc.,vs. Pfizer, Inc., G.R. No. 167715, November 17, 2010

7. Limitations of Patent Rights

a. Prior User
b. Use by the Government

8. Patent Infringement

a. Tests in Patent Infringement

i. Literal Infringement

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

ii. Doctrine of Equivalents

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

The doctrine of equivalents provides that an infringement takes place when a

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

b. Defenses in Action for Infringement

An invention must possess the essential elements of novelty, originality and

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

9. Licensing

a. Voluntary
b. Compulsory

The Director of Patents may fix the terms and condition of the compulsory license
if the parties cannot agree on them. Prince vs. United Laboratories, Inc.,166 SCRA
133 (1988)

10. Assignment and Transmission of Rights

C. Trademarks

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

1. Definition of Marks, Collective Marks, Trade Names

2. Acquisition of Ownership of Mark

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

Trade secrets constitute proprietary rights. The inventor, discoverer, or possessor of a

trade secret or similar innovation has rights therein which may be treated as property,
and ordinarily an injunction will be granted to prevent the disclosure of the trade
secret by one who obtained the information "in confidence" or through a "confidential
relationship. That trade secrets are of privileged nature is beyond quibble. But, the
privilege is not absolute; the trial court may compel disclosure where it is
indispensable for doing justice. Therefore, a person engaged in the business of general
manufacturing and selling of, industrial chemicals, solvents, lubricants, acids, alkalies,
salts, paints, oils, varnishes, colors, pigments and similar preparations, among others, is
protected by various statutory laws and may not be compelled to reveal his chemical
composition, formulation, and ingredients of his special lubricants, as they are trade
secrets within the contemplation of the law. Air Philippines Corporation v. Pennswell,
Inc., 540 SCRA 215 (2007).

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

The cancellation of registration of a trademark has the effect of depriving the

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

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

In trademark registration, while both competing marks refer to the word “KOLIN”
written in upper case letters and in bold font, but one is italicized and colored black
while the other is white in pantone red color background and there are differing
features between the two, registration of the said mark could be granted. It is
hornbook doctrine that emphasis should be on the similarity of the products involved
and not on the arbitrary classification or general description of their properties or
characteristics. The mere fact that one person has adopted and used a trademark on
his goods would not, without more, prevent the adoption and use of the same
trademark by others on unrelated articles of a different kind. Taiwan Kolin
Corporation, LTD., vs. Kolin Electronics Co., Inc.,G.R. No. 209843, March 25, 2015

3. Acquisition of Ownership of Trade Name

4. Non-Registrable Marks

Under the doctrine of secondary meaning, a word or phrase originally capable of

exclusive appropriation with reference to article in the market because geographically
or otherwise descriptive might nevertheless have been used so long and so exclusively
by one producer with reference to his article that, in the trade and to that branch of
the purchasing public, the word or phrase has come to mean that the article was his
produce/ “Lyceum” is a generic name. The number alone of institutions using “Lyceum”
as part of their school name suggests strongly petitioner’s use of word “Lyceum” has
not been attended with exclusivity for applicability of the doctrine of secondary
meaning. Lyceum of the Philippines vs. Court of Appeals, 219 SCRA 610 (1993)

5. Prior Use of Mark as a Requirement

Section 124.2 of R.A. No. 8293 provides that the applicant or the registrant shall file a
declaration of actual use of the mark with evidence to that effect, as prescribed by the
Regulations within three (3) years from the filing date of the application. Otherwise,
the applicant shall be refused or the marks shall be removed from the Register by the
Director. Moreover, Rule 204 of the Rules and Regulations on Trademarks provides
that: Declaration of Actual Use. The Office will not require any proof of use in
commerce in the processing of trademark applications. However, without need of any
notice from the Office, all applicants or registrants, shall file a declaration of actual use
of the mark with evidence to that effect within three years, without possibility of
extension, from the filing date of the application. Otherwise, the application shall be
 refused or the mark shall be removed from the register by the Director motu propio.
Thus, a party’s declaration in his Comment and Memorandum that he has not filed the
DAU as mandated by pertinent provisions of R.A. No. 8293 is a judicial admission that
he has effectively abandoned or withdrawn any right or interest in his trademark.
Mattel, Inc.,vs. Emma Francisco, et al 560 SCRA 504 (2008)

6. Tests to Determine Confusing Similarity between Marks

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

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

There are two types of confusion arising from the use of similar or color-able imitation
marks, namely confusion of goods (product confusion) and confusion of business
(source of origin confusion). Thus, while there is confusion of goods when the products
are competing, confusion of business exists when the products are non-competing but
related enough to produce confusion of affiliation. In determining likelihood of
confusion, jurisprudence has developed two tests, the dominancy test and the holistic
test. The test of dominancy is now explicitly incorporated into law in Section155.1 of
the Intellectual Property Law which defines infringement as the “colorable imitation of
a registered mark or dominant feature thereof”. Applying the dominancy test, “Big
Mak” mark for hamburger of LC Big Mak Burger, Inc.,is confusingly similar with the
registered “Big Mac” mark for the same food product of Mcdonald’s Corporation.
McDonalds’ Corporation vs. LC Big Mak Burger, 437 SCRA 10 (2004)

a. Dominancy Test

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

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

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

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

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

“NANNY” is confusingly similar to “NAN,” the prevalent feature of Nestle’s line of

infant powdered milk products which is is written in bold letters and used in all
products. The first three letters of “NANNY” are exactly the same as the letters of
“NAN” and when “NAN” and “NANNY” are pronounced, the aural effect is confusingly
similar. Soceite Des Produits Nestle, S.A. vs. Dy, Jr., G.R. No. 172276, August 8, 2010)
 The Dominancy Test focuses on the similarity of the prevalent or dominant features of
the competing trademarks that might cause confusion, mistake, and deception in the
mind of the purchasing public. Respondent’s use of the stylized “S” in its Strong rubber
shoes infringes on the mark of the petitioner as it is the dominant feature of the latter’s
trademark; the likelihood of confusion is present as purchasers may associate the
respondent’s product as connected with petitioner’s business. Sketchers USA vs. Inter
Pacific Industrial Trading Corporation, GR No. 164321, March 28, 2011

b. Holistic Test

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

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

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

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

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

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

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

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

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

8. Rights Conferred by Registration

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

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

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

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

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

10. Infringement and Remedies

While an application for administrative cancellation of a registered trademark on any

of the grounds recognized by laws falls under the exclusive cognizance of the Bureau
of Trademarks (of the Intellectual Property Office), an action for infringement or unfair
competition, as well as the remedy of injunction and relief for damages, is explicitly
and unquestionably within the competence and jurisdiction of the ordinary courts. An
application for such administrative cancellation cannot per se have the effect or
restraining or preventing the courts from the exercise of their lawfully conferred
jurisdiction. A contrary rule would unduly expand the doctrine of primary jurisdiction
which, simply expressed, would merely behoove regular courts, in controversies
involving specialized disputes, to defer to the findings or resolutions of administrative
tribunals on certain technical matters. Conrad and Company, Inc.,vs. Court of Appeals,
246 SCRA 691 (1995)

Despite the institution of an Inter Partes case for cancellation of a mark with the
Bereau of Legal Affairs, Intellectual Property Office by one party, the adverse party can
file a subsequent action for infringement with the regular courts of justice in
connection with the same registered mark. However, with the decision of the Regional
Trail Court upholding the validity of the registration of the service mark “Shangri-La”
and “S” logo in the name of Developers Group, the cancellation case filed with the
Bureau has become moot. To allow the Bureau to proceed with the cancellation case
would lead to a possible result contradictory to that which the Regional Trial Court has
rendered, albeit the same is still on appeal. Such a situation is certainly not in accord
with the orderly administration of justice. In any case, the Court of Appeals has the
competence and jurisdiction to resolve the merits of the said RTC decision. Shangri-la
International Hotel Management Ltd., et al. vs. Court of Appeals, 359 SCRA 273 (2001)

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

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

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

a. Trademark Infringement

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

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

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

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

Mere unauthorized use of a container bearing a registered trademark in connection

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

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

The mere unauthorized use of a container bearing a registered trademark in

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

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

b. Damages
c. Requirement of Notice

11. Unfair Competition

Mere similarity in the shape and size of the container and label does not constitute
unfair competition. SMC cannot claim unfair competition arising from the fact that
ABI's BEER PALE PILSEN is sold, like SMC's SAN MIGUEL PALE PILSEN in amber steinie
bottles absent any showing that the BEER PALE PILSEN is being passed off as SAN
MIGUEL PALE PILSEN. Asia Brewery, Inc.,vs. Court of Appeals and San Miguel
Corporation, G.R. No. 103543, July 5, 1993

The essential elements of an action for unfair competition are (1) confusing similarity
in the general appearance of the goods, and (2) intent to deceive the public and
defraud a competitor. The confusing similarity may or may not result from similarity in
the marks, but may result from other external factors in the packaging or presentation
of the goods. In this case, the intent to deceive and defraud may be inferred from the
fact that there was actually no notice (on their plastic wrappers) to the public that the
“Big Mak” hamburgers are products of “L.C. Big Mak Burger, Inc.” McDonald’s
Corporation vs. L.C. Big Mak Burger, Inc., G.R. No. 143993, August 18, 2004

Unfair competition under Section 168 of RA 8293 is a transitory or continuing offense.

Search warrant may be applied in any court where any element of the alleged offense
was committed. Sony Computer Entertainment, Inc., v. Supergreen, Inc., 518 SCRA 750
(2007)

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

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

Section 168 of Republic Act No. 8293, otherwise known as the “Intellectual Property
Code of the Philippines” (IP Code), provides for the rules and regulations on unfair
competition. Section 168.2 proceeds to the core of the provision, describing forthwith
who may be found guilty of and subject to an action of unfair competition — that is,
“any person who shall employ deception or any other means contrary to good faith by
which he shall pass off the goods manufactured by him or in which he deals, or his
business, or services for those of the one having established such goodwill, or who shall
commit any acts calculated to produce said result x x x.” In this case, the Court finds
the element of fraud to be wanting; hence, there can be no unfair competition. Shang
Properties Realty Corporation (formerly the Shang Grand Tower Corporation) and
Shang Properties Inc., (formerly EDSA Properties Holdings, Inc.) vs. St Francis
Development Corporation, G.R. No. 190706, July 21, 2014

Unfair competition is defined as the passing off (or palming off) or attempting to pass
off upon the public of the goods or business of one person as the goods or business of
another with the end and probable effect of deceiving the public. This takes place
where the defendant gives his goods the general appearance of the goods of his
competitor with the intention of deceiving the public that the goods are those of his
competitor. Here, it has been established that Co conspired with the Laus in the
sale/distribution of counterfeit Greenstone products to the public, which were even
packaged in bottles identical to that of the original, thereby giving rise to the
presumption of fraudulent intent. In light of the foregoing definition, it is thus clear
that Co, together with the Laus, committed unfair competition, and should,
consequently, be held liable therefor. Although liable for unfair competition, the Court
deems it apt to clarify that Co was properly exculpated from the charge of trademark
infringement considering that the registration of the trademark "Greenstone" –
essential as it is in a trademark infringement case – was not proven to have existed
during the time the acts complained of were committed. Roberto Co vs. Keng Huan
Jerry Yeung and Emma Yeung, G.R. No. 212705, September 10, 2014

12. Trade Names or Business Names

The ownership of a trademark or tradename is a property right which the owner is

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

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

The Philippines is obligated to assure nationals of countries of the Paris Convention

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

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

13. Collective Marks

D. Copyrights

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

1. Basic Principles, Sections 172.2, 175 and 181

2. Copyrightable Works

a. Original Works
b. Derivative Works

The name “Charlie Brown” and its pictorial representation were copyrightable. Since
copyright was obtained thereon, the owner can prevent its use as trademark by
somebody else. United Features vs. Munsingwear Creation, 179 SCRA 260 (1989)
3. Non-Copyrightable Works

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

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

4. Rights of Copyright Owner

The owner of a motion picture can file an action for infringement of copyright even if
the motion picture has not been registered with the National Library. Non-compliance
with the registration requirement under the then law on copyright (PD 49) merely
limits the remedies available to the copyright owner. This is because the copyright for
a work is acquired by the intellectual creator from the moment of creation even in the
absence of registration and deposit. Columbia Pictures, Inc.,vs. Court of Appeals, 261
SCRA 144 (1996)

5. Rules on Ownership of Copyright

6. Limitations on Copyright

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

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

The must-carry rule mandates that the local television (TV) broadcast signals of an
authorized TV broadcast station, such as the GMA Network, Inc., should be carried in
full by the cable antenna television (CATV) operator, without alteration or deletion. In
this case, the Central CATV, Inc.,was found not to have violated the must-carry rule
when it solicited and showed advertisements in its cable television (CATV) system.
Such solicitation and showing of advertisements did not constitute an infringement of
the “television and broadcast markets” under Section 2 of E.O. No. 205. GMA Network
Inc., vs. Central CATV Inc., G.R. No. 176694, July 18, 2014

a. Doctrine of Fair Use

b. Copyright Infringement

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

Infringement of a copyright is a trespass on a private domain owned and occupied by

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

To constitute infringement, it is not necessary that the whole or even a large portion of
the work shall have been copied; if so much is taken that the value of the original is
sensibly diminished, or the labors of the original author are substantially and to an
injurious extent appropriated by another, that is sufficient in point of law to constitute
piracy. The injury is sustained when respondent lifted from petitioners’ book materials
that were the result of the latter’s research work and compilation and misrepresented
them as her own, even circulating the book DEP for commercial use without
acknowledging petitioners as her source. Pacita Habana, et. al. vs. Felicidad Robles
and Goodwill Trading Co., Inc., G.R. No. 131522, July 19, 1999
 The gravamen of copyright infringement is not merely the unauthorized
“manufacturing” of intellectual works but rather the unauthorized performance of any
of the rights exclusively granted to the copyright owner. Hence, any person who
performs any of such acts without obtaining the copyright owner’s prior consent
renders himself civilly and criminally liable for copyright infringement. NBI-Microsoft
Corporation vs. Judy Hwang, et. al., G.R. No. 147043, June 21, 2005

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

X. Special Laws

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

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

1. Policy of the Law

2. Covered Institutions

3. Obligations of Covered Institutions

4. Covered Transactions

5. Suspicious Transactions

6. When is Money Laundering Committed

7. Unlawful Activities or Predicate Crimes

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

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

8. Anti-Money Laundering Council

9. Functions

10. Freezing of Monetary Instrument or Property

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

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

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

11. Authority to Inquire Into Bank Deposits

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

1. Policy of the Law

2. Definition of Terms

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

Under Sec 3 (d) of the Foreign Investments Act of 1991, the phrase "doing business"
shall include appointing representatives or distributors domiciled in the Philippines or
who in any calendar year stay in the country for a period or periods totalling one
hundred eighty (180) days or more. Thus, the phrase includes "appointing
representatives or distributors in the Philippines" but not when the representative or
distributor independently transacts business in its name and for its own account. Alfred
Hahn vs. Court of Appeals, G.R. No. 113074, January 22, 1997
 Whether a foreign corporation is "doing business" does not necessarily depend upon
the frequency of its transactions, but more upon the nature and character of the
transactions. “Doing business” covers any other act or acts that imply a continuity of
commercial dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the functions normally
incident to, and in progressive prosecution of, commercial gain or of the purpose and
object of the business organization. Eriks Pte. Ltd. vs. Court of Appeals, G.R. No.
118843, February 6, 1997

To constitute "doing business", the activity to be undertaken in the Philippines is one

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

The appointment of a distributor in the Philippines is not sufficient to constitute

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

c. Export Enterprise
d. Domestic Market Enterprise

3. Registration of Investments on Non-Philippine Nationals

4. Foreign investments in Domestic Market Enterprise

5. Foreign Investment Negative List

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

D. Warehouseman Receipt’s Law

Where the court ordered the manager of the bonded warehouse to deliver the
deposited palay to certain specified parties, and the person ordered to present the
original warehouse receipts failed to do so because they were allegedly lost in a fire,
the court may order said manager to release the palay to the proper parties upon their
issuing a receipt therefor, without necessity of producing and surrendering the original
receipts. Estrada vs. Court of Agrarian Relations, 2 SCRA 986 (1961)

A warehouseman has no cause of action for repossession and damages against a

person to whom it delivered deposited articles on the basis of an alleged falsified
delivery permit where the real parties interested in the questioned articles have not
yet sued the warehouseman for damages on account of said wrongful delivery.
Consolidated Terminals vs. Artex Development Co., 63 SCRA 46 (1975)

The negotiation of the warehouse receipt by the buyer of goods purchased from and
deposited to the warehouse is valid even if the warehouseman who issued a negotiable
warehouse receipt was not paid by the buyer. The validity of the negotiation cannotbe
impaired by the fact that the owner/warehouseman was deprived of the possession of
the same by fraud, mistake or conversion. Philippine National Bank vs. Noah’s Ark
Sugar Refinery, 226 SCRA 36 (1993)

In PNB vs. Noah’s Ark Sugar Refinery (supra), the Supreme Court ruled that PNB is
entitled to the stocks of sugar as the endorsee of the quedans. In this case, the
Supreme Court clarified that while PNB is entitled to the stocks of sugar, delivery to it
shall effected only upon payment of the storage fees. Imperative is the right of the
warehouseman to demand payment of his lien because in according with Section 29 of
the Warehouse Receipts Law, the warehouseman loses his lien upon the goods by
surrendering possession thereof. Philippine National Bank vs. Se. Jr., 256 SCRA 380
(1996)

The remedies available to a warehouseman to enforce his warehouseman’s lien are: (1)
to refuse to deliver the goods until his lien is satisfied, pursuant to Section 31 of the
Warehouse Receipts Law; (2) to sell the goods and apply the proceeds thereof to the
value of the lien pursuant to Sections 33 and 34 of the warehouse Receipts Law; and
(3) by other means allowed by law to a creditor against his debtor, for the collection
from the depositor of all charges and advances which the depositor expressly or
impliedly contracted with the warehouseman to pay under Section 32 of the
Warehouse Receipts Law; or such remedies allowed by law for the enforcement of a
lien against personal property under Section 35 of said law. Even in the absence of a
provision in the warehouse receipts, law and equity dictate the payment of the
warehouseman’s lien pursuant to Section 27 and 31 of the Warehouse Receipts Law.
The refusal of the warehouseman who previously owned the sugar stored with it, to
deliver the sugar to the endorsee of the quedans on the ground that it was still the
owner of the sugar because it had not been paid by the buyer, is not a valid excuse. The
loss of the warehouseman’s lien, however, does not necessarily mean the
extinguishment of the obligation to pay the warehouseman fees and charges which
continues to be a personal liability of the owners, i.e., the pledgors, not the pledgee, in
this case. But even as to the owners pledgors, the warehouseman fees and charges
have ceased to accrue from the date of the rejection by the warehouseman to heed
the lawful demand by the endorsee of the quedan for the release of the goods.
 A warehouseman’s lien should in no event go beyond the value of the credit in favor of
the pledge. It is basis in foreclosures that the buyer does not assume the obligations of
the pledgor to his other creditors even while such buyer acquires title over the goods
less any existing preferred lien thereon. Philippine Naitonal Bank vs. Sayo, Jr., 292
SCRA 202 (1998)

Reasons which a warehouseman may invoke to legally refuse to effect delivery of the
goods covered by the quedans: (1) That the holder of the receipt does not satisfy the
conditions prescribed in Section 8 of the Act. See Sec. 8, Act No. 2137); (2) That the
warehouseman has legal title in himself on the goods, such title or right being derived
directly or indirectly from a transfer made by the depositor at the time of or
subsequent to the deposit for storage, or from the warehouseman’s lien. 3) That the
warehouseman has legally set up the title or right of third persons as lawful defense
for non-delivery of the goods as follows: x x x (4) That the warehouseman having a lien
valid against the person demanding the goods refuses to deliver the goods to him until
the lien is satisfied. Sec. 31, Act no. 2137); (5) That the failure was not due to any fault
on the part of the warehouseman, as by showing that, prior top demand for delivery
and refusal, the goods were stolen or destroyed by fire, flood, etc., without any
negligence on his part, unless he has contracted so as to be liable in such case, or that
the goods have been taken by mistake of a third person without the knowledge or
implied assent of the warehouseman, or some other justifiable grounds for non-
delivery.

Adverse claim of ownership as a basis by a warehouseman for refusing to deliver the

goods covered by warehouse receipts is not a valid legal excuse, ibid

E. Insolvency

Duties, taxes and fees due on specific movable property of the insolvent to the State or
any subdivision thereof and taxes due upon the insolvent’s land or building are
preferred than claims for unpaid wages in respect of the particular movable or
immovable property to which the tax liens have attached. Republic vs. Peralta, 150
SCRA 39 (1987)

Declaration of bankruptcy or a judicial liquidation must be present before the worker’s

preference may be enforced. x x x. Preference applies only to claims which do not
attach to specific properties. The right of preferences as regards unpaid wages does
not constitute a lien on the property of the insolvent debtor. A mortgage is a lien on
property while a preference is not. A recorded mortgage is a special preferred credit
while the preference give to workers under Article 110 of the Labor Code is an
ordinary preferred credit. DBP vs. NLRC, 183 SCRA 328, Hautea vs. NLRC, 230 SCRA
119 (1994)

Under the Insolvency Law, attachments dissolved are those levied within one month
next preceding the commencement of the insolvency proceedings and judgments
vacated and set aside are judgments entered in any action filed within thirty days
immediately prior to the commencement of the insolvency proceedings. Thus, a levy
on preliminary attachment made more than four months before the filing of an
insolvency proceeding is not dissolved and consequently any execution sale made
during the pendency of the insolvency proceeding is valid. Radiola-Toshiba Phils. vs.
Intermediate Appellate Court, 199 SCRA 373 (1991)

The law grants to a juridical person, as well as to natural persons, the power to petition
for the adjudication of bankruptcy of any natural or juridical person, provided that
with respect to juridical person, it is a resident corporation and adjoins at least two
other residents in presenting the petition to the Bankruptcy Court. When a foreign
bank alleged in its petition that it is licensed to do business in the Philippines and
actually doing business in the country, it is in effect stating that it is a resident foreign
corporation in the Philippines. State Investment House vs. Citibank, NA 203 SCRA 9
(1991)

Claims against a corporation that filed a petition for suspension of payment suspended
only upon the appointment of management committee or rehabilitation receiver.
Barotac Sugar Mills vs. Court of Appeals, 275 SCRA 497 (1997)

The suspension of claims due to the appointment of a rehabilitation receiver shall not
prejudice or render ineffective the status of a secured creditor as compared to a totally
secured creditor. In the event that rehabilitation is no longer feasible and claims
against the distressed corporation would eventually have to be settled, the secured
creditors shall enjoy preference over the unsecured creditors subject only to the
provisions of the Civil Code on Concurrence and Preference of Credits. RCBC vs.
Intermediate Appellate Court, 320 SCRA 279 (1999)

The Department of Labor and Employment, Labor Arbiters and the NLRC may not
legally act on the labor claims of employees after the Securities and Exchange
Commission (now the RTC) has issued an order suspending all actions against a
company under rehabilitation. Rubberworld vs. NLRC, 336 SCRA 433 (2000)

A liquidation court cannot continue with the liquidation proceedings of the Philippine
Veterans Bank when Congress had mandated its rehabilitation and re-opening.
Liquidation is the winding up of a corporation so that assets are distributed to those
entitled to receive them. It is process of reducing assets to cash, discharging liabilities
and dividing surplus or loss. Rehabilitation, on the other hand, contemplates a
continuance of corporate life and activities in an effort to restore and reinstate the
corporation to its former position of successful operation and solvency. Thus, the
concept of liquidation is diametrically opposed or contrary to be concept of
rehabilitation, such that both cannot be undertaken at the same time. To allow the
liquidation proceedings to continue would seriously hinder the rehabilitation of PVB.
Philippines Veterans Bank Employees Union vs. Vega, 360 SCRA 33 (2001)

In the absence of liquidation proceedings, the claim of an unpaid seller cannot be

enforced against the transferee of the purchases. x x x Under the system of the Civil
Code of the Philippines, only taxes enjoy a similar absolute preference. All the
remaining thirteen classes of preferred creditors under Article 2242 enjoy no priority
among themselves, but must be paid pro rata, i.e., in proportion to the amount of the
respective credits. But in order to make this pro rating fully effective, the preferred
creditors enumerated in Nos. 2 to 14 of Article 2242 (or such of them as have credits
outstanding) must necessarily be convened, and the import of their claims ascertained.
It is thus apparent that the full application of Articles 2249 and 2242 demands that
there must be first some proceeding where the claims of all the preferred creditors
may be bindingly adjudicated, such as insolvency, the settlement of decedent’s estate
under Rule 87 of the Rules of Court, or other liquidation proceedings of similar import.
This explains the rule of Article 2243 of the New Civil Code that the claims or credit
enumerated in the two preceding articles shall be considered as mortgages or pledges
of real or personal property, or liens within the purview of legal provisions governing
insolvency. The question as to whether the Civil Code and the Insolvency Law can be
harmonized is settled by this Article 2243. The preferences named in Article 2261 and
2262 (now 2241 and 2242) are to be enforced in accordance with the Insolvency Law.
Development Bank of the Philippines vs. Court of Appeals, 363 SCRA 307 (2001)

Under the Interim Rules of Procedure on Corporate Rehabilitation, all petitions for
rehabilitation filed by corporations, partnerships, and associations under PD 902-A in
accordance with the amendatory provisions of RA 8799 shall be transferred from SEC
to the RTC, Section 6, Rule 4 of the Interim Rules requires trial courts to issue a stay
order in the “enforcement of all claims, whether for money or otherwise, and whether
such enforcement is by court action or otherwise,” against the corporation under
rehabilitation, its guarantors and sureties not solidarity liable with it. The stay order is
effective from the date of its issuance until the dismissal of the petition or the
termination of the rehabilitation proceedings.

A “claim” is said to be “a right to payment, whether or not it is reduced to judgment,

liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or
undisputed , legal or equitable, and secured or unsecured”. The claim of a passenger
against PAL for missing luggage is a money claim or a financial demand that the law
requires to be suspended upon issuance of a stay order pending the rehabilitation
proceedings. Philippine Airlines vs. Sps. Sadic, 389 SCRA 589 (2002)

A creditor may enforce the liability of a surety despite the rehabilitation proceedings
involving the corporation whose obligation the surety secures. Philippine Blooming
Mills, Inc.,and Alfredo Ching vs. Court of Appeals, 413 SCRA 445 (2003)

The property of the surety cannotbe taken into custody by the rehabilitation receiver
and said surety can be sued separately to enforce his liability for the debts or
obligations of the debtor. MWSS vs. Daway, 432 SCRA 559 (2004)

When there are two or more defendants and one is not insolvent, the insolvency of a
co-defendant is not a good reason to justify execution pending appeal if their liability
under a court judgment is either subsidiary or solidary. Flexo Manufacturing
Corporation vs. Columbus Foods 455 SCRA 272 (2005)

The insolvency of a corporation cannot extend to the shareholders despite their

ownership of 70% of the capital stock of the corporation and as such, the sale
transaction of the stockholders does not come within the purview of Section 70 of the
Insolvency Law prohibiting transfers within one month after the date of the cleavage.
The fact that the respondent spouses bound themselves to answer for the
indebtedness of the corporation under the surety agreement is not reason enough to
conclude that the spouses are themselves debtors of the petitioner bank. Union Bank
of the Philippines vs. SPS. Alfredo Ong 491 SCRA 581 (2006)

Duties, taxes and fees due to the Government may enjoy priority only when they are
with reference to a specific movable property under Article 2241 (1) of the Civil Code
or immovable property under Article 2242 (1) of the same Code. With reference to the
other real and personal property of the debtor, sometimes referred to as “ free
property “, the taxes and assessments due to the National Government, other than
those in Articles 2241 (1) and 2242 (2) of the Civil Code will come only in the ninth
place in the order of preference. In Re: Petition for Assistance in the Liquidation of the
Rural Bank of Bokod ( Benguet ) , PDIC vs. Bureau of Internal Revenue, 511 SCRA 123
(2006)

The word “claim” used in Sec. 6 (c) of P.D. No. 902-A, as amended, refers to debts or
demands of a pecuniary nature and the assertion of a right to have money paid. It is
used in special proceedings like those before an administrative court on insolvency. In
Arranza v. B.F. Homes, Inc., “claim” was defined as an action involving monetary
considerations. Clearly, the suspension contemplated under Sec. 6 (c) of P.D. No. 902-
A refers only to claims involving actions which are pecuniary in nature. Consequently,
the filing of the case for violation of B.P. Blg. 22 is not a “claim” that can be enjoined
within the purview of P.D. No. 902-A. Tiong Rosario vs. Alfonso Co 563 SCRA 239
(2008)